## 1pngea2022001 ## Source details **Canonical URL:** [1pngea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1pngea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1pngea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1pngea2022001.pdf.json) --- ### EXECUTIVE SUMMARY — Context and recent developments - PNG described as a fragile state, vulnerable to recurrent shocks, climate and other natural disasters, and terms of trade shocks. - COVID-19: - Third wave straining healthcare system. - Vaccine hesitancy: about only 2 percent of the population fully vaccinated. - Delta variant surge overwhelmed healthcare; Australia, New Zealand and UK dispatched medical teams. - Political timing: - Elections due in June 2022; formal campaign period commencing by end-April. - Post-election: no-confidence votes forbidden for first 18 months after appointment of a Prime Minister. - Prior shocks: lower commodity prices in 2014; severe drought in 2015-16; major earthquake in 2018. - Most population depends on subsistence agriculture despite natural resource wealth. - Bank of Papua New Guinea (BPNG) safeguards assessment: - First Safeguards Assessment completed; Central Banking Act requires amendments to protect BPNG’s financial, personal, and institutional autonomy and enhance governance arrangements. - Compliance with IFRS supported; audit arrangements and internal audit alignment should be improved. - Internal control system being strengthened, including establishment of a risk management function. ### Recent economic performance - Real GDP: - 2020 downturn; 2021 real GDP estimated to grow by 1.7 percent driven by higher production of palm oil, cocoa, coffee. - Extractive sector output continued to decline due to closure of Ok-Tedi and Simberi mines and delays in opening Porgera. - Inflation: - 2020: 5.1 percent. - 2021 estimate: 5.8 percent. - Drivers: higher import prices, higher commodity prices particularly fuel, lockdown impacts on domestic supply chains. - External sector: - 2020 current account surplus narrowed marginally from 2019 to 22 percent of GDP. - 2020 goods export volumes up ~3 percent vs 2019, but export value declined by 19 percent: - LNG: -20 percent (price contribution) - Crude oil: -33 percent (price contribution) - Gold price rose by a record 27 percent, largely offsetting a 19 percent drop in 2020 gold export volumes. - 2021: high commodity prices and strong global demand kept CA surplus essentially unchanged despite supply bottlenecks. - Gross international reserves increased to 8 months of imports of goods and services (or 13 months of non-mineral imports) in 2020. - BPNG targets gross international reserves no less than US$1.8-2.0 billion. - Fiscal outturn (Mid-Year 2021): - Revenues exceeded Budget projections driven by significantly higher non-tax revenues and grants. - In first half-year of 2021, nearly 92 percent of the annual projected grants had been received. - Tax revenue collection lagged due to weaker personal income tax and international trade taxes. - Significant increases in compensation of employees, grants to provincial and local governments, and capital spending in H1 2021. - Lower interest payments than budgeted due to G20 DSSI relief. - Banking and financial sector: - Capital adequacy ratio: 39.6 percent in September 2021, mostly Tier 1 capital. - Non-performing loans (NPLs): 5.6 percent in September 2021. - BPNG required monthly bank reports and intensified supervision of liquidity, foreign exchange, and market risk. - AML/CFT regulator initiated regulatory actions against Bank South Pacific (BSP) in July 2021; no correspondent banking disruptions reported. ### Performance under the 2020–21 Staff Monitored Program (SMP) - SMP ran February 2020—June 2021; performance mixed due in part to the pandemic. - Staff assessment: - Four of six quantitative targets (QTs) met. - 13 of original 17 structural benchmarks (SBs) completed, five with delays. - Staff reached understandings on remedial steps and revised targets; authorities confirmed bulk measures only on the last day, preventing completion of first review. - Financial support: - PNG received a disbursement under the Rapid Credit Facility (RCF) in June 2020: SDR263.2 million (US$363.6 million, 100 percent of quota). - Implementation challenges: pandemic constraints, low capacity, virtual mission difficulties, inexperience with Fund programs delayed information sharing and reviews. ### Proposed 6‑month SMP (Dec 7, 2021–June 15, 2022): objectives and modalities - Program aims: - (i) Ensure fiscal consolidation to strengthen debt sustainability and make space for capital expenditure. - (ii) Address FX shortage aiming to restore kina convertibility. - (iii) Improve governance and anti-corruption in public sector, implement BPNG Safeguards Assessment recommendations, and adopt regulations for operationalizing the Independent Anti-Corruption Commission. - Fiscal framework: - Authorities passed a Budget framework for 2022 targeting a more than 1 percentage point of GDP reduction in the fiscal deficit. - Final Budget approved by Parliament in late November targets a deficit of 5.9 percent of GDP (prior action: NEC-approved framework targeting 6.0 percent of GDP). - Capacity assessment: - Staff will comprehensively assess authorities’ capacity to implement commitments; satisfactory assessment could lead to an upper credit tranche arrangement if a balance of payments need arises. - Near-term objective: catalyze budget support from external partners and avoid public finance distress. - Implementation modality: streamlined, focused program targeting critical reforms and frequent engagement to ensure information sharing and track progress. ### Outlook and risks - Baseline projections: - Real GDP growth: 4.8 percent in 2022; medium-term average growth estimated at 3 percent (non-resource sector driven). - Year-end inflation: around 5.0 percent in 2022. - Key assumptions: - Mines return to normal operations, including full resumption at Porgera. - Large resource companies’ on-site quarantine facilities help continued operations if infections spread. - Gradual easing of containment measures, higher government capital spending, some relaxation of travel restrictions in H2 2022. - Authorities do not plan strict lockdowns. - Downside risks: - Pandemic-related: low vaccination uptake could force restrictions and resource sector shutdowns. - Climate and natural disasters vulnerability. - Limited financing sources in adverse shock scenarios. - Cyber risk: October 2021 ransomware attack on Department of Finance froze access to funds and delayed 2022 Budget. - Upside risks: - Higher commodity prices or advancing resource projects (Papua LNG, P’nyang LNG, Wafi Golpu) could boost growth, exports, and revenues. - External position assessment: - External position in 2020 weaker than implied by fundamentals and desirable policy settings. - CA gap estimated at -2.2 percent of GDP (model dependent). - Staff assesses kina moderately overvalued by around 6 percent in real terms. - Overvaluation contributes to pressures in domestic FX market. - Gross international reserves in 2020: 8 months of imports — consistent with IMF staff’s 2020 reserves adequacy assessment. --- ### Debt sustainability and vulnerabilities (DSA highlights) - Risk of external and public debt distress: High (LIC DSF). - Public debt trajectory and objectives: - Strengthen medium-term debt sustainability by reducing public debt-to-GDP from 46.7 percent in 2020 to under 35 percent over the longer term (Box 1 fiscal objective). - Authorities intend to lower fiscal deficit in 2022 to 6.0 percent of GDP, including about ½ percent of GDP in policy measures. - Policy measures to support debt outlook: - Debt management operations and improvements in revenue generation (key SMP pillar) to address temporary breaches. - Updated Guarantee Policy (2021) to strengthen oversight over contracting of debt by wider public sector, including SOEs. - Contingent liabilities stress test assumptions: - Unrecorded SOE debt assumed: 9 percent of GDP. - Other unfunded liabilities (pensions): 3 percent of GDP. - Cumulative shock in contingent liabilities stress test: 17 percent of GDP. ### DSA indicators and projections (selected figures preserved) - Public debt-to-GDP: - 2019: 40.2 percent - 2020: 46.7 percent - 2021 Est.: 49.7 percent - 2022 Prog.: 51.2 percent - 2023 Prog.: 51.8 percent - 2024 Prog.: 52.5 percent - 2025 Prog.: 51.7 percent - 2026 Prog.: 50.1 percent - Public external debt-GDP ratio (percent): - 2016: 8.4 - 2017: 12.3 - 2018: 14.8 - 2019: 17.2 - 2020: 22.1 - 2021 Est.: 22.1 - 2022 Proj.: 22.4 - 2023 Proj.: 22.5 - 2024 Proj.: 20.6 - 2025 Proj.: 19.0 - 2026 Proj.: 17.3 - Debt-service to revenue: projected to breach threshold under baseline with a small breach in 2026 and a relatively large breach in 2028 (Eurobond bullet payment). - Composite Indicator (CI): 2.63 (October 2021 WEO and CPIA), indicating “weak” capacity to carry debt. - DSA judgment: Debt dynamics sustainable conditional on SMP implementation; shocks (especially export shocks) pose serious downside risks. ### Policy implications from DSA - Gradual fiscal consolidation, boosting revenues, and structural reforms to promote private sector growth needed to lower risk of debt distress. - Continued reliance on concessional and near-concessional financing; zero limit on new non-concessional external borrowing during SMP (except exempted official bilateral/multilateral financing). - Institutionalize Public Debt Committee (SB4) to produce debt issuance strategy, improve cashflow forecasting, and strengthen liquidity management. --- ### Fiscal policies — near-term developments, 2021 outturn and 2022 framework - 2021 outturn versus Budget: - Revenues expected 0.4 pp of GDP higher than budgeted (higher foreign grants and non-tax revenues, particularly SOE dividends). - Tax revenues expected to underperform. - Expenditure expected higher by 0.6 pp of GDP due to employee compensation, restoration of tuition subsidies, higher healthcare/COVID spending, and increased capital spending. - Debt service relief under DSSI expected to lower expenditure by 0.2 pp. - Result: deficit forecast 0.3 pp higher than Budget; deficit largely externally financed including use of general allocation of SDRs (1.3 pp). - 2022 Budget framework: - NEC-approved framework targets overall deficit of 6 percent of GDP (prior action). - Parliament approved final Budget targeting deficit of 5.9 percent of GDP. - Fiscal framework envisages revenue improvement driven by cyclical tax recovery and policy measures to increase SOE contributions and statutory authorities following Non-Tax Revenue Bill. - Expenditure focus: recovery support, shift toward capital spending, education and healthcare financing, one-off allocation for elections. - Key fiscal operation figures (percent of GDP, Text Table 2 select): - Revenue: 14.2 (2020 actual), 14.0 (2021 Budget), 14.4 (2021 Revised), 15.6 (2022 Prog.), Difference 1.2 - Tax revenue: 11.5, 12.0, 11.7, 12.3, Difference 0.6 - Non-tax revenue: 1.0, 0.9, 1.0, 1.5, Difference 0.5 - Grants: 1.7, 1.1, 1.8, 1.8, Difference 0.0 - Expenditure: 22.7, 21.2, 21.8, 21.6, Difference -0.2 - Expense: 18.6, 17.1, 17.6, 16.6, Difference -0.9 - Compensation of employees: 6.8, 6.2, 6.4, 6.0, Difference -0.4 - Net acquisition of non-financial assets: 4.1, 4.1, 4.2, 5.0, Difference 0.8 - Net lending (+)/borrowing (-): -8.6, -7.1, -7.4, -6.0, Difference 1.3 - Memo: Nominal GDP (billions of kina): 85.3, 92.7, 93.1, 101.0 ### Revenue and expenditure reform measures - Revenue reforms: - Approval of Consequential Amendments to the Tax Administration Act (TAA) (structural benchmark SB3). - Income Tax Act (ITA) reform to be completed in 2022 for force with 2023 Budget; aims: simplify compliance, introduce simpler tax for small businesses, limit deductions, strengthen administration. - Introduction of levies on banking and telecommunications being considered. - Authorities requested TA for review of the Medium-term Revenue Strategy (MTRS) expiring in 2022. - Expenditure management: - Strengthen payroll management systems; pilot in Department of Treasury completed. - Identified ~18,000 staff who have reached mandatory retirement and 575 more in 2022; upfront retirement costs required but transition expected to contain personnel cost trajectory. - 2022 Staffing Establishment Survey (SB2) planned to establish staffing baseline and integrate payroll into IFMS. - Commitment to increase healthcare spending and maintain social spending envelope in real terms. ### Financing and debt management - Deficit largely externally financed through concessional and near-concessional donor sources. - Government working with donors to strengthen transparency on spending; disbursements occurring more smoothly. - Institutionalization of Public Debt Committee (SB4) expected to strengthen domestic financial markets and provide cost-effective funding source. - Public sector external financing (US$ millions, Text Table 3 select): - Multilateral: 1,272.4 (2017); 1,631.8 (2018); 1,848.1 (2019); 2,900.4 (2020); 3,518.3 (2021); 3,822.0 (2022) - Bilateral Paris Club: 7.6; 138.5; 460.1; 642.1; 644.6; 910.0 - Bilateral Non-Paris Club: 660.4; 724.4; 868.4; 1,016.9; 1,126.5; 1,175.2 (of which China: 537.5; 724.4; 859.8; 974.0; 1,052.2; 1,086.9) - Commercial: 848.2; 1,074.6; 1,076.8; 830.9; 577.4; 561.1 - Total: 2,788.6; 3,569.2; 4,253.4; 5,390.3; 5,866.8; 6,468.3 --- ### Monetary and exchange rate policies - Use of Temporary Advance Facility (TAF): - Since September 2020 authorities increased use of TAF to manage cash flow; TAF limit increased to ensure timely spending during late donor flows. - TAF is within-year financing; repayment must be within 12 months; authorities have not carried over outstanding TAF balances across budget years to date. - Operational guidelines for TAF finalized between BPNG and Treasury to safeguard BPNG’s monetary autonomy. - BPNG requested IMF TA to improve FX operations and liquidity management as precondition to reinstating kina convertibility. - Authorities committed to provide at least US$180 million to market every quarter (QT) while observing floor on FX reserves (QT). - Net international reserves (end-year, US$ millions, Table 3): - 2020: 2,686 - 2021 Est.: 2,435 - 2022 Proj.: 2,285 - 2023 Proj.: 2,265 - 2024 Proj.: 2,155 - 2025 Proj.: 2,164 - 2026 Proj.: 2,051 - Monetary stance: BPNG maintained accommodative stance in 2021 to support recovery; broad money and domestic credit rose (domestic credit 12.2 percent in 2021; broad money 8.2 percent in 2021). ### Strengthening the Central Banking Act and safeguards - Independent Advisory Group (IAG) appointed to review Central Banking Act in two phases: - Phase 1: BPNG mandate, institutional governance, monetary policy governance, review of TAF. - Phase 2: BPNG’s regulatory role. - Fund TA requested (SB5) to address shortcomings from Safeguards Assessment. - IAG report and Safeguards Assessment identify shortcomings, including recommendations that could be costly if adopted as-is: - introducing a dual mandate for BPNG targeting price stability and employment/economic growth without clear ranking; and - institutionalizing monetary financing of the government (with a limit). - Reforms aim to strengthen BPNG’s financial, personal, and institutional autonomy and improve internal controls and audit functions. --- ### Governance, SOE oversight, procurement and anti‑corruption - SOE transparency and reforms: - Financial statements for 2018 for all key SOEs identified by ADB have been published; most enterprises published 2019 and 2020 statements (MEFP ¶41). - Authorities completed all 2021 reform measures in ADB-supported SOE reform program. - Further commitment to SOE reforms in line with ADB program strongly encouraged. - Actions to address arrears: steps taken to address arrears accumulated by and to PNG Power Limited as part of strengthening its financial position (MEFP ¶21). - Procurement transparency: - Government committed to resume updating information on COVID-related procurement (site noted in source not to be listed here) and to conduct an audit of procurement contracts to be published within one year after end of State of Emergency. - National Procurement Act operationalized; continued commitment to procurement transparency necessary for durable governance improvement. - Anti-corruption: - Organic Law on the Independent Commission Against Corruption (ICAC) facing constitutional challenge; authorities preparing implementing regulations. - Interim ICAC produced Anti-corruption National Plan of Action endorsed by NEC in 2020. - Progress to operationalize ICAC and implement Whistleblowers Acts has been mixed; implementing regulations and staffing remain workstreams. - Fund to provide targeted capacity development on anti-corruption and rule of law. --- ### Strengthening SOE oversight and data availability - SOE disclosure progress: - By end-October 2021 produced audited financial statements: - 2018 for 9 key SOEs listed. - 2019 for at least 6 of the SOEs. - 2020 for at least 4 of the SOEs. - Program Monitoring Committee and data improvements: - Authorities set up high-level Program Monitoring Committee to maintain contact with staff and follow-up on data requests. - 2020–21 SMP affected by data gaps longer than envisaged (over 3 months in some cases). - Authorities requested use of more quickly available financing data to monitor fiscal deficit; staff supports this. - Commitment to strengthen data reporting to IMF per TMU; data reporting table specifies frequency and lag for fiscal, monetary, real and external sector indicators (examples preserved in TMU). --- ### Quantitative targets, indicative targets and structural benchmarks (selected) - TMU quantitative targets (stock/flow targets and floors/ceilings): - Fiscal deficit of central government (cumulative, ceiling within the year): 6.863 2.563 3.824 (preserved verbatim from Table 1 header layout) - Stock of net international reserves of the BPNG (floor, US$ millions): 2,000 (end-December / end-March / end-June proposed) - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative within the year, US$ millions): 660 180 360 (preserved verbatim) - Continuous zero ceiling on new non-concessional external debt contracted or guaranteed by central government or BPNG (US$ millions): 0 0 0 - Indicative targets (selected): - Tax revenue of central government (floor, cumulative within the year): 10.868 2.613 5.376 (preserved verbatim) - Present value of public and publicly-guaranteed external debt (ceiling, US$ millions): 6,500 6,750 6,750 (preserved verbatim) - Proposed structural benchmarks (Table 2 summary, timing preserved verbatim): - No. 1: Approval of a framework for the 2022 budget by NEC — Prior Action — Completed October 13, 2021 - No. 2: Complete and share Staffing and Establishment Review report — End-February 2022 - No. 3: Approval of Consequential Amendments to the Tax Administration Act by NEC and submission to Parliament — End-March 2022 - No. 4: Strengthen public debt committee (TORs, objectives, draft annual debt issuance strategy) — End-March 2022 - No. 5: Submit for parliamentary approval amendments to the Central Banking Act in consultation with Fund staff — End-March 2022 --- ### Financial sector stability and key indicators - Capital adequacy (Capital to risk-weighted assets): - 2016: 37.0 - 2017: 38.1 - 2018: 37.1 - 2019: 36.1 - 2020: 39.2 - Sep. 2021: 39.6 - Nonperforming loans to total loans: - 2016: 2.7 - 2017: 2.8 - 2018: 3.7 - 2019: 3.8 - 2020: 5.3 - Sep. 2021: 5.6 - Return on assets: - 2016: 2.2 - 2017: 3.4 - 2018: 3.8 - 2019: 4.1 - 2020: 3.8 - Sep. 2021: 7.8 - Liquidity: continued excess liquidity in banking system; banks increased holdings of government securities. --- ### Implementation risks and staff mitigation - Identified risks: - Capacity constraints, ongoing pandemic challenges, and election period limit reform scope. - No scope for program extension during election period if more time is required. - Continued lack of information sharing—critical problem in 2020–21 SMP—remains a risk. - Proposed mitigation: - Streamlined and focused program targeting critical reforms. - Regular and frequent engagement with authorities to ensure information is provided and reforms stay on track. - Staff support for specifying a single test date at end-December 2021 given reporting lags and capacity constraints; program review expected April 2022. - Staff to make comprehensive assessment of implementation capacity; positive assessment could enable escalation to upper credit tranche if BOP needs emerge. --- ### Staff views and next steps - Staff supports request for a 6-month SMP. - Letter of Intent and MEFP demonstrate program ownership and appropriate policies. - SMP expected to catalyze budget support from external partners and help avoid public finance distress. - Staff will assess authorities’ capacity to implement commitments and may pursue comprehensive assessment enabling upper credit tranche arrangement if balance of payments needs arise. *Source: 1pngea2022001 (IMF staff report excerpts and MEFP/TMU material as provided).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and recent developments - PNG is described as a fragile state, vulnerable to recurrent shocks, climate and other natural disasters, and terms of trade shocks. - COVID-19 developments: - A third wave of the COVID-19 pandemic is straining the healthcare system. - Widespread vaccine hesitancy has contributed to very low uptake: about only 2 percent of the population fully vaccinated. - The Delta variant surge has overwhelmed the healthcare system and increased COVID-related deaths. - Australia, New Zealand and UK have dispatched medical teams to the most affected regions. - Political timing: - Elections are due in June 2022, with the formal campaign period commencing by end-April. - Post-election period: no-confidence votes are forbidden for the first 18 months after appointment of a Prime Minister. - Pre-pandemic and other shocks: - Prior shocks include lower commodity prices in 2014; severe drought in 2015-16; and a major earthquake in 2018. - Most of the population depends on subsistence agriculture despite natural resource wealth. - Bank of Papua New Guinea (BPNG) safeguards assessment: - First Safeguards Assessment completed; Central Banking Act requires amendments to protect BPNG’s financial, personal, and institutional autonomy and enhance governance arrangements. - Transparency supported by compliance with IFRS; audit arrangements and internal audit alignment should be improved. - Internal control system being strengthened, including establishment of a risk management function. ### Recent economic performance - Real GDP: - After a downturn in 2020, real GDP is estimated to rebound modestly to grow by 1.7 percent in 2021. - Growth in 2021 largely driven by higher production of key agricultural export commodities (palm oil, cocoa, coffee). - Extractive sector output continued to decline due to closure of Ok-Tedi and Simberi mines and delays in opening Porgera. - Inflation: - Inflation rose to 5.1 percent in 2020 and is estimated at 5.8 percent in 2021. - Drivers: higher import prices, higher commodity prices particularly fuel, and lockdown impacts on domestic supply chains. - External sector: - 2020 current account (CA) surplus narrowed marginally from 2019 to 22 percent of GDP. - 2020 goods export volumes increased by around 3 percent versus 2019, but export value declined by 19 percent. - LNG: -20 percent (price contribution) - Crude oil: -33 percent (price contribution) - Gold price rose by a record 27 percent, largely offsetting a 19 percent drop in 2020 gold export volumes. - In 2021, high commodity prices and strong global demand kept the CA surplus essentially unchanged despite supply bottlenecks. - Gross international reserves increased to 8 months of imports of goods and services (or 13 months of non-mineral imports) in 2020. - BPNG targets gross international reserves no less than US$1.8-2.0 billion. - Fiscal outturn (Mid-Year 2021): - Revenues exceeded Budget projections, driven by significantly higher non-tax revenues and grants. - In first half-year of 2021, nearly 92 percent of the annual projected grants had been received. - Tax revenue collection lagged due to weaker personal income tax and international trade taxes. - Significant increases in compensation of employees, grants to provincial and local governments, and capital spending in H1 2021. - Lower interest payments than budgeted due to G20 DSSI relief. - Banking and financial sector: - Reported capital adequacy ratio at 39.6 percent in September 2021, mostly Tier 1 capital. - Non-performing loans (NPLs) rose to 5.6 percent in September 2021. - BPNG required banks to provide monthly reports on financial conditions and intensified supervision of liquidity, foreign exchange, and market risk. - AML/CFT regulator initiated regulatory actions against Bank South Pacific (BSP) in July 2021; no disruption to correspondent banking relationships reported. ### Performance under the 2020–21 Staff Monitored Program (SMP) - The 2020–21 SMP ran February 2020—June 2021 and performance was mixed, in part due to the pandemic. - Progress: - Most structural benchmarks were completed. - Staff’s preliminary assessment: four of six quantitative targets (QTs) were met and 13 of original 17 structural benchmarks (SBs) were completed, five with delays. - Staff reached understandings on remedial steps and revised targets, including 12 structural measures to complete the first review in early 2021; authorities only confirmed bulk measures on the last day of the program, so the review was not completed. - Financial support: - PNG received a disbursement under the Rapid Credit Facility (RCF) in June 2020 amounting to SDR263.2 million (US$363.6 million, 100 percent of quota). - Program implementation challenges: - Pandemic-related constraints, low capacity on authorities’ side, difficulties with virtual missions, and lack of experience with Fund programs caused delays in information sharing and completion of reviews. ### Program objectives and modalities for the proposed 6-month SMP (Dec 7, 2021–June 15, 2022) - Program aims: - (i) Ensure fiscal consolidation to strengthen debt sustainability, and make space for capital expenditure. - (ii) Address the FX shortage with the aim of restoring kina convertibility. - (iii) Improve governance and anti-corruption measures in the public sector, focusing on implementing recommendations of the BPNG Safeguards Assessment and adopting necessary regulations for full operationalization of the Independent Anti-Corruption Commission. - Fiscal framework: - Authorities passed a Budget framework for 2022 that targets a more than 1 percentage point of GDP reduction in the fiscal deficit. - Capacity assessment and path to deeper engagement: - Staff will make a comprehensive assessment of authorities’ capacity to implement program commitments, particularly to improve data lags and strengthen internal coordination. - A satisfactory assessment could lead to an eventual upper credit tranche arrangement if a balance of payments need arises. - Near-term objectives: - The SMP is expected to help catalyze budget support from external partners and avoid public finance distress. - Implementation modalities: - Staff propose a streamlined and focused program targeting critical reforms and frequent engagement with authorities to ensure information sharing and track reform progress. ### Outlook and risks - Baseline projections: - Real GDP growth expected to accelerate to 4.8 percent in 2022 as mining activity resumes and the non-resource sector expands. - Year-end inflation projected around 5.0 percent in 2022. - Medium-term growth estimated at an average of 3 percent, driven by the non-resource sector. - Key assumptions supporting recovery: - Mines affected by the pandemic expected to return to normal operations, including full resumption at the Porgera gold mine. - Large resource companies’ on-site quarantine facilities would help continued operations if infections spread. - Gradual easing of containment measures, higher government capital spending, and some relaxation of travel restrictions in second half of 2022. - Authorities do not plan strict lockdown measures. - Downside risks (tilted to the downside): - Main near-term risk remains pandemic-related; absence of faster vaccination progress could force further restrictions and lockdowns and potentially force resource sector shutdowns. - PNG vulnerability to climate and other natural disasters. - Limited sources of financing in an adverse shock scenario and pressing social and development needs limit room for policy adjustment. - Cyber risk: October 2021 ransomware attack on the Department of Finance froze access to funds, including donor funds, and delayed the 2022 Budget; other systems could be similarly vulnerable. - Upside risks: - Higher commodity prices or advancing resource projects (including Papua LNG, P’nyang LNG and the Wafi Golpu mining project) could boost growth, exports, and government revenues. - External position assessment: - PNG’s external position in 2020 was weaker than implied by fundamentals and desirable policy settings. - Depending on the model used, the CA gap is estimated at -2.2 percent of GDP. - Staff assesses the kina as moderately overvalued by around 6 percent in real terms. - Overvaluation contributes to pressures in the domestic foreign exchange market. - Gross international reserves in 2020 were equivalent to 8 months of imports, consistent with IMF staff’s assessment for reserves adequacy in 2020. ### Risks to the proposed SMP and staff mitigation - Identified risks: - Capacity constraints, ongoing pandemic challenges, and the election period limit the scope of reforms that can be successfully undertaken. - No scope for program extension during the election period if more time is required for remedial actions. - Continued lack of information sharing—critical problem in the 2020–21 SMP—remains a source of risk. - Proposed mitigation: - Design a streamlined and focused program targeting critical reforms. - Engage regularly and frequently with authorities to ensure information is provided and reforms stay on track. ### Staff views and next steps - Staff supports the request for a 6-month SMP. - The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies. - Staff will assess authorities’ capacity to implement program commitments and may pursue a comprehensive assessment that could enable escalation to an upper credit tranche arrangement if balance of payments needs emerge. - The SMP is expected in the near term to catalyze budget support from external partners and help avoid public finance distress. *Source: 1pngea2022001 - EXECUTIVE SUMMARY.* ### 13. PNG’s public and publicly guaranteed debt remains at high risk of debt distress, with ### 13. PNG’s public and publicly guaranteed debt remains at high risk of debt distress, with ### Debt sustainability and vulnerabilities - Under the Low-Income Country Debt Sustainability Framework (LIC DSF), the risk of both external and public debt distress is assessed as high. - Planned fiscal consolidation helps address debt vulnerabilities exacerbated by the global COVID-19 shock, but weak debt-carrying capacity remains. - Over the medium-term, public debt is projected to enter a downward trend; projected temporary breaches of sustainability indicators can mostly be addressed by: - debt management operations, and - improvements in revenue generation (a key pillar of the SMP). - The DSA confirms vulnerability to export shocks, signaling serious downside risks to the debt outlook. - An updated Guarantee Policy was issued in 2021 to strengthen oversight over contracting of debt by the wider public sector, including SOEs. - Steps are being taken to address arrears accumulated by and to the power utility as part of strengthening its financial position (MEFP ¶21). ### Program discussions — objectives and timeframe - Key objectives build on priorities identified in the last SMP (Box 1 and MEFP ¶14). - Priorities include: - return to a gradual process of fiscal consolidation to strengthen debt sustainability and make space for capital expenditure; - address the FX shortage with the aim of restoring kina convertibility over the medium term; - improve governance in the public sector. - Authorities view a multi-year engagement with the Fund, supported by other development partners, as needed. - The proposed short SMP aims to make tangible progress in the 6 months from December 7, 2021 to June 15, 2022. ### Box 1 — Key medium-term objectives and measures of the SMP (fiscal) - Strengthen medium-term debt sustainability by gradually reducing the public debt-to-GDP ratio from 46.7 percent in 2020 to under 35 percent over the longer term. - Authorities intend to: - Lower the fiscal deficit in 2022 to 6.0 percent of GDP, including through about ½ percent of GDP in policy measures. - Contain and reduce spending on compensation of employees by improving payroll management and manpower planning. - Ensure implementation of the Medium-Term Revenue Strategy and other revenue reforms to raise the domestic revenue-to-GDP ratio, including adoption of a revised Tax Administration Act and completion of an updated Income Tax Act. - Reorient spending toward capital investment and pressing social needs as fiscal space becomes available. ### Box 1 — Monetary, FX, structural and governance measures - Prepare for a gradual return to kina convertibility and adoption of a market-determined exchange rate by: - strengthening liquidity management and monetary operations; and - identifying the backlog of unfilled FX orders at commercial banks and taking measures to reduce it. - Address weaknesses in governance, autonomy and internal controls of BPNG by introducing amendments to the Central Banking Act. - Support improved oversight and control of SOEs and ongoing anti-corruption reforms (including preparation of enabling regulations). - Continue regular updates, timely audits and assessments of COVID-related spending. ### A. Fiscal policies — near-term developments and projections - Revenues and expenditure are both expected to exceed the 2021 Budget projections (MEFP ¶15-18; Text Table 2). - Revenues are expected to be 0.4 percentage point (pp) of GDP higher than budgeted, largely reflecting upward revisions to foreign grants and somewhat higher non-tax revenues, particularly dividends from SOEs. - Tax revenues are expected to underperform due to lower personal and company tax collection and lower indirect taxes reflecting lower import excises. - Expenditure is expected to be higher by 0.6 pp of GDP, reflecting: - upward revision of employee compensation, - restoration of tuition subsidies for schools, - higher healthcare and other COVID-related spending, - increase in capital spending. - Debt service relief under the DSSI is expected to lower expenditure by 0.2 pp. - Result: the deficit is now forecast to be 0.3 pp higher than in the Budget; the deficit will be largely externally financed, including use of the general allocation of SDRs (1.3 pp). - Authorities are consulting with Fund staff and internally to ensure transparent recording of the use of SDRs. ### A. Fiscal policies — 2022 Budget framework and measures - The 2022 Budget targets a gradual consolidation while preserving space for needed spending; NEC approved a fiscal framework targeting an overall deficit of 6 percent of GDP (prior action), published in the government’s 2022 Budget Strategy Paper. - The final Budget approved by Parliament in late November targets a deficit of 5.9 percent of GDP (see footnote 3). - Fiscal framework envisages improvement in domestic revenues driven by cyclical improvement in tax revenues and policy measures to increase SOE contributions and, following passage of the Non-Tax Revenue Bill, statutory authorities. - Expenditures to focus on supporting the recovery, shifting toward capital spending, adequately financing education and healthcare, and a one-off allocation for elections. ### A. Fiscal policies — revenue and expenditure reform measures - Revenue reforms and measures: - Approval of Consequential Amendments to the Tax Administration Act (TAA) to clarify laws and strengthen legal authority of revenue collection agencies (structural benchmark, SB3). - Work to reform the Income Tax Act (ITA) to be completed in 2022 and come into force alongside the 2023 Budget; revisions aim to simplify tax compliance, introduce a simpler tax system for small businesses, limit deductions and strengthen tax administration. - Introduction of levies on banking and telecommunications revenues being considered. - Authorities requested TA for review of the Medium-term Revenue Strategy (MTRS), which will expire in 2022 (MEFP ¶24). - Expenditure management measures: - Strengthen payroll management systems (MEFP ¶25-26); pilot in Department of Treasury completed. - Identified approximately 18,000 staff who have reached mandatory retirement and 575 more who will join them in 2022; upfront retirement costs required but transition expected to contain personnel cost trajectory over medium term. - 2022 Staffing Establishment Survey (SB2) planned to establish detailed staffing information and integrate payroll management into IFMS. - Commitment to increase healthcare spending and maintain social spending envelope in real terms (IT). ### A. Fiscal policies — financing and debt management - Deficit will continue to be largely externally financed through concessional and near-concessional donor sources (MEFP ¶28). - Government working with donors to strengthen transparency on spending to limit delays; disbursements are occurring more smoothly. - Institutionalization of the public debt committee (SB4) is expected to strengthen domestic financial markets and provide a reliable and cost-effective funding source. - Key fiscal operations table (Text Table 2) — select figures (Percent of GDP unless otherwise indicated): - Revenue: 14.2 (2020 actual), 14.0 (2021 Budget), 14.4 (2021 Revised), 15.6 (2022 Prog.), Difference 1.2 - Tax revenue: 11.5, 12.0, 11.7, 12.3, Difference 0.6 - Non-tax revenue: 1.0, 0.9, 1.0, 1.5, Difference 0.5 - Grants: 1.7, 1.1, 1.8, 1.8, Difference 0.0 - Expenditure: 22.7, 21.2, 21.8, 21.6, Difference -0.2 - Expense: 18.6, 17.1, 17.6, 16.6, Difference -0.9 - Compensation of employees: 6.8, 6.2, 6.4, 6.0, Difference -0.4 - Net acquisition of non-financial assets: 4.1, 4.1, 4.2, 5.0, Difference 0.8 - Net lending (+)/borrowing (-): -8.6, -7.1, -7.4, -6.0, Difference 1.3 - Memo item: Nominal GDP (billions of kina): 85.3, 92.7, 93.1, 101.0 ### B. Monetary and exchange rate policies - Since September 2020 authorities increased use of the Central Bank overdraft (TAF) to manage cash flow; TAF limit was increased to ensure timely spending during late donor flows. - TAF is not intended as permanent government financing; repayment must be within 12 months; authorities have not carried over outstanding TAF balances across budget years to date. - Operational guidelines for TAF were finalized between BPNG and the Treasury to safeguard BPNG’s monetary autonomy (MEFP ¶34). - BPNG has requested IMF TA to improve FX operations and liquidity management as a precondition to reinstating kina convertibility. - Strengthening the Public Debt Committee (MEFP ¶35, SB4) is committed to improve liquidity management and forecasting. - Public sector external financing composition (Text Table 3, in millions of US dollars): - Multilateral: 1,272.4 (2017); 1,631.8 (2018); 1,848.1 (2019); 2,900.4 (2020); 3,518.3 (2021); 3,822.0 (2022) - Bilateral Paris Club: 7.6; 138.5; 460.1; 642.1; 644.6; 910.0 - Bilateral Non-Paris Club: 660.4; 724.4; 868.4; 1,016.9; 1,126.5; 1,175.2 - of which: China: 537.5; 724.4; 859.8; 974.0; 1,052.2; 1,086.9 - Commercial: 848.2; 1,074.6; 1,076.8; 830.9; 577.4; 561.1 - Total: 2,788.6; 3,569.2; 4,253.4; 5,390.3; 5,866.8; 6,468.3 ### B. FX reserves and market support - Authorities committed to providing at least US$180 million to the market every quarter (QT) while observing the floor on FX reserves (QT). - At the height of COVID, BPNG prioritized maintaining FX reserves and fell short of its target for FX sales to authorized dealers in the 2020-21 SMP. ### C. Strengthening the Central Banking Act - Ongoing review expected to modernize BPNG and improve governance and accountability (MEFP ¶36-38). - Independent Advisory Group (IAG) appointed to conduct review in two phases: - Phase 1: BPNG mandate, institutional governance, monetary policy governance, review of TAF. - Phase 2: BPNG’s regulatory role. - Fund TA has been requested (SB5) to address shortcomings identified by the Safeguards Assessment. - IAG report identifies shortcomings consistent with the Safeguards Assessment and contains recommendations that could be costly if adopted as-is, including: - introducing a dual mandate for BPNG targeting price stability and employment/economic growth without a clear ranking, and - institutionalizing monetary financing of the government, though with a limit. - Reforms will need support to strengthen BPNG’s financial, personal, and institutional autonomy and to improve internal controls and audit functions. ### D. Addressing governance challenges and procurement transparency - The Organic Law on the Independent Commission Against Corruption (ICAC) is facing a constitutional challenge; authorities continue to prepare for full ICAC operation and are developing implementing regulations. - Interim ICAC produced the Anti-corruption National Plan of Action, endorsed by NEC in 2020. - Continued multi-year effort with close Fund support is needed to address governance challenges. - Transparency in procurement must be maintained, particularly for COVID-related spending (MEFP ¶29): - Government committed to resume updating information on COVID-related procurement, including posting details of beneficial owners of successful bidders at https://www.procurement.gov.pg/covid-19-procurement/, which has not been updated since mid-2020. - Authorities intend to conduct an audit of procurement contracts to be published within one year after the end of the State of Emergency, in line with RCF commitments; staff will monitor progress and encourage an earlier start given that most COVID-related spending occurred in 2020 and 2021. - National Procurement Act has been operationalized; continued commitment to procurement transparency is necessary for durable governance improvement. *Source: 1pngea2022001 - 13. PNG’s public and publicly guaranteed debt remains at high risk of debt distress, with* ### 26. Strengthening oversight and management of SOEs, including publishing audited ### 26. Strengthening oversight and management of SOEs, including publishing audited ### Strengthening SOE oversight and transparency - Financial statements for 2018 for all key SOEs identified by the Asian Development Bank (ADB), especially companies under Kumul Consolidated Holdings (KCH), have been published. - Most of these enterprises have also published 2019 and 2020 financial statements (MEFP ¶41). - The authorities have completed all reform measures for 2021 in the ADB-supported SOE reform program, improving the legislative and policy framework, and enhancing governance and transparency. - Further commitment to SOE reforms, in line with the program developed with the ADB, is strongly encouraged. - Continued transparency with timely audited financial statements of SOEs and COVID-19 procurement contracts is needed; adherence to this transparency requirement will help with broader anti-corruption efforts. ### Improving data availability for program monitoring and policy formulation - The SMP will aim to address challenges related to data compilation and reporting (MEFP ¶45). - The 2020-21 SMP was impacted by data and information reporting gaps that were longer than envisaged, more than 3 months in some cases, which ultimately stymied the timely completion of reviews. - To address this, the authorities have set up a high-level Program Monitoring Committee to maintain close contact with staff and follow-up on data requests, including ad hoc requests for information. - Staff will support the process by scheduling periodic meetings to ensure data requests receive the authorities’ fullest attention. - The authorities have requested to use the more quickly available financing data to monitor the fiscal deficit, which staff supports. ### Staff appraisal: macroeconomic outlook, program design, and governance - Economic recovery in 2022 is expected to gain momentum but remains fragile; high risks surrounding the macro framework and the program largely emanate from the pandemic. - The current surge in COVID-19 cases, if not controlled, has the potential to derail the recovery; in the absence of faster progress on vaccinations, further restrictions and lockdowns are possible, with attendant impacts on economic activity and external inflows. - PNG remains at high risk of debt distress with weak debt-carrying capacity, but contingent on prudent fiscal policies, debt remains sustainable. - The external balance assessment suggests that PNG’s external position is weaker than implied by fundamentals and desirable policies. - Mixed performance in the 2020-21 SMP attributable to the pandemic and capacity constraints: - 2020-21 SMP targets and structural benchmarks were very ambitious for a fragile state, especially after the COVID-19 outbreak. - Program performance was hampered by the pandemic, political instability, and severe capacity constraints. - Authorities made important progress in revenue reforms, cash forecasting, and facilitating a Safeguards Assessment. - The proposed SMP is ambitious and focuses on: - a balanced fiscal consolidation strategy centered on strengthening revenue mobilization and improving expenditure management, particularly bringing the government wage bill under control; - making space for needed investment and social spending; - addressing the FX shortage and putting in place conditions for the restoration of kina convertibility; - strengthening public sector governance, including strengthening the anti-corruption framework, and improving public sector oversight and transparency. - External financing and donor engagement: - Close Fund engagement is expected to crowd in financial support from other official bilateral and multilateral donors. - Authorities are finalizing financing for the execution of their 2021 and 2022 Budgets and have indicated intent to use the SDR allocation for budget financing in 2021. - Staff consider this an appropriate measure given pandemic-related spending needs and are working with authorities to ensure transparency and legal/institutional compliance. - Good progress on conditionality to access funding from multilateral development partners including the Asian Development Bank and the World Bank; discussions with bilateral partners, particularly Australia, are ongoing. - Under these conditions, staff consider the program to be fully financed. - Addressing the FX shortage and debt/liquidity management: - The FX shortage has eased somewhat due to cyclical developments but structural policies are needed. - Authorities are working to institutionalize the Public Debt Committee to develop a debt issuance strategy, develop cashflow projections, and commit to regular meetings to enable frequent issuance of securities for monetary and liquidity management—a precondition to effective management of FX demand and reinstatement of kina convertibility. - Safeguards and central bank governance: - The review of the Central Banking Act is an opportunity to address issues identified in the Fund’s Safeguards Assessment. - The assessment found the Central Banking Act requires amendments to sufficiently protect the BPNG’s financial, personal, and institutional autonomy and enhance governance arrangements. - Fund TA on amendments to the Central Banking Act will inform legislative amendments being drafted by the Treasury. - Anti-corruption and institutional reforms: - Progress to operationalize ICAC and implement the recently enacted Whistleblowers Acts has been mixed. - Pending resolution of litigation, the interim ICAC office is working toward drafting standard operating procedures, implementing regulations and a code of ethics, and establishing the ICAC organizational structure. - Fund will continue to provide targeted capacity development (CD) on anti-corruption and rule of law as a precursor to further analysis, such as a governance diagnostic assessment. - Program monitoring and approval: - Improving provision of data is critical to the success of this SMP and future Fund engagement; authorities set up a high-level Program Monitoring Committee and staff will step up engagement during non-mission periods. - Staff support the authorities’ request for a 6-month Staff Monitored Program (SMP). - Staff supports specifying a single test date at end-December 2021 given reporting lags and capacity constraints; the program review is expected to take place in April 2022. - Staff will make a comprehensive assessment of the authorities’ capacity to implement program commitments, which could lead to an eventual upper credit tranche arrangement if a balance of payments need arises. - Implementation risks: - Risks stem from vulnerability to shocks, and capacity and political constraints. - PNG faces exposure to external shocks, including commodity prices, and capacity constraints in policy implementation. - Given the election timetable, there will be no scope for a program extension to pursue remedial policy measures; the streamlined program design should mitigate some risks related to capacity and political constraints. *Source: IMF staff report (excerpts provided in the supplied content).* ### 2021. Proj ### 1pngea2022001 - 2021. Proj ### Real sector and inflation - Real GDP growth (contributions to percent change): charts indicate resource and non-resource contributions over 2010Q2–2021Q2 (visual only). - Real GDP growth (annual, Table 1): - 2016: 5.5 - 2017: 3.5 - 2018: -0.3 - 2019: 4.5 - 2020: -3.5 - 2021: 1.7 - 2022 Proj.: 4.8 - 2023 Proj.: 4.3 - 2024 Proj.: 3.0 - 2025 Proj.: 3.0 - 2026 Proj.: 3.0 - Resource growth (Table 1): - 2016: 2/15.3 - 2017: 8.1 - 2018: -9.2 - 2019: 11.3 - 2020: -8.4 - 2021: -3.2 - 2022 Proj.: 8.5 - 2023 Proj.: 4.0 - 2024 Proj.: -1.2 - 2025 Proj.: 0.0 - 2026 Proj.: 0.1 - Non-resource growth (Table 1): - 2016: 1.5 - 2017: 1.5 - 2018: 4.0 - 2019: 1.6 - 2020: -1.2 - 2021: 3.9 - 2022 Proj.: 3.3 - 2023 Proj.: 4.5 - 2024 Proj.: 4.7 - 2025 Proj.: 4.1 - 2026 Proj.: 4.1 - CPI (annual average, Table 1): - 2016: 6.7 - 2017: 5.4 - 2018: 4.7 - 2019: 3.7 - 2020: 4.9 - 2021: 5.0 - 2022 Proj.: 5.6 - 2023 Proj.: 4.7 - 2024 Proj.: 4.5 - 2025 Proj.: 4.5 - 2026 Proj.: 4.5 - CPI (end-period, Table 1): - 2016: 6.6 - 2017: 4.7 - 2018: 4.8 - 2019: 2.7 - 2020: 5.1 - 2021: 5.8 - 2022 Proj.: 5.0 - 2023 Proj.: 4.8 - 2024 Proj.: 4.6 - 2025 Proj.: 4.5 - 2026 Proj.: 4.5 ### Commodity prices and external sector - Commodity price year-on-year changes shown (visual): Liquified Natural Gas, Copper, Palm Oil, Gold, Hydrocarbons, Metals, Agriculture and Other for 2010–2021 projections. - Export product shares, 2020 (visual): categories include Exports, Marine Products, Forest Products. - Current account and components (visuals cover 2010–2021 Proj). - Balance of payments (Table 3, in millions of US dollars): - Current account balance: - 2016: 5,892 - 2017: 6,464 - 2018: 5,876 - 2019: 5,657 - 2020: 5,168 - 2021 Est.: 5,372 - 2022 Proj.: 6,521 - 2023 Proj.: 6,564 - 2024 Proj.: 6,770 - 2025 Proj.: 6,944 - 2026 Proj.: 7,009 - Trade balance: - 2016: 6,653 - 2017: 7,614 - 2018: 7,187 - 2019: 7,799 - 2020: 6,295 - 2021 Est.: 7,174 - 2022 Proj.: 8,478 - 2023 Proj.: 8,689 - 2024 Proj.: 8,786 - 2025 Proj.: 8,960 - 2026 Proj.: 9,025 - Exports (f.o.b.): - 2016: 8,490 - 2017: 10,113 - 2018: 9,719 - 2019: 11,476 - 2020: 9,262 - 2021 Est.: 10,309 - 2022 Proj.: 11,879 - 2023 Proj.: 12,441 - 2024 Proj.: 12,725 - 2025 Proj.: 13,093 - 2026 Proj.: 13,363 - Imports (f.o.b.): - 2016: -1,837 - 2017: -2,499 - 2018: -2,532 - 2019: -3,677 - 2020: -2,966 - 2021 Est.: -3,135 - 2022 Proj.: -3,401 - 2023 Proj.: -3,752 - 2024 Proj.: -3,939 - 2025 Proj.: -4,133 - 2026 Proj.: -4,338 - Memorandum items (Table 3): - Current account (percent of GDP): - 2016: 28.4 - 2017: 28.4 - 2018: 24.4 - 2019: 22.9 - 2020: 21.2 - 2021 Est.: 20.2 - 2022 Proj.: 22.6 - 2023 Proj.: 21.0 - 2024 Proj.: 20.4 - 2025 Proj.: 19.7 - 2026 Proj.: 18.7 - Net international reserves (end-year, in millions of US dollars): - 2016: 1,651 - 2017: 1,522 - 2018: 2,069 - 2019: 2,309 - 2020: 2,306 - 2021 Est.: 2,256 - 2022 Proj.: 2,106 - 2023 Proj.: 2,086 - 2024 Proj.: 2,066 - 2025 Proj.: 2,079 - 2026 Proj.: 1,971 - Gross international reserves (end-year, in millions of US dollars): - 2016: 1,681 - 2017: 1,682 - 2018: 2,230 - 2019: 2,309 - 2020: 2,686 - 2021 Est.: 2,435 - 2022 Proj.: 2,285 - 2023 Proj.: 2,265 - 2024 Proj.: 2,155 - 2025 Proj.: 2,164 - 2026 Proj.: 2,051 - Public external debt-GDP ratio (percent): - 2016: 8.4 - 2017: 12.3 - 2018: 14.8 - 2019: 17.2 - 2020: 22.1 - 2021 Est.: 22.1 - 2022 Proj.: 22.4 - 2023 Proj.: 22.5 - 2024 Proj.: 20.6 - 2025 Proj.: 19.0 - 2026 Proj.: 17.3 ### Fiscal developments - Central government operations (Table 2a, selected levels in millions of kina): - Revenue and grants: - 2016: 10,486 - 2017: 11,525 - 2018: 14,086 - 2019: 13,681 - 2020: 12,093 - 2021 Est.: 13,424 - 2022 Prog.: 15,730 - 2023 Prog.: 17,063 - 2024 Prog.: 18,493 - 2025 Prog.: 20,021 - 2026 Prog.: 21,683 - Taxes: - 2016: 8,422 - 2017: 9,141 - 2018: 10,476 - 2019: 10,918 - 2020: 9,802 - 2021 Est.: 10,868 - 2022 Prog.: 12,401 - 2023 Prog.: 13,638 - 2024 Prog.: 14,960 - 2025 Prog.: 16,380 - 2026 Prog.: 17,930 - Expenditure: - 2016: 13,572 - 2017: 13,320 - 2018: 16,134 - 2019: 17,396 - 2020: 19,398 - 2021 Est.: 20,287 - 2022 Prog.: 21,825 - 2023 Prog.: 22,361 - 2024 Prog.: 22,962 - 2025 Prog.: 23,223 - 2026 Prog.: 23,482 - Net lending (+)/borrowing (-): - 2016: -3,087 - 2017: -1,795 - 2018: -2,048 - 2019: -3,715 - 2020: -7,305 - 2021 Est.: -6,863 - 2022 Prog.: -6,095 - 2023 Prog.: -5,298 - 2024 Prog.: -4,469 - 2025 Prog.: -3,202 - 2026 Prog.: -1,799 - Fiscal ratios (Table 2b, percent of GDP): - Revenue and grants: - 2016: 16.1 percent of GDP - 2017: 15.9 - 2018: 17.7 - 2019: 16.3 - 2020: 14.2 - 2021 Est.: 14.4 - 2022 Prog.: 15.6 - 2023 Prog.: 15.6 - 2024 Prog.: 15.9 - 2025 Prog.: 16.2 - 2026 Prog.: 16.6 - Expenditure and net lending: - 2016: 20.9 percent of GDP - 2017: 18.4 - 2018: 20.3 - 2019: 20.7 - 2020: 22.7 - 2021 Est.: 21.8 - 2022 Prog.: 21.6 - 2023 Prog.: 20.4 - 2024 Prog.: 19.8 - 2025 Prog.: 18.8 - 2026 Prog.: 17.9 - Net lending (+)/borrowing (-) (percent of GDP): - 2016: -4.7 - 2017: -2.5 - 2018: -2.6 - 2019: -4.4 - 2020: -8.6 - 2021 Est.: -7.4 - 2022 Prog.: -6.0 - 2023 Prog.: -4.8 - 2024 Prog.: -3.8 - 2025 Prog.: -2.6 - 2026 Prog.: -1.4 - Gross government debt (percent of GDP): - 2016: 33.7 - 2017: 32.5 - 2018: 36.7 - 2019: 40.2 - 2020: 46.7 - 2021 Est.: 49.7 - 2022 Prog.: 51.2 - 2023 Prog.: 51.8 - 2024 Prog.: 52.5 - 2025 Prog.: 51.7 - 2026 Prog.: 50.1 - Public debt composition (Table 2a, levels in millions of kina): - Gross government debt: - 2016: 21,944 - 2017: 23,558 - 2018: 29,120 - 2019: 33,678 - 2020: 39,852 - 2021 Est.: 46,234 - 2022 Prog.: 51,750 - 2023 Prog.: 56,710 - 2024 Prog.: 60,986 - 2025 Prog.: 63,779 - 2026 Prog.: 65,578 - Domestic debt and Treasury bills/bonds detailed by year (Table 2a). ### Monetary and financial sector developments - Policy and market rates (visual): policy rate decreased in response to the pandemic (2010–2021). - Exchange rate (Index; 2010=100): Kina depreciated slightly against the US$ and NEER/REER series shown (visual). - Money and credit (Table 4, annual percentage change and levels): - Domestic credit (percent change): - 2016: 24.6 - 2017: -0.1 - 2018: -6.7 - 2019: 5.2 - 2020: 2.3 - 2021: 12.2 - 2022 Proj.: 10.0 - 2023 Proj.: 10.3 - 2024 Proj.: 8.0 - 2025 Proj.: 7.3 - 2026 Proj.: 7.4 - Credit to the private sector (percent change): - 2016: 7.2 - 2017: -3.8 - 2018: 7.4 - 2019: 4.1 - 2020: 4.2 - 2021: 9.1 - 2022 Proj.: 5.6 - 2023 Proj.: 8.8 - 2024 Proj.: 8.6 - 2025 Proj.: 8.6 - 2026 Proj.: 8.6 - Broad money (percent change): - 2016: 10.9 - 2017: -0.9 - 2018: -3.8 - 2019: 4.4 - 2020: 7.0 - 2021: 8.2 - 2022 Proj.: 8.1 - 2023 Proj.: 10.4 - 2024 Proj.: 6.8 - 2025 Proj.: 7.7 - 2026 Proj.: 6.7 - Liquidity (visual): continued excess liquidity in banking system; required and excess reserves series shown (monthly data 2017M1–2021M1). - Financial stability indicators (Table 5, percent): - Capital adequacy (Capital to risk-weighted assets): - 2016: 37.0 - 2017: 38.1 - 2018: 37.1 - 2019: 36.1 - 2020: 39.2 - Sep. 2021: 39.6 - Nonperforming loans to total loans: - 2016: 2.7 - 2017: 2.8 - 2018: 3.7 - 2019: 3.8 - 2020: 5.3 - Sep. 2021: 5.6 - Return on assets: - 2016: 2.2 - 2017: 3.4 - 2018: 3.8 - 2019: 4.1 - 2020: 3.8 - Sep. 2021: 7.8 - Capital adequacy and asset-quality charts indicate banks remain well-capitalized despite rising NPLs (visuals and Table 5). - Commercial banks holdings of government securities increased (visual; Treasury bills and bonds as percent of GDP series presented 2010–2021). ### Key summary indicators and projections - Nominal GDP (2019): US$24.8 billion. - Population (2019): 8.6 million. - GDP per capita (2019): US$2,878. - Quota: SDR 263.2 million. - Government gross debt (percent of GDP, Table 1): - 2019: 40.2 percent - 2020: 46.7 percent - 2021: 49.7 percent - 2022–2026: projected in Table 1 as 51.2, 51.8, 52.5, 51.7, 50.1 respectively. - External debt-to-GDP ratio (Table 1): - 2016: 8.4 - 2017: 12.3 - 2018: 14.8 - 2019: 17.2 - 2020: 22.1 - 2021: 22.1 - 2022–2026 projections: 22.4, 22.5, 20.6, 19.0, 17.3 - Gross official international reserves (Table 1): - 2016: 1.7 (in billions of U.S. dollars) - 2017: 1.7 - 2018: 2.2 - 2019: 2.3 - 2020: 2.7 - 2021 Proj.: 2.4 - 2022–2026 Proj.: 2.3, 2.3, 2.2, 2.2, 2.1 _ Sources: Country authorities; Department of Treasury; Bank of Papua New Guinea; IMF staff estimates and projections. _ ### Appendix I. External Sector Assessment ### Appendix I. External Sector Assessment ### Overall Assessment - Staff’s judgement: PNG’s external position is weaker than implied by fundamentals and desirable policies given its overvalued real effective exchange rate (REER). - Current account (CA) gap: -2.2 to -2.4 percent of GDP depending on the model. ### Potential Policy Responses - Kina overvaluation consistent with limited exchange rate adjustment to international inflation differentials or terms of trade movements. - Recommended actions: - Faster real exchange rate depreciation to support competitiveness of non-resource exports and address foreign exchange shortage. - Improved FX operations and liquidity management to strengthen the BPNG’s ability to manage inflation and the real exchange rate. - Eliminate exchange restrictions and multiple currency practices and adopt a market-determined exchange rate to aim for gradual return to kina convertibility. ### Foreign Assets and Liabilities: Position and Trajectory - Background: PNG does not produce international investment position (IIP) data. ### Current Account - 2020 trade and prices: - Goods export volumes increased by around 3 percent compared to 2019. - Value of exports dropped by 19 percent owing mainly to weak 2020 commodity prices. - LNG price down 20 percent; crude oil down 33 percent. - Gold price rose by a record 27 percent year on year, compensating for a 19 percent drop in gold export volumes. - Prices of agricultural goods recorded a modest decline. - 2020 CA outcome: - Lower export revenues were largely offset by weaker import demand. - 2020 current account surplus reduced marginally from 2019, to 21 percent of GDP. - Model estimates for 2020 (in percent of GDP): - CA-Actual: 21.2 - Cyclical contributions (from model): (-)0.3 - COVID-19 adjustor: (+) 1/0.6 - 1/ Cyclical adjustment to account for the temporary impact of the pandemic on tourism (1.6 percent of GDP) and an assumed drop of 75 percent as a result of travel restrictions and collapsing demand for tourism services. - Additional temporary/statistical factors: (+)0.0 - Natural disasters and conflicts: (-)0.0 - Adjusted CA: 21.5 - CA Norm (from model) 2/: -0.6 - 2/ Cyclically adjusted, including multilateral consistency adjustments. - Adjusted CA Norm: -0.6 - CA Gap: 22.2 to -2.2 (presented in source as "CA Gap22.2-2.2") - o/w Relative policy gap: 0.2 - Elasticity: -0.37 - REER Gap (in percent): -60.16.0 (presented in source as "REER Gap (in percent)-60.16.0") - Assessment details: - EBA-lite CA model suggests a CA gap of +22 percent of GDP (difference between the CA and the CA norm in cyclically adjusted terms). - Covid-19 adjuster amounts to 0.6 percent of GDP based on tourism assumptions noted above. - Estimated elasticity of the CA (trade balance) to the REER is -0.37 (Nakatari 2017). - Long-standing challenges in classifying large income account outflows (including external debt service payments related to resource projects) under the financial account rather than the current account significantly distort standard tests for PNG’s current account; therefore CA model results are discounted. - Based on the REER model, the CA gap is estimated at -2.2 percent of GDP. At -2.2 percent of GDP, the CA is weaker than implied by fundamentals. ### Real Exchange Rate - Background: - Kina has significantly depreciated in nominal terms (NEER) over the past few years, but the REER has remained highly stable. - 2020 Article IV Staff Report (Box 1) estimated a REER gap of around 11 percent for 2019, based on preliminary data. - In 2020, the Kina nominally depreciated 2.9 percent against the US dollar and 2.6 percent against the Australian dollar. - Assessment: - The REER model suggests the kina is moderately overvalued by around 6 percent. - Kina overvaluation contributes to continued pressures in the domestic foreign exchange (FX) market. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Capital account balance: very small (US$4 million, net; with credits of US$9.9 million and debits of US$5.9 million). - Financial account balance improved by 13 percent from 2019. - Net direct investment in 2020: around -800 million, driven by depressed direct investment into PNG. - Portfolio investment and financial derivatives: traditionally negligibly small. - Other investment: US$3.9 billion (captures most investment flows, including offshore flows). - Assessment and policy recommendation: - PNG maintains exchange restrictions subject to IMF approval under Article VIII, Section 2(a) arising from: - (i) requirement to obtain a tax clearance certificate evidencing the payment of all taxes prior to making payments or transfers for certain current international transactions; and - (ii) rationing of FX, resulting in undue delays and arrears in current international payments. - Staff recommends eliminating these impediments to exchange. - Removal of restrictions would imply need to adjust the foreign exchange system, including allowing the exchange rate to adjust flexibly to a market clearing level to eliminate the kina overvaluation, and clearing the existing backlog of FX orders to reduce delays in providing FX. ### FX Intervention and Reserves Level - Background: - With limited domestic and external borrowing opportunities, PNG’s fiscal and balance-of-payment financing gaps typically need to be financed with reserves. - In 2020, gross reserves increased to 8 months of total imports (or 13 months of non-mineral imports), well exceeding the 3-month norm. - Over the past few years, the BPNG has been targeting a gross international reserves level of no less than US$1.8-2.0 billion to meet the economy’s needs for FX. - ARA metrics are generally not available for PNG; staff-assessed reserve adequacy utilizes data on export revenues, broad money, and short-term debt liabilities. - Assessment: - Significantly higher commodity prices projected for 2021 compared to 2020 are expected to compensate for continued supply constraints owing mainly to the impacts of the pandemic on resource-sector production. - The 2021 SDR allocation provides for an additional US$360 million boost to reserves and will temporarily help reduce foreign exchange imbalances and ease FX shortages for a few months before the SDRs are converted into hard currency and subsequently used for budget support in 2021, as per the government’s plans. - Disbursement of external project financing and bilateral budget support typically occurred towards the end of the year, implying FX pressures subside by year-end. - Reserve adequacy assessment suggests that a floor of US$2.0 billion appears adequate. This floor is included in the SMP as a quantitative target. - Going forward, important to address FX shortages with the aim of gradual return to kina convertibility, including eliminating exchange restrictions and multiple currency practices, and adoption of a market-determined exchange rate. *Source: Appendix I. External Sector Assessment (excerpt).* ### Appendix II. Table 2. Papua New Guinea: Structural Benchmarks under the February 2020- ### Appendix II. Table 2. Papua New Guinea: Structural Benchmarks under the February 2020- ### Structural benchmarks (June 2021, concluded) - Measures 13–17 (money market and governance): - Measure 13: "Increase the spread around the base rate for repo operations to 100 basis points" - Purpose: Promote development of the interbank money market - Implementation date: End-March 2020 - Status: Met - Measure 14: "BPNG to seek additional TA to implement measures to strengthen monetary and FX market operations, and re-establish a functioning interbank FX market" - Purpose: Promote development of the interbank money market - Implementation date: End-June 2020 - Status: Not met - Measure 15: "Implementing SOE reform plan approved by the National Executive Council (NEC) in consultation with international partners such as ADB and Australia" - Purpose: Promote public sector efficiency, promote non-resource sector development, and minimize risks to fiscal and financial stability - Implementation date: End-June 2020 - Status: Not met (Completed October 2020) - Measure 16: "Develop a comprehensive and prioritized strategy for reducing corruption, coordinating across relevant government agencies, with technical assistance" - Purpose: Safeguard public resources, improve transparency and create a better business climate - Implementation date: End-November 2020 - Status: Met - Measure 17: "Passage of the ICAC Act in the Legislature and publish the Act in the National Gazette" - Purpose: Safeguard public resources, improve transparency, and create a better business climate - Implementation date: End-December 2020 - Status: Not met (The Act has been passed and published in May 2021) ### Staff-Level Agreement — Proposed prior actions and new/modified structural benchmarks (Table 3) - Measures 1–7 (fiscal and revenue administration) - Measure 1: "Completion of an annual cash flow forecast reflecting the 2021 Budget in line with program commitments" - Purpose: Good fiscal management - Implementation date: Prior Action - Preliminary Status: Met - Measure 2: "Completion of a pilot payroll cleansing exercise and setting out the results in a workshop to be taken across the wider public service." - Purpose: Improve expenditure control - Implementation date: End-May - Preliminary Status: Met (Previously SB 1 in Table 2) - Measure 3: "Development and approval of an annual workplan by the Office for Organization, Staffing, and Personnel Emoluments Audit Committee (OSPEAC) on public sector cost controls." - Purpose: Improve expenditure control - Implementation date: End-May - Preliminary Status: Met (Previously SB 1 in Table 2) - Measure 4: "IRC and other agencies report to the Budget Management Committee (BMC) on progress against 2020 MISC-determined objectives and milestones." - Purpose: Support the implementation of the MTRS and improve revenue collection - Implementation date: Prior Action - Preliminary Status: Met (Previously SB 5 in Table 2) - Measure 5: "Bi-monthly reports for discussion at the BMC on progress on the IRC Annual Plan and MTRS." - Purpose: Support the implementation of the MTRS and improve revenue collection - Implementation date: On-going - Preliminary Status: Met (Previously SB 5 in Table 2) - Measure 6: "Review of the best institutional arrangements for Tax and Customs revenue collection in PNG to be submitted to MISC for decision." - Purpose: Support the implementation of the MTRS and improve revenue collection - Implementation date: End-May 2021 - Preliminary Status: Met (Reschedule previously SB 8 in Table 2) - Measure 7: "Revised Non-Tax Revenue Administration Bill submitted to NEC for clearance." - Purpose: Support revenue collection - Implementation date: End May 2021 - Preliminary Status: Not met - Measures 8–12 (taxpayer services, debt management, central bank governance, integrity) - Measure 8: "Improve taxpayer services through simplification of tax forms, public awareness raising and business kits." - Purpose: Improve voluntary compliance - Implementation date: End-May 2021 - Preliminary Status: Met for small business tax only - Measure 9: "IRC to circulate to the MISC an approved and costed work plan for implementation of an improved debt case management system." - Purpose: Improve the accuracy of the debt register to allow active management of tax arrears. - Implementation date: End-May 2021 - Preliminary Status: Not met - Measure 10: "BPNG to issue, in agreement with Treasury and Finance, operational guidelines on the use of the TAF." - Purpose: Ensure good cash flow management of the annual budget - Implementation date: Prior Action - Preliminary Status: Met - Measure 11: "Treasury to release Terms of Reference for review of the Central Bank act including review of direct provision of financing to the government by BPNG." - Purpose: Avoid inappropriate monetary financing of fiscal deficits - Implementation date: Prior Action - Preliminary Status: Met - Measure 12: "Prepare implementing staffing regulations for the ICAC and Whistleblower Acts for submission to NEC." - Purpose: Safeguard public resources, improve transparency and create a better business climate - Implementation date: End-May 2021 - Preliminary Status: Met (Note: Did not issue implementing regulations for Whistleblower Act) ### Recent economic and program developments (excerpts from MEFP / Letter of Intent) - Pandemic impact and fiscal response: - Fiscal deficit for 2020 rose to 9 percent of GDP. - IMF Rapid Credit Facility (RCF) disbursement around US$363.6 million in June 2020. - Growth and inflation: - 2020 real GDP contraction: 3.5 percent. - 2021 real GDP growth projection: 1.7 percent (driven by non-resource sector growth). - Year-end inflation projection for 2021: around 5.8 percent. - External sector: - Resource export revenues reduced by around 8 percent of GDP in 2020. - 2020 current account surplus estimated at 21.8 percent of GDP, down from 22.4 percent of GDP in 2019. - Exports and imports expected to grow by 5.0 and 7.1 percent, respectively, by end-2021. - Budget execution to end-June 2021: - Government expended a total of K8,196.9 million or 41.8 percent of its planned expenditure for the year. - Expenditure financed by a total revenue envelope of K5,506.4 million or 42.4 percent of the 2021 Budget revenue projection and a net borrowing of K3,069.5 million. - Medium-term fiscal intentions (as stated in Letter of Intent): - Target non-extractive sector real growth in the medium term: 5% real growth. - Deficit narrowing: from K7.3 billion in 2020 to at most K6.1 bn in 2022. - Aim to achieve a cumulative consolidation of over K5 billion between 2020 and 2026, culminating with a budget surplus in 2027. - Request for a 6-month IMF Staff-Monitored Program commencing on December 7, 2021 (program to expire by June 15, 2022, per MEFP). *Source: Appendix II and Appendix III excerpts (MEFP and Letter of Intent) from the Papua New Guinea SMP documentation contained in the provided content.* ### 8. We have made progress in balancing operating and capital expenditure in line with our ### 1pngea2022001 - 8. We have made progress in balancing operating and capital expenditure in line with our ### Fiscal position and budget execution - Capital budget expenditure rose by 30.0 percent between 2019 and 2020; operating budget growth was restrained at 6.0 percent. - Original national budget: K15,843.3 million (excluding grants, project loans and the GST and bookmakers transfers, automatically calculated transfers to the provinces). - Budget outcome: K15,821.8 million. - For 2021, the Mid-Year Economic and Financial Outlook (MYEFO) projects higher foreign grants (K634.7 million higher), mining and petroleum taxes (K207 million higher), and non-tax revenues (K286.2 million higher). - Projected uses of additional 2021 revenue: - Grant-financed capital expenditure: K417 million - Salaries overrun: K266.6 million - Restoration of Government Tuition Fee Subsidy funding: K216 million - Savings on interest costs from DSSI and concessional budget support: K170 million - Additional cuts to other current spending: K178.5 million - Even with conservative assumptions, projected 2021 deficit: 7.4 percent of GDP. - External financing secured to date for 2021: K1,830.4 million. - Net domestic financing envelope maintained at K2,000 million for 2021. - SDR allocation to be utilized: SDR252.3 million. - Plan to increase domestic security issuance if external financing shortfall occurs; issuance calendar adjusted to higher net issuance in the first half of the year. ### Monetary developments and banking sector - BPNG maintained an accommodative monetary stance throughout 2021 to support recovery. - Broad money supply increased by 12.2 percent in the first half of 2021. - Increases reflected in net domestic assets (NDA) via purchase of Government securities mainly by commercial banks and financial institutions, and in net foreign assets (NFA) due to Government’s external borrowings. - Favorable FX inflows to September 2021 met most import demand; BPNG interventions reduced clearing time of large import orders to less than three months. - Capital adequacy ratio for the banking sector: 38.4 percent in June 2021 (mostly Tier 1 capital). - BPNG strengthened monitoring: banks required to provide monthly reports on financial condition; stepped up supervision of liquidity, foreign exchange and market risks. - Financial Analysis and Supervision Unit (FASU) regulatory actions in July 2021 against the largest commercial bank: issuance of a formal warning, requirement to remove certain executive management staff, and engagement of an external auditor; ensured no disruptions in existing correspondent banking relationships. ### Economic outlook and risks (2022 and medium term) - Growth forecast for 2022: 4.8 percent in real terms, largely underpinned by the resource sector and resumption of operations at Porgera and Simberi mines. - Year-end inflation projection: around 5.0 percent, driven by rebound in domestic demand. - Agriculture exports grew by 13 percent in 2020, driven by Cocoa and Palm Oil. - Vaccination progress (as reported): 207,207 doses administered; 2.3 percent of the population fully vaccinated. - Key risks: re-intensification of the pandemic (local outbreaks or impacts via trade partners), climate-related shocks (storms, droughts), and frequent/major earthquakes. ### Policy commitments and structural reforms - Program objectives: - Continue budget repair and investment; improve quality of capital investment; institutionalize and strengthen expenditure control; budget to cover all bills due; over time return to a budget surplus. - Strengthen debt sustainability by containing/reducing spending on personnel emoluments and strengthening domestic revenue mobilization. - Improve public sector governance: modernize BPNG’s legal and accountability framework; strengthen oversight and control over SOEs; build on anti-corruption efforts; commit to transparency in government procurement and spending. - Reduce foreign exchange shortages: formulate plan to address domestic FX market issues and improve liquidity management, supported by technical assistance. - Payroll and expenditure management reforms: - Pilot payroll exercise completed in first half of 2021 to improve data integrity; data gathering across government departments to be completed before end-2021 for Staffing and Establishment Report and integration of personnel records and payrolls. - Pilot to align ALESCO payroll coding to departmental cost centers using the Department of Treasury; plan to roll out to all government departments and agencies on ALESCO. ### Debt and SOE governance - Amended State Guarantee Policy includes provisions for monitoring government guarantees; loan guarantee payments and recovery; and recording and reporting of loan guarantees. - Policy strengthens monitoring and reporting and enables State to include rights to loan guarantee information in contracts. - Actions taken to address SOE financial conditions: paid overdue bills to PNG Power Limited to strengthen its fiscal position and reduce arrears debt. - Implementing reforms to improve SOE commercial footing and competitive neutrality policies to reduce fiscal exposure from contingent liabilities. ### Fiscal stance and measures for 2022 (priorities and revenue targets) - NEC-approved Budget target (prior action SB1): overall fiscal deficit of K6,095.0 million (6.0 percent of GDP (QT)), a more than 1-percentage point of GDP decline from 2021; Budget to be submitted to Parliament in November. - Main consolidation element: reduction in permitted concessional project loan drawdowns. - Target to increase tax revenues by K1.5 billion (+0.6 percent of GDP), mainly via increased indirect tax receipts. - Expected contributors to stronger tax collection: international trade taxes, recovery in excises, improved GST collection, rebound in personal income tax as expatriates return, stronger company tax from non-resource sector. - Structural revenue reforms planned/underway: - Passage of Consequential Amendments to the Tax Administration Act (TAA) to remove overlaps/inconsistencies and strengthen enforcement and valuation/assessment (SB3). - Revisions to the Income Tax Act (ITA) to simplify, address ambiguities, introduce potential small businesses tax, and improve accessibility; consultations underway, to be completed in 2022. - Improving tax administration: IRC to implement a Goods and Service Tax Monitoring System (GMS); procure and implement a new Integrated Tax Administration System (ITAS) in 2022 with full implementation planned in 2023. - PNG Customs to procure and install a Container Examination Facility in Lae in 2022. - Introduction of levies on banking and telecoms sectors to address super normal profits; design assistance from IMF experts; expected introduction as part of the 2022 Budget. - Revenue projections (indicative target, IT): K12.4 billion in 2022 and K10.7 billion in 2021. *Source: Excerpt from the provided IMF PDF chapter.* ### 24. The Medium-term Revenue Strategy (MRTS) has been important in guiding our reform ### 24. The Medium-term Revenue Strategy (MTRS) has been important in guiding our reform efforts ### Medium-term Revenue Strategy (MTRS) - MTRS developed with IMF technical assistance (TA) and set out comprehensive and detailed plans to improve domestic revenue mobilization. - Implementation hampered by capacity constraints and external shocks, including the pandemic. - Notable progress toward Strategy goals: work on the TAA and the revision of the ITA. - MTRS will expire in 2022; Government intends to: - Conduct a review of the MTRS to take stock of achievements, challenges and lessons learnt. - Request IMF TA to assist in the review of the MTRS implementation to-date. ### Expenditure management and payroll reforms - Government will maintain strong control of expenditure in 2022. - Revenue increases are the bedrock of fiscal consolidation, but expenditure management is a key part of the strategy. - Targets and aggregate figures: - Intend to reduce overall expenditure by 0.2 percentage points of GDP. - This translates into a nominal expenditure envelope that is around K1.5 billion larger than in 2021. - Overall envelope for personnel emoluments in 2022 is proposed to remain largely unchanged in nominal terms relative to 2021, yielding a reduction of 0.4 percentage point of GDP. - Payroll verification and retirement measures: - Verification of payrolls and identification of staff past mandatory retirement age largely completed in 2021. - Estimated approximately 18,000 staff currently on payroll who have reached the compulsory and normal retirement age. - Approximately 10 percent will transition into retirement by the end of 2021. - Another 575 or so retirees expected to reach this milestone in 2022. - Verification exercise intended to prevent new arrears while transitioning staff to retirement. ### Staffing Establishment Survey (SB2) and systems integration - Launched Staffing Establishment Survey (SB2) to continue from verification exercise; objectives: - Establish staffing baselines in all government departments and line agencies, with matching of identified workers and positions. - Set a regular process for updating staffing roles, including timely recording of staff movements. - Propose quality assurance checks to ensure data reliability. - Integration aims and timeline: - Map a process to fully integrate the staffing and payroll database with the system for issuance of warrants and the upgraded IFMS. - Procurement for the updated payroll system and IFMS still required; full integration will take time. - Expect link between institutional and financial approval for personnel spending to be completed within the next 12 months, enabling DPM to set and enforce a cap on payroll growth. ### Expenditure priorities for 2022 - Continue supporting key policy reforms introduced in 2020 and 2021 while managing personnel costs. - Priority spending areas: - Connect PNG (road/electrification/communication construction initiative), supporting rural communities, supporting SMEs, and ensuring the GTFS program is adequately financed. - Make room to clear past arrears expeditiously, including amounts owed to utility companies as part of SOE reform. - Specific allocations and character of spending: - Expenditure for the use of goods and services to comprise operational funding and big-ticket items such as the GTFS program, rentals and utilities, procurement of medical supplies, maintenance of critical capital projects (road, health, education), and payment of arrears. - Allocation of K850 million (of which K250 million is expected from international support) to finance expenses related to conducting the 2022 general election under the operating budget (voter registration, training of ballot workers, transportation of election materials, provision of security). - Spending on net acquisition of non-financial assets to be mostly projects supported in significant part through donor grants and project loans; PIP focus on road construction and key capital investments including hospitals and schools. - Intend to increase expenditure on social protection (current and capital spending on healthcare, education and law and order) so as to ensure it remains at least constant in real terms in 2022 (IT). ### Financing strategy and fiscal framework - Fiscal deficit largely financed through external sources. - Domestic borrowing costs have been brought down; further use of domestic resources envisaged as domestic financial market expands. - Continued avoidance of non-concessional borrowing; reliance on concessional or near-concessional loans from official bilateral and multilateral development partners (QT). - Commitment to Medium-Term Fiscal Framework: - Anchor: achieving and maintaining a sustainable level of Government debt over the longer term. - Maintain expenditure rule in revised FRA that limits current spending as a proportion of non-resource GDP and aims to bring the non-resource primary balance to zero in the medium term. ### Transparency, donor modalities, and recent donor support - Strengthen transparency related to awarding of government contracts and expenditures. - COVID-19 expenditure reporting provided to BMC with breakdowns by funding source, PHA distribution, and clinical cluster; details on K600 million response direct spending made public and provided to Parliament. - Commitment to complete a comprehensive audit report on past COVID-19 related spending by a reputable third-party auditor within a year of the end of the State of Emergency, if not sooner (RCF commitment). - Worked with development partners on new modalities to increase transparency and reduce disbursement delays; established monitoring and reporting group within Treasury. - As a result, the Government of Australia has already provided AUD52 million in 2021 so far to support the GTFS and Church Health Services programs. ### Monetary and exchange rate policies - Exchange rate policy: - Intend to continue provision of FX to market participants of at least US$180 million every quarter. - Subject to maintaining PNG’s international reserves above a minimum of US$2.0 billion. - Goal: fulfill all FX orders within 3 months in line with the invoicing period. - Preparing for a gradual return to kina convertibility, including a plan to address exchange restrictions and improve liquidity management; IMF TA requested to re-establish the inter-bank market. - Monetary management and TAF: - Reform to the TAF through amendments to the Central Banking Act increased limit and term of advances by BPNG to manage cash flow mismatches; TAF is a within-year cash flow tool with repayments by end of fiscal year. - Operational guidelines for the TAF finalized by BPNG and the Departments of Treasury and Finance. - Specific measures to strengthen liquidity management and BPNG money market operations include: - Strengthening cash management and liquidity forecasting frameworks: formally establish objectives of the PDC, define members’ responsibilities, produce an annual debt issuance strategy, produce and share one-week-ahead and one-month-ahead cash-flow projections, and issue a timetable of committee meetings (SB4). - Continue with zero monetary financing of the Budget; Operational Guideline for the TAF was signed and circulated. ### Review of the Central Banking Act - Independent Advisory Group (IAG) appointed to undertake review in two phases: - Phase one: governance and role in monetary policy. - Phase two: Central Bank’s regulatory role. - Advisory group report provided to the Minister on November 11. - BPNG underwent an IMF safeguards assessment; summary of recommended amendments provided to the IAG. - Intent to submit draft amendments to the Central Banking Act to Parliament (SB5), to be drafted in consultation with IMF experts and submitted to the Budget Session of Parliament before end-March 2022. ### Financial sector stability and AML/CTF framework - Banking supervision and risks: - BPNG to strengthen risk-based banking supervision; NPLs have risen only modestly to-date but stresses may build until recovery. - Banks need to upgrade management of FX and interest rate risks and improve monitoring of corporate and SOE balance-sheet vulnerabilities. - BPNG intensified liquidity, foreign exchange, and market risk supervision with ongoing TA from PFTAC; introduced additional monthly reports and will strengthen stress-testing capacity using SOE balance-sheet information from Kumul Consolidated Holdings Ltd (KCHL). - AML/CTF: - Continue strengthening effective implementation of AML/CTF framework, balancing development needs and limited implementation capacities. - BPNG/FASU to enhance risk-based supervision of banks; law enforcement to step up investigation, prosecution and sanctioning of ML cases and confiscation of proceeds of financial crime. ### Public sector reforms, SOE transparency and anti-corruption - SOE financial disclosures: - Reduced backlog of audited financial statements for SOEs as planned by November 2021. - Progress on 9 key SOEs (Air Niugini, Kumul Agriculture, entities under Kumul Telikom Holdings, Motor Vehicle Insurance, National Development Bank, PNG Power, PNG Ports Corporation, Post PNG, and Water PNG). - By end-October produced: - Audited financial statements for 2018 for 9 SOEs listed; - Audited financial statements for 2019 for at least 6 of the SOEs listed; and - Audited financial statements for 2020 for at least 4 of the SOEs listed. - Anti-corruption framework: - Passage of OLICAC (ICAC Act) and Whistleblowers’ Act in 2020; intend to adopt implementing regulations to operationalize both Acts. - May request IMF TA to review draft regulations and support staffing the ICAC. - Procurement reforms: - National Procurement Act operationalized; National Procurement Commission (NPC) established as an entity since April 1, 2019. - Donor support from ADB, EU and the Australian Government in implementing the NPA. ### Program monitoring and governance - Program evaluation: - Program implementation evaluated by the Managing Director of the IMF based on quantitative targets, indicative targets and structural benchmarks (Tables 1 and 2). - Sole program review based on outcome of QTs as at end-December 2021 and SBs described in Table 2; program review expected to take place in April 2022. - Program Monitoring Committee: - Composed of senior officials from the Treasury and the BPNG; tasked with monitoring program performance, maintaining frequent contact with Fund staff, and transmitting data and supporting materials. - Commitment to conduct fortnightly meetings with the IMF PNG staff team to appraise developments and provide updates on progress toward SBs. - Committed to regular sharing of information on program performance in line with the TMU schedule. *Source: 1pngea2022001 - 24. The Medium-term Revenue Strategy (MTRS) has been important in guiding our reform efforts* ### 45. We commit to strengthen data reporting to the IMF, as set out in the data release ### 1pngea2022001 - 45. We commit to strengthen data reporting to the IMF, as set out in the data release ### Commitment to strengthen data reporting and program monitoring - We commit to strengthen data reporting to the IMF, as set out in the data release schedule included in the TMU. - The SMP is an opportunity to strengthen institutional cooperation to improve the quality and timeliness of data collection and reporting. - Higher quality and more timely data are critical to support policymaking and monitoring, and are integral to strengthening our cooperation with the IMF. - The Program Monitoring Committee will proactively follow up on data needed for program monitoring. - In addition to the quantitative data to be reported on a regular basis, we commit to provide additional information needed to assess the status of proposed structural benchmarks and will make our best efforts to provide other data as needed to facilitate program monitoring. ### Quantitative targets and indicative targets (Table 1 highlights) - Table header: (In billions of kina, unless otherwise indicated) - Column headings and values presented verbatim from Table 1: - 20212022 End-DecemberEnd-MarchEnd-June Test DateIndicative Targets ProposedProposedProjection - Quantitative Targets - Fiscal deficit of the central government (cumulative, ceiling within the year) 6.8632.5633.824 - 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) 000 - External debt service arrears of the central government (ceiling, US$ millions) 000 - Stock of net international reserves of the BPNG (floor, US$ millions) 2,000 2,000 2,000 - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative within the year, US$ millions) 660180360 - BPNG direct monetary financing of the public sector (ceiling, cumulative within the year) 000 - Indicative targets - Tax revenue of the central government (floor, cumulative within the year) 10.8682.6135.376 - New domestic payments arrears of the central government (ceiling) 000 - Social and other priority spending (cumulative floor within the year) 2 3.1601.2622.665 - Present value of public and publicly-guaranteed external debt (ceiling, US$ millions) 3 6,500 6,750 6,750 - Memorandum items: - Concessional borrowing (cumulative, millions of US$) 627.9150300 - Stock of arrears to be cleared (cumulative for the year) 1.2000.5000.700 - Note entries preserved exactly as in source (including spacing and number groupings). ### Proposed structural measures (Table 2 summary) - Measures, timing, and status presented verbatim: - No. 1: Approval of a framework for the 2022 budget, in line with understandings reached with the IMF mission, by NEC — Prior Action — Completed October 13, 2021 - No. 2: Complete and share with Fund staff the Staffing and Establishment Review report, a comprehensive review of staffing in the government, including a plan for maintaining the integrity of the staffing data and a proposal to institute a quality assurance process to govern the payment of salaries. — End-February 2022 - No. 3: Approval of the Consequential Amendments to the Tax Administration Act, 2017 by the NEC and submission to Parliament for approval. The Amendments to the Act should clarify the enforcement powers of the revenue authorities (the Internal Revenue Commission and the Customs Department) and address any inconsistencies with legislation governing the collection of other taxes and revenues, including income taxes, the goods and services tax, stamp duties, the gaming tax and the departure tax. — End-March 2022 - No. 4: Strengthen the public debt committee comprising of BPNG and Treasury staff by establishing and sharing with Fund staff a set of objectives and aligning TORs defining members’ responsibilities, producing a draft annual debt issuance strategy to support forward planning and discussing as part of meetings. — End-March 2022 - No. 5: Submit for parliamentary approval amendments to the Central Banking Act to strengthen the independence, governance, accountability, and transparency of the Central Bank, in consultation with Fund staff. — End-March 2022 ### Technical Memorandum of Understanding (TMU): assessment criteria and definitions - TMU covers SMP spanning December 7, 2021 to June 15, 2022 and specifies assessment criteria, indicative targets, and data transmission terms. - Key assessment criteria and definitional points preserved verbatim: - Assessment Criteria set for end of December 2021; performance assessed against those quantitative targets as specified in Table 1 of the MEFP. - Government is defined as the central government; includes Extra Budgetary Units that have individual budgets not fully covered by the national budget. - Cumulative fiscal deficit is calculated on a cash basis as net incurrence of financial liabilities less net acquisition of financial assets by the central government from January 1. - Net acquisition of financial assets = net change in domestic financial assets + net change in external financial assets. - Net incurrence of liabilities = net incurrence of domestic liabilities + net incurrence of external liabilities. - Domestic liabilities include: debt securities outstanding; loans received from residents of PNG; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; and other accounts payable. - External liabilities include: debt securities outstanding; loans received from lenders not resident of PNG; and any other liabilities that meet the definition of external debt as set out in paragraph 7. - Debt definition follows paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 16919-(20/103) of October 28, 2020). - Debt includes loans, suppliers’ credits, and leases (present value at inception for leases). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligations that constitute debt are debt. - Debt includes borrowing by, or that receives guarantees from, the central government and the Bank of Papua New Guinea (BPNG) as set out in paragraph 10. - Accumulation of liabilities for conducting monetary policy by the BPNG (e.g., issuance of securities) is excluded from definition of debt. - External public debt = debt denominated or requiring payment in a currency other than the Kina. - Present value of any external borrowing = annual discounted future debt service payments using a discount rate of 5 percent. - External concessional borrowing = external borrowing where face value minus present value is not less than 35 percent of face value. - Continuous zero ceiling applies to contracting or guaranteeing external non-concessional debt by the Government or the BPNG; official bilateral and multilateral borrowing is excluded from that ceiling for program performance assessment. - Government debt guarantee means an explicit legal obligation of the central government or the BPNG to service a debt in the event of nonpayment by the borrower. - External debt service arrears are obligations not paid when due; a continuous ceiling on non-accumulation of external debt service arrears applies. - Net international reserves (stock) = BPNG’s gross foreign assets − gross foreign liabilities, per Section 78 of the PNG Central Banking Act (2000). - Gross foreign reserves include: monetary gold (excluding amounts pledged as collateral); SDRs; convertible currencies in cash or in nonresident financial institutions; PNG’s reserve tranche position with the IMF. - Gross foreign reserves exclude: foreign currency claims on residents; capital subscriptions in international institutions; assets from swaps <3 months; pledged, swapped, or encumbered reserve assets; precious metals other than gold; assets in nonconvertible currencies; illiquid foreign assets. - Gross foreign reserve liabilities include: total outstanding liabilities of the BPNG to the IMF (excluding SDR allocations); convertible currency liabilities to nonresidents with original maturity up to and including one year; commitments to sell FX from derivatives. - BPNG provision of foreign exchange to authorized FX dealers = amount of FX sold by BPNG to banks and authorized FX dealers each month. - Direct monetary financing of the central government refers to BPNG providing direct financing that spans more than a single fiscal year; limited temporary financing via the Temporary Advance Facility (TAF) is permitted and excluded from monetary financing calculation if it complies with Operational Guidelines. Acquisition of government securities by BPNG as part of monetary policy operations is excluded from monetary financing definition. ### Indicative targets and monitoring arrangements - Indicative targets set for end-December 2021 and March 2022; they serve to assess progress but are not binding quantitative criteria. - Definitions for indicative targets preserved verbatim: - Tax revenues defined in line with GFSM 2014 and classified into six categories: (i) taxes on income, profits, and capital gains; (ii) taxes on payroll and workforce; (iii) taxes on property; (iv) taxes on goods and services; (v) taxes on international trade and transactions; and (vi) other domestic revenue, including non-tax revenue. - Domestic payment arrears = overdue domestic payment obligations owed to entities legally incorporated in PNG and residents of PNG; include obligations to domestic service providers but exclude government liabilities to other public sector units. - Payments considered in arrears when: - Debt remains unpaid for more than 30 days after due date; - Wages or pensions remain unpaid 90 days after due date; - Payments for goods and services received more than 90 days after processing of supporting documents. - Indicative target on non-accumulation of new domestic arrears assessed only against arrears first accumulated in 2021, not against arrears accumulated in 2020 or earlier. - Social and other policy priority spending measured on a cash basis and comprises central government spending in health, education and law and order (both capital and operating expenses). ### Program Monitoring Committee and data reporting requirements - The Papua New Guinea authorities shall maintain a Program Monitoring Committee composed of senior officials from the Treasury and the BPNG. - The Committee is responsible for monitoring program performance, informing the Fund regularly, and transmitting supporting materials necessary for evaluation of benchmarks. - The Committee will prepare and provide to Fund staff electronically the information contained in the data reporting table. ### Data reporting table (selected items and reporting modalities) - Table title: Papua New Guinea: Data Reporting for Program Monitoring - Fiscal sector - Net acquisition of financial assets and net incurrence of financial liabilities — Type: Budget operations — Reporting Agency: Treasury — Reporting Frequency: Quarterly — Reporting Lag: 1 month - Payments incurred by the central government on education, health, and law and order (both capital and current spending) — Type: Budget operations — Reporting Agency: Treasury — Reporting Frequency: Quarterly — Reporting Lag: 6 weeks - Total domestic revenues received by the central government — Type: Revenue — Reporting Agency: Treasury — Reporting Frequency: Monthly — Reporting Lag: 1 month - The monthly cash plan — Reporting Frequency: Monthly — Reporting Lag: 1 month - Total stock of domestic arrears, with a breakdown between service providers — Type: Domestic arrears — Reporting Agency: Treasury — Reporting Frequency: Monthly — 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: Domestic debt — Reporting Agency: Treasury — Reporting Frequency: Monthly — Reporting Lag: 1 month - Total volume of sovereign bond issued, with interest rate, maturity, and recipient — Reporting Frequency: Monthly — Reporting Lag: 1 month - The amount of new domestic debt contracted by Government — Reporting Frequency: Monthly — Reporting Lag: 1 month - Details of disbursed external budget support and project grants and loans — Type: External debt — Reporting Agency: Treasury — Reporting Frequency: Monthly — Reporting Lag: 1 month - End of year external debt in U.S. dollars, by creditor, and originating currency — Reporting Frequency: Monthly — Reporting Lag: 1 month - The amount of new external debt contracted by Government — Reporting Frequency: Monthly — Reporting Lag: 1 month - All guarantees provided by the government including guarantees to public corporations and private sector — Reporting Frequency: Monthly — Reporting Lag: 1 month - Real sector - Consumer Price Index — Type: Economic indicators — Reporting Agency: NSO — Reporting Frequency: Quarterly — Reporting Lag: 3 months - National Accounts (breakdown of production) in real and nominal terms — Reporting Frequency: Annual — Reporting Lag: 24 months (latest GDP figures are for 2018) - 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 measures in Table 2 of the MEFP — Type: Structural benchmarks — Reporting Agency: Treasury — Reporting Frequency: Quarterly — Reporting Lag: 3 months - Monetary and financial sector - Detailed balance sheet data of the BPNG submitted in the reporting template — Type: Monetary Survey — Reporting Agency: BPNG — Reporting Frequency: Monthly — Reporting Lag: 1 month - Cash flows of the Waigani Public Account, including any use of TAF and TAF repayment — Reporting Frequency: Monthly — Reporting Lag: 1 month - Sale of FX by the BPNG to authorized FX dealers — Reporting Frequency: Monthly — Reporting Lag: 1 month - 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 - Financial Soundness Indicators (aggregate and by bank) — Reporting Frequency: Quarterly — Reporting Lag: 1 month - Lending activity of banks (by sector) — Reporting Frequency: Monthly — Reporting Lag: 1 month - External sector - Balance of Payments data in the reporting template provided by IMF staff — Type: BOP — Reporting Agency: BPNG — Reporting Frequency: Quarterly — Reporting Lag: 3 months - Import and export data, by sectors — Reporting Frequency: Quarterly — Reporting Lag: 3 months - Net international reserves, including reserve assets/liabilities by original currency — Reporting Frequency: Monthly — Reporting Lag: 1 month - Foreign exchange flow data (by type of flow) — Reporting Frequency: Monthly — Reporting Lag: 1 month - Banks’ 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 (orderbook) with information about length of time needed to fulfill order — Reporting Frequency: Monthly — Reporting Lag: 1 month ### Debt Sustainability Analysis (Joint Bank-Fund DSA) — key findings - Risk ratings and metadata (verbatim): - Risk of external debt distress High - Overall risk of debt distress High - Granularity in the risk rating Sustainable - Application of judgement No - Summary findings preserved verbatim: - Papua New Guinea (PNG) remains at high risk of debt distress under the Low-Income Country Debt Sustainability Framework (LIC DSF), with weak debt-carrying capacity. - While the planned fiscal consolidation helps address debt vulnerabilities exacerbated by the global COVID-19 shock, the risk of both external and public debt distress continues to be assessed as high. - Over the medium-term, public debt enters a downward trend and the projected temporary breaches of sustainability indicators can mostly be addressed by debt management operations as well as improvements in revenue generation, a key pillar of the new Staff-Monitored Program (SMP). - The Debt Sustainability Analysis (DSA) suggests that PNG is susceptible to exports and exchange rate shocks, signaling serious downside risks to the debt outlook in a global environment of high uncertainty. - To lower the risk of debt distress and ensure debt sustainability, gradual fiscal consolidation, including boosting revenues, and steadfast structural reforms to promote private sector growth would be needed. - Conditional on the implementation of policy measures included in the SMP, PNG’s external and overall debt is judged as sustainable. - Composite Indicator note (verbatim footnote): - The Composite Indicator (CI) of 2.63 is based on the latest available CI information—October 2021 IMF World Economic Outlook (WEO) and the World Bank’s Country Policy and Institutional Assessment (CPIA), indicating a “weak” capacity to carry debt. - Administrative note: - This Debt Sustainability Analysis has been prepared jointly by the International Monetary Fund and the World Bank, in accordance with the revised Debt Sustainability Framework for low-income countries approved by the Executive Boards of the IMF and the IDA. - Approved By Krishna Srinivasan (IMF), Marcello Estevão and Hassan Zaman (IDA) - Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA) - December 20, 2021 *Sources: Papua New Guinea authorities; and Fund staff estimates.* ### 1. The coverage of public debt in the DSA is unchanged from the previous (June 2020) DSA ### 1. The coverage of public debt in the DSA is unchanged from the previous (June 2020) DSA ### Coverage of public debt - Public sector segments captured in the DSA include: - central government - state and local government - guarantees to other entities in the public and private sector, including parts of state-owned enterprises (SOEs) - Debt numbers do not fully capture: - implicit government guaranteed debts of SOEs - unfunded superannuation liabilities relating to pensions - For this DSA, coverage remains unchanged from the June 2020 DSA. ### Contingent liabilities stress test assumptions and outcomes - Assumed unrecorded SOE debt not captured in official public debt data: 9 percent of GDP - Assumed other elements of general government not captured (mainly unfunded superannuation liabilities related to pensions): 3 percent of GDP - PPP capital stock in PNG per the World Bank’s PPP database: zero (therefore, no default shock is triggered) - Financial market shock added: 5 percent (reflecting the average fiscal cost of financial crisis in low-income countries) - Cumulative shock in the contingent liabilities stress test: 17 percent of GDP (compared to 7 percent under default assumptions) ### Background on SOE reforms and reporting - In the context of the previous SMP (expired end-June 2021), authorities initiated an SOE reform program to: - reduce the backlog of audited annual financial statements - strengthen SOE oversight - improve understanding of fiscal risks - The program includes a detailed review of SOE debt and government guarantees and is expected to improve reporting of public debt. ### Debt composition and financing developments (2017–2020) - Public debt build-up during 2017-2020 was mainly due to external loans. - Creditor composition has shifted from commercial loans to official multilateral and bilateral financing. - Domestic financing through T-bills and T-bonds has been stable over time. - Expensive commercial loans have been replaced with official multilateral and bilateral financing at more favorable conditions, which helps improve external debt burden indicators. - PPG external debt figures used for this DSA are consistent with WBG International Debt Statistics. ### SDR allocation and treatment in the DSA - IMF general allocation of SDRs became effective in August 2021. - PNG allocation: SDR 252 million (US$357 million, or 95.7 percent of quota). - Authorities decided to use the SDR allocation in its entirety to support the 2021 budget. - Treatment in DSA: - SDR allocation is included in public debt numbers for the purpose of this DSA. - Associated debt service of 0.05 percent of the amount outstanding is reflected. ### DSSI participation and consideration in the DSA - PNG participated in the G-20 Debt Service Suspension Initiative (DSSI). - Amounts considered in the analysis: - US$ 312.4 million for May-December 2020 - US$ 35.8 million for January-June 2021 - Prospective debt service suspension between July and December 2021 is not included. ### IDA status and SDFP context - PNG is an IDA blend country; total IDA19 allocation: SDR 178.4 million. - IDA19 PBA benefited from resource frontloading and an intra-regional reallocation of SDR 0.6 million (approved November 2021). - IDA decision to graduate a country to IBRD-only status is based on: macroeconomic prospects, risk of debt distress, vulnerability to shocks, institutional constraints, and poverty/social indicators. - PNG has satisfactorily implemented the Performance and Policy Actions (PPA) for fiscal year 2021 under the SDFP. ### Macroeconomic impact of COVID-19 and forecast highlights - Real GDP in 2020: estimated contraction of 3 ½ percent. - Pre-crisis 2020 forecast (2019 Article IV Staff Report): 2.0 percent. - Headline inflation (period-average CPI) in 2020: 4.9 percent. - Imports down 19 percent in 2020; 2020 current account surplus remained largely unchanged from 2019. - Gross international reserves increased by 17 percent from 2019. - PNG COVID-19 vaccination rate: merely 2 percent of the population fully vaccinated (estimated based on number of doses administered, as of mid-November 2021). - 2021 outlook: - Inflation (period average CPI) expected at 5.0 percent (higher than previous DSA projection of 3.7 percent). - Primary fiscal deficit estimated at 6 percent in 2021. - Current account surplus remains large, above 20 percent, owing to strong global demand for PNG’s exports. ### Fiscal assumptions for 2022 under the SMP - NEC-approved fiscal framework targets an overall deficit of 6 percent of GDP (published in government’s 2022 Budget Strategy Paper). - Framework envisages: - improvement in domestic revenues driven by cyclical improvement in tax revenues and policy measures to increase SOE contributions (following passage of the Non-Tax Revenue Bill) - expenditures focused on recovery, shift toward capital spending, financing education, and one-off allocation for elections - Macroeconomic performance in 2022 depends on vaccination rollout and vaccine uptake. ### Key macro-fiscal projections (selected figures from Text Table 2 and Text Table 3) - Real GDP growth y/y (in percent): - 2020: -3.5 (DSA vintage 2021) - 2021: 1.7 (DSA vintage 2021) - 2022: 4.8 (DSA vintage 2021) - Long-term potential real growth estimate: 3.1 percent - Inflation, annual average (consumer prices, percent): - 2020: 4.9 (DSA vintage 2021) - 2021: 5.0 (DSA vintage 2021) - Current account balance (percent of GDP): - 2021: 21.1 (DSA vintage 2021) - Primary balance (percent of GDP): - 2021: -6.0 (DSA vintage 2021) - 2022 program: -5.1 (DSA vintage 2021) - Government revenues (excluding grants, percent of GDP): - 2021: 12.5 (DSA vintage 2021) - 2022: 12.7 (DSA vintage 2021) - Fiscal operations (percent of GDP, Text Table 3 highlights): - Revenue 2020 actual: 14.2; 2021 revised: 14.0; 2022 program: 14.4 - Expenditure 2020 actual: 22.7; 2021 revised: 21.2; 2022 program: 21.8 - Net lending (+)/borrowing (-): 2020 actual: -8.6; 2021 revised: -7.1; 2022 program: -7.4 - Nominal GDP (billions of kina): 2020: 85.3; 2021: 92.7; 2022: 93.1 ### Financing mix and constraints - Domestic financing composition of T-bills and T-bonds assumed unchanged from past five years. - From 2025, average assumption: one-third of financing needs covered from official multilateral and bilateral resources; remaining financed domestically with balanced mix of bonds and T-bills. - During the SMP: zero limit on new non-concessional external borrowing (NCB) by the Department of Treasury and Bank of Papua New Guinea; multilateral and official bilateral financial support exempted. - NCB may be allowed only in exceptional circumstances (project integral to development program without concessional financing or used for debt management that improves public debt profile). - For 2022, IDA operations of SDR 111 million envisioned, financed through PNG’s PBA; IDA financing assumed to continue on blend credit terms. ### Debt carrying capacity and applicable thresholds - PNG’s Composite Indicator (CI) index: 2.63 (October 2021 WEO and CPIA), indicating weak debt-carrying capacity. - Applicable thresholds: - PV of external debt-to-GDP ratio: 30 percent - PV of external debt-to-exports ratio: 140 percent - External debt service-to-exports ratio: 10 percent - External debt service-to-revenue ratio: 14 percent - PV of public debt-to-GDP ratio: 35 percent ### Scenario stress tests and shock assumptions - Contingent liabilities stress test included to account for SOE debt not captured in official data (see assumptions under "Contingent liabilities stress test assumptions and outcomes"). - Commodity price shocks included: - Fuel price shock set at 35 percent (compared to default shock of 27 percent) - Non-fuel commodity price shock set at 21 percent: - base metals and precious metals: 20 percent - agricultural commodities other than grain: 22 percent - Price shocks to grain (wheat, corn, soybeans) not included as not relevant for PNG - Mitigating factors included at default values (fuel 2 percent; non-fuel 27 percent) - A third stress test simulates market financing pressures using standard assumptions, including exchange rate depreciation of 15 percent. *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### 15. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its ### 1pngea2022001 - 15. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its ### External debt baseline and projection findings - Under the baseline scenario, the debt-service to revenue indicator is projected to breach its threshold. - There is a small breach in 2026, and a relatively large breach in 2028, when a bullet payment for the 2018 Eurobond is due. - The authorities do not plan, at least not at this juncture, to roll over this bond. - After 2028, the indicator remains close to the threshold and the marginal breaches of the threshold are merely short-lived (one year). - The projections further show one small and short-lived breach of the debt service-to-exports ratio, which is discounted on the same grounds as the debt-service-to-revenue breach. - The present value of the debt-to-GDP ratio as well as the debt-to-exports ratio are below their respective thresholds over the entire projection horizon, and on a clear downward trend. ### Stress tests, shocks, and data caveats - Stress tests point to vulnerabilities in PNG’s external debt dynamics particularly with respect to exports shocks, which would cause threshold breaches for all four external sustainability indicators. - Changes in policy and the structure of the economy manifest in a divergence between the historical scenario and the baseline. - The assessment of debt dynamics is hampered by large residuals from external financial flows from money transfer by resource companies via offshore accounts. ### Public sector debt sustainability analysis (DSA) - Public debt ratios have increased substantially in recent years and reached almost 50 percent of GDP in 2020. - Starting from this level means that the public debt sustainability indicator is in breach of the threshold for countries with weak debt-carrying capacity (that is, 35 percent of GDP) during the first half of the projection horizon but, with public debt coming down, meets the threshold from 2031. - The debt-to-revenue ratio sees a continuous downward trend over the projection horizon. ### Risk ratings and vulnerabilities - PNG remains at “high” risk of external and overall debt distress. - The (mechanical) external debt distress rating as well as the overall debt distress rating are “high”, owing to the breaches of sustainability thresholds discussed above. No staff judgement has been applied to these ratings. ### Dynamics of debt service and main risks - Debt service on existing loans, paired with relatively weak revenue generation, are expected to almost double the debt service-to-revenue ratio over the medium term. - As debt service reduces and revenues increase, and barring further shocks to demand growth, the indicator enters a significant downward trend from its peak in 2026. - Stress tests show that adverse shocks to exports constitute the main risk to public debt sustainability. - The historical scenario indicates that it will be challenging to reduce debt from current levels and that reforms, including those envisaged in the SMP, are essential for supporting the sustainability of public finances. ### Overall assessment and policy implications - Debt dynamics are assessed as sustainable. - Public debt is expected not to increase significantly in the near term and to enter a clear downward path over the medium term. - The projected temporary breaches of sustainability indicators can be prevented by debt management operations as well as by boosting revenue generation. - The external debt-to-GDP and debt-to-exports ratios are below their thresholds over the entire projection horizon. - Public external and overall debt is judged to be sustainable conditional on the implementation of the policy measures part of the SMP. *Source: 1pngea2022001 — Excerpt paragraphs 15–22.* ### 23. The authorities took note of Staff’s assessment that PNG remains at high risk of debt ### 23. The authorities took note of Staff’s assessment that PNG remains at high risk of debt distress ### Authorities' assessment and policy stance - The authorities took note of Staff’s assessment that PNG remains at high risk of debt distress. - The authorities agree that large financing requirements to dampen the effects of the COVID-19 pandemic on PNG’s economy have left their mark on public debt. - Fiscal consolidation and conservative financing strategies will help support the sustainability of PNG’s debt going forward. ### External Debt Sustainability — Baseline Scenario (selected indicators, 2018–2041) - External debt (nominal) 1/: 2018: 71.4; 2019: 62.6; 2020: 69.2; 2021: 68.1; 2022: 65.9; 2023: 63.8; 2024: 60.9; 2025: 59.7; 2026: 58.7; 2031: 45.0; 2041: 25.9; (in percent of GDP) - of which: public and publicly guaranteed (PPG): 2018: 15.2; 2019: 18.0; 2020: 23.0; 2021: 24.9; 2022: 25.3; 2023: 25.5; 2024: 24.4; 2025: 24.4; 2026: 23.9; 2031: 15.9; 2041: 5.5 (in percent of GDP) - Change in external debt: -3.7; -8.9; 6.6; -1.1; -2.2; -2.1; -2.9; -1.2; -1.9; -2.7; -2.0 (yearly changes as reported) - Identified net debt-creating flows: -28.6; -24.7; -20.2; -21.3; -25.6; -23.6; -22.2; -21.4; -20.5; -17.3; -11.2; -10.0; -20.8 (percent of GDP sequence in table) - Non-interest current account deficit: -27.0; -25.5; -23.0; -24.0; -24.2; -22.5; -21.6; -20.7; -20.8; -17.3; -11.2; -9.2; -20.9 (percent of GDP) - Exports (percent of GDP): 41.7; 47.6; 38.4; 39.1; 41.5; 40.2; 38.7; 37.5; 35.4; 30.6; 22.9 - Imports (percent of GDP): 16.6; 21.0; 16.9; 15.9; 15.9; 16.0; 15.7; 15.3; 14.3; 12.7; 11.3 - Net current transfers (negative = inflow): -1.5; -1.3; -1.4; -1.0; -1.0; -0.9; -1.2; -1.1; -1.1; -0.8; -0.4; -1.0; -1.0 - Endogenous debt dynamics (contribution): -1.6; 0.8; 2.8; 2.7; -1.4; -1.1; -0.6; -0.8; 0.3; 0.0; 0.1 - Contribution from nominal interest rate: 2.7; 2.6; 1.8; 3.8; 1.6; 1.5; 1.2; 1.0; 2.0; 1.4; 0.9 - Contribution from real GDP growth: 0.2; -3.1; 2.2; -1.1; -3.0; -2.6; -1.8; -1.7; -1.7; -1.4; -0.9 - Residual 3/: 25.0; 15.9; 26.8; 20.3; 23.4; 21.5; 19.3; 20.2; 18.6; 14.6; 9.1; 12.8; 18.6 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: 28.4; 26.2; 25.7; 25.0; 23.3; 23.3; 21.7; 14.3; 5.7 (selected years as in table) - PV of PPG external debt-to-exports ratio: 73.9; 67.0; 61.9; 62.2; 60.4; 62.2; 61.2; 46.8; 24.9 (selected years) - PPG debt service-to-exports ratio: 1.6; 2.2; 8.5; 10.0; 3.0; 3.9; 5.4; 4.3; 8.1; 7.0; 5.4 (selected sequence) - PPG debt service-to-revenue ratio: 4.2; 7.3; 26.1; 30.9; 9.0; 11.1; 14.6; 11.0; 19.8; 14.0; 8.6 - Gross external financing need (Million of U.S. dollars): -3,883.1; -3,472.8; -3,187.8; -3,515.6; -4,815.4; -4,533.6; -4,760.4; -4,938.7; -5,762.5; -5,700.6; -7,396.7 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent): -0.3; 4.5; -3.5; 1.7; 4.8; 4.3; 3.0; 3.0; 3.0; 3.0; 3.3; 3.9; 3.2 (sequence as reported) - GDP deflator in US dollar terms (change in percent): 6.3; -1.7; 2.0; 7.2; 3.6; 3.8; 3.2; 3.1; 3.1; 3.3; 3.4; 2.1; 3.6 - Effective interest rate (percent) 4/: 3.8; 3.8; 2.8; 5.9; 2.6; 2.5; 2.0; 1.7; 3.6; 3.1; 3.5; 3.0; 3.3 - Growth of exports of G&S (US dollar terms, in percent): -2.5; 17.2; -20.4; 11.0; 15.1; 4.7; 2.3; 2.9; 0.3; 2.6; 8.7; 6.0; 4.8 - Growth of imports of G&S (US dollar terms, in percent): 6.4; 30.3; -20.7; 2.2; 8.7; 9.4; 3.7; 3.7; -0.7; 3.9; 15.7; -1.3; 4.2 - Grant element of new public sector borrowing (in percent): 44.1; 44.8; 43.6; 46.7; 28.5; 24.5; 16.8; 13.8; 30.0 (values reported in the table for particular years) - Government revenues (excluding grants, in percent of GDP): 15.4; 14.2; 12.5; 12.7; 13.8; 14.0; 14.4; 14.7; 14.5; 15.2; 14.3; 14.4; 14.3 - Aid flows (in Million of US dollars) 5/: 143.1; 212.5; 8.7; 173.1; 213.47.8; 1,084.8; 1,116.4; 754.8; 749.1; 693.2; 521.5; 693.4 (presented in table sequence) - Grant-equivalent financing (in percent of GDP) 6/: 4.0; 3.1; 2.8; 2.2; 2.2; 1.9; 1.2; 0.8; 2.1 (selected values) - Nominal GDP (Million of US dollars): 24,110; 24,751; 24,364; 26,573; 28,836; 31,235; 33,182; 35,223; 37,403; 50,665; 96,038 (selected years) - Nominal dollar GDP growth: 6.0; 2.7; -1.6; 9.1; 8.5; 8.3; 6.2; 6.2; 6.2; 6.4; 6.8; 5.9; 6.9 ### Public Debt Sector Sustainability — Baseline Scenario (selected indicators, 2018–2041) - Public sector debt 1/: 2018: 36.7; 2019: 41.5; 2020: 49.0; 2021: 56.0; 2022: 58.4; 2023: 58.5; 2024: 58.3; 2025: 57.1; 2026: 56.6; 2031: 35.6; 2041: 14.4; 26.3; 50.8 (table sequence as presented) - of which: external debt: same series as external DSA (see above) - Change in public sector debt: 2.0; 4.7; 7.5; 7.0; 2.4; 0.1; -0.2; -1.2; -0.5; -3.8; -0.7 (selected) - Identified debt-creating flows (selected): 0.0; 2.8; 8.4; 6.9; 2.8; 0.6; 0.1; -0.8; -0.1; -3.3; -1.5; 3.8; -0.8 - Primary deficit (selected): 0.2; 1.9; 6.0; 5.1; 3.7; 2.7; 1.1; 0.0; -0.6; -2.6; -1.2; 2.5; 0.1 (percent of GDP) - Revenue and grants (percent of GDP): 17.7; 16.3; 14.2; 14.4; 15.6; 15.6; 15.9; 16.2; 15.9; 16.2; 15.0; 16.1; 15.6 - Primary (noninterest) expenditure (percent of GDP): 18.0; 18.2; 20.2; 19.6; 19.3; 18.3; 17.1; 16.3; 15.3; 13.6; 13.8; 18.6; 15.8 - Automatic debt dynamics (contribution): -0.2; 0.9; 2.4; 1.8; -1.0; -2.1; -1.0; -0.9; 0.5; -0.7; -0.3 - Contribution from interest rate/growth differential: 0.1; 0.7; 2.6; 1.8; -1.0; -2.1; -1.0; -0.9; 0.5; -0.7; -0.3 - Contribution from average real interest rate: 0.0; 2.2; 1.1; 2.6; 1.6; 0.4; 0.7; 0.8; 2.1; 0.4; 0.2 - Contribution from real GDP growth: 0.1; -1.6; 1.5; -0.8; -2.6; -2.4; -1.7; -1.7; -1.7; -1.2; -0.5 - Residual: 2.0; 1.9; -0.9; 0.1; -0.4; -0.5; -0.3; -0.4; -0.4; -0.5; 0.8; 1.0; -0.4 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio (selected series in table): ...54.5; 57.4; 58.8; 58.0; 57.5; 56.1; 54.3; 34.1; 14.8 (values presented) - PV of public debt-to-revenue and grants ratio (selected): 384.6; 397.8; 377.5; 371.7; 361.6; 345.5; 341.3; 210.4; 99.0 - Debt service-to-revenue and grants ratio 3/: 103.0; 109.8; 140.0; 65.9; 75.2; 102.2; 114.0; 124.8; 134.9; 91.7; 41.7 - Gross financing need 4/: 18.5; 19.8; 25.9; 14.6; 15.4; 18.6; 19.3; 20.3; 20.9; 12.2; 5.1 ### Stress tests, sensitivity analysis, and benchmarks - Stress tests and sensitivity analyses are presented for public and PPG external debt, with multiple alternative scenarios, bound tests, and tailored tests (e.g., real GDP growth, primary balance, exports, other flows, depreciation, combinations). - Table 3 (sensitivity analysis for key indicators of public and PPG external debt, 2021–2031) reports baseline and shock outcomes for: - PV of debt-to-GDP ratio (baseline: 26 in 2021, 26 in 2022, 25 in 2023, etc.) - PV of debt-to-exports ratio (baseline and shocked series) - Debt service-to-exports ratio and Debt service-to-revenue ratio (baseline and shocked series) - Table 4 (sensitivity analysis for key indicators of public debt, 2021–2031) reports breaches of benchmarks in several tailored and bound tests; bold values in the tables indicate breaches of benchmarks. - Figure notes: The most extreme stress test is defined as the test that yields the highest ratio in or before 2031; one-off breaches are treated per the stated methodology. All additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. ### Drivers of debt dynamics and realism tools (high-level) - Figures show decomposition of changes in gross nominal PPG external debt and gross nominal public debt into contributions from: - Current account + FDI, nominal interest rate, real GDP growth, price and exchange rate changes, residuals, and other debt-creating flows. - Realism tools illustrate public and private investment rates, projected 3-year fiscal adjustments, and possible real GDP growth paths under different fiscal multipliers (multipliers shown include 0.2, 0.4, 0.6, 0.8). - Distributional charts compare current DSA vintages with previous DSA vintages and DSA-2015 projections. *Sources: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pngea2022001.pdf_