Papua New Guinea
2011 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Papua New Guinea
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International Monetary Fund
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Publication Date:
25 May 2011
eISBN:
9781455281589
Language:
English
Keywords:
ISCR; CR; net incurrence; net acquisition; exchange rate; commodity price; headline inflation; central bank; sovereign wealth fund; economic growth; public spending
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Papua New Guinea showed solid economic growth, supported by greater political stability, fiscal framework, and a healthy banking sector. Executive Directors encouraged the authorities to consider tighter macroeconomic policies in the face of rising inflation pressures and also stressed the need of a tight fiscal policy. They welcomed the Sovereign Wealth Funds (SWF), and considered it important to integrate the use of resources in the SWF into the budget and macroeconomic framework, supported by strong fiscal institutions. Directors observed that Liquefied Natural Gas (LNG) and other resource projects provide an opportunity to raise long-term growth and living standards.

Abstract

Papua New Guinea showed solid economic growth, supported by greater political stability, fiscal framework, and a healthy banking sector. Executive Directors encouraged the authorities to consider tighter macroeconomic policies in the face of rising inflation pressures and also stressed the need of a tight fiscal policy. They welcomed the Sovereign Wealth Funds (SWF), and considered it important to integrate the use of resources in the SWF into the budget and macroeconomic framework, supported by strong fiscal institutions. Directors observed that Liquefied Natural Gas (LNG) and other resource projects provide an opportunity to raise long-term growth and living standards.

INTRODUCTION

1. Papua New Guinea has enjoyed 10 years of positive economic growth. This unprecedented achievement for the country owes much to greater political stability, sound macroeconomic policies, and improved public finances. Higher commodity prices and the construction of a liquefied natural gas (LNG) project—a 190 percent of GDP investment—are boosting an economy facing capacity constraints. As a result, rising consumer and asset price inflation is threatening macroeconomic stability. To lower the risk of overheating, firm fiscal and monetary policies are required. This may be challenging with elections upcoming in 2012.

2. Rich natural resources provide an opportunity to raise long-term growth and living standards. To ensure that the opportunity is not wasted, sound policy frameworks and implementation will be essential. In particular, strict adherence to the allocations in the 2011 budget, close coordination of monetary and fiscal policies, and the integration of a sovereign wealth fund (SWF) into the macro framework should help maintain macroeconomic stability. Improvements in public financial management and structural reforms are needed to ensure that development objectives are achieved.

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK

3. Economic growth increased in 2010. The economy has weathered the global recession relatively well and real GDP growth is estimated to have picked up from 5½ percent in 2009 to 7 percent in 2010. The turnaround in the mineral sector was due to the start of production at new mines and slower-than-expected decline in oil and gas extraction on the back of higher commodity prices. Banks continued to finance a dynamic nonmineral economy, which got an additional boost from construction, transport, and communication related to the LNG project. Responding to high demand and rising food prices, agriculture production rebounded. However, the country’s infrastructure—roads, ports, and utilities—shows signs of capacity constraints, and bottlenecks have appeared in the markets for skilled labor and land (Figure 1).

Figure 1.
Figure 1.

Papua New Guinea—Macro Performance

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Bank of Papua New Guinea; International Financial Statistics, World Economic Outlook, and IMF staff calculations.

4. Strong domestic demand, the pick-up in international food prices, and the depreciation of the kina fuelled inflation in 2010. Headline inflation reached 7.8 percent in December. Underlying inflation has been trending upward since mid-2009 to 6 percent and is increasingly driven by domestic demand and higher labor costs. Moreover, inflation is likely to be underestimated in official data, which take inadequate account of rental increases and are based on an outdated consumption basket.

Staff’s Views

5. Near-term growth is projected to remain strong. Staff expects real GDP growth of 9 percent in 2011 as activity is boosted by the construction of the large LNG project, buoyant commodity exports, the start of production at the Ramu Nickel and Hidden Valley mines, and strong investor confidence. In 2013/14, real GDP growth is projected to slow down sharply as LNG construction and extraction from maturing oil fields and from the largest copper mine wind down. LNG production starts in 2015, leading to a 20 percent level jump in GDP. In the absence of further LNG plants and new mines, GDP growth is expected to converge to a 3–4 percent long-run trend rate. Nonmineral GDP growth per head is projected to continue at a moderate pace (Table 6).

Table 1

Papua New Guinea: Selected Economic and Financial Indicators, 2007–11

Nominal GDP (2009):

US$8 billion 1/

Population (2009):

6.3 million

GDP per capita (2009):

US$1,272

Quota: SDR 131.6 million

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Sources: Papua New Guinea authorities; and IMF staff estimates and projections.

Based on period average exchange rate.

Measured from above the line in the fiscal accounts.

Includes central government, central bank external debt, and statutory authorities.

Table 2

Papua New Guinea: Summary of Central Government Operations, 2008–16

(In percent of GDP)

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Sources: Data provided by the Papua New Guinea authorities; and IMF staff estimates.

Includes spending from trust accounts.

Table 3

Papua New Guinea: Balance of Payments, 2008–16

(In millions of U.S. dollars)

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Sources: Data provided by the Papua New Guinea authorities; and IMF staff estimates and projections.

Public external debt includes central government, central bank external debt, and statutory authorities.

Table 4

Papua New Guinea: Summary Accounts of the Depository Corporations, 2008–11

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Sources: Data provided by the Papua New Guinea authorities; and IMF staff estimates and projections.
Table 5

Papua New Guinea: Indicators of External Vulnerability, 2007–11

(In percent of GDP, unless otherwise indicated)

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

End of period.

Includes central government, central bank external debt, and statutory authorities.

Covers only banking system short-term external debt.

Table 6.

Papua New Guinea: Medium-Term Scenario, 2008–16

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

Measured from below the line in the fiscal accounts.

Measured from above the line in the fiscal accounts.

Includes changes in check float.

Includes central government, central bank external debt, and statutory authorities.

March 2011 WEO projections.

6. Inflation is expected to accelerate in 2011. Domestic demand is increasingly becoming a major driver of core inflation, and headline inflation could temporarily rise into double-digits pushed by international food and energy prices. Inflationary pressures are exacerbated by increases in public spending, higher wage costs—resulting from a shortage of skilled labor—and rapidly increasing prices associated with the use and development of land. Moreover, staff sees a risk that high inflation becomes entrenched in expectations. However, the impact of recent increases in international food prices on consumers is likely muted by a strong domestic supply response by peri-urban food producers (Box 1).

7. Risks to growth and inflation are tilted to the upside. Upside risks include an increase in mining activity related to high commodity prices, an early start of a second LNG project, stronger-than-expected private sector investment, and additional fiscal spending from trust accounts. Downside risks include possible disruptions in mining and delays in the LNG project, mainly related to land disputes, social tension that may be created by rising income inequality, and a possible correction of very high real estate prices in Port Moresby and Lae.

Authorities’ Views

8. The authorities broadly agreed with staff’s assessment of the economic outlook and inflation. Reflecting high volatility and uncertainties surrounding projections of commodity prices and production, their outlook is based on conservative assumptions. Like staff, their projections include only new mining and LNG projects with an approved development plan, but unlike staff, the authorities assume commodity prices to return gradually to recent lows. They agreed that official CPI measures are understating inflation. The 2010 household income and expenditure survey will be used to improve the quality of data, including the CPI basket. Real estate prices are about to peak, but any correction is likely to be muted.

The Impact of Food Price Movements on the Poor in PNG

Food price increases over the past year were moderate. In 2010, the prices of imported foods increased faster than those of domestically produced items. Nonetheless, urban households, in particular the landless urban poor, benefited from low-priced rice imports. Rural households living near major cities such as Port Moresby have become important food suppliers to the urban population.1 Their incomes increased moderately in 2010 and less than they had done during the food price surges of 2008. They cut back on imported foods, which represent a small portion of their diet, but an important source of protein.2 Subsistence farmers, and households further away from urban centers, were largely unaffected by increases in urban prices of domestically produced items.

A01ufig02

Growth in Food Price Indices

(In percent)

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: IMF staff calculations using BPNG CPI data, 1996 HIES weights.

Percentage of Change in Import Prices Passed Through to Domestic Prices

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Source: Mellor (2009).

Higher world demand for agricultural commodities has benefited rural regions, which export these products. Coffee price increases have increased cash income of the Eastern and Western Highlands, while high cocoa prices have benefited East New Britain and Bougainville. Oil palm production areas, such as the Hoskins project in New Britain, have enjoyed a price boom.

An elastic domestic supply response by substitute foods producers will mitigate the effect of projected increases in international food prices. Econometric analysis by Mellor (2009) suggests a weak and temporary pass-through from import prices to domestically produced goods prices in the major cities apart from Goroka.3 The likely channel is a high propensity for peri-urban farmers to substitute between subsistence and market production in response to price changes.

1 “Feeding Port Moresby Study,” Fresh Produce Development Agency (FPDA, 2008). 2 “Food and Agriculture in Papua New Guinea,” Bourke and Harwood (2009). 3 “Social Impact of Commodity Price Volatility in Papua New Guinea,” Mellor (2009).

POLICY THEME #1—MANAGING THE RISK OF OVERHEATING

A. Fiscal Policy

9. The large fiscal stimulus in place in 2009 was unwound in 2010. Windfall mineral revenues during the commodity price boom in earlier years were largely saved in trust accounts to pre-finance development expenditure or used to reduce public debt. However, in 2009 when the global financial crisis hit and commodity prices were low, the government relaxed restrictions on spending from trust accounts, and the fiscal balance moved into a deficit of 9½ percent of GDP. In 2010, global commodity prices rebounded and mineral revenue recovered, at the same time trust-account spending slowed. As a result, budget balance was almost achieved and the fiscal stance tightened.

10. Over the past 8 years, gross public debt fell from about 70 percent of GDP to below 30 percent of GDP. Public debt is approaching a sustainable level and is below the average of low income countries in the Asian-Pacific region. Moreover, for the first time the government has allocated funding to meet its annual obligations with superannuation funds and settled some of its arrears.

Staff’s Views

11. For 2011, the government targets a balanced budget. However, the government’s target does not include spending from trust accounts. Staff includes additional spending out of trust accounts, and assumes that trust-account spending remains just below the Medium-Term Fiscal Strategy (MTFS) ceiling of 4 percent of GDP— though with national elections in the offing, this assumption might be optimistic. In addition, it is unclear how much of the 2009 withdrawals from trust accounts has actually been spent or is still in the banking system, waiting to be spent during the election period. On the other hand, staff assumes higher commodity prices than the authorities, leading to higher-than-budgeted mineral revenue. As a result, staff expects a budget surplus of 1 percent of GDP.

12. Despite the surplus, the pace of overall public spending risks exacerbating inflationary pressures at a time when LNG construction peaks. Staff expects no further fiscal tightening to materialize and total public expenditure to increase faster than nominal GDP in 2011, resulting in a fiscal stimulus of about 3 percent of nonmineral GDP.

13. Tight budget implementation is needed to reduce demand pressure. Budget allocations should be strictly adhered to. Moreover, savings opportunities should be rigorously exploited and the typical year-end spending rush avoided. Instead, under-spent resources could be reallocated next year if needed. Some development projects are currently facing inflated prices as they are competing for scarce resources with private sector construction activities. Delaying these projects until the LNG construction phase is over, would lower demand pressures, raise value for money, and help achieve better service delivery.

14. Further reductions in public debt would reduce PNG’s vulnerability to shocks. The steady reduction in public debt over the past decade is commendable. However, none of the windfall revenues was used for debt reduction in 2010, in contrast to the previous MTFS rule to use 30 percent of above-normal mineral revenues for this purpose. Instead the government modified the MTFS rule to allow 100 percent of above-normal revenues to be devoted to public investment in future budgets, as long as debt stays below 30 percent of GDP. In light of falling oil and copper production over the medium term and the high uncertainties about the timing of future LNG revenues, staff noted it would be prudent to lower this threshold to 25 percent of GDP (around current levels) and include contingent liabilities in the calculation of the debt ceiling. Moreover, with mineral output falling, normal revenues from minerals should decline until LNG revenues commence.

Figure 2
Figure 2

Papua New Guinea—Fiscal Performance

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Papua New Guinea authorities; APDLISC, and IMF staff calculations.

15. Staff advised that further net debt reductions below the current level can be achieved by:

  • Saving any windfall revenues that may accrue, should market expectations of higher-than-budgeted mineral prices be realized, and setting aside some of these savings for debt reduction or to cover future liabilities related to participation in the LNG project.

  • Developing a payment schedule for the remaining unfunded superannuation liabilities.

16. Expectations about future mineral income need to be well managed. Once public revenues from LNG are affirmed, there may be some limited room for additional borrowing for well-identified development projects. To avoid excessive lending, gross and net public debt-to-GDP ratios of below 25 percent could serve as medium-term fiscal anchors.

Table:

Public Debt and Liabilities (In percent of GDP)

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Sources: PNG authorities and IMF staff calculations.

Does not include guarantees to state-owned enterprises (SOE), which were estimated at 2.5 percent of GDP in 2008 (no updates available).

Includes government equity stake in the LNG project.

Gross public debt and liabilities less government financial assets.

Authorities’ Views

17. The authorities noted that the 2011 budget strikes a balance between fiscal restraint in an economy that faces capacity constraints, pre-commitments, and development needs. For Ministers to agree on a balanced budget in a pre-election year was challenging. Moreover, there are many developing needs and funding of public services has been eroded in recent years, including for security, education, health, and maintenance and rehabilitation of infrastructure. Prudent revenue assumptions are appropriate, given PNG’s past experience with commodity price booms and uncertainties surrounding new LNG and mining projects.

B. Monetary Policy

18. The BPNG has kept its policy rate constant at 7 percent since end-2009. In 2010, the BPNG issued new central bank bills (CBB) totaling about 2 percent of GDP and increased the cash reserve requirement in October from 3 to 4 percent to absorb excess liquidity and reduce credit expansion by the banking system. Nonetheless, total liquidity in the banking system increased by almost 12 percent, mainly due to foreign exchange inflows, including mineral taxes and dividends. As a result, net foreign reserves increased by 19 percent and CBB and Treasury bill rates fell by about 3 percentage points. A weaker exchange rate and falling treasury rates indicate that monetary conditions have eased while excess liquidity in the banking system continues to reduce monetary-policy effectiveness.

Staff’s Views

19. High inflation rates are costly and difficult to reduce. Staff expects headline inflation to approach 10 percent in the short run and to stay elevated in the medium run. Moreover, measured inflation is likely to substantially underestimate true inflation. Such high inflation harms households on fixed incomes (e.g., retirees and minimum wage workers), distorts price signals, and reduces savings incentives. Over the medium term, higher inflation rates may be associated with greater inflation volatility and weakened central bank credibility. Once embedded in expectations, high inflation is difficult to reverse.

20. Monetary policy needs to be tightened to contain inflationary pressures and reduce the risk of higher inflation becoming entrenched in expectations. Monetary policy would work through three main channels:

  • Interest rates. Raising the Kina Facility Rate (KFR) 3 to 4 percentage points above expected core inflation would provide an important signal. However, the policy interest rate seems to have only limited sway over market rates as long as liquidity remains abundant.

  • Liquidity. The increase in the cash reserve requirement to 4 percent goes in the right direction and further increases should be considered. Liquidity could be reduced further by raising the CBB rate gradually back to just below the KFR.

  • Exchange rate. Tighter macroeconomic policies would help mitigate real appreciation. Raising the KFR and letting markets determine the Kina exchange rate could shift the real exchange rate adjustment from inflation to nominal exchange rate appreciation. The pass-through of exchange rates to domestic prices is strong in PNG (see last year’s Selected Issues, Chapter III).

Figure 3.
Figure 3.

Papua New Guinea—The Monetary Stance

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Bank of Papua New Guinea; International Financial Statistics, and IMF staff calculations.

21. The decision to move all new trust accounts to the Bank of Papua New Guinea (BPNG) facilitates fiscal and monetary policy coordination. It gives the BPNG better control over liquidity in the banking sector and market interest rates. Monetary policy will become more effective and the net cost to the public reduced by limiting the need to use high-cost central bank bills to mop up excess liquidity.

Authorities’ Views

22. The BPNG broadly shared staff’s inflation forecast. They agreed that inflation risks are on the upside and pointed to the need for fiscal restraint to reduce demand pressures. However, they were reluctant to increase interest rates because this could restrain private sector growth. The BPNG considered inflation below 10 percent tolerable at a time of high economic growth. With underlying inflation seen as stable, they considered the current monetary policy stance appropriate. However, the BPNG indicated they stood ready to tighten, should inflation exceed their comfort zone.

23. The authorities shared concerns about excess liquidity. The BPNG welcomed the decision to move new trust accounts to the central bank and suggested to manage them in offshore bank accounts. Further increases in the cash reserve requirement were also being considered.

C. Exchange Rate Assessment and External Stability

24. Following several years of surpluses, the current account shifted into deficit amidst weak commodity prices in 2009. Despite the recovery in commodity prices and exports, staff estimates the deficit to have widened to 24 percent of GDP in 2010, reflecting LNG-related goods and services imports and income deficits, mainly due to higher compensation of foreign employees, and higher dividend payments associated with increased mining profits from strong commodity prices (Table 3). However, current account deficits are largely financed by FDI and equity investments of the LNG partners. Foreign reserves are estimated to be around US$3.2 billion by March 2011 and cover almost five months of imports of goods and nonfactor services. The increase in reserves reflects strong inflows associated with mineral taxes and foreign investment.

25. The nominal effective exchange rate (NEER) depreciated by more than 7 percent in 2010. PNG is classified as a floating exchange rate regime. Over a longer horizon, the NEER remained roughly flat, while a positive inflation differential with main trading partners led to an appreciation of the real effective exchange rate by 20 percent since early 2008.

Staff’s Views

26. Due to a fall in oil and copper production, current account deficits will continue until 2015 when LNG production is expected to start. From 2015, LNG production and current-account surpluses are likely long-lasting. Nevertheless, a debt sustainability analysis shows a moderate risk of debt distress under a combination of negative shocks. This strengthens the case for a prudent approach to borrowing and enhanced fiscal discipline.

27. The real exchange rate is broadly in line with macroeconomic conditions in 2010, but moderately undervalued when projected LNG exports are factored in (Box 2). Uncertainties surrounding the estimation of equilibrium exchange rates imply, however, that the standard exchange rate assessment provides only rough guidance, in particular given uncertainties about the timing and scale of future LNG production and the lack of reliable data on local wages and prices of non-tradables.

Figure 4.
Figure 4.

Papua New Guinea—The External Position

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Bank of Papua New Guinea; Bloomberg; Information Notice System; and IMF staff calculations.

Authorities’ Views

28. The authorities agreed that the Kina is likely to appreciate due to the LNG and other mineral projects. While the authorities do not target a specific exchange rate, they are concerned that a rapid Kina appreciation hurts traditional exporters and the rural population. Therefore they favored a more gradual exchange rate adjustment. Central bank reserves have been increasing largely due to the payment of mineral taxes into government accounts at the central bank, while the BPNG has been a net seller of U.S. dollars on the spot markets.

Exchange Rate Assessment

Papua New Guinea’s real effective exchange rate remained stable throughout 2010. After appreciating by 4.7 percent in 2009, it rose by only 0.5 percent in 2010.

Staff estimates point to an undervaluation of the Kina relative to medium/longer-term fundamentals. Standard CGER methodologies are tailored to advanced and emerging market countries, and should be treated with caution when applied to PNG. To evaluate the distance from medium-term fundamentals, projections for 2017 (when PNG’s output gap is expected to close) are used. We use an amended MB approach taking into account the effects of LNG production on the trade balance and conclude that the REER is undervalued by about 20 percent relative to its projected value after LNG production begins. This is consistent with the assumed real exchange rate appreciation by 2015 in the government’s 2011 budget. The ERER approach yields only a slight undervaluation. However, it does not account for the structural break in the PNG economy due to LNG production.

Exchange Rate Assessment: Baseline Results 1/

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Source: Fund staff estimates.

All results are expressed in percent.

Staff projection of the underlying CA/GDP in 2017.

Based on a semi-elasticity of the CA/GDP with respect to the REER of −0.2.

Overvaluation is assessed relative to December 2010.

POLICY THEME #2–SECURING SUSTAINABLE GROWTH AND RAISING LIVING STANDARDS

D. Managing Resource Revenue

29. Broad consensus has been reached for the establishment of a sovereign wealth fund (SWF). The planned SWF consists of a consolidated pool of offshore funds with three coordinated and integrated funds: a savings fund, a stabilization fund, and an infrastructure fund. All mineral revenues are to be automatically deposited, with LNG tax and other mineral and petroleum taxes and dividends allocated to savings and stabilization funds and LNG dividends to the infrastructure fund. Drawdown arrangements are currently under discussion. To oversee its establishment, the government created a Secretaries Committee and interdepartmental working group, chaired by Treasury.

Staff’s Views

30. Staff supported the authorities’ decision to manage all resource revenues through an SWF. In many countries, such an arrangement has been helpful to manage the volatility of mineral revenues and contain real exchange rate appreciation, improve transparency, accountability, and good governance. Implementation of the Generally Accepted Principles and Practices–Santiago Principles would help overcome the “poor state of accounting and record keeping” reported by the Auditor General.

31. The coordination of drawdown arrangements from three funds will be challenging. Spending should be guided by the absorptive capacity of the economy, the requirements of cyclical stabilization, and intergenerational equity. Treasury and the BPNG will have to play a lead role in determining annual spending limits consistent with the absorptive capacity of the economy and its cyclical position. To ensure consistency, it would be helpful to reach annual Ministerial agreement on overall spending amounts linked to the budget process. The spending limits of the MTFS could serve as a preliminary guidepost for medium-term drawdown limits.

E. Development Strategy

32. The government’s new development plan focuses on addressing current supply constraints, while raising the effectiveness of core service delivery. In an important advance, the Medium-Term Development Plan (MTDP) shifts PNG’s planning process from expenditure-based to policy-focused, with line agencies made accountable for achieving sector targets (Box 3).

Staff’s Views

33. Addressing current supply constraints requires a more supportive environment for the private sector and a revival of the structural reform agenda. The government has taken steps to do this. It is investing considerable resources in land titling and making more land available for economic activity. It is also improving state-owned enterprises’ capacity to respond to current strong demand growth. However, more competition needs to be introduced in this sector and overall security improved to attract business.

34. Realizing the MTDP’s goals will also require marked gains in the effectiveness of public spending. Final spending, especially from trust funds, is often not monitored by central agencies and can differ markedly from budgeted purposes, as audits repeatedly report. The government is addressing these issues, including through investments in stronger financial management, monitoring, and reporting systems. Meanwhile, skilled staff retention is a growing constraint to achieving this agenda.

Figure 5.
Figure 5.

Papua New Guinea—Income Gap

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Authorities and IMF APDLISC database.

The New Development Plans

The Development Strategic Plan 2010–2030 (DSP) targets broad-based private-sector-led economic growth. To create a level playing field, tax concessions and subsidies are to be reduced.

The DSP envisages Papua New Guinea to become a middle-income country by 2030. This requires an annual average growth rate of about 8½ percent. Main DSP targets are to triple GDP per capita, create two million additional jobs, and convert 20 percent of land into bankable assets. In addition, the DSP sets specific growth targets for key economic sectors.

The Medium-Term Development Plan 2011–2015 (MTDP) identifies seven key priority areas, called enablers. The enablers focus on unlocking land for development; improving law and order; establishing quality economic corridors to link rural populations to markets and services; providing higher and technical education and universal access to basic education; providing key utilities such as electricity, water, and communications; and improving health outcomes.

F. Financial Stability and Development

35. Papua New Guinea’s financial sector has weathered the global financial crisis well. The three large banks are mostly funded domestically, and their total deposits have increased by almost 20 percent since 2009. Two of them have well-performing Australian parents; the largest one, Bank of South Pacific, is domestically owned. All three are well capitalized and highly profitable. The banking sector’s loan-to-deposit ratio is low at about 49 percent, and its liquidity ratio is high at 57 percent of total assets. Non-performing loans (NPL) fell from 2.7 percent in June 2009 to 1.8 percent of total loans in September 2010. Nonetheless, provisioning almost doubled to over 200 percent, while profitability recovered to pre-crisis levels. Profitability of the largest superannuation fund, which was hit by the global financial markets downturn, has improved by more than 45 percent in 2010. However, 85 percent of the population lacks access to financial services.

Staff’s Views

36. The FSAP found the overall financial sector soundness satisfactory. Regulation and supervision has been strengthened. The main recommendations are: complete the set of prudential standards and enhance the available supervisory tools; move to a more risk-based approach in supervision and make compliance with prudential standards compulsory; formalize bank liquidity support arrangements and establish a discount window; reform payment and settlement systems; develop the local-government securities market; and improve access to financial services (Appendix 4).

37. Financial institutions are highly exposed to property markets. Banks and Authorized Superannuation Funds (ASF) are vulnerable to corrections in urban property markets, in particular in Port Moresby and Lae. Moreover, it will be important that banks maintain high lending standards as credit demand, associated with the LNG project and the expansion of the mining sector, is likely to rise. Nonetheless, stress-tests, undertaken during the 2010/11 FSAP missions, indicate that the banking system should be able to withstand moderate shocks.

38. The absence of a liquid domestic government debt market and the concentration of bank assets in government securities represent risks to banks’ balance sheets. Moreover, the expansion in the mineral sector is likely to spur foreign interest in PNG’s bond market and increased integration into the global economy requires new vehicles to manage foreign currency risk and new banking products.

Authorities’ Views

39. The authorities noted that financial institutions are taking appropriate steps to lower their exposure to property markets. Financial institutions have responded to higher perceived risk by tightening lending standards rather than raising lending rates. In addition, all ASFs comply with prudential norms and the two largest ones have lowered their housing and property market exposure. In cooperation with multilateral institutions, such as the World Bank, the authorities started a National Payments project to strengthen the clearance and settlement infrastructure.

Figure 6
Figure 6

Papua New Guinea—The Banking Sector

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Bank of Papua New Guinea; International Financial Statistics, and IMF staff calculations.

STAFF APPRAISAL

40. We commend the authorities for their commitment to a medium-term fiscal framework. The framework has helped increase macroeconomic stability by insulating the budget from volatility in mineral revenue and reducing public debt to more sustainable levels. However, the slippages in 2009 have shown that the implementation of the MTFS needs to be strengthened.

41. Tighter fiscal policies during the construction phase of the LNG plant are needed to reduce inflationary pressures. Reaching Ministers’ agreement on a balanced 2011 budget was an appreciable achievement, given the expenditure pressures in a pre-election year. Nevertheless, a tighter fiscal stance is necessary and can be achieved by limiting spending out of trust accounts to well below the 4 percent of GDP limit; using saving opportunities during budget implementation, including windfall mineral revenues; and lowering the assumption of normal mineral revenue to 3 percent until revenues from LNG production commence.

42. The government’s decision to allocate funds to meet its superannuation obligations should be implemented as planned. A payment schedule for the rest of its arrears would raise policy credibility and put finances in better position to respond to future challenges.

43. A tighter stance of monetary policy is required to contain inflationary pressures and reduce the risk of higher inflation becoming entrenched in expectations. Inflation remains high and risks are clearly on the upside. Raising the policy rate well above expected core inflation would provide an important signal. Further increases in the cash reserve requirement and higher CBB rates would be helpful, and further foreign exchange accumulation should be avoided to limit liquidity creation. Moving to a more market-determined exchange rate, would help cushion the impact of large demand shocks, and a market-driven appreciation of the Kina would help reduce inflationary pressures from import prices.

44. The decision to move all new trust accounts to the BPNG should be implemented fully. It will give the central bank better control over domestic liquidity and market interest rates and reduce the net cost to the public sector by limiting the need to use central bank bills to remove excess liquidity. The BPNG should be allowed to manage these accounts offshore.

45. Plans to manage all resource revenues through a sovereign wealth fund are welcome. It will be important to invest its assets offshore; fully integrate withdrawals into the budget process; and ensure transparency, accountability, and good governance by adopting the internationally accepted Santiago Principles. To effectively achieve development objectives, the SWF needs to be integrated into the macro framework and supported by strong fiscal institutions, such as the MTFS and the Fiscal Responsibility Act.

46. The projected widening in the current account deficit is largely financed by FDI and is not expected to threaten external stability. The exchange rate is estimated to be undervalued by 2–20 percent and reserves remain adequate to address potential balance-of-payments needs.

47. The LNG and other resource projects provide an opportunity to notably raise long-term growth and living standards. Better social services—in particular health, education, and basic infrastructure—need to be delivered so that the benefits from the mineral boom are more evenly spread and living standards improved for everyone. To achieve higher nonmineral growth it will be essential to better align public spending with policy priorities and reinvigorate the reform process. Improvements to security and the business environment would also yield significant benefits.

48. The financial sector remains sound. However, to safeguard financial health, banks should be encouraged to maintain strict lending standards. Furthermore, all financial institutions need to guard against overexposure to the property sector. The FSAP recommendations should be implemented.

49. Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

Table 7

Papua New Guinea: Millennium Development Goals Progress, 1990–2009

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Source: World Development Indicators database, 2010.

Appendix 1 Papua New Guinea—Authorities’ Response to Recent Fund Policy Advice1

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Source: IMF staff.

Appendix 2 Papua New Guinea—Land Reform1

Ninety-seven percent of total land in PNG is held under customary tenure, while only 3 percent is under formal tenure, mostly owned by the State. Poor administration and an inadequate legal framework have prohibited productive use of both customary land and alienated land.2 The government’s development strategies recognize the need to implement appropriately designed land reforms to ensure that land is available for development. Past land reform initiatives in PNG have, however, largely failed. There is strong public resistance due to concerns that land reform will result in breakdown of traditional social safety mechanisms provided by communal ownership of land. Customary land supports more than 85 percent of the national population.

The National Land Development Program (NLDP) was launched in 2007 and the PNG parliament unanimously passed two laws in 2009 aimed at mobilizing land for development. The guiding principles underlying this legislation were that the customary ownership of the land was never to be lost but remain with the traditional landowners, and that any system of titling was as good as a state title. The first principle was demanded by PNG customary landowners and the latter by financial institutions.

Despite some progress, the implementation of the NLDP has generally been slow and its successful implementation remains a significant challenge. The Office of Urbanization is implementing pilot project areas in different parts of the country to accommodate urban expansion of cities and towns on land currently held under customary tenure using the new laws. To maximize chances of success the government must remain committed to a nationally-owned reform process that is transparent and inclusive and engage in broad participatory consultations that allow for full understanding of stakeholder interests and incentives.

Appendix 3 Papua New Guinea—Debt Sustainability Analysis1

Papua New Guinea (PNG) is assessed using the low-income country debt sustainability analysis (LIC DSA).2 While PNG remains at a moderate risk of debt distress, public debt sustainability has improved compared to the 2010 DSA assessment because of a stronger growth outlook. Under the baseline scenario, all external debt sustainability indicators remain well below their applicable thresholds. Stress tests indicate that the threshold for the present value of external public debt to GDP is breached only if prices of commodity exports in 2011–2013 are substantially below WEO forecasts and the government borrows to finance domestic consumption. Overall public debt should continue its downward path under the baseline. However, contingent liabilities related to the LNG project, arrears to public pension funds, and other domestic liabilities would delay this long-term adjustment. Substantial deterioration in the primary balance would harm PNG’s debt performance.

I. Background

PNG’s public and publicly guaranteed (PPG) debt levels have fallen dramatically over the past decade. Total public debt declined from 70 to 26 percent of GDP from 2001 to end-2010 (Appendix Table 1). External public debt fell from 50 to 11 percent of GDP during this period (Appendix Table 3a). Multilateral lenders such as the World Bank and the AsDB account for around 75 percent of PPG external debt, while Japan and Australia are the largest of the bilateral creditors. Private sector external debt at end-2010 is estimated at 13 percent of GDP.

Appendix Table 1

Papua New Guinea: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–2031

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Appendix Table 2

Papua New Guinea: Sensitivity Analysis for Key Indicators of Public Debt, 2011–2031

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Appendix Table 3a

Papua New Guinea: External Debt Sustainability Framework, Baseline Scenario, 2008–2031 1/

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1 +g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

II. Economic Outlook and Underlying DSA Assumptions

PNG weathered the global financial crisis well due to a large fiscal stimulus, strong domestic demand due to LNG project construction activities, and rebounding commodity prices. Real GDP growth was 7 percent in 2010 after a modest slowdown in 2009, and is projected to accelerate in 2011. PNG’s terms of trade and export earnings recovered dramatically from the lows of 2009, and both are projected to improve strongly in 2011 under the baseline scenario. Foreign reserves increased to around US$3.2 billion by March 2011, reflecting large and continuing financial inflows associated with the injection of equity and drawdown of loan funds for the financing of the LNG project by its partners. As indicated in the previous DSA,3 PNG is vulnerable to external demand and growth shocks. Due to rising commodity prices and strong growth, unfavorable public debt dynamics did not materialize in 2010.

Under the baseline scenario, commodity prices will remain high over the medium term while real GDP will move in line with the LNG sector. During the construction phase of the LNG project, elevated levels of domestic demand and the current account deficit will continue. With the start of LNG production in 2015, real GDP is projected to jump by 20 percent and the current account will move into a large and persistent surplus. Appendix Box 1 summarizes the medium-term macroeconomic framework underlying the DSA.

III. External Debt Sustainability Analysis

Over the projection period, all baseline PPG external debt and debt service indicators stay well below the policy-dependent debt burden thresholds (Appendix Table 3b and Appendix Figure 1). The PV of PPG external debt as a percentage of GDP is on a declining path and stays under 10 percent in the medium term, far below the 30 percent threshold. The PVs of PPG external debt-to-exports and debt-to-revenue ratios are also expected to stay below their applicable thresholds. Since additional financing needs for the LNG project and the current account deficit would be met with projected large FDI inflows, there would be no extra debt burden created. After 2015, the external debt burden is expected to fall even faster due to the projected large increase in exports and revenue from LNG production.

Appendix Table 3b

Papua New Guinea: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2011–2031

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Appendix Figure 1.
Appendix Figure 1.

Papua New Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021. In figure b. it corresponds to an authorities’ prices shock; in c. to a Exports shock; in d. to an authorities’ prices shock; in e. to a Exports shock and in figure f. to an authorities’ prices shock

Policy-Based PPG External Debt Burden Thresholds for PNG

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External debt sustainability is maintained under an array of possible stress tests, but would be threatened by poor fiscal policy in response to a large terms of trade shock (Appendix Table 3b). Consistent with WEO commodity price forecasts, the baseline scenario predicts PNG’s terms of trade to improve in 2011 before settling at a permanently high level. This, combined with the boost from LNG production, makes PNG resilient to a wide range of GDP growth and depreciation shocks. If we instead use the PNG authorities’ more conservative estimates for export prices over 2011–2013,4 and allow the government to borrow to finance the baseline levels of real consumption and imports (contrary to their stated fiscal strategy), then the PV of PPG external debt breaches the threshold of 30 percent of GDP. The price of gold is the most important price for external sustainability before LNG production kicks in.

Delays to the LNG project could generate adverse debt dynamics, even if PPG external debt indicators remain within the thresholds. While it is unrealistic for the LNG project to halt completely, delays to the project would slow down GDP growth and worsen PNG’s debt ratios. The historical scenario charts in Appendix Figure 1 can be interpreted as representing PNG’s debt dynamics in the absence of LNG construction and production, and without its associated liabilities, assuming that historical levels of real GDP growth are maintained.

IV. Public Debt Sustainability Analysis5

In the baseline scenario, PNG’s public debt ratio will continue its downward path over the medium and long term (Appendix Table 1 and Appendix Figure 2). This trend is aided by high commodity prices, rapid real GDP growth and the implementation of the authorities’ Medium Term Debt Strategy. The public debt-to-GDP ratio is forecast to decrease over the projection period as long as windfall revenues are saved during years of booming commodity prices. Provided these policies are in place, the PV of public sector debt will decline from 27 percent of GDP in 2010 to 13 percent of GDP in 2016 and to 7 percent of GDP by 2031.

Appendix Figure 2
Appendix Figure 2

Papua New Guinea: Indicators of Public Debt Under Alternative Scenarios, 2011–2031 1/

Citation: IMF Staff Country Reports 2011, 117; 10.5089/9781455281589.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021.2/ Revenues are defined inclusive of grants.

Economic growth and saving of commodity tax revenues are the key factors for the projected public debt path as shown in alternative scenarios and bound tests (Appendix Table 2). The public debt-to-GDP ratio would rise to 30 percent in 2031 if there is a negative shock to real GDP growth in 2012–13 with permanently lower revenues and unchanged expenditures until 2031.6 Keeping the primary fiscal surplus at 2.3 percent from 2011 through 2031 instead of moving into deficits over the medium term as in the baseline would result in the PV of the public debt-to-GDP ratio falling to zero by 2016. This scenario emphasizes the sensitivity of the public debt outlook to saving of windfall commodity revenues. Substantial deterioration of the primary balance in future budgets relative to the baseline would negatively affect debt sustainability.

Realization of contingent liabilities related to the LNG project, arrears to public pension funds, and other domestic liabilities would delay the downward trend in public debt ratios. The government’s unfunded superannuation liabilities, estimated to be 7 percent of GDP by end-2010, continue to grow, especially given the decision in the 2009 and 2010 budgets not to fully fund the central government’s 8.4 percent employer contributions. The government should develop a firm payment schedule for these unfunded liabilities. Contingent liabilities related to the LNG project are estimated to be about 7 percent of GDP in 2015.7 Although information is limited, attention should be given to the government’s possible need to backstop SOE borrowing.8 Should these factors materialize, unfavorable debt dynamics would not undermine public debt sustainability, but would substantially delay fiscal consolidation (Appendix Table 2 and Appendix Figure 2).9

V. Conclusion

PNG remains at moderate risk of debt distress, but PPG external debt sustainability has substantially improved as a result of high commodity prices and upcoming LNG production. The baseline scenario indicates that all external PPG debt burden indicators stay well below their indicative thresholds. External debt sustainability remains resilient to most stress tests, but would be threatened by a large negative terms of trade shock coupled with a poor fiscal response.

Public debt sustainability is sensitive to growth shocks and saving of windfall revenues over the longer term to pay down the debt. The government needs to carefully consider the risk of accumulating public liabilities until LNG taxation revenues are realized. Despite recent changes to the Medium Term Fiscal Strategy to allow 100 percent of windfall revenues to be used for public investment, it would be advisable for the authorities to use some portion of such gains to pay down high interest rate public debt. This would insulate the economy from adverse debt dynamics after possible negative growth shocks. One-off realizations of contingent liabilities would delay the paydown of government public debt, but would not generate unsustainable debt dynamics.

Macroeconomic Assumptions Underlying the DSA

  • Real GDP growth is projected to be 8 percent on average over the medium term, above the historical average of 4 percent, and slow gradually to 3–4 percent in the long run. In the medium term growth in the LNG and nonmineral sectors will offset the decline in copper and petroleum production.

  • Construction of the LNG project will be finished and production and exports are expected to start in 2015, with a maximum capacity of 6.6 million tons of LNG produced per annum. LNG production is estimated to raise the level of real GDP by about 20 percent in 2015. However, accounting for substantial income outflows, the LNG project is expected to increase annual GNI by about 8 percent.

  • Inflation is projected to rise to 9 percent in the near term due to increasing domestic demand and near-term capacity constraints, while stabilizing at around 4 percent in the long run.

  • The current account (including grants) is estimated to be in deficit in 2010 and the deficit is expected to remain sizeable until 2015, primarily reflecting the strong import growth during the construction phase of the LNG project. FDI inflows from foreign shareholders are projected to increase substantially and finance most of the imports.

  • The grant element of loans is expected to decline. As per capita income rises, the share of external financing provided on concessional terms is expected to decline over the projection period.1

  • The primary fiscal balance is projected to be in surplus of 2.3 percent of GDP in 2011 accounting for spending from the trust accounts. In the medium term primary deficits are anticipated, but these turn into surpluses over the long run as LNG tax revenues are realized.

1 Grant-equivalent financing (in percent of GDP) decreases over time. From 2016 onwards, the majority of new AsDB disbursements are through OCR facilities, which carry a higher interest rate than ADF loans.

Appendix 4 Papua New Guinea—FSAP: Main Lessons and Take-Aways

The joint IMF-World Bank FSAP mission, which visited Port Moresby in May 2010, took place against (i) a backdrop of wide-spread optimism for the operation of the Liquefied Natural Gas (LNG) projects after 2014 and (ii) a mild impact of the financial crisis on PNG largely due to the broad insulation of the financial sector from the global financial markets. The main findings and recommendations, which were updated during the 2011 Article IV consultations, are summarized below.

PNG’s financial sector

Total financial sector assets have grown to roughly 95 percent of GDP and are held by a wide range of institutions. Currently, there are four commercial banks, seven authorized superannuation funds, and a number of other nonbank financial sector institutions licensed and regulated by BPNG. General insurance companies regulated by the Insurance Commission and the stock exchange by the Securities Commission.

Banks and superannuation funds dominate the financial sector. Since the financial sector reforms in early 2000, banks have increased their assets fivefold to almost K17 billion by end-2010. The nationally owned Bank of South Pacific is the largest, followed by subsidiaries of two Australian banks and a Malaysian bank. In addition, there is a state-owned, non-deposit taking National Development Bank, which has a primary function of providing accessible credit to people in rural areas. Nonbanks are important, too, with about K7.5 billion in assets. Among them, the authorized superannuation funds (ASFs) are the largest, holding more than 70 percent of total nonbank financial assets. ASFs, in terms of assets size, are followed by the savings and loans societies, finance and microfinance companies, and insurance companies (including general, life, and broker).

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Source: BPNG and IMF staff estimates as of September 2010.

Access to finance is one of the major hurdles to further financial sector deepening. Only about 10 percent of the population and 17 percent of adults currently have access to formal financial services. Although financial services providers make efforts to expand their services, the majority of people in rural communities are still financially excluded. The staff supports the authorities’ plan to conduct a financial literacy survey in partnership with the World Bank and UNDP during 2011. This survey could lead to specific projects aimed at extending financial services to complement the banking services provided by microfinance institutions to people in rural areas.

The authorities are committed to support financial inclusion. The PNG Development Strategic Plan 2010–2030 identifies the extension of microfinance banking services to all districts in PNG as a priority. In addition, the national payment system development program aims to encourage the introduction and use of innovative, convenient, and cost-effective new retail payment instruments, with a special focus on rural areas.

Overall financial sector soundness is satisfactory

Indicators point to a generally well-capitalized and highly profitable financial sector. Credit and market risks in the banking sector are relatively low and can easily be offset by prevailing high levels of capital, low levels of nonperforming loans, and high provisions. Nonetheless, high capital ratios are appropriate to accommodate lending to larger clients and growing credit risk that is expected in the medium term. Also, high concentration of the financial sector, the absence of secondary market for government securities, and the lack of repo and discount windows require banks to maintain higher liquidity.

Regulation and supervision of the banking sector has been strengthened, although several elements will still be required to move toward a more risk-based approach. The BPNG has been developing its supervisory techniques since the reforms of 2000, but it is essential that it completes the suite of prudential standards, enhance the available supervisory tools, and make better use of the tools it has. The crisis management framework is incomplete, and steps need to be taken to put this in place.

Authorized Superannuation Funds (ASFs) are the principal source of long-term investment. Papua New Guinea’s demographic profile and a system of compulsory savings in the formal sector, along with wage growth, will ensure a positive net cash flow and anchor the role of these funds as a key source of domestic savings. The ASFs and general insurers have been performing with increasing efficiency, while general insurers are well capitalized, profitable and exhibit sound risk management.

The reform agenda needs to continue

Payment and settlements systems need major reforms. The legal framework does not recognize payment services as an independent activity, while the lack of an inter-bank real-time payment system with collateralized liquidity management creates systemic risks. The clearing house operations are manual and paper based. Establishing an independent Payment Systems Department in the BPNG is crucial to support regulation and oversight.

Efforts to develop the local government securities markets need to be intensified. Although the overall operation of the primary market reflects best practice, banks have limited incentives to canvass investors. Smaller investors face hurdles, as the minimum amount to participate on a competitive basis is high and there is no opportunity for smaller investors to enter noncompetitive bids. Exposure of PNG to international investors through the LNG projects may provide new opportunities to attract nonresident investors.

Improving access to financial services remains a developmental challenge, and efforts need to be stepped up. Around 85 percent of the adult population is excluded from the formal sector, largely those in rural communities. The main barriers are operational challenges and infrastructure weaknesses, resulting in high intermediation costs.

Further developments on AML and CFT issues should be pursued. This should include enacting legislation on terrorist financing and the use of existing supervisory powers to encourage banks to undertake detailed customer due diligence.

The establishment of a sovereign wealth fund is under consideration, but modalities need to be carefully designed. In view of the large revenues anticipated from the LNG projects, a key concern for the government is the setting-up of the appropriate institutional and investment management arrangements.

Attachment Main FSAP Recommendations

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1

Advice from the 2010 Article IV Consultation.

1

This appendix draws heavily from Chapter 3 of “The Political Economy of Economic Reform in the Pacific,” Yala (2010).

2

Papua New Guinea Development Strategic Plan 2010-2030.

1

Since Papua New Guinea is an IBRD/IDA blend country, this DSA is prepared by Fund staff in consultation with the World Bank and the Asian Development Bank (AsDB) under the IMF-WB DSA framework for Low-Income Countries. The fiscal year of Papua New Guinea is the calendar year.

2

Papua New Guinea is rated by the World Bank as a weak performer for its policies and institutions for the purposes of the IMF-WB low-income country DSA framework. Hence the applicable thresholds for this category for external public debt are: 30 percent for the present value (PV) of debt-to-GDP ratio; 100 percent for the PV of debt-to-exports ratio, 200 percent for the PV of debt-to-revenue ratio, 15 percent for the debt service-to-exports ratio, and 25 percent for the debt service-to-revenue ratio.

3

See Papua New Guinea: 2010 Article IV Consultation, IMF Staff Report 10/164.

4

The stress test uses authorities’ prices for gold, copper and oil only. This amounts to an average negative shock to export values of 22 percent relative to the baseline for each of the three years.

5

Public debt includes domestic central government, external public, and publicly guaranteed debt.

6

This is a temporary shock to GDP growth, so that the growth rates during 2012-13 are set to the historical average minus one standard deviation. Another permanent GDP growth shock, which could bring the PV of the debt-to-GDP ratio to 31 percent in 2031, is defined as the baseline GDP growth rate minus one standard deviation divided by the square root of the length of the projection period.

7

These liabilities arise from the issue of exchangeable bonds by the PNG government to finance its equity participation (in 2009) and its completion guarantee for debt financing (by 2015). Under the scheme, the creditor acquired exchangeable bonds, amounting to US$1.1 billion, with the option to exchange the bonds for equities in the Oil Search Company. Under the completion guarantee, if the project fails, the government may have to pay up to US$2 billion to the creditor.

8

From 2008 Article IV DSA estimates based on end-2007 financial statements of nine SOEs, contingent liabilities related to SOEs amount to about 2.5 percent of GDP. Off-balance sheet liabilities, which also may be significant, are not considered. Improving the financial data of SOEs, especially related to contingent liabilities, would help authorities get a better picture of public debt. Staff is supportive of government intentions to move toward a whole-of-government debt stock approach.

9

The alternative scenario (All Other Liabilities: Pension, SOEs, and LNG contingent liabilities) assumes that pension and SOEs liabilities are to be covered in the 2012 budget (total about 8 percent of 2012 GDP) and all LNG contingent liabilities will materialize in 2015 (about 7 percent of GDP).

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Cover IMF Staff Country Reports
Papua New Guinea: 2011 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Papua New Guinea
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 117
Publisher:
International Monetary Fund
ISBN:
9781455281589
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781455281589.002
Figure 1.

Papua New Guinea—Macro Performance

Growth in Food Price Indices

(In percent)
Figure 2

Papua New Guinea—Fiscal Performance
Figure 3.

Papua New Guinea—The Monetary Stance
Figure 4.

Papua New Guinea—The External Position
Figure 5.

Papua New Guinea—Income Gap
Figure 6

Papua New Guinea—The Banking Sector
Appendix Figure 1.

Papua New Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2011-2031 1/
Appendix Figure 2

Papua New Guinea: Indicators of Public Debt Under Alternative Scenarios, 2011–2031 1/