Papua New Guinea - Economic situation and development prospects

Report No. 1150-PNG Papua New Guinea: FLE COPY Economic Situation and Development Prospects July 14, 1976 East Asia and Pacific Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization,  CURRENCY EQUIVALENTS Currency Unit - Kina 1 Kina = US$1.27 1 US$ = K 0.787 K 1 million = US$1,270,000 FISCAL YEAR The Fiscal Year is July 1 - June 30. Note: Contrary to Papua New Guinean usage, but in conformity with that of the Bank, FY76 refers to the year 1975/76.  FOR OFCAL USE ONLY The report was prepared by an economic mission which visited Papua New Guinea from January 25 to February lh, 1976. The mission con- sisted of G.B. Baldwin, Chief, S.R. Bose, A.C. Galenson, and P.C. Moulin; F.L.C.H. Helmers also participated during the first week. The mission's work was greatly assisted by a report prepared by a pre-independence mission headed by G.H. Reif, and by the reports of two IMF missions that visited Papua New Guinea in late 1975 and early 1976. The report makes use of information relating to Government finances and the bal- ance of payments based on discussions with, and data obtained from, the International Monetary Fund mission which was in the field in November 1975. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   TABLE OF CONTENTS Country Data Map Summary and Conclusions 1. Introduction to Papua New Guinea ............................... Pag..1 A. Natural h'ndowment and Farly History .................... 1 B. Modernizing Forces. 2 C. Self-Government and Independence. 6 D. Provincial and Local Government; Secessionist Pressures. 9 11. The Cfians nog Structure of the iconomy.11 A. Introduction ..11 Per Capita Incomes . .11 Sector Origin of Production and Incomes . .11 B. Domestic Product, National Income, and Disposable Income . .1 C. Traditional Agriculture andi the Sources of Structural Change .17 Plantations and Cash-Crop Smallholders .17 Import-Substitution Possibilities in Agriculture. 18 Non-Agricultural Activities .19 The Government Sector .22 The Bougainville Copper Mine .23 D. Conclusion: Summary Character- 7--4cr of the Economy ......................................... 25 TII. Development Prosoects and Strategy ........29 A. The Government's Development Goals . .29 B. Possible Size of a Development Plan.., .. ...... 32 C. Program Ephases ..35 Agriculture and Rural Development .35 Infrastructure Investment .,.. 36 Industry ........................................... 76 'lousing an(i Urban Land Use ..................... 36 Education and Health .............. 37 1Employment ... 3E8 '. Organization of Plan Preparaton. .8 E. The Mleasurement, of Development Progress ................ 3c  Edge r.O. l. Puollc Revenues an(" Expenditures: Gurrent Situation and Longer-Term 0utlooR ....................................... 39 A. Recent Growth of Revenues and -xnenditues . 3 Sources of Revenue ...........................,.. 41 Outlook for Revenue rc ................... ..... 3 Australian Assistance .45 Debt Financing .............. , . , . , . 46 Exenditures .48 Statutory Bodies. 50 B. Illustrative Projection of Future Viabi ity.50 C. Four Keys to Controlling the Growth of Expenditures .53 Review of Services .53 Review of Physical Standards .54 Continuing Localization .54 Wage Restraint .55 V. The Balance of Payments: Prospects for elf-Relince... 57 A. Independence Creates a Balance of Payments Problem .57 B. Policy Orientation: A Hard Currency, An Open Economy, and Rejection of Devaluation .59 C. Present Structure of the Balance of Payments .60 Exports and Overall Balance .60 Structure of Imports .63 D. Balance of Payments Viability and Need for Bank Group Assistance .66 VI. The Outlook for Foreign Investment and the Prospects for Servicing Foreign Capital Payments .76 A. Basic Principles Underlying Government Policy .......................7,6,,.,,.,,,,,,,...... 76 Major Projects .77 Other Projects .79 B. Prospects for Additional Foreign Investment .. 80 C. Country Creditworthiness . 82 Annex 1: Agricultural Prospects Annex 2: Localization Annex 3: NJational Investment and Development Authority and National Investment Policy and Priorities Annex 4: Petroleum rPolU-cy and LeTislation Annex r: The Rural Imprcvement Prograr (RIP) and Its Relation tc Provincial anc Local Covernments  Annex 6: Incon.cs Policy Annex 7: Budget-Making Institutions and Procedures Annex 3: Papua New Guinea Financial Policy Relating to Major Mining Projects Annex 9: Forestry Annex 10: Land Tenure Systemi Annex 11: Priority Areas for Attention by the Government and Its External Donors Annex 12: Bibliography of Recent References Statistical Appendix   COUNTRY DATA - PAPUA NEW GUINEA AREA 2 POPULATION DENSITY f77,366 km 2.65 million (mid-1974) 2 Rate of growth: 2.6% (fron 1966 to 1976) 13.6/kin POPULATION CHARACTERISTICS (1974) HEALTH (1974) Crude Birth Rate (per 1,000) 64.2 Population per physician 10,860 Crude Death Rate (per 1,000) 16.3 Population per hospital bed 22k Infant Mortality (per 1,000 live births) 96.0 EDUCATION ACCESS TO ELECTRICITY Adult literacy rate (1971) 32.2% % of population - urban 50% Primary school enrollment (1975) 56.8% t/ GWP PER CAPITA lN 1973 US)61C GROSS DOMESTIC PRODIJCT IN FY714 ANNUAL RATE OF GROWTH ( %, Fy6h constant price) tat current prices) US $ Mln i4 _ FY7'-FY72 FY72-Mr73 FY73-FY7L CDP at Xarket Prices 1,515.1 100.0 2.5 20.1 1.2 Gross Domes:ic Investment 189.9 12.5 -20.1 -63.7 -37.5 Gross Domes-ic .Saving 455.4 30.1 -32.9 243.4 86.3 Current Account Balance 23? 6 15.4 _ IOL.2 18.6 Exports of Goods, NIFS 7% 5 49.8 36.3 -23.3 -6.6 Imports of Goods, NFS '036.0 28.8 -5.7 OUT?UT, LABOR FORCE AND PRODUCTIVITY IN FY72 2/ Value Added Labor Force V. A. Per Worker ,IS_ ' 000- % <S.$ % of national average Agriculture 258.7 40.1 158 48.8 1,637 82.2 Industry 1.89.7 29.4 43 13.3 '4B411 221.6 Srvices 197.1 30.5 123 37.9 1, 9 80.* Total/Average 645.5 100.0 324 100.0 1,99?2 100.0 GOVERNMENT FINANCE Central Government (K TWTh3 % of GDP FY76 FY7L FY72-FY73 Current Receipts 136.7 13.6 12.3 Current Expenditures 277.03/ 27.6 27.8 Current Deficit. -10.3 14.0 1737 Capital Expenditures 30.5 3.0 5.8 External Assistance (net) 152.3 15.2 16.2 1/ 1975 Ttrld Atlas. 2/ At factor cost. 3/ Includes K56 million in salaries and allownace paid by the Australian Governnent to its overseas officers in the PNG public service.  COUNTRY DATA - PAPUA NEW GUINEA MONEY, CREDIT AND PRICES FY73 FY74 FY75 (Million K outstanding end of periodJ Money and Quasi Money!/ 149.3 284.0 303.5 Bank Credit to Public Sector 19.3 -12.4 ., Bank Credit to Private Sector 118.3 137.9 170.1 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 25.1 28.3 Consumer Price Index (1971=100) 111.0 143.3 15L.1 Annual percentage changes in: Consuer Price Index (1971=100) 4.8 29.1 7.5 Ban" -redit to Public Sector 1.0 -16h.2 167.7 Bank Credit to Private Sector -12.6 16.6 23.h BALANCE OF PAYMENTS 3/ MERCHANDISE EXFORTS (AVERAGE FY73-FY75) FY73 FY74 FY75 (millions US $) TIS$Mln. % Exports of Goods, 304.4 676.3 562.3 Imports of Goods 276.9 330.4 496.0 Coffee 38.8 7.7 NF-Services (net) -38.1 -29.6 -56.7 Cocoa 33.5 6.7 Resource Gap (deficit = -) -150. 316.3 9.o Copra & Copra Products 4>3.0 8.6 Factor Service Payments (net)-122.8 -306.3 -50.2 Timber 19.9 7.0 Wet Transfers 188.2 222.6 189.6 All other commodities 32.' 64.5 Balance on Current Account 54. 232.6 l49.0 Total (excl. reexports) 501.7 100.0 Private Capital -30.9 -95.4 -27.5 EXTERNAL DEBT. JUNE 30, 1975 Pablic MLT Loans (net) 4O.1 53.8 L6.7 Direct Investment 68.4 210.2 -45.2 US $ Iln. Other Capital n.e.i. -9v -163.7 -174.4 Residual (surplus) 37.6 237.6 -3l Public Debt, incl. guaranteed 268 Non-Guaranteed Private Debt - F'IE AND RELATED MATERIALS Total outstanding & Disbursed 268 (US $ Million) Fy72_ _ FY73 Fy7h DEBT SERVICE RATIO for FY7L _ % Imports 15.2 14.2 29.6 Public Debt, incl. guaranteed 2.9 Exports - - - Non-Guaranteed Private Debt - Total outstanding & Disbursed 2.9 RATF OF EXCYANGE (Y=A$) IBRDl/IDA LENDflIG (as of 2/29/76) (l4illion NS $): lUntil December 23, 1972 Sept. 9, 1973-Sept. 30, 1974I US $1.00 -A$0 O.R40 U1S $1.00 AW.675 IBRD IDA A 1.00 =US $1.191 A $1.00 = US$1 .4875 Outstanding & Disbursed h0.6 20.0 Dec. 23, 1972 - Feb. 13, 1973 Sept. 30 June 30, 1975 Undisbursed 10.6 5.2 US $ 1.00 = A$D.7914 US$1 .00 = A$0.752 Outstanding incl. Undisbursed 5122 A$1 .00 = US $1.275 A$1 .00 = US $1.33 Feb. 13, 1973-Sept. 9, 1973 From June 30, 1975 US1 .00 = A$0.704 US $1.00 = A$D.787 A $1 .00 = US $1.42 A$1.00 = US .$1.27 1/ PNG has been part of the Australian monetary and banking system. Figures on money and quasi money are therefore only estimates. 2/ PNG as part of the Australian monetarSy system has had no complete separate balance of payments. Figures on private capital and monetary movements are rough estimates. The country has not had foreign exchange reserves on its own until the last year. 3/ Preliminary / Ratio of debt service to exports of goods and non-factor services.  ~ gNIMO |