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Papua New Guinea (PNG) must adjust to lower liquefied natural gas (LNG) and oil prices to avoid a crisis. The PNG LNG project is still extremely important for the country, but because of lower prices many of the benefits of the production phase of the project have vanished – probably for at least a decade. Adjustments are urgently required in fiscal, monetary and foreign exchange policies to adapt to the changed realities.
- World oil prices are now more than 35 per cent lower than at the time of the 2015 budget. This will have a direct impact on LNG revenues, since LNG prices are directly linked to oil prices.
- The fall in LNG and oil prices will reduce government revenue by over K1.4 billion in 2015 – more than 10 per cent of all revenue. Revenues in 2016 are now K2.5 billion less than expected at the time of the 2014 budget.
- PNG’s expected growth rate for 2015 is now 6.9 per cent, still good but far below the budget forecast of 15.5 per cent.
- Unless the Kina is re-floated and allowed to depreciate, PNG’s international reserves will fall by the end of 2015 to cover just over three months of imports. Reserves would keep falling and be exhausted by early 2017 as the balance of payments would stay in deficit.
- Without adjustment, PNG’s budget deficit in 2015 will increase to 8.8 per cent. On realistic expenditure assumptions, the deficit will continue rising to well over 10 per cent. The debt to GDP ratio will increase to 75 per cent by 2017 – two and half times the maximum level in the Fiscal Responsibility Act.