Borrowing for investment that grows the economy: Yala

Caption:  NRI Director Dr Charles Yala.

By MATTHEW VARI

Sunday, June 5, 2016 (Sunday Chronicle, PNG)

THE National Research Institute (NRI) has come out calling on the government in light of foreign currency and cash flow issues facing the country that any attempt to borrow should be done so with greater investment in boosting the economy other than beefing up foreign currency stocks.

Director for NRI, Dr Charles Yala, said when referring to the institute’s latest issue paper on the status of ‘Managing Fiscal Challenges in Papua New Guinea’, that the institute had been monitoring the state of the economy.

“We have a dedicated research program that with a study that focuses on PNG’s shortage in cash flow and falling of foreign reserves.”

“Research conducted by Professor Satish Chand who is an associate of the NRI, a very long time associate with very significant contributions both directly and indirectly to the NRI over the years, he is a professor of finance at the University of New South Wales.”

“This paper was presented at the recently concluded PNG Australia business council forum on the 16th of May.”

Dr Yala said with the current economic climate it is inevitable that there is going to be debt incurred in the form of some form or loan, whether to prop up the foreign exchange or for the cash flow.

“So what professor Satish says is that that debt must be strictly for investment. He makes three key points.”

“It is very difficult for the PNG Government to comply with the debt ceiling of 30 percent of GDP, as stated in the Fiscal Responsibility Act of 2006- the scenario we are facing is going to be inevitable that PNG cannot be able to retain or operate within that 30 percent GDP.”

“Putting aside the debt ceiling, PNG has the fiscal capacity to take on more foreign loans with a view to increase GDP, thus bringing down the ratio of dept to GDP, and the loans must be for investment and not consumption to grow the economy, because if you borrow and invest to grow the economy, than what is going to happen is it will allow us to increase our capacity to broaden our revenue base and our foreign exchange reserves,” Yala pointed out.

He said that the rate of increasing GDP must be greater than rate of interest paid on any new loan.

“In other words this money is going to be coming at a price and the ability of that money to make more money, its ability to generate more money to pay for it must be greater.”

“We have got to be very selective on why we are borrowing and what that money is going to be used for.”

“The main point here is that any form of loans should be taken from concessional loans from our traditional multilateral banks like ADB, and that money must be into improving capacity of the nation to export.”

“It is the only way where you can sustainably build up the foreign reserves. There is no other way.”

He said that Satish cautions that foreign borrowing can be used to replenish the dwindling foreign exchange but this should be looked at as a short term solution.

“It is a band aid solution with the underline argument to remain.”