PORT MORESBY (Pacnews) — The Papua New Guinea Central Bank fears heavy spending by the government leading up to the elections could push up the exchange rate and inflation.
In its monetary policy statement, the bank urged the PNG government to prudently manage its fiscal operations in the lead-up to the elections and continue to redirect expenditure to the priority areas of health, education, law and order and physical infrastructure.
Gov. Wilson Kamit warned that since much of the money in the last two supplementary budgets totaling more than 1.3 billion kina ($440 million) was locked away in trust accounts for future draw downs, this might increase government spending in the first six months of this year adding to an already highly cashed banking system.
He said the bank could face a tough time trying to diffuse the liquidity injections.
“Therefore, a closer co-ordination between the bank and the government is essential to ensure that macroeconomic stability is maintained and economic growth continues over the medium term,” Kamit said.
He said that the government should improve the capacity of its implementing agencies to use the supplementary budgets funds.
“In light of the national elections, it is imperative that the government adheres to its expenditure plans, as any over-expenditure or reduced revenue would result in a higher budget deficit.
“Under this scenario, the government should reduce recurrent expenditure rather than increase domestic financing.”
Kamit said assumptions for this year were expected to hold over the medium term however the risks could come from large fluctuations in exchange rates of PNG’s major trading partners and a decline in international commodity prices among other issues.