The 2022 Budget has support for economic growth as its top priority and sets the stage for fiscal consolidation over the medium term. This Budget is once again a high deficit budget.
The K5.985bn deficit projected for 2022 is an improvement from the 2021 Budget and brings the deficit to GDP ratio to just under 6%. This challenging deficit budget is comprised of revenue of K16.19bn and expenditure of K22.175bn. This will increase the level of public debt (excluding valuation changes and outstanding arrears) to K52.765bn which is 51.9% of GDP. On a percentage basis, the planned revenue growth exceeds the expenditure increase by around 10% and is on the backdrop of an improving global market and commodity prices as the world emerges from the economic contraction induced by the COVID-19 pandemic.
Key Insights from the 2022 Budget
Economic Analysis
A strong recovery from resumption of mining operations at Porgera, inflation rising on the back of imported inflation and many of the commodities and minerals produced by PNG experienced strong prices on the back of increasing economic activity and recoveries from the COVID-19 pandemic induced demand shock.
Taxation
The two dominant bank and telecommunication companies are badly hit in this Budget due to the new Market Concentration Levy. The new levy of K190m (bank) and K95m (telco) is likely to impact investor confidence and sentiment in PNG, consumers and superannuation members. The tobacco and alcohol industries and refined petroleum importers are the real winners from this Budget.
Economic Assumptions
Strong growth of 5.4% real growth is expected in 2022 after 1.5% in 2021, due to mining sector recovery of 35.8% with the planned Porgera mine resumption. In 2021 higher export commodity prices and higher GoPNG external borrowing have increased inflows of FX. 2021 inflation of 5.0% is expected to rise further in 2022 to 5.6^
Revenue
The year-to-date collection data for CIT and GST indicates that the 2021 Supplementary Budget may not be achieved. Due to the COVID-19 restrictions there have been fewer inspections and compliance activities undertaken by the IRC impacting 2021 revenues. We note that the vaccination rate in PNG remains low (below 5%) maintaining international travel restrictions for PNG.
Expenditure
Expenditure overall grew by 13.1% to K22.2bn and will need to be financed by a K6bn budget deficit. Operational spending is forecast to grow by 10.6% and capital spending by 17.1%. Sectoral allocations appear reasonable with a strong focus on developing a sustainable economic base. .
Fiscal Strategy & Budget Financing
A budget deficit in 2021 of 50.1 percent of GDP is expected to worsen in 2022 and 2023, before declining to a balanced budget in 2027. The gap between the proposed financing instruments and the deficit is concerning. GoPNG has taken advantage of the concessional loans in terms of availability and cost and looks to continue this strategy - the domestic market has provided valuable liquidity but is more expensive.
This Budget continues the primary themes from last year’s Budget, namely spend the money more wisely, raise revenues more fairly and finance debt more cheaply
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