World Bank : Papua New Guinea – Dealing with a Triple Crisis

In 2020, Papua New Guinea faced three crises: the COVID-19 health emergency, an economic contraction, and political uncertainty

Although the country largely avoided the health emergency experienced elsewhere, as of end of January 2021, Papua New Guinea had recorded more than 860 confirmed cases of COVID-19 and nine deaths.

As a result of pandemic-related restrictions and weaker demand, it is estimated that real GDP contracted by 3.8 percent in 2020 (compared to a pre-crisis projection of 2.9 percent growth), and the fiscal deficit widened to 8.1 percent of GDP (three percentage points higher than the pre-crisis projection). Consequently, the debt-to-GDP ratio surged to 49 percent (nine percentage points higher than the pre-crisis projection).

At the same time, unemployment increased, affecting the most vulnerable households, particularly women and youth.

On top of these new challenges, the government faced political uncertainty, with a threatened no-confidence vote and delays in approving the 2021 National Budget.

Despite a rapid launch of the emergency health and economic support program, legal and funding issues slowed its implementation.

In April 2020, the government announced a crisis response program of PGK 1.8 billion (about US$500 million, or 2.2 percent of GDP), comprising budget and off-budget funding. By the end of October 2020, only 74 percent of the fiscal stimulus program has been actioned.

The lack of formal safety net programs constrained government support to poor households. Cash constraints - due to reduced domestic revenue and backloaded external support from development partners - slowed the implementation of health and economic relief measures initially.

The government focused on securing foreign grants and loan support and amended the Central Banking Act to tap into domestically available funding at the Bank of Papua New Guinea (BPNG).

Budget support provided by the Government of Australia and the Asian Development Bank (ADB) led to an increase in international reserves at the end of 2020, affecting the pace of exchange rate adjustment.

Considering that the PNG economy entered the COVID-19 crisis with a poor record of resilience to external shocks, strengthening macroeconomic management and accelerating structural reforms will be vital.

Economic growth is expected to rebound to about 3.5 percent in 2021-22, but the economy will be nine percent smaller in 2023 compared to our pre-pandemic forecast.

Risks to the outlook are firmly weighted to the downside. The main risks include the possibility that the COVID-19 pandemic lingers and has an enduring economic impact.

For more inclusive and sustainable development over the medium term, the authorities will need to ensure that frontline health services continue to deliver during the crisis, introduce safety nets for the poor and vulnerable, support firms and employment in the informal sector, and strengthen the macroeconomic policy framework, including a renewed focus on fiscal consolidation.

Strengthening and investing in key institutions that deliver basic public services, especially during crises, will be vital, as discussed in a special focus section of this report.

The delivery of basic services in Papua New Guinea is extraordinarily challenging.

The population is highly dispersed and fragmented, as a result of the mountainous and archipelagic geography, low urbanization rate, high ethno-linguistic diversity, and social identities that are primarily small-scale.

Papua New Guinea shares the political economy characteristics of resource-rich states. These combine with Papua New Guinea's political structures and small-scale social identities to yield a political system and state that is increasingly dominated by patron-client relationships.

In this context, it is an extraordinary challenge for the state to be able to provide the population with basic services such as order and justice, education, health, and roads.

To understand how it does so, and why it is more successful in some areas than in others, requires an understanding of the capabilities of the institutions involved.

This special focus section of the PNG Economic Update uses an institutional capital framework to examine how PNG's institutions actually work and their existing capabilities.

The approach recognizes that the capabilities that institutions have are a product not only of factors internal to institutions, but also of factors in the broader social, economic, geographic, and political context.

The section focuses on institutions that provide basic services - village courts, education, health, and roads - and institutions that collect public revenues to fund these basic services.

It provides a stocktaking of institutional capital in these sectors and analyzes key resilience factors and opportunities, and key vulnerabilities and constraints, in each sector.

The analysis shows that the capability to deliver basic services depends on how effectively different state and non-state institutions come together to jointly provide the services.

No single scale or type of institution - state or non-state - has the requisite capabilities alone. Only through joint efforts can the capabilities required for service delivery in this extraordinarily challenging context be mobilized.

The analysis shows that institutional capital is weakest where these partnerships are weak or absent. This tends to be more the case where:

• The service requires significant amounts of capital spending, or significant amounts of non-salary recurrent spending controlled centrally by a single institution
• The political value of the service can be gained even if the service is provided only to a narrow set of beneficiaries
• The service is complex
• Local-level partnerships are vulnerable to the intrusion of patron-client relationships from higher tiers of government; or
• There is a large divergence between the rules coming from the different institutions jointly providing the service.

Key recommendations for policy makers, development partners, and other stakeholders include:

• In revenue, donors should continue to support Papua New Guinea to access to the global expertise needed to negotiate and implement agreements that secure a proper share of natural resource proceeds for consolidated revenue, even though political economy dynamics work against such outcome.
• In basic order and justice, government should make the modest investments required to increase the village court system's coverage in urban settlements and to increase the representation of women magistrates. These changes are partly implemented, but the funds to complete them are outstanding.
• In basic education, the priority should be to protect and raise the importance and authority of local school boards, to further strengthen local ownership and accountability for basic education.
• In basic health, government needs to reduce the sector's vulnerability to fiscal volatility, especially for church health providers, which has been starkly illustrated during the COVID-19 health emergency covered in Part A. Provincial Health Authorities should be supported to establish and maintain effective partnerships with institutions across the health sector, to address institutional fragmentation.
• In roads, at the national level, donors should take measures to safeguard funding for maintenance work in roads investments. At the subnational level, there is the opportunity to build on function grants for road maintenance, and substantially increase the incentives for maintenance, by providing results-based grants to provinces that successfully maintain provincial and local roads.