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WTO PNG Trade Policy Review



Report by the Secretariat - Summary Observations

The Independent State of Papua New Guinea (PNG) is an archipelago in the South Pacific. It consists mainly of the eastern half of the island of New Guinea, which borders the Indonesian province of Irian Jaya. PNG is a developing country, rich in resources, with a GDP per capita of some US$900 and low social indicators. The present Government, which took office in July 1999, inherited an economy in crisis and in urgent need of fundamental economic reform.

PNG's recent economic performance has been erratic with years of modest growth alternating with declines in output. The economy has been adversely affected by several unavoidable shocks, such as the Asian financial crisis, depressed commodity prices and severe droughts. These difficulties have been compounded by problems of governance, a weak institutional structure and process, and a seeming lack of momentum for reform.

The new Government appears committed to broad-based economic reform. These reforms seek to address chronic macroeconomic imbalances and structural deficiencies. The Government implemented a Supplementary Budget in August 1999 to contain the fiscal deficit. It has re-engaged in dialogue with the World Bank and the International Monetary Fund (IMF) to obtain support for reform, including trade liberalization and a far-reaching privatization programme.

Economic Environment
After independence in 1975, PNG adopted inward-looking policies to promote industries to process primary resources, such as fish and timber, and other manufactures, such as processed foods. These interventionist policies were manifested, inter alia, in: high and disparate trade taxes on imports and exports, as well as import quotas and prohibitions; a significant state role in industrial development, including joint ventures; a relatively large public service; and, more recently, fairly high fiscal deficits, financed by expansionary monetary policies.

PNG's present economic situation is difficult. Public debt is high, as are the Government's accumulated arrears; inflation has risen to over 20% a year, weakening external competitiveness, and low world commodity prices limit export earnings; external reserves are low and foreign direct investment is confined mainly to the "enclave" mining sector.

The authorities recognize the need for a restoration of confidence and in June 1999 announced the implementation of an Economic Recovery Package. The Package includes measures aimed at financial discipline and structural reform. Policy under the Package is to be outward looking, with trade reform seen as an important means of fostering private-sector-led growth and enhancing productivity and competitiveness. Meeting multilateral commitments is integral to the reform agenda; thus, for example, PNG's tariff is fully bound and it intends to implement WTO-consistent policies in intellectual property rights. In meeting these commitments, PNG looks to bilateral and multilateral donors for technical support.

In line with the Package, tax and tariff reform was introduced in July 1999. Specifically, a VAT was introduced on goods and services to fund a substantial tariff reduction programme. The average tariff was halved, to under 10%, and the structure rationalized; the average and maximum tariff are to be further phased down over the period to 2006. As noted, the Government introduced measures to contain the budget deficit to 1.7% of GDP, from a previous target of over 3%. Donors and international financial agencies are being approached to fund the deficit, thus avoiding recourse to the monetary authority; privatization proceeds are to help reduce the public debt. Change has also been mooted to improve governance and political accountability.

Trade and Foreign Direct Investment
International trade and foreign direct investment (FDI) are vital to the PNG economy. Merchandise exports and imports averaged 49% and 27% of GDP, respectively, during 1992-97. External balances have fluctuated considerably, mainly in line with mining developments.

Trade is relatively concentrated, both in commodities and markets. Exports are mainly oil and minerals (gold and copper), which account for some 60% of exports, as well as logs and traditional agricultural commodities, especially palm-oil products and coffee. Almost three quarters of exports in 1997 went to Australia, Japan and European Union (EU) countries, mainly Germany and the United Kingdom. Log exports fell sharply following the Asian crisis and the decline in world timber markets in late 1997.

Imports are predominantly of manufactures, especially machinery and transport equipment, food, fuels and lubricants. Over half of imports came from Australia, followed by the United States.

Outside the resource sectors, especially mining, which accounts for some 80% of foreign equity in PNG, relatively little foreign direct investment (FDI) has flowed into PNG. Such FDI has been unstable, and has recently slumped due to investor uncertainty over PNG’s political and economic situation. Australia is the major source of FDI.

Legal and Institutional Framework
PNG is a constitutional monarchy. Legislative power resides in a unicameral national Parliament. Executive power is vested in the national Government. Parliamentary elections must be held within periods of five years. The Prime Minister is elected by Parliament and appoints ministers to the National Executive Council, or Cabinet; the Government can fall on a successful no-confidence vote in Parliament. New governments have a constitutional grace period against no-confidence votes of 18 months, previously six months. Coalition governments have been the norm and no government or prime minister has yet served a full term.

Responsibility for trade-related policies rests with the national Government, but provincial governments have concurrent powers with the national Government in important trade-related areas, such as agriculture, forestry, industrial development, fishing and mining. This is especially true, for example, with respect to approval of forestry, mining and fishing developments on customary land, which cover over 90% of land ownership.

Trade and economic policy formulation in PNG has not always been well coordinated. An Advisory Secretary was established in the Prime Minister’s Office in January 1999 with a view to supporting reform, including oversight of cabinet decisions and implementation of the 1999 Budget.

The Government promotes public dialogue through the Consultative Implementation and Monitoring Council (CIMC), national economic summits - last held in February 1998 - and the annual National Development Forum. The Government’s inaugural Forum, held in August 1999, focussed on reform and the 2000 Budget. The Government also interacts with the private sector via the PNG Manufacturers’ Council and other bodies, such as the Chamber of Commerce. No independent statutory body exists to advise the Government on trade-related policies, including the tariff and industry assistance; in principle, the Industry Assistance Board has such a role, but has lacked the necessary institutional capacity.

Trade Policy Features and Trends
PNG became a de facto GATT contracting party in 1960 under its "UN trust" status with Australia, and acceded to the GATT in 1994. It became a WTO Member in June 1996. PNG's entire tariff is bound, mainly at ceiling tariff rates of 40% and 45%. PNG scheduled commitments under the General Agreement Trade In Services (GATS) on a broad range of services, including certain business, construction, financial and telecommunication services. It is not a signatory to any of the Plurilateral Trade Agreements.

As a member of APEC, PNG is committed to achieving free trade and investment in the region on goods and services by 2020. It is also a member of the South Pacific Forum.

PNG grants at least most-favoured nation (MFN) treatment to all WTO Members. PNG grants some duty-free tariff preferences under the Melanesian Spearhead Group (MSG). These preferences initially covered imports of beef from Vanuatu and canned tuna from the Solomon Islands; PNG exports of tea to these countries. Fiji has since joined the Agreement, in 1996, and more products are now covered, such as fruit, nuts, coffee and cement. MSG exports by PNG include mainly tinned meat, coffee and cement. MSG trade is a minor share of PNG’s total trade, however, and the Agreement has not significantly expanded trade within the region.

As a signatory to the Lomé Convention, PNG receives non-reciprocal tariff and other preferences from the EU on many goods. Financial assistance, totalling K 2.8 billion to end-1995, has also been provided, mainly to fund development projects and to finance past commodity price support schemes.

PNG is a party to the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), a non-reciprocal preferential agreement to provide the Forum island countries with duty-free access for their products to Australia and New Zealand. PNG is also a beneficiary of the GSP schemes of most industrialized economies.

Type and incidence of trade policy instruments
The tariff is PNG's main trade policy instrument. Tariffs were cut across-the-board on 1 July 1999 from an average (unweighted) applied MFN rate of 20% to 9%. The tariff structure was also simplified and rationalized with the number of tariff rates reduced from six to four – zero, 30%, 40% and 55% – by removing duties of 5% or 11% on basic and intermediate inputs and by lowering duties ranging previously between 75% and 125% to 55%, with some exceptions. Under the eight-year Tariff Reduction Programme, MFN rates will be further phased down to 15%, 25% and 40%, without exception, in 2006, when it is envisaged that the average applied tariff will be 5%.

However, tariffs were increased on some goods as from 1 July 1999, mainly to 30% or 40% to provide protection for domestic producers. These increases included rates on certain food and plastic products. Pockets of high tariff protection were also retained until 2006, including current rates of 82% on sugar, 70% on canned mackerel and 95% on plywood and veneer panels. On some products, where domestic production was considered non-viable, high tariff rates were reduced to zero.

Current duties, and the rates to apply in 2006, give rise to substantial dispersion and some escalation. The average tariff in 2006 on agricultural products will be 16%, compared with zero for mining and 5% for manufacturing. The revised tariff structure also seems to provide mixed incentives for processing. Unprocessed products are subject to the highest tariffs, on average, and semi-processed products the lowest. This indicates that the tariff structure may discourage processing, especially from raw inputs. Lower, more uniform tariffs on unprocessed products could improve the incentive structure.

All duties, with the main exception of those on alcoholic beverages, are ad valorem, thus lending transparency. There is widespread use of exemptions, often to specific users, but this is being rationalized. A duty drawback system is in operation but is little used, with refunds often involving significant delays. Recent efforts taken to improve the system include relaxing approval arrangements, and there are proposals to provide the drawback as a credit against the import duties.

PNG applies few formal non-tariff trade barriers. During the 1990s, high tariffs replaced widespread import quotas and bans. Certain import prohibitions and controls apply for environmental, health, public safety and security reasons, and under international conventions. PNG applies no trade embargoes, nor any local-content requirements for domestic production.

PNG has anti-dumping and countervailing provisions, but they have rarely been used, although application of anti-dumping duties is currently being considered for cement. Specific tariffs, mainly on food items, have been used as the main means of guarding against "cheap" imports. However, the Government has signalled greater use in future of anti-dumping provisions, which are now to be administered by the Internal Revenue Commission, within the Treasury portfolio, instead of the Ministry of Foreign Affairs and Trade.

PNG applies stringent quarantine regulations. Imports of vegetables and fruit that are also grown in PNG are banned outright. Imports of many plants, such as sugar cane, are also prohibited, while imports of others are restricted. Live animals and certain animal products, such as honey, beef, eggs and non-pork smallgoods, can only be imported from Australia and New Zealand (and Vanuatu in the case of beef). Fresh pig meat and pork smallgoods are importable only from Australia, and canned ham only from Australia, New Zealand, North American and certain EU member States.

PNG intends to align its national standards with international norms; it is a member of ISO and IEC. Many Australian and New Zealand standards are applied. Most standards are for health and safety reasons and apply particularly on chemicals, construction equipment, and building hardware. PNG aims to develop national accreditation bodies for conformity testing, based on ISO guidelines. Test results from foreign countries are usually accepted. PNG has no significant marking, labelling or packing requirements.

Government procurement is handled by the Central Tenders Board for contracts above K 0.5 million. Preferences exist for local suppliers on smaller contracts.

Export taxes, ranging to 70%, apply to unprocessed logs. Export taxes were lifted on all marine products, except bêche-de-mer, in 1997. Export licences are required for resource-based products, such as logs, which are also subject to minimum export price guidelines. Exports of certain unprocessed logs and raw rattan are banned. Other export controls are mainly for cultural, health and environmental reasons, or in accordance with international conventions.

PNG has no export quotas or voluntary export restraints, and exports are unsubsidized. However, a wide range of exports receive tax incentives, such as a tax exemption for up to three years on profits from exports and an exemption for any increases in such profits for a further four years. By targeting manufactured goods, these schemes tend to discriminate against other exports.

PNG has no production subsidies. Tax concessions assist investment and production; in addition to tariff concessions, there are income tax holidays and other measures, such as special write-offs and accelerated depreciation provisions for income tax purposes. These incentives are currently being rationalized under the Investment Promotion Authority (IPA); some measures, such as tax holidays provided to start-up firms under a pioneer industry scheme, have recently been removed, subject to grandfathering of existing incentives.

PNG does not have specific competition law; the Government intends to introduce a national competition policy. Price controls apply to a range of staple items; their coverage has been substantially reduced. They no longer apply, for example, to bakery or brewery products and soft drinks. Plans exist to further de-control prices. The Government also intends to inject greater competition and private participation into the supply of essential utilities.

The Government is reviewing PNG's investment procedures, to make them more transparent and conducive to FDI. A revised National Investment Policy is currently being introduced. Significant segments of industry remain reserved for domestic investors, although since 1995 such restrictions no longer cover manufacturing and construction activities; the authorities are reviewing the reserve list with a view to phasing it out. Where allowed, no foreign ownership limits apply to FDI. The Investment Promotion Authority screens and certifies foreign investment proposals. The aim is for the IPA is to become a "one-stop shop", facilitating investment by moving to a simpler system of registration and post-investment monitoring to replace the current case-by-case approval process. Non-PNG nationals may lease, but not own, land.

Sectoral policies

PNG is heavily dependent on agriculture and on natural resources, notably minerals, forestry and fish. Primary production accounts for just over half of GDP, and some one quarter of official employment. By contrast, manufacturing represents 9% of GDP. Agriculture is much more important if subsistence production is included; some 85% of the population depends on agriculture.

Besides mining, sectoral trade and investment policies relate mainly to the development of targeted domestic food, wood and fish processing industries, although, as noted, the tariff structure tends to discourage semi-processing activities. Trade and investment measures to support processing include export taxes and other controls on unprocessed timber and rattan, as well as efforts to make logging licences largely conditional upon domestic processing. Domestic processors receive preference in the allocation of logging permits, and first-purchase option on logs. The goal is to have at least 30% of logs processed domestically by 2000, compared to around 5% currently. Official policy is to ban log exports by 2000. Processors of plywood and veneer boards also receive high tariff protection, currently 95% but declining to 40% in 2006. The combination of implicit input subsidies on logs and high import tariffs would be expected to provide correspondingly high effective rates of assistance for wood products.

Domestication of the PNG tuna fishing industry is the principal objective of the 1999 Tuna Management Plan. PNG operators with majority domestic ownership receive preferential access to tuna fishing licences. Longline licences for catching sashimi tuna, for example, have been closed to foreign entrants since 1995. Additional preferences, including exemption from payment of licence access fees, are granted to wholly domestic-owned vessels. The Plan envisages a total of 100 purse seine tuna licences, with 30 going to vessels from Distant Water Fishing Nations (DWFN) under bilateral agreements, and a fall in the licensed annual catch for these vessels from about 250,000 tonnes currently to 128,000 tonnes. PNG is committed to reducing the number of DWFN licences by 10% a year.

The tuna cannery at Madang can be supplied only by PNG fishing operators, and relies almost totally on duty-free exports to EU markets under Lomé preferences. Previous efforts to establish regional fishing fleets and fish processing activities in PNG, as well as elsewhere in the region, have failed, having been unable to compete with more efficient processors.

Mandatory local-content requirements apply to DWFN vessels fishing in PNG waters. Each vessel must make at least three calls per journey to PNG designated ports and purchase minimum supplies worth US$90,000. PNG, along with other island neighbours, has also banned high-seas transshipment, which must occur in designated PNG ports. These controls tend to raise the costs incurred by foreign fishing fleets and reduce their capacity to pay higher licence fees.

PNG's fishing and forestry policies are also aimed at sustainable management. Fish catches and timber production, are currently below estimated sustainable yields. Such management will require enhanced surveillance measures to ensure that licensed levels are enforced. The Government is also taking steps to terminate unsustainable logging; these include withdrawing unused timber permits, since issued permits are thought to be double sustainable levels, and ensuring that expired licences are indeed terminated.

Trade measures, initially import bans and quotas, but currently relatively high tariffs, assist a range of agricultural commodities (including sugar, poultry, eggs and beef) in an attempt to achieve food self-sufficiency. These policies have met with little success, and contribute to high domestic food prices.

Traditional tree crops, especially coffee, copra, cocoa and palm oil products, remain important to the PNG economy, accounting for substantial exports. These products were assisted by price stabilization measures, which effectively provided substantial price support, during the late 1980s, when export prices collapsed. These schemes were terminated in 1999, except for a private scheme run by the Coffee Industry Corporation. The statutory Copra Marketing Board is the monopoly seller of copra and coconut products on both domestic and export markets.

Past governments have promoted import substitution policies through direct participation in numerous commercial joint ventures, if not complete state ownership, aided by measures such as trade restrictions or legislative provisions preventing new entrants. Examples include government participation in oil palm plantations, livestock ventures, Ramu sugar and Halla cement. The Government has divested some of these interests, however, and intends to sell off more as part of its privatization programme.

The Government plays a key role in the development of mining projects. Mining leases must be negotiated with national and provincial governments as well as with customary landowners. Higher standard company tax rates apply to mining and petroleum firms than to enterprises operating in other sectors, and additional profit taxes apply to returns above certain threshold levels. The Government may take a minority equity holding of up to 30% in any mining or petroleum project, either directly or via its 51% stake in Orogen Minerals. Royalties apply, at a rate of 2% of the value of mine output. A profits levy of 4% has been applied to compensate for the loss in government revenue from zero-rating mineral exports for VAT purposes, thereby allowing mining companies – in contrast to loggers – to receive a credit for VAT paid on inputs.

Hitherto, there has been minimal domestic processing of minerals. A petroleum refinery is currently under construction; it is expected to meet PNG’s entire demand for refined petroleum products.

Most basic services, such as electricity, telecommunications, ports, water, air and maritime transport, are provided by state-owned statutory monopolies. Postal and telecommunication services were corporatized in 1996, with the establishment of two separate entities, Telikom and Post PNG; however, Telikom will retain its legislated monopoly until 2002, when PNG is committed to opening the market to foreign suppliers, providing them with non-discriminatory access to the local network. Post PNG retains monopoly rights in providing certain postal services, such as registration and insurance of articles, although letter delivery is, in principle, open to private entrants. It is government policy to gradually divest 49% of both Telikom and Post PNG.

Banking licences are granted by the Central Bank. Foreign banks may operate domestically as locally incorporated subsidiaries or as foreign branches, provided an assigned minimum level of capital is kept within PNG. The Central Bank accepts that PNG branches of reputable foreign banks will be adequately supervised by those banks' own domestic prudential regulators.

Foreign companies may enter the PNG insurance market without discrimination; non-life firms must be licensed with the Insurance Commissioner. However, the Motor Vehicle Insurance Trust has a statutory monopoly on providing third-party motor vehicle insurance. Although foreign companies are expected to place all risks within PNG, such risks may be placed offshore, subject to approval from the Insurance Commissioner. In 1997, some 20% of gross non-life insurance premiums were placed abroad.

Life insurance companies and superannuation funds are currently unregulated. However, legislation is planned that would extend prudential controls to these companies and strengthen existing requirements for non-bank financial institutions.

The Securities Commission was established in 1998 to administer new companies and securities legislation, such as that dealing with company law and the formation of companies as well as takeovers and acquisitions. The PNG Stock Exchange commenced operations in 1999.

Trade Policies and Foreign Trading Partners
PNG's trade measures are generally applied on a non-discriminatory basis. Reliance on the tariff, which is fully bound and has been simplified, as the main trade instrument has made the trade regime more predictable and transparent. The economy, however, remains relatively weak and vulnerable to external shocks. Continued reform, including further efforts to liberalize trade and investment regimes, can increase the economy's flexibility and improve its prospects of achieving sustainable growth. PNG's trading partners can assist the adjustment process by ensuring stable, increased access to their markets.

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