Port Moresby, Papua New Guinea

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POST-COURIER

Tuesday, November 30, 1999

PAPUA NEW GUINEA BUDGET 2000

This is a full transcript of a speech by Sir Mekere Morauta, Kt MP, Prime Minister and Treasurer, on the occasion of the presentation of the 2000 Budget to Parliament on Tuesday November 30, 1999.

"ROAD TO RECOVERY"

Mr. Speaker, Honourable Colleagues, People of Papua New Guinea.

The Government I formed on 14th July is just four and a half months old. In that short time we have taken many tough decisions. We had to.

We had to reverse the macro-economic slide. We had to stabilise the exchange rate and the financial system. We had to restore fiscal responsibility. We had to rebuild the integrity of state institutions and a more orderly process of government and decision-making.

We had to re-establish sensible and productive relations with the rest of the world. We had to continue the pursuit of a lasting solution to the conflict in Bougainville.

We are proud of our achievements, but they are only a start. The challenges ahead are enormous.

The Supplementary Budget that Parliament passed in August laid the foundation for this crucial 2000 Budget. This Budget entrenches fiscal responsibility.

At the same time, within the overall financial constraints we face, it shifts resources to priority areas. Health, education, law and order, infrastructure maintenance, primary industries and revenue generation get increases.

The approval of this Budget by Parliament marks a turning point for Papua New Guinea.

In recent years we lost our way. We have lurched from crisis to crisis with no sense of direction. The lives of our people have become worse, not better.

We have now found the way forward.

We have begun to move steadily towards a better life for our people in the 21st century.

Everyone should have access to adequate food and to clean water to drink, to decent health and education, and to safety from crime. Everyone should have opportunities to earn income.

Everyone should have access to transport and communications so that their products can get to markets and they can understand and profit from the changing world around us.

Achieving this vision is the duty of my Government. We are pursuing it with determination.

Today marks a fundamental step along our difficult road to recovery, another firm step ahead on our path towards reconstruction and development.

Since July, the Government has worked relentlessly to bring the economy back on track and to set the building blocks for stability and better government.

The Supplementary Budget

Our first, very important step was to introduce a Supplementary Budget. Its aims were to restore macro-economic responsibility and financial stability and to correct the gross inadequacies of the original 1999 Budget.

The original 1999 Budget continued the sloppy thinking and false hopes of the 1998 Budget. Their failure led to the sticky economic and financial quagmire that bogged the country when we took office.

The budget deficit for the first half of 1999 was over 250 million Kina, running at an annualised rate of 5.4 per cent of GDP. The exchange rate was on a downward slide, and plummeted to below 30 US cents.

Inflation was rising; the annual inflation rate in 1998 was 22 per cent, and it continued to increase during the first half of this year. Interest rates reached an all-time high of 29 per cent. Foreign exchange reserves were as low as 84 million US dollars.

The need to finance over-expenditure raised the domestic debt to unsustainable levels. Debt service charges rose to more that 24 per cent of total outlays. The Government stopped paying its suppliers, resulting in a build-up of arrears.

The accumulation of 217 million Kina of arrears amounts to 8.6 per cent of total expenditure of the 1999 Supplementary Budget.

Such gross mismanagement of government finances and of the economy at large, resulted in a total loss of public confidence.

This caused lower investment and employment. Loss of confidence by the rest of the world made it impossible to secure much-needed external financing.

Moreover, the public service was in complete disarray, following a retrenchment program that was ill conceived and chaotically implemented.

The Supplementary Budget took stock of the situation and took measures to make sure the Government could meet its obligations.

This meant putting a halt to retrenchment, introducing new revenue measures worth 72 million Kina, and reducing expenditure.

This was the price that had to be paid for restoring economic stability and for putting an end to reckless borrowing from the Central Bank.

The deficit in the first half of the year was turned into a surplus of 60 million Kina for the second half of 1999.

The turnaround in the 1999 Budget outcome is a remarkable achievement. We have reduced the deficit to 1.6 per cent of GDP. This massive reduction allows us to plan properly for the year 2000.

Today, one month from the end of the year, the Supplementary Budget is largely on track. This is mainly due to the strict expenditure control mechanisms we have re-established to make sure we stick to our commitments.

The revised budget has achieved a degree of stabilisation. Our achievements have been highly commended by the International Monetary Fund, the World Bank and our other development partners.

This has helped to restore confidence. The commitment of 80 million US dollars of support from the Australian Government will make it possible to shore up our foreign exchange reserves.

The exchange rate has appreciated and steadied. Interest rates have declined by 7 to 8 percentage points. Inflation has fallen to an annual rate of 17 per cent.

These developments make it possible for the private sector to plan investment and reinvestment with some certainty. The continuation of these developments should lead to falling prices for goods and services.

Already, the price of rice has come down. That is a direct result of the success of our package of stabilisation measures.

We are on the right path; there is no doubt. We just need to keep walking at a steady pace.

The Response from our Development Partners

In these first four and a half months, the Government has re-established positive and constructive relations with the international community.

The restoration of economic stability and good government enabled me to make a positive impression on the region’s leaders at the September meeting of APEC in New Zealand. This led to the establishment of a new group, the Friends of Papua New Guinea.

IMF and World Bank endorsement of the Supplementary Budget, of the framework for the 2000 Budget and of the Government’s structural reform agenda, resulted in their agreeing to assist us next year.

This paved the way for a very successful Consultative Group meeting, held in Port Moresby at the beginning of this month.

For the first time in four years we sat down with our development partners.

All our multilateral and bilateral donors, and the new Friends of Papua New Guinea, warmly praised the restoration of stability and responsible economic management.

At the same time, they rightly pointed out that the road ahead is rocky and much still needs to be done.

The stability we have created remains fragile. The confidence that we have restored could vanish, unless we continue to act responsibly.

Such a loss of confidence would be disastrous. We need to move carefully, thoughtfully and consistently, taking well-judged steps, one at a time.

Mr. Speaker,

The 2000 Budget is the next step we must take.

The 2000 Budget

The 2000 Budget buttresses the achievements of the 1999 Supplementary Budget. It recognises the difficulties the country is facing, and addresses them in a responsible and constructive manner.

It lays the foundation for national economic recovery.

A Balanced Budget

The 2000 Budget is based on simple rules of sound financial management. It is a balanced budget.

The revenue side of the Budget will benefit from the significant measures we took in August. The 2000 Budget has no new revenue measures.

Expenditure reflects fiscal discipline and begins to implement an ambitious but achievable structural reform program.

Despite the severe limits on available resources, due to the burden of debt and unpaid bills we inherited, we have increased the allocations for high priority areas and for the Development Budget.

Mr. Speaker,

This Budget is fundamental for the future of Papua New Guinea. If we implement it successfully, we will move safely away from the edge of the precipice we were on just a few months ago.

We will also have created the preconditions for sustained economic growth and better standards of living for all our people.

During 2000 we intend to obtain extraordinary external support from the World Bank, the International Monetary Fund and other friendly governments.

I am pleased with the progress we have made with these institutions towards an agreement for balance of payments support from the IMF, amounting to 100 million US Dollars, a structural adjustment loan from the World Bank and the Asian Development Bank, and additional support from other Governments that are part of the Friends of PNG group, particularly Australia.

We expect about 200 million US dollars in extraordinary external budget financing.

Reduction of Government Debt

To strengthen macro-economic stability, government debt will be reduced substantially, in four ways.

Reducing government domestic debt and restoring financial stability will lead to lower domestic interest rates. This will encourage private sector investment, employment and economic growth.

At the same time, it will put government finances in a much healthier state.

In this first Budget of my Government, revenue is projected to be 11 per cent higher than in the 1999 Supplementary Budget. Total revenue and grants for 2000 are estimated at 2.867 billion Kina. As I have already mentioned, there will be no new revenue measures. This is the first budget in Papua New Guinea's history to have no new revenue measures.

Value Added Tax (VAT)

The introduction of Value Added Tax in July 1999 was based on the principle that it should be revenue neutral. The collections so far this year and our projections for next year prove this. The projections show a marginal increase in overall revenue as a result of VAT, but I repeat marginal. What we have done is to remove tariffs and import duties and replace them with VAT.

But while overall VAT is revenue neutral, Provincial Governments will derive large benefits from it. From the end of January 2000, VAT payments to provinces will be at least 22.5 per cent higher per month than previous provincial sales tax collections. On top of that large increase, all the costs of collection are borne by the National Government.

Mr. Speaker,

I want to make a commitment to Governors that the flow of VAT revenue to Provinces will be timely. Each month, the provinces will receive a cheque from the Internal Revenue Commission. It will be a regular payment; it will cost the provinces nothing to collect; and they will receive more than would have with provincial sales taxes.

The administration of the VAT is in its infancy. Teething problems are inevitable. Like any tax, distortions can emerge and unintended burdens may result.

I am committed to reviewing and correcting all anomalies and unintended effects that are identified. Some have already been identified, and only last week Cabinet approved the exemption of charities, aid donors and educational institutions from VAT, with immediate effect.

I have instructed the Taxation Review Committee under Sir Nagora Bogan to review the operation and effect of VAT. I urge Parliamentarians, community leaders and businesses to submit their comments for consideration.

Other Tax Reforms

As a result of early recommendations of the Taxation Review, the 4 per cent mining levy has been replaced by a formula-based charge. The 2000 Budget also abolishes the interest withholding tax on petroleum companies, as was done for mining companies in the Supplementary Budget.

Mr. Speaker,

I have called the 2000 Budget a Recovery Budget. Why?

Because it completes the sanitisation of past budget excesses, unpaid debts, illegal borrowings and over-expenditure. It allows us to recover from the past. This budget puts our house in order. It sets the foundation for growth.

It is projected that in 2000 total Gross Domestic Product will increase by 4.7 per cent. Non-mining GDP will increase by 4.4 per cent, compared with only 0.7 per cent in 1999. It is projected that in 2001 it will increase by 5.5 per cent. These rates of growth will be coupled with significant employment and incomes growth. They will improve the standard of living of the great majority of the population.

Expenditure

The decisions not to introduce new revenue measures in 2000 and to achieve a balanced budget, restrain increase in expenditure. In spite of this, we have increased spending on the six priority areas of health, education, infrastructure, agriculture, police and revenue generation.

To make room for that, other activities will necessarily be squeezed. In the 2000 Budget, most agencies have been allocated the same nominal amount of resources as in the 1999 Supplementary Budget.

Mr. Speaker,

We all know that Papua New Guinea’s social indicators are lower than in other South Pacific countries, and are getting worse. There is no reason why this should be so. On the contrary, ours should be much higher than our neighbours, all of whom have far less natural resources than we do.

We will reverse this trend. We will improve services to our villages and settlements.

As I explained earlier, my Government has already shifted expenditure away from unproductive outlays of debt service. This will bear fruit from 2001. Unfortunately, a large proportion of the 2000 Budget will be eaten up by the lack of financial discipline of previous governments. In fact, 786 million Kina, over 22 per cent of total spending, has to go to servicing the huge debt that has been accumulated.

Another inherited problem that further strains our scarce resources in 2000 is the need to outlay 100 million Kina for arrears recently uncovered. These include payments owed by the Defence

Force and the Police, outstanding court claims and utility bills.

However, Mr. Speaker, I am pleased to inform Members that our planned reduction in domestic debt, combined with the decline in interest rates, will reduce domestic interest payments in 2001 by about 120 million Kina, compared with 2000.

That saving, combined with the clearing of all past arrears, means that from 2001 we will be able to increase expenditure by almost a quarter of a billion Kina.

Mr. Speaker,

This is the radical change that I am aiming for. This is what the Recovery Budget in 2000 lays the foundation for.

Total outlays, including arrears, will be 3.495 billion Kina in 2000. Of this, 413 million Kina will be used for principal loan repayments. Total expenditure is thus 3.082 billion Kina. Recurrent spending for National and Provincial Departments is 2.077 billion Kina. 903 million Kina, or 29 per cent of total expenditure, goes to the Development Budget.

To ensure that Provincial Governments are equitably provided for, grants in 2000 across all categories are maintained at 1999 levels.

For next year, payments to Provinces through Special Support Grants, Mining Agreements and District Support Grants have been transferred to the Development Budget.

Total recurrent grants to provinces amount to 517 million Kina. Provinces also receive 322.3 million Kina of the Development Budget, a combined total expenditure for provinces of 839.3 million Kina, or 27.2 per cent of total expenditure.

On health and education, the two most important social services that Government must provide, the direct outlay will amount to 27 per cent of total expenditure.

The 2000 appropriation for these two essential services is 2 percentage points higher than recommended by the World Bank in their 1995 Structural Adjustment Program for Papua New Guinea. It is, however, still insufficient to accommodate the requirements and legitimate demands of people for adequate health and education services. We will need to spend more on these areas in future years.

The economic and infrastructure sectors receive 10.5 per cent of the total appropriation. The needs are much higher. I am committed to increase the share for infrastructure substantially in 2001.

Law and order agencies receive 6.7 per cent of total expenditure. This is high by international standards, but essential for the personal safety of our people.

Mr. Speaker,

65 per cent of total expenditure has been directed to the Government’s 6 priority areas - health, education, primary industry, infrastructure maintenance, law and order and revenue generation.

Interest payments consume 12 per cent of total expenditure. That leaves only 23 per cent for general administration and other activities.

At last Papua New Guineans will be able to see some positive outcomes of government expenditure, with improved funding for the things that matter.

Development Budget

As I mentioned earlier, the Development Budget will total 903 million Kina next year. This represents 7.9 per cent of GDP, and is a 27 per cent increase over 1999, with some 125 million Kina devoted to infrastructure maintenance alone.

Rural Development Funds for 2000 total 143.5 million Kina, with 1.5 million Kina per Open Member and half a million Kina for each Regional Member.

Mr. Speaker,

I want to reassure the public that transparency and accountability will be brought to bear on money spent under RDP funds. These expenditures can bring benefits to rural areas. They already do.

However, as a responsible government we need to address the worries expressed by many, both within and outside the country, and demonstrate that what RDP funds do is worthwhile.

We are reviewing the guidelines for disbursement. We plan to adopt a countrywide approach, based on District Development Programs, that will ensure the funds are spent in the best way possible, and achieve the Government’s objectives for basic service delivery. We will focus on key activities and combine RDP spending with other sources of financing, including donor funding, to maximise its impact.

Mr. Speaker,

The increased spending in priority areas that we have managed to fund in 2000 constitutes a small percentage of what should be devoted to these sectors in order to provide satisfactory services to our people. We still have a long way to go. Nevertheless, the 2000 Budget shows our commitment to shift resources away from low priorities to core functions that make a real difference to the well being of people.

This budget lays a financial and management base to embark on a more radical social and infrastructure development program from 2001. The savings we derive from our current vacuum-cleaning, through debt reduction and payment of all arrears, combined with the increased revenue Government can expect from increased economic activity, will allow us to make real progress towards improving services.

From Recovery to Growth

Mr. Speaker,

The 2000 Budget puts us firmly on the road to recovery. The Budget will complete the urgent task of short-term economic stabilisation and put better management systems in place.

It will enable us to move beyond short-term crisis management and tackle, one by one, the more fundamental challenges of social and economic development.

Up to now, we have failed to realise our potential. In our land of plenty, there are still people who cannot get to an aid post or attend school. For those who can, they may find no medical supplies, books or other education materials. There are people who have no clean running water, who cannot bring their produce to markets or who live in terror of criminals running loose. The causes of such failures are many, but there is little doubt that two of them are inefficiency and lack of productivity in the public sector.

Structural Reform Program

As part of the 2000 Budget, my Government has designed a program of structural reform to achieve the objectives that I outlined in my Acceptance Speech as Prime Minister.

I want to take this opportunity to state quite clearly that this Structural Reform Program is different from ones with similar names that have gone before. In 1991 we had a Structural Adjustment Program. In 1995, we had a Social and Economic Development Program. These two programs were imposed on us from outside. We never fully understood them. We never fully implemented them.

The Structural Reform Program that forms part and parcel of the 2000 Budget is different. We have designed it ourselves. I set the agenda, when outlining my Government’s objectives on our date with destiny, 14th July. My Supplementary Budget Speech further developed these ideas and the Supplementary Budget began their implementation. My address to all our development partners at the Consultative Group Meeting in early November continued the themes and outlined the progress we had already made.

The IMF and World Bank came. They saw what we ourselves were doing. They have supported our efforts, but they have imposed nothing that we had not already intended to do.

Our Structural Reform Program is ambitious, but it is essential. I am committed to its full implementation.

The Program will strengthen our public institutions and the way in which we govern. It will focus the Government’s activities on its core functions and capacities. It will create an economic environment where private enterprise can flourish and be the engine for sustained growth and creation of income-earning opportunities.

The Structural Reform Program is the strategy behind the numbers of the 2000 Budget. In time, with more focus and better-managed resources, we will be able to restore, and then to improve, basic services. Papua New Guinea finally has a government that will become leaner, more effective and more accountable.

I am pleased to report that our development partners recognise the Structural Reform Program initiative as a genuine commitment by my Government to undertake serious reforms. At the Consultative Group meeting our development partners committed themselves to a financial support package of over 300 million US Dollars for the 1999 and 2000 Budgets, and 100 million US Dollars in balance of payments support. They also committed to provide substantial technical assistance.

In the 2000 Budget, Mr. Speaker, we have allowed for a one-off expenditure for implementation of the Structural Reform Program, which Members can identify in the Budget Tables as 101 million Kina in the appropriation for extraordinary external budget support.

Mr. Speaker,

The reforms will build structures for better government. In summary, and as I have stated since the day my Government was formed, these are:

I will not outline each and every measure that will be pursued under the Structural Reform Program, but let me briefly present some of the major measures, under their appropriate objective, or heading.

Good Governance

The systems and procedures for the functioning of the Cabinet and of its decision-making process will be streamlined.

All policy submissions being considered by Cabinet will incorporate proper input from relevant agencies. A revamped Central Agencies Committee chaired by the Chief Secretary will screen all policy submissions. The same Committee will also be in charge of the overall Structural Reform Program.

The National Planning Committee will be re-established and will ensure that the vital link between the bureaucratic and the political levels of decision-making is one of fruitful cooperation and trust.

All decisions taken by Cabinet, except those where national security is an issue will be made public through appropriate means, so that scrutiny and accountability can function more effectively.

Cabinet has already approved a Code of Conduct for the public service.

These measures will, at long last, give back to Cabinet and to the public service their dignity and integrity.

Mr. Speaker,

In this session we plan to introduce legislation to strengthen the independence and the status of the Central Bank.

In the past couple of years the Central Bank was the object of gross abuse, and I want to prevent such abuse from ever occurring again. The proposed legislation will make sure that there is no outside interference in the conduct of monetary policy, and that government borrowing from the Central Bank is kept under strict control and within limits prescribed by law.

Budget Stability

Strengthening financial management and expenditure controls will also be a major task for next year. Never again should we wake up one day and find we forgot to pay 217 million Kina of debts. Never again should we allow anybody, departmental head or Minister, to breach the Public Finances Management Act and get away with it unpunished.

The budget process and the rules that govern it, written and unwritten, are some of the most important institutions of government. They need to be respected, conserved, improved, and nurtured.

Improving the Performance of the Public Sector

In order to focus the Government’s efforts we are starting a comprehensive review of public expenditure and of functions performed by all levels of Government. This review will guide the mammoth task of reforming the public sector and turning it into a more effective development engine.

The unclear role of lower levels of government under the New Organic Law, and the poor linkages between them, Provincial Governments and the National Government, are one of the main obstacles to development. We need to tackle this issue as a matter of priority.

I would like to praise the efforts of the Minister for Planning, Hon. Moi Avei, in bringing all the Governors and Administrators together with national departments, to discuss these problems and come up with a common charter for action. This initiative has to continue, until we manage to find a set of workable solutions to the problems posed by our decentralised system of government.

Throughout this process of public sector review, organisations affected will be involved in the evaluation and decision-making. We have seen how important this is, after the failure of the cost-reduction exercise that brought disarray in the public sector at the beginning of this year. Retrenchments will only occur once it is demonstrated they are beneficial to the reform program as a whole.

However, streamlining government functions would not yield much result if we did not ensure that we treat our public employees in a way that promotes and rewards good performance.

Another important way in which Governments can achieve a higher level of efficiency is to divest all those activities that do not properly belong in the public sector.

In recent years, Government-owned commercial enterprises have failed to deliver quality services and have not contributed to government revenue. As in many other countries, these enterprises have become a drain on available resources; they have been inefficient and have become fertile grounds for political interference and corruption to thrive.

The privatisation program that we have just launched will try to correct some of these distortions, and divest those activities that are not part of Government’s core functions. These activities belong in the marketplace, where they can operate efficiently in the proper environment, in the best interest of everyone.

I am happy with the high level of the debate that has been going on recently on the topic of privatisation, involving the Trade Unions, the Opposition and the general public. It is important that all problems and concerns are addressed, as long as the validity of the underlying principle is not confused.

We will make sure that when privatisation occurs, it will be for everybody’s long-term benefit.

Removing Obstacles to Growth

Finally, a fundamental part of the structural reform program deals with the objective of removing obstacles to growth, and of providing the private sector with the environment where it can develop and create wealth.

One of the most important initiatives I took shortly after being elected was to appoint Sir Nagora Bogan to conduct a Taxation Review, aimed at enhancing the fairness, transparency, efficiency and simplicity of our taxation system, including the Value Added Tax.

The terms of reference for the Review Team have been approved, and their work is already under way. The Review is to be completed in time for the 2001 Budget, but as it develops, the review will provide Government with very important information and recommendations.

Financial sector reform is also underway. In the March session, I will introduce a revised Banks and Financial Institutions Bill to ensure that the banking system is prudently managed, that financial services reach all of our people, at a reasonable cost. The bill will also make it impossible for fast-money schemes, such as those that have robbed many of our people over the last year or two, to operate.

I also plan to introduce an Insurance and Superannuation Supervision and Regulation Act, no later than August 2000. This legislation will regulate and supervise the industry and ensure that contributors’ funds are managed to their benefit, without any political interference.

We will review the structure of regulations and incentives for various forms of economic activity, and we will follow the example of more successful nations that have seen strong growth in private sector activity and substantial levels of foreign investment.

As part of our efforts to promote economic growth, we will continue with tariff reforms and trade liberalisation.

These are some of the important initiatives that are part of our structural reform agenda.

It is a very ambitious agenda, set out in detail in the documents accompanying the Budget legislation. The Budget provides the resources to support its implementation.

Mr. Speaker,

We have found the road to recovery.

We must travel along it, steadily and thoughtfully.

The 2000 Budget and its related reform program are our first steps along the path of reconstruction and development.

I commend the 2000 Budget to the House.

For additional reports from The Post-Courier, go to PACIFIC ISLANDS REPORT News/Information Links: Newspapers/The Post-Courier (Papua New Guinea).

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