## 1pngea2020001 ## Source details **Canonical URL:** [1pngea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1pngea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1pngea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1pngea2020001.pdf.json) --- ### Macroeconomic developments and outlook - Growth and output - Real GDP projected growth: 5.0 percent in 2019; 2 percent in 2020; average of 3 percent in the medium term. - Non-resource sector is the main medium-term growth driver. - Upside risk: prospects for major new gas and mining projects. - Inflation - Inflation: 4.8 percent at end-2018; projected 3.5 percent by year-end 2019. - Assuming gradual kina adjustment to eliminate overvaluation: inflation expected to pick up temporarily to 6.3 percent between 2020 to 2022 and taper to 3.9 percent by 2024. - External sector and reserves - 2019 current account: surplus of 24 percent of GDP (headline). - Adjusted current account analysis: staff estimate current account deficit close to zero after reclassifying income outflows. - Alternate non-resource current account: -6.1 percent of GDP. - REER overvaluation estimates: around 11 percent (EBA-lite), 12 percent (CAB metric), and 18 percent (non-resource CAB metric). - REER appreciated by 3 percent in 2019; NEER little change. - Net international reserves: rose to $2.3 billion (5.6 months of imports) at end-2018; reserves-to-imports at end-2019: 4.7 months of imports. - FX backlog: estimated K1.2-1.3 billion recently. ### Fiscal policies, performance, and strategy - Recent outcomes and revisions - Fiscal deficit: widened to 2.6 percent of GDP in 2018 from 2.5 percent in 2017. - Public debt-to-GDP: 33 percent in 2017 to 38 percent in 2018. - Revisions recognizing three SOE project loans added about 1.4 percent of GDP to debt; revaluing foreign-currency debt raised the debt ratio by about 1.8 percent of GDP. - 2019 performance and 2020 financing - Budget deficit for 2019 expected at 4.1 percent of GDP (vs. 2.3 percent in original Budget). - Deterioration driven by disappointing revenues and spending overruns (personal emoluments about 1 percent of GDP over budget). - Financing sources: domestic borrowing, multilateral and bilateral external loans; a Supplementary Budget passed Nov 2019 with cuts in current spending and savings in the public investment program, plus additional payments on arrears. - Medium-term strategy and targets - Authorities’ program aims to bring core deficit from 4 percent of GDP in 2019 to 2 percent of GDP in 2023-24. - FRA targets: long-term debt ceiling 30 percent of GDP; temporary upper limit 45 percent of GDP; intermediate debt ratio target 35 percent within ten years. - 2020 Budget introduced an expenditure rule limiting current expenditure calibrated in terms of non-resource GDP. - Core fiscal deficit and public debt projections (Text Table 1, percent of GDP) - Core fiscal deficit: -4.1 (2019), -3.3 (2020), -3.1 (2021), -2.2 (2022), -1.9 (2023), -1.9 (2024). - Public debt: 38.3 (2019), 40.8 (2020), 42.4 (2021), 42.2 (2022), 41.7 (2023), 41.1 (2024). - Arrears, payroll, and expenditure controls - Interagency office in Treasury established to identify, verify, and clear central government payment arrears. - Approximately 4,000 public workers over retirement age still on payroll; paying separation costs yields savings of about 0.1 percent of GDP in 2021 and 0.2 percent of GDP from 2022 onward. - Measures: link payroll to IFMS warrants; ceiling on payments for essential new staff; amalgamation/elimination of agencies; independent audit of government employment and payroll practices (structural benchmark). - Revenue measures and MTRS implementation - Near-term revenue measures expected to provide about 0.3 percent of GDP: one-off increase in cigarette excise taxes and for alcohol and social drinks; container examination facilities at Port of Lae to boost import compliance; increase progressive duty on unprocessed old-growth logs from average 32 percent to average 50 percent; strengthen collection of fees and services. ### Monetary, foreign exchange, and liquidity management - Exchange rate and BPNG actions - BPNG began restoring exchange rate flexibility in 2018 by eliminating guidance on FX allocation, allowing some kina depreciation, and supplying FX to banks. - Since late 2018, pace of depreciation slowed and kina remains overvalued (staff estimate: 11–18 percent). - External borrowings cited: $500 million sovereign bond, $180 million commercial loans, and $250 million World Bank and ADB loans helped raise NIR to $2.3 billion (5.6 months of imports) at end-2018. - FX backlog, liquidity, and monetary transmission - Liquidity forecasting hampered by lack of information on government spending and maldistribution of liquidity. - Financial system likely to continue seeing FX shortages, weak credit growth, and excess liquidity (deposits tied to prospective imports or dividend payments abroad). - BPNG’s ability to affect monetary conditions likely to remain very limited. - Program operations for FX and convertibility (SMP commitments) - BPNG to provide FX to authorized FX dealers at least $60 million per month on average over the first six months and each subsequent half year until backlog eliminated, subject to maintaining NIR at least $1.8 billion. - Progressive restoration of kina convertibility and a fully market-determined exchange rate; possible adjustment of 12–18 percent over 2–3 years feasible without excessive inflationary pressures. - BPNG to seek TA and consider monthly injections and auctions of FX; complete liquidity forecasting framework and tighten access to overnight lending (increase spread). ### Debt sustainability and public debt risks - DSA update to end-2018: PNG remains at moderate risk of debt distress. - Reasons risks rose: - Large increase in debt in 2018. - Shift toward external lending without proportionate reduction in domestic short-term debt. - Significant increases in ratio of debt servicing costs to revenue. - Concentration of domestic debt in short-term instruments. - Unfunded superannuation liabilities and government guarantees of SOE debt. - Key debt figures and indicators - Public debt rose from 32.5 percent of GDP in 2017 to 36.8 percent at end-2018 (other sections cite 38.3 percent for 2019). - Stock of central government guaranteed loans estimated at 14.1 billion Kina (18% of GDP) at end-2018. - Unfunded superannuation liabilities estimated around 2 billion Kina (3 percent of 2018 GDP). - Sovereign bond issued Oct 2018: maturity 10 years; coupon 8.4 percent; spread around 585 basis points in Dec 2019. - Gross Financing Needs (three-year average) peak at 20% of GDP in 2019-2021. - Policy implications - Need sustained fiscal consolidation, rein in current spending (personal emoluments highlighted), improve medium-term financial planning and debt management to lengthen maturities and lower interest costs, reconcile government liabilities and guarantees. ### Staff-Monitored Program (SMP) and program priorities - SMP objectives and rationale - Guide policy response to fiscal deterioration and catalyze financing. - Provide macro framework and structural benchmarks reflecting reform priorities. - SMP approved by Managing Director on February 20, 2020. - Key program pillars and structural reforms - Fiscal consolidation: control personal emoluments, clear government and SOE arrears, protect social spending, expedite MTRS implementation. - Restore kina convertibility and flexibility: clear FX orders backlog and eliminate kina overvaluation. - Strengthen liquidity management and monetary policy operations. - Structural reforms: implement updated MTRS; extensive SOE reform (power, telecoms); improve governance and reduce corruption; establish SWF implementation plan for future gas revenues. - Financing and conditionality - Successful SMP implementation could catalyze additional development financing and donor support. - Financing assumptions for 2020–2021: ADB and World Bank budget support, multilateral project support, bilateral support (Australia), and ADB Partial Credit Guarantee Facility. - Quantitative targets and indicative ceilings/floors set for 2020 (selected exact figures below). ### Quantitative targets and monitoring (selected exact figures) - Core fiscal deficit of central government (cumulative ceiling within the year, billions of Kina): - End-March: 0.847 - End-June: 1.694 - End-September: 2.386 - End-December: 3.079 - New non-concessional external debt contracted or guaranteed by central government or BPNG (cumulative ceiling, US$ millions): - End-March: 0 - End-June: 300 - End-September: 700 - End-December: 1,200 - Stock of net international reserves of the BPNG (floor, US$ millions): - End-March: 1,800 - End-June: 1,800 - End-September: 1,800 - End-December: 1,800 - BPNG provision of foreign exchange to authorized FX dealers (cumulative floor within the year, US$ million): - End-March: 180 - End-June: 360 - End-September: 540 - End-December: 720 - Indicative tax revenue (central government, cumulative floor within the year, Kina billions): - End-March: 2.417 - End-June: 4.834 - End-September: 8.038 - End-December: 11.242 - Memorandum item — Overall deficit of the central government (cumulative ceiling within the year, Kina billions): - End-March: 1.235 - End-June: 2.514 - End-September: 3.542 - End-December: 4.631 - Estimated stock of arrears to be cleared in 2020 (billions of Kina): - End-March: 1.052 - End-June: 0.852 - End-September: 0.352 - End-December: 0.000 ### Prior actions and structural benchmarks (selected, with implementation dates) - Prior actions (met) - Passing of 2020 Budget targeting underlying core fiscal deficit consistent with Table 1 (Prior Action). - Establish an interagency office in Treasury for identification, verification and clearance of arrears (Prior Action). - Structural benchmarks (selected) - Appoint a permanent IRC Commissioner General — Implementation date: End-March 2020. - Complete a detailed independent audit of government employment and payroll practices and program of reform — Implementation date: End-April 2020. - Establish an adequately-staffed MTRS implementation unit within IRC — Implementation date: End-April 2020. - Begin implementation of the Tax Administration Act with dedicated project team — Implementation date: End-June 2020 (full implementation by January 2021). - Incorporate an expenditure rule calibrated in terms of non-resource GDP in the 2020 Budget (Prior Action, met). - Complete liquidity forecast framework at BPNG in coordination with Treasury — Implementation date: End-June 2020. - Increase spread around base rate for repo operations to 100 basis points — Implementation date: End-March 2020. - Passage of the ICAC Act — Implementation date: End-December 2020. ### Financial supervision, AML/CFT, and SOE governance - Financial system - Banking sector: appears adequately capitalized; non-performing loans moderate; vulnerability from financial health of large SOE clients. - BPNG stress-testing suggests banks can manage significant exchange rate adjustment. - Recommendation: Strengthen risk-based supervision, liquidity and FX market supervision, and stress-testing capacity using SOE balance sheet information. - AML/CFT progress and needs - Progress: Establishment of FASU; improved domestic coordination through National Coordinating Committee; FASU admitted to Egmont Group in July 2019. - Needs: Enhance risk-based supervision of banks; law enforcement to step up prosecutions, sanctions, and confiscation of ill-gotten proceeds. - SOE oversight - Recommendations: Require audited financial statements; ensure Auditor General resources; restore non-political oversight of SOEs by Kumul Consolidated Holdings (KCH) with high transparency and accountability; review SOE dividend policy. ### Risks — Annex I Risk Assessment Matrix (selected) - Upside risks - Major natural resource projects initiated — Relative likelihood: High; Impact if realized: High. - Sustained pick up in fiscal revenues from MTRS — Relative likelihood: Medium; Impact: Medium. - Sharper pickup in activity from clearing FX backlog — Relative likelihood: High; Impact: Medium. - Downside risks - Domestic political turmoil, rising protectionism — Relative likelihood: High; Impact: Medium. - More difficult external and domestic financing conditions — Relative likelihood: High; Impact: Medium. - Intensification of geopolitical tensions — Relative likelihood: Medium; Impact: High. - Sustained decline in commodity prices — Relative likelihood: Medium; Impact: High. - Severe natural disasters including corona virus outbreak — Relative likelihood: Medium; Impact: High. - Staff advice on risk responses - Maintain expenditure rule and medium-term fiscal discipline; save surpluses in SWF and buffer funds for resource windfalls; front-load fiscal consolidation if financing conditions deteriorate; allow kina to depreciate vs. USD when appropriate; maintain social spending in severe shocks. ### Data, statistics, and technical assistance - Data weaknesses and capacity needs - Major data gaps: national accounts, fiscal accounts, balance of payments; national accounts publication lag (latest GDP figures historically lagged). - NSO governance challenges: need National Statistics Council or NSO reform committee to oversee reforms and restore credibility. - Monetary and financial statistics: monthly reporting generally aligned; Financial Soundness Indicators compiled for deposit takers. - Technical assistance and PFTAC engagement - Ongoing TA in MTRS, PFM, financial sector regulation and supervision, statistics, and macroeconomic analysis; IMF TA expected to continue through 2022 in several areas. - PFTAC support highlights: IFMS roll-out, cash management reforms, tax administration design, banking supervision frameworks, national accounts and BOP assistance. ### Staff appraisal — recommended priorities (summary) - Resume fiscal consolidation and restore exchange rate flexibility. - Control personal emoluments and rein in current spending; clear government and SOE arrears to support private sector. - Expedite and implement updated MTRS, strengthen IRC management and accountability, pass and implement Tax Administration Act and Income Tax Act (targets and benchmarks specified). - Strengthen SOE oversight, governance, and procurement processes; expedite ICAC Act and anticorruption strategy. - Restore kina convertibility, clear FX orders backlog, strengthen liquidity forecasting and BPNG money market operations. - Successful SMP implementation could catalyze additional donor and development financing; TA and capacity building are critical. *Source: IMF staff report content (1pngea2020001) contained in the supplied PDF chapter/section.* ### 1. External Assessment_____________________________________________________________________________ 17 ### 1. External Assessment ### Macroeconomic developments and outlook - Growth and output - Real GDP is projected to have grown by 5.0 percent in 2019, driven by recovery in energy and mineral production following the 2018 earthquake. - Real GDP growth is projected at 2 percent in 2020 and an average of 3 percent in the medium term, largely driven by the non-resource sector. - Upside risk: prospects for major new gas and mining projects. - Inflation - Inflation was 4.8 percent at end-2018. - Inflation is projected to have slowed to 3.5 percent by year-end 2019. - Assuming gradual kina adjustment to eliminate overvaluation, inflation is expected to pick up temporarily to 6.3 percent between 2020 to 2022 and taper to 3.9 percent by 2024. - External sector and foreign exchange - 2019 current account: a large surplus of 24 percent of GDP, down slightly from 2018. - Despite the current account surplus, the non-resource sector faces a chronic shortage of foreign exchange (FX) because the surplus is largely offset by financial outflows associated with resource sector investments. - Net international reserves rose to $2.3 billion (5.6 months of imports) at end-2018. - FX backlog: an estimated K1.2-1.3 billion for trade-related orders (recent months). - Outlook: some improvement in FX inflows is projected from external loans and a pickup in foreign investments, with gradual clearing of FX order backlog and a gradual diminution of international reserves over the projection horizon. ### Fiscal policies and financing - Recent fiscal outcomes and debt - Fiscal deficit widened to 2.6 percent of GDP in 2018 from 2.5 percent in 2017. - Public debt-to-GDP rose from 33 percent in 2017 to 38 percent in 2018, above the government's long-term target of 30 percent of GDP. - Revisions to public debt recognizing three SOE project loans added about 1.4 percent of GDP to debt; revaluing foreign-currency debt raised the debt ratio by about 1.8 percent of GDP. - 2019 fiscal performance and financing - Budget deficit for 2019 is expected to come in at 4.1 percent of GDP, significantly higher than the 2.3 percent in the original Budget. - Deterioration driven by disappointing revenue outcomes and significant spending overruns (notably personal emoluments about 1 percent of GDP over budget). - Financing: domestic borrowing, and multilateral and bilateral external loans; a Supplementary Budget was passed in November 2019 with cuts in current spending and savings in the public investment program, plus additional payments on arrears. - Medium-term fiscal strategy and targets - Authorities’ program aims to bring the core deficit down gradually from 4 percent of GDP in 2019 to 2 percent of GDP in 2023-24. - Under the scenario that includes contingent spending on arrears and capital investments, public debt is projected to rise to 45.4 percent of GDP in 2021 and then fall to 44 percent of GDP by 2024. - The Fiscal Responsibility Act (FRA) targets a long-term debt ceiling of 30 percent of GDP, with a temporary upper limit of 45 percent of GDP to accommodate absorption of contingent liabilities and an intermediate debt ratio target of 35 percent to be achieved in no more than ten years. - The 2020 Budget introduced a rule to limit current expenditure calibrated in terms of non-resource GDP. - Arrears, payroll, and expenditure control - Authorities established an interagency office in the Treasury to identify, verify, and clear central government payment arrears. - Estimates of arrears envelope and distribution are presented in Text Table 2 (stock of arrears outside the core program). - Measures to control current expenditure include: - Linking payroll to issuance of warrants in the Integrated Financial Management System (IFMS) and placing a ceiling on payments for essential new staff. - Amalgamation/elimination of a number of agencies to reduce personnel and goods and services spending. - Paying down separation (retirement) costs to allow staffing reductions: approximately 4,000 public workers over retirement age are still on the payroll; paying separation costs has an upfront cost but yields savings of about 0.1 percent of GDP in 2021 and 0.2 percent of GDP from 2022 onward. - A detailed audit of government employment and payroll practices by an independent organization to identify inappropriate hiring and develop reforms. - Revenue measures and tax administration - The authorities will redouble efforts to implement the updated Medium Term Revenue Strategy (MTRS), including organizational and institutional arrangements for the Internal Revenue Commission (IRC) and implementation of the Tax Administration Act (TAA) passed in 2018. - Near-term revenue-raising measures expected to provide about 0.3 percent of GDP include: - A one-off increase in cigarette excise taxes and for alcohol and social drinks. - Increased compliance for international taxes (imports) via container examination facilities at the Port of Lae. - Increasing the progressive duty rate on export of unprocessed old-growth logs from the current average of 32 percent to an average of 50 percent. - Compliance efforts to collect fees and services, including rent due the central government. - Core fiscal deficit and public debt projections (Text Table 1, percent of GDP) - Core fiscal deficit: -4.1 (2019), -3.3 (2020), -3.1 (2021), -2.2 (2022), -1.9 (2023), -1.9 (2024). - Public debt: 38.3 (2019), 40.8 (2020), 42.4 (2021), 42.2 (2022), 41.7 (2023), 41.1 (2024). - Planned arrears clearance and planned additional capital expenditure figures are included in Text Table 1 (see source text for exact breakdown). ### Monetary and foreign exchange policies - Exchange rate and BPNG actions - In 2018, Bank of Papua New Guinea (BPNG) began restoring exchange rate flexibility by eliminating guidance to banks on FX allocation, allowing some kina depreciation, and supplying FX to banks to reduce the backlog. - Since late 2018, the pace of depreciation slowed and the kina remains overvalued. - Some external borrowings ($500 million sovereign bond, $180 million commercial loans, and $250 million World Bank and ADB loans) contributed to rising net international reserves to $2.3 billion (5.6 months of imports) at end-2018 and were used partly to reduce the FX backlog. - Liquidity, FX shortages, and monetary transmission - Liquidity forecasting and management have been hampered by lack of information on prospective government spending and maldistribution of liquidity across institutions. - On current policies, the financial system is likely to continue to see FX shortages, weak credit growth, and excess liquidity (bank deposits bolstered by funds intended for imports or dividend payments abroad). - The BPNG’s ability to affect monetary conditions is likely to remain very limited under these circumstances. - Controls and capital flow measures - Staff are assessing measures introduced by BPNG Foreign Exchange Control Directives in March 2015 addressing capital outflows and FX hoarding (e.g., cessation of Kina deposits in local accounts of foreign banks, repatriation requirements for exporters, ban on approval of new offshore and onshore foreign currency accounts), in light of the Fund’s Institutional View on Liberalization and Management of Capital Flows. ### Risks - Near-term risks (predominantly downside) - Possible declines in commodity export prices. - Deterioration in the investment climate from domestic or external political developments. - Deterioration in domestic or external financing conditions. - Spread of the Corona virus to PNG would have a large negative impact. - Medium-term risks (mainly upside) - Potential impact, from 2021, of major new natural resource project investments. - Beneficial effects of exchange rate adjustment and revenue reforms. ### Policies for macroeconomic stability and development - Overall near-term priorities - Resume fiscal consolidation and restore exchange rate flexibility. - Strengthen policy frameworks to promote sustainable non-resource sector growth and prepare to manage the next resource boom. - Staff-Monitored Program (SMP) - In view of fiscal deterioration, the authorities requested an SMP to guide policy response and catalyze financing. - The SMP provides a macroeconomic framework with many structural benchmarks reflecting reform priorities; the draft SMP outline was endorsed by the National Executive Council in late November (text appended to the Report for information). - Fiscal framework reform - Revise fiscal framework to include an expenditure rule to help achieve fiscal targets and reduce pro-cyclicality. - The 2020 Budget introduced a rule limiting current expenditure calibrated in terms of non-resource GDP to guide budget formulation. *Source: IMF staff report — "1. External Assessment", Papua New Guinea.* ### 18. An update of the debt sustainability analysis (DSA) to end-2018 indicates that PNG ### 1pngea2020001 - 18. An update of the debt sustainability analysis (DSA) to end-2018 indicates that PNG ### Debt sustainability and fiscal risks - Update of the debt sustainability analysis (DSA) to end-2018 indicates that PNG remains at moderate risk of debt distress. - Risks risen due to: - Large increase in debt in 2018. - Shift in debt towards external lending without a proportionate reduction in domestic short-term debt. - Significant increases in the ratio of debt servicing costs to revenue. - Concentration of domestic debt in short-term instruments. - Unfunded superannuation liabilities. - Government guarantees of SOE debt. - Policy implication: Authorities need sustained fiscal consolidation and, in particular, rein in current spending to reduce the debt ratio and debt-servicing costs over the medium term. - Capacity needs: Improve medium-term financial planning and debt management to lengthen maturities and lower interest rates to help reach debt targets. *Authorities’ Views (debt and fiscal)* - Authorities concurred on the need for fiscal consolidation and agreed that personal emoluments were an important challenge to fiscal management. - Noted that the 2020 budget addresses retirees and wage arrears. - Cautioned that expenditure consolidation needs to leave room for social spending, infrastructure investments and the clearance of arears. ### Monetary and exchange rate policies - Main challenges: - Restore exchange rate flexibility. - Move towards money market operations to implement monetary policy. - Recommended actions (mission): - Restore exchange rate flexibility and eliminate overvaluation of the kina (MEFP paragraph 14 and Table 2). - External Sector Assessment suggests PNG’s external sector is moderately weaker than implied by fundamentals and desirable policies, and that the kina is overvalued by around 11 to 18 percent. - This overvaluation could be largely eliminated over the next three years without boosting inflation excessively. - Continue an orderly reduction in the FX orders backlog (MEFP paragraph 14 and Table 1). - Backlog declined in early 2019 but has been growing more recently. - BPNG should continue monthly injections of FX until the backlog is substantially cleared, and consider introducing auctions of FX. - Strengthen liquidity and debt management (MEFP paragraphs 14 and 15, and Table 2). - Treasury should improve cooperation with BPNG on liquidity forecasting. - BPNG should encourage banks to use the interbank market as their preferred source for meeting liquidity needs by raising the spread between the rate on its overnight lending facility and the policy rate. - Technical assistance: - IMF technical assistance (TA) has been provided; additional TA will be needed, preferably including a resident advisor. - Authorities’ Views (monetary and FX): - Authorities agreed on the need to restore exchange rate convertibility and to clear the FX orders backlog. - Authorities believe the kina overvaluation is towards the lower end of the IMF staff range and that the true backlog of FX orders is smaller than reported by banks. - BPNG emphasized need for on-the-ground technical assistance to strengthen FX market and monetary operations; staff will seek to assist. ### Financial supervision and AML/CFT issues - Financial system overview: - Appears adequately capitalized; non-performing loans moderate, but banks may be vulnerable. - As BPNG moves towards greater exchange rate flexibility, important to ensure banking system can manage exchange rate risks. - BPNG stress-testing suggests banks can manage significant exchange rate adjustment. - Larger concern: financial health of large SOE clients of banks; several SOEs are essentially bankrupt and banks will need adequate provisioning. - AML/CFT progress and challenges: - PNG has made substantial progress in strengthening its AML/CFT framework, but implementation challenges remain. - Needs strengthening: measures to mitigate money laundering (ML) and terrorism financing (TF) risks and maintain robust correspondent banking. - Recent progress: - Establishment of the Financial Analysis and Supervision Unit (FASU). - Improved domestic coordination through the National Coordinating Committee. - Recommendations: - FASU should continue enhancing its risk-based supervision of banks to improve AML/CFT compliance. - Law enforcement agencies should step up efforts in prosecuting and sanctioning ML cases and confiscating ill-gotten proceeds. ### Development strategy and revenue mobilization - Authorities’ Medium-Term Development Plan III focuses on infrastructure investment, improving law and order, and better education and health services. - Staff agree on development of the non-resource sector and highlight three complementary reform areas: - Reinvigorated and updated Medium-Term Revenue Strategy (MTRS). - Essential to achieve fiscal and development targets. - Development of non-resource sector requires substantial public investment in infrastructure, education, healthcare, clean water, electricity, and telecommunications. - Implementation of the MTRS has lagged; additional Treasury oversight required. - Important measures for the coming year include: - Strengthening Internal Revenue Commission (IRC) management and accountability. - Appointment of a permanent Commissioner General (CG) will give the CG necessary authority to drive structural and management changes (MEFP paragraph 10 and Table 2). - IRC accountability should be strengthened through clarifying deliverables and reporting on progress to the MTRS Steering Committee on a monthly basis (MEFP paragraph 18 and Table 2). - Implementing tax legislation. - IRC should begin to implement the provisions of the new Tax Administration Act (TAA) from mid-2020 (MEFP paragraph 10 and Table 2). - Adequate implementation will require establishment of a separate implementation unit at the IRC with dedicated resources. - The Income Tax Act (ITA) should be passed by end-June 2020, and come into effect in 2021 (MEFP paragraph 10 and Table 2). - Strengthened oversight and accountability of SOEs and Statutory Authorities (SAs) (MEFP paragraph 18). - SOEs operate in sectors crucial for non-resource development: air transportation, telecommunications, power generation. - Recommendations: - Require SAs and SOEs provide audited financial statements as required by law; ensure Auditor General has adequate resources to review and clear these statements promptly for Parliamentary oversight. - Restore strong, non-political oversight of SOEs by Kumul Consolidated Holdings (KCH), while holding KCH to high standards of transparency and accountability (MEFP paragraph 18 and Table 2). - Effectiveness of KCH has been undermined by appointment of ministers to oversee individual companies and some KCH Board appointments; restoring KCH role needs enhanced accountability for its own performance. - Strengthening governance and reducing corruption (MEFP paragraph 18 and Table 2). - Weak governance and corruption undermine efficiency, equity, and the rule of law. - Specific areas for action: - Public investment procurement: Enactment of the National Procurement Act (NPA) is welcome, but National Procurement Commission needs adequate staffing and training; bring bilateral aid projects into conformity with NPA and national construction standards. - Independent Commission Against Corruption (ICAC): Passage of revised legislation should be expedited. - Police Fraud and Anti-Corruption Directorate: Needs adequate resourcing and effective public oversight to limit political interference. - Authorities’ Views (development strategy): - Authorities agreed with staff recommendations. - Treasury and IRC agreed reinvigorated revenue strategy and stronger IRC accountability are needed. - Authorities indicated a very ambitious SOE reform agenda including governance reforms and divestiture of assets. - Governance is a high priority area and authorities will enunciate a comprehensive governance strategy. ### Other issues - National Statistical Office (NSO): - Faces major governance challenges: management, accountability, and cooperation problems jeopardize effectiveness and credibility. - Authorities urged to restore a National Statistics Council or NSO reform committee to oversee reforms, establish accountability, and ensure cooperation between agencies in production of core macroeconomic statistics. - Staff support NSO database management initiative to develop templates replicable across agencies for administrative data collection. - Multiple currency practices (MCPs) and exchange restrictions: - Staff encourage elimination of all MCPs and exchange restrictions. - Ending guidance to banks on FX allocation priorities is welcome, but FX rationing continues as BPNG provides limited amounts to meet banks’ FX requests for current international transactions. - Staff do not recommend Fund approval of retention of exchange restrictions arising from FX rationing and from the tax clearance certificate requirement, and of MCPs, given they are not temporary and no timetable for elimination exists. - Risks to the SMP program: - Macroeconomic risks and natural disasters could seriously disrupt fiscal consolidation and structural reforms. - Implementation risks: capacity development needs could delay reforms; sustained political support is essential. ### Staff appraisal and recommended program pillars - Context since 2014: - PNG affected by softer export commodity prices and natural disasters, leading to sluggish growth, FX shortages, weak investment, and escalating public and external debt. - External Sector Assessment points to overvaluation of the kina; Debt Sustainability Analysis suggests moderate risk of debt distress. - Structural challenges: large development spending needs; promoting economic and financial inclusion (especially for women); addressing corruption and governance weaknesses; political volatility. - Key elements of recommended package under the SMP: - Fiscal consolidation to gradually reverse buildup of public debt and reduce external debt risks. - Personal emoluments need strict control. - Government and SOE arrears need to be cleared to support private sector growth. - Social spending should be protected. - MTRS reforms need to be expedited to improve revenue flows to support investments and social spending. - Reforms must be sustained to achieve authorities’ debt targets under the revised Fiscal Responsibility Act. - Restore kina convertibility and flexibility by clearing foreign exchange orders backlog and eliminating kina overvaluation. - Strengthen liquidity management as first step in reforming monetary policy framework. - Structural reforms for sustainable medium-term growth, including: - Vigorous implementation of updated MTRS to finance development needs. - Extensive SOE reform to strengthen performance in keystone industries (power generation, telecoms). - Improving governance and reducing corruption to restore investor confidence and efficiency. - Financing and support: - Successful implementation of SMP could open door to additional development financing and further reforms. - Bilateral donors signaled willingness to support PNG’s transition in context of SMP. - Authorities indicated interest in seeking support under an IMF-supported program at conclusion of the SMP. - TA and training: Papua New Guinea has received significant TA in updated MTRS, expected to continue through 2022. - Additional TA in PFM, financial sector regulation and supervision, statistics and macroeconomic analysis from PFTAC; complemented by TA from MCM and/or other partners on monetary policy framework. - Upgrading capacity related to TA depends on implementation, which has been slow in some areas. - Consultation schedule: - Proposed next Article IV consultation to be held on the standard 12-month cycle. ### Box 1 — External Assessment (excerpt) - Staff judgement: 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). - The External Balance Assessment methodology (EBA-lite) based on preliminary data for 2019 suggests the currency is moderately overvalued. *Source: IMF staff report content (1pngea2020001) contained in the supplied PDF chapter/section.* ### 24.2 percent of GDP suggests a large undervaluation. However, such an analysis is distorted by problems ### 1pngea2020001 - 24.2 percent of GDP suggests a large undervaluation. However, such an analysis is distorted by problems ### Exchange rate assessment and REER valuation - A headline current account surplus of 24.2 percent of GDP suggests a large currency undervaluation, but this is distorted by classification issues. - After adjusting the current account surplus for misclassified large income account outflows (including external debt service payments related to resource projects), staff estimates the current account deficit should be close to zero. - REER assessments: - Using the current account balance (CAB) analysis metric (after adjustments), the REER is assessed to be overvalued by around 12 percent. - Using the non-resource current account balance of -6.1 percent of GDP, the analysis indicates the REER is overvalued by 18 percent. - The EBA-lite REER index model suggests an overvaluation of 11 percent. - The assessment of an overvaluation is consistent with limited exchange rate adjustment to international inflation differentials or terms of trade movements. - In 2019: - The REER appreciated by 3 percent. - The NEER experienced little change throughout the year. ### Current account, classification issues, and import compression - Classification distortions: - Large income account outflows, including external debt service payments related to resource projects, have been classified under the financial account rather than the current account, distorting the headline current account surplus. - It is presumed that the misclassified outflows exceeded the current account surplus in 2019. - A recent reclassification exercise with 2015 data reduced the current account surplus for that year by almost 40 percent, while dividend and interest payments are estimated to have more than doubled since 2016 from company level data. - Non-resource current account: - The non-resource current account balance is -6.1 percent of GDP (used in one REER overvaluation calculation). - Import compression: - Import compression resulting from FX shortages implies a larger underlying current account deficit and a higher degree of REER overvaluation. ### Reserves and external buffers - Reserves-to-imports: - The reserves-to-import ratio declined to 4.7 months of imports at end-2019. - Comparisons: - 4.7 months is well above the 3-month import cover norm. - 4.7 months is below the level of 6.9 months’ cover considered appropriate for low-income countries. - Gross official international reserves and related indicators appear across tables and projections (see Balance of Payments and Monetary Developments tables for detailed series and projections). ### Supporting empirical parameters and references - Elasticities used in related external adjustment analysis: - Exports elasticity: -0.44 - Imports elasticity: 0.29 - Source: Nakatani (2017) “External Adjustment in a Resource-Rich Economy: The Case of Papua New Guinea” IMF Working Paper No.17/267. - Staff adjustments include estimates related to the PNG LNG project. ### Key numerical findings and indicators (selected exact figures from the content) - Headline current account surplus cited: 24.2 percent of GDP. - Adjusted REER valuations: - Overvalued by around 12 percent (CAB metric). - Overvalued by 18 percent (non-resource current account of -6.1 percent of GDP). - EBA-lite REER index model suggests overvaluation of 11 percent. - 2019 movements: - REER appreciated by 3 percent in 2019. - Reserves: - Reserves-to-import ratio at end-2019: 4.7 months of imports. - Low-income country benchmark: 6.9 months’ cover. - Reclassification impact (2015 example): current account surplus reduction of almost 40 percent for that year. - Dividend and interest payments: estimated to have more than doubled since 2016 (company level data). *Source: IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Potential Deviations from Baseline Expectations - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively. ### Upside risks - Major natural resource projects initiated - Relative likelihood: High - Impact if realized: High - Potential impact: ↑ Favorable impact on GDP, external balance and fiscal position. - Staff advice on policy response: - Maintain expenditure in line with medium-term rule. - Save surpluses in SWF and buffer funds. - Sustained pick up in fiscal revenues from MTRS - Relative likelihood: Medium - Impact if realized: Medium - Potential impact: ↑ Favorable impact on fiscal position. - Staff advice on policy response: - Use additional funds to complete fiscal consolidation, then scale up public investment. - A sharper pickup in activity associated with clearing of the FX orders backlog - Relative likelihood: High - Impact if realized: Medium - Potential impact: ↑Favorable GDP impact, increased imports. - Staff advice on policy response: - May need to tighten monetary or fiscal policy stance to counter inflation pressures. ### Downside risks - Domestic political turmoil, rising protectionism and retreats from multilateralism - Relative likelihood: High - Impact if realized: Medium - Potential impact: ↓ Adverse impact on foreign direct investment and confidence, negatively impacting growth. - Staff advice on policy response: - Continue gradual fiscal consolidation and monetary policy reforms. - More difficult external and domestic financing conditions, including higher risk premia - Relative likelihood: High - Impact if realized: Medium - Potential impact: ↓ Higher debt service and refinancing risks. Pressure for government spending cuts. - Staff advice on policy response: - Front-load fiscal consolidation, with clear plan for further consolidation. - Intensification of geopolitical tensions - Relative likelihood: Medium - Impact if realized: High - Potential impact: ↓ Adverse impact on investment and growth. - Staff advice on policy response: - Continue gradual fiscal consolidation. - Allow the Kina to depreciate vs. USD. - Sustained decline in commodity prices - Relative likelihood: Medium - Impact if realized: High - Potential impact: ↓Declines in major commodity export prices. Adverse BOP impact; moderate budget impact. - Staff advice on policy response: - Continue with gradual fiscal consolidation. - Allow Kina to depreciate vs. USD. - Severe natural disasters including corona virus outbreak - Relative likelihood: Medium - Impact if realized: High - Potential impact: ↓ Negative impact on GDP growth, export and fiscal revenues, higher inflation. - Staff advice on policy response: - Allow Kina to depreciate vs. USD. - Maintain fiscal expenditure. *Source: Annex I. Risk Assessment Matrix (as presented in the IMF staff report).* ### 8. The authorities’ goal is to return fiscal policy to a sustainable path, while reorienting ### 8. The authorities’ goal is to return fiscal policy to a sustainable path, while reorienting ### Fiscal consolidation and expenditure reorientation - Objectives: - Contain unproductive expenditure, pay off arrears, and reorient spending toward capital investment. - Increase revenue through reforms in the updated Medium-Term Revenue Strategy (MTRS). - Strengthen the medium-term fiscal framework. - Fiscal policy for 2020 (Prior Action): - Authorities commit to submit to the National Assembly a budget law for 2020 that meets the quantitative targets for the underlying core deficit and the levels of public spending defined in the macroeconomic framework linked to the SMP. - The underlying core deficit is defined as the overall deficit of K4,631 million minus the payment of K1,022 million in arrears and K500 million in public investment projects that have not yet been identified, verified or funded. - As arrears are properly identified and verified, and financing is confirmed for public investment projects financed by International Financial Institutions, these will be included in the deficit through an adjustor. - Personnel and payroll measures: - Realistic budgeting for personnel costs, including: - Accounting for pay increases related to fixation agreements with unions. - Accounting for expected inflow of new staff on-boarding. - Better control of documentation and back pay for teachers. - Realistic accounting for leave fares and supplements. - Including severance pay and pension liabilities for employees retiring in the current year. - Limit growth of government payroll: - Implement an efficiency cut of 2 percent in the overall base salary bill. - Better implementation of the government hiring freeze, limits on exempted “essential service providers,” limits on unattached workers, and elimination of unbudgeted/unlawful payments (supplements and allowances). - Achieve through amalgamation/elimination of public agencies under the Public Sector Organization Reform. - For 2020, compensation of employees in the operational budget will be limited to K5,672.8 million. - Structural benchmark: complete a detailed independent audit of government employment and payroll practices to identify inappropriate hiring and payments and develop reforms. - Arrears management: - Establish an interagency office in Treasury to identify, verify and clear arrears and limit new domestic payments arrears (Structural Benchmark). - Verify severance payment and pension liabilities for approximately 4000 public workers over retirement age and complete their retirement; these payment arrears will be expenditures outside the underlying core deficit. - Identify and confirm domestic payments arrears on current expenditures (rent and utilities) and domestically-financed public investment projects and development budget arrears. - Authorities commit to limit the growth of new domestic payments arrears to zero during the life of the program. - Social spending protection: - Authorities will verify composition of social spending (current and capital spending on education, health and public safety, and income transfers) to be protected from cuts. - Authorities will abide by the expenditure floor on the definition of social spending included in the program as an indicative target. ### Revenue measures and MTRS implementation - Tax policy and compliance measures: - Additional measures mentioned in the 2020 Budget evaluated to provide about 0.3 percent of GDP in additional revenue: - A one-off increase in excise taxes for cigarettes and alcohol drinks by 10 percent; a return to CPI-based indexation and an increase in excise on anti-social drinks by 400 percent. - Increased compliance with international taxes (imports) from introduction of container examination facilities at the main Port of Lae. - Capturing resource rents on exports of unprocessed old-growth logs by increasing the progressive duty rate from the current average of 32 percent to an average of 50 percent. - Compliance efforts in collecting fees and services, including rent due the central government. - Medium-Term Revenue Strategy (MTRS) actions in 2020: - Appoint a permanent Commissioner General for the Internal Revenue Commission (IRC) (Structural Benchmark). - Treasury to lead an interagency review of institutional arrangements for Tax and Customs revenue collection (Structural Benchmark). - Implement provisions of the Tax Administration Act (TAA) and the updated MTRS: - TAA expected operational in July 2020 with full implementation by January 2021. - Strengthen the Program Management unit in IRC with experienced tax experts (Structural Benchmark). - IRC and Treasury to agree specific MTRS implementation objectives and milestones (Structural Benchmark). - Treasury and IRC to hold monthly MTRS Steering Committee meetings (Structural Benchmark). - Passing of the Income Tax Act (ITA): - Final revisions expected by March 2020. - Submit the Act for passage in Parliament in the June session and publish in the national gazette before September so full provisions would come into effect in January 2021 (Structural Benchmark). - Review SOE dividend policy to better control distribution of dividends to the central government (Structural Benchmark). ### Financing strategy and debt policy - 2020–2021 financing scenario: - Plan to finance overall budget deficits largely with external financing. - 2020 assumptions include external financing from ADB and World Bank budget support (to pay off arrears and for health and SOE reforms), multilateral project support for project spending and capital investments, bilateral budget support from Australia to finance some arrears clearance and capital spending, and borrowing under the ADB Partial Credit Guarantee Facility to retire more expensive commercial debt. - 2021 assumptions include ADB and World Bank budget support, multilateral project support, and additional bilateral budget support from Australia to help pay off arrears and support capital spending. - Government financing and debt commitments: - External financing arrears: commit to keep arrears on external debt service of the central government to zero during the life of the program. - Non-concessional financing: commit to limiting new non-concessional debt, contracted or guaranteed by the central government with maturity of one-year or more, to the limits under the program and specified in Table 1, and as defined in the TMU. - Domestic debt issuance and liquidity: - Treasury will prepare a Treasury debt issuance and external debt disbursement plan early in 2020 based on cash forecasts and share with BPNG (Structural Benchmark). - Treasury debt office to coordinate with BPNG on issuance and provide weekly updates for the coming three months to BPNG. - Medium-term fiscal framework and debt targets: - FRA amendment raises upper limit on debt temporarily to 45 percent of GDP. - Government’s long-term debt target: no more than 30 percent of GDP. - FRA provides transition to lower debt, with debt ratio to move below 35 percent of GDP in 10 years. - Authorities commit to a medium-term fiscal program in the SMP that will match these quantitative limits. - Reaching debt targets requires continued fiscal consolidation, particularly reining in current spending. - Expenditure rule (Prior Action): - Incorporate an expenditure rule calibrated in terms of non-resource GDP in the fiscal strategy of the 2020 Budget. - Rule would reduce the combined PE and goods and services recurrent budget, as a share of non-resource GDP, until long-term debt target of 30 percent of GDP is reached, while increasing public investment as a share of non-resource GDP. - Sovereign Wealth Fund (SWF): - SWF Law passed. - Authorities will create a plan for full implementation of the SWF when new gas projects come on line (Structural Benchmark). - Review disposition of revenues from resource sector SOEs (Kumul Petroleum and Kumul Mining) to establish a more direct and transparent flow of revenues to the SWF. ### Monetary, exchange rate, and liquidity management reforms - FX backlog and convertibility: - Objective: eliminate unfilled FX orders backlog, restore kina convertibility and exchange rate flexibility, and strengthen BPNG money market operations. - BPNG to provide FX to authorized FX dealers in the amount of at least $60 million per month, on average, over the first six months of the program, and in each subsequent half year until the backlog is eliminated, subject to maintaining Net International Reserves (NIR) at a level of at least $1.8 billion. - Implement progressive restoration of kina convertibility and a fully market-determined exchange rate; gradual restoration may involve exchange rate adjustment. - BPNG will seek TA to help restore functioning of the interbank FX market (Structural Benchmark). - IMF view: the kina is overvalued by between 12 and 18 percent, and an adjustment of this amount should be feasible over a 2-3 year period without putting excessive upward pressure on inflation. - Monetary operations and liquidity management: - Completion of a liquidity forecasting framework: Department of Treasury to provide weekly updates to BPNG of expected domestic debt issuance over the forthcoming three months (Structural Benchmark). - Tighten access to overnight lending by BPNG: raise the rate on its overnight lending facility (Structural Benchmark). - Halt BPNG financing of the public sector: BPNG additional net lending to the government under the “slack” arrangement will be limited to zero (Quantitative Target). - Seek TA to support implementation of reforms to monetary operations from IMF, Australia, or New Zealand (Structural Benchmark). ### Financial sector supervision and AML/CFT - Financial sector stability and supervision: - BPNG to strengthen risk-based banking supervision, intensifying liquidity, foreign exchange, and market risk supervision with TA from PFTAC. - Strengthen stress-testing capacity using SOE balance sheet information from Department of State Enterprises. - AML/CFT policies: - Continue strengthening implementation of AML/CFT framework to mitigate ML/TF risks and ease pressures on correspondent banking. - National Coordinating Council to develop AML/CFT priorities based on National Risk Assessment results. - FASU to enhance risk-based supervision of banks. - Law enforcement agencies to step up prosecutions and sanctions of ML cases and confiscate ill-gotten proceeds. ### Structural reforms, governance, and transparency - Revitalization of MTRS: - Treasury and IRC to agree specific MTRS implementation objectives and milestones to be achieved in 2020 based on PNG IRC Annual Plan and IMF TA recommendations (Structural Benchmark). - Strengthen the Program Management Office within IRC (Structural Benchmark). - Hold regular MTRS Steering Committee meetings to review progress (Structural Benchmark). - Comprehensive SOE reform (Structural Benchmark): - Implement reform package approved by the National Executive Council (NEC) including: - Strengthening SOE management. - Increasing transparency and accountability. - Improving investment procurement and planning processes. - Reforming role of Kumul Consolidated Holdings (KCH) in SOE oversight. - Improving financial viability of SOEs and divesting non-core assets. - Authorities to work closely with the Asian Development Bank (ADB) and other development partners. - Anti-corruption and procurement: - Develop a comprehensive and prioritized strategy for reducing corruption and coordinating efforts across agencies; TA will be sought (Structural Benchmark). - Passage of the Independent Commission Against Corruption (ICAC) Act is a priority to be completed in 2020 (Structural Benchmark). - Ensure adequate resourcing and training for the National Procurement Commission to implement the National Procurement Act (NPA). *IMF staff summary of commitments, measures, and benchmarks described in the cited program text.* ### 19. Key risks to the program stem from potential exogenous events, as well as from ### 1pngea2020001 - 19. Key risks to the program stem from potential exogenous events, as well as from ### Key risks to program implementation - External shocks could adversely affect PNG’s economic performance, lowering growth and weakening the fiscal position, making fiscal consolidation more difficult. - Access to external finance could be more challenging than anticipated, potentially forcing: - more difficult fiscal adjustment, or - slower clearance of arrears, or - cuts in capital spending than envisaged in the program. - Domestic implementation risks: - Slippage in implementation or loss of political support for the updated MTRS reforms and stronger control of personal emoluments would jeopardize medium-term fiscal consolidation. - Weakening support for SOE and governance reforms could undermine medium-term growth prospects and increase risks to public debt from contingent liabilities and fraud. ### Program reviews and monitoring framework - Reviews: - First, second and third reviews will be based on end-June 2020, end-December 2020, and end-June 2021 quantitative targets and indicative targets and prior actions and structural benchmarks. - The performance criteria and indicative targets: - Are defined in the Technical Memorandum of Understanding (TMU). - TMU specifies the nature and frequency of information and data to be provided for program monitoring. ### Quantitative and indicative targets for 2020 (Table 1) — key figures (in billions of kina, unless otherwise indicated) - Core fiscal deficit of the central government (cumulative ceiling within the year): - End-March Prog. Target: 0.847 - End-June Prog. Target: 1.694 - End-September Prog. Target: 2.386 - End-December Prog. Target: 3.079 - New non-concessional external debt contracted or guaranteed by the central government or the BPNG with maturity of one year or more (cumulative ceiling over the duration of the program, US$ millions): - End-March: 0 - End-June: 300 - End-September: 700 - End-December: 1,200 - External debt service arrears of the central government (ceiling, US$ millions): - End-March: 0 - End-June: 0 - End-September: 0 - End-December: 0 - Stock of net international reserves of the BPNG (floor, US$ millions): - End-March: 1,800 - End-June: 1,800 - End-September: 1,800 - End-December: 1,800 - BPNG provision of foreign exchange to authorized FX dealers (cumulative floor within the year, US$ million): - End-March: 180 - End-June: 360 - End-September: 540 - End-December: 720 - BPNG direct monetary financing of the public sector: - End-March: 0 - End-June: 0 - End-September: 0 - End-December: 0 Indicative targets (cumulative within the year): - Tax revenue of the central government (cumulative floor within the year): - End-March: 2.417 - End-June: 4.834 - End-September: 8.038 - End-December: 11.242 - Central government core current expenditure (cumulative ceiling within the year): - End-March: 3.929 - End-June: 7.858 - End-September: 11.072 - End-December: 14.409 - New domestic payments arrears of the central government (ceiling): - All quarter targets: 0 - Social and other priority spending (cumulative floor within the year): - End-March: 0.893 - End-June: 1.787 - End-September: 3.126 - End-December: 4.466 - Central government clearance of arrears and additional capital spending (cumulative ceiling within the year): - End-March: 0.388 - End-June: 0.820 - End-September: 1.156 - End-December: 1.552 Memorandum items: - Overall deficit of the central government (core deficit plus payments of arrears and additional capital spending) (cumulative ceiling within the year): - End-March: 1.235 - End-June: 2.514 - End-September: 3.542 - End-December: 4.631 - Concessional borrowing (ceiling, millions of US$): - Each quarter: 620 - Estimated stock of arrears to be cleared in 2020 (billions of kina): - End-March: 1.052 - End-June: 0.852 - End-September: 0.352 - End-December: 0.000 ### Prior actions and structural benchmarks for 2020 (Table 2) — selected measures and implementation dates Fiscal measures (selected): - Passing of a 2020 Budget targeting an underlying core fiscal deficit consistent with Table 1 of MEFP — Purpose: Resume momentum of fiscal consolidation — Prior Action (met). - Establish an interagency office in Treasury responsible for the identification, verification and clearance of arrears — Purpose: Improved control over government spending and clearance of arrears — Prior Action (met). - Complete a detailed independent audit of government employment and payroll practices and program of reform — Purpose: Improved control over government hiring and payroll to contain employee compensation expenditures — Implementation date: End-April 2020. - Appoint a permanent IRC Commissioner General — Purpose: Support the implementation of the MTRS — Implementation date: End-March 2020. - MTRS Steering Committee to set specific MTRS implementation objectives and milestones to be achieved in 2020 — Implementation date: End-February 2020. - Establish an adequately-staffed MTRS implementation unit within IRC — Implementation date: End-April 2020. - Hold monthly meetings of the MTRS Steering Committee to review progress — Implementation date: End-April 2020. - Conclude revisions of the Income Tax Act and pass the Act in parliament and publish in the gazette — Implementation date: End-December 2020. - Begin implementation of the Tax Administration Act, with a dedicated project team so full implementation is achieved by January 2021 — Implementation date: End-June 2020. - Complete a review led by Treasury of the best institutional arrangements for Tax and Customs revenue collection in PNG — Implementation date: End-September 2020. - Complete a review of existing SOE dividend policies — Implementation date: End-September 2020. - Incorporate an expenditure rule calibrated in terms of non-resource GDP in the existing fiscal strategy in the 2020 Budget — Purpose: Revise the medium-term fiscal framework — Prior Action (met). - Develop a plan for full implementation of the SWF, including consistency of the current arrangements with PNGs long-term development interests — Implementation date: End-December 2020. - Treasury to prepare a treasury debt issuance and external debt disbursement plan based on cash forecasts, and share regularly updated projections with BPNG — Implementation date: End-March 2020. Monetary and exchange rate measures: - Complete a liquidity forecast framework at the BPNG in coordination with Treasury — Implementation date: End-June 2020. - Increase the spread around the base rate for repo operations to 100 basis points — Implementation date: End-March 2020. - BPNG to seek additional TA to implement measures to strengthen monetary and FX market operations, and re-establish a functioning interbank FX market — Implementation date: End-June 2020. Structural and governance measures: - Implementing SOE reform plan approved by the National Executive Council (NEC) in consultation with international partners such as ADB and Australia — Implementation date: End-June 2020. - Develop a comprehensive and prioritized strategy for reducing corruption, coordinating across relevant government agencies, with technical assistance — Implementation date: End-September 2020. - Passage of the ICAC Act in the Legislature and publish the Act in the National Gazette — Implementation date: End-December 2020. ### Technical Memorandum of Understanding (TMU) — definitions and monitoring arrangements (selected) - TMU sets out understandings between PNG authorities and the IMF regarding definitions of the indicative targets for the 16-month SMP spanning from February 2020 to June 2021. - Prior Actions (high level): - Passing of a 2020 Budget targeting an underlying core fiscal deficit consistent with Table 1 of MEFP is a prior action for the SMP; the budget should include realistic budgeting for personnel costs, other operational expenditures and avoid further build-up of arrears. - Core fiscal deficit definition and adjustors: - Core fiscal deficit defined as the overall cash fiscal balance excluding: (1) expenditure for well-verified and authenticated central government payments arrears (up to the limit indicated); and (2) capital expenditure (net acquisition of non-financial assets) financed through project loans from multilateral financial institutions (up to the limit indicated). - Limits to arrears payments: - For 2020, total arrears payments will be limited to K1.052 billion. Indicative allocation for 2020 arrears: - K430 million for superannuation arrears for non-teachers; - K122 million for 2019 public servant pay increases; - K200 million for goods and services arrears (rent and utilities); - K300 million for capital spending projects, and other outstanding development budget allocations. - For 2021, total arrears payments will be limited to K930 million. Indicative allocation for 2021 arrears: - K430 million for superannuation arrears for teachers; - K200 million for goods and services arrears (rent and utilities); - K300 million for capital spending projects and other outstanding development budget allocations. - Capital expenditure exclusion: - Net acquisition of non-financial assets associated with projects financed by multilateral financial institutions (the World Bank and the Asian Development Bank) up to a limit of K500 million in 2020. - Government definition for SMP: - Government is defined as the central government; central government includes Extra Budgetary Units which have individual budgets not fully covered by the national budget. - Quantitative targets timing: - Set for end-March 2020, end-June 2020, end-September 2020, and end-December 2020. Performance in 2020 assessed against end-June 2020 and end-December 2020 quantitative targets; end-March and end-September are indicative. - Key definitions: - Overall fiscal balance: calculated on a cash basis as the difference between (1) government tax and non-tax revenue and budget grants; and (2) total current expenditure plus capital expenditure. - Debt: defined in accordance with Executive Board Decision No. 15688-(14/107) as all current liabilities created under a contractual arrangement requiring future payments; includes loans, suppliers’ credits and leases; arrears, penalties, and judicially awarded damages arising from failure to make contractual payments are debt. - External debt: defined by residency of the creditor; considered contracted once all conditions for entry into effect have been met. - Concessional debt: debt with a grant element of at least 35 percent, calculated using a unified discount rate of 5 percent. - Net international reserves of the BPNG: difference between total gross official international reserves and official reserve liabilities; gross reserves defined and exclusions specified in TMU. - Indicative targets definitions: - Tax revenues: defined in line with GFSM 2014 and classified into six major categories. - Current expenditure: central government expenditure within the current year, calculated as total expenditure less net acquisition of non-financial assets. - Domestic payment arrears: overdue domestic payment obligations to entities legally incorporated in PNG and residents of PNG; arrears criteria: - Debt unpaid for more than 30 days after due date; - Wages or pensions unpaid 90 days after due date; - Payments for goods and services received more than 90 days after processing of supporting documents submitted by suppliers. *Source: Papua New Guinea authorities; and Fund staff estimates; Technical Memorandum of Understanding as provided in the content unit.* ### 20. Social and other policy priority spending is measured on a cash basis and comprises ### 20. Social and other policy priority spending is measured on a cash basis and comprises central government spending in the following areas: health, education and law and order (both capital and operating expenses). ### Program Monitoring and Institutional Arrangements - A Program Monitoring Committee shall be maintained by the Papua New Guinea authorities. - Composition: senior officials from the Treasury and the BPNG. - Responsibilities: - Monitor performance of the program. - Inform the Fund regularly. - Transmit supporting materials necessary for the evaluation of benchmarks. - Prepare and provide electronically to Fund staff the information contained in the data reporting table. ### Data Reporting Requirements (Table 1 — Fiscal Sector) - National government operations — revenue, expenditure, and financing - Type of data: Budget operations - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 1 month - Detailed data on execution of the budget (by economic and administrative classification) - Reporting frequency: Bi-annual - Reporting lag: 1 month - Outstanding appropriation, allotment, commitment, vendor purchasing/payments, cash advances, and bank balances since beginning of calendar year - Reporting frequency: Quarterly - Reporting lag: 1 month - Monthly cash plan - Reporting frequency: Monthly - Reporting lag: 1 month - Payroll and non-payroll salary and allowance payments made by Treasury - Reporting frequency: Quarterly - Reporting lag: 1 month - Total stock of identified domestic arrears, with breakdown between service providers - Type of data: Domestic arrears - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 1 month - Stock of domestic debt, disbursements, amortization, interest, and other fees and charges; face value, maturity, interest rate, and payment schedule - Type of data: Domestic debt - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 1 month - Total volume of sovereign bond issued, with interest rate, maturity, and recipient - Reporting frequency: Bi-annual - Reporting lag: 1 month - Amount of new domestic debt contracted by Government - Reporting frequency: Quarterly - Reporting lag: 1 month - Details of disbursed external budget support and project grants and loans - Type of data: External debt - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 1 month - End of year external debt in U.S. dollars, by creditor, and originating currency - Reporting frequency: Annually - Reporting lag: 1 month - Amount of new external debt contracted by Government - Reporting frequency: Quarterly - Reporting lag: 1 month - All guarantees provided by the government including guarantees to public corporations and private sector - Reporting frequency: Quarterly - Reporting lag: 1 month - Financial status of major SOEs - Type of data: SOE data - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 3 months ### Data Reporting Requirements (Table 1 — Real Sector) - Consumer Price Index - Type of data: Economic indicators - Reporting agency: NSO - Reporting frequency: Quarterly - Reporting lag: 3 months - National Accounts (breakdown of production) in real and nominal terms - Reporting lag: 24 months - Note: (latest GDP figures are for 2016) - Agricultural production data (volume/value of major products) - Reporting agency: BPNG / Treasury - Reporting frequency: Quarterly - Reporting lag: 3 months - Mineral production data (volume/value of major products) - Reporting agency: BPNG / Treasury - Reporting frequency: Quarterly - Reporting lag: 3 months - Structural benchmarks: A table with a description of the status of implementation of the structural benchmarks in Table 2 of the MEFP - Type of data: Structural benchmarks - Reporting agency: Treasury - Reporting frequency: Quarterly - Reporting lag: 3 months ### Data Reporting Requirements (Table 1 — Monetary and Financial Sector) - Detailed balance sheet data of the BPNG submitted in the reporting template - Type of data: Monetary Survey - Reporting agency: BPNG - Reporting frequency: Monthly - Reporting lag: 1 month - Cash flows of BPNG - Reporting frequency: Monthly - Reporting lag: 1 month - Data on the amounts of on-budget grants, including transfers to the government’s accounts from the government’s external accounts at the BPNG - Type of data: Depository Corporations Survey - Reporting frequency: Quarterly - Reporting lag: 3 months - Balance sheets and income statements by financial institutions (aggregate and by bank) - Reporting frequency: Quarterly - Reporting lag: 3 months - Prudential data of financial institutions as per BPNG regulations, and average interest and maturity information for private sector loans - Type of data: Financial indicators - Reporting agency: BPNG - Reporting frequency: Quarterly - Reporting lag: 3 months - Financial Soundness Indicators (aggregate and by bank) - Reporting frequency: Quarterly - Reporting lag: 3 months - Lending activity of banks (by sector) - Reporting frequency: Quarterly - Reporting lag: 3 months ### Data Reporting Requirements (Table 1 — External Sector) - Balance of Payments data in the reporting template - Type of data: BOP - Reporting agency: BPNG - Reporting frequency: Quarterly - Reporting lag: 3 months - Import and export data, for aggregated sectors - Reporting frequency: Quarterly - Reporting lag: 3 months - Net international reserves, including reserve assets/liabilities by currency - Reporting frequency: Monthly - Reporting lag: 1 month - Foreign exchange flow data (by type of flow) - Reporting frequency: Monthly - Reporting lag: 1 month - Bank’s purchases and sales of foreign currency (specified by bank and by type of flow) - Reporting frequency: Monthly - Reporting lag: 1 month - List of the foreign exchange allocation pipeline - Reporting frequency: TBC - Reporting lag: 1 month ### Fund Relations and Key Financial Data (As of January 31, 2020) - Membership Status - Joined: October 9, 1975; Article VIII - General Resources Account - Quota: 263.20 SDR Million 100.00 Percent Quota - Fund holdings of currency: 262.76 SDR Million 99.83 Percent Quota - Reserve position in Fund: 0.45 SDR Million 0.17 Percent Quota - SDR Department - Net cumulative allocation: 125.49 SDR Million 100.00 Percent Allocation - Holdings: 6.31 SDR Million 5.03 Percent - Outstanding Purchases and Loans - 0.00 SDR Million 0.00 Percent Quota - Latest Financial Arrangements (Stand-by) - Stand-by: Approval Date 3/29/2000, Expiration Date 9/28/2001, Amount Approved 85.54 (SDR million), Amount Drawn 85.54 (SDR million) - Stand-by: Approval Date 7/14/1995, Expiration Date 12/15/1997, Amount Approved 71.48 (SDR million), Amount Drawn 35.34 (SDR million) - Stand-by: Approval Date 7/31/1991, Expiration Date 9/30/1992, Amount Approved 26.36 (SDR million), Amount Drawn 0.00 (SDR million) - Projected Payments to Fund (SDR million; based on existing use of resources and present holding of SDRs): - Charges/interest: - 2020: 0.89 - 2021: 0.88 - 2022: 0.88 - 2023: 0.88 - 2024: 0,88 - Total: - 2020: 0.89 - 2021: 0.88 - 2022: 0.88 - 2023: 0.88 - 2024: 0.88 ### Safeguards, Exchange Rate, and Article IV - Safeguards Assessments - BPNG was subject to a transitional assessment based on a Stand-By Arrangement approved in March 2000 and expired in September 2001. - Transitional assessment completed on May 4, 2001; recommendations made to alleviate identified weaknesses. - Currently, the BPNG is not subject to the Safeguards Assessments policy. - Exchange Rate Arrangement - De jure arrangement: "floating". - De facto arrangement: classified as "crawl-like" because the Kina has followed a depreciating trend within a 2 percent band against the U.S. dollar, since August 2017. - Exchange restrictions and multiple currency practices maintained (subject to IMF approval under Article VIII, Sections 2(a) and 3), including: - Requirement to obtain a tax clearance certificate prior to making payments or transfers for certain current international transactions. - Rationing of FX resulting in undue delays and arrears in current international payments. - Multiple currency practices arising from spreads of more than 2 percent between BPNG set FX allocation rates and rates used by AFEDs; and potential spread deviation of more than 2 percent between BPNG rates for government/embassy FX transactions and rates used by AFEDs. - Article IV Consultations - 2018 Article IV consultation discussions were held in September, 2018. - Concluded by the Executive Board on November 26, 2018 (IMF Country Report No. 18/352). - Papua New Guinea is on the standard 12–month consultation cycle. ### Technical Assistance and PFTAC Engagement (selected areas) - FAD, LEG, MFD/MCM, STA TA examples and timing: - MTRS work: joint FAD/PFTAC mission August 2017; STX visit August–October (year not specified); tax policy missions September 2017 and August 2018. - LEG: mission in September 2018 assisted planning legislative reforms for the MTRS. - MFD/MCM: August 2018 mission on liquidity forecasting and foreign exchange operations; December 2017 and February 2018 missions on banking supervision. - STA: multiple missions from February 2013 through June 2018 on monetary and financial statistics, balance of payments, government finance statistics, national accounts and price statistics. - PFTAC support highlights (As of November 2019) - Public Financial Management: - IFMS roll-out: IFMS originally purchased in 2005; by early 2014 only three ministries connected. IFMS deployed to 30 central government departments by July 2016 following PFTAC missions from 2014 to 2016. - PEFA assessment: FAD mission March 2015; PFM Reform Roadmap September 2015. - Cash management reforms and Cash Management Unit (CMU) creation; coordinated planning for cash pooling/sweeping scheme. - Training on risk-based and systems auditing (2017); advice on IPSAS cash reporting compliance and transition over a two-year time frame (2019). - PEFA fieldwork and data collection undertaken in July 2019 with finalization expected by December 2019. - Tax Administration and Policy: - Department of the Treasury developed a Medium-Term Revenue Strategy (MTRS); FAD missions provided advice on framework and content. - PFTAC missions (July 2017, December 2017, September 2018) facilitated design of a new corporate plan, design and monitoring unit, taxpayer services unit and a large taxpayer office. - Funding for MTRS implementation sourced through the Revenue Mobilization Trust Fund (RMTF); IMF resident advisor placed in Port Moresby with effect from mid-late August 2018. - Financial Sector Regulation and Supervision: - PFTAC initiated a medium-term strategic approach in early 2017 to enhance Financial Sector Supervision frameworks. - Assistance included: development of a risk rating and supervisory action planning framework; IT Risk On-site Examination framework; training on market and liquidity risk assessment; development of Market and Liquidity Risk On-site Examination framework. - Continued engagement in 2019 to enhance off-site supervision, build capacity in financial risk analysis, and finalize the Bank PNG market and liquidity risk assessment module. - Economic and Financial Statistics: - Historical BOP and statistical assessments in 2006–2009; since 2013 eight TA missions to assist NSO, BPNG, and Treasury with national accounts statistics. - Collaboration with the Australian Bureau of Statistics; secondment of two ABS staff to the PNG NSO from June 2015 to May (year not specified). *Source: Staff Report for the 2019 Article IV Consultation and Request for a Staff-Monitored Program — Informational Annex (Papua New Guinea).* ### 2016. PNG NSO staff have also benefited from attending four annual sub-regional statistics ### 1pngea2020001 - 2016. PNG NSO staff have also benefited from attending four annual sub-regional statistics ### Statistical capacity building and technical assistance - PNG NSO staff attended four annual sub-regional statistics workshops since 2013, centered around: - estimating GDP by expenditure, - the use of household income and expenditure surveys, - linkage to consumer price indices. - One mission is scheduled for 2019 pending NSO’s implementation of the reforms recommended by APD. - From ABS and PFTAC input, the NSO was able to resume publication of estimates of GDP by production in May 2016. - In 2019: - PFTAC assisted the NSO to disaggregate the Agriculture, Forestry and Fishing second into divisions (previously published as a single aggregate). - Assistance was provided to the NSO for the publication of the 2017 GDP estimates in November 2019. - Through February 2017, PNG received GFS TA under the Japan Administered Account (JSA2). - PFTAC funded GFS TA missions: - October 2017 and September 2018 — focused on improving GFS data for national budget volumes I and II and developing the financial balance sheet of the general government. - PNG was a beneficiary of the JSA Project (ended March 2016) on external sector statistics (ESS); four TA missions were provided but commitment was low and improvements limited. - PNG is a beneficiary of STA’s new three-year JSA project to improve ESS in the Asia-Pacific Region; one mission was conducted. ### National accounts, price statistics, and publication issues - National accounts: - GDP estimation and publication had been stopped for many years, but restarted in 2016 after a 10-year break. - In 2018, draft figures compiled for 2016 were challenged by the local Treasury Department. - During the latest PFTAC TA mission in April 2019, the NSO published revised national accounts data ranging from 2009 to 2016. - To increase user confidence, the NSO needs proactive management and regular stakeholder engagement. - Price statistics: - The NSO currently compiles an unpublished quarterly wholesale price index (WPI) and a quarterly CPI. - In May 2014, the NSO began to publish a new CPI series based on data from the 2009–2010 Household Income Expenditure Survey, ending a 35-year period during which the CPI used a consumption basket from the late 1970s. ### Government Finance Statistics (GFS), fiscal data gaps, and public sector reporting - Treasury reporting: - The Treasury started to report GFS data for the budgetary central government (BCG) to the IMF Statistics Department during 2016, after a 14-year absence. - Reporting commenced, but data suffers from insufficient coverage and timeliness. - Specific data deficiencies: - Central government tax revenue, nontax revenue, and public expenditure data are deficient. - Development budget expenditures and the utilization of grants and project loans are recorded with long lags. - Limited records on the use of trust accounts. - Tax revenues collected by authorities (extrabudgetary units of the central government) are generally not reflected in the central government’s financial information. - Timing issues regarding the recording of interest on discounted securities, though interest payment records are accurate. - Compiling, reconciling and disseminating full public sector debt statistics and government guarantees remain a challenge. - Reforms and alignment: - The Treasury aligned the national budget volume 1, in 2016, to adopt the guidelines presented in the Government Finance Statistics Manual 2014 (GFSM 2014) format. - Authorities prepared an accompanying 5-year historical time series of GFS data for the BCG. - Further work is required to enhance institutional and instrument coverage; budget volumes 1 and 2 continue to be improved on a GFSM 2014 basis. - Financial balance development remains a priority. - Continued technical assistance: - Papua New Guinea continues to benefit from technical assistance and regional capacity building initiatives through PFTAC. ### Monetary and financial statistics, financial sector surveillance, and external statistics - Monetary and Financial Statistics (MFS): - Monetary data are produced and reported to STA on a regular basis. - Introduction of the standardized report form (SRF) for the central bank, other depository corporations (ODCs), and other financial corporations (OFCs). - A 2013 TA mission introduced general insurance companies into the institutional coverage of OFCs and an improved SRF for OFCs. - Most monetary statistics published in International Financial Statistics (IFS) are currently aligned with the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - Financial sector surveillance: - BPNG has compiled selected financial soundness indicators (FSIs) for deposit takers. - In December 2016, BPNG started reporting all core financial soundness and twelve additional encouraged indicators to STA, with quarterly data availability starting in 2008Q4. - No FSIs are reported on other sectors such as other financial corporations, nonfinancial corporations, and households. - PNG reports data on several Financial Access Survey (FAS) indicators, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - External Sector Statistics (ESS): - PNG’s annual balance of payments data up to 2017 are disseminated on the IMF’s website. - International Investment Position (IIP) data are not available. - Immediate ESS priorities identified in the May 2018 mission: - implement the international investment survey, - improve the international transactions reporting system, - streamline cross-border transactions/positions data of liquefied natural gas, other energy and mineral companies’ activities. ### Macroeconomic analysis, the PNG MFF Model, and forecasting capacity - Development of PNG-specific financial programming framework: - Started in 2011 following a request by BPNG to build financial programming capacity. - Training provided to staff of both the BPNG and Department of Treasury. - A work program with the Department of Treasury and BPNG, in collaboration with APD country team and IMF Research Department, developed modeling tools to explore the macroeconomic impact of natural resource revenues. - Model simplification and upgrade: - In 2014, efforts to simplify and streamline the financial programming framework eased operational burden but resulted in weaknesses in capturing complex inter-sectoral linkages. - In May 2017, an upgrade commenced to alleviate identified weaknesses. - The core structure of the new PNG Monetary and Fiscal Forecasting (MFF) Model was completed in July 2017. - August 2017 — PFTAC and BPNG hosted a workshop on practical applications of the PNG MFF Model with participants from BPNG, Department of Finance, Department of Treasury, and Internal Revenue Commission. - The model was enhanced further in 2018 for scenario analysis and to incorporate public debt. - Inflation forecasting: - In 2014 and 2015 work was undertaken to improve BPNG’s inflation forecasting methodology following major revisions to the CPI by the NSO. - Interagency and capacity-building workshops in 2019: - January 2019 — Department of Treasury hosted an interagency workshop on Economic and Fiscal Forecasting facilitated by the PFTAC macro advisor; first two days focused on GDP methodology, forecasting GDP, and developing an interagency plan for enhancing GDP compilation and forecasting; remainder of workshop reviewed sectors in the PNG MFF Model and used the MFF Model for scenario analysis. - April 2019 — BPNG and Department of Treasury, with support from the Australian Department of Foreign Affairs and Trade and the Economic Governance and Inclusive Growth Partnership, co-hosted a five-day course on Macroeconomic Policy for Stabilization and Growth. - August 2019 — co-hosted a sub-regional workshop on Fiscal Frameworks for Pacific Countries. ### Data standards, reporting to STA, and data adequacy for surveillance (as of November 2019) - General assessment: - Data provision has some shortcomings, but data are broadly adequate for surveillance. - Most affected areas: national accounts, fiscal accounts, and balance of payments. - Participation in dissemination standards: - PNG began to participate in the General Data Dissemination System in 2012. - PNG has not yet implemented the enhanced GDDS (e-GDDS) by launching a National Summary Data Page (NSDP). - Reporting to STA (most recent): - GFS for publication in Government Finance Statistics Yearbook and IFS last reported for 2017, covering only the budgetary central government. - Monetary data are reported to STA for publication in IFS on a regular monthly basis. - BOP data for 2018 were reported to STA for publication in Balance of Payments Yearbook and IFS. - National accounts data for 2006-13 were reported to STA for publication in IFS. - Table of Common Indicators Required for Surveillance (As of December 9, 2019) — selected entries preserved exactly as presented: - Exchange Rates — Date of Latest Observation: 09/2019; Date Received: 10/2/2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of Latest Observation: 05/2019; Date Received: 08/20/2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Reserve/Base Money — 05/2019; 08/20/2019; M; M; M - Broad Money — 05/2019; 08/27/2019; M; M; M - Central Bank Balance Sheet — 05/2019; 08/20/2019; M; M; Q - Consolidated Balance Sheet of the Banking System — 05/2019; 08/27/2019; M; M - Interest Rates — 06/2019; 10/30/2019; W; W - Consumer Price Index — 03/2018; 10/31/2018; Q; Q; Q - Revenue, Expenditure, Balance and Composition of Financing — General Government — N/A; N/A; N/A; N/A; N/A - Revenue, Expenditure, Balance and Composition of Financing — Central Government — 2018; 03/31/2018; A; A; A - Stocks of Central Government and Central Government-Guaranteed Debt — 12/2018; 07/03/2018; Q; A - External Current Account Balance — Q2 2019; 11/28/2019; Q; Q; Q - Exports and Imports of Goods and Services — Q2 2019; 11/28/2019; Q; Q; Q - GDP/GNP — 2017; 01/28/2019; A; A; I - Gross External Debt — 2018; 07/03/2018; Q; A; A - International Investment Position — N/A; N/A; N/A; N/A; N/A ### Debt Sustainability Analysis (DSA), public debt coverage, and fiscal risks - Risk assessment: - Risk of external debt distress: Moderate - Overall risk of debt distress: Moderate - Granularity in the risk rating: Limited space to absorb shocks - Application of Judgement: Two short-lived breaches of debt service-to-revenue ratio are discounted - DSA findings: - The DSA indicates PNG faces moderate risk of debt distress based on an assessment of public external debt, with limited space to absorb shocks; and moderate overall risk of public debt distress. - Under the baseline scenario there are two short-lived breaches of the debt service-to-revenue ratio threshold (2020 and 2028). - The long-term breach is due to the bullet payment of sovereign bond issued in 2018, and can be discounted on the ground of the expected accumulation of revenue buffers from natural resource projects. - The 2020 breach is acceptable, as the projected financing plan for 2020-21 is expected to eliminate the rollover risk. - Under the most extreme shock (export growth shock), there are multiple breaches in the threshold for the debt service-to-revenue ratio. - The assessment of moderate risk is unchanged from the previous DSA (end-2017 debt), but limited space to absorb shocks highlights the need for stronger debt position through fiscal consolidation and changing liability composition towards lower-cost and longer-term debt. - Classification and thresholds: - This DSA was prepared jointly with the World Bank, in accordance with the revised Debt Sustainability Framework for low-income countries approved in December 2017. - PNG’s Composite Indicator score based on the October World Economic Outlook and 2019 CPIA measure indicates that the debt-carrying capacity is ‘medium’. - Thresholds for external debt-burden indicators are set as: PV of PPG debt/exports (180), PV of PPG debt/GDP (40), debt service/exports (15), and debt service to revenue (18). - PNG is classified as an IDA blend economy. - Public debt coverage (summary of issues and figures): - PNG’s coverage of public sector debt includes the central government, local government debt, and debt explicitly guaranteed by the central government. - The stock of central government guaranteed loans is estimated to have reached 14.1 billion Kina (18% of GDP) at the end of 2018. - The government has recognized and taken over servicing of three SOE project loans (Solwara, Motu-Kea Port and NCD Roads) as central government debt; the magnitude of all debt obligations is uncertain. - The debt figure does not fully capture implicit government guaranteed debts of SOEs and unfunded superannuation liabilities relating to pensions. - A contingent liability shock equivalent to 17 percent of GDP is included in the analysis to account for risks from possible government guarantees. - Debt trends and fiscal pressures: - Public debt rose from 32.5 percent of GDP in 2017 to 36.8 percent of GDP at the end of 2018 — above the government’s medium-term target of 30 percent. - Interest payments increased by 22 percent in nominal terms. - Budget slippage in 2018 reflected spending overruns and weak revenue collection; the significant increase in debt stock largely reflected revaluation of foreign currency debt and realization of state loan guaranteed loans for which interest was being paid from the central government. - The budget may remain exposed to unfunded superannuation liabilities estimated at around 2 billion kina (3 percent of 2018 GDP) and government arrears. - Since 2018, deficit financing has turned to external sources as commercial banks and superannuation funds approach internal limits for holding government securities. - Coverage and transparency issues: - Data coverage reflects weakness in transparency and accountability of Statutory Authorities and SOEs. - Authorities are reviewing external loan guarantees and superannuation liabilities. - Under the Staff Monitoring Program (SMP), authorities are initiating a program to reform SOEs to improve financial standing; this will include a detailed review of SOE debt and government guarantees. *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA).* ### 4. The recent increase in external debt is mainly due to accelerated borrowing from non- ### 1pngea2020001 - 4. The recent increase in external debt is mainly due to accelerated borrowing from non- ### External debt composition and drivers - The recent increase in external debt is mainly due to accelerated borrowing from non-Paris Club bilateral and commercial creditors (Text Table 4). - The share of Chinese loans (Bank of China and the Export-Import Bank of China) increased from 1.2 percent of total public external debt in 2010 to 20.0 percent in 2018. - Syndicated loans from Credit Suisse and a sovereign bond issued in October 2018 increased the share of commercial debt. - Two large creditors for external public debt as of end-2018 were the Asian Development Bank and the Export-Import Bank of China. - Private sector external debt has declined continuously since the liquified natural gas (LNG) sector started to repay its debt. - Despite a large current account surplus reflecting LNG exports, LNG projects do not bring in enough foreign exchange to the country due to the project agreements. - Increased PPG external debt has raised the burden of external debt service and posed a risk. - Text Table 4 (External Public Debt by Creditor Groups, In millions of U.S. dollars): - 2015: Multilateral 1,086; Bilateral Paris Club 113; Bilateral Non-Paris Club 299; Commercial -; Total 1,498. - 2016: Multilateral 1,164; Bilateral Paris Club 126; Bilateral Non-Paris Club 408; Commercial 229; Total 1,928. - 2017: Multilateral 1,272; Bilateral Paris Club 131; Bilateral Non-Paris Club 538; Commercial 348; Total 2,289. - 2018 Est.: Multilateral 1,632; Bilateral Paris Club 139; Bilateral Non-Paris Club 724; Commercial 1,075; Total 3,569. - 2019 Est.: Multilateral 1,788; Bilateral Paris Club 426; Bilateral Non-Paris Club 706; Commercial 1,082; Total 4,001. - 2020 Proj.: Multilateral 2,406; Bilateral Paris Club 1,341; Bilateral Non-Paris Club 684; Commercial 846; Total 5,276. - Footnotes from Text Table 4: - 1/ 2019 includes $300 million loan from Export Finance Australia with an interest rate of 2.5% and a maturity of 1 year. - 2/ 2018 includes the sovereign bond issued in October 2018 (maturity of 10 years with an interest rate of 8.4% and the syndicated loans from Credit Suisse (maturity of 3 years with an interest rate of 9%. ### Domestic debt profile and risks - Increased issuance of external debt has not been matched by improvement in the domestic debt profile. - Funds from the sovereign bond were intended to reduce the government’s short-term domestic debt, but the stock of domestic debt showed only a marginal decline at the end of 2018. - The debt profile remains exposed to interest rate, currency, and rollover risks. - Positive real GDP growth helped offset debt-creating flows caused by unfavorable real interest rates in recent years; however: - Higher financing needs, increasing nominal interest rates, and a wider interest rate spread indicate the trend may reverse and could create further pressure for the debt ratio to rise in the near term. - Refinancing and rollover risks remain high given concentration of large external debt service payments in the short term and shortening of the average maturity of government domestic financing. - Text Figure 2 (Composition of Domestic Debt 2012-2020, in millions of Kina) categories shown: Treasury Bills; Treasury Bonds; Loans (annual series 2012–2020). - Text Figure 3 (Weighted Average Interest Rate and Spread 2013-2024) shows: - Series for Spread; Average external interest rate; Average domestic interest rate; Weighted Average interest rate for 2013–2024 (percent axes shown 0.00% to 12.00%). ### Medium-term macroeconomic framework and projections - Real GDP projections and drivers: - Real GDP is projected to grow by 5 percent in 2019, underpinned by recovery in energy and mineral production following the earthquake in early 2018. - Non-resource growth is expected to remain at 2.9 percent in 2019. - In the absence of major new resource projects, real GDP growth is expected to moderate to around 3 percent in the medium-term. - Expected easing of foreign exchange restrictions and potential major new gas and mining projects provide upside risk. - Current account and external flows: - Large current account surplus continues to be offset by debt service and dividend payments associated with resource sector investments. - Current account surplus is expected to narrow slightly in 2019 reflecting weaker non-resource exports and compressed imports due to foreign exchange shortages. - Gradual narrowing of the surplus is expected in the medium-term as the foreign exchange backlog is cleared and imports recover. - Fiscal projections: - Primary fiscal balance projected to deteriorate from a deficit of 0.2 percent of GDP in 2018 to a deficit of 1.7 percent of GDP in 2019 due to spending over-runs and disappointing revenues. - Revenue shortfalls: personal and corporate income taxes, and mining and petroleum taxes below last year; non-tax revenue underperforming as SOE dividends and other one-off revenues come in below budget. - Expenditure overruns mainly due to personnel emoluments, expected at around 1 percent of GDP over budget. - Large deficit expected to be financed mainly through multilateral and bilateral external loans. - Fiscal consolidation and reforms (aims and specific measures): - Primary surplus projected to move into balance by 2022 and improve to a surplus of 0.2 percent of GDP by end-2024 assuming implementation of proposed reforms. - Key measures: - Realistic budgeting for personnel costs to avoid arrears and budget over-runs. - Paying down retirement costs to reduce public employment: currently approximately 4000 public workers over the retirement age still on the payroll because separation costs were not budgeted. - Limiting growth of government payroll through strict implementation of the hiring freeze, limits on unattached workers and exempt hires, and elimination of unbudgeted and unlawful payments. - A detailed audit of government employment and payroll practices by an independent organization. - Assessment of baseline projections: - Baseline projections considered reasonable; growth projections relatively higher due to strong rebound after the 2018 earthquake. - Baseline fiscal adjustment in primary balance does not fall in the upper quartile of past adjustments. - Contribution of public investment to growth seems reasonable compared to historical contributions. ### Debt-carrying capacity, DSA classification, and stress tests - PNG’s composite indicator index under the revised LIC-DSF remained unchanged with PNG’s debt-carrying capacity classified as medium. - Medium classification implies benchmark for present value of total public debt at 55 percent of GDP. - Because PNG is resource-rich, commodity price shocks are included in tailored stress tests. - Text Table 6 and Text Table 7 referenced for composite indicator calculation and PPG thresholds. - External debt burden thresholds (indicative table values): - PV of debt in % of Exports: Weak 140; Medium 180; Strong 240. - PV of debt in % of GDP: Weak 30; Medium 45; Strong 60. - Debt service in % of Exports: Weak 10; Medium 15; Strong 21. - Debt service in % of Revenue: Weak 14; Medium 18; Strong 23. - TOTAL public debt benchmark (PV of total public debt in percent of GDP): Weak 35; Medium 57; Strong 70. ### External debt sustainability and risk assessment - PPG external debt ratios indicate moderate risk of external debt distress. - PPG external debt service-to-revenue ratio shows two breaches in the baseline scenario, reflecting large repayments in 2020 and repayment of the sovereign bond in 2028; remaining indicators stay well below the indicative threshold. - The bullet payment in 2028 is a single short-lived breach (1-year) and is assumed likely to be supported by PNG’s large revenue buffers from future expected resource projects. - Historical scenario shows substantial threshold breaches but is not considered indicative of future risks due to historical large current account deficits during PNG LNG construction phase. - Extreme shock scenarios: - Two breaches of thresholds under the most extreme shock scenario (shock to export growth). - Present value of external debt to GDP ratio breaches threshold in 2021 and descends slowly towards the threshold starting from 2025. - Debt service to revenue ratio breaches multiple times in short-run and long-run under export shock. - However, PV of external debt to export ratio and external debt service to exports ratio remain well below indicative threshold under the most extreme scenario. - Market-financing risk indicators: - Sovereign bond issued October 2018 had spread around 585 basis points in December 2019. - Three-year average Gross Financing Needs (GFN) peaks at 20% of GDP in 2019-2021, surpassing recommended threshold of 14% of GDP. - Large external debt service payments in 2020 and 2021 and large share of short-term domestic debt drive high GFN. - As a frontier market, PNG’s high GFN, widening EMBI spread, and higher domestic borrowing costs pose significant market financing risks. ### Public debt outlook and vulnerabilities - Total public debt-to-GDP ratio: - Under baseline, PV of public debt-to-GDP ratio decreases towards 30 percent of GDP over the long term, below the benchmark. - Under alternative scenarios with shocks to exports or commodity prices, public debt-to-GDP ratio breaches the benchmark in the medium term. - Most extreme shock for public debt-to-GDP is the export growth shock, leading to a marginal breach of the indicative benchmark in the medium term. - Additional vulnerabilities: - Liquidity risks are present. - Unfunded superannuation liabilities represent an implicit fiscal risk. - The moderate risk assessment of overall public debt distress relies on strong assumption that short-term commercial loans will be rolled over on favorable terms and on implementation of fiscal consolidation under the IMF Staff Monitored Program. - Policy implications highlighted: - Government needs to strengthen fiscal consolidation implementation. - Implement a sound debt management strategy to lower cost of debt and extend maturities. - Reconcile existing government liabilities and guarantees. ### Authorities’ views and actions - Authorities noted increasing risks to debt sustainability and emphasized: - Need to retire a large portion of short-term domestic debt and rely on cheaper external sources for budget financing while accounting for foreign exchange risks. - Importance of lengthening maturity structure of domestic debts to reduce liquidity risks. - Need to review contingent liabilities. - Authorities specified that, in line with Fiscal Responsibility Act (FRA) requirements, they will recognize three SOE project loans for which the government has taken over servicing as central government debt (about 1.4 percent of GDP). - Authorities highlighted importance of including exchange rate valuation effects when calculating value of external debt stock in domestic currency terms and have taken IMF advice to revalue foreign currency debt at current exchange rates, in line with best international practice. ### Box 1 — Macroeconomic assumptions underlying the DSA update (high-level points) - GDP series revisions: - Newly published GDP series for 2017 (November 2019) reflected; 2018 GDP estimated to have contracted marginally by 0.8 percent largely due to the earthquake. - Real growth rate adjusted up from 3.8 percent in the 2018 DSA to 5.0 percent in this DSA. - Real GDP growth projected to average 3.1 percent in the medium/long run. - Resource projects (Papua LNG and others like Wafi Golpu) are upside risks. - Inflation (GDP deflator): - Actual 2017 GDP deflator was 7.7 percent in 2017. - 2018 GDP deflator estimated at 10.1 percent, higher than the projection in the 2018 DSA (8.1 percent). - GDP deflator projected around 1.9 percent in 2019 and to converge to around 3.0 percent in medium-long term (assumes some depreciation of the Kina in 2020-2022). - Current account: - Estimated current account surplus to GDP ratio in 2018 revised upward to 25.9 percent from 22.8 percent in the 2018 DSA. - Gradual erosion of current account surplus projected as FX backlog clears and imports recover. - Fiscal position: - Primary deficit in 2018 was 0.2 percent of GDP (a little smaller than 0.5 percent estimated in the 2018 DSA). - The primary fiscal deficit is estimated to increase to [text truncated in source]. *Source: IMF staff report excerpt.* ### 1.7 percent of GDP in ### 1pngea2020001 - 1.7 percent of GDP in ### Fiscal outlook and primary balance - Primary deficit of 1.7 percent of GDP in 2019 due to lower revenue and higher overall primary spending. - The primary deficit is projected to gradually improve to a surplus, assuming fiscal consolidation by improving tax revenues and controlling government expenditures. ### Debt indicators and stress tests (2019–2029) - External PPG MLT debt and public DSA assume additional financing needs generated by shocks are covered by PPG external MLT debt. - Stress tests presented include: Historical scenario; Commodity price shock (magnitude based on IMF Research Department outlook); Natural disaster; Market financing; Combined contingent liabilities. - Stress-test customization flags shown as "Yes" or "No" for changes to default settings; "n.a." denotes non-applicability. - Selected stress-test parameters noted: Avg. nominal interest rate on new borrowing in USD = 5.0%; Avg. maturity (incl. grace period) = 25; Avg. grace period = 7 (as shown in stress-test table). ### External debt sustainability — baseline tables and indicators - Table 1 (External Debt Sustainability Framework, Baseline Scenario, 2016–2039) highlights: - External debt (nominal) series entries include: 87.6, 72.8, 71.3, 60.1, 56.2, 52.9 (across listed years). - Identified net debt-creating flows (sample values): -22.1, -33.4, -31.3, -26.2, -24.7, -24.9. - Non-interest current account deficit sample values: -29.8, -30.2, -28.6, -26.7, -27.2, -26.8. - Exports and imports sample values: Exports 39.7, 44.0, 43.2, 43.8, 45.9; Imports 13.5, 16.5, 16.5, 19.1, 20.4. - PV of PPG external debt-to-GDP ratio sample series: 14.7, 15.7, 19.0, 20.3, 20.8, 20.5, 19.9, 12.8, 9.3. - PPG debt service-to-exports ratio sample values: 2.2, 2.2, 2.1, 2.3, 6.9, 4.8, 3.4, 4.5, 4.7, 3.5, 4.9. - PPG debt service-to-revenue ratio sample values: 6.4, 6.9, 5.9, 7.1, 22.6, 15.9, 11.5, 14.6, 14.9, 8.2, 6.5. - Gross external financing need (Million of U.S. dollars) sample entries: -2060.7, -3574.1, -4487.2, -3565.9, -4043.6, -4216.2, -4028.5, -3576.9, -3374.6, -378.9, -1656.2. - Key macroeconomic assumptions (selected values as presented): - Real GDP growth (in percent): 4.1; 3.5; -0.8; 5.0; 2.0; 2.8; 2.9; 3.2; 3.3; 2.9; 3.2; 5.6; 3.1. - GDP deflator in US dollar terms (change in percent): -8.2; 5.8; 7.1; -0.5; -1.8; -2.0; -1.8; 0.4; 1.0; 3.0; 3.1; 2.5; 0.9. - Growth of exports of G&S (US dollar terms, in percent): -3.2; 21.6; 4.1; 6.0; 4.8; 2.1; 2.2; 1.7; 1.3; 1.3; 1.3; 7.2; 2.2. - Growth of imports of G&S (US dollar terms, in percent): -18.6; 34.4; 6.4; 20.6; 6.9; 4.5; 11.6; 2.6; 2.6; 1.6; 1.7; 3.7; 5.2. - Government revenues (excluding grants, in percent of GDP) sample series: 13.9; 13.9; 15.5; 14.3; 14.1; 13.9; 14.0; 14.0; 14.1; 15.4; 16.9; 11.8; 14.4. ### Public sector debt dynamics (Table 2) - Public sector debt (percent of GDP) sample series: 33.7; 32.5; 36.8; 38.3; 41.2; 42.8; 43.0; 42.5; 42.2; 37.9; 30.3; 22.5; 41.0. - Of which: external debt series: 8.5; 8.8; 15.2; 16.5; 21.1; 23.3; 24.6; 24.9; 25.0; 19.4; 17.9; 7.8; 22.2. - Change in public sector debt series (selected): 3.8; -1.3; 4.3; 1.5; 2.9; 1.6; 0.2; -0.5; -0.3; -1.4; 2.2. - Revenue and grants (percent of GDP) sample series: 16.1; 15.9; 17.8; 15.4; 15.1; 14.9; 15.0; 15.0; 15.0; 16.2; 17.4; 13.1; 15.3. - Primary (noninterest) expenditure (percent of GDP) sample series: 18.9; 16.3; 18.0; 17.1; 17.8; 16.5; 15.1; 14.8; 14.8; 14.5; 19.4; 14.8; 15.3. - Primary deficit (percent of GDP) sample values: 2.8; 0.4; 0.2; 1.7; 2.8; 1.6; 0.1; -0.2; -0.2; -1.8; 2.1; 1.7; 0.0. - PV of public debt-to-GDP ratio series (selected): 36.7; 37.8; 39.6; 40.3; 39.7; 38.4; 37.3; 32.9; 25.3. ### Sensitivity analysis and breaching scenarios (Tables 3 and 4) - Table 3 sensitivity snapshots (Public and PPG external debt indicators, 2019–2029): - Baseline and alternative scenarios and bound tests show multiple indicator series and breaches of thresholds (bold values in original tables indicate breaches). - Tailored tests include: Combined contingent liabilities; Natural disaster; Commodity price; Market Financing. - Table 4 sensitivity snapshots (Public debt indicators, 2019–2029): - Baseline PV of Debt-to-GDP and Debt Service-to-Revenue ratios and scenario outcomes under B1–B6 bound tests and C1–C4 tailored tests (values presented across the 2019–2029 projection horizon). - TOTAL public debt benchmark shown as repeated constant entries (e.g., 55 across horizon in the table). ### Drivers of debt dynamics and realism tools - Figures illustrate decomposition of debt changes into: primary deficit, real interest rate, real GDP growth, price and exchange rate changes, other debt-creating flows, and residual/unexpected changes. - Realism tools (Figure 4) compare Public and Private Investment rates across DSA vintages and show fiscal adjustment paths alongside possible real GDP growth under different fiscal multipliers. *Source: IMF staff estimates and projections as presented in the Papua New Guinea country DSA materials included in the supplied content.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Papua New Guinea — Statement by Nigerl Ray, Executive Director for Papua New Guinea and Laura Johnson, Senior Advisor to Executive Director ### Staff Monitored Program (SMP) and Program Objectives - PNG requested and obtained a Staff Monitored Program (SMP) approved by the Managing Director on February 20, 2020. - SMP aims: - Support macroeconomic stabilization and re-build credibility and confidence in economic management. - Catalyze financial assistance from international donors and partners to fund the budget deficit and development priorities. - Provide a macroeconomic framework for reforms. - SMP focal areas: - Reverse the build-up of public debt and redirect public spending to more productive uses. - Bring expenditure under control while expanding government revenue. - Restore convertibility of the currency and clear the backlog of foreign exchange. - Structural reforms to support stronger, more sustainable and inclusive growth. - Authorities’ commitment: - Build a track record of implementing economic and social reforms with IMF support. - View the SMP as a vote of confidence in the reform program. ### Economic outlook and risks - Growth: - Authorities expect economic growth of 5.0 percent in 2019 (similar to staff estimates). - Growth expected to slow in 2020 due to lower production in the oil and gas sector. - Non-mineral sector expected to be resilient and is the government’s focus. - External sector: - Despite a large current account surplus, the non-resource sector faces a shortage of foreign exchange because the surplus is almost entirely offset by financial outflows associated with resource sector investments. - Coronavirus risks: - Major uncertainty given weak health systems and close communal living. - Preparations include increased dedicated funding and clearing unpaid medical bills; broader economic actions under consideration (e.g., encouraging immediate planting of food crops, examining cultural practices such as funeral arrangements “haus kraes”). - International assistance would be welcome. ### Fiscal policy: developments and measures - Fiscal situation: - A ‘due diligence’ exercise in September 2019 identified a fiscal situation considerably worse than previously stated. - Budget deficit and debt-to-GDP ratios increased due to lower-than-budgeted revenue in 2019, adoption of some international reporting standards, and higher expenditure including arrears payments. - Debt-to-GDP ratio is projected to be above 40 percent—higher than the range of 30.0 to 35.0 percent specified in the Fiscal Responsibility Act (FRA). - FRA amended in 2019 Supplementary Budget moving the upper limit to 45.0 percent, to be reduced back to 35.0 percent within 10 years. - 2019–2020 fiscal measures: - Supplementary Budget in October 2019 with cuts to capital and operational expenditure, including provincial and district grants. - Some re-appropriation of expenditure driven by wage cost overruns. - 2020 Budget presented November 2019 aims to continue fiscal consolidation through expenditure efficiency, sustainable investments, and broadening the revenue base. - Revenue measures in 2020 Budget: - Refinements to tax administration processes. - Increases in customs and excise duties. - Proposed small business tax. - Higher tariffs on tobacco and alcohol. - Appointment of a permanent Tax Commissioner to assist implementation of an updated medium-term revenue strategy with IMF technical support. - Expenditure-side measures: - Measures to reduce non-essential expenditure, improve accountability, and increase rural expenditure. - Wages and goods and services expenditure as a proportion of non-resource GDP were reduced in the 2020 Budget. - Allowing payment of arrears over next three years for wages and salaries from industrial agreements, pension exit payments, and contractual commitments. - New expenditure rule to improve control of operational expenditure, focusing attention on capital spending instead of the operating budget. - Financing and arrears: - 2020 Budget financing aims to repay part of government arrears; authorities focused on seeking cheaper financing sources. - Negotiations with the Australian Government for possible budget support; discussions with the ADB and World Bank. - SMP intended to help build confidence and catalyze international donor support. ### Monetary and financial sector policies - Monetary policy in 2019: - Bank of Papua New Guinea (BPNG) reduced policy rate from 6.25 percent to 5.0 percent due to low inflation, relative kina exchange rate stability, and weak global growth. - Easing stance intended to support bank lending to the private sector. - Operational refinements: - Securitizing borrowings under the Repurchase Agreement facility for government securities and Central Bank Bills to improve policy transmission and liquidity management. - Implementation in progress of a financial consumer protection framework. - Foreign exchange and convertibility: - Authorities agree on need to eliminate unfilled FX orders and ensure exchange rate convertibility; conducting a review with an independent consultant on transitioning arrangements. - Authorities favor a gradual approach given uncertainties over the size of the backlog and appropriate exchange rate level. - Plans to strengthen liquidity management and monetary policy operations; will request IMF and neighboring central banks’ technical assistance. - Financial system soundness and payment systems: - PNG has a sound financial system dominated by well-capitalized, profitable commercial banks with low non-performing loan ratios. - National Payment System (NPS) enhancements: - Retail Electronic Payment systems (REPS) rolled out in 2019 enabling participation by second-tier financial institutions. - REPS plus the Kina Automated Transfer System complete the modernization of an efficient, secure, and convenient payment system. ### Structural policies and governance - Resource sector and sovereign wealth fund: - Authorities committed to establishing a sovereign wealth fund for non-renewable resource proceeds. - Preference for tailored government involvement in future resource projects to obtain better returns early in projects’ lifecycles, better tax returns based on production, and greater local content and employment. - Major resource projects in pipeline include another LNG project, the Wafi-Golpu gold project, and expansion of the PNG LNG project (negotiations ongoing). - Non-resource reforms: - Improve telecommunications and transport infrastructure. - Promote labor mobility. - Support student loans for higher education. - Improve efficiency and productivity in the public sector. - SOE reforms planned in 2020 to enhance institutional capacity, improve management, and deliver better returns to the State. - Land reform: - Continue land reform program to improve land administration, dispute settlement, and facilitate customary land registration. - Governance and anti-corruption: - Progress made in enhancing the AML/CFT framework; BPNG’s Financial Analysis and Supervision Unit (FASU) underwent training and was admitted to the Egmont Group in July 2019. - PNG’s next mutual evaluation scheduled for 2021. - Need for training of magistrates and judges on AML/CFT and financial crimes. - Parliamentary Public Accounts Committee held hearings into procurement of health contracts for medicinal supplies. - Legislation on an Independent Commission Against Corruption tabled in Parliament in February 2020 and advanced to the next parliamentary step. - Whistleblower Act 2020 passed by Parliament in February 2020. - Plans for adequate resourcing and training of staff in the National Procurement Commission in 2020. --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1pngea2020001.pdf_