Papua New Guinea hikes tariffs to encourage local industry

Import tariffs imposed at the beginning of the year are starting to have an impact on local industry in Papua New Guinea, supporting efforts to curb the import bill and encourage self-sufficiency.  

First announced in the 2017 supplementary budget, and reinforced in the 2018 budget, the amended tariff regime seeks to enable local manufacturers to compete with imports, which policymakers hope will raise domestic production and create employment opportunities.

New tariff regime signals shift in trade policy

Importantly, the levy increases represent a change in course from the gradual import duty cuts implemented under the Tariff Reduction Programme (TRP), instituted on the advice of the World Bank in 1999.

Prior to the TRP, the final phase of which was suspended in January, tariffs were as high as 100% on prohibitive items. As tariffs were progressively lowered over the subsequent two decades, a goods and services tax was put in place to offset revenue losses.

While the new budget sees some duties lowered or lifted completely on a number of goods not produced locally, it imposes increases on many imported foodstuffs – in particular, eggs, meat and cooking oil – that already have an established local production base.

The duties vary considerably by product line, but most increases are on the order of 2.5 to 10 percentage points, according to an explanatory note released in November.

Another key shift is a hike on imported petroleum products, aimed at putting prices on a more equal footing with domestic production. The biggest change concerns the excise tax on diesel, which has risen from PGK0.10 ($0.03) to PGK0.23 ($0.07) per litre, bringing it closer to the PGK0.61 ($0.19) rate applied to petroleum. Further increases to diesel tariffs are planned for 2019 and 2020.

According to government statements, these tariffs are not designed as a revenue-generation mechanism, but rather as a fillip to local manufacturing; indeed, they are projected to bring in just PGK70m ($21.5m) this year, equivalent to 0.09% of GDP.

Tariff benefits vary by sector

As a result of the increased tariffs on imports a number of local manufacturers have begun investing in factory expansions and upgrades.

A prime example is the first large-scale dairy farm and processing plant, which began production in mid-February near the capital, Port Moresby. Developed at a cost of $50m and operated by Israeli-backed Innovative Agro Industry, the facility is looking to compete with imports from Australia and New Zealand.

Thanks to a combination of new tariffs on imported dairy products and a largely self-sustaining supply of raw milk, the locally produced cheese, milk, yogurt and ice cream are being marketed at a close to a 50% discount to their imported equivalents.

While the increased tariffs have begun to benefit producers in a number of sectors, namely agriculture and agro-processing, some other industries targeted by the measures will need more time to develop viable local substitutes.  

“While we are supportive of developing domestic capacity, local alternatives to many imported products are not available on the market yet,” Matthew Lewis, managing director of construction firm Hornibrook, told OBG.

“Being able to source products locally would be ideal, but this is a long-term goal and won’t happen overnight. Given the local economy and the dynamics of business, I don’t see that happening in the next five years or more,” he added.

According to Lewis, while it may take years to develop a broad-based materials segment, construction firms that can vertically integrate their operations to include materials will have an edge over rivals in the marketplace.

Import-replacement strategy part of broader diversification efforts

Measures such as the adjustment to the tariff regime are a reflection of broader efforts to diversify the economy, develop non-resource-based sectors and shift away from a reliance on exports, Charles Abel, the deputy prime minister and minister for Treasury, told OBG.

While tariff increases on food and other consumer goods may push up prices in the short term – the 2018 budget expects inflation to rise by one percentage point to 6.9% this year – officials say the longer-term benefits of greater local production capacity will generate economies of scale, resulting in a lowering of costs and increased food security.

“[The tariff programme] is certainly going to make sure that money stays in PNG and is not exported to create jobs outside the country,” Prime Minister Peter O’Neill told the PNG Business Council in January.