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Date Posted: Wed, Oct 01 2008, 06:28:35pm
For those interested in understanding the 2008 Supplementary Budget Speech.
website:
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http://www.treasury.gov.pg/html/national_budget/files/2008/budget_documents/2008%20Supplementary%20Budget%20Speech.pdf
The Speech
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2008 Supplementary Budget Speech
“Enhancing Growth”
Hon. Patrick Pruaitch, MP
Minister for Treasury and Finance
23rd September 2008
INTRODUCTION
Mr. Speaker and Honourable Members of Parliament, I am very pleased and honoured to
present to this House the 2008 Supplementary Budget.
This is a record fourth successive supplementary budget for Papua New Guinea and is
my second as Minister for Treasury and Finance.
Mr. Speaker, the Government is committed to improving service delivery to our people.
The supplementary budget presents yet another opportunity to achieve this. However, the
Government remains mindful of the significant domestic and international economic
challenges the country faces.
Mr. Speaker, in order to move the country towards a better future, the Government has
adopted the new Medium Term Fiscal Strategy (MTFS) 2008-2012, which is guided by
very important principles for allocating additional mineral revenue.
Mr. Speaker, it is appropriate that prudent fiscal management is based in the context of
the prevailing economic environment, hence I would like to discuss the state of the
economy before going on to outlining the main themes and initiatives of the 2008
Supplementary Budget.
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THE 2008 STATE OF THE ECONOMY
Mr. Speaker, the economy is in its sixth successive year of growth.
The 2008 Mid Year Economic and Fiscal Outlook (MYEFO) Report revised the expected
economic growth in 2008 up to 7.3 per cent from 6.6 per cent forecast in the 2008 Budget.
This revision was due to higher than projected growth in the communication and agricultural
sectors, as well as a broad based increase in economic activity in other non-mining sectors.
The mining and quarrying sector is also expected to expand, largely due to higher production
from Ok Tedi.
Given the positive outlook for economic growth in 2008, the Government is using the 2008
Supplementary Budget to invest in infrastructure, pay down debt and improve service delivery.
Going forward, the economy is facing significant domestic and international economic
challenges, including a heightened inflationary environment, an extremely uncertain
international economic environment, falling and volatile commodity prices from very high
levels and a significant appreciation in the exchange rate.
In light of this uncertain economic outlook, the Government is developing the 2009
Budget responsibly in order to promote macroeconomic stability and prudent fiscal
management. A detailed rundown on economic developments and the outlook will be
provided in the 2009 Budget in mid November this year.
THE GOVERNMENT’S FISCAL POSITION
Mr Speaker, there has been a significant improvement to the Government’s fiscal and
debt position due to good fiscal and macroeconomic management. The budget has been
in surplus in recent years, which provided opportunity for the Government’s total debt to
be reduced to 34.1 per cent of GDP in 2007, and is moving towards a sustainable path in
the medium term.
Beginning in 2008, the Government’s expenditure decisions will be guided by the
principles of the MTFS 2008-2012. As a starting point, a 70:30 rule will apply in the
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allocation of windfall revenue: 70 per cent will be used to pre-fund future one-off
additional public investments and 30 per cent to be used for public debt repayment.
Consistent with this Strategy, the Government will be maintaining recurrent expenditure at
sustainable levels and the windfall revenue to be used to provide for the benefits of the
future generation by comparing against competing investment proposals and on funding
one-off infrastructure and repaying public debt with some consideration on the impact this
will have on inflation.
Mr. Speaker, political stability and the Government’s commitment to prudent fiscal policy
and debt reduction including opening up of key economic sectors for competition will also
continue to play a key role in increasing confidence among our international partners and
domestic private sector businesses.
Mr. Speaker, the impact of this has been very positive for Papua New Guinea. The
reduction of public debt will continue to increase macroeconomic stability and investor
confidence, and will help to reduce interest rates, which in turn will cause reduction on the
Government’s interest expense on loans. This will free up more funds to be used on
MTDS priorities.
Expected Fiscal Developments in 2008
Mr. Speaker, I would now like to report on the Government’s expected fiscal performance
for 2008.
Revenue Estimates
Mr. Speaker, the 2008 MYEFO forecast that there would be K1,414.6 million additional
funds available in 2008 from the 2008 Budget forecast released in November last year.
The bulk of this, about K1.1 billion, was mainly due to an upward revision to Mining and
Petroleum Taxes (MPT) due to higher commodity prices (especially the doubling of oil
prices) since the 2008 Budget. The remainder was due to higher economic growth and
inflation.
6
However, since the MYEFO estimates were published, there have been a number of
significant developments affecting the revenue available for allocation in the 2008
Supplementary Budget. These developments include large falls in both the price and
production of our major export commodities, particularly oil, coupled with the appreciation
of the Kina against the US dollar, lower MPT arrears collection and lower dividend
payment from Ok Tedi.
These developments have resulted in the amount of additional funds available for
allocation in the 2008 Supplementary Budget being revised downward to K850 million.
Allocating Additional Revenue
Mr. Speaker, in order to derive optimum returns from our scarce resources, we have
considered and taken into account the following factors in formulating the 2008
Supplementary Budget:
• the potential threat and uncertainty which remains in the revenue forecasts over
the rest of 2008 due to the commodity price falls experienced over recent weeks,
which may continue;
• the need to continue with prudent fiscal management and budget discipline;
• the large amounts already appropriated for spending in 2008 and all the funds that
are currently available to be spent in trust funds because of the significant lead
time it takes to prepare and implement quality spending plans including capacity
constraints;
• the economy running at full capacity and any additional fiscal stimulus to the
economy needs to be undertaken in ways that will minimise the impact on
domestic demand, inflation and therefore interest rates;
• equity considerations for future generations as well as the entire population
because most of the additional revenue to be allocated is derived from the sale of
non-renewable natural resources of PNG for which they are equally entitled to
benefit from; and
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• the need to strike a good balance in relation to the great development needs in
PNG, combined with the need to improve service delivery right across the country,
weighted against the desire to reduce Government debt to a more sustainable
level, together with addressing other Government liabilities that are growing more
strongly.
Mr. Speaker, the Government’s consideration of these factors in the 2008 Supplementary
Budget is important in ensuring that the extra revenues are used productively. The
Budget also aims to further strengthen the Government’s overall financial position and
address both the pressing development needs of the country and to reduce the
Government’s public debt and other liabilities.
THE 2008 SUPPLEMENTARY BUDGET
Mr. Speaker, the 2008 Supplementary Budget allocates K850 million in four key areas:
1. Public Debt and Other Liabilities K285.0 million
2. Transport Infrastructure (roads, airports, wharves and jetties) K250.5 million
3. NEC Approved Expenditures K127.4 million
4. Other Spending Priorities K187.1 million
Mr. Speaker, I now turn to the details of the 2008 Supplementary Budget.
Repayment of Public Debt and Other Liabilities
Mr. Speaker, in a high inflationary environment, the new MTFS calls for more than 30% of
the additional mineral revenue to be allocated to the repayment of public debt and other
liabilities. As a consequence of the fiscal discipline shown by the Government, PNG’s
public debt level has halved when expressed as a percentage of GDP over the last five
years, falling to 34.1 per cent at the end of 2007. The Government’s strong fiscal position
this year provides a further opportunity to reduce these obligations even further, hence
K285 million is allocated for this purpose in the 2008 Supplementary Budget.
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Mr. Speaker, the Government is also mindful that the unfunded superannuation liability
has increased sharply over 2007 and 2008 as super funds have experienced
extraordinary returns including significant new numbers of Government employees that
are entitled to receive superannuation contributions paid for by the Government have
come to light.
While the Departments of Treasury and Finance are working with Nambawan Super to
determine better estimates of the Government’s unfunded superannuation liability, the
quantum could be roughly around 12% of GDP. The Government’s persistent endeavours
to repay its debt and other liabilities has and will continue to result in significant benefits
such as improving investor confidence, interest savings and reduced exchange rate risks.
This has and will continue to free up resources to allocate to other priority expenditure
areas on a recurrent basis. The repayment of public debt and other liabilities is the most
prudent fiscal policy approach the Government could take in the current circumstances of
strong economic growth and high inflation.
Reducing the Government’s Liabilities with Nambawan Superfund
Mr. Speaker, the State has previously allocated K400 million to reduce its unfunded
superannuation liabilities with Nambawan Super. However, Nambawan Super has earned
an extraordinary high rate of return on its invested funds in 2007 and looks likely to enjoy
another very high return in 2008. Nevertheless, the Government’s unfunded liability owed
to Nambawan Super is now well over K400 million less than what it would have been if
these funds had not been repaid.
Funds repaid to Nambawan Super provide more funds for investment in PNG by
Nambawan Super. While this helps to strengthen private sector investment in the
economy, the Government also needs to be mindful of demand management within the
economy, with the economy growing strongly and inflation being too high. Balancing both
the high rates of return recently experienced by Nambawan Super and demand
management issues, K40 million is allocated to Nambawan Super in the 2008
Supplementary Budget.
9
Outstanding MOA Commitments
Mr. Speaker, the State is required to honour its commitments to the resource project
provinces. The 2008 Supplementary Budget provides a real opportunity to the
Government to honour these commitments especially leading up to developing the PNG
LNG Project for which PNG is expected realise huge revenue flows for years to come.
To honour some of these commitments, K195 million is allocated in the 2008
Supplementary Budget. Of the K195 million, K100 million is for Southern Highlands
Province and K60 million for Gulf Province. K20 million is allocated for outstanding
commitments endorsed by the Expenditure Implementation Committee, K10 million for
the Gobe-Samberigi Road and K2.5 million each for Hela and Jiwaka.
Repayment of Public Debt
Mr. Speaker, with K195 million allocated to outstanding MOA commitments, and K40
million for the repayment of unfunded superannuation liabilities to Nambawan Super out
of a minimum of K285 million allocated to debt and liability repayment, the balance of K50
million is allocated for public debt repayment in the 2008 Supplementary Budget.
Pre-funding of Public Investment Programs
Mr. Speaker, with K285 million allocated to debt and liability repayment, K565 million
remains to be allocated in this supplementary budget.
The major emphasis for funding in this supplementary budget is placed on funding
maintenance and construction of transport infrastructure including roads, bridges,
wharves, jetties and airports. This is consistent with the National Transport Development
Plan (2006 – 2010) and the Government’s broader Medium Term Development Strategy
(2005 – 2010).
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Funding for Transport Infrastructure Development
Mr. Speaker, the amount of funding made available for transport infrastructure
development in this supplementary budget is considered after taking into account the
substantial funds that are already available in trust, and in recurrent and development
budgets.
In this context, the 2008 Budget appropriation of K195.6 million for National Infrastructure
Development Program (NIDP) is reallocated for maintenance and rehabilitation of five of
the 16 highest priority roads under the National Transport Development Plan (2006 –
2010) separately. An amount of K82.6 million is allocated for funding the maintenance of
the Highlands Highway, while the remaining K113 million has been distributed to fund the
other four very high priority road projects. The Sepik Highway is allocated with K53 million
while Koroba-Kopiago-Mendi Road, Buluminsky Highway, and New Britain Highway are
allocated K20 million each. All of this represents new funding available for roads.
Mr. Speaker, the 2008 Supplementary Budget will part fund the remaining 11 of the 16
priority road projects that are identified in the National Transport Development Plan and
some other major roads that are also in great need. It is envisaged that additional funding
for national priority roads will be considered in the 2009 Budget. Hence, K90 million is
provided in this supplementary budget for the following roads:
1. Porgera-Togoba Road K 20 million
2. West Coast Road K 10 million
3. Baiyer Road K 10 million
4. Hiritano Highway K 10 million
5. Coastal Highway K 10 million
6. Kokoda Road K 5 million
7. Wau Highway K 5 million
8. Buka Highway K 5 million
9. Magi Highway K 5 million
10. Ramu Highway K 5 million
11. Northern Highway K 5 million
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In addition to funding of these roads, the 2008 Supplementary Budget further allocates
K64 million or K4 million to each of the following 16 rural town roads:
1. Ialibu-Pangia Road K4.0 million
2. Mt Hagen Road K4.0 million
3. Wabag Road K4.0 million
4. Minj Road K4.0 million
5. Madang Road K4.0 million
6. Lumi Road K4.0 million
7. Wau-Bulolo Road K4.0 million
8. Bogia Road K4.0 million
9. Korere Road K4.0 million
10. Vanimo Road K4.0 million
11. South Coast Road K4.0 million
12. Kompiam Road K4.0 million
13. East Sepik Rural Roads K4.0 million
14. Angoram Road K4.0 million
15. Agaun Road K4.0 million
16. Kelerakwa Road K4.0 million
Mr. Speaker, apart from funding construction and maintenance of road infrastructures,
this supplementary budget also allocates K96.5 million to fund the following sea and air
transport infrastructures:
1. Existing Lae port K21.5 million
2. Other ports, wharves, jetties K20.0 million
3. Airport upgrades K20.0 million
4. National and Rural Bridges K35.0 million
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Funding of NEC Approved Expenditures
Mr. Speaker, I reiterate that the Government will not allocate additional mineral revenues
to fund ongoing expenditures, simply because they are not sustainable in the absence of
a commodity price boom. It is appropriate instead to have ongoing expenditures screened
properly, scrutinised and considered in the context of the 2009 Budget, which will be
handed down in November.
The following NEC approvals totalling K127.4 million granted earlier this year are funded
in this supplementary budget:
1. Pre-fund on-lending to Air Niugini for purchase of a new aircraft. K 70.0 million
2. National Television Service set-up by National Broadcasting K 12.0 million
Commission, for equipment & installation costs for 6 sites
under phase 1 of the project.
3. Outstanding land settlements. K 12.0 million
4. Set up of the Office of Climate Change. K 3.8 million
5. Payment of housing allowance for Attorney General’s staff. K 2.6 million
6. Funding for the Commission of Inquiry into Finance. K10.0 million
7. Outstanding National Disaster Office verified liabilities for K 6.5 million
Oro Disaster.
8. Feasibility studies for a road from Kisenepou in the Southern K 5.0 million
Highlands Province to Towei in the Gulf Province, linking the
current construction of Gobe-Samberigi road.
9. National Planning Technical Advisory Team K5.0 million
10. Bouganville Office K0.5 million
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Other Spending Priorities
Mr. Speaker, a total of K167.1 million is allocated on other spending priorities in the 2008
Supplementary Budget in the following manner:
1. National Border Authority K40.0 million
2. Construction of 4 regional provincial treasury offices and K26.0 million
other District Administration Offices to complete the district
treasury roll out program
3. Outstanding liabilities for Yomoki Ltd of K1.3 million and New K1.38 million
Guinea Fisheries of K80, 000 for food supplies
4. Refurbishment and maintenance of the air-conditioning system K1.4 million
and acquisition and installation of new generator set for the
National Museum
5. Outstanding liabilities for the 2008 LLG elections and the 2007 K12.9 million
National Elections National Elections
6. Land acquisitions by the State - for State schools K 1.74 million
7. Government Funding for Integrated Financial Management System K 5.85 million
8. Replenishment of the Secretary’s advance K12.63 million
9. PNG National Games K 2.3 million
10. Church Run Hospital Partnership (PPP) K14 million
11. Additional funding for Government House K1.6 million
12. Additional funding for National Parliament K6.0 million
13. Public Accounts Committee K1.3 million
14. Mirigini House Renovation K3.0 million
15. Prime Minister’s overseas and domestic commitments K5.0 million
16. Court Orders K20.0 million
17. PNG Canberra Office – Purchase of Residence K12.0 million
18. Public Service Housing K 10.0 million
19. Waigani Office Re-development K 10,0 million
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CONCLUSION
Mr. Speaker, let me conclude by emphasising the key messages.
The economy continues to grow strongly and the Government’s fiscal position has
improved significantly. This creates yet another opportunity for the Government to
improve the lives of our people. To achieve this, the Government is doing the sensible
thing by making sure that extra funds are spent in an effective and fiscally sustainable
manner for the benefit of the entire population. However, we need to ensure that the
expenditure allocations in this supplementary budget do not add to further inflationary
pressures in the currently high inflationary environment. We have also sought to insulate
the recurrent budget from the effects of any possible downturn in international commodity
prices, as we have seen recently for our major export commodities.
Mr. Speaker, the 2008 Supplementary Budget is set within the Government’s medium
term strategies, which serve as the basis for allocating more funds to the development
priorities of the Government. Consistent with this, additional funding is provided in this
supplementary budget for Public Investment Programs, in particular the provision of
transport infrastructure projects. This is in addition to the significant funding already
provided in the previous budgets for this purpose. This clearly demonstrates the Somare-
Temu Government’s commitment to develop and improve the infrastructure needs of our
people. We now need to see our Government departments and agencies follow through
with appropriate spending plans and effective implementation of the projects.
Mr. Speaker, it is with great pleasure that I commend the Appropriation Bill for the 2008
Supplementary Budget to the House.
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