Papua New Guinea: Staff Report for the 2016 Article IV Consultation
Author:
International Monetary Fund. Asia and Pacific Dept
Search for other papers by International Monetary Fund. Asia and Pacific Dept in
Current site
Google Scholar Close
Publication Date:
30 Jan 2017
eISBN:
9781475572384
Language:
English
Keywords:
ISCR; CR; GDP deflator; real GDP; deficit; GDP; PNG LNG project; FX inflow; FX rationing; return on equity; spot market; FX dealer; Asia and Pacific
Download PDF (1.6 MB)

Papua New Guinea (PNG) is a resource-rich economy, but low commodity prices and a major drought have weighed on economic growth and created fiscal challenges. Inflation has increased somewhat, partly reflecting the gradual exchange rate depreciation. Foreign exchange (FX) is in short supply, although inflows have recently picked up somewhat and the gross foreign reserve position is expected to remain broadly stable. Non-resource sector growth remains modest, underscoring the need for structural reform. In the lead-up to mid-2017 elections, the political situation has been more fluid than usual.

Abstract

Papua New Guinea (PNG) is a resource-rich economy, but low commodity prices and a major drought have weighed on economic growth and created fiscal challenges. Inflation has increased somewhat, partly reflecting the gradual exchange rate depreciation. Foreign exchange (FX) is in short supply, although inflows have recently picked up somewhat and the gross foreign reserve position is expected to remain broadly stable. Non-resource sector growth remains modest, underscoring the need for structural reform. In the lead-up to mid-2017 elections, the political situation has been more fluid than usual.

Recent Developments, Outlook, and Risks

A. Context and Background

1. Papua New Guinea (PNG) is a resource-rich country with significant potential facing daunting challenges. In addition to mineral, oil, and gas deposits, PNG enjoys abundant fisheries, forestry, and potential for expanded agriculture and tourism. However, economic growth is impeded by structural factors that weaken the environment for private sector development, and poverty remains widespread.1 Public expectations of benefits to the broader economy from resource wealth have yet to be realized, and there is much still to be gained from effective implementation of structural reforms to facilitate growth and development. In the lead up to the mid-2017 elections, the political situation has been more fluid than usual. The Prime Minister recently survived a vote of no confidence by a margin of 85 to 21.

2. Strong real GDP growth has been driven by the new gas sector project coming on stream, while underlying growth is modest and inflation has increased. The large liquefied natural gas project (PNG LNG) led to high real GDP growth during the project construction phase through 2014, and again in 2015 as LNG production reached full capacity. The current account surplus reflects LNG exports and import compression, largely offset by financial account outflows.2 However, underlying (non-resource sector) growth has moderated since 2012, running below trend (a rough proxy for potential), which staff estimates to be around 3½–4½ percent per annum.

3. The recent decline in commodity prices and drought in 2015 and early 2016 have weakened the external and fiscal positions and lowered economic growth. Commodity price declines have reduced the profitability of resource sector firms, leading to sharply lower tax revenues. An El Niño-related drought caused widespread food shortages and led to the closure of a river-linked large mining operation (Ok Tedi) for several months.

4. The authorities responded to the recent shocks by cutting budgetary expenditures in supplementary 2015 and 2016 budgets and adopting a prudent 2017 budget. Fiscal spending and deficits were ramped up in 2012–14, financed through domestic borrowing. Late last year, expenditures were adjusted downwards sharply through a supplementary budget, spurred by lower revenue and tightening domestic financing constraints. Revenues fell short of the budget again in the first half of 2016 in response to recent commodity price declines, prompting the Parliament to approve a supplementary 2016 budget in late August that offsets roughly half the revenue shortfall through expenditure cuts. The 2017 budget approved by the parliament in early November maintains fiscal discipline by targeting a fiscal deficit broadly consistent with PNG’s Medium Term Fiscal Strategy (MTFS), as elaborated below.

5. The Bank of Papua New Guinea (BPNG) responded to the terms of trade decline with a gradual depreciation of the Kina and FX rationing. Concerned about excessive currency depreciation, it imposed an FX trading margin in June 2014. As a result, the Kina appreciated by about 17 percent vis-à-vis the U.S. dollar initially, although it has since depreciated by 23½ percent. Despite significant unmet demand and FX queues, the exchange rate has been largely stable since May 2016. Consequently, and in contrast to many other commodity exporters, PNG’s real effective exchange rate (REER) remained broadly unchanged between end-2012 and end-2015. Gross foreign reserves were US$1.7 billion (3 months of imports) as of October 21, well short of the Fund’s reserve adequacy metric. Further reserve losses have been avoided thus far by FX rationing. There are, however, signs that a pick-up in agricultural exports such as coffee, the higher gold price, and the resumption of operations at the Ok Tedi mine have led to increased FX inflows, while compressed imports have reduced FX demand. Monetary policy transmission has been impeded by excess liquidity (Figure 4).

Figure 1.
Figure 1.

Papua New Guinea: Real Sector

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Sources: Country authorities; and IMF staff estimates and projections.
Figure 2.
Figure 2.

Papua New Guinea: External Sector

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Sources: Country authorities; and IMF staff estimates and projections.
Figure 3.
Figure 3.

Papua New Guinea: Fiscal Sector

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Sources: Country authorities; and IMF staff estimates and projections.
Figure 4.
Figure 4.

Papua New Guinea: Monetary Sector

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Sources: Country authorities; and IMF staff estimates and projections.

6. Improved GDP compilation has found 2013 nominal GDP to be around 40 percent above earlier National Statistics Office (NSO) estimates. The NSO has released revised nominal GDP estimates for 2006–13, which incorporate improvements in GDP compilation. The new estimates make better use of taxation and business survey data, resulting in a significantly expanded view of economic output (Box 1).3 The new GDP estimates imply lower tax, fiscal deficit, and debt ratios.

B. Outlook and Risks

7. Near-term economic growth is expected to decline from recent highs, and inflation is edging upwards. Lower real GDP growth rates in 2016 and 2017 reflect base effects following the commencement of LNG production, as well as more modest growth in the non-resource sector (Tables 1–5). The latter will be supported by pre-election and Asia-Pacific Economic Cooperation (APEC) related spending in 2017,4 but growth is expected to remain subdued in the absence of further private sector development.5 Headline inflation is expected to continue edging upwards in the near term, from 6 percent in 2015 to 7 percent in 2016, due to the gradual exchange rate depreciation and increases in prices of seasonal agricultural items. Continued moderate real GDP growth is consistent with a moderate expansion of private sector credit. Banks are expected to remain highly liquid, sound, and profitable.

Table 1.

Papua New Guinea: Selected Economic and Financial Indicators, 2012-17

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

Based on period average exchange rate.

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

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

Table 2a.

Papua New Guinea: Summary Operations of the Central Government, 2012-17

(In millions of Kina)

article image
Sources: Department of Treasury; and IMF staff estimates and projections.

Withdrawals from the Stabilization Fund (mining and petroleum taxes; mining, petroleum and gas dividends.)

As the authorities integrated the recurrent and development budgets from 2014 there is a discontinuity in the classification.

Grants include spending on wages and salaries, goods and services, and capital expenditure.

Contingent liabilities include future unfunded superannuation liabilities with Nambawan Super and SOE borrowing.

Table 2b.

Papua New Guinea: Summary Operations of the Central Government, 2012-17

(In percent of GDP)

article image
Sources: Department of Treasury; and IMF staff estimates and projections.

Withdrawals from the Stabilization Fund (mining and petroleum taxes; mining, petroleum and gas dividends.)

As the authorities integrated the recurrent and development budgets from 2014 there is a discontinuity in the classification.

Grants include spending on wages and salaries, goods and services, and capital expenditure.

Contingent liabilities include future unfunded superannuation liabilities with Nambawan Super and SOE borrowing.

Table 3.

Papua New Guinea: Balance of Payments, 2012-21

(In millions of U.S. dollars)

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

Includes staff’s estimates related to the PNG LNG project.

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

Table 4.

Papua New Guinea: Monetary Developments, 2012-17

article image
Sources: Bank of Papua New Guinea; and IMF staff estimates and projections.
Table 5.

Papua New Guinea: Medium-Term Scenario, 2012–21

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

Real GDP growth projections are based on the chained Laspeyres measure.

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

Includes staff’s estimates related to the PNG LNG project.

Public external debt service includes changes in check float.

IMF World Economic Outlook. Liquefied Natural Gas (LNG) price index is Indonesian LNG in Japan.

8. Near-term risks are weighted to the downside, but medium-term risks are more balanced (Appendix I).

  • Downside risks include the potential for fiscal consolidation to have a greater impact on the economy than currently expected. The political cycle could also increase fiscal pressures. In the external sector, there is a risk that the current FX allocation mechanism will prove unsustainable, which could lead to more rapid currency depreciation, possibly under disorderly conditions. A further drop in commodity prices would weaken the external and fiscal positions. In addition, natural disasters and other weather-related shocks pose continual downside risks, as demonstrated by the recent drought, although such drought conditions occur very infrequently.

  • On the upside, the medium-term outlook could be boosted by additional LNG capacity expansion. Papua LNG (for which a final investment decision could be taken in 2017, with construction to commence as early as 2018, although this timetable is subject to delays) and the PNG LNG extensions, which together are expected to amount to around the same size as the initial PNG LNG project (which had an approximately US$19 billion investment cost), are not included in the baseline projections pending final investment decisions. Other resource sector developments such as the Wafi-Golpu gold mine, pose similar upside risk (Box 2). For inclusive growth, upside risk derives from the potential for improved structural reform implementation to boost non-resource sector growth, as well as increased regional trade integration.

  • The Debt Sustainability Analysis indicates that the risk of debt distress in PNG remains low, based on an assessment of public and publicly-guaranteed external debt. In line with the 2015 Article IV consultation, factoring in public domestic and private external debt, the overall risk of debt distress remains heightened.

Policies for Macroeconomic Stability

9. Against this background, staff’s view is that modifying the macroeconomic policy mix would facilitate PNG’s adjustment to the large terms of trade shock. The 2017 budget targets a prudent fiscal deficit that balances the need to bring down the debt ratio against the costs of excessive fiscal adjustment in terms of growth and poverty reduction, with a view to bringing the gross government debt-to-GDP ratio below 30 percent by 2021, consistent with the debt ratio ceiling in the authorities’ Medium Term Fiscal Strategy (MTFS). Going forward, additional revenue measures should be implemented to lessen the need for expenditure cuts. Greater exchange rate flexibility would help strengthen the external and fiscal positions, yielding a larger growth contribution from net exports. More rapid exchange rate adjustment implies a need for monetary policy tightening to moderate the inflationary effects of the depreciation; in this regard, measures to strengthen monetary policy transmission channels are needed given the large stock of excess liquidity. Partially sterilized foreign exchange intervention and large money-financed fiscal deficits have played central roles in the liquidity build up, while limited central bank independence and weak government cash management have constrained efforts to absorb it. Thus far, excess liquidity has not led to inflationary pressures because structural impediments constrain private credit growth but this could change if the economy picks up.

A. Improving Fiscal Stability

Fiscal policy should balance the need to maintain macroeconomic stability against the needs of an inclusive growth agenda. In the near term, expenditure cuts should offset the revenue shortfall and any financing gap. While the 2017 budget targets strike an appropriate balance, financing constraints may force additional expenditure cuts in the remainder of 2016. Over the medium term, improvements in public financial management (PFM) and elimination of unproductive government expenditures should also contribute. A comprehensive tax reform package that would enhance efficiency and raise revenues based on the recent National Tax Review should be another pillar of medium-term adjustment.

10. In 2015, fiscal pressures stemming from the sharp drop in world commodity prices and tightening domestic financing constraints necessitated significant expenditure adjustment:

  • Revenues were K3.0 billion (or 5.0 percent of GDP) below original budget estimates, with three-quarters of the shortfall due to lower resource revenues. Expenditures were reduced by K2.7 billion (or 4.6 percent of GDP) relative to the budget. Spending cuts were concentrated at the national government level, and included large reductions in expenditure relative to original budget projections for health and education with virtually no reduction in provincial/district government expenditure. There were reports of payment arrears (particularly public sector wages).

  • Proceeds from a large asset sale was included in the 2015 budget as financing but the sale has been delayed, increasing the need for financing from other sources.6 Government securities auctions have been undersubscribed and financing costs have increased. Local financial institutions reportedly have a low appetite for additional government securities, given current holdings and internal risk limits. The BPNG’s share of domestic debt has thus increased, reaching 20 percent in June 2016.

A01ufig1

Financing Cost

(In percent)

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Source: PNG authorities.

11. The authorities sought new financing sources for the 2016 budget:

  • A 5-year US$500 million syndicated bank loan will likely finance the budget deficit in 2016. The US$200 million first tranche was disbursed in August, and the second tranche is under discussion.

  • Market conditions permitting, a debut sovereign bond issuance for $500 million is now planned for 2017. The World Bank and ADB are providing project-related support.

A01ufig2

Domestic debt by holder

(In percent)

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Source: PNG authorities.

  • Prospects for additional domestic budgetary financing are limited as banks and superannuation funds are nearing internal limits for holding government securities.

12. The 2016 supplementary budget included expenditure cuts and one-off revenue measures to offset the effects of declining world commodity prices and the weak domestic economy. Total revenue and grants in 2016 were expected to fall K1.9 billion (or 3.1 percent of GDP) short of the budget. In response, parliament passed a supplementary budget in August that included expenditure cuts of K0.9 billion (1.5 percent of GDP) and K1.0 billion in higher revenues from state-owned enterprise (SOE) and statutory authority dividends and asset sales. The timing of the asset sales is unclear and the dividends may not be consistent with the financial performance of the SOEs and statutory authorities. In light of external financing of US$500 million (equivalent to nearly K1.6 billion) from the syndicated bank loan, it is unlikely that financing could be secured for the entire projected K3.1 billion deficit, necessitating further expenditure cuts. Such cuts should be concentrated in provincial/district government spending, which would have the least adverse growth impact according to a recent ADB study.7 In addition, PFM processes and governance are weakest for such expenditures. Cutting expenditures further, however, could be difficult in a preelection year.

13. The 2017 budget targets a fiscal deficit that is consistent with a steadily declining debt-to-GDP ratio over the medium term, built upon broadly realistic revenue projections. The fiscal consolidation in 2017 will be driven mainly by spending, as revenue measures were limited primarily to enhanced tax compliance efforts. Revenues and grants are budgeted at K11.5 billion, an increase of K0.7 billion over the projected 2016 level, declining by 0.7 percentage points of GDP, with limited revenue measures having been included in the pre-election environment. Expenditures are budgeted at K13.4 billion, K0.2 billion lower than in the 2016 level. This implies a fiscal deficit of K1.9 billion (equivalent to 2.8 percent of GDP) and a debt-to-GDP ratio of 33½ percent. The public debt-to-GDP ratio is expected to decline over the medium term, to just under 30 percent of GDP in 2021, in line with the legislated limit of 30 percent in the MTFS, which serves as the fiscal anchor.8 The pace of fiscal consolidation should be carefully calibrated to avoid a sharp contraction, implying a more gradual adjustment than specified in the MTFS. The staff’s view is that the 2017 budget strikes an appropriate balance between the need to maintain debt sustainability and avoiding an economic contraction. Over the medium term, the authorities will need to specify the revenue and expenditure measures they will implement to achieve the targeted reduction in the fiscal deficit. As elaborated below, the National Tax Review provides a variety of recommendations on the revenue side but the contribution of each measure would need to be carefully assessed and quantified. On the expenditure side, also as elaborated below, there appears to be ample scope for increasing expenditure efficiency, particularly for provincial/district government capital expenditures.

A01ufig3

Fiscal consolidation is in progress…

Fiscal balance (in percent of GDP)

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Sources: Country authorities; and IMF staff estimates and projections.
A01ufig4

… to keep the debt ratio on a downward path

Public debt (in percent of GDP)

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

14. Going forward, a comprehensive revenue reform would help raise revenue collections and create space for maintaining efficient public spending. The National Tax Review completed in October 2015—while falling short of providing a quantified list of possible revenue measures— assessed the changes needed to PNG’s tax and non-tax revenue systems in support of the government’s sustainable development objectives. Key recommendations included reductions in personal and corporate income tax rates, broadening the personal and corporate income tax bases through reduced tax exemptions, improving the return from natural resource extraction, and increasing consumption tax rates. The Review recommends reduced state equity participation in the resources sector, to be offset by reforms to the Additional Profit Tax, as well as reforms to other aspects of the mining and petroleum tax regime. The Tax Review echoes 2013 FAD TA by noting that the tax arrangements for PNG’s mining and petroleum sectors are very generous compared to other resource rich countries and do not reflect the maturity of the PNG resource sector. Therefore, fiscal revenues from the resource sector may not improve significantly unless the government avoids granting tax holidays and concessions for subsequent resource projects. Finally, modernization of the Internal Revenue Commission (IRC) and the PNG Customs Service is urgently needed to improve tax administration and compliance.

15. The need to strengthen PFM was underscored by the recently published Public Expenditure and Financial Accountability (PEFA) Assessment (Box 3). Much scope remains to better deploy existing public sector resources towards effective public service delivery, including in core areas such as education, health, and law and order. The revenue shortfalls have provided impetus for stricter expenditure controls. The authorities have developed a high-level PFM reform strategy, known as the PEFA Road Map 2015-18, to address the deficiencies of the PFM systems identified in the PEFA. The first priority is placed on strengthening core PFM functions which will underpin and provide the platform for more advanced reforms, including the roll out of the new information management system (IFMIS). The road map is only a first step in the reform strategy, which should be complemented by fully articulated action plans and present more explicitly the role of line ministries.

16. Commendable progress has been made towards the rollout of the IFMIS, while other PFM reforms should be accelerated. Further steps to improve cash management are urgently needed to ensure effective use of public financial resources, beginning with tracking inflows from tax and other sources, and ending with tracking of outflows through payments by line ministries. Thirty-three agencies that account for 95 percent of the national budget are nearly covered by the IFMIS. These efforts have been supported by TA from the European Union. Work is underway to strengthen cash management supported by IMF TA. Passage of an amended PFM Act in August is another major reform since this brings greater accountability through mandatory audits and enhanced financial controls to statutory bodies such as the IRC and local level governments as well. Financial monitoring and performance of SOEs should also be improved. Severe cash management problems should be urgently addressed, including by implementing a new government banking framework, drawing upon recent IMF cash management TA recommendations. There are plans to improve the public procurement act next year.

17. The sovereign wealth fund (SWF) should be operationalized. With the legislation to establish the SWF now in place, the SWF should be operationalized as planned in 2016, even though little is expected to be saved in the near term under the current contribution rules and conditions. The Treasury Department is working on the establishment of a SWF for PNG, including the formation of the board, while the BPNG is examining possible models for the setting up of an administrative secretariat at BPNG. A technical report on the assessment of existing capacity in managing the assets and possible models for the establishment of the secretariat was completed in July 2016. BPNG is now working on developing a suitable model for the establishment of the secretariat.

Authorities’ Views

18. The government remains firmly committed to existing fiscal anchors. Fiscal discipline through expenditure cuts last year and this year in supplementary budgets are important steps in the direction favored by staff. The additional revenue raising and expenditure cutting measures in the 2016 supplementary budget maintains the fiscal deficit in the original budget. The government aims to achieve the MTFS objective of a balanced budget by 2021. Thus, public debt will remain sustainable through the medium term. The two new priorities for the 2017 budget are the general election and APEC preparations. Government will likely be unable to increase national infrastructure spending next year. It is committed to including a realistic revenue projection in the 2017 budget. The prospect of issuing a debut sovereign bond has served as a helpful disciplining device for macro policies. The authorities are assessing and evaluating the National Tax Review recommendations. It will be difficult to include revenue raising tax policy measures in the 2017 budget given the upcoming elections but the government will nevertheless consider raising indirect taxes such as ‘sin taxes’ (excises on alcohol, gambling, and tobacco) and the General Sales Tax (GST). Modernization of IRC and Customs will continue.

B. Monetary Policy and the Exchange Rate

The current FX allocation mechanism poses risks for sustainability of the external position and could result in disorderly exchange rate adjustment. Greater exchange rate flexibility and improved market efficiency and transparency would reduce the cost of adjustment to lower commodity prices and curtail risks. Steps to strengthen monetary policy effectiveness are urgently needed, as a tighter monetary policy stance may be called for to manage the pass-through from greater exchange rate depreciation to inflation.

19. Since the introduction of a trading margin for FX transactions in mid-2014, exchange rate adjustment has stalled in real effective terms. While the lower Kina/USD exchange rate has pushed up import prices, limited access to FX has been equally, if not more, challenging for businesses than if the Kina had depreciated more quickly. Since mid-2014, the nominal value of the Kina depreciated by around 5 percent against the Australian dollar, a key trading partner currency, and in real effective terms has depreciated by only 2 percent. Despite this depreciation, the FX market has remained short as reflected in the long queues of unmet import payment orders reported by banks, importers, and business associations, although the tightness of the FX market has moderated somewhat recently as FX inflows have picked up and imports have been compressed.

20. Staff found an additional restriction on current international payments and two multiple currency practices (MCPs) that are inconsistent with Article VIII of the IMF’s Articles of Agreement (see Informational Annex). In last year’s Article IV consultation, staff found that the tax clearance certificate regime was inconsistent with Article VIII and this restriction remains in place. This year, the mission found that the authorities had prioritized FX orders related to import payments, and among these, had given priority to the payments of selected importers and rationed FX causing shortages, delays, and arrears in current international payments (e.g., those related to non-priority imports, dividend payments, and consultancy fees). There are also indications from market participants that the reference rate/mid-rate is not truly market determined. The mission observed the presence of two MCPs. One MCP arises from the actual deviation of more than 2 percent between the rates used by the BPNG for its FX allocations to authorized FX dealers (AFEDs) and the rates used by the AFEDs in transactions with their clients. In addition, a MCP arises from potential spread deviations of more than 2 percent between the rates set by the BPNG for its transactions with the government and embassies, and the exchange rates used by AFEDs in transactions with their clients.

21. Faced with an excess demand, BPNG has intervened to supply small amounts of FX and slow the rate of Kina/USD depreciation. Between 2010 and 2012, FX supply was abundant due to partially sterilized inflows associated with the PNG LNG project construction phase, and strong commodity prices. This upswing reversed in 2013, as FDI inflows declined and commodity prices fell, and the subsequent increase in LNG exports was not matched by increased FX inflows. BPNG has been providing limited FX amounts to the market, and in 2015 spent nearly US$830 million in FX intervention, which was however insufficient to clear FX demand. By limiting its FX sales to the market, BPNG has avoided large reserve losses. Despite the FX shortage, the Kina/USD exchange rate has remained overvalued, which is expected to dissipate assuming a gradual depreciation into the medium term (Box 4). In addition, FX rationing has increased the risks of balance of payments problems, and hampered private sector investment by compressing imports, discouraging non-resource exports, and impeding dividend transfers abroad. Import compression has lifted the import coverage of foreign reserves. Staff found no evidence of a parallel FX market given recent actions by the authorities to monitor and close vostro bank accounts that could previously be used to channel parallel market transactions. However, there are clearly strong incentives for such a market to develop.

22. Staff urged BPNG to allow greater flexibility in the Kina/USD exchange rate and promote market efficiency and transparency. More flexibility in the exchange rate would allow the exchange rate to act as a shock absorber, which would help facilitate the adjustment to external shocks while maintaining adequate foreign reserves. It would also promote a greater economic growth contribution from net exports. Coupled with fiscal adjustment, more exchange rate flexibility would likely reduce overvaluation over time. At the same time, a return to a more effective auction system for FX would help allocate reserves more transparently and efficiently.9 An auction system would need to be underpinned by appropriate macroeconomic policies. Follow-up Fund TA could be helpful in this regard, including to develop measures that would increase market efficiency and transparency. Risks of faster depreciation include higher inflation, which should be contained by tightening liquidity as elaborated below, while balance sheet effects are limited given the low public external debt, and the bulk of private external debt has a natural hedge in the form of LNG exports.

23. A tighter monetary policy would likely be needed to manage the pass-through to inflation if faster currency depreciation were to take place, but monetary policy effectiveness appears constrained by excess liquidity. BPNG has kept the monetary policy interest rate (the Kina Facility Rate (KFR)) on hold at 6.25 percent since early 2013, which is roughly zero in real terms. However, changes in the monetary policy interest rate are not effective due to excess liquidity, as explained below. Moreover, bank lending rates are significantly higher in part due to pricing of credit risk. The liquidity build-up reflects domestic financing of large fiscal deficits and unsterilized FX purchases.

24. The current liquidity overhang has not resulted in rapid private credit growth thus far because of long-standing structural impediments. Although some interest rates are low or negative in real terms, private credit remains constrained, as near-zero deposit rates are coupled with significantly higher lending rates, in part due to pricing of credit risk. Structural factors— including with regard to law and order, contract enforceability, property rights, and land tenure—are key impediments to private credit growth that will take time to address. In this environment of constrained private sector credit, the large volume of banking sector liquidity has not fueled inflation but this could change if the economy picks up.

25. Staff advised the BPNG to absorb excess liquidity, following which it would be in a better position to evaluate whether there is a need to raise the current monetary policy interest rate. BPNG should absorb excess liquidity by active sterilization, stop monetizing the fiscal deficit, and improve liquidity management, drawing on MCM TA recommendations. Absorption of excess liquidity is impeded by the existence of public sector trust accounts held in the banking system rather than with the BPNG. MCM TA recommendations include: (1) moving government funds from the banks to the BPNG (which would also assist with cash management); and (2) until this transfer fully takes place, the BPNG should apply an additional reserve requirement to government funds held in the commercial banks. Reducing fiscal dominance and strengthening the BPNG’s capacity to absorb excess liquidity through issuing central bank bills would allow the higher reserve requirements to be phased out.

26. The BPNG is reviewing its plans to change the specification of the monetary policy interest rate to improve monetary policy transmission. BPNG announced in March plans to change the policy interest rate from the overnight KFR, to the 63-day Treasury bill yield. However, staff noted that without measures to adjust liquidity, this proposed change is unlikely to be effective. Moreover, any new monetary policy interest rate should be an overnight or other shorter-term rate, to better reflect the stance of monetary policy, and the use of a Treasury bill yield for this purpose should be avoided to preserve central bank independence.

Authorities’ Views

27. The low FX inflows resulting from continued low export commodity prices, and persistent import demand, contributed to the FX market imbalance and led to the depreciation of the Kina. In 2014, the BPNG introduced a trading margin of 75 basis points above and below the daily interbank rate to abolish the parallel market conducted by AFEDs. This measure reestablished a single market for FX transactions. The Kina has depreciated significantly vis-à-vis the U.S. dollar since then and is not overvalued in BPNG’s view. There has been an increase in FX inflows starting in the second quarter of 2016, particularly from the mining and agriculture sectors, though supply is still low. Together with the intervention by BPNG, the recent increases in inflows assisted in meeting some of the import orders in the FX market, reduced the size of FX queues reported by banks, and slowed the pace of depreciation of the Kina exchange rate. The supply of FX from these sources would have been sufficient to clear the outstanding import orders in the spot market. However, this did not happen because AFEDs used some of the spot inflows for foreign currency loans (trade finance) and forward contracts, instead of serving the spot market. The BPNG is discussing ways to improve the functioning of the spot market with authorized dealers. Further exchange rate depreciation would not stimulate export volumes due to production constraints but would only feed through into inflation.

28. The authorities disagreed with staff’s findings of Article VIII breaches. BPNG’s ability to draw down reserves is curtailed by the need to hold sufficient reserves for government payments and to maintain an orderly movement in the exchange rate. FX market efficiency is impeded by the oligopolistic behavior of commercial banks and importers. The BPNG does not impose any restrictions on commercial banks’ operations in the spot FX market. The interbank/mid-rate for the Kina is determined by market participants. This market is not hampered by BPNG and is transparent. While BPNG advises commercial banks concerning the priorities for its FX allocation, it is entirely up to the banks to decide how to allocate the FX inflows. The shortages and delays in the FX market are in large part caused by the AFEDs’ rationing of FX and provision of other products such as trade finance and forward contracts that divert some of the spot inflows. BPNG’s interventions are either general or targeted, the former being done more often than the latter. In the general interventions, FX dealers decide on the allocation of the FX themselves, while for the limited targeted intervention, FX allocation for strategic imports of food, fuel, communications, medicine, and education, are decided by BPNG and FX dealers implement accordingly. The tax clearance certificate requirement is not a restriction on FX flows but rather is imposed by the IRC and BPNG only checks compliance; the certificate is not required for trade transactions.

29. Inflation outcomes are still considered manageable and therefore BPNG plans to maintain a neutral monetary policy stance in the coming months. BPNG is mindful of the upward trend in inflation and will closely monitor developments and may adjust its monetary policy stance as necessary, although the interest rate channel to curb inflation is weak. Constrained private credit growth reflects demand and commercial banks’ risk perception. The BPNG announced in March its intention to have an alternative policy mechanism to address the weak transmission of the KFR to market interest rates. Persistently high banking system liquidity is contributing to the weak transmission of the KFR to market interest rates. The mechanism is still being considered in consultation with stakeholders, both domestic and external. The aim is to have a mechanism that will be more effective in ensuring that the policy signaling rate transmits to market interest rates. The authorities have agreed to open new trust accounts at the BPNG, with payments to be made using the new payment system (the Kina Automated Transfer System (KATS)), while leaving the existing trust accounts, whose balances have declined over time and are now very low, in place.

C. Financial Sector Issues

The banking system is sound, but access to financial services remains limited and financial inclusion efforts should continue.

30. The highly liquid banking system is sound and profitable, while PNG’s financial sector is shallow compared to many other middle-income countries in the region. Three large banks (two Australian and one domestic) play a dominant role in providing credit to the economy. Return on assets is around 2.0 percent (June 2016) and has averaged a healthy 2.5 percent over the last 10 years, and the capital adequacy ratio is high (32.3 percent in June 2016). The ratio of non-performing plus past-due loans to total risk-weighted assets is currently around 6 percent (June 2016), above the stable 10-year average of around 5 percent. However, banks only hold around half of their assets as loans, with the other half held largely as short-term securities and cash, due to structural (e.g., collateral) constraints as noted above. PNG’s ratio of domestic private credit to GDP is well below the average for East Asia and Pacific developing countries, Pacific Island Small States, and other Middle Income Countries.10 Given high banking system liquidity, and notwithstanding the aforementioned structural constraints on private credit growth, BPNG should ensure that its macro-financial surveillance is focused on identifying any pockets of credit growth that could create spillover risks to the economy.

31. Work is underway on financial inclusion and the payment system. PNG remains among the most underbanked countries on several indicators (numbers of branches, ATMs, and loan penetration). However, mobile access has been expanding, and financial inclusion efforts will benefit from the BPNG’s new KATS system, which represents substantial progress in payment system development and efficiency. While tiny compared to the banks, credit unions play a critical role in extending services to rural areas, in some cases being the only financial services provider. New credit union legislation will help to modernize the sector, but needs supporting regulations and guidelines.

32. The authorities continue to strengthen the AML/CFT regime and address the risks of withdrawal of correspondent banking relationships (CBRs). Owing to significant progress in enhancing the legal and regulatory framework, PNG successfully exited the Financial Action Task Force (FATF) “gray” list in June 2016. The authorities are committed to ensuring the effectiveness of the AML/CFT regime through strengthening institutions and enhancing domestic cooperation. In the context of increased regulatory compliance costs and the FATF listing, some financial institutions and money remitters in PNG previously experienced withdrawal of CBRs. The volume of CBR transactions nevertheless increased, which suggests consolidation of CBRs in other financial institutions. To mitigate the risks of CBR withdrawals, including in light of Bank of South Pacific’s branch network in the Pacific, the authorities are encouraged to continue enhancing the compliance of their regulatory and supervisory frameworks with international standards, including for AML/CFT.

Authorities’ Views

33. The banking system remains sound and stable. Credit growth was slow last year reflecting the drought and Ok Tedi mine closure. Real estate prices grew modestly, with excess capacity of office space and rentals having come down since 2012-13, and banks are very cautious. Banks’ exposure to the government though their holdings of government securities is significant, accounting for nearly one third of their total assets. Commercial bank lending to SOEs has been minimal, with the exception of one SOE that borrowed from a commercial bank to make a dividend payment. A new law on credit unions is potentially important for increasing financial inclusion.

34. After the passage of a suite of laws in July 2015 on AML/CFT, certain measures were implemented, including the recruitment of key personnel for the Financial Analysis and Supervision Unit (FASU). In May 2016, the Asia Pacific Group conducted an onsite audit of progress made on meeting the requirements of the FATF. These led to the delisting of PNG from the gray list by the FATF in June 2016.

Structural Reforms for Inclusive Growth

Despite strong ambitions, gains in inclusive growth have been elusive. In the context of multiple challenges and capacity constraints, priority should be placed on improving conditions for private sector development and making the most of non-renewable resource sector wealth.

35. A renewed focus is needed on improving the conditions for private sector development, particularly in non-resource sector SMEs.11 Infrastructure (including notably access to affordable electricity and road construction and air and sea transportation to allow perishable products to reach markets), access to financing by implementing the authorities’ financial inclusion strategy, and law and order are key elements of the environment for private sector development. The non-resource private sector is particularly important to inclusive growth, by increasing economic diversification and expanding employment opportunities, particularly given the capital-intensive nature of resource sector firms. Agriculture in particular is likely to be a source of unrealized potential, and the government should continue to move forward with the ADB and World Bank to enhance productivity (i.e., the World Bank’s Productive Partnerships in Agriculture Project for smallholder coffee and cocoa producers). Tourism also has considerable potential. The current SME reform process is a positive step but must be carefully tailored. In this regard, restrictions on foreign investors may adversely affect private sector growth. Measures to increase competition would also help increase economic efficiency and support inclusive growth.

36. Non-renewable resource sector wealth can be better leveraged through tax reform and transparency. State equity participation increases the economy’s exposure to resource sector developments through additional fiscal risks, even though those risks can be off-balance sheet in nature and non-transparent. Against this background, tax reform coupled with enhanced transparency has the potential to improve the resource sector’s ability to contribute to broader economic growth. Recent publication of PNG’s first Extractive Industries Transparency Initiative (EITI) report represented an important step forward for transparency, and highlighted deficiencies in the resource sector, including reporting by large multinational firms.

Authorities’ Views

37. The government will continue to implement structural reforms to boost investments and broaden the tax base through growth in the non-mineral sectors, especially agriculture. This is crucial because PNG will continue to face low world commodity prices and other supply shocks. The government will encourage and support SMEs by providing training on financial literacy and entrepreneurial skills, and financial inclusion initiatives. Given the constraints on the government’s capacity to formulate, implement, and monitor such projects, engaging in programs such as Public-Private Partnerships, including by SOEs, will be encouraged and the necessary legislation put in place to help ensure more cost effective service delivery.

Statistics and Other Issues

38. Sustained effort is being made to improve macroeconomic statistics but further progress is needed to support transparency and policymaking. In addition to revised nominal GDP estimates covered by ongoing TA, the government financial statistics framework is being updated, and PNG is about to report in the Government Financial Statistics Yearbook for the first time.12 These improvements have resulted from a sustained and committed effort by the authorities, leveraging IMF TA. Nevertheless, more progress is urgently needed, including among others, in balance of payments and international investment position data, and in making data publicly available.

Staff Appraisal

39. As a commodity exporter, the PNG economy has been hit hard by the drop in world commodity prices and a major drought. The authorities have responded to these shocks through fiscal tightening and a combination of modest exchange rate depreciation and FX sales. Strong economic growth driven by the start of the PNG LNG project has tailed off amidst weak non-resource sector growth. Inflation has begun to pick up reflecting earlier exchange rate depreciation and increases in prices of seasonal agricultural items. Prudent macroeconomic policies are therefore essential for maintaining debt sustainability and safeguarding the external position.

40. Additional fiscal adjustment is needed to ensure debt sustainability over the medium term. While the authorities should be commended for promptly passing a supplementary 2016 budget, further adjustment may be needed in view of financing constraints. Passage of a prudent 2017 budget should be commended, which will facilitate continued fiscal consolidation over the medium term, anchored by the existing 30 percent public debt-to-GDP fiscal anchor. The pace of adjustment should continue to balance the need to maintain debt sustainability against the costs of excessive fiscal adjustment in terms of growth and poverty reduction.

41. Greater revenue mobilization would create fiscal space for expenditures that would help address PNG’s huge development and social needs. Measures drawn from the National Tax Review should be adopted going forward. In the near term, efforts should be undertaken to improve tax compliance. There is considerable scope for improving the fiscal regime for extractive industries.

42. Government expenditure quality should be improved through PFM reform. There is much scope for better deploying existing public sector resources towards effective public service delivery, including on core areas of health and education. Further PFM reforms should build upon the recently published PEFA document and successes in rolling out the new information management system to encompass cash management issues. The SWF should be put into operation as soon as possible to help improve transparency and ensure that resource revenue is used in a manner that is consistent with macroeconomic stabilization and saving for future generations.

43. Greater exchange rate flexibility and a more efficient and transparent FX allocation mechanism are urgently needed. Lack of exchange rate flexibility has impeded PNG’s adjustment to sharply lower world commodity prices, weakened the external and fiscal positions, and reduced the growth contribution from net exports. The pass-through of more rapid exchange rate depreciation into inflation would need to be countered through monetary policy tightening but transmission channels are impeded by excessive banking system liquidity, implying the need for measures to absorb excess liquidity. Staff does not recommend Fund approval of the retention of the exchange restriction arising from FX prioritization and rationing of FX, of the tax clearance certificate requirement, and of the MCPs, because they are not temporary and in the absence of a timetable for their elimination.

44. An acceleration of structural reform is key for private sector development, in support of PNG’s inclusive growth strategy. The business environment, particularly for agriculture and SMEs, needs to be strengthened through providing better infrastructure, access to financing, and law and order.

45. While staff welcomes the recent progress, more decisive action is needed to improve macroeconomic statistics. Noteworthy progress has been made to strengthen national accounts and government finance statistics. Priorities for further reform include balance of payments, international investment position, and debt data.

46. It is proposed that the next Article IV consultation with PNG will be held on the standard 12-month cycle.

Papua New Guinea: GDP Revision 2006-13

In March 2016, The National Statistics Office (NSO) of PNG released a new set of nominal GDP estimates for 2006-13 after an 8-year hiatus. This was a revision to the nominal GDP for 2006 which was last released in March 2008 while the estimates for 2007-13 were released for the first time. The release includes new data sources as well as a revised industrial classification and was presented using the System of National Accounts 2008 standards and conventions.

The PNG Standard Industrial Classification (PNGSIC) 2014 has been derived from the United Nations International Standard Industrial Classification (ISIC) Revision 4. The ISIC Revision 4 has been modified to reflect the various forms of economic activity in PNG and replaces the ISIC Revision 3 which formed the basis of the previous GDP releases. The PNGSIC 2014 is more detailed that the PNGSIC 2000 and identifies new industries separately, especially the service-related industries.

Taxation and business survey data were the major sources for estimating the formal sector economic activity. Non-identifiable GST sales data and annual income tax returns data were collected from the Internal Revenue Commission and this was complemented by the annual Survey of Business Activities and the quarterly Business Liaison Survey to estimate output in the non-financial business sector given the absence of business register information. Similarly, output in the mining sector was estimated using Balance of Payments data. The BPNG was the primary source for data on the financial sector.

Information from the 2009/10 Household Income and Expenditure Survey (HIES) was used to estimate the informal economy and economic activity by the household sector. Household production was estimated for the 2009/10 reference year and extrapolated using the consumer price index and population estimates. The informal sector consists of betel nut production and trade; household lending activity; retailing by street vendors; transport; household manufacturing; and household construction.

The revised estimates are a significant upward revision from previous released numbers by NSO and also from IMF staff and PNG Treasury’s estimates for 2007-13. The revised volume estimates or Real GDP for 2006-13 have not yet been finalized. Table 1 highlights the magnitude of the revisions.

Table 1.

Papua New Guinea: Nominal GDP

(In billions of Kina)

article image

Papua New Guinea: Upcoming Mining and Petroleum Projects

Interest in PNG’s mining and petroleum sector continues despite the current low oil and gas prices. As of March 2016, there were 123 active exploration licenses, 68 exploration licenses pending renewal, and 72 new applications for exploration licenses with the Mineral Resources Authority of PNG. The three major projects that are currently advanced include the Papua LNG project, Nautilus Minerals Solwara 1 project, and the Wafi-Golpu mine.

Papua LNG Project

The Papua LNG project is PNG’s largest undeveloped gas resource and its second LNG project based on the Elk-Antelope gas fields in Gulf province. It is a joint venture project consisting of Total SA, which will also be the operator (40.1 percent), InterOil (36.5 percent) and Oil Search (23 percent), and expected to produce around 7 million tons annually. The final development concept and the sizing and capacity of facilities are currently being finalized and construction had been earmarked for 2018. However, this could now be delayed due to ExxonMobile’s purchase of InterOil and their plans to sequence this development with the train extensions at the PNG LNG project and other plans to achieve synergies with the PNG LNG project.

The Papua LNG project remains viable despite the current low global gas prices. The project is being touted as the lowest cost LNG project compared to other similar green field investments around the world and has the added benefit of being close to the world’s major LNG markets in Asia. According to the joint venture, global LNG demand will exceed contracted supply in the 2020s, just when Papua LNG is expected to deliver its first gas.

Major Mining Projects in Advanced Stages

The Nautilus Solwara 1 project will be the world’s first deep seabed mining project for copper, gold, zinc, and silver. The Solwara 1 project is located 30 kilometers offshore from New Ireland in the Bismarck Sea at a depth of 1,600 meters. Currently, construction of the Production Support Vessel and other specialized equipment is underway and mining was expected to start in the first half of 2018. However, given recent funding constraints, this could now be delayed.

The Wafi-Golpu project has 4.8 million tons of copper and 11 million ounces of gold. At its peak, it is expected to produce 150,000 tons of copper and 320,000 ounces of gold annually with an estimated mine life of 23–30 years. The project is located 65 kilometers from Lae city and is going through various stages of feasibility studies.

Others

There are several other mining and gas projects that are in various stages of exploration. One of the major ones is the Frieda River project in East and West Sepik province which is in an advanced exploration stage. It is PNG’s largest undeveloped copper-gold project and one of the top 10 undeveloped open pit copper mines in the world. Other notable mining projects include the Crater Mountain Project in Eastern Highlands province (gold), Mt. Kare project between Hela and Enga provinces (gold and silver), Yandera project in Madang (copper), Hessen Bay (iron sands), Woodlark in Milne Bay (gold), Mayur Resources projects in Gulf province (copper, gold, coal and iron sands), and Kili Teke project in Hela province (gold and copper deposits) as well as possible re-development of the now closed Paguna copper mine in Bougainville. There are also a number of potential gas developments such as the Stanley condensate stripping project, P’nyang field to support Papua LNG project expansion, aggregation of a number of gas accumulations in the Western province, and offshore Pandora gas project.

Papua New Guinea: Public Expenditure and Financial Accountability Assessment

The first Public Expenditure and Financial Accountability (PEFA) Assessment since 2009 was finalized in August 2015. It includes a set of 30 indicators organized around seven ‘pillars’ or core dimensions of PFM performance, with the aim of identifying areas where measures are needed to improve fiscal discipline, resource allocation, and the efficiency of public service delivery.

Overall performance was mixed. Scores were relatively stronger for pillars related to the credibility of fiscal strategy and budget, and policy-based planning and budgeting. Performance for other pillars was weaker, and the authors concluded that there is much scope for improvement, particularly regarding fiscal accounting/reporting, management and acquisition of assets and liabilities, transparency and auditing, and budget control and execution (Figure 1).

The authorities have developed a high-level PFM reform strategy to address the deficiencies of the PFM systems. First priority is placed on strengthening core PFM functions, including notably the new information management system roll out. However, several aspects of the reform strategy need to be strengthened to ensure a successful implementation of the PFM reform.

Figure 1.
Figure 1.

Average Performance by Seven PEFA Pillars

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

Note: Data used for ratings mainly covered 2011, 2012 and 2013. Average performance of pillars: indicator score “A” is equal to 3 and score “D” equal to 0. The step between A and D scores is 0.5. Source: PEFA Report

  • Credibility of the fiscal strategy and budget was satisfactory, as net deviations from the budget were small, though expenditure composition varied considerably. Recurrent spending (e.g., wages, goods and services, etc.) tended to be higher than budgeted due to weak expenditure controls and data, while the development budget tended to be lower, offsetting the former.

  • Policy-based planning and budgeting was orderly and well understood, and progress has been made in embedding the medium-term dimension into fiscal planning. However, expenditure and ceilings for agencies were only applied one year into the future, and did not cover half of the budget representing capital/development expenditure.

  • The comprehensiveness and transparency of the budget was limited. First, the presentation could be more analytical and open to external scrutiny and policy accountability. But more importantly, the extent of unreported government operations appears to be large.

  • Predictability and control in budget execution is weak. Transfers related to the government’s main operational account are poorly accounted for and bank reconciliations are often delayed. Cash flow forecasts are prepared, but information provided to executing departments is not reliable, and rules for reallocation are not always respected. Payroll controls are weak and compromised by the decentralization of responsibility to departments and provinces/districts.

  • External scrutiny and audit performance is weak, and there is little evidence that recommendations are followed up systematically, reflecting the absence of effective accountability mechanisms, legal recourse to impose penalties on non-complying officials, and related concerns.

  • Asset and liability management is weak, with numerous statutory bodies fulfilling a range of commercial, social and regulatory functions, often with long delays in reporting. Preparation of capital budgets appeared fragmented, and few departments undertake rigorous economic analyses of investment projects. The legal basis for borrowing and issuing guarantees was deemed unclear, fragmented, and contradictory.

  • Accounting, recording, and reporting are hampered by unreliable records, bank reconciliations are not carried out in a timely manner, and the coverage and classification of data do not allow direct comparisons with the original budget. No recognized accounting standards are used to prepare public financial statements, which are only submitted for audit 15-16 months after the end of the year (3-6 months is standard).

Papua New Guinea: External Assessment

PNG’s external position is moderately weaker than implied by fundamentals and desirable policies, given its weak gross foreign reserve position and overvalued real effective exchange rate.

PNG’s real effective exchange rate (REER) appreciated in 2015, as LNG production reached full capacity and LNG exports gained momentum. It has been depreciating in 2016, albeit very modestly, reflecting the persistent imbalance in the FX market. Notwithstanding the current depreciation of the Kina, excess demand for FX persists due to low foreign currency inflows. Restricted access to FX has contributed to a compression of imports.

The extended External Balance Assessment (EBA) methodology, EBA-lite tool, provides mixed results. Although the REER is likely overvalued if we adjust for LNG production and take into account FX rationing, the exchange rate misalignment is expected to disappear eventually as ongoing depreciation continues gradually into the medium term. The EBA-lite current account balance (CAB) analysis implies a current account norm of -2.7 percent of GDP, compared to an estimated outcome of 10.9 percent of GDP, suggesting that the REER is undervalued by around 46 percent. However, the 2015 current account surplus should be viewed in conjunction with the financial account outflows associated with the increase in nonresident bank balances of foreign LNG project owners. If we exclude LNG exports, the CAB is estimated at -0.4 percent of GDP, and the EBA-lite CAB analysis suggests that the REER is undervalued by only 10.9 percent. In any case, a fundamental issue with the EBA-lite methodology is that it does not incorporate the effects of FX rationing. The market exchange rate does not reflect the premium imposed by FX rationing on domestic buyers. The EBA-lite REER index model, on the other hand, points to overvaluation of about 29 percent, consistent with the limited exchange rate adjustment thus far to the large terms of trade shock.

Despite improvements in the current account, the reserves to import ratio is below the level implied by the reserve adequacy metric approach.1 Although the metric approach suggests that reserves should strengthen reflecting the increase in LNG exports starting in 2014, FX receipts are mostly held offshore consistent with project development agreements, so the net FX inflow from the LNG exports is limited. Also, declines in commodity prices have led to lower reserve levels.

Table 1.

EBA-lite Results

article image
Source: IMF staff estimates and projections.
A01bufig1

Reserve Adequacy

(In Months of Imports)

Citation: IMF Staff Country Reports 2017, 022; 10.5089/9781475572384.002.A001

1 Because of the limitation of data, central government’s data is used instead of general government data. The assessment here is based on staff’s judgement because there is a wide range of adequate levels of reserves, depending on methods used.
Table 6.

Papua New Guinea: Financial Soundness Indicators, 2011-15

(In percent)

article image
Sources: Bank of Papua New Guinea; and IMF staff calculations.

Fourth quarter data for each year.

Capital base includes Tier 1 and 2 capital.

Return on equity is calculated with Tier 1 capital.

Table 7.

Papua New Guinea: Millennium Development Goals, 1991-2015

article image
Source: World Bank, World Development Indicators database, 2016.

Appendix I. Risk Assessment Matrix

Potential Deviations from Baseline

article image

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Appendix II. Authorities’ Responses to Fund Advice

article image
article image
1

The most recent official poverty rate estimate is 40 percent (from the 2009/10 Household Income and Expenditure Survey).

2

The current account shifted from deficit during the LNG project construction phase, to surplus following the commencement of LNG exports. However, FX receipts are largely held offshore (consistent with project development agreements), so increases in exports have been largely offset by capital outflows.

3

Final estimates of real GDP levels have yet to be released. In the meantime, staff’s macro framework assumes unchanged GDP deflators. On this basis, the revised nominal GDP data imply lower real GDP growth.

4

PNG will host APEC in 2018.

5

The historical average for the last 20 years is around 3 percent for total real GDP growth and 4 percent for non-resource real GDP growth. Long-run average working age population growth is nearly 3 percent.

6

The asset is a 4.27 percent interest in the PNG LNG project, and was budgeted at K2.5 billion. The sale was delayed due to disagreements concerning the sale price and a slow vetting process to verify the relevant landowners under the communal land ownership system. The future timing of this asset sale is unclear.

7

Asian Development Bank, “Wok Bung Wantaim: Using Subnational Government Partnerships to Improve Infrastructure Implementation in Papua New Guinea,” Manila, Philippines, 2016.

8

Fiscal deficit and debt to GDP ratios in the authorities’ 2017 budget are modestly lower than Fund staff projections reflecting staff’s cautious assessment of the 2016 supplementary budget revenue measures and Fund staff’s use of the WEO oil price projections to forecast the oil and gas sector GDP deflator.

9

International Monetary Fund (2015), “Evolution of PNG’s FX Regime,” Papua New Guinea—Selected Issues (IMF Country Report No. 15/219).

10

International Monetary Fund (2015) “Financial Inclusion and Access—Supporting Inclusive Growth,” Papua New Guinea—Selected Issues (IMF Country Report No. 15/319).

11

International Monetary Fund (2015) “Structural Reforms for Sustainable and Inclusive Growth in PNG,” Papua New Guinea—Selected Issues (IMF Country Report No. 15/319).

12

Volume 1 of the 2016 Budget used the Government Financial Statistics Manual 2014.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Papua New Guinea: 2016 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2017: Issue 022
Publisher:
International Monetary Fund
ISBN:
9781475572384
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781475572384.002
Figure 1.

Papua New Guinea: Real Sector
Figure 2.

Papua New Guinea: External Sector
Figure 3.

Papua New Guinea: Fiscal Sector
Figure 4.

Papua New Guinea: Monetary Sector

Financing Cost

(In percent)

Domestic debt by holder

(In percent)

Fiscal consolidation is in progress…

Fiscal balance (in percent of GDP)

… to keep the debt ratio on a downward path

Public debt (in percent of GDP)
Figure 1.

Average Performance by Seven PEFA Pillars

Reserve Adequacy

(In Months of Imports)