## Papua New Guinea: Executive Summary (1pngea2023001) ## Source details **Canonical URL:** [Papua New Guinea: Executive Summary (1pngea2023001)](https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1pngea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1pngea2023001.pdf.json) --- ### Context and program aims - PNG is described as a fragile state, vulnerable to natural disasters and terms of trade shocks; shocks since 2014 include low commodity prices (2014–20), a severe drought (2015–16), and a major earthquake (2018). - Pandemic further increased public debt; public and publicly guaranteed debt assessed at high risk of debt distress. - Authorities requested a 38-month blended Extended Credit Facility (ECF) / Extended Fund Facility (EFF) program to: - Address a protracted balance of payments need manifested in FX shortages and advance reforms for inclusive and sustainable growth. - Strengthen debt sustainability through multi-year fiscal consolidation while making room for critical social and development needs. - Enhance legal and operational framework of the Bank of PNG (BPNG) to alleviate FX shortages and transition to a market-clearing exchange rate. - Operationalize and strengthen the anti-corruption framework. - Political context: General election July 2022 returned Prime Minister James Marape with a large majority and reappointment of the Treasurer; government protected from motions of no confidence until February–March 2024. *Major program modalities* - Staff supports a 38-month ECF/EFF. - Access requested: SDR 684.32 million (260.0 percent of quota) comprising: - SDR 228.11 million (86.7 percent of quota) under the ECF. - SDR 456.21 million (173.3 percent of quota) under the EFF. - Authorities intend to use disbursements for budget financing; program expected to be fully financed. PNG’s capacity to repay the Fund assessed as adequate but subject to elevated risks. ### Recent macro developments, outlook, and risks - Growth and inflation: - Real GDP: contracted by 3.2 percent in 2020; recovered to 0.1 percent in 2021; estimated at 4.5 percent in 2022. - Inflation: average inflation rose from 4.5 percent in 2021 to 6.6 percent in 2022. - 2023 projections: overall growth 3.7 percent; resource sector 0.3 percent; non-resource sector 4.9 percent. - 2023 inflation projected at 5.4 percent. - Medium-term growth projected to converge to potential (around 3.1 percent), supported by the non-resource sector. - External sector and reserves: - REER overvalued by 13.4 percent in 2022 (2.4 percent for 2021 in last Article IV report). - NEER appreciated by 6.9 percent in 2022; REER appreciated by 6.6 percent in 2022. - Reserves maintained at around 11 months of imports in 2022. - Reserve targets under program: minimum NIR of US$1,700 million by end-2023 (QPC); gross reserves consistent target US$2.8 billion (7.5 months of imports). - Reserve path projected to decline from 11 months in 2022 to just above 6 months in 2024 in baseline. - Financial sector: - Capital adequacy ratio: 37.6 percent as of June 2022. - Return on equity: 17.9 percent as of June 2022. - Non-performing loans (NPLs): 6.3 percent (increase noted). - Risks: - Downside: weaker external demand, commodity price volatility and dividend volatility, natural disasters, political developments after early-2024 grace period. - Upside: higher-than-expected commodity prices or start of major projects (Papua LNG, P’nyang LNG, Wafi Golpu) not in baseline. ### Fiscal consolidation: recent path, 2023 budget, and medium-term framework - Fiscal path and targets: - Fiscal deficit narrowed from nearly 9 percent of GDP in 2020 to an estimated 5.4 percent in 2022. - 2023 fiscal deficit ceiling: K4,985 million (4.3 percent of GDP) — quantitative performance criterion (QPC); deficit measured using financing data. - Program projects deficit around 1.2 percent of GDP by 2026 and a balanced budget by 2027 if consolidation fully executed. - Authorities will rely on official development financing and domestic market borrowing. - 2023 revenue measures and impacts (Text Table 1 figures preserved): - Change in domestic revenues: 1,993 million kina; 1.2 pp of GDP. - Tax: 1,068 million kina; 0.6 pp of GDP. - Non-tax: 925 million kina; 0.5 pp of GDP. - Due to policy measures: 1,713 million kina; 1.0 pp of GDP. - Selected policy impacts (million kina / pp of GDP): - Imposition of a 45 percent Company Tax rate on commercial banks: 240 / 0.1. - Increase in excise duties on alcohol and mixed drinks: 30 / 0.0. - Increase in duty on round logs: 30 / 0.0. - Increase in the personal income tax threshold from K12,500 to K20,000: -280 / -0.2. - Removal of excise duties on fuels until June 2023: -150 / -0.1. - Update of PNG Customs Harmonized System from HS 2017 to HS 2022: 0 / 0.0. - Update of SOE dividend policy: 1,293 / 0.7. - Ok Tedi: 293 / 0.2. - Kumul Petroleum: 1,000 / 0.6. - Introduction of the Non-Tax Revenue Act: 550 / 0.3. - Note: Change/estimated impact is relative to 2022 and does not include foreign grants. - Income Tax Act additional company tax (ACT) legality being challenged; payments held in trusts and not included in 2022 reported revenues—if upheld, revenues would be higher. - Expenditure and composition: - Budgeted expenditures ~21.4 percent of GDP; higher revenues intended to address accumulated arrears and personnel spending. - Capital spending expected to be 0.4 pp of GDP lower than in 2022. - Authorities’ medium-term framework envisions a balanced budget by 2027 and surpluses thereafter; debt-stabilizing primary balance expected by 2026 (DSA). - Floor on social expenditures for 2023: K3,866 million (around 3.4 percent of GDP). - Fiscal institutional and administrative actions: - Implement Tax Administration Act (TAA) and introduce amendments to Income Tax Act (ITA) by end-December 2023 (structural benchmark). - Adopt successor Medium-term Revenue Strategy (MTRS) by end-August 2023 (structural benchmark). - Indicative target (IT) floor on non-resource tax revenue collection: K12,558 million in 2023. - Payroll integration with public financial management system; HR Business Process workshops to be completed by June 2023 (structural benchmark). - Implementation of a new IT system expected to improve budget alignment and oversight. ### Monetary policy, FX operations, and BPNG governance reforms - Current assessment: - De jure exchange rate regime: floating; de facto classification: stabilized. - Kina assessed to be overvalued (Annex II). - BPNG FX allocation practices contributing to FX shortages: trading margin on FX buy-sell spreads since 2014, administrative allocation criteria, prohibition on forward transactions. - Excess kina liquidity remains substantial despite tighter policy since mid-2022. - Recent monetary actions: - Policy (kina facility) rate cumulatively raised by 50 basis points to 3.5 percent (mid-2022). - Reserve requirement ratio increased from 7 to 10 percent since mid-2022. - Greater issuance of central bank bills to mop up liquidity; excess liquidity persists and undermines transmission. - Program monetary and FX reforms and benchmarks: - Immediate priority: mop up excess kina liquidity to improve monetary transmission. - Introduce a fixed rate tender with full allotment by end-August 2023 (structural benchmark). - Review terms of short-term liquidity management instruments with Fund TA. - Roadmap: produce a roadmap for reforming monetary policy and exchange rate operations and framework by end-August 2023 (structural benchmark); implementation to feature Fund TA and structural benchmarks in subsequent reviews. - Safeguards: QPC ceiling on BPNG’s gross credit to government; indicative target floor on FX intervention to help reduce pent-up FX demand. - BPNG governance and CBA amendments: - December 2021 CBA revisions addressed some safeguards but introduced provisions weakening autonomy (advances to government on demand; new unranked mandates; Board decision-making on monetary policy). - Additional CBA amendments to be drafted with Fund staff and submitted to Parliament by end-2023 (structural benchmark). - Phase II of CBA review (IAG Phase II) to deliver recommendations by August 2023 focusing on financial sector development and governance issues. - FX provision targets: - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative, US$ millions): 2022 December: 878; 2023 March IT: 300; 2023 June test: 600; 2023 September IT: 900; 2023 December test: 1,200; 2024 March IT: 300. - In 2023, program envisages increase provision of FX to authorized FX dealers with a cumulative floor of US$1,200 million as an indicative target. ### Governance, anti-corruption, procurement, and transparency measures - ICAC and anti-corruption: - ICAC law (2020) in place; legal challenges dismissed in September 2022. - Shortlist for ICAC Commissioner and Deputy Commissioners finalized in late 2022. - Structural benchmarks: - Appoint ICAC Commissioner and two Deputy Commissioners by end-June 2023. - Finalize and adopt key implementing regulations to the ICAC law by end-2023. - Additional structural benchmarks to operationalize ICAC (training, case management IT system) to be added in future reviews. - UN and EU to complement Fund TA for anti-corruption support. - Procurement and transparency: - Resume full publication of information on COVID-related procurements by end-December 2023 (structural benchmark), including beneficial ownership for successful emergency contract awardees. - Publish budget information in GFS format and increase frequency and detail of published budget data. - BPNG to return to timely publication of audited financial statements and improve computation of FSIs with Fund support. - SOE governance: - Legislative amendments to Kumul Consolidated Holdings Act adopted in late 2021 with ADB support. - Continue SOE governance strengthening with ADB assistance. ### Debt sustainability, DSA findings, and stress tests - Overall assessment: - Public and publicly guaranteed debt remains at high risk of debt distress under the DSA. - Baseline shows public debt PV ratios increased to around 46.5 percent (2022 PV of public debt-to-GDP: 46.5) with public debt expected to enter a downward trend in the medium term conditional on fiscal consolidation and conservative financing. - The 2028 bullet payment on PNG’s existing US$500 million Eurobond presents a liquidity risk and triggers a spike in the debt service-to-revenue ratio in 2028, breaching the DSA threshold. - Key DSA numbers and projections (selected, preserved exactly where given): - Public debt stock evolution: increased from around 24 billion Kina (2017) to 53 billion Kina (2022). - Gross government debt (Kina, end of period): 2019: 33,678; 2020: 40,168; 2021: 48,173; 2022: 52,745; 2023 Proj.: 57,333; 2024 Proj.: 62,567; 2025 Proj.: 66,458; 2026 Proj.: 66,931; 2027 Proj.: 65,191; 2028 Proj.: 63,189. - PV of public debt-to-GDP ratio: 46.5 (2022), 43.3 (2023), 45.2 (2024), 46.5 (2025), 47.0 (2026), 44.7 (2027), 41.0 (2032), 25.5 (2042). - Debt service (Principal obligations to the Fund under ECF/EFF): peak in 2032 at around 121.7 million SDRs (46.2 percent of IMF quota). - Outstanding IMF credit peaks at 38.5 percent of gross international reserves in 2028 (staff calculations based on proposed access). - Public debt projected to peak at 47 percent of GDP in 2025 under baseline before falling thereafter. - Stress tests: - Exports shock scenario: PV of public debt-to-GDP ratio increases to a peak of 72 percent of GDP by 2025. - Commodity price volatility and contingent liabilities are key sources of vulnerability. - Market financing module indicates high liquidity pressure risks (EMBI spreads and GFN thresholds breached). - Policy implications from DSA: - Maintain gradual fiscal consolidation and boost revenues. - Conservative financing strategies emphasizing concessional financing from multilateral and bilateral partners. - Diversify domestic debt away from short-term Treasury bills toward longer-duration instruments to reduce rollover risks. ### Program financing, reserve dynamics, and IMF repayment capacity - Program access and disbursement schedule (selected entries preserved exactly): - 22 March 2023: Total 65.81 (ECF 21.94; EFF 43.87) — Percent of Quota: Total 25.0 (ECF 8.3; EFF 16.7). - 18 September 2023: Total 65.81 (ECF 21.94; EFF 43.87) — Percent of Quota: Total 25.0 (ECF 8.3; EFF 16.7). - 18 March 2024: Total 94.75 (ECF 31.58; EFF 63.17) — Percent of Quota: Total 36.0 (ECF 12.0; EFF 24.0). - 18 September 2024: Total 94.75 (ECF 31.58; EFF 63.17) — Percent of Quota: Total 36.0 (ECF 12.0; EFF 24.0). - 18 March 2025: Total 121.07 (ECF 40.36; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - 18 September 2025: Total 121.07 (ECF 40.36; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - 18 March 2026: Total 121.06 (ECF 40.35; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - Total across dates: 684.32 SDR million (ECF 228.11; EFF 456.21) — Percent of Quota Total 260.0 (ECF 86.7; EFF 173.3). - Reserve adequacy and path: - Reserve path remains consistently above the US$2 billion (5.2 month) floor suggested by adequacy metrics. - Baseline envisages gross international reserves falling from 11 months of imports in 2022 to just above 6 months in 2024, as BPNG increases FX provision to the market and removes FX restrictions to reduce backlogs. - Net international reserves (end-year, Table 3): 2019: 2,135; 2020: 2,126; 2021: 2,343; 2022: 3,226; 2023 Proj.: 1,700; 2024 Proj.: 1,000; 2025 Proj.: 1,000; 2026 Proj.: 1,200; 2027 Proj.: 1,400; 2028 Proj.: 650. - Capacity to repay IMF: - Under disbursement of 260 percent of quota, outstanding IMF credit trajectory (Millions of SDRs): 2023: 394.8; 2024: 584.3; 2025: 800.1; 2026: 868.6; 2027: 812.3; 2028: 737.5; 2029: 630.6; 2030: 509.5; 2031: 391.9; 2032: 270.2; 2033: 154.4; 2034: 64.6; 2035: 10.8; 2036: 0.0. - Principal obligations peak in 2032 at 121.7 million SDRs. - Total obligations as percent of government revenue and exports reported in Table 8; outstanding IMF credit peaks at 38.5 percent of gross international reserves in 2028. - Risks to capacity to repay: weaker external demand, commodity price volatility, natural disasters. Risks mitigated by commitment to fiscal sustainability, conservative assumptions excluding new resource projects, and program support. ### Program conditionality, monitoring, safeguards, and capacity development - Conditionality and benchmarks: - Quantitative performance criteria (QPCs), continuous PCs, indicative targets (ITs), and structural benchmarks specified in MEFP and Table 1. - Key QPCs and ITs include: fiscal deficit ceilings (cumulative), stock of NIR floor, BPNG gross credit ceiling, ceiling on PV of new external borrowing (US$1,405 million in 2023), non-accumulation of new external payment arrears (continuous), floor on non-resource tax revenue, floor on social and priority spending, floor on BPNG FX provision to authorized dealers. - Safeguards and BPNG assessment: - Last safeguards assessment completed in 2021; slow progress on implementing recommendations. - Outstanding priority: strengthen BPNG legal framework (CBA amendments) and aspects of reserves management and internal audit. - Timely publication of BPNG financial statements interrupted for FY2021; update assessment required by first program review. - Data, monitoring, and capacity development: - Program Monitoring Committee reactivated; Resident Representative in Port Moresby since November 21, 2022. - Detailed data reporting requirements specified (fiscal monthly reports, BPNG balance sheet monthly, daily sales of FX weekly, BOP quarterly, etc.). - Fund TA prioritized for monetary framework clarification, BPNG governance, MTRS, cash and debt management, PIMA, payroll control, and statistical improvements (BOP, national accounts, public debt statistics). - Authorities requested a Financial Sector Stability Review (FSSR) for 2023. ### Staff appraisal and recommended policy priorities - Staff view: program broadly supported; Letter of Intent and MEFP demonstrate program ownership and appropriate policies. - Principal staff recommendations and priorities: - Stay the course on fiscal consolidation: strengthen revenue mobilization and reorient spending to frontline services and investment while protecting social spending. - Strengthen debt sustainability: implement multi-year consolidation and adopt conservative, concessional financing strategies; diversify domestic debt toward longer maturities. - Enhance monetary policy framework and BPNG governance: mop up excess kina liquidity, introduce fixed-rate tender operations, produce reform roadmap, and revise the CBA to improve autonomy, mandate ranking (price stability priority), transparency, and accountability. - Alleviate FX shortages and gradually restore kina convertibility through sequenced reforms and increased FX provision while preserving adequate reserve buffers. - Operationalize anti-corruption framework: appoint ICAC leadership, adopt implementing regulations, and enhance inter-agency cooperation and procurement transparency. - Address capacity constraints with streamlined, macrocritical conditionality and timely Fund technical assistance; Resident Representative and Program Monitoring Committee to support implementation. - Monitor and mitigate risks from the 2028 Eurobond bullet payment and rising NPLs (6.3 percent), and prepare contingency measures for downside scenarios. *Source: IMF staff report — Papua New Guinea: Executive Summary (March 8, 2023).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### CONTEXT - Papua New Guinea (PNG) is a fragile state, vulnerable to natural disasters and terms of trade shocks. - Shocks since 2014: low commodity prices in 2014-20, a severe drought in 2015-16, and a major earthquake in 2018 reduced growth, caused FX shortages, and contributed to a pre-pandemic build-up of public debt. - The pandemic further increased public debt, which is now at high risk of distress. Development needs remain considerable; poverty is high, with most of the population living in rural areas without access to basic infrastructure and services. - Authorities requested 38-month arrangements under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) to address a protracted BOP need manifested in FX shortages, advance reforms for inclusive and sustainable growth, address debt vulnerabilities, strengthen central bank operations and gradually reinstate kina convertibility, and operationalize the anti-corruption framework. - The general election in July 2022 returned Prime Minister James Marape with a large majority and the reappointment of the Treasurer, creating a grace period during which the government cannot face motions of no confidence until February-March 2024. ### RECENT DEVELOPMENTS, OUTLOOK AND RISKS - Growth and inflation: - Real GDP: contracted by 3.2 percent in 2020; recovered to 0.1 percent in 2021; estimated at 4.5 percent in 2022. - Inflation: average inflation rose from 4.5 percent in 2021 to 6.6 percent in 2022. - Growth in 2023 is projected at 3.7 percent driven by the non-resource sector. Resource sector growth in 2023 projected at 0.3 percent; non-resource sector projected at 4.9 percent. - Inflation in 2023 expected to moderate to 5.4 percent. - Medium-term growth: projected to converge to potential (around 3.1 percent), supported by the non-resource sector. - External position: - Real Effective Exchange Rate (REER) overvalued by 13.4 percent in 2022 (2.4 percent for 2021 in the last Article IV report). - Nominal Effective Exchange Rate (NEER) appreciated by 6.9 percent in 2022; REER appreciated by 6.6 percent in 2022. - Reserves maintained at around 11 months of imports in 2022. - Public debt and debt sustainability: - Public and publicly guaranteed debt remains at high risk of debt distress (Debt Sustainability Analysis). - A bullet payment due in 2028 on PNG’s existing Eurobond represents a liquidity risk and triggers a spike in the debt service-to-revenue ratio in 2028, breaching the DSA threshold. - Debt is susceptible to export-related and other shocks. Domestic debt profile concentrated in short-term Treasury bills, raising rollover risks and calling for diversification toward longer duration bonds. - Financial sector: - Capital adequacy ratio and return on equity improved since the pandemic, reaching 37.6 and 17.9 percent respectively as of June 2022. - Non-performing loans (NPLs) have increased to 6.3 percent. - Risks to outlook: - Downside risks: weaker external demand for exports, large volatility in commodity prices and dividend payments, natural disasters, and potential political developments after the early-2024 grace period. - Upside risks: higher-than-expected commodity prices or the start of major projects (Papua LNG, P’nyang LNG, Wafi Golpu) not yet in staff’s or authorities’ medium-term framework. ### AIMS OF THE PROGRAM - Build on progress under past SMPs (2020/21 and 2021/22) to address structural impediments to growth and poverty reduction. Program objectives: - Strengthen debt sustainability through a multi-year fiscal consolidation program while making room for critical social and development needs. - Enhance the legal and operational framework of the Bank of PNG (BPNG) to alleviate FX shortages and transition to a market-clearing exchange rate. - Operationalize and strengthen governance and the anti-corruption framework. - The program will address current and prospective medium-term balance of payments needs, particularly to finance the budget, continue fiscal consolidation, advance central bank reforms, and demonstrate credible policies to maintain official development partner support. ### PROGRAM OBJECTIVES, MODALITIES, AND STAFF VIEWS - Program modalities: - Staff supports a 38-month ECF/EFF. - Access: SDR 228.11 million (86.7 percent of quota) under the ECF and SDR 456.21 million (173.3 percent of quota) under the EFF. - Authorities intend to use the entire amounts to finance the budget. The program is expected to be fully financed. PNG’s capacity to repay the Fund is adequate but subject to elevated risks. - Staff views: - The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies to reach the authorities’ goals. ### STAYING THE COURSE ON FISCAL CONSOLIDATION - Recent fiscal path and 2023 budget: - After fiscal expansion during the initial COVID wave, consolidation has begun. The deficit narrowed by 2.1 pp of GDP in 2021 largely due to lower expenditure and external support, including SDR allocation. - The 2022 Budget aimed for a further 1 pp reduction of the deficit through higher commodity revenues and introduction of the additional company tax (ACT) and a concentration levy on large companies in banking and telecommunications. The legality of the ACT is being challenged; payments received to date have been held in trusts and were not included in reported revenues in 2022. If courts uphold the ACT, revenues would be higher. - The 2023 budget targets a deficit of 4.3 percent of GDP. - Revenue projections and measures (Text Table 1: Contribution of Policy Measures to Change in Projected Domestic Revenues): - Change in domestic revenues: 1,993 million kina; 1.2 pp of GDP. - Tax: 1,068 million kina; 0.6 pp of GDP. - Non-tax: 925 million kina; 0.5 pp of GDP. - Of which due to policy measures: 1,713 million kina; 1.0 pp of GDP. - Selected policy impacts (million kina / pp of GDP): - Imposition of a 45 percent Company Tax rate on commercial banks: 240 / 0.1. - Increase in excise duties on alcohol and mixed drinks: 30 / 0.0. - Increase in duty on round logs: 30 / 0.0. - Increase in the personal income tax threshold from K12,500 to K20,000: -280 / -0.2. - Removal of excise duties on fuels until June 2023: -150 / -0.1. - Update of PNG Customs Harmonized System from HS 2017 to HS 2022: 0 / 0.0. - Update of SOE dividend policy: 1,293 / 0.7. - Ok Tedi: 293 / 0.2. - Kumul Petroleum: 1,000 / 0.6. - Introduction of the Non-Tax Revenue Act: 550 / 0.3. - Note: Change/estimated impact is relative to 2022 and does not include foreign grants. - Expenditure and medium-term framework: - Budgeted expenditures remain around 21.4 percent of GDP. Authorities plan to use higher revenues to address accumulated arrears to suppliers and personnel spending (mainly state contribution to employees’ provident fund). - Capital spending expected to be 0.4 pp of GDP lower than in 2022. - Authorities’ medium-term framework envisions a balanced budget by 2027 and surpluses thereafter. Debt-stabilizing primary balance expected to be achieved by 2026 (DSA). - Revenue improvements expected from resource and non-resource sectors, including increased tax and dividend payments from PNG LNG once tax holidays expire and borrowings are repaid starting in 2024. Ongoing revenue reforms and stricter control of recurrent spending aim to reorient spending to frontline services and investment. - Implementation of a new IT system is expected to improve alignment between budget allocations and spending and oversight. Savings expected from tapering of the domestic arrears clearance program over the medium term. ### TOWARD A MORE EFFECTIVE MONETARY POLICY FRAMEWORK - Program priorities include enhancing the legal and operational framework of BPNG to strengthen its mandate and autonomy, alleviate FX shortages, and transition to a market-clearing exchange rate. (Detailed operational reforms and sequencing are described in the main report and MEFP.) ### OPERATIONALIZING THE ANTI-CORRUPTION FRAMEWORK AND STRENGTHENING GOVERNANCE - Program includes measures to enhance governance and operationalize the anti-corruption framework to support reform credibility and official partner support. (Detailed measures are in the MEFP and attachments.) ### RISKS TO THE PROGRAM AND OTHER ISSUES - Major risks: - Downside: weaker external demand, commodity price volatility, dividend volatility, natural disasters, and political risks after the early-2024 grace period. - Upside: commodity price improvement or commencement of major projects not currently in projections. - Debt and liquidity risks: - 2028 Eurobond bullet payment creates liquidity stress and raises the debt service-to-revenue ratio above DSA thresholds. - Domestic short-term debt concentration increases rollover risk; recommend diversifying to longer-duration instruments. - Financial sector monitoring: - Rising NPLs (6.3 percent) suggest growing credit risks requiring closer monitoring. ### STAFF APPRAISAL - The program is broadly supported by staff: the authorities demonstrate ownership and appropriate policies to meet program goals. Program financing and capacity to repay the Fund are assessed as adequate but subject to elevated risks. The program is ambitious and requires careful sequencing and capacity building to ensure successful implementation. *Source: IMF staff report — Papua New Guinea: Executive Summary (March 8, 2023).* ### 13. The program builds on recent efforts to further narrow the deficit and durably address ### 13. The program builds on recent efforts to further narrow the deficit and durably address debt sustainability risks ### Fiscal consolidation and debt sustainability - Fiscal deficit narrowed from nearly 9 percent of GDP in 2020 to an estimated 5.4 percent in 2022. - 2023 fiscal deficit ceiling set at K4,985 million (4.3 percent of GDP) — quantitative performance criterion (QPC); deficit measured using financing data. - Program projects deficit of around 1.2 percent of GDP by 2026 and a balanced budget by 2027 if consolidation is fully executed. - Authorities will rely entirely on official development financing from development partners and domestic market borrowing (MEFP ¶19). - A QPC on the present value (PV) of newly contracted external borrowing: US$1,405 million in 2023, effective for the whole year. ### Revenue mobilization and tax administration reforms - Immediate revenue priorities: - Implement the Tax Administration Act (TAA) and introduce amendments to the Income Tax Act (ITA) to Parliament by end-December 2023 (structural benchmark). - Adopt a successor to the Medium-term Revenue Strategy (MTRS) by end-August 2023 (structural benchmark), in consultation with Fund staff. - Expected outcomes of ITA and TAA: modernize tax system, improve assessments, streamline compliance, and improve tax collection over time. - Maintain Cabinet oversight via the Budget Management Committee (Treasury, Finance, Planning) for future reforms. - Consider introducing an ad valorem levy on mineral production for future mining projects to secure immediate benefits from the resource sector. - Indicative target (IT) floor on non-resource tax revenue collection: K12,558 million in 2023. ### Expenditure composition, payroll, and public investment - Rebalance spending toward frontline services and priority capital spending (MEFP ¶13). - Integrate payroll with public financial management system to align employee compensation with approved staff numbers. - HR actions: - Complete HR Business Process workshops by June 2023 to implement 2022 Staffing and Establishment (S&E) Review recommendations for central agencies (structural benchmark). - Undertake a similar S&E exercise for teachers in 2023 (MEFP ¶15). - Prepare updated 5th edition of the General Orders; timeline to be finalized in 2023. - Upgrade IT systems for expenditure management with Fund TA to better control current spending. - Staff recommends a Public Investment Management Assessment (PIMA) to ensure quality projects at reasonable cost. - Maintain critical social spending; IT on social expenditures sets a floor of K3,866 million for 2023, or around 3.4 percent of GDP (MEFP ¶30). ### Monetary policy framework, FX market, and liquidity management - De jure exchange rate regime: floating; de facto classification: stabilized; staff assesses the kina to be overvalued (Annex II). - BPNG FX allocation features contributing to FX shortages: trading margin on FX buy-sell spreads since 2014, administrative allocation criteria, and prohibition on forward transactions (footnote 3). - 2022 developments: - FX market turnover improved thanks to larger inflows from export receipts. - FX shortages persist, hindering private sector activity, importers, and dividend repatriation. - Monetary policy tightening since mid-2022: - Policy (kina facility) rate cumulatively raised by 50 basis points to 3.5 percent. - Reserve requirement ratio increased from 7 to 10 percent since mid-2022. - More central bank bills issued to mop up liquidity; excess liquidity remains substantial. - Risks: stabilized exchange rate against US dollar has produced nominal effective appreciation and kina overvaluation; ongoing US Fed tightening may create difficult trade-offs if adverse current account shocks occur. ### Central Banking Act (CBA) revisions and governance of BPNG - December 2021 CBA revisions addressed some safeguards issues (prohibit carryover of central bank advances across fiscal years; introduce eligibility criteria for Board appointments). - Revisions also weakened autonomy in other areas: - Requirement for BPNG to provide advances to government on demand. - Introduction of growth and employment in the non-resource sector as new unranked mandates. - Transfer of monetary policy decision-making to the BPNG Board (potential conflict with oversight role). - Independent Advisory Group Phase II expected to deliver recommendations by August 2023, focusing on financial sector development and revisiting Phase I issues including Board role in monetary policy. ### Proposed monetary policy reforms and operational benchmarks - Immediate priority: mop up excess kina liquidity to improve monetary transmission. - Introduce a fixed rate tender with full allotment by end-August 2023 (structural benchmark). - Review terms of short-term liquidity management instruments with Fund TA (MEFP ¶21). - Roadmap actions: - Produce a roadmap for reforming monetary policy and exchange rate operations and framework by end-August 2023 (structural benchmark); implementation will require Fund TA and will feature structural benchmarks in subsequent reviews. - Safeguards against monetary financing: - QPC setting a ceiling on BPNG’s gross credit to government over program duration. - Floor on FX intervention of BPNG set as an indicative target (IT) to help reduce pent-up FX demand. ### Amendments to CBA and future safeguards - Additional CBA amendments to address mandate, governance, autonomy, transparency, and accountability to be drafted with Fund staff and submitted to Parliament by end-2023 (structural benchmark). - Phase II of CBA review to introduce financial regulation and supervision improvements, profit-sharing provisions, and emergency liquidity assistance function; Phase II amendments should be considered in consultation with Fund staff (MEFP ¶24). ### Anti-corruption, governance, and transparency measures - ICAC law (2020) creates a body to investigate and pursue complex corruption cases; legal challenges dismissed in September 2022. - Staffing and governance progress: - Shortlist for ICAC Commissioner and Deputy Commissioners finalized in late 2022. - Authorities to appoint ICAC Commissioner and two Deputy Commissioners by end-June 2023 (structural benchmark) and gradually fill operational staff. - Finalize and adopt key implementing regulations to the ICAC law by end-2023 to specify preventive, investigative, and prosecutorial processes and ensure information sharing (structural benchmark). - Additional structural benchmarks will be added in future program reviews to operationalize ICAC fully, including training and a case management IT system. - SOE governance: legislative amendments to Kumul Consolidated Holdings Act adopted in late 2021 with Asian Development Bank support. - Transparency actions: - Resume full publication of information on COVID-related procurements by end-December 2023 (structural benchmark), including beneficial ownership for successful emergency contract awardees. - Treasury to increase frequency and detail of published budget information, including GFS format. - BPNG to return to timely publication of audited financial statements and improve computation of financial soundness indicators, with Fund support. - FASU preparing for PNG’s 2023 FATF mutual evaluation; providing training and working on AML/CFT legal framework changes. ### Program modalities, access, and reserve targets - Requested program: 38-month blended ECF/EFF; PNG meets PRGT-blending criteria and completed SMP in June 2022 with broadly satisfactory performance (MEFP ¶). - Proposed access level: SDR 684.32 million (260.0 percent of quota), comprising: - SDR 228.11 million (86.7 percent of quota) under the ECF. - SDR 456.21 million (173.3 percent of quota) under the EFF. - Access backloaded: only 50 percent of quota to be disbursed in the first year. - Program targets: - Minimum net international reserves of US$1,700 million by end-2023 (QPC). - Consistent gross reserves target of US$2.8 billion (7.5 months of imports). - Financing assurances: program fully financed with firm commitments for first twelve months; Fund expected to play catalytic role; Fund burden sharing expected to average 34.7 percent across the program. ### Reserve dynamics (Box summary) - PNG’s gross international reserves projected to remain above 6 months of imports throughout the program period. - Baseline envisages reserves declining from 11 months of imports in 2022 to just above 6 months in 2024 due to: - Increased provision of FX to the market by the BPNG in 2023 to ease supply chain tensions. - Removal of FX restrictions and administrative barriers to reduce FX backlogs, with a peak impact expected in (text truncated in source). *Source: International Monetary Fund (1pngea2023001).* ### 2024. The reserve path remains consistently above the US$2 billion (5.2 month) floor suggested by the ### 1pngea2023001 - 2024. The reserve path remains consistently above the US$2 billion (5.2 month) floor suggested by the ### Reserve position and adequacy - The reserve path remains consistently above the US$2 billion (5.2 month) floor suggested by the reserve adequacy metrics (Annex II). - Higher reserves act as a buffer in an environment of heightened uncertainty: - There is likely pent-up demand for FX (including for dividend repatriation). To avoid exchange rate overshooting, and rapid capital outflows, a well-sequenced reform roadmap will be critical, and its implementation will necessitate technical assistance from the Fund. - A higher level of reserves will complement the reforms by strengthening market confidence in the reforms. - International experience shows that monetary and FX reforms are smoother when undertaken from a position of strength, including with an appropriate level of reserves. - Commodity price volatility can significantly impact reserves given PNG’s high dependence on the resource sector. Under a plausible downside scenario with temporarily lower LNG prices, reserves could fall below the floor suggested by the adequacy metrics in the absence of offsetting factors. - Footnote: In this setting, LNG export prices fall by one standard deviation in 2023 and 2024, computed using the 15-year historical average of price movements, and return to the baseline thereafter. ### Use of IMF resources and capacity to repay - Use of IMF resources: - The authorities intend to use ECF/EFF disbursements to finance the budget. - Without external budget support, the authorities would have to utilize reserves, complicating an orderly return to kina convertibility, and tighten the deficit much faster, which would constrain social and investment spending, or resort to costly domestic financing, strengthening the sovereign-bank nexus. - IMF disbursements are expected to be made to the BPNG. A memorandum of understanding between BPNG and the Treasury will guide the terms and conditions of resources made available to the government and their respective roles and responsibilities for servicing financial obligations to the Fund. - Capacity to repay: - Based on an ECF/EFF disbursement of 260 percent of quota, principal obligations to the Fund would peak in 2032 at around 121.7 million SDRs (46.2 percent of IMF quota). - This represents 2.0 percent of government revenue and 0.9 percent of exports of goods and services. - The peak in credit outstanding is below the top quartile of past UCT quality arrangements for PRGT countries when measured as a percent of GDP and external debt, but just above the top quartile when measured as a percentage of gross international reserves (Figure 4). - Outstanding IMF credit peaks at 38.5 percent of gross international reserves in 2028. - Downside risks to capacity to repay include weaker external demand for PNG’s exports, large volatility in commodity prices and natural disasters (Annex I). - Risks are partially mitigated by a commitment to fiscal sustainability and macroeconomic stability in the medium-term and by conservative assumptions excluding new resource sector projects from baseline projections. ### Safeguards, program risks, and mitigation - Safeguards assessment: - The last safeguards assessment was completed in 2021 with slow progress on implementing recommendations, in part driven by protracted BPNG Board vacancies and its management (MEFP ¶23). - A key recommendation to strengthen the legal framework of the BPNG remains outstanding and is expected to be addressed under this program (MEFP ¶23 and structural benchmark). - Other outstanding priority recommendations include aspects of the reserves management framework and the internal audit mechanism. - Timeliness of publication of BPNG financial statements has been interrupted for FY2021 and needs to be restored. - An update assessment will need to be completed by the first program review. - Program risks and mitigating measures: - Risks arise from limited implementation capacity in an environment vulnerable to multiple shocks. - Staff propose streamlined, focused and macrocritical conditionality, building on lessons from the 2021/22 SMP and the Fund’s Strategy for Fragile and Conflict-Affected States. - Arrival of the Resident Representative in November 2022, re-activation of the Program Monitoring Committee, and resumption of bi-weekly virtual meetings between the authorities and staff will support focus on program targets. - Political instability could delay reform implementation but is somewhat mitigated by current broad-based support. ### Capacity development, technical assistance, and data gaps - Capacity development (CD) priorities: - Clarify the monetary policy framework and exchange rate regime (including FX regulations). - Enhance governance of the BPNG. - Prepare a new MTRS to strengthen revenue administration. - Enhance cash and debt management. - Improve public investment management. - Strengthen control over payrolls and improve statistical systems, and enhance macro-fiscal estimates and forecasts. - Authorities have requested a Financial Sector Stability Review (FSSR) for 2023. - Fund TA will be complemented by the UN and EU (anti-corruption framework), ADB (SOE governance), and Australia (macro-economic statistics). - Data gaps and program monitoring: - Data reporting has been strengthened and a Program Monitoring Committee, chaired by the Secretary of the Treasury Department, has been re-activated. - Authorities, with Fund support, have started to compile BOP data under the 6th Edition of the Balance of Payments Manual. - Updated IT and PFM systems are expected to improve timeliness and quality of fiscal data and alignment of budgetary allocations with spending commitments. - Authorities have requested Fund technical assistance to extend fiscal reporting under the 2014 Government Finance Statistics Manual to local governments and SOEs. - Priorities include strengthening external sector, national accounts and public debt statistics. ### Staff appraisal and policy recommendations - Macroeconomic assessment: - Multiple external shocks since 2014 have weighed on PNG’s economy, led to FX shortages, and contributed to the build-up of public debt. - The real exchange rate is assessed to be overvalued, and public debt at high risk of distress. - Following the COVID-19 pandemic and the reopening of the economy, a recovery is underway amid favorable commodity prices. - Risks to the outlook are tilted to the downside, but there are upside risks to growth, exports and fiscal revenues, as large resource projects have not yet been incorporated in the baseline. - Policy priorities and recommendations: - Accelerate reforms initiated under the SMPs to achieve more resilient, inclusive, and sustainable growth. - Strengthen debt sustainability through sustained fiscal consolidation. - Enhance the legal and operational framework of the BPNG, alleviate FX shortages, transition to a market-clearing exchange rate, and make strides in governance and operationalizing the anti-corruption framework. - Immediate monetary priority: mop up excess kina liquidity in the banking system. - Over the medium term: gradually restore kina convertibility, move to a market-clearing exchange rate, remove exchange restrictions, and clarify the monetary policy operational framework. - Further revisions to the CBA are needed to address pending concerns regarding the mandate, governance, autonomy, transparency, and accountability of the BPNG. - Strengthen governance and anti-corruption frameworks (operationalize ICAC by appointing its Commissioner and two Deputy Commissioners, fill operational staff positions, and adopt implementing regulations to the ICAC law). - Fiscal consolidation trajectory: - Authorities lowered the deficit from almost 9 percent of GDP in 2020 to a target that is below half of that in 2023, with the aim of a balanced budget by 2027 and surpluses thereafter. - They intend to strengthen revenue collection as a key part of their fiscal consolidation strategy. - On the expenditure side, efforts focus on rebalancing the composition of spending and improving service delivery. - These policies are expected to put public debt on a sharp downward trajectory over the medium term. - Program support: - Based on balance of payment needs and strong policy commitments, staff supports the authorities’ request for 38-month arrangements under the ECF/EFF. - An IMF-supported program will enable progress on the reform agenda, address balance of payments needs, catalyze support from development partners, rebuild buffers to address FX shortages, and allow an ambitious but non-disruptive fiscal consolidation path while preserving needed social spending. *Source: 1pngea2023001 - 2024. The reserve path remains consistently above the US$2 billion (5.2 month) floor suggested by the* ### 41. Implementation risks to the program stem from vulnerability to shocks, and capacity ### 41. Implementation risks to the program stem from vulnerability to shocks, and capacity ### Program implementation risks - PNG is highly exposed to external shocks, including from commodity prices, that can adversely impact macroeconomic conditions. - Authorities face capacity constraints in policy implementation. - The streamlined program design should mitigate some risks, particularly around capacity and political constraints. - Timely CD support from the Fund and effective implementation of the recommendations will be crucial in achieving program objectives. - The arrival of the Resident Representative supports continued focus on program targets and strengthens real-time engagement with the authorities. ### Real and external sector developments - Real GDP recovered led by the non-resource sector. - Headline and underlying inflation picked up despite fiscal measures introduced to address food and fuel price surges. - Commodity prices have seen a sharp increase since 2020, bolstering export revenues despite supply bottlenecks. - Strong global demand for PNG’s export goods supports the trade balance and current account. - Export product share, 2021 (In percent): Hydrocarbons, Metals, Agriculture and Other, Marine Products, Forest Products (visual breakdown provided in source). - CPI (annual average) history and projections (Table 1): 2019: 3.9; 2020: 4.9; 2021: 4.5; 2022 Est.: 6.6; 2023 Proj.: 5.4; 2024 Proj.: 4.9; 2025 Proj.: 4.6; 2026 Proj.: 4.5; 2027 Proj.: 4.5; 2028 Proj.: 4.5. - Real GDP growth (Table 1): 2019: 4.5; 2020: -3.2; 2021: 0.1; 2022 Est.: 4.5; 2023 Proj.: 3.7; 2024 Proj.: 4.4; 2025 Proj.: 3.1; 2026 Proj.: 3.1; 2027 Proj.: 3.0; 2028 Proj.: 3.1. - Resource / non-resource contributions and projections are detailed in Table 1 (including mining and oil and gas shares of GDP). ### Fiscal developments and risks - Fiscal consolidation continued in 2022 driven by an improvement in resource revenues. - Current spending continues to take up the bulk of government spending, driven by employee compensation and use of goods and services. - Domestic financing now meets the bulk of financing needs as COVID-driven external financing has receded. - Public debt exceeded 50 percent of GDP in 2021, with external debt stabilizing as a percent of GDP. - Central government revenue and expenditure (Table 2b, percent of GDP): - Revenue and grants: 2019: 16.3; 2020: 14.7; 2021: 15.0; 2022 Est.: 15.8; 2023 Proj.: 17.1; 2024 Proj.: 16.6; 2025 Proj.: 17.0; 2026 Proj.: 17.1; 2027 Proj.: 17.3; 2028 Proj.: 17.5. - Expenditure: 2019: 20.7; 2020: 23.5; 2021: 21.8; 2022 Est.: 21.2; 2023 Proj.: 21.4; 2024 Proj.: 20.5; 2025 Proj.: 19.3; 2026 Proj.: 18.2; 2027 Proj.: 17.3; 2028 Proj.: 17.3. - Net lending (+)/borrowing (-) (percent of GDP): 2019: -4.4; 2020: -8.9; 2021: -6.8; 2022 Est.: -5.4; 2023 Proj.: -4.3; 2024 Proj.: -3.9; 2025 Proj.: -2.3; 2026 Proj.: -1.2; 2027 Proj.: 0.0; 2028 Proj.: 0.2. - Resource revenue (Table 2a, Kina): 2019: 1,242; 2020: 752; 2021: 1,016; 2022: 4,150; 2023: 4,024; 2024: 3,426; 2025: 3,864; 2026: 3,964; 2027: 4,224; 2028: 4,684. - Gross government debt (Table 2a, Kina, end of period): 2019: 33,678; 2020: 40,168; 2021: 48,173; 2022: 52,745; 2023 Proj.: 57,333; 2024 Proj.: 62,567; 2025 Proj.: 66,458; 2026 Proj.: 66,931; 2027 Proj.: 65,191; 2028 Proj.: 63,189. - External debt (Table 2b, percent of GDP): 2019: 16.7; 2020: 21.8; 2021: 24.8; 2022 Est.: 23.4; 2023 Proj.: 25.7; 2024 Proj.: 28.0; 2025 Proj.: 30.0; 2026 Proj.: 29.1; 2027 Proj.: 27.0; 2028 Proj.: 23.3. ### Monetary and financial sector developments - The central bank lifted the policy rate slightly in 2022 for the first time since the pandemic. - The kina has been stabilized against the US$ since 2020. - Credit to the private sector has been broadly unchanged over the past six years, with increasing excess liquidity in the banking system. - Nonperforming loans (NPLs) are on the rise, though banks remain well-capitalized. - Financial soundness indicators (Table 5): - Capital to risk-weighted assets: 2017: 38.1; 2018: 37.1; 2019: 36.1; 2020: 39.2; 2021: 41.1; 2022 (June): 37.6. - Nonperforming loans to total loans: 2017: 2.8; 2018: 3.7; 2019: 3.8; 2020: 5.3; 2021: 6.2; 2022 (June): 6.3. - Return on assets: 2017: 3.4; 2018: 3.8; 2019: 4.1; 2020: 3.8; 2021: 4.3; 2022 (June): 5.7. - Loan-to-deposit ratio: 2017: 65.8; 2018: 71.4; 2019: 71.3; 2020: 65.6; 2021: 59.7; 2022 (June): 57.2. ### External sector, reserves, and balance of payments - Exports (f.o.b., Table 3, U.S. dollars): 2019: 11,394; 2020: 9,139; 2021: 10,343; 2022 Est.: 15,505; 2023 Proj.: 13,743; 2024 Proj.: 14,174; 2025 Proj.: 14,510; 2026 Proj.: 14,876; 2027 Proj.: 15,271; 2028 Proj.: 15,724. - Current account balance (millions of U.S. dollars): 2019: 4,941; 2020: 4,699; 2021: 5,686; 2022 Est.: 10,821; 2023 Proj.: 7,312; 2024 Proj.: 7,349; 2025 Proj.: 8,086; 2026 Proj.: 8,091; 2027 Proj.: 8,719; 2028 Proj.: 9,165. - Gross international reserves (end-year, millions of U.S. dollars, Table 3): 2019: 2,309; 2020: 2,686; 2021: 3,240; 2022: 4,132; 2023 Proj.: 2,843; 2024 Proj.: 2,487; 2025 Proj.: 2,877; 2026 Proj.: 3,221; 2027 Proj.: 3,347; 2028 Proj.: 2,527. - Net international reserves (end-year, Table 3): 2019: 2,135; 2020: 2,126; 2021: 2,343; 2022: 3,226; 2023 Proj.: 1,700; 2024 Proj.: 1,000; 2025 Proj.: 1,000; 2026 Proj.: 1,200; 2027 Proj.: 1,400; 2028 Proj.: 650. ### IMF financing, repayment capacity, and program support - Proposed ECF/EFF disbursement schedule (Table 6, Amount (SDR Million); Percent of Quota): - 22 March 2023: Total 65.81 (ECF 21.94; EFF 43.87) — Percent of Quota: Total 25.0 (ECF 8.3; EFF 16.7). - 18 September 2023: Total 65.81 (ECF 21.94; EFF 43.87) — Percent of Quota: Total 25.0 (ECF 8.3; EFF 16.7). - 18 March 2024: Total 94.75 (ECF 31.58; EFF 63.17) — Percent of Quota: Total 36.0 (ECF 12.0; EFF 24.0). - 18 September 2024: Total 94.75 (ECF 31.58; EFF 63.17) — Percent of Quota: Total 36.0 (ECF 12.0; EFF 24.0). - 18 March 2025: Total 121.07 (ECF 40.36; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - 18 September 2025: Total 121.07 (ECF 40.36; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - 18 March 2026: Total 121.06 (ECF 40.35; EFF 80.71) — Percent of Quota: Total 46.0 (ECF 15.3; EFF 30.7). - Total across dates: 684.32 SDR million (ECF 228.11; EFF 456.21) — Percent of Quota Total 260.0 (ECF 86.7; EFF 173.3). - Indicators of capacity to repay the IMF (Table 8 highlights): - Outstanding IMF credit (Millions of SDRs): 2023: 394.8; 2024: 584.3; 2025: 800.1; 2026: 868.6; 2027: 812.3; 2028: 737.5; 2029: 630.6; 2030: 509.5; 2031: 391.9; 2032: 270.2; 2033: 154.4; 2034: 64.6; 2035: 10.8; 2036: 0.0. - Outstanding IMF credit (Percent of quota): 2023: 150.0; 2024: 222.0; 2025: 304.0; 2026: 330.0; 2027: 308.6; 2028: 280.2; 2029: 239.6; 2030: 193.6; 2031: 148.9; 2032: 102.7; 2033: 58.7; 2034: 24.5; 2035: 4.1; 2036: 0.0. - Total obligations based on existing and prospective credit — Principal (Millions of SDRs): 2025: 26.3; 2026: 52.6; 2027: 56.3; 2028: 74.7; 2029: 107.0; 2030: 121.1; 2031: 117.6; 2032: 121.7; 2033: 115.8; 2034: 89.8; 2035: 53.8; 2036: 10.8. - Total obligations as percent of government revenue, exports, GDP, and quota are provided in Table 8 for 2023–2036. - External financing requirements and sources (Table 7, millions of U.S. dollars): - Total financing requirements (selected years): 2019: -500; 2020: 7; 2021: -280; 2022: 1; 2023: -567; 2024: 1,975; 2025: -860; 2026: 8; 2027: -770. - Financing sources include net foreign direct investment, public sector project loan disbursements, other capital inflows, IMF exceptional financing, and proposed EFF/ECF financing. - IMF exceptional financing appears in projections (e.g., 2021: 379; 2022: 0; 2023: 178; 2024: 255; 2025: 326; 2026: 162; 2027: 0). - Projected external borrowing program (Table 9, 2023, USD million): - Total PPG external debt volume of new debt in 2023: 1,577.7 (Percent breakdown: Concessional debt 0.0; Non-concessional debt 1,577.7; Semi-concessional 1,577.7). - By creditor type: Multilateral 893.8 (57 percent); Bilateral - Paris Club 683.9 (43 percent). - Uses of debt financing: Infrastructure 875.4 (55 percent); Social Spending 116.0 (7 percent); Budget Financing 586.3 (37 percent). ### Key policy implications and priorities (as presented in the source) - Mitigate vulnerability to commodity price and other external shocks through prudent macroeconomic management. - Address capacity constraints in policy implementation with timely Fund CD support and implementation of recommendations. - Maintain focus on program targets and real-time engagement with authorities, supported by the Resident Representative. - Ensure domestic financing strategy accounts for the receding of COVID-driven external financing and for public debt dynamics (gross government debt projections and external debt stabilization). *Source: IMF staff estimates and projections as presented in the Papua New Guinea program chapter.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Overview and Methodology - The Risk Assessment Matrix (RAM) identifies events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood categories are staff’s subjective assessments: "low" indicates a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent. - The RAM reflects staff views on sources of risk and overall level of concern as of the time of discussions with the authorities. - Non-mutually exclusive risks may interact and materialize jointly. - "Short term" and "medium term" indicate that the risk could materialize within 1 year and 3 years, respectively. ### Domestic Risks — Findings and Staff Advice - Natural disasters, including related to climate change - Relative Likelihood: Medium: "PNG is highly vulnerable to natural disasters (flooding, landslides, earthquakes) and climate change (droughts & sea level rise)" - Expected Impact: Medium: "Negative impact on GDP growth, export and fiscal revenues, higher inflation." - Staff Advice: - "Invest in disaster risk reduction and resilience with the help of development partners." - "Build fiscal and external buffers for post-disaster relief effort." - Widespread social discontent and political instability - Relative Likelihood: Medium: "While the post-election period provides relative stability, the limited capacity of the state and a high level of social fragmentation remain chronic sources of political instability." - Expected Impact: Medium: "Adverse impact on foreign direct investment and confidence, negatively impacting growth. This can exacerbate pre-existing inequalities, causing socio-economic hardship (unemployment, poverty)." - Staff Advice: - "Focus on transparent and effective communication on key policies." - "Implement policies to support vulnerable households for which there is a need to build fiscal buffers through fiscal consolidation." - Major natural resource projects initiated; Higher LNG revenues over the medium term - Relative Likelihood: Medium: "Some major projects are being negotiated, but not yet included in the baseline." - Expected Impact: Medium: "Upside risk. Favorable impact on GDP, external balance, and fiscal position." - Staff Advice: - "Fast-track their implementation; Build fiscal and external buffers." ### External Risks — Findings and Staff Advice - Cyberthreats - Relative Likelihood: Medium: "Cyber-attacks on critical infrastructure and institution. PNG had a ransomware attack in October 2021." - Expected Impact: Medium: "Can affect provision of Government service and trigger financial instability or widespread disruptions in socio-economic activities and remote work arrangements." - Staff Advice: - "Need to invest in advanced IT security systems and train key personnel on cyber/ ransomware attacks." - "Invest in business recovery sites and backup for important Government services and financial sector." - Commodity price volatility - Relative Likelihood: Medium: "A succession of supply disruptions (e.g., due to conflicts and export restrictions) and demand weakness causes recurrent commodity price volatility." - Expected Impact: High: "Volatility in commodity prices will have an impact on external position and fiscal balance. This leads to bouts of price and real sector volatility." - Staff Advice: - "Higher resource revenue should help create fiscal space." - "Continue with fiscal spending to support the most vulnerable but ensure fiscal consolidation remains priority." - "Build buffers to prepare for lower commodity prices." - Abrupt global slowdown or recession including in China - Relative Likelihood: High: "Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and downward pressures on some commodity prices." - Expected Impact: High: "Would lead to lower external demand and lower commodity prices; BOP would worsen." - Staff Advice: - "Build buffers to support the economy and most vulnerable in the non-resource sector, as needed." *Source: Annex I. Risk Assessment Matrix, 1pngea2023001 — IMF staff document.* ### 1. After a strong growth in the non-resource economy in 2021, the economy is on course ### 1. After a strong growth in the non-resource economy in 2021, the economy is on course to register another strong growth in 2022. ### Recent performance and macro outcomes - Real non-resource GDP growth is estimated to have reached 4.5 percent in 2021 following the reopening after the pandemic. - Resource sector growth is estimated at 4.7 percent in 2021, reflecting increases in LNG production offset by lower levels of condensate and the delayed reopening of the Porgera mine. - Domestic inflation rose to 6.6 percent following the global inflation shock triggered by the war in Ukraine; this is described as still well below global averages. - External position strengthened due to high commodity prices, higher export receipts, and an increase in international reserves despite higher FX releases to the market: from US$60 million per month under the SMP to a monthly average of US$73 million in 2022. - Under the Staff Monitored Program (SMP) approved in December 2021: - Met all quantitative targets and were rated as meeting all but one structural benchmark. - Key reforms completed or advanced include passage of a 2021 budget targeting stronger fiscal consolidation, Consequential Amendments to the Tax Administration Act, a staffing and establishment review, and strengthening the public debt committee (PDC) with clarified objectives, TOR alignment, and an annual debt issuance strategy. - Most of the first Phase of the Central Banking Act (CBA) review was completed, guided by an Independent Advisory Group (IAG); plans to complete remaining issues in Phase 1 and most of Phase 2 by end of 2023. - Creation of a Program Monitoring Committee to improve inter-agency coordination and communication with the Fund. ### Outlook for 2023 and the medium term - Baseline growth projections: - Non-resource sector expected to grow by 4.9 percent in 2023. - Overall GDP growth forecast to fall to 3.7 percent in 2023. - Resource sector expected growth in 2023: 0.3 percent, driven by expected contraction in the oil and gas sector due to substantial downgrades in condensate and LNG production and natural decline in oil production while mine operations increase gradually. - Commodity price easing expected to reduce export revenues, but fiscal impact remains positive given a 2 to 4 month lag in LNG prices adjusting to oil prices. - Over the medium term, growth is expected to be sustained by higher private investment supported by the government’s public investment program (PIP). - Risk assessment: - Downside risks: sharp downturn in main trading partners and tighter global financial conditions. - Upside risks: approval of large extractive projects currently excluded from the baseline could significantly boost growth, investment, exports, and fiscal revenues. ### Key development and fiscal challenges - Large development and financing needs persist; poverty remains high with most people in rural areas facing limited access to basic infrastructure and services. - Public debt trajectory prior to pandemic: rose from K8 billion in 2012 to K34 billion in 2019, with increased payment arrears. - COVID-19 led to a major reduction of 20 per cent in domestic revenues. - A 13-year fiscal reform plan is in place to reduce budget deficits and public debt ratios; priorities include directing resources to basic infrastructure (power, utilities, transport), critical social services (education, health care, security), financial development and inclusion, and strengthening the business climate. ### Government’s medium-term reform priorities - Strengthen debt sustainability. - Rebalance expenditure to support public investment in human and physical capital. - Address FX shortages and modernize the monetary framework. - Strengthen the overall governance framework (including operationalizing ICAC and improving AML/CFT framework consistent with FATF standards). ### Aims of the proposed IMF-supported program - Continue budget repair to strengthen domestic revenue mobilization, improve quality and composition of public expenditure, and lower the fiscal deficit and debt to meet the Fiscal Responsibility Act. - Modernize the governance and operations of the BPNG to address FX shortages and reinstate Kina convertibility. - Strengthen governance by operationalizing the Independent Commission Against Corruption (ICAC) and improving AML/CFT frameworks consistent with FATF standards; enhance financial and payments systems for efficiency, deepening, and inclusion. - Program delivery through commitments with the Fund and Fund technical assistance. ### Fiscal policy commitments and measures - 2023 budget targets: - K1 billion reduction in the deficit (1.1 percentage point of GDP decline) relative to the outturn in 2022 (quantitative performance criterion, QPC). - Aim to achieve a balanced budget by 2027. - Revenue mobilization: - Passage in 2022 of the Non-Tax Revenue Administration (NTRA) Act. - Introduction of a broadened banking tax; IMF TA requested to improve the banking tax while at least maintaining the revenue estimate. - Planned passage of amendments to the Income Tax Act (ITA); process includes policy paper to NEC by April 2023, draft supporting regulations by August 2023, and passing the ITA alongside the 2024 budget (structural benchmark, SB by end-December 2023), with implementation beginning 1 January 2024. - Introduction of a new Medium-term Revenue Strategy (MTRS) by end-August 2023 (SB); Fund TA requested to support preparation and implementation. - IRC modernization supported by IMF TA; IRC finalizing new organization structure and business plan to feed into the MTRS. - Fund TA requested for examination of GST operations and possible alternatives or improvements. - Spending and expenditure management: - Commitment to maintaining overall spending envelope in real per capita terms. - Capital investment budget has been expanded and grown faster than recurrent budget over last five years. - Historic under-budgeting for personnel emoluments reduced from 25 percent in 2018 to 6 percent in 2021. - Plan to increase real funding for recurrent budgets to support additional police, teachers, and health care workers while limiting increases elsewhere and pursuing payroll reforms and better appropriations. - Goods and services expenditure cut by over 40 per cent in non-priority or central agencies to make room for priorities; priority social programs and long-term fixed commitments quarantined. - Arrears management: - Identified over 800 retirees at a cost of K120 million (K60 million in final entitlement and K60 million in superannuation) at end-2022; allocated K300 million in 2023 to clear retiree-related arrears and remove these staff from payrolls. - Recorded K6.6 billion in outstanding claims on goods and services to date; verified and paid K998.2 million; allocated K300 million to clear arrears related to purchases of goods and services in 2023. - Commit to review payroll and public expenditure management processes; completed Staffing and Establishment Review for all public sector employees except teachers in 2022; plan to complete teachers’ review in 2023. - Parliamentary Committee on Public Sector reforms (led by Deloitte) completed a review with actionable measures to introduce better controls on Compensation of Employees, improvements to ALESCO payroll system, and systematic audit/review of large monthly payments. ### Budget process, cash management, and contingencies - Budget process reforms: - Introduce approved sector budget ceilings early in the budget process to guide policy focus and balance wages, goods and services, and capital in sectoral spending. - World Bank TA requested for a Public Expenditure Review commencing in early 2023. - Cash management: - Current framework is decentralized with large government project payments via trust accounts in BPNG and commercial banks. - Project trust funds stood at around K1 billion as at end-September 2022. - Debt repayment account held around K600 million on average in 2022. - These arrangements are costly due to interest charges on overdrafts even as cash balances elsewhere remain unused. - NTRA passage will help by directing statutory bodies’ revenues into the Common Revenue Fund in the BPNG and out of commercial banks to improve cash management and lower excess banking system reserves. - Additional measures planned: better cash flow forecasting to the Budget Management Committee and coordination with development partners to avoid end-of-year receipts that complicate budget execution and liquidity management. - Contingency planning: - An indicative target (IT) will be set on non-resource tax revenues for program focus. - Recognize significant contribution from oil and gas dividends to fiscal framework; a significant portion of planned remittances are based on profits earned in 2022 and expected in the first half of the year. - Commitment to monitor revenues closely and undertake expenditure adjustments or reprioritization if significant shortfalls occur; early identification of contingency measures and communication to Fund staff. ### Debt management and financing strategy - Continued strengthening of debt recording and management capacity. - Financing strategy emphasizes substitution of costly financing with concessional financing from multilateral and bilateral partners to improve debt profile. - Program commitments include: - Maintain a limit on new public external debt contracted under the program, to be measured in present value terms (continuous QPC). - Non-accumulation of new external payment arrears during the program period (continuous QPC). - Borrowing plans to be linked closely to financing needed to execute the budget; 2023 budget envisages a transparent program of borrowing and on-budget spending. - Future borrowing guided by updated Debt Sustainability Analyses to lower the risk of debt distress. ### Monetary and exchange rate policy stance - Monetary tightening in 2022 in response to rising inflationary pressures: - Kina Facility Rate (KFR) raised to 3.5 percent. - Cash Reserve Requirement (CRR) increased in stages back to the pre-COVID level of 10 percent. - Active issuance of central bank bills (CBB) used to mop up excess liquidity. - Excess liquidity remains substantial, undermining monetary policy transmission and fueling marginal demand for FX, contributing to mismatch between FX demand and supply. *Source: 1pngea2023001 - 1. After a strong growth in the non-resource economy in 2021, the economy is on course to register another strong growth in 2022.* ### 21. To strengthen the monetary policy operational framework, we intend to intensify ### 21. To strengthen the monetary policy operational framework, we intend to intensify ### Monetary policy operational framework: planned reforms and instruments - Introduce a fixed rate tender with full allotment by August 2023 (SB), with the support of IMF TA. - Accompany the fixed rate tender with an interest rate corridor to limit interest rate volatility. - Review terms of CBBs to better suit short-term liquidity management: - Explicitly link the rate of the main short-term liquidity management instrument to the KFR to ensure transmission to lending rates. - Reduce the tenor from 28 days currently to no more than 2 weeks. - Review main parameters of the CRR system, including the length of the maintenance period and its averaging features, to align with best practices. - Continue to avoid monetary financing and monitor it through a QPC on the BPNG’s gross credit to government (Table 1). ### Foreign exchange policy and reserves targets - Continue supplying FX to the market in 2023 to help reduce FX shortages and start returning to kina convertibility. - Make enough FX available for timely payment of current account (or authorized) transactions. - In 2023, increase provision of foreign exchange to authorized FX dealers; set a cumulative floor of US$ 1,200 million as an indicative target. - Prepare and start implementing a sequenced roadmap for reforming foreign exchange market operations and regulations, and improvements in the monetary policy operations framework: - Roadmap to be prepared in consultation with the IMF by end-August 2023 (SB). - Seek Fund advice on trade-offs, experiences of other countries, and a communication strategy. - Request IMF technical assistance for implementation. ### BPNG governance, independence, and transparency - Fill vacancies at the Board and appoint BPNG’s governor and deputy governors in the next few months. - Move away from specifying BPNG dividends ex ante; future dividends will be based on realized profits after ensuring BPNG has financial resources to implement monetary policy. - Further amend the CBA to address mandate, governance, autonomy, transparency, and accountability of the BPNG: - Limit the provision of advances to the government. - Rank mandates with price stability as the BPNG’s primary objective. - Clarify the role of the Board in monetary policy formulation. - IAG second phase focusing on financial sector regulation and supervision to produce recommendations on at least high-level governance structures by August 2023. - Draft additional amendments to the CBA in consultation with the IMF and adopt them by end-December 2023 (SB). - Ensure timely publication of audited financial statements starting with FY 2022. - BPNG will undergo an updated safeguards assessment and commit to progress on recommendations. ### Financial sector stability, inclusion, and AML/CFT preparedness - Second phase of CBA review to examine BPNG’s role as financial regulator to support development while maintaining soundness and financial inclusion. - Expand the set of financial soundness indicators (FSIs) in accordance with the IMF’s 2019 FSI compilation guide. - Actively prepare the first financial stability report. - Requested a financial sector stability review from the IMF to identify key areas for improvement. - BPNG’s Financial Analysis and Supervision Unit (FASU) to raise awareness and provide training to supervised entities for the upcoming APG AML/CFT mutual evaluation. ### Governance and anti-corruption measures - Operationalize the Independent Commission Against Corruption (ICAC): - Appoint a Commissioner and two deputy Commissioners (SB for end-June 2023). - Start filling staff and provide training on investigation and prosecution. - Draft and adopt key implementing regulations to the ICAC law to specify preventive, investigative and prosecutorial processes and ensure information sharing (SB for end-December 2023). - Develop draft memoranda of understanding to enhance cooperation among police, Ombudsman Commission, Auditor-General’s Office, Public Prosecutors Office, FASU, and civil society. - Develop regulations for the Whistleblower Act to increase protections. - Operationalize the Unexplained Wealth provision added to the Proceeds of Crime Act. ### Procurement, fiscal transparency, and SOE governance - Post details of COVID-19 related procurements on the government procurement website, including names of entities awarded contracts and their beneficial owners, covering years 2020 and 2021 (SB for end-December 2023). - For contracts under normal procurement processes, rely on Auditor General’s Office audits; next report expected by the 30th April of the succeeding year, in line with the Audit Act, 1989. - Produce and publish budget books in GFS format alongside current books to improve comparability and local understanding. - Increase data sharing on transfers and expenditure on the Treasury website in electronic database form. - PNG Extractive Industries Transparency Initiative (PNGEITI) has completed the 2019 Reconciliation report; provisioned K3 million in the budget to support their work in 2023. - Continue to strengthen SOE governance with ADB support: amend legal framework, address corporate governance shortcomings, strengthen legislative and policy framework, enhance financial transparency and accountability, and improve financial sustainability of SOEs. ### Social protection and poverty reduction commitments - In the 2023 budget, total allocation (current and capital) directed to education, health and law and order stood at K5.26 billion, an increase of 12.6 percent over 2022 and 46.9 percent from 2021. - Intend to safeguard this allocation (IT) to avoid backtracking on recent gains in alleviating poverty. - Continue to work with development partners to strengthen delivery of public services to rural populations, address urban youth unemployment, improve labor mobility, remove barriers to employment, address urgent needs in child nutrition and communicable disease prevention, and support education through the Government Tuition Fee Subsidy scheme. ### Financing needs, program size, and reserve targets - Target international gross reserves level of US$2.9 billion (7 months of imports) by end-2025. - Request a program amounting to 260 percent of quota, to be disbursed over 38 months. - In the first year of the program, aim for net international reserves (reserves net of IMF financing outstanding) of US$1.7 billion by end-2023 (QPC). - To achieve end-2023 reserves of US$1.7 billion and meet expected external payment obligations, estimate financing need of US$764 million, of which 23 percent will come from drawings under the Fund program. - Request that program drawings be channeled toward budget support. ### Program reviews, monitoring, and data improvements - Request a 6-monthly review cycle based on quantitative performance criteria outlined in Table 1; first two reviews on or after September 18, 2023 and March 18, 2024. - Proposed first two test dates: June 30 and December 31, 2023. - Propose inclusion of indicative targets for interim assessment dates: March 31, 2023; September 30, 2023; and March 31, 2024. - Tables 1 and 2 outline proposed quantitative performance criteria, indicative targets and structural benchmarks for the first 12 months; detailed definitions provided in the attached Technical Memorandum of Understanding. - Reactivated the Program Monitoring Committee, chaired by the Secretary of the Treasury, to coordinate interactions with Fund staff and the Fund Resident Representative. - Intend to meet with Fund staff at least every two weeks during the program, with more frequent meetings when required. - Continue improvements in the quality and timeliness of data; recent Fund TA on external sector statistics allowed restatement of BOP data from 2015 to 2022 in line with BPM6; will publish revised data and prepare subsequent data according to the updated standard. ### Key quantitative performance criteria and indicative targets (selected highlights from Table 1) - Fiscal deficit of the government (ceiling, cumulative from the beginning of the year): - 2022 December: 5,985 - 2023 March (Indicative target): 1,646 - 2023 June (Test date): 3,092 - 2023 September (Indicative target): 4,239 - 2023 December (Test date): 4,985 - 2024 March (Indicative target): 1,586 - Stock of net international reserves of the BPNG (floor, US$ millions): - 2022 December: 3,226 - 2023 March (Indicative target): 2,845 - 2023 June (Test date): 2,463 - 2023 September (Indicative target): 2,082 - 2023 December (Test date): 1,700 - 2024 March (Indicative target): 1,525 - BPNG's gross credit to government (ceiling): - 2022 December: 2,051 - 2023 March—2024 March (various): 2,400 (proposed) - New external payment arrears of the government (ceiling, US$ millions): 0.0 (continuous) - Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): 1,405 (annual for 2023) - Non-resource tax revenue of the government (floor, cumulative from the beginning of the year): - 2022 December: 10,831 - 2023 March (Indicative target): 2,512 - 2023 June (Test date): 5,023 - 2023 September (Indicative target): 9,167 - 2023 December (Test date): 12,558 - 2024 March (Indicative target): 2,807 - Social and other priority spending (floor, cumulative from the beginning of the year): - 2022 December: 3,678 - 2023 March (Indicative target): 500 - 2023 June (Test date): 1,500 - 2023 September (Indicative target): 2,817 - 2023 December (Test date): 3,866 - 2024 March (Indicative target): 500 - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative from the beginning of the year, US$ millions): - 2022 December: 878 - 2023 March (Indicative target): 300 - 2023 June (Test date): 600 - 2023 September (Indicative target): 900 - 2023 December (Test date): 1,200 - 2024 March (Indicative target): 300 ### Structural benchmarks (selected, from Table 2) - End-December 2023: Introduce amendments to the Income Tax Act to strengthen revenue mobilization, and submit to Parliament amendments to the CBA in consultation with Fund staff. - End-August 2023: Adopt a new Medium-term Revenue Strategy (MTRS), in consultation with Fund staff; produce a sequenced roadmap for monetary policy and exchange rate reforms in consultation with Fund staff. - End-June 2023: Complete HR Business Process workshops on staffing and remuneration guidelines; appoint a Commissioner and two Deputy Commissioners to ICAC. - End-December 2023: Adopt key implementing regulations to the ICAC law; post details of COVID-19 related procurements (including beneficial owners) on the government procurement website covering years 2020 and 2021. - End-August 2023: Modify the open market operations framework by introducing a fixed rate tender with full allotment to sterilize excess liquidity more effectively. *Source: Papua New Guinea authorities and Fund staff, March 2023.* ### 1. Assessment Criteria have been set as of test dates and performance under the program ### 1. Assessment Criteria have been set as of test dates and performance under the program ### Definitions - The First Review will assess the end-June 2023 test date and the Second Review will assess the end-December 2023 test date. Assessment criteria are specified in Table 1 of the MEFP. - Government: the central government of the Independent State of Papua New Guinea. - Central government: component of general government covered by the national budget; encompasses national executive, legislative and judiciary powers; includes Extra Budgetary Units with individual budgets not fully covered by the national budget. - General government: the national and provincial governments; the Autonomous Bougainville government; and the commercial and statutory authorities. - Exchange rates for conversion into PGK (as of December 31, 2022, Table 1): - PGK/USD 3.524 - PGK/AUD 2.387 - USD/SDR 1.330 - Debt definition (in accordance with Executive Board Decision No. 15688-(14/107)): - Debt means all current (not contingent) liabilities created under a contractual arrangement that require future payments in assets or services to discharge principal and/or interest. - Principal forms: (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); (ii) suppliers’ credits (deferred payments after delivery of goods/services); (iii) leases (debt equals present value at lease inception of all lease payments expected during the agreement, excluding operation/repair/maintenance payments). - Arrears, penalties, and judicially awarded damages arising from failure to pay under a contractual obligation that constitutes debt are debt. - For this ECF/EFF program, debt includes borrowing by, or that receives guarantees from, the central government and the Bank of Papua New Guinea (BPNG), excluding liabilities accumulated for the purposes of conducting monetary policy by the BPNG (including issuance of central bank bills or notes). - External debt: debt denominated, or requiring payment, in a currency other than the Kina. - A debt and/or guarantee is considered contracted when all conditions for its coming into effect have been met, including approval by the Treasury. Contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements is also considered contracting of debt. - The program uses the “Guidelines on Performance Criteria with Respect to External Debt” (Decision No. 6230-(79/140) as revised on August 3, 2009 (Decision No. 14416-(09/91))) for the definition of “debt.” ### Quantitative Performance Criteria (QPCs) - Floor on the Cumulative Fiscal Deficit of the Central Government: - Fiscal deficit calculated on a cash basis as net acquisition of financial assets less net incurrence of financial liabilities by the central government from the start of the fiscal year on January 1 (see Table E “Transactions in Assets and Liabilities” in the 2021 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 received from residents of PNG; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; other accounts payable. - External liabilities include: debt securities outstanding; loans received from lenders not resident of PNG; and any other liabilities meeting the external debt definition in paragraph 6. - Cumulative fiscal deficits at end-June 2023 and December 2023 (PCs) and end-March 2023 and end-September 2023 (ITs) must be smaller than or equal to the amounts specified in Table 1 of the MEFP. - Floor on the Stock of Net International Reserves (NIR) of BPNG: - NIR (stock) = BPNG’s gross foreign assets − use of IMF credit by BPNG. - Gross foreign assets 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 assets 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. - Use of IMF credit by BPNG includes credit outstanding under IMF financing programs and SDR allocations to the BPNG. - Stock of net international reserves at end-June 2023 and end-December 2023 must be equal or greater than specified in Table 1 of the MEFP. - Ceiling on BPNG’s Gross Credit to Government: - BPNG’s gross credit to government = government securities held by BPNG (including T-bills and T-bonds) + advances made by BPNG to the central government excluding temporary advances made within the Temporary Advance Facility (TAF) + loans made by BPNG to the central government excluding on-lent IMF or other external financing by BPNG to the government. - BPNG’s gross credit to government at end-June 2023 and December 2023 must be lower than or equal to the amounts specified in Table 1 of the MEFP. ### Continuous Performance Criteria (PCs) - Ceiling on the Present Value (PV) of New External Debt Contracted or Guaranteed by the Government: - PV of any external borrowing = annual discounted future debt service payments using a discount rate of 5 percent. - For variable interest rate debts (benchmark + fixed spread), PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. - Program reference rate: six-month USD LIBOR = 2.73 percent (will remain fixed for the duration of the program). - If variable rate is linked to another benchmark, add a spread reflecting the difference between that benchmark and the six-month USD LIBOR (rounded to the nearest 50 bps). - For Australian Dollar interest rates, the spread over six month USD LIBOR is 50 basis points. - A continuous ceiling in PV terms applies to contracting or guaranteeing new external debt by the Government or the BPNG, including private debt for which official guarantees have been extended and for which value has not yet been received. - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies if deviations are prompted by changes in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees). The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed. - Debt is considered contracted when all conditions for entry into effect have been met, including approval by Treasury. Contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements is also considered contracting. - Government debt guarantee = an explicit legal obligation of the central government or the BPNG to service a debt in the event of nonpayment by the borrower. - Ceiling on New External Payment Arrears of the Government: - External payment arrears defined as external debt obligations of the government not paid when due in accordance with contractual terms (taking into account contractual grace periods). ### Other Assessment Criteria - During the program period, PNG will not: - a. Impose or intensify restrictions on the making of payments and transfers for current international transactions; - b. Introduce or modify multiple currency practices (MCPs); - c. Conclude bilateral payments agreements which are inconsistent with Article VIII of the IMF Articles of Agreement; - d. Impose or intensify import restrictions for balance of payments reason. ### Assessment Criteria: Indicative Targets - Indicative targets have been set for end-March 2023 and September 2023. Indicative targets are not binding; they serve to assess progress under the program and are specified in Table 1 of the MEFP. - Definitions for indicative target calculations: - Non-resource tax revenues: defined in line with the GFSM 2014 and consist of: (i) taxes on income, profits, and capital gains; (ii) taxes on payroll and workforce; (iii) taxes on property; (iv) taxes on goods and services; and (v) taxes on international trade and transactions, excluding mining and petroleum taxes. - BPNG provision of foreign exchange to authorized foreign exchange 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. - Social and other policy priority spending: measured on a cash basis; central government spending in health, education and law and order (both capital and operating expenses). ### Program Monitoring and Data Reporting - The Papua New Guinea authorities shall maintain a Program Monitoring Committee composed of senior officials from the Treasury and the Bank of Papua New Guinea. - The committee responsibilities: - Monitor performance of the program; - Inform the Fund regularly; - Transmit supporting materials necessary for evaluation of benchmarks. - With respect to continuous quantitative targets, the authorities will report any non-observance to the IMF promptly. *Source: 1pngea2023001 - 1. Assessment Criteria have been set as of test dates and performance under the program* ### 31. The Committee will prepare and provide to the Fund staff electronically the following ### 1pngea2023001 - 31. 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, Real, Monetary/Financial, External) - Scope: Detailed, regular electronic submission to Fund staff of the items listed in "Table 2. Papua New Guinea: Data Reporting for Program Monitoring". - Fiscal sector (Treasury reporting; monthly unless noted; reporting lags indicated): - Net acquisition of financial assets and net incurrence of financial liabilities (Budget operations) — Treasury — Monthly — 1 month. - External loans disbursed and external debt instruments issued, broken down by type of creditor or holder — Debt — Treasury — Monthly — 1 month. - External loans repaid and external debt instruments redeemed, broken down by type of creditor or holder — Debt — Treasury — Monthly — 1 month. - Domestic financial assets accumulated including deposits at the BPNG or other depository institutions — Debt — Treasury — Monthly — 1 month. - External financial assets accumulated, including FX deposits at the BPNG and other depository institutions, including foreign entities — Debt — Treasury — Monthly — 1 month. - Domestic loans disbursed — Debt — Treasury — Monthly — 1 month. - Domestic loans repaid — Debt — Treasury — Monthly — 1 month. - Domestic securities issued, broken down by original maturity, by face value and proceeds from issuance — Debt — Treasury — Monthly — 1 month. - Domestic securities redeemed by original maturity — Debt — Treasury — Monthly — 1 month. - Loans or advances from the BPNG (excluding any on-lending of external loans contracted with the Fund or other development partners) — Debt — Treasury — Monthly — 1 month. - Any other long-term (exceeding 1 year) domestic liability of the central government — Debt — Treasury — Monthly — 1 month. - Payments incurred by the central government on education, health, and law and order (both capital and current spending) — Debt — Treasury — Monthly — 1 month. - Total tax revenues received by the central government (taxes on income, profits, and capital gains; taxes on payroll and workforce; taxes on property; taxes on goods and services; taxes on international trade and transactions) — Revenue — Treasury — Monthly — 45 days. - Total revenue taxes received by the central government (mining and petroleum taxes; royalties levied on petroleum companies; [management taxes]) — Revenue — Treasury — Monthly — 45 days. - The monthly cash plan — Monthly — 1 month. - Stock of domestic debt, disbursements, amortization, interest, and other fees and charges; face value, maturity, interest rate, and payment schedule — Domestic debt — Treasury — Monthly — 1 month. - Stock of external debt, disbursements, amortization, interest, and other fees and charges; face value, maturity, interest rate, and payment schedule — External debt — Monthly — 1 month. - Details on amount and terms of disbursed external budget support and project grants and loans — External debt — Treasury — Monthly — 1 month. - End of year external debt in U.S. dollars, by creditor, and originating currency — Monthly — 1 month. - The amount of new external debt contracted by Government — Monthly — 1 month. - All guarantees provided by the government including guarantees to public corporations and private sector — Monthly — 1 month. - Real sector: - Consumer Price Index — Economic indicators — NSO — Quarterly — 3 months. - National Accounts (breakdown of production) in real and nominal terms — Annual — 24 months. - Agricultural production data (volume/value of major products) — [BPNG/Treasury] — Quarterly — 3 months. - Mineral production data (volume/value of major products) — [BPNG/Treasury] — Quarterly — 3 months. - Structural benchmarks: - A table with a description of the status of implementation of the structural measures in Table 2 of the MEFP — Structural benchmarks — Treasury — [Quarterly] — 3 months. - Monetary and financial sector: - Detailed balance sheet data of the BPNG submitted in the reporting template — Monetary Survey — BPNG — Monthly — 1 month. - Cash flows of the Waigani Public Account, Debt Repayment Account, and the Temporary Advance Facility (TAF) — Monthly — 1 month. - Daily sale of FX (in USD) by the BPNG to authorized FX dealers (detailed by dealer) — Weekly — 1 week. - Depository Corporations Survey — Quarterly — 3 months. - Balance sheets and income statements by financial institutions (aggregate and by bank) — Quarterly — 3 months. - Outstanding amount of unsatisfied requests for FX purchase to pay for current account (or authorized) transactions — Weekly — 1 week. - Financial Soundness Indicators (aggregate and by bank) — Quarterly — 1 month. - Lending activity of banks (by sector) — Monthly — 1 month. - External sector: - Balance of Payments data in the reporting template provided by IMF staff — BOP — BPNG — Quarterly — 3 months. - Import and export data, by sectors — Quarterly — 3 months. - Net international reserves, including reserve assets/liabilities by original currency — Monthly — 1 month. - Foreign exchange flow data (by type of flow) — Monthly — 1 month. - Banks’ purchases and sales of foreign currency (specified by bank, sector and by type of flow) — Monthly — 1 month. - List of the foreign exchange allocation pipeline (orderbook) with information about length of time needed to fulfill order — Monthly — 1 month. ### Fund relations and financial position (as reported) - Membership: Joined October 9, 1975; Article VIII. - General Resources Account (SDR Million; Percent Quota): - Quota: 263.20 SDR Million — 100.00 percent Quota. - Fund holdings of currency: 262.72 SDR Million — 99.82 percent. - Reserve position in Fund: 0.58 SDR Million — 0.22 percent. - SDR Department: - Net cumulative allocation: 377.76 SDR Million — 100.00 percent. - Holdings: 1.49 SDR Million — 0.39 percent. - Outstanding Purchases and Loans: - RCF Loans: 263.2 SDR Million — 100.00 percent Quota. - Latest financial arrangements (selected historical entries): - Stand-by: Approval Date 3/29/2000; Expiration Date 9/28/2001; Amount Approved 85.54 SDR million; Amount Drawn 85.54 SDR million. - Stand-by: Approval Date 7/14/1995; Expiration Date 12/15/1997; Amount Approved 71.48 SDR million; Amount Drawn 35.34 SDR million. - Stand-by: Approval Date 7/31/1991; Expiration Date 9/30/1992; Amount Approved 26.36 SDR million; Amount Drawn 0.00 SDR million. - Projected Payments to Fund (SDR million; based on existing use of resources and present holding of SDRs): - Charges/interest: 2023 — 9.65; 2024 — 12.94; 2025 — 12.93; 2026 — 12.94; 2027 — 12.94. - Principal: forthcoming table shows amounts: 2025 — 26.32; 2026 — 52.64; 2027 — 52.64. - Total: 2023 — 9.65; 2024 — 12.94; 2025 — 39.25; 2026 — 65.58; 2027 — 65.58. ### Safeguards, exchange regime, and surveillance - Safeguards Assessment (BPNG): - First Safeguards Assessment completed: central findings include need to amend the Central Banking Act to better protect 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 strengthening is underway, including establishment of a risk management function. Closer engagement of BPNG oversight bodies needed for timely implementation. - Exchange rate arrangement: - 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 stabilized within a two percent band against the US dollar; de facto arrangement reclassified to “stabilized” from crawl-like, effective November 3, 2020. - BPNG publishes intervention data in its annual report and semi-annual monetary policy statement. - Exchange restrictions and multiple currency practices (subject to IMF approval under Article VIII): - Exchange restrictions arising from: (i) requirement to obtain a tax clearance certificate (TCC) evidencing payment of all taxes prior to making payments or transfers for certain current international transactions; and (ii) rationing of FX, resulting in undue delays and arrears in current international payments. - Multiple currency practices arising from: (i) spread of more than 2 percent between rates set by BPNG for FX allocations to authorized FX dealers (AFEDs) and rates used by AFEDs with clients; and (ii) potential spread deviation of more than 2 percent between rates set by BPNG for FX transactions with the government and embassies and rates used by AFEDs with clients. - Article IV Consultations: - 2022 Article IV discussions held remotely April 4-26, 2022; concluded by Executive Board on June 13, 2022 (IMF Country Report No. 22/305). PNG on standard 12–month consultation cycle. ### Technical assistance, Resident Representative, and PFTAC engagement - TA from Headquarters (selected support areas and timing): - FAD: IPSAS Cash Reporting, IRC external governance, Taxpayer service implementation, IRC organization design and IT tender evaluation support (2020); joint FAD/PFTAC mission on MTRS update and review (September and October 2020 and January-February 2021); April 2021 TA on rewrite of Income Tax Act and Tax modeling; December 2021 mission on revenue administration program. - LEG: September 2018 mission on legislative reforms for the MTRS; virtual mission in 2020 on Institutional and Governance Review of IRC and PNG Customs. - MFD/MCM: August 2018 mission on liquidity forecasting and management and foreign exchange operations; December 2017 and February 2018 missions on banking supervision. - STA: TA on government finance statistics (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); January 2022 remote TA on public sector debt statistics; November 2022 in-person TA on financial soundness indicators. - Resident Representative: - Fund reopened Resident Representative Office in Port Moresby on November 21, 2022. Mr. Sohrab Rafiq is current resident representative. - PFTAC relations and activities (as of April 2022): - PFTAC-led PEFA diagnostic assessment published in 2020; September 2020 remote mission helped formulate a sequenced and prioritized PFM reform roadmap. - Tax administration and policy: MTRS 2018-2022 developed; IMF resident advisor August 2018–June 2021 (RMTF support ended June 2021); PFTAC continued capacity development; December 2021 PFTAC mission on IRC organizational structure. - Financial sector regulation and supervision: Supervision Framework Enhancement Program (SFEP) initiated in 2018; SFEP includes risk rating, supervisory action planning, on-site examination, financial analysis, and review/update of legislation and prudential standards; 11 prudential standards review completed August 2021. - Economic and financial statistics: collaboration with Australian Bureau of Statistics (ABS) on real sector statistics; further PFTAC TA on real sector statistics scheduled for FY23. - Public debt management: October–November 2021 two-week regional training on debt reporting and monitoring; November 2021 remote training on financial and loan analysis to Treasury officials; aim to raise DeMPA scores. ### Statistical issues, data adequacy, and reporting (as of April 2022 / Jan 2023 indicators table) - 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: - Accuracy and reliability affected by inadequate source data and lagged release dates. GDP data released with a lag of two years; NSO released GDP for 2019 in November 2021. - PFTAC and ABS coordinated TA: ABS on timely compilation and publication of GDP; PFTAC on steady improvement of data and methodology. - Price statistics: - NSO disseminates a quarterly consumer price index with expenditure weights from the 2009–10 Household Income Expenditure Survey; weights should ideally be updated. Producer price indexes are not compiled. - Government Finance Statistics (GFS): - Department of Treasury annually compiles and reports GFS for the budgetary central government to the IMF, making PNG a regular reporter, although coverage and timeliness could improve. - Deficiencies: central government tax revenue, nontax revenue, and public expenditure data; development budget expenditures and utilization of grants and project loans recorded with long lags; limited records on use of trust accounts; tax revenues collected by extrabudgetary units generally not reflected in central government financial information. - Improvements in compiling, reconciling, and disseminating public sector debt statistics and government guarantees have occurred but challenges remain in debt instrument and institutional coverage. - Financial sector surveillance: - BPNG compiles selected FSIs for deposit takers; currently reports thirteen core FSIs and eight additional indicators for deposit takers and real estate markets to STA, quarterly data availability starting 2008Q4, in line with 2019 FSI Compilation Guide. - No FSIs reported on other sectors such as other financial corporations, nonfinancial corporations, and households. A 2022 TA mission assisted preparations to report additional FSIs. - PNG reports several Financial Access Survey (FAS) indicators, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (UN SDG Target 8.10 indicators). - External sector statistics: - Annual balance of payments data up to 2018 disseminated on IMF website. IIP data not available. - February 2022 remote TA mission to improve ESS and training on BPM6 compilation; guidance provided to address data gaps in large cross-border transaction sectors (liquified natural gas project, mining, deposit taking corporations). - Significant effort required to implement TA recommendations to improve quality, coverage, periodicity and timeliness of ESS. - Participation in data systems: - PNG began participating in the General Data Dissemination System in 2012. PNG has not implemented enhanced GDDS (e-GDDS) recommendations by launching a National Summary Data Page (NSDP). - Reporting to STA (historical): - PNG last reported GFS for publication in Government Finance Statistics Yearbook and IFS for 2017 (budgetary central government only). - Monetary data are reported to STA for publication in IFS on a regular monthly basis. - BOP data for 2018 were reported to STA for publication in Balance of Payments Yearbook and IFS. - National accounts data for 2006-13 were reported to STA for publication in IFS. - Table of Common Indicators Required for Surveillance (selected observations and received dates; frequencies preserved exactly): - Exchange Rates: Date of Latest Observation 12/2022 — Date Received 01/2023 — Frequency: M M M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 12/2022 — Date Received 02/03/2023 — Frequency: M M M. - Reserve/Base Money: Date of Latest Observation 11/2022 — Date Received 02/03/2023 — Frequency: M M M. - Broad Money: Date of Latest Observation 11/2022 — Date Received 02/03/2023 — Frequency: M M M. - Central Bank Balance Sheet: Date of Latest Observation 11/2022 — Date Received 02/03/2023 — Frequency: M M Q. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 11/2022 — Date Received 02/03/2023 — Frequency: M M Q. - Interest Rates: Date of Latest Observation 08/2022 — Date Received 10/2022 — Frequency: M M M. - Consumer Price Index: Date of Latest Observation 9/2022 — Date Received 12/7/2022 — Frequency: Q Q Q. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of Latest Observation 12/2021 — Date Received 4/14/2022 — Frequency: A A A. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 12/2021 — Date Received 4/14/2022 — Frequency: Q A A. - External Current Account Balance: Date of Latest Observation Q2 2019 — Date Received 11/28/2019 — Frequency: Q Q Q. - Exports and Imports of Goods and Services: Date of Latest Observation Q2 2019 — Date Received 11/28/2019 — Frequency: Q Q Q. - GDP/GNP: Date of Latest Observation 2019 — Date Received 11/04/2021 — Frequency: A A I. - Gross External Debt: Date of Latest Observation 2018 — Date Received 07/03/2018 — Frequency: Q A A. - International Investment Position: Date of Latest Observation N/A — Date Received N/A — Frequency: N/A N/A N/A. ### Debt sustainability assessment (Joint Bank-Fund DSA) - Risk ratings: - Risk of external debt distress: High. - Overall risk of debt distress: High. - Granularity in the risk rating: Sustainable. - Application of judgment: No. - Key messages: - 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 remains 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. - The DSA indicates susceptibility to export-related and other shocks, underscoring downside risks to the debt outlook in a global environment of high uncertainty. - Policy recommendations to lower debt distress risk and ensure debt sustainability: - Gradual fiscal consolidation, including by boosting revenues. - Steadfast structural reforms to promote private sector growth. - Conservative financing strategies and implementation of authorities’ plans for further fiscal consolidation. - 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: - The Composite Indicator (CI) of 2.58 is based on the latest available CI information—October 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); March 8, 2023.* ### 1. The coverage of public debt in the DSA is unchanged from the previous (May 2022) DSA ### 1. The coverage of public debt in the DSA is unchanged from the previous (May 2022) DSA ### Coverage of public debt and scope - Segments captured in the DSA: central government, state and local government, and guarantees to other entities in the public and private sector, including parts of state-owned enterprises (SOEs). - Not fully captured: implicit government-guaranteed debts of SOEs and unfunded superannuation liabilities relating to pensions. - Coverage unchanged from May 2022 DSA prepared in the context of the IMF 2022 Article IV Consultation and review of the Staff Monitored Program (SMP). - Currency denomination is used to define external debt. ### Contingent liabilities stress test assumptions and results - Assumed uncovered SOE debt not captured in official public debt data: 9 percent of GDP. - Stock of explicit government guarantees: around 1.3 percent of GDP. - Other elements of general government (mainly unfunded superannuation liabilities related to pensions): 3 percent of GDP (projected to be 2.1 percent of GDP in 2023). - PPP capital stock in PNG (World Bank PPP database): zero → no default shock triggered. - Financial market shock added: 5 percent (reflecting the average fiscal cost of financial crisis in low-income countries). - Cumulative shock in the contingent liabilities stress test: 17 percent of GDP — compared to 7 percent under default assumptions. ### Public debt stock evolution and creditor composition - Public debt stock increased from around 24 billion Kina (2017) to 53 billion Kina (2022). - Increase mainly due to external loans; creditor composition shifting away from commercial loans toward official multilateral and bilateral financing. - Expensive commercial loans generally replaced with official multilateral and bilateral financing at more favorable conditions — helped improve debt sustainability indicators in the medium-term. - Public and Publicly Guaranteed (PPG) external debt figures used are consistent with World Bank’s International Debt Statistics. ### SDRs and other financing instruments - IMF general allocation of SDRs effective August 2021: SDR 252 million (US$ 357 million, or 95.7 percent of quota) allocated to PNG. - Authorities used the full SDR allocation to support the 2021 budget and to replace costly financing; allocation included in total public debt and its associated debt service is reflected in the DSA. ### IMF program and IDA classification / policies - New 38-month IMF program: total SDR 684.3 million under Extended Credit Facility (ECF) and Extended Fund Facility (EFF). - Program objectives: (i) strengthen debt sustainability via multi-year fiscal consolidation while meeting social and development needs, (ii) enhance legal/operational framework of BPNG to alleviate FX shortages and transition to a market-clearing exchange rate, (iii) build on governance and anti-corruption improvements. - PNG is an IDA blend country; total IDA20 allocation at SDR 173.7 million. PNG eligible for Regional Window, Crisis Response Windows, SUW-SMLs and the Private Sector Window. - IDA Sustainable Development Finance Policy (SDFP): PNG satisfactorily implemented PPA for fiscal year 2022. Two further SDFP PPAs for fiscal year 2023: - (i) a US$ 1 billion non-concessional PPG borrowing limit for new non-concessional long-term contractual obligations (applies continuously throughout FY23); - (ii) improve management of fiscal risks by approving a revised on-lending policy (introduces credit risk assessments, strengthens enforcement, recording and reporting requirements) and refrain from any new on-lending until revised policy is adopted. ### Macroeconomic outlook and fiscal baseline (key figures) - Real GDP growth (2022 estimated): 4.5 percent. - Headline inflation (period-average CPI) (2022): 6.6 percent. - Current account surplus (2022): 35 percent of GDP (largely driven by resource sector export revenue). - Goods export volumes increase in 2022 vs 2021: 6.5 percent. - Export values increase in 2022 vs 2021: 49 percent. - Long-term potential real growth estimate: around 3 percent. - Inflation projected to fall to an annual average of 4.5 percent in the medium term. - Current account surplus forecast to remain around 24 percent of GDP in the medium-term. - Baseline assumes rapid progress on fiscal consolidation to strengthen debt sustainability and build fiscal buffer; projections include significant fiscal consolidation and primary surpluses in the second half of the projection period to meet the Fiscal Responsibility Act target of government debt no more than 40 percent of GDP over the long term. - Near-term revenue improvements expected from Non-Tax Revenue Act (NTRA), Tax Administration Act (TAA), and amendments to the Income Tax Act (ACT). - Authorities project sharp increase in tax revenues from PNG LNG from 2026 onward as tax exemptions expire (not fully included in baseline). ### Fiscal and financing details (selected table values) - DSA vintage (2023 ECF/EFF) headline projections (2023–2027): - Real GDP growth y/y (in percent): 2023: 3.7; 2024: 4.4; 2025-2027: 3.1. - Resource sector growth: 2023: 0.3; 2024: 5.1; 2025-2027: 0.1. - Non-resource sector growth: 2023: 4.9; 2024: 4.2; 2025-2027: 4.1. - Inflation, annual average (consumer prices, percent): 2023: 5.4; 2024: 4.9; 2025-2027: 4.5. - Current account balance (percent of GDP): 2023: 24.0; 2024: 22.4; 2025-2027: 23.8. - Growth of exports of G&S (US$, in percent): 2023: -11.2; 2024: 3.1; 2025-2027: 2.5. - Growth of imports of G&S (US$, in percent): 2023: 3.6; 2024: 1.5; 2025-2027: 3.1. - Primary balance (percent of GDP): 2023: -2.2; 2024: -1.2; 2025-2027: 1.4. - Government revenues (excluding grants, percent of GDP): 2023: 15.3; 2024: 15.1; 2025-2027: 15.7. - Summary fiscal operations (percent of GDP): - Revenue and grants: 2022: 15.8; 2023: 17.1; 2024: 16.6. - Taxes: 2022: 12.6; 2023: 13.0; 2024: 13.3. - Expenditure: 2022: 21.2; 2023: 21.4; 2024: 20.5. - Interest: 2022: 2.1; 2023: 2.2; 2024: 2.7. - Net lending (+)/borrowing (-): 2022: -5.4; 2023: -4.3; 2024: -3.9. - Primary balance (percent of GDP): 2022: -3.3; 2023: -2.2; 2024: -1.2. ### Financing mix and domestic debt risks - DSA assumes composition of T-bills and T-bonds remains unchanged compared to past six years. - High concentration in short-term Treasury bills raises rollover and short-term liquidity risks. - Short-term liquidity risks and reliance on domestic financing fall through projection horizon as deficits are replaced by surpluses, particularly after 2027. - Continued development of domestic debt market needed to increase liquidity and shift to longer maturities. ### Country classification, thresholds, and stress tests - PNG’s Composite Indicator (CI): 2.58 → classified as weak debt-carrying capacity. - Applicable thresholds: - PV of external debt-to-GDP: 30 percent. - PV of external debt-to-exports: 140 percent. - External debt service-to-exports: 10 percent. - External debt service-to-revenue: 14 percent. - PV of public debt-to-GDP: 35 percent. - Scenario stress tests included: - Contingent liabilities stress test for uncovered SOE debt (see assumptions under “Contingent liabilities stress test assumptions”). - Commodity price shocks due to resource sector importance (commodities = 96 percent of total exports of goods and services): - Fuel price shock set at 35 percent (compared to default shock of 27 percent). - Shock to non-fuel commodity prices set to 21 percent (20 percent for base metals and precious metals; 22 percent for agricultural commodities other than grain). - Price shocks to grain (wheat, corn, soybeans) not included. - Mitigating factors included at default values (2 percent for fuel, and 27 percent for non-fuel). - Market financing module activated by PNG’s single outstanding Eurobond maturing in 2028. ### Debt sustainability analysis findings - Under the baseline scenario: - Debt-service-to-revenue indicator projected to breach its threshold, with a relatively large breach in 2028 due to the bullet payment for the US$500 million Eurobond (issued in 2018). - Marginal breaches in 2026 and 2027 as debt-service-to-revenue ratio increases to 15 percent (1pp above the threshold value). - Both before and after 2028 the indicator remains close to the threshold, which is falling by 2032. - Present value of debt-to-GDP ratio, debt-to-exports, and debt service-to-exports ratios remain below respective thresholds over the projection horizon. - Solvency indicators trend downwards in the latter half of the projection. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023001.pdf* ### 16. Stress tests point to vulnerabilities in PNG’s external debt dynamics particularly with respect ### 16. Stress tests point to vulnerabilities in PNG’s external debt dynamics particularly with respect ### External debt vulnerabilities and market financing risk - 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. - The market financing risk module indicates a high risk of heightened liquidity pressures primarily due to an elevated EMBI spread. - A heightened market stress event would not have a substantial impact on debt burden indicators as few future external debt disbursements are projected on commercial terms. - PNG’s elevated sovereign spreads likely reflect perceived risks due to the country’s characteristics: small and undiversified export base, small revenue base, vulnerability to shocks. ### Data, accounting issues, and balance of payments - Assessment of debt dynamics is hampered by large residuals from external financial flows from money transfer by resource companies via offshore accounts. - 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. - This over-estimation of the current account manifests as large positive residuals from external financial flows which persist into the projection period because a consistent accounting framework is used. - The authorities have received technical assistance from the IMF to help resolve these issues and plan to publish the balance of payments in BPM6 format. ### Public sector debt sustainability analysis — key statistics and baseline projection - Public debt PV ratios have increased substantially in recent years and are currently expected to fall to 43 percent of GDP for 2022. - 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. - Under the baseline scenario, the public debt to GDP ratio peaks at 47 percent of GDP in 2025, before falling in the second half of the projection. - The downward trend in the public debt-to-GDP ratio 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. - The profile of domestic debt, with a high concentration in short-term Treasury bills, raises concerns over rollover risks. - The fall in the level of short-term debt, from a peak of 15.1bn Kina in 2024 to 11.1bn Kina in 2028, is a mitigating factor for liquidity risks. - The substantial residuals from unidentified debt-creating flows, arising largely in 2019, are not anticipated to be repeated as the government has taken several steps to improve recording and reporting of debt. ### Public debt stress-test scenarios and vulnerabilities - The most extreme shock impacting the PV of public debt is a shock to exports: in this scenario the PV of public debt-to-GDP ratio increases to a peak of 72 percent of GDP by 2025, more than double the 35 percent threshold value and substantially above the starting level of 43 percent of GDP in 2022. - The tailored stress test for the combined contingent liability shock causes a deterioration in public debt sustainability which is felt most acutely through the total public debt service-to-revenue measure. - Contingent liabilities represent an important source of vulnerabilities in PNG. - The trajectory of the PV of the public debt-to-revenue ratio is impacted most by the commodity price shock, reflecting the strong reliance upon commodity exports within PNG. ### Risk rating, debt service outlook, and policy implications - 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”. - 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, commodity prices 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 recent SMPs, are essential for supporting the sustainability of public finances. - Market financing risks continue to be relevant, with the EMBI spread and the GFN thresholds breached, pointing to high market financing pressures. ### Assessment and conditional sustainability - 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 projected temporary breaches of sustainability indicators can be prevented by debt management operations as well as by boosting revenue generation. - 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. - This baseline sustainability assessment also relies upon higher future resource revenue as tax exemptions expire from 2026 onwards. *Source: IMF staff analysis as presented in the provided content.* ### 24. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress ### 24. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress ### Authorities’ assessment and fiscal actions - Authorities noted Staff’s assessment that PNG remains at high risk of debt distress but remains sustainable under the baseline projection. - Public debt including arrears rose from K8 billion in 2012 to K34 billion in 2019; addressing public debt (including arrears) is a significant priority. - COVID-19 significantly impacted domestic revenues and led to a large financing requirement; part of this was met through support under the IMF’s Rapid Credit Facility. - The redemption of the US$ 500 million sovereign bond in 2028, issued in 2018, is identified as a key risk. - Authorities reported fiscal consolidation since COVID-19, reducing the budget deficit from 8.9 percent of GDP in 2020 to an expected 4.3 percent of GDP in 2023. - A 13-year fiscal reform plan targets a budget surplus by 2027. - Authorities aim to direct resources to: addressing gaps in delivery of critical social services; closing the infrastructure deficit; enhancing financial development and inclusion; strengthening the business climate to encourage investment and growth. - Authorities expect increased revenues by 2027 as debt payments for the PNG LNG project are completed. - Recent strategy: substitute costly financing with concessional financing from multilateral and bilateral partners, improving PNG’s debt profile and lowering average interest costs. - Interest costs of domestic securities have declined over the past two years; authorities emphasized more favorable future contract negotiation and the medium-term revenue strategy to reduce medium-term risks. - No new resource projects are built into the analysis despite prospects for Final Investment Decisions in late 2023 on major new projects (potential upside to fiscal projections). - Authorities are committed to fiscal consolidation and conservative financing strategies to support debt sustainability going forward. ### Debt risks, dynamics, and projections (baseline) - External debt (nominal) trajectory (in percent of GDP): 61.7 (2019), 69.0 (2020), 67.8 (2021), 60.4 (2022), 62.1 (2023), 64.3 (2024), 66.7 (2025), 64.3 (2026), 61.2 (2027), 56.4 (2028), 52.4 (2029), 48.5 (2030), 44.9 (2031), 41.5 (2032), 38.5 (2033), 35.8 (2034), 33.4 (2035), 31.5 (2036), 29.8 (2037), 28.3 (2038), 26.8 (2039), 25.4 (2040), 23.5 (2041), 21.8 (2042). - Public and publicly guaranteed (PPG) external debt (in percent of GDP): 17.1 (2019), 21.8 (2020), 24.8 (2021), 23.4 (2022), 25.7 (2023), 28.0 (2024), 30.0 (2025), 29.1 (2026), 27.0 (2027), 23.3 (2028), 20.4 (2029), 17.5 (2030), 14.9 (2031), 12.4 (2032), 10.3 (2033), 8.5 (2034), 7.0 (2035), 5.9 (2036), 5.0 (2037), 4.2 (2038), 3.5 (2039), 2.9 (2040), 2.3 (2041), 1.9 (2042). - Change in external debt (percent of GDP): -5.4 (2019), 7.3 (2020), -1.2 (2021), -7.4 (2022), 1.7 (2023), 2.3 (2024), 2.3 (2025), -2.3 (2026), -3.2 (2027), -4.8 (2028), -3.9 (2029), -3.9 (2030), -3.6 (2031), -3.4 (2032), -3.0 (2033), -2.7 (2034), -2.3 (2035), -1.9 (2036), -1.7 (2037), -1.6 (2038), -1.5 (2039), -1.4 (2040), -1.9 (2041), -1.7 (2042). - Identified net debt-creating flows (percent of GDP): -21.6 (2019), -17.7 (2020), -28.5 (2021), -37.1 (2022), -25.2 (2023), -25.5 (2024), -26.7 (2025), -25.3 (2026), -25.4 (2027), -26.2 (2028), -24.0 (2029), -23.1 (2030), -22.3 (2031), -21.4 (2032), -20.7 (2033), -19.9 (2034), -19.2 (2035), -18.5 (2036), -17.8 (2037), -17.2 (2038), -16.6 (2039), -16.0 (2040), -15.5 (2041), -14.9 (2042). - Non-interest current account deficit (percent of GDP): -22.1 (2019), -21.5 (2020), -22.8 (2021), -35.3 (2022), -23.4 (2023), -23.0 (2024), -24.9 (2025), -23.4 (2026), -24.9 (2027), -24.6 (2028), -23.6 (2029), -22.8 (2030), -22.0 (2031), -21.2 (2032), -20.4 (2033), -19.7 (2034), -19.0 (2035), -18.3 (2036), -17.7 (2037), -17.1 (2038), -16.5 (2039), -15.9 (2040), -15.4 (2041), -14.8 (2042). - Endogenous debt dynamics (percent of GDP): 0.4 (2019), 4.2 (2020), -5.9 (2021), -1.4 (2022), -1.0 (2023), -1.6 (2024), -0.9 (2025), -1.0 (2026), 0.3 (2027), 0.3 (2028), 0.3 (2029), 0.3 (2030), 0.3 (2031), 0.3 (2032), 0.3 (2033), 0.3 (2034), 0.3 (2035), 0.3 (2036), 0.3 (2037), 0.3 (2038), 0.3 (2039), 0.2 (2040), 0.2 (2041), 0.2 (2042). - Contribution from nominal interest rate (percent of GDP): 2.1 (2019), 1.8 (2020), 1.5 (2021), 1.2 (2022), 1.1 (2023), 1.1 (2024), 1.0 (2025), 0.9 (2026), 2.1 (2027), 2.1 (2028), 1.9 (2029), 1.8 (2030), 1.7 (2031), 1.6 (2032), 1.5 (2033), 1.4 (2034), 1.3 (2035), 1.2 (2036), 1.2 (2037), 1.1 (2038), 1.1 (2039), 1.0 (2040), 0.9 (2041), 0.9 (2042). - Contribution from real GDP growth (percent of GDP): -2.9 (2019), 2.0 (2020), 0.0 (2021), -2.6 (2022), -2.2 (2023), -2.7 (2024), -2.0 (2025), -2.0 (2026), -1.8 (2027), -1.8 (2028), -1.6 (2029), -1.5 (2030), -1.4 (2031), -1.3 (2032), -1.2 (2033), -1.1 (2034), -1.0 (2035), -1.0 (2036), -0.9 (2037), -0.9 (2038), -0.8 (2039), -0.8 (2040), -0.7 (2041), -0.7 (2042). - Residual (percent of GDP): 16.2 (2019), 25.0 (2020), 27.4 (2021), 29.7 (2022), 26.9 (2023), 27.7 (2024), 29.0 (2025), 22.9 (2026), 22.2 (2027), 21.4 (2028), 20.1 (2029), 19.3 (2030), 18.6 (2031), 18.0 (2032), 17.6 (2033), 17.2 (2034), 16.8 (2035), 16.6 (2036), 16.1 (2037), 15.6 (2038), 15.2 (2039), 14.7 (2040), 13.6 (2041), 13.2 (2042). - Gross external financing need (Million of U.S. dollars): -2,737.0 (2019), -3,082.4 (2020), -3,748.0 (2021), -9,171.2 (2022), -5,506.1 (2023), -5,702.2 (2024), -6,211.5 (2025), -6,928.2 (2026), -6,891.6 (2027), -7,284.0 (2028), -7,484.4 (2029), -7,746.9 (2030), -8,013.0 (2031), -8,304.2 (2032), -8,551.4 (2033), -8,919.8 (2034), -9,321.6 (2035), -9,807.5 (2036), -10,190.9 (2037), -10,536.3 (2038), -10,885.3 (2039), -11,247.8 (2040), -11,629.4 (2041), -12,055.5 (2042). ### Public sector debt: levels, dynamics, and fiscal metrics - Public sector debt (percent of GDP): 40.6 (2019), 48.7 (2020), 52.1 (2021), 47.9 (2022), 49.9 (2023), 51.2 (2024), 51.8 (2025), 49.1 (2026), 44.9 (2027), 27.3 (2032), 7.7 (2042). - Public sector external debt (percent of GDP): 17.1 (2019), 21.8 (2020), 24.8 (2021), 23.4 (2022), 25.7 (2023), 28.0 (2024), 30.0 (2025), 29.1 (2026), 27.0 (2027), 12.4 (2032), 1.9 (2042). - Change in public sector debt (percent of GDP): 8.2 (2019), 8.1 (2020), 3.5 (2021), -4.2 (2022), 2.0 (2023), 1.3 (2024), 0.5 (2025), -2.7 (2026), -4.1 (2027), -3.0 (2032), -1.3 (2042). - Identified debt-creating flows (percent of GDP): 0.5 (2019), 8.2 (2020), 0.0 (2021), -2.8 (2022), 1.0 (2023), -0.4 (2024), -1.1 (2025), -2.4 (2026), -3.5 (2027), -2.6 (2032), -1.3 (2042). - Primary deficit (percent of GDP): 1.9 (2019), 6.2 (2020), 4.4 (2021), 3.3 (2022), 2.2 (2023), 1.2 (2024), -0.3 (2025), -1.4 (2026), -2.6 (2027), -2.1 (2032), -1.2 (2042). - Revenue and grants (percent of GDP): 16.3 (2019), 14.7 (2020), 15.0 (2021), 15.8 (2022), 17.1 (2023), 16.6 (2024), 17.0 (2025), 17.1 (2026), 17.3 (2027), 19.4 (2032), 18.4 (2042). - Primary (noninterest) expenditure (percent of GDP): 18.2 (2019), 20.9 (2020), 19.4 (2021), 19.1 (2022), 19.2 (2023), 17.8 (2024), 16.7 (2025), 15.7 (2026), 14.7 (2027), 17.2 (2032), 17.2 (2042). - Automatic debt dynamics (percent of GDP): -1.4 (2019), 2.0 (2020), -4.4 (2021), -6.1 (2022), -1.2 (2023), -1.6 (2024), -0.8 (2025), -1.0 (2026), -0.9 (2027), -0.4 (2032), -0.1 (2042). - Residual (percent of GDP): 7.7 (2019), -0.1 (2020), 3.5 (2021), -1.5 (2022), 1.1 (2023), 1.7 (2024), 1.7 (2025), -0.3 (2026), -0.6 (2027), -0.5 (2032), -0.1 (2042). - PV of public debt-to-GDP ratio: 46.5 (2022), 43.3 (2023), 45.2 (2024), 46.5 (2025), 47.0 (2026), 44.7 (2027), 41.0 (2032), 25.5 (2042). - Debt service-to-revenue and grants ratio (percent): 72.0 (2019), 114.4 (2020), 110.4 (2021), 86.7 (2022), 85.1 (2023), 88.8 (2024), 86.7 (2025), 80.0 (2026), 70.3 (2027), 39.5 (2032), 5.4 (2042). - Gross financing need (percent of GDP): 13.6 (2019), 23.0 (2020), 20.9 (2021), 17.0 (2022), 16.7 (2023), 16.0 (2024), 14.4 (2025), 12.2 (2026), 9.6 (2027), 5.5 (2032), -0.2 (2042). ### Key macroeconomic and financing assumptions (selected) - Real GDP growth (in percent): 4.5 (2019), -3.2 (2020), 0.1 (2021), 4.5 (2022), 3.7 (2023), 4.4 (2024), 3.1 (2025), 3.1 (2026), 3.0 (2027), 3.0 (2032), 3.0 (2042). Average projection: 3.9, 3.4. - GDP deflator in US dollar terms (change in percent): -1.7 (2019), -0.5 (2020), 11.9 (2021), 13.5 (2022), 0.0 (2023), -2.2 (2024), -2.1 (2025), 3.0 (2026), 3.2 (2027), 3.2 (2032), 3.2 (2042). Average projection: 0.6, 2.9. - Effective interest rate (percent): 3.3 (2019), 2.9 (2020), 2.4 (2021), 2.1 (2022), 1.9 (2023), 1.8 (2024), 1.6 (2025), 1.5 (2026), 3.5 (2027), 3.6 (2028), 3.5 (2029), 3.6 (2030), 3.6 (2031), 3.7 (2032), 3.7 (2033), 3.8 (2034), 3.9 (2035), 3.9 (2036), 3.9 (2037), 4.0 (2038), 4.0 (2039), 3.9 (2040), 3.9 (2041), 3.9 (2042). Average: 2.7, 2.8. - Growth of exports of goods & services (US dollar terms, percent): 16.6 (2019), -21.3 (2020), 14.2 (2021), 48.9 (2022), -11.2 (2023), 3.1 (2024), 2.3 (2025), 2.5 (2026), 2.6 (2027), 2.9 (2028), 2.9 (2029), 3.0 (2030), 3.0 (2031), 3.0 (2032), 3.0 (2033), 3.1 (2034), 3.1 (2035), 3.1 (2036), 3.1 (2037), 3.2 (2038), 3.2 (2039), 3.2 (2040), 3.2 (2041), 3.2 (2042). Average: 5.4, 5.7. - Government revenues (excluding grants, percent of GDP): 14.2 (2019), 12.9 (2020), 12.7 (2021), 14.1 (2022), 15.3 (2023), 15.1 (2024), 15.6 (2025), 15.7 (2026), 15.9 (2027), 16.4 (2028), 17.0 (2029), 17.6 (2030), 18.2 (2031), 18.1 (2032), 18.1 (2033), 18.0 (2034), 18.0 (2035), 17.9 (2036), 17.8 (2037), 17.8 (2038), 17.7 (2039), 17.6 (2040), 17.6 (2041), 17.5 (2042). Average: 15.7, 16.3. ### Stress tests, vulnerability analysis, and scenarios - Redemption risk: US$ 500 million sovereign bond maturing in 2028 is a key identified vulnerability. - Stress tests and sensitivity analyses presented include scenarios for: real GDP growth shocks, primary balance shocks, exports shocks, other flows, depreciation, combinations, combined contingent liabilities, commodity price shocks, market financing shocks, and natural disaster (n.a. where not applicable). - Selected public debt baseline and alternative outcomes (PV of debt-to-GDP and debt-service indicators) demonstrate breaches under several stress tests (detailed sensitivity tables show bold values where benchmarks are breached). - Figure summaries and tables indicate most extreme stress tests often relate to exports and commodity price shocks. ### Policy implications and recommendations highlighted by authorities - Continued fiscal consolidation to reduce budget deficits and public debt ratios, with target of a budget surplus by 2027. - Conservative financing strategies: prioritize concessional financing from multilateral and bilateral partners to improve debt profile and lower average interest costs. - Importance of medium-term revenue strategy and favorable contract negotiations to reduce medium-term risks. - Prioritize directing resources to social services, infrastructure, financial inclusion, and business climate improvements while maintaining debt sustainability. *Source: Country authorities; and staff estimates and projections.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Statement by Robert Nicholl, Executive Director for Papua New Guinea and Rhoda Karl, Advisor to Executive Director — March 22, 2023 ### Overview - PNG: second largest island in the world; over 800 different languages; population of 9 million. - Large portions of the country are rugged mountains and swamps; most of the population live in rural and remote areas with limited access to government services and the formal economy. - Vulnerabilities: climate change effects and frequently occurring natural disasters. - Authorities engaged with the Fund since first SMP in 2019; second SMP completed in 2022. - Under the second SMP: all quantitative targets were met and all but one structural benchmark were achieved. - Authorities view a successful ECF/EFF program as leaving PNG in a much stronger economic and fiscal position, reducing debt exposure, and supported by governance improvements. ### Economic conditions - Growth: - 2022 growth estimated at 4.5 percent, driven by recovery in the non-resource sector. - Growth expected to moderate to 3.7 percent in 2023 and converge to potential over the medium term. - Drivers over medium term: higher private investment and government public investment program; empowering and investing in Small-Medium Enterprises; improving connectivity/access to markets; reducing public sector arrears; structural reforms in State Owned Enterprises. - Inflation: - Accelerated to 6.6 percent in 2022 due to global price shocks from the pandemic and the war in Ukraine. - Expected to moderate to 5.4 percent in 2023. - Fiscal and monetary instruments used to cushion cost-of-living impacts: general subsidies on fuel, staple foods, hygiene; personal income tax relief; expanded school tuition fee subsidies to reach rural areas. - Funding of support measures came from windfall revenue from high commodity prices. - Phased removal of support measures commenced: reintroduction of GST on fuel at beginning of the year; reintroduction of the excise planned for June. - Monetary policy tightened, but excess liquidity has weighed on transmission effectiveness. - Risks: - Downside: weaker external demand for exports; tighter global financial conditions; delay in resumption of Porgera mine operations; climate-related natural disasters. - Upside (not included in authorities’ baseline fiscal estimates): potential for significantly larger LNG revenues once amortization and depreciation are completed; commencement of new extractive projects (Papua LNG, P’nyang LNG, Wafi Golpu mining project) with appreciable positive impacts on growth, investment, exports, and fiscal revenues. ### The Blended ECF/EFF Financing Program - Builds on previous SMP objectives: budget repair, fiscal consolidation, improved governance, strengthened monetary and exchange rate frameworks, and addressing prospective balance of payments needs. - Authorities committed to achieving 9 Structural Benchmarks (SBs) and several Quantitative Performance Criteria (QPC) and indicative targets. ### Fiscal policy - 2023 Budget targets a K1 billion reduction in the deficit (a 1.1 percentage points of GDP decline) relative to 2022. - Program objective: reduce the deficit to below 2 percent of GDP (from the 2022 estimate of 5.4 percent) and achieve a balanced budget by 2027. - Strategy: increase revenues while maintaining strict discipline on expenditures and strengthening debt management. - Revenue measures: - Passage of the Non-Tax Revenue Act as part of the 2023 Budget to appropriate fees and charges currently retained by statutory authorities. - Stepped-up efforts to pass the Income Tax Act rewrite (SB No.1) to strengthen domestic revenue mobilization, including simplifying filing, assessment, tax payments, and removing tax exemptions not aligned with policy objectives. - Request for Fund TA to develop the Medium-Term Revenue Strategy (SB No.2), mapping revenue policy and administrative reforms, including assistance on taxation reforms in the banking sector and GST operations. - Continued progress in improving revenue administration and modernizing the Internal Revenue Commission (IRC). - Expenditure measures: - Maintain the medium-term expenditure envelope in a 13-year plan. - Increase spending efficiency to address gaps in delivery of critical social services, close the infrastructure deficit, enhance financial development, and strengthen the business climate. - Strengthen payroll management to ensure salary budgets are realistic and focused on service delivery. - Maintain an expenditure rule to reduce the recurrent budget as a share of non-resource GDP. - Debt management: - Strengthen transparency in debt recording and management. - Pursue a prudent financing strategy to reduce debt distress risks and vulnerabilities. - Expected increase in revenues from PNG LNG project in 2027 upon completion of its debt payments will facilitate risk reduction. - Commitments under program: maintain a limit on new public external debt contracted under the Fund program, to be measured in present value terms (continuous QPC); non-accumulation of new external arrears during the program period (continuous QPC). ### Monetary and financial sector policies - Bank of PNG (BPNG) to strengthen monetary policy operational framework by draining excess liquidity and adopting more effective short-term liquidity management instruments. - Program requirement: modify open market operations through introduction of a fixed rate tender with full allotment (SB No.4). - Authorities have requested Fund TA to support understanding, costing and introduction of this new instrument given it is untested in PNG. - Authorities note prudence in reviewing the approach if costs and resulting market volatility exceed reasonable preliminary expectations. - FX and exchange rate operations: - BPNG committed to continue supplying FX to the market in 2023 to help reduce FX shortages and return to Kina convertibility. - A sequenced roadmap for reforming exchange rate operations and regulations will be adopted to make the exchange rate more flexible in the medium-term to support Kina convertibility; roadmap to be established with IMF TA (SB No.5). - Work to commence urgently, including provision of supporting Fund TA. - Central Banking Act (CBA) review: - Review launched in 2020 via Independent Advisory Group (IAG); authorities seek Fund collaboration to strengthen financial independence and governance of BPNG. - Further amendments to the CBA to strengthen mandate, governance, autonomy, transparency, and accountability (SB No.6) to occur in the first year of the Fund program. - BPNG to ensure timely publication of audited financial statements. - IAG will continue to review the overall financial sector; authorities seek Fund support for this process. - Financial stability and inclusion: - CBA review will examine BPNG’s role as financial regulator to support financial sector development while maintaining soundness, support for growth, and financial inclusion. - Commit to enhancing capacity to analyze and monitor financial stability and prepare for Financial Stability Task Force mutual evaluation. - Continue strengthening AML/CFT framework and remain vigilant to avoid returning to the grey list. ### Governance - Commit to fully operationalizing the new Independent Commission Against Corruption (ICAC) to deliver an effective anti-corruption framework. - Plan to appoint a Commissioner and two deputy Commissioners (SB No.7); continue to recruit and train staff for investigation and prosecution. - ICAC to draft implementing regulations to specify processes for preventive, investigative, and prosecutorial mandates and ensure information sharing across relevant entities (SB No.8). - ICAC drawing significant TA support from the UN and EU. - Authorities drafting memoranda of understanding to enhance cooperation among anti-corruption bodies: police, Ombudsman Commission, Auditor-General's Office, Public Prosecutor's Office, and Financial Analysis and Supervision Unit. - Developing regulations for the Whistleblower Act to increase protection of whistleblowers. - Procurement and transparency: - Commit to continued transparency in procurement; will post details of all Covid-19 related procurement contracts up to end 2021 (SB No.9). - Continue to introduce GFS formatting to all budget books to promote fiscal transparency. - Social spending: - 2023 budget allocation (current and capital) toward education, health and law and order: K5.26 billion. - Increase of 12.6 percent over 2022. - 46.9 percent higher than in 2021. - These expenditures safeguarded to alleviate poverty and meet pressing needs, particularly among the poor. - Continued work with development partners to strengthen public service delivery to rural populations, address urban youth unemployment, improve labor mobility, remove barriers to employment, address child nutrition needs, and prevent spread of communicable diseases. ### Fund relationship - Authorities appreciate IMF support during COVID via the Rapid Credit Facility and the General Allocation of SDR in 2021. - Under the SMPs, bilateral information flow strengthened with establishment of the Program Monitoring Committee to improve coordination among agencies (Treasury, Central Bank) and information sharing with the Fund. - Authorities emphasize the importance of clearly communicating benefits of reforms to the public and commit to working closely with the Fund on communication and providing timely technical assistance. - Authorities grateful for placement of a Resident Representative in PNG to strengthen communication and TA engagement. - Authorities view the program as meaningfully aligned with and supportive of their economic reform agenda and look forward to continuing partnership with the Fund. ### Market-Financing Risk Indicators (Figure notes and values excerpted) - Figure 5: Papua New Guinea: Market-Financing Risk Indicators. - 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 values excerpt: - Baseline / Market financing / Threshold / Potential heightened liquidity needs / High / Breach of benchmark: Yes - GFN Benchmarks: 14 - EMBI: 570 - Values: 17 672 - Chart axes and labels (verbatim snippets): - "3-Year Adjustment in Primary Balance (Percentage points of GDP)" - "3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile" - Time series labels include: 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023, and projections through 2032 for various debt and debt-service metrics. - Measures shown: Debt service-to-revenue ratio; PV of debt-to-exports ratio; PV of debt-to-GDP ratio; Debt service-to-exports ratio. - Scenario labels: Historical; Projected (Prev. DSA); Projected (Curr. DSA). - Multipliers shown in an illustrative chart: Multiplier = 0.2; Multiplier = 0.4; Multiplier = 0.6; Multiplier = 0.8; Baseline. *Source: Statement by Robert Nicholl, Executive Director for Papua New Guinea and Rhoda Karl, Advisor to Executive Director — March 22, 2023 (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023001.pdf_