## 1pngea2020002

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---

### Executive summary — context and request
- COVID-19 erupted as the government was beginning implementation under a Staff-Monitored Program (SMP).
- Crisis generates balance of payments and fiscal gaps of 4 and 3 percent of GDP, respectively.
- PNG entered the crisis with a fragile macroeconomy: public debt ratio was “over 40 percent” and fiscal consolidation stalled in 2019.
- SMP objectives as of Feb. 21 included: reduce public debt-to-GDP from over 40 percent toward under 30 percent; contain spending on personal emoluments; implement an updated Medium-Term Revenue Strategy; clear payment arrears within a transparent verification framework; strengthen liquidity management and FX operations; clear a backlog of unfilled FX orders; restore kina convertibility and flexibility; comprehensive SOE reforms; and strengthen anti-corruption and governance reforms.
- Authorities request financial assistance under the Rapid Credit Facility (RCF) and that the RCF be available for direct budget support; they seek additional financing from multilateral and bilateral donors and a suspension of debt service under the G-20 COVID-19 Debt Service Initiative.

### Staff recommendation and disbursement mechanics
- Staff supports an RCF disbursement of SDR 263.2 million (100 percent of quota).
- Staff supports disbursing the RCF in the form of budget support given the large fiscal financing gap.
- RCF funds will be disbursed to the central bank and on-lent to the government.
- BPNG commits to a safeguards assessment and to a Memorandum of Understanding covering on-lending of RCF funds to the Treasury.
- Most recent audited BPNG accounts are for 2018; audit of 2019 is under way and expected to be completed by mid-year.

### Impact of COVID-19 and medium-term projections
- GDP growth projection for 2020: fall to -1.7 percent (change of -3.7 percentage points from pre-crisis projection of 2.0 percent).
- CPI (annual average) 2020 = 3.7 (pre-COVID 4.8 percent to 3.7 percent post-COVID, Δ -1.1).
- Fiscal balance: pre-COVID -3.3 percent of GDP to post-COVID -6.4 percent of GDP (Δ -3.0).
- Public debt: from 40.8 percent to 43.5 percent (Δ 2.7).
- Current account: from 25.0 percent of GDP to 14.6 percent of GDP (Δ -10.4).
- Projections assume global recovery in 2021 and no widespread outbreak in PNG; risks include prolonged deterioration in world trade and commodity prices and a severe domestic outbreak.

### Balance of payments and fiscal impact — key figures (preserved exactly)
- Balance of payments: large external financing gap before reserve drawdown of US$1.0 billion or 4.0 percent of GDP.
- Gross international reserves projected to decline from $2 billion to $1.7 billion (3.5 months of imports).
- Text Table 2 — Balance of Payments: COVID-19 Impact (In billions of U.S. dollars)
  - Current account: Pre-COVID 6.3; Post-COVID 3.5; Δ -2.8
  - Resource balance: Pre-COVID 7.9; Post-COVID 5.2; Δ -2.7
  - Non-resource balance: Pre-COVID -1.6; Post-COVID -1.7; Δ -0.1
  - Foreign direct investment: Pre-COVID -0.7; Post-COVID -0.5; Δ 0.2
  - Portfolio investment: Pre-COVID -0.4; Post-COVID 0.0; Δ 0.4
  - Other investment: Pre-COVID -5.2; Post-COVID -4.1; Δ 1.1
  - Overall Balance: Pre-COVID 0.0; Post-COVID -1.0; Δ -1.0
  - Reserves draw down: 0.3
  - BOP financing needs: -0.7 (In percent of GDP) -2.8
  - Potential financing: 0.7
  - IMF (RCF): 0.4
  - Other MDBs: 0.1
  - Unidentified support: 0.2
- Fiscal financing gap: around US$700 million (3 percent of GDP).
- Text Table 3 — Fiscal Accounts: COVID-19 Impact (In percent of GDP)
  - Revenue: Pre-COVID 15.1; Post-COVID 14.1; Δ -1.0
  - o/w Tax revenue: Pre-COVID 12.2; Post-COVID 12.2; Δ 0.0
  - Non-tax revenue: Pre-COVID 1.9; Post-COVID 0.7; Δ -1.2
  - Expenditure: Pre-COVID 18.4; Post-COVID 20.4; Δ 2.0
  - Current: Pre-COVID 15.5; Post-COVID 17.4; Δ 1.9
  - o/w Compensation of Employees: Pre-COVID 5.8; Post-COVID 6.5; Δ 0.6
  - Goods and Services: Pre-COVID 4.4; Post-COVID 4.5; Δ 0.1
  - Capital: Pre-COVID 2.9; Post-COVID 3.0; Δ 0.1
  - COVID-19 related: ...0.6
  - Overall Balance: Pre-COVID -3.3; Post-COVID -6.4; Δ -3.0 (in billions of US dollars -0.8 to -1.5; Δ -0.7)
  - Potential Financing: ......0.7
  - IMF (RCF): ......0.4
  - Other IFIs: ......0.1
  - Unidentified support: ......0.2
  - Memorandum: Nominal GDP: Pre-COVID 25.3; Post-COVID 23.8; Δ -1.5

### Financing plan and gaps
- Of the estimated US$1 billion BOP financing gap:
  - US$700 million would be financed by additional external lending including US$364 million RCF financing and an estimated US$300 million from MDBs (World Bank and AsDB) and bilateral partners.
  - Remaining gap of around US$300 million would need to be closed by reserve drawdown, import compression, or additional donor support.
- On the fiscal side, of the additional US$700 million required:
  - US$500 million (1.9 percent of GDP) expected from exceptional financing including RCF disbursement US$364 million (1.6 percent of GDP) and MDBs US$72 million (0.3 percent of GDP).
  - Remaining 1.0 percent of GDP is unidentified financing sought from bilateral partners.
  - Remaining gap would need to be filled by additional issuance of domestic debt if other external financing cannot be secured.

### Policy response — fiscal measures and stimulus
- Authorities aim to keep overall nominal expenditure fixed at the 2020 Budget level and divert funds from goods and services (K400 million) and capital spending (K245 million) to COVID-19 related needs.
- Additional spending allocated: K645 million (0.8 percent of GDP) for direct health expenditure and other social protection needs, including security.
- Distribution of COVID-19-related Spending in 2020 (In millions of kina):
  - 95.5 Provincial and District Authorities basic health needs.
  - 56.5 Department of Health for COVID-related activities
  - 173 Police, Defense and Correctional Services, including border security
  - 113 Provincial and District Authorities to promote agricultural development and food security
  - 50 Price supports for agricultural products
  - 45.5 Rural small business support
  - 41.5 Logistics business stimulus package
  - 70 Unallocated emergency spending contingency
  - 645 Total
- Tax administration measures:
  - Temporary tax relief in the first half of the year with full payment in the second half via extension of filing due date and deferral of tax payments.
  - Deferral of imposition of tax penalties.
  - GST refunds to medical services, hospitality, tourism, manufacturing, air transport, and agriculture prioritized.
- Pension measures: Amendment to the Superannuation Act to allow accelerated access for members who have lost their jobs.
- National Executive Council agreed to a K5.7 billion Economic Stimulus Package (ESP) equivalent to 6 percent of PNG’s economy; direct fiscal spending in the stimulus package limited to K600 million; total COVID-related spending K645 million.

### Policy response — monetary, FX, and prudential measures
- BPNG measures:
  - Cutting the BPNG policy rate from 5 percent to 3 percent and instructing banks to pass this on to their key lending rates.
  - Reducing the cash reserve requirement from 10 percent to 7 percent.
  - Suspending provisioning requirements on bank loans covered by a 3-month loan debt service moratorium for borrowers badly affected by COVID-19 effects.
  - Initiating purchases of government securities held by the private sector over the next 3 months.
- Exchange rate policy:
  - Priority to restore currency convertibility and exchange rate flexibility consistent with SMP understandings to address FX shortages and reduce FX backlog.
  - Staff advice: BPNG should facilitate more rapid adjustment in the exchange rate vis-à-vis the US dollar.
  - Observed exchange rate movement: in the past year, the kina has appreciated by over 7 percent against the Australian dollar.
- Prudential supervision:
  - Asset classification and provisioning standards should be maintained.
  - BPNG should strengthen capacity for liquidity, foreign exchange, and market risk supervision.
  - Immediate priority: collect data on SOE balance sheets given heightened public debt vulnerabilities.

### Transparency, accountability, and prior actions
- Prior actions implemented to strengthen transparency and accountability for COVID-related procurement and spending:
  - MTRS Steering Committee set objectives and milestones documented in an MTRS 2020 Priority Reform Matrix on May 13-14.
  - Treasury began sharing detailed monthly projections for payments, receipts and cash with BPNG; latest update on May 8.
  - COVID-related government procurement details posted within one week of contracting on the government procurement website; as of mid-May, 14 contracts and purchases since mid-March totaling $20.7 million were posted with contract issuer, amounts, nature of goods/services, price per unit where applicable, contract recipients and beneficial owners, and validation of contract delivery.
  - Procurement reports provided to the Budget Management Committee weekly, first submitted on May 18.
  - Authorities committed to: within three months of end of State of Emergency, provide a consolidated procurement report to National Executive Council; within one year of end of State of Emergency, commission and publish an audit by an independent and reputable auditor.
- Letter of Intent and prior actions require Treasury to withhold funding from implementing agencies if they fail to provide appropriate acquittals.

### Debt sustainability, risks, and capacity to repay
- Updated DSA: PNG at high risk of debt distress, with no access to external market finance.
- Public debt: PV of public debt-to-GDP remains high at over 40 percent under baseline projections.
- DSA conditional conclusion: public debt assessed to be sustainable conditional on implementation of prudent fiscal policies and SMP commitments.
- DSA stress test assumptions: additional financing needs generated by shocks are assumed to be covered by PPG external MLT debt.
- COVID-19 impact on export prices (staff estimates): LNG (-30.4%) and copper (-17%).
- Authorities have applied to the Paris Club and are considering the G-20 Debt Service Suspension Initiative; maximum eligible debt service due in 2020 is US$55.6 million.
- Capacity to repay the Fund (based on RCF disbursement of SDR 263.2):
  - Obligations to the Fund would peak in 2026 at 52.7 million SDRs (20 percent of IMF quota).
  - This peak represents 1.5 percent of government revenue.
  - This peak represents 0.6 percent of exports of goods and services.
  - This peak represents 2 percent of gross international reserves.
- Staff assessment: PNG’s capacity to repay the Fund is adequate; repayment risks are contained conditional on SMP implementation.

### Medium-term outlook and vulnerabilities
- Real GDP growth: 2019 = 5.0; 2020 = -1.7; 2021 = 0.3; 2022 = 1.4; 2023 = 3.7.
- CPI (annual average): 2020 = 3.7; 2021 = 3.6; 2022 = 4.9; 2023 = 4.1.
- Central government: Revenue and grants (percent of GDP) 2020 = 14.1; 2021 = 15.6; 2022 = 16.0; 2025 = 16.8.
- Central government: Expenditure and net lending (percent of GDP) 2020 = 20.4; 2021 = 20.5; 2022 = 20.1; 2025 = 19.8.
- Net lending(+)/borrowing(-) (percent of GDP): 2020 = -6.4; 2021 = -5.0; 2022 = -4.1; 2025 = -3.1.
- Non-resource net lending(+)/borrowing(-) (percent of GDP): 2020 = -6.6; 2021 = -5.7; 2022 = -4.8; 2025 = -3.7.
- Gross official international reserves (in months of goods and services imports): 2020 = 3.5; 2021 = 3.5; 2022 = 3.5; 2025 = 4.8.
- Gross official international reserves (end-year, in millions of U.S. dollars): 2020 = 1,718; 2021 = 1,867; 2023 = 2,078; 2025 = 2,913.
- Current account (in percent of GDP): 2019 = 22.0; 2020 = 14.6; 2021 = 18.6; 2025 = 16.3.
- Exports, f.o.b. (millions of U.S. dollars): 2020 = 11,316; 2021 = 9,649; 2023 = 12,017; 2025 = 12,877.
- Gross public debt percent of GDP projected: 46.9 in 2022; 45.6 in 2023; 42.6 in 2025.

### Annex I highlights — Balance of Payments Financing (selected table entries preserved)
- I. Current Account Balance (columns 2019 SMP1 | 2019 | 2020 SMP | 2020 | 2020-21 SMP | 2021):
  - I. Current Account Balance: 6,098 | 5,499 | 6,316 | 3,483 | 6,333 | 4,438
  - Trade Balance: 7,473 | 7,630 | 7,756 | 5,841 | 7,872 | 7,068
  - Exports of goods: 10,788 | 11,280 | 11,316 | 9,649 | 11,555 | 11,222
    - LNG: 4,312 | 4,112 | 4,346 | 2,864 | 3,836 | 3,447
    - Gold: 2,790 | 3,087 | 3,111 | 3,534 | 3,086 | 3,960
    - copper: 509 | 658 | 614 | 464 | 512 | 561
  - Imports of goods: (3,315) | (3,650) | (3,560) | (3,808) | (3,683) | (4,154)
- II. Capital and Financial Account balance:
  - II. Capital and Financial Account balance: (6,570) | (5,720) | (6,368) | (4,431) | (6,342) | (4,289)
  - Foreign Direct investment4: (683) | (452) | (756) | (456) | (830) | (512)
  - Portfolio investment (net): (354) | 20 | (364) | 22 | (383) | 24
  - Other investment (net): (5,561) | (5,290) | (5,276) | (4,043) | (2,658) | (3,848)
  - Loans: (359) | (212) | (592) | (186) | (320) | (298)
  - Government (net): 379 | 400 | 338 | 689 | 665 | 665
    - Disbursements: 653 | 653 | 1,137 | 1,368 | 1,063 | 1,063
    - Amortization: (274) | (254) | (675) | (679) | (397) | (397)
- III. Overall Balance: (472) | (221) | (51) | (948) | (8) | 148
- IV. Reserves (-:increase): 472 | (221) | 52 | 290 | 8 | (148)
- IV. Financing gap: 472 | (221) | 52 | 657 | 8 | (148)
- IMF emergency financing: 364
- MDBs: 72

### Letter of Intent — government commitments (selected)
- Formal request for RCF support: SDR 263.2 million (100 per cent of quota) to meet urgent BOP and fiscal needs and finance COVID-related spending and imports.
- Preliminary modelling: GDP growth reduced by 3.7 percentage points to -1.7 percent in 2020; export earnings expected to fall by 13 per cent.
- Estimated revenue shortfall: K2,000 million fall in revenues cited in the Letter of Intent; staff cites around K2,200 million representing a loss of nearly one-fifth of expected domestic revenues in 2020.
- Initial government allocation to testing and quarantine facilities: K45 million.
- Additional financing agreements: K240 million (US$70 million) from the World Bank and the Asian Development Bank to support the National Emergency Response (NER).
- Government committed to introduce a supplementary budget to incorporate COVID-19 effects on revenue, expenditure and financing requirements.
- Structural reform commitments under the SMP include: updated MTRS; comprehensive SOE reform (supported by ADB); strengthening public sector governance and anti-corruption frameworks; move the kina back to a fully convertible and flexible currency.
- Letter of Intent dated 18 May 2020.

*Source: 1pngea2020002.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The COVID-19 pandemic erupted just as the government was beginning to implement wide-ranging fiscal, foreign exchange, structural, and governance measures under a Staff-Monitored Program (SMP).
- The crisis is generating balance of payments and fiscal gaps of 4 and 3 percent of GDP, respectively.
- Papua New Guinea’s longer-term outlook remains positive, largely reflecting the likelihood of major resource sector projects.
- PNG entered the crisis with a fragile macroeconomy: public debt ratio was “over 40 percent” and fiscal consolidation stalled in 2019.
- As of the SMP effective Feb. 21, key objectives included: reduce public debt-to-GDP from over 40 percent toward under 30 percent; contain spending on personal emoluments; implement an updated Medium-Term Revenue Strategy; clear payment arrears within a transparent verification framework; strengthen liquidity management and FX operations; clear a backlog of unfilled FX orders; restore kina convertibility and flexibility; comprehensive SOE reforms; and strengthen anti-corruption and governance reforms.

### Request for Fund Support
- Authorities request financial assistance under the Rapid Credit Facility (RCF) to address budgetary and external financing gaps arising from COVID-19.
- Authorities request the RCF be available for direct budget support.
- Authorities seek additional financing from multilateral and bilateral donors and a suspension of debt service under the G-20 COVID-19 Debt Service Initiative.
- Important prior actions implemented to strengthen revenue collection, improve treasury cash management, and safeguard transparency and accountability of COVID-related spending (see Prior Actions Under the RCF).

### Staff’s Views
- Staff supports an RCF disbursement of SDR 263.2 million (100 percent of quota).
- Given the large fiscal financing gap, staff supports disbursing the RCF in the form of budget support.
- Staff commends authorities’ commitment and actions to ensure high transparency and accountability for COVID-related spending.
- Discussions took place via teleconference during May 14-15, 2020. The staff team comprised Scott Roger (Head), Geoffrey Bannister, Natalija Novta (all APD), Yeu Jin Jung (SPR), and Devendra Narain (Pacific Res Rep Office).

### Impact of the COVID-19 Pandemic and Medium-Term Outlook
- GDP growth projection for 2020: fall to -1.7 percent, a change of -3.7 percentage points from pre-crisis projection of 2.0 percent.
- Inflation: from 4.8 percent (pre-COVID) to 3.7 percent post-COVID (Δ -1.1).
- Fiscal balance: from -3.3 percent of GDP (pre-COVID) to -6.4 percent of GDP post-COVID (Δ -3.0).
- Public debt: from 40.8 percent to 43.5 percent (Δ 2.7).
- Current account: from 25.0 percent of GDP to 14.6 percent of GDP (Δ -10.4).
- Measures taken: state of emergency, strict border controls, travel restrictions, partial lock-down; measures expected to be eased in second half of the year but could be extended.
- As of May 8, only 8 confirmed COVID-19 cases, all resolved.

### Balance of Payments and Fiscal Impact (selected figures preserved exactly)
- Balance of payments: large external financing gap before reserve drawdown of US$1.0 billion or 4.0 percent of GDP.
- Gross international reserves projected to decline from $2 billion to $1.7 billion (3.5 months of imports).
- Text Table 2 — Balance of Payments: COVID-19 Impact (In billions of U.S. dollars)
  - Current account: Pre-COVID 6.3; Post-COVID 3.5; Δ -2.8
  - Resource balance: Pre-COVID 7.9; Post-COVID 5.2; Δ -2.7
  - Non-resource balance: Pre-COVID -1.6; Post-COVID -1.7; Δ -0.1
  - Foreign direct investment: Pre-COVID -0.7; Post-COVID -0.5; Δ 0.2
  - Portfolio investment: Pre-COVID -0.4; Post-COVID 0.0; Δ 0.4
  - Other investment: Pre-COVID -5.2; Post-COVID -4.1; Δ 1.1
  - Overall Balance: Pre-COVID 0.0; Post-COVID -1.0; Δ -1.0
  - Reserves draw down: 0.3
  - BOP financing needs: -0.7 (In percent of GDP) -2.8
  - Potential financing: 0.7
  - IMF (RCF): 0.4
  - Other MDBs: 0.1
  - Unidentified support: 0.2
- Fiscal financing gap: around US$700 million (3 percent of GDP).
- Text Table 3 — Fiscal Accounts: COVID-19 Impact (In percent of GDP)
  - Revenue: Pre-COVID 15.1; Post-COVID 14.1; Δ -1.0
  - o/w Tax revenue: Pre-COVID 12.2; Post-COVID 12.2; Δ 0.0
  - Non-tax revenue: Pre-COVID 1.9; Post-COVID 0.7; Δ -1.2
  - Expenditure: Pre-COVID 18.4; Post-COVID 20.4; Δ 2.0
  - Current: Pre-COVID 15.5; Post-COVID 17.4; Δ 1.9
  - o/w Compensation of Employees: Pre-COVID 5.8; Post-COVID 6.5; Δ 0.6
  - Goods and Services: Pre-COVID 4.4; Post-COVID 4.5; Δ 0.1
  - Capital: Pre-COVID 2.9; Post-COVID 3.0; Δ 0.1
  - COVID-19 related: ...0.6
  - Overall Balance: Pre-COVID -3.3; Post-COVID -6.4; Δ -3.0 (in billions of US dollars -0.8 to -1.5; Δ -0.7)
  - Potential Financing: ......0.7
  - IMF (RCF): ......0.4
  - Other IFIs: ......0.1
  - Unidentified support: ......0.2
  - Memorandum: Nominal GDP: Pre-COVID 25.3; Post-COVID 23.8; Δ -1.5

### Financing Plan and Gaps
- Of the estimated US$1 billion BOP financing gap:
  - US$700 million would be financed by additional external lending including US$364 million RCF financing and an estimated US$300 million from MDBs (World Bank and AsDB) and bilateral partners.
  - Remaining gap of around US$300 million would need to be closed by reserve drawdown, import compression, or additional donor support.
- On the fiscal side, of the additional US$700 million required:
  - US$500 million (1.9 percent of GDP) expected from exceptional financing including RCF disbursement US$364 million (1.6 percent of GDP) and MDBs US$72 million (0.3 percent of GDP).
  - Remaining 1.0 percent of GDP is unidentified financing sought from bilateral partners.
  - Remaining gap would need to be filled by additional issuance of domestic debt if other external financing cannot be secured.

### Policy Response — Fiscal Measures
- Authorities aim to keep overall nominal expenditure fixed at the 2020 Budget level and divert funds from goods and services (K400 million) and capital spending (K245 million) to COVID-19 related needs.
- Additional spending allocated: K645 million (0.8 percent of GDP) for direct health expenditure and other social protection needs, including security.
- Distribution of COVID-19-related Spending in 2020 (In millions of kina):
  - 95.5 Provincial and District Authorities basic health needs.
  - 56.5 Department of Health for COVID-related activities
  - 173 Police, Defense and Correctional Services, including border security
  - 113 Provincial and District Authorities to promote agricultural development and food security
  - 50 Price supports for agricultural products
  - 45.5 Rural small business support
  - 41.5 Logistics business stimulus package
  - 70 Unallocated emergency spending contingency
  - 645 Total
- Tax administration measures:
  - Temporary tax relief in the first half of the year with full payment in the second half via extension of filing due date and deferral of tax payments.
  - Deferral of imposition of tax penalties.
  - GST refunds to medical services, hospitality, tourism, manufacturing, air transport, and agriculture prioritized.
- Pension measures:
  - Amendment to the Superannuation Act to allow accelerated access for members who have lost their jobs.

### Policy Response — Monetary, Foreign Exchange, and Prudential Measures
- Bank of Papua New Guinea (BPNG) measures:
  - Cutting the BPNG policy rate from 5 percent to 3 percent and instructing banks to pass this on to their key lending rates.
  - Reducing the cash reserve requirement from 10 percent to 7 percent.
  - Suspending provisioning requirements on bank loans covered by a 3-month loan debt service moratorium for borrowers badly affected by COVID-19 effects.
  - Initiating purchases of government securities held by the private sector over the next 3 months.

### Transparency, Accountability, and Prior Actions
- Prior actions under the RCF implemented to strengthen transparency and accountability regarding COVID-related procurement:
  - Medium-Term Revenue Strategy (MTRS) Steering Committee set objectives and milestones documented in an MTRS 2020 Priority Reform Matrix on May 13-14.
  - Treasury began sharing detailed monthly projections for payments, receipts and cash with BPNG; latest update on May 8.
  - COVID-related government procurement details posted within one week of contracting on the government procurement website; as of mid-May, 14 contracts and purchases since mid-March totaling $20.7 million were posted, including contract issuer, amounts, nature of goods/services, price per unit where applicable, contract recipients and beneficial owners, and validation of contract delivery.
  - Procurement reports provided to the Budget Management Committee weekly, first submitted on May 18.
  - Authorities committed to: within three months of end of State of Emergency, provide a consolidated procurement report to National Executive Council; within one year of end of State of Emergency, commission and publish an audit by an independent and reputable auditor.

### Medium-Term Outlook and Risks
- Projections assume global recovery in 2021 and no widespread outbreak in PNG.
- Risks:
  - More prolonged deterioration in world trade and commodity prices would worsen external sector and delay fiscal revenue recovery.
  - Severe domestic COVID-19 outbreak would further cut growth and fiscal revenues and increase healthcare spending; government with little fiscal space would need to cut non-essential spending and rely on additional donor support.
  - Sustained global downturn could keep export prices low, exerting downward pressure on the currency and making external financing conditions more challenging.

*Source: EXECUTIVE SUMMARY, 1pngea2020002.*

### 12.      Prudential standards should not be compromised. Asset classification and provisioning

### 12.      Prudential standards should not be compromised. Asset classification and provisioning

### Prudential supervision and bank regulation
- Asset classification and provisioning standards should be maintained.
- The BPNG should continue to strengthen its capacity for liquidity, foreign exchange, and market risk supervision.
- Given heightened public debt vulnerabilities, an immediate priority is collecting data on SOE balance sheets.

### Exchange rate policy and foreign exchange (FX) management
- Moving towards restoring currency convertibility and exchange rate flexibility, consistent with the understandings in the SMP, continues to be a priority to address FX shortages and an orderly reduction of the FX backlog.
- Restoring flexibility is particularly important in the non-resource sector, to promote agricultural employment, output, and exports.
- Risk scenario: If commodity prices remain low, the shortage of FX could put pressure on the exchange rate and result in financial outflows and a disorderly depreciation of the currency.
- Staff advice: BPNG should facilitate more rapid adjustment in the exchange rate vis-à-vis the US dollar.
- Observed exchange rate movement: in the past year, the kina has appreciated by over 7 percent against the Australian dollar.

### Transparency and accountability
- The government committed to high standards of transparency and accountability for COVID-19 spending.
- Prior actions (as in the Letter of Intent) to strengthen transparency and accountability before drawing on the RCF include:
  - Details of COVID-related government spending are posted on the National Procurement Commission website.
  - Weekly reports are provided to the Budget Management Committee.
  - A consolidated report will be provided to the National Executive Council within three months of the end of the State of Emergency.
  - An independent audit will be completed within a year.

### Fund support requested and financing context
- The authorities request a disbursement under the RCF equivalent to 100 percent of quota (SDR 263.2 million or about US$364 million) to help address an urgent balance of payments need.
- The authorities request this financing be made available in its entirety as budget support.
- Rationale: The urgent balance of payments need triggered by the COVID-19 pandemic is caused primarily by sudden exogenous shocks, not by a withdrawal of financial support by donors, and is expected to resolve within the next 12 months without major policy adjustments, as global growth recovers and resource prices revert to the pre-COVID path.
- The proposed disbursement of 100 percent of quota is 54 percent of the estimated financing gap after the expected draw-down of reserves.

### Debt sustainability and access to financing
- An updated DSA puts PNG at high risk of debt distress, with no access to external market finance.
- Consequence: PNG does not qualify as a presumed blender and may access PRGT resources exclusively.
- Drivers of high risk: adverse impact of the COVID-19 shock on GDP, fiscal deficits, and public debt, leading to higher debt-to-GDP and debt service-to-revenue paths than in the February 2020 Article IV/SMP DSA.
- Conditional assessment: public debt is still assessed to be sustainable, conditional on the implementation of prudent fiscal policies and commitments in the SMP.
- The authorities are considering requesting debt relief under the G20 Debt Service Suspension Initiative (DSSI); expected impact is limited because the maximum eligible debt service due in 2020 is US$55.6 million.

### Disbursement mechanics and safeguards
- RCF funds will be disbursed to the central bank and on-lent to the government.
- The BPNG commits to a safeguards assessment.
- Authorities will implement a Memorandum of Understanding covering the on-lending of RCF funds to the Treasury by the BPNG.
- Commitments include undergoing a safeguards assessment as soon as feasible, providing Fund staff with the most recent central bank audit reports, and authorizing the external auditors of the BPNG to hold discussions with staff.
- Note: The most recent audited accounts for the BPNG are for 2018 and have been provided to staff. The audit of the 2019 accounts is under way and is expected to be completed by mid-year.

### Capacity to repay the Fund (key statistics)
- Based on an RCF disbursement of SDR 263.2 (100 percent of quota):
  - Obligations to the Fund would peak in 2026 at 52.7 million SDRs (20 percent of IMF quota).
  - This peak represents 1.5 percent of government revenue.
  - This peak represents 0.6 percent of exports of goods and services.
  - This peak represents 2 percent of gross international reserves.
- Assessment: PNG’s capacity to repay the Fund is adequate.
- Staff view: Papua New Guinea’s commitment to fiscal sustainability in the medium term under the SMP and to macroeconomic stability suggest that repayment risks are contained.
- Longer-term outlook: Staff consider that PNG’s public debt is sustainable, particularly in view of the likelihood of major resource projects going ahead within the coming decade.

### Authorities’ views and domestic policy stance
- Authorities believe their strong mitigation measures have reduced the risks of a COVID-19 outbreak in PNG, while recognizing significant domestic risks remain and that the global recession could last longer.
- Fiscal strategy: keep the current spending envelope unchanged, make reallocations within the envelope, and cut administration costs where possible.
- Authorities aim to address additional COVID-19 spending needs if necessary, including by tapping domestic markets for additional financing.
- Additional external borrowing from bilateral and IFI lenders is being sought to cover further potential revenue shortfalls.
- BPNG stance on moratorium: support for the 3-month debt service moratorium for COVID-affected borrowers would involve no weakening of regulatory standards; for loans covered by the moratorium, provisioning requirements would be suspended for the same period.
- BPNG is consulting with PFTAC and MCM on further steps.
- Authorities reiterated commitment to the SMP, noting most structural benchmarks due to date have been completed with only a short delay, including the prior actions for the RCF.

### Staff appraisal (summary conclusions)
- The COVID-19 pandemic is hitting the PNG economy hard through mitigation measures and export losses.
- The crisis erupted as the government was beginning to implement wide-ranging measures under an SMP, significantly worsening the fiscal and balance of payments outlook, but the authorities have re-affirmed their commitment to reform.
- Near-term risks are primarily on the downside, especially if there is a widespread local outbreak.
- PNG’s longer-term outlook remains positive, based on the SMP reform agenda and the likelihood that major resource projects will come to fruition in coming years.
- Authorities have acted quickly to contain health and economic fallout with health measures to minimize importation risk, limit domestic transmission, and prepare medical capacity, and macroeconomic measures to shift budget resources into healthcare and support household and business balance sheets.
- The economic impact has generated significant fiscal and BOP financing needs that require strong financial support from PNG’s development partners.
- Lower resource export earnings are creating a large BOP shortfall, while containment measures are dampening activity, exports and government revenues.
- With little space for domestic financing and limited access to external commercial finance, PNG is heavily dependent on development partners.

*Source: 1pngea2020002 - 12. Prudential standards should not be compromised. Asset classification and provisioning*

### 26.      Staff supports the authorities’ request for a disbursement of SDR 263.2 million

### 1pngea2020002 - 26.      Staff supports the authorities’ request for a disbursement of SDR 263.2 million

### Staff recommendation
- Staff supports the authorities’ request for a disbursement of SDR 263.2 million (100 percent of quota) under the RCF to address the urgent balance of payments need.
- This disbursement would contribute substantially, together with support from other multilateral and bilateral donors, to addressing the urgent balance of payments need and large fiscal gaps caused by COVID-19.
- Staff commends the authorities for the implementation of the prior actions, notably measures to ensure strong transparency and accountability for COVID-related government spending.
- Continued strong commitment will remain essential.

### Rationale and intended use
- Primary purpose: address urgent balance of payments need and large fiscal gaps caused by COVID-19.
- Complementary financing: together with support from other multilateral and bilateral donors.
- Governance: prior actions implemented to ensure strong transparency and accountability for COVID-related government spending.

### Key statistics and fiscal context (selected figures preserved exactly as in source)
- Quota: SDR 263.2 million.
- Disbursement requested: SDR 263.2 million (100 percent of quota).
- Nominal GDP (2016): US$21.1 billion.
- Population (2016): 7.9 million.
- GDP per capita (2016): US$2,568.

Selected macro and fiscal indicators (preserved values from tables)
- Real GDP growth: 2019 = 5.0; 2020 = -1.7; 2021 = 0.3; 2022 = 1.4; 2023 = 3.7.
- CPI (annual average): 2020 = 3.7; 2021 = 3.6; 2022 = 4.9; 2023 = 4.1.
- Central government: Revenue and grants (percent of GDP) 2020 = 14.1; 2021 = 15.6; 2022 = 16.0; 2025 = 16.8.
- Central government: Expenditure and net lending (percent of GDP) 2020 = 20.4; 2021 = 20.5; 2022 = 20.1; 2025 = 19.8.
- Net lending(+)/borrowing(-) (percent of GDP): 2020 = -6.4; 2021 = -5.0; 2022 = -4.1; 2025 = -3.1.
- Non-resource net lending(+)/borrowing(-) (percent of GDP): 2020 = -6.6; 2021 = -5.7; 2022 = -4.8; 2025 = -3.7.
- Gross official international reserves (in months of goods and services imports): 2020 = 3.5; 2021 = 3.5; 2022 = 3.5; 2025 = 4.8.
- Gross official international reserves (end-year, in millions of U.S. dollars): 2020 = 1,718; 2021 = 1,867; 2023 = 2,078; 2025 = 2,913.
- Current account (in percent of GDP): 2019 = 22.0; 2020 = 14.6; 2021 = 18.6; 2025 = 16.3.
- Exports, f.o.b. (millions of U.S. dollars): 2020 = 11,316; 2021 = 9,649; 2023 = 12,017; 2025 = 12,877.
- Stock of Fund credit outstanding (in millions of SDRs): 2020 = 263.2; 2025 = 236.9; 2030 = 0.0.
- Disbursements (in millions of SDR): 2020 = 263.2.
- IMF RCF (exceptional financing in Table 2): 1,277 (millions of Kina).
- Exceptional Financing (Table 3, in millions of U.S. dollars): IMF RCF = 364; WB/ADB = 72; Unidentified financing = 221.

### Medium-term outlook and vulnerabilities
- Medium-term growth path: Real GDP returns to positive growth after 2021 with projections such as 2022 = 1.4 and 2023 = 3.7.
- Fiscal consolidation required: Net lending/borrowing and non-resource fiscal balances indicate sizable deficits through the medium term (e.g., net lending -4.1 percent of GDP in 2022; non-resource net lending -4.8 percent of GDP in 2022).
- External position: Current account and reserves expected to recover gradually but remain sensitive to commodity prices and COVID-19 related shocks.
- Debt dynamics: Gross public debt percent of GDP projected at 46.9 in 2022, 45.6 in 2023, and 42.6 in 2025 (Table 5 / Table 2).

*Source: IMF staff report and tables as provided in the original content unit.*

### Annex I. Balance of Payments Financing

### Annex I. Balance of Payments Financing

### Table overview
- Table 1. Papua New Guinea: 2020 Financing Needs and Sources (In millions of U.S. dollars, unless otherwise indicated)
- Column headings as presented: 2019 SMP1 | 2019 | 2020 SMP | 2020 | 2020-21 SMP | 2021

### I. Current Account Balance and components
- I. Current Account Balance:
  - 6,098 | 5,499 | 6,316 | 3,483 | 6,333 | 4,438
- Trade Balance:
  - 7,473 | 7,630 | 7,756 | 5,841 | 7,872 | 7,068
- Exports of goods:
  - 10,788 | 11,280 | 11,316 | 9,649 | 11,555 | 11,222
  - LNG: 4,312 | 4,112 | 4,346 | 2,864 | 3,836 | 3,447
  - Gold: 2,790 | 3,087 | 3,111 | 3,534 | 3,086 | 3,960
  - copper: 509 | 658 | 614 | 464 | 512 | 561
- Imports of goods:
  - (3,315) | (3,650) | (3,560) | (3,808) | (3,683) | (4,154)
- Services (net):
  - (1,235) | (1,232) | (1,315) | (1,304) | (1,418) | (1,454)
  - Exports: 267 | 294 | 273 | 277 | 279 | 284
  - Imports: (1,503) | (1,526) | (1,589) | (1,580) | (1,697) | (1,738)
- Income (net):
  - (729) | (1,323) | (751) | (1,366) | (787) | (1,489)
  - Credit: 44 | 67 | 45 | 69 | 47 | 70
  - Debit3: (774) | (1,391) | (796) | (1,434) | (834) | (1,560)
- Private transfers (net):
  - 222 | 90 | 222 | 93 | 221 | 71
- Official transfers (net):
  - 368 | 335 | 405 | 219 | 445 | 241

### II. Capital and Financial Account balance
- II. Capital and Financial Account balance:
  - (6,570) | (5,720) | (6,368) | (4,431) | (6,342) | (4,289)
- Capital account balance:
  - 29 | 2 | 28 | 47 | 29 | 48
- Foreign Direct investment4:
  - (683) | (452) | (756) | (456) | (830) | (512)
- Portfolio investment (net):
  - (354) | 20 | (364) | 22 | (383) | 24
- Other investment (net):
  - (5,561) | (5,290) | (5,276) | (4,043) | (2,658) | (3,848)
- Loans:
  - (359) | (212) | (592) | (186) | (320) | (298)
  - Government (net): 379 | 400 | 338 | 689 | 665 | 665
    - Disbursements: 653 | 653 | 1,137 | 1,368 | 1,063 | 1,063
    - Amortization: (274) | (254) | (675) | (679) | (397) | (397)
  - Private sector (net): (738) | (859) | (930) | (876) | (986) | (963)
- Others (net)5:
  - (5,202) | (5,079) | (4,684) | (3,857) | (2,337) | (3,550)

### III. Overall Balance; IV. Reserves; IV. Financing gap; V. Residual Financing gap
- III. Overall Balance:
  - (472) | (221) | (51) | (948) | (8) | 148
- IV. Reserves (-:increase):
  - 472 | (221) | 52 | 290 | 8 | (148)
- IV. Financing gap:
  - 472 | (221) | 52 | 657 | 8 | (148)
- IMF emergency financing:
  - 364
- MDBs-:
  - - | - | 72
- Bilateral Creditors-:
  - - | - | -
- V. Residual Financing gap:
  - 000221 | 00

### Notes (as presented)
- 2/ Current account balance in this table excludes prospective grant financing.
- 3/ Income account debit increase is mainly due to statistical revision introduced this year related to financing account.
- 4/ Negative FDI represents within-company repayments of the LNG project companies.
- 5/ Includes capital flows via commercial banks and other private sectors.
- 1/ 2019 data also have been revised after the SMP.

*PAPUA NEW GUINEA — INTERNATIONAL MONETARY FUND*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Request and purpose
- Formal request for support under the IMF’s Rapid Credit Facility (RCF).
- Requested disbursement: SDR 263.2 million (100 per cent of our quota).
- Purpose: meet urgent balance of payments and fiscal needs arising from the export market deterioration and the decline in the domestic economy caused by the COVID-19 outbreak, and to finance COVID-related spending and imports.
- Request that the disbursement be made fully available for use by the Treasury, as proposed in the attached Memorandum of Understanding between the Bank of Papua New Guinea (BPNG) and Ministry of Treasury.

### Economic impact and projections
- Preliminary modelling indicate economic growth is likely to fall to below zero in 2020; GDP growth forecast reduced by 3.7 percentage points to -1.7 percent in 2020.
- Export earnings expected to fall by 13 per cent.
- Estimated revenue shortfall:
  - K2,000 million fall in revenues cited in the Letter of Intent.
  - Staff statement cites revenues expected to fall by around K2,200 million representing a loss of nearly one-fifth of expected domestic revenues in 2020.
- Pre-pandemic budget deficit: K4,631 million (around 5 percent of GDP); expected to worsen.
- Balance of payments financing gap and fiscal hole estimated at around US$700 million.

### Health response and related financing
- Initial government allocation to testing and quarantine facilities: K45 million.
- Additional financing agreements: K240 million (US$70 million) from the World Bank and the Asian Development Bank to support the National Emergency Response (NER).
- Government committed to additional funding in case of a widespread outbreak to import medicines and personal protective equipment.

### Economic Stimulus Package (ESP) and fiscal measures
- National Executive Council agreed to a K5.7 billion Economic Stimulus Package (ESP).
- ESP size: equivalent to 6 per cent of PNG’s economy.
- Direct fiscal spending in the stimulus package limited to K600 million; total COVID-related spending K645 million (around 0.8 percent of GDP) as presented in the staff statement.
- ESP will use a mix of monetary and regulatory policies, reallocation of expenditure from less essential areas to priority health, security and economic sectors, and leverage international partners.
- Government intends to introduce a supplementary budget to incorporate COVID-19 effects on revenue, expenditure and financing requirements.

### Monetary and financial measures by BPNG
- Policy rate reduction from 5 percent to 3 percent.
- Cash reserve requirement reduced from 10 percent to 7 percent.
- BPNG initiating purchases of government bonds over the next three months.
- Households and businesses: loan repayment holidays; enhanced early access to superannuation savings for those losing employment.

### Prior actions, transparency and governance safeguards
- Prior actions completed (listed as prior actions for drawing on the RCF):
  - Procurement transparency: Posts details of all procurements awarded on the government procurement website within a week of procurement, including names of entities awarded the contract and their beneficial owners, goods/services procured, price per unit, overall contract amount, and reports of ex-post validation of delivery. (Completion: details posted; prior action.)
  - COVID-19 expenditure reporting: COVID-19 expenditure reports presented to the Budget Management Committee on a weekly basis; first report circulated on May 18. (Prior action.)
  - Medium-Term Revenue Strategy (MTRS) Steering Committee: set explicit objectives and milestones for the Internal Revenue Commission (IRC) to be achieved in 2020, based on the IRC Annual Plan; Steering Committee approved objectives and milestones on May 13. (Prior action.)
  - Treasury liquidity management information sharing: Since May 4, Treasury has been providing BPNG with a cashflow workbook including projections for spending and debt-service payments, projected revenues, debt issuance, donor grants and external loan disbursements; most recent provided to BPNG on May 15. (Prior action.)
- Additional transparency commitments:
  - Under emergency COVID-19 directions, State of Emergency Controller posts procurement details within a week; relevant information through May 11 posted on May 18.
  - Consolidated procurement report to be submitted to the National Executive Council and published within three months of the end of the emergency.
  - Government commits to commission and publish an audit, conducted by a reputable independent auditor, of COVID-related spending within a year of the end of the emergency.
  - Treasury to withhold funding from implementing agencies if they fail to provide appropriate acquittals.

### Bank of Papua New Guinea (BPNG) commitments
- BPNG commits to undergo an IMF safeguards assessment.
- BPNG to provide IMF staff with access to its most recently completed external audit reports and to authorize its external auditors to hold discussions with Fund staff.
- Sign the Memorandum of Understanding between the Department of Treasury and BPNG to ensure timely servicing of any financial obligations with the IMF.

### Debt sustainability assessment and risks (DSA highlights)
- Joint World Bank/IMF DSA prepared in context of the 2020 RCF request.
- Risk ratings:
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
- DSA macro and financing assumptions and outcomes:
  - GDP growth forecast reduced by 3.7 percentage points to -1.7 percent in 2020; terms-of-trade shocks incorporated.
  - Limited room to draw down reserves; reliance on concessional loans from the international community.
  - Present value (PV) of public debt-to-GDP ratio remains high at over 40 percent under baseline projections.
  - PV of public and publicly-guaranteed (PPG) external debt-to-GDP ratio does not breach the threshold under the baseline scenario.
  - Debt service-to-revenue ratio shows two short-lived breaches in 2020 and 2028 due to bullet payments for private creditors and bond payments.
  - PV of the public debt-to-GDP falls below 45 percent from 2024 onwards in baseline projections.
  - Baseline projections assume continued revenue mobilization efforts, including achieving the structural benchmark on the medium-term revenue strategy (MTRS).
- COVID-19 impact on exports and current account (staff estimates):
  - Prices of main exports: LNG (-30.4%) and copper (-17%).
  - Current account surplus reduction equivalent to 8.6 percent of GDP.
- DSA financing assumption for stress tests: All additional financing needs generated by shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA; default terms of marginal debt based on baseline 10-year projections.
- Conclusion in DSA: External and overall debt are at high risk of debt distress; public debt assessed to be on a sustainable path conditional on implementation of prudent fiscal policies under the SMP. Debt sustainability is subject to considerable downside risks, including a more severe or prolonged COVID-19 shock.

### Structural reform commitments under the Staff-Monitored Program (SMP)
- Government remains committed to the SMP and to returning to expenditure restraint and revenue mobilization to gradually reduce debt-to-GDP ratio to the long-term target of 30 percent.
- Commitment to move the Kina back to a fully convertible and flexible currency.
- Structural reforms to continue:
  - Updated Medium-Term Revenue Strategy (MTRS).
  - Comprehensive reform of the State-Owned Enterprise (SOE) sector (supported and endorsed by the Asian Development Bank).
  - Strengthening public sector governance and anti-corruption frameworks.
- Authorities report meeting nine of the ten structural benchmarks due by the end of April and have met two prior actions (MTRS objectives for IRC; Treasury cashflow sharing with BPNG).

### External financing and donor support
- Government seeking additional external financing from multilateral and bilateral partners to offset remaining financing needs.
- Specific donor support noted:
  - World Bank: $US20 million in medical supplies assistance (staff statement).
  - Asian Development Bank: $US195 million to support delivery of accessible, affordable, and high-quality health services in PNG (staff statement).
- Government will consider seeking debt relief on eligible debt under the G-20 COVID-19 debt relief initiative and has applied to the Paris Club for debt relief on eligible official bilateral debt under the G20 Debt Service Suspension Initiative.

### Policy commitments and stance on external restrictions
- Government does not intend to introduce measures that would exacerbate balance of payments difficulties, including not to introduce or intensify exchange and trade restrictions that would compound these difficulties.
- Commitment to avoid multiple currency practices or agreements inconsistent with Article VIII of the IMF Articles of Agreement.

*Letter of Intent dated 18 May 2020 (Appendix I).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1pngea2020002.pdf_