New economic strategy in Papua New Guinea seeks to support SMEs

The government of Papua New Guinea has rolled out a new plan to support small and medium-sized enterprises (SMEs) by improving access to finance and training. Unveiled in February, the SME Policy and Master Plan 2016-30 sets out objectives to expand the economy and create employment outside of the main population and trade hubs. The package, slated to receive PGK200m ($68.3m) worth of funding per annum, aims to create 2m jobs over the next 14 years. To achieve this, the number of SMEs is projected to increase 10-fold to 500,000, with local ownership of businesses targeted to rise from 10% to 70%.

SME Inclusion

SMEs already make a major contribution to national output, accounting for 200,000 jobs and an estimated 10% of GDP, though these figures are likely much higher if the informal sector is taken into account. In the long term, the government aims to increase the sector’s share of GDP to 50%. Integrating smaller businesses into the economy is key to reducing PNG’s reliance on mining and energy, according to Richard Maru, minister of trade, commerce and industry. At the plan’s launch, Maru said, “We cannot continue to rely on the extractive industry ... and that’s why we have created this master plan to guide the SMEs towards the national objectives that we aspire to achieve in the next 14 years.”

At present, SMEs face obstacles to financing, and are often perceived as high-risk by commercial lenders. In 2015 the level of attrition among SMEs remained high, with just 20% surviving for five years or more. As a result, SMEs count for a disproportionately small share of lending. For example, at Bank South Pacific (BSP), the largest bank in PNG, SMEs accounted for just 0.3% of the loan mix as of the end of 2015, compared to 20.2% for retail clients and 79.5% for corporate borrowers. In March 2016 local daily Business Advantage PNG reported that 94.4% of SMEs in PNG have never received a loan and just 2.5% had benefitted from direct government assistance.

Unlocking Lending

The government is flagging proposals on how to open fiscal doors for SMEs. Citing the example of Sri Lanka, Maru said banking legislation could be amended to mandate that banks dedicate a set level of capital to SME financing. In February 2016 he told local news site Loop PNG, “All financial institutions must collaborate with the government to help provide access to finance, training and development for local SMEs.”

Under such a scheme, banks licensed to operate in PNG could be obligated to direct a set percentage of their loan books to key sectors in need of support, such as agriculture, fisheries and tourism, Maru added. For its part, the government has earmarked more than PGK65m ($22.2m) for SME credit in 2016, in addition to funding under the SME master plan.

Meanwhile, National Development Bank (NDB) has pledged to provide more affordable credit facilities to SMEs, as well as financial literacy training through a business incubation scheme. However, a prior bid by the NDB to offer low-interest loans to SMEs was curtailed in 2015 due to a lack of adequate government funding. As such, private sector involvement will likely be needed. To that end, in February 2016 BSP announced it was backing government efforts to form public-private partnerships to provide access to finance and training, pledging PGK50,000 ($17,100) worth of support on top of the PGK37m ($12.6m) in SME loans offered in 2015. Robin Fleming, CEO of BSP, said the bank has PGK80m ($27.3m) to PGK100m ($34.1m) in outstanding SME investment.

Plans are also under way to work with educational institutions and non-state actors to improve financial inclusion. The government hopes to amend the school curriculum to foster a more entrepreneurial culture. However, such programmes will likely need a wide reach, as most economic activity is concentrated in two of the country’s 22 provinces, Port Moresby and Lae, but 80% of PNG’s population live in rural areas.