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PNG AT CROSSROADS WITH DEBTS

BUSINESS COMMENTARY

PNG AT CROSSROADS WITH DEBTS

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ECONOMIC GROWTH AND PROSPERITY SOUGHT

As the COVID 19 Pandemic continues to batter  and nations across the world grapple with the economic impact, governments are being innovative with debts. That is they are increasingly looking at options to shore up markets and promote economic growth and prosperity with debts.

Papua New Guinea is no different. 

For much of last year, we weathered the pandemic storm in terms of mitigating substantial loss of human life. At the same time, we faced significant economic costs with supply chain disruption.  Global travel grounded to a halt. Critical industries contracted, and unemployment began to soar.

As a result, the impact on individuals was substantial. Families lost entire incomes over night, the price of goods increased due to demand and the related inflationary impact of a weaker currency. For some, the loss of life altered their family as never before.

Before their nose, Governments have complex issues and challenges in these trying times. These include the need to sustain their economy. It has gone through external attack, maintaining critical services and ensuring  they spare the neediest in society. At the same time, governments also have a plate of decreasing revenue and increasing costs before them. 

At a strategic level, all governments need to think about how they can address these complex and deep socio-economic challenges. A range of levers and options are available. These include quantitative easing, adjustment to tax policy settings, stimulus measures and increasingly, the accumulation of debt.

DEBATE ON GOVERNMENT DEBTS 

Government debt debates are ongoing at various platforms including the floor of Parliament. This is justified. Borrowings leave a lasting burden and legacy that can remain for generations. But, in an economic environment such as that which we face today, the reality is that without borrowing external funds, we cannot sustain critical public services. Services will slow, economic dislocation can set in, and in turn, some societies can begin to break down. https://postcourier.com.pg/oneill-blasts-k3-8-billion-loan/

The dilemma of debt is not new.

Bad sides of loans

Economists have spoken about the benefits and negatives of borrowing for a long time. It is true that some debts are “bad”. Governments use some borrowings  simply for the purpose of “keeping the lights on” and sustaining costs will compound and grow. This is because, these types of borrowings bear no return, or what influential economist John Maynard Keynes referred to as “dead weight debt.”

It is akin to an everyday Papua New Guinean borrowing their weekly wage year in and year out without the capacity to repay. Interest continues to accrue, compounding year in on year. Thus, it leads to more borrowings to service debt. As a result, the “dead weight” of debt continues to grow. At the national level this can manifest in countries becoming heavily indebted leading to rising economic costs, and in the extreme, the breakdown of society and the state.

Good sides of loans

In contrast, some debts are “good”. Where government borrows funds strategically and responsibly and invests those funds in productive assets that generate a higher return, there is substantial economic benefit. A good example of this is a person that borrows money for a house. By investing in a house, the homeowner acquires an asset, with the value of that asset increasing over time. As that asset grows, the economic wealth of the individual increases. Some choose to leverage that increased wealth to borrow additional funds for an investment property. In turn, that property generates an income that services the debt, and as he or she repays that debt, the house becomes a wholly productive and income generating asset.

These analogies apply at the macro-economic level too.

As we have seen around the world, those States that borrow simply for the purpose of “keeping the lights on” get further and further into debt. Zimbabwe has shown for example. As debt increases, they force governments to take dangerous measures. In the case of Zimbabwe, they chose to print more money. As a consequence, the value of Zimbabwe’s currency began to fall. This in turn led the cost of essential goods to rise. As the cost of goods began to rise, the purchasing power of everyday citizens began to erode, and the capacity of the Government to service debt declined. The end result is social unrest, starvation and a very fragile state.

LESSONS TO LEARN FROM PAST GOVERNMENT 

For Papua New Guinea, in 2016, under the then Government of Peter O’Neill, government debt stood at K21.4 billion. Over the course of the next two years, that increased by K3.6 billion, or 14.2% to K25.6 billion. We invested much of that debt in critical public infrastructure – roads, ports, hospitals and schools. The legacy of which remains today.

Since 2018, public debt has increased by a startling 31.6% (K11.8 billion) to now stands at K37.4 billion in a space of 2 years. The Government has continued to borrow heavily through domestic and external sources throughout the COVID-19 crisis .

This is not necessarily bad, if they use that debt to invest in productive assets. If we borrow money to build a school, we can educate more young people. As education standards increase, we build a stronger and more capable labor force. This is turn helps us build our economy and the institutions of State. The same applies to building new roads.

These are the economic corridors that not only help sustain our economy, but which bring much needed prosperity to our rural and remote communities. As individual wealth begins to grow, the economic wealth and capacity of the state increases. This has a long-term compounding benefit.

The challenge for governments is to get the debt balance right. In the short term, there are times where governments need to borrow to sustain services. But, this can never be a long-term measure, as the example of Zimbabwe and others has shown. The debt mix must be carefully balanced and weighted towards investment in productive assets that allow our economy to grow.

PAPUA NEW GUINEA AT A CROSSROADS WITH LOANS

Today in Papua New Guinea, we are at a crossroad. The COVID-19 crisis is not going to go away. The global economic consequences will endure for decades to come.

The challenge that we face is that we must be strategic in how we leverage debt. With crisis also comes opportunity, and by investing in critical economic and social infrastructure, we can stimulate the economy and set our nation on a path towards long-term growth and prosperity. https://pngsun.com/2021/02/05/japanese-loan-to-png/

Alternatively, we can continue on a path of ever-increasing debt with little by way of return. The reality is that such an approach will only keep the lights on for so long. Thus, over time, Papua New Guinea’s position in the region and the world will erode.

The choice is clear.

The Government must position itself strategically to leverage debt. That is to ensure it benefits the generations to come and delivers real and tangible outcomes for the people.

A failure to do so could be dire, and the light of Papua New Guinea could begin to forever fade.

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