Another emerging market commodity exporter deep in fiscal trouble; another chance for the World Bank to try to prove its relevance.
Papua New Guinea is the latest exporter of oil and gas which, hit by the falling global price of hydrocarbons in recent years, has found itself short of foreign exchange and obliged to turn to international official lenders. As was the case with Nigeria, it is currently trying for a loan from the World Bank rather than accepting the advice of the acknowledged crisis lender, the International Monetary Fund.
It is easy to see why this benefits both Papua New Guinea and the bank. The Oceanian nation gets dollars without the stigma of borrowing from the IMF, and the bank occupies itself at a time that its core mission of development finance has been substantially eroded.
Nonetheless, it is not a sensible move. Pretending that what is at heart a macroeconomic foreign exchange problem can be resolved through microeconomic intervention will not help Papua New Guinea make the adjustment that it needs. It will merely draw the World Bank further into problems it is not designed to resolve.
The justification for calling in the bank to help is that the country’s commercial banks are short of dollars to help their clients clear foreign exchange transactions and thus conduct international trade. But the root of the dollar shortage is not the kind of microeconomic structural issue in the banking sector in which the World Bank has undoubted expertise.
Far more important is an exchange rate overvalued after sustained intervention by the central bank, together with a collapse in dollar earnings because of sliding global oil and gas prices, which have driven official foreign exchange reserves to dangerously low levels. As the IMF has been urging for years, Papua New Guinea needs to move towards a flexible currency and shore up its long-term fiscal position.
This is unlikely to be a short-term problem. There is a fundamental need to adjust public finances and restore external competitiveness. Papua New Guinea should not simply take loans from the World Bank to bail out its banks from the short-term consequences of the authorities’ own actions.
This is not the first time that the bank has wandered towards or over the edge of its remit. Nigeria, which faces similar problems with collapsing oil earnings and downward pressure on the currency, has also asked the World Bank for a loan that is fairly clearly meant to bail it out of a straight-up fiscal balance problem, not to improve its productive capacity.
It is understandable that the bank is seeking new ways to push money out of the door to clients. Its role in providing development finance country-by-country has increasingly been usurped by China’s bilateral lending and by regional development banks, including the new Asian Infrastructure Investment Bank.
But rather than contorting its lending to keep its existing model alive, the bank should switch much more of its energy towards plugging the real holes in development, the provision of “global public goods” - technology and know-how in areas such as health, energy and the environment.
The trend of countries with macroeconomic adjustment problems making a path to the World Bank’s door needs to be halted. The proper agency for crisis lending is across the road at the IMF. Papua New Guinea needs to admit it has a bigger issue than temporary difficulties in commercial banks, and the World Bank needs to find more fruitful things to do now that its traditional role is in long-term decline.
