Papua New Guinea : Request for Disbursement Under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
26 Jun 2020
eISBN:
9781513548708
Language:
English
Keywords:
ISCR; CR; PNG economy; government; PNG government; financial support; IMF financing support; PNG Treasurer; IMF lending tracker; COVID-19; Global; financing gap; PNG LNG project; return on equity; financing requirement
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea

Context

1. Papua New Guinea (PNG) entered the crisis with an already fragile macroeconomy and limited policy space to react. Growth in the resource sector has been challenged by weak commodity prices, while the non-resource sector remains hobbled by a lack of foreign exchange and an overvalued exchange rate. The authorities’ program of fiscal consolidation stalled in 2019 and the recognition of contingent liabilities increased the public debt ratio well above what had been previously projected.

2. The authorities requested a Staff-Monitored Program (SMP) in February to signal their commitment to addressing PNG’s key macroeconomic challenges (Box 1). While some measures in the SMP have been implemented as planned, some quantitative targets and dates for implementation of some structural reforms will need to be recalibrated at the time of the first SMP review (June 2020). Discussions with the authorities indicate that most structural benchmarks are being met, though some have been delayed by the COVID crisis. The most important outstanding measure is the completion of an audit of government employment and payroll practices. Some quantitative targets are being met, such as those for international reserves, non-concessional borrowing, and BPNG financing of the public sector, but others relating to the fiscal deficit and tax revenues will certainly be missed. To demonstrate their continued commitment to the objectives of the SMP and establish a positive track record on policy implementation, the authorities have completed, as prior actions for the RCF, two important but overdue benchmarks under the SMP (Box 2).

PNG’s SMP (effective Feb. 21)

Fiscal measures

  • To gradually reduce the public debt-to-GDP ratio from over 40 percent to the long-term target of under 30 percent:

    • Contain and reduce spending on personal emoluments;

    • Implement an updated Medium-Term Revenue

  • Gradually clear payments arrears within a transparent and credible verification framework.

Monetary and Foreign Exchange (FX) measures

  • Strengthen liquidity management and monetary

  • Clear a backlog of unfilled FX orders at banks;

  • Gradually restore kina convertibility and flexibility.

Structural and Governance measures

  • Implement a comprehensive program of State-Owned

  • Strengthen anti-corruption and governance reforms.

Prior Actions Under the RCF

As prior actions under the RCF, the authorities undertook to implement important, but overdue, benchmarks under the SMP, and to strengthen transparency and accountability regarding COVID-related government procurement.

The following measures that were benchmarks under the SMP have been implemented as prior actions for the RCF:

  • The Medium-Term Revenue Strategy (MTRS) Steering Committee to set specific objectives and milestones to be achieved in 2020, based on PNG Internal Revenue Commission (IRC) Annual Plan. The Steering Committee has set specific objectives and milestones, documented in an MTRS 2020 Priority Reform Matrix on May 13–14;

  • Treasury to prepare a debt issuance and external debt disbursement plan based on cash forecasts, and regularly share updated projections with BPNG. Treasury has begun sharing with BPNG detailed monthly projections for payments, receipts and cash. Latest update on May 8.

The following prior actions for the RCF have been implemented regarding COVID-related government spending:

  • Details of COVID-related government procurement are being posted within one week of contracting on the government procurement website (http://www.procurement.gov.pg/), under a special tab. As of mid-May, 14 contracts and purchases since mid-March, totaling $20.7 million, were posted. Contract and purchase details being reported include contract issuer, contract amounts, the specific nature of the goods or services procured, their price per unit (where applicable), contract recipients and beneficial owners, and validation of contract delivery;

  • Reports on procurement are now being provided to the Budget Management Committee on a weekly basis, with the first submitted on May 18.

Moreover, the authorities have committed to the following measures:

  • Within three months of the end of the State of Emergency, a consolidated report on procurement will be provided to the National Executive Council;

  • Within one year of the end of the State of Emergency, the government will commission and publish an audit by an independent and reputable auditor.

Impact of the COVID-19 Pandemic and Medium-Term Outlook

A. Impact

3. GDP growth is projected to fall to -1.7 percent in 2020, 3.7 percentage points below projections made before the crisis. The fall in GDP reflects measures taken to prevent importation and spread of COVID-19, and large declines in major export prices.

4. The authorities have taken strong measures to contain the risk of a COVID-19 outbreak. They declared a state of emergency involving strict border controls and travel restrictions, and a partial lock-down (Box 3). This has contained the spread of the virus so far, but has sharply cut economic activity in the non-resource sector. The measures are expected to be eased in the second half of the year, but could further reduce GDP growth if extended.

Text Table 1.

Impact of COVID

(In percent of GDP, unless otherwise indicated)

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Source: IMF Staff calculations.

Healthcare Policy: COVID-19 Measures

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5. The COVID-19 crisis affects PNG’s export earnings sharply, triggering a large balance of payments financing gap (Text Table 2). Weak global demand and lower prices for major resource exports are expected to reduce export earnings and lower the current account surplus from 22 percent of GDP in 2019 to 14.6 percent of GDP in 2020. This is only partially mitigated by lower financial account outflows (including external payments related to resource projects), resulting in a significant external financing gap, before the drawdown of reserves, of US$ 1.0 billion or 4.0 percent of GDP.1

Text Table 2.

Balance of Payments: COVID-19 Impact

(In billions of U.S. dollars)

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Source: Fund staff estimates.Note: For detailed information, please see Annex I.

6. Gross international reserves are projected to decline from $2 billion to $1.7 billion (3.5 months of imports), as the authorities draw down reserves to cushion the impact of reduced foreign exchange inflows on activity in the non-resource sector, and imports of essential medical supplies. This is below the level of 6.9 months cover estimated as appropriate for PNG according to the Fund’s reserve adequacy metric, but above the 3 months cover often used as a benchmark for reserve adequacy. Reserves are expected to increase from 2021, as the terms of trade improve, and non-resource exports recover.

7. Weaker fiscal revenues are expected to lead to a fiscal financing gap of around US$ 700 million (3 percent of GDP). Revenues are projected to fall by K2.2 billion, mainly due to lower profits and dividends from the resource sector, as well as declines in fees and other revenue. The authorities have allocated additional spending needs of K645 million (0.8 percent of GDP) to address direct health expenditure and other social protection needs, including security. They aim to keep overall nominal expenditure fixed at the 2020 Budget level and divert funds from goods and services (K400 million) and capital spending (K245 million) to COVID-19 related needs. As in the SMP, the authorities will continue to try to pay down arrears and pursue additional public investment projects contingent on finding adequate additional external financing for these expenditures.

Text Table 3.

Fiscal Accounts: COVID-19 Impact

(In percent of GDP)

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Source: IMF estimates.

8. The authorities are seeking financing from the RCF due to the urgent balance of payments need. Of the estimated US$1 billion balance of payments financing gap owing to COVID-19, US$700 million would be financed by additional external lending, including US$364 million RCF financing and an estimated US$300 million from multilateral development banks (MDBs) (World Bank and AsDB) and bilateral partners. The remaining gap of around US$300 million would need to be closed by reserve drawdown, import compression, or additional support from external donors, and for which the RCF could act as a catalyst. On the fiscal side, of the additional US$700 million required to fill the COVID-19 fiscal financing gap, US$500 million (1.9 percent of GDP) is expected to come from exceptional financing, including the disbursement under the RCF (US$364 million or 1.6 percent of GDP) and MDBs (US$72 million or 0.3 percent of GDP). The remaining 1.0 percent of GDP is unidentified financing, for which the authorities are seeking support from bilateral partners, including Australia and Japan. The remaining financing gap would need to be filled by additional issuance of domestic debt if other external financing sources cannot be secured. (Table 2b).

Table 1.

Papua New Guinea: Selected Economic and Financial Indicators, 2016–2025

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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, 2016–2025

(In millions of Kina)

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

The 2015 other revenue includes infrastructure tax credit, recoveries from former years (mainly fees and charges) and asset sale.

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.

Discrepancies between the overall balance and financing arise because of data coverage gaps in revenue and expenditure for extrabudgetary units, and payment arrears and cash withdrawals from trust accounts which are not fully accounted for due to data weaknesses.

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

Table 2b.

Papua New Guinea: Summary Operations of the Central Government, 2016–2025

(In percent of GDP)

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

The 2015 other revenue includes infrastructure tax credit, recoveries from former years (mainly fees and charges) and asset sale.

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.

Discrepancies between the overall balance and financing arise because of data coverage gaps in revenue and expenditure extrabudgetary units, and payment arrears and cash withdrawals from trust accounts which are not fully accounted for due to data weaknesses.

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

B. Medium-Term Outlook and Risks

9. The current projections are based on the expectation that the global economy will begin to recover in 2021, and that there is no widespread outbreak of COVID-19. A more prolonged deterioration in world trade and commodity prices will worsen the external sector and delay recovery in fiscal revenues. A severe COVID-19 outbreak in PNG would cut growth and fiscal revenues even further, and increase spending requirements on healthcare. With little fiscal space, the government would need to further cut non-essential spending and rely on additional donor support A sustained downturn in the world economy would also be likely to keep export prices low, putting downward pressure on the currency. The external financing environment could also become more challenging.

Addressing the Impact of the Pandemic

10. The authorities are taking measures to mitigate the economic impact of the crisis, with a package of stimulus measures. The large majority of these measures aim to cushion the economy with monetary, financial and banking policies. Only a small part of the package (K645 million or 0.8 percent of GDP) comprises direct fiscal spending on COVID-19 needs, as the authorities are attempting to maintain the fiscal envelope of spending in the 2020 Budget, given already high debt and the limited spread of COVID-19 to date.

A. Fiscal Policy Measures

  • The distribution of direct spending measures is presented in Text Table 4:

  • Tax administration measures. Companies and individuals will receive temporary tax relief in the first half of the year, with full payment of obligations in the second half, through an extension of the filing due date and a deferral of tax payments. In addition, there is a deferral of the imposition of tax penalties, and Goods Services Tax refunds to medical services, hospitality, tourism, manufacturing, air transport, and agriculture are also being prioritized.

  • Pension measures. The government is amending the Superannuation Act to allow accelerated access to members who have lost their jobs.

Text Table 4.

Papua New Guinea: Distribution of COVID-19-related Spending in 2020

(In millions of kina)

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Sources: Authorities’ data and IMF staff calculations.

B. Monetary, Foreign Exchange, and Prudential Policy Measures

11. The Bank of Papua New Guinea (BPNG) has introduced appropriate measures to support liquidity and credit in the economy:

  • Cutting the BPNG policy rate from 5 percent to 3 percent and instructing banks to pass this on to their key lending rates;

  • Reducing the cash reserve requirement from 10 percent to 7 percent;

  • Suspending provisioning requirements on bank loans covered by a 3-month loan debt service moratorium for borrowers badly affected by COVID-19 effects;

  • Initiating purchases of government securities held by the private sector over the next 3 months.

12. Prudential standards should not be compromised. Asset classification and provisioning standards should be maintained. The BPNG should continue to strengthen its capacity for liquidity, foreign exchange, and market risk supervision, and, given heightened public debt vulnerabilities, an immediate priority should be collecting data on SOE balance sheets.

13. Moving towards restoring currency convertibility and exchange rate flexibility, consistent with the understandings in the SMP, continues to be a priority to address FX shortages and an orderly reduction of the FX backlog. This is particularly important in the non resource sector, to promote agricultural employment, output, and exports. If commodity prices remain low, the shortage of FX could put pressure on the exchange rate and result in financial outflows and a disorderly depreciation of the currency. Staff advise BPNG to facilitate more rapid adjustment in the exchange rate vis-à-vis the US dollar, noting that, in the past year, the kina has appreciated by over 7 percent against the Australian dollar.

C. Transparency and Accountability

14. The government has committed to ensuring high standards of transparency and accountability for spending in relation to COVID-19. As indicated in the Letter of Intent, the authorities have acted to implement specific arrangements to strengthen transparency and accountability before drawing on the RCF (prior actions, Box 2): details of COVID-related government spending are posted on the National Procurement Commission website, and weekly reports are provided to the Budget Management Committee. Moreover, a consolidated report will be provided to the National Executive Council within three months of the end of the State of Emergency and an independent audit completed within a year.

Fund Support and Capacity to Repay

15. The authorities are requesting a disbursement under the RCF equivalent to 100 percent of quota (SDR 263.2 million or about US$364 million) to help address an urgent balance of payments need. The authorities are requesting that this financing be made available in its entirety as budget support2 The urgent balance of payments need triggered by the COVID-19 pandemic is caused primarily by sudden exogenous shocks, not by a withdrawal of financial support by donors, and is expected to resolve within the next 12 months without major policy adjustments, as global growth recovers and resource prices revert to the pre-COVID path. The proposed disbursement of 100 percent of quota is 54 percent of the estimated financing gap after the expected draw-down of reserves.

16. An updated DSA puts PNG at high risk of debt distress, with no access to external market finance3. Consequently, PNG does not qualify as a presumed blender and may access PRGT resources exclusively. The high risk of debt distress results from the adverse impact of the COVID-19 shock on GDP, fiscal deficits, and public debt, leading to higher debt-to-GDP and debt service-to-revenue paths than in the February 2020 Article IV/SMP DSA. However, public debt is still assessed to be sustainable, conditional on the implementation of prudent fiscal policies and commitments in the SMP. The authorities are considering requesting debt relief under the G20 Debt Service Suspension Initiative (DSSI). The impact is expected to be limited, however, as the maximum eligible debt service due in 2020 is US$55.6 million.

17. RCF funds will be disbursed to the central bank and on-lent to the government, and the BPNG commits to a safeguards assessment. In addition to implementing a Memorandum of Understanding covering the on-lending of RCF funds to the Treasury by the BPNG, the authorities commit to undergo a safeguards assessment as soon as feasible, to provide Fund staff with the most recent central bank audit reports, and to authorize the external auditors of the BPNG to hold discussions with staff.4

18. PNG’s capacity to repay the Fund is adequate (Table 8). Based on an RCF disbursement of SDR 263.2 (100 percent of quota), obligations to the Fund would peak in 2026 at 52.7 million SDRs (20 percent of IMF quota). This represents 1.5 percent of government revenue, 0.6 percent of exports of goods and services and 2 percent of gross international reserves. Papua New Guinea’s commitment to fiscal sustainability in the medium term under the SMP and to macroeconomic stability suggest that repayment risks are contained. Over the longer term, Staff consider that PNG’s public debt is sustainable, particularly in view of the likelihood of major resource projects going ahead within the coming decade.

Table 3.

Papua New Guinea: Balance of Payments, 2016–2025

(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.

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

Includes money transfer via offshore accounts.

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