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### EXECUTIVE SUMMARY — Key findings and program assessment
- IMF Executive Board approved 38-month ECF and EFF arrangements on March 22, 2023.
- Program performance over the second review period: all end-December 2023 quantitative performance criteria (QPC) and indicative targets (IT) were met.
- Fiscal outcome 2023:
  - Fiscal deficit reduced by 0.9 percentage points of GDP: from 5.3 percent in 2022 to 4.3 percent of GDP in 2023.
  - Total revenue (excluding grants) increased by 1.4 percentage points of GDP relative to 2022; tax revenue contributed 1.0 pp of GDP.
  - Revenue overperformance relative to first review projections: 0.4 pp of GDP.
  - Revenue composition changes (relative to 2022): corporate mining and petroleum tax (MPT) +0.8 pp of GDP; goods and services tax +0.5 pp of GDP; dividends from state-owned enterprises and entities -0.5 pp of GDP; other non-tax revenue -0.4 pp of GDP.
  - Expenditure composition changes (relative to 2022): transfers to other government units +1.2 pp of GDP; compensation of employees +0.4 pp of GDP; interest payments +0.2 pp of GDP; capital spending -0.7 pp of GDP; goods and services -0.5 pp of GDP.
- External and monetary outcomes:
  - Foreign exchange reserves and net international reserves (NIR) remained above program floors.
  - New external debt stayed well below the ceiling; no new external or domestic arrears accumulated.
  - Bank of PNG (BPNG) modified exchange rate arrangement and enhanced monetary operations under the Roadmap.
- Structural benchmarks (SBs) status:
  - Of nine SBs due: four met, two implemented with delay, two partially implemented with delay, one not implemented (ITA amendments).
  - ITA amendment SB proposed reset from end-December 2023 to end-December 2024.
  - Four new SBs proposed to enhance monetary policy operations and operationalize ICAC.
- Staff recommendation: support completion of the second reviews under EFF and ECF given satisfactory performance and ownership demonstrated in the Letter of Intent and MEFP.

### RECENT DEVELOPMENTS, OUTLOOK, AND KEY PROJECTIONS
- Growth and sectors:
  - Real GDP growth in 2023 estimated at 2.9 percent.
  - Non-resource sector growth in 2023: 4.1 percent.
  - Resource sector 2023 contracted by 0.4 percent.
  - Real growth projections: 2024: 4.6; 2025: 3.7; 2026: 3.4; 2027: 3.0; 2028: 3.1; 2029: 3.1.
  - Medium-term growth projected to stabilize around 3 percent (average 3.1 percent in Annex IV medium-term projection note).
- Inflation:
  - Headline inflation: 1.4 percent in 2023Q2; 3.9 percent in 2023Q4; 2.5 percent in 2024Q1.
  - Core inflation: 4.0 percent in 2023Q4.
  - Headline inflation projected to reach 5.0 percent by end-2024; medium-term convergence to 4.5 percent.
  - CPI (annual average) series: 2020: 4.9; 2021: 4.5; 2022: 5.3; 2023: 2.3; 2024: 4.4; 2025: 4.8; 2026: 4.8; 2027: 4.6; 2028: 4.5; 2029: 4.5.
- External sector and exchange rate:
  - Kina depreciated by about 7 percent as of mid-May 2024 against the US dollar.
  - EBA-lite REER model: external position at end-2023 moderately weaker than fundamentals; REER overvalued by about 4.9 percent (presentation also cites alternative high-frequency models ~7.6 percent).
  - FX shortages persist and hamper imports and activity.
  - Gross reserves 2023: US$ 3.9 bn (6.6 months of total imports; 8.6 months of non-mineral imports). BPNG gross international reserves floor: no less than US$2.0 billion.
- Banking and financial sector:
  - Banks well-capitalized, profitable, and liquid as of end-2023; capital adequacy ratios well above prudential standards.
  - Private sector credit picked up in 2023; NPLs remain above pre-pandemic levels but reduced from 2021 peak.
  - One bank holds 70 percent of all banking assets (concentration risk).
  - Bank-sovereign nexus high due to large government cash deposits and government securities held by commercial banks.
- Debt and debt sustainability:
  - December 2023 DSA: public and publicly guaranteed debt at high risk of debt distress.
  - Elevated debt and liquidity risks: bullet Eurobond payment due in 2028; higher bilateral and multilateral debt service payments between 2026 and 2029 breach debt service-to-revenue thresholds in baseline.
  - If fully executed, public debt projected to fall to 40.4 percent of GDP in 2029 from 52.0 percent in 2023.
  - Authorities considering financing options ahead of Eurobond repayment including Debt Swaps and partner funding.

### FISCAL ADJUSTMENT PLAN, MEDIUM-TERM FRAMEWORK, AND REVENUE REFORMS
- 2024 fiscal target and composition:
  - 2024 deficit target: reduce by 0.4 pp of GDP to 3.9 percent (K4.8 billion).
  - Adjustment composition (2024, pp of GDP): non-resource tax revenue +0.1; grants +0.8; resource revenue -0.5; non-tax revenue +0.3 (0.2 pp from NTRA; 0.1 pp from dividends).
  - Total expenditure projected broadly flat vs. 2023; composition changes: capital spending +0.7 pp; interest costs +0.2 pp; transfers to local government units +0.2 pp; compensation of employees -0.6 pp; goods and services -0.5 pp.
  - Fiscal package: 0.2 pp of GDP to support businesses affected by social unrest, to be covered by contingency budget appropriations.
- Medium-term objective: balanced budget by 2027 and surpluses thereafter.
- Revenue mobilization and tax reform:
  - Key measures: implement MTRS and substantial Income Tax Act (ITA) amendments, supported by IMF TA.
  - Proposed deadline resets: ITA amendments to Parliament — end-December 2024 (reset from end-December 2023); IRC Act amendments proposed reset to end-December 2024 (original end-October 2024).
  - IRC to finalize initial KPIs with IMF support (ongoing SB by end-May 2024).
- Arrears and payroll:
  - Remaining stock of unverified claims: K3.2 billion as of end-April 2024.
  - Appropriated in 2024 budget: K0.3 billion for arrears verification program.
  - Arrears Verification program: submissions K6.3 billion; verified K3.1 billion; paid K1.4 billion.
  - AscenderPay payroll cleansing: completed for national agencies in Port Moresby; next phase for provincial agencies (ongoing SB by end-August 2024).

### MONETARY, FX, AND CENTRAL BANK REFORMS
- Exchange rate arrangement and Roadmap:
  - Transitioned to crawl-like exchange rate arrangement effective January 3, 2024; biannual review of crawl parameters.
  - Crawl parameters: USD initial anchor; two percent-wide crawling band; formula based on real misalignment and inflation differentials.
  - Multiple-price FX auction mechanism implemented; gradual elimination of FX rationing toward kina convertibility per Roadmap.
  - Indicative ceiling on stock of unmet import-related orders implemented; NIR floor (QPC) remains in place.
- Monetary policy settings and operations:
  - Kina Facility Rate (KFR): reduced from 3.0 percent to 2.5 percent in November 2023, to 2.0 percent in February 2024, then increased by 50 basis points to 2.5 percent in May 2024.
  - Cash reserve requirement ratio increased by 100 basis points to 11 percent in May 2024.
  - BPNG signaled tightening stance for April-September 2024.
  - Open market operations: FRFA auctions started August 2023; FRFA rate aligned with KFR in November 2023; FRFA mopped up on average half of excess liquidity.
  - Planned reforms (new proposed SBs by end-August 2024): implement interest rate corridor centered on KFR bounded by standing overnight facilities priced at ±150 bps around KFR; modify reserve requirement framework by introducing partial reserve averaging and extending lagged maintenance period to 4-weeks.
- Central bank governance and legal reforms:
  - Permanent Governor appointed January 2024; Deputy Governor and Board positions filled April 2024.
  - Central Banking Act (CBA) amendments submitted to Parliament in June 2024 with key improvements (price stability ranked primary, Monetary Policy Committee established, limits on temporary advances, lender of last resort and emergency liquidity assistance frameworks); remaining governance and autonomy gaps identified.

### GOVERNANCE, ANTI-CORRUPTION, AML/CFT, AND TRANSPARENCY
- ICAC operationalization:
  - Commissioner and two Deputy Commissioners appointed; implementing regulations, procedure manuals, and secure IT in place; operational budget increased.
  - Planned appointments and MOUs: oversight committee appointment by end-September 2024 (proposed SB); at least four MOUs with other agencies by end-December 2024 (proposed SB).
  - ICAC staffing target: 95 by end-2024 (funding ramp-up from K10 million in 2023 to at least K47 million in 2024).
- AML/CFT:
  - AML/CFT Strategic Plan 2023-27 underway; APG mutual evaluation report expected adoption in July 2024 with implementation to follow.
  - Key APG recommendations: update ML/TF risk assessments; establish information sharing; improve suspicious transaction reporting; strengthen legal framework including beneficial ownership.
- Transparency and procurement:
  - In March 2024 posted details of major COVID-19 related contracts (over K100,000) on procurement website; total value ~K180 million. Beneficial ownership unavailable.
  - Commitments to publish more procurement data and improve SOE financial disclosure and timeliness of financial statements.
- SOE governance:
  - Legal and policy framework amended with ADB support; improvements in director appointments, audit timeliness, and dividend policy work.

### STRUCTURAL BENCHMARKS, CONDITIONALITY, AND TIMETABLE
- SBs status (November 2023 — May 2025 summary):
  - Introduce ITA amendments to Parliament — End-December 2024 (proposed reset).
  - Develop initial worksheet of output-based KPIs for IRC — End-May 2024 (in progress).
  - Submit IRC Act amendments to create oversight Board — End-December 2024 (proposed reset).
  - Complete payroll data cleansing in AscenderPay and produce report — End-August 2024 (ongoing).
  - Implement parameters for crawl-like exchange rate arrangement — Met (End-November 2023).
  - Publish FX regulations and eliminate certain TCC requirements — Met (End-December 2023).
  - Align 7-day CBB issuance rate with KFR — Met (End-December 2023).
  - Appoint Governor/Deputy/Board — Implemented with delay (April 2024; due End-November 2023).
  - Adopt ICAC implementing regulations — Implemented with delay (May 2024; due End-December 2023).
  - New proposed SBs: interest rate corridor, reserve averaging rule (both End-August 2024); ICAC oversight committee (End-September 2024); MOUs between ICAC and other agencies (End-December 2024).

### PROGRAM FINANCING, IMF ENGAGEMENT, AND CAPACITY TO REPAY
- Program financing and burden sharing:
  - Program fully financed with firm commitments for upcoming 12 months.
  - Fund burden sharing expected to average 34.5 percent across the program.
- Capacity to repay the Fund:
  - Fund credit outstanding (including projected purchases) will peak in 2026 at 3.5 percent of GDP.
  - Equivalent to around 7.3 percent of exports of goods and services and 36.7 percent of gross international reserves.
  - Total debt service to the Fund will peak at 1.2 percent of exports of goods and services and 7.5 percent of gross international reserves in 2030.
- Disbursement schedule (selected):
  - Executive Board approval: 22 March 2023; total amount SDR 65.8 (ECF 12.1; EFF 43.8 shown in table).
  - Total across schedule: 684.3 (SDR million) in table.
  - Papua New Guinea's quota: 263.2 million SDR (memorandum).

### DATA REPORTING, MONITORING, AND TEST DATES
- Program monitoring:
  - Semi-annual program reviews; waiver of applicability proposed for end-June 2024 PCs under EFF due to non-availability of final data.
  - New QPCs and ITs at end-June 2025; indicative targets at end-March 2025.
  - Proposed NIR adjustor conditional on external financing disbursements (first applied at end-December 2024).
- Key test dates and reporting:
  - Test dates: end-June 2024; end-December 2024; end-June 2025. Indicative assessment dates: end-September 2024 and end-March 2025.
  - Program Monitoring Committee chaired by Secretary of the Treasury; appointed monitoring coordinators at Treasury and BPNG.
- Selected quantitative targets and outcomes (preserved exactly as presented):
  - Stock of net international reserves of the BPNG (floor, US$ millions): 2,082; 2,707 met; 2,650; 3,292 met; 2,500; 2,830 met; 2,350; 2,200; 2,050; 1,988; 1,925.
  - Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): 1,405; 114 met; 943; 531 met; 1,072; 0 met; 1,072; 1,072; 1,072; 530; 530.
  - Non-resource tax revenue of the government (floor, cumulative from the beginning of the year): 9,167; 9,649 met; 12,741; 13,720 met; 2,935; 3,075 met; 5,871; 10,714; 14,677; 3,268; 6,537.
  - Social and other priority spending (floor, cumulative from the beginning of the year): 2,817; 3,699 met; 3,866; 4,787 met; 525; 1,735 met; 1,575; 2,958; 4,059; 550; 1,650.
  - Stock of unmet import-related FX orders (ceiling): 150; 46 met; 125; 100; 75; 50; 25; 0; 5; 0; 25.

### RISK ASSESSMENT — Annex I highlights and mitigation advice
- Risk likelihood thresholds: “low” <10 percent; “medium” 10–30 percent; “high” 30–50 percent.
- Regional/domestic risks:
  - Natural disasters and extreme climate events: Relative Likelihood: Medium; Expected Impact: Medium. Staff advice: invest in disaster risk reduction; build fiscal and external buffers.
  - Widespread social discontent and political instability: Relative Likelihood: High; Expected Impact: High. Staff advice: transparent communication; support vulnerable households while building fiscal buffers.
  - Major resource projects and higher LNG revenues (upside): Relative Likelihood: High; Expected Impact: High. Staff advice: fast-track implementation and build buffers.
- Global risks:
  - Cyberthreats: Relative Likelihood: Medium; Expected Impact: Medium. Staff advice: invest in IT security and business recovery sites.
  - Commodity price volatility: Relative Likelihood: High; Expected Impact: High. Staff advice: use higher resource revenue to create fiscal space and build buffers.
  - Abrupt global slowdown or recession: Relative Likelihood: Medium; Expected Impact: High. Staff advice: build buffers to support vulnerable non-resource sectors.

### MACRO-FINANCIAL IMPACT OF JANUARY 2024 SOCIAL UNREST (Annex III)
- Event: Social unrest on January 10, 2024; order restored within two days; looting and destruction of some retail businesses mainly in Port Moresby.
- Staff macro estimate:
  - Non-resource sector growth revised down by 0.2 percentage points (temporary halt in retail activity for affected businesses).
  - No impact estimated on resource sector activity.
- Fiscal response: authorities introduced a fiscal package to assist affected businesses; expected limited in size and covered by contingency appropriations.

### POVERTY REDUCTION AND GROWTH STRATEGY (PRGS / MTDP IV) — alignment with program
- PRGS launched January 2023 (MTDP IV) covering 2023–2027 with medium-term goals:
  - doubling domestic revenue and export revenue;
  - creating one million additional jobs;
  - improving standards of living for all PNG citizens.
- PRGS strategic priorities: 12 SPAs including MSME reforms, Connect PNG infrastructure, national health insurance policy, energy security, and education infrastructure.
- Alignment with ECF/EFF:
  - Fiscal repair intended to create fiscal space for PRGS priorities.
  - Spending on health, education, and law and order ring-fenced under the program.
  - Roadmap of monetary and FX reforms to tackle foreign exchange shortages impeding growth.

### PRIORITIES, TECHNICAL ASSISTANCE, AND NEXT STEPS
- Near-term priorities:
  - Improve cash management and implement Treasury Single Account (TSA) strategy; close remaining COVID trust accounts by end-September 2024.
  - Raise domestic revenue (MTRS and ITA reform) and strengthen IRC performance.
  - Continue monetary and FX reforms under Roadmap; introduce interest rate corridor and reserve averaging.
  - Operationalize ICAC and implement AML/CFT mutual evaluation recommendations.
  - Prepare Medium-Term Debt Strategy (Debt Strategy) and options for 2028 US$500 million Sovereign Bond maturing in 2028.
- Technical assistance and missions:
  - 2023 IMF CD supported Roadmap (MCM), MTRS and ITA revision (FAD), and FSI compilation (STA).
  - Ongoing support: revenue administration (PFTAC), macro-fiscal forecasting (ICD/PFTAC), BOP data (CDOT/STA).
  - Public financial management TA on expenditure controls and cash management in March 2024.
  - Financial Sector Stability Review scheduled for July 2024; Climate Policy Diagnostic and C-PIMA scheduled for June–August 2024.
  - Coordination with partners: UN and EU (anti-corruption), ADB (SOE governance), Australia (national accounts and AML/CFT).

*Source: IMF staff report — EXECUTIVE SUMMARY and annexes from 1pngea2024001-print-pdf (June 17, 2024).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background
- 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 authorities have made progress implementing program-supported reforms but faced a tense political and social environment culminating in civil unrest in January 2024 that affected the parliamentary calendar and delayed the adoption of laws.

### Program developments
- Program performance over the second review period was satisfactory: all end-December 2023 quantitative performance criteria (QPC) and indicative targets (IT) were met.
- Fiscal outcome and public finances:
  - The authorities reduced the fiscal deficit by 0.9 percentage points of GDP in 2023, from 5.3 percent in 2022 to 4.3 percent of GDP in 2023.
  - Total revenue (excluding grants) increased by 1.4 percentage points of GDP relative to 2022, mostly driven by tax revenue (1.0 pp of GDP).
  - Relative to first review projections, total revenue overperformed by 0.4 pp of GDP.
  - Revenue composition changes (relative to 2022): corporate mining and petroleum tax (MPT) +0.8 pp of GDP; goods and services tax +0.5 pp of GDP; dividends from state-owned enterprises and entities -0.5 pp of GDP; other non-tax revenue -0.4 pp of GDP.
  - Expenditure composition changes (relative to 2022): transfers to other government units +1.2 pp of GDP; compensation of employees +0.4 pp of GDP; interest payments +0.2 pp of GDP; capital spending -0.7 pp of GDP; goods and services -0.5 pp of GDP.
- External and monetary:
  - Foreign exchange reserves remained above the program floor; net international reserves (NIR) remained above the QPC floor.
  - New external debt stayed well below the ceiling; PNG has not accumulated new external or domestic arrears.
  - The Bank of PNG (BPNG) has modified its exchange rate arrangement and enhanced monetary policy operations under the Roadmap.
- Structural reforms:
  - Four out of nine structural benchmarks (SBs) due were met, two were implemented with delay, and two were partially implemented with delay.
  - The SB on amendments to the Income Tax Act (ITA) was not implemented; the deadline is proposed to be reset from end-December 2023 to end-December 2024 to allow integration of additional expert inputs and communication preparations.
  - Four new SBs are proposed to enhance monetary policy operations and operationalize the Independent Commission Against Corruption (ICAC).

### Policy discussions
- Main focus areas of discussions:
  - Continuation of the fiscal consolidation strategy while preserving space for critical social spending and law and order.
  - Progress on the authorities’ Roadmap to alleviate FX shortages, including the new crawl-like exchange rate arrangement and further enhancements in monetary policy operations and liquidity management.
  - Next concrete actions for operationalizing the governance and anti-corruption framework, including ICAC.

### Staff views
- Given satisfactory program performance and the authorities’ sustained commitment to reforms, staff supports the request for completion of the second reviews under the EFF and ECF arrangements.
- The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies to reach program goals.

### Recent developments, outlook, and risks
- Growth and sectoral developments:
  - Real GDP growth in 2023 is estimated at 2.9 percent.
  - Non-resource sector growth in 2023: 4.1 percent.
  - Resource sector in 2023 contracted by 0.4 percent, driven by lower-than-expected gold production and delays in reopening the Porgera mine.
- Inflation:
  - Headline inflation fell to 1.4 percent in 2023Q2, rose to 3.9 percent in 2023Q4, and moderated to 2.5 percent in 2024Q1.
  - Core inflation stood at 4.0 percent in 2023Q4.
  - Headline inflation is projected to reach 5.0 percent by end-2024; over the medium term inflation is expected to converge to 4.5 percent.
- External sector and exchange rate:
  - The kina depreciated by about 7 percent as of mid-May 2024 against the US dollar.
  - In line with the EBA-lite REER model, PNG’s external position at end-2023 was moderately weaker than implied by fundamentals, with the REER overvalued by about 5 percent.
  - Alternative high-frequency models indicate a REER overvaluation of around 7.6 percent as of end-2023.
  - FX shortages persist and continue to hamper imports and economic activity.
- Banking and financial sector:
  - Banks are reported to be well-capitalized, profitable, and liquid as of end-2023; capital adequacy ratios are well above prudential standards.
  - Private sector credit picked up in 2023; nonperforming loans remain higher than pre-pandemic levels but have decreased since their 2021 peak.
  - Concentration risk: one bank carries 70 percent of all banking assets.
  - Bank-sovereign nexus is high due to large government cash deposits and government securities held in commercial banks.
- Outlook:
  - Real growth in 2024 is expected to strengthen to 4.6 percent, with resource sector activity at 5.3 percent (reopening of Porgera) and non-resource sector growth at 4.4 percent.
  - Medium-term growth is projected to stabilize at around 3 percent.
- Debt sustainability and risks:
  - The December 2023 Debt Sustainability Analysis (DSA) assesses PNG’s public and publicly guaranteed debt at high risk of debt distress.
  - Elevated debt and liquidity risks, including a bullet Eurobond payment due in 2028 and higher bilateral and multilateral debt service payments between 2026 and 2029, lead to breaches of the debt service-to-revenue ratio threshold in the baseline scenario.
  - Authorities are considering financing options ahead of the Eurobond repayment, including Debt Swaps, funding from international partners, and an action plan to accumulate needed financial resources to smooth debt service.
- Risks:
  - Downside risks: weaker external demand, drops in commodity prices, natural disasters, further political and social instability undermining reforms and the business climate, and a dispute with the main fuel importer that could cause economy-wide fuel supply issues.
  - PNG is highly vulnerable to climate change and severe climate-related disasters.
  - Upside risks: higher commodity prices and the start of major resource project construction not yet in the baseline; the investment decision for Papua LNG has been delayed to 2025.
  - Inflation in 2024 could be lower if USD appreciation against other currencies offsets Kina depreciation against the USD.

### Program performance (detailed)
- Overall assessment:
  - Program performance was satisfactory with all end-December 2023 QPCs and ITs met.
  - Net international reserves remained above the QPC floor; BPNG gross credit to government was below the QPC ceiling.
  - PNG did not impose or intensify exchange restrictions or modify Multiple Currency Practices under the IMF’s revised MCP policy.
- Structural benchmarks:
  - Of nine SBs due, four were met, two implemented with delay, and two partially implemented with delay.
  - The ITA amendment SB is proposed to be reset to end-December 2024 to allow more time for drafting and communication.

*Source: IMF staff report — EXECUTIVE SUMMARY (June 17, 2024).*

### 14. The authorities are committed to the fiscal adjustment efforts, in line with their

### 1pngea2024001-print-pdf - 14. The authorities are committed to the fiscal adjustment efforts, in line with their

### Fiscal adjustment plan and outlook
- 2024 deficit target: reduce by 0.4 pp of GDP to 3.9 percent.
- Adjustment composition (2024, pp of GDP):
  - Non-resource tax revenue: increase 0.1 pp of GDP.
  - Grants: rebound 0.8 pp of GDP.
  - Resource revenue: decrease -0.5 pp of GDP (after high MPT levels in 2023).
  - Non-tax revenue: increase 0.3 pp of GDP (0.2 pp from full implementation of the Non-Tax Revenue Administration Act; 0.1 pp from dividends from the resource sector).
- Contingency: authorities intend to achieve larger adjustment if non-tax revenue overperforms (e.g., clearer dividend policies).
- Total expenditure (2024) projected broadly flat relative to 2023; composition changes (pp of GDP):
  - Higher capital spending: 0.7 pp of GDP.
  - Higher interest costs: 0.2 pp of GDP.
  - Transfers to other local government units: 0.2 pp of GDP.
  - Compensation of employees: -0.6 pp of GDP (containment of recurrent spending).
  - Goods and services expenditure rationalization: -0.5 pp of GDP.
- Fiscal package: 0.2 pp of GDP to support businesses affected by social unrest, to be covered by contingency budget appropriations.

### Medium-term fiscal framework and debt outlook
- Medium-term objective: balanced budget by 2027 and surpluses thereafter.
- If fully executed, public debt projected to fall to 40.4 percent of GDP in 2029 from 52.0 percent in 2023.
- Underpinning measures: sustained domestic revenue mobilization (MTRS), expenditure rationalization, prudent external and domestic borrowing mix.

### Revenue mobilization and tax reform
- Key reforms: implementation of MTRS and substantial amendments to the Income Tax Act (ITA), supported by IMF TA.
- Timing adjustments:
  - End-December 2023 deadline for tabling ITA amendments to Parliament proposed to be reset to end-December 2024.
  - IRC to finalize initial KPIs with IMF support (ongoing SB by end-May 2024).
  - Amendments to the IRC Act to create an oversight board: deadline proposed reset from end-October 2024 to end-December 2024.
- Expected benefits: streamline tax system, remove irrelevant provisions, close loopholes, ease compliance.

### Expenditure efficiency and public financial management
- Payroll management:
  - Cleansing completed for national agencies in Port Moresby; next phase to focus on provincial agencies (ongoing SB by end-August 2024).
  - Cleansing to enable upgrade of AscenderPay payroll IT system.
- Arrears and expenditure controls:
  - Remaining stock of unverified claims: K3.2 billion as of end-April 2024.
  - Appropriated in 2024 budget: K0.3 billion; committed to allocate further resources if revenue overperforms.
  - Plans to improve commitment accounting and management of multiyear contracts; modernization of IT systems for budget execution monitoring.
- Cash management:
  - Reduced consolidated balance of trust accounts in 2023; remaining COVID-related trust accounts to be closed by September 2024.
  - Plan to formulate a strategy to implement a Treasury Single Account (TSA) to reduce excess government cash in the banking system.

### External borrowing and debt sustainability
- Policy: prioritize concessional loans and grants, semi-concessional financing for critical projects.
- 2023 new external borrowing: US$ 531 million (significantly undershot PV limit of US$ 943 million).
- 2024 PV limit on new external borrowing: US$ 1,072 million; updated borrowing plan remains aligned with this limit.
- Limit subject to reassessment during the year; DSA serves as critical anchor.

### Exchange rate flexibility and monetary policy
- Exchange rate arrangement:
  - Transitioned to a crawl-like exchange rate arrangement; implementation kickstarted on January 3, 2024.
  - Kina has gradually depreciated, but USD appreciation meant kina overvaluation has not diminished; further adjustment required.
  - Scheduled biannual review of crawl parameters; strategy complemented by efforts to increase net FX inflows.
- Monetary policy settings and operations:
  - Kina Facility Rate (KFR) history:
    - Reduced from 3.0 percent to 2.5 percent in November 2023.
    - Reduced further to 2.0 percent in February 2024.
    - Increased by 50 basis points to 2.5 percent in May 2024.
  - Cash reserve requirement ratio increased by 100 basis points to 11 percent in May 2024.
  - BPNG signaled tightening stance for April-September 2024 (staff deems appropriate).
  - Open market operations: FRFA auctions started August 2023; FRFA rate aligned with KFR in November 2023; mopped up on average half of excess liquidity.
  - Commitments to further reforms:
    - Implement interest rate corridor centered on KFR bounded by standing overnight facilities priced at ±150 bps around KFR.
    - Modify reserve requirement framework: introduce partial reserve averaging and extend lagged maintenance period (new proposed SBs for end-August 2024).
- FX rationing and convertibility:
  - Gradual elimination of FX rationing measures towards kina convertibility per Roadmap.
  - BPNG intervenes to address essential orders and reduce import backlog; essential FX orders prioritized.
  - Indicative ceiling on stock of unmet import-related orders in orderbook implemented.
  - NIR floor (QPC) remains in place, unchanged relative to the first review.

### Central bank governance and legal reforms
- Senior appointments:
  - Permanent Governor appointed in January 2024.
  - Members for all vacant Board positions and a permanent Deputy Governor appointed in April 2024.
- Central Banking Act (CBA) amendments submitted to Parliament in June 2024.
  - Key improvements included:
    - Clearer ranking of central bank objectives with price stability as primary objective.
    - Establishment of a Monetary Policy Committee responsible for monetary policy formulation.
    - Limits on provision of temporary advances to the government.
    - Introduction of lender of last resort and emergency liquidity assistance frameworks.
  - Remaining gaps: governance, personal and financial autonomy, and accountability identified by IMF safeguards assessment; authorities committed to further reforms.

### Governance, anti-corruption, and transparency
- ICAC (anti-corruption):
  - Commissioner and two Deputy Commissioners appointed; operational progress: implementing regulations, procedure manuals, guidelines, secure IT, and hiring/training staff; increased operational budget.
  - Proposed SB: appointment of ICAC’s oversight committee by end-September 2024.
  - Proposed SB: finalization and signature of at least four draft memoranda of understanding between ICAC and five other agencies by end-December 2024.
- AML/CFT:
  - Continuing enhancements aligned with AML/CFT Strategic Plan 2023-27.
  - Expect APG mutual evaluation report adoption in July 2024 and kickstarted implementation of recommendations.
- Fiscal and financial transparency:
  - Information on major COVID-19 related contracts published in March 2024 (beneficial ownership not available).
  - Ongoing efforts to improve consistency of statistics (external sector) and increase frequency of in-year fiscal reporting.
  - Commitment to reinforce reliability of SOE financial information and resume publication of financial statements of state entities in the resource sector.

### Program modalities, monitoring, financing, and capacity
- Monitoring and conditionality:
  - Semi-annual program reviews based on QPCs and ITs, and SBs.
  - Under EFF, waiver of applicability proposed for end-June 2024 PCs due to non-availability of final data.
  - New targets for QPCs and ITs at end-June 2025; indicative targets at end-March 2025.
  - Proposed adjustor on NIR floor (QPC) conditional on external financing disbursements.
  - Deadlines for SBs on ITA and IRC Act amendments proposed reset to end-December 2024.
  - Four new SBs proposed, in addition to five ongoing.
- Financing and burden sharing:
  - Program fully financed with firm commitments for upcoming 12 months.
  - Fund burden sharing expected to average 34.5 percent across the program.
- Capacity to repay the Fund:
  - Fund credit outstanding (including projected purchases under ECF/EFF) will peak in 2026 at 3.5 percent of GDP.
  - Equivalent to around 7.3 percent of exports of goods and services and 36.7 percent of gross international reserves.
  - Total debt service to the Fund will peak at 1.2 percent of exports of goods and services and 7.5 percent of gross international reserves in 2030.
- Safeguards and outstanding issues:
  - Governance gaps at BPNG eliminated per update safeguards assessment (October 2023).
  - FY 2022 financial statement published (albeit with delay).
  - Agreement with Treasury to begin servicing 2021 SDR allocation and correct accounting treatment remains outstanding.
- Capacity development and TA:
  - 2023 IMF CD supported Roadmap (MCM), MTRS and ITA revision (FAD), and FSI compilation (STA).
  - Ongoing support: revenue administration (PFTAC), macro-fiscal forecasting (ICD/PFTAC), BOP data (CDOT/STA).
  - Public financial management TA mission on expenditure controls and cash management in March 2024.
  - Financial Sector Stability Review scheduled for July 2024.
  - Climate Policy Diagnostic and Climate Public Investment Management Assessment scheduled for July-August 2024.
  - Coordination with partners: UN and EU (anti-corruption), ADB (SOE governance), Australia (national accounts and AML/CFT).

### Program risks and staff appraisal
- Main risks:
  - Elevated program risks amid global and domestic uncertainty.
  - Downside risks: weaker external demand for exports, commodity price volatility, natural disasters, delayed start of new resource projects.
  - Institutional capacity constraints and potential slowdown in reform implementation in a volatile socio-political environment.
- Mitigating measures:
  - Streamlined, macro-critical conditionality informed by PNG’s CES.
  - Regular program monitoring meetings (in-country and virtual) with Treasury and BPNG.
  - Conservative macroeconomic assumptions for new resource projects (not in baseline projections).
- Staff appraisal highlights:
  - Economic outlook positive though downside risks significant.
  - 2024: non-resource growth expected to remain resilient; resource growth should rebound with reopening of Porgera gold mine.
  - Inflation expected to rise to its historical average by end-2024.
  - Program performance: satisfactory; authorities met all QPCs and fully or partially implemented all but one SB despite socio-political uncertainty.
  - Authorities proactive in requesting IMF technical assistance to address capacity constraints and support implementation.

*Source: 1pngea2024001-print-pdf - 14. The authorities are committed to the fiscal adjustment efforts, in line with their*

### 35. Fiscal consolidation efforts should continue in order to durably reduce the deficit and

### 35. Fiscal consolidation efforts should continue in order to durably reduce the deficit and 

### Fiscal consolidation and debt sustainability
- The 2023 deficit-to -GDP ratio decreased to its pre-pandemic level at 4.3 percent of GDP, about half of the 2020 ratio.
- Given high uncertainty on resource revenue, consolidation should rely on:
  - Domestic revenue mobilization, especially for non-resource tax revenue, in line with the new MTRS.
  - Expenditure rationalization and efficiency gains, including for payroll spending.
- Staff supports accelerating implementation of the MTRS, including in the 2025 Budget.
- Critical legal and institutional steps:
  - Legal amendments to the ITA and IRC Act to simplify tax policy and modernize tax administration.
  - Reforms to reinforce expenditure controls, improve expenditure monitoring, and implement a treasury single account.
- Fiscal management principles to ensure successful consolidation:
  - Rely on conservative assumptions and clear contingency plans.

### Monetary policy stance and inflation risks
- Tightening the monetary policy stance is appropriate given expected inflationary pressures from the exchange rate adjustment needed to achieve kina convertibility.
- The BPNG has been gradually depreciating the kina against the USD in line with the crawl-like arrangement.
- Recent appreciation of the USD against other currencies warrants more exchange rate adjustment to fully tackle misalignment, which is expected to create inflationary pressures.
- Monetary tightening should be commensurate to the needed adjustment and help keep inflation in check.
- Reducing interest rate differentials would help provide incentives for capital to stay in PNG and contribute to easing FX pressures.
- Enhancements to monetary operations increase the KFR’s impact on domestic interest rates; the KFR remains much lower than before the COVID-19 pandemic level and very accommodative.
- When kina convertibility returns, KFR decisions will need to be more sensitive to changes in the monetary policy stance for the reference currency.

### Central bank modernization and operations (BPNG)
- Ongoing reforms under the Roadmap should be sustained to modernize BPNG operations.
- Recent operational measures:
  - Move to fixed rate full allotment auction.
  - Alignment of the rate of issuance of 7-day central bank bills on the KFR.
- Further steps to provide commercial banks more liquidity flexibility and reduce excess liquidity:
  - Adoption of an interest rate corridor.
  - Reserve averaging.
- Roadmap measures also include:
  - Gradual easing of exchange restrictions.
  - Support to development of the interbank market.
  - Elaboration of a framework for emergency liquidity assistance.
- Recent appointments of BPNG senior management and Board, and amendments to the CBA, are expected to reinforce autonomy and accountability of the central bank and support reform steering and implementation.

### Anti-corruption, governance, and AML/CFT frameworks
- Efforts to reinforce the effectiveness of anti-corruption, governance and AML/CFT frameworks should continue.
- ICAC progress:
  - The ICAC has achieved substantial progress in its path to becoming fully operational.
  - Reform efforts should focus on ensuring the ICAC can effectively access information and take action as needed.
- AML/CFT actions:
  - Authorities should start implementing recommendations of the mutual evaluation rapidly to improve effectiveness of AML/CFT frameworks.
- Transparency actions in the resource sector:
  - Publication of recent financial statements of the state-owned petroleum and mining companies is critical to strengthen financial transparency and accountability.
  - Continue progress in strengthening transparency around procurement and in collecting beneficial ownership information.

### Climate vulnerability, adaptation, and financing
- PNG’s high vulnerability to climate change makes adaptation and disaster management policies critical to the authorities’ development strategy.
- To support the climate policy agenda, the authorities have requested access to the Resilience and Sustainability Facility (RSF).
- IMF staff will examine the RSF request in the coming months, informed by upcoming climate diagnostics.

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

### 40. Given the satisfactory program performance and the authorities’ sustained

### 40. Given the satisfactory program performance and the authorities’ sustained 

### Program review recommendation
- Staff supports the completion of the second review under the EFF and ECF arrangements and request for waiver of applicability for the end-June 2024 performance criteria under the EFF arrangement.
- 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 decreased in 2024Q1 after being on an upward trend since 2023Q2 while underlying inflation has been declining since 2022Q4.
- Commodity prices declined from their 2022 peaks, weakening exports, while imports moderated.
- Current account surpluses are driven by goods balance, mainly explained by resource goods exports.
- Selected time-series and index notes:
  - Headline CPI and Underlying Inflation series referenced through 2024Q1 (Trimmed Mean by BPNG).
  - Export and import growth and contributions depicted for 2018–2023 Est.

### Fiscal developments and consolidation
- Fiscal consolidation continued in 2023, driven by a steady performance in tax revenues.
- Current spending continues to take up the bulk of government spending, driven by employee compensation and use of goods and services, although grants to provinces significantly increased.
- External financing sources remain significant; public debt has broadly stabilized in recent years but remains above pre-pandemic levels.
- Key summary indicators (Table 1; selected rows and series):
  - Nominal GDP (2021): US$26.3 billion.
  - Population (2021): 11.8 million.
  - GDP per capita (2021): US$2,217.
  - Real GDP growth (2023 Est.): 2.9.
  - Real GDP growth projections: 2024: 4.6; 2025: 3.7; 2026: 3.4; 2027: 3.0; 2028: 3.1; 2029: 3.1.
  - CPI (annual average) series: 2020: 4.9; 2021: 4.5; 2022: 5.3; 2023: 2.3; 2024: 4.4; 2025: 4.8; 2026: 4.8; 2027: 4.6; 2028: 4.5; 2029: 4.5.
  - Central government revenue and grants (percent of GDP): 2023: 17.8; 2024: 18.3; 2025: 18.5; 2026: 18.8; 2027: 19.3; 2028: 19.3; 2029: 19.4; 2030: 19.9 (table spans to 2029).
  - Net lending(+)/borrowing(-) (percent of GDP): 2023: -4.3; 2024: -3.9; 2025: -2.6; 2026: -1.4; 2027: 0.0; 2028: 0.2; 2029: 0.4.
  - Government gross debt (percent of GDP): 2023: 52.0; 2024: 52.5; 2025: 51.2; 2026: 49.1; 2027: 45.6; 2028: 43.2; 2029: 40.4.

### Central government operations (selected figures)
- Table 2a (In millions of Kina; selected entries):
  - Revenue and Grants (2023): 18,538; (2024) 19,810; (2025) 22,168.
  - Revenue (2023): 17,066; (2024) 18,651; (2025) 20,093.
  - Taxes (2023): 16,454; (2024) 17,627; (2025) 17,850.
  - Resource revenue (2023): 4,336; (2024) 4,309; (2025) 3,800.
  - Expenditure (2023): 24,390; (2024) 24,615; (2025) 26,979.
  - Net lending (+)/borrowing (-) (2023): -5,852; (2024): -4,805; (2025): -4,810.
  - Gross government debt (end-period, Kina) (2022): 48,173; (2023): 53,680; (2024): 57,944; (2025): 64,168.

- Table 2b (In percent of GDP; selected entries):
  - Revenue and Grants (percent of GDP): 2023: 16.7; 2024: 17.8; 2025: 18.0.
  - Taxes (percent of GDP): 2023: 14.8; 2024: 15.8; 2025: 14.5.
  - Expenditure (percent of GDP): 2023: 21.9; 2024: 22.1; 2025: 22.0.
  - Primary balance (percent of GDP): 2023: -2.9; 2024: -1.8; 2025: -1.5.
  - Non-resource net lending(+)/borrowing(-) (percent of GDP): 2023: -9.2; 2024: -8.2; 2025: -7.3.

### Monetary and financial sector developments
- The policy rate remains lower than before the pandemic.
- The kina mildly depreciated against the US$ in 2023.
- Credit to the private sector relative to non-resource GDP has been broadly unchanged over the past six years.
- The move to a fixed rate full allotment auction in August 2023 for central bank bills has contributed to reducing excess liquidity in the banking system.
- NPLs are higher than before the pandemic, though the banks are profitable and well-capitalized.
- Commercial banks' holdings of government paper were broadly unchanged.
- Selected monetary indicators (Table 4; selected entries):
  - Bank of Papua New Guinea Net foreign assets (millions of Kina): 2020: 7,417; 2021: 8,221; 2022: 11,116; 2023: 10,551; 2024: 6,929; 2025: 5,521.
  - Reserve money (end-period, millions of Kina): 2020: 6,046; 2021: 6,702; 2022: 8,679; 2023: 7,922; 2024: 8,095; 2025: 8,429.
  - Broad money (Depository Corporations Survey, end-period, millions of Kina): 2020: 23,880; 2021: 27,087; 2022: 31,060; 2023: 34,150; 2024: 34,093; 2025: 36,128.
  - Net domestic credit (annual percentage change): 2020: 2.3; 2021: 15.9; 2022: 1.5; 2023: 14.9; 2024: 11.1; 2025: 9.6.
  - Broad money (annual percentage change): 2020: 7.0; 2021: 13.4; 2022: 14.7; 2023: 9.9; 2024: -0.2; 2025: 6.0.

### Balance of payments and external position
- Table 3 (Balance of Payments, selected entries; in millions of U.S. dollars):
  - Current account balance: 2020: 3,353; 2021: 3,466; 2022: 5,284; 2023: 5,145; 2024: 3,723; 2025: 4,512.
  - Exports (f.o.b.): 2020: 9,073; 2021: 11,269; 2022: 14,372; 2023: 13,945; 2024: 14,439; 2025: 15,323.
  - Imports (f.o.b.): 2020: -3,655; 2021: -5,137; 2022: -5,295; 2023: -5,360; 2024: -5,067; 2025: -5,381.
  - Net international reserves (end-year, millions of U.S. dollars): 2020: 2,126; 2021: 2,343; 2022: 3,179; 2023: 2,840; 2024: 1,673; 2025: 1,297.
  - Current account (percent of GDP): 2020: 14.1; 2021: 13.3; 2022: 16.7; 2023: 16.6; 2024: 11.9; 2025: 14.2.

### External financing, debt, and IMF arrangements
- Table 6 (Schedule of Disbursements and Purchases Under the ECF/EFF Arrangements; selected entries):
  - Executive Board approval (22 March 2023): Total amount SDR 65.8 (ECF 12.1; EFF 43.8; note total figures shown).
  - Observance and review-related scheduled availability dates include 18 September 2023, 18 March 2024, 18 September 2024, 18 March 2025, 18 September 2025, 18 March 2026.
  - Total across schedule: Amounts sum to Total 684.3 (SDR million) with ECFEFF splits shown in table.
  - Papua New Guinea's quota is 263.2 million SDR (memorandum).

- Table 7 (External Financing Requirements and Sources; selected entries, in millions of U.S. dollars):
  - Total financing requirements (selected years): 2020: -979; 2021: -5014; 2022: -10165; 2023: -5173; 2024: -4576; 2025: -4467.
  - Financing sources (selected years): 2020: -2435; 2021: -6016; 2022: -10956; 2023: -5777; 2024: -5388; 2025: -5097.
  - IMF financing (selected entries): 2020 disbursements/purchases noted (RCF/ECF/EFF lines in table).

- Table 8 (Indicators of Capacity to Repay the IMF, 2024–2037; selected metrics):
  - Total Obligations Based on Existing and Prospective Credit (Millions of SDRs): 2024: 21.5; 2025: 56.2; 2026: 89.8; 2027: 94.6; 2028: 107.4; 2029: 140.4.
  - Total Obligations (Millions of U.S. dollars): 2024: 28.6; 2025: 74.8; 2026: 119.9; 2027: 126.6; 2028: 144.1; 2029: 188.7.
  - Percent of exports of goods and services (Total Obligations): 2024: 0.2; 2025: 0.5; 2026: 0.8; 2027: 0.8; 2028: 0.9; 2029: 1.1.
  - Outstanding Fund Credit Based on Existing and Prospective Credit (Millions of SDRs): 2024: 584.3; 2025: 800.1; 2026: 868.6; 2027: 812.3; 2028: 742.8; 2029: 639.0.

### Projected external borrowing and uses (2024 snapshot)
- Table 9 (Summary Table of Projected External Borrowing Program, January 1, 2024–December 31, 2024):
  - Sources of debt financing (USD million): Total 1,136.9; Concessional debt 100.0 (PV/percent breakdown shown in table).
  - Uses of debt financing (USD million): Infrastructure 726.6; Budget Financing 410.3.
  - Memo items: PV of new debt in 2024 (program purposes) and PPG external debt indicators provided in table.

### Decomposition of public debt service and projected external borrowing program
- Table 10 (Decomposition of Public Debt Service by Creditors, 2023–2025): detailed creditor breakdowns and debt-service scheduling provided; categories include Multilateral, Bilateral (Paris Club and Non-Paris Club, including China EXIM), Bonds, Commercial creditors, Domestic instruments (T-Bills, Bonds, Loans).

### Financial soundness indicators
- Table 5 (Financial Soundness Indicators, 2018–2024 Q1; selected entries):
  - Capital to risk-weighted assets: 2018: 37.1; 2019: 36.1; 2020: 39.2; 2021: 41.1; 2022: 30.4; 2023: 39.6; 2024 Q1: 37.3.
  - Nonperforming loans to total loans: 2018: 3.7; 2019: 3.8; 2020: 5.3; 2021: 6.2; 2022: 4.8; 2023: 5.4; 2024 Q1: 5.4.
  - Return on assets: 2018: 3.8; 2019: 4.1; 2020: 3.8; 2021: 4.4; 2022: 3.9; 2023: 4.0; 2024 Q1: 5.0.
  - Loan-to-deposit ratio: 2018: 71.4; 2019: 71.3; 2020: 65.8; 2021: 59.8; 2022: 55.6; 2023: 55.6; 2024 Q1: 56.3.

### Structural benchmarks (November 2023—May 2025)
- Budget Repair measures (status highlights):
  - Introduce amendments to the Income Tax Act to Parliament (End-December 2023): Not met (proposed to be reset to end-December 2024).
  - Develop initial worksheet of output-based KPIs for IRC (End-May 2024): In progress.
  - Submit amendments to the Internal Revenue Commission Act 2014 to establish a Board for IRC oversight (End-October 2024): In progress (proposed to be reset to end-December 2024).
  - Complete data cleansing over payroll records in AscenderPay and produce report (End-August 2024): In progress.

- Governance and Operations of the BPNG (status highlights):
  - Submit amendments to the CBA to address mandate, governance, autonomy, transparency, accountability, and financial regulation/supervision (End-December 2023): Not met (partially implemented with delay in June 2024).
  - Set parameters for crawl-like exchange rate arrangement (End-November 2023): Met.
  - Publish all FX market regulations and directives on BPNG’s website (End-December 2023): Met.
  - Eliminate BPNG’s tax clearance certificate requirement for inclusion of intercompany loan FX orders in orderbook (End-December 2023): Met.
  - Align 7-day central bank bills issuance rate with Kina Facility Rate (End-December 2023): Met.
  - Appoint Governor and Deputy Governors of BPNG and fill Board vacancies (End-November 2023): Not met (implemented with delay in April 2024).

- Governance and Anti-Corruption Framework (status highlights):
  - Adopt key implementing regulations to the ICAC law (End-December 2023): Not met (implemented with delay in May 2024).
  - Post details of COVID-19 related procurements (years 2020 and 2021) on government procurement website (End-December 2023): Not met (partially implemented with delay in March 2024).
  - Initiate inter-agency working group on external sector statistics (End-June 2024): In progress.
  - Appoint ICAC’s oversight committee (End-September 2024): Newly proposed.
  - Adopt MOUs between ICAC and at least four anti-corruption agencies (End-December 2024): Newly proposed.

*Source: IMF staff estimates and projections, Department of Treasury; Bank of Papua New Guinea; and program documents included in the provided content.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### RAM design and likelihood thresholds
- The 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 subjective assessment):
  - “low” = probability below 10 percent
  - “medium” = probability between 10 and 30 percent
  - “high” = probability between 30 and 50 percent
- “Short term” = risk could materialize within 1 year; “medium term” = within 3 years.
- Non-mutually exclusive risks may interact and materialize jointly.

### Regional / Domestic Risks: sources, likelihood, impacts, and staff advice
- Natural disasters and extreme climate events
  - Relative Likelihood: Medium: PNG is highly vulnerable to natural disasters (flooding, landslides, earthquakes) and climate change (droughts & sea level rise).
  - Expected Impact: Medium: Negative impact on GDP growth, export and fiscal revenues, higher inflation.
  - Staff Advice: Invest in disaster risk reduction and resilience with the help of development partners. Build fiscal and external buffers for post-disaster relief effort.
- Widespread social discontent and political instability
  - Relative Likelihood: High: limited state capacity, high social fragmentation, anticipated socio-economic impact of ongoing reforms; 18-month post-election grace period has ended.
  - Expected Impact: High: Adverse impact on foreign direct investment and confidence, negatively impacting growth; can exacerbate inequalities and socio-economic hardship (unemployment, poverty).
  - Staff Advice: Focus on transparent and effective communication on key policies. Implement policies to support vulnerable households while building 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.
  - Staff Advice: Fast-track their implementation; Build fiscal and external buffers.

### Global Risks: sources, likelihood, impacts, and staff advice
- Cyberthreats
  - Relative Likelihood: Medium: Cyberattacks on physical or digital infrastructure and misuse of AI technologies; PNG had a major ransomware attack in October 2021.
  - Expected Impact: Medium: Can affect provision of Government service and trigger financial and economic instability or widespread socio-economic disruptions and remote work arrangements.
  - Staff Advice: 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: supply disruptions and demand fluctuations cause recurrent commodity price volatility.
  - Expected Impact: High: Impact on external position and fiscal balance; leads to bouts of price and real sector volatility.
  - Staff Advice: Use higher resource revenue to create fiscal space. Continue 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
  - Relative Likelihood: Medium: synchronized sharp growth downturn and market fragmentation triggering sudden stops in EMDEs.
  - Expected Impact: High: Lower external demand and lower commodity prices; BOP would worsen.
  - Staff Advice: Build buffers to support the economy and most vulnerable in the non-resource sector, as needed.

---

### Annex II. External Sector Assessment

### Overall assessment and REER valuation
- Overall Assessment: Papua New Guinea’s external position in 2023 was moderately weaker than the level implied by fundamentals and desirable policy settings.
- EBA-lite REER result: The estimated real effective exchange rate for 2023 was overvalued by 4.9 percent.
- Context: Overvaluation moderated since 2022 due to Kina depreciation, more favorable external conditions, and lower inflation in PNG (13.9 percent).

### Potential policy responses (exchange rate, FX operations, fiscal consolidation)
- Future real exchange rate depreciation would help support competitiveness of non-resource exports and address foreign exchange shortages.
- Improved FX operations and liquidity management (part of program objectives) would strengthen BPNG’s ability to manage inflation and the real exchange rate.
- Envisioned fiscal consolidation will help curb external imbalances over the medium term.

### Foreign assets and liabilities; public debt risks
- PNG does not produce international investment position (IIP) data.
- Risks: elevated public debt, Eurobond bullet payment due in 2028, and higher official bilateral and multilateral debt service payments between 2026 and 2029.
- Mitigant: Significant FDI inflows related to mining projects may act as a mitigating factor given long mid-life of these projects.

### Current account (CA) developments and assessment
- 2023 goods export volume: expanded by close to 9 percent from 2022 (10.4 percent drop one year before).
- 2023 export values: fell by close to 5 percent compared to one year before (after gaining almost 30 percent in 2022).
- 2023 goods imports nominal value: broadly stable in 2023 (+3.1 percent in 2022); imports of fuels and related goods underwhelming.
- CA outcome: Current account surplus remained broadly stable at 16.6 percent of GDP (16.7 percent of GDP in 2022).
- Assessment caveat: Statistical challenges and revisions to CA series (migration to BPM6 standards) lead staff to primarily base external position assessment on the REER model.
- REER-model implied CA gap: -1.6 percent of GDP, indicative the external position is moderately weaker than implied by fundamentals and policies.

### Table excerpt (EBA-Lite Model Results, 2023) — key figures (in percent of GDP)
- CA-Actual15.9
- Cyclical contributions (from model) (-)0.4
- Natural disasters and conflicts (-)0.0
- Adjusted CA15.5
- CA Norm (from model) 2/-0.7
- Adjustments to the norm (+) 3/13.2
- Adjusted CA Norm12.5
- CA Gap3.0-1.6
- o/w Relative policy gap2.2
- Elasticity-0.3
- REER Gap (in percent)-9.04.9

### Real exchange rate dynamics
- NEER: kina depreciated in nominal terms since 2012; in 2023 NEER depreciated by 4.3 percent.
- REER: in 2023 REER depreciated by 2.7 percent.
- EBA-lite REER assessment: Kina overvalued by 4.9 percent at end-2023 (REER was 13.4 percent overvalued in 2022).

### Exchange restrictions, capital and financial accounts
- Capital account: very small (US$7 million in 2023, net).
- Financial account balance: deficit narrowed to US$5.6 billion in 2023, from US$10.3 billion in 2022.
- Net direct investment in 2023: around US$-0.5 billion (US$-2.0 billion in 2022).
- Assessment: PNG maintains exchange restrictions subject to IMF approval under Article VIII, Section 2(a); staff recommends gradually eliminating restrictions consistent with the Roadmap for monetary and FX reforms.
- Authorities must calibrate reserve drawdown to ensure sustainability of kina convertibility; structural policies are needed to improve competitiveness and attract FDI. Fiscal policy gap contributes to CA gap.

### FX intervention and reserves
- 2023 gross reserves: US$ 3.9 bn, covering 6.6 months of total imports (or 8.6 months of non-mineral imports).
- BPNG reserve targeting: gross international reserves floor of no less than US$2.0 billion.
- Assessment: Floor of about US$2.0 billion appears sufficient to cover needs without severe disruption, but a reserve path above this floor remains appropriate given PNG’s fragility and sensitivity to commodity prices.
- Policy implication: Gradual elimination of exchange restrictions and adoption of a market-determined exchange rate to address FX shortages and aim for a return to kina convertibility.

---

### Annex III. The Macroeconomic Impact of Social Unrest

### Relationship between social unrest and economic performance
- Social unrest can hamper economic growth and can also be a response to inequality, staple price evolution, and unresolved legacy issues.
- Empirical evidence:
  - Major unrest events are followed by a 1 percentage point reduction in GDP six quarters after the event (Hadzi-Vaskov et al., 2021).
  - Lower growth and higher inequality are associated with more social unrest; higher social unrest is associated with lower growth, exacerbating inequality (Saadi Sedik and Xu, 2020).

### January 2024 PNG social unrest: observed and estimated impacts
- Event: Social unrest of January 10, 2024.
  - Containment: Restored order within two days.
  - Damage: Looting and destruction of some retail businesses mainly in Port Moresby.
- Macroeconomic impact (staff estimate):
  - Growth in the non-resource sector revised down by 0.2 percentage points, largely driven by a temporary halt in retail activities of businesses directly affected by the unrest.
  - No impact on resource sector activity.
- Fiscal response: Authorities committed to introduce a fiscal package to assist affected businesses; expected to be of limited size and covered by existing contingency budget appropriations.

### Mitigating the impact of unrest: policy insights
- Higher growth or decreased perception of inequality can contribute to less frequent and milder unrest events.
- Open and democratic institutions mitigate the economic impact of unrest (e.g., milder drops in stock returns following unrest in contexts with stronger institutions).
- Redistributive transfers matter: increases in inequality are associated with more unrest when redistributive transfers are low, suggesting social safety measures reduce social tensions and mitigate economic impact.

*Source: Annex I, II, and III (Risk Assessment Matrix; External Sector Assessment; The Macroeconomic Impact of Social Unrest) of the provided IMF Papua New Guinea country report content.*

### Annex IV. Poverty Reduction and Growth Strategy for Papua New

### Annex IV. Poverty Reduction and Growth Strategy for Papua New Guinea

### PRGS overview and objectives
- The Government of Papua New Guinea launched a new Poverty Reduction and Growth Strategy (PRGS) in January 2023 – PNG’s Medium-Term Development Plan IV (MTDP IV), covering the period 2023-2027.
- Medium-term goals include:
  - doubling domestic revenue and export revenue;
  - creating one million additional jobs;
  - improving standards of living for all PNG citizens.
- The PRGS was developed through extensive consultations with central government agencies, provincial and district administrators, development partners, private sector partners, civil society, and faith-based organizations.

### Structure, strategic priorities, and key interventions
- The PRGS is structured around 12 key Strategic Priority Areas (SPAs), supported by concrete intervention programs and projects and measured through quantifiable targets and indicators.
- Key initiatives expected to contribute to poverty alleviation and increased living standards:
  - reforms to reinforce the micro, small and medium enterprises sector;
  - continuation of the Connect PNG infrastructure program;
  - development of a national health insurance policy;
  - enhancements to energy security policies;
  - expansion of education infrastructure.
- New policy, legislative and institutional initiatives are incorporated to progress inclusive development.

### Alignment with IMF ECF/EFF arrangements
- The ECF/EFF arrangements are well aligned with the PRGS priorities, aiming to achieve sustainable growth and development through:
  - physical infrastructure and digitalization;
  - investment in health, education and law and order;
  - climate and gender policies.
- Fiscal repair strategy supported by the ECF/EFF program is intended to:
  - create fiscal space and allocate resources to PRGS goals;
  - increase spending efficiency through stronger governance and enhanced transparency.
- Consistent protections:
  - spending on health, education and law and order are ring-fenced from fiscal adjustment under the program.
- Monetary and FX reforms:
  - implementation of the Roadmap of monetary and FX reforms will help tackle foreign exchange shortages that impede growth and private sector development.

### Implementation, coordination, and monitoring
- Coordination priorities:
  - close collaboration between planning and budgeting departments to ensure PRGS objectives inform budget allocations.
- Monitoring priorities:
  - regular monitoring of progress;
  - preparation of a midterm update of the PRGS to keep priorities up-to-date and address delays or funding needs proactively.

### Economic developments (selected indicators and recent trends)
- Real non-resource GDP growth:
  - 3.8 percent in 2021;
  - 5.2 percent in 2022;
  - 4.1 percent in 2023.
- Real resource GDP growth:
  - -0.4 percent in 2023.
- Overall real GDP growth:
  - 2.9 percent in 2023 (moderated from 5.2 percent in 2022).
- Headline inflation:
  - fell to 1.4 percent in 2023 Q2;
  - 2.2 percent in 2023 Q3 (year-on-year);
  - 3.9 percent in 2023 Q4.
- Policy rates and monetary actions:
  - Kina Facility Rate (KFR) reduced from 3.0 percent to 2.5 percent in November 2023, aligning with the 7-day Central Bank Bill (CBB) rate;
  - KFR further reduced to 2.0 percent in February 2024.
- 2024 projections and near-term outlook:
  - Excluding expected new resource projects, real growth is expected to strengthen to 4.6 percent in 2024.
  - Projected resource sector activity growth in 2024: 5.3 percent.
  - End-of-period headline inflation projected at 5.0 percent in 2024.
  - Medium-term projection: economy projected to grow at an average 3.1 per cent annually; non-resource sector expected to grow at 4.0 percent.

### Risks to the outlook
- Downside risks:
  - sharp downturn in main trading partners;
  - tighter global financial conditions;
  - exposure to natural disasters and climate change;
  - further political and social instability undermining reform implementation and the business climate.
- Upside potential:
  - inclusion of large extractive sector projects (excluded from current projections) could have a large positive impact on growth, investment, exports and fiscal revenues.

### Fiscal and development challenges
- Development needs:
  - high poverty concentrated in rural areas with limited access to basic infrastructure and services.
  - urgent investments needed in power, utilities, transport links, education, health care and security.
- Fiscal history and targets:
  - public debt rose from K8 billion in 2012 to K34 billion in 2019.
  - COVID-19 led to a major reduction of 20 per cent in domestic revenues.
  - A 13-year fiscal reform plan aims to reduce budget deficits and public debt ratios and move towards a budget surplus by 2027.

### IMF-supported reform program objectives
- Program aims include:
  - continue budget repair to strengthen domestic revenue mobilization, improve quality and composition of public expenditure, lower fiscal deficit and debt to meet Fiscal Responsibility Act (FRA) requirements, and move towards a budget surplus by 2027;
  - continue foreign exchange repair and modernization of BPNG governance and operations to durably address FX shortages and reinstate Kina convertibility;
  - strengthen governance by operationalizing the Independent Commission Against Corruption (ICAC) and improving the AML/CFT framework consistent with FATF standards, while facilitating financial deepening and inclusion.

### Recent reform implementation and achievements (structural benchmarks and actions)
- All quantitative performance criteria (QPC) and indicative targets (IT) as of end-December 2023 were achieved.
- Out of nine structural benchmarks (SB) due:
  - fully implemented six (including four in timely fashion);
  - partially implemented two with delay.
- Chronological achievements:
  - Aligned issuance rate of 7-day CBBs with the KFR (November 2023).
  - Agreed parameters for a crawl-like exchange rate arrangement (December 2023) and set in motion on January 3, 2024.
  - Published all existing FX regulations and guidelines on the BPNG website (December 2023).
  - Removed BPNG requirement for a tax clearance certificate (TCC) for import-related intercompany loan repayments (December 2023).
  - Strengthened BPNG governance by confirming permanent appointment of the BPNG Governor (January 2024), appointed a Deputy Governor (April 2024), and filled all BPNG Board vacancies (April 2024) — implemented with delay (due end-November 2023).
  - Published contract data on COVID-19-related expenditure conducted under emergency procurement procedures on the government’s website (March 2024) — partially implemented with delay (due end-December 2023).
  - NEC approved implementing regulations for the ICAC law (May 2024) — implemented with delay (due end-December 2023).
  - Submitted amendments to the Central Banking Act (CBA) to Parliament (June 2024) — partially implemented with delay (due end-December 2023).

### Medium-term reform priorities and support needs
- Immediate priorities for the next twelve months:
  - improve cash management processes and ensure control of expenditures (IMF technical assistance requested);
  - raise domestic revenue, including passing amendments to the Income Tax Act to strengthen revenue mobilization;
  - improve performance and governance at the Internal Revenue Commission;
  - complete cleansing of payroll records;
  - continue implementation of monetary policy and exchange rate policy frameworks as set out in the reform roadmap;
  - support full operationalization of the ICAC and further governance and transparency improvements.
- Climate priorities:
  - develop climate mitigation, adaptation and disaster management programs in line with international climate commitments and coordinate with international partners;
  - requested a Climate Policy Diagnostic (CPD) and a Climate Public Investment Management Assessment (C-PIMA);
  - sought access to the Resilience and Sustainability Facility (RSF), proposed to be informed by these diagnostics.

*Source: Annex IV. Poverty Reduction and Growth Strategy for Papua New Guinea (from 1pngea2024001-print-pdf).*

### 9. We propose to reset the deadlines for two key structural benchmarks relating to legal

### 1pngea2024001-print-pdf - 9. We propose to reset the deadlines for two key structural benchmarks relating to legal

### Structural benchmarks and legal amendments
- Proposed reset deadlines:
  - Income Tax Act (ITA) amendments and new Income Tax regulations: submit draft to Parliament by end-December 2024 (SB with a proposed reset deadline by end-December 2024).
  - Internal Revenue Commission (IRC) Act amendments to establish a Board for IRC oversight: submit draft to Parliament at the time of the 2025 Budget discussion (SB with a proposed reset deadline by end-December 2024).
- Reasons for delay:
  - Unable to finalize ITA draft by end-December 2023 as initially planned.
  - Need more time to prepare Income Tax regulations, integrate inputs from stakeholders and experts including the IMF, and undertake consultative processes and communications.
  - Alignment required with anticipated parliamentary calendar for IRC Act amendments.
- Support and sequencing:
  - Drafts have benefitted from extensive IMF technical assistance and advice.
  - Regulations and implementation planning to follow parliamentary submission; amended ITA expected to enter into force in early 2026 if passed.

### 2023 fiscal outturn and performance vs. program
- Fiscal adjustment in 2023: 0.9 percentage point of GDP sustained.
- Fiscal deficit in 2023: K4.8 billion (4.3 percent of GDP), slightly lower than program ceiling (K4.9 billion, QPC).
- Revenue and grants:
  - Total revenue and grants underperformed relative to supplementary budget forecast by -K0.6 billion.
  - Non-resource tax revenue collection: K13.7 billion, exceeding program indicative target (K12.7 billion, IT).
  - Corporate mining and petroleum taxes (MPT) over-performed: +K0.9 billion.
  - Lower dividend payments from resource sector: -K0.6 billion.
  - Other non-tax revenue: -K0.4 billion.
  - Grants: -K0.9 billion.
  - Relative to 2022, total revenue and grants increased by K1.3 billion (1.1 percentage point of GDP).
- Expenditure changes relative to 2022:
  - Total expenditure increased by K0.2 billion (0.2 percentage point of GDP).
  - Increases: transfers to other government units K1.3 billion; compensation of employees K0.4 billion; interest payments K0.2 billion.
  - Offsets: goods and services -K0.6 billion; capital spending -K0.8 billion.
  - Social and other priority spending: K4.8 billion, above program indicative target (K3.9 billion, IT).

### 2024 fiscal stance, targets, and assumptions
- 2024 deficit target under IMF program: K4.8 billion (3.9 percent of GDP), corresponding to a consolidation effort of 0.4 percentage points of GDP relative to 2023.
- Revised forecasts (relative to first review): revenue and expenditure forecasts both revised up by 0.2 percentage points of GDP.
- Revenue outlook for 2024:
  - Overall revenue expected to increase relative to 2023 by 0.4 percentage point of GDP.
  - Drivers: moderate increase in non-tax revenue and one-off corporate income tax collection from settlement of a 2022 legal dispute.
  - MPT expected to decrease from record-high levels.
  - Potential non-tax revenue upside estimated at about K1.0 bn relative to program forecasts (K0.5 bn from dividends and K0.5 bn from NTRA implementation).
- 2024 Budget revenue measures:
  - Make permanent the K20,000 tax-free threshold for Personal Income.
  - Make permanent excise tax on the Second Tier Tobacco.
  - Reduce the Log Export Tax to 50 percent.
  - Reduce import duty on intermediate and basic household products.
- Expenditure-to-GDP in 2024: expected to increase by 0.1 percentage point relative to 2023.
- Contingency planning:
  - If dividends or other revenues overperform: use additional amounts to accelerate clearance of domestic payment arrears, increase priority spending, and reduce the deficit.
  - If significant revenue shortfalls occur: undertake expenditure adjustments to meet fiscal deficit target.
  - Identification of contingency measures for 2025 Budget: spending items that could be reappropriated or deferred (e.g., lower-priority investment projects and goods and services).

### Medium-Term Revenue Strategy (MTRS) and tax policy reforms
- MTRS objectives:
  - Guide revenue policies and administration reforms through to 2027.
  - Serve as reference for reform conditionalities for future program reviews.
  - Broaden the tax base, reduce distortions, and address policies that hinder tax compliance and services.
- Key legislative reforms identified:
  - Implementation of the 2017 Tax Administration Act.
  - Promulgation of a revised Income Tax Act (ITA) to simplify and modernize the tax system, close loopholes, and broaden the base.
- Timeline:
  - Finalization of ITA draft delayed; proposed amendments expected to be submitted to Parliament around the time of the 2025 Budget discussions (SB with a proposed reset deadline by end-December 2024).
  - Amended ITA, if passed, to enter into force in early 2026.
- Support: secure necessary technical assistance for regulations and implementation.

### Revenue administration modernization and governance
- IRC reforms:
  - IRC finalizing draft initial worksheet of output-based key performance indicators (ongoing SB by end-May 2024).
  - Preparing amendments to the IRC Act 2014 to establish a Board for IRC’s oversight (SB with a proposed reset deadline by end-December 2024).
  - Requested an updated Tax Administration Diagnostic Assessment (TADAT) to measure progress since 2019.
- PNG Customs Service priorities:
  - Address tax evasion/smuggling, improve customs declaration procedures, intelligence gathering and analysis, risk management, customs valuation, and post clearance audits.
  - Full transition to becoming an independent authority is required to implement targeted policies: maximize use of technology, increase human resources, effective customs enforcement, and strengthen excise administration.

### Payroll, human resources, and public employment management
- Payroll and HR reforms:
  - Implementing findings of the 2022 Staffing and Establishment Review (SER) across public sector employees.
  - Validated final SER report for teachers.
  - Identified 116 teachers over retirement age and budgeted funds for their retirement.
- AscenderPay data cleansing:
  - Ongoing SB by end-August 2024.
  - Completed exercise in Port Moresby national agencies: attached National Identification (NID) number to each employee for 31 out of 43 national agencies (excludes teachers, health workers and discipline forces in the Provinces).
  - “One position, one person, one pay (1PPP)” control switched on across all sectors on the payroll for current positions.
  - Requirement: all new hires must have an NID number before paid through the government payroll.
  - Centralized access for new hires through Department of Personnel Management as the employing agency.
  - Data Cleansing Forum held to solicit documentation and stakeholder feedback; action plan to capture capacity gaps and desktop analysis planned.
- Personnel emoluments (PE) management:
  - Historic under-budgeting for PE (25 percent in 2018) improved during program.
  - PE spending in 2023 broadly in line with budget targets.
  - Plans to increase funding for police, teachers and health care workers while decreasing the total PE budget for other agencies in 2024 compared to 2023.

### Arrears verification, retirement, and liabilities
- Arrears Verification (AV) program (established January 2020):
  - As of April 2024: submissions amounting to K6.3 billion.
  - Successfully verified K3.1 billion and paid K1.4 billion.
  - Remaining unverified stock of claims on goods and services under AV program: K3.2 billion.
  - 2024 Budget appropriation to AV program: K300 million.
- Salary arrears and retiree payments:
  - By end of last year: retired 2,682 retirees at a cost of K377 million.
  - Superannuation liability provided by Nambawan Super Limited (NSL): K72 million.
  - Current stock of rental arrears: K260 million.

### Commitment controls, IT modernization, and public investment
- Preventing new arrears:
  - No further payroll arrears accumulated as of end-December 2023; domestic debt continued to be paid on time (IT).
  - Budget allocated for teachers’ 3% salary increase: K125 million; implementation expected in the 2nd quarter of this year.
  - Preparing a concept for a commitment accounting framework including a contract management system to monitor multiyear commitments.
- IT modernization strategy (three stages):
  - Phase 1: move the IFMS system to the cloud.
  - Phase 2: upgrade to a new version of the software for the IFMS system.
  - Phase 3: study finance solution requirements for a broader reform of government financial IT systems.
  - Requested follow-up IMF technical assistance and committed to setting concrete structural benchmarks starting from the third review of the program.
- Public Investment Management:
  - Requested a Public Investment Management Assessment (PIMA) from the IMF to identify reform priorities to enhance efficiency of capital spending and infrastructure outcomes.

*Source: 1pngea2024001-print-pdf - 9. We propose to reset the deadlines for two key structural benchmarks relating to legal*

### 22. We intend to also reduce our reliance on trust accounts to improve expenditure

### We intend to also reduce our reliance on trust accounts to improve expenditure controls and management

### Trust accounts, cash management, and Treasury Single Account (TSA)
- Current decentralized framework: payments for many government projects are carried out through trust accounts in the BPNG and commercial banks, funded by transfers appropriated in the government budget.
- Balances reduced in half in 2023:
  - consolidated balance of K0.5 billion at end-December 2023, against K1.0 billion at end-December 2022.
- COVID-19 emergency trust account balances:
  - remaining balance of K35 million as of end-December 2023, against K410 million as of end-December 2022.
  - Commitment: close them by end-September 2024.
- Review of other trust accounts maintained outside the central bank to be conducted in the context of developing a full-fledged TSA.
- TSA modernization steps and technical assistance:
  - Passage of the Non-Tax Revenue Administration Act (NTRA) centralizes statutory bodies’ revenues into the Consolidated Revenue Fund at the BPNG.
  - IMF technical assistance on cash management received in March 2024; follow-up IMF technical support requested in April 2024.
  - Commitment to set concrete structural benchmarks starting from the third review of the program.

### Debt management progress and strategy
- Recent achievements:
  - Implementation of the Guarantee Policy and corresponding Guidance note and tools.
  - Upgrade and migration of the Commonwealth Debt Recording System to Meridian completed.
  - Review of the on-lending policy completed and approved by the NEC.
  - Draft of the first annual Debt Bulletin completed; intended publication containing debt statistics as of the close of 2023 by 2024 Q3.
- Strategy and constraints:
  - Continued substitution of costly financing with concessional financing from multilateral and bilateral partners to improve PNG’s debt profile.
  - Met the present value limit on new public external debt contracted for 2023 by a margin close to US$410 million (QPC), partly due to processing delays.
  - Maintain present value limit on new public external debt contracted in 2024 and 2025 (continuous QPC).
  - Continuous QPC: non-accumulation of new external payment arrears.
  - Borrowing to be linked to on-budget financing needs and guided by Debt Sustainability Analyses (IMF and World Bank) and the upcoming Medium-Term Debt Strategy (Debt Strategy).
  - Debt Strategy intended to be completed and submitted for NEC approval by end of second quarter.
  - US$500 million Sovereign Bond maturing in 2028: initial discussions on redemption plan commenced; possible options include Debt Swaps, funding by international partners, and an action plan to accumulate needed financial resources.
  - IMF TA to develop debt management capacity with the objective of expanding debt coverage to include SOEs.

### Monetary and exchange rate policies; de-dollarization roadmap
- Roadmap objectives:
  - Control cost of living and preserve price stability.
  - Ensure kina convertibility and an appropriate exchange price for exports and imports.
  - Strengthen monetary policy and exchange rate frameworks, improve government cash management, and reinforce inflation forecasting and monitoring.
- Exchange rate arrangement:
  - Since January 3rd, 2024, implementing a crawl-like exchange rate arrangement to support gradual return to kina convertibility by the end of the program.
  - USD/PGK exchange rate changes:
    - depreciated by 1.2 percent over the first three months of 2024.
    - added to the 5.5 percent depreciation observed between April and December 2023.
  - Key parameters agreed in December 2023:
    - USD as initial anchor currency for the crawl calculation.
    - formula for rate of crawl relying on real misalignment estimates and inflation differentials.
    - two percent-wide crawling band for the nominal exchange rate.
    - biannual pace for review and update of the rate of crawl.
  - Multiple-price FX auction mechanism implemented to increase transparency and competitiveness in the interbank market.
  - Communications: details on the new arrangement presented in September 2023 MPS and March 2024 MPS.
  - Goal: fully resolve kina misalignment and restore kina convertibility to enhance export competitiveness and rural incomes.

### Inflation, monetary tightening, and FX market operations
- Monetary policy measures to anchor inflation expectations and align with exchange rate arrangement:
  - BPNG Board approved a tightening monetary policy stance for April-September 2024 in March 2024 MPS (recommendation by the Monetary Policy Committee).
  - Policy actions:
    - increase in policy rate (KFR) by 50 basis points to 2.5 percent (effective May 2024).
    - increase in cash reserve requirement ratio (CRR) by 100 basis points to 11 percent (effective May 2024).
- FX market interventions and rationing:
  - In 2023, sold US$1.6 billion to authorized foreign exchange dealers (above the program’s indicative floor (IT)).
  - As of end-March 2024, provided a further US$0.3 billion to the market.
  - Total stock of import orders older than two months stood at K46 million, significantly lower under the program’s indicative floor (IT).
  - Continued gradual removal of FX rationing measures as the exchange rate approaches equilibrium.
  - Streamlined requirements for tax clearance certificates on import-related activities funded by inter-company loans, BPNG currency purchases, and government payments.
  - Published all FX market regulations and directives on the BPNG website; BPNG no longer requires tax clearance certificate to include FX orders related to intercompany loans for import payments in the orderbook.
  - Working on a government-wide strategy to increase net FX inflows and enhance competitiveness and FDI attractiveness.

### Liquidity management and monetary transmission
- Fixed rate full allotment (FRFA) and open market operations:
  - First FRFA auction conducted in late August 2023.
  - FRFA helped mop up on average half of the excess liquidity; precautionary reserves remain elevated.
  - Aligned rate of issuance of the 7-day central bank bills with the KFR.
  - Participation in FRFA auctions restricted to deposit-taking financial intermediaries required to maintain reserves and supervised by BPNG.
- Planned enhancements (timing and instruments):
  - Introduce a mid-rate corridor on the KFR, bounded by standing overnight deposit and borrowing facilities priced at ±150 basis points around the KFR (new proposed SB by end-August 2024).
  - Enhance CRR framework by introducing partial reserve averaging and extending the lagged maintenance period (new proposed SB by end-August 2024).
  - Fine-tune other monetary policy tools to complement the 7-day CBB in mopping up excess liquidity.
- Expected effects:
  - Reduce excess liquidity and commercial banks’ precautionary reserves.
  - Lower liquidity risk premium and improve liquidity management and monetary transmission.

### BPNG governance, independence, and legislative reforms
- Senior appointments and governance improvements:
  - Permanent Governor appointed in January 2024 (first female in the role).
  - All BPNG Board vacancies filled in April 2024; Deputy Governor appointed in April 2024 (SB implemented with delay).
  - Appointments reinforce BPNG governance and steering of the Roadmap implementation.
- Legislative and accountability reforms:
  - Draft amendments to the Central Banking Act (CBA) submitted to Parliament on June 5, 2024 (prepared in consultation with the IMF; SB partially implemented with delay).
  - Amendments address mandate, governance, autonomy, transparency, and accountability, including:
    - ranking BPNG mandates with price stability as primary objective;
    - establishment of a separate Monetary Policy Committee;
    - clearer limits on advances to government.
  - Expectation: amendments to be discussed during the September 2024 parliamentary session.
  - Safeguards assessment recommendations to be implemented according to assessment timelines (e.g., legislative reforms, Board and committee charters, timely publication of financial statements).
  - BPNG’s audited financial statement for FY22 published; commitment to restore timeliness with FY23 financial statements.

### Financial sector policies, financial inclusion, and AML/CFT
- 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, particularly in rural areas.
  - Strategic objectives: financial literacy, regulatory strengthening, digital infrastructure, public-private engagement, inclusive green finance, and technology-enabled service deepening.
  - Rollout to provincial levels and planned training programs (in-person and online).
  - Balance financial inclusion with financial stability and AML/CFT gains.
- Financial sector assessments and timeline:
  - IMF financial sector stability review (FSSR) delayed by January 2024 social unrest; mission expected for July 2024 with full report and recommendations expected for the second half of 2024.
- AML/CFT enhancements:
  - APG mutual evaluation onsite visit in October 2023; last face-to-face meetings with APG team in March 2024.
  - Final comments being provided ahead of APG Plenary discussion in July 2024.
  - BPNG’s Financial Analysis and Supervision Unit (FASU) coordinating with Department of Justice and Attorney General; mobilizing agencies through the National Coordinating Committee (NCC) on AML/CFT (21 government agencies).
  - Key APG recommendations include: update ML/TF risk assessments; establish information sharing arrangements; improve access to information; enhance quality of suspicious transaction reporting; apply risk-based supervision; investigate and prosecute financial crimes; asset forfeiture and confiscation; amend beneficial ownership legal framework.
  - FASU strengthening AML/CFT supervision via risk assessments and risk-based on-site and off-site inspections.

### Governance and anti-corruption (ICAC)
- ICAC operationalization and funding:
  - Planned funding ramp-up from K10 million in 2023 to at least K47 million in 2024 to make ICAC fully operational in 2024.
  - Staffing: 95 expected by end-2024, against 18 in July 2023.
  - Funding intended to cover recruitment, global expertise, new premises, legal costs, and forensic capabilities.
  - Commitment to sustain appropriate funding levels going forward.
- Institutional and operational milestones:
  - Key implementing regulations to the ICAC law adopted by the National Executive Council in May 2024 (SB implemented with delay).
  - ICAC to appoint oversight committee as per law (new proposed SB by end-September 2024).
  - ICAC adopted Code of Conduct and investigations manual; intelligence manual and commission hearing manual to be completed soon.
  - ICAC tasked with reviewing the National Anti-Corruption Plan of Action 2020-2025 and preparing its successor.
  - IT upgrades: new case management system acquired and to be rolled out this year; revamped website launched allowing complaints and providing operational information.
  - ICAC added as a member of the NCC in March 2024.
  - Memoranda of understanding targeted with BPNG’s FASU, the Police, the Ombudsman’s Office, the Auditor General’s Office (AGO) and the Public Prosecutor’s Office, aiming to sign with at least four of these five institutions by end-December 2024 (new proposed SB by end-December 2024).

*Source: 1pngea2024001-print-pdf - 22. We intend to also reduce our reliance on trust accounts to improve expenditure controls and management*

### 36. We have made progress in strengthening transparency around procurement. In March

### 1pngea2024001-print-pdf - 36. We have made progress in strengthening transparency around procurement. In March

### Procurement transparency
- In March 2024, the government posted on the government procurement website details of all major COVID-19 related contracts (over K100,000) procured since April 2020, including the names of the entities awarded the contract and their major shareholders; beneficial ownership could not be published due to its unavailability (SB partially implemented with delay).
- Overall value of published COVID-19 related contracts: about K180 million.
- Publication timing: accomplished with a three-month delay but extended beyond program commitment to publish data for years 2020 and 2021 by also including all major contracts procured since 2022.
- For contracts under normal procurement processes: will be accounted for under audit procedures undertaken by the AGO; commitment to ensure AGO is appropriately staffed and funded to carry out its external audit mandate.
- Forward commitments:
  - Work towards publication of all public procurement contracts to enhance fiscal and financial transparency.
  - Seek IMF advice to strengthen procurement procedures for public investment as part of the recently requested PIMA.

### Fiscal and financial transparency, statistics, and external sector
- Commitments to extend coverage of GFS reporting and improve consistency of statistics, particularly for the external sector.
- Actions taken:
  - Releasing more comprehensive GFS tables in the budget book.
  - Developing fully GFS compliant budget estimates volumes.
  - Working to better reflect fiscal positions of provincial and SOE sectors in budget documentation.
  - Updated and passed through Parliament the expenditure Appropriation Acts committing to publish quarterly reports of adjustments to budget allocations made by the Treasurer through the year.
- External sector statistics:
  - Continued improvements following recent Fund TA on external sector statistics and publishing data in accordance with the 6th Balance of Payments Manual (BPM6).
  - Plan to initiate an inter-agency working group on external sector statistics including representatives from the NSO, Treasury Department, PNG Customs Service and the BPNG (ongoing SB by end-June 2024).
  - Laying groundwork to produce international investment position (IIP) statistics.
- Financial statistics: the statistics module of the FSSR will further help the BPNG in improving financial statistics.

### SOE governance and state entities
- Legal and policy framework for SOEs amended with ADB support, strengthening financial and corporate governance.
- Improvements observed:
  - Timeliness of publication of audited financial statements for SOEs has improved.
  - Appointment of SOE directors is now skill-based, more transparent, with improved gender balance.
- Remaining objectives:
  - Improve reliability and quality of financial information for SOEs.
  - Improve timeliness and publication of financial statements for state entities.
  - With continued ADB support: unify and enhance procurement practices across SOEs, strengthen financial transparency and accountability, pass dividend policies for SOEs and state entities through the National Executive Council.
  - Improve financial sustainability of SOEs while ensuring Community Service Obligations are properly funded where appropriate and improving access to public services in rural and most remote areas.

### Social protection and poverty reduction
- PRGS / MTDP IV 2023-2027:
  - Launched January 2023.
  - Strategic objectives include: growing the economy to K200 billion by 2030, doubling both domestic revenue and export proceeds, creating one million additional jobs, and improving the quality of life for all people.
  - Key initiatives: reforms for micro, small and medium enterprises, continuation of Connect PNG policy, development of a national health insurance policy, enhancements to energy security policies, expansion of education infrastructure, and structural transformation in provincial and district administrations to deliver minimum service standards.
- Social spending and programs:
  - In 2023, spending directed to education, health and law and order was K4.8 billion, above the program target (IT) of K3.9 billion.
  - Note: the K4.8 billion does not include spending on the Government Tuition Fee Subsidy (GTFS) scheme or teachers’ salaries.
  - GTFS supported over 2.2 million students across over 10,000 schools.
  - Tertiary Education Student Assistant Scheme assisted over 18,000 students.
  - Higher Education Loan Program supported over 13,000 to access further studies.
- Forward commitments:
  - In 2024, continue redirecting expenditure to priority sectors to increase the number of teachers, health workers and police.
  - Continue working with development partners to strengthen social safety nets, deliver better rural public services, address urban youth unemployment, improve labor mobility, remove employment barriers, and address urgent child nutrition and communicable disease needs.

### Climate change
- Vulnerabilities and risks:
  - Heavy reliance on agriculture (especially subsistence level and export) vulnerable to climate shifts, flooding and extreme weather.
  - Ranked 8th among countries for highest disaster risk in the world on the World Risk Report, 2020.
  - World Bank 2021 Climate Risk Country Profile: hazards such as flash flooding, landslide, and coastal flooding likely to intensify.
  - Population affected by river flooding is projected to double by 2030.
- Government actions and commitments:
  - Amended the Climate Change Management Act to make the Climate Change Development Agency (CCDA) a regulatory agency; in process of appointing a National Climate Change Board.
  - CCDA preparing implementation report on enhanced Nationally Determined Contribution (NDC), basis for updated NDC in 2025; NDC commitments conditional on international financial support.
  - Working with partners to develop climate mitigation and adaptation programs through the Green Climate Fund and build on BPNG’s Green Finance Policy.
  - Requested IMF Climate Policy Diagnostic (CPD) and Climate Public Investment Management Assessment (C-PIMA); diagnostics to be undertaken in June-July 2024.
  - Sought access to the Resilience and Sustainability Facility (RSF), proposed to be assessed concurrently with the third review of the ECF/EFF arrangements, informed by these diagnostics.

### Financing strategy and program monitoring
- Purpose of the Fund program:
  - Address immediate balance of payments need, engage development partners, build buffers to support a more flexible exchange rate system, and signal commitment to sound macroeconomic policies and structural reforms.
  - Fund disbursements channeled toward budget support to allow continued spending at reasonable cost.
- Reserve targets and external financing:
  - Target international gross reserves: US$3.2 billion (4.8 months of imports) by end-2026.
  - Net international reserves (NIR) closed 2023 at US$3.3 billion, about US$640 million above the floor set for the December 2023 test date.
  - NIR target for end-2024 (QPC): US$2.05 billion.
  - Estimated external financing needs for the year: US$812 million, of which 31 percent will come from disbursements under the Fund program.
  - Request to add an adjustor to the NIR floor, conditional on external financing disbursements (see Para. 16 in the Technical Memorandum of Understanding).
- Program monitoring and test/review dates:
  - Review schedule (6-monthly): third, fourth and fifth reviews on or after September 18, 2024; March 18, 2025; and September 18, 2025.
  - Next three test dates: June 30, 2024; December 31, 2024; and June 30, 2025.
  - Proposal to include additional indicative targets for interim assessment dates: September 30, 2024 and March 31, 2025.
  - Request for a waiver of applicability for the end-June 2024 performance criteria under the EFF arrangement due to absence of final data at the time of this revision.
- Data and coordination arrangements:
  - Program Monitoring Committee active, chaired by the Secretary of the Treasury, coordinates PNG interactions with Fund staff and stakeholders.
  - Appointed program monitoring coordinators at the Treasury and BPNG to ensure timely transmission of program-related data.
  - Close and frequent contact maintained with the IMF Resident Representative.

### Key quantitative performance figures and indicative targets (selected, preserved exactly as presented)
- Fiscal deficit of the government (ceiling, cumulative from the beginning of the year) — selected values in Table 1:
  - Approved/Indicative and outcomes include: 4,239; 4,007 met; 4,935; 4,805 met; 1,586; 1,434 met; 3,014; 4,132; 4,810; 1,159; 2,203.
- Stock of net international reserves of the BPNG (floor, US$ millions):
  - 2,082; 2,707 met; 2,650; 3,292 met; 2,500; 2,830 met; 2,350; 2,200; 2,050; 1,988; 1,925.
- BPNG's gross credit to government (ceiling): 2,400; 2,026 met; 2,400; 1,929 met; 2,400; 2,024 met; 2,400; 2,400; 2,400; 2,400; 2,400.
- New external payment arrears of the government (ceiling, US$ millions): 0 0 met 0 0 met 0 0 met 0 0 0 0 0.
- Present value of new external debt contracted or guaranteed by the government (ceiling, US$ millions): 1,405; 114 met; 943; 531 met; 1,072; 0 met; 1,072; 1,072; 1,072; 530; 530.
- Non-resource tax revenue of the government (floor, cumulative from the beginning of the year): 9,167; 9,649 met; 12,741; 13,720 met; 2,935; 3,075 met; 5,871; 10,714; 14,677; 3,268; 6,537.
- Social and other priority spending (floor, cumulative from the beginning of the year): 2,817; 3,699 met; 3,866; 4,787 met; 525; 1,735 met; 1,575; 2,958; 4,059; 550; 1,650.
- BPNG provision of foreign exchange to authorized FX dealers (floor, cumulative from the beginning of the year, US$ millions): 900; 1,073 met; 1,200; 1,574 met.
- Stock of unmet import-related FX orders (ceiling): 150; 46 met; 125; 100; 75; 50; 25; 0; 5; 0; 25.

### Structural benchmarks (selected measures and implementation dates)
- Introduce amendments to the Income Tax Act to Parliament to strengthen revenue mobilization — End-December 2024 (Proposed reset deadline).
- 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’s oversight (in consultation with the IMF) — End-December 2024 (Proposed reset deadline).
- Complete data cleansing over current payroll records in the AscenderPay IT system and produce a report shared with the IMF — End-August 2024.
- Implement an interest rate corridor centered around the Kina Facility Rate (KFR), bounded by standing overnight deposit and borrowing facilities priced at +/- 150 bps around the KFR — End-August 2024 (Proposed).
- Modify to extend the lagged reserve maintenance period to 4-weeks and introduce partial reserve averaging — End-August 2024 (Proposed).
- Initiate an inter-agency working group on external sector statistics including NSO, Treasury Department, PNG Customs Service and the BPNG — End-June 2024.
- Appoint the ICAC’s oversight committee as mandated by Part XII of the ICAC law — End-September 2024 (Proposed).
- Adopt memoranda of understanding between ICAC and at least four of specified agencies to facilitate anti-corruption collaboration — End-December 2024 (Proposed).

*Source: Papua New Guinea authorities and IMF staff (content from the provided PDF excerpt).*

### 2.      For the purposes of the ECF/EFF program, government is defined as the central

### Program Definitions and Performance Criteria for the ECF/EFF Program (Papua New Guinea)

### Definitions of Government and General Government Coverage
- Government is defined as the central government of the Independent State of Papua New Guinea.
- Central government: component of general government covered by the national budget; encompasses fundamental activities of the national executive, legislative and judiciary powers.
- Includes Extra Budgetary Units which have individual budgets not fully covered by the national budget, in particular trust accounts.
- Budgetary central government: the central government excluding extra budgetary units.
- General government represents: the national and provincial governments; the Autonomous Bougainville government; and the commercial and statutory authorities.

### Exchange Rates for Program Transactions
- Transactions denominated in foreign currencies will be converted into PNG’s domestic currency (PGK) based on key exchange rates as of December 31, 2022:
  - PGK/USD 3.524
  - PGK/AUD 2.387
  - USD/SDR 1.330

### Debt: Definition, Scope, and Exclusions
- Debt definition follows Executive Board Decision No. 15688-(14/107).
- "Debt" means all current (i.e., not contingent) liabilities created under contractual arrangements requiring future payments in assets or services; primary forms include:
  - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
  - suppliers’ credits (deferred payments for goods/services);
  - leases (debt is the present value at inception of all lease payments expected during the agreement excluding payments for operation, repair, or maintenance).
- Arrears, penalties, and judicially awarded damages from failure to pay contractual obligations that constitute debt are debt.
- Failure to make payment on contractual obligations that are not debt under this definition (e.g., payment on delivery) will not give rise to debt.
- For the program, debt shall include borrowing by, or that receives guarantees from, the central government and the Bank of Papua New Guinea (BPNG), except:
  - Accumulation of liabilities for BPNG monetary policy operations, including issuance of securities or central bank bills/notes, shall be excluded from the definition of debt.
- External debt: debt denominated, or requiring payment, in a currency other than the Kina.
- A debt and/or guarantee is considered contracted when all conditions for its coming into effect have been met, including approval by the Treasury. Contracting of credit lines with no predetermined disbursement schedules or multiple disbursements is considered contracting of debt.

### Quantitative Performance Criteria (QPCs) — Fiscal Deficit and Related Calculations
- Ceiling on the Cumulative Fiscal Deficit of the Budgetary Central Government:
  - Fiscal deficit calculated on a cash basis as net acquisition of financial assets less net incurrence of financial liabilities by the budgetary central government from January 1.
  - Net acquisition of financial assets = net change in domestic financial assets + net change in external financial assets of the budgetary central government.
  - Net incurrence of liabilities = net incurrence of domestic liabilities + net incurrence of external liabilities.
    - Domestic liabilities include: debt securities outstanding; loans received from residents of PNG; insurance, pension and standardized guarantee schemes; financial derivatives and employee stock options; and other accounts payable.
    - External liabilities include: debt securities outstanding; loans received from lenders not resident of PNG; and any other liabilities that meet the definition of external debt.
- Performance assessment test dates and requirement:
  - Cumulative fiscal deficits at end-June 2024, end-December 2024 and end-June 2025 (PCs) and end-September 2024 and end-March 2025 (ITs) must be smaller than or equal to the amounts specified in Table 1 of the MEFP.

### Net International Reserves (NIR) of BPNG — Definition and Adjustor
- NIR (stock) = gross foreign assets − use of IMF credit.
- Gross foreign assets comprise:
  - BPNG’s holdings of monetary gold (excluding amounts pledged as collateral);
  - Holdings of Special Drawing Rights (SDRs);
  - BPNG holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments);
  - Papua New Guinea’s reserve tranche position with the IMF.
- Gross foreign assets exclude:
  - Any foreign currency claims on residents;
  - Capital subscriptions in international institutions;
  - Assets obtained through currency swaps of less than three months duration;
  - Pledged, swapped, or any encumbered reserve assets, including reserve assets used as collateral or guarantees for third-party external liabilities;
  - Precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets.
- Use of IMF credit includes credit outstanding under IMF financing programs with Papua New Guinea (including resulting from the ongoing ECF/EFF program).
- For program assessment, the stock of NIR at end-June 2024, end-December 2024 and end-June 2025 must be equal or greater than amounts specified in Table 1 of the MEFP.
- Adjustor for shortfall in disbursements:
  - The floor on NIR will be adjusted downward by the amount of the shortfall in program loan and grant disbursements from multilateral institutions and bilateral partners relative to the baseline projection reported in Table 2.
  - The adjustor will first be applied at the end-December 2024 test date.
  - Program loan and grant disbursements are defined as external loan and grant disbursements (excluding project financing disbursements) from official creditors that are freely usable for financing budget operations.
  - Table 2 — Expected disbursements of program loans and grants by multilaterals and bilateral partners (Cumulative from January 1, 2024):
    - 2024 December: 505 (In millions of US dollars)

### Ceiling on BPNG’s Gross Credit to Government
- 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 assessment, BPNG’s gross credit to government at end-June 2024, end-December 2024 and end-June 2025 must be lower than or equal to the amounts specified in Table 1 of the MEFP.

### Continuous Performance Criteria — Present Value (PV) Ceiling on New External Debt
- 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 debts linked to a benchmark + fixed spread:
  - PV calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.
  - Program reference rate for the six-month USD LIBOR is 2.73 percent and will remain fixed for the duration of the program.
  - If variable rate linked to a benchmark other than the six-month USD LIBOR, a spread reflecting the difference between that benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added.
  - For Australian Dollar interest rates, the spread over six-month USD LIBOR is 50 basis points.
- A continuous ceiling in PV terms applies to contracting or guaranteeing new external debt by the Government or the BPNG, including private debt with official guarantees not yet disbursed.
- Adjustor: 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.
- Debt is considered contracted when all conditions for its entry into effect have been met, including Treasury approval. Contracting of credit lines with no predetermined disbursement schedules or multiple disbursements is considered contracting of debt.
- Government debt guarantee: explicit legal obligation of the central government or the BPNG to service a debt in the event of nonpayment by the borrower.

### Ceiling on New External Payment Arrears of the Government
- External payment arrears of the government = external debt obligations not paid when due in accordance with contractual terms (taking into account contractual grace periods).

### Other Assessment Criteria (during program period)
- PNG will not:
  - a. Impose or intensify restrictions on the making of payments and transfers for current international transactions;
  - b. Introduce or modify multiple currency practices (MCPs);
  - c. Conclude bilateral payments agreements which are inconsistent with Article VIII of the IMF Articles of Agreement;
  - d. Impose or intensify import restrictions for balance of payments reasons.

### Indicative Targets and Definitions
- Indicative targets set for test dates: end-June 2024, end-December 2024 and end-June 2025. Indicative assessment dates: end-September 2024, end-March 2025. Targets are specified in Table 1 of the MEFP.
- Non-resource tax revenues: defined in line with GFSM 2014 and consist of:
  - (i) taxes on income, profits, and capital gains;
  - (ii) taxes on payroll and workforce;
  - (iii) taxes on property;
  - (iv) taxes on goods and services;
  - (v) taxes on international trade and transactions;
  - Excludes 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 are deemed in arrears when:
    - Domestic debt remains unpaid for more than 30 days after the due date stipulated in the agreement between the parties (creditor/debtor).
    - Wages or pensions remain unpaid 90 days after their due date.
- BPNG provision of foreign exchange to authorized foreign exchange dealers: amount of FX sold by BPNG to banks and other authorized FX dealers in PNG each month to assist meeting FX orders in the market. This indicative target was last assessed at end-December 2023.
- Stock of unmet import-related FX orders: total amount of FX orders related to imports of goods compliant with BPNG’s published FX regulations and submitted by authorized foreign exchange dealers to BPNG’s orderbook more than two months prior to the assessment date. First assessed at end-March 2024.
- Social and other policy priority spending: measured on a cash basis and comprises budgetary central government spending in health, education and law and order (both capital and operating expenses).

### Program Monitoring and Data Reporting
- Papua New Guinea authorities shall maintain a Program Monitoring Committee composed of senior officials from the Treasury and the Bank of Papua New Guinea.
- Responsibilities: monitor program performance, inform the IMF regularly, and transmit supporting materials necessary for evaluation of benchmarks.
- For continuous QTs, the authorities will report any non-observance to the IMF promptly.

*Source: 1pngea2024001-print-pdf*

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

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

### Data reporting requirements (Table 3: Papua New Guinea: Data Reporting for Program Monitoring)
- Fiscal Sector (reporting agency: Treasury)
  - Net acquisition of financial assets and net incurrence of financial liabilities (Budget operations). Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - External loans disbursed and external debt instruments issued, broken down by type of creditor or holder. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - External loans repaid and external debt instruments redeemed, broken down by type of creditor or holder. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Domestic financial assets accumulated including deposits at the BPNG or other depository institutions. Type of Data: Debt. Reporting Frequency: Bi-annual. Reporting Lag: 1 month.
  - External financial assets accumulated, including FX deposits at the BPNG and other depository institutions, including foreign entities. Type of Data: Debt. Reporting Frequency: Bi-annual. Reporting Lag: 1 month.
  - Domestic loans disbursed. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Domestic loans repaid. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Domestic securities issued, broken down by original maturity, by face value and proceeds from issuance. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Domestic securities redeemed by original maturity. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Loans or advances from the BPNG (excluding any on-lending of external loans contracted with the Fund or other development partners). Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Any other long-term (exceeding 1 year) domestic liability of the central government. Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Opening balance, closing balance, inflows and outflows of government trust accounts at end-month, both consolidated and detailed by trust account. Type of Data: Cash. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Payments incurred by the budgetary central government on education, health, and law and order (both capital and current spending). Type of Data: Debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Stock of domestic arrears: (i) total stock of verified and unverified claims under the Arrears Verification program; (ii) amount of claims verified and paid by the Arrears Verification Committee over the past month. Type of Data: Domestic Arrears. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Table comparing the value of the personnel emolument liabilities incurred and the value of the personnel emolument payments made over the past quarter. Type of Data: Domestic Arrears. Reporting Frequency: Quarterly. Reporting Lag: 6 weeks.
  - Total non-resource tax revenues received by the central government (taxes on income, profits, and capital gains; taxes on payroll and workforce; taxes on property; taxes on goods and services; taxes on international trade and transactions). Type of Data: Revenue. Reporting Frequency: Monthly. Reporting Lag: 6 weeks.
  - Total resource revenue received by the central government (mining and petroleum taxes; royalties levied on petroleum companies; mining and petroleum dividends; any other resource revenue). Type of Data: Revenue. Reporting Frequency: Monthly. Reporting Lag: 6 weeks.
  - Total non-resource non-tax revenue received by the central government (property income (interest, non-resource sector dividends, rent); sales of goods and services; fines, penalties and forfeits; any other non-resource non-tax revenue). Type of Data: Revenue. Reporting Frequency: Monthly. Reporting Lag: 6 weeks.
  - Monthly cash plan. Type of Data: Cash. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Stock of domestic debt, disbursements, amortization, interest, and other fees and charges; face value, maturity, interest rate, payment schedule and actual payments made over the past month. Type of Data: Domestic debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Stock of external debt, disbursements, amortization, interest, and other fees and charges; face value, maturity, interest rate, and payment schedule. Type of Data: External debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Details on amount and terms of disbursed external budget support and project grants and loans. Type of Data: External debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - End of year external debt in U.S. dollars, by creditor, and originating currency. Type of Data: External debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Amount of new external debt contracted by Government. Type of Data: External debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - All guarantees provided by the government including guarantees to public corporations and private sector. Type of Data: External debt. Reporting Frequency: Monthly. Reporting Lag: 1 month.

- Real Sector
  - Consumer Price Index. Type of Data: Economic indicators. Reporting Agency: NSO. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - National Accounts (breakdown of production) in real and nominal terms. Type of Data: Economic indicators. Reporting Agency: NSO. Reporting Frequency: Annual. Reporting Lag: 24 months.
  - Agricultural production data (volume/value of major products). Type of Data: Economic indicators. Reporting Agency: Treasury. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - Mineral production data (volume/value of major products). Type of Data: Economic indicators. Reporting Agency: Treasury. Reporting Frequency: Quarterly. Reporting Lag: 3 months.

- Structural Benchmarks
  - Table with a description of the status of implementation of the structural measures in Table 2 of the MEFP. Type of Data: Structural benchmarks. Reporting Agency: Treasury. Reporting Frequency: Bi-annual. Reporting Lag: 1 month.

- Monetary and Financial Sector (reporting agency: BPNG unless stated)
  - Detailed balance sheet data of the BPNG submitted in the reporting template. Type of Data: Monetary. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Amount of government securities held by BPNG at amortized cost. Type of Data: Monetary. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Cash flows of the Waigani Public Account, Debt Repayment Account, and the Temporary Advance Facility (TAF). Type of Data: Cash. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Daily sale of FX (in USD) by the BPNG to authorized FX dealers (detailed by dealer). Type of Data: FX. Reporting Frequency: Weekly. Reporting Lag: 1 week.
  - Depository Corporations Survey. Type of Data: Monetary. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - Balance sheets and income statements by financial institutions (aggregate and by bank). Type of Data: Financial. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - Outstanding amount of unsatisfied requests for FX purchase to pay for current account (or authorized) transactions. Type of Data: FX. Reporting Frequency: Weekly. Reporting Lag: 1 week.
  - Monthly update report on the implementation of the monetary and FX reform roadmap. Type of Data: Monetary / FX. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Financial Soundness Indicators (aggregate and by bank). Type of Data: Financial. Reporting Frequency: Quarterly. Reporting Lag: 1 month.
  - Lending activity of banks (by sector). Type of Data: Financial. Reporting Frequency: Monthly. Reporting Lag: 1 month.

- External Sector (reporting agency: BPNG)
  - Balance of Payments data in the reporting template provided by IMF staff. Type of Data: BOP. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - Import and export data, by sectors. Type of Data: BOP. Reporting Frequency: Quarterly. Reporting Lag: 3 months.
  - Net international reserves, including reserve assets/liabilities by original currency. Type of Data: BOP. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Foreign exchange flow data (by type of flow). Type of Data: BOP. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - Banks’ purchases and sales of foreign currency (specified by bank, sector and by type of flow). Type of Data: FX. Reporting Frequency: Monthly. Reporting Lag: 1 month.
  - List of the foreign exchange allocation pipeline (orderbook) with information about length of time needed to fulfill order and type of orders (especially imports of goods and import-related intercompany loans). Type of Data: FX. Reporting Frequency: Monthly. Reporting Lag: 1 month.

### Program implementation, outcomes, and macro-financial context
- Program performance and implementation
  - Authorities met all end-December 2023 quantitative and indicative targets, as well as all continuous performance criteria during the Second Review period.
  - Six Structural Benchmarks were fully implemented, while three are currently delayed.
  - The amendment to the Income Tax Act is the most prominent delayed benchmark; authorities request resetting the deadline from end-December 2023 to end-December 2024.
- Political, social, and capacity constraints
  - Program implementation is affected by public sector capacity constraints, socio-political frictions, lack of parliamentary stability, and episodes of social unrest.
  - January 2024 protests and riots resulted in loss of lives, destruction of property, and looting, and hampered the rate of progress.
- Fiscal and structural reform agenda
  - Reforms target non-resource sources of growth, improving public finances, retaining a larger share of natural resource returns, public infrastructure investment, improving governance, containing the public wage bill, and improving the efficiency of state-owned enterprises.
  - A 13-year fiscal repair program aims to return the budget to surplus by 2027 and create capacity to repay public debt over a four-year horizon.
- Market recognition
  - Since program inception in March 2023, international financial markets recognized progress through a material narrowing of the sovereign risk premium—the lowest spread since early 2019.

### Monetary and financial sector reforms and technical assistance
- Exchange rate and reserves
  - Parameters established for new crawling peg-like exchange rate regime; the PNG kina has been trading under this arrangement against the US dollar.
  - With ample foreign reserves to underpin credibility, any small remaining overvaluation of the real effective exchange rate is expected to be gradually eliminated.
  - Foreign exchange conversion and trading restrictions are being dismantled; an important outcome will be achieving full convertibility of the PNG kina.
- Central bank governance and operations
  - Central bank governance and operations are being reorganized; a governor and deputy governor have been appointed and key board positions filled.
  - The Central Banking Act (CBA) has been redrafted and submitted to parliament, subject to technical delays and competing priorities.
  - With IMF technical assistance, proposed changes are judged to significantly strengthen governance and operational independence.
- Monetary policy implementation
  - Monetary policy enhancements under a comprehensive roadmap include alignment of key policy rates, sterilization of excess liquidity in the interbank money market, and improved arrangements for open market operations.
  - The Bank of Papua New Guinea has requested assistance of a long-term expert from the IMF to assist with calibration, sequencing, coordination, and implementation of monetary policy reforms; authorities urge timely and favorable consideration of this request.
  - Planned introduction of an official interest rate corridor to enhance transmission of policy rate changes.

### Priorities, policy recommendations, and requests
- Near-term priorities
  - Improve cash management processes.
  - Further fiscal consolidation through expenditure restraint and broadening the revenue base.
  - Strengthen the Independent Commission Against Corruption to underpin property rights, contract enforceability, and the rule of law to attract foreign direct investment.
- Climate and resilience
  - Given vulnerability to climate change, authorities requested a Climate Policy Diagnostic (CPD) and a Climate Public Investment Management Assessment (C-PIMA).
  - Authorities acknowledge binding capacity constraints and limited absorptive capacity when undertaking climate-related work alongside the existing program agenda.
- IMF engagement and financing request
  - Authorities request Board approval of the Second Review under the ECF and EFF arrangements and the release of the related purchase and disbursement to address balance of payments and budget financing needs and to advance the reform agenda.

*Statement by Robert Nicholls, Executive Director for Papua New Guinea; Chris Becker, Advisor to Executive Director; and Megan Garner, Advisor to Executive Director — July 12, 2024.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1pngea2024001-print-pdf.pdf_