## cr18352

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**Canonical URL:** [cr18352](https://www.imf.org/-/media/files/publications/cr/2018/cr18352.pdf)

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### Recent developments, outlook, and risks — Economic activity, inflation, and balance of payments
- Aggregate growth averaged around 2 percent in 2016-17.
- Drivers of sluggish growth:
  - Low commodity prices and end of large resource project investments.
  - Severe drought in 2015-16 reduced mining and agricultural output.
  - Fiscal consolidation dampening aggregate demand.
  - Shortage of foreign exchange (FX) sustained by an overvalued exchange rate, causing severe import compression.
- 2018 developments:
  - Large (magnitude 7.5) earthquake disrupted gas, oil, and mining industries; resource-sector output projected to be below 2017 levels.
  - Overall GDP growth projected to be close to 0.0 percent in 2018.
  - CPI inflation projected to rise slightly to 4.8 percent at end-2018.
- 2019 and medium term:
  - Aggregate GDP growth projected at 3.8 percent in 2019; inflation projected to remain around 5 percent.
  - Medium-term aggregate growth projected to trend upwards towards the estimated sustainable rate of about 4 percent; major new resource projects could raise growth substantially.
- Balance of payments and reserves:
  - Current account surplus for 2018 estimated at around 23 percent of GDP.
  - International reserves around $1.7 billion, equivalent to 5 months of imports.
  - Projected improvement in FX inflows associated with higher commodity prices, a sovereign bond issue, and ADB and World Bank loans; expected increase in imports as FX backlog is shortened.

### Fiscal policies and financing — recent performance and projections
- 2018 fiscal stance and developments:
  - Budget deficit projected at 2.9 percent of GDP in 2018.
  - Tax collection up substantially from last year and well above budget projections; gains offset by expenditure slippages, particularly on personnel emoluments.
  - Public debt/GDP ratio projected at 36.8 percent of GDP in 2018, exceeding government’s debt ceiling target.
- Public financial management improvements:
  - IFMIS introduced and being extended to provincial governments (roll out due to be completed by end-2018).
  - National Procurement Act passed.
- Sovereign bond issuance:
  - Debut sovereign bond: $500 million, 10-year maturity, yield of 8.375 percent.
  - Intended uses: improve domestic debt profile and help resolve FX and exchange rate issues.
- Baseline medium-term projections (Unadjusted Scenario, Text Table 1) — selected series:
  - GDP growth (%): 2017: 2.5; 2018: 0.0; 2019: 3.8; 2020: 3.1; 2021: 3.7; 2022: 3.7; 2023: 3.8
  - Inflation (%): 2017: 5.4; 2018: 4.8; 2019: 4.7; 2020: 4.7; 2021: 4.7; 2022: 4.7; 2023: 4.1
  - Net lending/borrowing (% of GDP): 2017: -2.7; 2018: -2.9; 2019: -2.2; 2020: -1.7; 2021: -1.2; 2022: -0.9; 2023: -0.8
  - Government expenditure (% of GDP): 2017: 20.3; 2018: 20.8; 2019: 19.0; 2020: 18.8; 2021: 18.6; 2022: 18.6; 2023: 18.6
  - Government debt (% of GDP): 2017: 37.5; 2018: 36.8; 2019: 36.2; 2020: 35.5; 2021: 35.0; 2022: 34.1; 2023: 33.6
  - Current account (% of GDP): 2017: 23.9; 2018: 22.8; 2019: 23.0; 2020: 21.4; 2021: 20.3; 2022: 19.2; 2023: 18.4
  - Gross reserves (months of imports): 2017: 4.9; 2018: 5.6; 2019: 4.4; 2020: 4.8; 2021: 4.8; 2022: 4.7; 2023: 4.6

### Monetary and foreign exchange policies
- Policy objectives and challenges:
  - Restore exchange rate flexibility to cushion commodity price and investment cycle swings.
  - Kina relatively stable from 2016 until recently; FX rationing supported stability but caused import compression and a large backlog of FX orders.
  - Interest rate transmission is weak; BPNG’s capacity to implement monetary policy using interest rates needs strengthening.
  - FX shortage contributed to excess liquidity (bank deposits bolstered by funds for dividend payments abroad) while credit growth remained weak.
- Reform agenda (intentions):
  - (i) improve monetary policy communication; (ii) strengthen the monetary operations framework; (iii) restore functioning of the FX market and exchange rate flexibility; (iv) lengthen the maturity structure of public debt; (v) strengthen BPNG’s formulation of monetary policy.
- Steps taken and operational measures:
  - IMF technical assistance (TA) mission visited PNG; additional TA likely.
  - PFTAC assisted BPNG staff with forecasting and policy analysis capacity building.
  - BPNG notified banks it will no longer provide direction on allocation of FX to customers.
  - Since July, BPNG interventions to increase FX supply averaged about $50 million per month.
  - BPNG has overseen a gradual downward adjustment in the exchange rate against the US dollar of around 0.3 percent per month.
  - Intervention plus improved export earnings have begun to shorten FX orders backlog, particularly for trade in goods and services.

### Risks to the outlook
- Upside risks:
  - LNG and mining projects that could begin in 2020 would boost investment inflows and growth, easing fiscal and FX pressures (timing and values uncertain).
  - Stronger-than-expected non-resource sector response to easing FX rationing and gradual exchange rate adjustment.
- Downside risks:
  - Delays in easing FX shortages and exchange rate adjustment would adversely affect growth.
  - Weakening of global growth could reverse commodity price gains, reduce government revenues, increase pressure for fiscal consolidation, and lower business confidence.
- Noted potential major projects (examples in risk footnote): Wafi-Golpu; Papua LNG (led by Total); Pynang LNG (led by Exxon-Mobil); Pasca LNG (led by Twinza Oil and Gas).

### Macroeconomic outlook with recommended policy adjustments (Adjustment Scenario)
- Intended outcomes under Adjustment Scenario:
  - More ambitious fiscal consolidation coupled with exchange rate adjustment reduces public debt/GDP into the 30-35 percent medium-term target range by 2019.
  - Monetary policy eliminates overvaluation of the Kina and clears the FX orders backlog over the same period.
  - Growth and inflation trajectories broadly preserved; lower potential for debt distress and FX-market disruption.
- Adjustment Scenario medium-term projections (Text Table 2) — selected series:
  - GDP growth (%): 2017: 2.5; 2018: 0.0; 2019: 3.3; 2020: 3.2; 2021: 3.7; 2022: 3.6; 2023: 3.7
  - Inflation (%): 2017: 5.4; 2018: 4.8; 2019: 5.5; 2020: 5.0; 2021: 4.8; 2022: 4.8; 2023: 4.1
  - Net lending/borrowing (% of GDP): 2017: -2.7; 2018: -2.9; 2019: -1.0; 2020: -0.7; 2021: -0.4; 2022: -0.1; 2023: -0.1
  - Government expenditure (% of GDP): 2017: 20.9; 2018: 21.4; 2019: 18.3; 2020: 18.3; 2021: 18.2; 2022: 18.2; 2023: 18.2
  - Government debt (% of GDP): 2017: 37.5; 2018: 36.8; 2019: 35.0; 2020: 33.4; 2021: 32.3; 2022: 30.8; 2023: 29.6
  - Current account (% of GDP): 2017: 23.9; 2018: 22.8; 2019: 24.7; 2020: 23.5; 2021: 22.3; 2022: 20.9; 2023: 19.9
  - Gross reserves (months of imports): 2017: 4.9; 2018: 5.6; 2019: 4.5; 2020: 5.0; 2021: 5.0; 2022: 4.8; 2023: 4.7

### Policies for macroeconomic stability and development — Fiscal policy recommendations
- Fiscal strategy and targets:
  - Adopted medium-term target: zero non-resource primary balance to provide fiscal stability, sustainability, and intergenerational sharing of resource benefits.
  - Annual expenditure rule recommended to reconcile debt and revenue targets and focus attention on revenue needed for development spending.
- Consolidation needs:
  - Additional fiscal consolidation needed in 2019-22 to bring debt/GDP to long-term target of 30 percent; requires cutting net spending by around K 1 billion (1.4 percent of GDP).
  - Emphasis on spending restraint in the near term given time needed for sustained revenue increases under the Medium Term Revenue Strategy (MTRS).
- Specific fiscal measures recommended:
  - Personnel emoluments:
    - Reduce personnel costs by about K 0.5 billion (10 percent or 0.7 percent of GDP) through improved financial management controls.
    - Actions: complete identifying public employees using head counts, national identification cards and appointment letters; use IFMIS data to identify staff collecting more than one pay cheque; remove from payroll names of persons not actually working; ensure budget allocations based on accurate data; ensure OSPEAC meets regularly and takes action; reduce expenditure ceiling on personnel emoluments from 40 to 35 percent of non-resource, non-grant revenue.
  - District and Provincial Service Improvement Program (DSIP and PSIP) grants:
    - Recommended scaling back by K 0.5 billion (50 percent, or 0.7 percent of GDP) at least until the debt target has been achieved.
    - Cuts should concentrate on programs providing the least accountability.
  - Expenditure arrears and payment delays:
    - Priority to eliminate payments delays and arrears; paying on time would boost business confidence.
  - Revenue expansion and MTRS implementation:
    - Ensure government negotiation teams for major new gas and mining projects use IMF and World Bank TA analysis and tools.
    - MTRS requires strong, focused management; governance by MTRS Steering Committee (SC) is essential: SC should hold regular governance meetings, require regular reports from Treasury and IRC management, allocate dedicated resources for the SC secretariat, use large taxpayer office to pilot modern tax administration procedures, build a compliance risk management function especially for logging, fisheries, and gold mining, and allocate resources to strengthen enforcement and contract tax audit specialists.

### Fiscal policy and debt management (implementation guidance)
- Fund staff support using the sovereign bond and other government borrowing to lengthen the maturity profile of domestic public debt and resolve the FX orders backlog.
- Implementation of government debt management operations must be closely coordinated with interventions to reduce the FX orders backlog to minimize uncertainty and volatility in liquidity conditions.
- Authorities’ views:
  - Agreed additional fiscal consolidation is needed, although some uncertainty exists about magnitude.
  - A combination of revenue and expenditure measures is appropriate; payroll and grants are sensitive areas.
  - Provincial-level payroll audits and transparency in PSIPs and DSIPs emphasized.

### Monetary and FX operational recommendations (detailed)
- Clearing the backlog of FX orders prior to floating the exchange rate to avoid a large, disruptive movement in the exchange rate:
  - Commercial bank estimates suggest the overall backlog is around US$1 billion.
  - A well-communicated commitment to clear the backlog through regular FX interventions by BPNG over the next year or so could favorably impact business sentiment and investment.
  - Easing of import compression should favorably affect production and put some downward pressure on inflation.
- Gradual elimination of exchange rate overvaluation should precede floating:
  - EBA analysis suggests the Kina is overvalued by 10.7 percent.
  - Eliminating overvaluation will require a depreciation of 12-15 percent in nominal terms.
  - Fund staff recommend a somewhat faster pace of adjustment than seen so far in 2018.
  - BPNG should aim to complete the transition to an interbank FX market within two years.
- Other measures to boost net supply of FX:
  - Focus on sustainable increases in inflows.
  - Increase tax compliance by export earners to raise government revenues and FX inflows on a sustained basis.
- Strengthened liquidity management:
  - Clearing the FX orders backlog will withdraw substantial liquidity from the system.
  - Using proceeds from government foreign borrowing to retire short-term debt will inject liquidity.
  - Strengthen liquidity forecasting and communications with market participants and the monetary policy operational framework.

### Financial stability — assessment and monitoring priorities
- Overall banking sector soundness (averages cited):
  - Average 29 percent tier 1 capital asset ratio.
  - Average 1.3 percent NPLs.
  - Average 27.4 percent return on equity.
- Risks requiring monitoring:
  - Kina Bank’s proposed acquisition of ANZ retail and non-corporate commercial business — close monitoring needed for risk management capacity.
  - Reforms to monetary and FX operations and Treasury’s change to government debt maturity structure will raise liquidity, FX, and credit risk management challenges for commercial banks.
  - Reductions in systemic excess liquidity and exchange rate adjustment could adversely affect some firms’ balance sheets; bank discussions suggest gradual exchange rate adjustment is unlikely to generate significant stresses among banks’ customers, but careful monitoring is required.
- Interbank market issues:
  - Interbank market is not effectively redistributing liquidity between banks.
  - Interbank bilateral exposure limits and terms of access to central bank liquidity facilities may inhibit a market solution.
  - Recommendation: seek a market-based solution in which central bank liquidity provision is limited.

### Policies for inclusive development and governance
- Better management of natural resource wealth:
  - Government negotiating commercial agreements for major new LNG projects; improvements in terms in line with international best practice will yield significant revenues.
  - Develop a framework to manage and use revenues, including a sovereign wealth fund, fiscal buffers, and more transparent expenditure.
- Development of the non-resource sector:
  - Focus on incentives for private sector investment, supported by government provision of infrastructure, education, healthcare, clean water and electricity, and telecommunications.
  - Financing requires sustained increases in government revenue and careful prioritization of projects within a consistent medium-term fiscal framework.
  - Fund staff strongly endorse BPNG’s efforts to promote financial inclusion, noting it tends to promote greater gender equity.
- Addressing governance and corruption:
  - Eliminate corruption and strengthen governance to improve investment attractiveness, sustainable growth, and economic inclusion.
  - Recent governance-strengthening measures welcomed:
    - Establishment of the Independent Commission Against Corruption (ICAC): ICAC enabling legislation should be passed and gazetted; ICAC should be given a high degree of autonomy.
    - Roll-out of IFMIS: use IFMIS data to monitor DSIP and PSIP spending and compare against guidelines; publication can improve discipline and public confidence.
    - National Procurement Act: establish the National Procurement Commission quickly, give it autonomy, provide clear guidelines, and publicly monitor compliance.
    - Government payroll controls: OSPEAC should lead efforts to strengthen payroll monitoring and control.
    - AML/CTF compliance: completion and clearance of the National Risk Assessment (NRA); pursue MOUs for FASU; ensure FASU participation in Bank South Pacific supervisory college.

### Statistics, data, and measurement issues
- Urgent action needed to strengthen NSO governance, management, and performance:
  - Reactivate NSO Reform Committee including BPNG, Treasury, IRC, and Customs, under chairmanship of BPNG or Treasury.
  - Overhaul NSO management team and review NSO budget.
  - Establish a set of key economic statistics with release timetables for NSO accountability.
  - Ensure changes in methodology, significant data revisions, and major new initiatives (e.g. proposed 2019 HIES survey) are thoroughly reviewed.
  - Establish MOUs with government departments to make administrative data (e.g. GST data) available to NSO.
- Balance of payments data:
  - Implement recent TA recommendations; incorporate information on disposition of earnings from extractive industries, especially LNG sector, into balance of payments compilation.
- FX restrictions and Article VIII consistency:
  - Eliminate requirement for a tax clearance certificate prior to making payments or transfers for current international transactions.
  - Eliminate or modify limits placed on spreads between exchange rate on BPNG FX allocations and dealer rates with clients; re-formulate bands in percentage points rather than basis points, with bands explicitly limited to less than 2 percentage points.

### Staff appraisal — summary points
- Recent performance and shocks:
  - PNG economy grew sluggishly in recent years and was adversely affected by a large earthquake in 2018.
  - In 2015-16, low commodity export prices and a severe drought dampened growth; policy developments also contributed to slow growth.
  - Fiscal consolidation in response to weak revenues has dampened aggregate demand.
  - An overvalued exchange rate contributed to FX shortage and severe import compression, inhibiting the non-resource sector.
  - Early 2018 earthquake disrupted oil, gas, and minerals exports; production and exports have recovered.
  - Growth for 2018 estimated at close to 0.0, while inflation has declined to 4 ½ percent.
- Projections and policy implications:
  - In 2019, with full recovery from earthquake effects, growth projected to pick up to 3.8 percent.
  - Significant investment and growth spillovers from new resource projects are unlikely until at least 2021.
  - Until then, growth will be held back by need for fiscal consolidation to bring public debt/GDP ratio down towards long-term target ceiling of 30 percent.
  - At present pace of adjustment, the Kina will remain significantly overvalued and FX shortages will persist for a lengthy period.
  - More ambitious fiscal adjustment and additional flexibility and development of the monetary and exchange rate framework, coupled with structural policies for inclusive growth and better harnessing of PNG’s natural resource wealth, would have significant payoffs.
- Fiscal framework recommendations:
  - Reconfirm a long-term debt/GDP target of 30 percent, with a temporary ceiling of 35 percent.
  - Government adopted a zero non-resource primary balance as a medium-term fiscal target.
  - Staff recommend adoption of an expenditure rule (determined jointly with the revenue target) to reconcile fiscal targets and guide budget policy.
  - Strong commitment to strengthen domestic revenue mobilization through implementation of the Medium-Term Revenue Strategy is welcome.

### Fiscal consolidation: near-term assessment and recommendations
- Substantial progress in narrowing the fiscal deficit was made in 2017, but consolidation stalled in 2018; public debt/GDP ratio is well above the long-term target.
- Staff recommends a faster pace of consolidation than projected on current policies.
- Recommended instruments:
  - Combination of revenue increases and reductions in spending.
  - Particular emphasis on reductions in the government wage bill and grants.

### Exchange rate, FX operations, and liquidity management — key operational recommendations
- Staff welcome greater exchange rate flexibility and increase in FX supply to market participants.
- Recommended actions:
  - Step up the pace of exchange rate adjustment somewhat.
  - Use FX proceeds of the bond issue and other inflows of FX to eliminate the backlog of FX orders so that an interbank FX market can be re-established within two years.
  - Complement exchange rate actions with other measures to boost supply of FX to the market.
  - Strengthen liquidity management to manage the liquidity effects of public debt management and FX operations.
  - Carefully monitor the impact of these measures on financial stability.

### National accounts, external assessment, and key indicators
- National accounts data revisions (NSO March 2018) introduced a single extrapolation method for deflators (improves on previous single deflation method but falls short of double deflation).
- Key discrepancies between Treasury and NSO for 2015:
  - Nominal GDP growth: Treasury 9.8 percent; NSO 0.7 percent.
  - Real GDP growth: Treasury 10.5 percent; NSO 5.3 percent.
  - Deflator change: Treasury decrease 0.7 percent; NSO decline 4.4 percent.
- External assessment (EBA-lite mixed results):
  - EBA-lite current account norm: –3.8 percent of GDP; estimated outcome: 23.9 percent of GDP (suggesting CAB-based REER undervaluation of around 65 percent).
  - EBA-lite REER index model suggests an overvaluation of 10.7 percent (model result used because CAB analysis does not incorporate restricted FX).
- Reserves and adequacy:
  - Reserves around 5 months of imports at end-2017.
  - Reserves lie below levels implied by reserve adequacy metric for a resource-rich country and above a 3-month import cover rule.
  - LNG exports increased, but net FX inflow limited as earnings mostly held offshore for project debt servicing.

### Key macroeconomic and fiscal indicators (selected figures)
- Population: 7.9 million
- GDP per capita (2016): US$2,353
- Real GDP growth (annual): 2014: 15.4; 2015: 5.3; 2016: 1.6; 2017: 2.5; 2018 Est.: 0.0; 2019 Proj.: 3.8
- Central government operations (levels, millions of Kina) — Total revenue and grants: 2014: 11,875; 2015: 11,003; 2016: 10,486; 2017: 11,525; 2018 Proj.: 12,656; 2019 Proj.: 12,582
- Central government operations (percent of GDP) — Net lending (+)/borrowing (-): 2014: -6.3; 2015: -4.8; 2016: -5.2; 2017: -2.7; 2018 Proj.: -2.9; 2019 Proj.: -2.2
- Gross government debt (percent of GDP): 2014: 27.1; 2015: 32.3; 2016: 37.8; 2017: 37.5; 2018 Proj.: 36.8; 2019 Proj.: 36.2
- Balance of payments (current account, levels in millions of U.S. dollars): 2014: 303; 2015: 2,426; 2016: 4,517; 2017: 4,851; 2018 Est.: 4,867; 2019 Proj.: 5,097
- Gross official reserves (end-year, millions of U.S. dollars and months of imports): 2017: 1,736 (4.9 months); 2018 Est.: 2,213 (5.6 months); 2019 Proj.: 1,812 (4.4 months)
- Monetary aggregates (selected, millions of Kina): Broad money 2017: 22,628; 2018 Proj.: 26,359; 2019 Proj.: 23,584

### Debt sustainability, DSA, and public debt risks
- Public debt coverage and contingent liabilities:
  - Government-guaranteed debts of SOEs not fully captured; authorities’ estimate of current government guarantees to SOEs: K 1.4 billion, equivalent to about 2 percent of GDP.
  - Unfunded superannuation liabilities estimated at around K 2 billion (3 percent of 2017 GDP).
  - Treasury bills (less than 1 year to maturity) share of total domestic financing: 45 percent in 2012; 54 percent in 2017.
- Background on debt:
  - Total public debt to GDP: 37.5 percent as of end-2017.
  - Government debt rose from 19 percent of GDP in 2012 to 37.5 percent at end-2017.
  - Share of Chinese loans in total public external debt: 1.2 percent in 2010; 23.5 percent in 2017.
- External public debt by creditor groups (millions of U.S. dollars): Multilateral: 2017 = 1,272; Bilateral Paris Club: 2017 = 131; Bilateral Non-Paris Club: 2017 = 538; Commercial: 2017 = 348; Total external public debt: 2017 = 2,289.
- DSA findings and stress tests:
  - Baseline: PPG external debt ratios stay below indicative thresholds.
  - Planned increase in public external debt: from 11.3 percent of GDP in 2017 to 15.3 percent in 2018.
  - Historical shock scenario shows substantial threshold breaches; most extreme shock (export shocks) breaches PV of PPG external debt-to-GDP threshold.
  - External debt-service and public debt-service indicators show potential short-lived breaches under certain scenarios; overall risk of public debt distress assessed as moderate.
  - Medium classification for debt-carrying capacity implies threshold for PV of total public debt increased from 35 percent to 55 percent of GDP.
- Primary deficit / fiscal outlook in DSA:
  - Primary fiscal balance projected to improve from a deficit of 0.5 percent of GDP in 2018 to a surplus of 0.8 percent by end of forecast period (assuming MTRS implementation).
  - Baseline includes issuance of a US$500 million 10-year sovereign bond with a yield of 8.375 percent; redemption in 2028.

### Institutional, governance, and structural recommendations
- Strengthen PFM and SOE transparency: implement PEFA-identified reforms; publish audited accounts of SOEs; ensure boards for public bodies.
- Strengthen NSO, implement data quality improvements, and reconcile NSO and Treasury GDP estimates.
- Continue AML/CFT implementation and strengthen FASU operations and regional cooperation.
- Advance ICAC enabling legislation, operationalize National Procurement Commission, and use IFMIS for public transparency.

### Risk Assessment Matrix — selected entries
- External risk: Weakening of global growth — Relative likelihood: Medium; Impact if realized: H ↓; Staff advice: Allow Kina to depreciate; Additional fiscal adjustment required.
- Domestic risk: Measures to increase supply of FX and eliminate backlog of FX orders — Relative likelihood: High; Impact if realized: H ↓ If delayed, an adverse growth impact; ↑ If implemented, growth and investment response could be greater than expected.
- Domestic risk: Projects to increase LNG export capacity begin sooner than assumed (early 2020s) — Relative likelihood: Medium; Impact if realized: H ↑; Staff advice: Continue with fiscal consolidation in line with fiscal rule; Eliminate FX restrictions and restore floating exchange rate.

*Source: IMF staff report (cr18352 - 2018).*

### 2018. The staff team comprised Scott Roger (Head), Geoffrey

### cr18352 - 2018. The staff team comprised Scott Roger (Head), Geoffrey

### Recent developments, outlook, and risks — Economic activity, inflation, and balance of payments
- Recent years: aggregate growth averaged around 2 percent in 2016-17.
- Drivers of sluggish growth:
  - Low commodity prices and end of large resource project investments.
  - Severe drought in 2015-16 reduced mining and agricultural output.
  - Fiscal consolidation dampening aggregate demand.
  - Shortage of foreign exchange (FX) sustained by an overvalued exchange rate, causing severe import compression.
- 2018:
  - Growth adversely affected by a large (magnitude 7.5) earthquake disrupting gas, oil, and mining industries; resource-sector output projected to be below 2017 levels.
  - Overall GDP growth projected to be close to zero percent in 2018.
  - CPI inflation projected to rise slightly to 4.8 percent at end-2018.
- 2019 and medium term:
  - Aggregate GDP growth projected at 3.8 percent in 2019; inflation projected to remain around 5 percent.
  - Medium-term aggregate growth projected to trend upwards towards the estimated sustainable rate of about 4 percent; major new resource projects could raise growth substantially.
- Balance of payments and reserves:
  - Current account surplus for 2018 estimated at around 23 percent of GDP.
  - International reserves around $1.7 billion, equivalent to 5 months of imports.
  - Projected improvement in FX inflows associated with higher commodity prices, a sovereign bond issue, and ADB and World Bank loans; expected increase in imports as FX backlog is shortened.

### Fiscal policies and financing — recent performance and projections
- 2018 fiscal stance:
  - Budget deficit projected at 2.9 percent of GDP in 2018.
  - Tax collection up substantially from last year and well above budget projections; gains offset by expenditure slippages, particularly on personnel emoluments.
  - Public debt/GDP ratio projected at 36.8 percent of GDP in 2018, exceeding government’s debt ceiling target.
- Public financial management improvements:
  - IFMIS introduced and being extended to provincial governments (roll out due to be completed by end-2018).
  - National Procurement Act passed.
- Sovereign bond issuance:
  - Debut sovereign bond: $500 million, 10-year maturity, yield of 8.375 percent.
  - Intended uses: improve domestic debt profile and help resolve FX and exchange rate issues.
- Baseline medium-term fiscal projections (Unadjusted Scenario, Text Table 1):
  - GDP growth (%) by year: 2017: 2.5; 2018: 0.0; 2019: 3.8; 2020: 3.1; 2021: 3.7; 2022: 3.7; 2023: 3.8
  - Inflation (%) by year: 2017: 5.4; 2018: 4.8; 2019: 4.7; 2020: 4.7; 2021: 4.7; 2022: 4.7; 2023: 4.1
  - Net lending/borrowing (% of GDP): 2017: -2.7; 2018: -2.9; 2019: -2.2; 2020: -1.7; 2021: -1.2; 2022: -0.9; 2023: -0.8
  - Government expenditure (% of GDP): 2017: 20.3; 2018: 20.8; 2019: 19.0; 2020: 18.8; 2021: 18.6; 2022: 18.6; 2023: 18.6
  - Government debt (% of GDP): 2017: 37.5; 2018: 36.8; 2019: 36.2; 2020: 35.5; 2021: 35.0; 2022: 34.1; 2023: 33.6
  - Current account (% of GDP): 2017: 23.9; 2018: 22.8; 2019: 23.0; 2020: 21.4; 2021: 20.3; 2022: 19.2; 2023: 18.4
  - Gross reserves (months of imports): 2017: 4.9; 2018: 5.6; 2019: 4.4; 2020: 4.8; 2021: 4.8; 2022: 4.7; 2023: 4.6

### Monetary and foreign exchange policies
- Policy objectives and challenges:
  - PNG seeking to restore exchange rate flexibility to cushion commodity price and investment cycle swings.
  - Kina relatively stable from 2016 until recently; FX rationing supported stability but caused import compression and a large backlog of FX orders.
  - Interest rate transmission is weak; BPNG’s capacity to implement monetary policy using interest rates needs strengthening.
  - FX shortage contributed to excess liquidity (bank deposits bolstered by funds for dividend payments abroad) while credit growth remained weak.
- Reform agenda (intentions):
  - (i) improve monetary policy communication; (ii) strengthen the monetary operations framework; (iii) restore functioning of the FX market and exchange rate flexibility; (iv) lengthen the maturity structure of public debt; (v) strengthen BPNG’s formulation of monetary policy.
- Steps taken:
  - IMF technical assistance (TA) mission visited PNG; additional TA likely.
  - PFTAC assisted BPNG staff with forecasting and policy analysis capacity building.
  - BPNG notified banks it will no longer provide direction on allocation of FX to customers.
  - Since July, BPNG interventions to increase FX supply averaged about $50 million per month.
  - BPNG has overseen a gradual downward adjustment in the exchange rate against the US dollar of around 0.3 percent per month.
  - Intervention plus improved export earnings have begun to shorten FX orders backlog, particularly for trade in goods and services.

### Risks to the outlook
- Upside risks:
  - LNG and mining projects that could begin in 2020 would boost investment inflows and growth, easing fiscal and FX pressures (timing and values uncertain).
  - Stronger-than-expected non-resource sector response to easing FX rationing and gradual exchange rate adjustment.
- Downside risks:
  - Delays in easing FX shortages and exchange rate adjustment would adversely affect growth.
  - Weakening of global growth could reverse commodity price gains, reduce government revenues, increase pressure for fiscal consolidation, and lower business confidence.
- Noted potential major projects (listed as examples in risk footnote): Wafi-Golpu; Papua LNG (led by Total); Pynang LNG (led by Exxon-Mobil); Pasca LNG (led by Twinza Oil and Gas).

### Macroeconomic outlook with recommended policy adjustments (Adjustment Scenario)
- Summary of intended outcomes under adjustment scenario:
  - More ambitious fiscal consolidation coupled with exchange rate adjustment reduces public debt/GDP into the 30-35 percent medium-term target range by 2019.
  - Monetary policy eliminates overvaluation of the Kina and clears the FX orders backlog over the same period.
  - Growth and inflation trajectories broadly preserved; lower potential for debt distress and FX-market disruption.
- Adjustment Scenario medium-term projections (Text Table 2):
  - GDP growth (%) by year: 2017: 2.5; 2018: 0.0; 2019: 3.3; 2020: 3.2; 2021: 3.7; 2022: 3.6; 2023: 3.7
  - Inflation (%) by year: 2017: 5.4; 2018: 4.8; 2019: 5.5; 2020: 5.0; 2021: 4.8; 2022: 4.8; 2023: 4.1
  - Net lending/borrowing (% of GDP): 2017: -2.7; 2018: -2.9; 2019: -1.0; 2020: -0.7; 2021: -0.4; 2022: -0.1; 2023: -0.1
  - Government expenditure (% of GDP): 2017: 20.9; 2018: 21.4; 2019: 18.3; 2020: 18.3; 2021: 18.2; 2022: 18.2; 2023: 18.2
  - Government debt (% of GDP): 2017: 37.5; 2018: 36.8; 2019: 35.0; 2020: 33.4; 2021: 32.3; 2022: 30.8; 2023: 29.6
  - Current account (% of GDP): 2017: 23.9; 2018: 22.8; 2019: 24.7; 2020: 23.5; 2021: 22.3; 2022: 20.9; 2023: 19.9
  - Gross reserves (months of imports): 2017: 4.9; 2018: 5.6; 2019: 4.5; 2020: 5.0; 2021: 5.0; 2022: 4.8; 2023: 4.7

### Policies for macroeconomic stability and development — Fiscal policy recommendations
- Fiscal strategy and targets:
  - Adopted medium-term target: zero non-resource primary balance to provide fiscal stability, sustainability, and intergenerational sharing of resource benefits.
  - Annual expenditure rule recommended to reconcile debt and revenue targets and focus attention on revenue needed for development spending.
- Consolidation needs:
  - Additional fiscal consolidation needed in 2019-22 to bring debt/GDP to long-term target of 30 percent; requires cutting net spending by around K 1 billion (1.4 percent of GDP).
  - Emphasis on spending restraint in the near term given time needed for sustained revenue increases under the Medium Term Revenue Strategy (MTRS).
- Specific fiscal measures recommended:
  - Personnel emoluments:
    - Improve financial management controls to reduce personnel costs by about K 0.5 billion (10 percent or 0.7 percent of GDP).
    - Actions: complete identifying public employees using head counts, national identification cards and appointment letters; use IFMIS data to identify staff collecting more than one pay cheque; remove from payroll names of persons not actually working; ensure budget allocations based on accurate data; ensure OSPEAC meets regularly and takes action; reduce expenditure ceiling on personnel emoluments from 40 to 35 percent of non-resource, non-grant revenue.
  - District and Provincial Service Improvement Program (DSIP and PSIP) grants:
    - Recommended scaling back by K 0.5 billion (50 percent, or 0.7 percent of GDP) at least until the debt target has been achieved.
    - Cuts should concentrate on programs providing the least accountability.
  - Expenditure arrears and payment delays:
    - Priority to eliminate payments delays and arrears; paying on time would boost business confidence.
  - Revenue expansion and MTRS implementation:
    - Ensure government negotiation teams for major new gas and mining projects use IMF and World Bank TA analysis and tools.
    - MTRS requires strong, focused management; governance by MTRS Steering Committee (SC) is essential:
      - SC should hold regular governance meetings and require regular reports from Treasury and IRC management.
      - Dedicated resources should be allocated for the SC secretariat.
      - Use large taxpayer office to pilot modern tax administration procedures for rollout.
      - IRC should quickly build a compliance risk management function to identify and address tax non-compliance, especially in logging, fisheries, and gold mining.
      - Allocate resources to strengthen enforcement and contract tax audit specialists to address complex natural resources sector risks.

*Source: IMF staff report (cr18352 - 2018). The staff team comprised Scott Roger (Head), Geoffrey Bannister, Ryota Nakatani (all APD), and Leni Hunter and Jacinta Hesaie (RR-Fiji). The mission was accompanied by Sali David (OED). Medha Madhu Nair and Nadine Dubost assisted from HQ.*

### 21.      Fund staff support the use of the sovereign bond and other government borrowing to

### 21.      Fund staff support the use of the sovereign bond and other government borrowing to 

### Fiscal policy and debt management
- Fund staff support using the sovereign bond and other government borrowing to lengthen the maturity profile of domestic public debt and resolve the FX orders backlog.
- Implementation of government debt management operations must be very closely coordinated with interventions to reduce the FX orders backlog to minimize uncertainty and volatility in liquidity conditions.
- Authorities’ views:
  - Agreed additional fiscal consolidation is needed, although there is some uncertainty about the magnitude.
  - A combination of revenue and expenditure measures is appropriate.
  - Revenue efforts will focus on increasing compliance and strengthening non-tax revenue.
  - On expenditure: payroll and grants are sensitive areas.
    - Payroll: provincial-level audits to bring spending under better control; national-level savings via restructuring of departments.
    - PSIPs and DSIPs: focus on increasing transparency and improving procurement practices, which may lead to savings.

### Monetary and foreign exchange policies
- Key objectives of the strategy:
  - (i) restore exchange rate flexibility and a functioning FX market;
  - (ii) strengthen BPNG capacity to use interest rates to manage monetary conditions;
  - (iii) reduce the government’s dependence on short-term domestic debt.
- Recommended elements:
  - Clearing the backlog of FX orders prior to floating the exchange rate to avoid a large, disruptive movement in the exchange rate.
    - Commercial bank estimates suggest the overall backlog is around US$1 billion.
    - A well-communicated commitment to clear the backlog through regular FX interventions by BPNG over the next year or so could favorably impact business sentiment and investment.
    - Easing of import compression should favorably affect production and put some downward pressure on inflation.
  - Gradual elimination of exchange rate overvaluation should precede floating:
    - EBA analysis suggests the Kina is overvalued by 10.7 percent.
    - Eliminating overvaluation will require a depreciation of 12-15 percent in nominal terms.
    - Fund staff recommend a somewhat faster pace of adjustment than seen so far in 2018.
    - BPNG should aim to complete the transition to an interbank FX market within two years.
  - Other measures to boost the net supply of FX:
    - Focus on sustainable increases in inflows.
    - Increase tax compliance by export earners to raise government revenues and FX inflows on a sustained basis.
  - Strengthened liquidity management:
    - Clearing the FX orders backlog will withdraw substantial liquidity from the system.
    - Using proceeds from government foreign borrowing to retire short-term debt will inject liquidity.
    - Managing these operations to achieve liquidity objectives requires strengthening liquidity forecasting and communications with market participants.
    - Strengthen the monetary policy operational framework to enable BPNG to adjust liquidity conditions appropriately; pursue steps to strengthen the liquidity management framework in the near term.
- Authorities’ views:
  - Agreed with the general thrust of monetary and exchange rate policy reforms.
  - Emphasized careful management of liquidity effects from use of FX to clear the backlog and reduce short-term public debt.
  - Agreed that good communication with stakeholders is essential.
  - Planning of the reform implementation strategy is under way and TA will be requested as needed.

### Financial stability
- Overall assessment:
  - PNG banks are well-capitalized, have low NPLs, and high profitability.
    - Average 29 percent tier 1 capital asset ratio.
    - Average 1.3 percent NPLs.
    - Average 27.4 percent return on equity.
- Risks requiring monitoring by BPNG:
  - Kina Bank’s proposed acquisition of ANZ retail and non-corporate commercial business:
    - Initial absorption of many new customers and a large increase in scale could challenge Kina Bank’s risk management; close monitoring by BPNG is needed.
  - Reforms to monetary and FX operations and Treasury’s change to government debt maturity structure:
    - Will raise challenges for commercial banks in managing liquidity, FX, and credit risks, and affect market functioning.
    - BPNG Financial Markets Department should work with banks on smooth introduction; BPNG Supervision Department must ensure proper risk management.
  - Impact of reductions in systemic excess liquidity and exchange rate adjustment:
    - Could adversely affect some firms’ balance sheets.
    - Bank discussions suggest gradual exchange rate adjustment is unlikely to generate significant stresses among banks’ customers, but careful monitoring is required.
- Interbank market issues:
  - Evidence that the interbank market is not effectively redistributing liquidity between banks.
  - Interbank bilateral exposure limits and terms of access to central bank liquidity facilities may inhibit a market solution.
  - Recommendation: seek a market-based solution in which central bank liquidity provision is limited.
- Authorities’ views:
  - Agreed careful monitoring of Kina Bank’s expanded business is needed.
  - BPNG is considering options for dealing with maldistribution of liquidity between banks.

### Policies for inclusive development
- Key elements to achieve development objectives:
  - Better management of natural resource wealth:
    - Government negotiating commercial agreements for major new LNG projects.
    - Improvements in terms of LNG agreements, in line with international best practice, will yield significant revenues.
    - Important to develop a framework to manage and use revenues, including a sovereign wealth fund, fiscal buffers, and more transparent expenditure.
  - Development of the non-resource sector:
    - Focus on incentives for private sector investment, supported by government provision of essential public goods: infrastructure, education, healthcare, clean water and electricity, telecommunications.
    - Financing requires sustained increases in government revenue and careful prioritization of projects; a consistent and efficient medium-term fiscal framework is essential.
    - Fund staff strongly endorse BPNG’s efforts to promote financial inclusion, noting it tends to promote greater gender equity.
  - Addressing governance and corruption:
    - Eliminating corruption and strengthening governance is essential for investment attractiveness, sustainable growth, and economic inclusion.
    - Fund staff strongly support elimination of corruption and strengthening governance as part of PNG’s development strategy and its effective implementation through actionable measures.
- Recent governance-strengthening measures welcomed by Fund staff:
  - Establishment of the Independent Commission Against Corruption (ICAC):
    - Recommendation: ICAC enabling legislation be passed and gazetted in the near term; ICAC should be given a high degree of autonomy, particularly regarding selection of cases and powers of prosecution.
  - Roll-out of the IFMIS budget monitoring system:
    - Recommendation: use IFMIS data to monitor implementation of DSIP and PSIP spending and compare against guidelines; publication can improve discipline and public confidence.
  - National Procurement Act:
    - Potential to substantially increase transparency and integrity of procurement.
    - Recommendation: establish the National Procurement Commission quickly, give it considerable autonomy, provide clear guidelines, and publicly monitor compliance.
  - Government payroll controls:
    - Since 2017, Treasurer emphasized need to control public sector payroll to prevent budget overruns.
    - Recommendation: OSPEAC should lead efforts to strengthen payroll monitoring and control, eliminate over-payment to absent workers and multiple pay cheques.
  - AML/CTF compliance:
    - PNG was grey-listed in 2014; major improvements since then.
    - In 2015, PNG passed 5 major pieces of legislation to strengthen AML/CFT regime.
    - In 2016 BPNG took over AML/CTF supervision, establishing FASU and expanding planned staff from about 5 to 30-35.
    - Actions led to PNG’s removal from the grey-list in 2016.
    - With ADB assistance, FASU conducted a National Risk Assessment (NRA) in 2017, awaiting clearance by the National Executive Council.
    - Recommendations:
      - Immediate clearance of the NRA and strategy documents.
      - Pursue MOUs between FASU and counterparts in China, Malaysia, and Indonesia.
      - FASU should be a regular participant in meetings of the Bank South Pacific supervisory college.
- Authorities’ views:
  - Broad agreement on importance of governance reforms.
  - Noted ICAC is a work in progress and NRA will be made public shortly.
  - Logging and fishing identified as particularly challenging areas for AML.

### Statistics and other issues
- Urgent action needed to strengthen governance, management, and performance at the National Statistical Office (NSO):
  - Timely production, compilation, and dissemination of macroeconomic statistics is essential.
  - Suggested reactivation of the NSO Reform Committee, including BPNG, Treasury, IRC, and Customs, under the chairmanship of BPNG or Treasury.
  - Committee should:
    - Overhaul the NSO management team and review NSO’s budget.
    - Establish a set of key economic statistics to be produced and published, including appropriate release timetables, for which NSO should be accountable.
    - Ensure changes in methodology, significant data revisions, and major new initiatives (e.g. the proposed 2019 HIES survey) are thoroughly reviewed by the Committee.
    - Establish MOUs with government departments to make administrative data (e.g. GST data) available to NSO to improve quality and lower cost of producing key macroeconomic series.
- Balance of payments data:
  - Recent TA recommendations should be implemented.
  - IMF TA mission obtained valuable information on disposition of earnings from extractive industries, especially the LNG sector.
  - Recommendation: incorporate this information into balance of payments compilation.
- FX restrictions and Article VIII consistency:
  - Fund staff welcome elimination of BPNG guidance to authorized FX dealers on use of FX and encourage elimination of remaining FX restrictions inconsistent with Article VIII of the IMF’s Articles of Agreement:
    - Eliminate the requirement for a tax clearance certificate prior to making payments or transfers for current international transactions.
    - Eliminate or modify limits placed on spreads between exchange rate on BPNG FX allocations and dealer rates with clients; achieve consistency by re-formulating bands in terms of percentage points rather than basis points, with bands explicitly limited to less than 2 percentage points.
- Authorities’ views:
  - Agreed on need to improve governance and rebuild capacity in NSO and agreed with the suggested approach.

### Staff appraisal
- Recent performance and shocks:
  - PNG economy grew sluggishly in recent years due to domestic and external factors and was adversely affected by a large earthquake in 2018.
  - In 2015-16, low commodity export prices and a severe drought dampened growth; policy developments also contributed to slow growth.
  - Fiscal consolidation in response to weak revenues has dampened aggregate demand.
  - An overvalued exchange rate contributed to FX shortage and severe import compression, inhibiting the non-resource sector.
  - The early 2018 earthquake disrupted oil, gas, and minerals exports; production and exports have recovered.
  - Growth for the year is estimated at close to zero, while inflation has declined to 4 ½ percent.
- Projections and policy implications:
  - In 2019, with full recovery from earthquake effects, growth is projected to pick up to 3.8 percent.
  - Significant investment and growth spillovers from new resource projects are unlikely until at least 2021.
  - Until then, growth will be held back by need for fiscal consolidation to bring public debt/GDP ratio down towards long-term target ceiling of 30 percent.
  - At present pace of adjustment, the Kina will remain significantly overvalued and FX shortages will persist for a lengthy period.
  - More ambitious fiscal adjustment and additional flexibility and development of the monetary and exchange rate framework, coupled with structural policies for inclusive growth and better harnessing of PNG’s natural resource wealth, would have significant payoffs.
- Fiscal framework recommendations:
  - Build on recent measures to strengthen the fiscal framework.
  - Reconfirm a long-term debt/GDP target of 30 percent, with a temporary ceiling of 35 percent.
  - Government adopted a zero non-resource primary balance as a medium-term fiscal target.
  - Staff recommend adoption of an expenditure rule (determined jointly with the revenue target) to reconcile fiscal targets and guide budget policy.
  - Strong commitment to strengthen domestic revenue mobilization through implementation of the Medium-Term Revenue Strategy is welcome.
  - Recent issue of a debut sovereign bond will raise PNG’s external debt/GDP ratio, but government intends to use funds to improve the domestic public debt profile and help resolve the FX and exchange rate conundrum.

*IMF staff report (content unit: cr18352).*

### 38.      In the near term, additional fiscal consolidation is needed. Substantial progress in

### cr18352 - 38.      In the near term, additional fiscal consolidation is needed. Substantial progress in

### Fiscal consolidation: near-term assessment and recommendations
- Substantial progress in narrowing the fiscal deficit was made in 2017, but consolidation has stalled in 2018, and the public debt/GDP ratio is well above the long-term target.
- Staff recommends a faster pace of consolidation than is projected on current policies.
- Recommended instruments for consolidation:
  - A combination of revenue increases and reductions in spending.
  - Particular emphasis on reductions in the government wage bill and grants.

### Exchange rate, foreign exchange (FX) operations, and liquidity management
- Staff welcome greater exchange rate flexibility seen in recent months and the increase in supply of FX to market participants.
- Recommended actions:
  - Step up the pace of exchange rate adjustment somewhat.
  - Use FX proceeds of the bond issue and other inflows of FX to eliminate the backlog of FX orders so that an interbank FX market can be re-established within two years.
  - Complement exchange rate actions with other measures to boost supply of FX to the market.
  - Strengthen liquidity management to manage the liquidity effects of public debt management and FX operations.
  - Carefully monitor the impact of these measures on financial stability.

### Natural resource management, non-resource sector development, and governance
- Achieving the government’s development objectives requires:
  - Better management of natural resource wealth.
  - Development of the non-resource sector.
  - Addressing challenges in governance and corruption.
- Staff recommendations:
  - Seek better terms in negotiations for new resource projects.
  - Develop a framework for management and use of resource revenues.
  - Assess the long-term cost of non-resource sector development when determining domestic revenue mobilization targets.
  - Strong support for elimination of corruption and strengthening of governance as part of PNG’s development strategy.

### Institutional and surveillance note
- It is proposed that the next Article IV consultation with PNG be held on the standard 12-month cycle.

### National accounts: data revisions and measurement issues (Box 1)
- In March 2018, the NSO released National Accounts data for 2014 and 2015 incorporating an improved methodology for national accounts deflators (single extrapolation method vs previous single deflation method).
- The NSO method improves on the previous single deflation method but falls short of the preferred double deflation method; double deflation is more data demanding.
- Key discrepancies between Treasury and NSO for 2015:
  - Treasury estimates nominal GDP growth in 2015 of 9.8 percent vs just 0.7 percent for NSO.
  - Treasury estimated real GDP growth of 10.5 percent and a decrease in the deflator of 0.7 percent vs NSO’s estimate of 5.3 percent growth and a decline of 4.4 percent in the deflator.
  - Differences reflect different information on activity and prices in sectors such as oil, gas, and construction. The change in deflator methodology may have had some effect, but is not the primary explanation.
- Treasury has initiated meetings of key stakeholders, including NSO, BPNG, and IRC, to discuss differences and agree on appropriate revisions to the 2014-2015 data.

### External assessment summary (Box 2)
- Overall: PNG’s external position is moderately weaker than implied by fundamentals and desirable policies, given its weak gross foreign reserve position and overvalued real effective exchange rate (REER).
- EBA-lite results (mixed):
  - EBA-lite current account balance (CAB) analysis implies a current account norm of –3.8 percent of GDP, compared to an estimated outcome of 23.9 percent of GDP, suggesting that the REER is undervalued by around 65 percent.
  - The EBA-lite REER index model suggests an overvaluation of 10.7 percent.
  - The EBA-lite REER index model result is used instead because the EBA-lite current account balance does not incorporate the effects of restricted FX.
- Recent developments and drivers:
  - The current account surplus in 2017 was supported by large LNG exports and continued import compression caused principally by restricted access to FX.
  - The surplus has been largely offset by capital and financial account outflows associated with the LNG project—mainly servicing of the project debt.
  - In 2017, the REER appreciated marginally by 0.3 percent while the nominal effective exchange rate (NEER) depreciated by around 3 percent compared to 2016 outcomes.
- Reserves and adequacy:
  - Despite improvement in the current account, the reserves-to-import ratio is below the level implied by the reserve adequacy metric approach.
  - Reserves were around 5 months of imports at end-2017, lying below what the metric approach suggests as reserves levels for a resource rich country and above a 3-month import cover rule.
  - LNG exports have increased, but net FX inflow from these exports has been limited, as these are mostly held offshore and mostly for project debt servicing.

### Key figures and indicators cited
- 2017: substantial fiscal deficit narrowing.
- 2018: consolidation stalled.
- Re-establish interbank FX market within two years.
- NSO vs Treasury (2015):
  - Nominal GDP growth: Treasury 9.8 percent; NSO 0.7 percent.
  - Real GDP growth: Treasury 10.5 percent; NSO 5.3 percent.
  - Deflator change: Treasury decrease 0.7 percent; NSO decline 4.4 percent.
- EBA-lite current account norm: –3.8 percent of GDP.
- Estimated current account outcome: 23.9 percent of GDP.
- REER undervaluation implied by CAB analysis: around 65 percent.
- EBA-lite REER index overvaluation: 10.7 percent.
- REER change in 2017: appreciated 0.3 percent.
- NEER change in 2017: depreciated around 3 percent.
- Reserves: around 5 months of imports at end-2017.
- Reserve cover rule comparison: above a 3-month import cover rule.
- Nominal GDP (2016): US$21.1 billion 1/

*Source: IMF staff report text (excerpts).*

### 7.9 million

### 7.9 million

### Overview and key macroeconomic indicators
- Population: 7.9 million
- GDP per capita (2016): US$2,353
- Quota: SDR 131.6 million (14th Review: SDR 263.2 million)
- Real GDP growth (annual):
  - 2014: 15.4
  - 2015: 5.3
  - 2016: 1.6
  - 2017: 2.5
  - 2018 Est.: 0.0
  - 2019 Proj.: 3.8
- Sector shares (percent of GDP or output):
  - Agriculture, forestry and fishing (share): 2014: 17.8; 2015: 18.4; 2016: 18.5; 2017: 18.2; 2018 Est.: 18.7; 2019 Est.: 18.6
  - Mining and quarrying (share): 2014: 9.1; 2015: 7.7; 2016: 8.0; 2017: 8.0; 2018 Est.: 7.6; 2019 Est.: 7.7
  - Oil and gas extraction (share): 2014: 11.3; 2015: 14.1; 2016: 15.0; 2017: 15.4; 2018 Est.: 14.1; 2019 Est.: 15.0
- Resource sector indicators:
  - Resource revenue (share of GDP): 2014: 2.3; 2015: 1.1; 2016: 0.7; 2017: 1.0; 2018 Est.: 0.7; 2019 Est.: 0.5
  - Resource sector contribution to current account (levels and shares shown across tables)
- Prices and exchange rates:
  - CPI (period average) and CPI (end-period) available in tables; CPI (period average) examples: 2014: 5.2; 2015: 6.0; 2016: 6.7
  - US$/kina (end-period) series shown across tables
  - Terms of trade (2010=100, end-period) examples: 2014: 97.4; 2015: 102.0; 2016: 93.4; 2017: 85.0; 2018: 87.0; 2019: 84.8

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

### Central government operations (2014–19) — levels (millions of Kina)
- Revenue and Grants:
  - 2014: 11,875
  - 2015: 11,003
  - 2016: 10,486
  - 2017: 11,525
  - 2018 Proj.: 12,656
  - 2019 Proj.: 12,582
- Taxes (component of revenue):
  - 2014: 10,232
  - 2015: 9,157
  - 2016: 8,422
  - 2017: 9,128
  - 2018 Proj.: 9,715
  - 2019 Proj.: 10,586
  - Taxes on income, profits, and capital gains: 2014: 6,779; 2015: 5,894; 2016: 5,286; 2017: 5,317; 2018 Proj.: 5,522; 2019 Proj.: 6,061
  - Taxes on goods and services: 2014: 2,884; 2015: 2,680; 2016: 2,584; 2017: 3,242; 2018 Proj.: 3,567; 2019 Proj.: 3,876
- Grants:
  - 2014: 868
  - 2015: 820
  - 2016: 1,430
  - 2017: 1,440
  - 2018 Proj.: 1,025
  - 2019 Proj.: 943
- Other Revenue:
  - 2014: 775
  - 2015: 1,026
  - 2016: 634
  - 2017: 944
  - 2018 Proj.: 1,917
  - 2019 Proj.: 1,053
- Resource revenue (component of other revenue/revenue):
  - 2014: 1,301
  - 2015: 652
  - 2016: 396
  - 2017: 676
  - 2018 Proj.: 476
  - 2019 Proj.: 396
  - Mining and Petroleum Taxes: 2014: 794; 2015: 195; 2016: 92; 2017: 114; 2018 Proj.: 86; 2019 Proj.: 96 (table shows fragmented entries; recorded as given)
- Expenditure and net lending:
  - Total Expenditure:
    - 2014: 15,454
    - 2015: 13,759
    - 2016: 13,572
    - 2017: 13,320
    - 2018 Proj.: 14,718
    - 2019 Proj.: 14,258
  - Expense (component):
    - 2014: 12,427
    - 2015: 11,691
    - 2016: 12,157
    - 2017: 11,559
    - 2018 Proj.: 13,328
    - 2019 Proj.: 12,618
  - Net acquisition of non-financial assets:
    - 2014: 3,027
    - 2015: 2,068
    - 2016: 1,415
    - 2017: 1,761
    - 2018 Proj.: 1,390
    - 2019 Proj.: 1,640
  - Gross operating balance:
    - 2014: -552
    - 2015: -688
    - 2016: -1,672
    - 2017: -33
    - 2018 Proj.: -672
    - 2019 Proj.: -36
  - Net lending (+)/borrowing (-) [Overall balance]:
    - 2014: -3,579
    - 2015: -2,756
    - 2016: -3,087
    - 2017: -1,795
    - 2018 Proj.: -2,062
    - 2019 Proj.: -1,675
  - Primary balance:
    - 2014: -2,646
    - 2015: -1,715
    - 2016: -1,839
    - 2017: -270
    - 2018 Proj.: -346
    - 2019 Proj.: 45
- Financing and debt stock:
  - Net financial transactions (financing):
    - 2014: 3,579
    - 2015: 3,012
    - 2016: 3,087
    - 2017: 1,795
    - 2018 Proj.: 2,062
    - 2019 Proj.: 1,675
  - Gross government debt (levels):
    - 2014: 15,379
    - 2015: 18,457
    - 2016: 22,525
    - 2017: 24,583
    - 2018 Proj.: 26,017
    - 2019 Proj.: 27,225
  - Memorandum: Gross government debt, percentage of GDP:
    - 2014: 27.1
    - 2015: 32.3
    - 2016: 37.8
    - 2017: 37.5
    - 2018 Proj.: 36.8
    - 2019 Proj.: 36.2

### Central government operations (2014–19) — percent of GDP
- Total revenue and grants:
  - 2014: 20.9
  - 2015: 19.3
  - 2016: 17.6
  - 2017: 17.6
  - 2018 Proj.: 17.9
  - 2019 Proj.: 16.7
- Taxes (percent of GDP):
  - 2014: 18.0
  - 2015: 16.0
  - 2016: 14.1
  - 2017: 13.9
  - 2018 Proj.: 13.7
  - 2019 Proj.: 14.1
- Resource revenue (percent of GDP):
  - 2014: 2.3
  - 2015: 1.1
  - 2016: 0.7
  - 2017: 1.0
  - 2018 Proj.: 0.7
  - 2019 Proj.: 0.5
- Total expenditure (percent of GDP):
  - 2014: 27.2
  - 2015: 24.1
  - 2016: 22.8
  - 2017: 20.3
  - 2018 Proj.: 20.8
  - 2019 Proj.: 19.0
- Net lending (+)/borrowing (-) [Overall balance] (percent of GDP):
  - 2014: -6.3
  - 2015: -4.8
  - 2016: -5.2
  - 2017: -2.7
  - 2018 Proj.: -2.9
  - 2019 Proj.: -2.2
- Primary balance (percent of GDP):
  - 2014: -4.7
  - 2015: -3.0
  - 2016: -3.1
  - 2017: -0.4
  - 2018 Proj.: -0.5
  - 2019 Proj.: 0.1
- Non-resource net lending (+)/borrowing (-) (percent of GDP):
  - 2014: -8.6
  - 2015: -6.0
  - 2016: -5.8
  - 2017: -3.8
  - 2018 Proj.: -3.6
  - 2019 Proj.: -2.8
- Government deposits (percent of GDP): 2014: 7.6; 2015: 6.1; 2016: 4.7; 2017: 4.3; 2018 Proj.: 3.9; 2019 Proj.: 3.7

### Balance of payments (2014–23) — key flows (millions of U.S. dollars)
- Current account balance (levels):
  - 2014: 303
  - 2015: 2,426
  - 2016: 4,517
  - 2017: 4,851
  - 2018 Est.: 4,867
  - 2019 Proj.: 5,097
  - 2020 Proj.: 4,870
  - 2021 Proj.: 4,767
  - 2022 Proj.: 4,657
  - 2023 Proj.: 4,573
- Trade balance (levels):
  - 2014: 4,248
  - 2015: 5,150
  - 2016: 6,715
  - 2017: 7,203
  - 2018 Est.: 6,837
  - 2019 Proj.: 7,294
- Exports (f.o.b.):
  - 2014: 8,758
  - 2015: 7,800
  - 2016: 8,683
  - 2017: 9,710
  - 2018 Est.: 9,576
  - 2019 Proj.: 10,460
  - Resource exports examples: 2014: 7,073; 2015: 6,617; 2016: 7,103; 2017: 8,087; 2018 Est.: 8,323; 2019 Proj.: 9,052
- Imports (f.o.b.) and components:
  - Imports (f.o.b.) total: 2014: -4,510; 2015: -2,650; 2016: -1,968; 2017: -2,507; 2018 Est.: -2,739; 2019 Proj.: -3,166
  - Nonresource imports and resource import components reported in table
- Services, Income, Current transfers:
  - Services (levels): 2014: -3,104; 2015: -1,887; 2016: -1,648; 2017: -1,779; 2018 Est.: -1,293; 2019 Proj.: -1,292
  - Income (levels): 2014: -956; 2015: -944; 2016: -784; 2017: -820; 2018 Est.: -925; 2019 Proj.: -1,041
  - Current transfers: 2014: 115; 2015: 106; 2016: 234; 2017: 247; 2018 Est.: 247; 2019 Proj.: 136
- Capital and financial account balance (levels):
  - 2014: -883
  - 2015: -494
  - 2016: 1
  - 2017: -448
  - 2018 Est.: 5
  - 2019 Proj.: -479
- Net international reserves and gross official reserves (end-year, millions of U.S. dollars):
  - Net international reserves (end-year): 2014: 2,305; 2015: 1,865; 2016: 1,681; 2017: 1,736; 2018 Est.: 2,213; 2019 Proj.: 1,812
  - Gross official reserves (end-year) mirror net international reserves in table: 2014: 2,305; 2015: 1,865; 2016: 1,681; 2017: 1,736; 2018 Est.: 2,213; 2019 Proj.: 1,812
  - Months of imports (goods and services, c.i.f.) examples: 2014: 5.9; 2015: 6.0; 2016: 4.4; 2017: 4.9; 2018 Est.: 5.6; 2019 Proj.: 4.4
- Memorandum: Current account (percent of GDP) series:
  - 2014: 1.3
  - 2015: 11.8
  - 2016: 23.7
  - 2017: 23.9
  - 2018 Est.: 22.8
  - 2019 Proj.: 23.0
  - 2020–2023 projections included in table

### Monetary developments (2014–19)
- Bank of Papua New Guinea (end-period, millions of Kina):
  - Net foreign assets: 2014: 5,501; 2015: 4,695; 2016: 4,716; 2017: 5,114; 2018 Proj.: 6,809; 2019 Proj.: 5,620
  - Reserve money: 2014: 5,283; 2015: 5,171; 2016: 6,431; 2017: 7,029; 2018 Proj.: 10,228; 2019 Proj.: 8,669
  - Currency in circulation: 2014: 1,852; 2015: 1,891; 2016: 2,115; 2017: 2,192; 2018 Proj.: 2,277; 2019 Proj.: 2,351
- Depository corporations survey (end-period, millions of Kina):
  - Broad money:
    - 2014: 18,716
    - 2015: 20,219
    - 2016: 22,417
    - 2017: 22,628
    - 2018 Proj.: 26,359
    - 2019 Proj.: 23,584
  - Narrow money:
    - 2014: 13,440
    - 2015: 14,845
    - 2016: 16,032
    - 2017: 15,623
    - 2018 Proj.: 18,672
    - 2019 Proj.: 15,149
  - Claims on the private sector:
    - 2014: 10,264
    - 2015: 10,612
    - 2016: 11,379
    - 2017: 10,973
    - 2018 Proj.: 11,736
    - 2019 Proj.: 12,101
- Annual percentage change (selected):
  - Net foreign assets (depository corporations): -17.5; -13.9; -16.1; 8.4; 32.1; -16.6 (series provided)
  - Broad money growth (annual percent change): 3.4; 8.0; 10.9; 0.9; 16.5; -10.5
  - Reserve money (percentage change): 37.1; -2.1; 24.4; 9.3; 45.5; -15.2
- Memorandum:
  - Gross international reserves (millions of U.S. dollars): 2014: 2,305; 2015: 1,865; 2016: 1,681; 2017: 1,736; 2018 Est.: 2,214; 2019 Proj.: 1,815
  - Nominal nonresource GDP/Broad money examples: 2.4; 2.2; 2.1; 2.2; 2.1; 2.5

### Medium-term scenario (2014–23) — growth, fiscal, and external projections
- Real GDP growth (percentage change):
  - 2014: 15.4
  - 2015: 5.3
  - 2016: 1.6
  - 2017: 2.5
  - 2018: 0.0
  - 2019 Proj.: 3.8
  - 2020–2023 Proj.: 3.1, 3.7, 3.7, 3.8 (2020–2023 respectively)
- Resource and nonresource growth (selected):
  - Resource growth examples: 2014: 69.2; 2015: 39.0; 2016: 6.3; 2017: 4.3; 2018: -6.8; 2019: 8.3; 2020–2023: 5.0 each year
  - Nonresource growth examples: 2014: 7.0; 2015: -3.1; 2016: -0.1; 2017: 1.8; 2018: 2.6; 2019: 2.2; 2020–2023: 2.5, 3.2, 3.3, 3.3
- CPI (period average) and CPI (end-period) projections:
  - CPI (period average) examples: 2018: 4.8; 2019: 4.7; 2020–2023: 4.7, 4.7, 4.7, 4.1
  - CPI (end-period) examples: 2018: 4.8; 2019: 4.7; 2020–2023: 4.7, 4.7, 4.7, 4.1
- Central government operations (percent of GDP, medium term):
  - Total revenue and grants: 2018: 17.9; 2019 Proj.: 16.7; 2020–2023: 17.1, 17.4, 17.7, 17.8
  - Total expenditure: 2018: 20.8; 2019 Proj.: 19.0; 2020–2023: 18.8, 18.6, 18.6, 18.6
  - Primary balance (percent of GDP): 2018: -0.5; 2019 Proj.: 0.1; 2020–2023: 0.5, 0.8, 1.0, 1.0
  - Nonresource net lending (+)/borrowing (-) (percent of GDP): 2018: -3.6; 2019 Proj.: -2.8; 2020–2023: -2.2, -1.7, -1.4, -1.4
  - Nonresource primary balance (percent of nonresource GDP): 2018: -1.2; 2019 Proj.: -0.5; 2020–2023: -0.1, 0.3, 0.5, 0.5
- Gross public debt (percent of GDP) — medium-term:
  - 2018 Proj.: 36.8
  - 2019 Proj.: 36.2
  - 2020–2023 Proj.: 35.5, 35.0, 34.1, 33.6 (domestic and external components provided)
- Balance of payments (millions of U.S. dollars):
  - Exports, f.o.b.: 2018 Est.: 9,576; 2019 Proj.: 10,460; 2020–2023 Proj.: 10,584; 10,674; 10,775; 10,898
  - Imports, c.i.f.: 2018 Est.: -3,364; 2019 Proj.: -3,454; 2020–2023: -3,558; -3,655 (series across tables)
  - Current account (in percent of GDP): 2018 Est.: 22.8; 2019 Proj.: 23.0; 2020–2023 Proj.: 21.4, 20.3, 19.2, 18.4
- Gross official reserves (millions of U.S. dollars and months of imports):
  - Levels: 2018 Est.: 2,213; 2019 Proj.: 1,812; 2020–2023 Proj.: 2,016; 2,094; 2,121; 2,167
  - Months of goods and services imports (c.i.f.): 2018 Est.: 5.6; 2019 Proj.: 4.4; 2020–2023 Proj.: 4.7; 4.8; 4.7; 4.6
- Assumed commodity prices (selected):
  - Gold (U.S. dollars per ounce): 2018: 1,261; 2019: 1,218; 2020–2023: 1,255; 1,304; 1,343; 1,382
  - Copper (U.S. dollars per ton): 2018: 6,542; 2019: 6,208; 2020–2023: 6,279; 6,318; 6,326; 6,326
  - Liquefied Natural Gas Price Index (2005=100): 2018–2023: 136 (series shown)
  - Oil (U.S. dollars per barrel): 2018: 69.38; 2019: 68.76; 2020–2023: 65.73; 63.10; 61.33; 60.27

### Financial soundness indicators (2013–17)
- Capital adequacy:
  - Capital to risk-weighted assets: 2013: 27.9; 2014: 34.5; 2015: 33.4; 2016: 37.0; 2017: 38.1
  - Tier 1 capital to risk-weighted assets: 2013: 21.0; 2014: 27.2; 2015: 27.6; 2016: 29.8; 2017: 30.8
- Asset quality:
  - Nonperforming loans to total loans: 2013: 1.2; 2014: 1.4; 2015: 2.6; 2016: 2.7; 2017: 2.6
  - Past due loans to total loans: 2013: 2.2; 2014: 2.7; 2015: 3.9; 2016: 6.7; 2017: 5.0
  - Provision for losses to NPL: 2013: 288.0; 2014: 240.9; 2015: 143.8; 2016: 164.5; 2017: 183.2
- Earnings and profitability:
  - Return on assets: 2013: 2.4; 2014: 2.0; 2015: 1.7; 2016: 2.2; 2017: 2.2
  - Return on equity: 2013: 21.2; 2014: 26.2; 2015: 21.4; 2016: 16.7; 2017: 24.3
- Liquidity and other indicators:
  - Liquid assets to total assets: 2013: 55.2; 2014: 51.5; 2015: 49.0; 2016: 46.9; 2017: 46.1
  - Loan-to-deposit ratio: 2013: 50.3; 2014: 57.2; 2015: 60.5; 2016: 63.3; 2017: 65.6
  - Capital to total assets: 2013: 15.2; 2014: 16.1; 2015: 15.4; 2016: 16.3; 2017: 17.9

### Millennium Development Goals and social indicators (selected, 2000–2017)
- Poverty and employment:
  - Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population): 38.0 (year shown)
  - Employment-to-population ratio, 15+, total (%) series: 2000–2017 includes values such as 70.1; 71.0; 70.4; 68.7; 68.5; 68.6; 68.6; 68.1
- Health and education:
  - Immunization, measles (% of children ages 12-23 months): examples: 69.0; 82.0; 74.0; 89.0; 84.0; 79.0; 70.0; 62.0
  - Mortality rate, infant (per 1,000 live births): examples: 57.5; 54.9; 50.9; 46.0; 44.9; 43.8; 42.4; 41.8
  - Literacy rate, youth female (% of females ages 15-24): 50.9; 64.1; 64.1 (years shown)
  - Primary completion rate, total (% of relevant age group): 55.1; 78.6
- Environment and access:
  - Forest area (% of land area): 74.2 (multiple years)
  - Improved sanitation facilities (% of population with access): series around 18.9–19.2
  - Improved water source (% of population with access): series around 35.1; 37.1; 38.7; 39.9; 40.0
- Other social and technology indicators:
  - Fertility rate, total (births per woman): 4.5; 4.3; 4.0; 3.8; 3.8; 3.7; 3.7
  - GNI per capita, Atlas method (current US$) entries include 600; 670; 1,130; 1,970; 2,160; 2,780; 2,530; 2,410
  - Population, total (millions): 2000: 5.6; 2005: 6.3; 2009: 6.9; 2013: 7.6; 2014: 7.8; 2015: 7.9; 2016: 8.1; 2017: 8.3

*Sources: Department of Treasury; Bank of Papua New Guinea; IMF staff estimates and projections; World Bank, World Development Indicators database, 2017.*

### Annex I.  Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### External risks
- Weakening of global growth
  - Relative likelihood: Medium
  - Impact if realized: H ↓
  - Potential impact: Declines in major commodity export prices. Adverse BOP impact; moderate budget impact
  - Staff advice on policy response:
    - Allow Kina to depreciate
    - Additional fiscal adjustment required

### Domestic risks
- Measures to increase supply of FX and eliminate backlog of FX orders
  - Relative likelihood: High
  - Impact if realized: H ↓ If delayed, an adverse growth impact; ↑ If implemented, growth and investment response could be greater than expected
  - Potential impact: (Implied growth and external effects depending on timing)
  - Staff advice on policy response:
    - If not implemented, additional fiscal adjustment needed.
    - If impact of implementation is greater than expected, fiscal adjustment will be easier than expected.

- Projects to increase LNG (or other minerals) export capacity begin sooner than assumed (early 2020s)
  - Relative likelihood: Medium
  - Impact if realized: H ↑
  - Potential impact: Favorable impact on GDP, external balance and fiscal position. Could induce government to end consolidation
  - Staff advice on policy response:
    - Continue with fiscal consolidation in line with fiscal rule
    - Eliminate FX restrictions and restore floating exchange rate

### Notes on the Risk Assessment Matrix
- 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.
- Nonmutually 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.

*Source: Annex I. Risk Assessment Matrix, cr18352*

### Annex II. Authorities’ Responses to Fund Advice

### Annex II. Authorities’ Responses to Fund Advice

### Monetary, Financial and Exchange Rate Policies
- Fund recommendation: Remove excess liquidity to improve monetary policy effectiveness and reduce downside pressure on the kina exchange rate.
  - Policy actions: The BPNG is taking steps to overhaul its monetary operations framework, drawing on IMF TA. It is also increasing its FX interventions, which will drain liquidity. It is also setting up a framework for liquidity monitoring and forecasting as a precursor to reducing systemic liquidity.
- Fund recommendation: Allow greater exchange rate flexibility to clear the FX market.
  - Policy actions: Since mid-2018, BPNG has allowed an increased pace of Kina depreciation, at a rate of about 0.3% per month.
- Fund recommendation: Continue to implement AML/CFT legislation.
  - Policy actions: Authorities are taking steps to put in place a robust AML/CTF regime. FASU director and staff were appointed, and a first National Risk Assessment has been completed and is expected to be published in 2018.

### Fiscal Policy
- Fund recommendation: Adopt a fiscal policy stance consistent with putting public debt in line with the government’s targets and ensuring debt sustainability.
  - Policy actions: The 2018 budget aimed to cut the deficit to 2.5 percent of GDP. The 2019 Budget Strategy Paper tries to balance the non-resource primary balance by 2021, targeting 30 percent of debt-to -GDP ratio by 2022.
- Fund recommendation: Streamline the government payroll, defer grants to provinces and districts, and strengthen revenue collection.
  - Policy actions: The 2018 MYEFO Report shows that GST collections continue to be above budget reflecting greater tax compliance efforts, and mining and petroleum taxes are higher than expected due to higher commodity prices. However, on the expenditure side, trends in government payroll are also running above the budget. Grants to provinces and districts are fully funded in the 2018 Budget.

### Structural Reform
- Fund recommendation: Continue investments in health and education and improve infrastructure and law and order for the better business environment. Strengthen the SME sector by financial inclusion.
  - Policy actions: Tuition fee free education, free primary healthcare, transport infrastructure, and law and order remain policy priorities of the Government. The Government published a 5-year medium term development plan in 2018 incorporating the UN Sustainable Development Goals and Government’s Alotau Accord 2.
- Fund recommendation: Strengthen PFM by implementing further reforms identified in the PEFA assessment and SOE reform to enhance transparency and governance.
  - Policy actions: The Government intends to review a number of Acts and Bills such as the National Procurement Authority Bill and table this with audited accounts of SOEs in Parliament, as well as ensure that there are boards for public bodies.

### Statistics
- Fund recommendation: Improve macroeconomic statistics and move forward with the publication of new GDP estimates.
  - Policy actions: The authorities have made notable improvements in national accounts and fiscal data since 2014 and continue to make progress with TA. The NSO released new GDP estimates for 2015 in March 2018.

*Source: Annex II. Authorities’ Responses to Fund Advice (cr18352).*

### 2017. The PNG’s Composite Indicator score based on the October World Economic Outlook and 2017 CPIA

### 2017. The PNG’s Composite Indicator score based on the October World Economic Outlook and 2017 CPIA 

### Public debt coverage
- Coverage: central government and local government debt.  
- Government-guaranteed debts of SOEs not fully captured; authorities’ estimate of current government guarantees to SOEs: 1.4 billion Kina, equivalent to about 2 percent of GDP.  
- Contingent liability shock of 2 percent of GDP is included in the analysis to account for government guaranteed debt.  
- Unfunded superannuation liabilities (pensions) estimated at around 2 billion Kina (3 percent of 2017 GDP).  
- Treasury bills (less than 1 year to maturity) share of total domestic financing: 45 percent in 2012; 54 percent in 2017.

### Background on debt
- Total public debt to GDP: 37.5 percent as of end-2017.  
- Government debt rose from 19 percent of GDP in 2012 to 37.5 percent at end-2017 (almost doubled).  
- Interest payments have tripled (relative to earlier period).  
- Recent increase in external debt driven by borrowing from non-Paris Club bilateral and commercial creditors.  
- Share of Chinese loans (Bank of China + Export-Import Bank of China) in total public external debt: 1.2 percent in 2010; 23.5 percent in 2017.  
- Syndicated loans from Credit Suisse increased public external debt since 2016.  
- Two large creditors for external public debt at end-2017: Asian Development Bank and Export-Import Bank of China.  
- Private external debt has declined since LNG sector started to repay its debt.  
- Note: a significant residual on external financial flows arises from money transfers via offshore accounts by resource companies.

### External public debt by creditor groups (Text Table 1)
- Multilateral: 2015 = 1,086; 2016 = 1,164; 2017 = 1,272 (in millions of U.S. dollars).  
- Bilateral Paris Club: 2015 = 113; 2016 = 126; 2017 = 131 (in millions of U.S. dollars).  
- Bilateral Non-Paris Club: 2015 = 299; 2016 = 408; 2017 = 538 (in millions of U.S. dollars).  
- Commercial: 2015 = 0; 2016 = 229; 2017 = 348 (in millions of U.S. dollars).  
- Total external public debt: 2015 = 1,498; 2016 = 1,928; 2017 = 2,289 (in millions of U.S. dollars).  
- Source: Papua New Guinea Department of Treasury.

### Background on macro forecasts
- Real GDP growth: expected to be 0 in 2018 (earthquake early in the year).  
- Long-term growth revised up by 0.8 percentage points annually relative to 2017 DSA assumptions.  
- Primary fiscal balance: projected to improve from a deficit of 0.5 percent of GDP in 2018 to a surplus of 0.8 percent by end of forecast period (assuming implementation of the Medium Term Revenue Strategy).  
- Baseline includes issuance of a US$500 million 10-year sovereign bond with a yield of 8.375 percent. Funds intended to finance the deficit, reduce short-term domestic debt, and reduce backlog of unfilled FX orders.  
- Tax collection year-to-date: up substantially from last year and well above budget projections (reflecting tax compliance efforts and higher commodity prices).  
- New expenditure ceiling on personnel emoluments in the MTFS assumed to avoid expenditure slippages.

### Macroeconomic forecast comparisons (Text Table 2)
- Table headers: Year; Real GDP Growth (percent); GDP Deflator (percent); Inflation (percent); Current Account (percent of GDP); Primary Balance (percent of GDP).  
- Selected rows (Previous vs Current):  
  - 2015: Previous Real GDP Growth = 8.0; Current = 5.3. Previous GDP Deflator = 4.0; Current = -4.4. Previous Inflation = 13.3; Current = 11.8. Previous Current Account = -2.2; Current = -3.0.  
  - 2016: Previous Real GDP Growth = 2.4; Current = 1.6. Previous GDP Deflator = 3.4; Current = 2.7. Previous Inflation = 15.2; Current = 23.7. Previous Current Account = -2.6; Current = -3.1.  
  - 2017: Previous Real GDP Growth = 2.2; Current = 2.5. Previous GDP Deflator = 2.0; Current = 2.0. Previous Inflation = 7.1; Current = 13.9. Previous Current Account = -0.7; Current = -0.4.  
  - 2018: Previous Real GDP Growth = 2.5; Current = 0.0. Previous GDP Deflator = 1.8; Current = 1.8. Previous Inflation = 8.1; Current = 14.4. Previous Current Account = 22.8; Current = 22.8. Previous Primary Balance = -0.5; Current = -0.5.  
  - 2019–2023 rows also provided comparing previous and current forecasts for each indicator.

### Country classification and determination of scenario stress tests
- Composite indicator index calculated under revised LIC-DSF improved; PNG’s debt-carrying capacity now classified as "medium" (previously "weak").  
- Composite indicator based on October 2018 World Economic Outlook and 2017 CPIA index.  
- Medium classification implies threshold for PV of total public debt increased from 35 percent to 55 percent of GDP.  
- PNG is resource-rich; commodity price shocks are included in tailored stress tests.

### External DSA findings
- Baseline: PPG external debt ratios stay below indicative thresholds.  
- Planned increase in public external debt: from 11.3 percent of GDP in 2017 to 15.3 percent in 2018.  
- Historical shock scenario shows substantial threshold breaches but is not considered indicative of future risks (grounded in past large current account deficits during PNG LNG construction phase).  
- PPG external debt service-to-revenue ratio shows a 1-year and minimal breach in the baseline; this short-lived breach is discounted per DSA guidelines.  
- Most extreme shock (shocks to export growth) breaches PV of PPG external debt-to-GDP threshold.  
- Shock to PNG exchange rate causes breach of debt-service-to-revenue threshold.  
- Weak non-resource sector increases vulnerability to external shocks.  
- Upside risk: faster import recovery if a new resource project starts, as historical PNG LNG construction phase indicates.

### Overall risk of public debt distress
- Baseline: PV of public debt-to-GDP ratio decreases towards 34 percent of GDP over the medium term (below benchmark).  
- Alternative scenarios (shocks to exports or commodity prices): public debt-to-GDP ratio breaches the benchmark in the medium term.  
- Most extreme shock for debt service-to-revenue ratio: commodity price shock.  
- Commodity price shock implications: reduced commodity export revenues → lower mining taxes and dividends to government.  
- Liquidity risks increasing; unfunded superannuation liabilities are an implicit fiscal risk.

### Risk rating and vulnerabilities
- PNG’s risk of external public debt distress: moderate.  
- Overall public debt distress risk: moderate.  
- Upgrade in debt-carrying capacity from weak to medium contributes to moderate overall risk.  
- Moderate PPG external debt distress assessment assumes primary fiscal surpluses from government fiscal consolidation.  
- Granular analysis indicates limited space to absorb shocks: debt service-to-revenue ratio almost reaches threshold even after discounting a short-lived breach in 2020.  
- Policy implication: implementation of a sound debt management strategy and better capture of existing government liabilities and guarantees is increasingly important.

### Authorities’ views
- Authorities noted increasing risks to debt sustainability.  
- Three statistical issues recognized by authorities:  
  - Agree on new official GDP numbers among National Statistical Office, government, and central bank to precisely measure debt-to-GDP ratio.  
  - Include change in exchange rates when calculating external debt stock in domestic currency.  
  - Calculating government guarantees on SOEs is critical to identify contingent liabilities.  
- Current bond issue and other external financing expected to give government flexibility to address domestic FX imbalances and securities market problems by retiring short-term government securities.

### Box 1 — Macroeconomic assumptions underlying the DSA update
- Main changes relative to 2017 DSA: inclusion of sovereign bond issuance and recent high commodity prices; newly published lower 2015 nominal GDP series reflected.  
- Real GDP growth: earthquakes in early 2018 lowered real growth rate from 2.5 percent (2017 DSA) to 0 percent in this DSA. Real GDP growth projected to average 3.9 percent in medium/long run (an increase from 3.1 percent long-term average used in 2017 DSA).  
- Inflation (GDP deflator): actual 2017 inflation = 7.1 percent (substantially higher than 1.4 percent projected in 2017 DSA). Inflation projected around 8 percent in 2018; long-term convergence to core inflation of 3 percent assumed.  
- Current account: 2017 current account to GDP revised from 13.9 percent (2017 DSA) to 23.9 percent (reflecting higher resource exports and lower GDP). Gradual erosion of surplus projected as FX backlog cleared mainly in 2019 and imports recover.  
- Fiscal position: primary deficit in 2017 was 0.4 percent of GDP (smaller than 0.7 percent estimated in 2017 DSA). Primary fiscal deficit estimated to be 0.5 percent of GDP in 2018. Sovereign bond issuance included in 2018; redemption in 2028. Interest rate assumptions apply to bond issuance.

*Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); Approved by Odd Per Brekk and Maria Gonzalez (IMF) and John Panzer (IDA); November 9, 2018.*

### 8.375 percent.

### 8.375 percent.

### Fiscal outlook and policy direction
- The primary deficit will gradually improve to 0.8 percent of surplus in the long run, assuming fiscal consolidation by improving tax compliance and controlling government expenditures better.
- 8.375 percent.

### Key findings and projections
- Fiscal consolidation is assumed to be achieved through improving tax compliance and controlling government expenditures better.
- Indicators in the source include projections and historical series for external debt, public and publicly guaranteed (PPG) debt, and public sector debt for 2015–2038 under a baseline scenario.

### Debt dynamics and sustainability (summary of DSA content)
- The source presents an External Debt Sustainability Framework (Baseline Scenario, 2015-2038) and a Public Sector Debt Sustainability Framework (Baseline Scenario, 2015-2038), with detailed year-by-year projections for:
  - External debt (nominal) and the share that is public and publicly guaranteed (PPG).
  - Identified net debt-creating flows, including the non-interest current account deficit, exports, imports, net current transfers, other current account flows, and net FDI.
  - Endogenous debt dynamics components: contribution from nominal interest rate, contribution from real GDP growth, and contribution from price and exchange rate changes.
  - Residuals (including exceptional financing and valuation adjustments for projections).
- The DSA includes sustainability indicators such as:
  - PV of PPG external debt-to-GDP ratio.
  - PV of PPG external debt-to-exports ratio.
  - PPG debt service-to-exports ratio.
  - PPG debt service-to-revenue ratio.
  - Gross external financing need (Million of U.S. dollars).

### Public sector debt specifics
- The Public Sector Debt Sustainability Framework reports:
  - Public sector debt (in percent of GDP), with breakdowns of external debt and local-currency denominated debt.
  - Change in public sector debt and identified debt-creating flows.
  - Primary deficit, revenue and grants, and primary (noninterest) expenditure (all in percent of GDP).
  - Automatic debt dynamics, including contributions from interest rate/growth differential, average real interest rate, real GDP growth, and real exchange rate depreciation.
  - Residuals and other identified debt-creating flows (privatization receipts, recognition of contingent liabilities, debt relief).
  - Sustainability indicators: PV of public debt-to-GDP ratio, PV of public debt-to-revenue and grants ratio, debt service-to-revenue and grants ratio, gross financing need.
  - A computed "Primary deficit that stabilizes the debt-to-GDP ratio" series.

### Sensitivity and stress tests
- The source provides sensitivity analyses for key indicators of public and PPG external debt (2018–2028) and for public debt (2018–2028), including:
  - Alternative scenarios (e.g., key variables at historical averages).
  - Bound tests (e.g., adverse shocks to real GDP growth, primary balance, exports, other flows, one-time 30 percent nominal depreciation, combinations).
  - Tailored tests (e.g., combined contingent liabilities, commodity price shocks).
- Thresholds and breaches are identified in the tabulated sensitivity analysis to indicate where indicators exceed risk thresholds.

### Key macroeconomic and financing assumptions (selected)
- The DSA tables and figures use detailed macro assumptions and financing parameters, including:
  - Real GDP growth (in percent).
  - GDP deflator in US dollar terms (change in percent).
  - Effective interest rate (percent).
  - Growth of exports and imports of goods and services (US dollar terms, in percent).
  - Grant element of new public sector borrowing (in percent).
  - Government revenues (excluding grants, in percent of GDP).
  - Aid flows (Million of US dollars).
  - Grant-equivalent financing (in percent of GDP and of external financing).
  - Nominal GDP (Million of US dollars) and nominal dollar GDP growth.

### Analytical tools and diagnostics
- The source includes figures and diagnostics such as:
  - Indicators of Public and Publicly Guaranteed External Debt under alternative scenarios (2018–2028).
  - Indicators of Public Debt under alternative scenarios (2018–2028).
  - Drivers of debt dynamics – baseline scenario (external and public debt).
  - Realism tools linking fiscal adjustment and possible growth paths, and distributions of observed adjustments in Fund-supported programs for LICs.

*Source: cr18352 - 8.375 percent.*

### 2.5 percentage points of GDP in

### 2.5 percentage points of GDP in

### Developments and outlook
- Papua New Guinea is the largest Pacific island country with over 800 different ethnic languages and around 85 percent of the population living in rural and remote areas.
- The country is richly endowed with natural resources; the oil, gas and mining industries make up a significant part of the economy and expose PNG to commodity-driven cycles.
- The 2018 Supplementary Budget and the 2019 Budget show the budget deficit and debt-to-GDP ratios on declining paths, in compliance with the Fiscal Responsibility Act and the Medium Term Fiscal Strategy.
- Revenue in 2018 has been higher than expected but so has expenditure, with spending increases primarily due to higher employment in the Government’s priority areas of education, health and law and order.
- The authorities expect 0.3 percent growth in 2018, compared to staff’s zero percent, driven by a faster-than-anticipated recovery from the earthquake, improved commodity prices and APEC-related activities.
- The authorities agree the economy will pick up substantially next year, boosted by a recovery in the oil and gas sector and by activity associated with large mining and petroleum projects.
- External financing and market access in 2018:
  - Sovereign bond issued in October raising US$500 million for a 10-year maturity (heavily over-subscribed).
  - Budget support loans: first tranches of US$100 million (ADB) and US$150 million (World Bank) in 2018.
  - Final disbursement of a Credit Suisse commercial loan of US$190 million in 2018.

### Fiscal policy
- Authorities are committed to prudent financial management and fiscal consolidation, with progress on tax collection and public financial management.
- Resident TA from the Fund helped implement a five-year Medium-Term Revenue Strategy aimed at mobilizing domestic revenue; a large taxpayer office was opened in September to improve service and compliance.
- On expenditure, the Government is establishing tighter controls in the payroll system to ensure salaries are linked to budget warrants and instituting tighter controls on the in-take of teachers, health workers, police and the military (impact to be gradual because of programmed throughput from training colleges).
- Provincial and district grants are part of the Government’s decentralization strategy and have brought direct benefits to previously underserved areas.
- Medium Term Fiscal Strategy 2018-22 (incorporating requirements of the Fiscal Responsibility Act):
  - Limits public debt to within a band of 30 to 35 percent of GDP, trending towards the lower limit in the medium term.
  - Successive Budgets designed around this requirement, with the 2019 Budget showing debt falling below 30 percent of GDP in 2021.
- New National Accounts data for 2014 and 2015 incorporating a change in deflator methodology indicated a significantly lower nominal GDP level than previously reported and therefore a considerably higher debt-to-GDP ratio, threatening a breach of the Fiscal Responsibility Act; the authorities are now focusing on the best way forward.

### Monetary and financial sector policies
- Bank of Papua New Guinea (BPNG) maintained a neutral monetary policy stance given easing inflation, relative stability of the kina exchange rate and moderate global economic growth.
- Liquidity levels remain high; lending to the private sector has been relatively weak but is expected to pick up with increased economic activity.
- BPNG is refining its monetary policy framework to improve transmission and liquidity management, including:
  - Introducing quantitative targets for the reserve money framework.
  - A new overdraft facility (the Intra-day Liquidity Facility).
  - A collateralized repo facility with an interest rate corridor.
- Authorities agree with staff on exchange rate flexibility and the need for orderly adjustment but consider a more gradual depreciation appropriate given structural issues with a shallow domestic market and few dealers.
- Government foreign borrowing, including the bond issue, has helped clear most of the backlog of foreign exchange orders; the kina equivalent is being used to restructure and reduce short-term domestic debt to reduce high domestic interest costs, reduce refinancing risks and extend maturity of the government’s debt portfolio.
- PNG’s financial system is sound and dominated by commercial banks which are well-capitalized, profitable and have low NPL ratios.
- Authorities will remain vigilant on financial stability in light of proposed monetary and FX reforms, liquidity management challenges and the proposal to change the Government’s domestic debt maturity structure.
- The proposed take-over of ANZ’s retail and SME business operations by Kina bank will require careful monitoring by BPNG.

### Structural policies
- Major resources projects under development that could boost medium-term growth include expansion of the existing PNG LNG project, development of another LNG project and the Wafi-Golpu gold project.
- Authorities consider government involvement in future resource projects should be tilted more towards higher payments earlier in the project cycle, to reduce fiscal risk and ensure revenue is derived from production rather than profitability.
- A sovereign wealth fund is currently being established to invest proceeds from the non-renewable resources sector; a board will be appointed shortly to start operationalizing the fund.
- Authorities recognize the need to diversify the economy into sectors such as agriculture, tourism and services, and have assisted these sectors in the 2019 Budget (examples include support for production of locally-grown rice, vegetables, meat and dairy product).
- PNG hosted APEC in 2018; authorities considered this an important opportunity to showcase the country and promote investment.
- Governance reforms and progress:
  - Enhancing the AML/CFT framework and undertaking a national risk assessment.
  - National Procurement Act and revised Public Finance Management Act approved by Cabinet.
  - Legislation on an Independent Commission Against Corruption (ICAC) is awaiting approval.
  - Civil society organizations welcome the new IMF focus on addressing governance issues.

*Statement by Nigel Ray, Executive Director for Papua New Guinea, Grant Johnston, Alternate Executive Director, and Sali David, Advisor to Executive Director — November 26, 2018*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18352.pdf_