## _cr04355

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### Executive Summary — Economic Background
- Economic recovery and stabilization policies started to take hold from mid-2003.
- Budget deficit for the year was limited to 2 percent of GDP (5¾ percent in 2002).
- Real GDP growth estimated at 2.7 percent in 2003, after three years of negative growth, driven mainly by stronger agricultural and mineral sectors.
- 12-month consumer price inflation declined from 20 percent in the March quarter of 2003 to below 3 percent in the March quarter of 2004.
- Temporary factors strengthening the balance of payments:
  - Strong world commodity prices (gold, copper, oil) underpinned sharp rise in exports.
  - External current account moved from a small deficit in 2002 to a surplus of 10 percent of GDP in 2003.
  - Kina appreciated against the U.S. dollar by 20 percent during January 2003–April 2004.
  - Gross international reserves rose to 6 months of nonmining imports during this period.
- Longstanding structural problems remain; medium-term prospects for faster sustainable growth and poverty alleviation will remain weak without significant progress on structural reforms.

### Key Issues and Staff Recommendations
- Fiscal targets and actions:
  - Government’s 2004 budget target of an overall deficit of 1½ percent of GDP is appropriate.
  - Further fiscal consolidation required in 2005–09 (deficits averaging below 1 percent of GDP annually) to facilitate a steady decline in the public debt-to-GDP ratio.
  - If revenue shortfall emerges, additional actions should be taken to meet the 2004 budget target.
  - Urged authorities to replace the temporary import levy (2 percent) at the end of 2004 with alternative sustainable taxation.
- Wage bill and spending reallocation:
  - Wage bill currently at 9.2 percent of GDP; insufficient actions taken to reduce it.
  - Staff emphasized reducing public sector wage bill and reallocating spending to health, education, and infrastructure.
  - Any increase in employment in priority sectors should be fully offset by cutbacks in nonpriority areas.
- Monetary and exchange rate policy:
  - Continue cautious monetary stance to keep inflation low and maintain sound balance of payments.
  - Present level of the kina is broadly appropriate despite appreciation.
- Structural reform priorities:
  - Accelerate structural reforms despite political uncertainties.
  - Implement recommendations of World Bank-led PERR finalized in mid-2003 and strengthen efficiency of provincial expenditure.
  - Address impediments to private sector growth: less corruption, better governance and law and order, friendlier regulatory regime, land reform.

### Recent Economic Developments (selected details)
- Context and challenges:
  - Macroeconomic stabilization gains under the last SBA (March 2000–September 2001) eroded before June 2002 elections.
  - Fiscal deterioration, law and order deterioration, governance problems, declining mineral sector prospects cited.
- Fiscal and monetary indicators:
  - Fiscal deficit: 5.7 percent of GDP in 2002 (from 4 percent in 2001); equivalent of 2 percent of GDP during first half of 2003.
  - Inflation accelerated to 20 percent in the year to end-March 2003.
  - Treasury bill rates rose to 20 percent in 2002.
- Recovery from mid-2003:
  - Real GDP estimated growth: 2.7 percent in 2003.
  - Agricultural outputs and petroleum, gold, copper rebounded.
  - Inflation declined to 3 percent in the year to the March quarter of 2004.
  - Annual deficit estimated at 2 percent of GDP for 2003.
  - Treasury bill rates: fell from over 20 percent in August to about 16 percent in December 2003; about 10 percent for 28-day bills and 12 percent for 182-day bills in late April 2004.
  - KFR tightened from 12½ percent to 16 percent during November 2002–June 2003; then reduced during August 2003–May 2004 to 10 percent.
  - Commercial bank credit to private sector declined by almost 3 percent in 2003 and remained weak in early 2004.
- External accounts:
  - External current account surplus of 10 percent of GDP in 2003 versus small deficit in 2002.
  - Official gross international reserves rose to about 6 months of nonmineral imports at end-December 2003.
  - Kina appreciated in real effective terms by an estimated 8 percent during January 2003–April 2004; nominal exchange rate rose by 20 percent against the U.S. dollar while falling somewhat against the Australian dollar.
- Structural reform progress:
  - Little progress in implementing PERR recommendations; minimal efforts to strengthen provincial expenditure efficiency and monitoring/reporting of provincial accounts.
  - Need to strengthen monitoring and financial condition of main public enterprises for corporatization and possible sale.
  - Structural impediments to private sector growth remain formidable (governance issues, poor infrastructure).

### Medium-Term Framework and Risks (2004–09)
- Agreed macroeconomic objectives:
  - Real GDP growth of 2½ percent annually over 2004–09, with nonmineral activity growth increasing gradually to about 3½ percent by end of forecast period.
  - Inflation targeted to decline to 2 percent by 2009, assuming fiscal and monetary discipline.
  - External current account projected to move toward approximate balance during 2006–09.
- Fiscal challenge and public debt:
  - Main challenge: ensure budget deficit averages under 1 percent of GDP in 2005 and beyond.
  - Central government debt could decline from 63 percent of GDP at end-2003 to 46 percent at end-2009, with bulk of reduction in external debt (if fiscal targets met).
- External financing and donors:
  - Small external financing gaps predicted while preserving external reserves (at least 4 months of nonmineral import cover).
  - Need to maintain good donor relations, implement enhanced cooperation with Australia, secure financing assurances from the European Union, and resolve disagreements with World Bank and ADB (both projects presently suspended because of governance concerns).
- Political and external vulnerabilities:
  - Reform momentum slowed by political uncertainties, including adjournment of parliament in January to avoid possible no-confidence motion.
  - Other risks: adverse movements in world commodity prices; projected declines in mineral output; difficulties rolling over domestic short-term treasury bills (20 percent of GDP); large official external debt repayments over next three years (3–4 percent of GDP annually); exchange rate depreciation risks.
  - Public external debt-service ratio projected to decline from 8 percent of exports of goods and services in 2004 to 4½ percent in 2009.
- Commercial bond issue risk:
  - Consideration of a large nonconcessional commercial bond issue (up to $150 million or about 3 percent of GDP) could undermine reform confidence.
  - Staff argued bond would deviate from policy of reducing public debt-to-GDP ratio; not needed for balance of payments in near term; could be costly and entail exchange rate risk.
  - Prime Minister indicated in parliamentary statement on May 12 that bond issue remains an option.

### Fiscal Policy — 2004 Budget and Execution
- 2004 budget:
  - Target overall deficit of 1½ percent of GDP.
  - Revenue and grants projected to increase slightly to 30.2 percent of GDP, mainly because of higher external grants.
- Revenue concerns and measures:
  - Shelving of Cabinet-approved VAT/GST rate increase from 10 percent to 12½ percent (estimated revenue loss of 0.7 percent of GDP).
  - Gradual elimination of mining levy (estimated loss of 0.3 percent of GDP).
  - Tax concessions to agricultural sector (possible loss of 0.5 percent of GDP).
  - Authorities noted these measures broadly offset by temporary import levy of 2 percent and reduction in number of dependents eligible for rebates from four to three.
- Current spending and wage bill:
  - Current spending estimated unchanged at 21.7 percent of GDP.
  - Public sector wage bill budgeted at 9.2 percent of GDP in 2004.
  - Budget provisions include 3 percent wage increase and additional performance bonuses; automatic annual growth of about 2 percent in number of employees in health, education, and law and order sectors despite hiring freeze.
- Domestic arrears, transparency, execution:
  - Authorities estimated total arrears nearly 2 percent of GDP at end-2003.
  - Staff urged acceleration of repayment of arrears, aiming to eliminate them by end-2005, and recommended detailed audited accounting of outstanding arrears.
  - Longstanding discrepancy between monthly above-the-line budget data and below-the-line financing information remained unresolved; authorities refining reconciliation procedures and plan to reduce trust accounts and route transactions through government main account.

### Monetary Policy, Financial Sector, and Exchange Rate
- Monetary stance:
  - Supported cautious monetary policy per Governor’s statement of January 30, aimed at restraining inflation and underpinning growth.
  - Central bank intends gradual decline in interest rates as inflation declines; commitment to keep real interest rates positive.
- Exchange rate regime:
  - Floating exchange rate regime to be retained given vulnerability to external shocks.
  - Appreciation of kina did not undermine competitiveness in 2003 because of high export prices.
  - Large import content of CPI (over 50 percent) means import-cost reductions help hold down inflation.
- Financial sector condition and supervision:
  - Banking system generally sound though full indicator set not available.
  - Domestic bank (nearly 60 percent of deposits) profitability improved; two foreign-owned banks (about 40 percent of deposits) profitable.
  - Nonperforming loans below 10 percent of deposits; capital adequacy ratios above the 11 percent legal minimum.
  - Investments in government securities account for large share of assets.
  - Authorities agreed to improve financial reporting to central bank and implement Fund TA recommendations progressively.

### Structural Reform Agenda, Public Enterprises, and Privatization
- Strategic Plan for Supporting Public Sector Reform, 2003–07 announced February 2004.
  - Plan targets downsizing public service by 10 percent and full implementation of PERR recommendations.
  - Authorities have not yet established clear phasing; priority attached to fiscal sustainability, payroll control, and budget discipline.
  - Staff stressed no slippage in implementing timetable and initiation of key actions during 2004.
- Provincial spending and grants:
  - National Economic Fiscal Commission developing functional grants to direct funds to core priorities (health, education, road maintenance) and extend grants to less-developed districts.
  - Proposed revision of Organic Law on provincial and local governments to reflect recommendations while keeping grants financeable by central government budget.
- Public enterprises and privatization:
  - Financial condition of main public enterprises poor; most make losses.
  - Early privatization of Telikom in prospect; PNG Power, PNG Post, Harbors Board, Air Niugini to adopt commercial criteria and improve governance with possible privatization.
  - Independent Public Business Commission should be cautious in providing new capital injections; all privatization receipts should be transferred to central government budget and used to repay debt.

### Structural Impediments to Private Sector Growth and Governance
- Obstacles identified:
  - Lack of urban job opportunities contributing to high crime rates.
  - Weak rural infrastructure (feeder roads, main highways) affecting agricultural output.
  - Governance problems in forestry and fisheries.
  - Mineral sector affected by law and order problems; complex communal landowner rights create potential compensation claims deterring investors.
  - Complex regulatory requirements for investors needing simplification.
- Staff recommendations:
  - Urged closer dialogue with private sector.
  - Reinforced “zero tolerance” policy for corruption and strengthening of key institutions (Office of the Auditor General).
  - Government to publish Auditor General’s report annually in timely manner.
  - Greater transparency in procurement and government operations emphasized.

### Superannuation, Trade Policy, Anti–Money Laundering, and Statistics
- Superannuation and pensions:
  - Financial position of pension funds improved; potential source of funds for domestic private sector investment.
  - New Superannuation Act passed May 2002: reduced government influence; separation of trusteeship, fund administration and investment management; strengthened transparency and central bank regulatory powers.
- Trade and tariffs:
  - Multi-year tariff reform on track: all tariffs reduced by 5 percentage points from January 2003; final stage scheduled for January 2006.
  - After completion, tariffs will fall into four tiers between 0–40 percent.
  - Simple average nominal tariff on imports is 6 percent (4 percent for nonagricultural goods); PNG rated one (least restrictive) on Fund’s trade restrictiveness index.
  - Export taxes: 5 percent on logs, mineral ores and concentrates, crocodile skins; 15 percent on sandalwood.
  - Temporary import levy introduced for 2004 of 2 percent.
- Anti–money laundering and statistics:
  - No specific anti–money laundering or anti–terrorism financing legislation at present; preliminary draft law circulated; Financial Intelligence Unit under discussion.
  - PNG ratified International Convention for Suppression of the Financing of Terrorism in March 2003.
  - Deficiencies in macroeconomic database: quality, coverage, timeliness affect policy analysis; NSO underfunded and lacks trained staff.
  - PNG participates in GDDS project and is developing GDDS metadata.

### Staff Appraisal — Summary Recommendations
- Macroeconomic assessment:
  - Progress since mid-2003: tighter fiscal policy, higher mineral/petroleum revenue, budget deficit about 2 percent of GDP for year, real GDP growth over 2½ percent in 2003, external current account surplus, reserves nearly 6 months of non-mining imports, kina appreciated.
  - Economic situation remains fragile due to political uncertainties disrupting structural reform.
- Priorities:
  - Further fiscal consolidation: budget deficits below 1 percent of GDP over medium term to reduce public debt-to-GDP ratio.
  - Limit wage costs and reallocate resources to health, education, infrastructure, per PERR recommendations.
  - Sustain prudent monetary policy; avoid undue rapid easing that could undermine external position.
  - Continue flexible exchange rate regime; avoid external commercial borrowing including international bond issue.
  - Revive efforts to address deficiencies in economic statistics; next Article IV consultation on 12-month cycle.

### Box 1 — Public Expenditure Review and Rationalization (PERR) — Key Reform Areas
- Road Map to Fiscal Sustainability:
  - Fiscal deterioration fueled by large expansion of public sector employment, recurring expenditure overruns, crowding out spending on goods and services and health, education, infrastructure.
  - Key: implement fiscal and structural policies per medium-term macroeconomic framework.
- Civil service size and payroll:
  - Rapid payroll expansion despite hiring freeze: at least 2,000 unattached officials, many ‘ghost workers’, many underemployed casual workers, unallocated allowances, high absenteeism.
  - Substantial savings attainable by cleansing payrolls with no adverse impact on service delivery.
- Restoring budget integrity:
  - Budget systems strong in principle but breached; recommendations include giving Financial Controllers more power, closing trust accounts, penalizing breaches.
- Expenditure adjustment and prioritization:
  - Conduct detailed agency reviews to identify retained or outsourced functions; institutionalize reporting by economic and functional classification.
- Improving health and education spending:
  - Reprioritize spending toward drugs and medicines and donor coordination; phase out post-primary subsidies to manage enrollment growth; increase school supplies while reducing excess teacher numbers.

### Box 2 — Impediments to Growth and Poverty Alleviation
- Overview:
  - Per capita real GDP lower than at independence in 1975.
  - Social indicators poor: average life expectancy 20 years below Australia; infant mortality 10 times higher than developed countries; rising HIV/AIDS prevalence.
- Mineral and petroleum sector:
  - Mineral sector generated about 5 percent of GDP in fiscal revenues since independence.
  - Constraints: geographic isolation, high extraction costs, enclave-type operations, past violence (Bougainville), law and order, governance, infrastructure, land reform issues leading to few new projects and declining fiscal revenues.
- Forestry and tourism:
  - Forestry plagued by unsustainable practices due to poor governance and uncertain property rights.
  - Tourism potential hindered by lawlessness and undeveloped infrastructure; very few tourists currently.
- Agricultural sector:
  - Over 85 percent of population in rural areas; impediments include deteriorating roads (feeder roads under provincial responsibility), presence of roadside bandits, limited access to credit due to traditional land tenure.
- Urban sector:
  - Rapid urban growth with limited formal private employment, growing unemployment, escalating crime in squatter settlements; many skilled workers absorbed by public sector.

### Box 4 — Australia–Papua New Guinea Enhanced Cooperation Program (highlights)
- Agreement at fifteenth Annual Ministerial Forum in Adelaide on December 11, 2003; program up to five years.
- Deployment of up to 294 Australian experts; objectives: strengthen law and order, governance, economic and public sector administration.
- Financial support: annual grants on the order of $330 million per year, including $120 million for policing activities alone.
- First Australian experts arrived February 2004.
- Police, law and justice assistance: up to 230 Australian police officers; initial deployments to Bougainville, Port Moresby, Lae, Mount Hagen, Highlands Highway.
- Legal assistance: 18 senior legal specialists to key legal offices; full implementation requires treaty and enabling legislation.
- Immigration, border, transport, aviation assistance: up to 10 Australian officials; one Australian in Civil Aviation Authority.
- Economic management and public administration assistance: up to 36 specialists in Finance, Treasury, Personnel Management to tighten payroll, expenditure controls and improve budget formulation/execution.

### Key Statistics and Selected Economic Indicators (highlights from Tables)
- Nominal GDP (2002): US$2.8 billion
- Population (2002): 5.4 million
- GDP per capita (2002): US$514
- Quota: SDR 131.6 million
- Selected macro series — Real GDP growth: -1.2 (2000), -2.3 (2001), -0.8 (2002), 2.7 (2003), 2.5 (2004)
- CPI (annual average): 15.6 (2000), 9.3 (2001), 11.8 (2002), 14.7 (2003), 7.4 (2004)
- Fiscal (central government, percent of GDP) — Revenue and grants: 31.2 (2000), 31.0 (2001), 29.4 (2002), 30.0 (2003), 30.2 (2004)
- Overall balance, cash basis (including grants): -1.4 (2000), -4.1 (2001), -5.7 (2002), -2.0 (2003), -1.5 (2004)
- Net international reserves (end-period, millions U.S.$): 256 (2000), 331 (2001), 226 (2002), 398 (2003), 427 (2004)
- Public external debt-to-GDP ratio: 42.8 (2000), 54.7 (2001), 56.4 (2002), 44.1 (2003), 36.0 (2004)
- Exports, f.o.b.: 2,215 (2000), 1,878 (2001), 1,646 (2002), 2,213 (2003), 2,329 (2004)
- Current account (including grants) in percent of GDP: 8.7 (2000), 6.9 (2001), -0.7 (2002), 10.1 (2003), 4.5 (2004)

### Medium-Term Scenario (2000–09) — Selected Projections
- Growth and prices:
  - Real GDP: -1.2 (2000), -2.3 (2001), -0.8 (2002), 2.7 (2003), 2.5 (2004), 2.9 (2005), 2.3 (2006), 2.5 (2007), 2.6 (2008), 2.6 (2009)
  - CPI (average): 15.6 (2000), 9.3 (2001), 11.8 (2002), 14.7 (2003), 7.4 (2004), 6.0 (2005), 4.5 (2006), 3.0 (2007), 2.2 (2008), 2.0 (2009)
- Public finances (percent of GDP):
  - Total revenue and grants: 31.2 (2000) … 30.2 (2004) … 27.9 (2009)
  - Total expenditure: 32.3 (2000) … 31.7 (2004) … 27.7 (2009)
  - Primary balance (below the line): 3.1 (2000), 0.1 (2001), -1.7 (2002), 3.7 (2003), 3.4 (2004), 4.3 (2005), 4.2 (2006), 3.9 (2007), 3.6 (2008), 3.5 (2009)
  - Overall balance: -1.4 (2000), -4.1 (2001), -5.7 (2002), -2.0 (2003), -1.5 (2004), -0.8 (2005), -0.4 (2006), -0.1 (2007), 0.0 (2008), 0.2 (2009)
- Public debt (percent of GDP, end-period) — Gross central government debt: 58.8 (2000), 69.4 (2001), 73.1 (2002), 63.2 (2003), 58.4 (2004), 54.8 (2005), 52.3 (2006), 50.1 (2007), 47.6 (2008), 45.6 (2009)
  - Domestic: 19.6 (2000) … 26.2 (2004) … 23.8 (2009)
  - External: 39.3 (2000) … 32.2 (2004) … 21.8 (2009)
- External sector projections (millions U.S.$):
  - Exports, f.o.b. (projected): 2,329 (2004), 2,279 (2005), 2,236 (2006), 2,227 (2007), 2,242 (2008), 2,258 (2009)
  - Of which Mineral: 1,784 (2004), 1,716 (2005), 1,647 (2006), 1,614 (2007), 1,601 (2008), 1,588 (2009)
  - Imports, c.i.f. (projected): -1,610 (2004), -1,708 (2005), -1,784 (2006), -1,860 (2007), -1,904 (2008), -1,942 (2009)
- Reserves (millions U.S.$, projected): Gross official reserves: 515 (2004), 500 (2005), 485 (2006), 515 (2007), 540 (2008), 557 (2009); Net official reserves: 427 (2004), 471 (2005), 482 (2006), 512 (2007), 537 (2008), 555 (2009)

### IMF Relations, Technical Assistance, and Statistical Issues
- Membership: Joined October 9, 1975; Article VIII.
- Quota: 131.60 (SDR million), 100.00 percent of quota.
- Fund holdings of currency: 210.64 (SDR million), 160.06 percent of quota.
- SBA outstanding: 79.43 (SDR million), 60.36 percent of quota.
- Resident Representative: post opened May 2000; filled by Mr. G. Yadav.
- Technical assistance: selected missions and areas listed (FAD, LEG, MFD, STA); BPNG receives TA on monetary policy and bank supervision.
- Statistical weaknesses:
  - NSO underfunded and understaffed; only CPI produced on somewhat timely basis.
  - Monetary, national accounts, government finance, and external sector data suffer from timeliness, coverage, and quality issues.
  - Planned missions: monetary and financial statistics mission in second quarter FY 2005; NSO working toward implementing 1993 SNA recommendations and rebasing CPI via planned HIES.

### Annex Highlights — AsDB and PFTAC Relations
- AsDB approvals through end-March 2004: 57 loans totaling $874 million for 47 projects; 11 active loans as of end-March 2004.
- AsDB recent/planned lending:
  - One loan of $19 million for community water transport approved March 25, 2004.
  - Second $35 million tranche of Public Service Program envisaged for release in third quarter 2004.
  - Current plans envisage annual lending averaging about $35 million during 2004–06.
- PFTAC assistance (as of April 4, 2004):
  - 15 missions since 1996; focus on public finance and statistics.
  - PNG implementing ASYCUDA customs system; interest in PFTAC assistance to draft new Customs Act.
  - Monetary and financial statistics TA provided; PNG member of IMF’s GDDS.

### Social Indicators (selected)
- Population and demographics: Total population, mid-year (millions): 1970–75: 2.7; 1980–85: 3.5; 1995–2002: 5.4.
- Poverty: National headcount index: 37.5; Urban: 16.1; Rural: 41.3.
- GNI per capita (U.S.$): 560; 700; 530; 960; 430.
- Gini index: 50.9.
- Net primary school enrollment rate (percent): Total: 77; 92; 80.
- Life expectancy at birth (years): Total: 49; 53; 57; 69; 59.
- Maternal mortality (modeled, per 100,000 live births): 300.
- Births attended by skilled health staff (percent): 53; 68.

### IMF Executive Board and Government Statements (June 2, 2004)
- Executive Board welcomed macroeconomic improvement and emphasized priorities: strengthen macroeconomic policies, wide-ranging reforms to address vulnerabilities, improve private sector growth and employment.
- Board recommendations: expenditure restraint, contain wage bill, accelerate repayment of domestic arrears with audited accounting, maintain cautious monetary stance, continue flexible exchange rate, improve bank supervision and TA implementation, sustain structural reforms and privatization, avoid new public external commercial borrowing.
- Government statement (Michael J. Callaghan): credited sound macro management for improvements; noted real GDP increase 2.7 percent in 2003; inflation decline claims; reserves risen to over six months of non-oil imports; stressed fiscal strategy (deficit target 1.5 percent of GDP in 2004, temporary import levy 2 percent), recruitment freeze, deferred bond issue consideration, reaffirmed BPNG independence, and commitment to structural reforms and privatization.

*Source: _cr04355 - Executive Summary, Annexes, Boxes and Selected Tables (IMF staff report content).*

### Executive Summary ......................................................................................................

### Executive Summary

### Economic Background
- Economic recovery and stabilization policies in Papua New Guinea started to take hold from mid-2003.
- The budget deficit for the year was limited to 2 percent of GDP (5¾ percent in 2002).
- Real GDP growth is estimated at 2.7 percent in 2003, after three years of negative growth, owing mainly to stronger performance of the agricultural and mineral sectors.
- The 12-month consumer price inflation rate declined from 20 percent in the March quarter of 2003 to below 3 percent in the March quarter of 2004.
- Favorable temporary factors strengthened the balance of payments:
  - Strong world commodity prices, especially for gold, copper, and oil, underpinned a sharp rise in exports.
  - The external current account moved from a small deficit in 2002 to a surplus of 10 percent of GDP in 2003.
  - The kina appreciated against the U.S. dollar by 20 percent during January 2003–April 2004.
  - Gross international reserves rose to 6 months of nonmining imports during this period.
- Longstanding structural problems remain and are proceeding only slowly; in view of declining mineral output, medium-term prospects for faster sustainable growth and poverty alleviation will remain weak without significant progress on structural reforms.

### Key Issues and Staff Recommendations
- The government’s 2004 budget target of an overall deficit of 1½ percent of GDP is appropriate.
- Insufficient actions have been taken to reduce the wage bill (currently at 9.2 percent of GDP) and reallocate spending to health, education, and infrastructure.
- Further fiscal consolidation will be required in 2005–09 (deficits averaging below 1 percent of GDP annually) to facilitate a steady decline in the public debt-to-GDP ratio.
- Monetary policy:
  - The cautious stance of monetary policy needs to be continued, so as to keep inflation low and maintain a sound balance of payments.
  - The present level of the kina is broadly appropriate, notwithstanding its recent appreciation because of the strengthened fiscal position and improving external debt dynamics.
- Structural reform:
  - It is essential to accelerate the structural reform process, despite political uncertainties, including the adjournment of parliament as the government aims to avoid a no-confidence vote.
  - Public sector reform should include early action to implement the recommendations of the World Bank-led Public Expenditure Review and Rationalization (PERR) finalized in mid-2003, and measures to strengthen the efficiency of provincial expenditure.
  - Formidable structural impediments to private sector growth must be urgently addressed to facilitate higher investment and employment and to improve social conditions, including by means of less corruption, better governance and law and order, and a more friendly regulatory regime.

### Recent Economic Developments (selected details)
- Context and challenges:
  - The government faced daunting economic and financial challenges when it took office in August 2002.
  - Macroeconomic stabilization gains under the last Stand-by Arrangement (SBA), March 2000–September 2001, eroded rapidly before the June 2002 elections.
  - Fiscal deterioration, law and order deterioration, governance problems, dim prospects for medium-term mineral sector production, and structural impediments to private sector growth were cited.
- Fiscal and monetary indicators:
  - Fiscal deficit was 5.7 percent of GDP in 2002 (from 4 percent in 2001), and reached the equivalent of 2 percent of GDP during the first half of 2003.
  - Inflation accelerated to 20 percent in the year to end-March 2003.
  - Treasury bill rates rose to 20 percent in 2002 (attracting large purchases by nonbanks).
- Recovery from mid-2003:
  - Real GDP estimated growth of 2.7 percent in 2003.
  - Agricultural outputs (coffee, cocoa, palm oil, rubber, tea, copra oil) and petroleum, gold, and copper rebounded.
  - Inflation declined progressively to 3 percent in the year to the March quarter of 2004.
  - Annual deficit estimated at 2 percent of GDP for 2003.
  - Treasury bill rates fell from over 20 percent in August to about 16 percent in December 2003; further to 10 percent for 28-day bills and 12 percent for 182-day bills in late April 2004.
  - Monetary policy: KFR tightened from 12½ percent to 16 percent during November 2002–June 2003; then reduced during August 2003–May 2004 to 10 percent.
  - Commercial bank credit to the private sector declined by almost 3 percent in 2003 and remained weak in early 2004.
- External accounts:
  - External current account surplus of 10 percent of GDP in 2003 versus a small deficit in 2002.
  - Official gross international reserves rose to about 6 months of nonmineral imports at end-December 2003.
  - Kina appreciated in real effective terms by an estimated 8 percent during January 2003–April 2004; the nominal exchange rate rose by 20 percent against the U.S. dollar while falling somewhat against the Australian dollar.
- Structural reform progress:
  - Little progress in implementing PERR recommendations; minimal efforts to strengthen efficiency of provincial expenditure and monitoring/reporting of provincial accounts.
  - Ongoing need to strengthen monitoring and financial condition of main public enterprises for corporatization and possible sale.
  - Structural impediments to private sector growth remain formidable (governance issues, poor infrastructure).

### Policy Discussions — Overview
- Authorities generally responsive to Fund policy advice in recent years except around the 2002 election.
- SBA (March 2000–September 2001) was successfully concluded; fiscal problems reemerged prior to mid-2002 election and were not brought under control until mid-2003.
- Since mid-2003 authorities have tightened public expenditure control; commitment to accelerate structural reforms exists but progress is slow due to political difficulties.
- Medium-term strategy necessities: further fiscal consolidation, political stability, less corruption, improved governance and law and order, friendlier private sector regulatory climate, and land reform.
- Potential for faster growth in agriculture, light manufacturing, tourism, and other services if policies are appropriate.

### A. Medium-Term Framework
- Agreed macroeconomic objectives:
  - Real GDP growth of 2½ percent annually over 2004–09, with nonmineral activity growth increasing gradually to about 3½ percent by end of the forecast period.
  - Inflation targeted to decline to 2 percent by 2009, assuming fiscal and monetary discipline is maintained.
  - External current account projected to move toward approximate balance during 2006–09, with higher nonmineral exports only partly offsetting decline in mining and petroleum exports.
- Fiscal challenge:
  - Main fiscal challenge: ensure budget deficit averages under 1 percent of GDP in 2005 and beyond to permit gradual decline in public debt-to-GDP ratio.
  - Central government debt could decline from 63 percent of GDP at end-2003 to 46 percent at end-2009, with the bulk of reduction occurring in external debt (given fiscal targets are met).
- External financing and donors:
  - Small external financing gaps predicted while preserving external reserves (at least 4 months of nonmineral import cover).
  - Essential to maintain good relations with donor community, implement enhanced cooperation program with Australia, secure additional financing assurances from the European Union, and resolve disagreements with the World Bank and ADB (both projects presently suspended because of governance concerns).
- Political and external vulnerabilities:
  - Reform momentum slowed by political uncertainties, including adjournment of parliament in January to avoid a possible no-confidence motion.
  - Other risks: adverse movements in world commodity prices; threats to fiscal sustainability from projected declines in mineral output; difficulties rolling over domestic short-term treasury bills (20 percent of GDP); need to make large official external debt repayments over next three years (3–4 percent of GDP annually); exchange rate depreciation risks.
  - Public external debt-service ratio projected to decline from 8 percent of exports of goods and services in 2004 to 4½ percent in 2009, mainly reflecting repayments to multilateral institutions, including to the Fund of drawings under the 2000–01 Stand-by Arrangement.
- Commercial bond issue risk:
  - Consideration of a large nonconcessional commercial bond issue (up to $150 million or about 3 percent of GDP) could undermine reform confidence.
  - Staff argued the bond would deviate from policy of reducing public debt-to-GDP ratio, is not needed for balance of payments in near term, could be costly given poor credit rating, entails exchange rate risk, and an unsuccessful bid could undermine investor confidence.
  - Prime Minister indicated in a parliamentary statement on May 12 that the bond issue remains an option.

### B. Fiscal Policy
- 2004 budget:
  - Target overall deficit of 1½ percent of GDP, consistent with objectives of reducing inflation and domestic interest rates.
  - Revenue and grants projected to increase slightly to 30.2 percent of GDP, mainly because of higher external grants.
- Revenue concerns:
  - Shelving of Cabinet-approved VAT/GST rate increase from 10 percent to 12½ percent (estimated revenue loss of 0.7 percent of GDP).
  - Gradual elimination of the lucrative mining levy (estimated loss of 0.3 percent of GDP).
  - Granting of tax concessions to the agricultural sector (possible loss of 0.5 percent of GDP).
  - Authorities noted these measures broadly offset by a temporary import levy of 2 percent, and a reduction in the number of dependents eligible for rebates from four to three.
- Staff recommendations:
  - If revenue shortfall emerges, additional actions should be taken to meet the budget target.
  - Urged authorities to replace the import levy at the end of 2004 with alternative types of taxation that could be sustained over the medium term.

*Source: _cr04355 - Executive Summary ......................................................................................................*

### 17. Current spending is estimated to be about unchanged at 21.7 percent of GDP.

### _cr04355 - 17. Current spending is estimated to be about unchanged at 21.7 percent of GDP.

### Fiscal stance and current spending
- Current spending is estimated to be about unchanged at 21.7 percent of GDP.
- Public sector wage bill budgeted at 9.2 percent of GDP in 2004.
- Budget provisions and wage-related measures:
  - 3 percent wage increase and additional performance bonuses.
  - Introduction of automatic annual growth of about 2 percent in the number of employees in the health, education, and law and order sector, notwithstanding the current hiring freeze.
  - Continued independence of the teachers services commission in recruiting new staff.
- Staff position on employment and payroll:
  - Staff emphasized importance of reducing the public sector wage bill and expressed disappointment over lack of effort to date, while recognizing some progress: computerizing the payroll, identifying ghost workers, and eliminating overpayments of allowances.
  - Staff stated any increase in employment in the priority sectors should be fully offset by cutbacks in nonpriority areas.

### Domestic arrears, transparency, and budget execution
- Historical and estimated arrears:
  - Arrears substantially reduced during the 2000–01 SBA period, but new arrears accumulated through end-2002.
  - Authorities estimated total amount outstanding at nearly 2 percent of GDP at end-2003, notably government contributions to the state officials pension fund and verified legal claims against the state.
  - Some further claims are with the Solicitor General for authentication purposes.
- Staff recommendations and authorities’ commitments:
  - Staff urged acceleration of repayment of arrears, with a view to eliminating them by the end of 2005.
  - Staff recommended a detailed audited accounting of the outstanding stock of arrears, by creditors and the timing of their occurrence, to improve transparency and budget execution.
  - Authorities expressed commitment to continue avoiding any new arrears and efforts to strengthen the Office of the Solicitor General.

### Fiscal reporting and trust accounts reconciliation
- Longstanding discrepancy between monthly above-the-line budget data and below-the-line financing information remained unresolved.
- Authorities’ actions:
  - Refining reconciling of check-based expenditure data of the Ministry of Finance with the central bank’s settlements data.
  - Establishing monitoring procedures to keep comprehensive monthly records of inflows and outflows from nonbank trust accounts.
  - Plan to greatly reduce the number of trust accounts in the next one or two years and route transactions through the government’s main account at the central bank.

### Monetary policy, exchange rate, and inflation
- Monetary stance:
  - Staff supported cautious monetary policy outlined in the Governor’s six-monthly statement of January 30, aimed at restraining inflation and underpinning sustained growth.
  - Central bank intends to promote a gradual but steady decline in interest rates as inflation declines and exchange rate stability continues.
  - Authorities committed to keeping real interest rates positive given fiscal and external sector vulnerabilities and an uncertain political environment.
- Exchange rate regime:
  - Floating exchange rate regime to be retained, given vulnerability to external shocks.
  - Appreciation of the kina did not undermine competitiveness in 2003 because of high export prices.
  - Foreign trade account projected to remain in substantial surplus in 2004, with higher mineral and nonmineral exports.
  - Large import content of the consumer price index (over 50 percent) means import-cost reductions are helping to hold down inflation.

### Financial sector condition and supervision
- Banking system overview:
  - Generally sound banking system, though a full set of indicators is not available.
  - Domestically-owned bank (with nearly 60 percent of total deposits) profitability improved since privatization in 2001.
  - Two foreign-owned banks (about 40 percent of total deposits) profitable for many years; as branches they are not required to publish complete separate accounts.
- Asset quality and capital:
  - Banks report further reductions in nonperforming loans (below 10 percent of deposits).
  - Satisfactory capital adequacy ratios (above the 11 percent legal minimum requirement).
  - Investments in government securities continue to account for a large share of assets.
- Supervisory improvements:
  - Authorities agreed there was room for further improvement in financial reporting by banks to the central bank, and more effective enforcement of supervisory decisions.
  - Recommendations of the Fund’s technical advisors on bank supervision and regulation (submitted to the Governor in December 2003) to be progressively implemented in full.

### Structural reform agenda and public enterprises
- Strategic Plan for Supporting Public Sector Reform, 2003–07:
  - Announced February 2004 as part of medium-term development strategy.
  - Plan focused on downsizing the public service by 10 percent and fully implementing the PERR recommendations.
  - Authorities have not yet established a clear phasing; priority attached to fiscal sustainability, better payroll control, and improved budget discipline.
  - Staff stressed no slippage in implementing the timetable, including initiation of key actions during 2004.
- Provincial spending and grants:
  - National Economic Fiscal Commission developing a system of functional grants to direct funds to core priority expenditures (health, education, road maintenance) and extend grants to less-developed districts.
  - Proposed revision of the Organic Law on provincial and local governments to reflect recommendations while keeping grants financeable by the central government budget.
  - Further actions: implement PERR reforms to reduce and control local spending, ensure provincial revenue used in priority areas, and improve financial management and procurement.
- Public enterprises and privatization:
  - Financial condition of main public enterprises remains poor; most continue to make losses.
  - Early privatization of Telikom is in prospect; interest from foreign investors.
  - For PNG Power, PNG Post, the Harbors Board, and Air Niugini, focus on adopting commercial criteria, improving performance and corporate governance, with possible privatization over the medium term.
  - Independent Public Business Commission (owner of assets) should exercise extreme caution in providing new capital injections.
  - All receipts from privatization should be promptly transferred by the Commission to the central government budget and used to repay debt.

### Structural impediments to private sector growth and governance
- Obstacles identified:
  - Lack of job opportunities in urban areas contributing to high crime rates and poor social conditions.
  - Weak rural infrastructure affecting agricultural output (feeder roads and main highways).
  - Governance problems in forestry and fisheries sectors.
  - Mineral sector affected by law and order problems; complex communal-based land owner rights create potential compensation claims that discourage investors.
  - Complex regulatory requirements for domestic and foreign investors needing simplification.
- Staff recommendations:
  - Urged authorities to engage in closer dialogue with the private sector to resolve these issues.
  - Reiterated intention to enhance “zero tolerance” policy for corruption and strengthen key institutions, notably the Office of the Auditor General.
  - Government will publish the Auditor General’s report annually in a timely manner to improve transparency.
  - Greater transparency in procurement and all areas of government operations emphasized.

### Superannuation, trade policy, and other issues
- Pension funds and Superannuation Act:
  - Financial position of pension funds improved over the past two years; now a potentially large source of funds for domestic private sector investment.
  - New Superannuation Act passed in May 2002 implementing task force recommendations: reduced government influence; separation of trusteeship, fund administration and investment management; strengthened transparency, accountability, and central bank regulatory powers.
  - Authorities stated changes fully implemented; investment performance greatly improved and administrative costs reduced.
- Trade tariff reform:
  - Multi-year tariff reform program on track.
  - All tariffs reduced by 5 percentage points with effect from January 2003; final stage scheduled for January 2006.
  - After completion, all tariffs will fall into one of four tiers ranging between 0–40 percent.
  - Simple average nominal tariff on imports is 6 percent (and only 4 percent for nonagricultural goods), giving Papua New Guinea a rating of one (least restrictive) on the Fund’s index of trade restrictiveness.
  - No significant nontariff barriers; export taxes: 5 percent on logs, mineral ores and concentrates, crocodile skins, and 15 percent on sandalwood.
  - Temporary import levy introduced for 2004 of 2 percent.
- Anti-money laundering and statistics:
  - No specific anti-money laundering or anti-terrorism financing legislation at present; preliminary draft law circulated for comments and establishment of a Financial Intelligence Unit under discussion.
  - Papua New Guinea ratified the International Convention for Suppression of the Financing of Terrorism in March 2003.
  - Deficiencies in macroeconomic database: quality, coverage, and timeliness of national, fiscal, and external accounting affect policy analysis; National Statistics Office underfunded and lacks trained staff.
  - Papua New Guinea participates in the GDDS project for Pacific Island countries and is working to develop its GDDS metadata.

### Staff appraisal and policy recommendations
- Recent macroeconomic developments and vulnerabilities:
  - Progress made to restore macroeconomic stability since mid-2003; tighter fiscal policy and higher mineral/petroleum revenue held the budget deficit to about 2 percent of GDP for the year.
  - Real GDP growth estimated at over 2½ percent in 2003, after three years of negative growth.
  - External current account moved into substantial surplus; official external reserves rose to the equivalent of nearly 6 months of non-mining imports and the kina appreciated.
  - Economic situation remains fragile due to political uncertainties disrupting structural reform.
- Fiscal outlook and priorities:
  - Government’s 2004 budget deficit of 1½ percent of GDP consistent with further improvements, but fiscal sustainability questions remain.
  - Revenue losses from shelving the Cabinet-approved increase in the VAT/GST rate and introduction of tax concessions for the mining and agricultural sectors.
  - Insufficient actions taken to reduce the bloated wage bill; as non-wage expenditure is compressed, domestic arrears could rise.
  - Public sector reform priorities: limit wage costs and switch resources to health, education, and infrastructure, in line with World Bank-led PERR recommendations.
  - Further fiscal consolidation needed over the medium term, with budget deficits of below 1 percent of GDP to steadily reduce public debt-to-GDP ratio.
  - Strengthen provincial budgets and financial conditions of main public enterprises; implement government proposals forcefully.
- Monetary and exchange rate advice:
  - Prudent monetary policy must be sustained to prevent resurgence of inflationary pressures.
  - Central bank should avoid unduly rapid easing and lowering of interest rates that could undermine the external position.
  - Flexible exchange rate regime should be continued; present level of the kina broadly appropriate.
- External borrowing:
  - Authorities should avoid borrowing externally on commercial terms, including through an international bond issue: no balance of payments need; bond issue would be inconsistent with reducing public debt-to-GDP ratio; proceeds, if spent, would undermine fiscal discipline; and likely to be very expensive.
- Statistics and future consultations:
  - Authorities urged to revive efforts to address longstanding deficiencies in economic statistics.
  - Staff proposes next Article IV consultation be held on the standard 12-month cycle.

### Box 1 — Public Expenditure Review and Rationalization (PERR) — Reform areas
- Road Map to Fiscal Sustainability:
  - Fiscal deterioration over the last decade fueled by large expansion of public sector employment, recurring expenditure overruns, crowding out spending on goods and services and health, education, and infrastructure projects.
  - Authorities established a medium-term macroeconomic framework; key is implementation of fiscal and structural policies.
- Civil Service Size and Payroll:
  - Rapid payroll expansion despite hiring freeze.
  - At least 2,000 unattached officials that do no work, many ‘ghost workers,’ many underemployed casual workers, payments of unallocated allowances and benefits, and high absenteeism.
  - Substantial savings attainable by cleansing payrolls with no adverse impact on service delivery.
- Restoring Integrity of Budget Institutions and Systems:
  - Budget systems strong in principle but repeatedly flaunted due to poor governance (appropriations breached, procurement procedures bypassed).
  - Recommendations: give Financial Controllers more power, close trust accounts, and penalize individuals who breach budget protocols.
- Expenditure Adjustment and Prioritization:
  - Strengthen medium-term development strategy by conducting detailed agency reviews to identify functions to be retained by government or outsourced.
  - Institutionalized system for reporting expenditures by economic and functional classification would facilitate decisions.
- Improving Health Spending:
  - Rural health services deteriorated despite expanded donor funding.
  - Recommendations: better prioritize spending, allocate more funds to drugs and medicines and less on personnel; improve donor coordination.
- Improving Education Spending:
  - To mitigate budgetary impact of continuing high population growth on enrollments, phase out post-primary school subsidies.
  - Increase expenditure on school supplies with some reduction in number of teachers, whose employment has increased too rapidly.

*Source: _cr04355 - 17. Current spending is estimated to be about unchanged at 21.7 percent of GDP.*

### Box 2. Papua New Guinea: Impediments to Growth and Poverty Alleviation

### Box 2. Papua New Guinea: Impediments to Growth and Poverty Alleviation

### Overview
- Papua New Guinea’s per capita real GDP is lower than at the time of independence in 1975.
- Social and poverty indicators remain poor:
  - average life expectancy 20 years below that of Australia;
  - infant mortality 10 times higher than in developed countries;
  - rising prevalence of HIV/AIDS.
- Efforts to eradicate poverty have been hampered by impediments to growth in all sectors and by poor delivery of social services, especially in the rural area.

### Mineral and petroleum sector
- Papua New Guinea has large deposits of gold, copper, and oil.
- Since independence, the mineral sector has generated fiscal revenues of about 5 percent of GDP.
- Constraints and impacts:
  - geographic isolation of resources implies a high extraction cost in addition to the usual capital intensity of mining activity;
  - foreign companies have financed all major mining projects, with few downstream linkages because most mines operate as isolated enclaves;
  - violence and collapse of the large copper mine in Bougainville in the early 1990s led to a drying up of new exploration activity;
  - deteriorating law and order and governance problems, crumbling infrastructure, overdue land reform, and low profitability have hampered prospects for large scale investment activity.
- Consequence: few projects are expected to be initiated in the years ahead, and fiscal revenues are expected to decline.

### Forestry and tourism
- Papua New Guinea has the second largest rainforest in the world.
- Forestry sector issues:
  - plagued by unsustainable and environmentally destructive practices stemming from poor governance and uncertain property rights.
- Tourism potential:
  - country has bountiful coral reefs, rich culture, and proximity to the Australian market;
  - due to lawlessness and undeveloped infrastructure, there are very few tourists currently.

### Agricultural sector
- More than 85 percent of the population lives in the rural areas.
- Impediments to formal agricultural development:
  - deteriorating roads caused by inefficient allocation of development expenditure, especially for feeder roads which fall under the responsibility of the provincial governments;
  - presence of roadside bandits limiting farmers’ opportunity to bring goods to market;
  - limited access to credit because farmers cannot use their land as collateral due to the traditional land tenure system, undermining the use of more efficient large-scale farming practices.

### Urban sector
- Urban centers, especially Port Moresby, have grown rapidly since independence.
- Labor and social consequences:
  - formal private urban employment has barely increased, resulting in growing unemployment and escalating criminal activities, particularly in squatter settlements;
  - urban employment hamstrung by lack of entrepreneurial experience, low levels of education, and weak legislation to support small- and medium-sized enterprises;
  - many of the best workers have been absorbed by the public sector and state-owned enterprises, limiting the pool of skilled workers available to private firms.

*Source: _cr04355 - Box 2. Papua New Guinea: Impediments to Growth and Poverty Alleviation*

### Box 4. Papua New Guinea: Australia-Papua New Guinea

### Box 4. Papua New Guinea: Australia-Papua New Guinea Enhanced Cooperation Program

### Enhanced Cooperation Program — overview
- Agreement reached at the fifteenth Annual Ministerial Forum in Adelaide on December 11, 2003, between the Australian and Papua New Guinea governments.
- Program duration: up to five years.
- Deployment of up to 294 Australian experts to work side-by-side with PNG officials (some in-line positions).
- Objectives: strengthen law and order, governance, and economic and public sector administration.
- Financial support: annual grants on the order of $330 million per year, including $120 million for policing activities alone.
- First Australian experts arrived in February 2004.

### Police, law, and justice assistance
- Up to 230 Australian police officers to be provided, together with basic policing equipment and training.
- Initial deployment locations: Bougainville, Port Moresby, Lae, Mount Hagen, and along the Highlands Highway.
- Legal assistance: 18 senior legal specialists to be placed in:
  - the Solicitor General’s office (including the Solicitor General),
  - the Public Prosecutor’s Office,
  - the National and Supreme Courts,
  - the National Court Registry,
  - the Department of Justice.
- Implementation requirement: a treaty between the two governments and enabling legislation passed by the PNG Parliament for full implementation of the legal program.

### Immigration, border and transport security, and aviation management and safety
- Up to 10 Australian officials to assist with:
  - border control and migration management,
  - improved revenue collection,
  - international trade security and border integrity,
  - enhanced security of aviation and maritime transport systems to meet international transport security obligations.
- An Australian will be placed as a high-ranking official in the Civil Aviation Authority to ensure management and governance standards, particularly for safety regulation and standards.

### Economic management and public sector administration assistance
- Up to 36 economic and public administration specialists to be deployed in the Departments of Finance, Treasury, and Personnel Management.
- Roles and activities:
  - Offer economic advice to senior PNG officials.
  - Tighten payroll and expenditure controls.
  - Boost the efficiency of government spending to increase funding for services and infrastructure.
  - Improve budget formulation and execution to enhance overall fiscal discipline.

### Key statistics and selected economic indicators (highlights from Tables)
- Nominal GDP (2002): US$2.8 billion
- Population (2002): 5.4 million
- GDP per capita (2002): US$514
- Quota: SDR 131.6 million

Selected macroeconomic series (Real sector, percent change)
- Real GDP growth: -1.2 (2000), -2.3 (2001), -0.8 (2002), 2.7 (2003), 2.5 (2004)
- Mineral: -0.5 (2000), 4.5 (2001), -18.7 (2002), 3.0 (2003), 2.0 (2004)
- Nonmineral: -0.5 (2000), -4.1 (2001), 4.5 (2002), 2.6 (2003), 2.6 (2004)

Inflation
- CPI (annual average): 15.6 (2000), 9.3 (2001), 11.8 (2002), 14.7 (2003), 7.4 (2004)
- CPI (12 months): 10.0 (2000), 10.3 (2001), 14.8 (2002), 8.4 (2003), 6.5 (2004)

Fiscal (central government, percent of GDP)
- Revenue and grants: 31.2 (2000), 31.0 (2001), 29.4 (2002), 30.0 (2003), 30.2 (2004)
- Expenditure and net lending: 32.3 (2000), 34.7 (2001), 33.8 (2002), 31.2 (2003), 31.7 (2004)
- Overall balance, cash basis (including grants) (from below the line): -1.4 (2000), -4.1 (2001), -5.7 (2002), -2.0 (2003), -1.5 (2004)

Public debt and reserves
- Net international reserves (end-period, millions of U.S. dollars): 256 (2000), 331 (2001), 226 (2002), 398 (2003), 427 (2004)
- Gross international reserves (millions of U.S. dollars): 304 (2000), 440 (2001), 343 (2002), 523 (2003), 515 (2004)
- Public external debt-to-GDP ratio (in percent): 42.8 (2000), 54.7 (2001), 56.4 (2002), 44.1 (2003), 36.0 (2004)
- Public external debt service ratio (percent of exports): 6.8 (2000), 8.0 (2001), 7.9 (2002), 7.3 (2003), 8.0 (2004)

Balance of payments (millions of U.S. dollars)
- Exports, f.o.b.: 2,215 (2000), 1,878 (2001), 1,646 (2002), 2,213 (2003), 2,329 (2004)
- Imports, c.i.f.: -1,490 (2000), -1,326 (2001), -1,292 (2002), -1,431 (2003), -1,610 (2004)
- Current account (including grants): 299 (2000), 204 (2001), -203 (2002), 461 (2003), 76 (2004)
  - In percent of GDP: 8.7 (2000), 6.9 (2001), -0.7 (2002), 10.1 (2003), 4.5 (2004)

Monetary indicators (end-period percentage change)
- Domestic credit: -4.5 (2000), -12.3 (2001), 20.9 (2002), -6.9 (2003), 4.9 (2004)
- Credit to the private sector: 3.0 (2000), -1.2 (2001), -6.3 (2002), -2.8 (2003), 4.5 (2004)
- Broad money: 5.4 (2000), 1.9 (2001), 4.2 (2002), -3.3 (2003), 5.5 (2004)
- Interest rate (182-day T-bills, end-period): 14.9 (2000), 10.2 (2001), 13.5 (2002), 16.9 (2003), ...

### Medium-term scenario (2000–09) — selected projections
Growth and prices (change in percent)
- Real GDP: -1.2 (2000), -2.3 (2001), -0.8 (2002), 2.7 (2003), 2.5 (2004), 2.9 (2005), 2.3 (2006), 2.5 (2007), 2.6 (2008), 2.6 (2009)
- CPI (average): 15.6 (2000), 9.3 (2001), 11.8 (2002), 14.7 (2003), 7.4 (2004), 6.0 (2005), 4.5 (2006), 3.0 (2007), 2.2 (2008), 2.0 (2009)

Public finances (in percent of GDP)
- Total revenue and grants: 31.2 (2000), 31.0 (2001), 29.4 (2002), 30.0 (2003), 30.2 (2004), 30.1 (2005), 29.5 (2006), 29.0 (2007), 28.3 (2008), 27.9 (2009)
- Total expenditure: 32.3 (2000), 34.7 (2001), 33.8 (2002), 31.2 (2003), 31.7 (2004), 30.9 (2005), 29.9 (2006), 29.1 (2007), 28.3 (2008), 27.7 (2009)
- Primary balance (measured on a below the line basis): 3.1 (2000), 0.1 (2001), -1.7 (2002), 3.7 (2003), 3.4 (2004), 4.3 (2005), 4.2 (2006), 3.9 (2007), 3.6 (2008), 3.5 (2009)
- Overall balance: -1.4 (2000), -4.1 (2001), -5.7 (2002), -2.0 (2003), -1.5 (2004), -0.8 (2005), -0.4 (2006), -0.1 (2007), 0.0 (2008), 0.2 (2009)

Public debt (percent of GDP, end-period)
- Gross central government debt: 58.8 (2000), 69.4 (2001), 73.1 (2002), 63.2 (2003), 58.4 (2004), 54.8 (2005), 52.3 (2006), 50.1 (2007), 47.6 (2008), 45.6 (2009)
  - Domestic: 19.6 (2000), 21.1 (2001), 23.5 (2002), 24.6 (2003), 26.2 (2004), 26.2 (2005), 25.2 (2006), 24.6 (2007), 24.2 (2008), 23.8 (2009)
  - External: 39.3 (2000), 48.4 (2001), 49.6 (2002), 38.6 (2003), 32.2 (2004), 28.6 (2005), 27.1 (2006), 25.5 (2007), 23.4 (2008), 21.8 (2009)

External sector (in millions of U.S. dollars)
- Exports, f.o.b. (projected): 2,329 (2004), 2,279 (2005), 2,236 (2006), 2,227 (2007), 2,242 (2008), 2,258 (2009)
  - Of which: Mineral: 1,784 (2004), 1,716 (2005), 1,647 (2006), 1,614 (2007), 1,601 (2008), 1,588 (2009)
- Imports, c.i.f. (projected): -1,610 (2004), -1,708 (2005), -1,784 (2006), -1,860 (2007), -1,904 (2008), -1,942 (2009)
- Gross central government external financing gap (memorandum): Financing gaps shown are expected to be filled by assistance from the multilateral and bilateral donors.

Reserves (millions of U.S. dollars, projected)
- Gross official reserves: 515 (2004), 500 (2005), 485 (2006), 515 (2007), 540 (2008), 557 (2009)
- Net official reserves: 427 (2004), 471 (2005), 482 (2006), 512 (2007), 537 (2008), 555 (2009)

### IMF relations and technical assistance (selected points)
- Membership: Joined October 9, 1975; Article VIII.
- Quota: 131.60 (SDR million), 100.00 percent of quota.
- Fund holdings of currency: 210.64 (SDR million), 160.06 percent of quota.
- Stand-by Arrangement (SBA) outstanding: 79.43 (SDR million), 60.36 percent of quota.
- Financial arrangements (selected): Stand-by approved 3/29/00–9/28/01 (85.54 SDR million, amount drawn 85.54); earlier stand-bys listed.
- Resident Representative: post opened in Port Moresby in May 2000 and is currently filled by Mr. G. Yadav.
- Technical assistance from Headquarters (selected):
  - FAD: joint FAD/PFTAC mission March 2000; missions December 2000 and February 2002 on fiscal transparency and reporting.
  - LEG: mission November 1996 on legal framework for National Value-Added Tax.
  - MFD: missions in 2001 on foreign exchange management and monetary policy; assistance in bank supervision and central bank operations; a resident advisor to BPNG research department through August 2003.
  - STA: four missions in 1995–96 on national accounts compilation.
- Exchange rate arrangement: the kina is determined freely in the interbank market; the central bank frequently intervenes with spot purchases or sales of foreign exchange.
- Article IV consultation: standard 12-month cycle; last discussions held February 9–18, 2003; staff report considered and consultation concluded June 4, 2003.

### World Bank, IFC, and MIGA relations (selected points)
- World Bank to date: 35 IBRD loans and 13 IDA credits amounting to $786.6 million and $114.9 million commitments respectively.
- Active IBRD loans (five), totaling $99 million in commitments: Forestry and Conservation Project ($17 million), Gas Development TA ($7 million), Mining TA ($10 million), Gazelle Restoration Project ($25 million), Road Maintenance and Rehabilitation Project ($40 million).
- Forestry and Conservation Project: disbursements suspended in August 2003 due to noncompliance; government committed to addressing issues.
- World Bank Interim Strategy Note being prepared, focusing on:
  - containing economic decline and mitigating contraction impact on the poor and vulnerable;
  - building foundations for revived economic growth, particularly in rural areas;
  - three thematic areas: improving economic management and public sector performance; improving human development outcomes and protecting the poor and vulnerable; strengthening preconditions for pro-poor growth.
- IFC activity:
  - Pacific Enterprise Development Facility financed 22 projects for small- and medium-sized enterprises.
  - IFC reviewed potential investments in gas, telecommunications, manufacturing, and financial sectors.
  - IFC invested $3 million in the Kula Fund, which has made four investments in PNG totaling $4.9 million since 1997.
- MIGA: facilitated $892 million in foreign direct investment in PNG; currently one guarantee in the mining sector worth $51 million in gross exposure.

*Source: Box 4. Papua New Guinea: Australia-Papua New Guinea Enhanced Cooperation Program (IMF staff report content).*

### ANNEX                                                                        III

### _cr04355 - ANNEX III

### Papua New Guinea: Relations with the Asian Development Bank (AsDB) (As of March 31, 2004)

- AsDB approvals through end-March 2004:
  - 57 loans totaling $874 million for 47 projects.
  - 24 loans ($463 million) from ordinary capital resources.
  - 33 loans ($412 million) from special funds resources.
  - $42 million provided for 120 technical assistance projects.
  - 11 active loans as of end-March 2004.
- Strategic focus (overarching objective: alleviating poverty):
  - Improved governance and public sector financial management.
  - Private sector development: improve central agency performance, sector policy and institutional frameworks (especially agriculture and fisheries), enhance factor productivity (skills development and microfinance), and improve market access via selected infrastructure investments (transport), especially in rural areas.
  - Social sectors: assist policy development in health, support infrastructure investments and service delivery, especially in rural areas.
- Recent and planned lending:
  - One loan of $19 million for community water transport approved March 25, 2004.
  - Second $35 million tranche of the Public Service Program envisaged for release in the third quarter of 2004, subject to AsDB Board approval.
  - No further lending envisaged during 2004; two loans on standby.
  - Current plans envisage annual lending averaging about $35 million during 2004–06.
- Technical assistance:
  - 2004 program for grant-financed technical assistance comprises four projects totaling about $2 million.

- Table excerpt (loan approvals and disbursements, 1998–2004; in millions of U.S. dollars):
  - Loan approvals: 1998: 14.1; 1999: 109.0; 2000: 45.5; 2001: 75.9; 2002: 5.7; 2003: 0; Proj. 2004: 19.0
  - Loan disbursements: 1998: 24.0; 1999: 35.1; 2000: 13.0; 2001: 43.6; 2002: 14.0; 2003: 13.8; Proj. 2004: 50.0
  - Source: Data provided by the AsDB.

*Italic: Source: _cr04355 - ANNEX III (AsDB relations), data provided by the AsDB.*

### Papua New Guinea: Relations with the Pacific Financial Technical Assistance Centre (PFTAC) (As of April 4, 2004)

- Assistance since 1996:
  - 15 missions, primary focus on public finance and economic and financial statistics.
  - 23 PNG officials sent to Centre’s regional seminars, workshops and training courses during 1996–2003.
  - Assistance mostly provided directly by the Fund as PNG’s needs exceed PFTAC capacity.
- Public financial management:
  - PFTAC assisted in preparation of a ROSC published October 2000.
  - Participated in FAD technical assistance mission (December 2000) on reconciliation of fiscal and monetary reports and correct treatment of treasury bill arrangements.
  - No further PFTAC visit in public expenditure management area as of April 4, 2004.
- Tax administration and policy:
  - Extensive bilateral assistance; no PFTAC visit since 1997.
  - Officials attended 2003 Regional Seminar in Tonga on VAT design/implementation.
  - PNG implementing ASYCUDA customs automated system despite insecure financing; interest in PFTAC assistance to draft a new Customs Act; may request a short term visit to assess needs.
- Financial sector regulation and supervision:
  - Central bank has relatively developed on-site examination capabilities, but legislative framework inadequate.
  - Long-term technical assistance provided directly by MFD.
  - Project coordinator visited Port Moresby in December 2003 for South Pacific Governors’ meeting; new MOU of AFSPC adopted.
- Economic and financial statistics:
  - 2000 PFTAC fundamental review of statistical operations; follow-up mission in February 2001.
  - Peripatetic adviser assisted central bank on balance of payments (switch to BPM5).
  - PNG is a member of the IMF’s GDDS; further TA subject to improvement with GDDS meta-data.

*Italic: Source: _cr04355 - ANNEX IV (PFTAC relations).*

### Social Indicators (selected; source: 2004 World Development Indicators CD-ROM, World Bank)

- Population and demographics (selected entries):
  - Total population, mid-year (millions): 1970–75: 2.7; 1980–85: 3.5; 1995–2002: 5.4; East Asia and Pacific: 1,838.5; Low-income group: 2,494.6
  - Growth rate (percent annual average for period): 2.4; 2.6; 2.5; East Asia and Pacific: 1.0; Low-income: 1.9
  - Urban population (percent of population): 11.9; 14.0; 17.9; East Asia and Pacific: 38.2; Low-income: 30.6
  - Total fertility rate (births per woman): 6.0; 5.9; 4.3; East Asia and Pacific: 2.1; Low-income: 3.5
- Poverty (percent of population):
  - National headcount index: 37.5
  - Urban headcount index: 16.1
  - Rural headcount index: 41.3
- Income:
  - GNI per capita (U.S. dollars): 560; 700; 530; 960; 430
  - Consumer price index (1995=100): 285; 521; 214
  - Food price index (1995=100): 59; 182
- Distribution:
  - Gini index: 50.9
  - Lowest quintile (percent of income or consumption): 4.5
  - Highest quintile (percent of income or consumption): 56.5
- Public expenditure (percent of GDP):
  - Health: 3.9; 1.9; 1.1
  - Education: 4.4; 2.3; 3.2; 3.1
- Education and health access:
  - Net primary school enrollment rate (percent of age group), Total: 77; 92; 80
  - Access to an improved water source (percent of population), Total: 42; 76; 76
  - Immunization rate (percent under 12 months): Measles: 33; 71; 70; 65. DPT: 40; 57; 78; 65
  - Child malnutrition (percent under 5 years): 30; 15; 42
- Life expectancy at birth (years):
  - Total: 49; 53; 57; 69; 59
  - Male: 49; 52; 56; 68; 58
  - Female: 49; 54; 58; 71; 60
- Mortality (per 1,000 live births / per 100,000 births):
  - Infant: 90; 79; 70; 32; 79
  - Under 5: 147; 108; 94; 42; 121
  - Maternal (modeled, per 100,000 live births): 300
- Births attended by skilled health staff (percent): 53; 68

*Italic: Source: _cr04355 - ANNEX V (Social indicators).*

### Statistical Issues (ANNEX VI, key diagnostics and needs)

- General assessment:
  - Quality, coverage, and timeliness of economic statistical releases significantly impede macroeconomic policy.
  - National Statistical Office (NSO) underfunded, lacks staff with computer training, faces difficulty obtaining data from businesses and government departments despite legislative authority.
  - Only Consumer Price Index is produced on a somewhat timely basis; BPNG and Department of Treasury produce most current data.
  - NSO completed 2000 Population Census collections and released preliminary results in July 2001; planned HIES postponed due to funding constraints.
  - PNG participates in GDDS; nominated a GDDS coordinator and developing GDDS metadata.
- Monetary accounts:
  - Timeliness and frequency of monetary data reporting are irregular; reporting to Fund’s STA needs improvement.
  - Planned monetary and financial statistics mission in second quarter of FY 2005 to: (i) review procedures for collecting, compiling, and reporting monetary data; (ii) develop integrated database for STA, APD, and authorities; (iii) examine national definitions of monetary aggregates; (iv) assist in implementing the Monetary and Financial Statistics Manual.
- National accounts:
  - March 2004: NSO released preliminary national income, expenditure, and production accounts estimates for 1994–2002 rebased to 1998 prices; figures subject to revisions and not used to update staff estimates.
  - Previous estimates (National Income, Expenditure and Product, 1993–98) compiled using 1968 SNA; NSO working toward implementing 1993 SNA recommendations.
- Sources for business activity measures (PFTAC mission, February 2001):
  - Corporate income tax data from Internal Revenue Commission (IRC): corporate profits, revenues and other financial data for some 4,000 companies.
  - Value-added tax data from IRC: sales and input data for a broad range of businesses.
  - Membership data from superannuation funds: employment numbers for private and public sectors.
  - Government needs to ensure NSO access to these data and provide resources to compile series timely.
- Prices:
  - Only a quarterly CPI compiled; deficiencies include outdated weights based on consumption studies from the mid-1970s and weaknesses in data collection.
  - NSO intends to use planned HIES to rebase CPI; technical assistance needed to computerize CPI collation and production.
- Government finance:
  - Central government tax revenue statistics generally accurate and timely; nontax revenue and public expenditure data deficient.
  - Development budget expenditures and utilization of grants/project loans recorded with large lags; few records on accrual trust accounts.
  - No data on deferred pension liabilities to civil servants, provincial and local government budgets, off-budget outlays, corresponding liabilities, and implicit transfers between government and public enterprises.
  - Weaknesses lead to discrepancies between observed domestic financing from monetary and debt data and domestic financing requirement from fiscal data.
- External sector:
  - Quarterly balance of payments data reported to Fund with substantial lag; based on exchange record system not tightly monitored.
  - Financial account data poor due to deficiencies in data collection, especially private external debt.
  - Donor/lender disbursements directly to contractors bypass exchange record system; substantial proportion of current account and capital flows unrecorded.
  - Authorities moving to customs-based merchandise trade coverage; ASYCUDA records about 80 percent of trade transactions electronically, but BPNG and NSO lack resources to access database.

*Italic: Source: _cr04355 - ANNEX VI (Statistical issues).*

### Core Statistical Indicators (as of March 31, 2004 — metadata and reporting characteristics)

- Date of latest observation (selected):
  - Exchange rate: 3/26/04
  - International Reserves: 3/26/04
  - Central Bank Balance Sheet: Jan. 04
  - Reserve/Base Money: Jan. 04
  - Broad Money: Jan. 04
  - Interest Rates: 3/24/04
  - Consumer Price Index: 2003 Q4
  - Exports/Imports: Dec. 03
  - Current Account Balance: 2003 Q4
  - Overall Government Balance: Dec. 03
  - GDP/GNP: 2003
  - External Debt/Debt Service: 2003 Q4
- Frequency and reporting modes:
  - Frequencies: D-daily; W-weekly; M-monthly; Q-quarterly; A-annually.
  - Sources: Direct reporting by Bank of Papua New Guinea and/or Department for Treasury and Planning.
  - Modes of reporting: C-fax; O-Internet; V-obtained during mission and/or Annual Meetings.
  - Confidentiality: C-for unrestricted use; D-embargoed for specified period and thereafter for unrestricted use.
  - Publication frequency varies across series (weekly to annually).

*Italic: Source: _cr04355 - ANNEX VI (Core statistical indicators metadata).*

### IMF Public Information Notice (PIN) No. 04/125 — Article IV Consultation with Papua New Guinea (Executive Board conclusion: June 2, 2004; PIN release November 10, 2004)

- Background and recent macro performance:
  - Real GDP in 2003 estimated to have grown by 2.7 percent after three years of decline.
  - Inflation declined to 8½ percent in the year to the December quarter (2003).
  - Budget in overall balance during second half of 2003; annual deficit about 2 percent of GDP.
  - Treasury bill rates fell from over 20 percent in August 2003 to about 16 percent in December 2003; later to 10 percent for 28-day bills and 12 percent for 182-day bills in late April 2004.
  - Monetary policy tightened Nov 2002–Jun 2003: Kina Facility Rate (KFR) increased from 12½ percent to 16 percent; reduced progressively to 10 percent in May 2004.
  - Commercial bank credit to private sector declined by almost 3 percent in 2003 and remained weak in early 2004.
  - External current account registered a surplus of 10 percent of GDP in 2003 (from a small deficit in 2002).
  - Official gross international reserves rose to about 6 months of nonmineral imports at end-December 2003; broadly unchanged in first quarter 2004.
  - Kina appreciated in real effective terms by an estimated 8 percent during January 2003–April 2004; nominal exchange rate rose about 20 percent against the U.S. dollar.
- Medium-term outlook (government’s development strategy):
  - Target real GDP growth of 2½ percent annually over 2004–09.
  - Growth in nonmineral activity to increase gradually to about 3½ percent by end of forecast period.
  - Inflation expected to decline steadily to 2 percent by 2009, assuming fiscal and monetary discipline maintained.
  - External current account projected to move toward approximate balance during 2006–09.
  - Main fiscal challenge: ensure budget deficit averages under 1 percent of GDP in 2005 and beyond to permit gradual decline in public debt-to-GDP ratio.
- Executive Board assessment — key points and recommendations:
  - Welcomed macroeconomic improvement: return to positive growth, sharp decline in inflation, strengthening external account and reserves.
  - Priorities: strengthen macroeconomic policies and implement wide-ranging reforms to address vulnerabilities and improve private sector growth and employment.
  - Fiscal policy:
    - Commended holding fiscal deficit to 2 percent of GDP in 2003; supported 2004 budget objective of reducing deficit to 1.5 percent of GDP.
    - Expenditure restraint should be core of fiscal adjustment; contain public sector wage bill.
    - Urged acceleration of repayment and elimination of domestic arrears; recommend detailed, audited accounting of outstanding stock of arrears.
  - Monetary policy and exchange rate:
    - Commended prudent monetary stance; recent lowering of interest rates helpful but maintain cautious stance to keep inflation restrained.
    - Supported maintenance of flexible exchange rate system.
  - Financial sector:
    - Financial system generally sound; bank profitability satisfactory; asset quality improved.
    - Need to enforce bank supervisory decisions more effectively; encouraged progressive implementation of Fund TA recommendations.
    - Welcomed improvement in pension funds performance and progress on anti–money laundering legislation.
  - Structural reforms:
    - Emphasized need for sustained reform to improve public sector efficiency and private sector foundations.
    - Specific reforms: reduce government wage bill (hiring freeze, removal of ghost workers, elimination of unauthorized allowances, retrenchments), strengthen revenue base, improve governance, reduce corruption, improve law and order, address land tenure, simplify regulatory requirements, accelerate privatization program.
  - Debt management:
    - Underscored prudent debt management and reliance on concessional financing; welcomed authorities’ announcement to defer international bond issue.
    - Discouraged new public external commercial borrowing given strategy to reduce public debt-to-GDP ratio and absence of balance of payments need.
  - Statistics:
    - Noted improvements in economic statistics but urged further efforts to improve quality and timeliness of national accounts, budgetary and balance of payments data.

*Italic: Source: _cr04355 - Public Information Notice No. 04/125 and Executive Board summary (Article IV Consultation, June 2, 2004).*

### Selected Economic Indicators (Papua New Guinea, 2000–04 — Est./Proj.)

- Real sector (percentage change):
  - Real GDP: 2000: -1.2; 2001: -2.3; 2002: -0.8; 2003: 2.7; 2004 (Proj.): 2.5
  - Mineral: 2000: -0.5; 2001: 4.5; 2002: -18.7; 2003: 3.0; 2004 (Proj.): 2.0
  - Nonmineral: 2000: -0.5; 2001: -4.1; 2002: 4.5; 2003: 2.6; 2004 (Proj.): 2.6
  - CPI (period average): 2000: 15.6; 2001: 9.3; 2002: 11.8; 2003: 14.7; 2004 (Proj.): 7.4
- Central government budget (percent of GDP):
  - Revenue and grants: 2000: 31.2; 2001: 31.0; 2002: 29.4; 2003: 30.0; 2004 (Proj.): 30.2
  - Expenditure and net lending: 2000: 32.3; 2001: 34.7; 2002: 33.8; 2003: 31.2; 2004 (Proj.): 31.7
  - Overall balance, cash basis (including grants) 1/: 2000: -1.4; 2001: -4.1; 2002: -5.7; 2003: -2.0; 2004 (Proj.): -1.5
  - Domestic financing (net) 2/: 2000: 1.2; 2001: 0.9; 2002: 6.2; 2003: 3.8; 2004 (Proj.): 2.2
    - Of which: Banking system: 2000: -1.4; 2001: -2.5; 2002: 5.2; 2003: -0.8; 2004 (Proj.): 0.5
  - External financing (net): 2000: 0.2; 2001: 3.1; 2002: -0.9; 2003: -2.2; 2004 (Proj.): -1.6
  - Privatization (net): 2000: 0.3; 2001: 0.0; 2002: 1.8; 2003: 0.3; 2004 (Proj.): 0.5
- Money and credit (percentage change; end-of-period):
  - Domestic credit: 2000: -4.5; 2001: -12.3; 2002: 20.9; 2003: -6.9; 2004 (Proj.): 4.9
  - Net credit to government: 2000: -12.5; 2001: -26.1; 2002: 82.0; 2003: -7.9; 2004 (Proj.): 5.7
  - Credit to the private sector: 2000: 3.0; 2001: -1.2; 2002: -6.3; 2003: -2.8; 2004 (Proj.): 4.5
  - Broad money: 2000: 5.4; 2001: 1.9; 2002: 4.2; 2003: -3.3; 2004 (Proj.): 5.5
- Balance of payments (millions of U.S. dollars):
  - Exports, f.o.b.: 2000: 2,215; 2001: 1,878; 2002: 1,646; 2003: 2,213; 2004 (Proj.): 2,329
  - Imports, c.i.f.: 2000: -1,490; 2001: -1,326; 2002: -1,292; 2003: -1,431; 2004 (Proj.): -1,610
  - Current account (including grants): 2000: 299; 2001: 204; 2002: -20; 2003: 346; 2004 (Proj.): 176
    - (In percent of GDP): 8.7; 6.9; -0.7; 10.1; 4.5
  - Overall balance: 2000: 78; 2001: 66; 2002: -96; 2003: 183; 2004 (Proj.): 32
- Reserves and external debt (end-of-period):
  - Gross international reserves (millions of U.S. dollars): 2000: 304; 2001: 440; 2002: 343; 2003: 523; 2004 (Proj.): 515
  - (In months of nonmining imports, c.i.f.): 3.2; 5.7; 4.6; 5.8; 5.0
  - Public external debt-to-GDP ratio (in percent) 3/: 2000: 42.8; 2001: 54.7; 2002: 56.4; 2003: 44.1; 2004 (Proj.): 36.0
  - Public external debt-service ratio (percent of GNFS): 2000: 6.8; 2001: 8.0; 2002: 7.9; 2003: 7.3; 2004 (Proj.): 8.0
- Exchange and interest rates:
  - US$/kina (period average): 2000: 0.3624; 2001: 0.2976; 2002: 0.2573; 2003: 0.2816
  - US$/kina (end-of-period): 2000: 0.3255; 2001: 0.2625; 2002: 0.2488; 2003: 0.3000
  - Interest rate (182-day Treasury bills, end-of-period): 2000: 14.9; 2001: 10.2; 2002: 13.5; 2003: 16.9
- Nominal GDP (millions of kina): 2000: 9,515; 2001: 9,948; 2002: 10,992; 2003: 12,204; 2004 (Proj.): 12,596

- Footnotes:
  - 1/ Measured from below the line in the fiscal accounts.
  - 2/ Includes changes in check float.
  - 3/ The decline in the debt ratio in 2003 is mainly due to a significant increase in nominal GDP and exchange rate effects.

*Italic: Source: IMF staff estimates and projections; data provided by the Papua New Guinea authorities (Selected Economic Indicators, 2000–04).*

### Statement by Michael J. Callaghan, Executive Director for Papua New Guinea (June 2, 2004) — Key points and government positions

- Key Points summarised:
  - Sound macroeconomic management contributed to improvement, notably tighter fiscal policy and prudent monetary policy.
  - Decisive mid-2003 action ensured deficit held at originally-budgeted target of 2 percent of GDP.
  - Targeted deficit of 1.5 percent of GDP in 2004 aimed to continue moving public finances to a more sustainable basis.
  - Introduction of a temporary import levy in 2004 was necessary to maintain sound fiscal policy pending broader reforms.
  - Possible international bond issue deferred.
  - Government recognizes need to remove impediments to private sector activity: infrastructure bottlenecks, governance, law and order, political stability; progress being made.
- Restoring macroeconomic stability (government view):
  - Emphasized importance of macroeconomic stability as prerequisite for raising growth potential; commended policy advancements since last consultation.
- Improved economic performance (government highlights):
  - Real GDP estimated to have increased by 2.7 percent in 2003.
  - Inflation fallen from 20 percent in March Quarter 2003 to around 3 percent (statement).
  - International reserves risen to over six months of non-oil imports.
  - Balance of payments moved from estimated deficit of 2.2 percent of GDP in 2002 to surplus of 2.8 percent in 2003.
  - Private sector employment rose by nearly 9 percent in 12 months to June 2003 (from just above 1 percent prior).
  - Forward indicators: new petroleum licenses increased (1 in 2002 to 12 in 2003); active exploration wells rose from 4 in 2002 to 8 by end-2003; outlays on mining exploration doubled in 2003 compared with 2002.
- Fiscal discipline and 2004 Budget strategy:
  - Mid-year expenditure adjustment in 2003 equivalent to 0.8 percent of GDP led to budget balance in second half of 2003 and deficit of 2 percent of GDP for year.
  - 2004 Budget medium-term strategy components:
    - Reduce public debt to around 60 percent of GDP by 2007.
    - Further reduce budget deficits over 2005–2007 and a balanced budget thereafter.
    - Introduce improved governance and stringent expenditure controls.
    - Reallocate increased expenditure to improve government services.
    - Pursue medium-term plans to promote export-oriented sector growth.
  - Recruitment freeze and restrictions on casual employees; personnel controls receiving increased attention following Public Expenditure Review and Rationalization Study.
  - Temporary import levy of 2 percent introduced in 2004 to ensure fiscal responsibility while reforms implemented.
  - Government facing large net outflows in 2004 to cover payments to AsDB, World Bank, IMF, and earlier bilateral loan to Australia; pursuing strategy to transfer PNG toward self-reliance.
  - Consideration of small external commercial financing; international bond issue deferred (statement by Prime Minister, May 12, 2004) to allow further assessment.
- Monetary policy and financial sector:
  - BPNG maintained prudent monetary stance focusing on reducing inflation and maintaining financial stability.
  - Kina facility rate reduced by 100 basis points on two occasions in 2004 due to greater fiscal discipline and lower inflation.
  - Government reaffirmed commitment to total independence of BPNG.
  - Financial sector supervision: pension fund position improved; Superannuation Act and Life Insurance Act reduce political interference and tighten regulatory oversight with BPNG administering acts.
- Structural reforms and governance:
  - Government recognizes need to remove bureaucratic and infrastructure impediments to private investment, address law and order, and enhance governance/accountability.
  - Steps: depoliticize appointment processes, re-orient personnel management, strengthen probity and oversight agencies, improve service delivery, strengthen procurement practices, improve debt management, liberalize investment, promote private sector participation, and progress privatization with proper procedures.
  - Integrity of Political Parties and Candidates Acts (2002) cited as improving political stability.
  - Acknowledged that reform momentum slowed due to political uncertainties (possibility of no-confidence motion after 18-month embargo lapse), but government position strengthened by opposition members joining government.
- Appreciation:
  - Government thanked IMF for assistance through Article IV process, staff visits, and technical assistance.

*Italic: Source: _cr04355 - Statement by Michael J. Callaghan, Executive Director for Papua New Guinea (June 2, 2004).*

*Italic: Content compiled from _cr04355 - ANNEX PDF unit provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04355.pdf_