IMF Executive Board Concludes 2011 Article IV Consultation with Papua New GuineaPublic Information Notice (PIN) No. 11/58
May 20, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On May 18, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Papua New Guinea.1
Papua New Guinea has enjoyed a decade of solid economic growth, supported by greater political stability, a sound fiscal framework, and a healthy banking sector. Nonetheless, Papua New Guinea remains a low-income country highly exposed to commodity price fluctuations. A weak infrastructure, problems with governance, and high crime curtails development.
The economy has weathered the global recession relatively well and real GDP growth is estimated to have picked up from 5½ percent in 2009 to 7 percent in 2010. Higher commodity prices and the construction of a liquefied natural gas production facility (LNG)—a 190 percent of GDP project—have boosted the economy, while banks continued to provide finance, and agriculture production rebounded. However, the country’s infrastructure—roads, ports, and utilities—has shown signs of capacity constraints, and bottlenecks have appeared in the markets for skilled labor and land. Inflation has reached 7.8 percent at end-2010 and is increasingly driven by domestic demand.
A large fiscal impulse in place in 2009 was unwound. Higher commodity prices boosted revenues in 2010, at the same time spending from off-budget accounts slowed. As a result, after the deficit had reached 9½ percent of GDP in 2009, a balanced budget was almost achieved in 2010. The Bank of Papua New Guinea has kept the policy interest rate at 7 percent since end-2009. However, monetary conditions loosened as short-term interest rates declined to around 3 percent and the nominal effective exchange rate depreciated by more than 7 percent in 2010.
The financial sector has weathered the global financial crises well and remains sound. Banks are well capitalized and liquid. However, despite lowering their exposure, financial institutions are vulnerable to a possible correction in property markets.
Although commodity prices and exports recovered in 2010, the current account deficit has widened to 24 percent of GDP. It was, however, largely financed by foreign direct investment related to the LNG project. External debt declined to about 11 percent of GDP at end-2010.
Executive Board Assessment
Executive Directors welcomed Papua New Guinea’s strong economic growth over the past decade, supported by sound policies. Directors considered the near-term outlook to be generally favorable but encouraged the authorities to consider tighter macroeconomic policies in the face of rising inflationary pressures. Over the longer term, it would be important to reinvigorate structural reforms to support the development of the non-mineral sector, while ensuring effective use of mineral resources to sustain economic growth and raise living standards.
Directors stressed the need for appropriately tight fiscal policy during the construction phase of the liquefied natural gas plant. They welcomed the agreement on a balanced 2011 budget and recommended strict adherence to budget allocations and the limit on trust-account spending. Directors considered that it would be prudent to save windfall mineral revenues and use part of such resources to reduce government debt. They also commended the government’s decision to allocate funds to meet its superannuation obligations and called on the authorities to settle the remaining arrears.
Directors recommended a tighter monetary policy stance to address inflationary pressures. They considered the staff’s assessment of the real effective exchange rate and supported greater exchange rate flexibility, while noting the need to preserve the competitiveness of the non-mineral sector. Directors supported the authorities’ efforts to reduce excess liquidity in the banking system by considering a further increase in the cash reserve requirement. They called on the authorities to implement fully the decision to move all new trust accounts to the Bank of Papua New Guinea.
Directors welcomed the authorities’ plan to manage resource revenues through a sovereign wealth fund (SWF). They stressed that the SWF should be well governed and adhere to the Santiago Principles to ensure effective management and use of the resources. They also considered it important to integrate use of the resources in the SWF into the budget and macroeconomic framework, supported by strong fiscal institutions.
Directors observed that the liquefied natural gas and other resource projects provide an opportunity to raise long-term growth and living standards. They urged the authorities to deliver better social services—in particular, security, health, education, and basic infrastructure—to ensure that the benefits from the mineral boom are more evenly spread among all segments of the population. Directors encouraged the authorities to make further progress in structural reforms to support the development of the non-mineral sector and sustain economic growth. They also stressed the importance of firm implementation of the priorities in the authorities’ medium-term development plan.
Directors noted that the financial sector remains sound and able to withstand moderate shocks. They urged the authorities to implement the Financial Sector Assessment Program recommendations and supported their efforts to improve access to financial services in rural communities.