Papua New Guinea: Staff Report for the 2016 Article IV Consultation—Informational Annex
Author:
International Monetary Fund. Asia and Pacific Dept
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Publication Date:
30 Jan 2017
eISBN:
9781475572384
Language:
English
Keywords:
ISCR; CR; GDP deflator; real GDP; deficit; GDP; PNG LNG project; PNG government; programming framework; PNG Sovereign Wealth Fund; PFTAC advisor; PNG project; Government finance statistics; Monetary statistics
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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.

Fund Relations

(As of September 30, 2016)

Membership Status

Joined: October 9, 1975; Article VIII

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

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Projected Payments to Fund1

(SDR million; based on existing use of resources and present holding of SDRs):

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Safeguards Assessments

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

Exchange Rate Arrangement

Papua New Guinea’s de jure exchange rate arrangement is floating. From April 2014, the Kina has reduced its volatility and followed a trend within a 2 percent band against the U.S. dollar. Accordingly, the de facto exchange rate arrangement was reclassified to a crawl-like arrangement, effective April 11, 2014. Papua New Guinea maintains the following exchange restrictions subject to IMF approval under Article VIII, Section 2(a) of the IMF’s Articles of Agreement arising from: (i) the requirement to obtain a tax clearance certificate evidencing the payment of all taxes prior to making payments or transfers for certain current international transactions; and (ii) the rationing of FX and its allocation by BPNG to certain priority items, which results in undue delays and arrears in current international payments. Papua New Guinea also maintains the following multiple currency practices (MCPs) subject to Fund approval under Article VIII, Section 3: (i) a MCP arising from the spread of more than 2 percent between the rates set by BPNG for its FX allocations to authorized FX dealers (AFEDs), and the rates used by AFEDs in transactions with their clients; and (ii) an MCP arising from the potential spread deviation of more than 2 percent between the rates set by BPNG for its FX transactions with the government and embassies, and the rates used by AFEDs in transactions with their clients.

Article IV Consultations

The 2015 Article IV consultation discussions were held during August 9-21, 2015. It was concluded by the Executive Board on October 30, 2015 (IMF Country Report No. 15/318). Papua New Guinea is on the standard 12–month consultation cycle.

TA from Headquarters

FAD: A joint FAD/PFTAC mission in March 2000 assisted the authorities in preparing a Report on the Observance of Standards and Codes Fiscal Transparency Module, published in October 2000. A mission in December 2000 provided advice on the reconciliation of large and volatile differences in fiscal reporting based on information provided by the Treasury Department and information reported by the Bank of Papua New Guinea. A mission in February 2002 assessed progress in improving fiscal transparency. A joint FAD/PFTAC mission visited PNG to provide advice on the sovereign wealth fund management in May 2011. A mission in March 2013 provided advice on reform of the extractive industries fiscal regime. A mission in October 2015 provided advice on Land and Property Tax and Non-Tax Revenue Reforms.

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

MFD/MCM: TA through peripatetic visits was delivered on bank regulation and supervision (2001, February–March 2007, July–August 2009, and February 2010), medium-term monetary policy formulation (October 2004 and September 2005), reserve management (June 2006, September 2007, March/July–August 2009, January–February 2010), internal audits (2004, August 2007), accounting (September–October 2006, February 2007, February–March/June–July/November 2009), liquidity management (January 2009), monetary and forex operations (July–August 2009, February 2010, March 2015), macroprudential oversight and financial stability (September 2012), and the sovereign wealth fund (July 2013).

STA: A multisector statistics mission occurred in September 2006 followed by a high-level STA visit in December 2007, in collaboration with the ABS. TA was provided on monetary and financial statistics (April 2005, May 2006, April 2008, November 2009 May 2010, and February 2013); balance of payments and the international investment position (June 2008, November 2009, May-June 2013, February 2014, and July 2015); government finance statistics (2012, May and October 2013, April-May and October 2014, April 2015, September 2015, March 2016); and GDDS metadata (January 2012). A joint mission with the ABS discussed statistical capacity building and in particular reform of the National Statistical Office in July-August 2014.

Resident Representative

The Regional Resident Representative Office for Pacific Island Countries based in Suva, Fiji was opened on September 13, 2010 and the office covers Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Mr. Tubagus Feridhanusetyawan is the current resident representative.

Relations with the Pacific Financial Technical Assistance Centre

(As of July 2016)

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

A. Public Financial Management

The PFTAC assisted in the preparation of a ROSC, which was published in October 2000. The PFTAC PFM Advisor has participated in occasional FAD technical assistance missions, and an attachment of one PNG official to PFTAC was completed in April 2007. PNG participated, with four officials, in the U.S. Treasury study visit in September 2008. In May 2011, the PFTAC macroeconomic advisor participated in an FAD mission on advising PNG on the SWF. In July 2013, a PFTAC PFM Advisor visited PNG at the request of the Treasury Minister to review the budget preparation process, and discuss with authorities plans for training in the PEFA methodology. In May-June 2014, PFTAC provided information, communication, and technology (ICT) assessment mission and recommended a comprehensive reform strategy to better support of operation of the Department of Finance.

In 2014, however, PFTAC PFM assistance expanded greatly. Starting early in 2014, and continuing through early 2015, PFTAC began training PNG staff to carry out a PEFA Self-Assessment. Subsequently, in March 2015, PFTAC and a team from FAD conducted an external PEFA assessment which corroborated most of the findings of the self-assessment. PFTAC and FAD then worked with Department of Finance officials to develop a PFM Reform Roadmap to address major deficiencies identified by the PEFA Assessment.

PFTAC’s largest PFM project during the past two years has been assisting PNG in overcoming roadblocks to the implementation of its Integrated Financial Management System (IFMS) and recommending steps needed to speed up ministry/agency connection to the new system that PNG decided to purchase in 2005. By early 2014, only three ministries—Finance, Treasury, and Planning— were connected to the system.

In a series of missions beginning in May 2014, PFTAC’s expert on the PNG project examined a number of aspects of the implementation effort including highly technical matters, levels of cooperation from other ministries, IFMS project organizational issues, staffing, and local opportunities for out-sourcing some aspects of the IFMS support operations. Most of the PFTAC Advisor’s recommendations were accepted and, later in 2014, PNG’s Department of Finance started the process of reforming its ICT delivery operations in order to accelerate the deployment of the IFMS system.

As of the end of July 2016, the TA had enabled expansion of the system to 30 central government departments (compared to the 3 connected when assistance commenced last year), with the remaining 30 due to be implemented by the end of 2016, depending on resource availability. The IFMS team has begun to plan their first implementation in a provincial and district environment, targeting East New Britain province and its districts as its first pilot. IFMS is currently used on a regular basis by over 2,000 users across government. PNG’s September 2015 PFM Reform Roadmap, prepared with assistance from PFTAC, placed a high priority on completing the IFMS roll-out recognizing that many accounting, financial management, and reporting weaknesses could be overcome with full implementation of the system. The Roadmap’s tight prioritization of objectives under the leadership of Finance Secretary Dr. Ken Ngangan played a significant role in expanded commitments from DFAT and the EU to provide more TA support to PNG’s Department of Finance to ensure a sustainable rollout and business process reform.

In addition, during 2015 PFTAC supported short-term missions to review cash management, reconciliation, and reporting processes.

B. Tax Administration and Policy

PFTAC has not supported the Internal Revenue Commission (IRC) in revenue administration as they are strongly supported by two Australian Programs; (1) the Strongim Gavman Program (SGP) which is used to engage senior ATO advisors to the IRC; and (2) the Economic Public Sector Program (EPSP) which provides support for strategic, governance, integrity matters and IT support.

A new IT system continues to be rolled out which includes new applications for withholding taxes, Goods and Services Tax and Corporate Income Tax. Over 120,000 transactions on average per month are currently being processed through the new system, with the next phase of development targeted at the introduction of applications to support modern risk management and case management for both audit and collection of tax arrears. Additional plans are in place to introduce e-filing, e-payment, and a self-service portal that taxpayers can access to obtain information on the status of their tax accounts.

A tax review diagnostic conducted by an accounting firm has provided numerous recommendations that are currently under discussion. One recommendation—to modernize taxpayer registration by issuing a Taxpayer Identification number—is already being implemented.

Peripheral modules will follow over the next twelve months, with project completion by 2017.

C. Financial Sector Regulation and Supervision.

There is no current PFTAC involvement in this area. In September 2014, BPNG hosted the annual meeting of the Association of Financial Supervisors of Pacific Countries, for which PFTAC is the secretariat. In March 2007, PFTAC funded an attachment for two supervisors from BPNG to assist the Cook Islands’ supervisory authority to undertake an on-site examination of a domestic bank. In 2008, PFTAC funded an attachment of one supervisor to assist the Reserve Bank of Fiji to undertake an on-site examination of a local branch of a PNG-based bank. PFTAC has not received any subsequent request for assistance from the BPNG.

D. Economic and Financial Statistics

In February 2006, an advisor briefly assessed BOP compilation with a view to improving its quality, and to assessing progress with the implementation of recommendations made by previous missions. A multi-sector statistics mission in September 2006 assessed the statistical systems (BOP, national accounts, prices statistics, government finance statistics, and monetary statistics), with the PFTAC advisor assessing the national accounts and providing overall coordination. In 2008 and 2009, the advisor undertook BOP statistics missions to review statistical prerequisites, progress in improving compilation methods and source data, as well as to assist BPNG statistics staff in assessing the feasibility of electronic data collection.

Since 2013, PFTAC has conducted a series of six TA missions to assist the National Statistical Office (NSO), BPNG, and Department of Treasury with improving national accounts statistics. PFTAC has increasingly focused its TA on improving capacities at the NSO in the broader context of the NSO reform process initiated by the authorities in 2014. Support has been provided in close collaboration with the ABS, which has provided statistical leadership and management advice as well as TA on data collection issues including business and household surveys with the secondment of two ABS staff to the PNG NSO since July 2015 and until June 2016. PNG NSO staff have also benefited from attending three annual sub-regional statistics workshops since 2013, centered in particular around estimating GDP by expenditure, the use of household income and expenditure surveys, and their linkage to consumer price indices.

E. Macroeconomic Analysis

Following a request by the BPNG for assistance in building up financial programming capacity, the development of a PNG-specific financial programming framework started in 2011. Training in the use and updating of the framework was provided to staffs of both BPNG and the Department of Treasury. Staff from both institutions also participated in training on financial programming techniques provided jointly by PFTAC and the Singapore Regional Training Institute during a December 2012 regional workshop in Fiji. A separate work program with the Department of Treasury and BPNG developed in collaboration with the APD country team and the IMF’s Research Department modeling tools for exploring the macroeconomic impact of the surge in natural resource revenues from the LNG project. Further development of the financial programming framework started in 2014 because the existing framework was too detailed and resource-intensive to update, given day-to-day monitoring and projection needs. More recently work has been undertaken to improve the BPNG’s inflation forecasting methodology following major revisions to the consumer price index (CPI) by the NSO in June 2014.

Joint Matrix of Bank-Fund Collaboration

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Relations with the Asian Development Bank

(As of October 12, 2016)

PNG joined the Asian Development Bank (ADB) in 1971. In line with the government’s development agenda and ADB’s Strategy 2020 midterm review priorities, the 2016 – 2018 Country Partnership Strategy, focuses on supporting rural populations by enhancing transport infrastructure, delivering health services, and reengaging in water and other urban infrastructure and services. The strategy was developed in close consultation with the government and other stakeholders, and is aligned with the government’s Development Strategic Plan, 2010–2030 and National Strategy for Responsible Sustainable Development, 2014–2030. This focus is consistent with the Midterm Review of Strategy 2020 of the ADB.

ADB will continue to seek opportunities for cofinancing and to produce knowledge products that inform and influence national policy debates and support country operations. ADB support for private sector development—through state-owned enterprise reform—will lower business transaction costs, thereby helping to expand small and medium-sized enterprises and create jobs in the formal economy. ADB operations will focus on supporting climate proofing infrastructure and increasing the climate resilience of vulnerable sectors. ADB will mainstream gender in all general intervention projects.

The country operations business plan, 2017–2019 is the second under the country partnership strategy (CPS) 2016–2020 for PNG. The indicative lending program for 2017–2019 amounts to $1,363.0 million, comprising of $129.0 million in Concessional Ordinary Capital Resources lending (COL) and $1,234.0 million in Ordinary Capital Resources (OCR). The indicative nonlending program amounts to $5.35 million, which includes project preparatory TA. Additionally, the program includes cofinancing of $300 million.

ADB will increase its total financing for development projects (lending, nonlending, and cofinancing) by 125 percent, from $743.7 million (2016–2018) to $1,668.4 million (2017–2019). The current programming period includes new infrastructure development projects, particularly in the transport sector, that will help increase connectivity and the delivery of basic services to the poorest and most remote parts of the country. The proposed transport projects will help create opportunities for inclusive economic growth, improve the delivery of basic services, increase regional connectivity with the rest of Asia, and build resilience to climate change.

PNG was able to withstand the impact of the global financial crisis in 2008; however, the recent global commodities downturn has worsened its fiscal position. PNG saw a sharp fall in public revenue (by 21 percent in 2015), necessitating a large fiscal adjustment. The economy remains exposed to global economic volatility. ADB will provide TA to strengthen the government’s initiative to achieve calibrated fiscal consolidation, undertake expenditure reform, and strengthen PFM. At the request of the government, ADB has included a standby policy-based lending option for 2017 to safeguard critical social outlays. ADB will work closely with Australia, the European Union, the International Money Fund, the World Bank, and other donor partners to develop a coordinated response to the macroeconomic crisis and increase the country’s resilience to external shocks.

ADB will increase partnerships with subnational provincial governments to implement infrastructure projects. Provincial governments have emerged as important stakeholders. The Department of Planning and ADB hosted an event on May 18, 2016, in Madang, PNG, to share knowledge concerning infrastructure projects with provincial governors and administrators. The event built upon ADB’s study of partnering with subnational governments, and the outcome of the event provided a way forward for deepening the partnership.

Overall project implementation performance remains satisfactory. In 2015, contract awards amounted to $122 million and disbursements totaled $136 million. Total disbursements in 2015 were 115 percent of projected disbursements. However, maintaining and improving portfolio performance requires continued capacity building of counterpart agencies responsible for project implementation.

Table 1.

Papua New Guinea: Public Sector Loan Approvals and Disbursements, 2011-2016

(US$ millions)

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Source: Asian Development Bank

Statistical Issues

Papua New Guinea — Statistical Issues Appendix

As of September, 2016

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Papua New Guinea: Table of Common Indicators Required for Surveillance

(As of November 2, 2016)

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

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

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

Foreign, domestic bank, and domestic nonbank financing.

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

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Lack of capacity prevented the authorities from providing the data.

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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