## _cr0699 ## Source details **Canonical URL:** [_cr0699](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0699.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0699.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0699.pdf.json) --- ### Executive Summary — Background and Outlook - The economy continues to perform well as the recovery maintains its momentum and the authorities adhere to disciplined fiscal and monetary policies. - Central government budget estimated to be once more in surplus in 2005, supported by strong mining and petroleum revenue and constrained expenditure, resulting in a further reduction in public sector debt. - Monetary policy achieved a favorable combination of relatively low interest rates and inflation; credit to the private sector picked up for the first time in four years. - International reserves are strong and the kina remains broadly stable. - Mining and gas prospects improved, but medium-term outlook vulnerable due to structural problems that discourage private activity, including: - improving governance, - strengthening law and order, - upgrading infrastructure, - simplifying investment regulations. ### Key Issues, Policy Directions, and Risks - Staff supports authorities’ medium-term development strategy (MTDS): maintain stable macro environment, move to higher sustainable growth, reduce poverty. - Risks highlighted: - substantial downside risks remain, - possibility of increasing spending pressures, - slowing momentum for reform ahead of the 2007 parliamentary elections. - Fiscal stance and requirements: - Authorities’ medium-term fiscal strategy: budget balance and progressively reducing public debt relative to GDP is judged appropriate and feasible. - Further reforms required: extending expenditure controls, reducing the wage bill, improving tax administration to create room for increased social and capital expenditure. - Monetary policy: - Staff endorsed central bank’s commitment to maintaining low inflation and retention of the flexible exchange rate regime. - Structural reform: - Further reforms needed to attract private investment, increase job creation, and reduce poverty; mission pressed for more rapid action. ### Recent Macroeconomic Performance (selected exact figures) - Real GDP: - rose by about 3 percent in 2004; similar rate expected for 2005. - Growth projection: rise gradually to about 4.5 percent by 2010. - Inflation: - Average CPI inflation fell from 14.7 percent (preceding year) to around 2 percent in 2004, and is estimated to average 1 percent in 2005. - CPI (annual average): 2001 9.3; 2002 11.8; 2003 14.7; 2004 2.1; 2005 1.0. - Fiscal outturn 2005: - High mineral and non-mineral revenue and lower than expected expenditure generated net savings of about 5 percentage points of GDP. - Authorities used about half of the savings to reduce domestic arrears and increase spending in priority areas. - Another 2.5 percent of GDP of savings were set aside for a future equity acquisition in the Highlands-Queensland gas pipeline project and recorded as an expenditure. - Authorities estimated a budget deficit of 0.6 percent compared to the original projection of a deficit of 0.9 percent of GDP. - Staff estimate (adjusting for funds set aside but not spent): budget balance in a surplus of about 2.7 percent of GDP. - Total public sector debt fell to 49 percent of GDP in 2005 from 72 percent in 2002; about half of total public sector debt is external. - Monetary and financial conditions: - Central bank lowered signaling Kina Facility Rate from a 16 percent peak in July 2003 to 6 percent in September 2005. - Broad money expected to rise by about 15 percent in 2005 (Table/notes also report broad money percent change 2005 14.9). - Private sector credit increased by about 20 percent in 2005 from a low base (first increase in four years); Monetary Survey reports private sector credit percent change 2005 19.9. - Gross international reserves expected to close 2005 at 5.5 months of non-mineral imports. - Exchange rate and competitiveness: - The kina appreciated against the U.S. dollar by about 15 percent in nominal terms over the past two years to the report. - Kina roughly unchanged on a real effective exchange rate basis over past two years. - Selected aggregate indicators: - Nominal GDP (2004): US$4.28 billion. - Population (2004): 5.6 million. - GDP per capita (2004): US$764. ### Public Sector Reform, Expenditure Management, and Employment - Public Sector Reform Program key elements: - “Right-sizing” the public sector; draft plan submitted to cabinet. - Gradual reduction in size of civil service by 10 percent by 2007. - Strengthen monitoring and audit systems; continue privatization program; strengthen provincial and local governments. - PERR findings and actions: - August 2005 PERR review: progress in improved debt management, greater budget transparency, and higher health and education spending. - Remaining needs: secure control of expenditure (including payroll), benchmark processes, strengthen transparency and accountability, improve managerial capacity. - 2006 budget and tax measures: - 2006 budget target: overall deficit of 0.6 percent of GDP. - 2006 tax policy package: estimated negative revenue impact about 0.5 percent of GDP in 2006. - FY2006-07 permanent tax measures (selected exact provisions): - Increase tax-free threshold from K6,000 to K6,300 in 2006 and to K6,600 in 2007. - Create a new tax bracket at a 30 percent rate, reducing existing 35 percent bracket. - Increase top income bracket from K95,000 to K150,000 in 2006 and to K250,000 in 2007. - Reduce top marginal tax rate from 47 percent to 45 percent in 2006 and to 42 percent in 2007. - Partial elimination of double taxation of dividends with a final withholding tax. - Mission recommendations to safeguard non-mineral revenue: offset revenue loss via revenue-enhancing measures, implement PFTAC recommendations (large taxpayer unit; presumptive tax for small businesses), consider raising GST if needed. ### Sub-national Finance, Trust Accounts, and Contingent Liabilities - Sub-national governments manage about 20–25 percent of central government’s total expenditures but lack basic control and reporting standards. - Trust accounts reduced by half since 2004; another 350 tagged for closure; mission suggested a time-bound plan to close remaining trust accounts not subject to standard controls. - Debt management guidelines: limit new debt to domestic or concessional sources and lengthen maturity; mission cautioned against lengthening maturity at high cost while domestic interest rates fall. - Mission expressed concern about growing implicit contingent liabilities from state-owned enterprises’ borrowing plans. ### Monetary Policy, Exchange Rate, and Statistics - Exchange rate regime: - Current floating exchange rate arrangement remains appropriate; authorities intervene only to smooth volatility. - Authorities relaxed foreign exchange controls on a range of capital transactions in June 2005. - Monetary policy framework: - Central bank extended forecasting horizon to three years with MFD assistance; plans to develop inflation forecasting capacity and better understand monetary transmission. - Semi-annual Monetary Policy Statement improved public communication and accountability. - Need to implement STA mission recommendations on monetary statistics, especially to address weaknesses in central government accounts at the central bank. - Monetary indicators (selected): - Reserve money (end-period): 2005 1,009 (millions of kina). - Broad money (end-period): 2005 4,122 (millions of kina); broad money percent change 2005 14.9. - Bank of PNG Net foreign assets (end-period): 2005 2,316 (millions of kina). - Interest rate (182-day T-bills; end-period): 2005 4.0. ### Financial Sector Soundness and Rural Development Bank (RDB) - Financial sector indicators (Bank Papua New Guinea source, in percent): - Capital Base to Risk Weighted Assets: 2005 1/: 31.2 (note 1/ September). - Tier 1 to Risk Weighted Assets: 2005 1/: 16.7. - NPLs to Total Loans: 2005 1/: 4.2. - Return on Assets 2/: 2005 2/: 4.3 (note 2/ 2005 is June). - RDB rehabilitation actions after declared insolvency in July 2004: - replaced board and managing director, - temporarily stopped lending, - recapitalized through a 0.3 percent of GDP injection, - cut staff by one third with a 5 million kina retrenchment grant, - brought in experienced commercial lending officers. - Mission urged passage of new legislation (scheduled submission early 2006) to establish corporate rules for RDB and limit political interference; likely to come under BPNG prudential supervision if licensed. ### Mining, Gas, and Project Timelines (selected exact figures) - Mining and petroleum dominate the economy; recent positive developments and strong world prices improved outlook. - Queensland-Highlands Gas Project: - Pipeline length: 2,655 km from the Highlands to northern Australia. - Front-end engineering and design nearing completion; financing being arranged. - Initial gas deliveries targeted for 2009, if all goes to schedule. - Government borrowing assumption related to gas pipeline: government borrows about 4 percent of GDP in 2007 to complete financing of its equity participation; staff working assumption: one third financed through external concessional loans and remainder through external commercial borrowing. - Oil: 25 percent of exports; production declined; current reserves expected to be exhausted by 2012. - Gold and silver: 30 percent of exports; gold output in decline but new mines started in 2005 and others beginning production by 2008. - Copper (17 percent exports), nickel and other minerals: Ok Tedi copper expected higher and last longer; Ramu nickel/cobalt deposit could contribute in longer run. ### Debt Sustainability — Baseline, Projections, and Stress Tests (selected exact figures) - Public sector debt history and baseline projections: - 76 percent of GDP at end-2002. - 49 percent of GDP at end-2005 (estimated). - Baseline: public sector debt ratio expected to decline to about 43 percent of GDP by end-2010 and 17 percent by 2025. - NPV of public debt: 54 percent of GDP in 2005 declining to 42 percent in 2010 and 16 percent in 2025 (Annex VI table summaries). - Key quantitative indicators (selected exact values from Annex VI, Table 1): - Public sector debt (percent of GDP): 76.2 (2002), 65.0 (2003), 55.0 (2004), 48.7 (2005), 46.3 (2006), 50.4 (2007), 49.1 (2008), 45.7 (2009), 42.9 (2010), 31.7 (2015), 17.4 (2025). - NPV of public sector debt (percent of GDP): 75.0 (2002), 62.5 (2003), 54.3 (2004), 47.1 (2005), 44.9 (2006), 51.1 (2007), 49.2 (2008), 45.2 (2009), 41.9 (2010), 31.2 (2015), 15.9 (2025). - Debt service-to-revenue ratio (percent): 27.5 (2002), 34.6 (2003), 18.1 (2004), 15.8 (2005), 15.4 (2006), 15.3 (2007), 15.5 (2008), 15.4 (2009), 14.8 (2010), 10.9 (2015), 6.2 (2025). - External debt (percent of GDP): 76.0 (2002), 63.3 (2003), 49.3 (2004), 37.8 (2005), 32.1 (2006), 35.5 (2007), 36.8 (2008), 35.9 (2009), 33.4 (2010). - Stress-test results (selected exact impacts): - Decline in real GDP growth to one standard deviation below historical average would raise the NPV of public debt to GDP ratio by about 16 percentage points of GDP in 2010 (compared to 2005). - One-time 30 percent real exchange rate depreciation in 2006 would raise the NPV of debt to GDP ratio by about 10 percentage points in 2010. - External stress tests: - Decline in real GDP growth by one standard deviation would raise NPV of external public debt from 2005 by 30 percentage points of GDP in 2007, with impact declining to 43 percent of GDP by 2010 and 19 percent by 2025. - Decline in export value growth by one standard deviation would raise NPV of external debt-to-GDP ratio from 2005 by 35 percentage points to a high of 61 percent of GDP in 2007, before falling to 19 percent by 2025. - Risk assessment: - Under IMF-WB DSA for LICs, PNG’s total public sector debt is at moderate-to-high risk of debt distress. - Recommendation: ensure any external borrowing is obtained on concessional terms; avoid nonconcessional borrowing where possible. ### Data, Statistics, and Technical Assistance Needs - Data provision improved but shortcomings in quality, coverage, consistency, and timeliness remain for national accounts, balance of payments, and fiscal data. - NSO constraints: underfunded, lacks sufficient staff with computer training; planned HIES postponed. - Monetary and financial statistics: April 2005 mission introduced standard reporting form and initiated integrated monetary database; reporting to STA needs improvement. - Balance of payments: quarterly data reported with substantial lag; no data reported since mid-2002 (at time of source content excerpt). - PNG is a member of the GDDS project organized under PFTAC but has yet to submit metadata; further TA contingent on GDDS metadata improvements. - Fund technical assistance and PFTAC involvement highlighted across fiscal transparency, tax administration, monetary policy, and statistics. ### Public Information Notice (PIN) and Executive Board Conclusions (selected exact verbatim thematic points) - PIN header: Public Information Notice (PIN) No. 6/20; Executive Board concluded Article IV consultation on February 13, 2006. - Recent macro outcomes reiterated: - Real GDP rose by about 3 percent in 2004; similar expected for 2005. - CPI inflation fell to around 2 percent in 2004 and estimated 1 percent in 2005. - Total public sector debt reduced to 49 percent of GDP in 2005 from 72 percent in 2002. - Central bank lowered Kina Facility Rate from 16 percent (July 2003) to 6 percent (September 2005). - Broad money expected to rise by over 13 percent in 2005; private sector credit increased by about 20 percent. - Kina appreciated about 15 percent in nominal terms; gross international reserves expected to close 2005 at 5.5 months of non-mineral imports. - Executive Board recommendations and concerns (verbatim thematic points): - Sustain gains while moving to higher growth via accelerated fiscal reform, fiscal prudence, supportive monetary policy, and structural reform to encourage private investment. - Strengthen non-mineral sector and re-orient expenditure toward infrastructure and social spending; reduce wage bill and streamline government while safeguarding service delivery. - Strengthen tax administration; if mineral revenues remain high, use surpluses for priority infrastructure/social spending and debt repayment. - Contain fiscal risks before 2007 election; avoid nonconcessional borrowing, including to finance gas pipeline. - Maintain low inflation, monitor liquidity, tighten monetary policy if necessary; floating exchange rate appropriate. - Accelerate structural reforms: competition in public enterprise sector, law and order, governance, transparency, infrastructure, simplify investment regulations. - Consolidate RDB rehabilitation and improve data provision. ### Staff Recommendation - The staff recommends the next Article IV consultation be held on the standard 12-month cycle. *Source: _cr0699 - Executive Summary and selected sections (IMF staff report excerpts as provided).* ### Executive Summary ...................................................................................................... ### _cr0699 - Executive Summary ...................................................................................................... ### Background - The economy continues to perform well as the recovery maintains its momentum and the authorities adhere to disciplined fiscal and monetary policies. - The central government budget was estimated to be once more in surplus in 2005, as mining and petroleum revenue remain strong and overall expenditure is kept in check, resulting in a further reduction in public sector debt. - Monetary policy has achieved a favorable combination of relatively low interest rates and inflation. In response to these conditions, as well as to the more stable political environment, credit to the private sector has picked up for the first time in four years. - International reserves are strong and the kina remains broadly stable. - Mining and gas prospects have improved, but the overall medium-term outlook remains vulnerable due to structural problems that continue to discourage private activity, including: - improving governance, - strengthening law and order, - upgrading infrastructure, - simplifying investment regulations. ### Key Issues and Policy Discussions - The staff supports the authorities’ medium-term development strategy, which aims to maintain the current stable macroeconomic environment while moving the economy to a higher sustainable growth path and reducing poverty. - Risks highlighted: - substantial downside risks remain, - the possibility of increasing spending pressures, - slowing momentum for reform ahead of the 2007 parliamentary elections. - Fiscal stance: - The authorities’ medium-term fiscal strategy of budget balance and progressively reducing public debt relative to GDP is judged appropriate and feasible. - Required further reforms to achieve these objectives and safeguard progress: - extending expenditure controls more broadly, - reducing the wage bill, - improving tax administration. - These steps would create room for increased social and capital expenditure planned to address development needs. - Monetary policy: - Staff endorsed the central bank’s continuing commitment to maintaining inflation at a low level, along with retention of the flexible exchange rate regime. - Structural reform: - Further structural reforms are key to higher private activity, greater job creation, and reduced poverty. - The mission pressed for more rapid action on steps needed to attract private investment. ### Introduction — Political and Policy Context - Historical performance: From the mid-1990s until the early 2000s, economic and social performance was poor; Real GDP was broadly unchanged since the early 1990s and per capita income little higher than at independence in 1975. - Since 2002 (current government led by Prime Minister Sir Michael Somare): - Policy response: progressively tightened fiscal policy, supportive monetary policy. - Outcome: improved economic position and restored macroeconomic stability. - Real GDP growth: turned positive in 2003 after contracting in the previous three years. - Inflation: dropped sharply. - Medium-Term Development Strategy (MTDS) launched (April 2005) focusing on economic reform to boost growth to a higher sustainable level. - Political environment: stabilized in advance of parliamentary elections in 2007; Prime Minister Somare likely to complete a full five-year term through 2007; installation of an autonomous government on Bougainville Island in June 2005 appears to have quieted the 15-year conflict there. - Australia–Papua New Guinea Enhanced Cooperation Package (ECP): - Under the revived proposal, ECP will shift from law and order focus to improving governance and reducing corruption. - The 30 officials serving as economic advisors to the government will remain in place. - Alignment with Fund advice: - Direction of authorities’ policies in line with Fund advice. - Flexible exchange rate maintained. - Fiscal consolidation and debt reduction achieved as urged by Executive Directors. - Mixed structural reform outcomes: public wage bill remains high; some progress in switching expenditure to priority areas; slower-than-envisaged advancement on governance, law and order, infrastructure, and investment regulation improvements. ### The Current Economic Setting — Performance and Indicators - Growth and inflation: - Real GDP rose by about 3 percent in 2004 and a similar rate of growth is expected for 2005. - Average CPI inflation fell from 14.7 percent in the preceding year to around 2 percent in 2004, and is estimated to average 1 percent in 2005. - External accounts: - Expected to be in surplus in 2005, buoyed by high commodity prices for minerals and oil, start of oil refinery operations, and increased non-mineral export volume. - Fiscal outturn 2005: - High mineral and non-mineral revenue and lower than expected expenditure generated net savings of about 5 percentage points of GDP. - Authorities used about half of the savings to reduce domestic arrears and increase spending in priority areas. - Another 2.5 percent of GDP of savings were set aside for a future equity acquisition in the Highlands-Queensland gas pipeline project and recorded as an expenditure. - Authorities estimated a budget deficit of 0.6 percent compared to the original budget projection of a deficit of 0.9 percent of GDP. - Adjusting for funds set aside but not actually spent in 2005, the staff estimates the budget balance to be in a surplus of about 2.7 percent of GDP. - Total public sector debt fell to 49 percent of GDP in 2005 from 72 percent in 2002; about half of total public sector debt is external. - Monetary and financial conditions: - Central bank lowered the signaling Kina Facility Rate from a 16 percent peak in July 2003 to 6 percent in September 2005. - Broad money expected to rise by about 15 percent in 2005, reflecting increased net foreign assets. - Private sector credit increased by about 20 percent in 2005 from a low base (first increase in four years). - Gross international reserves expected to close 2005 at 5.5 months of non-mineral imports. - Exchange rate and competitiveness: - The kina appreciated against the U.S. dollar by about 15 percent in nominal terms over the past two years (to the report), mainly reflecting strong export receipts and improved confidence. - Over the past two years the kina has remained roughly unchanged on a real effective exchange rate basis. - External competitiveness appears adequate given increased non-mineral export volume and a relatively stable share of Papua New Guinea’s exports in total world exports. - World Bank “ease of doing business” aggregate ranking: 64 out of 155 countries globally. ### Boxed Findings and Analytical Points (summary of boxes in the text) - Box 1 — Challenges to Growth: - Long-run growth: GDP increased at an average annual rate of 5½ percent during 1960–75, then fell to 2.3 percent during 1976–2004. - Growth accounting (1960–2004): slowdown largely explained by significant slowing of capital inputs and TFP growth. - Investment trends: trending downward except for spikes during mineral booms. - 1996–2004: trend TFP contributed negatively to GDP growth. - Structural constraints: rugged terrain (less than 4 percent of roads and of airport runways are paved), adult literacy 66 percent, governance and law and order issues disincentivize investment. - Sources of Growth table excerpts (factor growth rates and contributions): - Real GDP growth: 5.6, 2.3, 0.8 (for periods 1965-1975; 1976-2004; 1996-2004 respectively). - Capital: 6.9, 1.6, 0.3. - Labor: 1.9, 2.4, 2.6. - TFP: 2.0, 0.1, -1.0. - Memorandum items: Potential output growth 5.3, 2.3, 0.6; Trend TFP growth 1.7, 0.1, -1.2. - Box 2 — The Medium-Term Development Strategy (MTDS) (2005–2010): - MTDS aims: (i) establishing good governance; (ii) promoting export-driven growth in agriculture, forestry, fisheries and tourism; (iii) accelerating rural development and poverty reduction. - Means: - Public sector reform: improved accountability, reduced costs, more efficient service delivery, fiscal sustainability. - More favorable climate for private business: improved law and justice, expanded telecommunications, development of human resources, upgraded transportation infrastructure. - Redirect public expenditure toward “priority areas”: rural and transportation infrastructure, basic education, law and justice, preventive health care programs including HIV/AIDS prevention. - Fiscal strategy dependent on implementation of Public Sector Reform Program and Public Expenditure Review and Rationalization (PERR) to secure savings in lower-priority budgetary expenditure for redirection to priority areas. - Financing mapped in a medium-term macroeconomic framework: growth expected to rise gradually, inflation should remain modest, continued fiscal restraint expected to contribute to further decline in public debt level. ### Staff Appraisal (summary points from Executive Summary and later appraisal references) - Continued adherence to disciplined fiscal and monetary policies has produced desirable macroeconomic outcomes: budget surplus in 2005 (staff estimate about 2.7 percent of GDP), lower public debt (49 percent of GDP in 2005), low inflation (around 1 percent in 2005), and strengthened international reserves (5.5 months of non-mineral imports). - The medium-term fiscal strategy of achieving budget balance and reducing public debt relative to GDP is appropriate and feasible but requires: - broader expenditure control, - wage bill reduction, - improved tax administration, - sustained structural reform to attract private investment and support higher sustainable growth. - Maintaining low inflation and a flexible exchange rate is supported. - Priority policy focus: accelerate reforms to improve governance, law and order, infrastructure, and investment regulation simplification to translate improved macro stability into higher private-sector-led growth and poverty reduction. *Source: _cr0699 - Executive Summary ......................................................................................................* ### 10. The authorities have taken steps to improve public sector efficiency and the ### _cr0699 - 10. The authorities have taken steps to improve public sector efficiency and the ### Summary of reforms and implementation status - Authorities adopted stricter controls on recurrent public expenditure, but overall structural reform progress has been slow, particularly in revenue administration and provincial government operations. - Positive steps: improved controls on recurrent expenditures; some improvement in Rural Development Bank financial condition. - Limited or stalled areas: infrastructure investment, land reform, privatization. - Governance and bureaucracy: political analysts give poor marks on corruption and quality of the bureaucracy, though ratings are comparable to others in the region. - Relations with the World Bank are strained over governance questions in connection with loans for forestry management. ### Medium-Term Development Strategy (MTDS) — objectives and mission endorsement - MTDS targets: improved governance, stronger export-driven growth, accelerated rural development. - MTDS pillars endorsed by mission: - (a) improvement in medium-term fiscal sustainability through public sector reform; - (b) continuation of low inflation by maintaining appropriate monetary stance; - (c) more vigorous reform to remove impediments to private sector development, including redirecting public spending toward infrastructure, law and order, education, and health. - Mission recommended additional steps to strengthen non-mineral revenue and improve the private sector environment (e.g., large taxpayer unit, presumptive tax regime for small businesses). ### Medium-term macroeconomic outlook and risks - Growth projection: rise gradually to about 4.5 percent by 2010. - Real per capita growth: with current population growth, annual real per capita growth rates would be over 2 percent. - Inflation: should remain subdued below 4 percent annually. - Key downside risks: - Uncertainties regarding nickel and gas projects. - Commodity price volatility: a 5 percent reduction in prices of PNG’s main commodity exports would reduce government revenue by about 0.3 percent of GDP each year. - Weak execution of reform agenda, particularly ahead of the 2007 elections. - Delay or suspension of large mineral projects would sharply curtail fiscal and external outlook. - Debt sustainability: a return to low recent real GDP growth would increase projected debt-to-GDP ratios by 4 percentage points of GDP in 2010. ### Public Sector Reform (Box 3) — key elements and PERR findings - Public Sector Reform Program key elements: - “Right-sizing” the public sector; draft plan submitted to cabinet. - Public expenditure reform: gradual reduction in size of civil service by 10 percent by 2007. - Strengthen monitoring and audit systems for accountability and compliance. - Continue privatization program. - Strengthen performance of provincial and local governments. - PERR (Public Expenditure Review and Rationalization) action plan elements: - Reduce size of civil service, including new payroll system. - Strengthen budget systems, greater transparency, remedial action for breaches of agreed budgets. - Expenditure prioritization at agency/sector level. - Improve health and education spending. - August 2005 PERR review: progress in improved debt management, greater budget transparency, and higher health and education spending. - Remaining needs identified by PERR: - Secure control of expenditure, including the payroll. - Benchmark processes and monitor progress. - Further strengthen transparency and accountability. - Strengthen leadership and management. - Improve capacity of managers and individual staff. ### Fiscal policy stance, 2006 budget and revenue measures - Government medium-term fiscal strategy (MTFS): keep central government budget close to balance and progressively reduce public debt relative to GDP. - 2006 budget target: overall deficit of 0.6 percent of GDP. - Mission view: objectives achievable and appropriate, but subject to commodity price/mineral revenue volatility, pre-election spending pressures, and potential financing of the Queensland-Highlands gas pipeline. - 2006 tax policy package: estimated negative revenue impact about 0.5 percent of GDP in 2006 (mainly from progressive reduction in personal income tax rates and increased exemption threshold). - FY2006-07 main tax policy measures (permanent measures introduced in the 2006 budget): - Personal income tax: - Increase tax-free threshold from K6,000 to K6,300 in 2006 and to K6,600 in 2007. - Create a new tax bracket at a 30 percent rate, reducing existing 35 percent bracket. - Increase top income bracket from K95,000 to K150,000 in 2006 and to K250,000 in 2007. - Reduce top marginal tax rate from 47 percent to 45 percent in 2006 and to 42 percent in 2007. - Partial elimination of double taxation of dividends with a final withholding tax. - Tourism industry incentives: double deduction for promotion costs; accelerate depreciation for facilities expenses; removal of some import duties. - Excises: cap on inflation adjustment for excise tax rates; introduction of a reduced excise rate for low margin tobacco products. - Mission recommendations to safeguard non-mineral revenue: - Offset revenue loss from tax package and scheduled cuts via revenue-enhancing measures. - Implement PFTAC recommendations: establish a large taxpayer unit; introduce presumptive tax for small businesses. - Consider raising GST rates if needed in future. ### Expenditure management and public employment - 2006 budget shifts welcomed: greater expenditure toward infrastructure, increased education and health spending; improved integrated payroll system to help control salary expenditure. - Payroll and employment: - Large cuts in payrolls in nonpriority areas in 2004 and 2005 were offset by hiring in priority areas (teachers and health workers). - Overall public employment broadly unchanged; wage bill remains large. - Mission preference: more front-loaded retrenchment rather than gradual employment reduction, and accelerated implementation of “right-sizing” recommendations. - Trust accounts and controls: - Trust accounts reduced by half since 2004; another 350 tagged for closure. - Mission suggested time-bound plan to close remaining trust accounts not subject to standard controls and subject statutory authorities to standard expenditure reporting obligations. ### Sub-national government financing and oversight - Sub-national governments manage resources amounting to about 20–25 percent of central government’s total expenditures, but lack basic control and reporting standards; rural service delivery remains poor. - Authorities intend to: - Clarify legal framework for sub-national responsibilities. - Reform financing arrangements and grant systems. - Enforce reporting system for sub-national spending and debt. - District service improvement program creates small treasury offices in each district to place local governments under central treasury monitoring. - Mission noted need to subject district support grants (outside budget oversight) to standard public expenditure controls pending elimination. ### Debt management and contingent liabilities - New debt management guidelines aim to reduce costs and risks: limit new debt to domestic or concessional sources and lengthen maturity. - Mission cautioned against lengthening maturity at high cost while domestic interest rates are falling and warned about oversubscription dynamics in Inscribed Stocks auctions. - Mission emphasized avoiding new external commercial debt and expressed concern about growing implicit contingent liabilities from state-owned enterprises’ borrowing plans. ### Monetary and exchange rate policy - Central bank reaffirmed commitment to maintaining low inflation. - Mission and authorities agree: prudent fiscal policy plus cautious monetary stance should keep inflation subdued. - Risks: high excess reserves and low interest rates reviving credit growth; mission cautioned against further easing. - Authorities considering supplemental measures to open market operations if needed, including levying mineral taxes in kina and developing a secondary market for government securities to improve monetary policy implementation. ### Mining sector prospects (Box 4) — role and project timelines - Mining sector (including petroleum) dominates the economy; recent positive project developments and strong world prices improved outlook. - Queensland-Highlands Gas Project: - Pipeline length: 2,655 km from the Highlands to northern Australia. - Front-end engineering and design nearing completion; financing being arranged. - Initial gas deliveries targeted for 2009, if all goes to schedule; government revenue from project expected to offset declining oil proceeds. - Sector-specific notes: - Oil (25 percent exports): production declined; current reserves expected to be exhausted by 2012; InterOil announced new bids for exploration. - Gold and silver (30 percent exports): gold output in decline, but two new gold mines started in 2005 and Hidden Valley and other projects beginning production by 2008. - Copper (17 percent exports), nickel and other minerals: Ok Tedi copper mine production expected higher and last longer than previously envisaged; Ramu nickel/cobalt deposit could contribute in longer run. _Extracted from the provided IMF staff report content._ ### 24. The authorities and the mission agreed that the current floating exchange rate ### _cr0699 - 24. The authorities and the mission agreed that the current floating exchange rate ### Exchange rate regime and monetary policy - The current floating exchange rate arrangement remains appropriate; it has: - helped to promote adjustments to economic shocks, - allowed the authorities to pursue an independent monetary policy. - In the last two years, the appreciation of the kina against the U.S. dollar: - helped bring down inflation, - eased the external debt service burden, - occurred without an apparent loss in competitiveness. - Authorities reaffirmed commitment to the floating exchange rate and indicated policy to intervene only to smooth volatility. ### Foreign exchange controls and capital transactions - The authorities relaxed foreign exchange controls on a range of capital transactions in June 2005. - Initial assessment indicated minimal impact on the foreign exchange market despite negative interest rate differentials with foreign partners. - Additional actions to eliminate foreign exchange restrictions were under consideration. ### Monetary policy framework and statistics - Central bank progress: - Forecasting horizon extended to three years with MFD expert assistance to bring a more medium-term focus. - Plans to further develop inflation forecasting capacity and understanding of the monetary transmission mechanism. - Improved coordination with the Treasury on liquidity and debt management policies. - Semi-annual Monetary Policy Statement improved public communication and accountability. - Need to implement recommendations of the recent STA mission on monetary statistics, especially to address weaknesses in central government accounts at the central bank. ### Private sector development and structural reforms (MTDS) - Removing longstanding impediments to private investment is essential to higher growth and job creation. - Recent improvements welcomed: - relaxation of restrictions on visa and work permits, - greater resources for road maintenance, - reduction of the tax burden, - improved dialogue with the business community. - Remaining structural shortcomings requiring accelerated MTDS implementation: - improve telecommunication and transportation infrastructure (particularly in rural areas), - strengthen law and order, - improve governance, - address land tenure issues, - revive an efficient “one–stop shop” for investment, - strengthen contract enforcement through judicial and legal training, - increase transparency in public procurement. - Expected benefits: diversify the export base, reduce dependence on the mineral sector, promote job creation, and improve the law and order climate. ### Financial sector soundness and indicators - Regulatory strengthening for the central bank, banks, and superannuation funds has improved financial sector soundness. - Available data show: - nonperforming loans continue to be low, - capital adequacy ratios remain above the minimum requirement. - Authorities and mission agreed the rise in lending to the private sector in 2005 supports growth, while remaining vigilant to emerging risks, particularly sector concentration of bank credit. - Authorities intend to promptly implement recently passed AML/CFT legislation and create a Financial Intelligence Unit. - Financial Sector Indicators (In percent) — Source: Bank Papua New Guinea. - Capital Base to Risk Weighted Assets: - 2000: 18.0 - 2001: 18.6 - 2002: 16.3 - 2003: 23.2 - 2004: 28.7 - 2005 1/: 31.2 - Tier 1 to Risk Weighted Assets: - 2000: 15.0 - 2001: 14.8 - 2002: 12.5 - 2003: 15.3 - 2004: 21.3 - 2005 1/: 16.7 - NPLs to Total Loans: - 2000: 3.5 - 2001: 3.1 - 2002: 7.3 - 2003: 7.1 - 2004: 3.9 - 2005 1/: 4.2 - Return on Assets 2/: - 2000: 1.2 - 2001: 1.6 - 2002: -0.8 - 2003: 3.6 - 2004: 3.0 - 2005 2/: 4.3 - Notes: - 1/ September. - 2/ 2005 is June. ### Rural Development Bank (RDB) rehabilitation - Government actions after declared insolvency in July 2004: - replaced the previous board of directors and managing director, - temporarily stopped lending activity, - recapitalized the bank through a 0.3 percent of GDP injection, - cut staff by one third with assistance of a 5 million kina retrenchment grant, - brought in experienced commercial lending officers to manage the portfolio. - Mission urged passage of new legislation (scheduled for submission to Parliament in early 2006) to establish corporate rules ensuring RDB operates on commercial grounds and limits political interference. ### Public enterprises, pricing, and trade policy - Larger public enterprises’ financial positions improved under outside management, but additional measures needed to improve long-term prospects and efficiency: - introduce competition and regulatory frameworks where public enterprises have dominant or monopoly positions, - prompt publication of financial statements to enhance transparency and governance. - Mission supported establishment of competition and regulatory frameworks as foundation for reviving privatization. - Welcomed pass-through of world oil price increases to domestic petroleum product prices and tariff increases for utilities; stressed need to keep prices in line with world prices or costs of production. - Telikom’s monopoly status to be reviewed in 2007 when current contract expires; privatization for some public enterprises might be considered. - Trade regime: - Papua New Guinea’s regime is among the least restrictive in the region. - Elimination of the copra marketing board helped stimulate copra exports in 2005. - Seven-year tariff reform launched in 1999 expected to be completed in early 2006, compressing the tariff structure to four rates (zero, 30, 40, and 55 percent) and reducing the average nominal import tariff. - Papua New Guinea does not face major difficulties in accessing foreign markets. ### Governance, auditing, and transparency - Mission urged rapid action under MTDS to improve governance through increased transparency and accountability. - Recommended reinforcing the Office of the Auditor General with additional resources and better compliance from government entities to allow publication of final audited accounts of the central and provincial governments within one year as provided under the law. - Authorities agreed further strengthening of the auditing function required increased attention. ### Data provision and statistical capacity - Data provision for surveillance purposes has improved and is generally adequate. - Shortcomings remain in quality, coverage, consistency, and timeliness of national accounts, balance of payments, and fiscal data. - Further strengthening of the statistical framework is needed, including rehabilitation of the National Statistics Office. - Authorities sought Fund technical assistance to improve the data base. ### Staff appraisal: macroeconomic progress and priorities - Progress since 2003: - Impressive progress in reversing difficult macroeconomic conditions earlier in the decade. - Macroeconomic stability restored through disciplined fiscal and monetary policies and improved commodity prices. - Key challenge: sustain gains and move to a higher growth path to reduce poverty. - MTDS: - Staff supports implementation of the Medium-Term Development Strategy to meet growth and poverty goals. - Achieving the medium-term fiscal objective of maintaining budget balance and supporting higher growth will require structural fiscal reform. - Monetary policy: - Should continue focusing on maintaining relatively low and stable inflation. - Authorities cautioned against further policy easing given high liquidity and low interest rates encouraging rapid credit growth. - Encouraged to strengthen and develop tools for effective monetary policy implementation. - Fiscal and expenditure management: - Re-orientation toward infrastructure and social spending is welcomed. - Government encouraged to follow through with plans to reduce public employment (particularly in non-core areas) and reduce the wage bill which crowds out development expenditure. - Consider more front-loaded retrenchment in government employment and rapid implementation of right-sizing recommendations. - Non-mineral revenue base should be strengthened; improve tax administration including establishment of a large taxpayer unit. - If mineral revenue remains high and surpluses emerge, windfalls should finance priority infrastructure or social spending (if can be spent effectively) and repay government debt; conversely, if risks materialize, authorities should consider steps to safeguard the MTFS. - Progress made in expenditure and debt management, but extend standard financial management control to trust accounts, statutory authorities budgets, and sub-national government operations; monitor growing contingent liabilities related to state-owned enterprises’ borrowing. - Financial sector: - Progress in strengthening the financial sector noted; more needed to ensure RDB operates on commercial terms and is free from political interference. - Private sector and governance: - Higher growth, employment creation, and poverty reduction depend on stronger private sector activity and accelerated MTDS implementation to remove structural impediments. - Greater competition in the public enterprise sector and reviving privatization needed. - Rapid implementation required for plans to increase transparency and accountability, including greater support for the Office of the Auditor General. - Data: - Data provision generally adequate but further strengthening needed to correct shortcomings affecting monitoring of macroeconomic developments. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 43. The staff recommends that the next Article IV consultation be held on the ### _cr0699 - 43. The staff recommends that the next Article IV consultation be held on the ### Recommendation - The staff recommends that the next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic performance and key indicators - Macroeconomic performance has improved in recent years, although growth is still below most comparators while population growth remains high. - Good macroeconomic policies led to a reduction in inflation to levels that compare favorably, while fiscal accounts moved into surplus, resulting in improved external debt levels and official reserves. - Real GDP Growth, 2004-2005 (average annual percent change): comparative series shown for Pacific Islands, Papua New Guinea, Solomon Islands, Sub-Sahara Africa, Developing Asia (chart referenced). - Population Growth, 2004-05 (percent average): Papua New Guinea compared with Developing Asia, Pacific Islands, Sub-Sahara Africa, Solomon Islands (chart referenced). - CPI Inflation, 2004-2005 (average annual percent change): comparative series with values up to 14 percent+ for some comparators (chart referenced). - External Debt, 2004-05 (percent of GDP): comparative series showing up to 70 percent for some comparators (chart referenced). - Government Balance/GDP, 2004-05 (percent average): comparative series including negative and positive balances (chart referenced). - External reserves, 2004-05 (months of imports): comparative series up to 12 months for some comparators (chart referenced). ### Mineral resources and revenue outlook - Proven Oil Reserves, January 2005 (billion barrels): Brunei, Timor Leste, Papua New Guinea, Bahrain, Syria, Malaysia, Yemen, Indonesia (chart referenced up to 5 billion barrels). - Proven Gas Reserves, January 2005 (trillion cubic feet): Yemen, Brunei, Papua New Guinea, Syria, Bahrain, Malaysia, Indonesia (chart referenced up to 100+ tcf). - Oil/Mineral Revenue in Percent of Total Revenue, 2004: Chad, Papua New Guinea 1/ (Total mineral revenue), Cameroon, Indonesia, Gabon, Angola, Timor-Leste, Nigeria (chart referenced up to 90 percent). - Oil reserves are small and rapidly being depleted. - Gas reserves are more promising as new fields are expected to come on line in the future. - Currently government mineral revenue remains low and is not projected to increase significantly in the near term. ### Domestic economic indicators (2000–2005) - Real GDP growth and CPI inflation series plotted for 2000–2005 (charts referenced). - Fiscal Balance (In percent of GDP) series 2000–2005 showing overall balance movements (chart referenced). - Monetary Developments (Annual percentage change) for broad money and reserve money, 2000–2005 (chart referenced). - Interest Rates (T-bill 91 days, T-bill 182 days, Kina facility rate) series from Dec 1999 to Dec 2005 (chart referenced). ### External economic indicators (2000–2005) - External Trade and Current Account (In percent of GDP) series for 2000–2005 (chart referenced). - Commodity Price Movements (1999=100) for Gold, Oil, Copper, Coffee, Dec 1999–Dec 2005 (chart referenced). - Exchange Rates (NEER, REER, US$/Kina, 2000=100) series 2000–2005 (chart referenced). - Gross Official Reserves: months of non-mineral imports and U.S. dollars series 2000–2005 (chart referenced). ### Selected economic indicators, 2001–06 (Table 1 highlights) - Nominal GDP (2004): US$4.28 billion - Population (2004): 5.6 million - GDP per capita (2004): US$764 - Quota: SDR 131.6 million - Real GDP growth (2001–06 Est./Proj.): 2001 -0.1; 2002 -0.2; 2003 2.9; 2004 2.9; 2005 3.0; 2006 3.5 - Mineral growth (2001–06): 2001 -10.4; 2002 -15.9; 2003 10.2; 2004 -0.9; 2005 -0.7; 2006 6.2 - Nonmineral growth (2001–06): 2001 1.9; 2002 2.5; 2003 1.9; 2004 3.5; 2005 3.5; 2006 3.2 - CPI (annual average) (2001–06): 2001 9.3; 2002 11.8; 2003 14.7; 2004 2.1; 2005 1.0; 2006 2.4 - Central government budget (percent of GDP), Revenue and grants (2001–06): 2001 29.7; 2002 27.8; 2003 28.4; 2004 31.3; 2005 28.0; 2006 27.7 - Expenditure and net lending (2001–06): 2001 33.2; 2002 31.8; 2003 29.6; 2004 29.8; 2005 25.2; 2006 27.3 - Overall balance, cash basis (including grants) 2/ (2001–06): 2001 -3.9; 2002 -5.3; 2003 -1.6; 2004 1.1; 2005 2.7; 2006 0.4 - Domestic financing (net) 3/ (2001–06): 2001 0.9; 2002 6.1; 2003 3.7; 2004 0.5; 2005 -1.0; 2006 0.4 - External financing (net) (2001–06): 2001 3.0; 2002 -0.9; 2003 -2.1; 2004 -1.6; 2005 -1.7; 2006 -0.8 - Interest rate (182-day T-bills; end-period) 4/ (2001–06): 2001 12.4; 2002 10.9; 2003 18.7; 2004 3.1; 2005 4.0; 2006 6.0 - Exports, f.o.b. (millions of U.S. dollars) (2001–06): 2001 1,878; 2002 1,646; 2003 2,153; 2004 2,554; 2005 3,352; 2006 3,714 - Imports, c.i.f. (millions of U.S. dollars) (2001–06): 2001 -1,321; 2002 -1,301; 2003 -1,435; 2004 -1,794; 2005 -2,321; 2006 -2,600 - Current account (including grants) (millions of U.S. dollars) (2001–06): 2001 201; 2002 -311; 2003 598; 2004 820; 2005 323; 2006 239 - Net international reserves (millions of U.S. dollars) (end-period, 2001–06): 2001 331; 2002 224; 2003 398; 2004 575; 2005 749; 2006 800 - Gross international reserves (millions of U.S. dollars) (end-period, 2001–06): 2001 440; 2002 340; 2003 521; 2004 639; 2005 750; 2006 801 - Public external debt-to-GDP ratio (percent) 5/ (2001–06): 2001 48.7; 2002 51.5; 2003 44.1; 2004 34.5; 2005 27.3; 2006 24.9 - Exchange rates (US$/kina period-average) 4/ (2001–05): 2001 0.2964; 2002 0.2573; 2003 0.2814; 2004 0.3104; 2005 0.3217... - Nominal GDP (millions of kina) (2001–06): 2001 10,396; 2002 11,657; 2003 12,858; 2004 13,790; 2005 15,143; 2006 16,117 ### Central government operations summary (Table 2 highlights) - Revenue and grants (percent of GDP): 2001 29.7; 2002 27.8; 2003 28.4; 2004 31.3; 2005 Rev. 33.0; Budget/Staff Est/Proj. series continuing (see table). - Revenue (percent of GDP) 2001–05: 23.7; 21.8; 22.6; 25.1; 24.6; 24.7; 22.8; 23.5 (various column entries in table). - Tax revenue (percent of GDP): 2001 22.1; 2002 20.3; 2003 20.8; 2004 23.3; 2005 23.1; further subcomponents include Mineral taxes and Nonmineral taxes with series (Mineral taxes: 2001 5.3; 2002 3.1; 2003 3.9; 2004 5.3; 2005 6.4; etc.). - Total expenditure and net lending (percent of GDP): 2001 33.2; 2002 31.8; 2003 29.6; 2004 29.8; 2005 33.7; 2005 Staff Est. 25.2; 2006 Proj. 27.3 - Overall balance (from above the line) (percent of GDP): 2001 -3.6; 2002 -4.1; 2003 -1.2; 2004 1.5; 2005 -0.6; 2005 Staff Est. 2.7; 2006 Proj. -0.6; 2006 Staff Proj. 0.4 - Primary balance (from below the line) (percent of GDP) series provided in table with values including 2001 0.5; 2002 -0.3; 2003 4.2; 2004 4.2; 2005 1.7; 2006 4.8; etc. - Financing (percent of GDP) series indicating domestic and external financing (External financing (net): 2001 3.0; 2002 -0.9; 2003 -2.1; 2004 -1.6; 2005 -1.0; 2005 Staff -1.7; 2006 -0.8). - Memoranda: Nonmineral overall balance series (2001 -9.6; 2002 -8.5; 2003 -6.0; 2004 -4.7; 2005 -7.6; 2006 -4.4; etc.). - Total central government gross debt (% of GDP): 2001 72; 2002 72; 2003 62; 2004 54; 2005 49; 2006 48; additional entries in table. ### Banking system and monetary accounts (Table 3 highlights) - Bank of Papua New Guinea Net foreign assets (2001–06, end period, in millions of kina): 2001 1,249; 2002 908; 2003 1,317; 2004 1,862; 2005 2,316; 2006 2,498 - Reserve money (end-period, 2001–06): 2001 578; 2002 644; 2003 666; 2004 874; 2005 1,009; 2006 1,116 - Monetary Survey Broad money (end-period, 2001–06): 2001 3,087; 2002 3,217; 2003 3,109; 2004 3,587; 2005 4,122; 2006 4,534 - Broad money percent change (12-month basis): 2001 1.9; 2002 4.2; 2003 -3.3; 2004 15.4; 2005 14.9; 2006 10.0 - Private sector credit (percent change, 12-month basis): 2001 3.0; 2002 -1.2; 2003 -6.3; 2004 -4.3; 2005 -2.2; 2006 19.9 - 182 day T-bill yield (end period) (2001–06): 2001 17.0; 2002 12.4; 2003 10.9; 2004 18.7; 2005 3.1; 2006 4.0 ### Balance of payments (Table 4 highlights) - Current account balance (2001–06, millions of U.S. dollars): 2001 201; 2002 -311; 2003 598; 2004 820; 2005 323; 2006 239 - Mineral component (2001–06): 2001 802; 2002 473; 2003 728; 2004 793; 2005 1,100; 2006 1,105 - Nonmineral component (2001–06): 2001 -601; 2002 -503; 2003 -503; 2004 -569; 2005 -705; 2006 -897 - Trade balance (2001–06, millions of U.S. dollars): 2001 556; 2002 344; 2003 718; 2004 760; 2005 1,031; 2006 1,115 - Exports (f.o.b.) (2001–06): 2001 1,878; 2002 1,646; 2003 2,153; 2004 2,554; 2005 3,352; 2006 3,714 - Imports (c.i.f.) (2001–06): 2001 -1,321; 2002 -1,301; 2003 -1,435; 2004 -1,794; 2005 -2,321; 2006 -2,600 - Gross official reserves (end-year, millions of U.S. dollars) (2001–06): 2001 440; 2002 340; 2003 521; 2004 639; 2005 750; 2006 801 - Net international reserves (in millions of U.S. dollars) (2001–06): 2001 331; 2002 224; 2003 398; 2004 575; 2005 749; 2006 800 - Public external debt-service (percent of G&S exports) 1/ (2001–06): 2001 7.9; 2002 7.9; 2003 7.5; 2004 8.7; 2005 6.0; 2006 3.1 - Public external debt-GDP ratio (percent) 1/ (2001–06): 2001 48.7; 2002 51.5; 2003 44.1; 2004 34.5; 2005 27.3; 2006 24.9 ### Medium-term projections and vulnerabilities (Table 5 & 6 highlights) - Medium-Term Scenario (2001–10) projections: - Real GDP growth projection (2007–10): 2007 3.5; 2008 3.5; 2009 4.1; 2010 4.5 (and earlier years listed). - CPI (period average) projections for 2006–10: 2006 2.4; 2007 3.5; 2008 3.8; 2009 3.9; 2010 3.9 - Current account balance (in percent of GDP) projections: 2006 4.6; 2007 -2.0; 2008 -2.6; 2009 -1.3; 2010 3.9 - Central government total revenue and grants (percent of GDP) projected 2006–10: 2006 27.7; 2007 28.4; 2008 27.9; 2009 26.8; 2010 26.3 - Central government total expenditure (percent of GDP) projected 2006–10: 2006 27.3; 2007 28.3; 2008 28.0; 2009 26.8; 2010 26.0 - Central government debt (percent of GDP) projections: 2006 46.3; 2007 50.4; 2008 49.1; 2009 45.6; 2010 42.9 - Financial indicators (2000–05): Gross official reserves (millions of U.S. dollars) series and ratios such as gross official reserves (months of nonmineral imports, c.i.f.) 2000 3.2; 2001 5.7; 2002 4.5; 2003 5.6; 2004 5.8; 2005 5.5 - Financial market indicators: Foreign currency long-term government debt rating series by Moody's and Standard & Poor's across years (table entries). ### Social and development indicators (Millennium Development Goals, Table 7 highlights) - Selected MDG indicators and related statistics (1990–2004 series): - Poverty headcount, national (% of population): 2000s series includes 37.5 (year indicated in table). - Net primary enrollment ratio (% of relevant age group): values include 66, 74.8, 78.2, 74.3 etc. across years. - Primary completion rate, total (%): 51.1, 50.3, 51.7, 57.6, 52.6 (various years). - Immunization, measles (% of children ages 12-23 months): series includes 67, 73, 41, 68, 49, 49 (various years). - Infant mortality rate (per 1,000 live births): series includes 74, 72, 70, 69, 69 (various years). - Under-5 mortality rate (per 1,000): series includes 101, 98, 95, 93, 93 (various years). - Incidence of tuberculosis (per 100,000 people): 267.2, 256.9, 249.5, 242.3, 235.3, 235.3 (various years). - Fertility rate, total (births per woman): 5.6, 4.8, 4.6, 4.3, 4.3 (various years). - GNI per capita, Atlas method (current US$) series: 860, 1,200, 900, 670, 490, 580 (various years). - Population, total (millions): 4.4, 4.8, 5.1, 5.5, 5.6 (various years). ### Fund relations, arrangements, and technical assistance (Annex I & II) - Membership Status: Joined October 9, 1975; Article VIII. - Quota: 131.60 SDR Million (100.00 percent quota); Fund holdings of currency 131.16 (99.67); Reserve position in Fund 0.44 (0.33). - SDR Department allocation: Net cumulative allocation 9.30 (100.00); Holdings 0.02 (0.20). - Outstanding Purchases and Loans: None. - Financial Arrangements (historical approvals and amounts drawn): - Stand-by 4/25/90–6/24/91 Amount Approved 26.36 (SDR Million) Amount Drawn 0.00 - Stand-by 7/31/91–9/30/92 Amount Approved 26.36 Amount Drawn 0.00 - Stand-by 7/14/95–12/15/97 Amount Approved 71.48 Amount Drawn 35.34 - Stand-by 3/29/00–9/28/01 Amount Approved 85.54 Amount Drawn 85.54 - Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs): Principal forthcoming 2005–2009 all 0.00; Charges/interest forthcoming 2006 0.28; 2007 0.28; 2008 0.28; 2009 0.28; Total forthcoming 2006 0.28; 2007 0.28; 2008 0.28; 2009 0.28. - Safeguards Assessments: Transitional assessment of the Bank of Papua New Guinea (BPNG) completed on May 4, 2001; identified weaknesses and recommendations; full safeguards assessment required if another Fund arrangement is approved. - Exchange Rate Arrangement: The exchange rate of the kina is determined freely in the interbank market; the central bank may intervene with spot purchases or sales of foreign exchange. - Article IV Consultation: Papua New Guinea is on the standard 12-month consultation cycle. The last Article IV consultation discussions were held during March 1–11, 2004. The staff report (SM/04/172) was considered by the Executive Board and the consultation concluded on June 2, 2004. - Technical Assistance from Headquarters (selected items): - FAD: joint FAD/PFTAC mission in March 2000 prepared a ROSC Fiscal Transparency Module (published October 2000); missions in December 2000 and February 2002 on fiscal reporting and fiscal transparency. - LEG: missions in November 1996 (VAT legal framework) and November 2005 (drafting tax administration law). - MFD: missions in 2001–03 on foreign exchange management, monetary policy implementation, bank supervision, financial sector restructuring, accounting framework; resident advisor to BPNG research department for 15 months through August 2003; short visits on bank regulation and supervision (2001–November 2005), medium-term monetary policy (October 2004 and September 2005), and internal audits (July and October 2005). - STA: four missions in 1995–96 on national accounts; mission on monetary and financial statistics in April 2005. - Resident Representative: Post opened in Port Moresby in May 2000 and is currently filled by Mr. E. Faal. ### Relations with PFTAC (Annex II highlights) - Assistance limited due to Australian Enhanced Cooperation Plan (ECP); 13 PFTAC missions since 2000; PNG sent 38 officials to PFTAC regional events since 2000. - Public Financial Management: PFTAC assisted in preparation of ROSC published October 2000; participated in FAD mission (December 2000) on fiscal-monetary report reconciliation. - Tax Administration and Policy: PFTAC taxation expert visited August 2004 recommending reforms including a Large Taxpayers Unit; follow-up mission April 2005 indicated authorities continue to study reforms but have no present plans to implement them. - Financial Sector Regulation and Supervision: No current PFTAC involvement; adviser visits Sept 2004 and July 2005 to identify TA opportunities; BPNG hosted Association of Financial Supervisors of Pacific Countries meeting in October 2005 with PFTAC as secretariat. - Economic and Financial Statistics: 2000 review of statistical operations with follow-up February 2001; peripatetic adviser assisted central bank on balance of payments in May (year indicated in annex). *Source: IMF staff report content as provided in the supplied document excerpts.* ### 2003. PNG is a member of the General Data Dissemination System (GDDS) project organized ### _cr0699 - 2003. PNG is a member of the General Data Dissemination System (GDDS) project organized ### PFTAC / GDDS participation - PNG is a member of the General Data Dissemination System (GDDS) project organized under PFTAC, but has yet to submit metadata; further TA in this area will be subject to improvement with GDDS metadata. - The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji is a regional technical assistance institution operated by the IMF with financial support of the Asian Development Bank, Australia, Japan and New Zealand. The Center’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. - PFTAC member countries listed: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu. ### Relations with the World Bank Group — lending, projects, and strategy - To date, the World Bank has provided 35 IBRD loans and 13 IDA credits to PNG, amounting to US$786.6 million and US$114.9 million in commitments, respectively. - Four active World Bank loans, totaling US$82 million in commitments: - Gas Development TA (US$7 million) - Mining TA (US$10 million) - Gazelle Restoration Project (US$25 million) - Road Maintenance and Rehabilitation Project (US$40 million) - Global Environment Facility-supported Teachers’ Solar Lighting Project: US$0.992 million. - June 2003: World Bank suspended disbursements on the Forestry and Conservation Project (FCP) due to noncompliance with the loan agreement. June 2005: the World Bank cancelled the loan. - Ongoing World Bank analytical/advisory work in: public expenditure management, health and education service delivery, and HIV/AIDS strategy. - The World Bank prepared an Interim Strategy Note (ISN) in line with guidelines for assistance to Low-Income Countries Under Stress, to guide involvement over the next 18 months and evaluate comparative advantage. Objectives: (a) promote development dialogue and stem the decline in social indicators; and (b) build the foundations for improved governance and sustained recovery. The ISN was presented to the Bank’s Board on April 12, 2005. - Specific project developments: - Preparation of Smallholder Agriculture Development Project restarted after FCP suspension. - Community Driven Development stocktaking ongoing. - Youth Competition Program (Development Marketplace) launched and attracted partners. - Community outreach programs supported by Global Development Learning Network. ### IFC and MIGA engagement - IFC (through Pacific Enterprise Development Facility — PEDF) has in the past secured financing for 22 individual enterprises. - PEDF initiated a program of technical assistance to support development of small and medium enterprises in selected sectors. - IFC Capacity Building Fund contribution: US$100,000 toward an improved credit appraisal system at Bank South Pacific, increasing availability and reducing cost of finance in rural PNG. - Subject to PNG government approval, in 2006 IFC expects to establish a permanent presence in-country; PEDF to undertake a significantly enhanced program targeting SMEs in agribusiness, tourism, and oil, gas and mining sectors. - IFC investment commitments: US$14.5 million in three projects, including a US$3.0 million investment in the Kula Fund (Kula Fund made four investments totaling US$4.9 million since its establishment in 1997). - FY05 IFC commitments: US$1.2 million in equity plus a US$2 million line of credit for PNG Microfinance Limited; organizing a US$2.2 million capacity building technical assistance program. - IFC reviewing potential investments in the gas sector. - MIGA has facilitated a total of US$892 million in foreign direct investment in Papua New Guinea. MIGA currently has one guarantee in the mining sector worth U$51 million in gross exposure. ### Papua New Guinea: IBRD/IDA Lending Operations (summary lines as presented) - Headline statement: (In millions of U.S. dollars) Fiscal Year 1999 2000 2001 2002 2003 2004 2005 - Commitments 0.042.1134.540.191.0 103.7 61.3 - Disbursements 10.639.811.24.56.2 7.8 10.7 - Undisbursed balance 43.0134.5114.193.084.8 96.0 50.6 - Note: Fiscal year is July–June. - As of November 23, 2005. ### Relations with the Asian Development Bank (AsDB) - Through mid-December 2005, AsDB had approved 57 loans totaling $874 million for 46 projects. - Of this total, 24 loans ($463 million) from ordinary capital resources and 33 loans ($412 million) from special funds resources. - In addition, $46 million provided for 126 technical assistance projects. - There are currently 9 active loan-financed projects, and one which is being closed. - AsDB strategy for Papua New Guinea focuses on: strengthening governance, supporting private sector development, and improving social conditions. Short-term priorities: consolidation (relationships with Government and donors), policy dialogue in key sectors, administration and implementation of existing projects, and very selective new operations to deliver clear results. - Sectoral focus highlights: - Public sector management: fiscal and financial management and public service reform. - Private sector development: improve sector policy and institutional frameworks (agriculture), enhance factor productivity (skills development and microfinance), and improve market access via selected transport infrastructure investments, especially in rural areas. - Social sectors: policy development (health), infrastructure investments (water and sanitation), service delivery, and expanded efforts to address HIV/AIDS. - Recent and planned approvals: - Latest loan approved March 25, 2004 for $19 million for community water transport. - No lending envisaged in 2005. - 2006 envisaged: a grant of $15 million from special funds resources for HIV/AIDS (first such grant for PNG); tentative plans for two road transport projects financed with three loans: - (i) $20 million supplementary loan from ordinary capital resources for the Highlands Region road maintenance and upgrading project; - (ii) rehabilitation of the Highlands Highway financed with $18 million from special funds resources and $22 million from ordinary capital resources (work may be deferred to 2007). - 2006 possible $13 million loan from special fund resources for health sector development. - Possible AsDB financing for proposed gas pipeline to Australia may be finalized during 2006. - Current program envisages annual grant-financed technical assistance totaling about $2 million, not including special grants from special fund resources. - Table excerpt presented (In millions of U.S. dollars) 1999–2005: - Loan approvals 109.0 45.5 75.9 5.7 0.0 19.0 0.0 - Loan disbursements 35.1 13.0 43.6 14.0 13.8 19.2 15.0 ### Statistical issues — coverage, timeliness, and capacity constraints - Overall: Data provision for surveillance purposes is generally adequate, but inadequate coverage and timeliness of statistical releases hinder macroeconomic policy. - National Statistical Office (NSO) constraints: - Underfunded and lacks sufficient staff with computer training. - Difficulties obtaining and collating data from businesses and other government departments despite legal powers. - Only Consumer Price Index produced on a somewhat timely basis. - Other data producers: Bank of Papua New Guinea (BPNG) and Department of Treasury produce the most current data. - Census and surveys: - NSO, with AusAID assistance, completed collections for the 2000 Population Census and released preliminary results in July 2001. - Planned Household Income and Expenditure Survey (HIES) intended for 2002 was postponed due to funding constraints. - PNG participates in the Pacific Regional GDDS Project; represented at GDDS workshop in Suva in November 2002. A GDDS coordinator has been nominated and metadata is being developed prior to formal participation in the GDDS. - Monetary and financial statistics: - Monetary data not available on a regular basis; reporting to the Fund’s Statistics Department (STA) needs improvement. - April 2005 monetary and financial statistics mission: - Reviewed BPNG collection, compilation, and dissemination procedures. - Introduced the standard form for reporting central bank data and designed the central bank survey. - Initiated development of an integrated monetary database for BPNG, APD, and STA. - Recommendations made to align sectorization, classification of financial instruments, valuation procedures, and institutional coverage of depository corporations with the MFSM. - National accounts: - Mid-2000 NSO release: National Income, Expenditure and Product, 1993–98 compiled using the 1968 SNA. - NSO has been working to implement the 1993 SNA. - 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’s estimates. - Sources identified by PFTAC (February 2001) to generate measures of business activity: - Corporate income tax data from the Internal Revenue Commission (IRC): corporate profits, revenues, and other financial data for some 4,000 companies. - Value-added tax data from the IRC: sales and input data for a broad range of businesses. - Membership data from superannuation funds: employment numbers for both private and public sectors. - CPI issues: - Only price index compiled is a quarterly CPI. - Main deficiencies: outdated weights based on mid-1970s consumption studies and weaknesses in data collection practices. - NSO intends to rebase CPI using planned HIES results; rebasing delayed. - Need for technical assistance to computerize collation and production of the index. - Government finance statistics (GFS) issues: - Annual GFS reported to STA suffer from insufficient coverage and timeliness. - Central government tax revenue statistics generally accurate and timely; nontax revenue and public expenditure data are deficient. - Development budget expenditures and utilization of grants and project loans recorded with long lags; few records on accrual trust accounts. - Timing issues regarding recording of interest on discount securities. - No data available for deferred pension liabilities to civil servants, provincial and local government budgets, off-budget outlays and corresponding liabilities, or transfers between government and public enterprises. - These weaknesses contribute to discrepancies in domestic financing between monetary/debt estimates and fiscal records. - Latest data reported and published in GFS Yearbook and IFS are for 1999-2002 and cover only budgetary central government. - Balance of payments and trade statistics: - Quarterly balance of payments data reported to the Fund with substantial lag; no data reported since mid 2002. - Data based on exchange record system, which is not tightly monitored despite BPNG reporting requirements. - Financial accounts data of poor quality due to major deficiencies in data collection, especially private external debt. - Donors and lenders often disburse funds directly to contractors, bypassing the exchange record system; substantial proportion of current account and capital flows not recorded. - Efforts underway to improve merchandise trade statistics coverage by moving to customs-based data. - ASYCUDA customs system currently used by the IRC electronically records about 80 percent of trade transactions, but neither BPNG nor the NSO has the resources to access this database. ### Data reporting table (as presented) - Date of Latest Observation | Date Received | Frequency of Data6 | Frequency of Reporting6 | Frequency of Publication6 - Exchange rates 11/30/05 | 12/19/05 | D | W | W - International reserve assets and reserve liabilities of the monetary authorities1 8/31/05 | 10/05 | W | W | Q - Reserve/base money 10/05 | 12/23/05 | M | M | Q - Broad money 1 0/05 | 12/23//05 | M | M | Q - Central bank balance sheet 10/05 | 12/23/05 | M | M | Q - Consolidated balance sheet of the banking system 10/05 | 12/23/05 | M | Q | Q - Interest rates2 10/31/05 | 12/20/05 | W | W | Q - Consumer price index 06/05 | 11/05 | Q | Q | Q - Revenue, expenditure, balance and composition of financing3 ––general government4 09/05 | 11/05 | M | Q | Q - Revenue, expenditure, balance and composition of financing3 ––central government 2004 | 10/05 | M | Q | Q - Stocks of central government and central government-guaranteed debt5 2004 | 11/05 | Q | A | A - External current account balance 03/05 | 11/05 | Q | Q | Q - Exports and imports of goods and services 03/05 | 11/05 | Q | Q | Q - GDP/GNI 2004 | 7/05 | A | A | A - Gross external debt 2004 | 10/05 | Q | A | A - Footnotes included in the table as presented: - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds. - 3 Foreign, domestic bank, and domestic nonbank financing. - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5 Including currency and maturity composition. - 6 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA). ### Public and external debt sustainability (introductory material) - The annex summarizes the debt sustainability analysis (DSA) for Papua New Guinea using the new framework for low-income countries. - The baseline macroeconomic scenario underlying this DSA is the medium-term outlook discussed in the staff report, including the sustained implementation of the ongoing medium-term fiscal strategy. - The annex assesses the impact of various exogenous shocks on the sustainability of public sector debt and external debt under the baseline scenario. - Main assumption excerpt (partial): Real GDP growth is anticipated to rise gradually from about 3 percent in 2005 to about *Document: _cr0699 - 2003. PNG is a member of the General Data Dissemination System (GDDS) project organized (IMF/annexes as provided in the source content).* ### 4.5 percent by 2010, as agricultural productivity improves, the gas pipeline project and ### _cr0699 - 4.5 percent by 2010, as agricultural productivity improves, the gas pipeline project and ### Macroeconomic baseline and assumptions - Real GDP growth projected to reach "4.5 percent by 2010, as agricultural productivity improves, the gas pipeline project and the Ramu nickel mine come on line toward the end of the decade, and structural reform is implemented." - Monetary policy: "remains geared toward achieving the objective of keeping inflation at subdued levels and maintaining a sound external position." - Fiscal stance: "Near balance of the fiscal accounts are expected from 2007 forward, along with gradual improvements in the nonmineral overall and primary balances between 2006 and 2010." - External financing/access: "Papua New Guinea would have access to external concessional finance." - Commodity assumptions: "Prices of key commodities are in line with WEO projections." - Structural reforms: "Structural reforms, including those under the Medium-term Development Strategy, would continue to gradually improve governance, law and order, transportation infrastructure, and public sector enterprises’ finances. Overall, the investment climate would continue to slowly be enhanced." ### Total public sector debt sustainability (baseline) - Public sector debt ratio history: - "76 percent of GDP at end-2002" - "49 percent of GDP at end-2005" (estimated) - Drivers of past improvement: "government’s prudent fiscal policy, favorable mineral sector developments, the appreciation of the kina, declining interest rates, and a sustained economic recovery since the current government took office in mid-2002." - Multilateral debt: "accounts for about 58 percent of total external public debt." - Baseline projections: - "public sector debt ratio is expected to decline gradually to about 43 percent of GDP by end-2010 and 17 percent by 2025 (Annex VI, Table 1)." - "NPV of public debt would decline from 54 percent of GDP in 2005 to 42 percent of GDP in 2010 and 16 percent of GDP in 2025." - "The public sector debt service to revenue ratio would remain broadly stable at about 15 percent during the medium term, and falling significantly over the longer term." - Borrowing assumption related to gas pipeline: - "the assumption that the government borrows about 4 percent of GDP in 2007 to complete the financing of its equity participation in the Highlands-Queensland gas pipeline." - Staff working financing assumption: "one third would be financed through external concessional loans and the remainder through external commercial borrowing." - Contingent liabilities: "the debt stock from 2005 forward includes contingent liabilities of the government for the first time (debt of statutory authorities)." - Risk assessment: "under the IMF-WB DSA framework for LICs, Papua New Guinea’s total public sector debt is at moderate-to-high risk of debt distress." - Main findings summarized: - "(i) only one indicator—NPV of debt to GDP ratio—is above its threshold under the baseline scenario—and it declines under the threshold over the long term," - "(ii) other indicators are well below their threshold over the entire projected period, and" - "(iii) only under one bound test for lower real GDP growth are these thresholds significantly breached." ### Sensitivity analysis and stress tests - Debt dynamics particularly sensitive to: "changes in real GDP growth and the exchange rate (Annex VI, Table 2 and Figure 1)." - Stress test results (selected exact impacts): - "Compared to 2005, a decline in real GDP growth to one standard deviation below its historical average would raise the NPV of public debt to GDP ratio by about 16 percentage points of GDP in 2010." - "A one-time 30 percent real exchange rate depreciation in 2006 would raise the NPV of debt to GDP ratio by about 10 percentage points in 2010." - Additional stress test outcomes (from Annex VI tables, selected entries preserved verbatim where reported): - Bound test B1: "Real GDP growth is at historical average minus one standard deviations in 2006-2007" results show notable increases in debt indicators (table entries such as increases to "63" and "60" in specific rows in the source table). - Bound test B4: "One-time 30 percent real depreciation in 2006" produces marked spikes in some indicators (table entries show high ratios in 2007–2010). ### External debt sustainability - External debt trends: - "total external debt has also declined steadily in recent years, from 76 percent of GDP in 2002 to about 38 percent of debt in 2005." - "External debt as a percent of exports has also declined from 19 percent in 2002 to 11 percent in 2005." - Baseline external debt projections: - "The NPV of public external debt rises in 2007 with the borrowing by about 4 percent of GDP to complete the assumed financing of its equity participation in the Highlands-Queensland gas pipeline. Thereafter it declines, reaching 23 percent of GDP in 2010 and 10 percent of GDP in 2025." - External stress-test impacts (exact figures preserved): - "A decline in real GDP growth by one standard deviation below its historical average would raise the NPV of external public debt from 2005 by 30 percentage points of GDP in 2007 with the impact declining gradually over the medium term to 43 percent of GDP by 2010 and 19 percent by 2025." - "A decline in export value growth by one standard deviation below its historical average would raise the NPV of external debt-to-GDP ratio from 2005 by 35 percentage points to a high of 61 percent of GDP in 2007, before falling to 19 percent of GDP by 2025 over the longer term." - Moderating factor: "Papua New Guinea’s external debt distress risk is moderated by the fact it has an excellent external repayment record." ### Conclusions and policy recommendations - Main conclusion: "With continued adherence to prudent macroeconomic and fiscal policies, Papua New Guinea’s debt indicators are projected to improve over the medium-to-long term, but slippage of these policies could have adverse consequences on public external debt sustainability." - Assessment of manageability: "the stock of debt and debt service as presently projected appear manageable and sustainable." - Key vulnerabilities: "this assessment rests on the need to avoid policy slippages and highlights the vulnerability of the debt dynamics to potential shocks." - Policy recommendation: "To further help guard against these vulnerabilities, Papua New Guinea needs to ensure that any external borrowing is obtained on concessional terms." - Historical repayment record: "Papua New Guinea has never defaulted on external debt to its creditors." ### Key quantitative indicators (selected exact values from Annex VI, Table 1 & supporting tables) - Public sector debt (percent of GDP): 76.2 (2002), 65.0 (2003), 55.0 (2004), 48.7 (2005), 46.3 (2006), 50.4 (2007), 49.1 (2008), 45.7 (2009), 42.9 (2010), 31.7 (2015), 17.4 (2025). - NPV of public sector debt (percent of GDP): 75.0 (2002), 62.5 (2003), 54.3 (2004), 47.1 (2005), 44.9 (2006), 51.1 (2007), 49.2 (2008), 45.2 (2009), 41.9 (2010), 31.2 (2015), 15.9 (2025). - NPV of public sector debt-to-revenue ratio (percent): 270.1 (2002), 219.9 (2003), 173.3 (2004), 168.5 (2005), 162.3 (2006), 180.0 (2007), 176.1 (2008), 168.8 (2009), 159.4 (2010), 120.0 (2015), 61.0 (2025). - Debt service-to-revenue ratio (percent): 27.5 (2002), 34.6 (2003), 18.1 (2004), 15.8 (2005), 15.4 (2006), 15.3 (2007), 15.5 (2008), 15.4 (2009), 14.8 (2010), 10.9 (2015), 6.2 (2025). - External debt (percent of GDP): 76.0 (2002), 63.3 (2003), 49.3 (2004), 37.8 (2005), 32.1 (2006), 35.5 (2007), 36.8 (2008), 35.9 (2009), 33.4 (2010), 35.2 (2015), 26.9 (2020), 23.7 (2025). - NPV of external debt (percent of GDP): 69.9 (2002), 56.8 (2003), 47.4 (2004), 36.3 (2005), 30.7 (2006), 36.2 (2007), 36.8 (2008), 35.4 (2009), 32.4 (2010), 34.6 (2015), 26.4 (2020), 23.4 (2025). - Key macro assumption: Real GDP growth (percent) by year in Annex VI, Table 1: -0.2 (2002), 2.9 (2003), 2.9 (2004), 0.6 (2005), 3.9 (2006), 3.0 (2007), 3.5 (2008), 3.5 (2009), 3.5 (2010), 4.1 (2011), 4.5 (2015), average 2005-10: 3.7, 2011-25 average: 3.5. - Gross financing need (percent of GDP): 27.2 (2002), 22.5 (2003), 17.2 (2004), 13.6 (2005), 14.5 (2006), 14.3 (2007), 14.0 (2008), 12.8 (2009), 11.5 (2010), 8.4 (2015), 4.3 (2025). *Source: IMF staff estimates and projections as presented in the provided content.* ### Annex VI, Table 3. Papua New Guinea: External Debt ### _cr0699 - Annex VI, Table 3. Papua New Guinea: External Debt ### Annex VI, Table 3 — Baseline and Scenario Strings (NPV of debt and related indicators) - Table header context: "Sustainability Framework, Baseline Scenario, 2002-2025 1/ (In percent of GDP, unless otherwise indicated) Projections" - Column labels (implied by the table layout in the source): "Estimate 20052006200720082009201020152025" - Baseline (first block): 2624302825231710 - A. Alternative Scenarios - A1. Key variables at their historical averages in 2006-25 1/: 262222147300 - A2. New public sector loans on less favorable terms in 2006-25 2/: 2624333229272217 - B. Bound Tests - B1. Real GDP growth at historical average minus one standard deviation in 2006-07: 2633565347433119 - B2. Export value growth at historical average minus one standard deviation in 2006-07 3/: 2636616056534419 - B3. US dollar GDP deflator at historical average minus one standard deviation in 2006-07: 2623282624221610 - B4. Net non-debt creating flows at historical average minus one standard deviation in 2006-07 4/: 2626353330272112 - B5. Combination of B1-B4 using one-half standard deviation shocks: 2640747267635224 - B6. One-time 30 percent nominal depreciation relative to the baseline in 2006 5/: 2634424036322415 ### Annex VI, Table 3 — Additional Blocks (debt service / ratios) - Baseline (second block): 3531393937332624 - A. Alternative Scenarios (second block) - A1. Key variables at their historical averages in 2006-25 1/: 3528292010400 - A2. New public sector loans on less favorable terms in 2006-25 2/: 3531434343403338 - B. Bound Tests (second block) - B1. Real GDP growth at historical average minus one standard deviation in 2006-07: 353139393937332624 - B2. Export value growth at historical average minus one standard deviation in 2006-07 3/: 356212712913012110669 - B3. US dollar GDP deflator at historical average minus one standard deviation in 2006-07: 353139393937332624 - B4. Net non-debt creating flows at historical average minus one standard deviation in 2006-07 4/: 3534464544403227 - B5. Combination of B1-B4 using one-half standard deviation shocks: 3552929393877551 - B6. One-time 30 percent nominal depreciation relative to the baseline in 2006 5/: 3531393937332624 ### Annex VI, Table 3 — Third block (debt service ratio or related indicator) - Baseline (third block): 106667644 - A. Alternative Scenarios (third block) - A1. Key variables at their historical averages in 2006-25 1/: 63344310 - A2. New public sector loans on less favorable terms in 2006-25 2/: 63344443 - B. Bound Tests (third block) - B1. Real GDP growth at historical average minus one standard deviation in 2006-07: 63355422 - B2. Export value growth at historical average minus one standard deviation in 2006-07 3/: 64599879 - B3. US dollar GDP deflator at historical average minus one standard deviation in 2006-07: 63355422 - B4. Net non-debt creating flows at historical average minus one standard deviation in 2006-07 4/: 63355433 - B5. Combination of B1-B4 using one-half standard deviation shocks: 64477756 - B6. One-time 30 percent nominal depreciation relative to the baseline in 2006 5/: 63355422 ### Memorandum item (as reported in the table) - "Grant element assumed on residual financing (i.e., financing required above baseline) 6/": 3131313131313131 ### Footnotes and simulation assumptions (verbatim key points) - Footnote 1/: "Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt (FDI)creating flows. The NPV of debt and de service tend to zero over time as the 10-year average of the current account balance (a 6.8 percent of GDP surplus) and net FDI inflows imply that debt is paid off." - Footnote 2/: "Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline." - Footnote 3/: "Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels)." - Footnote 4/: "Includes official and private transfers and FDI." - Footnote 5/: "Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent." - Footnote 6/: "Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2." - Source line from table: "Source: Staff projections and simulations." ### Public Information Notice (PIN) — Key macro findings and selected indicators (verbatim numeric highlights) - PIN header: "Public Information Notice (PIN) No. 6/20 FOR IMMEDIATE RELEASE February 24, 2006" - Executive Board conclusion date referenced: "On February 13, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Papua New Guinea." - Recent macro outcomes and projections: - "Real GDP rose by about 3 percent in 2004" and "a similar rate of growth is expected for 2005." - "CPI inflation in 2004 to around 2 percent from 14.7 percent in the preceding year, and inflation is estimated to average 1 percent in 2005." - "The improved fiscal outcome resulted in a further reduction in total public sector debt, about half of which is external debt, to 49 percent of GDP in 2005 from 72 percent in 2002." - "The central bank progressively lowered the signaling Kina Facility Rate from a 16 percent peak in July 2003 to 6 percent in September 2005." - "Broad money is expected to rise by over 13 percent in 2005." - "Private sector credit picked up ... increasing by about 20 percent from a low base." - "The kina appreciated against the U.S. dollar by about 15 percent in nominal terms during this period." - "Gross international reserves are expected to close 2005 at 5.5 months of non-mineral imports." - Executive Board Assessment — key recommendations and concerns (verbatim thematic points) - Sustain recent gains while moving to a higher growth path to reduce poverty via accelerated fiscal reform, fiscal prudence, supportive monetary policy, and structural reform to encourage private investment. - Strengthen the non-mineral sector to diversify the export and revenue base and promote private sector job opportunities. - Re-orient government expenditure toward infrastructure and social spending; reduce the wage bill and streamline government while safeguarding public service quality and service delivery. - Strengthen tax administration to bolster the non-mineral revenue base. - If mineral revenues remain high and surpluses emerge, use resources for priority infrastructure and social spending and to repay government debt. - Contain fiscal risks in the run-up to the 2007 election. - Further strengthen budget management and transparency, including at sub-national level; avoid nonconcessional borrowing, including to finance the gas pipeline project. - Maintain low inflation and monitor liquidity; tighten monetary policy as necessary; continue to strengthen monetary policy tools. - Floating exchange rate arrangement viewed as appropriate; intervene only to smooth volatility. - Accelerate structural reforms: increase competition in public enterprise sector, improve law and order, strengthen governance, increase transparency and accountability, upgrade infrastructure, simplify investment regulations. - Consolidate rehabilitation of the Rural Development Bank and improve data provision. ### Selected Economic Indicators (2001–05) — verbatim numeric table highlights - Real GDP growth (total / Mineral / Nonmineral) by year: - 2001: -0.1 / -10.4 / 1.9 - 2002: -0.2 / -15.9 / 2.5 - 2003: 2.9 / 10.2 / 1.9 - 2004: 2.9 / -0.9 / 3.5 - 2005: 3.0 / -0.7 / 3.5 - CPI (annual average): 2001: 9.3; 2002: 11.8; 2003: 14.7; 2004: 2.1; 2005: 1.0 - Central government budget (percent of GDP) — 2005 row: Revenue and grants 28.0; Expenditure and net lending 25.2; Overall balance, cash basis (including grants) 1/: 2.7; Domestic financing (net) 2/: -1.0; Of which: Banking system -2.0; External financing (net) -1.7 - Money and credit (end-period percentage change) — 2005 row: Domestic credit -1.0; Net credit to government -24.7; Credit to the private sector 19.9; Broad money 14.9; Interest rate (182-day T-bills, end-period) 4.0 - Balance of payments (in millions of U.S. dollars) — 2005 row: Exports, f.o.b. 3,352; Imports, c.i.f. -2,321; Current account (including grants) 203; (In percent of GDP) 4.2; Overall balance 171 - Reserves and external debt (end-period, in millions of U.S. dollars) — 2005 row: Net international reserves 749; (In months of nonmining imports, c.i.f) 5.5; Gross international reserves 750; (In months of nonmining imports, c.i.f) 5.5; Public external debt-to-GDP ratio (in percent) 27.3; Public external debt-service ratio (percent of exports of goods and services) 6.0 - Exchange rates (period average / end-period) — 2005 row: US$/kina (period average) 0.3217; US$/kina (end-period) 0.3230 - Nominal GDP (millions of kina): 2005: 15,143 ### Statement by Papua New Guinea authorities (selected numeric highlights) - Statement date: "February 13, 2006" - Government macro targets and frameworks: - MTFS aim: "reduce the budget deficit progressively to balance by 2008, and progressively reduce public debt to GDP." - Authorities' summary of outcomes and indicators: - "GDP is expected to have grown by 3.0 percent in 2005, from 2.9 percent in 2004" - Non-mining GDP growth in 2005: 3.5 percent - Inflation: "has fallen from almost 20 percent in 2003 to 1.7 percent in 2005" - Interest rates: "market rates currently under 5 percent" - International reserves latest available data: "K2,396 million (US$774 million) at the end of 2005, from K2,061 million (US$639 million) in 2004" - Reserves coverage: "sufficient to cover 4.7 months of total imports and 9.0 months of non-mineral imports." - Balance of payments in 2005: "recorded a surplus of 2.9 percent of GDP in 2005" *Source: Staff projections and simulations; Public Information Notice (PIN) No. 6/20; IMF Article IV consultation materials as presented in the source content.* ### 2.4 percent of GDP in 2004. ### _cr0699 - 2.4 percent of GDP in 2004. ### Growth and employment - Private sector employment increased by 2.8 percent in the year to September 2005, driven by increased activities in the manufacturing, minerals and construction sectors, following a decline of 0.4 percent in 2004. - Private sector employment is expected to continue to increase given the expected growth of total GDP in 2006 and over the medium-term. - The outlook for 2006 and over the medium-term: growth of 3.5 percent expected in 2006 and is broad based across all sectors. - Promising resource projects coming into construction expected to contribute strongly to growth: PNG to Australia Gas Project and the Ramu Nickel Mine. ### Enhanced fiscal discipline and fiscal outcomes - Fiscal outturn for 2005 is likely to be 0.6 percent of GDP or even better, compared with the original projected deficit of 0.9 percent of GDP. - For 2006, the budgeted deficit of 0.6 percent is again in line with the MTFS. - Savings from lower interest payments have been re-allocated to reducing arrears and other outstanding obligations, and to priority spending areas identified in the MTDS. - Government has set aside K400 million ($US128.0 million) to part fund the Government’s minority equity share in the PNG to Australia Gas Project; this reduces the Government’s borrowing requirements to finance its share of the gas project. - Authorities reaffirm intention not to contract non-concessional loans to finance its equity share; Government is working closely with the ADB to secure ADB financing for the remaining equity in the project. ### Public debt and debt management - Total public sector debt reduced to 49 percent of GDP in 2005, from 72 percent in 2002. - Total public sector debt is budgeted to fall to 46 percent of GDP in 2006. - Government has recently developed a medium-term strategy for debt management and seeks to lengthen the maturity of its debt portfolio while avoiding an inordinate rise in interest costs. - Authorities acknowledge staff’s debt sustainability analysis and agree on the need for continued prudent macroeconomic policies and reforms; they recognize downside risks that could curtail fiscal and debt sustainability. ### Fiscal governance and public expenditure management - Financial controllers and internal audit units are now established in large spending agencies, including Defence, Police, Health and Education, to strengthen expenditure control and financial discipline. - Authorities agree more needs to be done to improve governance and accountability to strengthen public expenditure management. - Minister for Finance and Treasury reiterated commitment to work within parameters of the MTFS and MTDS to provide policy stability; warned that slipping macroeconomic management or faltering reform efforts would produce a gloomy outlook. ### Monetary policy and financial sector supervision - Monetary policy has eased substantially over the past two years, in line with lower inflation and inflationary expectations. - Accommodative policy stance supported by Government’s prudent fiscal management and favorable external conditions, which strengthened the exchange rate position and curbed price pressures. - Private sector credit increased by around 20 percent in 2005 from a low base. - Bank of Papua New Guinea (BPNG) reaffirmed commitment that monetary policy will remain accommodative while inflation pressures remain subdued. - Money market interest rates have been below BPNG’s official indicator rate for a considerable period; liquidity conditions will need close management by the Bank. - Regulatory and supervisory framework for the central bank, commercial banks, non-bank financial institutions, superannuation funds and life insurance companies have been strengthened, resulting in improved financial sector soundness. - Implementation of the Fund’s technical assistance recommendations on financial sector supervision is underway to complete the overall reform agenda. ### Rural Development Bank and governance risks - Government has stepped in to revive the deteriorating Rural Development Bank (RDB), declared insolvent in July 2004 because of poor management and weak governance. - New legislation submitted to Parliament for approval in early 2006 intends to allow the RDB to operate on commercial grounds while maintaining its core objective of providing banking service for the rural sector. - RDB is likely to come under the prudential supervision of BPNG if licensed to operate as an authorized bank; authorities will need to keep new arrangements under close review given governance risks. ### Structural reform and private sector development - Government’s strategy to support private sector development and growth comprises three elements: - A stable investment climate. - An efficient, effective and affordable public sector. - Creating a competitive and dynamic private sector. - Political stability and clear plans under the MTFS and MTDS are essential; benefits have included low inflation and interest rates, a stable exchange rate, steady economic growth, improving investment trends and employment creation. - The Rightsizing review calls for a more streamlined public service concentrating on declining core government functions; some reforms to be taken forward in 2006. - Authorities agree with Fund’s advice that accelerated implementation of the MTDS is needed to address remaining structural shortcomings hampering the private sector. - 2006 Budget increased resources going to priority areas, including rehabilitation and maintenance of roads, law and order, primary education and health. - Roll-out of the District Services Improvement Program will be important for improving infrastructure for commerce and agricultural development; achieving appropriate implementation, monitoring and reporting against budget appropriations and development plans is crucial. - Government will address regulatory impediments and competition issues: - ICCC to examine regulatory changes for transition to a more competitive telecommunications market when the telecommunications monopoly expires in 2007. - ICCC to examine competition within coastal shipping to assess merits of strengthening competition and regulatory control. - Regulatory impediments around air transport will be reviewed with a view to increasing competition and reducing air transport costs. - Authorities will continue to implement review of PNG’s investment regime to streamline investment regulations and processes. - National Working Group on Business Impediments has made substantial inroads into removing red tape and bureaucratic bottlenecks. - BPNG liberalized foreign exchange controls in June 2005 to support private sector investment. *Source: _cr0699 - 2.4 percent of GDP in 2004.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0699.pdf_