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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
20 Sep 2022
eISBN:
9798400221262
ISBN:
9798400221262
Language:
English
Keywords:
government support; IMF safeguards assessment; Policy formulation; Papua New Guinea authorities; IMF arrangement; Exchange rate flexibility; Monetary policy frameworks; Commodity prices
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IMF Country Report No. 22/305

Abstract

IMF Country Report No. 22/305

Copyright Page

IMF Country Report No. 22/305

PAPUA NEW GUINEA

2022 ARTICLE IV AND REVIEW OF THE STAFF MONITORED PROGRAM—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR PAPUA NEW GUINEA

September 2022

In the context of the 2022 Article IV and Staff Monitored Program, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its June 13, 2022 consideration of the staff report on issues related to the Article IV Consultation and the IMF arrangement.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 13, 2022, following discussions that ended on April 26, 2022, with the officials of Papua New Guinea on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 25, 2022.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.

  • A Statement by the Executive Director for Papua New Guinea.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2022 International Monetary Fund

Press Release

PR22/258

IMF Executive Board Concludes 2022 Article IV Consultation and Review of the Staff Monitored Program with Papua New Guinea

FOR IMMEDIATE RELEASE

Washington, DC – July 14, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Papua New Guinea.

On June 13, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Papua New Guinea, and the IMF Managing Director approved the completion of the Review of the Staff-Monitored Program with Papua New Guinea.

Papua New Guinea (PNG)’s economy is weathering the pandemic well, despite many challenges. After a decline in 2020, real GDP growth in 2021 was driven by the agricultural sector, buoyed by higher commodity prices and Government support. Output in the extractive sector in 2021 declined due to the closures of Ok-Tedi copper mine and Simberi and Porgera gold mines. Inflation in 2021 was at 5.7 percent, owing to freight charges and higher prices of imported goods and fuel, and domestic supply chain disruptions. The kina is still overvalued in real terms, and a shortage of foreign exchange (FX) in the non-resource sector persists. The 2021 fiscal deficit was lower than the budget projection, driven by higher tax revenues and foreign grants while tight control of expenditure was maintained.

Growth is projected to strengthen in 2022, before slowing to 3.0 percent over the medium term. Recovery is expected in the resource sector with Ok-Tedi and Simberi mines returning to normal operations in 2022, thanks to improved COVID preparedness. The reopening of the Porgera gold mine is assumed in late 2022, which will increase growth in 2023. The gradual easing of containment measures and higher capital spending by the government should support recovery in the non-resource sector. The war in Ukraine is impacting PNG through higher commodity prices and higher inflation, with the former leading to a stronger balance of payments and fiscal revenues, given that PNG is a large commodity producer.

Executive Board Assessment2

Executive Directors stressed that Papua New Guinea (PNG)’s economy has weathered the pandemic well despite many challenges, and that the medium-term outlook is positive, supported by the resource sector. Directors commended the authorities on their broadly satisfactory performance under the Staff Monitored Program (SMP). They agreed that the main policy priorities are to implement fiscal consolidation and strengthen the monetary policy framework and governance, as well as to promote climate resilience, gender equality, and inclusive growth. Directors welcomed the planned opening of the Fund’s resident representative office in PNG to support this policy agenda. They noted that it will also be important to accelerate the COVID-19 vaccination campaign.

Directors encouraged continued fiscal consolidation to meet the requirements of the Fiscal Responsibility Act, strengthen debt sustainability, and rebuild buffers against future shocks. They stressed the importance of raising resource sector revenues and encouraged the adoption of a moderate ad valorem levy on future resource projects. Directors called for additional revenue mobilization and improvements in the payroll system to contain expenditures and increase space for needed social and development spending over the medium term. They urged the authorities to conduct and publish audits of COVID-19 related procurement contracts.

Directors underscored the importance of tightening monetary policy to avoid second-round effects if recent inflationary pressures from higher food and energy prices persist. They emphasized that a comprehensive approach to reinstating kina convertibility is needed, including a review of the monetary policy framework, improving liquidity management, and developing a plan to gradually allow greater exchange rate flexibility and remove exchange restrictions. Directors urged the authorities to address with support from Fund technical assistance the remaining weaknesses in the Central Banking Act related to mandate, governance, autonomy, transparency, and accountability. Directors also encouraged further measures to increase financial inclusion and financial sector development.

Directors welcomed the efforts to strengthen governance, including operationalization of the Independent Commission Against Corruption, and improvements in the AML/CFT framework and regulations. They underscored the importance of a sustained, multi-year 2 program to further improve governance, with close external support, including from the Fund.

Directors remarked that PNG is highly vulnerable to climate change and stressed that policies should focus on developing and financing climate adaptation projects, as well as reducing the rate of deforestation and reaching PNG’s nationally determined contributions.

Table 1.

Papua New Guinea: Selected Economic Indicators, 2017–2027

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.

Title page

PAPUA NEW GUINEA

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION AND REVIEW OF THE STAFF MONITORED PROGRAM

May 25, 2022

EXECUTIVE SUMMARY

Context. Papua New Guinea (PNG)’s economy is weathering the pandemic well, despite many challenges. Real GDP in 2022 is projected to exceed its 2019 level, and the medium-term outlook is positive, supported by investment in (and revenues from) the resource sector. The war in Ukraine is impacting PNG through higher commodity prices and higher inflation, with the former leading to a stronger balance of payments and higher fiscal revenues, since PNG is a large commodity producer. Risks remain skewed to the downside and include a worsening health situation given the low vaccination rate, volatility in commodity prices, and political instability.

Staff Monitored Program (SMP) performance. The performance of the SMP was broadly satisfactory. All quantitative targets were met and all structural benchmarks were also fully met on time, apart from the benchmark related to the Central Banking Act (CBA). Amendments to the CBA were passed, which addressed some weaknesses identified in the IMF safeguards assessment. However, the amendments have weakened the CBA in other areas. The authorities agreed to revisit areas of key concerns as part of the Phase 2 of CBA reform, with the help of Fund technical assistance.

Policy Priorities. Near- and medium-term policies need to focus on: addressing debt vulnerabilities, easing FX shortages, strengthening the CBA, improving governance, and promoting climate-resilient and inclusive growth.

  • Fiscal policy. PNG needs to increase revenues from the resource sector, while improving the payroll system to contain expenditures. Other priorities include completing revisions to the Income Tax Act, improving the tax administration system, and updating their medium-term revenue strategy, with Cabinet oversight.

  • Central banking policies. A comprehensive approach to reinstating kina convertibility is needed, which includes a review of the monetary policy framework, improving liquidity management and forecasting, and a gradual increase in exchange rate flexibility and removal of exchange restrictions. Further amendments to the CBA are needed to sufficiently protect the BPNG’s financial, personal, and institutional autonomy.

  • Reforms to raise medium-term growth. Continue structural reforms to boost non-resource sector growth, including SOE reforms, tax code modernization and anti-corruption measures. Ensure the Independent Commission Against Corruption can fulfill its mandate by developing implementing regulations and recruiting staff. Large climate adaptation needs will need to be financed mainly from external concessional sources while efforts to reorient expenditure away from current spending should be intensified, given the limited fiscal space.

  • Data issues. PNG needs to further improve data quality and availability. While information sharing has substantially improved compared to the 2020-21 SMP, addressing reporting lags and challenges in data compilation remains a priority.

Approved By

Sanjaya Panth (APD) and Andrea Schaechter (SPR)

Remote discussions took place between an IMF staff team—led by Tahsin Saadi Sedik and comprising Natalija Novta, Narayanan Raman (both APD), Daniel Wales (SPR) and Devendra Narain (Pacific Islands Resident Representative Office)—and the Papua New Guinea authorities between April 4-26, 2022. Laura Johnson and Rhoda Karl (OED) also participated in the meetings. Enakshi Das and Nadine Dubost assisted in the preparation of this report.

Contents

  • CONTEXT

  • RECENT ECONOMIC DEVELOPMENTS

  • PROGRAM PERFORMANCE AND FUND ENGAGEMENT

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Fiscal Policies: Strengthening Debt Sustainability

  • B. Monetary, Exchange Rate and Financial Sector Policies

  • C. Strengthening the Central Banking Act

  • D. Addressing Governance Challenges

  • E. Climate and Biodiversity: Challenges and Opportunities

  • F. Improving Data Availability for Program Monitoring and Policy Formulation

  • STAFF APPRAISAL

  • BOX

  • 1. Key Objectives and Measures of the 2022 SMP

  • FIGURES

  • 1. Real and External Sector Developments

  • 2. Fiscal Developments

  • 3. Monetary and Financial Sector Developments

  • TABLES

  • 1. Selected Economic Indicators, 2017–2027

  • 2a. Summary Operations of the Central Government, 2017-2027 (In millions of kina)

  • 2b. Summary Operations of the Central Government, 2017-2027 (In percent of GDP)

  • 3. Balance of Payments, 2017–2027

  • 4. Monetary Developments, 2017–2027

  • 5. Financial Stability Indicators, 2017–2022

  • ANNEXES

  • I. Staff Monitored Program Targets

  • II. Risk Assessment Matrix

  • III. External Sector Assessment

  • IV. Removing Impediments to Growth

  • V. Monetary Policy Framework

  • VI. Climate Change Vulnerabilities, Adaptation Needs and Access to Climate Finance

  • VII. FX Shortages

  • VIII. Authorities’ Responses to Fund Advice in the 2019 Article IV Consultation

  • APPENDIX

  • I. Letter of Intent

    • Attachment I. Technical Memorandum of Understandiing

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Papua New Guinea: 2022 Article IV and the Staff Monitored Program-Press Release; Staff Report; and Statement by the Executive Director for Papua New Guinea
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2022: Issue 305
Publisher:
International Monetary Fund
ISBN:
9798400221262
ISSN:
1934-7685
Pages:
112
DOI:
https://doi.org/10.5089/9798400221262.002