Economic Overview

Indicators available to the Bank of Papua New Guinea suggest that with on-going macroeconomic stability, economic activity continued to pick up during the first nine months of 2005. Mineral and agriculture exports, particularly coffee grew strongly on the back of in-creases in world prices. Stability in the economy, as a result of sound fiscal management and a stable exchange rate led to a low inflation outcome for the nine months to September 2005. With favourable economic conditions and low domestic interest rates, lending to the private sector increased as did the level of formal private sector employment.

According to the Bank’s Employment Index, the level of employment in the formal private sector, excluding the mineral sector, increased by 4.2 percent in the June quarter of 2005, mainly driven by a substantial increase in agricultural sector employment. By indus-try, there was higher level of employment in the wholesale, manufacturing, building/construction, and agriculture/forestry/fisheries sectors, while the other sectors recorded declines. By region, all employment levels increased. In the September quarter of 2005, the level of employment increased by 0.8 percent. By industry, there was higher level of employment in the building/construction, manufacturing, wholesale and finance/business sectors, while the other sectors declined. By region, only the Highlands, Morobe and National Capital District (NCD) recorded increases. Over the year to September 2005, the overall employ-ment level increased by 2.5 percent, compared to 2.2 percent over the year to June 2005.

The headline inflation rate, as measured by the Con-sumer Price Index (CPI), was 0.4 percent in the September quarter of 2005, compared to 1.1 percent in the June quarter of 2005. The increase was attributed to higher price indices in the ‘Food’, ‘Drinks, tobacco and betelnut’ and ‘Miscellaneous’ expenditure groups. By region, all urban areas, except Port Moresby, recorded higher prices. The annual headline inflation rate was 1.6 percent in the September quarter of 2005, compared to 0.9 percent in the June quarter of 2005.

The exclusion-based inflation measure was negative 0.1 percent in the September quarter of 2005, com-pared to 1.6 percent in the June quarter of 2005. Trimmed mean inflation was 0.7 percent in the September quarter of 2005, the same as in the June quarter of 2005. The annual exclusion-based and trimmed mean measures were negative 0.1 percent and 3.2 percent respectively, in September 2005.

The kina exchange rate appreciated on average against the major currencies in the September quarter of 2005. The quarterly exchange rate appreciated on average by 0.65 percent against the US dollar and 1.77 percent against the Australian dollar. The Trade Weighted Index (TWI) which measures the value of the kina against a basked of currencies of Papua New Guinea’s major trading partners increased by 2.3 percent in the September quarter of 2005 (see “For the Record”).

The increase in international prices for mineral and agricultural exports more than offset the appreciation of the kina against the US dollar. This resulted in a 14.2 percent increase in the weighted average kina price of exports in the September quarter of 2005, compared to the corresponding quarter of 2004. There was 14.6 percent increase in the weighted average price of mineral exports, with higher kina prices of crude oil and copper. For the agricultural, logs and marine product exports, the weighted average kina price increased by 12.6 percent. This was accounted for by higher kina prices of coffee, tea and logs.

The overall deficit in the balance of payments for the nine months to September 2005, was K8 million, compared to a surplus of K130 million in the corresponding period of 2004. This outcome was a result of a significant deterioration in the capital and financial accounts, which more than offset an improvement in the current account.

The current account recorded a huge surplus of K1,139 million in the nine months to September 2005, compared to a deficit of K145 million in the corresponding period of 2004. This outcome was a result of surplus in the trade account combined with a lower deficit in the services account.

The capital and financial accounts recorded a deficit of K1,199 million in the nine months to September 2005, compared to a surplus of K281 million in the corresponding period of 2004. The deterioration reflected a build up in foreign currency account balances of mineral companies, an increase in net foreign asset holdings of the banking system and an increase in trade credits owed to PNG resident companies.

The level of gross foreign exchange reserves at the end of September 2005 was K2,053.3 (US$671.8) million, sufficient for 5.3 months of total and 7.3 months of non-mineral import covers.

The Bank of Papua New Guinea eased its monetary policy stance during the third quarter of 2005 by reducing the Kina Facility Rate (KFR) by 100 basis points to 6.0 percent in September 2005, from 7.0 percent in June.

The Bank continued to utilise its Open Market Opera-tion (OMO) instruments in the conduct of monetary policy. The Central Bank Bills (CBBs) and the Repur-chase Agreement Facility (RAF) were used actively to manage the high level of liquidity in the banking system. Trade in the interbank market was low reflecting the high liquidity conditions.

The average level of broad money supply (M3*) in-creased by 16.1 percent in the September quarter of 2005, compared to an increase of 3.3 percent in the June quarter of 2005. The growth was due to increases of 17.9 percent, 2.7 percent and 5.1 percent in average net foreign assets of the banking system, average net credit to the Government and average net credit to the private sector, official entities and non-monetary financial institutions, respectively. The average level of the monetary base grew by 14.7 percent over the September quarter of 2005, compared to an increase of 1.7 percent in the June quarter. The increase was mainly associated with the high level of commercial bank deposits at the Central Bank.

Total domestic credit extended by the banking system mainly through the commercial banks to the private sector, official entities and the non-monetary financial institutions increased by K59.2 million to K1,753.9 million, compared to a decline of K1.8 million during the corresponding quarter of 2004. The annualised rate of growth in domestic credit, excluding the Central Government and advances under the price support schemes, was 81.6 percent over the nine months to September 2005.

Preliminary estimates of the fiscal operations of the National Government for the nine months to September 2005 showed an overall surplus of K484.9 million, compared to a surplus of K476.0 million in the corresponding period of 2004 and represents 3.3 percent of nominal Gross Domestic Product (GDP). The higher surplus was due to increased revenue, which more than offset an increase in expenditure.

Total revenue, including grants, during the nine months to September of 2005 was K3,163.8 million, 9.8 percent higher than the receipts collected in the corresponding period of 2004. This represents 68.2 percent of the budgeted revenue for 2005. The increase was attributed to higher collections in most categories of tax revenue combined with higher foreign grants, which more than offset a decline in non-tax revenue. Total expenditure over the nine months to September 2005 was K2,678.9 million, 11.4 percent higher than in the corresponding period in 2004, and represents 56.1 percent of the budgeted expenditure for 2005. The increase was due to both higher recurrent and development expenditures.

The budget surplus of K484.9 million was used to make net overseas and domestic loan repayment of K241.8 million and K243.1 million, respectively.

Source: Bank of PNG, Quarterly Economic Bulletin