CONTENTS. 1. General Overview International Developments Domestic Economic Conditions 9

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1 1 CONTENTS 1. General Overview 2 2. International Developments 5 3. Domestic Economic Conditions 9 Domestic Economic Activity Employment Consumer Price Index 4. Export Commodities Review 15 Mineral Exports Agriculture, Logs and Fisheries Exports 5. Balance of Payments Monetary Developments 21 Interest rates and Liquidity Money Supply Lending 7. Public Finance 23 For the Record 25 Kina Facility Rate (KFR) Announcement Glossary of Terms and Acronyms 26 Reference For the Record 32 Reference 33 Statistical Section 34 List of Tables S1 The contents of this publication may be reproduced provided the source is acknowledged. PORT MORESBY 07 th January 2015

2 2 1. GENERAL OVERVIEW Economic indicators available to the Bank of Papua New Guinea (the Bank) show that growth in economic activity continued into the September quarter of This was attributable to increased activity in the nonmineral private sector, reflective of increased Government spending on infrastructure and other priority areas under its expansionary fiscal budget, and the commencement of production and export of LNG in May The total level of employment increased by 0.2 percent in the September quarter, mainly reflecting growth in the non-mineral private sector. The weighted average kina price of Papua New Guinea's exports increased by 8.6 percent in the September quarter of 2014, compared to the corresponding quarter of However, declines in export volumes of most of the major export commodities resulted in lower export receipts. This, combined with high import demand, resulted in the kina depreciating against all major currencies. Consequently, the Trade Weighted Index (TWI) depreciated by 0.7 percent in the quarter. With the lag effect of the depreciation of the kina and a pick-up in imported inflation, the annual headline inflation in the September quarter of 2014 increased by 5.3 percent. The Bank continued to take a cautious approach in its monetary policy stance by maintaining the Kina Facility Rate at 6.25 percent throughout the quarter. Data from the Bank's Business Liaison Survey (BLS) show that the total nominal value of sales in the private sector increased by 17.4 percent in the June quarter of 2014, compared to a decline of 7.1 percent in the March quarter. Excluding the mineral sector, sales increased by 2.1 percent, following a decline of 6.4 percent in the previous quarter. Sales increased in the mineral, agriculture/forestry/fisheries, manufacturing, wholesale, construction and transportation sectors while it declined in the retail and financial/business and other services sectors. By region, sales increased in all regions. Over the twelve months to June 2014, total nominal sales increased by 23.4 percent, while excluding the mineral sector, it increased by 15.9 percent. The Bank's Employment Index shows that the total level of employment in the private sector increased by 0.2 percent in the September quarter of 2014, compared to an increase of 0.1 percent in the June quarter. Excluding the mineral sector, employment increased by 0.3 percent, with increases in the construction, retail and transportation sectors. By region, employment increased in the Highlands, Morobe and Islands regions, while it declined in NCD and Momase. Over the twelve months to September 2014, the total level of employment increased by 1.5 percent, while excluding the mineral sector, it increased by 3.0 percent. Quarterly headline inflation, as measured by the Consumer Price Index (CPI), was 1.6 percent in the September quarter of 2014, compared to an increase of 1.5 percent in the June quarter. Price increases were recorded in the 'Household Equipment', 'Miscellaneous', 'Health', 'Clothing and Footwear', 'Recreation', 'Transport', 'Alcoholic Beverages, Tobacco and Betelnut', 'Restaurants and Hotels', 'Food and Non- Alcoholic Beverages' and 'Housing' expenditure groups. Prices in all centres increased, with Port Moresby having the highest increase, followed by Alotau/Kimbe/ Rabaul, Lae and Goroka/Hagen/Madang. The annual exclusion based inflation increased by 5.0 percent in the September quarter, compared to a decline of 1.1 percent in the same period in The annual trimmed mean inflation was 5.4 percent in the quarter, compared to 0.2 percent in the same period in During the September quarter of 2014, the average daily kina exchange rate depreciated against all major currencies except the Japanese yen and the euro. The kina depreciated against the US dollar by 1.4 percent to , pound sterling by 0.6 percent to and Australian dollar by 0.5 percent to , while it appreciated against the Japanese yen by 0.2 percent to and the euro by 2.1 percent to These movements resulted in the depreciation of the daily average TWI by 0.7 percent to 34.75, compared to the June quarter of The weighted average kina price of Papua New Guinea's exports increased by 8.6 percent in the September quarter of 2014, compared to the corresponding quarter of There was a 6.2 percent increase in the weighted average price of mineral exports, with higher kina prices of gold, copper, crude oil and nickel. For the agricultural, logs and marine product exports, the weighted average price increased by 15.7 percent, with higher kina prices for most agricultural commodities, logs and marine products. Excluding logs, the weighted average price of agricultural and marine product exports

3 3 increased by 16.2 percent in the quarter, compared to the corresponding quarter of The higher kina export prices reflected higher international prices for most commodities, combined with the depreciation of the kina against USD. The balance of payments recorded an overall deficit of K436 million for the nine months to September 2014, compared to a deficit of K1,173 million in the corresponding period of A deficit in the current account more than offset a surplus in the capital and financial account. The deficit in the current account was lower than in the corresponding period of 2013 and was due to a higher trade surplus and lower net service and income payments The surplus in the capital and financial account was mainly due to inflows from portfolio investment reflecting drawdown from investments in short term money market instruments. This more than offset higher net outflows from direct and other investments reflecting equity outflow and build up in foreign currency account balances of mineral companies, respectively. The level of gross foreign exchange reserves at the end of September 2014 was K6,086.6 (US$2,489.3) million, sufficient for 7.4 months of total and 10.6 months of non-mineral import covers. The Central Bank continued to take a cautious approach and maintained the KFR at 6.25 percent in the September quarter of 2014, in consideration of the low inflation outcomes in the first two quarters of the year. Domestic interest rates, including for short-term securities, continued to increase between the end of June and September There was a net issuance of K52.8 million of Central Bank Bills (CBBs) in the quarter. To meet its financing needs, the Government made a net issuance of K527.3 million in Treasury bills and K486.0 million in Inscribed stocks. The average level of broad money supply (M3*) increased slightly by 0.7 percent in the September quarter, compared to an increase of 1.7 percent in the June quarter of This outcome was mainly influenced by an increase in average net claims on the Central Government as a result of increased issuances of securities and drawdown of Government deposits, combined with an increase of 1.8 percent in average private sector credit. The average net domestic claims outstanding, excluding net claims on the Central Government, increased by 2.6 percent in the September quarter of 2014, following an increase of 5.0 percent in the June quarter. The average level of deposits in other depository corporations (ODCs) increased by 0.8 percent to K19,433.6 million in the September quarter of 2014 compared to the previous quarter. This mainly reflected an increase in transferable deposits and other deposits of public non-financial corporations. The net foreign assets of the financial corporations, comprising depository corporations (DCs) and other financial corporations (OFCs), decreased by 12.2 percent to K8,427.4 million in the September quarter of 2014, compared to an increase of 2.5 percent in the June quarter. This resulted from a decline in net foreign assets of the DCs, which more than offset an increase in OFCs. Net claims on the Central Government increased by K535.6 million to K5,926.3 million in the September quarter of 2014, compared to an increase of K329.9 million in the previous quarter. This was a result of issuance of Government securities for Budgeted financing. In the September quarter of 2014, total domestic credit extended by financial corporations to the private sector, public non-financial corporations, Provincial and Local level Governments, and OFCs increased by K372.1 million to K13,506.5 million, compared to an increase of K590.5 million in the previous quarter. This was due to increases of K269.4 million and K102.8 million in credit to the private sector and public non-financial corporations, respectively. The annualized growth in domestic credit, excluding Central Government, was 11.8 percent in the September quarter of Preliminary estimates of the fiscal operations of the National Government over the nine months to September 2014 show an overall deficit of K1,510.1 million, compared to a deficit of K495.5 million in the corresponding period of This represents 3.8 percent of nominal GDP, and reflected higher expenditure which more than offset an increase in revenue. Total revenue, including foreign grants, over the nine months to September 2014 was K6,675.9 million, 2.0 percent higher than the receipts collected in the corresponding period of This represents 52.6 percent of the budgeted revenue for The increase

4 4 in revenue was largely attributed to higher collection of direct receipts, which more than offset lower non-tax receipts and foreign grants. Total expenditure in the period was K8,186.0 million, 16.3 percent higher than in the corresponding period of 2013 and represents 54.4 percent of the budgeted appropriation for This outcome reflected higher recurrent and development expenditures. As a result of these developments in revenue and expenditure, the Government recorded a deficit of K1,510.1 million. The budget deficit and net external loan repayment of K146.0 million were financed by domestic sources with K1,656.1 million. External loan repayments comprised of K117.6 million, K7.4 million and K21.0 million for concessionary, commercial and extraordinary financing sources, respectively. Domestic financing comprised of a net purchase of Government securities totalling K1,514.9 million and K250.7 million by OFCs and ODCs, combined with a net drawdown of K893.9 million from Government deposits at the Central Bank. These more than offset a K1,003.4 million payments mostly in cheques presented by other resident sectors. Total public (Government) debt outstanding increased by K798.6 million to K14,651.6 million at the end of September 2014, from the end of June. The domestic debt has increased while the net external debt decreased. The increase in domestic debt resulted from new issuance of Treasury bills and Inscribed stocks, while the decrease in external debt reflected net loan repayments. The total amount of Government deposits in the depository corporations increased by K177.7 million to K4,211.2 million in September 2014, compared to K4,033.5 million in June 2014.

5 5 2. INTERNATIONAL DEVELOPMENTS Global economic growth for 2014 has been revised downward due to weaker-than-expected growth in the first half of 2014, reflecting uneven growth among major economies and regions as downside risks increased. In its October 2014 World Economic Outlook (WEO) publication, the International Monetary Fund (IMF) revised downwards its global growth projections to 3.3 percent from 3.4 percent in the April WEO Update. The revision reflects the geo-political tensions in oil producing regions in the Middle East and the on-going crisis between Russia and Ukraine. In the advanced economies, the outlook for growth remained at 1.8 percent for 2014, mainly driven by the US economy. Growth in the emerging markets and developing economies is also expected to moderate at around 4.4 percent, with China and India been major contributors. Inflation is expected to remain low in the advanced economies and moderate in the emerging market and developing economies. Monetary policy in all major regions remained accommodative to support growth over the year. In July, the leaders of Brazil, Russia, India, China and South Africa (BRICS) held their 6 th summit in Portaleza, Brazil under the theme "Inclusive growth: Sustainable solutions". They adopted several action plans including: a New Development Bank to finance infrastructure and sustainable development; a Contingent Reserve Arrangement to assist during balance of payments difficulties; and Export Credit Insurance Agencies to facilitate business in other emerging or developing economies. They also agreed to improve and enforce competition policies and work together to implement the action plans. In August, the European Union's Foreign Affairs Council (FAC) met in Brussels, Belgium and called on Russia to withdraw its forces from its border with Ukraine and to stop all hostilities. The council stressed the importance of aid to be delivered with due regard for the humanitarian principles of independence, neutrality and impartiality and in agreement with the Ukrainian authorities. The Council urged Russia, Ukraine and the US to join the EU in seeking a political and sustainable solution to the crisis. In September, the 3 rd international conference on Small Island Developing States (SIDS) was held in Apia, Samoa, under the theme 'Recognizing special circumstances facing small island developing States'. The conference was attended by over 3,000 delegates, comprising political leaders and representatives of regional and multi-lateral institutions, non-government organisations and various interest groups. The conference adopted the outcome of the Accelerated Modalities of Action, (the Samoa Pathway), which captures a broad range of challenges facing SIDS, with the emphasis on addressing social, economic and environmental vulnerabilities, in particular the impact of climate change. Delegates also discussed debt sustainability, non-communicable diseases and disaster risk reduction, as well as sustainable development and management of oceans and seas. Also in September, the 3 rd High-Level Meeting of the Organization of the Petroleum Exporting countries (OPEC) and Russia Energy Dialogue was held in Vienna, Austria. Delegates discussed the current developments and prospects of the oil market, agreeing that the market is well-supplied with sufficient stock levels and adequate spare capacity. They also underscored the importance of stable and predictable markets for the benefit of the industry and investments, and the well-being of the global economy. In the US, real GDP increased by 2.3 percent over the year to September 2014, compared to an increase of 1.6 percent over the same period in The growth reflected an increase in private sector investment in commercial real estate, machinery, and factories combined with a pickup in household and government consumption. The latest IMF forecast is for real GDP to grow by 2.2 percent in 2014, lower than the earlier forecast of 2.7 percent. Industrial production grew by 4.3 percent over the year to September 2014, compared to 3.2 percent over the same period in The growth was driven by the production of durable goods and increased mineral processing. The Purchasing Manager's Index published by the Institute for Supply Management was 56.6 in September 2014, compared to 55.3 percent in June 2014, indicating an expansion in the manufacturing industry. Consumer prices increased by 1.7 percent over the year to September 2014, compared to an increase of 1.2 percent in the corresponding period in Broad money supply increased by 6.4 percent over the year

6 6 to September 2014, compared to 6.5 percent over the same period in The Federal Reserve kept the Federal Funds rate unchanged between zero and 0.25 percent to encourage borrowing and stimulate economic activity. The trade deficit was US$723.3 billion over the year to September 2014, compared to a deficit of US$715.2 billion over the corresponding period in The larger deficit reflected higher import demand. In Japan, real GDP declined by 1.2 percent over the year to September 2014, compared to an increase of 2.7 percent over the same period in The decline was attributed to an increase in the sales tax in April, which dampened consumer spending. A drop in housing investment and capital spending and a fall in inventory by the private sector also contributed to this decline. The latest IMF forecast is for real GDP to grow by 0.9 percent in 2014, lower than its earlier forecast of 1.4 percent. Industrial production grew by 0.6 percent over the year to September 2014, compared to an increase of 5.1 percent over the same period in The lower outcome was mainly due to a drop in the demand for steel products. Retail sales remained unchanged over the year to September 2014, compared to an increase of 1.6 percent over the corresponding period in This was attributed to the increase in sales tax. The level of unemployment fell to 3.6 percent in September 2014, compared to 4.0 percent in September The improvement in employment was associated with increasing private sector profits and, supported by stronger exports and industrial production. Consumer prices increased by 3.3 percent over the year to September 2014, compared to an increase of 1.0 percent over the corresponding period in The increase reflected higher prices of utilities, particularly for fuel, lighting and water. Broad money supply (M3) increased by 3.0 percent over the year to September 2014, compared to 3.8 percent in the same period in The Bank of Japan continued to buy government bonds in its bid to increase monetary base by trillion yen per annum to stimulate economic activity and avoid deflation. It therefore, maintained its policy rate at 0.1 percent in the September quarter of Trade deficit was US$106.2 billion over the year to September 2014, compared to a deficit of US$90.7 billion over the corresponding period in The larger deficit was a result of higher import of food products, metals, petroleum products and coal, combined with lower exports of electronics and other primary and manufactured products. In the Euro area, real GDP increased by 0.8 percent over the year to September 2014, compared to a decline of 0.4 percent over the same period in Among the Euro area member states, Greece recorded the highest growth rate of 0.7 percent, followed by Slovakia, Spain, Latvia and France with each growing at 0.3 percent, while Germany grew by 0.1 percent, mainly due to public and private spending. There is a loss of momentum in the Euro area as the recovery, to a larger extent, remains fragile as it continues to experience unemployment and debt issues. The latest IMF forecast is for real GDP to grow by 0.8 percent in 2014, lower than its earlier forecast of 1.2 percent. Industrial production increased by 0.7 percent over the year to September 2014, compared to an increase of 1.0 percent over the same period in The increase was driven by the manufacturing of motor vehicles and other capital goods. Retail sales increased by 0.6 percent over the year to September 2014, compared to an increase of 0.3 percent over the same period in The increase was driven by higher demand for clothing, textiles and pharmaceutical products. The level of unemployment was 11.5 percent in September 2014, compared to 12.2 percent in September Although, unemployment declined, it remains high reflecting the on-going stagnation in most European economies. Consumer prices in the Euro area, as measured by the Harmonized Index of Consumer Prices (HICP), increased by 0.3 percent over the year to September 2014, compared to an increase of 1.1 percent over the same period in Broad money supply increased by 2.1 percent over the year to September 2014, the same as in the corresponding period in The European Central Bank (ECB) lowered its refinancing rate to 0.05 percent in the September quarter of 2014, and cut the deposit facility rate to negative 0.2 percent. The ECB also announced that it would start buying securitized debt and covered bonds to ease the flow of bank funding to the economy, with the aim to stimulate

7 7 growth and avoid deflation. The trade surplus was US$235.3 billion over the year to September 2014, compared to a surplus of US$184.9 billion over the same period in The higher trade surplus was due to an increase in exports mainly to China, combined with a decline in imports. In Germany, real GDP grew by 1.2 percent over the year to September 2014, compared to an increase of 0.6 percent over the corresponding period in The expansion was mainly driven by an increase in household consumption and exports. The latest IMF forecast is for real GDP to grow by 1.4 percent in 2014, lower than its earlier forecast of 1.9 percent. Industrial production declined by 0.2 percent over the year to September 2014, compared to an increase of 0.9 percent over the same period in This was associated with a drop in the demand for construction and energy equipment, as well as consumer and capital items. Retail sales increased by 2.3 percent over the year to September 2014, compared to an increase of 0.3 percent over the same period in This reflected an increase in demand for general consumable products. The level of unemployment was 6.7 percent in September 2014, compared to 6.9 percent in September 2013, reflecting tight labour market conditions. Consumer prices increased by 0.8 percent over the year to September 2014, compared to an increase of 1.4 percent over the corresponding period in Money supply increased by 4.7 percent over the year to September 2014, compared to an increase of 2.8 percent over the same period in The increase was associated with favourable lending conditions by the ECB keeping the refinancing rate very low at 0.05 percent. The trade account recorded a surplus of US$282.1 billion over the year to September 2014, compared to a surplus of US$252.2 billion over the same period in The higher surplus was mainly due to an increase in exports of chemical products, electronics and intermediate and consumer goods mainly to the other European countries. In the United Kingdom, real GDP increased by 3.0 percent over the year to September 2014, compared to an increase of 1.5 percent over the corresponding period in This was attributed to an increase in the construction, manufacturing and the services sectors. The IMF maintained its forecast for real GDP to grow by 3.2 percent in Industrial production increased by 1.4 percent over the year to September 2014, compared to an increase of 2.2 percent over the same period in Retail sales increased by 2.6 percent over the year to September 2014, compared to an increase of 2.2 percent over the corresponding period in The increase was due to stronger household consumption. Unemployment was 6.5 percent in September 2014, compared to 7.8 percent in September The decline reflected an improvement in the labour market conditions, supported by the expansion in economic activity. Consumer prices increased by 1.2 percent over the year to September 2014, compared to an increase of 2.7 percent over the same period in The lower increase was mainly due to a fall in the prices of food and non-alcoholic beverages, miscellaneous goods and services. Broad money supply declined by 2.0 percent over the year to September 2014, compared to an increase of 3.0 percent over the same period in The Bank of England maintained its policy rate at 0.5 percent in the September quarter of Trade account recorded a deficit of US$185.6 billion over the year to September 2014, compared to a deficit of US$169.8 billion over the same period in This was a result of increased imports of fuel, other petroleum oils and services. In China, real GDP grew by 7.3 percent over the year to September 2014, compared to an increase of 7.4 percent in the corresponding period in Growth was mainly driven by activities in the services and manufacturing sectors. The IMF maintained its forecast for real GDP growth at 7.4 percent in Industrial production increased by 8.0 percent over the year to September 2014, compared to an increase of 10.2 percent over the same period in Although the slowdown was associated with a weaker residential property market, the growth was driven by the mineral processing industries, the manufacturing of food and recycling and disposal of waste. Unemployment was 4.1 percent in September 2014, compared 4.0 percent in the corresponding period in 2013.

8 8 Consumer prices increased by 1.6 percent over the year to September 2014, compared to 3.1 percent over the same period in The People's Bank of China kept its policy rate unchanged at 6.0 percent in the September quarter of 2014, while injecting CNY 500 billion (US$81 billion) into the banking system, with the aim to support credit and economic growth. The trade surplus was US$320.5 billion over the year to September 2014, compared to a surplus of US$253.3 billion over the same period in The higher trade surplus reflected increasing exports and falling imports, mainly to the US, euro zone and South East Asian countries. In Australia, real GDP increased by 2.7 percent over the year to September 2014, compared to a growth of 2.3 percent over the same period in The increase was mainly driven by net exports, private and public spending. The IMF maintained their forecast for real GDP to grow by 2.8 percent in Industrial production grew by 3.8 percent over the year to September 2014, compared to an increase of 2.7 percent over the corresponding period in The increase was associated with activity in the mining, wood processing and utilities sectors. Retail sales increased by 3.4 percent over the year to September 2014, compared to an increase of 2.2 percent over the corresponding period in 2013, reflecting strong consumer demand for clothing, footwear and personal accessories. Unemployment was 6.1 percent in September 2014, compared to 5.6 percent in September 2013, mainly reflective of changes in seasonal employment. Consumer prices increased by 2.3 percent over the year to September 2014, compared to an increase of 2.2 percent over the corresponding period in Broad money supply increased by 8.1 percent over the year to September 2014, compared to an increase of 6.3 percent over the corresponding period in The Reserve Bank of Australia kept its official cash rate unchanged at 2.5 percent in the September quarter of 2014, as it continued its accommodative monetary policy stance to support demand for credit and strengthen economic activity. The trade account recorded a surplus of US$18.4 billion over the year to September 2014, compared to a surplus of US$13.4 billion over the same period in This was a result of increased agricultural and mineral exports, as well as services mainly to China and Japan EXCHANGE RATES United States dollar per kina Australian dollar per kina Japanese yen per kina Euro per kina Special Drawing Rights per kina

9 9 In the September quarter of 2014, the US dollar appreciated against all major currencies, reflecting improved economic growth and lower interest rates in the US, slowing growth in Japan, China and the Euro area. With declining inflation and expectation of easing monetary policy by the ECB, this would lead to further falling rates. The US dollar appreciated by 0.9 percent against the Australian dollar, 0.8 percent against the pound sterling, 1.7 percent against the Japanese yen and 3.3 percent against the euro. During the September quarter of 2014, the average daily kina exchange rate depreciated against most major currencies except the yen and the euro. The kina depreciated against the US dollar by 1.4 percent to , pound sterling by 0.6 percent to and Australian dollar by 0.5 percent to It appreciated against the yen by 0.2 percent to and the euro by 2.1 percent to These movements resulted in the depreciation of the daily average TWI by 0.7 percent to 34.75, compared to the June quarter of The depreciation was a result of increase import demand and lower export receipts. 3. DOMESTIC ECONOMIC CONDITIONS DOMESTIC ECONOMIC ACTIVITY 1 Data from the Bank's Business Liaison Survey (BLS) show that the total nominal value of sales in the private sector increased by 17.4 percent in the June quarter of 2014, compared to a decline of 7.1 percent in the March quarter. Excluding the mineral sector, sales increased by 2.1 percent, following a decline of 6.4 percent in the previous quarter. Sales increased in the mineral, agriculture/forestry/fisheries, manufacturing, wholesale, construction and transportation sectors while the retail and financial/business and other services sectors recorded declines. The value of sales increased in all regions. Over the twelve months to June 2014, total nominal sales increased by 23.4 percent, while excluding the mineral sector, sales increased by 15.9 percent. In the mineral sector, sales increased by 67.8 percent in the June quarter of 2014, compared to a decline of 9.0 percent in the March quarter. The June quarter marked the commencement of LNG production and export, with the first LNG cargo shipment made in May. This milestone achievement was the main driver of growth in this sector. Higher production and export volumes of gold, nickel and cobalt also contributed to the growth. Over the twelve months to June 2014, sales increased by 65.0 percent. In the agriculture/forestry/fisheries sector, sales increased by 25.9 percent in the June quarter of 2014, following a decline of 24.1 percent in the previous quarter. The increase was driven by stronger sales in the palm oil industry, increased demand for coffee from the European countries, and better catchment of tuna by a major fishing company. Over the twelve months to June 2014, sales increased by 52.7 percent. In the manufacturing sector, sales increased by 16.5 percent in the June quarter of 2014, compared to a decline of 17.3 in the March quarter. Favourable timing of shipments from the Napanapa Oil Refinery, hence a larger exported volume, contributed the largest increase in this sector. In addition, demand for alcoholic beverages as well as food products, such as rice and flour, was strong in the quarter leading to better sales. This movement is largely explained by seasonal factors associated with the Easter and Mother's Day celebrations. Activity in this sector continues to be adversely affected by high domestic production costs and competition from cheaper imported products. Over the twelve months to June 2014, sales increased by 19.2 percent. In the wholesale sector, sales increased by 12.4 percent over the quarter, compared to an increase of 2.9 percent in the March quarter of This growth was primarily driven by an increase in fuel distribution and sales across the country, as well as stronger demand for heavy duty engine oils and lubricants. There was also a strong increase in the sales of consumer goods - a seasonal effect attributed to the Easter and Mother's Day celebrations in the quarter. Over the twelve months to June 2014, sales increased by 32.5 percent. In the construction sector, sales increased by 11.2 percent in the June quarter of 2014, compared to a decline of 6.4 percent in the previous quarter. The increase in this sector was driven by private sector 1 The quarterly growth rates for the March 2014 quarter have been revised and therefore might differ from those previously reported in the June QEB. The June quarter growth rates reported here will be subject to revisions in the next quarter.

10 10 construction activities, such as construction work in the Western province at the Ok Tedi mine, infrastructure development by the Ok Tedi Development Foundation and other construction projects undertaken by the private sector in NCD. The Government-funded projects - including major road construction and maintenance projects in NCD and the Southern Highlands province, as well as the on-going construction of venues and facilities for the 2015 Pacific Games - also contributed to the increase. Over the twelve months to June 2014, sales increased by 54.7 percent. In the transportation sector, sales increased by 4.6 percent in the June quarter of 2014, compared to a marginal growth of 0.6 percent in the March quarter. The demand for freight transportation services, particularly from domestic manufacturers, was strong in the quarter and led this increase. On account of this demand, the provision of support services, such as stevedoring and warehousing, also increased. However, some air passenger carriers captured in the survey experienced declines in sales as increasing competition in this sector exercised downward pressure on prices and caused a decline in passenger numbers. Over the twelve months to June 2014, sales increased by 14.1 percent. In the financial/business and other services sector, sales declined by 6.9 percent in the June quarter of 2014, following a decline of 3.8 percent in the previous quarter. The decline was mainly in the financial subsector reflecting a drop in the foreign exchange earnings of financial intermediaries. Over the twelve months to June 2014, sales in this sector declined by 2.1 percent. In the retail sector, sales declined by 11.7 percent in the June quarter, compared to a decline of 0.6 percent in the March quarter of There were lower sales of tyres, vehicles, heavy machinery and equipment to the mining and, oil and gas sectors. In addition, a big retailer recorded a decline as it went through an adjustment period following the introduction of a new accounting system across the country. Over the year to June 2014, sales in the retail sector declined by 7.7 percent. The total nominal value of sales increased across all regions. Momase recorded the largest quarterly growth of 49.9 percent, compared to a decline of 32.7 percent in the preceding quarter. The increase was mainly driven by the mineral sector, reflecting higher sales as production volume and export of nickel ore and cobalt increased significantly. This, combined with a strong positive contribution from the wholesale sector, more than offset a decline in the manufacturing sector. Over the twelve months to June 2014, sales increased by 37.9 percent. In the Highlands region, sales increased by 48.3 percent in the June quarter, compared to a decline of 12.0 percent in the March quarter of Increases were recorded in the mineral sector as PNG LNG commenced production and export and, in the agriculture/forestry/fisheries sector, as coffee production and export was stronger during the quarter. Over the twelve months to June 2014, sales increased by 71.6 percent. In the Southern region, sales increased by 21.1 percent in the June quarter of 2014, compared to a decline of 12.6 percent in the previous quarter. Increases were recorded in the mineral and agriculture/forestry/fisheries sectors as a result of a higher production of gold at both the Ok Tedi and Tolukuma mines and stronger export of palm oil, respectively. Over the year to June 2014, sales increased by 20.3 percent. In NCD, sales increased by 10.9 percent in the June quarter of 2014, compared to a decline of 8.5 percent in the previous quarter. A strong growth was recorded in the wholesale sector accounted for by higher sales from the Napanapa Oil Refinery, as well as increased sales and distribution of fuel at service stations across NCD. Manufacturing sector sales also increased due to higher demand for alcoholic beverages and electricity. Road construction and maintenance work in the construction sector as well as construction of venues and facilities for the 2015 Pacific Games also contributed to this increase. Over the year to June 2014, sales increased by 15.8 percent. In Morobe, sales increased by 2.5 percent in the quarter, compared to a decline of 3.1 percent in the March quarter of The increase in the wholesale sector was due to stronger demand for general consumer goods, as well as higher sales and distribution of fuel at service stations. Growth was also recorded in the manufacturing sector as demand for food products, particularly rice, increased over the quarter. Over the year to June 2014, sales increased by 3.6 percent. In the Islands region, sales increased by 0.5 percent in the June quarter of 2014, compared to an increase of

11 percent in the March quarter. The increase was driven by the wholesale sector due to higher fuel sales, the mineral sector as gold production and export at Simberi mine increased and the agriculture/forestry/ fisheries sector due to stronger demand and export of palm oil. Over the twelve months to June 2014, sales increased by 14.4 percent. EMPLOYMENT The Bank's Employment Index shows that the total level of employment in the private sector increased by 0.2 percent in the September quarter of 2014, compared to an increase of 0.1 percent in the June quarter. Excluding the mineral sector, employment increased by 0.3 percent, with increases in the construction, retail and transportation sectors. By region, employment increased in the Highlands, Morobe and Islands regions, while it declined in NCD and Momase. Over the twelve months to September 2014, the total level of employment increased by 1.5 percent, while excluding the mineral sector, it increased by 3.0 percent. In the construction sector, the level of employment increased by 8.0 percent in the September quarter of 2014, compared to an increase of 2.7 percent in the previous quarter. The increase was due to on-going government-funded road maintenance and upgrading work in the Highlands region, upgrading of the Kimbe airport, and the on-going construction of the 2015 Pacific Games venues and facilities in NCD. Construction and renovation of facilities and accommodation for the education and health sector as well as building of commercial properties by the private sector also contributed to the increase. Over the year to September 2014, the level of employment rose by 43.0 percent. In the retail sector, the level of employment increased by 5.7 percent in the September quarter of 2014, compared to an increase of 0.2 percent in the previous quarter. The increase was attributed to the recruitment of new workers by a major retail company for its new branch in NCD and recruitment of casual labour in the Islands region due to increased demand for retail products. Over the year to September 2014, the level of employment increased by 2.8 percent. In the transportation sector, the level of employment increased by 2.5 percent in the September quarter of Formal Private Sector Employment Index Based: March 2002= , compared to a decline of 3.2 percent in the previous quarter. The pick-up in sales was due to higher stevedoring activity in NCD, Alotau and Lae seaports. A passenger transportation company in the Islands region also hired casual employees to cater for an increase in passenger travel and cargo haulage. Over the year to September 2014, the level of employment increased by 2.8 percent. In the financial/business and other services sector, the level of employment declined by 0.5 percent in the September quarter of 2014, compared to a decline of 2.5 percent in the June quarter. The drop in employment was mainly attributed to the laying-off and resignation of staff especially in the services sub-sector due to lower demand for catering, security and accounting services. Over the year to September 2014, the level of employment fell by 1.1 percent. In the mineral sector, the level of employment fell by 1.2 percent in the September quarter of 2014, compared to a decline of 6.1 percent in the previous quarter. The fall in employment was due to the completion of a plant expansion project at a mine site in the Islands region, which resulted in workers being laid-off, as well as a redundancy exercise carried out by a mining company in the Southern region as part of its rationalisation programme to cut costs. Over the year to September 2014, the level of employment declined by 16.4 percent. In the agriculture/forestry/fisheries sector, the level of employment declined by 1.7 percent in the September quarter of 2014, compared to an increase of 3.3 percent in the previous quarter. The decline was mainly driven by a rubber company laying-off its workers as a result of low international rubber prices, while a palm oil

12 12 company laid-off its seasonal workers as the harvesting season ended. A sugar production company also reduced its workforce as the sugarcane harvesting season ended. Over the year to September 2014, the level of employment rose by 4.6 percent. In the manufacturing sector, the level of employment fell by 2.5 percent in the September quarter of 2014, compared to a decline of 1.0 percent in the June quarter. A lower harvest of tuna led to a reduction in the workforce by a fish canning company in the Momase region, while a timber processing company in the Southern region reduced its staff as logging activity slowed. Over the year to September 2014, the level of employment declined by 6.6 percent. In the wholesale sector, the level of employment further declined by 2.8 percent in the September quarter of 2014, following a decline of 3.5 percent in the previous quarter. The fall was mainly attributed to a major wholesale company implementing a redundancy exercise to reduce its operational costs and improve efficiency of its operations, combined with the layingoff and resignation of staff in other wholesale companies. Over the year to September 2014, the level of employment dropped by 8.0 percent. By region, the level of employment increased in the Highlands, Morobe and Islands, while it declined in NCD, Southern and Momase. In the Highlands region, the level of employment increased by 10.1 percent in the September quarter of 2014, compared to an increase of 4.2 percent in the June quarter. This increase was mainly due to on-going government-funded road construction and upgrading projects. Over the year to September 2014, the level of employment increased by 5.7 percent. In Morobe, the level of employment increased by 3.8 percent in the September quarter of 2014, compared to a decline of 6.2 percent in the previous quarter. The pick-up was due to the construction and renovation of schools and commercial buildings, and higher stevedoring activity at the Lae wharf. Over the year to September 2014, the level of employment declined by 4.8 percent. In the Islands region, the level of employment rose by 1.5 percent in the September quarter of 2014, compared to a fall of 1.3 percent in the June. The increase was due to the on-going upgrading work at the Kimbe airport, recruitment of casuals due to a pickup in demand for retail trade and a passenger transportation company recruiting casuals to cater for higher demand for passenger travel and cargo haulage. Over the year to September 2014, the level of employment increased by 3.3 percent. In NCD, the level of employment fell by 1.1 percent in the September quarter of 2014, compared to an increase of 0.9 percent in the previous quarter. The decline was mainly attributed to a redundancy exercise carried out by a major wholesale company to reduce costs and improve efficiency of its operations. Termination and resignation of staff by various catering and accounting firms also contributed to the decline. Over the year to September 2014, the level of employment increased by 4.4 percent. In the Southern region, the level of employment declined by 5.6 percent in the September quarter of 2014, compared to an increase of 3.8 percent in the previous quarter. This was due to a redundancy exercise carried out by the Tolukuma gold mine to restructure its operations, reduction of workforce by a rubber producing company as a result of depressed international price of rubber and the laying off of workers by a palm oil company as the harvesting season ended. Lower logging and processing activity also contributed to the decline. Over the year to September 2014, the level of employment declined by 2.3 percent. In the Momase region, the level of employment declined by 7.7 percent in the September quarter of 2014, compared to an increase of 5.8 percent in the previous quarter. The decline was mainly attributed to the laying off of casual employees by a sugar manufacturing company as the harvesting season ended, while lower harvest of fish led to workforce reduction at a fish cannery. Over the year to September 2014, the level of employment increased by 0.3percent. CONSUMER PRICE INDEX Quarterly headline inflation, as measured by the Consumer Price Index (CPI) and released by the National Statistical Office (NSO), was 1.6 percent in the September quarter of 2014, compared to an increase of 1.5 percent in the June quarter. Price increases were recorded in the 'Household Equipment', 'Miscellaneous', 'Health', 'Clothing and Footwear', 'Recreation', 'Transport', 'Alcoholic Beverages, Tobacco and

13 13 Betelnut', 'Restaurants and Hotels', 'Food and Non- Alcoholic Beverages' and 'Housing' expenditure groups. Prices in all urban centres increased, with Port Moresby having the highest increase, followed by Alotau/Kimbe/ Rabaul, Lae and Goroka/Hagen/Madang. The CPI for the 'Household Equipment' expenditure group increased by 5.6 percent in the September quarter of 2014, compared to an increase of 0.9 percent in the previous quarter. The largest increase was in the 'household furniture & furnishings' sub-group of 9.0 percent, followed by 'household maintenance goods' sub-group with 8.4 percent and 'household appliance' sub-group with 1.4 percent. This expenditure group contributed 4.9 percentage points to the overall movement in the CPI. The CPI for the 'Miscellaneous' expenditure group increased by 5.3 percent in the quarter, compared to a decline of 4.0 percent in the June quarter of This was due to increases in the prices of toiletries and personal care products of 8.9 percent, baby oil and powder of8.4 percent, children's toys of 10.8 percent and insect repellent by 6.0 percent. These, more than offset a decline of 0.4 percent in the barber fees. This expenditure group contributed 1.5 percentage points to the overall movement in the CPI. The CPI for the 'Health' expenditure group increased by 4.8 percent in the September quarter of 2014, compared to an increase of 3.6 percent in the previous quarter. There were increases of 7.1 percent in the 'medical supplies' sub-group and 0.4 percent in the 'medical services' sub-group. This expenditure group contributed 3.2 percentage points to the overall movement in the CPI. Prices in the 'Clothing and Footwear' expenditure group increased by 3.9 percent in the September quarter of 2014, compared to an increase of 1.8 percent in the previous quarter. There were increases of 6.3 percent in the 'women and girls wear' sub-group, 6.1 percent in the 'men's wear' sub-group, 2.7 percent in the 'footwear' sub-group, 2.8 percent in the 'boys wear' sub-group, and 1.2 percent in the 'headwear' subgroup. These more than offset price declines of 0.6 percent and 3.3 percent in the 'clothing' and 'sewing items' sub-groups, respectively. This expenditure group contributed 6.2 percentage points to the overall movement in the CPI Headline Consumer Price Index (percentage change over the quarter) Prices in the 'Recreation' expenditure group increased by 3.2 percent in the September quarter of 2014, compared to a decline of 2.3 percent in the June quarter. This was accounted for by increases in the prices of flash drives of 16.0 percent, digital camera of 7.2 percent, bicycle of 3.6 percent, batteries of 3.5 percent, biros of 3.0 percent and DVD players of 1.6 percent. These more than offset declines in the prices of photography of 15.7 percent, sports gate and movie fees of 6.3 percent and television of 4.6 percent. This expenditure group contributed 2.9 percentage points to the overall movement in the CPI. The CPI for the 'Transport' expenditure group increased by 2.2 percent in the September quarter of 2014, compared to an increase of 1.0 percent in the previous quarter. Prices increased in the 'motor vehicle purchase' sub-group by 9.1 percent, as a result of higher prices of motor vehicles and outboard motors, in the 'fares' sub-group by 0.5 percent, and in the 'other services' sub-group by 0.7 percent. There were no price changes in the 'fuel and lubricants' sub-group, while the price in the 'operation of transport' sub-group declined by 0.1 percent This expenditure group contributed 15.4 percentage points to the overall movement in the CPI. Prices in the 'Alcoholic Beverages, Tobacco and Betelnut' expenditure group increased by 1.8 percent in the September quarter, compared to an increase of 1.3 percent in the previous quarter. There were increases in the 'tobacco' sub-group of 12.0 percent and 'alcoholic beverages' sub-group of 6.1 percent, which more than offset a decline of 4.0 percent in the 'betelnut and mustard' sub-group. This expenditure group contributed 13.1 percentage points to the overall movement in the CPI.