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IMF Executive Board Concludes 2020 Article IV Consultation with Papua New Guinea

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2020 Article IV Consultation with Papua New Guinea







April 6, 2020















WASHINGTON, DC – The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Papua New Guinea.

On February 20, 2020, the Managing Director of the International Monetary Fund (IMF) approved a Staff-Monitored Program in Papua New Guinea and, on March 9, 2020, the Executive Board of the IMF concluded the Article IV consultation[2] with Papua New Guinea.

The Papua New Guinea (PNG) economy is estimated to have rebounded in 2019 following the contraction triggered by the large earthquake in 2018. Real GDP is projected to have grown by 5.0 percent in 2019, underpinned by recovery in energy and mineral production following the earthquake. In 2019, inflation is projected to have slowed to 3.5 percent by year-end, reflecting limited exchange rate depreciation, lower commodity prices and trading-partner inflation. Despite a large current account surplus, PNG’s non-resource sector continues to face a shortage of foreign exchange, hampering growth prospects. The current account surplus, estimated at 23 percent of GDP in 2019, is almost entirely offset by financial outflows associated with resource sector investments. In 2019 the fiscal balance deteriorated, despite higher revenues than expected, largely reflecting personnel cost over-runs. The public debt to GDP ratio has increased sharply, as the new government has recognized a large stock of payments arrears.

The challenge for the new government, which took office in June, is to resume fiscal consolidation while, at the same time, laying the foundations for raising sustainable growth and employment in the non-resource sector. Key elements of the policy framework being put in place include tightening expenditure controls, re-invigorating revenue reforms, restoring exchange rate flexibility, initiating reforms to state-owned enterprises, and addressing corruption.

To support their efforts and underscore their commitment to reform, the PNG authorities requested a 16-month IMF Staff-Monitored Program (SMP), which has been welcomed by the IMF Managing Director. The SMP provides the authorities with the opportunity to establish a track record of performance in implementation of reforms, and can also provide the basis for a Fund financially-supported program. SMPs are not accompanied by financial assistance nor endorsed by the IMF Executive Board. The reforms being undertaken by the PNG government are being supported with IMF capacity development and financial support from the Australian government.

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Disclaimer The Staff Report was prepared by a staff team of the IMF for the Executive Board’s consideration on March 9, 2020. The staff report reflects discussions with the PNG authorities in October 28-November 9, 2019 and is based on the information available as of November 21, 2019. It focuses on PNG near- and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. The outbreak has greatly amplified uncertainty and downside risks around the outlook. Staff is closely monitoring the situation and will continue to work on assessing its impact and the related policy response in PNG and globally.

Executive Board Assessment[3]

Executive Directors noted that while Papua New Guinea recovered in 2019 from the adverse impact of the 2018 earthquake, the economy is underperforming, with low trend growth, foreign exchange shortages, and rising public debt. Going forward, Directors emphasized the need to improve fiscal sustainability, enhance financial sector stability, restore exchange rate convertibility and flexibility, and boost sustainable, inclusive growth. In this context, they welcomed the new government’s initiatives and noted that the authorities’ request for a Staff Monitored Program sent a strong signal of their commitment to implement reforms.

Directors underscored that fiscal expenditure reforms need to focus on bringing personnel emoluments under control to make space for social spending and public investment. On the revenue side, the updated Medium-Term Revenue Strategy needs to be pursued vigorously, as increased domestic revenue mobilization is essential to achieve development objectives. Directors noted the sharp increase in public debt in 2019 which reflected recognition of state-owned enterprise debt and revaluation of external debt. However, Directors emphasized the need to reduce the debt-to-GDP ratio as a crucial anchor for fiscal policy, for which a strong and sustained program of expenditure and revenue reforms is essential.

Directors agreed that foreign exchange shortages were an impediment to private sector investment and competitiveness in the non-resource sector. They encouraged the authorities to restore exchange rate flexibility and currency convertibility and to strengthen the effectiveness of monetary operations. 

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Directors stressed the need for structural reforms. In particular, they urged the authorities to pursue governance reforms to enhance efficiency and equity in the delivery of public services, and state-owned enterprise reforms to strengthen their accountability and improve performance. In addition, Directors saw scope for improvements in AML/CFT compliance.

Directors agreed that the government’s reform program is ambitious and will require support from development partners both financially and with technical assistance. They encouraged the authorities to fully engage in capacity development and utilize Fund technical assistance, including for improvements in data quality. 

Table 1. Papua New Guinea: Selected Economic and Financial Indicators, 2016-2024

Nominal GDP (2016):   

US$21.1 billion 1/

Population (2016):         

7.9 million

GDP per capita (2016): 

US$2,568

Quota:

SDR 131.6 millions (14th Review: SDR 263.2 million)

 

2016

2017

2018

2019

2020

2021

2022

2023

2024

 

 

Est.

Proj.

 

(Percentage change)

Real sector

Real GDP growth 

4.1

3.5

-0.8

5.0

2.0

2.8

2.9

3.2

3.3

Resource 2/ 

9.8

7.9

-9.3

9.7

-0.9

0.7

0.2

0.0

0.0

Non-resource 

1.5

1.5

3.4

2.9

3.3

3.8

4.1

4.6

4.6

Mining  and quarrying (share)

9.0

10.2

10.6

10.3

11.6

11.9

12.1

11.8

11.4

Oil and gas extraction (share)

14.8

16.5

16.8

17.7

16.8

16.6

16.0

15.8

15.2

CPI (annual average)

6.7

5.4

4.7

3.9

4.8

6.4

6.7

5.8

4.1

CPI (end-period)

6.6

4.7

4.8

3.5

5.7

6.6

6.7

5.0

3.9

 

(In percent of GDP)

Central government operations

Revenue and grants

16.1

15.9

17.8

15.4

15.1

14.9

15.0

15.0

15.0

Of which: Resource revenue

0.6

0.9

1.7

1.5

1.3

1.1

1.0

1.0

0.9

Expenditure and net lending

20.9

18.4

20.4

19.5

18.4

18.1

17.2

16.9

16.8

Net lending(+)/borrowing(-)

-4.7

-2.5

-2.6

-4.1

-3.3

-3.1

-2.2

-1.9

-1.9

Non-resource net lending(+)/borrowing(-)

-5.4

-3.4

-4.3

-5.7

-4.7

-4.2

-3.2

-2.9

-2.8

 

(Percentage change)

Money and credit

 

 

 

 

 

 

 

 

 

Domestic credit

24.6

-0.1

-7.9

8.2

4.9

8.7

7.8

8.3

8.7

Credit to the private sector

7.2

-3.8

7.4

10.5

8.2

8.4

10.6

8.2

8.0

Broad money

10.9

-0.9

-3.8

5.4

6.6

11.0

11.2

10.3

10.1

Interest rate (182-day T-bills; period average)

7.4

7.1

7.0

6.8

7.0

8.5

9.1

8.3

7.0

 

(In billions of U.S. dollars)

Balance of payments

 

 

 

 

 

 

 

 

 

Exports, f.o.b.

8.1

9.8

10.1

10.8

11.3

11.6

11.8

12.0

12.2

Of which: Resource sector

7.3

8.9

8.9

9.7

10.0

10.0

10.1

10.2

10.3

Imports, c.i.f.

-1.8

-2.5

-2.5

-3.3

-3.6

-3.7

-4.2

-4.3

-4.4

Current account (including grants)

5.5

6.2

6.3

6.1

6.3

6.3

6.0

5.9

5.9

(In percent of GDP)

26.6

27.2

25.9

24.2

25.0

24.9

23.2

22.3

21.4

Gross official international reserves

1.7

1.7

2.2

2.0

1.9

1.9

2.0

2.1

2.2

(In months of goods and services imports)

5.4

5.2

5.6

4.7

4.3

3.9

3.9

4.0

4.2

 

(In percent of GDP)

Government debt

 

 

 

 

 

 

 

 

 

Government gross debt

33.7

32.5

36.8

38.3

40.8

42.4

42.2

41.7

41.1

External debt-to-GDP ratio (in percent) 3/

8.5

8.8

15.2

16.1

20.1

22.2

23.4

24.4

24.9

External debt-service ratio (percent of exports) 3/

2.3

2.2

2.1

2.3

6.9

4.5

2.8

3.2

3.5

Exchange rates

US$/kina (end-period)

0.3150

0.3095

0.2970

NEER (2005=100, end-period)

101.2

98.6

95.5

REER (2005=100, end-period)

121.1

122.3

121.4

Terms of trade (2010=100, end-period)

12.2

12.8

13.7

13.9

14.8

15.3

15.6

15.9

0.0

Nominal GDP (in billions of kina)

65.0

72.5

79.2

84.7

92.2

101.0

110.9

119.3

126.9

Non-resource nominal GDP (in billions of kina)

49.5

53.1

57.4

61.0

66.0

72.2

79.8

86.4

93.2

Sources: Department of Treasury; Bank of Papua New Guinea; and IMF staff estimates and projections.

1/ Based on period average exchange rate.

 

 

 

 

 

 

 

 

 

2/ Resource sector includes production of mineral, petroleum, and gas and directly-related activities such as mining and quarrying, but excludes indirectly-related activities such as transportation and construction.

3/ Public external debt includes external debt of the central government, the central bank, and statutory authorities.








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