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Strong investment drives Asian Development Bank forecast

PORT MORESBY, Papua New Guinea (PNG Post-Courier, July 19, 2011) - The Asian Development Bank (ADB) has predicted that the PNG economy would experience a growth of 8.5 percent this year and a moderate growth of 6.5 percent in 2012, according to an ADB report released today.

The report says higher inflation still remains an economic risk despite the positive signs of growth such as strong investment and favourable commodity prices.

In the March 2011 quarterly economic bulletin, the Bank of PNG Governor Loi Bakani noted that annual headline inflation as indicated by the Consumer Price Index (CPI), increased by 9.0 percent in the first quarter of 2011, but the ADB expects inflation in PNG to increase to 9.5 percent in 2011 before dropping to 8 per cent in 2012. This would be a 1.2 per cent increase in inflation rate from the 7.2 per cent announced by the Bank of PNG in 2010.

ADB also noted that the economy could be overheating as a result of increased investments and spending as well as bottlenecks in transportation and construction. Added to this, the ADB also notes that the shortage of skilled workers limits the economy’s capacity to respond to demand, while city property prices and rentals continue to soar.

"Private investment so far in 2011 has been strong and private consumption also strengthened across the economy," said Charles Andrews, Country Director of ADB’s PNG Resident Mission. External factors expanding the money supply will test the Bank of PNG’s ability to control inflation through standard monetary measures."

The ADB report, the Pacific Economic Monitor, reviews 14 economies of the Pacific three times a year. The report forecasts that these economies will expand by 6.4 per cent this year, and will grow by 5.5 per cent in 2012, with PNG, the Solomon Islands and Timor-Leste, leading the growth in the Pacific region with their natural resources export. The Solomon Islands is expected to grow by 7.5 percent and Timor-Leste by 10 percent. The other Pacific Islands are expected to post much lower GDP growth, averaging 1.5 per cent and 1.9 per cent in 2011 and 2012.

The ADB report notes that there is a need for proper management of government trust fund expenditures and for fiscal and monetary policy harmony in PNG, especially with the temptation to increase expenditures in the lead up to the 2012 national elections.The Pacific Economic Monitor offers advice on how to counter these pressures, such as developing physical and institutional infrastructures to enable efficient import and transport of commodities and construction supplies.

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