## _cr07111

## Source details

**Canonical URL:** [_cr07111](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07111.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07111.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07111.pdf.json)

---

### Executive summary — overview and recent performance
- Papua New Guinea is enjoying its fourth year of recovery and macroeconomic stability, supported by broadly sound economic policies and record mineral revenue inflows.
- Current performance is strong relative to recent history, but the performance gap relative to comparator countries is widening given higher growth among peers.
- Downside risks have increased, and development needs remain high.
- Per capita income is little improved since independence in 1975.
- Poverty and unemployment remain high; anecdotal evidence suggests unemployment is about 40 percent of the labor force in major urban centers, such as Port Moresby.
- As a result of earlier election-year fiscal policy excesses, the current government faced a near crisis situation when it took office in 2002; its initial years mainly focused on stabilizing the fiscal situation and promoting economic recovery.

### Near-term policy challenge and macro stance
- Fiscal-monetary policy mix: continue policies that maintain macroeconomic stability.
- Monetary policy:
  - Maintain low inflation; stand ready to tighten if fiscal-related demand pressures intensify.
  - BPNG interventions to absorb liquidity; interest rates reduced sharply relative to regional policy rates.
- Exchange rate:
  - Current managed floating exchange rate allows reserve build-up while protecting nonmineral competitiveness by resisting rapid appreciation of the kina.
  - Greater flexibility would be needed in the face of sustained pressure.
- Budgets:
  - 2006–07 budgets appropriately focused on one-off development spending increases given temporary nature of record mineral revenue inflows.
  - Authorities should minimize potential for nonpriority expenditure and associated inflationary pressures ahead of the mid-2007 general elections.

### Recent developments and near-term outlook (Tables 2–5)
- Growth and inflation:
  - "The recovery is expected to gain steam in 2007, with growth rising to over 4 percent, as new mines begin production and increased government spending stimulates activity in the nonmineral sector."
  - "Inflation, estimated at 3.5 percent on average in 2006, is expected to rise slightly in 2007 ... but remain consistent with the Bank of Papua New Guinea’s (BPNG) 4 percent medium-term inflation objective."
- External sector and reserves:
  - "The current account surplus should narrow in 2007 as the value of mineral exports begins to decline with lower prices expected for key exports."
  - "Official external reserves should increase to about $1.6 billion (4 months of goods and services imports)."
- Exchange rate and reserves:
  - Kina appreciated by 3 percent against the U.S. dollar and 6 percent on a real effective basis in 2006.
  - External reserves growing but still not large relative to comparators.

### Fiscal sector developments and central government operations (selected figures reproduced exactly)
- Central government operations (In percent of GDP):
  - Revenue and grants: 34.2 27.0 35.3 36.1 30.3 32.1
  - Nonmineral revenue: 17.4 15.6 16.9 17.4 16.8 17.4
  - Mineral revenue: 8.4 5.7 12.6 12.9 8.4 9.8
  - Grants: 8.0 5.8 5.8 5.8 5.0 5.0
  - Total expenditure and net lending: 30.6 27.6 34.7 29.7 30.5 30.1
  - Recurrent expenditure: 19.9 18.2 19.4 19.4 19.4 19.4
  - Salaries and wages: 8.0 7.8 8.6 8.6 7.9 7.9
  - Goods and services: 6.2 5.1 5.6 5.6 6.0 6.0
  - Other: 5.6 6.2 6.0 6.1 6.5 6.5
  - Development expenditure: 10.7 9.4 14.7 10.3 11.1 10.7
  - Net lending 2/: 0.0 0.0 0.6 0.0 0.0 0.0
  - Overall balance 3/: 3.6 -0.5 0.6 6.4 -0.2 2.1
  - Nonmineral overall balance 3/: -4.8 -6.2 -12.0 -6.5 -8.6 -7.7
- Notes reproduced verbatim where present:
  - "1/ Includes supplementary budgets passed in August and November 2006."
  - "2/ In 2006, the budget treats savings for a future acquisition of an equity participation in the PNG gas project as an expenditure. Under IMF's GFS standards, these are treated as expenditure for loan repayment."
  - "3/ Measured from above the line."
- Fiscal outcomes and execution:
  - An overall fiscal surplus expected for the 3rd year in 2007.
  - Nonmineral imbalances are widening, reflecting higher development spending financed by record mineral revenue inflows.
  - Given weak implementation capacity and late timing of 2006 supplementary budgets, spending outcome expected to be significantly less than appropriated; remaining amounts deposited in trust fund accounts for future spending.
- Debt dynamics:
  - Repayment of 0.5 percent of GDP of external debt in 2006 to the Asian Development Bank (AsDB).
  - Public sector debt–to-GDP ratio of 40 percent in 2007 (projection reflecting real GDP growth, kina appreciation, and low interest rates).

### Structural reforms and medium-term development (MTDS 2005–10)
- MTDS objectives:
  - establish good governance;
  - promote export-driven growth in agriculture, forestry, fisheries, and tourism;
  - accelerate rural development and poverty reduction via public sector reform, improved accountability, reduced costs, and redirecting public expenditure toward rural and transportation infrastructure, basic education, law and justice, and preventive health care programs including for HIV/AIDs.
- Implementation status:
  - Almost two years after inception, progress stalled in many areas.
  - Important advance: larger share of budgeted expenditure shifted toward infrastructure and human capital.
  - "Right-sizing" report completed, but implementation delayed until after 2007 elections.
- Structural reform priorities:
  - Strengthen operations of public enterprises; limited progress and most enterprises continued to run losses.
  - Create a business-friendly environment (transportation, telecommunications, law-and-order, governance); limited progress.
  - Multi-year tariff reform program: On track (completed early 2006); some backtracking in 2007 budget.

### Role of the mining sector (Box 2)
- The mining sector (including petroleum and natural gas) dominates the economy; recent surge in mineral prices spurred investment and exploration.
- Commodity export shares and outlook (shares reproduced where given):
  - Gold and silver (27 percent of exports): Lihir expanding; Kainantu recently began operations; several new small mines expected in next 2–3 years; Porgera life likely longer than expected.
  - Copper (27 percent of exports), nickel, and other minerals: Ok Tedi copper expected to decline steadily; Ramu nickel mine expected to begin construction in 2007, production in 2010.
  - Oil (23 percent of exports): Production volumes should remain flat during 2007–10, followed by gradual decline thereafter.
  - Natural gas: late–2006 Gulf discovery; InterOil announced new exploration bids; $5.3 billion PNG-Queensland Gas Pipeline Project now unlikely to materialize after partners' negative reassessment; government considering alternatives.

### Medium-term outlook and risks
- Baseline: Real GDP growth of about 4 percent expected over the medium term; continued low inflation; falling export prices should narrow external current account surpluses.
- Specific projections and indicators:
  - Real GDP growth of about 4 percent expected over 2006-2011 in Appendix I.
  - Official external reserves projected to increase to about $1.6 billion.
- Downside risks (balance of risks to the downside):
  - Higher-than-expected election-related spending → price pressures → tighter monetary policy → potential growth choke-off.
  - Weak fiscal accountability (trust funds) → risk of higher/inefficient spending.
  - Steeper-than-anticipated decline in world export commodity prices or postponement of large mineral projects → need for fiscal adjustment.
  - Unwinding of structural reform progress → dampened investor confidence.
  - Further spread of HIV/AIDs.
- Upside potential:
  - Rapid development of gas reserves could improve the longer-term growth outlook.
- Growth and poverty reduction threshold:
  - "A doubling of the baseline growth rates would be needed to significantly reduce poverty and unemployment."
  - "Stronger annual growth of 7–8 percent is within reach, but would require more effective use of mineral wealth, a sustainable medium-term fiscal policy, and decisive structural reform."

### Monetary and financial sector
- Monetary stance and liquidity:
  - Money supply and credit growth strong; monetary policy remains relaxed in low inflation environment.
  - BPNG intervenes to absorb liquidity to keep reserve money within target range.
  - Domestic credit growth broad-based; private sector credit rapid but relative to GDP has just regained pre-downturn levels and remains low relative to comparators.
  - Financial sector indicators (non-performing loans, return on assets) indicate the sector is healthy.
- Banking system data (selected):
  - Domestic credit (end-period percentage change): 30.7 -7.1 0.7 8.6 5.4 3.6
  - Broad money growth (annual percentage change): 7.3 -4.4 14.8 29.5 33.0 13.0
  - Private sector credit (annual percentage change): 1.4 -4.1 0.9 23.7 27.9 16.5

### Debt risk, DSA findings and sensitivities (Appendix I highlights)
- Risk classification: Papua New Guinea is at a moderate risk of debt distress under the IMF-WB DSA framework for LICs.
- Historical and projected debt dynamics:
  - Public sector debt ratio declined from 67.4 percent of GDP at end-2003 to an estimated 39.3 percent of GDP at end-2006.
  - Baseline projection: public sector debt ratio projected to decline to 34.3 percent of GDP by 2011 and 13.6 percent by 2026.
  - NPV of public debt: 48.2 percent of GDP in 2005 → 40.1 percent of GDP in 2006 → 35.3 percent of GDP by 2011 → 13.5 percent of GDP by 2026.
- Sensitivity and stress tests (selected results reproduced):
  - A 10 percent reduction in key export prices reduces government revenue by 0.5 percent of GDP annually.
  - Decline in real GDP growth to one standard deviation below historical average would raise NPV of public debt-to-GDP ratio by about 20 percentage points in the long term.
  - One-time 30 percent real exchange rate depreciation in 2007 would raise NPV of debt-to-GDP ratio by about 10 percentage points.
  - For external debt: a decline in export value growth by one standard deviation below historical average would raise the NPV of public external debt-to-GDP ratio by 25 percentage points during 2006–09 and only fall below the threshold level in 2019.
  - One-time 30 percent nominal depreciation in 2007 would raise the NPV of debt-to-GDP by 6 percentage points in the first three years.
- Composition and terms:
  - Of total public debt, approximately 50 percent is external; of external loans, 47 percent are in US dollars, 36 percent in Japanese yen, and 14 percent in Euros.
  - Multilateral debt accounts for about two-thirds (AsDB and World Bank); Japan is the main bilateral creditor.
  - Policy: foreign-currency loans considered only if highly concessionary (grant element of 35 percent).

### Key numeric macro and fiscal statistics (selected, preserved exactly)
- Nominal GDP (2005): US$4.94 billion
- Population (2005): 5.8 million
- GDP per capita (2005): US$855
- Quota: SDR 131.6 million
- Real GDP growth (percent change, 2002–07): 1/-0.2 2.2 2.7 3.3 3.7 4.3
  - Mineral growth: -15.9 2.8 0.3 5.0 0.2 6.2
  - Nonmineral growth: 2.5 2.1 3.1 3.1 4.1 4.0
- CPI (annual average): 11.8 14.7 2.1 1.7 3.5 4.3
- Central government operations (percent of GDP, 2002–07 estimates/projections):
  - Revenue and grants: 27.8 29.1 34.1 34.2 36.1 32.1
  - Expenditure and net lending: 31.9 30.3 32.4 30.6 29.7 30.1
  - Overall balance, cash basis (including grants): 2/-5.3 -1.8 0.0 4.1 6.4 2.1
  - Domestic financing (net): 6.1 4.0 1.8 -2.7 -5.2 -1.6
  - External financing (net): -0.9 -2.1 -1.8 -1.4 -1.3 -0.5
  - Nonmineral balance: 2/-8.5 -6.4 -6.3 -4.3 -6.5 -7.7
- Central government debt (percent of GDP): 71.7 63.6 60.0 47.3 39.2 39.8
- Net international reserves (end-period; millions of U.S. dollars): 223 399 599 765 1,450 1,575
  - In months of nonmining imports, c.i.f.: 3.0 4.3 5.5 5.2 8.3 8.7

### Agreed public expenditure management and financial sector actions
- Public expenditure management actions agreed:
  - Urgently improve monitoring and reporting of budget outcomes; apply sanctions to encourage compliance.
  - Expand financial controllers and auditors; close trust accounts; speed up ITIS finalization.
  - Strengthen budget execution for infrastructure and key services; authorities interested in technical assistance (possibly through PFTAC).
  - Clarify legal framework and subject provinces and local governments to basic controls and reporting standards; reform unsustainable legal commitments for central government financing of subnational governments.
  - Revive the public sector reform program (right-sizing) as a priority for the next government.
- Financial sector strengthening measures agreed:
  - Implement MCM recommendations on bank supervision rapidly.
  - Establish risk-based internal audit system.
  - Implement AML/CFT legislation and strengthen internal management procedures.
  - Reinforce supervision of superannuation funds and create secondary market steps for government securities.
  - Staff concern: reverse plans to expand the Rural Development Bank into microfinance without adequate oversight; ensure all banking license applications comply with due diligence and fit-and-proper criteria.
  - Staff recommendations: expand supervision to non-banking financial institutions; tighten central bank propriety controls.

### Revenue, tax administration and trade policy
- Nonmineral revenue already high relative to comparators; emphasis on improving tax administration while preserving revenue base.
- Internal Revenue Commission pursuing a three-year plan to improve compliance and broaden tax base.
- Staff emphasized finalizing draft Administration Act and recommended comprehensive review of overall tax system to ensure consistency and fair treatment of businesses and windfall profits.
- Trade policy:
  - Seven-year tariff reform program completed in early 2006 compressing tariff structure to four rates; zero rate applicable on three quarters of commodities.
  - 2007 budget introduced temporary tariff increases of 5–25 percent on canned beans and tuna, and soft drinks; staff urged redressing these slippages.

### Data, statistics and transparency
- Data provision generally adequate for surveillance but shortcomings in quality, coverage, and timeliness persist.
- Poor condition of fiscal, national accounts, and balance of payments data hinders transparency and accountability.
- Authorities developing plan to implement STA mission recommendations and rehabilitate the National Statistical Office; staff urged implementation without delay.
- Auditor General progress welcomed; staff suggested broader accessibility of completed audits (now available through 2005).

### Staff appraisal and core recommendations (summary)
- Maintain macroeconomic stability through prudent fiscal and monetary policies; be ready to tighten monetary policy if inflation pressures emerge.
- Preserve nonmineral sector competitiveness and build reserves; allow exchange rate flexibility if sustained pressures materialize.
- Use mineral revenue windfalls cautiously: prioritize absorptive-capacity-constrained infrastructure and social spending; use remainder to reduce debt.
- Target gradually improving nonmineral balances over the medium term rather than overall budget balance to cope better with volatile and exhaustible mineral revenue.
- Strengthen public expenditure management, close trust accounts, improve monitoring/reporting, and implement right-sizing to streamline spending.
- Address structural impediments: law and order, governance, transport and communications infrastructure, utilities, human capital.
- Strengthen financial supervision (including non-banks), complete AML/CFT implementation, and reverse ill-supervised expansion of development bank into microfinance.
- Improve statistical capacity and timeliness of macroeconomic data.

*Source: IMF staff report extract (sections and tables from the provided content unit _cr07111).*

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

### Executive Summary

### Overview and recent performance
- Papua New Guinea is enjoying its fourth year of recovery and macroeconomic stability, supported by broadly sound economic policies and record mineral revenue inflows.
- The current economic performance is strong relative to recent history, but the performance gap relative to comparator countries is widening given higher growth among peers.
- Downside risks have increased, and development needs remain high.
- As a result of earlier election-year fiscal policy excesses, the current government faced a near crisis situation when it took office in 2002; its efforts during its initial years mainly—and successfully—focused on stabilizing the fiscal situation and promoting economic recovery.
- Per capita income is little improved since independence in 1975.
- Poverty and unemployment remain high; anecdotal evidence suggests unemployment is about 40 percent of the labor force in major urban centers, such as Port Moresby.

### Near-term policy challenge
- The near-term challenge is to continue following an appropriate fiscal-monetary policy mix that maintains macroeconomic stability.
- Monetary policy should continue to maintain low inflation, and the authorities should stand ready to tighten the stance if fiscal-related demand pressures intensify.
- Given the expectation of diminished mineral revenue inflows, the current managed floating exchange rate appropriately allows a build-up of reserves while protecting nonmineral sector competitiveness by resisting rapid appreciation of the kina. Greater flexibility would be needed in the face of sustained pressure.
- The 2006–07 budgets are appropriately focused on one-off development spending increases given the temporary nature of current record mineral revenue inflows.
- The authorities should take measures to minimize the potential for nonpriority expenditure and associated inflationary pressures emerging ahead of the mid-2007 general elections.

### Fiscal strategy and debt
- A more ambitious medium-term fiscal strategy would better cope with volatile and exhaustible mineral revenue and anchor fiscal sustainability.
- The suggested strategy would use budget surpluses to pay down public debt while leaving room for more spending in areas that would contribute to higher sustained nonmineral sector growth.
- Past targets and outcomes referenced:
  - 2004 Article IV Consultation target: Reduce fiscal deficits (-5 percent of GDP) and public debt (72 percent GDP).
  - Outcome: Fiscal deficit in balance and debt reduced to 60 percent of GDP; consecutive fiscal surpluses since 2004; debt lowered further to 39 percent of GDP in 2006.
- Prior recommendation to reduce nonpriority spending, including wage bill, to provide room for priority expenditure such as infrastructure and education:
  - 2004 assessment: Little progress; 2004 budget provided for 3 percent wage increase and additional performance bonuses.
  - More recent outcome: Current spending, including wage bill, reduced as share of GDP. Budget focus on infrastructure expenditure, but execution capacity weak. “Right-sizing” report completed, but implementation delayed until after 2007 elections.

### Structural reforms and medium-term development
- A key medium-term challenge is to renew momentum on structural reforms—including in the public sector—to raise growth in the nonmineral sector and reduce unemployment and poverty.
- The investment environment needs considerable strengthening, including by addressing:
  - poor communications and transportation infrastructure,
  - high crime,
  - weak governance.
- Structural reform progress (selected items):
  - Strengthen operations of public enterprises with view to possibly privatize in medium term: No significant progress. Most enterprises continued to run losses. Financial positions have improved but still slow progress in improving service delivery. No privatization planned.
  - Create business-friendly environment to encourage growth and job creation in nonmineral sector: Limited progress in easing constraints, e.g., weak law-and-order and infrastructure. Little further progress; however, budgeted spending increase for rehabilitating infrastructure.
  - Multi-year tariff reform program: On track. Completed in early 2006; some backtracking in 2007 budget.

### Medium-Term Development Strategy (MTDS) objectives (2005–10)
- MTDS objectives:
  - establish good governance;
  - promote export-driven growth in agriculture, forestry, fisheries, and tourism;
  - accelerate rural development and poverty reduction, through:
    - public sector reform with improved accountability, reduced costs, more efficient service delivery, and fiscal sustainability;
    - a more favorable climate for private sector activity through improved law and justice, expanded telecommunications, development of human resources, and upgraded transportation infrastructure;
    - redirecting public expenditure toward the priority areas of rural and transportation infrastructure, basic education, law and justice, and preventive health care programs, including for HIV/AIDs.
- Almost two years after the strategy’s inception, progress has stalled in many areas. An important advance has been in shifting a larger share of budgeted expenditure toward infrastructure and human capital. However, the MTDS’s objectives remain valid and a point of reference for the public.

### Risks and recent uncertainties
- Recent developments have introduced new uncertainty to the outlook as the mid-year parliamentary elections draw closer.
- Frequent cabinet changes over the past year, including in key economic ministries, have complicated macroeconomic policy-making.
- The PNG-Queensland gas pipeline project, originally expected to start construction in late 2006, was put on hold following a recent reassessment by foreign partners.

_Provided content: _cr07111 - Executive Summary ......................................................................................................; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07111.pdf_

### 4.      Recent developments and the near-term outlook remain favorable (Tables 2–5

### _cr07111 - 4.      Recent developments and the near-term outlook remain favorable (Tables 2–5

### Recent developments and near-term outlook
- High commodity prices and expanding mineral production should contribute to continued growth and fiscal and external surpluses.
- Growth:
  - "The recovery is expected to gain steam in 2007, with growth rising to over 4 percent, as new mines begin production and increased government spending stimulates activity in the nonmineral sector."
- Inflation:
  - "Inflation, estimated at 3.5 percent on average in 2006, is expected to rise slightly in 2007 as fiscal spending increases pressure on prices, but remain consistent with the Bank of Papua New Guinea’s (BPNG) 4 percent medium-term inflation objective."
- External sector and reserves:
  - "The current account surplus should narrow in 2007 as the value of mineral exports begins to decline with lower prices expected for key exports."
  - "Official external reserves should increase to about $1.6 billion (4 months of goods and services imports)."

### External and real sector signals
- Exchange rate and sector dynamics:
  - "After a steep rise in the kina’s value in 2003–05, it appreciated by 3 percent against the U.S. dollar and 6 percent on a real effective basis in 2006."
  - "High world prices for key export commodities are driving surpluses on the external accounts."
  - "High mineral prices are pushing up both mineral sector exports and imports, as construction on new mines begins."
  - "External reserves are growing, though they are still not large relative to comparators."
  - "The kina continues to appreciate steeply on a real effective basis, though less so against the US$."

### Fiscal sector developments and central government operations
- Overall fiscal position:
  - "An overall fiscal surplus is expected for the 3rd year in 2007."
  - "Nonmineral imbalances are widening, reflecting higher development spending financed by record mineral revenue inflows."
  - "The 2006-07 budgets provide for large spending increases mainly for development expenditure (over three quarters of the total increase), much of it one-off, and smaller allotments for public enterprise investment, natural disaster victims, and domestic arrears clearance."
  - "Given weak implementation capacity and the late timing of the 2006 supplementary budgets, the spending outcome is expected to be significantly less than appropriated. The remaining amounts would be deposited in trust fund accounts for future spending."
- Debt dynamics:
  - "Repayment of 0.5 percent of GDP of external debt in 2006 to the Asian Development Bank (AsDB) combined with positive debt dynamics (real GDP growth, kina appreciation, and low interest rates) should contribute to a public sector debt–to-GDP ratio of 40 percent in 2007."
- Selected central government operations (In percent of GDP) — rows and figures reproduced exactly as shown:
  - Revenue and grants: 34.2 27.0 35.3 36.1 30.3 32.1
  - Nonmineral revenue: 17.4 15.6 16.9 17.4 16.8 17.4
  - Mineral revenue: 8.4 5.7 12.6 12.9 8.4 9.8
  - Grants: 8.0 5.8 5.8 5.8 5.0 5.0
  - Total expenditure and net lending: 30.6 27.6 34.7 29.7 30.5 30.1
  - Recurrent expenditure: 19.9 18.2 19.4 19.4 19.4 19.4
  - Salaries and wages: 8.0 7.8 8.6 8.6 7.9 7.9
  - Goods and services: 6.2 5.1 5.6 5.6 6.0 6.0
  - Other: 5.6 6.2 6.0 6.1 6.5 6.5
  - Development expenditure: 10.7 9.4 14.7 10.3 11.1 10.7
  - Net lending 2/: 0.0 0.0 0.6 0.0 0.0 0.0
  - Overall balance 3/: 3.6 -0.5 0.6 6.4 -0.2 2.1
  - Nonmineral overall balance 3/: -4.8 -6.2 -12.0 -6.5 -8.6 -7.7
  - Notes reproduced verbatim where present:
    - "1/ Includes supplementary budgets passed in August and November 2006."
    - "2/ In 2006, the budget treats savings for a future acquisition of an equity participation in the PNG gas project as an expenditure. Under IMF's GFS standards, these are treated as expenditure for loan repayment."
    - "3/ Measured from above the line."

### Monetary and financial sector
- Monetary stance and liquidity:
  - "Although money supply and credit growth are strong, in the current low inflation environment, monetary policy remains relaxed."
  - "The BPNG intervenes to absorb liquidity."
  - "Interest rates were reduced sharply, relative to regional policy rates."
  - "Domestic credit growth appears relatively broad based."
  - "Although credit growth has been rapid, relative to GDP it has just regained levels existing prior to the economic downturn and remains low relative to comparators."
  - "Financial sector indicators, including non-performing loans and return on assets, indicate the sector is healthy."
  - "…To keep reserve money within target range."

### Role of the mining sector (Box 2)
- Overview:
  - "The mining sector (including petroleum and natural gas) dominates Papua New Guinea’s economy."
  - "Once considered a sector in decline, the recent surge in mineral prices has spurred investment in existing mines to expand production and in new exploration as reflected in a sharp rise in mineral exploration applications."
  - "The outlook hinges on whether planned projects come on stream before expected declines in mineral prices dampen activity once more."
- By commodity (shares of exports reproduced exactly where given):
  - Gold and silver (27 percent of exports):
    - "The largest mine (Lihir) is expanding output with new investment, a second sizeable mine (Kainantu) recently began operations, and several new small mines should start production over the next 2–3 years. The life of another large mine (Porgera) will likely be longer than previously expected."
  - Copper (27 percent of exports), nickel, and other minerals:
    - "Copper production from the Ok Tedi mine is expected to decline steadily from its recent highs, albeit over a longer timeframe than previously envisaged. The large Ramu nickel mine is expected to begin construction in 2007, with production commencing in 2010."
  - Oil (23 percent of exports):
    - "Production volumes should remain flat during 2007–10, followed by a gradual decline thereafter."
  - Natural gas:
    - "Following the late–2006 discovery of natural gas in Papua New Guinea’s Gulf region, the largest producer, InterOil, has announced new exploration bids."
    - "However, the $5.3 billion PNG-Queensland Gas Pipeline Project tapping natural gas reserves located in Papua New Guinea’s Highlands region is now unlikely to materialize after the external partners’ recent negative reassessment of the project’s viability due to increasing costs."
    - "The government is considering alternative options for use of the Highland’s gas reserves and another project may be developed if prices remain high."

### Medium-term outlook and risks
- Baseline projection:
  - "The macroeconomic outlook should remain positive, if fiscal and monetary policies are maintained on their current path."
  - "Real GDP growth of about 4 percent is expected over the medium term, together with continued low inflation rates."
  - "Falling export prices should underlie narrowing external current account surpluses."
  - "The nonmineral fiscal deficit is expected to improve gradually after 2007, if one-off spending in the 2006–07 budgets is not carried over and the “right sizing” program to streamline the government is implemented."
- Downside risks:
  - "The balance of risks is to the downside."
  - Specific risk channels noted:
    - "Higher-than-expected election-related spending could lead to increasing price pressures; the resulting rise in interest rates as monetary policy is tightened could choke off economic growth."
    - "Still weak fiscal accountability, especially for many trust funds, also poses risks of higher or inefficient spending."
    - "A steeper-than-anticipated decline in world export commodity prices or postponement of large mineral projects would heighten the need for fiscal adjustment to allow room for essential development spending."
    - "Inaction or unwinding of previous progress on structural reform would dampen investor confidence."
    - "The further spread of HIV/AIDs—already one of the highest infection rates in the Asia-Pacific region—would have consequences for growth and human development."
- Upside potential:
  - "On the upside, rapid development of gas reserves could improve the longer-term outlook for growth."
- Growth and poverty reduction threshold:
  - "A doubling of the baseline growth rates would be needed to significantly reduce poverty and unemployment."
  - "Stronger annual growth of 7–8 percent is within reach, but would require more effective use of Papua New Guinea’s mineral wealth, including a sustainable medium-term fiscal policy that efficiently delivers needed development expenditure, and decisive efforts on structural reform to encourage greater activity in the nonmineral sector."
  - "The resulting strengthened fiscal position would improve the debt sustainability outlook."

*Source: IMF staff report extract (section 4 and Box 2) reproduced from the provided content unit.*

### 8.      Papua New Guinea is at a moderate risk of debt distress, emphasizing the

### _cr07111 - 8.      Papua New Guinea is at a moderate risk of debt distress, emphasizing the

### Debt risk and sensitivities
- Papua New Guinea is at a moderate risk of debt distress, emphasizing the importance of continued prudent fiscal policy (Appendix I).  
- The staff’s debt sustainability analysis (DSA) using the low-income country framework indicates public sector debt outlook is particularly sensitive to changes in real GDP growth and to the exchange rate.  
- A 10 percent reduction in key export prices reduces government revenue by 0.5 percent of GDP annually.  
- Debt-outlook scenarios presented in the material include:
  - Baseline (4 percent real growth)
  - Reform (7-8 percent real growth)
  - Alternative debt paths shown for Baseline, Lower GDP, and Real depreciation scenarios (Debt to GDP shown in percent).

### Outlook indicators (figures and projections noted in text)
- Commodity Price Movements indexed to 2000=100 for Gold, Oil, Copper, Coffee (2000–2011 shown).  
- GDP Per Capita projections in 2006 Prices include:
  - Baseline (4 percent real growth)
  - Reform (7-8 percent real growth)
- Reserve coverage and competitiveness indicators highlighted:
  - Foreign reserves at 4 months of goods and services imports (not large relative to comparator countries).
  - Competitiveness indicators show either little change or some decline in nonmineral sector competitiveness in recent years.

### Monetary and exchange rate policy
- Staff view current monetary policy stance as appropriate given rising monetary and credit aggregates and high banking system liquidity; the BPNG has absorbed sufficient liquidity to keep inflation within the low single digits.  
- Risks for inflation in 2007 include:
  - Unproductive election-related government spending.
  - Expected upward revisions in controlled prices (likely temporary).
  - Sustained large mineral revenue inflows.
- Policy guidance:
  - Monetary policy should be tightened if signs of inflation pressure emerge.
  - Authorities reaffirm commitment to a floating exchange rate; interventions are generally limited to smoothing fluctuations.
  - Given limited fiscal resources and incomplete fiscal discipline to defend a fixed rate, the exchange rate should be allowed to move flexibly if sustained pressures materialize.

### Fiscal policy: current stance, risks, and medium-term strategy
- 2006 and 2007 budgets aimed for a balanced budget while increasing development spending (especially infrastructure), with most higher spending described as one-off increases aligned with MTDS objectives.  
- Staff concerns and observations:
  - Weak public expenditure management risks leakages and nonpriority spending, potentially creating demand and inflation pressure—especially ahead of mid-2007 elections.
  - The share of domestic-financed development expenditure is increasing sharply, though total level remains stable.
  - The staff urged use of revenue over-performance primarily to pay down debt and to consider covering the large unfunded government liability to the civil-servant superannuation fund (about 10 percent of GDP).
  - The authorities noted costly penalties for early repayment of some external debt and a desire to build a market for government securities, limiting immediate domestic debt paydown.
- Key fiscal numeric points:
  - Unfunded government liability to the civil-servant superannuation fund: about 10 percent of GDP.
  - Estimated 150 trust fund accounts had an aggregate balance of 6.5 percent of GDP at end-2006, including about 3 percent of GDP set aside for future gas project investment.
  - Wage bill remains high, about 8 percent of GDP.
  - Subsidies to public enterprises about 0.7 percent of GDP in the 2006–07 budgets.
  - Existing medium-term strategy targeted budget balance and a decline in the debt-to-GDP ratio to 45 percent by 2009; the medium-term debt-to-GDP target was achieved in 2006.
- Staff recommendations for medium-term fiscal framework:
  - Target gradually improving nonmineral balances over the medium term instead of continuing to target overall budget balance, to better cope with volatility and exhaustibility of mineral revenue.
  - Cautiously spend mineral revenue windfalls on priority infrastructure and social projects to the extent absorptive capacity permits, and use the remainder to reduce debt.
  - A more ambitious debt reduction strategy could lower the NPV debt-to-GDP ratio below the 30 percent threshold that classifies Papua New Guinea at a moderate risk by the end of the medium-term horizon.
- Public expenditure management actions agreed between authorities and staff:
  - Urgently improve monitoring and reporting of budget outcomes, including applying sanctions to encourage compliance, expanding financial controllers and auditors, closing trust accounts, and speeding up ITIS finalization.
  - Strengthen budget execution for infrastructure and key services; authorities expressed interest in technical assistance (possibly through PFTAC).
  - Clarify legal framework for responsibilities across government levels; subject provinces and local governments to basic controls and reporting standards; reform current unsustainable legal commitments for central government financing of provincial and local governments.
  - Revive the public sector reform program (right-sizing) as a priority for the next government (authorities had deferred action until mid-2007).

### Revenue, tax administration, and policy adjustments
- Nonmineral revenue is already high relative to comparators; staff support emphasis on improving tax administration while preserving the revenue base.  
- Internal Revenue Commission pursuing a three-year plan to improve tax administration through better compliance and broadening the tax base.  
- Staff emphasized finalizing the draft Administration Act prepared with Fund technical assistance and recommended a comprehensive review of the overall tax system to ensure consistency with economy-wide priorities and fair treatment of businesses and windfall commodity profits.

### Structural reform and financial sector issues
- Structural reform objective: encourage private sector activity and raise growth in nonmineral sector in line with MTDS and MDGs.
- Financial sector indicators and assessment:
  - Recent rapid expansion of private sector credit is a welcome sign of re-intermediation; private sector credit has regained pre-downturn levels.
  - Distribution of credit increase appears relatively broad-based.
  - Backward-looking indicators of financial sector soundness, such as nonperforming loans and return-on-assets, are favorable.
  - Three of the four major banks in Papua New Guinea are subsidiaries of established foreign banks, suggesting underlying risks to the system are low.
  - Authorities will continue to monitor private sector credit growth for signs of increased concentration or deterioration in credit quality.
- Structural impediments noted:
  - Law and order and governance remain major disincentives to investment.
  - Other structural rigidities include weak and costly basic utilities and transportation and communication infrastructure.
  - Infrastructure and human capital needs remain critical to support higher sustained growth.

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

### 19.      In addition, the authorities and staff agreed on other measures that would

### _cr07111 - 19.      In addition, the authorities and staff agreed on other measures that would

### Financial sector strengthening
- Agreed measures to further strengthen the financial sector:
  - Progress rapidly on implementing MCM recommendations regarding bank supervision.
  - Establish a risk-based internal audit system.
  - Implement recently-enacted AML/CFT legislation.
  - Strengthen internal management procedures.
  - Reinforce supervision of superannuation funds, including passage of legislation now under consideration.
  - Complete implementation of steps needed for the creation of a secondary market for government securities.
- Concerns about expansion of the Rural Development Bank:
  - New draft legislation would allow the Rural Development Bank to expand into microfinance without adequate oversight and accountability.
  - Staff expressed concerns given poor experience with development banks globally and within Papua New Guinea itself.
  - Authorities agreed on the need to adhere to basic financial sector supervision regulations, including the principle that all applications for a banking license, including microfinance operations, must comply with all due diligence and fit and proper criteria.
- Staff recommendations:
  - Follow through with recommendations to expand supervision to non-banking financial institutions.
  - Tighten propriety controls at the central bank.
  - Complete implementation of AML/CFT legislation.
  - Reverse plans to expand the development bank into microfinance without adequate oversight.

### Private sector development
- Diagnosis of constraints:
  - For private nonmineral activity to become the main source of strong and sustainable economic growth and job creation, the investment environment needs considerable strengthening.
  - Persistent constraints: poor and costly transport and communications infrastructure, unreliable basic utilities, weak governance, high crime and weak prosecution, land issues, little access to skilled labor.
  - The budgeted increase in spending on infrastructure could measurably affect growth if efficiently executed.
- Public utilities:
  - Financial position of large public utilities has improved; enterprises are designing plans to improve service delivery.
  - Concerns remain about slow progress on services and continued need for fiscal subsidies.
  - Staff recommended that, subject to the still incomplete appropriate regulatory framework being put in place, parallel actions should be taken such as privatization, opening sectors to competition, or private minority shares to introduce shareholder oversight.
  - Authorities noted they have no plans to advance privatization; current strategy focuses on cost-cutting, rationalization and enhancement of services, and possible use of private-partnership arrangements as a source of expertise and capital.

### Trade, transparency, and statistics
- Trade policy:
  - Papua New Guinea maintains one of the least restrictive trade regimes in the region.
  - In 2006, authorities completed the seven-year tariff reform program launched in 1999 compressing the tariff structure to four rates, with the zero rate applicable on three quarters of commodities.
  - The 2007 budget introduced new exceptions by raising tariffs by 5–25 percent on three imports (canned beans and tuna, and soft drinks) to protect local industry.
  - Staff expressed concerns with the backtracking on tariff reform and urged redressing these slippages as quickly as possible.
  - Authorities explained the increases were temporary pending a comprehensive review of tariff policy.
- Public accounts and audits:
  - Progress by the Auditor General’s office in completing public account audits with greater timeliness is welcomed; improved compliance by budget agencies in providing data noted.
  - Staff suggested broader accessibility of completed audits—now available through 2005—would help strengthen transparency and accountability.
  - Authorities plan to further improve timeliness and expand scope of budget audits to include an assessment of governance issues.
- Statistical shortcomings:
  - Data provision generally adequate for surveillance purposes but shortcomings in quality, coverage, and timeliness continue to hinder effective monitoring of macroeconomic developments.
  - Poor condition of fiscal, national accounts, and balance of payments data add to the lack of transparency and accountability within the public sector.
  - Authorities welcomed recommendations of the recent STA multi-sector mission for strengthening the statistical framework and are developing a plan for implementing the recommendations and rehabilitating the National Statistical Office.
  - Staff urged implementation of the STA mission’s recommendations should begin without delay.

### Staff appraisal: macroeconomic policy and risks
- Economic progress and main challenge:
  - Papua New Guinea has made good progress in achieving macroeconomic stability since 2002.
  - Fiscal consolidation since 2002, supportive monetary policy, and favorable export commodity prices have led to the fourth year of real economic growth and low inflation.
  - Main challenge: maintaining macroeconomic stability in the short term, especially given increased downside risks.
  - Need for an improved investment environment to encourage faster long-term growth to reduce poverty and unemployment and close the performance gap with comparator countries.
- Monetary and exchange rate policy:
  - Current monetary policy stance seeks to maintain low inflation.
  - With upward risks for inflation over the next year, including from increases in government spending, the authorities should be prepared to tighten monetary policy should signs of inflation pressure emerge.
  - The managed float exchange rate policy is appropriate.
  - Given the temporary nature of current large mineral revenue inflows, guarding against loss of nonmineral sector competitiveness and accumulation of reserves are pragmatic responses.
  - Additional flexibility should be shown in the face of sustained upward pressure or should downward pressure materialize.
- Fiscal policy and spending risks:
  - The 2006 supplementary budgets and 2007 budget are appropriately focused on one-off development expenditure given the temporary nature of the current large mineral revenue inflows.
  - Decrease in recurrent spending and debt, and increase in development expenditure are welcomed.
  - Significant concerns: potential size of the spending increase and risks that spending will not be used as appropriated, given weak implementation capacity and history of misappropriation of funds and pre-election spending excesses.
  - Recommended actions:
    - Considerably strengthen enforcement of the monitoring and reporting of budget outcomes.
    - Subject all major spending agencies to basic accountability procedures.
    - Move rapidly to resume implementation of the right-sizing initiative to streamline public spending.
    - Limit wage increases to productivity increases.
    - Pursue greater debt reduction, especially if further windfall revenue materializes, such as covering the large unfunded liability to the civil servant superannuation fund.
    - Preserve the nonmineral revenue base as critical support for long-term fiscal sustainability.
- Structural reforms and infrastructure:
  - Little progress on underlying structural constraints holding back private sector activity and more rapid medium-term growth.
  - Necessary regulatory framework for public enterprise sector should be quickly finalized as a first step to introduce competition.
  - Rapid progress needed to improve transport and communications infrastructure and strengthen governance and law enforcement.
- Financial sector and credit:
  - Recent expansion of credit to the private sector is a welcome sign; overall financial sector appears sound.
  - Authorities urged to expand supervision to non-banking financial institutions, tighten central bank propriety controls, and complete AML/CFT implementation.
  - Plans to expand the development bank into microfinance without adequate oversight are a concern and should be reversed.
- Data and statistical capacity:
  - Although data provision is generally adequate for surveillance purposes, major shortcomings in quality and timeliness continue to affect monitoring of macroeconomic developments.
  - Authorities’ intention to overhaul the main statistical framework is welcomed; implementation of the STA mission’s recommendations should begin without delay.

*Source: IMF staff report excerpt.*

### 33.      The staff recommends that the next Article IV consultation be held on the

### _cr07111 - 33.      The staff recommends that the next Article IV consultation be held on the

### Consultation timing
- The staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

### Millennium Development Goals (1990–2004) — Selected progress indicators
- Goal 1: Poverty and hunger
  - Income share held by lowest 20%: ..5......
  - Poverty headcount, national (% of population): ..38......
  - Prevalence of underweight in children (under five years of age): ....15..13
  - Target: Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day; Halve, between 1990 and 2015, the proportion of people who suffer from hunger.
- Goal 2: Education
  - Primary completion rate, total (% of relevant age group): 51.3 52 52.4 55.2 53.9
  - Persistence to grade 5, total (% of cohort): 69..68 69..
  - Youth literacy rate (% ages 15-24): 69......67
- Goal 3: Gender equality
  - Proportion of seats held by women in national parliament (%): 0..221
  - Ratio of girls to boys in primary and secondary education (%): 80.3..88.9 88.1 87
  - Ratio of young literate females to males (% ages 15-24): 83.9......92.7
  - Share of women employed in the nonagricultural sector (%): 20 26 30 33 35
- Goal 4: Child mortality
  - Immunization, measles (% of children ages 12-23 months): 67 75 59 49 44
  - Infant mortality rate (per 1,000 live births): 74 72..70 68
  - Under 5 mortality rate (per 1,000): 101 98..95 93
- Goal 5: Maternal health
  - Births attended by skilled health staff (% of total): ..53.2..41..
  - Maternal mortality ratio (modeled estimate, per 100,000 live births): ......300..
- Goal 6: HIV/AIDS, malaria, and other diseases
  - Prevalence of HIV, total (% of population aged 15-49): ........2
  - Contraceptive prevalence rate (% of women ages 15-49): ..26......
  - Incidence of tuberculosis (per 100,000 people): 267......233.1
  - Tuberculosis cases detected under DOTS (%): ....7.4819.1
- Goal 7–8: Environment and global partnership
  - Forest area (% of total land area): 70....67 65
  - Access to an improved water source (% of population): 39......39
  - Access to improved sanitation (% of population): 44......44
  - CO2 emissions (metric tons per capita): 0.6 0.5 0.5 0.5..
  - Aid per capita (current US$): 100.4 79.2 71.5 37.5 46.1
  - Fixed line and mobile phone subscribers (per 1,000 people): 7.3 9.3 12.4 13.4 19.1
  - Internet users (per 1,000 people): 00 2.4 9.2 29.5
  - Personal computers (per 1,000 people): ....39.5 55.4 55.4 63.6
- General indicators
  - Fertility rate, total (births per woman): 5.1 4.8 4.6 4.1 3.9
  - GNI per capita, Atlas method (current US$): 830 1,060 810 1,056 550
  - Life expectancy at birth, total (years): 52.3 53.4 53.8 55.2 56
  - Literacy rate, adult total (% of people ages 15 and above): 56.6......57.3
  - Population, total (millions): 4.1 4.7 5.1 5.4 5.8
  - Trade (% of GDP): 89.6 105.6 96.5 132.2 125.3
- Note: Table 1. Papua New Guinea: Millennium Development Goals Progress, 1990 - 2004. Source: World Development Indicators database, September 2006.

### Key macroeconomic and fiscal statistics (selected)
- Nominal GDP (2005): US$4.94 billion
- Population (2005): 5.8 million
- GDP per capita (2005): US$855
- Quota: SDR 131.6 million
- Real GDP growth (percent change, 2002–07): 1/-0.2 2.2 2.7 3.3 3.7 4.3
  - Mineral growth: -15.9 2.8 0.3 5.0 0.2 6.2
  - Nonmineral growth: 2.5 2.1 3.1 3.1 4.1 4.0
- CPI (annual average): 11.8 14.7 2.1 1.7 3.5 4.3
- Central government operations (percent of GDP, 2002–07 estimates/projections)
  - Revenue and grants: 27.8 29.1 34.1 34.2 36.1 32.1
  - Expenditure and net lending: 31.9 30.3 32.4 30.6 29.7 30.1
  - Overall balance, cash basis (including grants): 2/-5.3 -1.8 0.0 4.1 6.4 2.1
  - Domestic financing (net): 6.1 4.0 1.8 -2.7 -5.2 -1.6
  - External financing (net): -0.9 -2.1 -1.8 -1.4 -1.3 -0.5
  - Nonmineral balance: 2/-8.5 -6.4 -6.3 -4.3 -6.5 -7.7
- Central government debt (percent of GDP): 71.7 63.6 60.0 47.3 39.2 39.8
- Money and credit (end-period percentage change): Domestic credit: 30.7 -7.1 0.7 8.6 5.4 3.6; Broad money: 7.3 -4.4 14.8 29.5 33.0 13.0
- Exports, f.o.b. (millions of U.S. dollars): 1,646 2,153 2,554 3,278 4,379 4,455
- Imports, c.i.f. (millions of U.S. dollars): -1,302 -1,435 -1,794 -2,462 -2,895 -3,123
- Current account (including grants) (millions of U.S. dollars): -311 598 819 904 2,114 0
  - (In percent of GDP): -1.0 4.5 2.2 3.8 7.4 2.5
- Net international reserves (end-period; millions of U.S. dollars): 223 399 599 765 1,450 1,575
  - In months of nonmining imports, c.i.f.: 3.0 4.3 5.5 5.2 8.3 8.7
- Public external debt-service-ratio (percent of exports): 4/7.9 7.5 8.7 6.0 3.5 2.5
- Public external debt-to-GDP ratio (percent): 4/54.2 42.9 36.8 25.3 20.7 20.6
- Exchange rates (US$/kina period-average): 0.2573 0.2814 0.3104 0.3223 0.3274 ...
- Nominal GDP (millions of kina): 11,656 12,567 12,652 15,339 17,269 17,633
- Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates and projections.

### Summary of central government operations (2003–07, percent of GDP)
- Revenue and grants: 29.1 34.1 34.2 35.3 36.1 30.3 32.1
  - Revenue: 23.2 27.4 26.2 29.5 30.3 25.3 27.2
  - Tax revenue: 21.3 25.4 24.4 27.4 28.2 23.4 25.4
    - Mineral taxes: 4.0 5.8 7.5 11.4 11.7 7.5 9.0
    - Nonmineral taxes: 17.3 19.6 16.9 16.0 16.5 15.9 16.4
  - Grants: 5.9 6.7 8.0 5.8 5.8 5.0 5.0
- Total expenditure and net lending: 30.3 32.4 30.6 34.7 29.7 30.5 30.1
  - Recurrent expenditure: 21.3 22.4 19.9 19.4 19.4 19.4 19.4
  - Interest: 5.5 2.9 2.2 2.5 2.5 2.7 2.7
  - Development expenditures and net lending: 9.0 10.1 10.7 15.3 10.3 11.0 10.6
- Overall balance (from above the line): -1.2 1.7 3.6 0.6 6.4 -0.2 2.1
- Financing: 1.8 0.0 -4.1 -0.6 -6.4 0.2 -2.1
  - External financing (net): -2.1 -1.8 -1.4 -1.3 -1.3 -0.5 -0.5
  - Domestic financing (net): 4.0 1.8 -2.7 0.7 -5.2 0.7 -1.6
- Memoranda:
  - Nonmineral overall balance (below the line): -6.4 -6.3 -4.3 ... -6.5 -8.6 -7.7
  - Total central govt. gross debt (% of GDP): 63.6 60.0 47.3 39.2 39.2 ... 39.8
  - Nominal GDP (in millions of kina): 12,567 12,652 15,339 17,269 17,269 17,633 17,633

### Banking system and monetary aggregates (selected end-period levels and changes)
- Bank of Papua New Guinea: Net foreign assets: 909 1,322 1,869 2,367 4,395 4,968
  - Foreign assets: 1,377 1,743 2,072 2,368 4,396 4,969
  - Net domestic assets: -239 -653 -998 -1,432 -3,343 -3,799
  - Reserve money: 669 669 871 935 1,052 1,168
- Monetary survey (end-period, millions of kina)
  - Net foreign assets: 1,421 1,621 2,165 2,929 4,665 5,243
  - Broad money: 3,569 3,410 3,915 5,069 6,742 7,619
  - Broad money growth (annual percentage change): 7.3 -4.4 14.8 29.5 33.0 13.0
  - Net domestic credit (annual percentage change): 30.7 -7.1 0.7 8.6 5.4 3.6
  - Private sector credit (annual percentage change): 1.4 -4.1 0.9 23.7 27.9 16.5

### Balance of payments (2002–07) — selected items (millions of U.S. dollars)
- Current account balance: -311 598 819 904 2,114 0
  - Mineral contribution to current account: 473 728 793 1,039 1,523 1,204
  - Nonmineral: -503 -569 -705 -849 -1,103 -1,064
- Trade balance: 344 718 760 816 1,484 1,332
  - Exports (f.o.b.): 1,646 2,153 2,554 3,278 4,379 4,455
    - Mineral exports: 1,228 1,635 1,863 2,467 3,419 3,368
    - Nonmineral exports: 417 518 690 811 961 1,087
  - Imports (c.i.f.): -1,302 -1,435 -1,794 -2,462 -2,895 -3,123
- Overall balance: -101 187 206 161 686 124
- Net international reserves (end-year, millions of U.S. dollars): 223 399 599 765 1,450 1,575
  - In months of nonmineral imports (c.i.f.): 4.5 5.7 6.1 5.2 8.3 8.7
- Public external debt-GDP ratio (in percent): 54.2 42.9 36.8 25.3 20.7 20.6

### Medium-term scenario and projections (2003–11) — highlights
- Real GDP growth projections (change in percent): 2.2 2.7 3.3 3.7 4.3 3.7 4.4 4.7 4.0
  - Mineral and nonmineral components provided for multiple years.
- CPI (period average) projections: 14.7 2.1 1.7 3.5 4.3 4.0 3.5 3.5 3.5
- Savings and investment (percent of GDP): Foreign savings: 4.5 2.2 2.3 3.8 7.4 2.5 1.7 0.9 0.7 0.5
- Central government operations (percent of GDP) — projections:
  - Total revenue and grants: 29.1 34.1 34.2 36.1 32.1 32.2 30.9 28.8 28.2
  - Total expenditure: 30.3 32.4 30.6 34.7 29.7 29.8 29.6 28.2 27.8
  - Primary balance 2/: 3.6 2.9 6.3 9.0 4.8 4.9 3.7 3.0 2.5
  - Nonmineral balance 2/: -6.4 -6.3 -4.3 -6.5 -7.7 -6.4 -6.3 -5.9 -5.6
  - Overall balance 2/: -1.8 0.0 4.1 6.4 2.1 2.4 1.3 0.7 0.3
- Gross public debt (in percent of GDP) projections: 67.4 62.0 47.5 39.3 39.9 39.8 38.1 35.0 34.3
- Balance of payments projections (millions of U.S. dollars):
  - Exports, f.o.b.: 2,153 2,554 3,278 4,379 4,455 4,554 4,828 5,031 5,287
  - Current account (in percent of GDP): 4.5 2.2 3.8 7.4 2.5 1.7 0.9 0.7 0.5
  - Net official reserves (millions of U.S. dollars) projections: 399 599 765 1,450 1,575 1,620 1,650 1,715 1,775
- Assumed commodity prices (selected): Gold (US$/oz): 355 398 403 548 575 612 643 675 693; Copper (US$/ton): 1,704 2,753 3,563 6,523 5,814 4,361 3,392 2,907 2,713; Oil (US$/barrel): 30 41 55 67 56 59 60 60 60

### Appendix I — Public and External Debt Sustainability (DSA) — main assumptions
- Real GDP growth is projected to grow at about 4 percent in 2006-2011 as agricultural productivity improves, several mining projects come on stream, and continued gradual progress is made on structural reform.
- Monetary policy continues to be geared toward maintaining low inflation and achieving a sound external position.
- Fiscal policy remains unchanged and in line with the government’s medium-term fiscal strategy; surpluses are expected to decline due to falling mineral revenues and nonmineral balances improve steadily after 2007.
- Papua New Guinea would have access to external concessional finance and continue to follow a prudent debt strategy.
- Prices of key commodities are in line with January 2007 WEO assumptions.
- Structural reforms under the authorities’ Medium-term Development Strategy are implemented at a gradual pace.
- Given uncertainty surrounding the PNG-Queensland gas pipeline project, the DSA assumes no government borrowing to finance an equity participation.

### Public sector debt sustainability — key findings and projections
- Historical change: Public sector debt ratio declined from 67.4 percent of GDP at end-2003 to an estimated 39.3 percent of GDP at end-2006.
- Composition of external debt: Of total public debt, approximately 50 percent is external; of external loans, 47 percent are in US dollars, 36 percent in Japanese yen, and 14 percent in Euros. Multilateral debt accounts for about two-thirds (AsDB and World Bank). Japan is the main bilateral creditor.
- Policy under Medium-Term Debt Strategy: Foreign-currency loans are considered only if highly concessionary (grant element of 35 percent).
- Baseline projections:
  - Public sector debt ratio projected to decline to 34.3 percent of GDP by 2011 and 13.6 percent by 2026.
  - NPV of public debt: 48.2 percent of GDP in 2005 → 40.1 percent of GDP in 2006 → 35.3 percent of GDP by 2011 → 13.5 percent of GDP by 2026.
  - NPV of public debt service-to-revenue ratio falls significantly in 2006 due to high windfall revenue, expected to rise somewhat in 2007 as mineral revenue moderates, then revert to relatively stable (13 percent) before declining sharply in the longer term.
- Risk rating: Papua New Guinea faces a moderate risk of debt distress under the IMF-WB DSA framework for LICs.
  - 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.
  - Other indicators are well below thresholds over the entire projected period.
  - One bound test for lower real GDP growth significantly breaches thresholds.

### External debt sustainability — key findings and stress tests
- Decline in external debt: Total external debt declined from 65.3 percent of GDP in 2003 to 32.9 percent in 2006.
- External debt as percent of exports declined from 107 percent in 2003 to 42 percent in 2006.
- Baseline assessment: External public debt dynamics are sustainable; the three debt indicators (NPV of public external debt to GDP, NPV to exports, debt service to exports) do not breach key thresholds.
- Private external debt: Estimated at 12 percent of GDP at end-2006; expected to decline as large mineral projects reach completion.
- Vulnerabilities and stress test results:
  - Decline in real GDP growth to one standard deviation below historical average would raise the NPV of public debt-to-GDP ratio by about 20 percentage points of GDP in the long term.
  - A one-time 30 percent real exchange rate depreciation in 2007 would raise the NPV of debt-to-GDP ratio by about 10 percentage points.
  - For external debt: a decline in export value growth by one standard deviation below historical average would raise the NPV of public external debt-to-GDP by 25 percentage points during 2006–09 and only fall below the threshold level in 2019.
  - A one-time 30 percent nominal depreciation in 2007 would raise the NPV of debt-to-GDP by 6 percentage points in the first three years before falling over the longer term.
  - The export shock to the NPV of debt-to-exports would raise the level closer to (though still under) the distress threshold for the first ten years before falling over the long term.
- Mitigating factor: Papua New Guinea has an excellent external repayment record, having never defaulted.

### Conclusions and policy recommendations
- Continued prudent debt management is required to mitigate risks to public debt sustainability.
- The outlook is sensitive to changes in real GDP growth and exchange rate; debt dynamics are vulnerable to potential shocks and policy slippages.
- Recommendation: Ensure that any external borrowing is obtained on concessional terms, in line with the Medium-Term Debt Strategy.
- Maintain disciplined fiscal policy and implementation of structural reforms to support sustainable debt dynamics.

*Source: IMF staff report and Appendix I — Papua New Guinea: Public and External Debt Sustainability (extracted tables and text).*

### Appendix I. Figure 1. Papua New Guinea: Indicators of Public Debt Under Alternative Scenarios, 2006-2026 1/

### Appendix I. Figure 1. Papua New Guinea: Indicators of Public Debt Under Alternative Scenarios, 2006-2026 1/

### Indicators of public debt under baseline and most extreme stress test
- Charts presented:
  - NPV of debt-to-GDP ratio: series for 2006–2026 showing "Baseline" and "Most extreme stress test".
  - NPV of Debt-to-Revenue Ratio 2/: series for 2006–2026 showing "Baseline" and "Most extreme stress test".
  - Debt Service-to-Revenue Ratio 2/: series for 2006–2026 showing "Baseline", "Most extreme stress test", and "Poor performer threshold".
- Note 1/: "Most extreme stress test is test that yields highest ratio in 2016."
- Note 2/: "Revenue including grants."
- "Poor performer threshold" indicated on Debt Service-to-Revenue Ratio chart.

### Appendix I. Figure 2. Papua New Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006-2026 (In percent)
- Sources: Papua New Guinea authorities; and Fund staff projections and simulations.
- Note 1/: "Poor performer threshold for NPV of debt-to-exports ratio is 100 percent and for debt service-to-exports ratio is 15 percent."
- Charts presented:
  - NPV of debt-to-GDP ratio: series for 2006–2026 showing "Baseline" and "Most extreme stress test".
  - NPV of debt-to-exports ratio 1/: series for 2006–2026 showing "Baseline" and "Most extreme stress test".
  - Debt service-to-exports ratio 1/: series for 2006–2026 showing "Baseline", "Most extreme stress test", and "Poor performer threshold".

### Public sector debt—baseline projections and identified drivers (selected rows, percent of GDP)
- Public sector debt 1/: 67.4; 62.0; 47.5; 39.3; 39.9; 39.8; 38.1; 35.0; 34.3; 25.2; 13.6
- o/w foreign-currency denominated: 42.9; 36.8; 25.3; 20.7; 20.6; 19.9; 18.8; 16.8; 16.1; 11.3; 8.2
- Change in public sector debt: -9.2; -5.4; -14.5; -8.1; 0.6; -0.1; -1.7; -3.2; -0.6; -1.6; -0.8
- Identified debt-creating flows: -12.8; -3.3; -2.6; -2.0; 7.1; 5.3; 3.7; 1.2; 2.5; -0.8; -0.4
- Primary deficit: -3.7; -3.0; -6.3; -2.0; 2.4; -9.0; -4.8; -4.9; -3.7; -3.0; -2.5
- Revenue and grants: 29.1; 34.1; 34.2; 36.1; 32.1; 32.2; 30.9; 28.8; 28.2; 27.8; 27.8
  - of which: grants: 5.9; 6.7; 8.0; 5.8; 5.0; 5.1; 5.0; 4.6; 4.4; 3.4; 2.1
- Primary (noninterest) expenditure: 25.4; 31.2; 27.8; 27.1; 27.3; 27.3; 27.2; 25.8; 25.6; 26.2; 26.9
- Automatic debt dynamics: -8.8; -0.2; -8.9; -3.3; 2.8; 2.1; 0.6; -1.1; 0.8; 0.0; 0.0
- Contribution from interest rate/growth differential: 1.8; 0.6; -4.2; -1.3; 1.1; 1.2; 0.0; -0.6; 0.3; 0.0; 0.0
  - of which: contribution from average real interest rate: 3.4; 2.4; -2.2; 0.4; 2.7; 2.6; 1.7; 1.1; 1.6; 0.9; 0.5
  - of which: contribution from real GDP growth: -1.6; -1.8; -2.0; -1.7; -1.6; -1.4; -1.7; -1.7; -1.3; -0.9; -0.5
- Contribution from real exchange rate depreciation: -10.6; -0.8; -4.8; -2.0; 1.7; 1.0; 0.6; -0.5; 0.5; ...
- Other identified debt-creating flows: -; 0.3; -0.2; 12.7; 10.3; 9.1; 8.1; 6.7; 5.3; 4.2; 0.8; 0.4
  - Privatization receipts (negative): -0.3; -0.2; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Recognition of implicit or contingent liabilities: 0.0; 0.0; 12.7; 10.3; 9.1; 8.1; 6.7; 5.3; 4.2; 0.8; 0.4
  - Debt relief (HIPC and other): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
  - Other (specify, e.g. bank recapitalization): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- Residual, including asset changes: 3.7; -2.0; -11.9; -6.2; -6.4; -5.5; -5.3; -4.4; -3.2; -0.8; -0.4
- NPV of public sector debt: 24.5; 25.2; 48.2; 40.1; 40.8; 40.8; 39.2; 35.9; 35.3; 26.6; 13.5
  - o/w foreign-currency denominated: 0.0; 0.0; 26.1; 21.5; 21.5; 20.9; 19.9; 17.8; 17.2; 12.8; 8.1
  - o/w external: ...; ...; 26.1; 21.5; 21.5; 20.9; 19.9; 17.8; 17.2; 12.8; 8.1
- NPV of contingent liabilities (not included in public sector debt): 0.0; 0.0; 9.7; 10.0; 10.0; 10.2; 9.8; 9.2; 8.9; 6.3; 4.1
- Gross financing need 2/: 23.5; 24.5; 10.9; 4.6; 3.0; -0.6; 0.6; 1.5; 1.9; 1.6; 0.9
- NPV of public sector debt-to-revenue ratio (in percent) 3/: 84.2; 73.7; 141.0; 111.0; 127.0; 126.6; 126.8; 124.6; 125.5; 95.7; 48.4
  - o/w external: ...; ...; 76.2; 59.5; 67.0; 64.9; 64.3; 61.8; 61.0; 45.9; 29.0
- Debt service-to-revenue ratio (in percent) 3/ 4/: 34.6; 18.1; 13.2; 13.2; 12.8; 12.8; 12.9; 13.3; 12.8; 9.4; 5.1
- Primary deficit that stabilizes the debt-to-GDP ratio: 5.4; 2.4; 8.2; -0.8; -5.4; -4.8; -2.0; 0.2; -1.9; 0.0; 0.0

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent) (series entries): 2.2; 2.7; 3.3; 1.2; 3.7; 3.7; 4.3; 3.7; 4.4; 4.7; 4.0; 4.1; 3.5; 3.5; 3.5
- Average nominal interest rate on forex debt (in percent) (series entries): 2.7; 2.6; 2.6; 3.6; 0.8; 2.9; 3.3; 3.4; 3.5; 3.6; 3.4; 3.4; 3.0; 1.6; 2.7
- Average real interest rate on domestic currency debt (in percent) (series entries): 13.9; 10.0; -9.0; 3.2; 6.6; 0.7; 13.5; 12.4; 7.5; 4.7; 8.1; 7.8; 5.7; 9.4; 6.5
- Real exchange rate depreciation (in percent, + indicates depreciation): -19.8; -1.8; -13.4; 3.3; 13.6; -8.0; ...; ...; ...; ...; ...; ...; ...; ...; ...
- Inflation rate (GDP deflator, in percent): 5.5; -2.0; 17.3; 8.4; 5.7; 8.6; -2.1; -2.7; 1.6; 4.9; 1.5; 2.0; 3.5; 3.5; 3.5
- Growth of real primary spending (deflated by GDP deflator, in percent): -11.1; 26.2; -7.7; 3.8; 15.1; 1.1; 5.1; 3.6; 4.0; -0.5; 3.0; 2.7; 3.9; 3.7; 3.8
- Grant element of new external borrowing (in percent): ...; ...; ...; ...; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; ...

Sources and notes:
- Sources: Papua New Guinea authorities; and Fund staff estimates and projections.
- 1/ Includes central government, central bank external debt, and statutory authorities.
- 2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.
- 3/ Revenues including grants.
- 4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.
- 5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

### Appendix I. Table 1. Public Sector Debt Sustainability Framework, Baseline Scenario, 2003-2026 — Scenarios and bound tests (selected entries)
- Baseline (row of figures): 40 41 41 39 36 35 27 13  (layout as in source)
- A. Alternative scenarios:
  - A1. Real GDP growth and primary balance are at historical averages: 40 45 49 51 50 51 47 34
  - A2. Primary balance is unchanged from 2006: 40 43 73 32 61 18 11 -29 -106
  - A3. Permanently lower GDP growth 1/: 40 41 42 41 39 40 39 57
- B. Bound tests:
  - B1. Real GDP growth is at historical average minus one standard deviations in 2007-2008: 40 45 52 53 52 55 59 72
  - B2. Primary balance is at historical average minus one standard deviations in 2007-2008: 40 46 51 49 45 45 36 22
  - B3. Combination of B1-B2 using one half standard deviation shocks: 40 47 53 51 47 36 19
  - B4. One-time 30 percent real depreciation in 2007: 40 51 52 50 46 45 36 20
  - B5. 10 percent of GDP increase in other debt-creating flows in 2007: 40 50 50 49 45 45 35 21

- Baseline (second block of figures): 111 127 127 127 125 126 96 48
- A. Alternative scenarios (second block):
  - A1. Real GDP growth and primary balance are at historical averages: 111 139 151 162 169 178 164 116
  - A2. Primary balance is unchanged from 2006: 11 11 15 10 28 56 34 0 -104 -383
  - A3. Permanently lower GDP growth 1/: 111 128 130 133 135 140 139 203
- B. Bound tests (second block):
  - B1. Real GDP growth at historical average minus one standard deviation in 2007-2008: 111 140 157 169 178 191 210 258
  - B2. Primary balance at historical average minus one standard deviation in 2007-2008: 111 142 158 159 158 160 129 278
  - B3. Combination of B1-B2 using one half standard deviation shocks: 111 145 163 164 161 163 127 69
  - B4. One-time 30 percent real depreciation in 2007: 111 160 160 162 160 162 128 71
  - B5. 10 percent of GDP increase in other debt-creating flows in 2007: 111 156 156 158 156 158 127 77

- Baseline (third block): 13 13 13 13 13 9 5
- A. Alternative scenarios (third block):
  - A1. Real GDP growth and primary balance are at historical averages: 13 13 18 22 24 23 19 15
  - A2. Primary balance is unchanged from 2006: 13 13 6 2 -3 -8 -32 -77
  - A3. Permanently lower GDP growth 1/: 13 13 13 14 15 16 18 35
- B. Bound tests (third block):
  - B1. Real GDP growth at historical average minus one standard deviation in 2007-2008: 13 14 17 22 26 27 31 44
  - B2. Primary balance at historical average minus one standard deviation in 2007-2008: 13 13 21 27 22 21 19 15 11
  - B3. Combination of B1-B2 using one half standard deviation shocks: 13 13 21 26 22 21 18 14 9
  - B4. One-time 30 percent real depreciation in 2007: 13 13 14 15 15 15 11 7
  - B5. 10 percent of GDP increase in other debt-creating flows in 2007: 13 13 29 23 20 17 15 11

- Note 1/: "Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period)."
- Note 2/: "Revenues are defined inclusive of grants."

### Appendix I. Table 2. Sensitivity Analysis for Key Indicators of Public Debt 2006-2026 (selected)
- Historical estimates and projections for external debt (nominal) 1/: 65.3; 55.0; 40.5; 32.9; 30.8; 29.3; 25.7; 22.2; 19.8; 26.8; 14.8; 11.5
  - o/w public and publicly guaranteed (PPG): 45.7; 38.0; 25.4; 20.9; 20.2; 19.9; 18.6; 16.8; 15.9; 18.7; 11.2; 8.1
- Change in external debt: -11.5; -10.4; -14.5; -7.6; -2.1; -1.4; -3.6; -3.6; -2.4; -0.8; -0.1
- Identified net debt-creating flows: -18.9; -9.4; -16.5; -11.0; -5.7; -4.8; -4.1; -3.1; -2.6; 0.6; 0.7
- Non-interest current account deficit: -7.1; -4.0; -5.2; -5.5; 4.0; -10.0; -5.0; -4.3; -3.4; -3.0; -2.6; -4.7; 0.5; 0.7; 0.3
- Deficit in balance of goods and services: -2.0; 1.6; 6.9; -2.9; 1.8; 3.9; 3.8; 4.6; 5.3; 8.6; 5.9
- Net current transfers (negative = inflow): -6.6; -4.6; -8.8; -5.5; 1.6; -6.2; -5.4; -5.7; -5.6; -5.1; -4.9; -3.8; -2.2; -3.3
- Other current account flows (negative = net inflow): 1.5; -0.9; -3.3; -0.9; -1.4; -2.4; -1.6; -2.5; -3.0; -4.3; -3.0
- Net FDI (negative = inflow): -2.7; -0.7; -1.4; -2.8; 2.5; -2.3; -1.9; -2.0; -1.9; -1.3; -1.3; -1.8; -1.0; -0.6; -0.9
- Endogenous debt dynamics 2/: -9.0; -4.8; -10.0; 1.3; 1.2; 1.5; 1.2; 1.2; 1.3; 1.3; 1.1; 0.6
  - Contribution from nominal interest rate: 2.7; 1.7; 1.3; 2.6; 2.6; 2.6; 2.5; 2.3; 2.2; 1.6; 1.0
  - Contribution from real GDP growth: -1.4; -1.6; -1.5; -1.3; -1.4; -1.1; -1.2; -1.1; -0.8; -0.5; -0.4
  - Contribution from price and exchange rate changes: -10.3; -4.9; -9.8
- Residual (3-4) 3/: 7.4; -1.0; 2.1; 3.4; 3.6; 3.3; 0.5; -0.5; 0.2; 1.8; -1.4; -0.8
  - o/w exceptional financing: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- NPV of external debt 4/: ...; ...; 41.2; 33.6; 31.6; 30.3; 26.7; 23.1; 20.8; 16.3; 11.3
  - In percent of exports: ...; ...; 58.1; 41.1; 38.1; 35.3; 30.9; 27.8; 25.3; 23.4; 22.6
- NPV of PPG external debt: ...; ...; 26.1; 21.6; 21.1; 20.9; 19.6; 17.8; 16.9; 19.7; 12.6; 8.0
  - In percent of exports: ...; ...; 36.8; 26.4; 25.4; 24.3; 22.6; 21.4; 20.6; 18.2; 15.9
- Debt service-to-exports ratio (in percent): 16.2; 12.7; 9.9; 8.3; 7.0; 7.1; 6.7; 6.5; 6.3; 5.7; 4.3
- PPG debt service-to-exports ratio (in percent): 0.8; 6.2; 4.9; 3.5; 2.7; 2.9; 1.9; 2.2; 2.0; 2.5; 2.5; -0.5
- Total gross financing need (billions of U.S. dollars): 0.0; 0.2; 0.0; -0.3; -0.1; 0.0; 0.0; 0.1; 0.1; 0.3; 0.3
- Non-interest current account deficit that stabilizes debt ratio: 4.3; 6.4; 9.3; -2.4; -2.9; -2.8; 0.2; 0.6; -0.2; 1.4; 0.8

### Key macroeconomic assumptions (external DSA, selected)
- Real GDP growth (in percent) (series entries): 2.2; 2.7; 3.3; 1.2; 3.7; 3.7; 4.3; 3.7; 4.4; 4.7; 4.0; 4.1; 3.5; 3.5; 3.5
- GDP deflator in US dollar terms (change in percent) (series entries): 15.4; 8.1; 21.8; 0.4; 14.1; 10.3; -3.2; -4.7; 0.3; 3.5; 0.2; 1.1; 1.9; 1.9; 1.9
- Effective interest rate (percent) 5/: 4.1; 2.9; 3.0; 4.2; 0.7; 7.3; 7.9; 8.4; 8.8; 9.7; 10.1; 8.7; 10.9; 8.7; 10.5
- Growth of exports of G&S (US dollar terms, in percent): 31.8; 15.8; 27.3; 3.1; 18.1; 31.8; 2.3; 2.3; 5.6; 4.1; 2.8; 8.1; 2.1; 1.9; 2.1
- Growth of imports of G&S (US dollar terms, in percent): 13.6; 21.9; 36.6; 7.3; 17.5; 15.9; 8.3; 4.7; 5.5; 5.3; 3.6; 7.2; 2.5; 2.1; 2.5
- Grant element of new public sector borrowing (in percent): ...; ...; ...; ...; ...; 35.3; 39.7; 37.9; 36.8; 39.0; 33.1; 37.0; 32.5; 32.6; 32.6
- Memorandum item: Nominal GDP (billions of US dollars): 3.5; 3.9; 4.9; 5.7; 5.7; 5.6; 5.9; 6.4; 6.7; 8.7; 14.9

Notes and sources for Table 2:
- Sources: Papua New Guinea authorities; and Fund staff estimates and projections.
- 1/ Includes both public and private sector external debt.
- 2/ Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate; and r = growth rate of GDP deflator in U.S. dollar terms.
- 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.
- 4/ Assumes that NPV of private sector debt is equivalent to its face value.
- 5/ Current-year interest payments devided by previous period debt stock.
- 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

### Appendix I. Table 3. External Debt Sustainability Framework, Baseline Scenario, 2003-2026 (selected scenario results)
- Baseline series (first block): 22 21 21 20 18 17 13 8
- A. Alternative Scenarios (first block):
  - A1. Key variables at their historical averages in 2007-26 1/: 22 20 17 14 11 7 -20 -73
  - A2. New public sector loans on less favorable terms in 2007-26 2/: 22 21 21 20 19 18 15 12
- B. Bound Tests (first block):
  - B1. Real GDP growth at historical average minus one standard deviation in 2007-08: 22 23 24 22 20 19 14 9
  - B2. Export value growth at historical average minus one standard deviation in 2007-08 3/: 22 31 49 47 44 43 37 17
  - B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-08: 22 24 26 24 22 21 16 10
  - B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08: 22 23 26 24 22 21 17 9
  - B5. Combination of B1-B4 using one-half standard deviation shocks: 22 29 42 41 38 37 30 15
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/: 22 31 30 28 26 25 18 12

- Baseline series (second block): 26 25 24 23 21 21 18 16
- A. Alternative Scenarios (second block):
  - A1. Key variables at their historical averages in 2007-26 1/: 26 24 20 17 14 13 -28 -146
  - A2. New public sector loans on less favorable terms in 2007-26 2/: 26 26 25 24 23 22 22 23
- B. Bound Tests (second block):
  - B1. Real GDP growth at historical average minus one standard deviation in 2007-08: 26 26 25 24 23 21 18 16
  - B2. Export value growth at historical average minus one standard deviation in 2007-08 3/: 26 44 82 79 77 76 77 48
  - B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-08: 26 25 24 23 21 21 18 16
  - B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08: 26 28 30 28 27 26 24 19
  - B5. Combination of B1-B4 using one-half standard deviation shocks: 26 35 50 48 47 46 45 30
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/: 26 25 24 23 21 21 18 16

- Baseline series (third block): 43 32 22 2 -1
- A. Alternative Scenarios (third block):
  - A1. Key variables at their historical averages in 2007-26 1/: 42 22 22 2 1 -8
  - A2. New public sector loans on less favorable terms in 2007-26 2/: 42 33 22 2 2
- B. Bound Tests (third block):
  - B1. Real GDP growth at historical average minus one standard deviation in 2007-08: 42 33 22 2 2 1
  - B2. Export value growth at historical average minus one standard deviation in 2007-08 3/: 43 45 55 5 6
  - B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-08: 42 33 22 2 1
  - B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08: 42 33 32 2 2
  - B5. Combination of B1-B4 using one-half standard deviation shocks: 43 34 33 3 3
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/: 42 33 22 2 1

- Memorandum item: "Grant element assumed on residual financing (i.e., financing required above baseline) 6/": 33 33 33 33 33 33 33 33
- Notes:
  - 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 creating flows."
  - 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."
  - 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 (i.e. an offsetting adjustment in import levels)."
  - 4/ "Includes official and private transfers and FDI."
  - 5/ "Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent."
  - 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."

*Sources: Papua New Guinea authorities; and Fund staff projections and simulations.*

### Appendix I. Table 4. Papua New Guinea: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed Externa

### _cr07111 - Appendix I. Table 4. Papua New Guinea: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External

### Debt indicators and projections
- Public external debt-to-GDP ratio (end-period, in percent): 54.2 (2002), 42.9 (2003), 36.8 (2004), 25.3 (2005), 20.7 (2006).
- Public external debt-service ratio (percent of GNFS): 7.9 (2002), 7.5 (2003), 8.7 (2004), 6.0 (2005), 3.5 (2006).
- Projection context: NPV of debt-to-GDP ratio and NPV of debt-to-exports ratio are reported in the Appendix I table header (2006–26 horizon) for sensitivity analyses (table title preserved).

### Recent macroeconomic performance and near-term outlook
- Real GDP growth (percent change): -0.2 (2002), 2.2 (2003), 2.7 (2004), 3.3 (2005), 3.7 (2006).
  - Mineral growth: -15.9 (2002), 2.8 (2003), 0.3 (2004), 5.0 (2005), 0.2 (2006).
  - Nonmineral growth: 2.5 (2002), 2.1 (2003), 3.1 (2004), 3.1 (2005), 4.1 (2006).
- CPI (annual average): 11.8 (2002), 14.7 (2003), 2.1 (2004), 1.7 (2005), 3.5 (2006).
- Real GDP growth outlook noted in text: growth rising to over 4 percent in 2007 and "Real GDP growth of about 4 percent is expected over the medium term."

### Fiscal sector — levels and composition
- Central government revenue and grants (percent of GDP): 27.8 (2002), 29.1 (2003), 34.1 (2004), 34.2 (2005), 36.1 (2006).
- Central government expenditure and net lending (percent of GDP): 31.9 (2002), 30.3 (2003), 32.4 (2004), 30.6 (2005), 29.7 (2006).
- Overall balance, cash basis (including grants) (percent of GDP): -5.3 (2002), -1.8 (2003), 0.0 (2004), 4.1 (2005), 6.4 (2006).
  - Domestic financing (net) (percent of GDP): 6.1 (2002), 4.0 (2003), 1.8 (2004), -2.7 (2005), -5.2 (2006).
    - Of which: Banking system: 6.3 (2002), -0.9 (2003), 0.3 (2004), -1.2 (2005), -2.4 (2006).
  - External financing (net) (percent of GDP): -0.9 (2002), -2.1 (2003), -1.8 (2004), -1.4 (2005), -1.3 (2006).
- Fiscal developments noted in text:
  - Repayment of 0.5 percent of GDP of external debt in 2006.
  - Public sector debt-to-GDP ratio projected at 40 percent in 2007 (textual projection based on real GDP growth, kina appreciation, low interest rates).

### External sector and reserves
- Exports, f.o.b. (millions of U.S. dollars): 1,646 (2002), 2,153 (2003), 2,554 (2004), 3,278 (2005), 4.379 (2006).
- Imports, c.i.f. (millions of U.S. dollars): -1,302 (2002), -1,435 (2003), -1,794 (2004), -2,462 (2005), -2,895 (2006).
- Current account (including grants) (millions of U.S. dollars): -31 (2002), 159 (2003), 88 (2004), 190 (2005), 421 (2006).
  - Current account (percent of GDP): -1.0 (2002), 4.5 (2003), 2.2 (2004), 3.8 (2005), 7.4 (2006).
- Overall balance (millions of U.S. dollars): -101 (2002), 187 (2003), 206 (2004), 161 (2005), 686 (2006).
- Net international reserves (end-period, in millions of U.S. dollars): 223 (2002), 399 (2003), 599 (2004), 765 (2005), 1,450 (2006).
  - Net international reserves (in months of nonmining imports, c.i.f.): 3.0 (2002), 4.3 (2003), 5.5 (2004), 5.2 (2005), 8.3 (2006).
- Gross international reserves (end-period, in millions of U.S. dollars): 339 (2002), 523 (2003), 663 (2004), 765 (2005), 1,451 (2006).
  - Gross international reserves (in months of nonmining imports, c.i.f.): 4.5 (2002), 5.7 (2003), 6.1 (2004), 5.2 (2005), 8.3 (2006).
- Official external reserves expected to increase to about $1.6 billion (4 months of goods and services imports) (textual projection).

### Money, credit, and exchange rates
- Domestic credit (end-period percentage change): 30.7 (2002), -7.1 (2003), 1.5 (2004), 8.6 (2005), 5.4 (2006).
  - Net credit to government: 114.4 (2002), -8.3 (2003), 3.2 (2004), -13.9 (2005), -37.3 (2006).
  - Credit to the private sector: 1.4 (2002), -4.1 (2003), 0.9 (2004), 23.7 (2005), 27.9 (2006).
- Broad money (end-period percentage change): 7.3 (2002), -4.4 (2003), 14.8 (2004), 29.5 (2005), 33.0 (2006).
- Interest rate (182-day T-bills, period average): 10.9 (2002), 18.7 (2003), 3.1 (2004), 3.8 (2005), 3.4 (2006).
- Exchange rates:
  - US$/kina (period average): 0.2573 (2002), 0.2814 (2003), 0.3104 (2004), 0.3223 (2005), 0.3274 (2006).
  - US$/kina (end-period): 0.2488 (2002), 0.3000 (2003), 0.3200 (2004), 0.3230 (2005), 0.3300 (2006).

### Key risks and policy recommendations (as stated)
- Risks highlighted:
  - Downside balance of risks: higher-than-expected election-related spending, weak fiscal accountability (especially trust funds), steeper-than-anticipated decline in world export commodity prices, postponement of large mineral projects, inaction on structural reforms, spread of HIV/AIDS.
  - Upside possibility: rapid development of gas reserves could improve longer-term growth.
- Policy recommendations and priorities:
  - Maintain prudent macroeconomic policies (fiscal and monetary).
  - Step up structural reforms to accelerate diversification, boost private investment and growth, and advance Millennium Development Goals.
  - Central bank focus on price stability and readiness to tighten monetary policy if inflation pressures emerge.
  - Monitor inflationary pressures from increased liquidity; consider a more flexible exchange rate if sustained revenue inflows occur.
  - Strengthen public expenditure management, subject major spending agencies to basic accountability procedures, close unneeded trust accounts, resume "right-sizing" to streamline government spending.
  - Preserve non-mineral revenue base and contain the non-mineral fiscal deficit; improve tax administration.
  - Continue cautious spending of mineral revenue windfalls for priority infrastructure and social-welfare-enhancing projects as absorptive capacity permits; use remainder to reduce debt.
  - Strengthen financial supervision (including non-banks) and implement legislation against money laundering and terrorism financing.
  - Improve quality and timeliness of macroeconomic statistics.

### Select fiscal and external outcomes emphasized in narrative
- 2006: overall fiscal surplus for the second successive year; limited implementation of 2006 supplementary budgets with remainder deposited in trust fund accounts.
- 2006: repayment of 0.5 percent of GDP of external debt.
- 2007 projection: public sector debt-to-GDP ratio of 40 percent (textual projection).
- Growth thresholds for poverty reduction: stronger annual growth of 7-8 percent needed to significantly reduce poverty and unemployment; doubling of baseline growth rates would be required.

*Source: _cr07111 - Appendix I. Table 4. Papua New Guinea: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006-26.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07111.pdf_