## 1pngea2022002

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### Executive summary — context and health indicators
- PNG’s economy is weathering the pandemic; Real GDP in 2022 is projected to exceed its 2019 level.
- Economy supported by investment in (and revenues from) the resource sector; more than two thirds of exports are petroleum gases (primarily LNG), gold, and copper.
- War in Ukraine: impacts via higher commodity prices and higher inflation; higher commodity prices strengthen the balance of payments and fiscal revenues.
- Key vulnerabilities and risks:
  - Low vaccination rate: Less than 3 percent of the population is fully vaccinated.
  - Total vaccination (May 13, 2022): 441,214
  - 1st dose: 323,345
  - Fully vaccinated: 263,995
  - Share of population fully vaccinated: 2.9 percent
  - Risks skewed to the downside: worsening health situation, commodity price volatility, political instability, climate vulnerability.
- Pre-pandemic build-up of public debt driven by low commodity prices (2014–2020), drought (2015-16), and a major earthquake (2018); public and publicly guaranteed debt now at high risk of distress.

### Recent economic developments and outlook
- 2021 performance:
  - Real GDP growth in 2021: 1.2 percent (driven by agriculture: palm oil, cocoa).
  - Inflation in 2021: 5.7 percent.
- External position and FX:
  - Preliminary 2021 current account gap: –0.9 percent of GDP.
  - Kina estimated overvalued by about 2.4 percent in real terms (Annex III).
  - Gross international reserves exceeded program target of US$2 billion.
- Fiscal 2021:
  - Fiscal deficit in 2021: 6.6 percent of GDP (below program target of 7.4 percent).
  - Revenues exceeded budget projections driven by higher non-tax revenues, including foreign grants and dividends from the resource sector.
  - The 2021 increase in the general allocation of SDRs was used for budget financing.
- Outlook (selected projections):
  - Real GDP growth: 2022: 4.2 percent; 2023: 4.7 percent; Medium term: 3.0 percent.
  - Real GDP in 2022 projected to exceed 2019 level barring large negative shocks.

### Staff Monitored Program (SMP) performance and Fund engagement
- SMP performance: broadly satisfactory.
  - All quantitative targets (QTs) were met.
  - All structural benchmarks (SBs) were fully met on time, apart from the benchmark related to the Central Banking Act (CBA).
- Disbursements and TA:
  - SDR263.2 million (US$363.6 million, 100 percent of quota) disbursed in June 2020 under the Rapid Credit Facility (RCF).
  - Fund TA provided in national accounts, public debt, government finance and external sector statistics, revenue administration, banking supervision and regulation, and macroeconomic forecasts.
- Engagement history:
  - PNG engaged with the Fund through a Rapid Credit Facility and two SMPs; pre-pandemic SMP expired in June 2021.
  - Capacity constraints and virtual mission challenges affected timeliness of information sharing.

### Central Banking Act (CBA) amendments and monetary policy issues
- December 2021 CBA amendments: addressed some safeguards concerns but introduced new weaknesses.
  - Positive changes: prohibiting carryover of central bank advances across fiscal years; introducing eligibility criteria for all Board appointments (replacing ex‑officio appointments).
  - Concerns introduced:
    - Requirement for BPNG to provide advances to the government on demand.
    - Introduction of growth and employment in the non-resource sector as new (unranked) mandates, potentially conflicting with price stability.
    - Transfer of monetary policy decision-making to the BPNG Board, creating a conflict with the Board’s oversight role.
- Authorities intend to revisit Phase 1 areas (mandate, advances to government, role of the Board) in Phase 2 and have requested Fund TA.
- Staff recommendations (monetary/FX):
  - Adopt comprehensive approach to reinstating kina convertibility including:
    - Review of monetary policy framework.
    - Improve liquidity management and forecasting.
    - Gradual increase in exchange rate flexibility and removal of exchange restrictions.
  - Further amendments to the CBA needed to protect BPNG’s financial, personal, and institutional autonomy.

### Exchange rate, FX shortages, and external sector assessment
- De jure exchange rate regime: floating; de facto classified as stabilized.
- Staff assessment: kina overvalued in real terms (~2.4 percent) and FX rationing persists.
- FX market operations and policies:
  - Since 2014, BPNG imposed a trading margin on FX buy-sell spreads, impeding exchange rate adjustment and contributing to FX rationing.
  - Small FX orders are fulfilled first; larger orders experience delays; anecdotal evidence of pent-up demand and bilateral off-market deals.
  - Reinstating kina convertibility requires effective tools to manage excess kina liquidity and improved liquidity forecasting.
- External sector indicators (selected):
  - Exports, f.o.b. (US$ billions): 2021: 9.7; 2022: 12.3; 2023 (Proj.): 12.7.
  - Gross official international reserves (US$ billions): 2021: 3.2; 2022: 3.0; reserve adequacy floor in SMP: US$2.0 billion.
  - Current account (percent of GDP): 2021: 18.7; 2022: 23.1.

### Fiscal policy, revenue mobilization, and debt sustainability
- Need for rapid fiscal consolidation to strengthen debt sustainability.
  - Required adjustment: lower the deficit by about 5½ percent of GDP by 2027 to meet Fiscal Responsibility Act target (government debt no more than 40 percent of GDP over the long term).
  - Achieving a balanced budget by 2027 would lower risks from significant debt service obligations maturing in 2028.
- Revenue findings and recommendations:
  - Since 2012, average resource sector revenue has fallen even as resource sector’s share of GDP more than doubled to a third of GDP.
  - Tax revenues have declined by about 5 percent of GDP since 2012, driven by personal income tax and company tax.
  - PNG collects only a quarter of its potential GST.
  - March 2022 measures:
    - New flat tax on banking and telecommunication sectors targeting companies with market concentration over 40 percent, estimated to yield additional revenues of 0.3 percent of GDP in 2022.
    - Annual levy on telecommunications replaced by a one-off charge of K350 million (0.3 percent of GDP), raising the yield for 2022 to 0.5 percent of GDP but lowering medium-term gains to less than 0.2 percent annually.
  - IRC plans: introduce an Integrated Tax Administration System (online filing/payments).
  - Staff recommended a new Medium-term Revenue Strategy (MTRS) with Cabinet oversight; authorities requested TA.
  - Staff advised introducing an additional moderate ad valorem levy on future resource projects, payable directly to the central government.
- Expenditure and arrears management:
  - Near-term focus: strengthen payroll systems; Staffing and Establishment Survey (SB#2) completed.
  - Authorities committed to increasing healthcare spending and maintaining social spending in real terms.
  - Temporary relief package (March 2022) for high prices due to war in Ukraine expected cost: K611 million (0.6 percent of GDP); financed through higher resource revenues.
- Debt status and DSA findings:
  - Public and publicly guaranteed debt: high risk of debt distress.
  - Eurobond represents a liquidity risk (US$500 million bullet maturing 2028 noted as key risk).
  - DSA: contingent liabilities stress test assumptions include 9 percent of GDP for uncaptured SOE debt and 3 percent of GDP for other general government elements (unfunded superannuation); cumulative contingent liabilities shock = 17 percent of GDP.
  - Key debt indicators (selected):
    - Gross government debt (percent of GDP): 2021: 49.5; 2022: 48.9; 2023 (Proj.): 51.7; 2024 (Proj.): 52.8; 2025 (Proj.): 54.1; 2026 (Proj.): 61.0; 2027 (Proj.): 52.7.
    - PV of PPG external debt-to-GDP ratio: 2022: 23.1; 2028: 20.5.
    - PPG debt service-to-revenue ratio: 2028: 18.7 (projected breach in 2028 due to Eurobond).

### Banking sector and financial stability
- Banking sector indicators (selected):
  - Reported capital adequacy ratio at end-March 2022: 36.3 percent (mostly Tier 1 capital).
  - Tier 1 capital to risk-weighted assets (2022 March): 32.9 percent.
  - Non-performing loans (NPLs): 6.0 percent (2022 March).
  - Return on assets (2022 March): 6.2; Return on equity (Tier 1 basis, 2022 March): 44.7.
  - Liquid assets to total assets (2022 March): 19.7 percent; Loan-to-deposit ratio (2022 March): 57.5 percent.
- Financial sector structure and inclusion:
  - Four commercial banks (two domestic, two foreign); credit to GDP just under 20 percent.
  - Financial inclusion constrained by low urbanization and large informal economy.
- AML/CFT and supervisory actions:
  - AML/CFT regulatory actions initiated in July 2021 against Bank South Pacific (BSP).
  - FASU activities and preparations for upcoming evaluation (planned for 2023).

### Governance, procurement transparency, and anti-corruption
- Institutional reforms:
  - Independent Commission Against Corruption (ICAC) law passed (2020); implementation pending implementing regulations and staff recruitment.
  - Corruption Perception Index improved in 2021, but governance challenges persist (negative scores in Worldwide Governance Indicators).
- Procurement transparency:
  - Staff urged government to resume updating COVID-related procurement information (site noted in source not to be listed here).
  - Staff recommended audit of procurement contracts commence as soon as possible.

### Climate, biodiversity, and adaptation finance
- Climate adaptation needs:
  - Estimated adaptation needs: about 2 percent of GDP annually for the next 10 years.
  - Current average annual investment in adaptation: about 0.2 percent of GDP (2014–19 bilateral + multilateral totals).
- Major hazards: sea level rise, coastal erosion, flooding, drought, landslides.
- Policy and financing recommendations:
  - Finance adaptation mainly from external concessional sources.
  - Urgent action to reduce deforestation; implement REDD+ and pursue REDD+ Results Based Payments (Green Climate Fund and others).
  - Explore Voluntary Carbon Markets (VCMs) and debt-for-climate/nature swaps.
- Climate finance flows (2014–19, selected totals):
  - Bilateral total adaptation & multiple foci: 478.4 (Millions USD)
  - Multilateral total adaptation & multiple foci: 150.8 (Millions USD)
  - Total average annual adaptation & multiple foci (% GDP): 0.4

### Human capital, physical capital, and structural reforms
- Human capital findings:
  - About 50 percent of children under 5 are stunted.
  - Children on average expect about 10 years of schooling; learning-adjusted years about 6 years.
  - Immunization coverage among the lowest in the world; completeness of birth registration estimated at 13 percent in 2018.
  - COVID-19 vaccination (mid-February/May 2022): fully vaccinated share: 2.9 percent.
- Physical capital and economic complexity:
  - PNG rich in natural wealth but low infrastructure quality and declining economic complexity of exports over past decade.
  - At least 85 percent of total land mass is “unalienated” land governed by customary law.
- Structural reform recommendations:
  - Strengthen property rights and contract enforcement.
  - Continue SOE reforms, tax code modernization, anti-corruption measures.
  - Invest in climate-resilient infrastructure and improve transport, electricity, ICT, water and sanitation.
  - Promote green, inclusive growth and revenue-raising measures linked to climate policy.

### SMP targets, structural benchmarks, and program monitoring
- SMP quantitative outcomes (selected, Annex I):
  - Fiscal deficit of the central government (cumulative, ceiling within the year) — 2021 Outcome: 6.270 (billion kina) — Status: Met (2021 Projection: 6.863).
  - Stock of net international reserves of the BPNG (floor, US$ millions) — 2021 Outcome: 3,240 — Status: Met (2021 Prog./Test Date: 2,000).
  - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative within the year, US$ millions) — 2021 Outcome: 663.6 — Status: Met (2021 Prog.: 660).
  - Tax revenue (floor, cumulative) — 2021 Outcome: 11.1294 (billion kina) — Status: Met (2021 Prog.: 10.868).
  - Social and other priority spending (cumulative floor) — End‑March 2022 Outcome: 0.203 — Status: Not Met (End‑March 2022 Prog.: 1.262).
- SMP structural measures (Dec 2021–Mar 2022):
  - No. 1: Approval of framework for 2022 budget by NEC — Prior Action Met.
  - No. 2: Staffing and Establishment Review — Status: Met.
  - No. 3: Consequential Amendments to the Tax Administration Act — Status: Met.
  - No. 4: Strengthen public debt committee (BPNG and Treasury) — Status: Met.
  - No. 5: Submit CBA amendments in consultation with Fund staff — Status: Not Met (CBA amendments passed without sufficiently strengthening the CBA).

### Data reporting, statistical issues, and program monitoring committee
- Data limitations and improvements:
  - GDP data released with a lag of two years; NSO released GDP for 2019 in November 2021.
  - Fiscal data reporting affected by ransomware attack in late 2021; reporting lags remain a priority.
  - External sector statistics: remote TA in February 2022 to improve BPM6 compilation.
- Program Monitoring Committee:
  - Composed of senior officials from Treasury and BPNG to monitor program performance and transmit supporting materials.
- Data reporting requirements (selected):
  - Net acquisition of financial assets and net incurrence of financial liabilities — Treasury — Quarterly — Reporting Lag: 1 month.
  - Payments on education, health, law and order — Treasury — Quarterly — Reporting Lag: 6 weeks.
  - Detailed BPNG balance sheet data — BPNG — Monthly — Reporting Lag: 1 month.
  - Sale of FX by BPNG to authorized FX dealers — Monthly — Reporting Lag: 1 month.

### Risks, stress tests, and staff advice
- Risks tilted to the downside; key downside risks:
  - Worsening domestic health situation;
  - Weaker external demand;
  - Large commodity price volatility or higher inflation (linked to war in Ukraine or slowdown in China);
  - Domestic political instability delaying reforms;
  - Climate-related natural disasters.
- Upside risks:
  - Higher-than-expected commodity prices;
  - Start of major projects (Papua LNG, P’nyang LNG, Wafi Golpu) and other projects not in baseline;
  - Revenues rising if PNG LNG loan amortization ends and depreciation expenses fall earlier than baseline.
- DSA stress test findings:
  - Exports shocks would cause threshold breaches for all four external sustainability indicators.
  - Contingent liabilities shock (including uncaptured SOE debt of 9 percent of GDP and 3 percent for unfunded superannuation) shifts PV of public debt‑to‑GDP ratio upwards by 16 percentage points from baseline.
  - Market financing risk: EMBI spread elevated; moderate market financing pressures.

### Authorities’ views and commitments
- Authorities broadly agreed with recent developments; highlighted strong economic performance relative to peers.
- Authorities more optimistic on debt-carrying capacity and perceived lower risk of debt distress, citing:
  - Increased revenues by 2027 as PNG LNG loan amortization completes.
  - Strategy to substitute costly financing with concessional multilateral and bilateral financing.
- Commitments:
  - Fiscal consolidation and conservative financing strategies.
  - Continue CBA reform in Phase 2 with IMF TA.
  - Strengthen revenue collection, payroll reform, operationalize ICAC, and improve data sharing.

_International Monetary Fund — Executive Summary and selected excerpts from Papua New Guinea Staff Report (May 25, 2022), content unit 1pngea2022002._

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- PNG’s economy is weathering the pandemic well despite many challenges. Real GDP in 2022 is projected to exceed its 2019 level, and the medium-term outlook is positive, supported by investment in (and revenues from) the resource sector.
- The war in Ukraine is impacting PNG through higher commodity prices and higher inflation; higher commodity prices lead to a stronger balance of payments and higher fiscal revenues, since PNG is a large commodity producer.
- Risks remain skewed to the downside: a worsening health situation given the low vaccination rate, volatility in commodity prices, and political instability.
- PNG is a fragile, climate-vulnerable country with substantial development and governance challenges. More than two thirds of its exports are petroleum gases (primarily liquified natural gas, LNG), gold, and copper.
- From 2014 to 2020: low commodity prices, a severe drought in 2015-16, and a major earthquake in 2018 softened growth, led to FX shortages, and contributed to a pre-pandemic build-up of public debt, which is now at high risk of distress.
- Pandemic context and health indicators:
  - Less than 3 percent of the population is fully vaccinated.
  - Total vaccination (May 13, 2022): 441,214
  - 1st dose: 323,345
  - Fully vaccinated: 263,995
  - Share of population fully vaccinated: 2.9 percent
- General elections scheduled for July 2022; caretaker government during campaigning implies no policy initiatives until a new government is sworn in.

### Recent economic developments and outlook
- 2021 performance:
  - Real GDP growth in 2021: 1.2 percent, driven by agriculture (palm oil, cocoa).
  - Inflation in 2021: 5.7 percent.
- External position and FX:
  - Preliminary 2021 current account gap: –0.9 percent of GDP.
  - The kina estimated as overvalued by about 2.4 percent in real terms (Annex III).
  - FX market pressures have eased though FX shortages persist.
  - Gross international reserves comfortably exceeded the program target of US$2 billion.
- Fiscal 2021:
  - Fiscal deficit in 2021: 6.6 percent of GDP (below the program target of 7.4 percent).
  - Revenues exceeded budget projections driven by higher non-tax revenues, including foreign grants and dividends from the resource sector.
  - The 2021 increase in the general allocation of SDRs was used for budget financing.
- Debt:
  - Public and publicly guaranteed debt remains at high risk of debt distress.
  - The existing Eurobond represents a liquidity risk.
  - The Debt Sustainability Analysis suggests susceptibility to exports and other shocks, signaling downside risks.
- Banking sector:
  - Reported capital adequacy ratio at end-March 2022: 36.3 percent (mostly Tier 1 capital).
  - Non-performing loans (NPLs): 6 percent.
  - AML/CFT regulatory actions initiated in July 2021 against Bank South Pacific (BSP).

### Staff Monitored Program (SMP) performance and Fund engagement
- SMP performance: broadly satisfactory.
  - All quantitative targets (QTs) were met.
  - All structural benchmarks (SBs) were fully met on time, apart from the benchmark related to the Central Banking Act (CBA).
- Specific program outcomes:
  - The 6-month SMP contained: one prior action, 6 QTs, and 4 SBs (Annex I).
  - Authors met all QTs at end-December 2021; December 2021 indicative targets (ITs) were also met.
  - March 2022 ITs preliminarily met except for social and other priority spending (missed due to delayed capital projects).
  - SBs met included: comprehensive payroll review (SB #2) and strengthening of the public debt committee (SB #4).
  - Audited financial statements for major non-petroleum SOEs were published and consequential amendments to the Tax Administration Act (SB #3) were passed alongside the 2022 Budget.
- Fund support and TA:
  - SDR263.2 million (US$363.6 million, 100 percent of quota) was disbursed in June 2020 under the Rapid Credit Facility (RCF).
  - Fund technical assistance provided in national accounts, public debt, government finance and external sector statistics, revenue administration, banking supervision and regulation, and macroeconomic forecasts.
- Engagement history:
  - PNG engaged with the Fund through a Rapid Credit Facility and two SMPs; the pre-pandemic SMP expired in June 2021.
  - Capacity constraints, virtual mission challenges, and limited program experience caused delays in sharing information for timely completion of reviews.

### Central Banking Act (CBA) and monetary policy issues
- December 2021 amendments to the CBA addressed some IMF safeguards concerns but introduced new weaknesses:
  - Positive changes: prohibiting carryover of central bank advances across fiscal years; introducing eligibility criteria for all Board appointments (replacing ex-officio appointments).
  - Concerns introduced:
    - Requirement for BPNG to provide advances to the government on demand.
    - Introduction of growth and employment in the non-resource sector as new (unranked) mandates, potentially conflicting with the price stability mandate.
    - Transfer of monetary policy decision-making to the BPNG Board, creating a conflict with the Board’s oversight role.
- Authorities intend to revisit Phase 1 areas (mandate, advances to government, role of the Board) in Phase 2 of CBA reform and have requested Fund TA.

### Policy priorities and recommendations
- Overall near- and medium-term focus:
  - Address debt vulnerabilities, ease FX shortages, strengthen the CBA, improve governance, and promote climate-resilient and inclusive growth.
- Fiscal policy recommendations:
  - Increase revenues from the resource sector.
  - Improve the payroll system to contain expenditures.
  - Complete revisions to the Income Tax Act.
  - Improve the tax administration system.
  - Update the medium-term revenue strategy with Cabinet oversight.
- Central banking and monetary policy recommendations:
  - Adopt a comprehensive approach to reinstating kina convertibility including:
    - Review of the monetary policy framework.
    - Improve liquidity management and forecasting.
    - Gradual increase in exchange rate flexibility and removal of exchange restrictions.
  - Further amendments to the CBA are needed to sufficiently protect the BPNG’s financial, personal, and institutional autonomy.
- Reforms to raise medium-term growth:
  - Continue structural reforms to boost non-resource sector growth, including SOE reforms, tax code modernization, and anti-corruption measures.
  - Ensure the Independent Commission Against Corruption can fulfill its mandate by developing implementing regulations and recruiting staff.
  - Large climate adaptation needs should be financed mainly from external concessional sources.
  - Intensify efforts to reorient expenditure away from current spending given limited fiscal space.
- Data and program monitoring:
  - Further improve data quality and availability.
  - Address reporting lags and challenges in data compilation.
  - Information sharing has substantially improved compared to the 2020-21 SMP but remains a priority area.

### Authorities’ views
- Authorities broadly agreed with recent developments and highlighted strong economic performance relative to peers.
- They emphasized supportive fiscal measures and prudent policies to protect the vulnerable and maintain non-resource sector activity during COVID-19 and in response to the war in Ukraine.
- Authorities were more optimistic about debt-carrying capacity and perceived a lower risk of debt distress, citing increased revenues by 2027 as debt payments for the PNG LNG project are completed.

*Source: Executive Summary, Papua New Guinea, May 25, 2022, International Monetary Fund.*

### 16.      The Safeguards Assessment of the BPNG, completed in August 2021, found that

### 16.      The Safeguards Assessment of the BPNG, completed in August 2021, found that

### Safeguards assessment — key findings
- Amendments to the CBA were necessary to safeguard the financial, personal, and institutional autonomy of the BPNG and enhance its governance arrangements.
- Weaknesses identified included:
  - Internal audit mechanism and internal controls, particularly with regards to Board vacancies, the investment policy, and the emergency lending framework of the BPNG.
  - External audit findings and arrangements.
- The BPNG is addressing recommendations on internal audit practices and the financial reporting mechanism.
- Progress in implementing recommendations has been slow, in part due to management changes introduced with the CBA amendments.

### 2022 SMP — Key Objectives and Measures (Box 1)
Fiscal
- To gradually strengthen medium-term debt sustainability:
  - Lower the fiscal deficit in 2022 to 6.0 percent of GDP, with ½ percent of GDP in policy measures,
  - Contain spending on compensation of employees, and
  - Strengthen tax administration and collection.

Monetary and FX
- To prepare for a gradual return to kina convertibility:
  - Strengthen liquidity management, and
  - Reduce delay in fulfilling FX orders.

Structural and Governance
- Address weaknesses in the governance, autonomy, and internal controls of the BPNG.

### Authorities’ views on safeguards and engagement
- Authorities welcomed continued IMF engagement that started with the Due Diligence Exercise and Staff Monitored Program in 2019.
- Support for placement of an IMF Resident Representative in Port Moresby to strengthen engagement.
- Authorities requested Technical Assistance from the IMF to support the Government’s Independent Advisory Group process and the reforms to modernize and strengthen BPNG.
- Expectation that TA and engagement will improve external understanding and help tailor international best practice to PNG's circumstances.

### Outlook and risks — growth and drivers
- Growth projections:
  - 2022: 4.2 percent
  - 2023: 4.7 percent
  - Medium term: 3.0 percent
- Real GDP in 2022 is projected to exceed its 2019 level, barring large new negative shocks.
- 2022 assumptions and contingencies:
  - Ok-Tedi and Simberi mines expected to return to normal operations in 2022.
  - Reopening of the Porgera gold mine assumed in Q4 2022; if postponed to 2023, 2022 growth would be slightly lower and 2023 slightly higher.
  - Gradual easing of containment measures and higher government capital spending support non-resource sector recovery.
  - War in Ukraine impacts PNG through higher commodity prices and higher inflation; higher commodity prices strengthen balance of payments and fiscal revenues.
- Medium-term drivers and dependencies:
  - Gradual recovery in the non-resource sector expected to drive growth.
  - Public debt as a percentage of GDP projected to decline due to envisaged fiscal consolidation, requiring steadfast reform implementation.
  - Outlook depends on: (a) the health burden of the pandemic in PNG, (b) commodity prices and external demand, and (c) structural reforms including SOE reforms, anti-corruption measures and tax code modernization.

### Risks
- Risks are tilted to the downside.
- Downside risks include:
  - Worsening domestic health situation,
  - Weaker external demand for PNG’s exports,
  - Large volatility in commodity prices, or higher inflation (potentially related to the war in Ukraine or slowdown in China),
  - Domestic political instability and difficulty forming a government that could delay reform implementation,
  - Climate-related natural disasters.
- Upside risks include:
  - Higher-than-expected commodity prices,
  - Start of major projects (Papua LNG, P’nyang LNG, Wafi Golpu) and other smaller projects not in the baseline,
  - Revenues may increase significantly if amortization of the PNG LNG Project loans ends, and depreciation expenses fall, earlier than the baseline.

### Fiscal policies — strengthening debt sustainability
- Rapid fiscal consolidation is appropriate to strengthen debt sustainability.
- Required adjustment:
  - Lowering the deficit by about 5½ percent of GDP by 2027 to meet the Fiscal Responsibility Act target of government debt no more than 40 percent of GDP over the long term.
  - Achieving a balanced budget by 2027 would lower risks from significant debt service obligations on external borrowing coming due in 2028.
- Priority: increase revenues from the resource sector to strengthen debt sustainability.
  - Since 2012, average resource sector revenue has fallen even as resource sector’s share of GDP more than doubled, to a third of GDP.
  - Authorities project a sharp increase in tax revenues from the PNG LNG project from 2026 onward, after tax exemptions expire.
  - Staff advised introducing an additional moderate ad valorem levy on future resource projects to be paid directly to the central government, in line with IMF TA recommendations.
- Revenue mobilisation and tax administration:
  - Tax revenues have declined by about 5 percent of GDP since 2012, driven by personal income tax and company tax.
  - GST revenue collection improved in 2021; PNG collects only a quarter of its potential GST.
  - New Income Tax Act (ITA) expected to improve compliance over the medium term.
  - March 2022 measures: new flat tax on banking and telecommunication sectors targeting companies with market concentration over 40 percent, estimated to yield additional revenues of 0.3 percent of GDP in 2022.
  - March change: annual levy on telecommunications sector replaced by a one-off charge of K350 million (0.3 percent of GDP), raising the yield for 2022 to 0.5 percent of GDP but lowering medium-term gains to less than 0.2 percent annually.
  - IRC plans to introduce an Integrated Tax Administration System (online filing/payments).
  - Staff recommended a new Medium-term Revenue Strategy (MTRS) with Cabinet oversight; authorities requested TA to assist review of MTRS.
- Expenditure management:
  - Near-term focus on strengthening payroll systems; Staffing and Establishment Survey (SB#2) in 2022 to determine staffing levels and integrate payroll into IFMS.
  - Authorities committed to increasing healthcare spending and maintaining social spending in real terms.
  - Staff emphasized containing compensation of employees to free room for social and development spending, and recommended budgeting for clearance of arrears to the staff retirement fund.
  - Strengthening PFM and a Public Investment Management Assessment recommended.
- Temporary measures to mitigate high prices due to the war in Ukraine (March 2022):
  - Removal of the fuel excise and GST on fuel products for six months;
  - Raising the income tax threshold from K12,500 to K17,500 from 1 June 2022 to the end of the year;
  - Paying for school project fees;
  - Purchasing selected staple food items for sale at fixed prices.
  - Package expected to cost K611 million (0.6 percent of GDP), to be financed through higher resource revenues, keeping the nominal fiscal deficit and medium-term consolidation path unchanged.
  - Given weak social safety nets, targeted transfers were judged not feasible; development of a formal social safety net recommended.
- Authorities’ stance:
  - Committed to budget repair to strengthen long-term debt sustainability.
  - Expect improved revenues from the concentration levy; see levies as compatible with continued high profitability of affected companies.
  - Implementation of Tax Administration Act and revised ITA expected to strengthen revenue collection and streamline compliance.
  - Strategy based on equity participation in new projects expected to yield significant medium-term benefits.
  - Completion of the Staffing and Establishment Review to feed into personnel emoluments budget for 2023.
  - Pilot project linking payrolls to issuance of warrants to bring payments into IFMS and under Parliamentary Appropriation limits.

### Monetary, exchange rate, and financial sector policies
- Exchange rate regime and FX market:
  - De jure exchange rate regime is floating, but de facto the kina is classified as stabilized, impeding exchange rate adjustment and contributing to FX shortage.
  - Staff assesses the kina to be overvalued.
  - Since 2014, BPNG imposed a trading margin on FX buy-sell spreads of authorized dealers, impeding exchange rate adjustment to a market-clearing level and, coupled with insufficient supply, resulting in FX rationing.
  - Small FX orders are fulfilled first; larger FX orders often experience delays. Anecdotal evidence of large pent-up demand and use of bilateral off-market deals.
- 2021–early 2022 developments:
  - Favorable commodity prices, sustained donor inflows, the SDR allocation, and BPNG provision of FX improved fulfillment of FX orders relative to 2020.
  - Despite stable exchange rate against the US dollar, there has been no commensurate increase in reserves; FX shortages persist.
  - Kina overvaluation and FX rationing created incentives for firms to keep FX offshore.
  - Exit from the current system should be carefully planned due to pent-up FX demand and risks of exchange rate overshooting.
- Reinstating kina convertibility — policy requirements:
  - BPNG needs effective tools to manage current excess kina liquidity as a precondition.
  - Authorities committed to strengthening the Public Debt Committee (SB #4) to improve liquidity management and forecasting.
  - Eventual move to kina convertibility calls for review of the monetary policy framework, greater exchange rate flexibility, and removal of exchange restrictions.
  - Further TA from the Fund recommended (Annex V and VII).
- Monetary policy stance and inflation risks:
  - BPNG reduced its policy rate, the Kina Facility Rate, to 3 percent and has kept it at 3 percent since 2020.
  - BPNG plans to keep an accommodative stance citing weak recovery; staff note tightening may be needed if inflationary pressures persist to avoid second-round effects, and any tightening should be data dependent.
  - BPNG will likely keep the exchange rate stable against the US dollar to avoid further inflationary pressures, but this impedes needed exchange rate adjustment to eliminate kina overvaluation and ease FX shortages.
  - U.S. Federal Reserve monetary policy tightening further complicates policy trade-offs.
- Financial sector structure and inclusion:
  - Financial sector is underdeveloped: four commercial banks (two domestic and two foreign), credit to GDP is just under 20 percent.
  - Preliminary plans to increase access to credit for agricultural or informal enterprises (PNG’s Financial Sector Development Strategy 2016-2020).
  - Superannuation funds, life insurance companies and the stock exchange are developing.
  - Financial sector inclusion constrained by low urbanization, large informal economy, and low financial literacy.
  - COVID financial sector measures (loan payment deferrals) were temporary and have expired without negative implications for banking asset quality.
  - Staff recommended a Financial Sector Stability Review.
- Authorities’ differing views:
  - Treasury agreed on need to gradually restore exchange rate convertibility.
  - BPNG argued the exchange rate is market-determined and saw no need for change; BPNG sees no FX rationing.
  - Treasury emphasized FX shortages and overvalued fixed exchange rate harm non-mineral sector growth and employment and called for changing BPNG incentives to move away from sole focus on inflation.

### Strengthening the Central Banking Act (CBA)
- Further amendments needed to strengthen the CBA.
- Phase 2 of the CBA reform expected to revisit areas covered under Phase 1:
  - Clarify the mandate of the central bank;
  - Strengthen institutional, operational, personal, and financial autonomy of the BPNG;
  - Clarify the role of the Board in monetary policy formulation to avoid complicating the accountability framework of the BPNG.
- Staff stressed progress toward a satisfactory CBA, to be drafted in consultation with Fund staff, will be essential for an eventual upper credit tranche (UCT) program.
- Recommended subsequent amendments to address remaining weaknesses identified by the safeguards assessment and those introduced by the new amendments.
- Staff recommended further amendments be made after careful consideration of the legal framework (legal structure and mandate, governance, financial/personal/institutional autonomy, transparency, and accountability).

*Source: 1pngea2022002 - 16.*

### 34.      Staff noted that the overvalued kina and FX shortages have hurt the non-resource

### 1pngea2022002 - 34.      Staff noted that the overvalued kina and FX shortages have hurt the non-resource

### Exchange rate, FX shortages, and monetary framework
- Staff finding: The overvalued kina and FX shortages have hurt non-resource sector growth.
- Staff recommendation: Do not add an unranked growth and employment mandate for the BPNG to address FX shortages.
- Staff recommendation: Move closer to the equilibrium exchange rate and improve FX market operations to carefully address pent-up demand for FX.
- Staff warning: Be deliberate in next steps; rapid and frequent changes to the BPNG’s legal framework will likely lead to sub-optimal outcomes and weaken central bank credibility.
- Staff policy: A comprehensive approach to reinstating kina convertibility is needed, including:
  - review of the monetary policy framework,
  - continued improvements in liquidity management and forecasting,
  - plan for a gradual increase in exchange rate flexibility and removal of exchange restrictions,
  - measures to increase financial inclusion and financial sector development.
- Assessment: PNG’s external position in 2021 was broadly in line with fundamentals, with the kina still overvalued in real terms. FX market pressures have eased, though shortages persist.

### Temporary Advance Facility (TAF) and central bank financing
- Observation: Authorities have used the Temporary Advance Facility (TAF) prudently so far.
- Fact: Use of TAF was repaid at the end of 2021 following the drawdown of external financing.
- Early 2022 status: Minimal use of the TAF; cash flow funded from oversubscriptions in Treasury Bills auctions and carry-over of funds from previous year’s external financing.
- Institutional improvement: Waigani Public Account (the Treasury Single Account) has been separated from the TAF account to ease monitoring, reporting and audit.
- Observation: So far in 2022, there have not been any central bank purchases of government securities to help finance the budget (the slack arrangement).
- Staff appraisal: The prudent use of the TAF so far is welcome.

### Central Banking Act (CBA) amendments, governance of BPNG, and authorities’ views
- Authorities’ view: 2021 amendments strengthened the BPNG Board and removed ex-officio positions; move to more collegiate decision-making on monetary policy; Phase 2 move to a Monetary Policy Committee to allow greater input from partners.
- Authorities’ view: The BPNG Board is now viewed as more empowered, more qualified, and better aligned with increased responsibilities.
- Authorities’ view: Prudent use of the TAF to manage cash flow within the fiscal year; new limit on purchase of government securities to prevent monetary financing.
- Treasury concern: New growth and employment objectives will reduce BPNG’s incentive to maintain a stabilized exchange rate.
- BPNG concern: Introduction of new, unranked objectives presents challenges for monetary policy to pursue multiple objectives.
- Staff recommendation: The CBA needs to be revisited; Phase 2 must address governance, autonomy, transparency, and accountability weaknesses identified by the safeguards assessment and following 2021 CBA amendments.
- Process note: The window for corrective actions during the SMP has closed due to the electoral calendar; authorities agreed to revisit key concerns as part of Phase 2 CBA reform, supported by IMF TA.
- Staff position: Support authorities’ request to complete the sole review under the 6-month SMP.

### Fiscal stance, debt, and revenue policy recommendations
- Staff appraisal: Rapid progress on fiscal consolidation, as envisaged by the authorities, is appropriate to strengthen debt sustainability.
- Fiscal rule reference: Fiscal Responsibility Act specifies government debt should be maintained at no more than 40 percent of GDP over the long term.
- Staff recommendation: Achieving a balanced budget by 2027 would lower risks from significant debt service obligations on external borrowing coming due in 2028.
- Staff recommendation: Priority is to increase revenues from the resource sector to lower the deficit and strengthen debt sustainability.
- Staff recommendation: Introduce an additional moderate ad valorem levy on future resource projects, payable directly to the central government, to yield revenues immediately and lower risk compared to equity participation.
- Staff recommendation: Complete revisions to the Income Tax Act, improve tax administration to allow online filing and payments, and update the medium-term revenue strategy with Cabinet oversight.
- Staff recommendation: Strengthen payroll systems throughout government to contain remuneration expenditure and increase room for social and development spending.
- Staff appraisal: PNG’s public and publicly guaranteed debt is at high risk of debt distress but remains sustainable.

### Governance, procurement transparency, and anti-corruption efforts
- Institutional reform: 2020 ICAC law establishes a new body with power to investigate and pursue complex corruption cases; law faces a constitutional challenge, but interim ICAC office is preparing for full operationalization via implementing regulations and staff recruitment.
- Indicator: Corruption Perception Index compiled by Transparency International shows an improvement in 2021.
- Governance assessment: Significant governance challenges remain, reflected in PNG’s negative scores in almost all components of Worldwide Governance Indicators.
- Staff recommendation: A sustained, multi-year effort with close external support, including from the IMF, is needed to address governance weaknesses and corruption vulnerabilities.
- Procurement transparency issue: Staff urged the government to resume updating information on COVID-related procurement at https://www.procurement.gov.pg/covid-19-procurement/, which has not been updated since mid-2020.
- Staff recommendation: Authorities reiterated intention to conduct an audit of procurement contracts; staff recommended the audit start as soon as possible.
- Note: National Procurement Act has been operationalized, but improved commitment to transparency is necessary for durable governance improvement.

### AML/CFT framework
- Historical context: PNG’s latest mutual evaluation against FATF standards was in 2011, with PNG rated partially compliant or non-compliant with 32 out of 40 recommendations, leading to placement on FATF’s grey list in 2014.
- Progress: Following significant improvements, PNG was removed from the FATF grey list in 2016.
- Upcoming evaluation: A favorable evaluation at the upcoming evaluation, currently planned for 2023, will be important.
- Preparations: Financial Analysis and Supervision Unit (FASU) has provided training to supervised entities, conducted sectoral risk assessments, and is working on changes to the AML/CFT legal framework.
- Authorities’ view: Active recruiting for ICAC operationalization; expectation that ICAC will be upheld at the Supreme Court; BPNG commended FASU’s prudent and active regulatory actions in line with AML/CFT commitments.

### Climate and biodiversity
- Staff assessment: Climate issues are macrocritical in PNG given high vulnerability to climate change and large adaptation needs.
- Major hazards: sea level rise, coastal erosion, coastal and inland flooding, drought, and landslides.
- Environmental capital note: PNG has high environmental capital supporting extensive subsistence farming, increasingly under threat from climate change and deforestation.
- Estimated adaptation needs: about 2 percent of GDP annually for the next 10 years; need to be financed largely from external sources given limited fiscal space.
- Forest and climate policy recommendations:
  - Urgent action to reduce deforestation rate while still lower than in other major rainforest countries.
  - Promote green, inclusive growth and raise revenue.
  - Establish Voluntary Carbon Markets (VCMs); authorities have recently joined a carbon offsets scheme with Australia.
  - Explore debt-for-climate swaps as part of a broader climate finance strategy.
  - Implement National Strategy on Reducing Emissions from Deforestation and Forest Degradation (REDD+).
  - Pursue REDD+ Results Based Payments through the Green Climate Fund and other entities.
- Authorities’ view: Authorities welcomed staff focus on climate issues; BPNG Center for Excellence in Financial Inclusion (CEFI) noted initiative to design a green finance policy including a green taxonomy planned to launch this year.

### Data availability and program monitoring
- Progress: PNG has strengthened data reporting to support program monitoring; a high-level Program Monitoring Committee was set up to maintain close contact with Fund staff and follow-up on data requests.
- Improvement: Substantial improvement in information sharing compared to the 2020-21 SMP; meetings and information flows more frequent in the 2021-22 SMP.
- Remaining issues: Reporting lags remain a priority; fiscal data reporting was affected by a ransomware attack in late 2021, hindering access to funds and continuing to affect quality and timeliness of fiscal data.
- Staff recommendation: Implement recommendations of recent Fund TA, including on public sector debt and external sector statistics.
- Authorities’ view: Agreed information-sharing has improved significantly with the Program Monitoring Committee and reiterated commitment to greater engagement with the Fund and successful completion of the SMP.
- Staff appraisal: PNG needs to further improve data quality and availability; addressing reporting lags and data compilation challenges remains a priority, particularly for key fiscal indicators such as expenditure, revenue and financing.

### Staff appraisal: economic outlook, inflation, and key policy priorities
- Outlook: Real GDP in 2022 is projected to exceed its 2019 level; medium-term outlook positive, supported by the resource sector.
- Inflation: Inflationary pressures have increased; BPNG should tighten monetary policy sooner if inflationary pressures persist to avoid second-round effects from higher food and energy prices.
- Policy priorities (near- and medium-term):
  - Address debt vulnerabilities and maintain inflation under control.
  - Ease foreign exchange shortages.
  - Strengthen the CBA.
  - Improve governance.
  - Promote climate-resilient and inclusive growth.
- SMP performance: Broadly satisfactory; all quantitative targets met and all structural benchmarks fully met on time, apart from the benchmark related to the CBA. Amendments addressed some weaknesses but weakened the CBA in other areas.
- Engagement: Authorities’ willingness to remain engaged with the Fund is welcome; further Fund engagement will support reforms, raise revenue, and support green, inclusive growth.
- Institutional proposal: Next Article IV consultation proposed on the standard 12-month cycle.

*Source: IMF staff report excerpts from the Papua New Guinea SMP (selected sections).*

### 8.6 million

### Papua New Guinea — Key Macroeconomic, Fiscal, Monetary, and External Indicators (2017–2027)

### Real sector and prices
- Population (implied): 8.6 million
- GDP per capita (2019): US$2,878
- Real GDP growth (annual)
  - 2017: 3.5
  - 2018: -0.3
  - 2019: 4.5
  - 2020: -3.5
  - 2021: 1.2
  - 2022 (Est.): 4.2
  - 2023 (Proj.): 4.7
  - 2024 (Proj.): 3.0
  - 2025 (Proj.): 3.0
  - 2026 (Proj.): 3.0
  - 2027 (Proj.): 3.0
- Resource sector growth (annual)
  - 2017: 8.1
  - 2018: -9.2
  - 2019: 11.3
  - 2020: -8.3
  - 2021: -3.5
  - 2022 (Est.): 4.8
  - 2023 (Proj.): 5.9
  - 2024 (Proj.): -0.1
  - 2025 (Proj.): 0.1
  - 2026 (Proj.): 0.1
  - 2027 (Proj.): 0.1
- Non-resource growth (annual)
  - 2017: 1.5
  - 2018: 4.0
  - 2019: 1.6
  - 2020: -1.2
  - 2021: 3.2
  - 2022 (Est.): 4.0
  - 2023 (Proj.): 4.3
  - 2024 (Proj.): 4.2
  - 2025 (Proj.): 4.1
  - 2026 (Proj.): 4.1
  - 2027 (Proj.): 4.1
- Sector shares (percent)
  - Mining and quarrying (share)
    - 2017: 10.2
    - 2018: 10.4
    - 2019: 10.8
    - 2020: 10.0
    - 2021: 9.4
    - 2022: 10.4
    - 2023: 12.1
    - 2024: 11.9
    - 2025: 11.5
    - 2026: 11.0
    - 2027: 10.5
  - Oil and gas extraction (share)
    - 2017: 16.5
    - 2018: 17.5
    - 2019: 17.6
    - 2020: 16.4
    - 2021: 17.7
    - 2022: 20.7
    - 2023: 17.3
    - 2024: 14.9
    - 2025: 12.8
    - 2026: 11.9
    - 2027: 11.2
- Inflation (CPI)
  - Annual average
    - 2017: 5.4
    - 2018: 4.4
    - 2019: 3.9
    - 2020: 4.9
    - 2021: 4.5
    - 2022: 6.4
    - 2023 (Proj.): 5.4
    - 2024 (Proj.): 4.9
    - 2025 (Proj.): 4.6
    - 2026 (Proj.): 4.5
    - 2027 (Proj.): 4.5
  - End-period CPI
    - 2017: 4.7
    - 2018: 4.8
    - 2019: 2.7
    - 2020: 5.1
    - 2021: 5.7
    - 2022: 6.0
    - 2023 (Proj.): 5.2
    - 2024 (Proj.): 4.7
    - 2025 (Proj.): 4.5
    - 2026 (Proj.): 4.5
    - 2027 (Proj.): 4.5

### Central government operations (selected levels and ratios)
- Revenue and grants (percent of GDP)
  - 2017: 15.9
  - 2018: 17.7
  - 2019: 16.3
  - 2020: 14.2
  - 2021: 14.4
  - 2022: 14.7
  - 2023 (Proj.): 15.6
  - 2024 (Proj.): 14.8
  - 2025 (Proj.): 15.0
  - 2026 (Proj.): 15.3
  - 2027 (Proj.): 15.6
- Resource revenue (percent of GDP)
  - 2017: 0.9
  - 2018: 1.8
  - 2019: 1.5
  - 2020: 0.9
  - 2021: 0.9
  - 2022: 1.1
  - 2023 (Proj.): 1.2
  - 2024 (Proj.): 2.0
  - 2025 (Proj.): 1.0
  - 2026 (Proj.): 1.3
  - 2027 (Proj.): 1.5
- Expenditure and net lending (percent of GDP)
  - 2017: 18.4
  - 2018: 20.3
  - 2019: 20.7
  - 2020: 22.7
  - 2021: 21.8
  - 2022: 21.3
  - 2023 (Proj.): 21.6
  - 2024 (Proj.): 20.3
  - 2025 (Proj.): 18.9
  - 2026 (Proj.): 18.4
  - 2027 (Proj.): 17.5
- Net lending(+)/borrowing(-) (percent of GDP)
  - 2017: -2.5
  - 2018: -2.6
  - 2019: -4.4
  - 2020: -8.6
  - 2021: -6.6
  - 2022: -5.5
  - 2023 (Proj.): -4.2
  - 2024 (Proj.): -3.1
  - 2025 (Proj.): -1.7
  - 2026 (Proj.): -0.6
  - 2027 (Proj.): 0.0
- Non-resource net lending(+)/borrowing(-) (percent of GDP)
  - 2017: -3.4
  - 2018: -4.4
  - 2019: -6.2
  - 2020: -9.4
  - 2021: -7.7
  - 2022: -7.5
  - 2023 (Proj.): -5.2
  - 2024 (Proj.): -4.3
  - 2025 (Proj.): -3.2
  - 2026 (Proj.): -2.0
  - 2027 (Proj.): -1.3

- Summary central government nominal levels (selected)
  - Revenue and Grants (millions of kina)
    - 2017: 11,525
    - 2018: 14,086
    - 2019: 13,681
    - 2020 (Prog.): 12,093
    - 2021 (Prel.): 13,424
    - 2022 (Prog.): 13,860
    - 2023 (Budget): 15,730
    - 2024 (Revised): 16,190
    - 2025 (Proj.): 16,416
    - 2026 (Proj.): 17,117
    - 2027 (Proj.): 18,484
  - Taxes (millions of kina)
    - 2017: 9,141
    - 2018: 10,476
    - 2019: 10,918
    - 2020: 9,802
    - 2021: 10,868
    - 2022: 11,129
    - 2023: 12,401
    - 2024: 12,523
    - 2025: 12,138
    - 2026: 13,692
    - 2027: 14,963
  - Resource revenue (millions of kina)
    - 2017: 676
    - 2018: 1,429
    - 2019: 1,242
    - 2020: 752
    - 2021: 871
    - 2022: 1,016
    - 2023: 1,194
    - 2024: 1,588
    - 2025: 2,199
    - 2026: 1,194
    - 2027: 1,531
  - Expenditure (millions of kina)
    - 2017: 13,320
    - 2018: 16,134
    - 2019: 17,396
    - 2020: 19,398
    - 2021: 20,287
    - 2022: 20,131
    - 2023: 21,825
    - 2024: 22,175
    - 2025: 22,401
    - 2026: 21,953
    - 2027: 22,201
  - Net lending(+)/borrowing(-) (millions of kina)
    - 2017: -1,795
    - 2018: -2,048
    - 2019: -3,715
    - 2020: -7,305
    - 2021: -6,863
    - 2022: -6,270
    - 2023: -6,095
    - 2024: -5,985
    - 2025 (Proj.): -5,985
    - 2026 (Proj.): -4,836
    - 2027 (Proj.): -3,716
- Gross government debt (levels, millions of kina)
  - 2017: 23,558
  - 2018: 29,120
  - 2019: 33,678
  - 2020: 40,168
  - 2021: 46,234
  - 2022: 48,173
  - 2023 (Proj.): 51,750
  - 2024 (Proj.): 52,765
  - 2025 (Proj.): 54,158
  - 2026 (Proj.): 56,772
  - 2027 (Proj.): 61,054
- Gross government debt (percent of GDP)
  - 2017: 32.5
  - 2018: 36.7
  - 2019: 40.2
  - 2020: 47.1
  - 2021: 49.5
  - 2022: 48.9
  - 2023 (Proj.): 51.7
  - 2024 (Proj.): 52.8
  - 2025 (Proj.): 54.1
  - 2026 (Proj.): 61.0
  - 2027 (Proj.): 52.7

### Balance of payments and external sector
- Exports, f.o.b. (US$ billions)
  - 2017: 10.1
  - 2018: 9.7
  - 2019: 11.0
  - 2020: 10.0
  - 2021: 9.7
  - 2022: 12.3
  - 2023 (Proj.): 12.7
  - 2024 (Proj.): 12.7
  - 2025 (Proj.): 12.9
  - 2026 (Proj.): 13.2
  - 2027 (Proj.): 13.5
- Of which resource sector exports (US$ billions)
  - 2017: 7.7
  - 2018: 7.4
  - 2019: 8.3
  - 2020: 6.6
  - 2021: 7.8
  - 2022: 7.9
  - 2023 (Proj.): 8.1
  - 2024 (Proj.): 8.4
  - 2025 (Proj.): 8.8
  - 2026 (Proj.): 9.1
  - 2027 (Proj.): 9.4
- Imports, c.i.f. (US$ billions)
  - 2017: -2.5
  - 2018: -2.5
  - 2019: -3.9
  - 2020: -3.3
  - 2021: -3.2
  - 2022: -3.5
  - 2023 (Proj.): -3.7
  - 2024 (Proj.): -3.9
  - 2025 (Proj.): -4.1
  - 2026 (Proj.): -4.3
  - 2027 (Proj.): -4.5
- Current account (including grants) (US$ billions)
  - 2017: 6.5
  - 2018: 5.9
  - 2019: 4.5
  - 2020: 5.5
  - 2021: 5.1
  - 2022: 7.3
  - 2023 (Proj.): 7.4
  - 2024 (Proj.): 7.2
  - 2025 (Proj.): 7.3
  - 2026 (Proj.): 7.4
  - 2027 (Proj.): 7.5
- Current account (percent of GDP)
  - 2017: 28.4
  - 2018: 24.5
  - 2019: 18.3
  - 2020: 22.4
  - 2021: 18.7
  - 2022: 23.1
  - 2023 (Proj.): 22.0
  - 2024 (Proj.): 20.6
  - 2025 (Proj.): 19.9
  - 2026 (Proj.): 19.0
  - 2027 (Proj.): 18.2
- Gross official international reserves
  - Levels (US$ billions)
    - 2017: 1.7
    - 2018: 2.2
    - 2019: 2.3
    - 2020: 2.7
    - 2021: 3.2
    - 2022: 3.0
    - 2023 (Proj.): 3.0
    - 2024 (Proj.): 2.8
    - 2025 (Proj.): 2.7
    - 2026 (Proj.): 2.6
    - 2027 (Proj.): 2.6
  - In months of goods and services imports
    - 2017: 5.2
    - 2018: 4.6
    - 2019: 4.8
    - 2020: 7.5
    - 2021: 8.3
    - 2022: 7.3
    - 2023 (Proj.): 6.9
    - 2024 (Proj.): 5.0
    - 2025 (Proj.): 4.8
    - 2026 (Proj.): 4.8
    - 2027 (Proj.): 4.5
- Public external debt (percent of GDP)
  - 2017: 12.3
  - 2018: 14.8
  - 2019: 17.2
  - 2020: 21.8
  - 2021: 24.4
  - 2022: 22.0
  - 2023 (Proj.): 21.8
  - 2024 (Proj.): 21.0
  - 2025 (Proj.): 19.7
  - 2026 (Proj.): 18.0
  - 2027 (Proj.): 16.4

### Exchange rates and terms of trade
- US$/kina (end-period)
  - 2017: 0.3095
  - 2018: 0.2970
  - 2019: 0.2935
  - 2020: 0.2850
  - 2021: 0.2850
  - 2022: ...
- Terms of trade (2010=100, end-period)
  - 2017: 56.7
  - 2018: 56.8
  - 2019: 60.8
  - 2020: 68.8
  - 2021: 55.8
  - 2022 (Est.): 62.7
  - 2023 (Proj.): 65.5
  - 2024 (Proj.): 66.4
  - 2025 (Proj.): 67.5
  - 2026 (Proj.): 68.2
  - 2027 (Proj.): 68.4

### Monetary developments and banking sector
- Broad money (annual percentage change)
  - 2017: -0.9
  - 2018: -3.8
  - 2019: 4.4
  - 2020: 7.0
  - 2021: 13.4
  - 2022: -2.1
  - 2023 (Proj.): 16.7
  - 2024 (Proj.): 5.7
  - 2025 (Proj.): 4.8
  - 2026 (Proj.): 5.5
  - 2027 (Proj.): 4.8
- Credit to the private sector (annual percentage change)
  - 2017: -3.8
  - 2018: 7.4
  - 2019: 4.1
  - 2020: 4.2
  - 2021: 0.4
  - 2022: 8.2
  - 2023 (Proj.): 8.7
  - 2024 (Proj.): 8.1
  - 2025 (Proj.): 8.6
  - 2026 (Proj.): 8.6
  - 2027 (Proj.): 8.5
- Interest rate (182-day T-bills; period average)
  - 2017: 7.1
  - 2018: 7.0
  - 2019: 6.4
  - 2020: 5.6
  - 2021: 6.0
  - 2022: 6.8
  - 2023 (Proj.): 7.9
  - 2024 (Proj.): 8.3
  - 2025 (Proj.): 8.1
  - 2026 (Proj.): 7.8
  - 2027 (Proj.): 7.5

- Bank of PNG reserves and monetary aggregates (selected levels, end-period, millions of kina)
  - Gross international reserves (end-year, US$ millions)
    - 2017: 1,682
    - 2018: 2,230
    - 2019: 2,309
    - 2020: 2,686
    - 2021: 3,240
    - 2022: 3,040
    - 2023 (Proj.): 3,014
  - Reserve money (end-period, millions of kina)
    - 2017: 5,363
    - 2018: 5,261
    - 2019: 5,915
    - 2020: 6,046
    - 2021: 6,702
    - 2022: 7,495
    - 2023 (Proj.): 7,466
  - Broad money (end-period, millions of kina)
    - 2017: 22,208
    - 2018: 21,368
    - 2019: 22,318
    - 2020: 23,880
    - 2021: 27,091
    - 2022: 26,523
    - 2023 (Proj.): 30,959

### Financial stability indicators (selected, fourth quarter data unless noted)
- Capital adequacy (percent)
  - Capital to risk-weighted assets
    - 2017: 38.1
    - 2018: 37.1
    - 2019: 36.1
    - 2020: 39.2
    - 2021: 41.1
    - 2022 (March): 36.3
  - Tier 1 capital to risk-weighted assets
    - 2017: 30.8
    - 2018: 29.6
    - 2019: 28.2
    - 2020: 31.9
    - 2021: 32.5
    - 2022 (March): 32.9
- Asset quality
  - Nonperforming loans to total loans
    - 2017: 2.8
    - 2018: 3.7
    - 2019: 3.8
    - 2020: 5.3
    - 2021: 6.2
    - 2022 (March): 6.0
- Earnings and profitability
  - Return on assets
    - 2017: 3.4
    - 2018: 3.8
    - 2019: 4.1
    - 2020: 3.8
    - 2021: 4.3
    - 2022 (March): 6.2
  - Return on equity (Tier 1 capital basis)
    - 2017: 25.1
    - 2018: 26.4
    - 2019: 28.4
    - 2020: 25.6
    - 2021: 30.9
    - 2022 (March): 44.7
- Liquidity
  - Liquid assets to total assets
    - 2017: 16.9
    - 2018: 15.9
    - 2019: 17.7
    - 2020: 18.3
    - 2021: 18.9
    - 2022 (March): 19.7
  - Loan-to-deposit ratio
    - 2017: 65.8
    - 2018: 71.4
    - 2019: 71.3
    - 2020: 65.6
    - 2021: 59.7
    - 2022 (March): 57.5

### Key nominal GDP series (millions of kina)
- GDP at current prices
  - 2017: 72,522
  - 2018: 79,405
  - 2019: 83,846
  - 2020: 85,357
  - 2021: 93,079
  - 2022: 94,609
  - 2023 (Proj.): 101,003
  - 2024 (Proj.): 109,344
  - 2025 (Proj.): 109,344
  - 2026 (Proj.): 115,992
  - 2027 (Proj.): 120,783
- Non-resource nominal GDP (millions of kina)
  - 2017: 53,139
  - 2018: 57,280
  - 2019: 60,088
  - 2020: 62,884
  - 2021: 73,836
  - 2022: 75,287
  - 2023 (Proj.): 73,836
  - 2024 (Proj.): 81,839
  - 2025 (Proj.): 88,502
  - 2026 (Proj.): 95,565
  - 2027 (Proj.): 103,202

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

### Annex I. Staff Monitored Program Targets

### Annex I. Staff Monitored Program Targets

### Quantitative and Indicative Targets (2021–2022)
- Fiscal deficit of the central government (cumulative, ceiling within the year)
  - 2021 Projection: 6.863 (billion kina) — Outcome: 6.270 — Status: Met
  - End-March 2022 Prog.: 2.563 — Outcome: -0.895 — Status: Met
  - End-June 2022 Prog.: 3.824
- 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)
  - 2021 Prog.: 0 — Outcome: 0 — Status: Met
  - End-March 2022 Prog.: 0 — Outcome: 0 — Status: Met
  - End-June 2022 Prog.: 0
- External debt service arrears of the central government (ceiling, US$ millions)
  - 2021 Prog.: 0 — Outcome: 0 — Status: Met
  - End-March 2022 Prog.: 0 — Outcome: 0 — Status: Met
  - End-June 2022 Prog.: 0
- Stock of net international reserves of the BPNG (floor, US$ millions)
  - 2021 Prog./Test Date: 2,000 — Outcome: 3,240 — Status: Met
  - End-March 2022 Prog.: 2,000 — Outcome: 3,000 — Status: Met
  - End-June 2022 Prog.: 2,000
- BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative within the year, US$ millions)
  - 2021 Prog.: 660 — Outcome: 663.6 — Status: Met
  - End-March 2022 Prog.: 180 — Outcome: 188.8 — Status: Met
  - End-June 2022 Prog.: 360
- BPNG direct monetary financing of the public sector (ceiling, cumulative within the year)
  - 2021 Prog.: 0 — Outcome: 0 — Status: Met
  - End-March 2022 Prog.: 0 — Outcome: 0 — Status: Met
  - End-June 2022 Prog.: 0

Indicative Targets
- Tax revenue of the central government (floor, cumulative within the year)
  - 2021 Prog.: 10.868 — Outcome: 11.1294 — Status: Met
  - End-March 2022 Prog.: 2.613 — Outcome: 2.773 — Status: Met
  - End-June 2022 Prog.: 5.376
- New domestic payments arrears of the central government (ceiling)
  - 2021 Prog.: 0 — Outcome: 0 — Status: Met
  - End-March 2022 Prog.: 0 — Outcome: 0 — Status: Met
  - End-June 2022 Prog.: 0
- Social and other priority spending (cumulative floor within the year)
  - 2021 Prog.: 3 — Outcome: 3.160 — Status: Met
  - End-March 2022 Prog.: 1.262 — Outcome: 0.203 — Status: Not Met
  - End-June 2022 Prog.: 2.665
  - Note: Comprises central government spending on health, education and law and order (both capital and operating expenses).
- Present value of public and publicly-guaranteed external debt (ceiling, US$ millions)
  - 2021 Prog.: 6,500 — Outcome: 6,327 — Status: Met
  - End-March 2022 Prog.: 6,750 — Outcome: 6,707 — Status: Met
  - End-June 2022 Prog.: 6,707

Memorandum Items
- Concessional borrowing (cumulative, millions of US$)
  - 2021: 627.9 — 2022 End-March: 150 — End-June: 300
- Stock of arrears to be cleared (cumulative for the year)
  - 2021: 1.200 — 2021 Outcome: 0.419 — 2022 End-March Prog.: 0.500 — End-March Outcome: 0.700

### SMP Structural Measures (December 2021–March 2022)
- No. 1: Approval of a framework for the 2022 budget, in line with understandings reached with the IMF mission, by NEC — Status: Prior Action Met.
- No. 2: Complete and share Staffing and Establishment Review report (comprehensive review of staffing, plan for maintaining integrity of staffing data, proposal for quality assurance for salary payments) — Due: End-February 2022 — Status: Met.
- No. 3: Approval of Consequential Amendments to the Tax Administration Act, 2017 by the NEC and submission to Parliament (clarify enforcement powers of revenue authorities and address inconsistencies across tax legislation) — Due: End-March 2022 — Status: Met.
- No. 4: Strengthen the public debt committee (BPNG and Treasury) by establishing objectives, aligning TORs, producing draft annual debt issuance strategy, and discussing in meetings — Due: End-March 2022 — Status: Met.
- No. 5: Submit for parliamentary approval amendments to the Central Banking Act to strengthen independence, governance, accountability, and transparency of the Central Bank, in consultation with Fund staff — Due: End-March 2022 — Status: Not Met. CBA amendments passed, without sufficiently strengthening the CBA.

### Risk Assessment Matrix (Annex II): Key Risks, Likelihood, Impact, and Staff Advice
- Domestic Risks
  - Natural disasters related to climate change
    - Relative likelihood: Medium
    - Expected impact: Medium (Negative impact on GDP growth, export and fiscal revenues, higher inflation)
    - Staff advice: Invest in disaster risk reduction and resilience with help of development partners; build fiscal and external buffers for post-disaster relief.
  - Widespread social discontent and political instability
    - Relative likelihood: High
    - Expected impact: Medium (Adverse impact on FDI and confidence; exacerbate inequalities)
    - Staff advice: Transparent communication on key policies including vaccination; implement policies to support vulnerable households; build fiscal buffers through fiscal consolidation.
  - Major natural resource projects initiated; Higher LNG revenues over the medium term
    - Relative likelihood: Medium
    - Expected impact: Medium (Upside risk; favorable impact on GDP, external balance, fiscal position)
    - Staff advice: Fast-track implementation; build fiscal buffers.
- External Risks
  - Outbreaks of lethal and highly contagious Covid-19 variants
    - Relative likelihood: Medium
    - Expected impact: High (Lower economic activity, supply shortages, impact on fiscal balance and external balance)
    - Staff advice: Increase vaccination rate with development partners; prioritize health spending; fiscal consolidation to create reprioritization space.
  - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions
    - Relative likelihood: High
    - Expected impact: High (Higher inflation; external position and fiscal balance would improve for a commodity exporter)
    - Staff advice: Create fiscal space for stimulus and increase social welfare spending.
  - Cyberthreats
    - Relative likelihood: Medium
    - Expected impact: Medium (Affect government services, financial stability; PNG had a ransomware attack in October 2021)
    - Staff advice: Invest in advanced IT security, train personnel, invest in business recovery sites and backups.
  - Rising and volatile food and energy prices
    - Relative likelihood: High
    - Expected impact: High (Improved external position and fiscal balance but bouts of price and real sector volatility)
    - Staff advice: Use higher resource revenue to create fiscal space; continue fiscal spending to support vulnerable while ensuring fiscal consolidation remains a priority.
  - Abrupt growth slowdown in China
    - Relative likelihood: Medium
    - Expected impact: High (Lower external demand and commodity prices; long-term LNG contracts soften budget impact)
    - Staff advice: Build buffers to support the economy and vulnerable non-resource sectors.

Notes on RAM methodology
- “Low” indicates probability below 10 percent, “medium” between 10 and 30 percent, and “high” between 30 and 50 percent.
- “Short term” and “medium term” indicate risks could materialize within 1 year and 3 years, respectively.

### External Sector Assessment (Annex III): Assessment, Findings, and Policy Responses
- Overall Assessment
  - Staff judgement: PNG’s external position is broadly in line with the level implied by fundamentals and desirable policies (current account gap of -0.9 percent of GDP based on the REER model).
  - The real effective exchange rate (REER) is assessed as overvalued by around 2.4 percent.
  - Judgment is preliminary, given most 2021 data are still estimates.
- Potential Policy Responses
  - Limited exchange rate adjustment to international inflation differentials or terms of trade movements is consistent with the kina valuation assessment.
  - Future real exchange rate depreciation would help competitiveness of non-resource exports and address FX shortages.
  - Improved FX operations and liquidity management would strengthen BPNG’s ability to manage inflation and the REER.
- Current Account and External Flows (2021)
  - Goods export volumes decreased by around 11 percent compared to 2020 (fall in mineral resource exports including gold, silver, copper and nickel, partly due to Porgera mine closure).
  - Value of exports decreased by only 4 percent in 2021 owing mainly to resurgent 2021 commodity prices.
  - Nominal value of imports fell by around 3 percent.
  - Current account surplus reduced to 18.7 percent of GDP in 2021.
- REER and CA Model Results
  - EBA-lite REER model before adjustments: overvaluation of 3.2 percent.
  - Adjustments: -0.5 percent (policy deviations) and -0.3 percent (natural disasters) → REER overvaluation: 2.4 percent.
  - Semi-elasticity used: -0.37 → REER overvaluation of 2.4 percent equivalent to a CA gap of -0.9 percent of GDP.
  - EBA-lite CA model estimates CA norm at -0.3 percent of GDP; adjusted CA at +19.2 percent of GDP after cyclical and COVID-19 adjustments; CA gap of +19.6 percent of GDP (which corresponds to a -52.9 percent REER undervaluation under the CA model).
  - Staff discount the EBA-lite CA model results due to likely overstatement of the CA surplus in PNG resulting from classification challenges (large income account outflows and external debt service payments related to resource projects being recorded under the financial account rather than the current account).
  - Authorities are receiving Fund technical assistance in external sector statistics.
- Real Exchange Rate Observations
  - Kina has significantly depreciated in nominal terms (NEER) over past few years, while REER has remained highly stable.
  - In 2021, the Kina remained constant against the US dollar and nominally appreciated 8.9 percent against the Australian dollar.
  - Staff view: kina overvaluation contributes to domestic FX market pressures.
- Capital and Financial Accounts
  - Capital account balance very small: US$7 million net (credits US$12.8 million; debits US$5.9 million).
  - Financial account balance worsened by 19 percent from 2020.
  - Net direct investment in 2021: around US$847 million.
  - Other investment (including offshore flows) captured as US$4.7 billion.
- Exchange Restrictions and Multiple Currency Practices (MCPs)
  - PNG maintains exchange restrictions subject to IMF approval under Article VIII, Section 2(a) due to:
    - Requirement to obtain a tax clearance certificate prior to making payments or transfers for certain current international transactions.
    - Rationing of FX resulting in undue delays and arrears in current international payments.
  - Staff recommendation: eliminate these impediments to exchange.
    - Removal would require adjusting the FX system, allowing exchange rate to adjust flexibly to a market-clearing level to eliminate kina overvaluation, and clearing backlog of FX orders.
  - PNG also maintains an MCP subject to Fund approval: potential spread deviation of more than 2 percent between BPNG FX transaction rates with government/embassies and rates used by AFEDs with clients.
- FX Intervention and Reserves
  - With limited domestic and external borrowing opportunities, fiscal and BOP financing gaps are typically financed with reserves.
  - 2021 gross reserves increased to 8 months of total imports (or 15 months of non-mineral imports), exceeding the 3-month norm.
  - BPNG targets gross international reserves no less than US$1.8-2.0 billion.
  - 2021 SDR allocation provided an additional US$360 million boost to reserves; government used these SDRs for budget support in 2021.
  - Reserve adequacy assessment suggests a floor of US$2.0 billion appears adequate; this floor is included in the SMP as a quantitative target.
  - Policy advice: address FX shortages and aim for gradual return to kina convertibility by eliminating exchange restrictions and MCPs, and adopting a market-determined exchange rate.

*Sources: Papua New Guinea authorities; and Fund staff estimates.*

### 1.      To diversify its economy and achieve

### 1.      To diversify its economy and achieve sustainable and inclusive long-term growth and development, PNG needs both human capital and physical capital, two key factors of production.

### Human Capital
- Findings
  - Human capital includes health, education, and gender equality as necessary for a productive labor force.
  - About 50 percent of children under 5 are stunted in PNG.
  - PNG has high infant survival rate with the vast majority of children surviving to age 5.
  - Adult survival rate is somewhat lower than average in peer countries.
  - Children on average can expect to go to school for about 10 years; learning-adjusted years of school are about 6 years.
  - PNG ranks poorly on globally harmonized test scores.
  - Immunization coverage in PNG is among the lowest in the world and has been declining over the past decade.
  - PNG has low health expenditures per capita compared to its peers.
  - Completeness of birth registration was estimated at only 13 percent in 2018.
  - COVID-19 official case and death totals appear significantly undercounted; test positivity rate at Port Moresby General Hospital reached 80 percent in January 2022 while official reported COVID cases increased relatively little.
  - COVID-19 vaccination rollout began in May 2021; only 2.9 percent of the population is fully vaccinated as of mid-February 2022, making PNG the least vaccinated country in the Asia Pacific region, and the 10th in the world.
  - A recent survey found less than 20 percent of respondents planned to vaccinate against COVID-19; about 50 percent did not want the vaccine citing fear of side effects, lack of trust, and skepticism about effectiveness.
  - Up to 30 percent of the population are unsure about COVID vaccination and may be open to it.
- Policy implications and recommendations
  - Increase health expenditures to support vaccination drives, expand nursing staff, and improve vital statistics.
  - Design and implement strategies to combat vaccine hesitancy and misinformation spread via social media.
  - Deploy gender-responsive policies to mitigate COVID-19 impacts and address long-term structural drivers of gender inequality.
  - Empower women economically and expand women’s decision-making in households to promote better health and education outcomes and broaden access to credit (noting that women typically have user rights over land but rarely hold ownership rights).
  - Improve completeness of vital statistics, including birth and death registration.

### Physical Capital and Economic Complexity
- Findings
  - PNG is among the richest countries in terms of natural wealth but has relatively low quality of infrastructure, human capital, and control of corruption.
  - Quality of infrastructure in PNG is low and, together with low human capital and undiversified exports, is not conducive to industrial development.
  - In the past 10 years, PNG rapidly expanded exports of minerals, especially LNG; over the same period economic complexity of PNG’s exports has declined.
  - PNG is at the bottom of the distribution in economic complexity of exports, even compared to other commodity exporters.
  - Many commodity exporters have below average economic complexity; some commodity exporters have managed to diversify and increase complexity, showing commodity dependence need not be a trap.
  - At least 85 percent of PNG’s total land mass constitutes “unalienated” land governed by customary law.
  - Customary tenure practices vary and are passed on verbally.
  - Large-scale extractive operations, related environmental damages and lack of transparency in public contracts have caused intra and inter-community conflicts over land rights and complicated land tenure reform.
- Policy implications and recommendations
  - Strengthen property rights and contract enforcement to promote investment in physical capital and support development.
  - Consider “strategic bets” or jumps into new strategic areas of production given limited nearby diversification opportunities.
  - Leverage opportunities from digitalization and global technological changes to help commodity exporters derive benefits and support structural transformation.
  - Invest in climate-resilient infrastructure and improve quality of transport, electricity, ICT and telecommunications, and water and sanitation.

### Conclusion: The Road Ahead
- Recent and ongoing policy actions and outcomes
  - The 2022 National Budget has significantly increased health expenditures.
  - November 2020 oral polio vaccine campaign reached 91 percent of the 1.3 million target children under 5 years.
  - In 2019, PNG integrated measles and rubella vaccines into the last round of polio vaccination, preventing a potential measles outbreak that affected several Pacific countries in 2019.
  - In 2018, PNG vaccinated 3.1 million children under 15 years in a nationwide polio campaign—attaining around 80 percent coverage in most provinces.
  - The 2022 Budget allocates funds to establish a Government Secretariat dedicated to the fight against gender-based violence and support for related NGOs.
  - The Connect PNG Program and related “Economic Enablers” projects in the 2022 Budget aim to improve transport infrastructure, connect road networks, expand the electricity grid, improve ICT and telecommunications, support clean renewable energy, and provide safe water and sanitation.
  - Passage of the Connect PNG Funding and Implementation Arrangements Bill in November 2021 will facilitate implementation of the infrastructure program.
  - The Independent Commission Against Corruption (ICAC) and implementation of the Whistleblowers Act are expected to deter corruption, strengthen rule of law, and improve transparency and accountability if consistently implemented over time.
- Forward-looking recommendations
  - Continue scaling up health spending and targeted immunization campaigns to reverse declining vaccination trends.
  - Strengthen measures to combat misinformation and protect health workers and vaccine teams from threats of violence.
  - Continue reforms to enhance women’s empowerment, reduce gender-based violence, and implement gender-responsive fiscal measures.
  - Prioritize formalization of land tenure and clear transaction rules while addressing community conflicts linked to extractive activities and environmental damages.
  - Ensure further investment in climate-resilient infrastructure to reduce poverty and enhance sustainable growth.
  - Maintain and deepen anti-corruption reforms to improve the business and investment climate and attract private investment.

*IMF staff analysis as presented in the source content.*

### 1.      The monetary policy framework is determined by the central bank objective(s), its

### 1.      The monetary policy framework is determined by the central bank objective(s), its

### Framework summary and nominal anchors
- PNG formally followed reserve money targeting, with the main objective of stable inflation.
- Intermediate target: reserve money, or growth of monetary aggregates more broadly.
- Operational target: the policy rate—the Kina Facility Rate (KFR)—set with the aim of influencing domestic market interest rates.
- In recent years the exchange rate was implicitly an additional nominal anchor, as BPNG viewed stability of the exchange rate as necessary for stable inflation.
- Table 1. PNG Monetary and Exchange Rate Policy Framework until December 2021 (as described):
  - Framework (Nominal Anchor): Reserve Money Targeting (explicitly) and Exchange rate (implicitly)
  - Objective: Inflation and Stable exchange rate (implicitly)
  - Intermediate targets: Reserve money and Exchange rate (implicitly)
  - Operational targets: Interest rate and Exchange rate (implicitly)
  - Instruments: Open Market Operations, FX Intervention, Reserve requirements, Repo facility

### The impossible trinity, FX rationing, and consequences
- The “impossible trinity” (trilemma): only two of monetary policy autonomy, stable exchange rate, and free capital mobility can be achieved simultaneously.
- In recent years BPNG exercised monetary policy autonomy and maintained a stable exchange rate, implying PNG could not have free capital mobility.
- To maintain a stable exchange rate in the FX market, BPNG imposed exchange rate trading margins around the official rate in June 2014, forcing the market exchange rate in line with the official rate.
- FX rationing and limited BPNG FX supply led to FX shortages, which likely disrupted trade and economic activity.
- Attempts to prevent exchange rate depreciation without supportive fiscal or monetary policies usually lead to excess demand for FX in the official market.

### BPNG communication, implicit anchors, and practice
- Since BPNG did not commit to a specific target for money growth, it allowed ample discretion and implicitly added the exchange rate as a nominal anchor and target.
- BPNG communicated monetary policy stance semiannually, each March and September, announcing the stance for the next six months.
- The Governor decided the extent to which inflation stability requires exchange rate stability, often noting pass-through.
- In practice, the exchange rate regime moved from de jure floating to de facto stabilized (PNG country AREAER Report).
- BPNG typically monitored the exchange rate, reserve money growth and the interest rate, steering them within a comfort zone.
- Deviations from reserve money growth from target would typically not trigger an adjustment, despite larger-than-targeted excess liquidity, if BPNG was comfortable about inflation.

### Operational implementation: instruments and practices
- Open market operations (OMOs):
  - BPNG primarily implements monetary policy through OMOs.
  - BPNG issues central bank bills with tenors: 1-month (28 days) most commonly, 2-month (63 days), 3-month (91 days), and longer tenors.
  - OMOs are typically aimed at draining excess kina liquidity.
  - OMOs are calibrated based on weekly BPNG liquidity forecasts, taking into account effects on short-term interest rates and inflation, against the reserve money framework.
  - BPNG participates in the primary and secondary market for Treasury bills and Government Bonds.
- Reserve requirements, repo facility, and FX intervention:
  - Cash reserve requirements are calculated weekly; the reserve requirement in percent was stable from late 2014 until the COVID-19 pandemic.
  - Reserve requirements can affect demand for excess liquidity for precautionary purposes.
  - The Repo Facility intends to provide short-term liquidity to commercial banks and is not used much.
  - FX intervention is not viewed as a monetary policy instrument by BPNG, but FX provision by BPNG to authorized FX dealers directly affects kina liquidity in the market.

### Transmission, market frictions, and liquidity issues
- The KFR is intended as a reference for interbank money market rates and OMOs, but transmission to deposit and lending rates is weak.
- The 28-day central bank bill rates are the most relevant for transmission and are only loosely correlated with the KFR.
- Factors limiting demand for central bank bills and weakening transmission:
  - Binding credit limits and bidding limits for certain commercial banks in PNG.
  - High liquidity demand for precautionary purposes.
  - Lack of a reliable secondary market for government securities.
- Auctions are sometimes under-allotted; BPNG retains discretion to cut the auction and reject yields considered outliers, which can prevent an upward drift in yields but often fails to drain excess liquidity (de Barros Serrao and others, 2019).

### Amendments to the Central Banking Act and implications (timeline and content)
- July 2021: PNG government set up an Independent Advisory Group (IAG) to review and recommend reforms to the Central Banking Act.
- The Central Banking Act was originally passed in 2000 and required modernization.
- IAG identified key problems including the practice of FX rationing and insufficient support for growth by BPNG.
- IAG recommended returning to full kina convertibility (and implicitly, a more flexible exchange rate regime) and modifying central bank objectives to introduce growth and employment as additional objectives, of equal rank to stable inflation.
- December 2, 2021: PNG Parliament enacted wide-ranging reform via the Central Banking (Amendment) Bill 2021.
- Additional amendments are planned for Phase II of the reforms.
- Implications:
  - Introduction of growth and employment as additional BPNG objectives complicates the monetary policy framework.
  - Monetary policy cannot generate long-term growth or employment; repeated short-term stimulation beyond potential would raise inflation and inflation expectations.
  - Conflicts between inflation and growth objectives can arise; unranked objectives reduce accountability and may de-anchor inflation expectations (IMF, 2015).
  - Assessing growth or unemployment rates consistent with price stability is difficult, especially in PNG given lack of data and dominance of the informal sector.

### Kina convertibility, exchange rate flexibility, and transition considerations
- Kina convertibility definition: anyone who wants to exchange kina for US dollars is able to do so, without restrictions in terms of amount or wait time.
- If the kina is overvalued and fully convertible, BPNG would eventually run out of US dollar reserves as people demand to buy dollars.
- Achieving full convertibility requires an exchange rate that clears the market and a well-functioning FX market, including central bank operations.
- A move to greater kina flexibility would be a major change and must be carefully planned to avoid excess volatility and ensure market and institutional readiness.
- Monetary and exchange rate policy frameworks should provide a clear nominal anchor consistent with country needs (IMF, 2015).
- Framework choice depends on:
  - (1) initial macroeconomic conditions (inflation, FX reserve adequacy, fiscal and external imbalances);
  - (2) structural characteristics (size, openness, mobility and flexibility of factors, type and frequency of shocks);
  - (3) institutional features and prospects for development (IMF, 2022a).
- For commodity-exporting countries, considerations:
  - Commodity exporters with undiversified output and frequent terms-of-trade shocks may favor a more flexible exchange rate.
  - Very small, very open economies with undeveloped financial markets may prefer a fixed exchange rate.
  - If characteristics do not clearly favor float or peg, an intermediate arrangement (crawling peg or crawl-like) may be appropriate.
- Transition to greater exchange rate flexibility:
  - Some countries continue to rely on the exchange rate as nominal anchor while increasing flexibility.
  - Transition can be an intermediate step toward inflation targeting; it initially requires relatively minor operational changes.
  - For countries opting for a wider band around a peg, initial exchange rate should be close to equilibrium and the band wide enough to accommodate typical shocks but not so wide that the anchor is lost.
  - For commodity exporters, changes may be smoothest when commodity prices and reserves are high and depreciation pressures low.
  - Intervention policy needs to be articulated.
  - Under a crawling peg, adjustments may be at a fixed rate or in response to selected quantitative indicators (IMF, 2022b).

### Transition to inflation targeting and capacity building
- Transition to inflation targeting would require reforms implemented over several years.
- Conditions for successful inflation targeting:
  - Clear central bank mandate for price stability.
  - Political and operational independence.
  - Forecasting and analytical capacity.
  - Effective operational and communications framework.
  - Central bank financing of the government may not be permitted, unless it expressly serves the purpose of monetary policy.
- Regardless of exchange rate regime chosen, central bank analytical capacity building is helpful.
- In PNG, improvement in liquidity forecasting is a preparatory measure and is included as a structural benchmark in the Staff Monitored Program.
- Capacity building needs: monetary and foreign exchange operations, and communications.
- BPNG needs to invest in capacity building regardless of the chosen monetary policy framework.

### Key statistics and precise figures (as reported)
- Table tenors and durations:
  - 1-month (28 days)
  - 2-month (63 days)
  - 3-month (91 days)
- Policy and legislative dates:
  - IAG set up in July 2021.
  - Central Banking (Amendment) Bill 2021 enacted on December 2, 2021.
  - Central Banking Act originally passed in 2000.
- Vulnerability and socio-economic figures:
  - Estimated potential climate change GDP loss: up to 15.2% of GDP by 2100 (ADB, 2013) — referenced in the adjoining annex.
  - About 80 percent of PNG population is rural.
  - Rural access to safe water and sanitation: 33 percent and 13 percent respectively; urban access: 89 percent and 57 percent respectively (PNG, 2015).

*Source: IMF staff report (PDF content unit: 1pngea2022002; canonical URL: https://www.imf.org/-/media/files/publications/cr/2022/english/1pngea2022002.pdf).*

### 4.      Climate adaptation needs in PNG are large and

### 4.      Climate adaptation needs in PNG are large and 

### Adaptation needs and adaptive capacity
- Climate adaptation needs are estimated at about 2 percent of GDP annually for the next 10 years (IMF, 2021a).
- PNG’s current adaptive capacity is one of the lowest in Asia Pacific, due to fragile health and education systems as well as insecurity of water supply (IMF, 2021a).
- Most importantly investments of 2 percent per year for climate adaptation are currently prohibitive for PNG, given lack of fiscal space, and will need to be supported externally.
- According to the World Bank Hotspot Study, PNG ranks first in global landslide hazard profile.

### GHG emissions profile and trends
- Thanks to vast forests which act as carbon sinks, Papua New Guinea’s net emissions were negative until 2008 (PNG, 2018), but are rising.
- Papua New Guinea’s emissions were dominated by the energy sector, but have risen in Land use, land-use change and forestry (LULUCF).
- In the agriculture sector, emissions have been rising but at a much slower pace.
- PNG is still considered a low emitter of GHGs, both in absolute terms and per capita.

### Mitigation commitments and conditionality
- As part of its nationally determined contributions (NDC), PNG aims to reach carbon neutrality by 2050, but this commitment is conditional on external financing.
- The likelihood of achieving the NDC is uncertain due to the conditional nature of financing.
- Key NDC target: reduce emissions from deforestation and forest degradation due to commercial logging and agriculture expansion through enhanced land use planning, enforcement of timber legality, and promotion of climate-friendly agriculture.
- Corruption, rule of law and climate vulnerabilities are closely interlinked in PNG and constitute fragility factors; high rates of deforestation and reported destruction of biodiversity are associated with lack of transparency and accountability in granting concessions and large contracts.
- Recommended governance safeguards and anti-corruption measures: transparency of public contracts, oversight mechanisms against corruption, accountability of officials and companies.

### Policy actions, plans and recent legislative steps
- PNG has been a leader in calls to reduce emissions from deforestation and forest degradation, developing into REDD+ under UNFCCC.
- Prime Minister announced a ban on round log exports by 2025 and an end to logging by 2030 (National 2022a; The National 2022b).
- Success of logging export ban depends on PNG’s ability to provide alternative sources of revenue to compensate for revenue lost from industrial logging operations; success in raising revenue through REDD+ results-based payments will be crucial.
- PNG launched implementation plans and legislative initiatives to support mitigation and adaptation:
  - Enhanced NDC Implementation Plan 2021-2030 (PNG, 2021) detailing goals, targets, finance needs and monitoring plans.
  - Electricity Implementation Roadmap (with development partner support).
  - Amendments to the Climate Change (Management) Act (October 2021) to establish a new climate trust fund, administered by the Climate Change and Development Authority, to collect and distribute all forms of climate finance, including REDD+ payments.
  - PNG’s Development strategic plan 2010-2030 and other national planning framework documents are expected to support domestic climate adaptation and climate finance efforts.

### Climate finance access, flows, and gaps
- PNG’s track record of access to climate finance has been relatively poor given significant needs; most climate finance so far has been sourced from bilateral donors.
- Largest bilateral donors supporting PNG investments in adaptation and mitigation: Australia, Japan and the European Union.
- Expanding financing sources to include global climate funds would enable PNG to benefit from technical expertise in project selection and monitoring; PNG produced a detailed Country Program with the Green Climate Fund (GCF 2020) to facilitate access.
- Despite recent progress, PNG’s average annual investments in climate adaptation of about 0.2 percent of GDP fall well short of the estimated need of 2 percent.

### Climate finance, 2014-19 (Millions USD, unless otherwise indicated)
- Australia: Adaptation & Multiple Foci 317.6; Mitigation 4.6
- EU: Adaptation & Multiple Foci 125.9; Mitigation 0.0
- Japan: Adaptation & Multiple Foci 4.9; Mitigation 230.1
- Other (bilateral): Adaptation & Multiple Foci 30.0; Mitigation 9.8
- Bilateral total: Adaptation & Multiple Foci 478.4; Mitigation 244.6
- ADB: Adaptation & Multiple Foci 88.0; Mitigation 60.9
- World Bank: Adaptation & Multiple Foci 7.7; Mitigation 29.3
- Other (multilateral): Adaptation & Multiple Foci 55.0; Mitigation 16.4
- Multilateral total: Adaptation & Multiple Foci 150.8; Mitigation 106.6
- Total: Adaptation & Multiple Foci 629.2; Mitigation 351.1
- Total average annual: Adaptation & Multiple Foci 104.9; Mitigation 58.5
- Total average annual (% GDP): Adaptation & Multiple Foci 0.4; Mitigation 0.2

### Debt-for-climate/nature swaps and financing instruments
- Debt-for-climate or debt-for-nature swaps: debt claims exchanged for specific spending or policy commitments on the debtor’s side, typically at lower fiscal cost than the original debt service.
- In exchange for debt forgiveness, the member can commit to policies to protect existing forested areas and pursue faster GHG reductions across sectors.
- Recent debt-for-climate swaps examples: Seychelles (2018), Democratic Republic of Congo (2019), Belize (2021) (IMF, 2022).
- Debt-for-climate swaps are most appropriate where debt is still sustainable but limited fiscal space restricts domestic climate-related spending; depending on alignment and modalities, swaps can increase fiscal space for climate spending directed to climate-friendly growth and resilience.

### Key constraints and priorities for action
- Key constraint: lack of fiscal space to finance estimated adaptation needs of 2 percent of GDP annually; external support is required.
- Governance and anti-corruption measures are critical to reduce climate vulnerabilities and meet NDCs.
- Expanding access to global climate funds (e.g., GCF) and leveraging instruments such as debt-for-climate swaps could increase financing and technical capacity.
- Providing alternative revenue sources to replace industrial logging revenues is crucial to successfully implement the logging ban and reduce deforestation.

_1pngea2022002 - 4.      Climate adaptation needs in PNG are large and_

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Progress and context of IMF engagement
- Date: 21 May 2022.
- Papua New Guinea completed a Staff Monitored Program (SMP) approved in December 2021 and reports strengthened reform work and international collaboration.
- Engagement since late 2019 included a Due Diligence exercise to review debt and fiscal data and initial work to reform the Central Bank Act.
- The government requests IMF Technical Assistance (TA) to continue work on the Central Bank Act and related legislation, recognizing reforms must include legislative changes, strengthening BPNG capacity, and improving coordination with Treasury.
- The government welcomes IMF re-engagement in person and the appointment of an IMF Resident Representative.

### Achievements under the first stage of the 2020/21 SMP
- Establishment of the Arrears Verification Committee:
  - Identification of over K5 billion in pre-2019 arrears.
  - Validated and paid K255 million in 2020 and K419 million in 2021.
- Improved information sharing between Treasury and the Central Bank, including formalized Terms of Reference (TORs) for the public debt committee and defined BPNG role.
- Final implementation of the new Tax Administration Act providing new enforcement powers.
- Introduction of a new Small Business Tax simplifying the tax code for small companies.
- Passage of the Independent Commission on Anti-Corruption (ICAC) Act and initiation of supporting regulation development.
- Instituted the Temporary Access Facility (TAF) for cash flow management and issued guidelines developed in line with IMF advice.
- Rapid Credit Facility (RCF) approval supported implementation of the 2020 budget during COVID-19 and aided reforms:
  - Formation of a Steering Committee to implement the Medium-term Revenue Strategy with reporting on Internal Revenue Commission reforms.
  - Reporting on procurement and contracts to the internal Budget Management Committee (BMC).
  - Strengthening of the BMC to improve information flow on cash flow forecasts, spending, revenue collection, warrants, and major procurements.
- Commitment to:
  - Report on COVID spending at the end of the pandemic emergency.
  - Publish details on all outstanding awarded COVID-related contracts (including beneficial ownership information).
  - Audit COVID spending and publish the report within 6 months of the end of the pandemic.
- Use of Special Drawing Rights (SDRs) in 2021 to execute the budget, meet urgent healthcare and social needs, and replace costly financing.

### 2021/22 SMP performance and fiscal outcomes
- All quantitative targets and all but one structural benchmark were met on time based on IMF review.
- 2021 budget deficit: K6.3 billion (versus program target K6.9 billion).
- Tax revenue collection exceeded target by K261 million (0.3 percent of GDP).
- Since 2020, the deficit has declined by over 2 percentage points of GDP.
- Data through March 2022: budget surplus of K895 million driven by higher-than-target tax revenue collection.
- The higher revenues enabled relief for rising food and fuel prices without increasing the fiscal deficit beyond its budget target.
- Net International Reserves target (end-December 2021) was comfortably met; BPNG provided more than the targeted foreign exchange to FX dealers to help meet FX demand.

### Structural reforms and institutional progress
- Approval of a budget targeting a lower deficit than the SMP prior action to signal commitment to budget repair.
- Early approval of consequential amendments around the Tax Administration Act to prevent conflicts with other legislation.
- Completion of a staffing and establishment review detailing issues and a plan to resolve them (including proper recording of staff under correct appropriation heads).
- Strengthening of the public debt committee (BPNG and Treasury) with objectives, aligned TORs, defined members’ responsibilities, and a draft annual debt issuance strategy.
- Passage of selected amendments to the Central Bank Act following the first stage of the Independent Advisory Group report; commitment to complete the reform agenda under the structural benchmark.
- Commitment to continue salary reform work, strengthen revenue collection, operationalize ICAC, and leverage IMF TA on a rule of law diagnostic.
- Formation of a Program Monitoring Committee improved data reporting and information sharing.
- Despite a ransomware attack on the Treasury’s computer systems in late 2021, IMF staff were furnished with information needed to assess program performance.

### Requests to IMF and transparency commitments
- Request for IMF management approval to complete the SMP review based on strong SMP performance and ongoing CBA reforms.
- Authorization for IMF to publish the letter and its attachment.
- Reaffirmed commitment to work closely with IMF staff and the international community.

### Attachment I — Technical Memorandum of Understanding (TMU): scope and purpose
- TMU specifies definitions of indicative targets for the 6-month SMP spanning from December 7, 2021 to June 15, 2022, and should be read with the MEFP.
- TMU specifies assessment criteria and indicative targets for the period following completion of the First Review in April 2022 until program expiration in June 2022, and data transmission terms and timeframes.

### A. Assessment Criteria: Quantitative Targets (high-level)
- Assessment Criteria set for end-December 2021; performance assessed against those quantitative targets unless otherwise specified (specified in Table 1 of the MEFP).
- Government defined as the central government (component of general government covered by the national budget), including Extra Budgetary Units with individual budgets not fully covered by the national budget.

Definitions and calculations (selected key points preserved verbatim)
- Cumulative fiscal deficit:
  - Calculated on a cash basis as the net incurrence of financial liabilities less net acquisition of financial assets by the central government from the start of the fiscal year on January 1.
  - Definitions and data to assess fiscal deficit follow Table E (“Transactions in Assets and Liabilities”) in the 2020 Final Budget Outcome.
- Net acquisition of financial assets = net change in domestic financial assets + net change in external financial assets of the central government.
- Net incurrence of liabilities = net incurrence of domestic liabilities + net incurrence of external liabilities.
  - Domestic liabilities include debt securities outstanding; loans from residents; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; and other accounts payable.
  - External liabilities include debt securities outstanding; loans from lenders not resident of PNG; and any other liabilities meeting the external debt definition per paragraph 7.
- Fiscal deficit excluding payments for clearance of arrears incurred in past fiscal years may be reported as a memorandum item to encourage monitoring of arrears clearance.

- Debt definition (per Guidelines on Public Debt Conditionality, Decision No. 16919-(20/103), October 28, 2020):
  - Debt = all current (not contingent) liabilities created under contractual arrangements requiring future payments in assets or services.
  - Primary forms: loans; suppliers’ credits; leases (present value at inception of lease of lease payments excluding operation/repair/maintenance).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - For the SMP, debt includes borrowing by or guaranteed by the central government and the BPNG (see paragraph 10).
  - Accumulation of liabilities for BPNG monetary policy (e.g., central bank bills/notes) excluded from the definition of debt.

- External public debt:
  - Defined as debt denominated or requiring payment in a currency other than the Kina.
  - A debt/guarantee is considered contracted when all conditions for effect have been met, including Treasury approval.
  - Contracting of credit lines with no predetermined disbursement schedules or multiple disbursements considered contracting of debt.

- Present value of external borrowing:
  - Defined as the annual discounted future debt service payments using a discount rate of 5 percent.

- External concessional borrowing:
  - Defined where face value minus present value (per paragraph 8) is not less than 35 percent of face value.
  - Continuous zero ceiling on contracting or guaranteeing external non-concessional debt by the Government or the BPNG.
  - Official bilateral and multilateral borrowing excluded from the external non-concessional borrowing ceiling for program assessment.

- Government debt guarantee:
  - Explicit legal obligation of the central government or the BPNG to service a debt in event of borrower nonpayment.

- External debt service arrears:
  - External debt obligations not paid when due per contractual terms (considering grace periods).
  - Continuous ceiling on non-accumulation of external debt service arrears applies during the program.

- Net international reserves (stock):
  - Defined as BPNG’s gross foreign assets minus gross foreign liabilities, in line with Section 78 of the PNG Central Banking Act (2000).

- Gross foreign reserves include:
  - BPNG’s holdings of monetary gold (excluding amounts pledged as collateral);
  - Holdings of Special Drawing Rights (SDRs);
  - BPNG holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments);
  - Papua New Guinea’s reserve tranche position with the IMF.

- Gross foreign reserves exclude:
  - Any foreign currency claims on residents;
  - Capital subscriptions in international institutions;
  - Assets obtained through currency swaps of less than three months duration;
  - Pledged, swapped, or any encumbered reserve assets (including reserve assets used as collateral or guarantees for third-party external liabilities);
  - Precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets.

- Gross foreign reserve liabilities include:
  - Total outstanding liabilities of the BPNG to the IMF, excluding the SDR allocations;
  - Convertible currency liabilities of the BPNG to nonresidents with an original maturity of up to and including one year;
  - Commitments to sell foreign exchange arising from derivatives (futures, forwards, swaps, options).

- BPNG provision of foreign exchange to authorized FX dealers:
  - Amount of FX sold by BPNG to banks and other authorized FX dealers in PNG each month to assist meeting FX orders in the market.

- Direct monetary financing of the central government:
  - Refers to BPNG providing direct financing to the central government that spans more than a single fiscal year.
  - Limited, temporary financing for cash management via the Temporary Advance Facility (TAF) is permitted and excluded from calculation of direct monetary financing if it complies with the Operational Guidelines (Terms & Conditions) governing TAF use between Treasury, Finance and BPNG.
  - Acquisition of government securities by BPNG as part of monetary policy and management operations is excluded from the definition of monetary financing.

### B. Assessment Criteria: Indicative Targets
- Indicative targets set for end-December 2021 and March 2022; these serve to assess progress but are not binding quantitative criteria (specified in Table 1 of the MEFP).
- Tax revenues defined in line with GFSM 2014 and classified into:
  - (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;
  - (vi) other domestic revenue, including non-tax revenue.

- Domestic payment arrears:
  - Overdue domestic payment obligations of the central government 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 deemed in arrears when:
    - Debt remains unpaid for more than 30 days after the due date stipulated in the agreement (creditor/debtor).
    - Wages or pensions remain unpaid 90 days after their due date.
    - Payments for goods and services rendered received more than 90 days after processing of the supporting documents submitted by suppliers.
  - Indicative target on non-accumulation of new domestic arrears assessed only against arrears first accumulated in 2021, not on arrears accumulated in 2020 or earlier.

*Appendix I. Letter of Intent and Attachment I. Technical Memorandum of Understanding (TMU), Papua New Guinea.*

### 21.      Social and other policy priority spending is measured on a cash basis and comprises

### 21.      Social and other policy priority spending is measured on a cash basis and comprises

### Definition of social and other policy priority spending
- Social and other policy priority spending is measured on a cash basis.
- It comprises central government spending in the following areas: health, education and law and order (both capital and operating expenses).

### Program Monitoring and Data Reporting
- To facilitate the monitoring of program implementation, the Papua New Guinea authorities shall maintain a Program Monitoring Committee.
- The committee will be composed of senior officials from the Treasury and the Bank of Papua New Guinea.
- The committee shall be responsible for:
  - monitoring the performance of the program,
  - informing the Fund regularly, and
  - transmitting the supporting materials necessary for the evaluation of benchmarks.

*Source: IMF staff report excerpt.*

### 23.      The Committee will prepare and provide to the Fund staff electronically the following

### 1pngea2022002 - 23. The Committee will prepare and provide to the Fund staff electronically the following information contained in the data reporting table below.

### Data Reporting Requirements for Program Monitoring
- Fiscal sector reporting (reporting agency and cadence as listed):
  - 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 reporting:
  - 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
- Structural benchmarks reporting:
  - 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 Reporting
- Central bank and financial sector data (reporting cadence and lags):
  - 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 Reporting
- External sector and FX reporting:
  - 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

### Fund Relations, Technical Assistance, and Capacity Building
- Membership and Fund holdings (as of April 30, 2022):
  - Quota: 263.20 SDR Million — Percent Quota: 100.00
  - Fund holdings of currency: 262.76 SDR Million — Percent: 99.83
  - Reserve position in Fund: 0.45 SDR Million — Percent: 0.17
  - Net cumulative allocation (SDR Department): 377.76 SDR Million — Percent: 100.00
  - Holdings (SDR Department): 259.00 SDR Million — Percent: 68.56

- Outstanding purchases and loans (RCF Loans):
  - RCF Loans: 263.2 SDR Million — Percent Quota: 100.00

- Projected payments to Fund (SDR million; based on existing use of resources and present holding of SDRs):
  - Charges/interest: 0.37 (2022); 0.59 (2023); 0.59 (2024); 0.59 (2025); 0.59 (2026)
  - Total: 0.37 (2022); 0.59 (2023); 0.59 (2024); 26.91 (2025); 53.23 (2026)
  - Principal: 26.32 (2025); 52.64 (2026)

- Safeguards assessment findings (Bank of Papua New Guinea):
  - Central Banking Act requires amendments to sufficiently protect the BPNG’s financial, personal, and institutional autonomy and enhance governance arrangements.
  - Audit arrangements should be improved to safeguard external auditors’ independence and align internal audit to international standards.
  - Internal control system is being strengthened, including through establishment of a risk management function.
  - Closer engagement of BPNG’s oversight bodies is needed to ensure timely implementation.

- Exchange rate arrangement and practices:
  - De jure arrangement: “floating”.
  - On June 4, 2014, BPNG introduced an exchange rate trading margin with a kina buying rate within 75 basis points (bps) above the interbank midrate and a kina selling rate within 75 bps below the midrate.
  - Since November 2020, the exchange rate has stabilized within a two percent band against the US dollar; de facto arrangement reclassified to “stabilized” effective November 3, 2020.
  - Exchange restrictions subject to IMF approval under Article VIII, Section 2(a): (i) requirement to obtain a tax clearance certificate (TCC) prior to making payments or transfers for certain current international transactions; (ii) rationing of FX, resulting in undue delays and arrears in current international payments.
  - Multiple currency practices (MCPs) subject to Fund approval under Article VIII, Section 3: potential spread deviation of more than 2 percent between rates set by BPNG for its FX transactions with the government and embassies, and rates used by AFEDs in transactions with their clients.

- Technical Assistance (TA) highlights:
  - FAD: IPSAS Cash Reporting, IRC external governance, Taxpayer service implementation, IRC organization design and IT tender evaluation support; MTRS update and review; rewrite of Income Tax Act and Tax modeling; revenue administration program and IRC organizational structure (December 2021).
  - LEG: Legislative reforms planning for the MTRS (September 2018); Institutional and Governance Review of the Internal Revenue Commission and PNG Customs (February–March 2020 virtual).
  - MCM: Liquidity forecasting and management, foreign exchange operations (August 2018); banking supervision TA (December 2017 and February 2018).
  - STA: Government finance statistics TA (January and September 2020); national accounts and price statistics (February 2020); remote TA on Balance of Payments Statistics/Direct Investment (October 2020); remote TA on External Sector Statistics (February 2022); virtual TA on public sector debt statistics (January 2022).
  - PFTAC activities: PEFA diagnostic assessment (published 2020) and sequenced PFM reform roadmap; support on MTRS implementation and organizational reforms for IRC; Supervision Framework Enhancement Program (SFEP) with Bank PNG since 2018; TA to review and develop 11 prudential standards (completed August 2021); support for real sector statistics with ABS; further TA on real sector statistics scheduled for FY23; public debt management training and remote training on financial and loan analysis (October–November 2021; November 2021).
  - Resident Representative: Regional Resident Representative Office in Suva opened September 13, 2010; Fund in process of opening a Resident Representative Office in Port Moresby.

### Statistical Issues — Assessment of Data Adequacy and Quality
- General assessment:
  - Data provision has some shortcomings, but data are broadly adequate for surveillance. Most affected areas: national accounts, fiscal accounts, and balance of payments.

- National Accounts:
  - GDP data are released with a lag of two years due to management and capacity constraints.
  - In November 2021, the NSO released GDP for 2019.
  - PFTAC and ABS coordinate TA: ABS addressed timely compilation and publication of GDP figures; PFTAC focused on steady improvement of data and methodology.
  - Proactive management and regular stakeholder engagement must improve to increase user confidence.

- Price Statistics:
  - NSO disseminates a quarterly consumer price index, with expenditure weights from the 2009–10 Household Income Expenditure Survey; these weights should ideally be updated.
  - Producer price indexes are not compiled.

- Government Finance Statistics (GFS):
  - Department of the Treasury annually compiles and reports GFS data for the budgetary central government (BCG) to the IMF; PNG is a regular reporter, although coverage and timeliness could improve.
  - Central government tax revenue, nontax revenue, and public expenditure data are deficient.
  - Development budget expenditures and utilization of grants and project loans are recorded with long lags; limited records on the use of trust accounts.
  - Tax revenues collected by authorities (extrabudgetary units of the central government) are generally not reflected in central government financial information.
  - Timing issues regarding the recording of interest on discounted securities.
  - Challenges remain in debt instrument and institutional coverage for public sector debt statistics and government guarantees.
  - Weaknesses contribute to discrepancies in financing between estimates from monetary and debt data and those derived from fiscal records.
  - Financial balance development remains a priority.
  - Papua New Guinea continues to benefit from technical assistance and regional capacity building initiatives through PFTAC and the Data for Decisions (D4D) Trust Fund.

- Monetary and Financial Statistics:
  - Monetary data are produced and reported to STA on a regular basis.
  - Introduction of standardized report form (SRF) for central bank, other depository corporations (ODCs), and other financial corporations (OFCs).
  - 2013 TA mission introduced general insurance companies into institutional coverage of OFCs and improved SRF for OFCs.
  - Most monetary statistics published in International Financial Statistics (IFS) are currently aligned with the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG).
  - Financial Soundness Indicators (FSIs): BPNG compiles selected FSIs for deposit takers; reports thirteen core FSIs and eight additional indicators for deposit takers and real estate markets to STA, with quarterly data availability starting in 2008Q4 and in line with the 2019 FSI Compilation Guide.
  - No FSIs reported on other sectors such as other financial corporations, nonfinancial corporations, and households.
  - PNG reports data on several Financial Access Survey (FAS) series, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.

- External Sector Statistics:
  - Annual balance of payments data up to 2018 are disseminated on the IMF’s website.
  - IIP data are not available.
  - Remote TA mission in February 2022 to improve quality of external sector statistics (ESS) and train BPNG staff on BPM6 compilation; guidance provided for addressing critical data gaps, particularly in sectors with large cross-border transactions (liquified natural gas project, mining sector, and deposit taking corporations).
  - Significant effort required by authorities to implement recommendations of recent and previous TA missions to improve quality, coverage, periodicity, and timeliness of ESS.

- Data Standards and Reporting:
  - PNG began to participate in the General Data Dissemination System in 2012.
  - PNG has not yet implemented recommendations of the enhanced GDDS (e-GDDS) by launching a National Summary Data Page (NSDP).
  - Reporting to STA:
    - GFS for publication in Government Finance Statistics Yearbook and IFS last reported for 2017 (budgetary central government only).
    - Monetary data reported to STA for publication in IFS on a regular monthly basis.
    - BOP data for 2018 reported to STA for publication in Balance of Payments Yearbook and IFS.
    - National accounts data for 2006-13 reported to STA for publication in IFS.

- Table of Common Indicators Required for Surveillance (As of May, 2022) — selected entries and dates:
  - Exchange Rates: Date of Latest Observation 1/2022 — Date Received 3/1/2022 — Frequency of Data: M — Frequency of Reporting: M — Frequency of Publication: M
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 03/2022 — Date Received 05/06/2022 — Frequency: M M M
  - Reserve/Base Money: 03/2022 — Date Received 05/06/2022 — Frequency: M M M
  - Broad Money: 03/2022 — Date Received 05/06/2022 — Frequency: M M M
  - Central Bank Balance Sheet: 03/2022 — Date Received 05/06/2022 — Frequency: M M Q
  - Consolidated Balance Sheet of the Banking System: 11/2021 — Date Received 01/2022 — Frequency: M M Q
  - Interest Rates: 12/2021 — Date Received 01/2022 — Frequency: M M M
  - Consumer Price Index: 12/2021 — Date Received 02/31/2022 — Frequency: Q Q Q
  - Revenue, Expenditure, Balance and Composition of Financing — Central Government: 12/2021 — Date Received 4/14/2022 — Frequency: A A A
  - Stocks of Central Government and Central Government-Guaranteed Debt: 12/2021 — Date Received 4/14/2022 — Frequency: Q A A
  - External Current Account Balance: Q2 2019 — Date Received 11/28/2019 — Frequency: Q Q Q
  - Exports and Imports of Goods and Services: Q2 2019 — Date Received 11/28/2019 — Frequency: Q Q Q
  - GDP/GNP: 2019 — Date Received 11/04/2021 — Frequency: A A I
  - Gross External Debt: 2018 — Date Received 07/03/2018 — Frequency: Q A A
  - International Investment Position: N/A — Date Received N/A — Frequency: N/A N/A N/A

### Debt Sustainability Analysis (Joint Bank-Fund)
- Risk ratings:
  - Risk of external debt distress: High
  - Overall risk of debt distress: High
  - Granularity in the risk rating: Sustainable
  - Application of judgment: No

- Summary of findings and policy implications:
  - 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.
  - Planned fiscal consolidation helps address debt vulnerabilities exacerbated by the global COVID-19 shock, but 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 projected temporary breaches of sustainability indicators can mostly be addressed by debt management operations as well as improvements in revenue generation.
  - Debt Sustainability Analysis suggests PNG is susceptible to exports and other shocks, signaling downside risks to the debt outlook in a global environment of high uncertainty.
  - To lower the risk of debt distress and ensure debt sustainability, recommended measures include:
    - Gradual fiscal consolidation, including boosting revenues.
    - Steadfast structural reforms to promote private sector growth.
  - Conditional on implementation of the authorities’ plans for further fiscal consolidation and conservative financing strategies, PNG’s external and overall debt is judged as sustainable.
  - Composite Indicator (CI) of 2.62 is based on April 2022 IMF World Economic Outlook (WEO) and the World Bank’s Country Policy and Institutional Assessment (CPIA) for 2021, indicating a “weak” capacity to carry debt.

*Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA), May 25, 2022.*

### 1.      The coverage of public debt in the DSA is unchanged from the previous (December 2021)

### 1pngea2022002 - 1.      The coverage of public debt in the DSA is unchanged from the previous (December 2021)

### Coverage of public debt in the DSA
- Segments captured:
  - central government
  - state and local government
  - guarantees to other entities in the public and private sector, including parts of state-owned enterprises (SOEs)
- Elements not fully captured:
  - implicit government guaranteed debts of SOEs
  - unfunded superannuation liabilities relating to pensions
- Contingent liabilities stress test assumptions (added because of difficulties capturing SOE risks):
  - 9 percent of GDP assumed as SOE debt not captured in official public debt data
  - 3 percent of GDP assumed for other elements of general government (mainly unfunded superannuation liabilities related to pensions)
  - PPP capital stock in PNG is zero (World Bank PPP database), therefore no PPP default shock
  - Financial market shock of 5 percent is added (reflecting the average fiscal cost of financial crisis in low-income countries)
  - With these assumptions, the cumulative shock in the contingent liabilities stress test amounts to 17 percent of GDP—compared to 7 percent under default assumptions

### Background on debt levels and composition
- Public debt stock change:
  - increased from around 25 billion Kina to 49 billion Kina between 2017 and 2021
  - increase mainly due to external loans
- Creditor composition:
  - shifting away from commercial loans towards official multilateral and bilateral financing
- Effects of shocks:
  - pandemic and terms-of-trade shock to main exports (mainly LNG and metals) exacerbated fiscal deficits and increased government debt
- Debt relief and data sources:
  - PNG participated in the G-20 Debt Service Suspension Initiative (DSSI) lowering debt service costs during 2020 and 2021
  - Public and Publicly Guaranteed (PPG) external debt figures used for this DSA are consistent with the World Bank’s International Debt Statistics

### Special Drawing Rights and IDA context
- SDR allocation:
  - SDR 252 million (US$ 357 million, or 95.7 percent of quota) allocated to PNG in August 2021
  - Authorities used the full SDR allocation to support the 2021 budget
  - SDR allocation is included in public debt numbers for this DSA and associated debt service for the amount outstanding is reflected
- IDA status:
  - PNG is an IDA blend country, with total IDA19 allocation at SDR 178.4 million
  - PNG benefitted from resource frontloading and an intra-regional reallocation for SDR 0.6 million, approved in November 2021
- IDA Sustainable Development Finance Policy (SDFP) and Performance and Policy Actions (PPA):
  - PNG satisfactorily implemented the PPA for fiscal year 2021 aimed at improving debt management and debt transparency
  - Two SDFP PPAs for fiscal year 2022:
    - a US$ 1 billion non-concessional PPG borrowing limit for new non-concessional long-term contractual obligations, applying continuously throughout FY22
    - operationalize the 2021 State Guarantee Policy with the adoption of a binding Guidance Note for Loan Guarantees (to incorporate credit risk assessment in decision making on guarantees and improve reporting)

### Macro outlook and assumptions
- Recent and medium-term growth and inflation:
  - Real GDP in 2021 estimated to have increased by 1.2 percent
  - Pre-crisis forecast (2019 Article IV) had 2021 GDP growth at 2.8 percent
  - Headline inflation (period-average CPI) estimated at 4.5 percent in 2021
  - 2021 current account surplus estimated to have decreased to 19 percent of GDP; medium-term forecast around 18 percent of GDP
- Fiscal assumptions for 2022 (under the SMP):
  - Parliament approved a budget aiming for an overall deficit of 5.9 percent of GDP (below the 6 percent target agreed with the Fund as part of the Staff Monitored Program)
  - Baseline projection assumes vaccination rates remain slow, but low mobility prevents large-scale transmission; March 2022 temporary relief package announced to address rising food and fuel prices (tax relief and higher spending), offset by higher mining revenue
- Long-term potential and medium-term forecasts:
  - long-term potential real growth estimate at 3.1 percent (unchanged from 2021 DSA)
  - inflation projected to remain significantly higher in the medium term, before falling to an annual average of 4.5 percent
  - current account surplus forecast to remain around 18 percent of GDP over the medium term
- DSA vintage macro assumptions (selected exact values from Text Table 2):
  - Real GDP growth y/y (in percent) — 2022 vintage: 2022: -3.5; 2021: 1.2; 2023: 4.2; 2024-2032 (average): 3.0
  - Resource sector — 2022 vintage: 2022: -8.3; 2021: -3.5; 2023: 4.8; 2024-2032 (average): 0.1
  - Non-resource sector — 2022 vintage: 2022: -1.2; 2021: 3.2; 2023: 4.0; 2024-2032 (average): 4.1
  - Inflation, annual average (consumer prices, percent) — 2022 vintage: 2022: 4.9; 2021: 4.5; 2023: 6.4; 2024-2032 (average): 4.6
  - Current account balance (percent of GDP) — 2022 vintage: 2022: 22.4; 2021: 18.7; 2023: 23.1; 2024-2032 (average): 22.0
  - Primary balance (percent of GDP) — 2022 vintage: 2022: -6.0; 2021: -4.3; 2023: -3.4; 2024-2032 (average): -2.5
  - Government revenues (excluding grants, percent of GDP) — 2022 vintage: 2022: 12.5; 2021: 12.4; 2023: 13.1; 2024-2032 (average): 13.3

### Fiscal projections, consolidation, and risks
- Medium-term baseline assumptions:
  - rapid progress on fiscal consolidation consistent with authorities’ plans to meet the Fiscal Responsibility Act (government debt maintained at no more than 40 percent of GDP over the long term)
  - projection builds in significant fiscal consolidation and primary surpluses in the second half of the projection period
  - authorities project a sharp increase in tax revenues from the PNG LNG project from 2026 onward as tax exemptions expire (not yet included in baseline)
  - achieving a balanced budget by 2027 would lower risks from significant debt service obligations coming due in 2028
- Main downside risks:
  - outbreaks of Covid-19, natural disasters, lower global growth, social or political instability (elevated around the 2022 general elections)
  - limited financing in adverse scenarios would constrain policy adjustment room
- Upside risks:
  - war in Ukraine has increased commodity prices and inflation, leading to stronger balance of payments and higher fiscal revenues
  - potential starts of resource projects (Papua LNG, P’nyang LNG, Wafi Golpu) could boost growth and fiscal revenues if investment decisions are reached
- Realism tools finding:
  - three-year cumulative primary balance adjustment at about 3.8 precent is within the top 12 percent of historical experiences, relative to peers
  - much of the adjustment arises during 2022 and reflects temporarily higher deficits due to the pandemic

### Financing mix and debt management assumptions
- Domestic financing assumptions:
  - composition of T-bills and T-bonds remains unchanged compared to the past six years
  - from 2025, DSA assumes on average one-third of financing needs covered from official multilateral and bilateral resources, rest domestic financing with a balanced mix of bonds and T-bills
  - continued development of the domestic debt market necessary to increase liquidity and reliance on domestic financing
  - Phase 2 of the Central Banking Act review expected to look at competition in the domestic banking sector
- Non-concessional borrowing (NCB) policy under SMP:
  - zero limit to new NCB by Department of Treasury and Bank of Papua New Guinea during SMP; multilateral and official bilateral support exempted
  - NCB may be allowed only in exceptional circumstances (integral project with no concessional financing available, or debt management operations that improve public debt profile)

### Country classification, stress test design, and thresholds
- Debt carrying capacity and classification:
  - PNG’s Composite Indicator (CI) is 2.62 (April 2022 WEO and CPIA), indicating weak debt-carrying capacity
  - applicable thresholds (based on classification):
    - PV of external debt-to-GDP ratio threshold: 30 percent
    - PV of external debt-to-exports ratio threshold: 140 percent
    - external debt service-to-exports ratio threshold: 10 percent
    - external debt service-to-revenue ratio threshold: 14 percent
    - PV of public debt-to-GDP ratio threshold: 35 percent
- Contingent liabilities and scenario stress tests:
  - contingent liabilities stress test included to account for SOE debt not captured in official data (using 9 percent of GDP for SOE debt and 3 percent for unfunded superannuation liabilities, as noted above)
  - commodity price shock settings (reflecting resource sector importance; commodities share in total exports of goods and services is 96 percent):
    - fuel price shock set at 35 percent (compared to default shock of 27 percent)
    - non-fuel commodity prices shock set at 21 percent, with 20 percent for base metals and precious metals, and 22 percent for agricultural commodities other than grain
    - grain price shocks not included (not relevant for PNG)
    - mitigating factors at default values (2 percent for fuel, and 27 percent for non-fuel)
  - PNG’s single outstanding Eurobond (maturing in 2028) activates the market financing module

### Debt sustainability outcomes (external DSA summary)
- Baseline scenario key outcome:
  - the debt-service to revenue indicator is projected to breach its threshold in 2028 due to the bullet payment for the US$ 500 million Eurobond issued in 2018
  - after 2028 the indicator remains close to the threshold with further marginal breaches until 2032
  - present value of the debt-to-GDP ratio, debt-to-exports, and debt service-to-export ratios remain below their respective thresholds over the entire projection horizon and are on a downwards trend

*Source: IMF staff DSA chapter: “The coverage of public debt in the DSA is unchanged from the previous (December 2021)”*

### 17.      Stress tests point to vulnerabilities in PNG’s external debt dynamics particularly with respect

### 17.      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

### Stress test findings and external dynamics
- 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 manifests in a divergence between the historical scenario and the baseline. The historical scenario reflects large current account deficits associated with the construction phase of PNG LNG and is not considered an appropriate indicator for future risks.
- The market financing risk module indicates a moderate risk of heightened liquidity pressures as the EMBI spread is elevated, although GFNs remain below their benchmark.
- A heightened market stress event would not have a substantial impact of debt burden indicators.
- PNG’s elevated sovereign spreads likely reflect the perceived risks due to the country’s characteristics (small and undiversified export base, small revenue base, vulnerability to shocks).
- The published data on the current account surplus in PNG is likely overstated due to 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.
- 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
- Public debt ratios have increased substantially in recent years and reached 51 percent of GDP in 2021.
- 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.
- The debt-to-revenue ratio sees a continuous downward trend over the projection horizon.
- In the baseline projection, the continuous fall in the public debt-to-GDP ratio over the next 5 years arises through stronger real GDP growth and a smaller fiscal deficit than over the past 5 years, as growth headwinds wane and gradual fiscal consolidation continues.
- A tailored stress test for the combined contingent liability shock causes a deterioration in public debt sustainability:
  - The trajectory of the PV of the public debt-to-GDP ratio shifts upwards by 16 percentage points from the baseline, representing the most extreme shock for all three public debt indicators.
  - This analysis suggests contingent liabilities represent one important source of vulnerabilities in PNG.

### Risk rating 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 under the baseline scenario.
  - No staff judgement has been applied to these ratings.
- Debt service on existing loans, paired with relatively weak revenue generation, are expected to almost double the debt service-to-revenue ratio by 2025.
  - As debt service reduces and revenues increase, and barring further shocks to demand growth, the indicator enters a significant downward trend from this peak.
- Stress tests show that adverse shocks to exports and contingent liabilities constitute the main risks to public debt sustainability.
- The historical scenario indicates that it will be challenging to reduce debt from current levels and that reforms, including those already implemented during the SMP, are essential for supporting the sustainability of public finances.
- Market financing risks continue to be relevant, with the EMBI spread threshold breached, pointing to moderate market financing pressures.

### Outlook and policy implications
- Debt dynamics are assessed as sustainable.
  - Public debt is expected not to increase in the near-term and to enter a clear downward path over the medium-term.
  - 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 authorities plans for further fiscal consolidation and conservative financing strategies.
- The projected temporary breaches of sustainability indicators can be prevented by debt management operations as well as by boosting revenue generation.
- Reforms to SOE oversight and reporting (initiated in the context of the previous SMP) — including a detailed review of SOE debt and government guarantees and efforts to reduce the backlog of audited annual financial statements — are expected to improve the reporting of public debt and understanding of fiscal risks.

*Source: IMF staff assessment as presented in the provided content unit.*

### 25.      The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress

### 25.      The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress

### Authorities’ assessment and views
- Authorities acknowledged Staff’s assessment that PNG remains at high risk of debt distress but considered debt sustainable under the baseline projection.
- They emphasized that large financing requirements to dampen the effects of the COVID-19 pandemic have increased public debt.
- Identified a key risk: redemption of the US$ 500 million Eurobond in 2028, issued in 2018.
- Authorities were more optimistic about debt-carrying capacity and perceived a lower risk of debt distress, citing:
  - Increased revenues by 2027 as debt payments for the PNG LNG project are completed.
  - A strategy to substitute costly financing with concessional financing from multilateral and bilateral partners, which improved PNG’s debt profile.
  - Falling interest costs of domestic securities over the past two years.
  - More favorable future contract negotiation and the medium-term revenue strategy as mitigating factors.
- Authorities committed to fiscal consolidation and conservative financing strategies to support debt sustainability going forward.

### Debt levels and trajectories (selected indicators and projections)
- External debt (nominal):
  - 2019: 62.6
  - 2020: 68.6
  - 2021: 66.7
  - 2022: 60.0
  - 2023: 58.8
  - 2024: 58.0
  - 2025: 57.9
  - 2026: 56.2
  - 2027: 54.7
  - 2028: 52.4
  - 2029: 49.9
  - 2030: 47.1
  - 2031: 44.5
  - 2032: 42.3
  - 2042: 24.4
- External debt (of which: public and publicly guaranteed (PPG)):
  - 2019: 18.0
  - 2020: 23.0
  - 2021: 24.7
  - 2022: 22.9
  - 2023: 23.2
  - 2024: 23.1
  - 2025: 23.8
  - 2026: 23.5
  - 2027: 23.0
  - 2028: 21.3
  - 2029: 19.8
  - 2030: 17.9
  - 2031: 16.2
  - 2032: 14.9
  - 2042: 6.0
- Change in external debt (selected years):
  - 2019: -8.9
  - 2020: 6.0
  - 2021: -1.9
  - 2022: -6.7
  - 2023: -1.2
  - 2024: -0.8
  - 2025: -0.1
  - 2026: -1.6
  - 2027: -1.5
  - 2028: -2.3
- Identified net debt-creating flows (selected years):
  - 2019: -20.0
  - 2020: -22.5
  - 2021: -25.7
  - 2022: -25.8
  - 2023: -24.9
  - 2024: -22.6
  - 2025: -21.8
  - 2026: -20.9
  - 2027: -20.0
  - 2028: -19.5
- Non-interest current account deficit (percent of GDP, selected years):
  - 2019: -20.4
  - 2020: -24.2
  - 2021: -20.1
  - 2022: -24.4
  - 2023: -23.1
  - 2024: -21.6
  - 2025: -20.7
  - 2026: -19.7
  - 2027: -20.0
  - 2028: -19.5
- Exports (percent of GDP, selected years):
  - 2019: 45.8
  - 2020: 41.0
  - 2021: 35.8
  - 2022: 39.2
  - 2023: 38.2
  - 2024: 36.8
  - 2025: 35.7
  - 2026: 34.5
  - 2027: 33.2
  - 2028: 32.5
- Net FDI (negative = inflow, percent of GDP, selected years):
  - 2019: 0.1
  - 2020: -0.3
  - 2021: -0.3
  - 2022: -0.3
  - 2023: -0.3
  - 2024: -0.3
  - 2025: -0.2
  - 2026: -0.2
  - 2027: -0.2
  - 2028: -0.2

### Sustainability and debt service metrics (selected)
- PV of PPG external debt-to-GDP ratio (selected projection years):
  - 2022: 23.1
  - 2023: 21.2
  - 2024: 21.1
  - 2025: 20.8
  - 2026: 21.2
  - 2027: 20.9
  - 2028: 20.5
  - 2029: 19.2
  - 2030: 18.0
  - 2031: 16.4
  - 2032: 14.9
  - 2042: 5.6
- PV of PPG external debt-to-exports ratio (selected):
  - 2022: 64.6
  - 2023: 54.1
  - 2024: 55.1
  - 2025: 56.4
  - 2026: 59.2
  - 2027: 60.6
  - 2028: 61.7
  - 2029: 59.0
  - 2030: 57.2
  - 2031: 53.9
  - 2032: 50.8
  - 2042: 28.1
- PPG debt service-to-exports ratio (selected years):
  - 2019: 1.2
  - 2020: 4.8
  - 2021: 4.5
  - 2022: 2.7
  - 2023: 3.5
  - 2024: 3.9
  - 2025: 4.6
  - 2026: 5.0
  - 2027: 5.0
  - 2028: 8.5
  - 2029: 6.7
  - 2030: 8.1
  - 2031: 7.7
  - 2032: 7.4
  - 2042: 6.0
- PPG debt service-to-revenue ratio (selected years):
  - 2019: 3.8
  - 2020: 15.8
  - 2021: 12.8
  - 2022: 7.9
  - 2023: 10.2
  - 2024: 10.3
  - 2025: 11.5
  - 2026: 11.6
  - 2027: 11.1
  - 2028: 18.7
  - 2029: 13.9
  - 2030: 15.9
  - 2031: 14.4
  - 2032: 13.2
  - 2042: 7.6
- Gross external financing need (Million of U.S. dollars, selected years):
  - 2019: -2319.0
  - 2020: -3906.7
  - 2021: -3298.9
  - 2022: -5617.9
  - 2023: -5343.7
  - 2024: -5404.7
  - 2025: -5262.8
  - 2026: -6134.5
  - 2027: -5612.5
  - 2028: -5254.2
  - 2029: -5605.6
  - 2030: -5573.9
  - 2031: -5747.5
  - 2032: -5949.5
  - 2042: -7497.7

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent, selected years):
  - 2019: 4.5
  - 2020: -3.5
  - 2021: 1.2
  - 2022: 4.2
  - 2023: 4.7
  - 2024: 3.0
  - 2025: 3.0
  - 2026: 3.0
  - 2027: 3.0
  - 2028: 3.0
  - 2029: 3.0
  - 2030: 3.0
  - 2031: 3.1
  - 2032: 3.1
  - 2042: 3.4
  - Average (projections): 4.0; 3.3 shown elsewhere
- GDP deflator in US dollar terms (change in percent, selected years):
  - 2019: -1.7
  - 2020: 3.3
  - 2021: 9.5
  - 2022: 10.9
  - 2023: 1.3
  - 2024: 1.1
  - 2025: 1.5
  - 2026: 3.0
  - 2027: 3.2
  - 2028: 1.9
  - 2029: 3.2
  - 2030: 3.2
  - 2031: 3.3
  - 2032: 3.3
  - 2042: 3.2
- Effective interest rate (percent, selected years):
  - 2019: 3.1
  - 2020: 2.8
  - 2021: 2.2
  - 2022: 2.1
  - 2023: 2.0
  - 2024: 1.8
  - 2025: 1.5
  - 2026: 1.3
  - 2027: 3.5
  - 2028: 3.5
  - 2029: 3.4
  - 2030: 3.4
  - 2031: 3.4
  - 2032: 3.3
  - 2042: 3.6
- Growth of exports of G&S (US dollar terms, in percent, selected years):
  - 2019: 12.7
  - 2020: -10.8
  - 2021: -3.2
  - 2022: 26.6
  - 2023: 3.4
  - 2024: 0.3
  - 2025: 1.5
  - 2026: 2.2
  - 2027: 2.5
  - 2028: 2.7
  - 2029: 2.7
  - 2030: 2.8
  - 2031: 2.9
  - 2032: 2.9
  - 2042: 3.2
- Government revenues (excluding grants, percent of GDP, selected years):
  - 2019: 14.2
  - 2020: 12.5
  - 2021: 12.4
  - 2022: 13.1
  - 2023: 13.3
  - 2024: 13.8
  - 2025: 14.4
  - 2026: 14.7
  - 2027: 14.8
  - 2028: 14.8
  - 2029: 15.1
  - 2030: 15.5
  - 2031: 15.8
  - 2032: 16.0
  - 2042: 16.0

### Public sector debt profile (selected)
- Public sector debt (percent of GDP):
  - 2019: 41.5
  - 2020: 49.0
  - 2021: 51.4
  - 2022: 49.8
  - 2023: 50.3
  - 2024: 50.7
  - 2025: 49.8
  - 2026: 47.4
  - 2027: 44.3
  - 2032: 26.3
  - 2042: 4.5
- Change in public sector debt (selected years):
  - 2019: 4.7
  - 2020: 7.5
  - 2021: 2.4
  - 2022: -1.6
  - 2023: 0.6
  - 2024: 0.4
  - 2025: -0.9
  - 2026: -2.4
  - 2027: -3.1
- Primary deficit (percent of GDP, selected years):
  - 2019: 1.9
  - 2020: 6.0
  - 2021: 4.3
  - 2022: 3.4
  - 2023: 2.5
  - 2024: 1.1
  - 2025: 0.0
  - 2026: -0.9
  - 2027: -1.6
  - 2028: -2.7
- PV of public debt-to-GDP ratio (selected projection years):
  - 2022: 50.2
  - 2023: 48.4
  - 2024: 48.5
  - 2025: 48.7
  - 2026: 47.5
  - 2027: 45.1
  - 2028: 42.1
  - 2029: 25.3
  - 2032: 4.2

### Stress tests, sensitivity analysis and risks
- Staff DSA presents alternative scenarios, bound tests, and tailored (country-specific) tests for public and PPG external debt indicators through 2032.
- Table highlights (selected):
  - Sensitivity analysis results show breaches under some scenarios (bold values in source), with notable vulnerability to:
    - Real GDP growth shocks (B1),
    - Primary balance deterioration (B2),
    - Export shocks (B3),
    - Combined contingent liabilities (C1),
    - Commodity price shocks (C3).
- Figures summarize indicators under alternative scenarios (PV of debt-to-GDP, PV of debt-to-exports, debt service-to-revenue, debt service-to-exports) and identify the most extreme shock for each indicator in or before 2032.

### Policy implications and commitments
- Authorities’ mitigation strategies include:
  - Fiscal consolidation.
  - Conservative financing strategies.
  - Continued substitution of costly financing with concessional financing from multilateral and bilateral partners.
  - Medium-term revenue strategy and improved contract negotiations to reduce medium-term risks.
- Staff projections underline the importance of these measures given the timing of large debt service obligations (notably the US$ 500 million Eurobond redemption in 2028).

*Sources: Country authorities; and staff estimates and projections.*

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### 1pngea2022002 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### Fiscal adjustment and possible growth paths / 3-year adjustment in primary balance
- Chart description: "The size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is found on the vertical axis."
- 3-Year Adjustment in Primary Balance (Percentage points of GDP): horizontal axis labels include -4.5, -4.0, -3.5, -3.0, -2.5, -2.0, -1.5, -1.0, -0.5, 0.0, 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.5, 4.0, 4.5, 5.0, 5.5, 6.0, 6.5, 7.0, 7.5, 8.0, more.
- Key summary statement from figure: "3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile."
- Projection scenarios shown with multipliers: Baseline; Multiplier = 0.2; Multiplier = 0.4; Multiplier = 0.6; Multiplier = 0.8.
- Time series labels appearing in figures: 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023; and projection horizon extending through 2027 with labels 2018–2027 in some panels.

### Market-financing risk indicators (Figure 5)
- Notes:
  - 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon.
  - 2/ EMBI spreads correspond to the latest available data.
  - Sources: Country authorities; and staff estimates and projections.
- Benchmarks and indicators shown:
  - GFN Benchmarks (values shown include 14; 11; 854; 0; 5; 10; 15; 20; 25)
  - EMBI: "Yes" / "No" breach of benchmark indicated.
  - Debt service-to-revenue ratio time series labels: 2022, 2024, 2026, 2028, 2030, 2032 with vertical axis labels 0, 20, 40, 60, 80, 100, 120, 140, 160.
  - PV of debt-to-exports ratio: 0, 5, 10, 15, 20, 25, 30, 35 with horizon 2022–2032.
  - PV of debt-to-GDP ratio: 0, 2, 4, 6, 8, 10, 12 with horizon 2022–2032.
  - Debt service-to-exports ratio: 0, 2, 4, 6, 8, 10, 12 with horizon 2022–2032.

### Overview (Statement by Chang Huh, Laura Johnson, Rhoda Karl — June 13, 2022)
- Program delivery and reform progress:
  - Authorities increased engagement with the Fund and demonstrated significant progress during the COVID outbreak.
  - Significant reforms delivered toward budget repair, capital investment improvements (expenditure rule), reducing government arrears, enhancing information sharing, implementation of Tax Administration Act, and establishment of the Independent Commission of Anti-Corruption (ICAC) Act.
  - Under the most recent Staff Monitored Program (SMP), the authorities met all Quantitative Targets and all Structural Benchmarks except one, and completed the review with the IMF.
  - The budget deficit for 2021 was below the program target; the planned deficit target for 2022 was lower than agreed.
  - Staff assessment: "PNG’s planned fiscal adjustment places it in the top 12 percent of historical adjustments."
  - This is the first successful completion of a program with the IMF in over two decades by PNG.

### Economic conditions
- Recent fiscal actions and COVID response:
  - 2019 Supplementary Budget included budget cuts equivalent to over 1 percentage point of GDP.
  - PNG weathered the pandemic relatively better than peers due to swift 2020 response.
- Inflation and short-term relief measures:
  - Inflation moderately above recent trends due to international conditions, supply-chain disruptions, higher commodities and oil prices resulting from the war in Ukraine.
  - Authorities implemented short-term measures: removing excise and the Goods and Services Tax on fuel; reducing prices on selected staple food items; increasing the tax-free threshold for Personal Income Tax; supplementing the Tuition Fee Subsidy.
  - Cost of these measures "will be offset by the expected revenue increase from higher commodities prices."
  - Rationale: targeted relief effective given lack of social security system; supports budget repair while providing widespread transfers.
- Medium-term growth and fiscal outlook:
  - Authorities' objective: achieve 5 percent growth in the non-resource sector.
  - Government expects to return to a budget surplus by 2027, with debt-to-GDP ratios declining rapidly even before then.
- Risks to outlook:
  - Downside risks: new COVID-19 variants; weaker external demand for PNG’s exports; large volatility in commodity prices; higher inflation; climate-related natural disasters.
  - Upside risks (not included in authorities' baseline): higher than-expected commodity prices; falling domestic interest costs; possibility of significantly larger LNG revenues in the medium term; commencement of major extractive projects (Papua LNG, P’nyang LNG, Wafi Golpu).

### Debt sustainability and financing
- Staff view: PNG's public and publicly guaranteed debt is "sustainable but at high risk of debt distress."
- Authorities' perspective:
  - View debt carrying capacity as more nuanced.
  - Note large financing requirements during COVID elevated debt levels.
  - Point to a $US500 million bullet bond repayment due in 2028 as a risk to debt distress.
  - Authorities expect manageability via increased PNG LNG revenues in 2027, restructuring toward cheaper financing, and an updated public guarantee policy to strengthen oversight of SOE loans.
- Domestic debt market:
  - Authorities have reduced cost of locally issued debt securities; near-end rates for ~4 year maturities down from over 10 percent to around 6 percent in the most recent auction.

### Financial sector and governance
- Financial sector characteristics:
  - Dominated by commercial banks that are well-capitalized and profitable, with ample or excessive liquidity.
  - Non-performing loans have risen.
  - Financial inclusion constrained by low urbanization, large informal economy, and low financial literacy.
- Anti-corruption and AML/CFT actions:
  - Financial Analysis Supervision Unit initiated regulatory actions against Bank South Pacific to strengthen AML/CFT compliance and reduce correspondent banking risks.
  - Passage and implementation of ICAC law providing investigative powers for complex corruption cases.
  - PNG's Corruption Perception Index improved for 2021.
  - Ongoing engagement with development partners: UN, EU, ADB, Australia.

### Climate vulnerability
- PNG highly vulnerable to climate change with large adaptation needs: rising sea levels, coastal erosion, flooding, drought, landslides.
- Authorities have worked to reduce emissions, protect rainforest, and adapt despite limited financial support.
- Staff report emphasized climate issues; financing challenges will require development partner and external support.

### Broad program performance — specific reform actions under SMPs
- Reforms implemented:
  1) Arrears Verification Committee identified over K5 billion in pre-2019 arrears; arrears payments of K255 million in 2020 and K419 million in 2021.
  2) Improved information sharing between Treasury and Central Bank; establishment of an observer position on the Central Bank board for Treasury; review and formalization of TORs for the public debt committee.
  3) Introduction of the Tax Administration Act.
  4) Implementation of a new Small Business Tax to simplify the tax code for small companies.
  5) Passage of the ICAC Act and establishment of ICAC authority.
  6) Instituting the Temporary Access Facility (TAF) for cash flow management with guidelines developed with IMF advice.
  7) Approval of consequential amendments around the Tax Administration Act to prevent conflicts with other legislation.
  8) Completion of a staffing and establishment review to address proper recording of staff under correct appropriation heads and other issues.
  9) Completion of the first stage of the Independent Advisory Group (IAG) report into the Central Bank Act and passage of initial amendments in December 2021.

### Central Bank reform (Phase 1 outcomes and next steps)
- Reform design and IAG:
  - IAG composed of former Central Bank Governor, former Chief Secretary to Government, and head of Development Policy Centre at ANU; IAG review used IMF advice.
  - Eight recommendations on the Monetary Policy Committee (MPC) were deferred; authorities inclined to move toward an MPC path.
- Phase 1 changes (passed unanimously by PNG Parliament):
  - Modernized and strengthened independence, governance, accountability, and transparency of the Central Bank.
  - Decision-making power for monetary policy and financial regulation moved from a single person to a strengthened Board with merit-based appointments and removal of ex-officio positions.
  - Strengthened transparency and reporting to Parliament and public; improved coordination with Treasury while respecting independence.
  - Move toward a joint mandate for monetary policy balancing price stability and avoiding exchange-rate anchoring that undermined growth.
  - Closed loopholes on funding the government: absolute limits on Central Bank purchases of government securities; cash advance facility limited to within-year flows with repayment within the fiscal year.
  - TAF designed with automatic flexibility within a fixed limit and requirement of full repayment by end of financial year; in 2022 TAF drawdown "has never exceeded half of the maximum drawdown" and there is currently a surplus in government cash accounts.
- Phase 2:
  - Authorities requested further Fund TA to continue review and amendment of the Central Bank Act (CBA), including objectives of BPNG, role of the Board, and role of BPNG regarding government cashflow management.
  - Authorities expect no preconceived Fund expectations ahead of TA mission.

### Fund relationship
- IMF support and engagement:
  - Appreciation for IMF support during COVID via the Rapid Credit Facility and the 2021 General Allocation of SDR.
  - SMPs productive; authorities strengthened bilateral information flows.
  - Authorities support placement of a Resident Representative in PNG and greater TA engagement.
  - Authorities look forward to continued constructive partnership with the Fund to support economic reform agenda and development outcomes for PNG.

*Statement by Chang Huh, Executive Director for Papua New Guinea; Laura Johnson, Senior Advisor to Executive Director; and Rhoda Karl, Advisor — June 13, 2022*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pngea2022002.pdf_