$Unique_ID{COW02798} $Pretitle{294Q} $Title{Papua New Guinea Chapter 4. Economic Planning and Policy} $Subtitle{} $Author{Mark Easton} $Affiliation{HQ, Department of the Army} $Subject{million percent new government papua land production guinea areas country} $Date{1984} $Log{Market Scene in Rabaul*0279801.scf Tolai Farmers*0279802.scf } Country: Papua New Guinea Book: Oceania, An Area Study: Papua New Guinea Author: Mark Easton Affiliation: HQ, Department of the Army Date: 1984 Chapter 4. Economic Planning and Policy The government's national development strategy sought to improve the quality of life for Papua New Guinea's predominantly village population and focused on rural development in the less developed areas of the country. A second objective was to reduce the heavy reliance on Australian aid by developing a few large natural resource projects. The first goal recognized that for generations the people would continue to rely on the agricultural sector for their livelihood. Revenues from enclave mining were to provide resources for the financing of development programs. To carry out this dual strategy the government established an annual National Public Expenditure Plan (NPEP), a rolling four-year plan for the public sector to link the planning process with overall economic policy. The first NPEP in 1978 accounted for only 4 percent of budget expenditures, but by 1984 the NPEP covered more than 25 percent of the planned total budget expenditure. Of particular concern has been the lack of growth in the agricultural sector. Major constraints to developing this important sector have been inadequate extension services, lack of finance, land laws that prevented the consolidation of inefficient smallholdings, the shortage of management talent, and old legislation designed to encourage the transfer of foreign-owned plantations to Papua New Guineans. In order to attract foreign investment and revitalize the agricultural sector, the government decided in 1980 to suspend the Plantation Distribution Scheme, which had allowed for the compulsory purchase of foreign-owned plantations and their redistribution to Papua New Guineans. Other measures included generous depreciation allowances, permission to introduce piece-rate wages, and allowance for the transfer of estate land titles between expatriate owners under specified conditions. A line of credit was set up through the commercial banks from the Bank of Papua New Guinea to fund foreign-owned estates. The government was also considering developing joint ventures in which it would assume the complicated risks related to land titles from foreign investors. A special ministerial committee was set up in 1980 to develop a comprehensive agricultural policy. Fiscal and Monetary Policy. Government and Central Bank policies have become increasingly conservative. The devaluation of the kina in 1983, though partially inflationary, was timed to boost export earnings and reduce imports. The decision to restrain wage increases was deflationary and was expected to increase job opportunities. In 1983 the government also decided to cut its staff by 10 percent, restrain the growth of expenditures to 3 percent, and trim the cost of capital projects. Nevertheless, expenditures were projected at K731 million and receipts at only K622 million. Australian aid still composed nearly one-third of all government income. The commodity stabilization funds, moreover, were being depleted. In 1982 the funds paid out K7 million, and K167 million remained. The copra fund was in debt to the government. Budget forecasts for the 1983-87 period called for expenditures of K3.1 billion, which included the repayment of principal and interest on public loans equivalent to 16.6 percent of total expenditure. Capital expenditures were to be 23 percent of the total. About K1.7 billion of the expenditures were to be paid for from tax and other revenues. Some 62 percent of the forecast resource gap of K1.4 billion was to be met through the Australian budgetary grant, about 24 percent from overseas and domestic commercial loans, and the rest from overseas concessional loans. The government has mandated several important statutory commercial enterprises, the major enterprise being the Electricity Commission, Air Niugini, the Harbors Board, and the Post and Telecommunications Corporation. Budget expenditures for these four authorities were K209 million in 1981. In 1983 the government expected them to transfer profits of K18 million back to the government. Both the airline and the electricity commission generated profits in 1981, but the profitability of all four depended partly on high tariffs that adversely affected consumer costs. The government's monetary policy turned restrictive in the 1980s. The narrow money supply decreased in 1981 and 1982, while the broad money supply rose by 8 percent and 5 percent, respectively. Commercial bank lending rose by 12 percent in 1982, but new lending commitments by the Papua New Guinea Development Bank fell sharply. Prime interest rates dropped by 2 percent in 1982 to 12.5 percent but were still high in comparison with inflation. In 1983 the government planned to increase the broad money supply by 7 to 10 percent and bank lending by around 13 percent. Land Policy. Clan groups held 97 percent of the land of Papua New Guinea under complex customary ownership and usage rights that varied among the country's 700 ethnic groups. Ownership rights were normally acquired through birth, but acquisition of land by purchase had become an established custom in a few areas. Land use must be distinguished from landownership; most land was owned in common by the ethnic group, while usage rights for individuals within groups varied greatly. A further distinction was often made regarding the trees or fruits of the land, which were considered the property of an individual or family and in some instances of the extended group. Under the practice of shifting cultivation (see Glossary), no requirement existed for clear title to land plots. Smallholders, who accounted for about 50 percent of the area under cash cropping, used customary land and still generally did not own their own land. Disputes over usage and ownership were common and hampered agricultural productivity in some areas. European contact, especially in those areas formerly under German control and in Papua prior to 1906, resulted in considerable alienation of customary land and its transfer to freehold title held by Europeans. Following World War I the Australian administration established the principle that no new freehold land was to be granted to expatriates. In the period prior to independence, some traditional groups insisted on the return to them of lands that had been alienated by foreigners, causing considerable tension and conflict. The Land Commission was established immediately prior to independence to review all land issues in Papua New Guinea. It concluded that freehold titles held by expatriates should be converted statutorily into government guaranteed leasesholds, generally without compensation to the freeholders. Freehold land held by Papua New Guineans was to be converted to group titles. The government was urged to acquire alienated plantations in land-short areas, by compulsory means if necessary, and then to return them to adjacent communities. Legislation was enacted subsequent to 1973 to carry out the recommendations of the Land Commission. Some 70 European plantations (out of some 1,200 plantations in the country) were acquired by the late 1970s. Although individual ownership of land by Papua New Guineans was not encouraged, the government did enact legislation to provide titles to various groups for the customary land they held and to define customary rights for land use. The principal objective of government land policy was to rationalize, strengthen, and revive traditional or customary land usage. The impact of the government's land policies, however, was to discourage long-term capital investment from abroad. Without reversing its basic policy, the government was providing new incentives for foreign investors in agriculture in the mid-1980s. Agriculture, Forestry, and Fishing Papua New Guinea's agricultural sector consisted of two overlapping components: a traditional sector producing subsistence crops and a relatively modern sector producing commercial crops. Traditional agriculture was based on gardens established on customary clan lands. Clearance of trees (ax work) was traditionally done by men, and women took charge of other agricultural and food preparation tasks. Land use varied greatly, and no firm rule stipulated whether plots were organized by individuals, families, or larger clan elements. Perhaps 80 percent of the people relied on the vegetables they grew for food. From 4 to 5 million tons of vegetables and fruit were produced annually on some 250,000 hectares of customary land. Sweet potatoes were a staple food in many areas and may represent 40 percent of the total vegetable production. Sago was the staple starch for perhaps 150,000 people living near great rivers and swamps, especially in the southern part of the country. Bananas, taro, yams, sugarcane, and coconuts were also important foods. Tomatoes, maize, citrus fruits, papaw, and peanuts were grown as well. Rice was grown on a small scale, and coastal villagers fished for food. The government has encouraged the production of vegetables and in 1976 established the Food Marketing Corporation to handle the distribution of vegetables and fruits throughout major centers of the country. Pigs and poultry were important in village life. In 1980 it was estimated that 20,000 tons of pork, 500 tons of poultry, and 400,000 dozen eggs were produced. Papua New Guinea was the largest producer of copra and coconut oil in the South Pacific. The most important growing areas were the Gazelle Peninsula, New Ireland, Bougainville, parts of West New Britain, Manus, and the coast of Madang Province, although significant production also came from Milne Bay and Central provinces in the southern part of the country. About 50 percent of all copra was normally produced from village groves, while the remainder came from large plantations-many owned by expatriate interests. Estate production has dropped dramatically in recent years as expatriates have been unwilling to replant and make other capital investments in the face of changing land policies. Copra was marketed through the Copra Marketing Board, which collected a stabilization levy to be deposited with the copra stabilization fund. In the early 1980s the international market for copra was severely depressed. Consequently, there were large drawdowns on the stabilization fund, and by 1982 the government had to provide loan assistance to the fund. In 1982 Papua New Guinea exported copra and copra oil valued at only K25 million. Prices were beginning to revive in 1983, when exports reached K33.7 million. After the Highlands were opened for settlement in the late 1950s, coffee production increased dramatically. It was the country's most valuable agricultural export in 1983, earning K94.77 million. More than 200,000 smallholders produced some 70 percent of the crop, and most production was in the hands of Papua New Guineans. The main arabica coffee-growing areas were in Eastern Highlands, Western Highlands, Simbu, and Morobe provinces. Robusta was grown widely but was concentrated in Central, Milne Bay, and Northern provinces. The Federal Republic of Germany (West Germany), the Netherlands, Britain, Australia, and South Africa were the principal purchasers. Cacao was planted as an alternative to copra. Significant plantations were established in East New Britain, North Solomons, New Ireland, and Madang provinces. By the mid-1960s some 64,800 hectares were under cacao, but production declined subsequently because of the age of the trees and reduced production from estates. About 35 percent of cacao-growing areas required replanting, and the government has responded with a replanting program whose benefits will be felt in the mid-1980s. About 50 percent of production came from smallholder plantings. About K41 million worth of cacao was exported in 1983 to West Germany, the Netherlands, the United States, Australia, and Britain. The government and a private corporation, Harrison and Crossfield, entered into a joint venture in 1967 to develop an oil palm industry in West New Britain Province. The idea was to establish a nucleus estate and to encourage and train adjacent smallholders to produce the palms. By 1974 the company had planted 3,700 hectares; 1,500 smallholders had planted 6,500 hectares. Two palm oil factories have been established for processing, and two other projects have been started-one in Northern Province and one in West New Britain Province. In 1981 exports of palm oil were valued at K14.2 million but in 1982 increased to K21 million. The Australian administration encouraged the development of rubber plantations near Port Moresby, and the industry was well established by the 1920s. There were about 16,000 hectares in rubber, and production was at a level of 4,000 tons in 1979, valued at about K3 million. By 1981 production reached 4,500 tons, representing an export value of K3.4 million. Some 3,700 smallholders were engaged in production. Australia traditionally purchases the entire crop. Tea was introduced as early as the 1930s in Papua New Guinea. It was not until the establishment of a tea factory in Morobe Province in 1962, however, that the industry grew. The Morobe factory closed in 1973 but not before providing seed for some 10 plantations that had been started in Southern Highlands and Western Highlands provinces. By 1981 tea exports reached K7.1 million. In the 1960s the Papua New Guinea government adopted a strategy to establish a limited number of large ranches, to be followed by the development of smallholder projects using cattle from the large ranches. The goal of developing a national herd of 300,000 head by 1980, however, had not been met. Ranch cattle stabilized at about 80,000 head and smallholder herds at about 46,000 head. In 1978 local production supplied only about one-third of local consumption, the remainder being provided by imports. Production was estimated to increase only about 20 percent through 1990. Papua New Guinea was well endowed with forest resources; the area under forest cover was 36 million hectares in the early 1980s-more than 75 percent of total land area. Fifteen million hectares had potential commercial timber assets. Much of the timber was on clan-owned land, which often resulted in disputes over usage rights and ownership. To mitigate these problems the government has purchased timber rights from landowners and then issued timber permits to commercial companies. About 2 million hectares were covered by timber rights owned by the government; some 283,000 hectares were under license to the more than 60 companies operating in the country. Government policy has urged firms to use the entire production of the forest-timber, used chips, and pulp-and then to reforest cut areas to create a permanent industry. It has also encouraged the industry to phase out the export of unprocessed logs and to do more processing within the country. Exports have been growing at about 17 percent per year. By 1982 timber products were Papua New Guinea's fourth ranking export, reaching sales of K62 million. Papua New Guinea's fisheries resources provided a considerable source of nutrition, income, and export earnings. In 1978 the country was one of the largest skipjack tuna exporters in the world. With the expansion of its fishing waters to the 200-nautical-mile EEZ (see Glossary) limit, the potential catch could reach 100,000 tons per year. However, the industry declined sharply in the 1980s. Fish exports decreased from K32 million in 1980 to K20 million in 1981 and K8.3 million in 1982. This reflected a decline in demand for tuna, especially in the United States, which accounted for half of the world's consumption. A modest shellfish industry exported prawns and lobsters annually. Industry and Infrastructure The Bougainville copper mine, which went into production in 1972 after investment of more than US$400 million, remained vital to the well-being of the economy in 1984. In the early 1980s reserves were estimated to be at least 944 million tons of ore having 0.48 copper content, bearing 15.83 grams of gold per ton. Bougainville Copper commissioned two new crushing mills in 1981 and 1982 and was able to increase production by 12.5 percent in the first year and by a further 3 percent in the next. Because of low international prices, however, revenues did not rise correspondingly. Faced with its lowest prices in 30 years, the company earned a profit of only K28.5 million before taxes and K11 million after taxes in 1982. Copper concentrates provided 68 percent of the nation's total export earnings in 1974 but declined to about 50 percent of earnings in 1980; export earnings have been rising since then. Construction of the Ok Tedi copper and gold mine in the Star Mountains of Western Province under a consortium of the Papua New Guinea government (20 percent of the equity) and Australian, American, and West German private interests was scheduled to reach the first stage of completion in 1984. Production would begin with gold-bearing ores, and gold production could eventually peak at 19 or 20 tons per year. Copper production should begin in the late 1980s. Revenues from the Ok Tedi mine could equal those of the Bougainville mine. The next major mining project will likely be a nickel-cobalt-chromite mine on the Ramu River in Madang Province; three foreign firms were assaying the area for potential nickel, cobalt, and chromite deposits in 1984. Investment costs for a mine there could exceed US$1 billion. A number of other projects also appeared likely to materialize in the mid-1980s. A consortium of Australian, Japanese, and West German firms were conducting feasibility studies at a copper site on the Freida River that would be similar in scope to Ok Tedi, which is only 80 kilometers to the southwest. Also, gold production could commence by 1989 at a mine in Enga Province. Yet another gold mine was being developed at Lihir Island in New Ireland Province, where initial tests have uncovered 20 million tons of ore averaging 2.1 grams of gold per ton. For a number of years oil exploration has been proceeding unsuccessfully. The situation brightened in 1983, however, when Niugini Gulf found significant reserves of petroleum and gas at a well in Western Province. Commercial exploitation was likely despite the fact that the find was located in difficult terrain. The country's potential for hydroelectric power is high, but as of 1984 there was little use for electricity on such a grand scale. Nevertheless, some of the potential has been realized. There were four schemes in development in 1984, and others were planned for Port Moresby, Bougainville, and Ok Tedi. The Ramu River project, which cost K30 million to develop, had an installed capacity of 45 megawatts and would eventually have a capacity of 255 megawatts. Japanese and Australian interests were proceeding with a feasibility study for a 1,500-megawatt station and dam on the Purari River that was estimated to cost K700 million to develop. Because of Papua New Guinea's difficult topography and poor road network, air and water transportation have played important economic roles. Air Niugini flew scheduled services to 18 airports, and small commercial operators served 133 smaller airports. Operation costs and rates were high. Overseas routes linked the country to Sydney, Brisbane, Cairns, Manila, Kagoshima, Jayapura, Honiara, and Hong Kong. The two main airports were at Port Moresby and near Lae. The country relied on its 18 relatively well-equipped sea and river ports and some 400 minor ports to handle international and coastal trade. In 1980 international cargo amounted to 3.7 million tons and coastal traffic to 800,000 tons. About 15 major companies serviced the larger ports; 170 smaller craft handled the coastal trade. The government's fleet of 61 vessels engaged in maritime transportation. In 1982 the country's roads covered about 19,000 kilometers, of which 940 kilometers were paved. The national government maintained about 5,000 kilometers; provincial and local governments maintained the rest. Most of the roads were located in or near the major coastal towns and in Central Province, forming unlinked, regional grids. Conditions were poor because of inadequate maintenance and damage from overloaded vehicles. Accidents were common. The government was considering a project to improve the roads and enhance safety in 1984. In 1982 there were about 55,000 vehicles in operation, of which 38 percent were sedans and station wagons, 32 percent were light trucks, 15 percent were heavy trucks, about 6 percent were motorcycles, 5 percent were buses, and the rest were tractors. [See Market Scene in Rabaul: Courtesy Government of Papua New Guinea] [See Tolai Farmers: Cracking cacao nuts. Courtesy Government of Papua New Guinea] Communications were highly developed in 1984. The country was linked to Guam, Sabah in Malaysia, Hong Kong, and Singapore via the Seacom coaxial cable and to Australia, New Zealand, Canada, and Britain via the Compac cable. Transmission quality was good, and subscribers could dial their own calls to most Australian states. The country was connected to telex services throughout the world. Internal radio communication was provided through a system of centers linked to government or privately owned high frequency stations. The National Broadcasting Commission operated stations at Port Moresby, Rabaul, Madang, Goroka, and Wewak and was generally responsible for programs focusing on the better educated segments of the society. Provincial shortwave stations catered to local areas and tastes. Television was to be introduced in 1985. Only 24,000 people were employed in the manufacturing sector in 1980. Much of the industry was devoted to producing items to substitute for the nation's many imports-especially food and drink, tobacco products, textiles, wood products, paper, printed matter, fabricated metal products, small ships, and repair services. The small internal market, low purchasing power of the population, and poor transportation network impeded the development of the sector. Foreign Economic Relations The modern sectors of Papua New Guinea's economy were based on the export of basic commodities and the import of nearly all capital goods and services. Exports fell in 1980, 1981, and 1982, by which time they were less than 75 percent of their 1979 value. In 1982 exports held their 1981 value following the appreciation of the dollar against the kina in 1982. Exports decreased from 44 percent of GDP in 1979 to 33 percent of GDP in 1982. Imports rose 1.8 percent to K751 million, while exports declined 0.5 percent to K563 million for a net trade deficit of K188 million. Ranked in value in 1982, Papua New Guinea's major exports were gold (K172 million), copper (K119 million), coffee (K78 million), timber (K60 million), cacao (K32 million), copra and coconut oil (K25 million), and palm oil (K21 million). In 1982 the leading purchasers of Papua New Guinea exports were Japan (K183 million), West Germany (K141 million), Australia (K46 million), Britain (K32 million), and Spain (K25 million). Imports by sector in 1981 were machinery and equipment (30 percent of the total value), manufactured goods (22 percent), petroleum products (21 percent), and food and beverages (20 percent). Imports in 1982 remained at substantially the same shares. Petroleum products grew to 25 percent. Leading suppliers in 1982 were Australia (K309 million), Singapore (K110 million), Japan (K107 million), the United States (K64 million), and New Zealand (K41 million). The recent downturn in international oil prices benefited Papua New Guinea in 1983. The deficits in the 1982 trade and current accounts were estimated to be almost US$260 million and US$471 million, respectively, and represented 11 percent and 21.2 percent of the GDP, respectively. Capital flows increased markedly in 1981 and 1982 to finance the Ok Tedi mine construction, but these capital flows did not cover deficits in the current account. Consequently, the overall balance of payments moved to a deficit of US$32 million in 1982. International reserves were at US$362 million at the end of 1982, representing 4.4 months of imports, down from US$515 million in 1979, or 7.9 months of imports. Outstanding public debt was US$638 million in 1982; it had been US$404 million in 1979. Debt service payments rose from 4.4 percent of total export earnings in 1979 to 10.4 percent in 1982 and were rising further in 1983. The foreign investment climate in Papua New Guinea remained generally favorable. Investors were obliged, however, to deal with both the national and the provincial governments to have investments approved. In order to ensure rapid localization, investors were also expected to engage in training programs for Papua New Guineans. The National Investment and Development Authority coordinated approval of investment applications. The list of areas where the government encouraged investment was long and included minerals, petroleum, forestry, fishing, shipbuilding, tourism, agriculture and livestock, export-oriented secondary industry, and technical and personal services. Major investment in mining in 1982 more than offset net disinvestment in manufacturing and agriculture. Some K200 million was spent on Ok Tedi mine and road construction and K57 million for crushing mills at the Bougainville copper mine.