Bank of Papua New Guinea (BPNG) predicts a rebound in real GDP (gross domestic product) growth in 2024, primarily driven by a strong performance in the mineral sector of PNG.
This is based on the March 2024 Monetary Policy Statement delivered by Central Bank Governor Ms. Elizabeth Genia, AAICD, on its assessment of broader macroeconomic developments along with BPNG’s medium-term outlook and review of global developments and domestic outlook.
A rebound in real GDP growth to around 3.0 percent would be underpinned by the resumption of production at the Porgera mine and higher output of gold, copper, and silver from the broader mining sector, Ms. Genia said.
The positive flow on effects, from the commencement of operations at New Porgera and increased government spending, are also expected to provide opportunities for the non-mineral sector.
However, the Bank reports a challenging business environment, with a decline in business confidence as indicated by the Business Sentiment Survey conducted in February 2024.
This decline is expected to persist due to lingering effects of January's civil unrest, resulting in continued pressure on business revenues and employment levels in the non-mineral private sector in the first half of 2024.
The Bank's forecast for PNG's domestic growth in 2023 is a modest real GDP growth of 1.4 percent, a significant drop from the 5.2 percent recorded in 2022.
Ongoing challenges such as foreign currency shortages, transportation costs, law enforcement issues, and unreliable power sources remain major concerns for businesses, prompting cost-cutting measures and exploration of cheaper alternatives.
Looking ahead, the Bank anticipates a boost in economic activity, with projected real GDP growth of 4.5 percent in 2025, supported by various factors including full-year production at New Porgera and increased activity in the mineral sector, including a recovery in the retail and wholesale sectors and some pickup in activities associated with pre-final investment decision spending by new resource projects.
In 2026, growth is projected to be around 3.6 percent, supported by increased activity in the mineral sector along with positive flow-on effects from increased exploration activities and capital investment.
Risks to the domestic economic growth outlook are considered balanced, with downside risks including tighter monetary policies from major economies, geopolitical conflicts, and climate change-related events.
Globally, the IMF's World Economic Outlook indicates a slight decrease in real global GDP growth to 3.1 percent in 2023, primarily due to factors such as Central Banks tightening monetary policies, geopolitical conflicts, and the withdrawal of COVID-related fiscal support.
However, global growth is expected to remain relatively strong in 2024 and 2025, driven by a strong US economy and major emerging markets.
Inflation globally is forecasted to decrease, with headline inflation projected to decline to 5.8 percent in 2024 and further to 4.4 percent in 2025.
Regarding PNG's Balance of Payments, the country has experienced large current account surpluses driven by the mineral sector and exports of LNG, copper, and gold.
However, there is a structural issue with a deficit of foreign currency inflows into PNG's domestic FX market, despite significant interventions from the BPNG.
Inflation in PNG is expected to increase in 2024 due to continued depreciation of the Kina against the US Dollar, with the CPI projected to reach 5 percent and remain elevated throughout 2025 before easing in 2026. Supply side disruptions and geopolitical conflicts pose risks to the medium-term inflation outlook.
The issue of excess liquidity in the banking system has been addressed through the introduction of liquidity management instruments by the BPNG, like the Fixed Rate Full Allotment (FRFA) 7-Day Central Bank Bill auction and lowering the Kina Facility Rate to 2.0 percent to support businesses after the civil unrest.
The BPNG will adopt a tightening bias in the coming months to manage inflationary pressures, including increases to the Cash Reserve Ratio and the possibility of longer-dated FRFA Central Bank Bill auctions.
Downside risks include a tighter-than-anticipated monetary policy stance from the Central Banks of the major economies, prolonged geo-political conflict in the Middle East, and climate change-related weather events.
Balance of Payments and Inflation
PNG has experienced significant current account surpluses driven by the mineral sector and LNG, copper, and gold exports. However, structural issues persist, including a deficit of foreign currency inflows into the domestic (Foreign Exchange) FX market.
In 2023, commercial foreign currency inflows into PNG’s domestic FX market amounted to USD 5.5 billion against outflows of USD 7.2 billion. BPNG intervened with a record level of USD 1.6 billion to ease pressure on businesses and international reserves.
Inflation remained below 2.2 percent in 2023 but is expected to increase to 5 percent in 2024 and remain elevated throughout 2025, mainly due to the depreciation of the Kina against the US Dollar.
Monetary Policy Stance and Broad Money
BPNG adjusted its monetary policy stance in response to economic conditions, lowering the Kina Facility Rate (KFR) to 2.0 percent in February 2024 to support businesses after January's civil unrest.
Looking ahead, BPNG will adopt a tightening bias to address inflationary pressures, considering measures such as increases to the Cash Reserve Ratio (CRR) and the KFR.
Future Outlook
BPNG continues to address structural issues in the foreign exchange market and collaborate with the government and international partners, including the IMF, to enact necessary reforms. While challenges lie ahead, BPNG remains committed to promoting sustainable economic growth and stability.
Governor Genia, during the launch of the Central Bank’s Monetary Policy Statement on the 4th April in Port Moresby-PNG, emphasized the importance of addressing challenges and implementing effective policy measures to achieve desired outcomes and ensure a stable environment for businesses and economic growth.
Ms. Genia said, “We are continuing to work through the IMF Program along with the government and that is progressing well. The technical assistance we have received at the BPNG in working with the IMF has been of great benefit to us and we look forward to the IMF’s next mission to PNG which is later this month.”
The PNG government has already enacted several amendments to the Central Banking Act in December 2021 following on from the recommendations from Phase 1 of the Independent Advisory Group’s report. Further amendments to the Central Banking Act are expected very soon following the release of the IAG’s Phase 2 Report in late November last year.
“We have new Board appointments, very recently announced, and I am delighted to say we have a full Board with nine members now appointed. There is a wealth of experience being brought to the BPNG through those Board appointments and they will make a significant contribution to the BPNG and to PNG’s economy.
“There are some challenges ahead of us but nothing that can’t be addressed and overcome. The measures we are introducing, with the exchange rate and the overall monetary policy framework will take time to achieve their desired outcomes,” she added.
The BPNG will adopt a tightening bias in the coming months to manage inflationary pressures, including increases to the Cash Reserve Ratio and the possibility of longer-dated FRFA Central Bank Bill auctions, Governor Genia said.
