Papua New Guinea – The case of a misleading current account surplus


April 10, 2024

Over the last decade, the current account balance has been in a notable surplus in Papua New Guinea (PNG), averaging 15% of GDP. A large current account surplus might indicate currency undervaluation due to the relatively higher demand for the domestic currency. Moreover, the surplus might be used for accumulating foreign exchange reserves, increasing economic resilience, and safeguarding the stability of the local currency. However, all that glitters is not gold: the kina cannot be considered undervalued (quite the opposite), and the Bank of PNG has not managed to obtain substantial foreign reserves.

Commodity exports in Papua New Guinea rose substantially in recent years: export receipts more than doubled in USD terms since 2013 and increased by 25% between 2021 and 2022. The main contributors to this upswing were liquefied natural gas (LNG) and gold (50% and 20% of exports, respectively). Even though commodity prices have exhibited large volatility, LNG prices increased during the last few years, therefore improving PNG’s terms of trade and trade balance.

The current account balance has been historically dominated by the generous trade balance, being in a large surplus for a decade now, particularly since foreign-owned companies started to produce and export. This trade surplus was also amplified by the gloomy fact that imports have been generally lower compared to exports (especially in recent quarters), indicating the Central Bank holding back FX reserves, constraining domestic demand, and backlogging firms’ USD orders, artificially limiting the import of goods to the country.

Secondly, on the financing side of the Balance of Payments, the Financial Account (notably the ‘Other Investment’ category) has been predominantly negative, indicating serious outflows of financing. The reason for this is the repatriation of profits by foreign investors in the LNG sector. The root of the problem is that initially, unfavorable terms of LNG investments have been signed, with foreign stakeholders being majority owners, such as ExxonMobil, Santos, JX Nippon, or (with interests in an upcoming project) TotalEnergies. Domestic or state-owned enterprises (most notably, Kumul Petroleum) usually have around 20-30% of shares, therefore the profit generated cannot contribute significantly to domestic disposable income.

For this reason, the windfall revenues of commodity exports neither lead to boosting domestic demand (through government spending) and the accumulation of FX reserves, nor strengthen the local currency. As a summary, the artificially inflated current account balance does not reflect PNG’s external position properly, spuriously implying a favorable outlook. Nevertheless, in its outlook, the IMF gradually started to reclassify repatriated profits from Other Investments to Primary Income – where it truly belongs. As a result, profits generated in the trade balance are more directly cancelled out by the negative primary income when being repatriated, decreasing the current account surplus to a more credible level – implying a rather modest outlook.