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Papua New Guinea: Staff Report for the 2007 Article IV Consultation—Informational Annexes

Author(s):
International Monetary Fund
Published Date:
March 2008
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Annex I: Papua New Guinea—Fund Relations

(As of November 30, 2007)

I. Membership Status: Joined October 9, 1975; Article VIII

II. General Resources Account:

SDR MillionPercent Quota
Quota131.60100.00
Fund holdings of currency131.1699.67
Reserve position in Fund0.440.33

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation9.30100.00
Holdings0.060.63

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount Approved

(SDR Million)
Amount Drawn

(SDR Million)
Stand-by4/25/906/24/9126.360.00
Stand-by7/31/919/30/9226.360.00
Stand-by7/14/9512/15/9771.4835.34
Stand-by3/29/009/28/0185.5485.54

VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20072008200920102011
Principal0.000.000.000.000.00
Charges/interest0.000.330.330.330.33
Total0.000.330.330.330.33

VII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, the Bank of Papua New Guinea (BPNG) was subject to a transitional assessment based on its Stand By Arrangement (SBY) with the Fund, which was approved in March 2000 and expired in September 2001. The transitional assessment was completed on May 4, 2001 and made recommendations to alleviate identified weaknesses. Currently, the BPNG is not subject to the safeguards policy.

VIII. Exchange Rate Arrangement:

Papua New Guinea has a managed floating exchange rate arrangement; the exchange rate of the kina is determined in the interbank market in which authorized banks participate. Papua New Guinea has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions.

IX. Article IV Consultation:

Papua New Guinea is on the standard 12-month consultation cycle. The previous Article IV consultation discussions were held during November 6–17, 2006. The staff report (IMF Country Report No. 07/111) was considered by the Executive Board and the consultation concluded on March 7, 2007.

X. Technical Assistance from Headquarters:

FAD: A joint FAD/PFTAC mission in March 2000 assisted the authorities in preparing a Report on the Observance of Standards and Codes Fiscal Transparency Module, published in October 2000. A mission in December 2000 provided advice on the reconciliation of large and volatile differences in fiscal reporting based on information provided by the Department of Finance and Treasury and information reported by the Bank of Papua New Guinea. A mission in February 2002 assessed progress in improving fiscal transparency.

LEG: A mission in November 1996 provided advice on the legal framework for the National Value-Added Tax. A mission in November 2005 provided advice on the drafting of a tax administration law. A mission in July 2006 provided a comprehensive program of assistance in the development of the AML/CFT regime, including legislative drafting and capacity building. A mission in August/September 2007 assisted the authorities in finalizing the terms of the Revenue Administration Bill.

MFD/MCM: A mission in November 2001 reviewed foreign exchange management. A mission in June 2001 assessed the monetary policy implementation framework. During 2001–03 assistance was provided through missions in bank supervision, financial sector restructuring and improving the accounting framework and monetary operations of the central bank. A resident advisor was assigned to the BPNG research department for 15 months through August 2003. Technical assistance through peripatetic visits was delivered on bank regulation and supervision (2001–February/March 2007), medium-term monetary policy formulation (October 2004 and September 2005), reserve management (June 2006–September 2007), internal audits (2004–August 2007), and accounting (September/October 2006–February 2007).

STA: Four missions in 1995–96 provided advice on the compilation of national accounts. A mission reviewed monetary and financial statistics in April 2005 and a follow-up mission took place in May 2006. Subsequently, a multisector mission visited in September 2006. A high level STA mission to follow up on the multisector mission visited Port Moresby in December 2007, joined by the Australian Bureau of Statistics and AusAid.

XI. Resident Representative:

A post was opened in Port Moresby in May 2000 and is currently filled by Mr. E. Faal.

Annex II: Papua New Guinea—Relations with the Pacific Financial Technical Assistance Centre1

(As of December 2007)

Assistance to Papua New Guinea (PNG) in recent years has been coordinated with the IMF Resident Representative in Port Moresby, and with the extensive assistance provided by the Australian Enhanced Cooperation Program (ECP). Since 2000, PFTAC has provided 24 missions to PNG, and the Government has sent over 50 officials to the Centre’s regional seminars, workshops, and training courses in this period.

Public Financial Management

PFTAC assisted in the preparation of a ROSC, which was published in October 2000. The PFTAC PFM Advisor has participated in occasional FAD technical assistance missions, and an attachment of one PNG official to PFTAC was completed in April 2007. The PFTAC PFM Advisor is expected to participate in a joint PEFA assessment, with ADB and other donors, in mid-February 2008.

Tax Administration and Policy

The IMF Legal Department drafted a Tax Administration Act in 2005, adopted by the Government in 2006, that: i) the re-established the Internal Revenue Commission as an independent tax authority; and (ii) included customs administrative provisions. An IMF Legal Department mission in September 2007 prepared the Internal Revenue Commission Administration Bill 2007 to strengthen and consolidate all revenue administrative provisions into one statute. It is expected that the new law will shortly be passed by the Parliament.

In 2006, the Commissioner General of the IRC requested assistance to obtain an independent strategic assessment of the existing IT system looking five years out. A PFTAC expert has undertaken technical assistance through a series of short missions. The first mission was completed in July 2006, the second in October 2006, the third in January 2007, the fourth in May 2007 and the fifth in September 2007. PFTAC is considering a further request from the IRC to provide technical assistance to prepare the business case to Government for the purpose of purchasing of a technology system and associated applications.

Financial Sector Regulation and Supervision

There is no current PFTAC involvement in this area, as technical assistance is provided by MCM, but the Advisor visited BPNG in September 2004 and July 2005 to identify areas where technical assistance could be provided. In October 2005, the BPNG hosted the annual meeting of the Association of Financial Supervisors of Pacific Countries, for which PFTAC is the secretariat. In March 2007, PFTAC funded an attachment for two supervisors from BPNG to assist the Cook Islands’ supervisory authority to undertake an on-site examination of a domestic bank.

Economic and Financial Statistics

In February 2006, the Advisor briefly assessed the BOP compilation with a view to improve its quality, and to assess progress against recommendations made by previous missions. A multi-sector statistics mission in September 2006 assessed the statistical systems (BOP, national accounts, prices statistics, government finance statistics and monetary statistics), with the PFTAC Advisor assessing the national accounts and providing overall coordination. The BOP expert provided some TA to progress improvements to the methodology and source data.

Annex III: Papua New Guinea—Relations with the World Bank Group

(As of December 6, 2007)

Papua New Guinea (PNG) formally became a member of the World Bank upon gaining independence in 1975 but had been a recipient of loans from the World Bank since 1968. To date, the World Bank has provided PNG with 36 IBRD loans totaling US$786.6 million and 14 IDA credits totaling US$152.2 million in commitments. The World Bank portfolio in PNG currently consists of two active loans totaling US$62.3 million in commitments: Gazelle Restoration Project (US$25 million; the project is scheduled to close at the end of 2007) and the Road Maintenance and Rehabilitation Project (US$37.3 million). In addition, the Bank is implementing a Global Environment Facility-supported Teachers’ Solar Lighting Project (US$0.99 million).

The Bank’s relationship with the Government of PNG in recent years was not even. Following a suspension and later cancellation of the Forestry and Conservation Project in 2003–05 due to noncompliance with some loan covenants, the World Bank prepared an Interim Strategy Note (ISN) covering an 18-month period, in lieu of a full 4-year Country Assistance Strategy (CAS). The ISN was approved by the Bank’s Board on April 12, 2005.

Under the ISN the Bank’s work in PNG focused primarily on priority analytical/advisory services, capacity building and community outreach activities. In particular, the Bank, jointly with AusAID and ADB, has participated in the programmatic Public Expenditure Review and Rationalization process (FY04-present). The Bank also prepared Country Procurement Assessment Report (FY04), Report on Strategic Directions for Human Development (FY06), Community Driven Development Stocktaking and Roadmap (FY07), and Telecommunications Sector Review (FY07). In April 2007 the Bank also approved a US$37.3 million IDA credit to supplement funding for an earlier project for road maintenance and rehabilitation. In 2006 the Bank, with support from domestic and foreign donors, also organized a Youth Competition Program (Development Marketplace) which attracted a large number of quality development proposals. A second round of the Program was launched in November 2007. The Bank has also been involved in a number of community outreach activities supported by its Global Development Learning Network and Public Information Center.

Following a significant improvement in macroeconomic performance and a number of other areas since the ISN was prepared, the Bank is now strengthening its commitment to PNG. In close consultation with the Government the Bank has prepared a full four-year CAS. The Strategy, expected to be approved by the Bank’s Board of Directors in mid-December, 2007, is designed to launch a long-term partnership between the Bank and PNG aimed at supporting sound management of economy and natural resources, and addressing immediate service delivery needs while also building a foundation for tackling longer-term institutional and accountability challenges.

As part of the new CAS, the World Bank is increasing concessional financial resources available to Papua New Guinea and will assist the country to access global and regional grant funds such as Global Environmental Facility. In particular, the CAS envisions up to three IDA credits per fiscal year totaling US$45 million in FY08 and US$30–32 million per fiscal year thereafter. 2 Within this envelope, the Bank has prepared a Smallholder Agriculture Development Project (US$27.5 million) which is expected to be approved in mid-December, 2007, together with the CAS. Another project, Mining Sector Technical Assistance, is at an advanced state of preparation. The Bank is also expanding the staff of its Port Moresby office. To reaffirm the Bank’s commitment to PNG, the country was also visited in November 2007 by the Bank’s Regional Vice President for East Asia and Pacific, the most senior Bank staff visit to PNG in recent years.

PNG’s debt outstanding to the World Bank as end-November, 2007 stood at US$313.8 million. However, as part of its strategy to reduce the public debt level, the Government of PNG has expressed interest in early repayment of the less concessional part of the debt and selected for early repayment seven IBRD loans totaling around US$56 million. The early repayment of these loans is expected to be completed in early 2008.

The Bank’s private sector arm, International Financial Corporation, has also strengthened the level of its engagement in PNG over the past two year. IFC’s Private Enterprise Partnership for the Pacific (PEP-Pacific) established a full-time presence in PNG in early 2006, co-located with the World Bank. Since then IFC advisory service activity in PNG has increased considerably, with a focus on access to finance, tourism, the business environment, and infrastructure.

Within these programs PEP-Pacific is working to: improve the capacity of commercial banks to provide credit; increase the availability of finance and financial services for the poor, including investment in PNG Microfinance; assist in building financial infrastructure, including establishment of a credit referral bureau; support a survey of PNG’s informal economy to inform development of a national informal sector policy and ultimately enhancing livelihood opportunities for the poor; improve the business environment by working on a sub-set of the Doing Business indicators, in collaboration with the Foreign Investment Advisory Service; strengthen the tourism sector; improve agribusiness production, quality, supply chains and marketing; and explore–jointly with the Bank–opportunities to support growth in the commercial fisheries sector.

The IFC’s current investment portfolio in PNG consists of a $1.2 million equity commitment to PNG Microfinance Limited, of which $756 thousand has already been disbursed, giving the IFC a 19 percent shareholding in the bank. The equity investment is supported by a $2 million institutional capacity building program presently under procurement. The IFC has also entered into negotiations with Digicel PNG Ltd on a $40 million line of credit to support the roll-out of its national mobile telephony network. In addition, the IFC is tracking investment opportunities in agribusiness, gas and mining, infrastructure, and forestry.

The Multilateral Investment Guarantee Agency (MIGA) has provided one guarantee in PNG. The guarantee worth US$76.6 million in gross exposure covers a portion of equity investment and a loan by a syndicate of commercial lending institutions for the Lihir open-pit gold mine. The guarantee facilitated several hundred million US$ in foreign investment in PNG.

Papua New Guinea: IBRD/IDA Lending Operations(In millions of U.S. dollars)
Fiscal Year200020012002200320042005200620072008*
Commitments132.3057.3000037.30
Disbursements39.811.365.17.37.810.922.420.71.4
Undisbursed balance134.5114.1106.485.877.151.128.345.445.9
Debt service49.943.839.337.736.032.839.840.319.4
Note: Fiscal year is July-June.

As of November 30, 2007.

Note: Fiscal year is July-June.

As of November 30, 2007.

Annex IV: Papua New Guinea—Relations with the Asian Development Bank3

(As of December 2007)

The Asian Development Bank (AsDB) has approved 60 loans to Papua New Guinea (PNG) totaling $1,027 million for 47 projects, of which 26 loans ($558 million) have been extended from ordinary capital resources while 35 loans ($469 million) from special funds resources. The special fund resources were also used for one grant amounting $15 million. In addition, $51.6 million has been provided for 133 technical assistance projects. There are currently 12 active loans involving 9 projects (and one special fund grant-financed project).

The AsDB strategy for PNG (approved in July 2006) and country operations business plan for 2008–2010 (approved in August 2007) are in line with the PNG government’s Medium-Term Development Strategy, focusing more on key areas: (i) public financial management, (ii) private sector development, (iii) transport sector, and (iv) health and HIV/AIDS. Reforming public sector enterprises has remained focused. A modest lending is envisaged, reflecting both a tighter focus of the AsDB operations in PNG and the government’s wish to continue its successful reduction of overall public debt. In line with the government’s commitment to developing its own results-management framework, the AsDB is supporting and adopting the government’s performance targets and indicators.

The AsDB’s lending to PNG for 2008–2010 is expected to remain a blend from the Asian Development Fund (ADF) and ordinary capital resources (OCR). The indicative cumulative value for 2008–2010 is $262.2 million, comprising the $140 million OCR lending program that includes (i) Highlands Highway Rehabilitation Project ($30.0 million), (ii) Power Sector Project ($10 million), and (iii) PNG Gas Project ($100.0 million) and the $122.5 million ADF lending program that includes (i) Private Sector Development and Governance ($32.5 million), (ii) Power Sector Project ($15 million), (iii) Highlands Highway Rehabilitation ($30.0 million), and (iv) Transport Multi-Tranche Financing Facility ($20 million).

The AsDB’s non-lending assistance program envisages annual grant-financed technical assistance about $2 million per year for 2008–2010, totaling of $6 million. Consistent with the Country Strategy and Planning document, non-lending assistance continues to focus on project preparation, strengthening governance, and improving public sector management.

In 2007, a $100 million loan for Lae Port Development Project and a $15 million project for Lae Port Livelihood and Social Improvement (Japan Fund for Poverty Reduction) were approved. In addition, three technical assistance projects totaling $1.9 million were approved for Highlands Highway project, power sector development plan, and support for public expenditure review and rationalization.

Papua New Guinea: Loan Approvals and Disbursements, 2001-2007(In millions of U.S. dollars)
2001200220032004200520062007
Loan approvals75.95.70.019.00.053.0100.0
Loan disbursements44.714.013.819.221.529.326.0*

The 2007 disbursement figure will be revised at the end of the year.

The 2007 disbursement figure will be revised at the end of the year.

Annex V: Papua New Guinea—Statistical Issues

Data provision for surveillance purposes is generally adequate. However, inadequate coverage and timeliness of key macroeconomic data continues to hinder the conduct of macroeconomic policy. The September 2006 STA multisector statistics mission assessed the institutional arrangements, methodological foundations, and accuracy and reliability of data and found serious shortcomings. Shortcomings in institutional arrangements, insufficient resources, and inadequate priorities have given rise to gaps in the quality of macroeconomic statistics. There are considerable uncertainties about the accuracy and reliability of data on GDP, imports, exports, and price statistics, with very limited coverage of the government finance statistics. The paucity of good source data and methodological shortcomings render estimates of the savings-investment balance, GDP components, and trade balance highly questionable. As a follow-up to the multisector statistics mission, a high level STA mission joined by senior officials of the Australian Bureau of Statistics visited Port Moresby in December 2007 to provide a strategy to substantially improve macroeconomic statistics.

The National Statistical Office (NSO) is underfunded and lacks sufficient staff with computer training. It faces difficulties in obtaining and collating data from businesses and other government departments although it does have the relevant legal power. As a result, the only economic release produced on a somewhat timely basis is the Consumer Price Index (CPI). The Bank of Papua New Guinea (BPNG) and the Department of Treasury produce the most current data. The NSO, with assistance from AusAID, completed data collection for the 2000 Population Census and released preliminary results in July 2001. Papua New Guinea participates in the Pacific Regional General Data Dissemination System (GDDS) Project and was represented at the GDDS workshop held in Suva in November 2002. A GDDS coordinator has been nominated and metadata are being developed prior to formal participation in the GDDS.

In mid-2000, the NSO released a set of national accounts estimates: National Income, Expenditure and Product, 1993–98. These estimates were compiled using the 1968 System of National Accounts. However, the NSO has been working to implement the 1993 System of National Accounts. In March 2004, the NSO released a preliminary set of national income, expenditure, and production accounts estimates for 1994–2002, rebased to 1998 prices. As these figures are still in need of substantial improvements, the 2006 multisector mission recommended against publication of the new GDP data until the needed revisions are made. In an attempt to fill the vacuum, the Treasury—responsible for GFS—has actually assumed the role of estimating the NA for 2002 to the present.

The NSO currently compiles a new quarterly wholesale price index (which it does not publish) and a CPI. Main deficiencies in the CPI include outdated weights that are based on consumption studies conducted in the mid-1970s and weaknesses in data collection practices. The NSO intends to use the results of the planned Household Income Expenditure Survey (HIES) to rebase the CPI; however, this has been delayed for a long time. Moreover, technical assistance is needed to computerize the collection and production of the index.

Annual government finance statistics (GFS) reported to STA suffer from insufficient coverage and timeliness. While central government tax revenue statistics are generally accurate and timely, nontax revenue and public expenditure data are deficient. In particular, development budget expenditures and the utilization of grants and project loans are recorded with long lags, and few records on the use of accrual trust accounts are available. While interest payment records are accurate, there are timing issues regarding the recording of interest on discount securities. No data are available for deferred pension liabilities to civil servants, provincial and local government budgets, off-budget outlays and corresponding liabilities, or transfers between the government and a large number of public enterprises. These weaknesses contribute to discrepancies in domestic financing between estimates from monetary and debt data and those derived from fiscal records. The 2006 multisector mission encouraged the authorities to prepare a list of public sector units to permit a comprehensive delineation of the levels of government, which should help reconcile the GFS with other datasets. The latest data reported and published in the GFS Yearbook and IFS are for 1999-2002 and cover only budgetary central government.

Monetary data are now being produced on a regular basis and reporting to STA has improved. Two monetary and financial statistics missions (April 2005 and May 2006) visited Papua New Guinea which helped to (i) finalize the review of the collection, compilation, and dissemination procedures of monetary statistics by the BPNG; (ii) develop a work program to facilitate the full implementation of the methodology recommended in the Monetary and Financial Statistics Manual (MFSM); (iii) prepare the standardized report forms (SRFs) for reporting monetary data of the central bank, other depository corporations (ODCs), and monetary aggregates; and (iv) finalize the integrated monetary database that meets the data needs of the BPNG, STA, and APD. The 2006 multisector statistics mission ensured that the data used and disseminated by the BPNG is in line with the MFSM; assisted the authorities in the design of a new call report form to be used by the BPNG to collect balance sheet data from ODCs and other financial corporations (OFCs); and introduced measures to better identify the positions with the central government. The BPNG now reports monetary data for the central bank, ODCs, and monetary aggregates using the SRFs, which are published in IFS and the IFS Supplement on Monetary and Financial Statistics. The BPNG, in close cooperation with STA, will introduce the new call report form in early 2008. This will permit the compilation of a financial corporations survey, which is very important as the assets of the OFCs (superannuation funds, insurance companies, and other financial intermediaries) represent about 50 percent of the total assets of the financial corporations sector. A follow-up mission is scheduled for end-FY08 to compile the surveys for the OFCs and financial corporations.

Annual balance of payments statistics are reported to the Fund for publication. These data are based on the International Transactions Recording System (ITRS), which is not tightly monitored despite the BPNG reporting requirements. There are marked differences between the official data on exports and imports of goods and those reported by trading partners. The financial accounts data are of poor quality because of major deficiencies in data collection, especially in the areas of private external debt. In many cases, donors and lenders disburse funds directly to contractors for the purchase of goods and services, effectively bypassing the ITRS. Therefore, a substantial proportion of current account and capital flows are not recorded. The 2006 multisector mission identified as a priority to strengthen current account estimates, including through improved classification of investment earnings, trade credits, and grant receipts as well as enhancing source data for imports and exports. This will require identifying transactors in the ITRS and intensifying cooperation with Customs to obtain more timely and accurate ASYCUDA data.

Papua New Guinea: Table of Common Indicators Required for Surveillance(As of January 5, 2008)
Date of Latest ObservationDate ReceivedFrequency of Data 6Frequency of Reporting 6Frequency of Publication 6
Exchange rates01/04/0801/05/08DWW
International reserve assets and reserve liabilities of the monetary authorities 112/14/0712/21/07WWQ
Reserve/base money10/0712/04/07MMQ
Broad money10/0712/04/07MMQ
Central bank balance sheet10/0712/04/07MMQ
Consolidated balance sheet of the banking system10/0712/04/07MMQ
Interest rates 212/14/0712/21/07WWQ
Consumer price index09/0712/07QQQ
Revenue, expenditure, balance and composition of financing 3—general government 4N/AN/AN/AN/AN/A
Revenue, expenditure, balance and composition of financing 3—central government08/0712/07MQQ
Stocks of central government and central government-guaranteed debt 509/0711/07QQQ
External current account balance06/0709/07QQQ
Exports and imports of goods and services06/0709/07QQQ
GDP/GNI200607/07AAA
Gross external debt200606/07QAA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

1

The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji is a regional technical assistance institution operated by the IMF with financial support of the Asian Development Bank, Australia, Korea, Japan and New Zealand. The Center’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

2

PNG is formally a blend IBRD-IDA country. No immediate IBRD lending to PNG is envisioned.

3

Prepared by AsDB staff.

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