## 1pngea2023002 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1pngea2023002 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1pngea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1pngea2023002.pdf.json) --- ### Background and program purpose - IMF Executive Board approved 38-month Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements with Papua New Guinea on March 22, 2023. - Program objectives: - Address protracted balance of payments need manifested in foreign exchange shortages. - Support reforms to address long-standing structural impediments to inclusive growth. - Focus on macro-critical conditionality, supported by capacity development (CD), and informed by a Country Engagement Strategy (CES). ### Program performance (first half of 2023) - Overall assessment: Strong program performance and sustained authorities’ commitment to reforms. - Key quantitative outcomes and targets (selected): - All end-June 2023 quantitative performance criteria (QPCs) were met. - Fiscal deficit of the government (ceiling, cumulative): 2022 Approved 5,985; December Est. 1,646; Outcome 449 — met. 2023 Approved 3,092; Outcome 2,858 — met. - Stock of net international reserves of the BPNG (floor, US$ millions): 2022 Approved 3,226; December Est. 2,845; Outcome 2,996 — met. 2023 Approved 2,463; Outcome 2,831 — met. - BPNG's gross credit to government (ceiling): 2022 Approved 2,051; December Est. 2,400; Outcome 1,913 — met. 2023 Approved 2,400; Outcome 2,032 — met. - Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): 2022 Approved 1,405; Outcome 0 — met. 2023 Approved 1,405; Outcome 60 — met. - Non-resource tax revenue of the government (floor, cumulative Kina): 2022 Approved 10,831; March Est. 2,512; Outcome 2,787 — met. 2023 Approved 5,023; Outcome 5,900 — met. - Social and other priority spending (floor, cumulative Kina): 2022 Approved 3,678; March Est. 500; Outcome 998 — met. 2023 Approved 1,500; Outcome 2,069 — met. - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative, US$ millions): 2022 Approved 878; March Est. 300; Outcome 300 — met. 2023 Approved 600; Outcome 773 — met. - Structural benchmarks (SBs): - All SBs due by end-August 2023 were met in timely fashion, except adoption of the new Medium-term Revenue Strategy (MTRS), implemented with a slight delay (October 2023). ### Modifications to QPCs and technical adjustments - In light of stronger-than-expected performance, proposed end-December 2023 changes include: - Reduce targets for the budget deficit and the present value of external debt ceilings. - Increase the floor on net international reserves. - Proposed technical adjustments: - Modify definitions of two QPCs (net international reserve floor and gross credit to government ceiling) per safeguards assessment recommendations. - Clarify scope of deficit ceiling QPC to capture budgetary transfers to trust accounts without adding net movements in trust account balances. ### Fiscal outlook and consolidation (2023–2024 and medium term) - 2023: - Authorities’ deficit target for 2023 is 4.4 percent of GDP, sustaining a fiscal adjustment of 0.9 percentage point of GDP relative to 2022. - Supplementary budget sets deficit target at 4.4 percent of GDP; deficit target revised from K4.985 bn to K4.935 bn; nominal GDP revised from K114.8 bn to K112.2 bn. - Revenue expected K0.8 billion higher than initial budget; non-resource tax revenue end-December 2023 IT revised from K12.5 billion to K12.7 billion. - Additional allocations: higher global interest rates (+K0.3 billion) and additional goods and services expenditure (+K0.5 billion); lower dividend payments from resource sector (-K0.7 billion). - Contingency: if further revenue overperformance occurs, authorities commit to either accelerate arrears clearance, reduce the deficit, or increase priority spending. - 2024: - Deficit reduction of 0.5 pp of GDP expected in the 2024 budget (MEFP ¶1 2). - Total revenue projected to fall by 0.1 pp of GDP: - Sharp expected decrease of resource tax revenue: -1.0 pp of GDP. - Offsets: adoption of new tax policy measures +0.4 pp of GDP; new dividend policy +0.6 pp of GDP. - Expenditure will decrease by 0.6 pp of GDP; capital spending will contribute about half of the expenditure effort: - 0.3 pp of GDP. - Authorities aim for a balanced budget by 2027; if fully executed, public debt would lower to 46.5 percent of GDP in 2028 from an estimated 52.4 percent in 2023. - Arrears and cash management: - Remaining stock of unverified claims (arrears): K1.96 billion. - Planned 2024 allocation for arrears clearance: K500 million (planned); prior allocations: 2023 Budget K300 million; 2023 Supplementary Budget K400 million. - Plan to centralize government funds into the central bank to pave the way for a Treasury Single Account (TSA); IMF TA requested to assist reform strategy by end-February 2024. ### Monetary policy, exchange rate reform, and FX operations - BPNG actions and monetary stance: - Kina Facility Rate (KFR) lowered from 3.5 percent to 3.0 percent in September 2023 (later reported adjustments in staff update show KFR lowered from 3.0 to 2.5 percent and 7-day CBB rate aligned at 2.5 percent in updated note). - BPNG introduced fixed rate full allotment auction for short-term central bank bills (End-August 2023) and FRFA tender mopped up about K2 billion of excess liquidity. - Fixed rate chosen for 7-day central bank bills (CBBs): 2 percent; alignment of fixed rate with the KFR proposed as SB for end-December 2023. - Exchange rate and external position: - Kina has been gradually depreciating since May 2023 (about 5 percent against the US dollar as of end-October 2023); gradual depreciation noted elsewhere as -0.8 percent per month against the US$ since May 2023. - EBA-lite REER model: REER overvalued by 13.4 percent in 2022; alternative high-frequency models median overvaluation 7 percent as of end-2022. - Roadmap and proposed regime: - Authorities committed to gradual transition to exchange rate flexibility with a preferred crawl-like exchange rate arrangement (Annex II). - Key parameters to be set as SB for end-November 2023 and implemented early December 2023. - Proposed replacement (from January 2024) of indicative floor on BPNG’s provision of FX with an indicative ceiling on the stock of unmet import-related orders in the orderbook. - BPNG record FX intervention in May 2023: US$273 million. ### Governance, anti-corruption, and transparency - ICAC: - ICAC Commissioner and Deputy Commissioners sworn in; drafting key implementing regulations (ongoing SB by end-December 2023). - Ensuring sufficient 2024 budget allocations for ICAC is needed. - SOE governance: - ADB support to Kumul Consolidated Holdings (KCH) to improve SOE governance; reform priorities include revising procurement and dividend policies. - Fiscal and financial transparency: - BPNG improved reporting of external sector statistics (ESS) and financial soundness indicators (FSI). - Publication of COVID-related procurements, including beneficial ownership, on track to resume by end-December 2023. - BPNG FY21 audited financial statements published with delay; FY22 statement not yet finalized. - Structural benchmarks (selection and dates): - Adopt MTRS (End-August 2023) — implemented with delay (October 2023). - Modify open market operations and produce monetary/FX roadmap (End-August 2023) — met. - Publish FX market regulations and eliminate tax clearance requirement for certain FX orders (End-December 2023) — newly proposed/in progress. - Appoint BPNG Governor and Deputy Governors and fill Board vacancies (End-November 2023) — proposed SB. ### Debt sustainability, DSA findings, and financing - DSA headline findings: - PNG’s public and publicly guaranteed debt remains at high risk of debt distress under LIC DSF; overall risk of debt distress = High. - Elevated debt and a bullet payment due in 2028 on PNG’s Eurobond (US$500 million) drive breaches in the debt service-to-revenue ratio threshold. - External debt vulnerable to export-related shocks; domestic debt concentrated in short-term T-bills raising rollover risks. - Key debt-related figures and projections: - Government gross debt (Latest projections, millions of Kina): 2023 64,168; 2024 68,700; 2025 71,352; 2026 71,059; 2027 71,399. - Government net lending (+)/borrowing (-) (Latest projections, Kina): 2023 -4,935; 2024 -4,810; 2025 -3,303; 2026 -1,975; 2027 132; 2028 461. - Public sector debt (percent of GDP): 2022 Est. 48.4; 2023 Proj. 52.4; 2024 Proj. 52.2; 2025 Proj. 52.7; 2026 Proj. 52.1; 2027 Proj. 49.2; 2028 Proj. 46.5. - Target international gross reserves: US$3.1 billion by end-2025. - End-June net international reserves (NIR): US$2.8 billion, about US$350 million above program floor at approval. - Program financing and burden sharing: - Program fully financed with firm commitments for upcoming 12 months. - Fund burden sharing expected to average 36.1 percent across the program. - ECF/EFF disbursement assumption: 260 percent of quota; total program sum SDR 684.3 million (ECF 228.1, EFF 456.2; Percent of Quota 260.0, ECF 86.7, EFF 173.3). - ECF-EFF disbursements timing (selected): 22 March 2023 Total 65.8; 18 September 2023 Total 65.8; 18 March 2024 Total 94.7. - Papua New Guinea's quota is 263.2 million SDR. - Capacity to repay the Fund: - Principal obligations to the Fund would peak in 2032 at around 121.7 million SDRs (46.2 percent of IMF quota). - This peak represents 2.0 percent of government revenue and 0.9 percent of exports of goods and services. - Outstanding IMF credit peaks at 34.8 percent of gross international reserves in 2028. ### Alternative scenario — Papua LNG (Annex III) - Project assumptions: - FID expected in early 2024; construction phase assumed to last five years; production commence in 2029; project life 25 years. - Project cost for construction: US$10 billion. - Joint venture ownership: Total Energies 37.55 percent; Exxon Mobil 37.04 percent; Santos 22.83 percent; JX Nippon 2.58 percent. - State back-in right up to 22.5 percent of participating equity at FID. - Gas resources estimated at over 1 billion barrels of oil equivalent; LNG capacity up to 6 million tons per year (mt/y). - Macroeconomic impacts (construction phase): - Assumed leakage 70 percent; estimated cumulative 25.5 percent increase in real GDP level over five years vs 22.3 percent under baseline, equivalent to average 0.6 percentage point additional annual growth over 2024-29. - Construction-related imports and income payments worsen current account by around US$1.4 billion per year vs non-investment baseline. - Average FDI inflows related to project: US$2 billion per year for five years, yielding additional accumulation of US$600 million in FX reserves per year; cumulative additional FX reserves US$3 billion during construction. - Expected scaled-down kina appreciation pressures of about 10 percent during construction. - Fiscal and sovereign guarantees: - Sovereign guarantees may raise public debt by some US$2.0-2.5 billion from 2024 to 2029 during construction; guarantees expected to roll back at end of construction. - Operation phase (from 2029): - LNG exports volume increase by 75 percent relative to 2015-2022 average; trade balance improvement USD 1.5-2 billion once production reaches potential. - Direct fiscal revenue assumed to start small from 2029 and gradually increase; dividends expected once government loan to finance equity participation is repaid. - Caveat: project only included in baseline after FID is signed. ### Capacity development (CD) and statistics - IMF CD supported Roadmap (MCM), MTRS and ITA revision (FAD), and FSI compilation (STA). - Complementary CD: revenue administration (PFTAC), macro-fiscal forecasting (ICD/PFTAC), BOP data (CDOT/STA). - Financial Sector Stability Review scheduled for January 2024. - Public financial management TA on expenditure controls and cash management requested for early 2024. - Data gaps remain in National Accounts compilation and CPI statistics. - BPM6 adoption: BOP data published in BPM6 format for 2015–2022; revisions lowered prior current account estimates (annual average USD 2.4 billion lower between 2015–2021). ### Risks, risk assessment, and policy advice (Annex I) - Domestic risks (selected): - Natural disasters and extreme climate events: Relative Likelihood: Medium; Expected Impact: Medium. Policy advice: invest in disaster risk reduction; build fiscal and external buffers. - Widespread social discontent and political instability: Relative Likelihood: Medium; Expected Impact: Medium. Policy advice: transparent communication and protect vulnerable households while building fiscal buffers. - Major natural resource projects initiated (upside): Relative Likelihood: High; Expected Impact: High. Policy advice: fast-track implementation and build buffers. - Global risks (selected): - Commodity price volatility: Relative Likelihood: High; Expected Impact: High. Policy advice: create fiscal buffers; prioritize fiscal consolidation. - Abrupt global slowdown or recession, including in China: Relative Likelihood: Medium; Expected Impact: High. Policy advice: build buffers and support vulnerable non-resource sectors. - Exchange rate framework recommendation: - Shift to a de facto crawl-like arrangement as a nominal anchor; AREAER criteria summary and IMF guidance on parameters provided. - IMF passthrough estimate: after a year, a 10 percent depreciation of the nominal effective exchange rate could lead to a 4 to 5 percentage-point increase in inflation. ### Staff views, mission, and program monitoring - Staff supports completion of the first review under the EFF and ECF arrangements, citing strong program performance and authorities’ commitment. - Mission visit: Port Moresby September 7-21, 2023; meetings with Treasurer Ian Stuckey-Ling, BPNG Acting Governor Elizabeth Genia, and senior officials. - Program monitored through semi-annual reviews based on QPCs, ITs, and SBs; proposed target modifications and nine new SBs added to four ongoing. - Program Monitoring Committee holds regular meetings with Fund staff at least every two weeks; Resident Representative office re-established November 2022. *Source: EXECUTIVE SUMMARY and related excerpts, 1pngea2023002 (IMF).* ### EXECUTIVE SUMMARY ### 1pngea2023002 - EXECUTIVE SUMMARY ### Background and Program Purpose - On March 22, 2023, the IMF Executive Board approved 38-month Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements with Papua New Guinea to address a protracted balance of payments need manifested in foreign exchange shortages and to support the authorities’ reforms to address long-standing structural impediments to inclusive growth. - The program is focused on macro-critical conditionality, supported by capacity development (CD), and informed by a Country Engagement Strategy, in line with the IMF’s Strategy for Fragile and Conflict-Affected States (FCS). ### Program Performance (First Half of 2023) - Overall assessment: Strong program performance with continued authorities’ commitment to reforms. - Quantitative performance: - All end-June 2023 quantitative performance criteria (QPCs) were met. - Fiscal consolidation is on track. - Net international reserves (NIR) remained above the program floor despite a large FX intervention in May 2023. - New external debt remains well below the ceiling and PNG has not accumulated new external arrears. - No new multiple currency practice (MCP) nor modification of existing MCPs, and no intensification of exchange restrictions since program approval. - Structural reform agenda: - All structural benchmarks (SBs) were met in timely fashion, except the adoption of the new Medium-term Revenue Strategy (MTRS), which was implemented with a slight delay. - The MTRS and the monetary and FX reform roadmap (the ‘Roadmap’) benefitted from IMF CD and will guide future reforms under the program. - Text Table 1 highlights (selected QPCs and ITs, First Half of 2023, in millions kina unless mentioned otherwise): - Fiscal deficit of the government (ceiling, cumulative): 2022 Approved 5,985; December Est. 1,646; Outcome 449 — met. 2023 Approved 3,092; Outcome 2,858 — met. - Stock of net international reserves of the BPNG (floor, US$ millions): 2022 Approved 3,226; December Est. 2,845; Outcome 2,996 — met. 2023 Approved 2,463; Outcome 2,831 — met. - BPNG's gross credit to government (ceiling): 2022 Approved 2,051; December Est. 2,400; Outcome 1,913 — met. 2023 Approved 2,400; Outcome 2,032 — met. - Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): 2022 Approved 1,405; Outcome 0 — met. 2023 Approved 1,405; Outcome 60 — met. - Non-resource tax revenue of the government (floor, cumulative): 2022 Approved 10,831; March Est. 2,512; Outcome 2,787 — met. 2023 Approved 5,023; Outcome 5,900 — met. - Social and other priority spending (floor, cumulative): 2022 Approved 3,678; March Est. 500; Outcome 998 — met. 2023 Approved 1,500; Outcome 2,069 — met. - BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative, US$ millions): 2022 Approved 878; March Est. 300; Outcome 300 — met. 2023 Approved 600; Outcome 773 — met. ### Modifications to Quantitative Performance Criteria (QPCs) - In light of stronger-than-expected performance and to build external and fiscal buffers: - Proposed changes for end-December 2023: - Reduce targets for the budget deficit and the present value of external debt ceilings. - Increase the floor on net international reserves. - Proposed technical adjustments: - Modify definitions of two QPCs (net international reserve floor and gross credit to government ceiling) in line with safeguards assessment recommendations. - Clarify the scope of the deficit ceiling QPC to capture budgetary transfers to trust accounts without adding net movements in trust account balances. ### Policy Discussions (Key Focus Areas) - Main discussion topics: - Preparation of the supplementary budget for 2023 and the budget for 2024, including composition of the consolidation effort and specific measures consistent with the authorities’ medium-term fiscal strategy. - Implementation of the Roadmap, including the start of the gradual return to kina convertibility and modernization of monetary and FX policy operations. - First concrete steps for operationalization of the governance and anti-corruption framework. A. Sustaining the Fiscal Consolidation Momentum - 2023 deficit target and fiscal adjustment: - The authorities’ deficit target for 2023 is 4.4 percent of GDP, sustaining a fiscal adjustment of 0.9 percentage point of GDP relative to 2022. - The supplementary budget sets the deficit target at 4.4 percent of GDP, smaller by K50 million relative to program approval. - The deficit target was revised from K4.985 bn in the initial budget to K4.935 bn in the supplementary budget; due to a downward revision of the 2023 nominal GDP from K114.8 bn to K112.2 bn, the deficit-to-GDP ratio is 4.4 percent of GDP against 4.3 at program approval. - Revenue and spending adjustments: - Revenue is expected to be K0.8 billion higher than in the initial budget, reflecting overperformance in tax revenue collection in the first half of the year (K1.4 billion), largely driven by higher corporate income tax revenues in both the non-resource and resource sectors. - This was partly offset by lower dividend payments from the resource sector (-K0.7 billion). - Proposed revision: end-December 2023 indicative target (IT) on non-resource tax revenue from K12.5 billion to K12.7 billion. - Additional revenue will cover: higher global interest rates (+K0.3 billion) and additional goods and services expenditure (+K0.5 billion) to address rental and utility costs and accelerate domestic arrears clearance. - If further revenue overperformance occurs by year-end, the authorities commit to either: further accelerate arrears’ clearance, reduce the deficit, or increase priority spending. B. Making the Exchange Rate More Flexible and Enhancing Monetary Policy Effectiveness - BPNG actions and monetary stance: - The Bank of PNG announced monetary policy operations reforms in its March and September 2023 Monetary Policy Statements, allowed a gradual depreciation of the exchange rate, and intervened actively to alleviate FX shortages. - The Kina Facility Rate (KFR) was lowered from 3.5 percent to 3.0 percent in September 2023. - Despite the KFR cut, BPNG’s efforts in absorbing excess liquidity constitute a de facto tightening. - Exchange rate and external position: - The exchange rate has been gradually depreciating since May 2023 (about 5 percent against the US dollar as of end-October 2023). - In line with the EBA-lite REER model presented at program approval, PNG’s external position in 2022 was substantially weaker than implied by medium-term fundamentals and desirable policies, with the REER overvalued by 13.4 percent. - Alternative models using higher frequency data indicate a milder REER overvaluation of 7 percent as of end-2022, which has continued to moderate in the first half of 2023 due to lower inflation in PNG. - Despite improvements, FX shortages persist, hampering imports and economic activity. C. Turning Good Governance Commitments into Action - Governance and anti-corruption: - The Independent Commission Against Corruption (ICAC) Commissioner and Deputy Commissioners have been formally sworn in. - Policy discussions included the first concrete steps for operationalizing the governance and anti-corruption framework. ### Recent Developments, Outlook, and Risks - Recent macro developments: - Growth in 2022: 4.3 percent, driven by the non-resource sector as the economy fully reopened; resource sector impacted by Porgera gold mine delays and planned LNG maintenance shutdown. - Headline inflation: declined to 1.4 percent in 2023Q2 (year-on-year), influenced by a one-off reduction in tuition costs and lower imported inflation. - Core inflation: 4.5 percent as of 2023Q2. - Fiscal balance: 2022 fiscal deficit at 5.3 percent of GDP, slightly lower than expected; fiscal balance improved by 1.5 percentage point relative to 2021. - Banking sector: banks reported well-capitalized, profitable, and with ample liquidity as of mid-2023; capital adequacy ratios remain well above prudential standards; private sector credit picked up in first half of 2023 and nonperforming loans decreased since 2021. - Monetary policy: - KFR lowered from 3.5 percent to 3.0 percent in September 2023. - Outlook and projections: - 2023 growth: expected to soften to 3.0 percent due to normalization of LNG production. - 2024 growth: expected rebound to 5.0 percent, driven by expected reopening of Porgera gold mine and sustained agriculture and services growth. - Inflation projections: reach 3.5 percent by end-2023 (year-on-year) and 5.0 percent by end-2024; medium-term inflation converge to 4.5 percent. - Medium-term growth: projected to stabilize at around 3.1 percent, supported by the non-resource sector. - Risks: - Downside risks: weaker external demand for exports, drop in commodity prices, natural disasters (including El Niño), political developments after the grace period that could hamper reform implementation, ongoing dispute between BPNG and main fuel importer over FX access possibly causing fuel supply issues. - Upside risks: higher commodity prices and start of major resource projects not in the baseline. - Alternative scenario: construction phase of Papua LNG could yield an average 0.6 percentage point of additional annual growth over 2024-29 (Annex III). - Debt sustainability: - PNG’s public and publicly guaranteed debt remains at high risk of debt distress (Debt Sustainability Analysis). - Elevated debt, liquidity risk from a bullet payment due in 2028 on PNG’s Eurobond, and higher official bilateral and multilateral debt service payments between 2026 and 2029 lead to breaches of the debt service-to-revenue ratio threshold. - External debt susceptible to export-related shocks; domestic debt profile concentrated in short-term Treasury bills raises rollover risks and calls for proactive debt management. ### Staff Views and Mission - Staff supports request for completion of the first review under the EFF and ECF arrangements, citing strong program performance and authorities’ sustained commitment to reforms. - The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies. - Mission visit: a staff team visited Port Moresby during September 7-21, 2023. The mission met with Treasurer Ian Stuckey-Ling, BPNG Acting Governor Elizabeth Genia, Chair of the BPNG Board David Toua, Treasury Secretary Andrew Oaeke, Internal Revenue Commissioner General Sam Koim, senior government officials, development partners, and private sector representatives. Ms. Karl (OED) participated in meetings with the government. The mission was assisted by Sohrab Rafiq, Resident Representative, and Sylvester Kilian, local economist. Nadine Dubost, Loa Anisi and Saraf Nawar provided administrative and research support. *Source: EXECUTIVE SUMMARY, 1pngea2023002 - EXECUTIVE SUMMARY (IMF).* ### 16. Fiscal consolidation is expected to continue in 2024, in line with the authorities’ ### 16. Fiscal consolidation is expected to continue in 2024, in line with the authorities’ ### Fiscal outlook and 2024 consolidation - Deficit reduction of 0.5 pp of GDP is expected in the 2024 budget (MEFP ¶1 2). - Total revenue projected to fall by 0.1 pp of GDP. - Sharp expected decrease of resource tax revenue due to lower commodity prices: -1.0 pp of GDP. - Offsets to the resource revenue decline: - Adoption of new tax policy measures: +0.4 pp of GDP (including revisions to personal income tax rules on fringe and dependent benefits, rollout of GST to extractive and finance sectors, reform of taxes on tobacco and alcohol). - New dividend policy regarding state entities in the extractive sector: +0.6 pp of GDP. - Expenditure will decrease by 0.6 pp of GDP relative to 2023, consistent with rationalizing current spending while preserving priorities (MEFP ¶17). - Capital spending will contribute about half of the expenditure effort: - 0.3 pp of GDP. - Contingency: the authorities identified expenditure items that could be deferred or cancelled in case of revenue shortfalls (MEFP ¶13). ### Medium-term fiscal framework and debt sustainability - Authorities’ medium-term fiscal framework aims for a balanced budget by 2027 and surpluses thereafter, underpinned by sustained domestic revenue mobilization and continued expenditure rationalization (MEFP ¶15 and ¶16). - If fully executed, envisaged strategy would lower public debt to 46.5 percent of GDP in 2028 from an estimated 52.4 percent in 2023. ### Revenue mobilization and administration - Strengthening revenue collection is key (MEFP ¶14). - Implementation of the MTRS and a rewrite of the Income Tax Act (ITA) are ongoing (SB for end-December 2023), with FAD TA support. - Scope of the MTRS covers all main revenue collecting agencies and taxes from resource and non-resource economy. - Modernization of the IRC’s tax administration system and implementation of the 2017 Tax Administration Act (TAA) remain priorities; TAA not yet operational. - IRC adopted a new functional structure in late July 2023. - Proposed new SB: adoption by IRC of initial key performance indicators with Fund support by end-May 2024. - Proposed new SB: creation of an oversight board for IRC requiring amendment of the 2014 IRC Act by end-October 2024. ### Expenditure efficiency and public financial management - Payroll management (MEFP ¶17): - HR Business Process workshops on staffing and remuneration completed (SB for end-June 2023). - Staffing and establishment review for teachers completed in 2023; payroll diagnostic review completed. - Planned reforms: unify HR policies across departments; upgrade AscenderPay; payroll records cleansing proposed as new SB by end-August 2024. - Expenditure management and controls (MEFP ¶18 and ¶19): - Remaining stock of unverified claims (arrears): K1.96 billion. - Authorities plan to increase 2024 budget allocation for arrears clearance and use future revenue over-performance to address arrears. - FAD TA requested to strengthen expenditure controls across the expenditure chain. - Authorities plan to gradually reduce cash balances and commit to close all remaining COVID-related trust accounts by end 2023. - Cash management (MEFP ¶20): - With FAD TA support, authorities intend to centralize government funds from commercial banks into the central bank to pave the way for a Treasury Single Account (TSA). ### External borrowing and financing policy - Continued prudent external borrowing policy prioritized (MEFP ¶21). - Prioritization of concessional loans and grants, alongside semi-concessional financing for critical projects. - A proposed limit on the PV of new external borrowing for 2024 (QPC); PV limit for 2023 proposed to be revised down accordingly. ### Exchange rate flexibility and monetary policy reforms - Authorities committed to gradual transition to exchange rate flexibility and clearer monetary policy framework (MEFP ¶23). - Preferred framework: crawl-like exchange rate arrangement to act as nominal anchor (Annex II). - Setting key parameters proposed as new SB for end-November 2023, for implementation in early December 2023. - Kina overvaluation estimated at 7 percent (see Annex V); kina has been gradually depreciating since May 2023. - Roadmap (MCM TA support) includes measures to enhance monetary policy formulation, remove FX rationing gradually, improve liquidity management, and enhance communication (MEFP ¶22). - Governance: urgent need to appoint BPNG permanent Governor and Deputy Governors and fill Board vacancies (proposed new SB by end-November 2023) to address governance gaps (MEFP ¶26). - FX market measures (MEFP ¶24): - BPNG record FX intervention in May 2023: US$273 million. - Proposed as of January 2024: replace indicative floor on BPNG’s provision of FX with an indicative ceiling on the stock of unmet import-related orders in the orderbook. - Proposed short-term SBs for end-December 2023: - Publication on BPNG’s website of all regulations and directives regarding the FX market. - Elimination by BPNG of requiring a tax clearance certificate prior to including FX orders related to intercompany loans obtained for import payments in the orderbook. - Staff recommends gradual elimination of existing exchange restrictions and MCPs consistent with the Roadmap and Fund advice. - Liquidity management (MEFP ¶25): - FRFA tender helped mop up about K2 billion of excess liquidity. - Fixed rate chosen for 7-day central bank bills (CBBs): 2 percent; KFR is 3 percent. - Alignment of fixed rate for 7-day CBBs with the KFR proposed as new SB for end-December 2023. - Plans to implement interest rate corridor bounded by overnight standing facilities by end-2023, and to modify reserve maintenance period and introduce reserve averaging in early 2024. - Central Bank Act (CBA) amendments (MEFP ¶27): - Draft amendments to remove requirement for BPNG to provide advances to government on demand; rank mandates with price stability as primary objective; clarify BPNG Board role in monetary policy. - Amendments expected to be shared with IMF for consultation in the fall and presented to Parliament (ongoing SB for end-December 2023). - QPC on BPNG’s gross credit to government maintained to prevent monetary financing. ### Governance, anti-corruption, and transparency - Anti-corruption (MEFP ¶30): - Commissioner and two Deputy Commissioners of ICAC appointed and sworn in; drafting key implementing regulations (ongoing SB by end-December 2023). - Ensuring sufficient 2024 budget allocations for ICAC is needed. - AML/CFT (MEFP ¶29): - BPNG’s FASU increased staff capacity, provided trainings; onsite APG mutual evaluation visit occurred in October 2023; final report expected to be adopted in July 2024. - AML/CFT Strategic Plan 2023-27 adopted in September 2023. - SOE governance (MEFP ¶33): - ADB support to Kumul Consolidated Holdings (KCH) to improve SOE financial and corporate governance. - Reform priorities: revise SOE procurement and dividend policies to harmonize practices. - Fiscal and financial transparency (MEFP ¶27, 29, 31, 32): - BPNG improved computation and reporting of external sector statistics (ESS) and financial soundness indicators (FSI) on its website. - More comprehensive GFS tables published alongside budget documents. - Proposed new SB: inter-agency working group to improve consistency of ESS with other sectoral statistics by end-June 2024. - Publication of COVID-related procurements, including beneficial ownership, on track to resume by end-December 2023. - BPNG FY21 audited financial statements published with delay; FY22 statement not yet finalized. ### Program modalities, financing, and risks - Program monitoring and conditionality: - Program monitored through semi-annual reviews based on QPCs and ITs, and SBs. - Target modifications proposed for deficit ceiling (QPC), NIR floor (QPC), ceiling on PV of external debt (continuous QPC), and non-resource tax revenue floor (IT). - Nine new SBs proposed, adding to four ongoing. - Financing and burden sharing: - Program is fully financed with firm commitments for the upcoming 12 months. - Fund burden sharing expected to average 36.1 percent across the program. - Capacity to repay the Fund (Table 8): - ECF/EFF disbursement assumption: 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 peak represents 2.0 percent of government revenue and 0.9 percent of exports of goods and services. - Outstanding IMF credit peaks at 34.8 percent of gross international reserves in 2028. - Downside risks: weaker external demand for PNG’s exports, volatility in commodity prices, natural disasters (Annex I). - Mitigants: commitment to fiscal sustainability and conservative assumptions on new resource projects (not in baseline). - Safeguards assessment: - Update mission completed; recommendations include eliminating governance gaps at BPNG and addressing legal framework vulnerabilities (covered under structural benchmarks). - Other priorities: strengthen financial reporting timeliness, align internal audit with international standards, finalize framework for treatment of 2021 SDR allocations used for budget support. - Program risks and mitigation: - Risks arise from limited implementation capacity in a volatile economic and political environment. - Conditionality streamlined and focused on macro-critical reforms, informed by PNG’s CES (Annex IV). - Bimonthly program monitoring meetings with Treasury and BPNG in place; Resident Representative office established in November 2022 to facilitate interactions. *Source: IMF staff and Papua New Guinea MEFP excerpts (as provided in the content unit).* ### 34. Capacity development (CD). Ongoing and planned IMF CD activities are closely integrated ### 34. Capacity development (CD). Ongoing and planned IMF CD activities are closely integrated ### Capacity development activities and coordination - IMF CD supported preparation of the Roadmap (MCM), preparation of a new MTRS and the revision of the ITA (FAD), and FSI compilation (STA). - Complementary IMF CD support included: - revenue administration (PFTAC), - macro-fiscal forecasting (ICD/PFTAC), - BOP data (CDOT/STA). - A Financial Sector Stability Review is scheduled for January 2024. - Public financial management TA (FAD) on expenditure controls and cash management was requested for early 2024. - Fund TA is complemented by (and coordinated with) other partners, including: - anti-corruption framework (UN and EU), - governance of SOEs (ADB), - national accounts and AML/CFT (Australia). - A Program Monitoring Committee has been set up to support information-sharing with staff. ### Data gaps and statistical priorities - Data reporting has been strengthened to support program monitoring. - Shortcomings remain in National Accounts compilation, particularly the production of CPI statistics, which need to be addressed. ### Staff appraisal — economic outlook and risks - Non-resource growth is expected to continue its post-pandemic rebound. - Resource growth should pick up in 2024 with the reopening of Porgera gold mine. - Inflation developments: - Inflation has been declining due to fiscal measures and lower imported inflation. - Inflation is expected to rise and reach 3.5 percent at end-2023 and 5.0 percent at end-2024. - Downside risks are significant, with exports, fiscal revenues and FX reserves vulnerable to commodity price shocks. - Upside scenario: the start of new large resource projects, such as Papua LNG, represents a major upside scenario for economic growth in the near to medium run. ### Staff appraisal — policy implementation and program performance - The authorities have demonstrated continued commitment to reforms. - Program performance: - Authorities met all QPCs and SBs, although one SB was implemented with a slight delay. - Adoption of important strategic documents: the MTRS and the monetary and FX reform roadmap. ### Fiscal policy recommendations - Fiscal consolidation efforts should continue to durably reduce the deficit and address debt sustainability risks. - Recent progress: - The 2023 deficit-to -GDP ratio is on track to get back to its pre-pandemic level at 4.4 percent of GDP, that is about half of the 2020 ratio. - Given high uncertainty on resource revenue, consolidation in 2024 and beyond should rely on: - domestic revenue mobilization, especially non-resource tax revenue, in line with the new MTRS, - expenditure rationalization and efficiency gains. - Authorities’ cautious approach—relying on conservative assumptions and clear contingency plans—is emphasized as key to successful consolidation. ### Monetary policy and exchange rate guidance - As inflation is expected to bounce back, the BPNG should stand ready to tighten its monetary policy stance. - The concurrent easing of the policy rate and reduction of excess liquidity has made communication of the monetary policy stance challenging. - Further tightening may be needed to avoid inflation increasing beyond its historical average. - The kina has been depreciating against the US dollar, allowing reduction of part of the overvaluation. - Historically low headline inflation, strong US dollar and comfortable FX reserves place authorities in a comfortable position to bring the exchange rate to the equilibrium. ### BPNG governance and operational recommendations - BPNG’s commitment to monetary and FX reforms has been encouraging since the start of the program. - Critical governance actions requested: - government should fill out pending vacancies in BPNG senior management and board, - appoint a BPNG Governor and Deputy Governors. - Operational changes noted: - BPNG shifted to a fixed rate full allotment auction for monetary policy operations, sharply reducing excess liquidity. - Increasing the fixed rate to the KFR is appropriate; aligning the two rates is critical to enhance monetary policy effectiveness and avoid inconsistency in signaling the monetary stance. ### Anti-corruption, governance and AML/CFT - ICAC is actively gearing up to become fully operational in 2024; this hinges on sufficient budget resources being allocated to it. - Staff supports authorities’ efforts towards greater transparency, including regarding COVID-19 related procurements, which should benefit from planned improvements in IT systems. - Authorities should continue to improve AML/CFT effectiveness through timely implementation of the AML/CFT Strategic Plan 2023-27. *Source: 1pngea2023002 - 34. Capacity development (CD). Ongoing and planned IMF CD activities are closely integrated* ### 42. Given the strong program performance to date and the authorities’ sustained ### 1pngea2023002 - 42. Given the strong program performance to date and the authorities’ sustained ### Program assessment - Staff supports completion of the first review under the EFF and ECF arrangements. - The Letter of Intent (Appendix I) and Memorandum of Economic and Financial Policies (Attachment I) demonstrate program ownership and appropriate policies to reach the goals of the authorities’ program. ### Real and external sector developments - Real GDP recovered since the pandemic, led by the non-resource sector. - Headline inflation declined, but underlying inflation remains sticky (BPNG trimmed mean used for underlying inflation). - Commodity prices have moderated since 2022 but remain higher than before the pandemic (Commodity Prices index: 2018M1 =100 baseline). - Resource exports supported by commodity price developments; imports moderated. - Trade balance and current account supported by strong global demand for PNG’s export goods. - Table 1 key projected real sector figures (selected): - Real GDP growth: 2022 Est. 3.0; 2023 Proj. 5.0; 2024 Proj. 3.1; 2025 Proj. 3.1; 2026 Proj. 3.0; 2027 Proj. 3.1; 2028 Proj. 3.1 - Resource growth: 2022 Est. 3.7; 2023 Proj. -1.4; 2024 Proj. 6.3; 2025 Proj. 0.1; 2026 Proj. 0.1; 2027 Proj. 0.1; 2028 Proj. 0.2 - Non-resource growth: 2022 Est. 4.6; 2023 Proj. 4.6; 2024 Proj. 4.6; 2025 Proj. 4.1; 2026 Proj. 4.1; 2027 Proj. 4.0; 2028 Proj. 4.0 - CPI (annual average): 2022 Est. 2.2; 2023 Proj. 4.0; 2024 Proj. 4.8; 2025 Proj. 4.8; 2026 Proj. 4.6; 2027 Proj. 4.5; 2028 Proj. 4.5 - CPI (end-period): 2022 Est. 3.5; 2023 Proj. 5.0; 2024 Proj. 4.8; 2025 Proj. 4.8; 2026 Proj. 4.6; 2027 Proj. 4.5; 2028 Proj. 4.5 ### Fiscal developments - 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. - External financing sources are still dominant. - Public debt remains elevated relative to pre-pandemic levels despite a small decrease in 2022. - Table 1 fiscal projections (percent of GDP): - Revenue and grants: 2022 Est. 16.7; 2023 Proj. 18.2; 2024 Proj. 18.0; 2025 Proj. 18.5; 2026 Proj. 18.8; 2027 Proj. 19.4; 2028 Proj. 19.6 - Resource revenue: 2022 Est. 3.9; 2023 Proj. 3.6; 2024 Proj. 3.1; 2025 Proj. 3.3; 2026 Proj. 3.1; 2027 Proj. 3.2; 2028 Proj. 3.2 - Expenditure and net lending: 2022 Est. 22.0; 2023 Proj. 22.6; 2024 Proj. 22.0; 2025 Proj. 21.0; 2026 Proj. 20.2; 2027 Proj. 19.3; 2028 Proj. 19.3 - Net lending (+)/borrowing (-): 2022 Est. -5.3; 2023 Proj. -4.4; 2024 Proj. -3.9; 2025 Proj. -2.5; 2026 Proj. -1.4; 2027 Proj. 0.1; 2028 Proj. 0.3 - Government gross debt (percent of GDP): 2022 Est. 48.4; 2023 Proj. 52.4; 2024 Proj. 52.2; 2025 Proj. 52.7; 2026 Proj. 52.1; 2027 Proj. 49.2; 2028 Proj. 46.5 ### Central government operations (selected levels, in millions of Kina) - Revenue and grants (Latest projections): 2023 20,403; 2024 22,168; 2025 24,066; 2026 25,708; 2027 28,026; 2028 30,119 - Taxes (Latest projections): 2023 16,321; 2024 17,850; 2025 19,866; 2026 21,328; 2027 23,165; 2028 24,934 - Resource revenue (Latest projections): 2023 4,024; 2024 4,008; 2025 3,800; 2026 4,296; 2027 4,290; 2028 4,552 - Expenditure and net lending (Latest projections): 2023 25,338; 2024 26,979; 2025 27,369; 2026 27,684; 2027 27,894; 2028 29,658 - Net lending (+)/borrowing (-) (Latest projections): 2023 -4,935; 2024 -4,810; 2025 -3,303; 2026 -1,975; 2027 132; 2028 461 - Gross government debt (Latest projections, millions of Kina): 2023 64,168; 2024 68,700; 2025 71,352; 2026 71,059; 2027 71,399 ### Monetary and financial sector developments - The central bank lifted the policy rate slightly in 2022 before reducing it back in 2023 in a context of lower inflation. - The kina had essentially stabilized against the US$ in recent years (period average indices shown). - Credit to the private sector broadly unchanged over the past six years; significant excess liquidity in the banking system prior to the new liquidity instrument introduced in August 2023. - NPLs higher than before the pandemic, but banks remain profitable and well-capitalized. - Selected monetary and financial indicators (Table 4 & Table 5): - Credit to the private sector (annual percent change): 2022 -0.6; 2023 10.4; 2024 12.3 - Broad money (annual percent change): 2022 13.4; 2023 14.7; 2024 0.6 - Reserve money levels (end-period, millions of Kina): 2019 5,915; 2020 6,046; 2021 6,702; 2022 8,679; 2023 6,918; 2024 7,289 (Proj.) - Gross international reserves (end-year, millions of U.S. dollars): 2019 2,309; 2020 2,686; 2021 3,240; 2022 4,032; 2023 3,382; 2024 3,122 (Proj.) - Financial soundness indicators (Table 5, selected): - Capital to risk-weighted assets: 2023 end-June 30.4; 2023 end-2023 (end-June shown) 36.4 - Nonperforming loans to total loans: 2023 end-June 5.4 - Return on assets: 2023 end-June 1.8 - Capital Adequacy: Tier 1 capital to risk-weighted assets 2023 end-June 31.1 ### Balance of payments and external sector (selected, Table 3) - Current account balance (millions of U.S. dollars): 2019 3,655; 2020 3,353; 2021 3,466; 2022 7,175; 2023 Proj. 5,614; 2024 Proj. 5,275; 2025 Proj. 5,497; 2026 Proj. 4,919; 2027 Proj. 4,067; 2028 Proj. 3,611 - Exports (f.o.b., millions of U.S. dollars): 2022 14,369; 2023 Proj. 13,172; 2024 Proj. 13,806; 2025 Proj. 14,315; 2026 Proj. 14,729; 2027 Proj. 15,128; 2028 Proj. 15,605 - Resource exports (f.o.b., millions of U.S. dollars): 2022 12,264; 2023 Proj. 11,376; 2024 Proj. 11,861; 2025 Proj. 12,260; 2026 Proj. 12,578; 2027 Proj. 12,869; 2028 Proj. 13,213 - Imports (f.o.b., millions of U.S. dollars): 2022 -4,216; 2023 Proj. -4,119; 2024 Proj. -4,153; 2025 Proj. -4,344; 2026 Proj. -4,510; 2027 Proj. -4,690; 2028 Proj. -4,914 - Net international reserves (end-year, millions of U.S. dollars): 2019 2,135; 2020 2,126; 2021 2,343; 2022 3,179; 2023 2,295; 2024 Proj. 1,692 ### ECF-EFF disbursement schedule (Table 6) - Total program availability (SDR million) and timing (selected): - 22 March 2023: Total 65.8 (ECF 12.1, EFF 43.8; Percent of Quota 25.0, ECF 8.3, EFF 16.7) - 18 September 2023: Total 65.8 (same split) - 18 March 2024: Total 94.7 (ECF 53.1, EFF 58.1; Percent of Quota 36.0, ECF 12.0, EFF 24.0) - Subsequent dated disbursements continue through 18 March 2026 with a Total program sum of 684.3 (ECF 228.1, EFF 456.2; Percent of Quota 260.0, ECF 86.7, EFF 173.3) - Note: Papua New Guinea's quota is 263.2 million SDR. ### External financing and projected borrowing (Tables 7, 9a, 9b) - Table 7 total financing requirements and sources (selected): - Current account deficit (millions of U.S. dollars): 2022 -7,175; 2023 Proj. -5,614; 2024 Proj. -5,275; 2025 Proj. -5,497; 2026 Proj. -4,919; 2027 Proj. -4,067; 2028 Proj. -3,611 - Public sector loan amortization (millions of U.S. dollars): 2023 Proj. 308; 2024 Proj. 443; 2025 Proj. 562; 2026 Proj. 599; 2027 Proj. 1,156; 2028 Proj. 0 - Financing gap (millions of U.S. dollars): 2023 201; 2024 456; 2025 100; 2026 280; 2027 166; 2028 285 - IMF financing years (percent of quota): Annual IMF financing: 2023 100%; 2024 0%; 2025 0%; 2026 50%; 2027 72%; 2028 92%; Cumulative IMF financing (percent of quota): 2023 100%; 2024 100%; 2025 100%; 2026 150%; 2027 222%; 2028 304% - Projected external borrowing program (2023, Table 9a): - By sources of debt financing (USD million, percent): Total 1,130.9 (100.0) - Concessional debt: 116.6 (10.3) - Non-concessional debt: 1,014.4 (89.7) - Uses: Infrastructure 525.1; Social Spending 105.9; Budget Financing 500.0 - Projected external borrowing program (2024, Table 9b): - By sources of debt financing (USD million, percent): Total 1,263.0 (100.0) - Concessional debt: 100.0 (7.9) - Non-concessional debt: 1,163.0 (92.1) - Uses: Infrastructure 852.7; Budget Financing 410.3 ### Program performance criteria, indicative targets, and structural benchmarks - Quantitative performance criteria and indicative targets (Table 10, selected): - Stock of net international reserves of the BPNG (floor, US$ millions): end-December 2022 Est. 3,226; end-March 2023 Approved 2,845; end-June 2023 Approved 2,996; end-September 2023 Approved 2,463; proposed end-December 2023 2,831; end-March 2024 proposed 2,082; end-June 2024 proposed 1,700; with a TMU monitoring figure of 2,650 for a specified test date. - BPNG's gross credit to government (ceiling, million Kina): multiple ceilings set at 2,400 across test dates. - Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): various approved figures include 1,405 and proposed revisions reflecting plus/minus values. - Non-resource tax revenue (floor, cumulative Kina): e.g., end-December 2023 Approved 12,558; 2024 proposed milestones up to 14,677. - Social and other priority spending (floor, cumulative Kina): e.g., end-December 2023 Approved 3,866; end-December 2024 proposed 4,059. - Stock of unmet import-related FX orders (ceiling, US$ millions): 150 (ceiling), with interim test dates 125 and 100 and 75 - Structural benchmarks (Table 11, March 2023—October 2024): - Budget repair: - Complete HR Business Process workshops (End-June 2023): Met. - Adopt a new Medium-term Revenue Strategy (MTRS) (End-August 2023): Not met (implemented with delay in October 2023). - Introduce amendments to the Income Tax Act to Parliament (End-December 2023): In progress. - Additional newly proposed measures (e.g., IRC KPIs, payroll data cleansing, IRC Act amendments) with implementation dates between End-May 2024 and End-October 2024. - Governance and operations of the BPNG: - Modify open market operations framework by introducing fixed rate tender with full allotment (End-August 2023): Met. - Produce sequenced roadmap for reforming monetary policy and exchange rate operations (End-August 2023): Met. - Several newly proposed BPNG governance and FX market reforms with End-November 2023 to End-December 2023 implementation dates (status: Newly proposed or In progress). - Governance and Anti-corruption Framework: - Appoint ICAC Commissioner and two Deputy Commissioners (End-June 2023): Met. - Adopt key implementing regulations to the ICAC law (End-December 2023): In progress. - Post details of COVID-19 related procurements on government procurement website for 2020–2021 (End-December 2023): In progress. - Initiate an inter-agency working group on external sector statistics (End-June 2024): Newly proposed. *Source: IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Risk assessment framework and definitions - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Relative likelihood definitions (staff’s subjective assessment): - “low” = probability below 10 percent - “medium” = probability between 10 and 30 percent - “high” = probability between 30 and 50 percent - Timing labels: - “Short term” = risk could materialize within 1 year - “Medium term” = risk could materialize within 3 years - Non-mutually exclusive risks may interact and materialize jointly. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. ### Regional / Domestic Risks - Natural disasters and extreme climate events - Relative Likelihood: Medium: PNG is highly vulnerable to natural disasters (flooding, landslides, earthquakes), climate change (droughts & sea level rise) and El Niño. - Expected Impact: Medium: Negative impact on GDP growth, export and fiscal revenues, higher inflation. - Policy 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: The limited capacity of the state and a high level of social fragmentation remain chronic sources of political instability. Reform implementation could be hampered by political developments, particularly once the grace period expires. - 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). - Policy 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: High: Some major projects are being negotiated, but not yet included in the baseline. - Expected Impact: High: Upside risk. Favorable impact on GDP, external balance, and fiscal position. - Policy advice: Fast-track their implementation; Build fiscal and external buffers. ### Global Risks - Cyberthreats - Relative Likelihood: Medium: Cyberattacks on physical or digital infrastructure trigger financial and economic instability. PNG had a ransomware attack in October 2021. - Expected Impact: Medium: Can affect provision of Government service and trigger financial and economic instability or widespread disruptions in socio-economic activities. - Policy 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: High: A succession of supply disruptions (e.g., due to conflicts and export restrictions) and demand fluctuations causes recurrent commodity price volatility, external and fiscal pressures, contagion effects, and social and economic instability. - 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. - Policy 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: Medium: Global and idiosyncratic risk factors combine to cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and market fragmentation. In China, sharper-than-expected slowdown in the property sector, unexpected fiscal tightening due to local government financing stress and decline in investment, and/or rising geopolitical tensions disrupt economic activity. - Expected Impact: High: Would lead to lower external demand and lower commodity prices. - Policy advice: Build buffers to support the economy and most vulnerable in the non-resource sector, as needed. ### Key domestic FX and monetary context (selected observations from Annex II) - De jure and de facto regime: - PNG’s de jure exchange rate regime is floating, but its de facto exchange rate arrangement has been classified by the IMF as either “crawl-like” or “stabilized” arrangement relative to the US dollar since 2014. - Formally, the exchange rate is determined daily by the FX market, with publication of a reference rate on the BPNG website at the end of each working day. - Historical episode and operations: - During the PNG LNG construction phase (2010-2013) the kina appreciated by about 25 percent. - In May 2014, the BPNG introduced a trading band around the interbank rate, which led to a forced 17 percent appreciation of the spot market rate, producing FX shortages. - Since then, the exchange rate against the US dollar has been slowly depreciating in nominal terms with persistent and significant FX shortages. - Monetary framework in practice: - While formally implementing a reserve money targeting framework in support of the price stability objective, the BPNG has in practice relied on an implicit exchange rate anchor. - Twice a year, the Economics Department updates its monetary program to set quarterly base money targets; communication by the BPNG does not formally refer to reserve money targets. - The effect of changes in monetary aggregates on inflation is weak, in part owing to excess liquidity. Implicitly, the exchange rate has functioned as the nominal anchor given the high pass-through to inflation. ### Proposed appropriate exchange rate framework for PNG (summary) - Rationale for more flexibility: - PNG is a resource-dependent open economy, subject to high volatility due to exposure to commodity price shocks as well as natural disasters and climate hazards. - PNG has displayed higher average inflation than its main trading partners over the past decade, and the exchange rate has been overvalued for a decade. - Greater flexibility could reduce misalignments, promote interbank FX market development, and support hedging tools and financial sector development. - Limits on a full float: - A full de facto floating exchange rate is not suitable at this point because PNG is a relatively small economy with a concentrated financial sector; large depreciations could threaten financial stability and fiscal sustainability. Dutch-disease risks from large resource projects could trigger over-appreciation, threatening competitiveness. - Recommended transition option: - Shift to a de facto crawl-like arrangement to serve as the nominal anchor for monetary policy. Objectives: - Reduce misalignments by bringing the exchange rate closer to fundamentals. - Allow moderate fluctuations while preventing exchange rate overshooting (both appreciation and depreciation). - Manage exchange rate for price stability purposes given high passthrough to inflation. - Passthrough estimates: - IMF estimates that after a year, a 10 percent depreciation of the nominal effective exchange rate could lead to a 4 to 5 percentage-point increase in inflation, with results largely stable whether one consider headline or core CPI. - Correlation between depreciation size and inflation holds for large depreciations; no clear correlation for smaller-size depreciations. - Parameters for a crawl-like arrangement (IMF / MCM guidance) - AREAER criteria for a crawl-like arrangement: - The exchange rate must remain within a narrow margin of 2 percent relative to a statistically identified trend for six months or more (with the exception of a specified number of outliers). - The exchange rate arrangement cannot be considered as floating. - Normally, a minimum rate of change greater than allowed under a stabilized (peg-like) arrangement is required. However, an arrangement will be considered crawl-like with an annualized rate of change of at least 1 percent, provided that the exchange rate appreciates or depreciates in a sufficiently monotonic and continuous manner. - Design parameters and recommendations: - Anchor currency/ies: Should be relevant to PNG’s trade and finance, convertible and traded at low cost, have low and stable inflation, and not be excessively unstable relative to other major currencies. - Rate of crawl: Should correct current misalignment and avoid further misalignment due to inflation differentials with main trading partners. Once established, equal linear daily steps can be set. Review at least every six months based on updated misalignment and inflation projections. - Width of the crawl band: Ensure the exchange rate stays within +/- 1 percent of the daily reference rate to remain consistent with a crawl-like arrangement. - Institutional and operational prerequisites: - The shift requires coordinated action across many areas, a clearly articulated monetary policy regime, and consistency with fiscal policy (including prudent fiscal policy to avoid fiscal dominance). - Central bank must emphasize the primacy of the price stability mandate, strengthen analytical and operational capacity, and have a clear and unified framework for evaluating monetary policy and intervention decisions. *Source: Annex I. Risk Assessment Matrix (and selected text from Annex II. Proposed Appropriate Exchange Rate Regime and Monetary Framework in PNG).* ### Annex III . Alternative Scenario: Launch of Papua LNG ### Annex III . Alternative Scenario: Launch of Papua LNG ### Overview - Project timeline and scale: - Gas Agreement signed in 2019; Fiscal Stability Agreement signed in February 2021. - FEED studies completed in March 2023; Final Investment Decision (FID) expected in early 2024. - Construction phase assumed to start soon after FID and take five years; production assumed to commence in 2029 and have an operation life of 25 years. - Project cost for the construction phase estimated at US$10 billion. - Joint venture ownership: Total Energies (37.55 percent), Exxon Mobil (37.04 percent), Santos (22.83 percent), JX Nippon (2.58 percent). - State back-in right of up to 22.5 percent of participating equity interest at the time of the FID. - Gas resources estimated at over 1 billion barrels of oil equivalent; LNG production capacity up to 6 million tons per year (mt/y). - Fiscal terms under the Fiscal Stability Agreement: - Corporate income tax: 32 percent of taxable profit. - Royalties: 2 percent of sales (wellhead value) plus 2 percent development levy and 2 percent production levy. - Additional profit tax: 15 percent if post-tax internal rate of return is more than 15 percent. ### Construction phase: expected macroeconomic and external impacts - Methodology and comparators: - Impacts are estimated by scaling and adjusting the observed effects of the PNG LNG project (2010-2013) to Papua LNG’s size and inflation. - PNG LNG reference: US$19 billion capital expenditure, construction 2010-13, first production April 2014, originally estimated capacity 6.9 mt/y. - Real and external sectors: - For PNG LNG, “leakage” reached close to 75 percent of the US$19 bn cost (impact on domestic activity about 25 percent of the investment); local content of the investment was 25 percent. - For Papua LNG, an estimated leakage of 70 percent is assumed (authorities intend higher domestic content). - This yields an estimated cumulative 25.5 percent increase in the level of real GDP over five years compared to 22.3 percent under the baseline projection, equivalent to an average 0.6 percentage point of additional annual growth. - External sector flows during the investment phase: construction requires imports of goods and services and primary income payments—these three items should worsen the current account balance by around US$1.4 billion per year (vis-à-vis a non-investment baseline). - Financial account: FDI inflows related to the project would be on average US$2 billion per year for five years, yielding a net effect of additional accumulation of US$600 million in FX reserves per year. - Cumulative additional FX reserves of US$3 billion during construction would correspond to 7-8 months of 2030 imports (or 10-11 months of non-mineral imports). - Exchange rate: - PNG LNG previously triggered a kina appreciation of about 25 percent against the USD in 2010-12. - For Papua LNG, scaled-down appreciation pressures of about 10 percent are expected. - A crawl-like arrangement is expected to avoid rapid appreciation; the project combined with added FX reserves should help reach the equilibrium exchange rate sooner and support elimination of FX shortages and gradual removal of FX rationing. - Fiscal sector and public debt: - Project financing provided by consortium; the PNG estate (through Kumul Petroleum) would own between 1/5 and 1/4 of the project. - The state is not expected to put its share upfront; it would be financed by the consortium and repaid out of project dividends, with financiers likely to require sovereign guarantees during construction. - Sovereign guarantees typically constitute gradually as disbursements occur and are estimated to lead to a gradual increase in public debt by some US$ 2.0-2.5 billion from 2024 to 2029. - Guarantees would be rolled back at the end of construction, decreasing debt accordingly. - Fiscal revenue impact as a share of GDP expected to be marginal during the construction phase (consistent with PNG LNG experience). ### Operation phase: expected impacts from 2029 - Output, trade, and external balances: - Once in operation from 2029, sectors most affected during construction are expected to return close to baseline activity. - Volume of LNG exports expected to increase by 75 percent relative to the 2015-2022 average volume of exports. - Imports are expected to fall back to levels comparable to the baseline. - Real GDP will be boosted by significant increase in natural gas production during early years of operations. - Trade balance expected to improve by USD 1.5-2 billion once production reaches potential. - Fiscal revenue timing and composition: - Direct fiscal revenue from the project assumed to start in small amounts from 2029 and gradually increase over production. - Income tax revenue expected to flow as capital cost deductions are exhausted. - Dividend payments to the state expected once the government loan contracted to finance its equity participation is repaid. - Exchange rate effects during operations: - End of construction may reduce demand for kina, while higher exports would increase FX supply; the net effect on the exchange rate is less certain. - Scope limits: - This alternative scenario does not include impacts of other large resource projects in the pipeline (e.g., Wafi-Golpu gold mine or P’nyang LNG project), which could start in the second half of the decade. ### Key assumptions, risks, and notes - Assumptions and timing: - FID expected in early 2024; construction phase assumed to last five years; production starting 2029; project life 25 years. - Project cost assumed US$10 billion for construction. - Leakage assumption of 70 percent for Papua LNG (compared with 75 percent for PNG LNG). - Fiscal and sovereign credit risks: - Sovereign guarantees used to enable state participation may raise public debt by US$ 2.0-2.5 billion during construction, though guarantees roll back at project end. - Balance of payments and reserves: - Average FDI inflows of US$2 billion per year for five years; US$600 million extra FX reserve accumulation per year; total US$3 billion additional reserves during construction. - Caveat: - This annex is based on public information and staff assumptions; final parameters might differ. The project will only be included in staff’s and authorities’ baselines once the FID is signed. *Source: IMF staff estimates.* ### 10. The Fund’s CD priorities are determined by program objectives and authorities’ ### 10. The Fund’s CD priorities are determined by program objectives and authorities’ demand, while considering PNG’s absorptive capacity ### Fund capacity development (CD) priorities and recent activities - CD delivery is closely coordinated with other PNG partners to avoid duplication and increase synergy. - Recent activities intended to support the program and address sources of fragility: - Revenue mobilization - Fiscal Affairs Department (FAD) and PFTAC have been delivering support to develop a MTRS, simplifying and modernizing the tax system and revenue administration, including debt management, and monitoring of fiscal risks. - The thrust of the MTRS will be to raise revenues in the medium term by a few percentage points of GDP to help sustainably narrow the fiscal deficit and put public debt on a downward trajectory, while identified growth- and equity-enhancing expenditure priorities in infrastructure, health, education, social assistance and security are safeguarded. - Staff recommended to the authorities a Public Investment Management Assessment (PIMA) to ensure investments deliver quality projects at reasonable cost to strengthen potential growth and identify areas where to rebalance the composition of spending to emphasize delivery of frontline services and priority capital spending. - Monetary policy and central bank governance - Support from MCM, FIN, and LEG has helped the authorities produce a sequenced roadmap to move toward a market-clearing exchange rate, alleviate FX shortages and strengthen central bank risk management practices, including through a safeguards assessment. - An IMF Financial Sector Stability Review (FSSR) is being planned for early 2024—the country’s first—to identify systemic financial risks and gaps in the financial supervision and regulatory framework of banks. - Governance and transparency - Program includes steps to strengthen the legal and institutional frameworks for auditing and AML/CFT and protection of correspondent banking relationships. - The Fund stands ready to discuss possibilities of providing TA, complementing TA received from other partners. - Improving macro-financial data - Regular in-person and virtual support from STA and PFTAC is helping improve the quality and timeliness of national and government financial accounts, and BOP. - Improving macro-fiscal forecasting - ICD and PFTAC are providing TA to strengthen authorities’ forecasting capacity and policy evaluation. ### Country engagement and partner coordination - Resident Representative office re-established on the ground; the country’s first IMF office in over two decades to improve real-time two-ways flow of information and ensure the Fund is attuned to the country’s needs. - Close coordination with development partners is critical to program success. - Conventional partners listed: Asian Development Bank (ADB), World Bank, United Nations agencies, European Union, Australia, Japan, and the U.S. - Ongoing cooperation and exploration of synergies: World Bank on public financial management (PFM), ADB on SME governance reforms, UN and EU on anti-corruption reforms. - Cooperation also maintained with non-governmental organizations. ### Program risks - Significant risks to program engagement: - Reform implementation could be hampered by political developments, particularly once the grace period precluding votes of no confidence in parliament expires. - Even without disruption, government reforms could stall before the general elections scheduled for early 2027. - A deterioration of external economic conditions and natural disasters could undermine macro-financial stability, given dependence on commodities. ### Annex V — Adopting BPM6 Standards in the Balance of Payments Statistics - BOP data published based on BPM6 standards in 2023. - IMF’s CDOT provided TA on external sector statistics (ESS) to the Bank of Papua New Guinea (BPNG) in 2022 to identify and compile transactions in the current account, capital account and the financial account consistent with BPM6. - Following mission guidance, BPNG produced balance of payments estimates for 2015 to 2022 in the BPM6 format, published earlier this year as part of the Quarterly Economic Bulletin Statistical Tables. - Revised series show more moderate current and financial account balances: - Current account balance was lower than previously estimated by an annual average of USD 2.4 billion between 2015 and 2021. - Smaller trade balance for goods and services: US$ 900 million, on average. - Income balance revised to the downside: US$ 700 million. - The income account now includes all dividends to nonresident investors in the mining industry. - Financial account balance also smaller, with significant changes in other investments: US$ 2.1 billion. - Downward revision reflects reductions in external deposits of the LNG sector. - Areas for future improvement in statistics: - Measurement of external assets and liabilities for compilation of the international investment position (IIP). - Ensuring statistical consistency with national accounts and government financial statistics. - Initiating an inter-agency working group with representatives from the NSO, Treasury Department, PNG Customs Service and the BPNG to improve consistency of ESS with other official statistics. ### Annex VI — Alternative models of the exchange rate assessment - Motivation: - Roadmap design and implementation require assessment and monitoring of the evolution of the equilibrium exchange rate. - EBA-lite models do not capture PNG’s country-specific characteristics as a fragile state prone to major shocks and economic transformation. - Significant data revisions due to move to BPM6 standards and need for higher frequency analysis suggested complementary models based on fundamental drivers of the REER: terms of trade, economic activity, and financial conditions indicators. - Modeling approach: - Following de Gregorio, et. al. (2005), time series models estimated on quarterly frequency data to derive empirical elasticities of the real exchange rate with respect to fundamental drivers. - Four variants of the equation estimated (listed as equations (1)–(4)) including lagged dependent variable terms, oil prices, gas prices, gold prices, the dollar index, US GDP, a dummy for global financial condition shocks (dot com crisis (2000), global financial crisis (2008), COVID pandemic crisis (2020)), and up to 1 through 4 lags. - Instead of choosing a single specification among the 16 alternatives, the median estimate among all of them is computed for each period to infer the fitted real exchange rate. - Results and interpretation: - Alternative models indicate a milder overvaluation than from EBA-lite analysis, with a relatively wide range of estimates. - The median overvaluation across these models is 7 percent, with estimates ranging between 5 and 15 percent at end-2022. - Estimates for the REER for the beginning of 2023 show overvaluation has moderated by 3 to 4 percentage points due to weaker US dollar and lower inflation in PNG. - Figure referenced: Fitted Kina (REER Index, 2010=100) showing Range of Estimates, REER, and Median (sources: BPNG; Haver; and IMF staff estimates). ### Letter of Intent and Memorandum of Economic and Financial Policies (highlights) - Letter dated November 4, 2023 summarizes PNG’s reform progress and requests completion of the First Review under the ECF and EFF arrangements and related purchase and disbursement. - Request for immediate disbursement of SDR 65.81 million (25.0 percent of quota), of which SDR 21.94 million (8.3 percent of quota) under the ECF and SDR 43.87 million (16.7 percent of quota) under the EFF. - Underscored commitment to transparency and consented to publication of the letter, MEFP, TMU and related board documents. - Economic developments and outlook (from MEFP, Attachment I): - Real non-resource GDP growth: 4.8 percent in 2021, and 4.6 percent in 2022 and 2023. - Resource sector growth: estimated 3.7 percent in 2022; expected to contract by 1.4 percent in 2023 as LNG production normalizes. - End-of-period inflation: 3.4 percent in 2022; projected 3.5 percent in 2023. - Kina Facility Rate (KFR) lowered to 3 percent (from 3.5 percent) in September 2023. - Excluding expected new resource projects, real growth forecast at 5.0 percent in 2024. - Porgera mine resumption expected to boost resource sector growth to 6.3 percent in 2024. - Non-resource sector growth projected at 4.6 percent in 2024. - End-of-period headline inflation projected at 5.0 percent in 2024 as the base effect of the fiscal package fades. - Medium-term projection: economy projected to grow at an average 3.1 per cent annually, supported by higher private investment, the public investment program (PIP), including Connect PNG, and private sector investment. *Source: IMF staff report content from the supplied PDF chapter/section.* ### 4. We recognize that the external environment is uncertain but there are both downside ### 4. We recognize that the external environment is uncertain but there are both downside and upside risks to the outlook for growth, exports and the fiscal picture. ### External environment and risks - Downside risks: - Sharp downturn in main trading partners. - Tighter global financial conditions. - Exposure to natural disasters and climate change. - Upside potential: - Large extractive sector projects in the pipeline (excluded from the baseline) that would have a large positive impact on growth, investment, exports, and fiscal revenues if approved. ### The Government’s Medium-Term Economic and Financial Reform Program - Developmental and financing challenges: - Poverty remains high, with most people in rural areas and limited access to basic infrastructure and services. - Urgent investment needs: power, utilities, transport links, education, health care, and security. - Public debt trajectory and fiscal context: - Public debt rose from K8 billion in 2012 to K34 billion in 2019. - Domestic revenues fell by 20 per cent due to the COVID-19 pandemic. - A 13-year fiscal reform plan is in place to reduce budget deficits and public debt ratios. - Reform priorities: - Continue budget repair and strengthen debt sustainability. - Ensure growth in social spending to increase provision of services. - Address FX shortages and reinstate convertibility of the Kina. - Strengthen governance, operationalize the Independent Commission Against Corruption (ICAC), and improve the AML/CFT framework consistent with FATF standards. ### Objectives and performance under the IMF-supported program (ECF/EFF, approved March 2023) - Program aims: - Strengthen domestic revenue mobilization, improve the quality and composition of public expenditure, lower fiscal deficit and debt to meet the Fiscal Responsibility Act, and strengthen debt sustainability. - Modernize governance and operations of the BPNG to address FX shortages and reinstate convertibility of the Kina. - Operationalize ICAC and improve AML/CFT framework; enhance financial and payments systems for financial deepening and inclusion. - Early implementation and deliverables: - All quantitative performance criteria (QPC) and indicative targets (IT) as of end-June 2023 were achieved. - All five structural benchmarks (SB) due by end-August 2023 were met in timely fashion, with one SB met with delay. - Chronology of reform actions: - HR Business Process workshops with most government departments (March 2023). - Formal appointment of Commissioner and two Deputy Commissioners of ICAC (June 2023). - Sequenced roadmap for reforming monetary and foreign exchange frameworks (August 2023). - Implemented fixed rate full allotment auction for short-term central bank bills (August 2023). - Adopted new medium-term revenue strategy (MTRS) (October 2023) — SB met with a small delay. ### Debt management progress - Implemented Guarantee Policy and Guidance note and tools. - Upgraded and migrated Commonwealth Debt Recording System to Meridian. - Completed review of the on-lending policy; planning strengthened policy framework. - Targeted initiative to enhance reporting of Guarantees in alignment with GFS format with PFTAC assistance. - Drafted the first annual Debt Bulletin, intended for publication this year. ### Structural benchmarks and pending reforms - Preparing amendments to the Income Tax Act (ITA) to enhance revenue mobilization. - Preparing amendments to the Central Banking Act (CBA) to address mandate, governance, autonomy, transparency and accountability of the BPNG, informed by the Independent Advisory Group (IAG). - Advanced stage in finalizing ICAC Act implementing regulations. - Ready to publish online details on COVID-19 related procurements for 2020 and 2021. ### Fiscal policies, 2023–2024 and medium term - 2023 Supplementary Budget: - End-year tax revenue target revised upward by K1.4 billion. - Non-tax revenues projected to underperform by -K0.7 billion (lower dividend payments from the resource sector). - Overall expected total revenue increase of K0.8 billion relative to the initial budget. - Additional revenue allocation: - Higher interest expenditure from global interest rates: K0.3 billion. - Financial support to PNG Power: K0.2 billion. - Additional rental and utility costs: K0.2 billion. - Additional funds to clearing arrears: K0.1 billion. - End-year deficit target revised slightly to K4.935 billion (from K4.985 billion) (QPC). - Targets/indicative targets: - Collect at least K12.8 bn of non-resource tax revenue by end-2023 (IT). - Ensure at least K3.9 bn of priority spending, including social, is executed (IT). - 2024 fiscal stance and targets: - Target deficit of 3.9 percent of GDP in 2024, a consolidation effort of 0.5 percentage point of GDP relative to 2023. - Revenue expected to decline by 0.1 percentage point of GDP relative to 2023 due to lower resource revenue and faster GST refunds processing. - Revenue policy measures to offset decline: +0.4 percentage point of GDP from measures including GST (Section 65A) rollout to Extractive and Finance sectors, introduction of dividend policy, sin tax reforms, and adjustments to income tax rules. - Total expenditure to decline by 0.6 percentage point of GDP. - Target to achieve a balanced budget by 2027 supported by domestic revenue mobilization and expenditure efficiency improvements. ### Revenue mobilization and MTRS - Medium-term Revenue Strategy (MTRS): - Successor to the first Strategy that ended in 2022; prepared with Fund TA and approved by Cabinet on October 2023 (SB met with delay). - Guides revenue policy and administration reforms through to 2027; inputs from IRC, Customs, Treasury and Finance. - Key legislative reforms identified: implementation of 2017 Tax Administration Act and promulgation of a revised Income Tax Act (ITA). - Proposed ITA amendments expected to be submitted to Parliament in November 2023 (ongoing SB by end-December 2023); amended ITA to enter into force in early 2025 if passed. - IRC modernization: - New organizational structure adopted in July 2023. - IRC to produce, in coordination with IMF, key output-based performance indicators (new SB by end-May 2024). - Amendments to Internal Revenue Commission Act 2014 to establish a Board for IRC oversight (new SB by end-October 2024). - Ongoing and planned Fund TA support for domestic revenue mobilization. ### Expenditure management, payroll, and HR reforms - Expenditure strategy: - Commitment to reduce overall spending envelope in real per capita terms while improving spending efficiency. - Capital investment budget has been expanding faster than recurrent budget over last five years. - Historic under-budgeting for personnel emoluments (PE) reached 25 percent in 2018; PE spending in line with budget targets over first six months of 2023 and expected to remain so through year-end. - Expenditure rule to reduce recurrent budget as a share of non-resource GDP maintained while increasing funding in real terms for police, teachers, and health care workers tied to new capital investment operation and maintenance needs. - Goods and services expenditure cut by over 40 per cent in non-priority or central agencies. - Payroll and HR improvements: - Implementing findings of 2022 Staffing and Establishment Review (SER) for all public sector employees (except teachers); SER for teachers undertaken and final report validation in process. - March 2023 HR Business Process workshops on staffing and remuneration guidelines (SB met). - Emphasis on comprehensive capture of payroll and retirement information in AscenderPay (previously ALESCO); instruction issued to enter allowances and retirement exit payments each pay period. - Planned amendments to General Orders and HR policies and thorough data cleansing of payroll IT records (new SB by end-August 2024) ahead of a system upgrade. ### Arrears verification and clearance - Arrears Verification (AV) program (established January 2020): - As of August 2023, AV Committee examined claims amounting to K3.1 billion, verified and paid K1.2 billion. - Remaining unverified stock of claims on goods and services under the AV program: K1.96 billion. - Budget allocation increases: - 2023 Budget: K300 million appropriated to AV program. - 2023 Supplementary Budget: K400 million allocation to AV program. - Planned 2024 Budget: K500 million allocation to AV program. - Commitment to increase AV allocations in future initial and supplementary budgets if revenue overperforms. - Outstanding personnel emolument liabilities stock: K0.6 billion as of end-June 2023. - Commitment not to accumulate further payroll arrears and to continue paying domestic debt on time (IT). - Will extend commitment to arrears on goods and services by the time of the second review, after receiving FAD TA advice. *Source: Content unit 1pngea2023002.* ### 19. We intend to also reduce our reliance on trust accounts to improve expenditure ### 19. We intend to also reduce our reliance on trust accounts to improve expenditure ### Trust accounts, cash management, and Treasury Single Account (TSA) - Under the current decentralized framework, payments for a large number of government projects are carried out through trust accounts in the BPNG and commercial banks, funded by transfers appropriated in the government budget. - Consolidated balance of trust accounts: K1.1 billion at end-August 2023. - Commitment: close all remaining COVID trust accounts (remaining balance of K0.2 billion as of end-August 2023) by end-year 2023. - Plan to seek FAD advice on how to gradually reduce cash balances on these accounts to optimize government cash management. - Rationale for TSA: - To avoid incurrence of arrears on external debt service payments, the government builds substantial cash reserves in a debt repayment account (on average K0.5 billion over the first six months of the program), which ensures timely payments but leads to interest charges on the overdraft while large pockets of cash are idle elsewhere, including in trust accounts. - The passage of the Non-Tax Revenue Administration Act (NTRA) has helped centralize statutory bodies’ revenues into the Consolidated Revenue Fund at the BPNG. - Actions: - Initiate steps to fully bring government funds from the banking sector to the central bank, paving the way for a TSA. - Request IMF TA to assist in the preparation of a reform strategy by end-February 2024 for the implementation of a TSA and for enhanced cash management and forecasting. ### Debt recording, financing strategy, and debt management capacity - Strategy highlights: - Continue strengthening debt recording and management capacity and maintain a prudent financing strategy to reduce costs and lower risks. - Substitution of costly financing with concessional financing from multilateral and bilateral partners has improved PNG’s debt profile. - Program constraints and commitments: - Maintain present value limits on new public external debt contracted in 2023 and in 2024 (continuous QPC for each year). - Remain committed to the non-accumulation of new external payment arrears during the program period (continuous QPC). - Fiscal planning: - Ensure borrowing plan is closely linked to financing needed to execute the budget. - 2024 budget will envisage a transparent borrowing program and on-budget spending. - Future intentions: - Aim to lower the risk of debt distress, guided by updated Debt Sustainability Analyses by the IMF and World Bank and an upcoming Medium-Term Debt Strategy. - On the back of IMF TA, aim to further develop debt management capacity with the objective of expanding debt coverage to include SOEs. ### Monetary policy and exchange rate roadmap - Objective: control inflation and achieve price stability; ensure kina convertibility and an appropriate exchange price for exports and imports. - Roadmap status: - Finalized in August 2023 (SB met); approved and formally announced in September as part of the Monetary Policy Statement. - Prepared with technical support of the IMF and follows from work of the Independent Advisory Group (IAG). - Consolidated status of progress on the roadmap will be provided to the Board of the BPNG on a monthly basis and shared for information with the IMF. - Will serve as reference for reform conditionalities for future program reviews. - Assistance: request IMF TA and advice to help with implementation of key elements. ### Exchange rate arrangement: crawl-like transition and convertibility - Policy: - Implement a de facto crawl-like exchange rate arrangement to support gradual return to kina convertibility by the end of the program. - Crawl-like arrangement chosen to transition back to a more flexible exchange rate, in line with the de jure regime. - Recent movements: - Kina has gradually depreciated since May 2023 (-0.8 percent per month against the US$); small appreciation on a Trade Weighted basis due to strengthening of the US$. - Implementation timing and parameters: - Close to final decision on key parameters in coordination with the IMF (new SB by end-November 2023); implement starting early December 2023. - Key parameters include: - (i) the anchor currency, - (ii) modalities for the calculation of the rate of crawl (including methodologies on how to measure the exchange rate adjustment needed and how to apply judgment in interpreting the results), - (iii) the width of the crawl band, - (iv) the pace of regular reviews and updates of the rate of crawl, - (v) the strategy for communication of the arrangement to the market, - (vi) the modalities for FX interventions to support the arrangement. - Goal: fully resolve misalignment of the kina gradually over the program and restore kina convertibility to enhance competitiveness of agricultural exports and increase rural income. ### Foreign exchange rationing, interventions, and market measures - Historical interventions: - To alleviate FX shortages, the government intervened with a monthly average of US$ 125 million since the beginning of 2023, which is above the indicative floor of the program (IT). - Ongoing challenges: - Persistent mismatch between FX supply and demand. - Large pent-up FX demand from dividends waiting to be repatriated and portfolio external investment from domestic superannuation funds. - New monitoring and policy from Jan 1, 2024: - Replace the indicative floor on BPNG’s FX provision to the market with a new indicative ceiling on the stock of unmet import-related orders in the order book older than two months (new IT). - Transition approach: - From implementation of the new exchange rate arrangement, strive to carry out FX interventions sufficient to clear essential payments. - Proceed with a cautious, gradual removal of FX rationing measures as the exchange rate approaches its equilibrium level. - Regulatory review and transparency: - Review the “Enhanced Due Diligence” reporting requirements issued in July 2022 and other regulations/directives on the FX market. - Review coverage of requirements for tax clearance certificates on all import-related activities, BPNG currency purchases and government payments. - Publish all regulations and directives regarding the FX market on the BPNG website (new SB by end-December 2023). - Ensure BPNG does not require a tax clearance certificate to include FX orders related to intercompany loans obtained for import payments in the orderbook (new SB by end-December 2023). ### Liquidity management and monetary operations - Actions taken: - Intensified efforts to mop up excess liquidity: issue central bank bills in higher volumes; introduced a 7-day tenor; transferred revenues of statutory bodies from commercial banks to the central bank. - In late August 2023 modified open market operations by carrying out the first FRFA auction (SB met). - Auction outcomes: - A total of K1.9 billion of 7-day central bank bills were issued at the second auction, effectively mopping up most of the excess liquidity. - The first FRFA auction was conducted at 2 percent, transitioning from the 7-day rate used prior, but lower than the KFR, currently set at 3.0 percent. - Commitments: - Gradually align the rate of issuance of the 7-day central bank bills with the KFR (new SB by end-December 2023). - Once aligned, introduce a mid-rate corridor on the KFR, bounded by standing overnight facilities priced at +/- 150 bps around the KFR. - Enhance the cash reserve requirement framework by introducing reserve averaging and extending the maintenance period by March 2024. ### BPNG governance, independence, and staffing - Staffing and governance actions: - Fill the Governor and Deputy Governors positions and Board vacancies at BPNG by end-November 2023; appointments have been delayed due to need for appropriate board composition for reforms. - Commit to fill remaining Board vacancies and appoint Governor and Deputy Governors before end of calendar year (new SB for end-November 2023). - Institutional reforms: - Reinforce financial independence, mandate and autonomy of the BPNG. - Moved away from specifying BPNG dividends ex ante; future dividend payments will be based on BPNG’s realized profits after ensuring sufficient financial resources for monetary policy. - Continue to avoid monetary financing, monitored through a QPC on the BPNG’s gross credit to government. - On track to draft, in consultation with the IMF, and submit amendments to the Central Banking Act (CBA) to Parliament addressing mandate, governance, autonomy, transparency, and accountability of the BPNG (ongoing SB by end-December 2023). - Amendments will: limit provision of advances to the government; rank mandates with price stability as primary objective; clarify the role of the Board in monetary policy formulation. - Safeguards and transparency: - BPNG underwent an updated safeguards assessment in July 2023; committed to implement recommendations per timelines in the assessment report, including legislative reforms, senior management and Board appointments, and timely publication of financial statements. - Finalization of BPNG’s audited financial statement for FY22 has faced delays due to late appointment of auditors and implementation of new IT systems; it will be published shortly with commitment to restore timeliness going forward. ### Financial sector policies, inclusion, and stability - Financial inclusion strategy: - Government published financial inclusion strategy for 2023-2027 in April 2023. - Target: reach 2 million unbanked population by 2027, including 50 percent of women, in particular in rural areas. - Strategic objectives: financial literacy and education, strengthen regulatory environment, develop efficient digital infrastructure, promote public/private engagement, develop enabling environment for inclusive green finance, deepen financial service delivery through emerging technology. - Emphasis: balance financial inclusion with preserving financial stability and AML/CFT framework gains. - Regulatory reviews and assessments: - Second phase of the CBA review is ongoing to examine BPNG’s role as financial regulator; IAG’s final report expected by December 2023. - IMF’s financial sector stability review (FSSR) process has started; full report and recommendations expected in the second half of 2024. - Financial stability capacity building: - Expanded and published financial soundness indicators (FSIs) in accordance with IMF’s 2019 FSI compilation guide, with IMF TA support. - Readying first financial stability report to be released in coming months. - APG AML/CFT mutual evaluation onsite visit took place in October 2023. - FASU increased staff capacity, conducted awareness-raising and training, and carried out a dozen onsite inspections and off-site reviews of AML/CFT programs throughout 2023. ### Governance, procurement transparency, and statistical improvements - Anti-corruption: - Independent Commission Against Corruption (ICAC) steps: - Appointed a Commissioner and two deputy Commissioners, all international (SB met); recruiting staff. - Drafting key implementing regulations to the ICAC law to specify preventive, investigative and prosecutorial processes and ensure information sharing; adoption on track by end-December 2023 (ongoing SB for end-December 2023). - Developing IT systems, communication materials, internal policies and guidelines, and cooperation with anti-corruption bodies including FASU. - Ensure ICAC receives sufficient budget allocations. - Procurement transparency: - Prepare posting details of COVID-19 related procurements on the government procurement website, including names of entities awarded contracts and their beneficial owners, in line with RCF commitments from April 2020 for years 2020 and 2021 (ongoing SB for end-December 2023). - Completed an independent report into COVID spending and will share the report with the IMF. - For normal procurement, continue accounting under audit procedures by the AGO; ensure AGO is adequately staffed and funded. - Statistical and fiscal transparency: - Extend coverage of GFS reporting and improve consistency of statistics. - Enhanced GFS reporting with Fund support, releasing more comprehensive GFS tables in the budget book and developing fully GFS compliant budget estimates volumes; work disrupted due to IFMS issues but to continue. - Recent Fund TA on external sector statistics allowed re-stating BOP data from 2015 to 2022 in line with BPM6; revised data publishing has started. - Initiate an inter-agency group on external sector statistics, including NSO, Treasury Department, PNG Customs Service and the BPNG (new SB by end-June 2024). ### SOE governance and financial sustainability - Reforms and outcomes: - Amended legal and policy framework for SOEs with ADB support; strengthened financial and corporate governance. - All SOEs under Kumul Consolidated Holdings published FY22 audited financial statements, most by end-June 2023. - Appointment of SOE directors is now skill-based and more transparent; share of women on executive boards of SOEs has increased. - Future plans: - Intend to unify and enhance procurement practices across SOEs. - Continue strengthening financial transparency and accountability. - Pass a dividend policy through the NEC. - Improve financial sustainability of SOEs while ensuring Community Service Obligations are properly funded and improving access to public services in rural, remote areas. ### Social protection and poverty reduction spending - 2023 Budget allocations: - Total allocation (current and capital) directed to education, health and law and order: K5.26 billion in 2023. - This represents an increase of 12.6 percent over 2022 and 46.9 percent from 2021. - Execution after six months has been above the program target (IT). - 2024 plans and social measures: - Continue redirecting expenditure to priority sectors to preserve gains in alleviating poverty. - Work with development partners to strengthen social safety net programs, deliver better public services to rural population, address urban youth unemployment, improve labor mobility, remove barriers to employment, address urgent needs in child nutrition, prevent spread of communicable diseases, and continue support to education via Government Tuition Fee Subsidy scheme. - Introduced a Household Assistance package to support incomes during worldwide rises in inflation: - Rise in PIT threshold from K17,500 to K20,000. - Expansion of the GTFS to cover project fees for schools. - Temporary removal of excise and GST on fuel, which has now been unwound as prices moderated. *Source: 1pngea2023002 - 19. We intend to also reduce our reliance on trust accounts to improve expenditure (PDF chapter/section).* ### 35. Papua New Guinea has vulnerabilities to climate change and needs to build resilience. ### 35. Papua New Guinea has vulnerabilities to climate change and needs to build resilience. ### Climate vulnerability: key findings - Papua New Guinea relies heavily on agriculture, especially at the subsistence level and for export, which "remains vulnerable to shifts in the climate, flooding and extreme weather events." - Ranked 8th among countries for highest disaster risk in the world on the World Risk Report, 2020. - Gaps in understanding climate vulnerability due to: - "lack of study of localized historical and future climate conditions," - "limited social data." - The World Bank (2021 Climate Risk Country Profile) notes that "hazards such as flash flooding, landslide, and coastal flooding are all likely to intensify." - The population affected by river flooding is "projected to double by 2030." - Government commitments and actions: - Develop climate mitigation and adaptation programs through the Green Climate Fund. - Develop green financing standards through the BPNG. - Fund the UN Climate and Biodiversity Trust Fund in the 2023 budget. - Recognized need: "there is a continued and growing need for support in this area." ### Financing strategy: purpose and role of the Fund program - The program addresses an immediate balance of payments need, enabling engagement with development partners and building buffers to support a more flexible exchange rate system. - The Fund program is described as "a critical component in reinforcing the Government’s commitment to sound macroeconomic policies and needed structural reforms." - Program financing aims to: - Build and maintain the international reserve buffer to address FX market demand-supply mismatches safely. - Support an "ambitious but non-disruptive fiscal consolidation path that preserves needed social spending." - Serve as an important signal to development partners that PNG is on the path to macro-financial sustainability. - Disbursements under the Fund program are "channeled toward budget support," allowing continued execution of spending "at a reasonable cost." ### Reserve and financing targets (exact figures) - Target international gross reserves: US$3.1 billion ("6 months of imports") by end-2025. - End-June net international reserves (NIR): US$2.8 billion, "about US$350 million above the floor set at program approval." - Target NIR for end-2023: US$2.65 billion (up from US$1.7 billion at program approval) (QPC). - Estimated financing needs for 2023: US$662 million, of which 27 percent will come from disbursements under the Fund program. - End-2023 proposed revision and other reserve-related test figures (from Table 1, preserved as presented): - Stock of net international reserves of the BPNG (floor, US$ millions) — row values include: 3,226; 2,845; 2,996; 2,463; 2,831; 2,082; 1,700; 2,650; 1,525; 2,500; 2,350; 2,200; 2,050. - Note on NIR calculation: "Including US$0.5 billion corresponding to our SDR allocation, no longer subtracted in our NIR calculation." ### Program monitoring: schedule and institutional arrangements - Review cycle: "6-monthly review cycle based on quantitative performance criteria outlined in Table 1." - Second, third and fourth reviews scheduled "on or after March 18, 2024, September 18, 2024 and March 28, 2025." - Next three test dates: December 31, 2023; June 30, 2024; December 31, 2024. - Additional indicative assessment dates proposed: March 31, 2024 and September 30, 2024. - Quantitative performance criteria, indicative targets and structural benchmarks for the next 12 months are in Tables 1 and 2; definitions provided in the attached Technical Memorandum of Understanding (TMU). - Program Monitoring Committee: - "holds regular meetings with Fund staff, at least every two weeks (and more if needed)." - Chaired by the Secretary of the Treasury. - Coordinates PNG activities related to the program and keeps frequent contact with the IMF Resident Representative. ### Structural benchmarks (selected measures and implementation dates) - Budget repair measures: - Introduce amendments to the Income Tax Act to Parliament to strengthen revenue mobilization — End-December 2023. - Develop an initial worksheet of output-based key performance indicators for IRC — End-May 2024. - Submit to Parliament amendments to the Internal Revenue Commission Act 2014 to establish a Board for IRC oversight — End-October 2024. - Complete data cleansing over current payroll records in the AscenderPay IT system and share report with IMF — End-August 2024. - Governance and operations of the BPNG: - Submit to Parliament amendments to the CBA to address mandate, governance, autonomy, transparency, accountability, and improvements in financial regulation and supervision — End-December 2023. - Set parameters for the crawl-like exchange rate arrangement (anchor currency; rate of crawl; crawl band width; pace of reviews; communication strategy; FX intervention modalities) — End-November 2023. - Publish all regulations and directives regarding the FX market on BPNG's website — End-December 2023. - Eliminate BPNG’s requirement of a tax clearance certificate to include FX orders related to intercompany loans in the orderbook — End-December 2023. - Align the 7-day central bank bills issuance rate with the Kina Facility Rate — End-December 2023. - Appoint the Governor and Deputy Governors of the BPNG and fill all vacancies at the BPNG Board — End-November 2023. - Governance and anti-corruption: - Adopt key implementing regulations to the ICAC law — End-December 2023. - Post details of COVID-19 related procurements (including names of entities awarded contracts and their beneficial owners) for 2020 and 2021 on the government procurement website — End-December 2023. - Initiate an inter-agency working group on external sector statistics (NSO, Treasury, PNG Customs Service, BPNG) — End-June 2024. ### Technical Memorandum of Understanding (TMU): definitions and methodological points - Program scope: ECF/EFF program spans "March 2023 to May 2026" and the TMU specifies quantitative PCs and indicative targets for the period following completion of the First Review until September 2024. - Government definitions: - "Government is defined as the central government of the Independent State of Papua New Guinea." - Budgetary central government excludes extra budgetary units; general government includes national and provincial governments, the Autonomous Bougainville government, and commercial and statutory authorities. - Exchange rates (End of period, 2022): - PGK/USD 3.524 - PGK/AUD 2.387 - USD/SDR 1.330 - Debt definition follows Executive Board Decision No. 15688-(14/107); includes loans, suppliers’ credits, leases (present value at inception), arrears, penalties, and judicially awarded damages arising from contractual obligations that constitute debt. - For program purposes, "debt shall include borrowing by, or that receives guarantees from, the central government and the Bank of Papua New Guinea (BPNG)." Monetary policy liabilities of BPNG (e.g., issuance of securities, central bank bills or notes) are excluded from the definition of debt. - External debt: "a debt denominated, or requiring payment, in a currency other than the Kina." Contracting of debt includes approval by the Treasury; credit lines with no predetermined disbursement schedules are considered contracted when approved. - Quantitative Performance Criteria (QPCs) — fiscal deficit calculation: - Fiscal deficit is "calculated on a cash basis" as "net acquisition of financial assets less net incurrence of financial liabilities by the budgetary central government from the start of the fiscal year on January 1." - Net acquisition of financial assets = net change in domestic financial assets + net change in external financial assets. - Net incurrence of liabilities = net incurrence of domestic liabilities + net incurrence of external liabilities. - Domestic liabilities include "debt securities outstanding; loans received from residents of PNG; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; and other accounts payable." - External liabilities include "debt securities outstanding; and loans received from lenders not resident of PNG; and any other liabilities that meet the definition of external debt as set out in paragraph 6." *Source: Papua New Guinea authorities and IMF staff (1pngea2023002 - 35. Papua New Guinea has vulnerabilities to climate change and needs to build resilience.)* ### 10. For the purpose of program performance assessment, the cumulative fiscal deficits at ### 1pngea2023002 - 10. For the purpose of program performance assessment, the cumulative fiscal deficits at ### Floor on the Stock of Net International Reserves (NIR) - Net international reserves (stock) = gross foreign assets − use of IMF credit. - Gross foreign assets comprise: - The BPNG’s holdings of monetary gold (excluding amounts pledged as collateral); - Holding 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 but not limited to 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. - Starting from end-December 2023, the use of IMF credit includes the credit outstanding under IMF financing programs with Papua New Guinea (including resulting from the ongoing ECF/EFF program). - For program performance assessment, the stock of net international reserves at end-December 2023 and end-June 2024 must be equal or greater than specified in Table 1 of the MEFP. ### Ceiling on BPNG’s Gross Credit to Government - From December 2023 onwards, BPNG’s gross credit to government = sum of: - government securities held by BPNG at amortized cost, 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. - For program performance assessment, BPNG’s gross credit to government at end-December 2023 and end-June 2024 must be lower than or equal to the amounts specified in Table 1 of the MEFP. ### Continuous Performance Criteria (PCs) — PV Ceiling on New External Debt - Present value (PV) of any external borrowing by the government = stream of annual discounted future debt service payments for each loan, using a discount rate of 5 percent. - For variable-rate debt expressed as benchmark + fixed spread: - PV is calculated using a program reference rate + the fixed spread (in basis points) specified in the contract. - Program reference rate for the six-month USD LIBOR = 2.73 percent and will remain fixed for the duration of the program. - If variable rate is linked to a benchmark other than six-month USD LIBOR, add a spread reflecting the difference between that benchmark and the six-month USD LIBOR (rounded to the nearest 50 bps). - For interest rates on the Australian Dollar, the spread over six-month USD LIBOR = 50 basis points. - A continuous ceiling in PV terms applies to contracting or guaranteeing new external debt by the Government or the BPNG; it covers debt contracted or guaranteed for which value has not yet been received, including private debt with official guarantees. - An adjustor of up to 5 percent of the external debt ceiling (in PV terms) may apply if deviations are prompted by a change 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. - A debt is considered contracted when all conditions for its 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 - External payment arrears of the government = 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 Program Period) - PNG will not: - Impose or intensify restrictions on the making of payments and transfers for current international transactions; - Introduce or modify multiple currency practices (MCPs); - Conclude bilateral payments agreements which are inconsistent with Article VIII of the IMF Articles of Agreement; - Impose or intensify import restrictions for balance of payments reason. ### Indicative Targets and Definitions - Indicative targets set for test dates: end-December 2023 and end-June 2024; indicative assessment dates: end-March 2024 and end-September 2024. Targets specified in Table 1 of the MEFP. - Definitions: - Non-resource tax revenues = GFSM 2014 categories: (i) taxes on income, profits, and capital gains; (ii) taxes on payroll and workforce; (iii) taxes on property; (iv) taxes on goods and services; (v) taxes on international trade and transactions — excluding mining and petroleum taxes. - New domestic payment arrears of the budgetary central government = overdue domestic payment obligations owed to entities legally incorporated in PNG and residents of PNG; include obligations to domestic service providers but exclude government liabilities to other public sector units and exclude obligations related to purchases of goods and services. - Payments deemed in arrears when: - Domestic debt remains unpaid for more than 30 days after the due date stipulated in the agreement between the parties; - Wages or pensions remain unpaid 90 days after their due date. - BPNG provision of foreign exchange to authorized FX dealers = amount of FX sold by BPNG to banks and other authorized FX dealers each month to assist meeting FX orders. This indicative target will last be assessed at end-December 2023. - Stock of unmet import-related FX orders = total amount of FX orders related to imports of goods submitted by authorized FX dealers to BPNG’s orderbook more than two months prior to the assessment date. This indicative target will first be assessed at end-March 2024. - Social and other policy priority spending = cash-basis budgetary central government spending in health, education and law and order (capital and operating). ### Program Monitoring and Data Reporting - Authorities shall maintain a Program Monitoring Committee composed of senior officials from the Treasury and the Bank of Papua New Guinea to monitor program performance, inform the Fund regularly, and transmit supporting materials necessary for evaluation of benchmarks. For continuous QTs, authorities will report any non-observance to the IMF promptly. - The Committee will provide the Fund electronically the data specified in the reporting table (Table 2). Key reporting elements include (selection): - Fiscal sector: net acquisition of financial assets and net incurrence of financial liabilities; details on external and domestic loans and securities; stock of domestic arrears; monthly cash plan; payments on education, health, law and order. Reporting frequency typically Monthly or Bi-annual with lags of 1 month or 6 weeks as specified. - Monetary/Financial sector: detailed BPNG balance sheet data; amount of government securities held by BPNG at amortized cost; cash flows of Waigani Public Account, Debt Repayment Account, and TAF; daily and weekly FX sales and outstanding unsatisfied FX requests. Reporting frequencies range from Weekly to Quarterly with specified lags. - External sector: balance of payments, import/export data, net international reserves, foreign exchange flow data, banks’ FX purchases/sales, FX allocation pipeline. Reporting typically Monthly or Quarterly with lags of 1 month to 3 months. ### Debt Sustainability Analysis (DSA) — Key Findings and Assumptions - Risk assessments: - Risk of external debt distress = High - Overall risk of debt distress = High - Granularity in the risk rating = Sustainable - Application of judgment = No - 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 from the COVID-19 shock, but risk of both external and public debt distress remains high. - Over the medium-term public debt enters a downward trend; projected temporary breaches of sustainability indicators can mostly be addressed by debt management operations and improvements in revenue generation. - DSA indicates susceptibility to trade-related and contingent liabilities shocks; downside risks in a high-uncertainty global environment. - To lower risk of debt distress and ensure sustainability: gradual fiscal consolidation (including boosting revenues) and steadfast structural reforms to promote private sector growth are needed. - Conditional on implementation of authorities’ plans for fiscal consolidation and conservative financing strategies, PNG’s external and overall debt is judged as sustainable. - Composite Indicator (CI) = 2.56 based on latest available CI information—April 2023 IMF WEO and World Bank CPIA for 2021 indicating a “weak” capacity to carry debt. ### Public Sector Debt Coverage and Contingent Liabilities Stress Test - Coverage unchanged from March 2023 DSA: central government, state and local government, and guarantees to other entities in the public and private sector, including parts of SOEs. Debt numbers do not fully capture implicit government-guaranteed SOE debts and unfunded superannuation liabilities relating to pensions. - Contingent liabilities stress test assumptions: - Assume 9 percent of GDP as SOE debt not captured in official public debt data (the stock of explicit government guarantees ≈ 1.3 percent of GDP). - Assume 3 percent of GDP for other elements of general government (mainly unfunded superannuation liabilities related to pensions, projected to be 2.1 percent of GDP in 2023). - World Bank’s PPP database indicates PPP capital stock = zero; therefore no default shock is triggered. - Add a financial market shock of 5 percent (reflecting average fiscal cost of financial crisis in low-income countries). - With these assumptions, cumulative shock in the contingent liabilities stress test = 17 percent of GDP — compared to 7 percent under default assumptions. *Source: IMF and IDA staff report, Papua New Guinea — DSA and program documentation (November 6, 2023).* ### 2. Between 2017 and 2022, the stock of public debt in PNG increased from around 24 ### 1pngea2023002 - 2. Between 2017 and 2022, the stock of public debt in PNG increased from around 24 ### Public debt stock and creditor composition - Between 2017 and 2022, the stock of public debt in PNG increased from around 24 billion Kina to more than 53 billion Kina. - Increase was mainly due to external loans, with creditor composition shifting away from commercial loans towards official multilateral and bilateral financing. - Expensive commercial loans have generally been replaced with official multilateral and bilateral financing at more favorable conditions, helping to improve debt sustainability indicators in the medium-term. - Public and Publicly Guaranteed (PPG) external debt figures used for this DSA are consistent with the information in the World Bank’s International Debt Statistics. ### Decomposition of public debt service by creditor (2022–2024) — selected figures from Text Table 2 - Total (In US$ million): 14969 10047 5340 4654 4856 1715 15 - External (In US$ million): 7426 5024 7174 0857 5212 - Multilateral creditors (In US$ million): 3364 2211 3851 8426 2111 - IMF (In US$ million): 709 521 660 00 - World Bank (In US$ million): 5454 2134 3347 000 - ADB (In US$ million): 2015 1362 4413 820 2101 - Bilateral Creditors (In US$ million): 3482 2311 2731 6526 5111 - Paris Club (In US$ million): 1907 1361 8150 1361 00 - o/w: Australia (In US$ million): 1397 9417 2351 22100 - Non-Paris Club (In US$ million): 1575 1115 9311 5129 000 - o/w: China EXIM (In US$ million): 1174 8468 9097 000 - Bonds (In US$ million): 5003 2424 2420 00 - Commercial creditors (In US$ million): 8010 1717 7000 - Domestic (In US$ million): 7543 5024 4623 4247 4281 1514 13 - T-Bills (In US$ million): 3479 2311 3778 3698 3577 1212 11 - Bonds (In US$ million): 3216 2110 6694 3455 7212 - Loans (In US$ million): 8496 3176 1141 47100 - Contingent liabilities (In US$ million): 81653 n/a n/a n/a n/a n/a - Nominal GDP (In US$ million): 31533 n/a 100 (Note: Table entries reproduced exactly as presented in source Text Table 2.) ### Special Drawing Rights (SDRs) - The IMF’s general allocation of SDRs became effective in August 2021, with 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, replacing costly financing and helping reduce the budget deficit. - For the purpose of this DSA, the SDR allocation is included in total public debt while the associated debt service for the amount outstanding is also reflected. ### IMF program (ECF/EFF) and objectives - New 38-month IMF program approved by the Board in March 2023. - Facilities total SDR 684.3 million under the IMF’s Extended Credit Facility (ECF) and the Extended Fund Facility (EFF). - Program objectives focus on: - strengthening debt sustainability through a multi-year fiscal consolidation program while making room to meet critical social and development needs; - enhancing the legal and operational framework of the BPNG to alleviate FX shortages and transition to a market-clearing exchange rate; - building on improvements to governance and the anti-corruption framework. ### IDA status, SDFP, and Performance and Policy Actions (PPAs) - PNG is an IDA blend country, with total IDA20 allocation at SDR 173.7 million. - PNG is eligible to access the Regional Window, the Crisis Response Windows, and the Private Sector Window; PNG is not eligible for SUW-SMLS due to a set-aside in place because of unmet FY23 PPAs. - For fiscal year 2022, PPAs aimed at limiting non-concessional borrowing and operationalizing the 2021 State Guarantee Policy were satisfactorily implemented. - FY23 PPAs (missed by PNG): - (i) a US$ 1 billion PPG external 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 and refraining from any new on-lending until the revised policy is adopted. - Because PNG missed both FY23 PPAs, the country is subject to a set-aside of 20 percent from its FY24 IDA country allocation. - Due to breach of the non-concessional borrowing ceiling (NCB) in FY23, PNG is required to implement an additional PPA on fiscal sustainability in FY24. - Recovery of the set-aside at the start of FY25 will be contingent on: - (i) implementation of FY23 PPA2 (carry-over PPA); - (ii) compliance with the NCB ceiling PPA; - (iii) implementation of the PPA on fiscal sustainability in FY24. ### Macroeconomic outlook and forecasts (2023–2028) — key projections and assumptions - 2023 real GDP growth expected to remain elevated at 3.0 percent, driven by the non-resource sector (4.6 percent); resource sector growth forecasted to contract by 1.4 percent. - 2022 average headline inflation: 5.3 percent (3.4 percent, year-on-year by yearend). - Headline inflation (period-average CPI) forecasted to moderate to 2.2 percent in 2023. - Current account balance for 2023 expected to be significantly lower, by 5.4 percentage points of GDP, at 18.6 percent relative to the March 2023 projections; 2022 current account surplus revised to 22.8 percent of GDP. - In 2022, goods exports volumes estimated to have increased by 6.5 percent compared to 2021; export values increased by 49 percent compared to 2021. - Medium-term baseline: - long-term potential real growth estimate around 3 percent (little changed from March 2023 DSA). - Inflation projected to reach an annual average of 4.6 percent in the medium term. - Current account surplus forecast to remain strong but slightly decrease to around 12 percent of GDP in the medium-term. - Main downside risks: natural disasters, lower global growth, social or political instability. - Upside risks: higher-than-expected commodity prices, or start of any major projects (Papua LNG, P’nyang LNG, Wafi Golpu) which are not included in the baseline. ### Macroeconomic and fiscal assumption table (selected entries from Text Table 3 and Text Table 4) - Real GDP growth y/y (in percent) — 2023 ECF/EFF first rev.: 3.0 5.0 3.1 3.1 (table format preserved as presented). - Resource sector — 2023 ECF/EFF first rev.: -1.4 6.3 0.1 0.1. - Non-resource sector — 2023 ECF/EFF first rev.: 4.6 4.6 4.1 4.0. - Inflation, annual average (consumer prices, percent) — 2023 ECF/EFF first rev.: 2.2 4.0 4.8 4.6. - Current account balance (percent of GDP) — 2023 ECF/EFF first rev.: 18.6 16.3 16.7 12.3. - Primary balance (percent of GDP) — 2023 ECF/EFF first rev.: -1.9 -1.5 -0.2. - Text Table 4 — Summary of Fiscal Operations, 2023-2025 (percent of GDP): - Revenue and grants: 18.2 18.0 18.5 - Taxes: 14.5 14.5 15.2 - Grants: 1.8 1.7 1.4 - Expenditure: 22.6 22.0 21.0 - Expense: 18.5 18.2 17.4 - Compensation of employees: 6.1 6.2 5.9 - Interest: 2.5 2.5 2.3 - Net lending (+)/borrowing (-): -4.4 -3.9 -2.5 - Primary balance (percent of GDP): -1.9 -1.5 -0.2 ### Fiscal strategy, reforms, and risks - Medium-term baseline assumes rapid progress on fiscal consolidation to strengthen debt sustainability and build a fiscal buffer. - Authorities plan to meet Fiscal Responsibility Act requirement to maintain government debt at no more than 40 percent of GDP over the long term. - Measures to contain expenditure growth: reducing current expenditure as a share of non-resource GDP; improving payroll management; stronger expenditure controls; more efficient cash management practices. - Revenue mobilization priorities: implementation of the Non-Tax Revenue Act (NTRA), updated dividend policy to raise resource sector revenue, implementation of the Tax Administration Act (TAA), and amendments to the Income Tax Act (ITA). - From 2026 onward, authorities project an increase in tax revenues from the PNG LNG project as tax exemptions expire; potential for significantly higher dividends after loan amortization for the project is completed (not fully included in the baseline). - Achieving a balanced budget by 2027 would lower risks from significant debt service obligations on external borrowing coming due in 2028. ### Debt financing composition and domestic market considerations - DSA assumes composition of domestic financing similar to past six years in first half of forecast horizon: 75 percent of new issuances corresponding to T-bills, with T-bill financing gradually decreasing over time. - High concentration in short-term Treasury bills raises rollover and short-term liquidity risks; these risks fall throughout the projection horizon as newly issued debt levels decline and fiscal deficits are replaced by surpluses after 2027. - Continued development of the domestic debt market is necessary to increase liquidity and shift to longer maturities. ### Country classification, thresholds, and stress tests - PNG’s debt carrying capacity assessed as weak; Composite Indicator (CI) is 2.56 (based on April 2023 WEO and 2021 CPIA), indicating weak debt-carrying capacity. - Applicable thresholds: - PV of external debt-to-GDP ratio: 30 percent - PV of external debt-to-exports ratio: 140 percent - External debt service-to-exports ratio: 10 percent - External debt service-to-revenue ratio: 14 percent - PV of public debt-to-GDP ratio: 35 percent - Scenario stress tests: - Contingent liabilities stress test included to account for SOE debt not captured in official public debt data. - Commodity price shock parameters: fuel price shock set at 35 percent (compared to default shock of 58 percent); shock to non-fuel commodity prices set to 24 percent (20 percent for base metals and precious metals, 31 percent for agricultural commodities other than grain; grain shocks not included). - Mitigating factors at default values: 2 percent for fuel, and 27 percent for non-fuel. - PNG’s single outstanding Eurobond (maturing in 2028) activates the market financing module. _Italic source line: Content derived from the IMF country document provided in the PDF chapter excerpt._ ### 15. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its ### 1pngea2023002 - 15. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its ### Baseline external debt dynamics and key drivers - Debt-service-to-revenue indicator is projected to breach its threshold, with: - A relatively large breach in 2028 driven by the bullet payment for the US$500 million Eurobond, which was issued in 2018. - Marginal breaches in 2026, 2027 and 2029 as the debt-service-to-revenue ratio surpasses 14, the threshold value, due to higher official bilateral and multilateral debt service payments given tighter financial conditions, which is falling by 2030. - In the baseline scenario: - The present value of debt-to-GDP ratio as well as debt-to-exports and debt service-to-export ratios remain below their respective thresholds over the entire projection horizon. - Solvency indicators are on a downwards trend in the latter half of the projection. ### Stress tests and external vulnerabilities - Stress tests indicate notable vulnerabilities in PNG’s external debt dynamics, particularly to exports shocks, which would cause threshold breaches for all four external sustainability indicators. - Market financing risk module: - Indicates a moderate risk of heightened liquidity pressures primarily due to elevated GFNs. - 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. - Sovereign spreads: - PNG’s relatively elevated sovereign spreads (which have dropped by close to 150 basis points since the ECF/EFF approval) likely reflect perceived risks due to the country’s characteristics (small and undiversified export base, small revenue base, vulnerability to shocks). ### Data revisions, residuals, and accounting issues - The current DSA shows an improvement to the assessment of debt dynamics with smaller residuals. - With Fund TA support, recently published BOP data in BPM6 addressed issues that led to overestimating residuals, such as 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. - Some data quality issues persist, likely continuing to drive positive residuals from external financial flows which persist into the projection period as a consistent accounting framework is used. ### Public sector debt sustainability (DSA) — levels and projections - Public debt PV ratios have increased substantially in recent years and are currently expected to increase to 47 percent of GDP for 2023. - Starting from this level means 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 remains broadly stable just above 52 percent of GDP until 2025, before falling, more markedly in the second half of the projection. - The downward trend 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. - Domestic debt profile and liquidity: - High concentration in short-term Treasury bills raises rollover risk; diversifying issuance toward longer-term Treasury bonds would lower these risks and make debt service costs more predictable. - Short-term debt falls from a peak of 14.9bn Kina in 2022 to 8.6bn Kina in 2028, a mitigating factor for liquidity risks. - Residuals from unidentified debt-creating flows, arising largely in 2018, are not anticipated to be repeated as the government has taken several steps to improve recording and reporting of debt. ### Public debt stress-test outcomes and key magnitudes - Stress tests identify several vulnerabilities for public debt: - The most extreme shock impacting the PV of public debt is a shock to exports: PV of public debt-to-GDP ratio peaks at 62.1 percent of GDP in 2027, more than 1.5 times the 35 percent threshold value and substantially above the starting level of 22.4 percent of GDP in 2023, before gradually decreasing over the next years. - A tailored stress test for the combined contingent liability shock causes deterioration felt most acutely through the total public debt service-to-revenue measure, underscoring contingent liabilities as an important source of vulnerability. - The trajectory of the PV of the public debt-to-revenue ratio is impacted most by the commodity price shock, reflecting strong reliance on commodity exports. ### Risk rating, near-term pressures, and outlook - PNG remains at “high” risk of external and overall debt distress. The mechanical overall debt distress rating is “high”, owing to multiple breaches of sustainability thresholds under the baseline scenario. - External debt distress rating remains at high risk given breaches in debt service-to-revenue. - Debt service on existing loans, paired with relatively weak revenue generation, are expected to almost double the debt service-to-revenue ratio by 2025; thereafter, as debt service reduces and revenues increase (barring further shocks to demand growth), the indicator enters a downward trend. - Stress tests show main risks to public debt sustainability are adverse shocks to exports, commodity prices and contingent liabilities. - Historical scenario indicates it will be challenging to reduce debt from current levels and that reforms implemented during recent SMPs are essential to support fiscal sustainability. - Market financing risks remain relevant, with the GFN threshold breached, pointing to moderate market financing pressures. ### Policy implications and conditionalities for sustainability - Public debt dynamics are assessed as sustainable conditional on policy implementation: - Public debt is expected to remain broadly stable in the near-term and to enter a clear downward path over the medium-term. - Projected temporary breaches of sustainability indicators can be prevented by debt management operations and by boosting revenue generation. - Public external and overall debt is judged sustainable conditional on implementation of the authorities’ plans for further fiscal consolidation and conservative financing strategies (such as substituting costly financing with concessional financing from multilateral and bilateral partners). - The baseline sustainability assessment also relies upon higher future resource revenue as tax exemptions expire from 2026 onwards. *Source: IMF DSA excerpt provided in content unit 1pngea2023002* ### 24. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress ### 1pngea2023002 - 24. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress ### Summary assessment (authorities' views vs. staff) - Staff assessment: "PNG remains at high risk of debt distress but remains sustainable under the baseline projection." - Authorities' acknowledgement: - Large financing requirements to dampen COVID-19 effects have increased public debt. - Redemption of the US$ 500 million Eurobond in 2028, issued in 2018, is identified as a key risk. - Authorities' optimistic points and policy stance: - More optimistic about debt-carrying capacity and perceive a lower risk of debt distress, citing increased revenues by 2027 as PNG LNG project debt payments are completed. - Strategy to substitute costly financing with concessional financing from multilateral and bilateral partners, improving PNG’s debt profile. - Interest costs of domestic securities have fallen over the past two and a half years. - Emphasized importance of more favorable future contract negotiation and the medium-term revenue strategy as mitigating factors for medium-term risks. - Committed to fiscal consolidation and conservative financing strategies to support sustainability. ### Key external debt and sustainability figures (selected, from Table 1) - External debt (nominal), selected years (In percent of GDP, unless otherwise indicated): - 2020: 69.0 - 2021: 68.5 - 2022: 60.7 - 2023: 67.5 - 2024: 67.5 - 2025: 70.2 - 2026: 71.7 - 2027: 70.9 - 2028: 67.4 - 2033: 46.0 - 2043: 27.6 - Of which: public and publicly guaranteed (PPG), selected years: - 2020: 21.8 - 2021: 24.8 - 2022: 23.6 - 2023: 27.8 - 2027: 32.5 - 2028: 29.2 - 2033: 13.9 - 2043: 25.6 - Change in external debt (percent of GDP), selected years: - 2020: 7.3 - 2021: -0.5 - 2022: -7.8 - 2023: 6.8 - 2024: 0.0 - 2025: 2.7 - 2026: 1.5 - 2027: -0.8 - 2033: -2.3 - 2043: -1.9 - Identified net debt-creating flows (percent of GDP), selected entries: - 2020: -15.4 - 2021: -26.1 - 2022: -39.8 - 2023: -22.2 - 2024: -21.9 - 2025: -21.1 - 2026: -19.3 - 2027: -16.3 - 2033: -12.4 - 2043: -16.6 - Non-interest current account deficit (percent of GDP), selected years: - 2020: -17.4 - 2021: -16.3 - 2022: -25.2 - 2023: -19.8 - 2024: -17.5 - 2025: -17.8 - 2026: -15.9 - 2027: -14.5 - 2033: -9.0 - 2043: -14.4 - Endogenous debt dynamics (percent of GDP), selected years: - 2020: 5.7 - 2021: -3.3 - 2022: -8.9 - 2023: -0.7 - 2024: -2.0 - 2025: -0.9 - 2026: -1.0 - 2027: 0.5 - 2033: 0.2 - Residual (percent of GDP), selected years: - 2020: 22.7 - 2021: 25.6 - 2022: 32.0 - 2023: 28.9 - 2024: 21.9 - 2025: 23.8 - 2026: 20.8 - 2027: 15.5 - 2033: 15.2 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio, selected years: - 2027: 11.4 - 2028: 9.3 - 2033: 7.6 - 2043: 2.4 - PV of PPG external debt-to-exports ratio, selected years: - 2027: 55.6 - 2028: 60.9 - 2033: 24.6 - PPG debt service-to-exports ratio, selected years: - 2020: 12.7 - 2021: 8.1 - 2022: 5.3 - 2023: 3.1 - 2026: 5.9 - 2033: 1.1 - PPG debt service-to-revenue ratio, selected years: - 2020: 37.8 - 2021: 27.6 - 2022: 15.8 - 2023: 8.5 - 2027: 15.3 - 2033: 2.1 - Gross external financing need (Million of U.S. dollars), selected years (negative indicates net financing requirement as presented): - 2020: -2228.1 - 2021: -3230.2 - 2022: -7126.1 - 2023: -3994.9 - 2024: -4137.9 - 2025: -4137.1 - 2026: -4243.4 - 2027: -2713.0 - 2033: -7891.7 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent), selected years: - 2020: -3.2 - 2021: 0.1 - 2022: 4.3 - 2023: 3.0 - 2024: 5.0 - 2025: 3.1 - 2026: 3.1 - 2027: 3.0 - 2033: 3.8 - 2043: 3.3 - GDP deflator in US dollar terms (change in percent), selected years: - 2020: -0.5 - 2021: 10.3 - 2022: 14.9 - 2023: -7.3 - 2024: 2.1 - 2027: -0.7 - 2033: 0.6 - Effective interest rate (percent) 4/, selected years: - 2020: 5.2 - 2021: 5.0 - 2022: 4.2 - 2023: 1.8 - 2024: 1.8 - 2025: 1.7 - 2026: 1.6 - 2027: 3.7 - 2033: 4.8 - Growth of exports of G&S (US dollar terms, in percent), selected years: - 2020: -18.4 - 2021: 24.8 - 2022: 26.9 - 2023: -8.0 - 2024: 4.8 - 2025: 3.6 - 2026: 2.9 - 2027: 2.7 - 2033: 3.6 - Growth of imports of G&S (US dollar terms, in percent), selected years: - 2020: -14.3 - 2021: 34.0 - 2022: -13.3 - 2023: -2.5 - 2024: 0.5 - 2025: 3.1 - 2026: 2.7 - 2027: 2.8 - 2033: 4.0 - Government revenues (excluding grants, in percent of GDP), selected years: - 2020: 12.9 - 2021: 12.8 - 2022: 15.4 - 2023: 16.4 - 2024: 16.4 - 2025: 17.1 - 2026: 17.4 - 2027: 18.0 - 2033: 18.4 ### Public sector debt summary (selected, from Table 2) - Public sector debt (percent of GDP), selected years: - 2020: 48.7 - 2021: 52.2 - 2022: 48.4 - 2023: 52.4 - 2024: 52.2 - 2025: 52.7 - 2026: 52.1 - 2027: 49.2 - 2028: 46.5 - 2033: 37.4 - Change in public sector debt (percent of GDP), selected years: - 2020: 8.1 - 2021: 3.5 - 2022: -3.8 - 2023: 4.0 - 2024: -1.2 - 2025: 0.5 - 2026: -0.6 - 2027: -2.8 - 2028: -2.9 - 2033: -0.7 - Identified debt-creating flows (percent of GDP), selected years: - 2020: 9.7 - 2021: 1.6 - 2022: -3.7 - 2023: 0.9 - 2024: -1.3 - 2025: -1.0 - 2026: -1.8 - 2027: -3.2 - 2028: -2.9 - 2033: -2.4 - Primary deficit (percent of GDP), selected years: - 2020: 6.2 - 2021: 4.4 - 2022: 3.0 - 2023: 1.9 - 2024: 1.5 - 2025: 0.2 - 2026: -0.9 - 2027: -2.5 - 2028: -2.1 - 2033: -0.5 - PV of public debt-to-GDP ratio (selected projection entries): - 2027: 42.6 - 2028: 27.8 - 2033: 13.4 - Debt service-to-revenue and grants ratio (selected): - 2020: 133.8 - 2021: 122.3 - 2022: 101.4 - 2023: 85.1 - 2024: 83.4 - 2025: 83.1 - 2033: 27.5 - Gross financing need (percent of GDP), selected years: - 2020: 25.8 - 2021: 22.7 - 2022: 19.9 - 2023: 17.4 - 2024: 16.5 - 2025: 15.5 - 2026: 14.0 - 2027: 11.0 - 2028: 11.2 - 2033: 4.9 ### Stress tests and sensitivity analysis (high-level) - Figures and tables present multiple stress-test scenarios (e.g., commodity price shock, exports shock, combined contingent liabilities, market financing shock) assessing indicators such as: - PV of debt-to-GDP ratio - PV of debt-to-exports ratio - Debt service-to-revenue ratio - Debt service-to-exports ratio - Table 3 provides sensitivity analysis for key indicators of public and publicly guaranteed external debt, 2023-2033, including: - Baseline and alternative scenarios A1 (key variables at historical averages), bound tests B1–B6 (e.g., Real GDP growth, Primary balance, Exports, Depreciation, Combination), and tailored tests C1–C4 (e.g., Combined contingent liabilities, Commodity price, Market Financing). - Baseline PV and threshold comparisons are reported across 2023–2033 for multiple indicators. *Source: 1pngea2023002 - 24. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress (PDF content provided).* ### 2. Primary balance345671077777 ### 2. Primary balance345671077777 ### Sensitivity analysis and key debt indicators (2023–2033) - Table 4: Public debt sensitivity—baseline debt service-to-exports series (2023–2033): 47, 47, 48, 47, 45, 43, 39, 36, 33, 30, 28. - Table 4: PV of debt-to-GDP ratio—baseline series (2023–2033): 259, 261, 259, 252, 231, 217, 195, 174, 154, 142, 131. - Table 4: PV of Debt-to-Revenue Ratio—baseline series (2023–2033): 85, 83, 83, 79, 70, 68, 55, 51, 46, 42, 40. - Alternative scenario A1 (Key variables at their historical averages in 2023-2033) samples: - Debt service-to-exports: 47, 49, 50, 52, 53, 54, 55, 55, 56, 56, 57. - PV of debt-to-GDP ratio: 259, 270, 274, 279, 276, 280, 273, 267, 261, 265, 270. - PV of Debt-to-Revenue Ratio: 85, 83, 81, 75, 74, 88, 86, 89, 89, 93, 97. - Bound tests (selected): - B1. Real GDP growth (PV debt-to-exports series): 47, 53, 60, 62, 62, 61, 61, 60, 60, 60, 60. - B3. Exports (PV debt-to-GDP series): 259, 312, 400, 396, 373, 359, 328, 294, 263, 245, 227. - C3. Commodity price (PV of debt-to-GDP series): 259, 390, 438, 485, 462, 448, 411, 372, 356, 356, 356. - Tailored tests: - C1. Combined contingent liabilities (PV of debt-to-GDP series): 259, 355, 348, 340, 316, 301, 275, 250, 227, 215, 204. - C3. Commodity price (debt service/other indicators): 47, 54, 63, 71, 76, 79, 80, 78, 77, 76. - Benchmarks and thresholds shown in the sensitivity framework: - Thresholds in some tests: 10, 10, 10, 10, 10, 10, 10, 10, 10, 10, 10 (listed under one section). - TOTAL public debt benchmark: 35, 35, 35, 35, 35, 35, 35, 35, 35, 35, 35. ### Market-financing risk indicators and drivers of debt dynamics - Figure 3 and Figure 5 highlight baseline drivers and market-financing risk indicators: - Maximum gross financing needs (GFN) measured over a 3-year baseline projection horizon. - EMBI spreads correspond to the latest available data; an EMBI value reported is 570. - Visual indicators in the report compare Baseline, Market financing, and Threshold lines for: - Debt service-to-revenue ratio (2023–2033 axis shown). - PV of debt-to-exports ratio (2023–2033 axis shown). - PV of debt-to-GDP ratio (2023–2033 axis shown). - Debt service-to-exports ratio (2023–2033 axis shown). ### IMF staff updates and program conditionality (Statement by the IMF Staff Representative, November 22, 2023) - Monetary policy instrument alignment implemented: - Kina Facility Rate (KFR) lowered from 3.0 to 2.5 percent. - 7-day central bank bills rate increased from 2.0 to 2.5 percent. - Outcome: KFR and central bank bills rate aligned at 2.5 percent. - National Accounts outturns: - 2021: real GDP growth outturn was -0.8 percent (versus 0.1 percent in the Staff Report); nominal GDP increased by 11.0 percent (versus 11.9 percent in the Staff Report). - 2022: real GDP growth outturn was 5.2 percent (versus 4.3 percent in the Staff Report); nominal GDP increased by 21.4 percent (versus 20.2 percent in the Staff Report); nominal GDP was K111.2 billion (broadly in line with the Staff Report estimate K111.0 billion). - Program conditionality and reforms: - Early implementation of structural benchmark SB 9 to align rates considered necessary to improve monetary transmission and enable liquidity management reforms. - Roadmap to guide monetary policy and exchange rate framework reforms; work to determine key parameters of the crawl-like exchange rate arrangement with implementation requirement by end-December 2023. - Plan to return to kina convertibility by the end of the program. - Debt recording and management: - Implementation of the Guarantee Policy and data migration to a new system. - Present value limits on new public external debt contracted in 2023 and in 2024 are being maintained. - Financial sector and governance actions: - New financial inclusion strategy for 2023-2027 published. - CBA amendment work to address weaknesses in mandate, governance, autonomy, transparency, and accountability (ongoing SB). - Asia/Pacific Group on Money Laundering (APG) AML/CFT mutual evaluation in October noted as supporting effective implementation. - Risks to growth and fiscal outlook: - Growth risks tilted to the downside; notable upsides include commencement of new resource extractive projects and possible large LNG revenue inflows if amortization and depreciation expenses fall earlier than baseline. - Fiscal consolidation to continue in 2024; medium-term budget repair strategy aims to achieve a balanced budget by 2027 in line with a 13-year plan. - Higher-than-expected revenue performance to be used to cover expected increase in interest expenditure, financial support to PNG Power, rental and utility costs, and for clearing payment arrears. - Climate change vulnerability: - PNG ranked 8th among countries for highest disaster risk in the world according to the World Risk Report, 2020. - Authorities committed to climate mitigation and adaptation, working with development partners. ### Authorities’ view and program progress (Statement by Robert Nicholl et al., November 22, 2023) - Program implementation and governance: - Authorities have met all quantitative performance criteria (QPC) and indicative targets (IT) for end-June 2023 and all five structural benchmarks (SB), except one which was met after a short delay. - Human Resource business process workshops identified staffing and payroll management reforms. - Appointment of the Commissioner and two Deputy Commissioners of the Independent Commission Against Corruption (ICAC). - New Medium-Term Revenue Strategy (MTRS) for 2023-2027 prepared with Fund TA. - Development needs and priorities: - PNG faces large development and financing needs; urgent investment required in power, utilities, and transport links, and extension of education and health services. - Program intended to catalyze resources from multilateral and bilateral development partners. - Fiscal and debt management priorities: - Authorities confident in achieving ambitious fiscal targets, with increased domestic revenue mobilization guided by the MTRS and enhanced expenditure efficiency. - Expectation that sovereign debt distress risk will subside when LNG revenue picks up in 2027 and new resource projects come onstream. - Concessional financing substitution improving PNG’s debt profile. - Capacity support and communication: - Authorities request continued close engagement and technical assistance from the Fund to implement reforms and to communicate benefits to the public. *Sources: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pngea2023002.pdf_