Australian Aid to PNG - AusAID

Although the precise extent of the dutch disease problem is somewhat unclear, asense of the potential impact is provided by the large fall in the nominal value of thekina in recent years. Since the kina was floated in October 1994, it has been on adownward trend attributable to declining mining and oil revenue, the gradual removalof Australian budget support and large Government budget deficits. At the time ofthe float, the kina was roughly at parity with the US$. Such a high exchange rate hasproven unsustainable and the kina is now worth around a quarter of its pre-floatvalue in US$ terms. 4It is important to appreciate that the dutch disease problem in Papua New Guinea couldhave been largely avoided. The original intention of the Government was that revenuefrom the mining and oil sector was to be saved in the Mineral Resource StabilisationFund (the MRSF). While positive account balances were recorded over the 1990s, these‘savings’ were only book entries and budget deficits meant that the Governmentactually quickly spent the mining and oil revenue. If instead the mining and oil revenuehad been saved and spent gradually as originally intended, the effect on the exchangerate and hence non-mining and oil sectors would have been much less.So in one sense the dutch disease problem evident in Papua New Guinea is best seenas a result of how the Government used the mining and oil revenue, rather thanmining and oil activity per se. The large inflow of aid has also been an importantcontributor to the problem. It follows that the dutch disease problem is best thoughtof as a result of the public sector rather than the mining and oil projects alone.As a result of a decline in mining and oil revenue and the removal of Australianbudget support, the economy is now facing the effects of an unwinding of a ‘dutchdisease’ problem that has seen the public sector undermine prospects for the privatesector for much of the period since independence. 5 This is triggering economicchanges that are creating problems for many in the community, notably in the urbancentres reliant on formal economic activity. This is frequently described as a crisis,and is seen by some as evidence of a failing state. But the changes are also creatingopportunities for others, notably for the rural poor and the informal sector. Over time,the changes triggered by a falling kina can be expected to see a sustainable economyemerge providing for improved growth and poverty outcomes. While the adjustmentnow occurring could certainly be managed at a lower cost (if for example theGovernment controlled overspending and provided well maintained physicalinfrastructure), it offers important benefits for the long term.4 It is emphasised that the fall in the nominal value of the kina is also in part a result of over-expenditure bythe National Government. Had the National Government operated balanced budgets and not the large deficitsseen over the last ten years, the nominal value of the kina would be considerably higher than at present(see Sugden (2002) for a discussion).5 See Sugden (2000).The Contribution of Australian Aid to Papua New Guinea’s Development 1975–2000 23