Having the confidence to change

Returning to Papua New Guinea after twenty years, it is tempting to think that nothing much has changed. Back then the narrative was that the Sandline crisis led to a change in the political landscape. From Chan to Skate, who the Australians mistakenly thought would be some sort of saviour. Rather than ushering in a period of economic wisdom, as some overseas observers had predicted, the Skate government arguably oversaw an even more disastrous period of economic mismanagement. With the kina rapidly devaluing, the Treasury had run out of cash and was restricting money to departments. The Central Bank did not have enough foreign currency to supply to the commercial banks and their clients. Inflation was high, and people were restless. Against this backdrop, El Nino was wreaking havoc through drought and frost. The eventual collapse of both the economy and the government was so deep it enabled the technocrats to finally complete long overdue reforms in taxation and budget control.

Today, it is easy to assume that it is a case of ‘the same old story.’ Simply replace Chan with Somare, and Skate with O’Neil. With falling oil prices, the government is short of liquidity and trying to mortgage the future of its people for cash today; the kina is in decline, and the Central Bank holding back foreign currency. High inflation and the effects of another El Nino event are ramping up food prices.

But some things are different now. For starters Port Moresby is a cosmopolitan city, so physically transformed it is barely recognisable from what was only twenty years ago. Despite all of the challenges, the economy has managed to absorb a population that has more than doubled since independence. There is a significant middle class of Papua New Guineans who are educated, vocal and more than capable of both demanding change, and also determining what that change should be. Even a casual glance at social media shows the depth of talent and debate.

Whilst it remains true that much of the development benefits have been focussed on Moresby, and too little outside of the capital, the country remains blessed with immense cultural and mineral wealth. It also remains a country where hope, courage and luck can always improve the situation. The question is whether these ingredients are enough to enable the country to overcome its current challenges?

As always, there is a core group of observers who seem to view the current economic and political malaise as a hopeless situation. Today’s story – whispered in private or told via social media, but never quite openly discussed – is that through the egregious use of the nation’s wealth in order to benefit the few in Waigani, Prime Minister Peter O’Neil has managed to establish the sort of ‘de-facto’ dictatorship nobody thought possible in a Melanesian state. With next to no political opposition at home, the Manus detention centre has been a brilliant mute on Canberra. As has been the notion, held by some in the Australian capital, that a stable semi-authoritarian regime in Port Moresby is preferable to a government that changes often – albeit democratically. No matter how hard the prime minister may prod DFAT, they are simply unable to respond. With such a free hand, O’Neill has managed to enhance his reputation with his regional neighbours. His international standing will continue to be bolstered as PNG prepares to host the APEC summit in 2018.

O’Neill has managed to keep a hold on power by raiding the numerous cash pots available to the government and by mortgaging the country’s future resource base. This strategy has so far enabled the government to run debt defying budget deficits. The plan to fill the current hole is a combination of a half billion dollar foreign currency loan, the sale of shares to landowners in the National Petroleum Company PNG (NPCP) and potential revenue from the sale of Oil Search to Woodside. Any money raised through the takeover over of Sustainable Development Program (SDP) will be a bonus. These funds are necessary to continue the superficial building (and rebuilding) of roads and other infrastructure in the capital and also funding the K10 million district funds overseen by MPs; thereby keeping the crony capitalists and political elite satisfied.

However, in the same way that much of the analysis twenty years ago was overly simplistic and lacking in context so too is this story. For starters it is hard to place the entire blame for the current state of the economy purely on the current government. Many previous administrations pursued similar strategies, just perhaps not as effectively. Also very few economist predicted the rapid decline in commodity prices or the drastic impact of El Nino on agricultural production. Were it not for these factors, some of the current economic constraints, especially in terms of limited liquidity, would not be as severe.

The private sector and the donors, smelling loans, have been falling over themselves to be the lender of choice and have therefore deliberately not been up front with the government for fear of losing business. Australia has been almost totally silent in terms of the underlying economic situation, with the exception of a few advisers within government. The government itself, meanwhile, simply points to recent GDP growth rates as a sign that things will get better. It has been left to a few independent thinkers to point out that ‘you cannot eat GDP growth’ and that current levels of borrowing has a price that the people of Papua New Guinea just cannot afford – inflation.

There is a phrase used amongst Pacific civil servants – policy moonwalking – which, like the famous dance by Michael Jackson, refers to when the policy of government appears to be moving forward, but in fact is actually going backwards. It appears as if O’Neill’s policy moonwalkers have failed to accept and adapt to the radical change in circumstances. Rather they continue to pursue the strategy of relying on short term financing in the vein hope that things will get better. These analysts are correct in that the country still has many long-term assets that can be mortgaged, but they have missed the fact that with oil prices falling so sharply this strategy can actually be a trap – in that the more you borrow now, the more desperately you have to borrow in the future. The price is inflation, which is fuelling the looming crisis. By printing money to finance the massive deficits, the government has reduced the value of the kina, and this is what has made imports such as rice more expensive. While the economists and academics can argue all day, the reality is that what people can afford to eat has drastically decreased. You don’t need to be an economist to forecast the situation – simply ask any Papua New Guinean. The drought and frost in the highlands has made the situation worse, and while the foreign owners of the hydroponic farms might be benefiting, the population are suffering and this will eventually lead to frustration, anger and potentially violence.

It is unlikely the ‘foreign bond’ of half a billion dollars can be issued unless, like the UBS loan, it is secured against a national asset. At this stage it is not clear what that asset would be. In the same way the government’s financial expectations of the sums of money they would receive from the landowners taking an increased equity in NPCP seems far removed from the financial reality, and all indicators are that the landowners are receiving rational private advice in this regard. So with the state owned enterprises seemingly in debt, and the Central Bank and government building up short term liabilities, the most likely outcome is that – despite the long term outlook for the country being sound – in the short term the government will have no money and inflation will get worse. The potential debt burden is made even worse by the hidden liabilities in terms of debts owed by government entities that don’t yet have audited accounts, but which could still be a drain on future budgets.

There will ultimately have to be some sort of political ramification. What the trigger will be nobody knows, but the tension amongst the rural and urban poor is noticeable. The prime minister might have control over the heads of the army and the police, but if civil servants and people are seriously poor – as seems evident now – the people of Papua New Guinea can and will effect democratic change. Whether it be a motion of no confidence, based on the fact that O’Neill can no longer deliver the financing necessary to keep political stability, or a result of the numerous court actions against him, or a massive turnover at the polls – something will have to give.

As the poor increase in numbers and go ever more hungry, while the political elite continue to flaunt their wealth on the streets of Moresby, the real concern is whether this change will be brought about civil or political unrest.