To decrease the negative effects of economic volatility induced by fluctuations in commodity prices and to improve management of natural resource revenues, Papua New Guinea wanted to learn international best practices through exchanges with other developing countries. The World Bank connected Papua New Guinea with Chile and Mongolia to learn how to implement policies and create governance institutions that would safeguard and manage windfall mineral resource savings, achieve long-term fiscal stability, and address acute social and infrastructural needs. Using funding provided by the South-South Experience Exchange Facility, high ranking government officials from Papua New Guinea took part in an International Forum on Sovereign Wealth Funds in China, held videoconferences with Mongolia, and went on a study tour to Chile.
“A great deal came from the Chile visit, from the perspective of all the agencies involved,” said a Papua New Guinea Department of Treasury official. “Being able to physically meet with counterparts gave far more insights into how to develop the SWF, particularly the frameworks and governance structure, the operational rules, and it also provided a lot of help around the administrative process of the SWF.”
The knowledge exchange included videoconferences, a conference in China, and a study tour to Chile. In May 2011, senior Papua New Guinea government officials took part in the International Forum on Sovereign Wealth Funds (SWFs)[i] event in Beijing. The first session provided an overview of the recent macroeconomic and capital market developments relevant to investment and global asset allocation. It also presented information on policy implications for SWFs resulting from the challenging, post-financial-crisis environment. The second session discussed in more detail the long-term SWF investments and highlighted the problems of pro-cyclicality in investors’ behavior and extreme sensitivity to short-term volatility. The other sessions covered regulatory reforms and investment regimes from the perspectives of both investors and recipients. The event allowed Papua New Guinea officials to hold out-of-session meetings with peers from other participating countries to learn about robust frameworks for managing significant natural resource revenues.
Papua New Guinea has rich natural resource deposits, including oil, gold, and copper; these are also the country’s main exports. The government’s macroeconomic management improved considerably during the 2004-2008 commodity boom, which helped the economy cope relatively well with the subsequent global economic crisis. However, like other economies overly reliant on mineral resources, Papua New Guinea suffers from the negative effect of volatile commodity prices. In addition, senior policymakers lacked exposure to global best practices in managing mineral revenues, decreasing commodity-induced economic volatility, and maintaining aggregate fiscal discipline. The country’s windfall savings from mineral resource exports have not been well managed, with over 20 ineffective and insecure trust accounts. Those accounts are denominated in domestic currency—the kina—and have very low interest rates. The fact that commercial banks hold half of the accounts complicates sterilization efforts and leads to net fiscal losses for the government.
The knowledge exchange supported government officials from Papua New Guinea in the development of an Organic Law—a constitutional amendment—for the country’s Sovereign Wealth Fund (SWF). Through personal exposure to other emerging economies' experiences, key members of SWF’s Technical Working Group gained insights into developing such a fund and managing windfall savings. The Papuan Parliament passed the main law, and has continued to develop the details of supporting legislation, regulations, and management arrangements.
The exchange enhanced the support provided by Papua New Guinea’s main development partner, the Government of Australia. The activities coincided with internal reviews of the Australian advisory program, leading Australia to consider a wider range of international experience to solve Papua New Guinea’s policy challenges. Given the significant resources provided by Australia, this change is likely to further improve Papua New Guinea’s natural resource revenue management, while also ensuring the country will benefit from other South-South exchanges in different areas.
Technical staff of Budget Office, Ministry of Finance, Chile