The outbreak of Covid-19 in Papua New Guinea represents an added threat to economic growth and stability, given the country's limited capacity to manage the health crisis, according to three global economic analysts.
On the plus side, government has raised more than K1 billion (US$286 million) ‘COVID Bonds’ from banks and super funds and Treasurer Ian Ling-Stuckey says he’ll be seeking another K1.5 billion for COVID bonds over the coming weeks.
Fitch Solutions’ Country Risk Research Unit, the latest ANZ Bank’s Pacific Insight Report and ratings agency Standard and Poor’s (S&P) have all revised down growth forecasts, with both Fitch and ANZ predicting a recession this year.
But the Bank of PNG, the central bank, thinks the impact of Covid-19 will be ‘contained’ during 2020 and will be minimal next year and 2022, according to its latest biannual Monetary Policy Statement.
The Reserve Bank of Fiji (RBF) has today confirmed Fiji's sure path to an economic recession, as all sectors of the economy brace for the harsh impact of the current coronavirus pandemic.
"Following almost a decade of positive economic growth, the domestic economy is now forecast to fall into a recession. The magnitude of the contraction depends on how long the pandemic lasts and the extent of local contagion," RBF stated in its March Economic Review, released today.
"The main transmission will be through the tourism industry and cessation of economic activity due to appropriate precautionary measures taken by the Government and the general population. The halt in tourism activity and the general decline in incomes and consumption appetite will also negatively affect Government revenue and have spillover effects to all other sectors in the economy."
A recession is generally defined as two successive quarters (6 months) of economic decline and weak GDP growth.
Fiji's predicament mirrors the trend in most countries around the world, with the pandemic sparing no one including the global economy, which itself is on life support in the form of financial response packages doled out by all affected governments as well as the world's bilateral and multilateral financial institutions.
This week, the International Monetary Fund (IMF), whose membership of189 countries includes Fiji, issued a bleak prognosis on the health of the world's economy after virtual meetings with leaders of the G-20.
"It is now clear that we have entered a recession as bad or worse than in 2009. We do project recovery in 2021," said IMF's managing director Kristalina Georgieva in a telecast press briefing.
"In fact, there may be a sizeable rebound, but only if we succeed with containing the virus everywhere and prevent liquidity problems from becoming a solvency issue."
The IMF, she said, had so far received 81 requests - an unprecedented number - from member countries for emergency funding.
Fiji's economy, initially forecast to grow by one percent this year, is now estimated to contract by 4.3 percent as a result of the coronavirus pandemic.
The Fiji National Provident Fund (FNPF) said it has enough cash to pay out to members who lose their jobs as a result of the COVID-19 pandemic's impact on the Fijian economy.
Amid growing concerns that the Fund is being used to compensate for government's lack of direct assistance to out-of-work Fijians when it unveiled its COVID-19 response budget last week, FNPF CEO Jaoji Koroi said the superannuation fund's liquidity and solvency were healthy and robust that there was no need for alarm.
"For your comfort, we have about F$400million (US$175million) cash in the banking system and that's not including the deposit we hold with them," he said in a media conference yesterday.
"We have projections for the next 12 months and we're adequately covered in terms of our cash flow so as far as we're concerned, there's sufficient funds for us to meet our obligations," Koroi said, adding that FNPF recorded a net reserves of F$1.3 billion last financial year and solvency was also currently being reviewed.
The Fijian government in its COVID-19 response budget, had announced that FNPF members employed in the country's tourism sector - the first to buckle under COVID-19 - may withdraw up to F$1000 (US$437) to assist them as the country waits for normalcy to return.
As well, members in the currently-quarantined Lautoka city were eligible for F$500 (US$218) each.
Some 43,000 workers are immediately eligible under the two assistance measures but as money would be deducted from their own accounts, Koroi said not all may want to withdraw.
However, in case they do, around F$40m (US$17.5m) was ready to meet that obligation.
"It's doable," he said. "We did Cyclone Winston [FNPF's relief package to eligible members after Cyclone Winston ravaged the country in 2016] and that was around F$276 million, so cash is sufficient to meet all these things."
The Fund already offers unemployment benefit for its members but this has been reduced from F$2,000 per member to F$1,000 to streamline processing.
It is expected that members outside the tourism sector who lose their jobs during these harsh times may apply for that.
As Fiji's largest financial institution with over F$7billion (US$3billion) worth of assets in 2019 and half the population as its members, FNPF is a major force in the stability of the country's economy, with around 42 percent of that $7b invested in Fiji government securities in Fiji and in the international financial markets.
It has not ruled out buying more in the upcoming government issuance to finance the F$1billion COVID-19 response budget.
"We're no different from any other superannuation funds as everywhere else, they're all going for treasury bills. The stock markets have fallen by 20-30 percent so this [government securities] is a safe investment that is giving us the returns," Koroi said.
The Fund is also a significant investor in the tourism sector, being owner or part owner of some of Fiji's top hotels, which have either closed or are in the process of closing as the global tourism industry is brought to its knees by COVID-19.
Koroi said the FNPF will use the current slowdown to refurbish some of these hotels.
The Coronavirus outbreak, the Australian bushfires, continuing US-China geopolitical and trade tensions and damage caused by Tropical Cyclones Tino and Sarai have seen 2020 get off to a difficult start in our region. Pair that with sensitive regional trade negotiations, a New Zealand election and Brexit, and Pacific island countries are looking to downgrade economic growth projections across the board.
As we went to press, coronavirus (or COVID-19) diagnoses stood at almost 77,800 globally. There had been 2348 confirmed deaths and cases confirmed in 28 countries, including Australia. There had been no cases recorded in any Pacific Island nations.
Oxford Economics has projected COVID-19 will cost the global economy over US$1tn (representing a 0.5 per cent fall in global GDP) if it becomes a pandemic and spreads beyond Asia. The firm’s economic modelling suggests the virus is already having a “chilling” effect as company after company report amended revenue forecasts as a result of production challenges and supply problems. China’s GDP will fall from 6 per cent last year to 5.4 per cent in 2020 predicts Oxford Economics. ANZ Research predicts a greater impact, a decline in GDP to 5 per cent.
While Pacific Island nations have significant, and growing links with China, it’s the impact of the coronavirus, on top of the devastating summer 2019/20 bushfires on close neighbour Australia that may have the more significant immediate impact.
Australia’s Reserve Bank says the coronavirus poses a material threat to Australia’s economy. It had already estimated the bushfires would cut economic growth by 0.2 percentage points in the December and March quarters, and that drought will cut GDP by a further 0.25 per cent throughout this year. Deloitte Access Economics says the coronavirus will cut $1.8 billion from budget revenues.
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2019 was meant to mark the end of the PNG government’s 20-year Tariff Reduction Program (TRP), introduced in 1999 and designed to reduce tariffs gradually to a uniform 10% across the different tariff categories. In fact, 2019 was the second year the government deviated from the TRP, with more tariff rate increases introduced in addition to those of 2018. In total, the PNG government has instituted 323 tariff line increases in the past two years. Tariffs are taxes that increase prices consumers and producers pay for imported goods and inputs. The reason for the tariffs, according to the Customs Tariff Amendment (2019) Act, is to “provide relief to local pioneer industry and existing local manufacturers from cheap imports”. In my recent discussion paper, “Predicting the Impact of PNG’s 2018 and 2019 Tariff Increases: A Review of PNG’s Trade Policy History”, I undertook an analysis of the likely impact of these tariff increases by reviewing PNG’s trade protection history.
A quick glance at products enjoying recent tariff rate increases gives some idea of the products and industries PNG intends to promote. These include frozen meat, packaged fruit and vegetables, sugar and confectionary, flour, cereals, women’s handbags, various wooden products, garments and fabric, beverages, smoked fish, soap and plywood furniture. The average (unweighted) tariff rate increase in 2018 was 7%, and this doubled to 14% in 2019. But there were some substantial increases. In particular, a 25% tariff introduced on various milk products – previously tariff free – clearly intended to benefit PNG’s first joint venture dairy enterprise, Ilimo Dairy Farm. While there were no further tariff increases in the 2020 budget, there were no tariff reductions either.
Have protections for the manufacturing sector in PNG historically encouraged the economy to grow? A Tariff Review Taskforce established in 2003 to evaluate the effects of reduced tariff rates on PNG’s different sectors found that for the manufacturing sector, the industries that expanded the slowest were those subjected to some of the highest tariff rates, such as tuna and mackerel canneries. High tariffs also had a negative effect on export industries, the taskforce argued, by causing the price of imported inputs to increase. Furthermore, large capital-intensive producers were more adversely affected due to higher input costs, compared to smaller, labour-intensive producers.
The argument in favour of tariffs imposed temporarily to allow a certain industry to become competitive is known as the infant industry argument. The goal of infant industry protection is to ensure that industrial capability is developed in its initial stages of operations. Once these industries can compete against rival companies, the tariffs are lifted.
In East Asia successful economies like Korea and Japan historically used trade protections, while in Latin America many poorly performing economies also used trade protections. The degree to which protections helped or harmed growth in both instances is contested. PNG, however, historically has a poor record in selecting ‘winning industries’, with the cement and sugar industries prominent examples of industries that failed to become competitive under high tariffs. A key test to tell whether the infant industry argument holds is to ask whether the industry is competitive after tariffs have been gradually reduced. The TRP was in many ways a test to see which industries were ‘winners’ and which were not.
For example, Ramu Agri-Industries (RAI) lodged a complaint in 2013 when tariff rates were reduced to 40%, arguing that its products were no longer competitive. This complaint came after RAI (formerly Ramu Sugar Limited) had been producing sugar for 31 years, having enjoyed import bans, tariffs as high as 85%, and pioneer industry status. The reasons why the sugar industry did not become competitive were inadequate climate conditions, sugar disease, and low world sugar prices. RAI has since reduced sugar production by converting 2,500 hectares of sugar cane into oil palm, which has been doing well in PNG. Perhaps without protection RAI would have converted more land to oil palm earlier.
Another example is PNG Halla Cement, a joint venture between a South Korean company and the PNG government. PNG Halla enjoyed an import ban and then high tariffs on cement imports in the 1980s. Lack of competitiveness caused the government to divest its stake in the company in 2000.
The intention of the 2018 and 2019 tariff increases to grow the manufacturing sector is good, and as a revenue source for a government that has run budget deficits for the past seven years, tariffs do appear attractive. However, as PNG trade history indicates, several industries singled out for high levels of trade protections in the past have failed to thrive.
Maholopa Laveil is a Lecturer in economics at the School of Business and Public Policy at the University of PNG.
This article appeared first on Devpolicy Blog, devpolicy.org, from the Development Policy Centre at The Australian National University