Press Release No. 08/107

Press Release No. 08/107

An International Monetary Fund (IMF) mission led by Ms. Susan Creane, Deputy Division Chief in the Asia-Pacific Department, visited Port Moresby, Papua New Guinea, during May 1-7, 2008, to discuss recent economic developments, the outlook for 2008 and the medium-term.

The mission issued the following statement in Port Moresby on May 7:

"A combination of prudent fiscal and monetary policies, and high global prices for mineral commodity exports, have underpinned Papua New Guinea's recent buoyant economic growth and macroeconomic stability. Real GDP growth, at over 6 percent in 2007, was broad-based and is expected to continue to be strong in 2008. Inflation is expected to continue to rise in 2008, albeit from a relatively low level, boosted by higher global food and petroleum prices, in addition to strong domestic demand.

"The key challenge going forward will be to continue to manage the large, but temporary, fiscal surpluses to promote higher sustainable growth and maintain low inflation. Given the strength of growth in the domestic economy, the mission is concerned that an additional loosening of fiscal policy in 2008 risks sparking additional inflation pressures. In particular, proposals to accelerate a large amount of spending in the districts this year, equivalent to over 4 percent of GDP, raises an acute risk of a sharp rise in inflation and significant waste of Papua New Guinea's resources, given the weak capacity to spend at this level. This would represent a change from the prudent fiscal policies followed in recent years and raises the potential for a return to the macroeconomic instability witnessed earlier this decade.

"In this regard, the mission welcomes efforts to improve the quality of public spending and encourages the authorities to approve the proposed Medium-Term Fiscal Strategy for 2008-12. This strategy would appropriately contain the expansion of the nonmineral fiscal deficit and smooth spending of the windfall mineral revenues over the medium term, while allowing essential spending to address development needs. The mission also notes that the current positive global and domestic economic conditions present the opportune moment to introduce reforms needed to encourage private activity in the non-extractive industries sectors of the economy. Decisive action to improve basic utilities, such as power, telecommunications services, and address weak transportation and high crime is needed for Papua New Guinea catch up with its peers with higher growth on a sustained basis.

"Regarding monetary policy, the Bank of Papua New Guinea has well managed inflationary pressures to date. The possible strong fiscal stimulus, combined with higher projected mineral inflows and still rapid credit growth, would pose a considerable challenge in trying to contain rising inflation and increase the expectation of a tightening of monetary conditions."