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
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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; vaccination effort; near-term expenditure management; return on equity; cash flow; Pacific Islands; Global
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1. Papua New Guinea (PNG) is a fragile, climate-vulnerable country, seeking to foster inclusive growth while grappling with high debt. PNG is home to the third largest rainforest in the world, rich in biodiversity and natural resources. More than two thirds of its exports are petroleum gases (primarily liquified natural gas, LNG), gold, and copper. From 2014 to 2020, low commodity prices, a severe drought in 2015-16, and a major earthquake in 2018 softened growth, led to shortages of foreign exchange, and contributed to a pre-pandemic build-up of public debt, which is now at high risk of distress. The pandemic, coupled with vaccine hesitancy and poor public health resources, has further strained public finances.

Abstract

1. Papua New Guinea (PNG) is a fragile, climate-vulnerable country, seeking to foster inclusive growth while grappling with high debt. PNG is home to the third largest rainforest in the world, rich in biodiversity and natural resources. More than two thirds of its exports are petroleum gases (primarily liquified natural gas, LNG), gold, and copper. From 2014 to 2020, low commodity prices, a severe drought in 2015-16, and a major earthquake in 2018 softened growth, led to shortages of foreign exchange, and contributed to a pre-pandemic build-up of public debt, which is now at high risk of distress. The pandemic, coupled with vaccine hesitancy and poor public health resources, has further strained public finances.

Context

1. Papua New Guinea (PNG) is a fragile, climate-vulnerable country, seeking to foster inclusive growth while grappling with high debt. PNG is home to the third largest rainforest in the world, rich in biodiversity and natural resources. More than two thirds of its exports are petroleum gases (primarily liquified natural gas, LNG), gold, and copper. From 2014 to 2020, low commodity prices, a severe drought in 2015-16, and a major earthquake in 2018 softened growth, led to shortages of foreign exchange, and contributed to a pre-pandemic build-up of public debt, which is now at high risk of distress. The pandemic, coupled with vaccine hesitancy and poor public health resources, has further strained public finances.

2. Poverty and gender inequality are high, health conditions are weak, and education levels are very low. Most of the population lives in rural areas, without access to electricity and infrastructure. Development needs and governance challenges remain significant. Women have substantially less access to health care and education, and minimal representation in government.

uA001fig01
Sources: World Bank, UNDP Human Development Report, 2020; and IMF staff calculations.Note: Poverty is the headcount ratio at US$1.90 a day (2011 PPP, percent of population). Poverty for PNG is for 2009 (latest available), for other Pacific Island Countries (PICs) average of 2008-10 is used. Education variables show percent of population over 25 with at least some secondary education. Gender Inequality Index ranges from 0 to 1, with higher value indicating higher inequality, and is based on three groups of variables: reproductive health, female political representation, and gender gaps in the labor market.

3. General elections are scheduled to take place in July 2022. With a caretaker government in place during the campaigning period, no policy initiatives are expected until a new government is sworn in. The post-election period offers a window for reforms, as the continuity of the Prime Minister is assured for the first 18 months following a general election.

Recent Economic Developments

4. Swift measures prevented a large COVID-19 outbreak in 2020, but mobility quickly returned to pre-pandemic levels, contributing to waves of COVID-19 in 2021 and 2022. In March 2020, the authorities introduced nationwide isolation, restrictions on domestic and international travel, and school closures, which have since been removed. Cumulative cases and deaths have been relatively low, but many likely go unrecorded. Less than 3 percent of the population is fully vaccinated. Widespread beliefs that vaccines are unsafe are thwarting the authorities’ vaccination efforts.

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Sources: PNG National Department of Health; Google COVID-19 Mobility data; and IMF staff estimates.

5. Despite many challenges, PNG’s economy has weathered the pandemic better than its regional peers. Growth in 2021, at 1.2 percent, was driven by the agricultural sector (palm oil, cocoa), buoyed by higher commodity prices and government support. Output in the extractive sector in 2021 was dampened by the continued closure of the Porgera gold mine. Inflation was at 5.7 percent in 2021, reflecting higher prices and freight charges for imported goods and fuel, and domestic supply chain disruptions.

uA001fig03

GDP Projections, Pre- and Post-COVID-19

(Index)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: IMF staff calculations. PICs shows an average for Pacific Island Countries, excluding Papua New Guinea.

6. PNG’s external position in 2021 was broadly in line with the level implied by fundamentals and desirable policy settings. This assessment is preliminary given most 2021 data are still estimates, but initial results suggest a 2021 current account gap of –0.9 percent of GDP, and the kina as overvalued by about 2.4 percent in real terms (Annex III). The external position has profited from high commodity prices and strong global demand for PNG’s export goods.1 FX market pressures have eased, though FX shortages persist. Gross international reserves comfortably exceeded the program target of US$2 billion, consistent with IMF staff’s assessment for reserves adequacy.

uA001fig04
Sources: IFS; and IMF staff estimates and calculations.

7. The 2021 fiscal deficit was lower than the budget projection. Revenues exceeded budget projections, driven by significantly higher non-tax revenues, especially foreign grants and dividends from the resource sector, late in the year. On the expenditure side, the budget outcome shows slightly higher retirement-related costs, remuneration for new teachers, defense and police personnel, offset by lower capital spending. As a result, the deficit stood at 6.6 percent of GDP, well below the program target of 7.4 percent. The deficit was financed through external concessional sources, though domestic borrowing, particularly through the issuance of Treasury bills, was significant. PNG was impacted by a ransomware attack on the Integrated Financial Management System (IFMS) in October 2021, which temporarily impacted budget execution and preparation of the 2022 budget. The 2021 increase in the general allocation of SDRs was used for budget financing, replacing costly financing and allowing the authorities to execute the budget as planned. This is appropriate given the need to balance the urgent demands of the pandemic and the need to strengthen debt sustainability. Staff is working with the Treasury and BPNG to record this transparently and consistently.

8. PNG’s public and publicly guaranteed debt remains at high risk of debt distress. After rapid increases in recent years, public debt ratios remain elevated while the bullet payment on PNGs existing Eurobond represents a liquidity risk. The Debt Sustainability Analysis (DSA) also suggests that PNG is susceptible to exports and other shocks, signaling downside risks to the debt outlook in a global environment of high uncertainty.

9. Banks remain profitable and well capitalized, with ample liquidity, but non-performing loans (NPLs) have risen. At end-March 2022, the reported capital adequacy ratio stood at 36.3 percent, mostly composed of Tier 1 capital, and NPLs at 6 percent. In July 2021, the AML/CFT regulator, the Financial Analysis Supervision Unit, initiated regulatory actions against the Bank South Pacific (BSP), the largest commercial bank in PNG, citing several breaches of regulations. The actions aimed at strengthening AML/CFT compliance and reducing risks of disrupting correspondent banking relationships.

10. The Central Banking Act (CBA) was amended in December 2021, raising new concerns. The new CBA addressed some weaknesses identified in the IMF safeguards assessment. These include prohibiting carryover of central bank advances across fiscal years, and introducing eligibility criteria for all Board appointments, replacing the previous system of appointing ex-officio members. However, the 2021 amendments have weakened the CBA in other areas. The key concern is the introduction of a requirement for BPNG to provide advances to the government on demand. The amendments also: (i) introduced growth and employment in the non-resource sector as new (unranked) mandates, which could come into conflict with the price stability mandate; and (ii) transferred monetary policy decision-making to the BPNG Board, which creates a conflict with the Board’s oversight role.

Authorities’ Views

11. The authorities broadly agreed on recent developments and highlighted their strong economic performance relative to peers. They noted supportive fiscal measures and prudent economic policies, both at the onset of the COVID-19 pandemic and in response to the war in Ukraine, to protect the vulnerable population and maintain activity in the non-resource sector. The authorities were more optimistic about their debt-carrying capacity and perceived a lower risk of debt distress, pointing to increased revenues by 2027 as debt payments for the PNG LNG project are completed.

Program Performance and Fund Engagement

12. PNG has engaged extensively with the Fund in recent years, including in the contexts of a Rapid Credit Facility and two Staff Monitored Programs (SMPs). The pre-pandemic SMP expired in June 2021. Despite eventual expiry, the 2020-21 SMP provided an important anchor for the authorities to advance their reform agenda. The burden of the pandemic, coupled with capacity constraints, the challenges of mounting virtual missions, and a lack of experience with Fund programs caused delays in sharing information needed for a timely completion of program reviews.2

13. To address the pandemic, SDR263.2 million (US$363.6 million, 100 percent of quota) was disbursed in June 2020 under the Rapid Credit Facility (RCF). The 2021 increase in the general allocation of SDRs was used to replace costly financing within the existing budget deficit, which is appropriate given the ongoing demands of the pandemic. Staff is working with the authorities to ensure this is done transparently and consistently and in accordance with the authorities’ legal and institutional frameworks. The authorities are also receiving Fund technical assistance (TA) in national accounts, public debt, government finance and external sector statistics, revenue administration, banking supervision and regulation, and macroeconomic forecasts.

14. The current 6-month SMP—built on the priorities identified in the 2020-21 SMP (Box 1)—was streamlined, with one prior action, 6 quantitative targets (QTs), and 4 structural benchmarks (SBs) (Annex I). The 2021 SMP was approved in December 2021. Data for the single test date at end-December 2021 show the authorities have met all QTs. In particular, the 2021 fiscal deficit was lower than the program target, reserves comfortably exceeded the program floor, and FX provision to the market was in line with the program target. The December 2021 indicative targets (ITs) were also met. Regarding SBs, the authorities met the comprehensive payroll review (SB #2) and strengthening of the public debt committee (SB #4). In addition, the authorities published audited financial statements for major non-petroleum SOEs and passed the consequential amendments to the Tax Administration Act (SB #3), alongside the 2022 Budget, before program approval, further strengthening public sector governance and revenue administration respectively. Preliminary data suggest that the ITs for March 2022 were met, with the exception of the target on social and other priority spending, which was missed as capital projects in the affected sectors had not yet started.

Key Objectives and Measures of the 2022 SMP

Fiscal

To gradually strengthen medium-term debt sustainability:

  • Lower the fiscal deficit in 2022 to 6.0 percent of GDP, with ½ percent of GDP in policy measures,

  • Contain spending on compensation of employees, and

  • Strengthen tax administration and collection.

Monetary and FX

To prepare for a gradual return to kina convertibility:

  • Strengthen liquidity management, and

  • Reduce delay in fulfilling FX orders.

Structural and Governance

  • Address weaknesses in the governance, autonomy, and internal controls of the BPNG.

15. While amendments to the CBA have been passed (SB #5), a number of key recommendations from staff have not yet been incorporated (see para 10). The window for corrective actions during the SMP has closed due to the electoral calendar, but the authorities intend to revisit in the context of Phase 2 some areas covered under Phase 1 of the CBA review, including the mandate, advances to the government, and the role of the Board. They have requested Fund technical assistance (TA) in this respect (Letter of Intent). Staff noted that further amendments should be done in consultation with Fund staff.

16. The Safeguards Assessment of the BPNG, completed in August 2021, found that amendments to the CBA were necessary to safeguard the financial, personal, and institutional autonomy of the BPNG and enhance its governance arrangements. Other weaknesses were identified in the internal audit mechanism, the external audit findings and arrangements, and internal controls, particularly with regards to Board vacancies, the investment policy, and the emergency lending framework of the BPNG. The BPNG is addressing recommendations on internal audit practices and the financial reporting mechanism. Overall, however, progress in implementing recommendations has been slow, in part due to management changes introduced with the CBA amendments.

Authorities’ Views

17. The authorities welcomed the continued engagement with the IMF that started with the Due Diligence Exercise and Staff Monitored Program in 2019. The authorities support the planned placement of an IMF Resident Representative in Port Moresby to strengthen engagement, and further discussions in person as COVID restrictions are reduced. The authorities look forward to further cooperation on the central bank reforms and request Technical Assistance from the IMF to support the Government’s Independent Advisory Group process and the reforms which aimed to modernize and strengthen BPNG. This should help improve external understanding of the reform process and support tailoring international best practice to PNG’s circumstances.

Outlook and Risks

18. Growth is projected to strengthen to 4.2 percent in 2022 and 4.7 percent in 2023 driven by the resource sector, before slowing to 3.0 percent over the medium term (Table 1). Real GDP in 2022 is projected to exceed its 2019 level, barring large new negative shocks.

  • 2022: With improved COVID preparedness, Ok-Tedi and Simberi mines are expected to return to normal operations in 2022. The reopening of the Porgera gold mine is now assumed in Q4 2022. If opening is postponed to 2023, then 2022 growth would be slightly lower and 2023 growth slightly higher. 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.

  • Over the medium term, a gradual recovery in the non-resource sector is expected to drive growth. Public debt as a percentage of GDP is projected to decline due to the fiscal consolidation envisaged, which will require steadfast reform implementation. The medium-term outlook will depend on: (a) the health burden of the pandemic in PNG, which is expected to ease somewhat, (b) commodity prices and external demand, which are expected to remain strong, and (c) structural reforms to boost non-resource sector growth, including SOE reforms, anti-corruption measures and tax code modernization, which are expected in the baseline.

19. Risks are tilted to the downside (Annex II).

  • Downside risks include a worsening health situation domestically; weaker external demand for PNG’s exports; large volatility in commodity prices, or higher inflation, potentially related to the war in Ukraine or slowdown in China; domestic political instability, and difficulty forming a government that could delay reform implementation; or climate-related natural disasters.

  • Upside risks include higher-than-expected commodity prices, or start of any of several major projects, including Papua LNG, P’nyang LNG or the Wafi Golpu mining, and a series of other smaller projects, which are not yet in the baseline scenario. Revenues may increase significantly if amortization of the PNG LNG Project loans ends, and depreciation expenses fall, earlier than the baseline.

Authorities’ Views

20. The authorities broadly agreed with the outlook and risks. They pointed to the upside risks, with the expected start of major resource projects and significant improvement in fiscal balances in the outer years. Even though the likelihood of the start of major resource projects is high, they agreed to include them in the baseline only when investment decisions are reached.

Policy Discussions

The Article IV and SMP review discussions centered on: near- and medium-term policies to reduce debt vulnerabilities; monetary and exchange rate policies to facilitate a gradual return to kina convertibility; further amendments needed to sufficiently protect the BPNG’s financial, personal, and institutional autonomy; and policies needed to improve governance, promote climate-resilient and inclusive growth.

A. Fiscal Policies: Strengthening Debt Sustainability

21. Rapid progress on fiscal consolidation, as envisaged by the authorities, is appropriate to strengthen debt sustainability. Lowering the deficit as planned by about 51/2 percent of GDP by 2027 is needed to meet the requirements of the Fiscal Responsibility Act, which specifies that government debt should be maintained at no more than 40 percent of GDP over the long term. Further, achieving a balanced budget by 2027 would lower the risks from significant debt service obligations on external borrowing coming due in 2028. PNG is also vulnerable to climate shocks and natural disasters, which will require the rebuilding of buffers to address these shocks as they manifest.

22. The priority for PNG is to increase revenues from the resource sector to strengthen debt sustainability. Compared to other commodity exporters, the share of government revenue coming from the resource sector is very low in PNG relative to the share of resource sector in GDP (see text figure). Since 2012, average resource sector revenue has fallen, even as the resource sector’s share of GDP more than doubled, to a third of GDP. The authorities project a sharp increase in tax revenues from the PNG LNG project from 2026 onward, after tax exemptions expire. Further, the authorities see scope for significantly higher dividends after loan amortization for the project is completed but this is not included in the baseline. Staff advised the introduction of an additional moderate ad valorem levy on future resource projects that would be paid directly to the central government, in line with IMF TA recommendations.

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Sources: Middle East and Centra Asia Regional Economic Outlook (April, 2022); and IMF staff calculations.Note: PNG’s resource sector revenue and share of GDP (shown in red) is compared to oil and gas revenue and oil and gas GDP of other countries.

23. While near-term tax revenues are expected to improve with the recovery, the authorities are pursuing reforms to improve revenue collection over the medium term. Tax revenues have declined by about 5 percent of GDP since 2012, driven by personal income tax and company tax. GST revenue collection improved in 2021. Further improvement is possible, as PNG collects only a quarter of its potential GST (right text chart), partly because of a large informal economy and low capacity. Over the medium term, the new Income Tax Act (ITA), is expected to improve compliance by simplifying the tax code, though the authorities have not yet prepared estimates on the potential yields from these reforms. In March 2022, the authorities introduced a new flat tax on the banking and telecommunication sectors, targeting companies with market concentration over 40 percent, which was estimated to yield additional revenues of 0.3 percent of GDP in 2022. In March, the annual levy on the telecommunications sector was replaced by a one-off charge of K350 million (0.3 percent of GDP), raising the yield for 2022 to 0.5 percent of GDP but lowering the medium-term gains to less than 0.2 percent annually. The Internal Revenue Commission (IRC) plans to introduce a new Integrated Tax Administration System, to allow online filing of returns and payments, better taxpayer services, and improved case management. Staff stressed the need to strengthen revenue mobilization while improving the investment climate. A new Medium-term Revenue Strategy (MTRS) to improve revenue administration, with Cabinet oversight to strengthen implementation, would support reforms. The authorities have asked for TA to assist in their review of their MTRS.

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Sources: IMF (forthcoming) Domestic Resource Mobilization in the Pacific Island Countries; and IMF staff calculations.1 VAT C-efficiency is defined as the ratio of actual VAT revenues to the product of the standard rate and final consumption. It conveys the percentage of potential VAT (GST) a country can collect. PIC = Pacific Island Countries.

24. The authorities’ near-term expenditure management is focused on strengthening payroll systems. Reducing current spending, particularly on compensation of employees, would support the fiscal consolidation efforts and enable the authorities to increase capital spending. In 2022, the authorities undertook a Staffing and Establishment Survey (SB#2) to determine current staffing levels, and eventually integrate the payroll management system into the IFMS, the public expenditure management system. While containing overall expenditures, the authorities are committed to increasing healthcare spending and maintaining social spending in real terms to meet the pressing needs of the pandemic and post-pandemic period. Staff emphasized efforts to contain current expenditure, particularly remuneration of public employees, to free up room for needed social and development spending. Staff discussed follow up actions to contain personnel expenses, building on the completion of SB #2 to move away from the imposition of caps on overall wage bills, which are not sustainable. Staff advised that the Survey also allow and budget for the clearance of arrears to the staff retirement fund. As the authorities rebalance fiscal expenditure to prioritize development spending, management of capital expenditure will be critical, and staff recommended strengthening PFM, including through TA from the IMF. A Public Investment Management Assessment could identify reforms needed to strengthen public investment management going forward.

25. To mitigate the effects of high prices due to the war in Ukraine, the authorities introduced a package of temporary measures in March 2022. The package consists of a removal of the fuel excise and GST on fuel products for six months; raising the income tax threshold from K12,500 to K17,500 from 1 June 2022 to the end of the year; paying for school project fees; and purchasing selected staple food items for sale to the public at fixed prices. The combination of temporary tax and spending measures are expected to cost K611 million (0.6 percent of GDP), to be financed through higher resource revenues due to higher commodity prices, thereby keeping the nominal fiscal deficit and the medium-term fiscal consolidation path unchanged. Given PNG’s weak social safety nets, more efficient mechanisms such as targeted transfers were judged to be not feasible. Efforts to develop a formal social safety net would be needed to enhance support’s targeting and spending efficiency. Further government measures to reduce poverty and support inclusive growth focus on infrastructure investments through the Connect PNG Program, funding to reduce gender-based violence, and greater expenditures on health and education (Annex IV).

Authorities’ Views

26. The authorities stressed their commitment to continue budget repair to strengthen long-term debt sustainability. In the near term, they expect to see improved revenues from the newly-introduced concentration levy, which they saw as necessary given the lack of competition and elevated profits in the banking and telecommunications sectors, noting that the levies would still allow the affected companies to be highly profitable. Over the medium term, the implementation of the Tax Administration Act and passage of the revised ITA are expected to strengthen revenue collection while streamlining tax compliance, which should improve the business climate. On improving resource revenues, the authorities agreed that improving on past performance would be critical and were confident that their strategy based on equity participation in new projects would yield significant benefits in the medium term due to the positive prospects for energy prices. On controlling expenditure, the completion of the Staffing and Establishment Review is expected to feed into the setting of the personnel emoluments budget for 2023. In addition, the government is trialing a pilot project to link payrolls to the issuance of warrants, thereby bringing these payments into the IFMS and under Parliamentary Appropriation limits.

B. Monetary, Exchange Rate and Financial Sector Policies

27. PNG’s de jure exchange rate regime is floating, but de facto the kina is classified as stabilized, which has impeded exchange rate adjustment and contributed to the FX shortage. Staff assesses the kina to be overvalued. BPNG imposed a trading margin on FX buy-sell spreads of authorized dealers since 2014, which impedes the exchange rate from adjusting to a market-clearing level to eliminate the overvaluation and, coupled with an insufficient supply into the market, has resulted in FX rationing. Despite the FX shortage, no evidence of a parallel FX market has emerged because small FX orders, which affect the bulk of customers, are fulfilled first. Larger FX orders, often to pay dividends abroad, typically experience delays. Anecdotal evidence suggests there is large pent-up demand for FX and that firms are using bilateral off-market deals to secure FX.

28. Thanks to favorable commodity prices in 2021, sustained donor inflows, the SDR allocation, and BPNG provision of FX to the market, FX orders were fulfilled more promptly in 2021 and early 2022 than in 2020. Despite the increase in commodity prices and the fact that the exchange rate has been stable against the US dollar, there has been no commensurate increase in reserves, and while the FX shortages have diminished, they persist. The underlying reasons are the kina overvaluation (expected depreciation of the exchange rate in future) and FX rationing (firms are not able to access FX when they need it), which have created incentives for firms to keep their FX offshore (Annex VII). Exit from the current system should be carefully planned, given the pent-up demand for FX and risks of the exchange rate overshooting.

29. A comprehensive approach is needed to reinstate kina convertibility. As a precondition, the BPNG needs effective tools to manage current excess kina liquidity. The authorities committed to strengthening their existing Public Debt Committee (SB #4) to improve liquidity management and forecasting. Staff noted that an eventual move to kina convertibility calls for a review of the monetary policy framework, greater exchange rate flexibility and removal of exchange restrictions. Further TA from the Fund on these issues is recommended (Annex V and VII).

30. If inflationary pressures persist, the BPNG should tighten monetary policy to maintain inflation under control. Following the pandemic, BPNG reduced its policy rate, the Kina Facility Rate, and has kept it at 3 percent since 2020. BPNG plans to keep an accommodative monetary policy stance for the time being, citing weak recovery. However, if inflation pressures persist despite recent fiscal measures in response to the fallout of the war in Ukraine, a tighter monetary policy may be needed sooner to avoid the second-round effects, and should be data dependent. BPNG will likely keep the exchange rate stable against the US dollar to avoid further inflationary pressures, impeding the needed exchange rate adjustment to eliminate the kina overvaluation and ease FX shortages. Monetary policy tightening by the US Federal Reserve is further complicating policy trade-offs, given the stabilized exchange rate.

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Sources: Datastream; BPNG; and IMF staff calculations.

31. PNG’s financial sector is underdeveloped. There are four commercial banks, two domestic and two foreign, generally serving separate markets. Phase 2 of the CBA review is expected to look at the competition in the banking sector. Credit to GDP is just under 20 percent, with preliminary plans to increase access to credit for agricultural or informal enterprises articulated in PNG’s Financial Sector Development Strategy 2016-2020. Superannuation funds, life insurance companies and the stock exchange are developing. Financial sector inclusion is constrained by low urbanization, a large informal economy, and low financial literacy. Financial sector COVID measures such as loan payment deferrals were temporary, approved on a case-by-case basis, and have all since expired, without negative implications for banking system’s asset quality. Staff recommended a Financial Sector Stability Review.

Authorities’ Views

32. The Treasury agreed with the need to gradually restore exchange rate convertibility, while BPNG argued that the exchange rate is market-determined and saw no need for change. The Treasury emphasized that the FX shortages and overvalued fixed exchange rate are hurting growth and employment in the non-mineral sector. They argued that BPNG incentives need to change to move away from the sole focus on inflation, and a more balanced approach is needed. BPNG views the current exchange rate regime as both de jure and de facto floating, and sees no FX rationing.

C. Strengthening the Central Banking Act

33. Further amendments are needed to strengthen the CBA. Phase 2 of the CBA reform is expected to revisit some areas covered under Phase 1, including clarifying the mandate of the central bank; strengthening the institutional, operational, personal, and financial autonomy of the BPNG; and clarifying the role of the Board in monetary policy formulation to avoid complicating the accountability framework of the BPNG. Staff stressed that progress toward a satisfactory CBA, to be drafted in consultation with Fund staff, will be an essential element for an eventual upper credit tranche (UCT) program, and recommended subsequent amendments to address remaining weaknesses identified by the safeguards assessment and those introduced by the new amendments (see paragraph 10). Staff recommended that further amendments be made after carefully considering all aspects of the legal framework (legal structure and mandate, governance, financial/personal/institutional autonomy, transparency, and accountability).

34. Staff noted that the overvalued kina and FX shortages have hurt the non-resource sector growth but advised that adding an unranked growth and employment mandate for the BPNG is not the appropriate solution to address FX shortages. Instead, staff recommended moving closer to the equilibrium exchange rate and improving FX market operations to carefully address pent-up demand for FX. Staff also advised the authorities to be deliberate in the next steps in the process as rapid and frequent changes of the BPNG’s legal framework will likely lead to sub-optimal outcomes and weaken the credibility of the central bank.

35. The authorities have used the Temporary Advance Facility (TAF) prudently so far. Use of TAF was repaid at the end of 2021 following the drawdown of external financing. In early 2022, there was minimal use of the TAF, with the cash flow funded from oversubscriptions in the auction of Treasury Bills and carry-over of funds from previous year’s external financing. The authorities have separated the Waigani Public Account (the Treasury Single Account) from the TAF account, to ease monitoring, reporting and audit. So far in 2022, there have not been any central bank purchases of government securities to help finance the budget (the slack arrangement).

Authorities’ Views

36. The Treasury highlighted many improvements introduced with the 2021 amendments to the CBA. This particularly includes the strengthened BPNG Board and removal of ex-officio positions from the board. They also pointed to the move to a more collegiate decision-making on monetary policy, which is expected to be strengthened further with a move to a Monetary Policy Committee now moved to Phase 2 to allow greater input from partners. The authorities now view the BPNG Board as more empowered, more qualified, and better aligned with its increased responsibilities. The authorities emphasized their prudent use of the TAF to manage cash flow within the fiscal year, and the new limit on purchase of government securities to prevent monetary financing. The Treasury believes that the new growth and employment objectives will reduce the BPNG’s incentive to maintain a stabilized exchange rate. BPNG expressed concerns about the introduction of new, unranked, objectives, and highlighted the challenge for monetary policy to pursue these multiple objectives.

D. Addressing Governance Challenges

37. The authorities are making a concerted effort to strengthen governance. The 2020 ICAC law bestows a new body with the power to investigate and pursue complex corruption cases. The law is facing a constitutional challenge, but the interim ICAC office is preparing for full operationalization by developing implementing regulations and recruiting staff. In the context of these efforts, the Corruption Perception Index compiled by Transparency International shows an improvement in 2021. However, significant governance challenges remain, reflected in PNG’s negative scores in almost all components of Worldwide Governance Indicators. To address governance weaknesses and corruption vulnerabilities in PNG, a sustained, multi-year effort with close external support, including from the IMF, is needed. Staff stand ready to provide IMF TA to complement the extensive anti-corruption support provided by other developing partners, including the UN, EU, ADB, and Australia, and discussed corruption in the context of impediments to growth.

38. Transparency in procurement needs to be improved, particularly for COVID-related spending. Staff urged the government to resume updating information on COVID-related procurement, including posting details of beneficial owners of successful bidders at https://www.procurement.gov.pg/covid-19-procurement/, which has not been updated since mid-2020. The authorities have reiterated their intention to conduct an audit of procurement contracts, and staff recommended that the audit start as soon as possible. While the National Procurement Act has now been operationalized, improved commitment to transparency in procurement is necessary for a durable improvement in governance. Such reforms to strengthen fiscal governance will help to reduce vulnerabilities to corruption and improve public sector management.

39. Efforts to strengthen the AML/CFT framework should continue. PNG’s latest mutual evaluation against FATF standards was in 2011, with PNG rated partially compliant or non-compliant with 32 out of 40 recommendations, leading to the placement of PNG on the FATF’s grey list in 2014 (as a jurisdiction with strategic AML/CFT deficiencies). Following significant improvements in the AML/CFT regime, PNG was removed from the FATF grey list in 2016. A favorable evaluation at the upcoming evaluation, currently planned for 2023, will be important. In preparation for the next evaluation, the Financial Analysis and Supervision Unit (FASU) has provided training to supervised entities, conducted sectoral risk assessments, and is working on changes to the AML/CFT legal framework.

Authorities’ Views

40. The authorities described active recruiting procedures for full operationalization of ICAC, hopeful that ICAC will be upheld at the Supreme Court. They noted strong public support for anti-corruption efforts and ICAC, and expectation that ongoing work will continue regardless of the election outcome. BPNG commended prudent and active regulatory actions by the FASU in line with AML/CFT commitments.

uA001fig08
Sources: Transparency International, D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank) (2020); and IMF staff calculations.Note: For Worldwide Governance indicators, negative values are below the global average. Higher values of the Corruption Perception Index indicate lower perceived corruption. Use of these indicators should be considered carefully, as they are derived from perception-based data. PICs refers to Pacific Island Countries.

E. Climate and Biodiversity: Challenges and Opportunities

41. Climate issues are deemed macrocritical in PNG, given high vulnerability to climate change and large adaptation needs (Annex VI). Major climate hazards in PNG include sea level rise, coastal erosion, coastal and inland flooding, drought, and landslides. While lacking infrastructure, PNG has a high environmental capital, which supports extensive subsistence farming, and is increasingly under threat from climate change and deforestation. Climate adaptation needs are estimated at about 2 percent of GDP annually for the next 10 years and need to be financed largely from external sources given limited fiscal space.

uA001fig09

Percent of Own Forest Lost Since 2000

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: United Nations Biodiversity Lab; and IMF staff calculations.

42. PNG’s large rainforest provides essential global climate stabilization service and ecosystem services to the local population. Urgent action is needed to reduce the rate of deforestation—while it is still lower than in other major rainforest countries—and promote green, inclusive growth, and raise revenue. The authorities are looking to establish Voluntary Carbon Markets (VCMs) and have recently joined a carbon offsets scheme with Australia, even as this requires greater efforts to reach PNG’s nationally determined contributions (NDCs). Debt-for-climate swaps could be explored as part of a broader climate finance strategy. Implementation of the authorities National Strategy on Reducing Emissions from Deforestation and Forest Degradation (REDD+) is vital. REDD+ Results Based Payments through the Green Climate Fund and other entities should be pursued further.

Authorities’ Views

43. The authorities welcomed staff’s focus on climate issues as in line with the country’s long-time leadership in this space internationally. They detailed their extensive efforts to reduce emissions and protect the rainforest, while also adapting to climate change. BPNG Center for Excellence in Financial Inclusion (CEFI) noted their initiative to design a green finance policy for PNG, including a green taxonomy, which they plan to launch this year.

F. Improving Data Availability for Program Monitoring and Policy Formulation

44. PNG has strengthened data reporting to support program monitoring but further work is needed to ensure the data to support policy formulation is adequate. To improve information-sharing with staff, the authorities set up a high-level Program Monitoring Committee to maintain close contact with staff and follow-up on data requests. As a result, there has been substantial improvement in information sharing compared to the 2020-21 SMP. In the 2021-22 SMP, meetings and information flows have become more frequent, though addressing reporting lags remains a priority. Reporting of fiscal data was affected by a ransomware attack in late 2021, which hindered access to funds and continues to affect the quality and timeliness of fiscal data. Staff emphasized the need to implement the recommendations of the recent Fund TA, including on public sector debt and external sector statistics.

Authorities’ views

45. The authorities agreed that information-sharing with Fund staff has improved significantly with the formation of Program Monitoring Committee. They reiterated their commitment to greater engagement with the Fund and successful completion of the SMP.

Staff Appraisal

46. Papua New Guinea (PNG)’s economy is weathering the pandemic well, despite many challenges, including vaccine hesitancy. Real GDP in 2022 is projected to exceed its 2019 level, and the medium-term outlook is positive, supported by the resource sector. But inflationary pressures have increased. The introduction by the authorities of a package of fiscal measures to mitigate the impact of higher prices due to the war in Ukraine was appropriate, given that it consisted of temporary tax cuts and higher social spending, financed by higher resource revenues. Developing a formal social safety net, which would allow more targeted transfers to the vulnerable, would be needed. PNG’s external position in 2021 was broadly in line with the level implied by fundamentals, with the kina still overvalued in real terms. FX market pressures have eased, though shortages persist. PNG’s public and publicly guaranteed debt is at high risk of debt distress but remains sustainable.

47. 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 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. While the window for corrective actions during the SMP has closed due to the electoral calendar, the authorities agreed to revisit areas of key concerns as part of the Phase 2 of CBA reform, supported by IMF TA. Staff support the authorities’ request to complete the sole review under the 6-month SMP.

48. Near- and medium-term policies need to focus on: addressing debt vulnerabilities, maintaining inflation under control, easing the foreign exchange shortages, strengthening the CBA, improving governance, promoting climate-resilient and inclusive growth:

  • Rapid progress on fiscal consolidation, as envisaged by the authorities, is appropriate to strengthen debt sustainability. Lowering the deficit as planned is needed to meet the requirements of the Fiscal Responsibility Act, which specifies government debt should be maintained at no more than 40 percent of GDP over the long term. Further, achieving a balanced budget by 2027 would lower the risks from significant debt service obligations on external borrowing coming due in 2028. PNG is also vulnerable to climate shocks and natural disasters, which will require the rebuilding of buffers to address these as they manifest.

  • The priority for PNG is to increase revenues from the resource sector to lower the deficit and strengthen debt sustainability. The authorities are advised to introduce an additional moderate ad valorem levy on future resource projects, payable directly to the central government, which would yield revenues immediately and lower risk to future revenues compared to an excessive reliance on equity participation in new projects. The authorities are encouraged to complete revisions to the Income Tax Act, improve the tax administration system to allow online filing of returns and payments, and update their medium-term revenue strategy, with Cabinet oversight.

  • Efforts to strengthen medium-term revenue collection and the payroll system to contain expenditures should continue. The authorities should strengthen payroll systems throughout the government to contain expenditure on remuneration of public employees and increase room for needed social and development spending.

  • BPNG should tighten monetary policy sooner if inflationary pressures persist to avoid second-round effects from higher food and energy prices.

  • A comprehensive approach to reinstating kina convertibility is needed. The authorities were advised to review the monetary policy framework, continue to improve liquidity management and forecasting, and plan for a gradual increase in exchange rate flexibility and removal exchange restrictions. Further measures to increase financial inclusion and financial sector development are welcome.

  • The CBA needs to be revisited to strengthen the BPNG. In particular, Phase 2 needs to address weaknesses in the governance, autonomy, transparency, and accountability of the BPNG, as identified by the safeguards assessment and following the 2021 CBA amendments. The prudent use of the TAF so far is welcome.

  • The authorities are making continued efforts to strengthen governance. Efforts include plans for operationalization of the ICAC office which will investigate and pursue complex corruption cases, ensuring greater transparency in procurement, and improvements in the AML/CFT framework and regulation. In light of significant governance challenges, a sustained, multi-year effort with close external support, including from the IMF, is needed.

  • Risks from climate change are macrocritical in PNG. Policy should focus on developing and financing climate adaptation projects. Measures to reduce the rate of deforestation and reach PNG’s nationally determined contributions are essential.

49. The authorities’ willingness to remain engaged with the Fund is welcome. Further Fund engagement will continue to play a role in advancing PNG’s reform agenda, raising revenue, and supporting green, inclusive growth.

50. PNG needs to further improve data quality and availability. There has been substantial improvement in information sharing compared to the 2020-21 SMP. Nevertheless, addressing reporting lags and challenges in data compilation remains a priority. In particular, improving the compilation of key fiscal indicators such as expenditure, revenue and financing would strengthen monitoring of budget execution and support policy formulation.

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

Figure 1.
Figure 1.

Papua New Guinea: Real and External Sector Developments

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

1/ Trimmed mean estimate calculated by BPNG.Source: BPNG, IMF Commodity Price System, IMF staff estimates and projections.

Figure 2.
Figure 2.

Papua New Guinea: Fiscal Developments

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: Country authorities, IMF staff estimates and projections.

Figure 3.
Figure 3.

Papua New Guinea: Monetary and Financial Sector Developments

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: BPNG and IMF Staff Calculations

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.

Table 2a.

Papua New Guinea: Summary Operations of the Central Government, 2017–2027

(In millions of kina, unless otherwise specified)

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

Does not include projected revenues from new mining projects where the investment decision has not yet been reached.

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

No specific allocation for COVID-19 related spending is proposed for 2022. Nevertheless, spending on healthcare and other social services is anticipated to cover any COVID-related needs.

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

Discrepancies between the overall balance and financing may 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.

Excluding payments made for settlement of domestic arrears and net acquisition of non-financial assets not classified as “core” in the Staff Monitored Program approved in February 2020.

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

Table 2b.

Papua New Guinea: Summary Operations of the Central Government, 2017–2027

(In percent of GDP, unless otherwise specified)

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

Does not include projected revenues from new mining projects where the investment decision has not yet been reached.

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

No specific allocation for COVID-19 related spending is proposed for 2022. Nevertheless, spending on healthcare and other social services is anticipated to cover any COVID-related needs.

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

Discrepancies between the overall balance and financing may 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.

Excluding payments made for settlement of domestic arrears and net acquisition of non-financial assets not classified as “core” in the Staff Monitored Program approved in February 2020.

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

Table 3.

Papua New Guinea: Balance of Payments, 2017–2027

(In millions of US dollars, unless otherwise specified)

article image
Sources: Historical data from BPNG and IMF. Near-term forecasts 2020-2023 from BPNG. IMF staff projections from 2024.

Includes money-transfer via offshore accounts.

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

Table 4.

Papua New Guinea: Monetary Developments, 2017–2027

(In millions of kina, unless otherwise specified)

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

Table 5.

Papua New Guinea: Financial Stability Indicators, 2017-2022 1/

(In percent, unless otherwise indicated)

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

Fourth quarter data for each year.

Capital base includes Tier 1 and Tier 2 capital.

Return on equity is calculated with Tier 1 capital.

Annex I. Staff Monitored Program Targets

Table 1.

Papua New Guinea: Quantitative Targets and Indicative Targets for 2021 – 2022 1/

(In billions of kina, unless otherwise indicated)

article image
Sources: Papua New Guinea authorities; and Fund staff estimates.

For definitions and adjustors see the Memorandum of Economic and Financial Policies and the Technical Memorandum of Understanding.

End-March 2022 indicative target outcomes are preliminary.

Comprises central government spending on health, education and law and order (both capital and operating expenses).

The ceiling is to apply for the entire year.

Table 2.

Papua New Guinea: SMP Structural Measures, December 2021–March 2022

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Annex II. Risk Assessment Matrix1

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Annex III. External Sector Assessment

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Annex IV. Removing Impediments to Growth

This annex reviews the impediments to growth in PNG, both in terms of physical capital and human capital. First, it puts a spotlight on health outcomes and gender equality necessary to support human capital growth, and overall development. Second, it reviews the economic structure in PNG, the level of economic complexity, and comments on future opportunities for diversification, which are urgently needed.

1. To diversify its economy and achieve sustainable and inclusive long-term growth and development, PNG needs both human capital and physical capital, two key factors of production. Land and natural wealth are a third factor of production, that PNG has in abundance. The rule of law, while not a factor of production per se, is needed so that the output produced, i.e., property, is protected and honored. Compared to the rest of the world, PNG as well as its peers in the Asia Pacific are among the richest countries in terms of natural wealth (World Bank, 2021a). However, in terms of quality of infrastructure, human capital and control of corruption, PNG has relatively more room for improvement. To foster growth, especially in non-resource sector, PNG needs to make significant progress in building human and physical capital and lowering corruption, so that it can leverage its natural wealth and achieve development goals.

uApp04fig01

Factors of Production: PNG and the Rest of the World

(Index)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: Global Quality of Infrastructure Index; World Bank Human Capital Index; The Changing Wealth of Nations; Corruption Perception Index; Transparency International; and IMF staff calculations.

Human Capital

2. Human capital typically includes health and education, and in a broader sense also gender equality, all qualities that are necessary for a productive labor force. If a high share of working-age adults is not in good health, the overall workforce is less productive. Higher quality education allows workers to be more productive, especially at higher-value-added tasks. Finally, gender equality is important because it ensures human capital development among girls and women, which is necessary for the full use of human resources of a country. At the extreme—if women do not participate in the labor force—they cannot contribute to GDP. If women are less educated, and have less personal autonomy, there are fewer opportunities for them to contribute to economic development (Duflo, 2012, Jayachandran, 2015). McKinsey (2015) estimates that advancing women’s equality can add $12 trillion to global growth.

3. PNG has relatively poor health and education outcomes compared to peers. PNG has achieved high infant survival rate, with the vast majority of children surviving to age 5. However, about 50 percent of children under 5 are stunted, indicating poor overall health. Adult survival rate is also somewhat lower than avarage in peer countries. In terms of education, while children on average can expect to go to school for about 10 years, the learning-adjusted years of school are about 6 years. Similarly, gloabally harmozied test scores, PNG ranks poorly.

uApp04fig02

Human Capital Index: Health and Education Components

(Probability; fraction; years; scores)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: World Bank Human Capital Index, 2020; and IMF staff calculations.Notes: Child survival rate is the probability of survival to age 5. Children not stunted shows the fraction of children under 5. Adult survival rate is 1 minus the mortality for age 15-60. Expected and learning-adjusted years of schooling following the Human Capital Index methodology. Black lines show the global interquartile range.

4. Immunization coverage1 in PNG is among the lowest in the world and has been declining over the past decade, which is of particular concern. A positive relationship between health and economic growth is well known, as good health raises productivity and wages, especially in low-income countries (Strauss and Thomas, 1998, Currie and Vogl, 2012). There are also direct macroeconomic benefits of vaccination, with GDP growth found to be higher in the years following increases in vaccination rates (Masia and others, 2018). Low and declining vaccination rates in PNG will likely burden the population and raise public health costs over time in the absence of remedial policy action. PNG has low health expenditures per capita, compared to its peers, which hampers its development goals, a key item on the authorities’ agenda. It would be prudent to further increase health expenditures to support vaccination drives, expand nursing staff, and improve vital statistics.2

uApp04fig03
Sources: World Health Organization; UNICEF; Our world in data; and IMF staff calculations.Note: DTP-3 refers to the vaccine for diphtheria, tetanus, & pertussis third dose. BCG refers to the Bacille calmette-guerin vaccine; H_B-3 refers to Hepatitis B third dose; and Pol-3 refers to Polio third dose.

5. COVID 19 vaccination rate in PNG is among the lowest in the world, in part due to strong vaccine hesitancy, fueled by social media. COVID vaccination was rolled out in May 2021, and only 2.9 percent of the population is fully vaccinated as of mid-February 2022, making PNG the least vaccinated country in the Asia Pacific region, and the 10th in the world. A recent survey found that less than 20 percent of the respondents in PNG planned to vaccinate against COVID 19. About 50 percent of respondents did not want the vaccine, citing fear of side effects, lack of trust in vaccines, and skepticism about its effectiveness (Hoy and others, 2021).3 Misinformation through social media has contributed to the anti-vaccine sentiment, which is so strong at times that some health workers and vaccine awareness teams have been threatened with violence while on duty (Blades, 2021).

uApp04fig04

Health Expenditure Per Capita

(Current USD)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: World Bank; and IMF staff calculations.

6. Women’s economic empowerment and greater decision-making in the household tend to promote better health and education outcomes, and support human capital development.

There is a strong underlying relationship between gender inequality and health outcomes across countries. For example, lower gender inequality is associated with higher male and female life expectancy, lower morbidity and premature mortality (Veas and others, 2021). Gender inequality is also strongly associated with COVID vaccination rates across countries (see text figure). While women typically have user rights over land in PNG, they rarely hold ownership rights, which reduces their ability to access credit from financial institutions (FAO, 2019). Greater empowerment of women and the poor, along with fiscal decentralization and community-driven development, can improve delivery of local public goods (Casey, 2018, Duflo 2012). Narrowing economic gender gaps would promote health and education, and help reach PNG’s development goals.

uApp04fig05
Sources: World Bank Development Indicators; UNDP Human Development Report; Our world in data; and IMF staff calculations.Note: Each blue dot represents a country, while PNG is shown in red.

Physical Capital and Economic Complexity

7. The quality of infrastructure in PNG is low and, along with low human capital and undiversified exports, appears not conducive to the development of industry. In terms of manufacturing value added and industry employment, PNG is well below peers. In the past 10 years, PNG has rapidly expanded its exports of minerals, especially LNG. Over the same period, the economic complexity of PNG’s exports has declined. Economic complexity is a measure of the knowledge in a society as expressed in the products in makes. The economic complexity of a country is calculated based on the diversity of exports a country produces and their ubiquity, or the number of the countries able to produce them (Hidalgo and Hausmann, 2009). Research from the Harvard’s Growth Lab suggests that countries whose exports are more complex than expected for their income level grow faster, driven by a process of diversifying knowhow to produce a broader set of goods and services.

8. PNG has not yet started the traditional development process of structural transformation. Structural transformation refers to the transition from primarily agricultural production to more manufacturing sector output. Typically, along the development path, growth is driven by diversification into new products that are related to those already being produced domestically, but slightly more complex (Hausmann and Klinger, 2007). Given PNG’s undiversified economy there are relatively limited opportunities for expansion into nearby products and jumps into new strategic areas of production may be appropriate, the so-called “strategic bets approach” (Hausmann and Klinger, 2009).

9. PNG is currently at the bottom of the distribution in terms of economic complexity of exports, even when compared to other commodity exporters. However, the fact that some commodity exporters have managed to diversify and increase their economic complexity, relative to PNG, suggests that exporting commodities need not be a trap per se. Nevertheless, almost all commodity exporters have below average economic complexity and face considerable challenges to transition into higher-value-added sectors. New analysis by UNCTAD (2021) identifies opportunities for commodity exporters to derive benefits from digitalization and the global technological revolution, and policies that can support their structural transformation.

10. To promote investment in physical capital and support development, PNG should strengthen property rights and contract enforcement. At least 85 percent of the total land mass in PNG constitute the so-called “unalienated” land governed by customary law (Hennings, 2021). The customary tenure practices vary from community to community and are passed on verbally. The authorities have showed efforts to unlock economic value of the land and attract investment by formalizing the land tenure and transaction rules. At the same time, large-scale extractive operations, related environmental damages and lack of transparency in public contracts have caused intra and inter-community conflicts over land rights and further complicated the reforms.

Conclusion: The Road Ahead

11. Despite the myriad of challenges, the authorities are starting to make progress. In terms of health, the authorities are making crucial efforts to improve health outcomes. The 2022 National Budget has significantly increased health expenditures. In November 2020, PNG administered oral polio vaccine and managed to reach 91 percent of the 1.3 million target children under 5 years. In 2019, PNG integrated measles and rubella vaccines into the last round of the polio vaccination, which prevented potential measles outbreak in PNG that affected several Pacific countries in 2019. In 2018, PNG successfully vaccinated 3.1 million children under 15 years in a nationwide polio vaccination campaign – attaining around 80 percent coverage in most provinces. These successful immunization programs indicate that if right strategies are implemented, PNG can improve vaccination rates. Combating misinformation about the COVID vaccine in PNG will be difficult. But the fact that a sizeable share of the population, up to 30 percent, is unsure about COVID vaccination and may be open to it, offers some hope (Hoy and others, 2021).

uApp04fig06
Sources: World Bank World Development Indicators, The Atlas of Economic Complexity, Global Quality of Infrastructure Index and IMF staff calculations.Note: Exports chart legend lists major sectors in PNG; other sectors are included but not labeled. Each country in scatterplot represents a country, PNG shown in red. Years shown are latest available.

12. In terms of gender equality, the authorities are making efforts to reduce violence against women. A Special Parliamentary Committee on Gender-Based Violence issued its first report calling for urgent Government Action. The 2022 Budget allocates funds to establish a Government Secretariat dedicated to the fight against gender-based violence, and support for related NGOs. It is important to note that COVID-19 disproportionately affects women’s income, employment and education opportunities, as they care for the family during a time of crisis (IMF, 2021). Therefore, countries should deploy gender-responsive policies, which will help to mitigate the short-term impacts, while also addressing long-term structural drivers of gender inequality.

13. With regards to infrastructure, the Connect PNG Program and related efforts are important steps forward. The 2022 Budget supports a group of projects—"Economic Enablers"—to improve infrastructure. This includes improvements in transport infrastructure, connecting road networks, expansion of the electricity grid, improved reliance and efficiency of the ICT and the telecommunications network, clean renewable energy, and safe water and sanitation, all important ways for PNG to reduce poverty and enhance sustainable growth (World Bank, 2020). Passage of the Connect PNG Funding and Implementation Arrangements Bill in November 2021 will further facilitate the implementation of the ambitious infrastructure development and rehabilitation program. Further investment in climate-resilient infrastructure will be needed.

14. In terms of corruption, the authorities are making crucial headway with the Independent Commission Against Corruption (ICAC). ICAC’s future ability to coordinate development and implementation of anti-corruption policies, along with the ability to investigate and prosecute complex corruption cases is expected to deter corruption and strengthen the rule of law. Implementation of the recently enacted Whistleblowers Act should also contribute to greater transparency and accountability, and deter abuse of public office for personal gain. If consistently implemented over time, these developments should have positive effects on the business and investment climate, paving the way for development.

References

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  • Cerra, V., Eichengreen, B., El-Ganainy, A. and Schindler, M., 2021. How to achieve inclusive growth. Oxford University Press.

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  • Duflo, E., 2012. Women empowerment and economic development. Journal of Economic literature, 50(4), pp.1051-79.

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Annex V. Monetary Policy Framework

This annex reviews the current monetary policy framework in PNG and how the monetary policy framework might change with the reforms of the Central Banking Act. It summarizes the key considerations when choosing a monetary framework and exchange rate regime and points to further technical assistance to determine the most appropriate exchange rate regime with a consistent monetary framework and build a possible roadmap for the transition.

1. The monetary policy framework is determined by the central bank objective(s), its intermediate and operational target(s), and the instruments it uses to achieve these. In PNG, the monetary policy framework can be summarized as in Table 1 below. Formally, PNG has followed reserve money targeting, with the main objective of stable inflation. The intermediate target was reserve money, or growth of monetary aggregates more broadly. The operational target was the policy rate—the Kina Facility Rate (KFR)—which would be set with the aim of influencing domestic market interest rates. In recent years, however, the exchange rate was implicitly an additional nominal anchor, as BPNG viewed stability of the exchange rate as necessary for stable inflation.

Table 1.

PNG Monetary and Exchange Rate Policy Framework until December 2021

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2. The monetary policy framework needs to be consistent with the exchange rate arrangement, which can be assessed from the perspective of the “impossible trinity”. There are three desirable properties that countries would like to have: monetary policy autonomy, stable exchange rate and free capital mobility. However, the impossible trinity (or trilemma) states that, in theory, only two of these properties are possible at the same time. For example, in recent years BPNG has had monetary policy autonomy and maintained a stable exchange rate, and therefore PNG could not have free capital mobility. To maintain a stable exchange rate in the FX market, BPNG imposed exchange rate trading margins around the official rate in June 2014, forcing the market exchange rate in line with the official rate. This, coupled with BPNG’s limited supply of FX to the market, led to FX shortages, which likely disrupted trade and economic activity. More generally, attempts to prevent exchange rate depreciation without supportive fiscal or monetary policies usually lead to an excess demand for FX in the official market.

3. In recent years, BPNG did not commit to a specific target for money growth, allowing ample discretion, and implicitly adding the exchange rate as a nominal anchor and target. BPNG would communicate its analysis through semiannual monetary policy statements, each March and September, announcing the monetary policy stance for the next six months. In this way, the Governor would decide the extent to which inflation stability requires exchange rate stability, often noting pass-through. In practice, the exchange rate implicitly became an additional nominal anchor, and the exchange rate regime moved from de jure floating to de facto stabilized (PNG country AREAER Report). The BPNG would typically monitor the exchange rate, reserve money growth and the interest rate, steering them within a comfort zone. Deviations from reserve money growth from target would typically not trigger an adjustment, despite larger-than-targeted excess liquidity, as long as BPNG was comfortable about the level of inflation (de Barros Serrao and others, 2019).

uApp05fig01

Exchange Rate and Consumer Price Index

(Units, RHS index)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: BPNG; and IMF staff calculations.
uApp05fig02

Kina Facility Rate, Central Bank Bills Rate and Commercial Loans Rates

(Percent)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: BPNG; and IMF staff calculations.Note: CCB (28) refers to 28-day Central Bank Bills. Commercial loan rate is the weighted average for performing loans. KFR is the Kina Facility Rate.

4. BPNG implements monetary policy primarily through open market operations. BPNG issues central bank bills with 1-month (28 days), most commonly, as well as 2-month (63 days) and 3-month (91 days) and longer tenors. Open market operations (OMOs) are typically aimed at draining excess kina liquidity. The OMOs are calibrated based on the BPNG liquidity forecast, conducted weekly, and take into account any effects on short-term interest rates and inflation developments, against the background of the reserve money framework. BPNG also participates in the primary and secondary market for Treasury bills and Government Bonds.

5. The KFR is intended to be a reference for interbank money market rates and open market operations, however transmission to deposit and lending rates is weak. The 28-day central bank bill rates are the most relevant for transmission, and they are only loosely correlated with the KFR. Binding credit limits and bidding limits for certain commercial banks in PNG, high liquidity demand for precautionary purposes, and lack of a reliable secondary market for government securities, all limit the demand of central bank’s bills so that auctions are sometimes under-allotted. The BPNG retains the discretion to cut the auction and reject yields considered outliers. In this way it can prevent an upward drift in yields, but often fails to drain excess liquidity (de Barros Serrao and others, 2019).

6. Other instruments used for monetary policy implementation include reserve requirements, the repo facility, and FX intervention. Cash reserve requirements are calculated weekly, and the reserve requirement in percent has been stable from late 2014 until the COVID-19 pandemic. Reserve requirements can affect the demand for excess liquidity for precautionary purposes. The Repo Facility intends to provide short-term liquidity to commercial banks and is not used much. FX intervention is not viewed as a monetary policy instrument by BPNG, but FX provision by BPNG to authorized FX dealers also directly affects kina liquidity in the market.

Amendments to the Central Banking Act and Implications for the Monetary Framework

7. In July 2021, the PNG government set up an Independent Advisory Group (IAG) to review and recommend reforms to the Central Banking Act, with implications for the monetary policy framework. The Central Banking Act, originally passed in 2000, needed to be modernized. Some of the key problems identified in the IAG Report, include the practice of FX rationing and insufficient support for growth by the BPNG. To address these, the IAG recommended to return to full kina convertibility (and implicitly, a more flexible exchange rate regime) and to modify the central bank objectives to introduce growth and employment as additional objectives, of equal rank to stable inflation).1 Following the IAG report, a wide-ranging reform to the Central Banking Act was made by the PNG Parliament on December 2, 2021, via the Central Banking (Amendment) Bill 2021. Additional amendments are planned for the Phase II of the reforms. These changes affect the monetary framework in PNG.

uApp05fig03

Excess Liquidity and Reserve Requirements

(kina million; percent, RHS)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: BPNG; and IMF staff calculations.

8. The introduction of growth and employment as additional BPNG objectives complicates the monetary policy framework in PNG. First, monetary policy cannot generate long term growth or employment, and if BPNG repeatedly stimulated short term growth, beyond the potential, inflation and inflation expectations would increase. Second, at times, there will be conflicts between inflation and growth objectives, which will be difficult to resolve when these objectives are unranked. For example, it is possible that lowering interest rates could promote growth in the short term but also raise inflation. At times of conflict between unranked objectives, a lack of primary inflation mandate tends to lead to heightened uncertainty about the future level of inflation, de-anchoring of inflation expectations, and lack of accountability of monetary policy (IMF, 2015). With a growth objective subordinate to inflation, policymakers can still transparently allow inflation to deviate from its target over a longer-than-usual horizon, allowing growth to recover, and keeping inflation expectations anchored. Based on experience in other countries (IMF, 2015), the existence of several unranked objectives is likely to introduce more discretion in the BPNG decision making, and reduce accountability. Also, assessing the growth rate (or unemployment rate), consistent with price stability, is difficult even in advanced countries. In PNG, it is a daunting challenge given the lack of data and the dominance of the informal sector.

9. While kina convertibility does not necessarily require a floating exchange rate regime, for kina convertibility to be sustainable over the long run, some movement in the exchange rate would need to be permissible. Kina convertibility means that anyone who wants to exchange kina for US dollars is able to do so, without restrictions in terms of amount or wait time. If the kina is overvalued and fully convertible, BPNG would eventually run out of US dollar reserves as people demand to buy dollars. Achieving such convertibility would require an exchange rate that clears the market, and in turn, require a well-functioning FX market, including central bank operations. The introduction of a more flexible exchange rate regime would have brought a major change in the monetary policy framework in PNG. A move to greater kina flexibility, would have to be carefully planned, to avoid any excess volatility in the exchange rate, and ensure that the market and institutions are ready.

Monetary and Exchange Rate Policy Frameworks Should Provide a Clear Nominal Anchor

10. Monetary and exchange rate policy frameworks should provide a clear nominal anchor, consistent with each country’s economic needs and goals (IMF, 2015). For example, many low-income countries have a framework that targets a monetary aggregate, such as a reserve money framework. Many emerging market economies have an inflation targeting framework. An exchange rate arrangement that is inconsistent with a country’s characteristics can amplify the impact of adverse shocks and undermine economic growth. In recent years many countries have successfully balanced their need for adequate exchange rate flexibility with some active management of the exchange rate to prevent exchange rate overshooting, inflation pressures and financial vulnerabilities (Fayad and Ward, 2020). In economies with underdeveloped credit markets, monetary policy is mainly transmitted through the exchange rate channel, so greater exchange rate flexibility tends to improve transmission.

11. The appropriate monetary and exchange rate policy framework will depend on country-specific characteristics. In particular, it will depend on (1) initial macroeconomic conditions, such as inflation, FX reserve adequacy, and fiscal and external imbalances; (2) structural characteristics of the economy, including its size and openness, mobility and flexibility of factors of production, and type and frequency of shocks; and (3) institutional features and prospects for their development (IMF, 2022a). For commodity exporting countries, the choice can be challenging (IMF, 2016, Al-Sadiq and Otker, 2021). Commodity exporters with relatively undiversified output, that are susceptible to large and frequent terms-of-trade shocks, may favor a more flexible exchange rate. Those that are very small, very open, and with undeveloped financial markets may prefer a fixed exchange rate. If country characteristics do not clearly support the choice of either a float or a peg, an intermediate arrangement—a crawling peg or a crawl-like arrangement—could be an appropriate choice. The chosen FX regime should allow nominal stability, facilitate sustained economic growth and trade, ease external adjustment, and promote broad systemic stability.

12. As countries move towards more exchange rate flexibility, some continue to rely on the exchange rate as nominal anchor, while increasing its flexibility. The transition to a more flexible exchange rate anchor is easier and often represents an intermediate step on the road to a different nominal anchor such as inflation targeting. It initially requires relatively minor operational changes and does not rely on a central bank having the analytical, operational, and communications capacity to move to a floating exchange rate (IMF 2022b). A more flexible exchange rate anchor serves to get businesses and households accustomed to two-way variations in the exchange rate, tends to promote development of FX markets and hedging tools.

13. Transition to greater exchange rate flexibility can be a difficult and long process, and success is most likely when the transition is carefully planned.2 IMF technical assistance can help define a roadmap for the transition that would usually be implemented over several years (IMF, 2022b). For countries opting for a wider band around a peg, the initial exchange rate should be close to equilibrium, and the band should be wide enough to accommodate typical shocks, but not so wide that the exchange rate anchor is lost. For commodity exporters, changes in the FX regime might be smoothest when commodity prices and reserves are high, and depreciation pressures low, as in the current juncture. An intervention policy needs to be articulated. Under a crawling peg, the exchange rate adjustments may be at a fixed rate or in response to changes in selected quantitative indicators, such as past inflation differentials vis-à-vis major trading partners or differentials between the inflation target and expected inflation in major trading partners (IMF, 2022b).

14. A transition to inflation targeting would require reforms, implemented over several years. An inflation target is often chosen as a new nominal anchor, given the difficulty of targeting reserve money, or other monetary aggregates at lower rates of inflation. A key benefit of an inflation target is that it helps to simultaneously maintain low and stable inflation and stabilize output. For successful inflation targeting, a country needs to have a clear central bank mandate for price stability, political and operational independence, forecasting and analytical capacity, and an effective operational and communications framework (Heenan and others, 2006, IMF 2022b). In particular, for successful and effective inflation targeting, central bank financing of the government may not be permitted, unless it expressly serves the purpose of monetary policy.

15. Regardless of the chosen exchange rate regime and nominal anchor, central bank analytical capacity building is helpful. In the case of PNG, improvement in liquidity forecasting is one such preparatory measure, which is included as a structural benchmark in the Staff Monitored Program. In addition, capacity building in monetary and foreign exchange operations, as well as communications would be helpful. BPNG needs to invest in capacity building regardless of the chosen monetary policy framework.

References

  • Al-Sadiq and Otker, 2021, “Commodity Shocks and Exchange Rate Regimes: Implications for the Caribbean Commodity Exporters”, IMF working paper, Washington, DC.

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  • de Barros Serrao, Della Valle and Vandepeute, 2019, “Papua New Guinea: Foreign Exchange Market and Monetary Policy Operational Framework” IMF Monetary and Capital Markets Department, Technical Assistance Report, Washington, DC.

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  • Fayad and Ward, 2020, “Caught in the Crosswinds: The experiences of Selected Economies Responding to External Volatility with Multiple Policy Levers”, IMF working paper, Washington, DC.

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  • Heenan, G., Peter, M. and Roger, S. 2006, “Implementing Inflation Targeting: Institutional Arrangements, Target Design, and Communications”, IMF Working Paper, WP/06/278, Washington, DC.

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  • IMF, 2015, “Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries,” Staff Report, Washington, DC.

  • IMF, 2016, Commodity Price Shocks and Greater Exchange Rate Flexibility: Why, If, To What, and How? MCM Macrofinancial Note, MNF/2016/1, Washington, DC.

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  • IMF, 2022a forthcoming, “Monetary Policy Technical Assistance Handbook: Choice of Exchange Rate Arrangement”, Washington, DC.

  • IMF, 2022b forthcoming, “Monetary Policy Technical Assistance Handbook: Transitioning to Greater Exchange Rate Flexibility”, Washington, DC.

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  • Otker-Robe, I. and Vavra, D. 2007, “Moving to Greater Exchange Rate Flexibility: Operational Aspects Based on Lessons from Detailed Country Experiences”, IMF Occasional Paper 256, Washington, DC.

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

This annex reviews the effects of climate change in PNG and the climate mitigation services that PNG provides to the rest of the world. First, it identifies climate risks and vulnerabilities in PNG. Second, it discusses PNG’s climate adaptation needs. Third, it presents PNG’s current track record of access to climate finance, and comments on possible ways forward to better adapt to the changing climate and to strengthen mitigation efforts.

1. Papua New Guinea (PNG) has a humid, tropical climate, with immense biodiversity. Home to the third largest rainforest in the world, PNG hosts about 6-7 percent of the world’s biodiversity on less than 1 percent of land area (PNG, 2007). Small settlements are spread out over a vast rural area without much access to infrastructure but with high environmental capital, which is increasingly under threat from climate change and deforestation.

uApp06fig01

Land Cover in Papua New Guinea

(Percent)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: United Nations Biodiversity Lab.

2. Papua New Guinea is among countries most vulnerable to the negative effects of climate change (Volz, 2020). PNG is the ninth most vulnerable country in the world, based on the United Nations University World Risk Report (2021). Based on the Notre Dame vulnerability index, in 2019 it was the thirty-fifth most vulnerable country, well above the average vulnerability of either the Asia Pacific region or the world (see figure). PNG’s vulnerabilities are particularly high in terms of food security, ecosystem services, quality of human habitat, and health. Climate hazards in PNG include sea level rise, coastal erosion, coastal and inland flooding, drought, landslides, heatwaves, and inland frost, among others (GCF 2020, UNDP 2016). Estimates suggest that climate change could trigger a loss of up to 15.2% of GDP by 2100 in PNG (ADB, 2013).

uApp06fig02

Overall and Sectoral Vulnerabilities to Climate Change

(Index)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: University of Notre Dame Global Adaptation Index, 2019.

3. Most of the population—about 80 percent—is rural, highly exposed to climate risks. Due to high dependence on subsistence farming, livelihoods are disrupted by flooding, landslides in the mountainous areas, and saltwater intrusion on the islands.1 Commercial agriculture contributes to net deforestation, which reduces ecosystem services that people rely on. Weak governance and lack of transparency and accountability in natural resources management increase exposure to climate risks. Access to water and sanitation is often inadequate. In the rural areas, access to safe water and sanitation is available to only 33 and 13 percent of the population, while in the urban areas it is 89 and 57 percent, respectively (PNG, 2015).

4. Climate adaptation needs in PNG are large and current adaptive capacity is low. Climate adaptation needs are estimated at about 2 percent of GDP annually for the next 10 years (IMF, 2021a). This is less than the average for the Asia Pacific region, but more than the average for Asia excluding the Pacific Island Countries (see figure). Most importantly investments of 2 percent per year for climate adaptation are currently prohibitive for PNG, given lack of fiscal space, and will need to be supported externally. PNG’s adaptive capacity is one of the lowest in Asia Pacific, due to fragile health and education systems as well as insecurity of water supply (IMF, 2021a).

uApp06fig03

Annual Public Adaptation Needs

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: IMF (2021a).

5. Thanks to vast forests which act as carbon sinks, Papua New Guinea’s net emissions were negative until 2008 (PNG, 2018), but are rising. Papua New Guinea’s emissions were dominated by the energy sector (see chart), but have risen in Land use, land-use change and forestry (LULUCF). In the agriculture sector, emissions have been also rising but at a much slower pace. Nevertheless, PNG is still considered a low emitter of GHGs, both in absolute terms and per capita.

6. As part of its nationally determined contributions (NDC), PNG aims to reach carbon neutrality by 2050, but this commitment is conditional on external financing. As such, the likelihood of achieving the NDC is uncertain. The key target is to reduce emissions from deforestation and forest degradation due to commercial logging and agriculture expansion, by enhanced land use planning, enforcement of timber legality, and promotion of climate-friendly agriculture. Corruption, rule of law and climate vulnerabilities are closely interlinked in PNG and constitute fragility factors. High rate of deforestation and reported destruction of biodiversity are associated with lack of transparency and accountability in granting concession and large contracts. Strong governance safeguards and anti-corruption measures, such as transparency of public contracts, oversight mechanisms against corruption, accountability of officials and companies, are critical for reducing climate vulnerabilities, meeting NDCs, and achieving sustainable economic growth.

7. PNG has long been a leader in the call to reduce emissions from deforestation and forest degradation in developing countries, which developed into REDD+, supported by UNFCCC. The Prime Minister has announced a ban on round log exports by 2025 and an end to logging by 2030 (National 2022a). But success will depend on PNG’s ability to provide alternative sources of revenue to compensate for the revenue lost from industrial logging operations (Economist, 2022; The National, 2022b). Success in raising revenue through REDD+ results-based payments will be crucial in this respect.

uApp06fig04

GHG Emissions and Removals by Sector in Papua New Guinea, 2000-2015

(Gg CO2 equivalent)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: PNG (2018), Climate Change and Development Authority, Biennial Update Report.Note: Land-use change and forestry (LULUCF) includes emissions and removals from forest plantations, non-forest trees, logging, fuelwood consumption and other wood use. IPPU stands for Industrial Processes and Product Use. Energy includes emissions from fossil fuel combustion and liquified natural gas. Waste includes methane emissions from solid waste and wastewater.

8. To support its climate mitigation and adaptation efforts, PNG launched several implementation plans and legislative initiatives. The Enhanced NDC Implementation Plan 2021-2030 (PNG, 2021) details goals and targets, finance needs and monitoring plans. With help from development partners, PNG also issued the Electricity Implementation Roadmap. In October 2021, PNG passed amendments to the Climate Change (Management) Act to establish a new climate trust fund, administered by the Climate Change and Development Authority, to collect and distribute all forms of climate finance, including REDD+ payments (Economist, 2022). PNG’s Development strategic plan 2010-2030, and other supportive documents in the national planning framework, are expected to support domestic climate adaptation and climate finance efforts.

9. PNG’s track record of access to climate finance has so far been relatively poor given significant needs, and mostly sourced from bilateral donors. Australia, Japan and the European Union have been the largest bilateral donors supporting PNG investments in both adaptation and mitigation. Expanding the sources of financing to include global climate funds would enable PNG to benefit also from the technical expertise brought by such funds such as in project selection and monitoring. PNG has made crucial progress in producing a detailed Country Program with the Green Climate Fund (GCF 2020), which should facilitate access to the GCF. Despite recent progress, however, PNG’s average annual investments in climate adaptation of about 0.2 percent of GDP fall well short of the estimated need of 2 percent (see text table).

Climate Finance, 2014-19

(Millions USD, unless otherwise indicated)

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Source: IMF (2021b).

10. In addition to other instruments of climate finance, PNG could consider debt-for-climate swaps. A debt-for-climate or debt-for-nature swap is an operation in which debt claims are exchanged for specific spending or policy commitments on the side of the debtor country typically at lower fiscal cost than the original debt service. For example, in exchange for debt forgiveness, the member can commit to policies which would firmly protect the existing forested area in the country and pursue a faster pace of GHG reductions across sectors. Most recently, the Seychelles, the Democratic Republic of Congo and Belize have negotiated debt-for-climate swaps in 2018, 2019 and 2021, respectively (IMF, 2022). Debt-for-climate swaps are most appropriate for countries where debt is still sustainable (see Debt Sustainability Assessment), but limited fiscal space restricts domestic climate-related spending. Depending on alignment of specific climate priorities between creditors and the debtor country, and the modalities of a debt-for-climate swap, fiscal space can be increased for climate spending and directed to climate-friendly growth and resilience.

References

  • Asian Development Bank (ADB), 2013. “The Economics of Climate Change in the Pacific,” Asian Development Bank, Mandaluyong City, Philippines.

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  • Economist Intelligence Unit, 2022. “Papua New Guinea: Country Report 1st Quarter 2022”, Economist Intelligence Unit, London, UK.

  • Green Climate Fund (GCF), 2020. “Papua New Guinea Country Program”.

  • Papua New Guinea (PNG), 2007. “Papua New Guinea National Biodiversity Strategy and Action Plan”.

  • Papua New Guinea (PNG). 2015. “Papua New Guinea Water, Sanitation and Hygiene (WaSH) Policy 2015-2030”, Department of National Planning and Monitoring, Government of Papua New Guinea.

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  • Papua New Guinea (PNG), 2018. “Biennial Update Report to UNFCCC 2018”, Climate Change and Development Authority.

  • Papua New Guinea (PNG), 2021. “Enhanced NDC 2020 Implementation Plan (2021-2030)”, Climate Change and Development Authority.

  • International Monetary Fund (IMF), 2021a. “Fiscal Policies to Address Climate Change in Asia and the Pacific.” IMF Departmental Paper, Washington, DC.

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  • International Monetary Fund (IMF), 2021b. “Unlocking Access to Climate Finance for Pacific Island Countries”, IMF Departmental Paper, Washington, DC.

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  • International Monetary Fund (IMF), 2022. “Debt swaps as an instrument of climate finance” forthcoming – SPR paper on debt-for-climate swaps

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  • The National, 2022a. “Switching to carbon trading”, by Michael Philp, February 17, 2022.

  • The National, 2022b. “Govt plans to end logging by ’30”, by Michael Philp, January 14, 2022.

  • United Nations Development Program (UNDP), 2016. “National Adaptation Plan process in focus: Lessons from Papua New Guinea”

  • Volz and Ahmed, 2020. “Macrofinancial Risks in Climate Vulnerable Developing Countries and the Role of the IMF: Towards a joint V20-IMF Action Agenda.”

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Annex VII. FX Shortages

This annex reviews the persistent FX shortages in PNG. First, it provides the background for how and when FX shortages began. Second, it discusses current FX shortages and their possible causes.

1. Papua New Guinea (PNG) has experienced persistent FX shortages since 2013. Between 2010 and 2012 PNG experienced high currency inflows associated with the construction phase of PNG LNG and high commodity prices. FDI flows declined in 2013. The fall in commodity prices, which began with the fall in copper and gold prices in 2011 and 2012, followed by the collapse of oil prices in 2014, caused a rapid deterioration in PNG’s terms of trade (text chart). To slow the nominal depreciation of the Kina, while also preventing the emergence of a spread between the market and official exchange rates, on June 4 2014, the BPNG instated a trading margin around FX buy-sell spreads of authorized dealers around the official rate. This allowed the BPNG to gradually devalue the Kina, which has depreciated by around 21 percent in effective nominal terms since 2014. This compares to a 2.6 depreciation of the REER over the same period. Although PNG’s de jure exchange rate arrangement is floating, beginning in April 2014 the exchange rate followed a depreciating trend within a 2 percent band against the US dollar resulting in a de facto reclassification as “crawl-like”. Since November 2020 the Kina has remained within a 2 percent band against the US dollar, resulting in a further de facto reclassification as “stabilized”. Difficulties in obtaining FX have led to import compression since 2012, with multiple surveys highlighting this as a key constraint on businesses (text chart below). This is most notable in the non-mineral sector, as the decline in imports in the mineral sector partly reflects completion of the PNG LNG construction phase.

uApp07fig01

Goods Terms of Trade

(Index, 2005 = 100)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Sources: BPNG; and IMF calculations.
uApp07fig02

Imports and Exports of Goods

(USD billions)

Citation: IMF Staff Country Reports 2022, 305; 10.5089/9798400221262.002.A001

Source: BPNG.

2. The scale of the problem is difficult to gauge. Anecdotal evidence suggests large pent-up demand for FX. Data from BPNGs order book report the duration of FX order fulfillments. However, some firms may seek permanent alternative solutions to mitigate delays in FX provision, thereby reducing officially recorded FX orders. Alternatively, firms may place multiple or larger orders as they attempt to secure FX from the official market. Despite the FX shortage, it seems no parallel FX market has developed because small FX orders, affecting most customers, are fulfilled first.

3. Exports are highly concentrated, while import needs are broad-based. PNG’s mineral goods exports account for the majority of FX revenue (for example 29.1 percent from Gold and an additional 28.7 percent from LNG alone). In the absence of a market-determined exchange rate, the individual incentives of each exporting company to repatriate foreign currency through the official market may differ. Two key considerations for exporters, at the firm-level, are: (i) the expectation of future depreciation; (ii) potential difficulties in re-obtaining FX to pay for required intermediary imports (including operational costs, debt service and tax obligations). Both factors act to reduce the supply of FX provided to the official market. In contrast, as a largely undiversified island economy, imported goods are required across most sectors.

4. In response to FX shortages some exporters hold export receipts offshore. This practice, permissible under multiple resource sector Project Development Agreements (PDAs), allows exporting firms to repatriate a small fraction of FX revenue to pay local costs, while the majority of FX revenue does not enter the domestic market. Dividends are typically paid to shareholders from these offshore accounts. This represents a further impediment to fully functioning FX market as few companies bridge the mineral/non-mineral or exporting/importing sector divide. This confines FX provision from the private sector. Accompanying this, the profile of government take from PNG LNG export profits is only forecast to rise substantially after 2026, limiting FX provision from the public sector until 2026.

5. Large fiscal deficits, financed through the slack arrangement, increased FX demand. A sustained fiscal deficit, if financed by BPNG, typically increases FX demand. Indeed, during 2014 and into 2015 Treasury bill auctions were mostly under-subscribed resulting in central bank purchases of under-subscribed bills through BPNGs ”slack agreement”. BPNGs share of domestic debt increased, reaching 20 percent in June 2016.

6. Several idiosyncratic factors have also worsened FX shortages in recent years. The severe drought in 2015, earthquake in 2018 and the more recent closure of the Porgera, Simberi and Ok Tedi mines have reduced exports, and hence FX supply to the official market. As these temporary factors fade FX supply should increase.

7. Higher commodity prices and policy action may help alleviate the problem. A rise in the price of PNG’s primary exports should increase the supply of FX to the market. Duration within the BPNG’s order book has already fallen, reflecting both an improvement in the terms of trade in 2021 and greater FX provision during the IMF SMP. However, incomplete or lagged pass-through from spot price changes to contracted prices, may reduce the revenue elasticity of PNG’s exporters. Additionally, higher commodity prices will not alter the structural symptom of offshore profits unless accompanied by expectations of exchange rate appreciation, and medium-term commitments to sustained FX injections by BPNG to fully fulfill FX demand.

8. IMF staff have advised BPNG to allow greater flexibility in the Kina/USD exchange rate since 2014. Flexibility would allow the exchange rate to adjust to a market clearing level to eliminate the kina overvaluation. A more flexible exchange rate will also help facilitate adjustment to external shocks. The current juncture of high commodity prices, lower overvaluation, and the expected beginning of the construction phase for Papua LNG create a unique opportunity for the authorities to act and help alleviate risks from a disorderly adjustment. Any adjustment should be carefully planned to avoid exchange rate overshooting, with consideration given to how changes may impact the overall monetary policy framework (Appendix V). In the medium-term, a holistic approach to overcome structural impediments, including expanded market access and greater export diversity, could improve liquidity in the FX market.

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

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Appendix I. Letter of Intent

21 May 2022

Dear Ms. Georgieva,

In completing our Staff Monitored Program (SMP), which was approved in December 2021, we are pleased to have further strengthened our reform work, and collaboration with the international community. Significant political support for reform, repairing the budget, and a desire to engage closely with the international community has meant the Government of Papua New Guinea has maintained substantial engagement with the IMF since our first request for a SMP in late 2019. This engagement has been productive and supported several key reforms, starting with the Due Diligence exercise to review debt and fiscal data; and progressing the work we have done starting to reform the Central Bank Act. Under the first stage of the 2020/21 SMP1 we were pleased to have made significant strides on:

  • 1) Establishing the Arrears Verification Committee, which has led to the identification of over K5 billion in pre-2019 arrears, that we have made strides in clearing – validating and paying K255 million in 2020, and K419 million in 2021.

  • 2) Improving information sharing between the Treasury and the Central Bank – particularly on liquidity management, and cash planning. We have since formalized the Terms of Reference (TORs) for the public debt committee, including the Bank of Papua New Guinea (BPNG)’s role.

  • 3) The final implementation of the new Tax Administration Act which will allow us new powers to enforce tax regulations.

  • 4) The introduction of a new Small Business Tax, to simplify the tax code for small companies,

  • 5) The passage of the Independent Commission on Anti-Corruption (ICAC) Act and launching the process for the development of supporting regulation.

  • 6) Instituting the Temporary Access Facility (TAF) for cash flow management, and the issuance of guidelines around its use, the latter of which were developed in line with IMF advice.

We were also grateful for the urgent approval of a Rapid Credit Facility (RCF), that helped us implement the 2020 budget even during the COVID-19 outbreak. In addition to providing immediate financing, we were pleased we managed to achieve some reforms during this period, tied to the RCF. These included, forming a Steering Committee to implement our Medium-term Revenue Strategy that provided reporting against reforms the Internal Revenue Commission has been making; and reporting on our procurement and contracts to our internal Budget Management Committee (BMC) to help us keep track of COVID spending. The strengthening of the BMC has been a crucial part of improving information flow between central agencies, with information on cash flow forecasts, spending, revenue collection, warrants and major procurements now regularly shared. We reaffirm our commitment to report on COVID spending at the end of the pandemic emergency, publish details on all outstanding awarded COVID-related contracts (including related beneficial ownership information), and have COVID spending audited and the report published within 6 months of the ending of the pandemic. We are also grateful for the allocation of Special Drawing Rights (SDRs), which enabled us to execute our budget and meet urgent healthcare and other social needs in 2021 in the face of the prolonged COVID-19 pandemic. We used the SDR allocation to replace costly financing.

Turning to our 2021/22 SMP, we are pleased to report good progress: all quantitative targets and all but one of the structural benchmarks were met on time based on the IMF review.

In particular, the 2021 budget deficit stood at K6.3 billion, significantly below our program target of K6.9 billion. We exceeded our target on tax revenue collection by K261 million (0.3 percent of GDP) while maintaining strict control over expenditure. Since 2020, the deficit has declined by over 2 percentage points of GDP, which is a quite remarkable turnaround. Data through March 2022 shows this positive trend continued: we have recorded a budget surplus of K895 million on the back of both exceeding our target on tax revenue collection. The higher revenues have allowed us to provide much-needed relief due to rising food and fuel prices without increasing the fiscal deficit beyond its budget target. We remain committed to continue strengthening public finances and debt sustainability.

We also comfortably met the end-December 2021 Net International Reserves target, helping to strengthen our reserve adequacy, and the BPNG provided more than the targeted foreign exchange to FX dealers to help meet FX demand.

More importantly, the reduction in the deficit was achieved while maintaining social spending and advancing on several meaningful reforms, including:

  • 1) The approval of a budget that targeted a lower deficit than was agreed as a prior action for the SMP to signal our steadfast commitment to budget repair.

  • 2) The early approval of the consequential amendments around the Tax Administration Act, to prevent conflicts with other legislation.

  • 3) The completion of a staffing and establishment review, that incorporated details on the issues we face and sets out a plan to resolve them – including key issues like the proper recording of staff under the correct appropriation heads. This report was crucial to allow future meaningful reforms to occur in this space.

  • 4) The strengthening of the public debt committee comprising of the BPNG and Treasury by establishing a set of objectives, aligning TOR defining members’ responsibilities, and producing a draft annual debt issuance strategy to support forward planning.

  • 5) The passage of selected amendments to the Central Bank Act (CBA) following the completion of the first stage of the Independent Advisory Group report, and we look forward to completing our reform agenda as envisaged under the structural benchmark.

We are committed to maintaining the momentum on structural reforms, including progressing on our salary reform work; strengthening revenue collection; and building on our major reforms in our anti-corruption framework by operationalizing the ICAC and by leveraging IMF TA on a rule of law diagnostic. Our data reporting and information sharing framework was also strengthened due to the SMP through the formation of a Program Monitoring Committee. Despite problems caused by a ransomware attack on the Treasury’s computer systems in late 2021, we have been able to furnish IMF staff with the information needed to assess program performance and intend to build on the work done so far. There have also been a large number of economic reforms instituted by the government that have not been formally incorporated in the SMP, but the IMF’s broad role in monitoring the progress of the PNG economy and wider reforms has been vital for re-building confidence in PNG’s economic management. As we make progress on these key issues, we intend to work closely with IMF staff.

We request IMF TA to continue the work on reviewing and amending the Central Bank Act and other relevant Acts, including central bank objectives, the role of the board, and the central bank’s role in government cash management all within an understanding of PNG’s circumstances. We also recognize that reforms will need to encompass not only legislative changes but strengthening the BPNG’s capacity and improving coordination with the government, most notably with the Treasury and look forward to IMF engagement in these areas.

We welcome IMF efforts to improve dialogue and re-engage in person as COVID restrictions are reduced. The appointment of an IMF Resident Representative will be a key step in this regard. This should help strengthen the relationship with the Fund and the international community, promote better two-way communication and information sharing, and support our reform process.

In view of the strong performance under the SMP, and ongoing steps to reform the CBA, we request that management of the IMF approve this review under the SMP. We authorize the IMF to publish this letter and its attachment, in line with the commitment to transparency of our government.

Yours Sincerely,

     /s/

Hon. Ian Ling Stuckey, CMG, MP.

Treasurer

Attachment I. Technical Memorandum of Understanding

This technical memorandum of understanding (TMU) sets out the understanding between the Papua New Guinea authorities and the International Monetary Fund (IMF) regarding the definitions of the indicative targets for the 6-month Staff-Monitored Program (SMP) spanning from December 7, 2021 to June 15, 2022, and should be read in conjunction with the Memorandum of Economic and Financial Policies (MEFP) that accompanies this TMU. It specifies the assessment criteria and indicative targets on which the implementation of the SMP will be monitored in the period following completion of the sole First Review in April 2022 and until program expiration in June 2022. In addition, the TMU reaffirms the terms and timeframe for transmitting the data that will enable IMF staff to assess program implementation and performance.

A. Assessment Criteria: Quantitative Targets

1. Assessment Criteria have been set for the end of December 2021 and performance under the program is assessed against those quantitative targets, unless otherwise specified. The assessment criteria are specified in Table 1 of the MEFP.

2. For the purposes of the SMP, the government is defined as the central government. Central government is defined as the component of general government covered by the national budget and encompasses fundamental activities of the national executive, legislative and judiciary powers. It includes Extra Budgetary Units which have individual budgets not fully covered by the national budget.

Definitions and Calculations

For the calculation, monitoring and evaluation of the assessment criteria, the following definitions will be used:

3. The cumulative fiscal deficit is calculated on a cash basis, and will be calculated as the net incurrence of financial liabilities less net acquisition of financial assets by the central government from the start of the fiscal year on January 1. The definitions and data to assess the fiscal deficit will be the same as set out in Table E (“Transactions in Assets and Liabilities”) in the 2020 Final Budget Outcome published by the Government of PNG.

4. Net acquisition of financial assets will be calculated as the net change in domestic financial assets plus the net change in external financial assets of the central government.

5. Net incurrence of liabilities is defined as the sum of the net incurrence of domestic liabilities and net incurrence of external liabilities of the central government.

  • Domestic liabilities will include debt securities outstanding; loans received from residents of PNG; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; and other accounts payable.

  • External liabilities will include debt securities outstanding; and loans received from lenders not resident of PNG; and any other liabilities that meet the definition of external debt as set out in paragraph 7 below.

To encourage monitoring of arrears clearance, the fiscal deficit excluding payments for the clearance of arrears incurred in past fiscal years may be reported as a memorandum item.

6. Debt is defined for the program purposes in accordance with paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements, adopted by Decision No. 16919-(20/103) of the Executive Board of the IMF on October 28, 2020. The term “debt” will be understood to mean all current, i.e. not contingent liabilities, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take various forms; the primary ones being as follows:

  • loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments after the date on which the goods are delivered or services are provided; and

  • leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of these guidelines, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

Under the definition of debt set out in this paragraph, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on a contractual obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

For the purposes of this SMP, debt shall include borrowing by, or that receives guarantees from, the central government and the Bank of Papua New Guinea (BPNG) as set out in paragraph 10. Accumulation of liabilities for the purposes of conducting monetary policy by the BPNG, including the issuance of securities or other marketable instruments such as central bank bills or notes, shall be excluded from the definition of debt.

7. External public debt is defined as a debt denominated, or requiring payment, in a currency other than the Kina. For program purposes, a debt and/or guarantee is considered contracted when all conditions for its coming into effect have been met, including approval by the Treasury. The contracting of credit lines with no predetermined disbursements schedules or with multiple disbursements will be also considered as contracting of debt.

8. The present value of any external borrowing by the government is defined as the annual discounted future debt service payments for that loan, using a discount rate of 5 percent.

9. External concessional borrowing by the government is defined as external borrowing where the difference between the face value of the loan and the present value of the loan as defined in paragraph 8 is not less than 35 percent when expressed as a percentage of the face value. A continuous zero ceiling will apply on the contracting or guaranteeing of external non-concessional debt by the Government or the BPNG. For the purposes of the SMP, official bilateral and multilateral borrowing is excluded from the external non-concessional borrowing ceiling to assess program performance.

10. Government debt guarantee means an explicit legal obligation of the central government or the BPNG to service a debt in the event of nonpayment by the borrower.

11. External debt service arrears are defined as external debt obligations of the government that have not been paid when due in accordance with the relevant contractual terms (taking into account any contractual grace periods). A continuous ceiling on the non-accumulation of external debt service arrears shall apply during the program period.

12. Net international reserves (stock) are defined as the difference between the BPNG’s gross foreign assets and gross foreign liabilities, in line with the definition in Section 78 of the PNG Central Banking Act (2000).

13. Gross foreign reserves are defined as the sum of:

  • The BPNG’s holdings of monetary gold (excluding amounts pledged as collateral);

  • Holding of Special Drawing Rights (SDRs);

  • BPNG holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments);

  • Papua New Guinea’s reserve tranche position with the IMF.

14. Gross foreign reserves exclude:

  • Any foreign currency claims on residents;

  • Capital subscriptions in international institutions;

  • Assets obtained through currency swaps of less than three months duration;

  • Pledged, swapped, or any encumbered reserve assets, including but not limited to reserve assets used as collateral or guarantees for third-party external liabilities;

  • Precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets.

15. Gross foreign reserve liabilities are defined as:

  • The total outstanding liabilities of the BPNG to the IMF, excluding the SDR allocations;

  • Convertible currency liabilities of the BPNG to nonresidents with an original maturity of up to and including one year;

  • Commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options).

16. BPNG provision of foreign exchange to authorized foreign exchange dealers is defined as the amount of FX sold by BPNG to banks and other authorized FX dealers in PNG, as defined by the BPNG under FX administration regulations, each month, with the intention to assist meeting the FX orders in the market.

17. Direct monetary financing of the central government refers to BPNG providing direct financing to the central government that spans more than a single fiscal year. Limited, temporary financing for cash management purposes shall be permitted via the Temporary Advance Facility (TAF), and excluded from calculation of direct monetary financing, if it complies with the Operational Guidelines (Terms & Conditions) governing the use of the TAF between Treasury, Finance and BPNG. The acquisition of government securities by the BPNG as part of its monetary policy and management operations is excluded from the definition of monetary financing.

B. Assessment Criteria: Indicative Targets

18. Indicative targets have been set for end of December 2021 and March 2022. Indicative targets serve to assess progress under the program but are not binding quantitative criteria under which performance under the program is evaluated. The targets are specified in Table 1 of the MEFP. For the calculation, monitoring and evaluation of the indicative targets, the following definitions will be used:

Definitions and Calculations

19. Tax revenues of the government are defined in line with the GFSM 2014 and are classified into the following categories: (i) taxes on income, profits, and capital gains; (ii) taxes on payroll and workforce; (iii) taxes on property; (iv) taxes on goods and services; (v) taxes on international trade and transactions; and (vi) other domestic revenue, including non-tax revenue.

20. Domestic payment arrears are overdue domestic payment obligations of the central government, owed to entities legally incorporated in Papua New Guinea and residents of Papua New Guinea. They include obligations to domestic service providers but exclude government liabilities to other public sector units. Except in case where the terms and conditions of the transaction stipulate a longer period, payments are deemed to be in arrears when:

  • Debt remains unpaid for more than 30 days after the due date stipulated in the agreement between the parties (creditor/debtor).

  • Wages or pensions remain unpaid 90 days after their due date.

  • Payments for goods and services rendered received more than 90 days after processing of the supporting documents submitted by suppliers.

The indicative target on the non-accumulation of new domestic arrears shall only be assessed against any arrears that are first accumulated in 2021, and not on arrears accumulated in 2020 or earlier.

21. Social and other policy priority spending is measured on a cash basis and comprises central government spending in the following areas: health, education and law and order (both capital and operating expenses).

C. Program Monitoring and Data Reporting

22. To facilitate the monitoring of program implementation, the Papua New Guinea authorities shall maintain a Program Monitoring Committee. The committee will be composed of senior officials from the Treasury and the Bank of Papua New Guinea, and shall be responsible for monitoring the performance of the program, informing the Fund regularly, and transmitting the supporting materials necessary for the evaluation of benchmarks.

23. The Committee will prepare and provide to the Fund staff electronically the following information contained in the data reporting table below.

Table 1.

Papua New Guinea: Data Reporting for Program Monitoring

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1

The CA surplus is likely overstated. See Annex III.

2

A detailed discussion of performance under the 2020-21 SMP can be found in IMF Country Report No. 2022/055.

1

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 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 between 30 and 50 percent). 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. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

1

Based on common vaccines for immunization programs across the world: Bacille calmette-guerin (BCG; Diphtheria, tetanus, & pertussis third dose (DTP-3); Hepatitis B third dose (H_B-3); and Polio third dose (P-3).

2

Incomplete vital statistics is a widespread problem in PNG: completeness of birth registration was estimated at only 13 percent in 2018 (World Bank) and information on completeness of death registration is unavailable, but likely to be similarly poor. Official COVID-19 case and death totals appear significantly undercounted. For example, the test positivity rate at the Port Moresby General Hospital reached 80 percent in January 2022, but the increase in official reported COVID cases was relatively low.

3

Similar results were observed in surveys conducted by The National news agency and ANU’s Development Policy Center.

1

In addition, the IAG made recommendations to strengthen BPNG governance and accountability, to limit monetary financing, and other recommendations not discussed here.

2

See Otker-Robe and Vavra (2007) for a detailed country experiences of orderly and disorderly transitions.

1

According to the World Bank Hotspot Study, PNG ranks first in global landslide hazard profile.

1

Please see also our Letter of Intent and associated Memorandum of Economic and Financial Policies that accompanied IMF Country Report No. 20/95.

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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

GDP Projections, Pre- and Post-COVID-19

(Index)

Percent of Own Forest Lost Since 2000
Figure 1.

Papua New Guinea: Real and External Sector Developments
Figure 2.

Papua New Guinea: Fiscal Developments
Figure 3.

Papua New Guinea: Monetary and Financial Sector Developments

Factors of Production: PNG and the Rest of the World

(Index)

Human Capital Index: Health and Education Components

(Probability; fraction; years; scores)

Health Expenditure Per Capita

(Current USD)

Exchange Rate and Consumer Price Index

(Units, RHS index)

Kina Facility Rate, Central Bank Bills Rate and Commercial Loans Rates

(Percent)

Excess Liquidity and Reserve Requirements

(kina million; percent, RHS)

Land Cover in Papua New Guinea

(Percent)

Overall and Sectoral Vulnerabilities to Climate Change

(Index)

Annual Public Adaptation Needs

(Percent of GDP)

GHG Emissions and Removals by Sector in Papua New Guinea, 2000-2015

(Gg CO2 equivalent)

Goods Terms of Trade

(Index, 2005 = 100)

Imports and Exports of Goods

(USD billions)