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UNCLAS SECTION 01 OF 02 CANBERRA 000615 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/ANP, EEB 
 
E.O. 12958: N/A 
TAGS: EAID ECON EFIN PREL PP AS
SUBJECT: AUSTRALIAN CONFERENCE ON PAPUA NEW GUINEA 
 
CANBERRA 00000615  001.2 OF 002 
 
 
¶1.  (U) SUMMARY: Australian Papua New Guinea watchers are 
cautiously optimistic about the PNG economy but concerned 
about the longer term management of potential revenue 
windfalls from major resource projects, particularly the 
ExxonMobil LNG project that could double GDP by 2014. 
However, Australian economists warn that PNG Government 
forecasts are too optimistic and worry that PNG is looking to 
spend the windfall profits before the project is up and 
running. PNG officials in Australia are trying to convince 
observers that the country has learned from previous mistakes 
and is prepared to deal with the windfall profits.  Australia 
provided over A$400 million (US$320 million) in assistance to 
PNG in 2008-09 and is the largest source of foreign 
investment.  Experts in Canberra believe that PNG's overall 
economic development strategy is good, with implementation 
being the major challenge.   Australian observers are 
optimistic that PNG,s debt reduction and current account 
surplus in 2008 will allow them to weather the global 
financial crisis, though they worry about falling tax revenue 
caused by slowing global commodity demand.  End Summary. 
 
ASSESSMENT ON PNG,s FISCAL POLICY 
 
¶2.  (U) Australia National University held its annual PNG 
Policy Forum, considered the premier annual conference for 
Australia's comparatively large community of PNG watchers. 
Bob Warner, Director of the Center for International 
Economics, stated that PNG had a good strategy for dealing 
with the windfall profits from a new ExxonMobil LNG project 
in PNG,s Southern Highlands.  At the same time, Warner 
admitted the government had a history of "patchy 
implementation" of previous similar strategies and that there 
is reason to be concerned about future governments following 
this strategy.  He warned that the PNG government is already 
looking at ways to spend the significant expected profits 
from the LNG project but that there will be no cash flow 
until 2014.  According to Warner, the PNG government is not 
sticking to their strategy to use 40% of windfall revenues 
from current projects to reduce debt, with only  17% of 
current revenues going to service debt. There is no 
accounting for 60% of the trust account spending and 
government also issued a supplementary budget after running a 
deficit in 2008 reversing the planned 1% surplus. 
 
¶3.  (U) The PNG High Commissioner to Australia countered that 
the government is anticipating strong profits and is 
preparing to use them properly.  He suggested that a budget 
stabilization fund could easily be created.  However, PNG saw 
its Mineral Resource Stabilization Fund emptied in 1999 to 
deal with government debt instead of vital infrastructure. 
Economists at the conference expressed concern about a repeat 
caused by insufficient planning.  Australia National 
University,s Aaron Battan also noted that the government's 
forecasted doubling of GDP from the LNG project was too 
optimistic. 
 
OUTLOOK ON PNG 
 
¶4.  (U) The panel pointed out that PNG,s economy is 
primarily commodity-based and focused on cash crops (coffee, 
cocoa and palm oil), minerals, timber and petroleum.  Gold, 
coffee and cocoa prices have remained stable, but the fall of 
oil and copper prices and the fall of timber demand are 
expected to reduce tax revenue 25% in 2009.  However, AusAID 
Chief Economist Mark McGillivray stated that PNG was 
QChief Economist Mark McGillivray stated that PNG was 
relatively well positioned going into the GFC.  PNG,s 
current account surplus was 8.7% of GDP in 2008 and the 
government reduced debt from 70% to 30% of GDP.  PNG,s 
banking sector has remained stable and the country has 
limited exposure to the decline in tourism.  75% of the 
population depends on the subsistence sector which is more 
exposed to natural disasters.  However, it was noted that PNG 
is highly exposed to fluctuations in commodity prices and 
overseas demand.  Government expenditures and inflation have 
also increased substantially with the windfall revenues from 
the recent commodity price boom. 
 
¶5.  (SBU) COMMENT: As Australia,s former protectorate and 
closest neighbor, PNG remains a major interest to Australian 
academics and government officials.  Australian experts are 
clearly wary about PNG plans to absorb what could be 
substantial profits from the ExxonMobil LNG play. 
Australia,s mixed record with commodities extraction in PNG 
 
CANBERRA 00000615  002.2 OF 002 
 
 
may play a role in that, but concerns over institutional 
capacity and transparency are clearly coloring their views on 
how PNG should and will handle the revenue.  PNG is 
Australia,s largest recipient of development assistance, and 
wasteful spending of windfall profits could undermine further 
support in Canberra for future increases in assistance.  End 
Comment. 
 
Clune