## _cr0898 - Executive Summary ## Source details **Canonical URL:** [_cr0898 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0898.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0898.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0898.pdf.json) --- ### Background and recent performance - Macroeconomic performance was positive in 2007 with strong growth and low inflation, reflecting reasonably prudent policies and high world prices for key mineral exports. - The country remains poor with significant underlying vulnerabilities. - Temporarily large mineral revenue inflows have intensified spending pressures and the 2008 budget includes large expenditure increases. - Structural reform agenda to improve the investment climate has seen little progress; growth performance gap relative to peers continues to grow. - Political environment stabilized: Prime Minister Somare returned for an unprecedented second-consecutive term following the mid-2007 parliamentary elections. - The World Bank has recently re-engaged with new project lending after several years of inactivity. ### Key near-term economic setting and vulnerabilities - Buoyant growth of over 6 percent is estimated for 2007, based on robust mineral and nonmineral growth. - Inflation has remained in the low single digits; annual average CPI inflation is estimated at under 2 percent in 2007. - International reserves are at a record high; official reserves boosted to over $2 billion at end-2007, equivalent to about 5 months of goods and services imports. - Urban unemployment is estimated at around 40 percent. - Economy exposed to commodity price shocks; mineral production expected to decline over the medium to longer term. - Investment environment constraints include weak infrastructure and governance, high crime, and low skills. ### Mining-sector outlook (highlights) - Mining, including petroleum, is the largest sector and dominates exports but is enclave in nature and its role is declining over the medium term. - Current high world prices brought fiscal revenue to all time highs, emphasizing vulnerability to shocks. - Over the medium/long term, oil production expected to fall. - Projections indicate mineral exports, mineral sector share of GDP, and mineral revenue as a share of total revenue will decline over time. ### Nonmineral-sector competitiveness (highlights) - Real effective exchange rate (REER) has remained largely stable and in line with competitors since 2004. - Export market share increased on a value basis, largely reflecting higher export prices; export volumes have shown little or no improvement. - Export market share on a volume basis has declined over the past ten years. - Nonmineral sector competitiveness constrained by: - weak and costly basic utilities; - poor transportation, communication, and electric power infrastructure; - low skills and literacy; - high crime; - weak governance. - Agricultural exports (largest share of nonmineral exports) were hit by bad weather in 2005–06. ### Policy recommendations — fiscal, monetary, exchange rate, and structural - Fiscal policy and public expenditure: - Manage budget expenditure carefully to contain inflationary pressures and meet critical development needs. - Shift spending toward investment and other priority areas that will aid economic growth. - Improve public financial management. - Further reduce debt as a form of saving the temporarily large mineral revenue inflows. - Contain actual (cash) expenditure to more sustainable and stable levels; ensure windfall mineral revenue is used for well-designed MTDS-prioritized development spending and debt reduction. - Monetary policy: - Monetary stance remains appropriate for now; BPNG successfully kept inflation under control. - Authorities should stand ready to tighten if looser fiscal policy stokes inflationary pressures. - BPNG sterilized temporary foreign exchange inflows through open market operations; net costs of sterilized intervention have been negative. - Exchange rate policy: - Current exchange rate level is not out of line with fundamentals; managed float allowing some reserve build up while protecting competitiveness remains generally appropriate. - Temporary nature of mineral revenue inflows suggests permanent real exchange rate appreciation is not needed; allow flexibility as needed. - Behavioral equilibrium exchange rate (BEER): kina slightly undervalued compared to long-run equilibrium REER since 1994; 2Q–2007 deviation about 2 percent using HP and CF filters. - Purchasing power parity (PPP): real exchange rate of the kina is 9.7 percent lower than its “long-run level.” - Structural reform: - Urged to accelerate progress on structural reform; without it, outlook for more rapid nonmineral sector growth, job creation, and poverty alleviation is dim. - Resume public sector reform, including "right-sizing" and reform of state enterprises. - Improve infrastructure, governance, land tenure, and human capital. - Publish completed 2004–06 audited central government accounts; expand public sector audits and strengthen subnational financial management. ### Outlook and baseline projection (staff and authorities) - Baseline projection: growth to average about 3.5 percent over the medium term, mainly reflecting the onset of production at new mines. - Nonmineral growth expected to decelerate from current peaks to trend growth rates in the absence of structural reform. - Inflation should remain in the middle single digits. - Scenario assumptions: - (i) current fiscal policy continues to be implemented relatively well, with higher but not excessive fiscal spending in the near term and with the ability to ensure reasonable expenditure quality, - (ii) monetary policy continues to contain inflation, and - (iii) limited structural reforms are undertaken. - External assumptions: - (i) mineral exports and revenue inflows decline from their current peak, based on government production estimates, - (ii) the exchange rate continues to be managed flexibly, and - (iii) the external current account position deteriorates in line with the decline in mineral exports and with no improvement in nonmineral exports. ### Risks — downside and upside - Downside risks: - higher unproductive fiscal spending raising demand pressures and spur inflation; - weaker global economy leading to lower commodity prices; - no action or reversal of progress on the structural reform agenda. - Upside risks: - sustained higher commodity prices; - further crowding-in of private activity from the increase in public investment; - additional production from existing or new gas and mining projects. - Sensitivity: a 10 percent reduction in export prices reduces mineral revenue by 0.5 percent of GDP annually. - Noted project pipeline: a US$10 billion LNG project, with production expected in 2013, has completed pre-feasibility studies. ### Fiscal developments, MTFS proposal, and public expenditure pressures - Fiscal position and trends: - Overall fiscal surpluses expected for the 3rd year in 2007. - Nonmineral deficit (cash basis) likely to worsen as mineral revenue eases and spending increases. - Public debt-to-GDP ratio lowered to about 35 percent at end-2007, down sharply from a peak of 77 percent in 2002. - Prepayment of external debt and pension liabilities totaled 4 percent of GDP in the 2007–08 budgets. - FY07–08 budgets set aside a cumulative total of about 4.5 percent of GDP for districts and provinces. - Concerns: - Nonmineral deficit projected to rise from 4.7 percent of GDP in 2005 to 8 percent by 2009 due to spending set aside in 2008 and earlier budgets being spent over 2008–12. - Absorptive and implementation capacity constraints could add to domestic demand and price pressure, and lead to waste. - Large amount of spending allocated to projects outside the MTDS and weak subnational reporting raise concerns. - Proposed Medium-Term Fiscal Strategy (MTFS) 2008–12 (proposal not yet approved): - Identifies a “normal component” of mining and petroleum revenue prudently expected over the long term of 4 percent of GDP. - Ongoing spending, including development spending, limited to total “normal revenue” (sum of nonmineral revenue and the 4 percent of GDP expected from the mineral sector). - Targets an underlying non-mineral budget deficit of 4 percent of GDP; target reviewed at minimum biannually. - Rules for additional mineral revenue (above 4 percent of GDP): - Expenditure smoothing: (i) benefit future generations via investment or debt reduction; (ii) be phased over a number of years; (iii) be carefully designed and implemented given limited implementation capacity. - Public investment and debt prepayment: roughly 60 percent of additional mineral revenue be used for public investment and 40 percent for debt prepayment. Debt prepayment would be reduced, rather than investment, should expected additional revenue not materialize. - Staff encouragement: formally approve the proposal to replace current MTFS policy; welcomed emphasis on the nonmineral balance and even timing of actual (cash) spending given absorptive constraints. - Staff caution: proposals to increase public borrowing to fund large-scale investment projects are a concern without a prioritized, costed, and publicly-consulted assessment aligned to the MTDS. ### Debt sustainability — assessment and risks - DSA conclusion: Papua New Guinea’s public debt burden faces a moderate risk of debt distress under the IMF-WB DSA framework for LICs. - Total public sector debt: - Declined from 62 percent of GDP at end-2004 to an estimated 34.5 percent of GDP at end-2007. - Projected to decline to 26.9 percent of GDP by 2012 and 10.9 percent by 2027 under the baseline. - NPV of public debt: - 39.2 percent of GDP in 2006; 34.6 percent of GDP in 2007. - Projected to decline to 26.6 percent of GDP by 2012 and to 10.3 percent of GDP by 2027. - Composition: - Approximately 52 percent of total public debt is external; of that external debt, 41 percent of loans are in U.S. dollars. - Multilateral debt (AsDB and World Bank) accounts for about three-quarters of external debt. - Sensitivities: - Sustained reduction in real GDP growth by one standard deviation below the baseline would raise NPV public debt-to-GDP by around 11 percentage points by 2017. - A shock to real GDP growth during 2008-09 (historical average minus one standard deviation) would result in NPV public debt-to-GDP rising to around 90 percent by 2027. - A one-time 30 percent real exchange rate depreciation in 2007 would raise NPV debt-to-GDP by about 8 percentage points over the medium term. - Fiscal risks and contingent liabilities: - Unfunded civil service pension liabilities equivalent to about 11 percent of GDP. - Borrowing by state-owned enterprises (SOEs) is significant and growing; proposed government borrowing to finance equity in the gas sector would concentrate risks. - Policy guidance: - Continue prudent management of debt; avoid policy slippages that weaken real GDP and export growth. - Ensure external borrowing is on concessional terms. - Carefully manage pensions, SOE and development bank contingent liabilities. ### Financial sector health and vulnerabilities - Overall assessment: financial sector appears sound based on backward-looking indicators; stress tests show resilience to moderate shocks. - Financial indicators: - Financial sector assets grew to 71 percent of GDP at June 2007, from 45 percent at end-2003. - Credit growth remains strong though decelerating; credit-to-GDP remains low relative to comparators. - Bank of Papua New Guinea net foreign assets (selected): 1,869; 2,367; 4,319; 6,511; 7,843. - Broad money (end-period, selected): 3,915; 5,069; 7,041; 8,780; 10,360. - Risks and needed reforms: - Continued rapid credit growth raises concern about potential deterioration in loan portfolios with a lag. - Need to strengthen bank regulation and supervision and form a credit registry. - Financial intermediation remains low relative to peers; weak enforcement of creditor rights and contracts constrains development. - Authorities expressed interest in a Financial Sector Assessment Program (FSAP). - Development bank concerns: - Staff raised concerns about the recently revived development bank relying on budget transfers, potential political interference, weakening of credit culture, and renewed fiscal liabilities. - Staff urged that the bank not engage in expensive borrowing and that expansion into microfinance comply with due diligence and commercial criteria. ### Progress on reforms, data, governance, and tax administration - Structural reforms under the MTDS stalled over the past year, particularly public sector reform and state enterprise reform; “Rightsizing” report completed but no implementation plans. - Urgent need to resume public sector reform to improve implementation capacity, monitoring, accountability, and transparency. - Trust funds: government trust fund balances estimated at 10.5 percent of GDP for end-2007, including 2.7 percent of GDP for participation in a gas project; increased use of trust funds is a concern given past abuse. - Data weaknesses: significant shortcomings in quality, coverage and timeliness of macroeconomic data; urgent mobilization of expertise to improve statistics and trigger multi-donor technical assistance per the December 2007 STA mission Aide Memoire. - Tax concessions: growing list of ad hoc tax concessions could undermine the tax base; measures taken include creation of a high level committee to review requests and consideration of a tax system review. ### Relations with the World Bank Group (highlights) - Historical lending: 36 IBRD loans totaling US$786.6 million and 14 IDA credits totaling US$152.2 million in commitments. - Active projects (as of December 6, 2007): - Gazelle Restoration Project — US$25 million (scheduled to close end-2007) - Road Maintenance and Rehabilitation Project — US$37.3 million - Teachers’ Solar Lighting Project — US$0.99 million - New CAS expected mid-December, 2007 to launch long-term partnership; CAS envisages up to three IDA credits per fiscal year totaling US$45 million in FY08 and US$30–32 million per fiscal year thereafter. - PNG’s debt outstanding to the World Bank as of end-November, 2007: US$313.8 million; government selected seven IBRD loans totaling around US$56 million for early repayment. ### Key summary statistics (selected) - Nominal GDP (2006): US$5.58 billion - Population (2006): 5.9 million - GDP per capita (2006): US$943 - Quota: SDR 131.6 million - Real GDP growth (2003–08, selected): 2/ 2.2 2.7 3.4 2.6 6.2 5.8 - CPI (annual average, selected): 14.7 2.1 1.7 2.3 1.7 5.0 - Public debt-to-GDP (selected): 63.6 60.0 47.5 39.3 34.5 31.4 - Gross official reserves (end-year, selected, millions of U.S. dollars): 523 663 765 1,427 2,100 2,445 - Exports, f.o.b. (selected, millions of U.S. dollars): 2,153 2,554 3,278 4,205 4,994 5,220 - Mineral exports (selected): 1,635 1,863 2,467 3,391 3,977 4,162 - Current account (including grants, selected, millions of U.S. dollars): 159 882 0 716 326 2209 - Nonmineral balance (selected, percent of GDP): -6.4 -6.3 -4.7 -7.7 -7.5 -7.8 - Financial sector indicators (selected): - Financial sector assets rose to 71 percent of GDP at June 2007 from 45 percent at end-2003. - Credit to the private sector (percent change, 12-month basis, selected): 0.9 23.7 38.2 29.7 19.8 - Millennium Development Goals progress (selected): Poverty headcount, national (% of population): 38; Primary completion rate, total (selected): 51.3 52 52.4 56 53.9; Under-5 mortality (per 1,000) (selected): 94 87 .. 80 74. *Source: IMF staff report excerpt.* ### Executive Summary ...................................................................................................... ### _cr0898 - Executive Summary ### Background - Macroeconomic performance was positive in 2007 with strong growth and low inflation, reflecting reasonably prudent policies and high world prices for key mineral exports. - The country remains poor with significant underlying vulnerabilities. - Temporarily large mineral revenue inflows have intensified spending pressures and the 2008 budget includes large expenditure increases. - Large expenditure increases could result in increased inflationary pressures and waste in the near term, given the absence of implementation and absorptive capacity, and the need for considerable fiscal consolidation as mineral revenue inflows ease over the medium term. - The structural reform agenda to improve the investment climate has seen little progress. - Recent economic performance is an improvement relative to the recent past, but the growth performance gap relative to peers continues to grow. ### Key near-term economic setting and vulnerabilities - Buoyant growth of over 6 percent is estimated for 2007, based on robust mineral and nonmineral growth. - Inflation has remained in the low single digits. - International reserves are at a record high. - There has been little improvement in development indicators; urban unemployment is estimated at around 40 percent. - The economy is exposed to commodity price shocks, and mineral production is expected to decline over the medium to longer term. - An unattractive investment environment, including weak infrastructure and governance, constrains more rapid and sustained growth of the nonmineral sector. - Political environment has stabilized: Prime Minister Somare has returned for an unprecedented second-consecutive term following the mid-2007 parliamentary elections. - The World Bank has recently re-engaged with new project lending after several years of inactivity. ### Mining-sector outlook (Box 1 highlights) - Mining, including petroleum, is the largest sector in the economy and dominates exports, but is enclave in nature and its role is declining over the medium term. - Current high world prices have brought fiscal revenue to all time highs, emphasizing vulnerability to shocks. - Over the medium/long term, oil production is expected to fall. - Projections indicate mineral exports, mineral sector share of GDP, and mineral revenue as a share of total revenue will decline over time (figures and projections presented in the source). ### Nonmineral-sector competitiveness (Box 2 highlights) - Papua New Guinea's real effective exchange rate (REER) has remained largely stable and in line with competitors since 2004. - Export market share has increased on a value basis, largely reflecting higher export prices, especially for mineral exports; export volumes have shown little or no improvement. - Export market share on a volume basis has declined over the past ten years. - The nonmineral sector faces competitiveness constraints tied to infrastructure, governance, and other investment climate factors. ### Policy recommendations - Budget expenditure should be managed carefully to contain inflationary pressures and meet critical development needs. - Shift spending toward investment and other priority areas that will aid economic growth. - Improve public financial management. - Further reduce debt as a form of saving the temporarily large mineral revenue inflows. - Monetary policy stance: - The monetary stance remains appropriate for now, with the central bank successfully keeping inflation under control. - Authorities stand ready to tighten if the expected looser fiscal policy stokes inflationary pressures. - Exchange rate policy: - The current exchange rate level is not out of line with fundamentals. - The managed float exchange rate policy, allowing some reserve build up while protecting competitiveness, remains generally appropriate given the expected near-term decline in mineral revenue inflows. - In staff's view, additional flexibility would be needed in the face of sustained pressures. - Structural reform: - Government is urged to accelerate progress on structural reform; without it, the outlook for more rapid nonmineral sector growth, job creation, and poverty alleviation is dim. ### Staff appraisal and forward-looking considerations - Near-term macroeconomic prospects are positive (referenced Figures and Table in source). - The pickup in growth reflects a combination of several one-off factors, including a strong rebound in mineral and agriculture production following recent events (source context). - There is a need for considerable fiscal consolidation as mineral revenue inflows are projected to ease over the medium term. - The nonmineral sector must drive growth over the longer term given the enclave and declining nature of the mineral sector. *Source: Executive Summary (IMF staff report content provided).* ### Box 2. Is Papua New Guinea’s Nonmineral Sector Competitive? (Concluded) ### Box 2. Is Papua New Guinea’s Nonmineral Sector Competitive? (Concluded) ### Competitiveness and structural constraints - Papua New Guinea maintains one of the least restrictive trade regimes in the region. - Domestic structural rigidities continue to hamper competitiveness and growth of the core nonmineral sector, including: - weak and costly basic utilities; - poor transportation, communication, and electric power infrastructure; - low skills and literacy; - high crime; - weak governance. - Constraints to private activity identified: unreliable services from basic utilities, poor transportation infrastructure, high crime, low public sector capacity to provide services, unclear licensing and regulation policies, weak human capacity, delays in work-visas, and land tenure issues. As a result, foreign and domestic investment outside the enclave mineral sector is low. - Competitiveness of the nonmineral sector has not improved recently, yielding little or no increase in nonmineral export volumes; agricultural exports (largest share of nonmineral exports) were hit by bad weather in 2005–06. ### Human and physical capital and institutional capacity (selected indicators as reported) - Human development and infrastructure indicators remain weak relative to regional averages (figures shown in source tables and charts). - Progress toward selected Millennium Development Goals: some progress made, but “considerable distance” remains before MDG goals will be met (source charts track Primary Completion Rate, Girls to Boys ratio, Under 5 Mortality, Tuberculosis incidence, Improved Water access, Forest area). ### Recent macroeconomic performance and key statistics - PNG is in its 5th year of recovery; momentum increasing from the nonmineral sector. - Annual average CPI inflation is estimated at under 2 percent in 2007. - Annual average inflation expected to trend upward toward the middle single digits over 2008, with pass-through of rising petroleum prices, some kina depreciation on an NEER basis, and higher demand pressure from increased budget spending. - Public debt-to-GDP ratio lowered to about 35 percent at end-2007, down sharply from a peak of 77 percent in 2002. - Official reserves boosted to over $2 billion at end-2007, equivalent to about 5 months of goods and services imports. - Monetary aggregates continue to grow rapidly, although at a decelerated pace; broad money velocity has declined given low inflation and real interest rates and improved financial intermediation. - Kina developments: - Kina appreciated against the U.S. dollar by 7 percent over the year to November (year unspecified in source). - On a nominal and real effective basis, the kina depreciated by about 4 and 5 percent, respectively, over the year through September (year unspecified in source). - Financial sector: - Financial sector assets grew to 71 percent of GDP at June 2007, from 45 percent at end-2003. - Credit growth remains strong though decelerating; credit recovery is broad-based but credit-to-GDP remains low relative to comparators. - Backward-looking indicators suggest the financial sector appears sound with low NPLs. - Credit rating actions: Standard & Poor’s upgraded Papua New Guinea’s credit rating to ‘B+’ on foreign currency long-term debt and ‘BB-’ on local currency rating. - External accounts: - Large foreign exchange inflows related to buoyant mineral exports kept the current account in surplus in recent years. - High world prices for key export commodities are driving surpluses; new gold mines starting production in 2007–08 further boost exports. - Mineral price-driven expansion is increasing both mineral sector exports and imports (construction on new mines underway). - International reserves are growing. ### Fiscal developments and outlook - Fiscal position: - Overall fiscal surpluses expected for the 3rd year in 2007. - Nonmineral deficit (cash basis) likely to worsen as mineral revenue eases and spending increases. - Fiscal consolidation begun in 2002 faltered, with current spending on goods and services rising along with development spending. - Public debt positive dynamics and repayments in 2006–08 lowered the debt burden. - Budget and spending notes: - High mineral revenue inflows, combined with restraint of recurrent costs and implementation capacity constraints, helped boost fiscal savings since 2002 relative to comparators. - Development spending remained a focus in budgets, but new allocations to districts and provinces (where implementation capacity is weak) and nonpriority spending are concerns. - Prepayment of external debt and pension liabilities totaled 4 percent of GDP in 2007–08 budgets (staff note). - Staff projection and concerns: - Nonmineral imbalances are widening through 2008, reflecting higher current and development spending financed by record mineral revenue inflows. - Medium-term fiscal strategy proposals focus on nonmineral balances to address mineral revenue volatility. ### Progress on reforms and policy challenges - Progress on the structural reform agenda under the Medium-Term Development Strategy (MTDS) has stalled over the past year, particularly on public sector reform. - Specific areas of weak implementation: - Little progress on reform of state enterprises and public sector “rightsizing” (report completed but no implementation plans). - Expansion of supervision to non-banking financial institutions is planned (insurance supervision planned); propriety controls being tightened with MCM assistance; AML/CFT implementation remains incomplete. - Legislation passed to allow development bank to expand into microfinance; expansion must comply with appropriate oversight conditions. - No change in data quality; authorities are discussing steps with the Fund and donors to reform governance and improve statistics. ### Advice from the 2006 Article IV discussions and authorities’ response (selected) - Monetary and Exchange Rate Policy: - Advice: Stand ready to tighten monetary policy should inflation pressures emerge. - Action taken: BPNG kept inflation under control using open market operations and reaffirmed commitment to tighten as necessary. - Fiscal Policy: - Advice: Avoid election-related spending excesses; minimize nonpriority spending, strengthen budget execution, and increase transparency. - Action taken: Fiscal surplus in 2007 due to high mineral revenues and expenditure restraint; public debt lowered to 35 percent of GDP from 39 percent in 2006; budgets continued to focus on development spending with new allocations to districts and provinces; little improvement on transparency. - Advice: Debt prepayment advocated as a form of saving. - Action taken: Prepayment of external debt and pension liabilities totaled 4 percent of GDP in 2007–08 budgets. - Advice: Introduce medium-term fiscal strategy targeting nonmineral balances. - Action taken: A new medium-term fiscal strategy has been proposed that focuses on nonmineral balances. - Financial Sector Policy: - Advice: Follow through with expansion of supervision to non-banking financial institutions, tighten propriety controls, and implement AML/CFT legislation. - Action taken: Planned extension of BPNG supervision to insurance companies; propriety controls being tightened with MCM assistance; AML/CFT implementation still incomplete. - Structural Reforms: - Advice: Renew momentum on structural reform to improve the investment environment, including reform of the public sector. - Action taken: Little progress; “Rightsizing” report completed but no implementation plans. - Data and governance: - Advice: Improve quality of macroeconomic data. - Action taken: No change in data quality; authorities are discussing reforms with Fund and donors. *Source: IMF staff compilation from Papua New Guinea authorities, World Bank, and Fund staff estimates (content as provided in the source document).* ### 6. In the absence of a change to current policy trends, the staff and authorities ### _cr0898 - 6. In the absence of a change to current policy trends, the staff and authorities ### Outlook and baseline projection - Baseline projection: growth to average about 3.5 percent over the medium term, mainly reflecting the onset of production at new mines. - Nonmineral growth: expected to decelerate from current peaks to trend growth rates in the absence of structural reform. - Inflation: should remain in the middle single digits. - Scenario assumptions: - (i) current fiscal policy continues to be implemented relatively well, with higher but not excessive fiscal spending in the near term and with the ability to ensure reasonable expenditure quality, - (ii) monetary policy continues to contain inflation, and - (iii) limited structural reforms are undertaken. - External prospects assumptions: - (i) mineral exports and revenue inflows decline from their current peak, based on government production estimates, - (ii) the exchange rate continues to be managed flexibly, and - (iii) the external current account position deteriorates in line with the decline in mineral exports and with no improvement in nonmineral exports in the absence of reform to improve the investment climate. - Baseline nonmineral GDP growth requirement: the baseline nonmineral GDP growth rate needs to roughly double over a sustained period to meet objectives of reduced poverty, significant job creation, and higher development. ### Risks—downside and upside - Significant macroeconomic and external vulnerabilities remain. - Downside risks: - higher unproductive fiscal spending raising demand pressures and spur inflation; - weaker global economy leading to lower commodity prices; - no action or reversal of progress on the structural reform agenda. - Upside risks: - global developments leading to sustained higher commodity prices; - further crowding-in of private activity from the increase in public investment; - additional production from existing or new gas and mining projects. - Sensitivity of mineral revenue: a 10 percent reduction in export prices reduces mineral revenue by 0.5 percent of GDP annually. - Noted project pipeline: A US$10 billion LNG project, with production expected in 2013, has completed pre-feasibility studies. ### Debt sustainability and public debt risks - Debt sustainability analysis (DSA) conclusion: Papua New Guinea’s public debt burden faces a moderate risk of debt distress. - External debt sustainability: vulnerable to shocks that lower export growth below the baseline. - Debt outlook sensitivities: - escalation in public spending; - declines in world mineral prices; - larger public sector borrowing—including by state-owned enterprises (SOEs). - Authorities’ debt strategy: continues to bar new net debt. - DSA framework: The DSA used the low-income country framework. The results were discussed with the World Bank. ### Fiscal policy and public expenditure pressures - 2007 and 2008 budgets: aimed to manage temporarily large inflows of mineral revenue through a combination of higher development spending and debt repayment. - Positive elements: - one-off spending increases to meet priority infrastructure and social development needs aligned with the MTDS are appropriate; - welcomed pre-payment of external debt and reduction in unfunded civil service pension liabilities. - Prepayments and liabilities: Prepayments of external debt and pension liabilities totaled a cumulative 4 percent of GDP in the FY07–08 budgets. - Concerns about fiscal relaxation: - nonmineral deficit projected to rise from 4.7 percent of GDP in 2005 to 8 percent by 2009 due to spending set aside in 2008 and earlier budgets being spent over 2008–12; - absorptive and implementation capacity constraints could add to domestic demand and price pressure, and lead to waste. - Subnational spending concerns: - a large amount of spending allocated to projects outside the MTDS, with new spending directed to provinces and districts raising concern because of lack of capacity to prioritize and deliver projects, weak financial controls, and near absence of reporting in local governments. - FY07–08 budgets: set aside a cumulative total of about 4.5 percent of GDP for districts and provinces. - Projected fiscal consequence: projected fall-off in mineral revenue from 2008 onward raises prospect of need for considerable and sustained fiscal consolidation over the medium term. - Staff recommendation on expenditure: contain actual (cash) expenditure to more sustainable and stable levels, while ensuring windfall mineral revenue is used for well-designed MTDS-prioritized development spending and debt reduction. - Authorities’ response: cited high development needs and legacy underfunding in rural areas; intend to introduce procedures to improve oversight and strengthen subnational government capacity; increase in spending likely to be phased over several years. ### Proposed Medium-Term Fiscal Strategy (MTFS) update - Proposal scope: Treasury proposed a new MTFS covering 2008–12 to update the expiring 2002–07 strategy; this proposal has not yet been considered or approved by the cabinet or parliament and is thus not current policy. - Key elements of the proposal: - Identifies a “normal component” of mining and petroleum revenue prudently expected over the long term of 4 percent of GDP. - Ongoing spending, including development spending, limited to total “normal revenue” (sum of nonmineral revenue and the 4 percent of GDP expected from the mineral sector). - Targets an underlying non-mineral budget deficit of 4 percent of GDP; target reviewed at minimum biannually and spending cuts or temporary deficits incurred in case of a mineral revenue shortfall. - Additional mineral revenue (above 4 percent of GDP) rules: - Expenditure smoothing: additional mineral revenue should (i) be used to benefit future generations either through investment or debt reduction; (ii) be phased over a number of years to avoid disruptive fluctuations in domestic or import demand; and (iii) be carefully designed and implemented to ensure positive net benefit and reflect limited implementation capacity. - Public investment and debt prepayment: roughly 60 percent of additional mineral revenue be used for public investment and 40 percent for debt prepayment. Debt prepayment would be reduced, rather than investment, should expected additional revenue not materialize. - Staff encouragement: formally approve the proposal to replace current MTFS policy; welcomed emphasis on the nonmineral balance and even timing of actual (cash) spending given absorptive constraints. - Implementation caveats: requires investment prioritization and improvement in financial management. - Staff caution: proposals to increase public borrowing to fund large-scale investment projects are a concern without a prioritized, costed, and publicly-consulted assessment of investment needs aligned to the MTDS. - Public sector investment efficiency concerns: absence of reforms to address poor management in SOEs casts doubt on efficiency of additional investment in that sector. - Authorities’ stance on debt contracting: proceed cautiously; improvement to date reflects strategy to reduce debt as a form of saving and to create fiscal space; longstanding policy under the medium-term debt strategy to contract external debt only on concessional terms. ### Public sector reform and financial management - Urgency: resumption of public sector reform plans is urgently needed to improve implementation capacity, monitoring, accountability, and transparency. - Status: plans to strengthen financial management and streamline public sector employment (under the “right-sizing” initiative) appear stalled. - Trust funds: increased use of trust funds is a concern given past abuse; government trust fund balances estimated at 10.5 percent of GDP for end-2007, including 2.7 percent of GDP for participation in a gas project. - Authorities’ actions: planning government-wide measures to strengthen financial management, tighten expenditure controls, remove dormant trust funds, and increase accountability on remaining trust funds; discussions begun to map the way forward for the multi-donor financial management reform program. ### Tax concessions and revenue administration - Concern: use of special arrangements for individual projects resulted in a growing list of ad hoc tax concessions that could undermine the tax base. - Measures taken: - creation of a high level committee to review requests with respect to their economic benefits and ensure consistency with tax laws; - government agreed to consider a review of the tax system to ensure fair treatment across sectors and a fair share of mineral sector profits for the government. ### Monetary policy and exchange rate - Monetary stance: staff views the monetary stance as appropriate given BPNG’s ability to contain inflation to date. - Sterilization: BPNG sterilized temporary foreign exchange inflows through open market operations to maintain reserve money growth within its target; it additionally relaxed restrictions on outward capital flows. Net costs of the sterilized intervention have been negative. - Need to stand ready to tighten: BPNG should stand ready to tighten given expectation of a looser fiscal stance. - Inflation and pressures: although CPI data indicate inflation remains low, additional fiscal stimulus, some recent NEER depreciation, and pass through of higher oil prices are contributing to rising underlying inflationary pressure. - Monetary aggregates: monetary and credit aggregate growth rates are still rapid, though no longer accelerating, and liquidity in the banking system remains high. - Central bank commitment: BPNG reconfirmed commitment to tighten the monetary stance if necessary; tightening through open market operations and upward changes in the policy rate would have a rapid impact on restraining inflation. - Data improvements: BPNG developing alternative information sources, including a survey of business inflation expectations to complement its own retail price index. - Exchange rate policy: - staff support for current exchange rate policy: continued managed float with the BPNG leaning against too rapid appreciation against the U.S. dollar. - Recent movement: rate of appreciation against the U.S. dollar has increased over the past year; associated intervention eased relative to past years. - Nominal vs. trade-weighted concerns: BPNG balanced concerns about potential inflationary impact of nominal depreciation on a trade-weighted basis that occurred early in 2007, most of which has since been unwound; staff welcomed shift toward focus on the nominal effective exchange rate. - Reserves: foreign exchange reserves expected to level off at about 5 months of imports of goods and services. - Staff assessment: current level of the exchange rate is broadly in line with macroeconomic fundamentals. - Policy view: temporary nature of mineral revenue inflows suggests permanent real exchange rate appreciation is not needed; exchange rate should be allowed to move flexibly as needed. - Supporting analysis notes: - Behavioral equilibrium exchange rate (BEER): kina slightly undervalued compared to long-run equilibrium REER since 1994; 2Q–2007 deviation about 2 percent using HP and CF filters. - Macroeconomic balance (MB): marginal REER appreciation of about 0.4 percent needed to close gap between current account norm (1.8 percent of nominal GDP) and underlying current account projection for 2012 (-3.3 percent of nominal GDP). - Purchasing power parity (PPP): real exchange rate of the kina is 9.7 percent lower than its “long-run level.” ### Financial sector health and vulnerabilities - Overall assessment: financial sector appears sound; key positive given importance of financial intermediation for future growth. - Resilience: backward-looking financial sector indicators remain strong relative to other countries that have experienced rapid credit growth; stress tests show the banking system is resilient to moderate shocks to the credit portfolio that may arise from falling commodity prices and weak economic policy. - Risks from credit growth: - continued rapid credit growth raises concern about potential deterioration in banks' loan portfolios, which may manifest with a lag. - staff welcomed efforts to strengthen bank regulation and supervision and to form a credit registry. - Structural constraints: financial intermediation remains low relative to peers, pointing to need to overcome structural rigidities constraining development, including weak enforcement of contracts and creditor rights. - Authorities’ stance: agreed with concerns, reaffirmed commitment to continue enhancing sector regulation and supervision, and expressed interest in a Financial Sector Assessment Program (FSAP) to evaluate recent growth and provide recommendations for deepening and strengthening the sector. *IMF staff and authorities discussion as contained in the provided chapter excerpt.* ### 18. The staff raised concerns regarding the recently revived development bank, ### _cr0898 - 18. The staff raised concerns regarding the recently revived development bank, ### Development bank: concerns and staff advice - The staff raised concerns regarding the recently revived development bank, while welcoming the intention to operate it without political interference. - Given the domestic and global experience, and the development bank’s continued reliance on budget transfers for its capital base, concerns remain about: - the potential for funds being directed to political interests, - a weakening of credit culture, - renewed fiscal liabilities, which would introduce risks for the financial sector. - The staff further urged that the bank not engage in expensive borrowing and that expansion into microfinance comply with due diligence and commercial criteria. ### Structural reform: status, barriers, and recommended actions - Structural reforms faltered over the past year. - The staff and the authorities agreed that broader reforms are necessary to: - lift medium-term growth by boosting productivity, - strengthen international competitiveness and resilience to external shocks. - The authorities noted their intention to create the necessary environment conducive for private business, as set out in the MTDS. - Immediate steps are needed to address long-standing barriers to private activity and investment in the nonmineral sector; the constraints include: - poor and costly transportation and public communications and power infrastructure, - weak governance, high crime and weak prosecution, - weak land tenure system, - poor education resulting in high illiteracy and low skills. - The government’s willingness to consider private equity participation in SOEs is encouraged as a welcome first step toward improving management, oversight, and provision of basic services. - The staff encouraged: - completion of the needed regulatory environment, - opening of the public enterprise sectors to competition. - Publication of the completed 2004–06 audited central government accounts would be a strong signal of commitment to public sector transparency and accountability. - Additional resources are needed to extend the coverage of external audits to subnational governments. - The staff urges swift implementation of the planned internal management audit committees for government ministries. ### Macroeconomic statistics: data weaknesses and priorities - Both staff and the authorities agreed that intensive efforts to improve macroeconomic statistics are needed to address shortcomings in the quality, coverage and timeliness of macroeconomic data. - Analysis of recent economic developments is increasingly constrained by data weaknesses and utmost priority should be given to mobilizing the needed expertise to improve statistics. - The staff encourages rapid implementation of steps needed to trigger implementation of the multi-donor technical assistance plan as set out in the Aide Memoire of December 2007 STA mission. ### Staff appraisal: key assessments and policy recommendations - Papua New Guinea’s economic performance remains positive, reflecting a combination of prudent policies and favorable external factors in recent years. - The current economic conditions and political stability provide an ideal opportunity to push ahead with the reforms set out in the MTDS to lift Papua New Guinea’s long-term economic growth. - Given Papua New Guinea’s resources, higher growth rates—which have been achieved by its peers—could be realized if: - the appropriate fiscal-monetary policy mix maintains macroeconomic stability, - mineral revenues are used productively, - structural reforms are undertaken to remove rigidities constraining private activity. - Significant underlying vulnerabilities remain despite improved macroeconomic fundamentals: - growth has accelerated, - inflation is low, - for the near-term, external and fiscal vulnerabilities have declined, - development indicators have shown little improvement, - the economy remains highly sensitive to commodity price shocks and dependent on mineral sector developments, - an unattractive investment environment discourages activity in the nonmineral sector. - The potential fiscal stimulus from increased spending under recent budgets is a concern: - Given absorptive and capacity constraints, it could add to domestic demand and price pressures. - Higher expenditure should be aligned with the MTDS, and with the capacity to implement and closely monitor spending—especially the spending allocated to local governments. - Other elements of recent budgets are appropriate, including: - the one-off spending increases to meet priority infrastructure and social development needs aligned with the MTDS, - the prepayment of public debt. - Proposals for a new medium-term fiscal strategy that focuses on a stable and sustainable underlying nonmineral deficit are welcomed; approval is encouraged as it would represent an effective extension of recent prudent fiscal policies, particularly if supported by prioritization and financial management improvements. - Preserving the integrity of the nonmineral tax base, including limiting exemptions, is key to ensuring long-term fiscal sustainability and reducing exposure to volatile mineral resources. - Continuation of the government’s strategy to reduce debt as a form of saving is urged to create additional fiscal space and reduce risks. - Complementary measures include avoiding the contracting of new external debt on commercial terms, and recognizing the concentration of risks associated with further equity investment in the volatile mineral sector. - Recent improvements in public debt levels could be quickly reversed with rapid new borrowing—including by the SOEs—and a change in debt dynamics. - The resumption of public sector reform is urgently needed to improve implementation capacity, and strengthen financial management and transparency. Steps should include: - resuming the right-sizing initiative, - following through with the public expenditure reform plans supported by a multi-donor effort, - expanding public sector audits, - publishing central government audited accounts on a timely basis. - The monetary stance is appropriate; the central bank has successfully managed to keep inflation within the low single digits. However, with pressures on prices building, including with the additional fiscal stimulus, the authorities should stand ready to tighten as needed. - The level of the exchange rate is broadly in line with macroeconomic fundamentals; analyses indicate that the kina is now close to its equilibrium level. - The managed float exchange rate policy remains generally appropriate given the expected near-term decline in mineral revenue inflows; however, should sustained pressures emerge, additional flexibility should be shown. - Reforms to improve and deepen financial intermediation are high on the authorities’ agenda; weaknesses in the underlying institutional environment need to be addressed, including weak enforcement of creditor rights and contracts. - Broader structural reforms are necessary to raise growth and to strengthen export competitiveness and resilience to external shocks; recent private competition with state monopolies has had an important impact on growth and shows the benefits of such approaches. - Although data provision is generally adequate for surveillance purposes, significant weaknesses in the quality and timeliness of statistics hamper monitoring of macroeconomic developments; the authorities should accelerate efforts to strengthen the statistical framework, in line with STA mission recommendations. *Source: IMF staff report excerpt.* ### 33. The staff recommends that the next Article IV consultation be held on the ### _cr0898 - 33. The staff recommends that the next Article IV consultation be held on the ### Staff recommendation - The staff recommends that the next Article IV consultation be held on the standard 12-month cycle. ### Key summary statistics (2006 base) - Nominal GDP (2006): US$5.58 billion - Population (2006): 5.9 million - GDP per capita (2006): US$943 - Quota: SDR 131.6 million ### Real sector and prices (selected annual figures) - Real GDP growth (2003–08, selected): 2/ 2.2 2.7 3.4 2.6 6.2 5.8 - Mineral component (selected): 2.8 0.3 5.0 -5.9 4.1 4.9 - Nonmineral component (selected): 2.1 3.1 3.1 3.7 6.5 5.9 - CPI (annual average, selected): 14.7 2.1 1.7 2.3 1.7 5.0 - CPI (end-period, selected): 8.4 2.4 4.6 -1.0 4.5 5.5 ### Central government operations (percent of GDP; selected) - Revenue and grants (2003–08, selected): 29.2 34.1 34.8 36.9 37.8 36.1 - Expenditure and net lending (2003–08, selected): 30.3 32.4 31.1 30.1 31.8 32.2 - Overall balance, cash basis (including grants) (from above the line, selected): -1.2 1.7 3.7 6.8 6.0 3.9 - Domestic financing (net) (selected): 4.0 1.8 -2.7 -4.3 -3.8 -2.5 - External financing (net) (selected): -2.1 -1.8 -1.1 -1.3 -2.1 -1.4 - Nonmineral balance (selected): -6.4 -6.3 -4.7 -7.7 -7.5 -7.8 - Central government debt (percent of GDP) (selected): 63.6 60.0 47.5 39.3 34.5 31.4 ### Fiscal structure and budget composition (2005–08, percent of GDP; selected) - Revenue and grants (2005–08, Est./Proj.): 34.1 34.8 36.9 28.8 38.6 37.8 36.1 36.1 - Tax revenue (selected): 25.4 24.5 29.0 22.3 30.7 28.8 28.0 28.1 - Mineral taxes (selected): 5.8 7.5 11.7 7.1 13.0 11.9 10.3 10.3 - Grants (selected): 6.7 8.4 5.4 4.7 5.5 5.5 5.7 5.6 - Total expenditure and net lending (selected): 32.4 31.1 30.1 29.0 36.9 31.8 35.1 32.2 - Recurrent expenditure (selected): 22.4 20.0 17.7 18.5 19.2 19.3 18.5 19.4 - Development expenditure (selected): 10.1 11.1 12.4 10.5 17.7 12.5 16.7 12.8 - Overall balance (from above the line) (selected): 1.7 3.7 6.8 -0.2 1.7 6.0 1.0 3.9 - Financing: 0.0 -3.8 -5.7 0.2 -1.7 -6.0 -1.0 -3.9 - Nonmineral balance (below the line) (selected): -6.3 -4.7 -7.7 -8.2 -12.9 -7.5 -10.6 -7.8 - Total central govt. gross debt (% of GDP) (selected): 60.0 47.5 39.3 ...... 34.5 ... 31.4 ### Balance of payments (2003–08, selected; millions of U.S. dollars) - Exports, f.o.b. (selected): 2,153 2,554 3,278 4,205 4,994 5,220 - Mineral exports (selected): 1,635 1,863 2,467 3,391 3,977 4,162 - Imports, c.i.f. (selected): -1,435 -1,794 -2,462 -2,805 -3,346 -3,557 - Current account (including grants) (selected): 159 882 0 716 326 2209 - Current account (in percent of GDP) (selected): 4.5 2.2 4.2 2.9 4.3 3.3 - Mineral contribution to current account (percent of GDP) (selected): 20.6 20.2 21.2 24.4 24.0 25.0 - Nonmineral contribution to current account (percent of GDP) (selected): -16.1 -17.9 -17.0 -21.5 -19.7 -21.7 - Gross official reserves (end-year, selected): 523 663 765 1,427 2,100 2,445 - In months of nonmineral imports (c.i.f.): 5.7 6.1 5.2 8.5 11.1 11.8 - In months of imports of goods and nonfactor services: 2.7 2.8 2.4 3.8 4.7 5.2 - Overall balance (selected): 187 206 161 662 673 345 ### Banking system and monetary aggregates (2004–08, selected) - Bank of Papua New Guinea net foreign assets (selected): 1,869 2,367 4,319 6,511 7,843 - Reserve money (selected): 871 935 1,138 1,320 1,446 - Broad money (end-period, selected): 3,915 5,069 7,041 8,780 10,360 - Broad money (percent change, 12-month basis) (selected): 14.8 29.5 38.9 24.7 - Credit to the private sector (percent change, 12-month basis) (selected): 0.9 23.7 38.2 29.7 19.8 - Interest rate (182-day T-bills; period average) (selected): 18.7 3.1 3.8 3.7 4.1 ### Medium-term scenario and projections (2004–13, selected) - Real GDP growth projection (2004–13, selected): 2.7 3.4 2.6 6.2 5.8 4.7 4.1 3.5 2.4 2.6 - Mineral: 0.3 5.0 -5.9 4.1 4.9 4.4 6.7 3.8 -5.9 -3.4 - Nonmineral: 3.1 3.1 3.7 6.5 5.9 4.7 3.8 3.5 3.4 3.3 - CPI (period average) projection (selected): 2.1 1.7 2.3 1.7 5.0 5.0 4.5 4.2 4.0 4.0 - Foreign savings (in percent of GDP) projection (selected): 2.2 4.2 2.9 4.3 3.3 1.7 1.3 -0.9 -3.3 -3.7 - Public saving-investment balance 1/ (selected): 0.0 3.8 5.7 6.0 3.9 0.6 -1.2 -1.9 -1.7 -0.4 - Private saving-investment balance (selected): -2.2 -8.0 -8.6 -10.3 -7.2 -2.2 -0.1 2.8 5.0 4.1 - Total revenue and grants (percent of GDP, projection): 34.1 34.8 36.9 37.8 36.1 33.6 30.8 29.6 29.4 29.6 - Total expenditure (percent of GDP, projection): 32.4 31.1 30.1 31.8 32.2 33.0 32.0 31.5 31.1 30.0 - Primary balance 2/ (selected): 2.9 6.0 7.5 8.0 6.1 2.7 0.8 0.0 0.1 1.6 - Gross public debt (in percent of GDP) projection (selected): 62.0 48.1 39.3 34.5 31.4 30.3 28.4 27.5 26.9 26.2 - Exports, f.o.b. projection (millions of U.S. dollars, selected): 2,554 3,278 4,205 4,994 5,220 5,024 5,054 4,908 4,779 4,727 - Current account (in percent of GDP, projection): 2.2 4.2 2.9 4.3 3.3 1.7 1.3 -0.9 -3.3 -3.7 - Net official reserves (millions of U.S. dollars, projection): 599 765 1,427 2,100 2,445 2,520 2,550 2,470 2,215 1,915 - Assumed commodity prices (selected): - Gold (US$/oz): 398 403 548 596 621 648 680 707 720 720 - Copper (US$/ton): 2,753 3,563 6,523 6,591 5,814 4,361 3,392 2,907 2,810 2,810 - Oil (US$/barrel): 41 55 67 74 89 87 87 86 86 86 ### Indicators of external vulnerability (2002–07, selected) - Gross public debt (end of period, percent of GDP) (selected): 76.6 67.4 62.0 48.1 39.3 34.5 - Gross official reserves (millions of U.S. dollars, selected): 339.0 523.0 663.1 764.9 1,427.0 2,100.0 - Gross official reserves (months of nonmineral imports, c.i.f.) (selected): 4.5 5.7 6.1 5.2 8.5 11.1 - Public external debt to GDP ratio (percent, selected): 54.2 42.9 36.8 25.8 21.2 17.8 - Public external debt service to exports (percent, selected): 7.9 7.5 8.7 6.0 3.5 4.0 - Exchange rate (per U.S. dollar; period average) (selected): 3.9 3.6 3.2 3.1 3.1 3.0 - Foreign currency long-term government debt ratings (selected): - Moody's: B1(stab.) B1(stab.) B1(stab.) B1(stab.) Ba2 Ba2 - Standard & Poors: B(neg.) B(stab.) B(pos.) B(pos.) B B+ ### Banking system summary (2004–08, selected; millions of kina) - Monetary Survey net foreign assets (selected): 2,165 2,929 4,648 7,262 8,760 - Net domestic assets (selected): 1,750 2,141 2,392 1,517 1,600 - Domestic credit (selected): 3,066 3,329 3,975 4,122 4,357 - Claims on the private sector (selected): 1,724 2,133 2,947 3,822 4,580 - Broad money velocity (selected): 3.2 3.0 2.4 2.1 1.9 - Nominal nonmineral GDP/Broad money (selected): 2.6 2.3 1.8 1.6 1.5 ### Millennium Development Goals progress (selected indicators, 1990–2005) - Poverty headcount, national (% of population): 38 (period indicated) - Prevalence of underweight in children (under five years): 15 .. 13 (periods) - Primary completion rate, total (% of relevant age group) (selected): 51.3 52 52.4 56 53.9 - Youth literacy rate (% ages 15-24) (selected): 69 .. 67 - Proportion of seats held by women in national parliament (%): 0 0 2 2 1 - Ratio of girls to boys in primary and secondary education (%): 80.3 .. 88.9 87 87 - Immunization, measles (% of children ages 12-23 months) (selected): 67 42 59 62 60 - Infant mortality rate (per 1,000 live births) (selected): 69 64 .. 60 55 - Under-5 mortality rate (per 1,000) (selected): 94 87 .. 80 74 - Births attended by skilled health staff (% of total) (selected): .. 53.2 .. 41 .. - Maternal mortality ratio (modeled estimate, per 100,000 live births) (selected): .. .. 300 .. - 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): 267 250 .. 250 250 - Forest area (% of total land area) (selected): 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) (selected): 0.6 0.5 0.5 0.5 0.4 - Aid per capita (current US$) (selected): 100.4 79.2 71.5 52 45 - Debt service (% of exports) (selected): 18 10 88.1 5.9 - Fixed line and mobile phone subscribers (per 1,000 people) (selected): 7.3 9.3 12.4 14 15 - Internet users (per 1,000 people) (selected): 0 0 2.4 82 3 - Personal computers (per 1,000 people) (selected): .. .. 39.5 53 63.6 *Source: Data provided by the Papua New Guinea authorities; IMF staff estimates and projections, as presented in the source content.* ### APPENDIX I. PAPUA NEW GUINEA: PUBLIC AND EXTERNAL DEBT SUSTAINABILITY ### APPENDIX I. PAPUA NEW GUINEA: PUBLIC AND EXTERNAL DEBT SUSTAINABILITY ### A. Main Assumptions - Real GDP growth is projected to grow at about 4 percent in 2008–2012 with moderate growth in the nonmineral sectors, including the agricultural sector, and several mining projects coming on stream. The latter will offset a steady decline in petroleum production. - Monetary policy continues to be geared toward achieving low inflation and smoothing exchange rate volatility. - Fiscal policy, as measured by actual spending and the nonmineral balance, is expected to improve gradually after 2009. Overall fiscal surpluses are expected to decline due to falling mineral revenues and spending of preceding years’ mineral windfall revenues (having been temporarily saved in trust funds). - Consistent with the medium-term debt strategy, debt levels continue to be lowered, to a sustainable level, and financial risks reduced, e.g., by reducing the exposure to foreign debt and lengthening the maturity of domestic bonds. - Prices of key commodities are in line with assumptions. - Structural reforms outlined under the authorities’ Medium-Term Development Strategy, particularly those on public sector reform, are delayed or implemented at a slow pace. - Real GDP growth is expected to average 2.6 percent in the long-term. This outcome envisages a return to the long-run average growth rate. It is predicated on the gradual implementation of structural reforms to enhance private sector activity, the maintenance of a stable macroeconomic environment and ongoing slow improvements in public infrastructure and services that should raise help productivity. There is also upside potential from the development of new mineral and gas projects. ### B. Total Public Sector Debt Sustainability - Public sector debt ratio: - Declined from 62 percent of GDP at end-2004 to an estimated 34.5 percent of GDP at end-2007. - Projected to decline to 26.9 percent of GDP by 2012 and 10.9 percent by 2027 under the baseline. - Net present value (NPV) of public debt: - 39.2 percent of GDP in 2006; 34.6 percent of GDP in 2007. - Projected to decline to 26.6 percent of GDP by 2012 and to 10.3 percent of GDP by 2027. - Composition and structure: - Approximately 52 percent of total public debt is external; of that external debt, 41 percent of loans are in U.S. dollars. - Multilateral debt (AsDB and World Bank) accounts for about three-quarters of external debt. Japan is the main bilateral creditor. - Underlying public domestic debt maturity increased since 2003; by end-2007 around 70 percent of the debt stock was issued with maturities of 2–10 years. - Under the authorities’ Medium-Term Debt Strategy, foreign-currency loans are considered only if they are concessional (with a grant element of at least 35 percent), and new loans from the World Bank and AsDB will meet this criteria. - Debt service and revenues: - Public debt service-to-revenue ratio fell to a trough of 10.8 percent in 2006. - Expected to rise somewhat during 2007–08 as the government uses some of its ‘mineral windfall’ to pre-pay external debt, and to fall gradually over the medium term. - Sensitivity to shocks: - A sustained reduction in real GDP growth, by one standard deviation below the baseline spread over the projection period, would raise the NPV of public debt to GDP ratio by around 11 percentage points by 2017. - A shock to real GDP growth during 2008-09, of the historical average growth rate minus one standard deviation, would result in a sustained increase in the NPV of public debt to GDP ratio, rising to around 90 percent by 2027. - A one-time 30 percent real exchange rate depreciation in 2007 would raise the NPV of debt to GDP ratio by about 8 percentage points over the medium term. - Fiscal risks and contingent liabilities: - Unfunded civil service pension liabilities are equivalent to about 11 percent of GDP. The government will make partial repayments in 2007–08 and from 2009 it should be fully funding its share of new pension contributions; the balance will remain sizeable. - Borrowing by state-owned enterprises (SOEs) is reportedly significant and growing, although information is limited. Proposed government borrowing to finance equity in the potentially large gas sector would further concentrate risks associated with the volatile mineral sector. Better disclosure of such information would greatly enhance the assessment of debt sustainability. ### C. External Debt Sustainability - External debt levels and ratios: - Total external debt declined from 55 percent of GDP in 2004 to 32.4 percent in 2007. - External debt as a percent of exports declined from a peak of 127 percent in 2002 to 37 percent in 2007. - Private external debt was estimated at 14.7 percent of GDP at end-2007. Private external debt is expected to decline over the long term, as large mineral projects that accounted for a high proportion of debt reach completion. - Indicator performance under the baseline: - External public debt dynamics are sustainable under the baseline scenario. By 2006 all five debt indicators—the NPV of public external debt in percent of GDP, exports, and revenue, and the ratio of debt service to exports and revenue—were below the policy dependent thresholds. All the indicators continue to improve over the medium and long term period, with the exception of the ratio of the NPV of public external debt to government revenue, which temporarily increases over the medium term as mineral revenues decline (though it remains well below the threshold). - Vulnerabilities: - External debt sustainability is most vulnerable to shocks from lower export growth. A decline in export value growth in 2008–09, by one standard deviation below its historical average, would raise the NPV of public external debt-to-GDP by over 20 percentage points over the medium term, and only fall below the 30 percent threshold in *Source: APPENDIX I. PAPUA NEW GUINEA: PUBLIC AND EXTERNAL DEBT SUSTAINABILITY* ### 2021. Similarly, the export shock would raise the NPV of external debt-to-exports and ### _cr0898 - 2021. Similarly, the export shock would raise the NPV of external debt-to-exports and ### Debt sustainability assessment — summary findings - Papua New Guinea faces a moderate risk of debt distress under the IMF-WB DSA framework for LICs. - Under the LIC DSA framework applicable thresholds (Papua New Guinea is rated a weak performer) for external public debt are: (i) 100 percent for NPV of external debt-to-exports, (ii) 30 percent for NPV of external debt-to-GDP, and (iii) 200 percent for NPV of external debt-to-fiscal revenue; and for debt service: (i) 15 percent of exports and (ii) 25 percent of revenues. - The baseline scenario does not indicate a breach of any thresholds, but: - The NPV of external public debt-to-GDP ratio exceeds the threshold under the stress test for lower export value growth. - The export shock would raise the NPV of external debt-to-exports and external debt-to-revenue closer to (though still under) their thresholds for the first ten years, before falling over the long term. - While a combination of shocks would also push the external debt-to-GDP ratio to just above the threshold over the medium term, neither of the ratios for debt service approach their thresholds. ### Sensitivity and stress-test results - Stress tests and alternative scenarios highlight vulnerability to weaker real GDP and export growth: - Export-value-growth shock: NPV of external debt-to-GDP exceeds threshold in the stress test for lower export value growth. - Combination shocks: external debt-to-GDP ratio pushed just above threshold over the medium term; debt-service ratios remain below thresholds. - Selected scenario labels used in sensitivity analysis: Baseline; A1 (historical averages); A2 (primary balance unchanged from 2007); A3 (permanently lower GDP growth); B1–B6 bound tests (including one-time 30 percent real depreciation and a 10 percent of GDP increase in other debt-creating flows). - Table summaries and figures cover projections for 2007–2027 and include “most extreme stress test” series; charts show baseline vs most extreme stress test for: NPV of debt-to-GDP, NPV of debt-to-exports, NPV of debt-to-revenue, debt-service-to-exports, and debt-service-to-revenue. ### Policy recommendations and implications - Continued prudent management of debt over the medium-to-long term is required to mitigate risks to public debt sustainability. - Specific policy guidance: - Avoid policy slippages that would weaken real GDP and export growth outcomes. - Ensure that any external borrowing is obtained on concessional terms. - Carefully manage other fiscal liabilities, e.g., from pensions, state-owned enterprises or the development bank. - These recommendations are consistent with the current medium-term debt strategy and the proposed MTFS. ### Key fiscal, debt, and macro figures (selected) - NPV of public sector debt (selected series): 58.8; 48.2; 39.2; 34.6; 31.3; 30.0; 28.2; 27.1; 26.6; 20.1; 10.3. - o/w foreign-currency denominated (NPV of public sector debt): 33.6; 25.8; 21.2; 17.9; 15.4; 14.6; 13.6; 13.0; 12.8; 11.4; 10.0. - NPV of public sector debt-to-revenue and grants ratio (in percent): 172.4; 138.6; 106.3; 91.5; 86.5; 89.3; 91.4; 91.7; 90.7; 65.8; 35.1. - NPV of public sector debt-to-revenue ratio (in percent): 214.7; 182.8; 124.4; 107.0; 102.3; 108.2; 112.0; 113.3; 112.6; 77.6; 39.0. - Debt service-to-revenue and grants ratio (in percent): 17.9; 11.9; 10.8; 13.0; 12.5; 10.7; 10.7; 10.9; 10.4; 6.6; 3.0. - Debt service-to-revenue ratio (in percent): 22.3; 15.7; 12.6; 15.2; 14.7; 13.0; 13.2; 13.5; 12.9; 7.8; 2.9. - Primary deficit that stabilizes the debt-to-GDP ratio: 2.5; 8.0; 1.3; -3.2; -3.0; -1.6; 1.1; 1.0; 0.4; -0.1; 0.1. - Real GDP growth (in percent) — selected projection series: 2.7; 3.4; 2.6; 0.8; 3.2; 6.2; 5.8; 4.7; 4.1; 3.5; 2.4; 4.4; 2.6; 2.6; 2.6. - Average nominal interest rate on forex debt (in percent) — selected: 2.4; 2.5; 3.0; 1.8; 1.4; 3.5; 4.2; 4.6; 4.5; 4.2; 4.0; 4.2; 3.7; 4.0; 3.7. - Average real interest rate on domestic currency debt (in percent) — selected: 10.0; -8.5; -3.1; 6.0; 16.0; 5.6; 7.0; 8.6; 4.6; 7.3; 7.4; 6.7; 4.8; 2.6; 4.2. - Inflation rate (GDP deflator, in percent) — selected: -2.0; 16.7; 8.9; 8.9; 5.2; 2.4; 2.3; 0.9; 4.8; 2.3; 1.9; 2.5; 4.0; 4.0; 3.9. - Gross financing need 2/: 24.5; 11.0; 5.4; 1.6; 1.7; 3.4; 4.3; 4.7; 4.1; 1.4; 0.6. - External debt (nominal) — selected: 55.0; 41.6; 39.0; 32.4; 27.9; 25.5; 22.6; 20.6; 19.1; 15.7; 12.2. - o/w public and publicly guaranteed (PPG) external debt (percent of GDP) — selected: 38.0; 25.9; 21.4; 17.6; 15.3; 14.7; 13.7; 13.2; 12.9; 11.6; 10.6. - NPV of external debt (in percent of exports) — selected: 48.5; 37.0; 32.0; 30.9; 29.1; 28.0; 27.4; 25.6; 23.9. - Debt service-to-exports ratio (in percent): 12.7; 9.9; 8.4; 8.2; 7.7; 7.1; 7.0; 7.2; 7.4; 6.5; 5.8. - PPG debt service-to-exports ratio (in percent): 9.0; 6.2; 3.7; 4.2; 3.6; 2.7; 2.5; 2.6; 2.6; 2.0; 1.6. - PPG debt service-to-revenue ratio (in percent): 23.2; 16.9; 9.4; 11.3; 10.2; 7.9; 7.8; 7.9; 7.5; 4.7; 2.8. - Grant-equivalent financing (in percent of GDP) — selected: 5.8; 5.9; 6.2; 6.2; 6.1; 6.2; 5.1; 3.3; 4.5. - Nominal GDP (billions of US dollars): 3.9; 4.9; 5.6; 6.1; 6.4; 6.5; 7.0; 7.2; 7.4; 9.2; 14.4. - Memorandum (NPVt-NPVt-1)/GDPt -1 (in percent): -2.2; -1.7; -0.3; -0.1; -0.1; 0.1; -0.7; 0.4; 0.2; 0.3. Note: figures above are drawn from staff projections, simulations, and historical data covering the 2004–2027 period and selected series for 2007–2027. *Source: Papua New Guinea authorities; and Fund staff estimates and projections (Staff Report for the 2007 Article IV Consultation — Informational Annexes, January 17, 2008).* ### ANNEX III: PAPUA NEW GUINEA—RELATIONS WITH THE WORLD BANK GROUP ### ANNEX III: PAPUA NEW GUINEA—RELATIONS WITH THE WORLD BANK GROUP ### Membership and historical lending - Papua New Guinea (PNG) became a World Bank member upon independence in 1975; recipient of World Bank loans since 1968. - To date, the World Bank has provided PNG with: - 36 IBRD loans totaling US$786.6 million - 14 IDA credits totaling US$152.2 million in commitments ### Current portfolio and active projects (as of December 6, 2007) - World Bank portfolio in PNG currently consists of: - Gazelle Restoration Project — US$25 million (the project is scheduled to close at the end of 2007) - Road Maintenance and Rehabilitation Project — US$37.3 million - Global Environment Facility-supported Teachers’ Solar Lighting Project — US$0.99 million ### Recent relationship dynamics and Interim Strategy Note (ISN) - Bank–government relationship experienced uneven periods, including suspension and cancellation of the Forestry and Conservation Project in 2003–05 due to noncompliance with some loan covenants. - The Bank prepared an Interim Strategy Note (ISN) covering an 18-month period (in lieu of a full 4-year Country Assistance Strategy (CAS)); ISN approved by the Bank’s Board on April 12, 2005. - Under the ISN the Bank’s work focused on priority analytical/advisory services, capacity building, and community outreach. ### Analytical, advisory, and programmatic work under ISN - Bank participation (jointly with AusAID and ADB) in the programmatic Public Expenditure Review and Rationalization process (FY04-present). - Reports and assessments prepared: - Country Procurement Assessment Report (FY04) - Report on Strategic Directions for Human Development (FY06) - Community Driven Development Stocktaking and Roadmap (FY07) - Telecommunications Sector Review (FY07) - Additional activities: - April 2007: approved US$37.3 million IDA credit to supplement funding for an earlier road maintenance and rehabilitation project - 2006: organized Youth Competition Program (Development Marketplace); second round launched in November 2007 - Community outreach via Global Development Learning Network and Public Information Center ### New Country Assistance Strategy (CAS) and expanded engagement - Following significant improvement in macroeconomic performance and other areas since the ISN, the Bank prepared a full four-year CAS in close consultation with the Government. - The Strategy, expected to be approved by the Bank’s Board of Directors in mid-December, 2007, is designed to launch a long-term partnership to: - support sound management of the economy and natural resources - address immediate service delivery needs - build a foundation for tackling longer-term institutional and accountability challenges - As part of the CAS the Bank is increasing concessional financial resources and will assist PNG to access global and regional grant funds such as Global Environmental Facility. - CAS envisages: - up to three IDA credits per fiscal year totaling US$45 million in FY08 and US$30–32 million per fiscal year thereafter - Projects in or near approval/preparation: - Smallholder Agriculture Development Project — US$27.5 million (expected to be approved mid-December, 2007, with the CAS) - Mining Sector Technical Assistance — at an advanced state of preparation - Operational and institutional steps: - expanding the staff of its Port Moresby office - visit by the Bank’s Regional Vice President for East Asia and Pacific in November 2007 ### PNG public debt to World Bank and early repayment plan - PNG’s debt outstanding to the World Bank as of end-November, 2007: US$313.8 million. - Government of PNG expressed interest in early repayment of the less concessional part of the debt and selected for early repayment seven IBRD loans totaling around US$56 million. - The early repayment of these loans is expected to be completed in early 2008. ### IFC (International Financial Corporation) engagement and activities - IFC’s Private Enterprise Partnership for the Pacific (PEP-Pacific) established a full-time presence in PNG in early 2006, co-located with the World Bank. - IFC advisory service activity increased, focusing on: - access to finance - tourism - the business environment - infrastructure - PEP-Pacific workstreams include: - improve capacity of commercial banks to provide credit - increase availability of finance and financial services for the poor, including investment in PNG Microfinance - assist in building financial infrastructure, including establishment of a credit referral bureau - support a survey of PNG’s informal economy to inform development of a national informal sector policy - improve the business environment by working on a sub-set of the Doing Business indicators (in collaboration with the Foreign Investment Advisory Service) - strengthen the tourism sector - improve agribusiness production, quality, supply chains and marketing - explore, jointly with the Bank, opportunities to support growth in the commercial fisheries sector - IFC investment portfolio in PNG: - $1.2 million equity commitment to PNG Microfinance Limited, of which $756 thousand has already been disbursed, giving the IFC a 19 percent shareholding in the bank - equity investment supported by a $2 million institutional capacity building program presently under procurement - negotiations with Digicel PNG Ltd on a $40 million line of credit to support roll-out of its national mobile telephony network - IFC tracking investment opportunities in agribusiness, gas and mining, infrastructure, and forestry ### MIGA activity - The Multilateral Investment Guarantee Agency (MIGA) has provided one guarantee in PNG: - guarantee worth US$76.6 million in gross exposure covering a portion of equity investment and a loan by a syndicate of commercial lending institutions for the Lihir open-pit gold mine - the guarantee facilitated several hundred million US$ in foreign investment in PNG ### IBRD/IDA lending operations — reported figures (as shown in source) - Papua New Guinea: IBRD/IDA Lending Operations (In millions of U.S. dollars) - Fiscal Year 2000 2001200220032004 20052006 2007 2008* - Commitments 132.3057.30000 37.3 - 0 - Disbursements 39.811.365.17.37.810.922.4 20.7 - 1.4 - Undisbursed balance 134.5 114.1106.485.877.151.128.3 45.445.9 - Debt service 49.943.839.337.736.032.839.8 40.319.4 - Note: Fiscal year is July–June. - * As of November 30, 2007. *Prepared from the IMF staff report annex: ANNEX III: PAPUA NEW GUINEA—RELATIONS WITH THE WORLD BANK GROUP (As of December 6, 2007).* ### 2003. Inflation has remained in the low single digits, and international reserves are at a record ### 2003. Inflation has remained in the low single digits, and international reserves are at a record high. ### Overview - Inflation has remained in the low single digits. - International reserves are at a record high. - Significant underlying vulnerabilities persist: little improvement in development indicators, urban unemployment estimated at around 40 percent, exposure to commodity price shocks, and expected decline in mineral production over the medium to longer term. - Investment environment constraints: weak infrastructure and governance, limiting sustained growth of the nonmineral sector. ### Macroeconomic performance (2007) - Buoyant growth of over 6 percent is estimated for 2007, based on robust mineral and nonmineral growth. - Annual average CPI inflation is estimated at under 2 percent in 2007. - The kina continued to appreciate against the U.S. dollar, 7 percent over the year to November. - On a nominal and real effective basis, the kina depreciated by about 4 and 5 percent, respectively, over the year through September. - Strong nonmineral activity is expected to continue in 2008, with some easing. ### Fiscal position - Large mineral revenue inflows and restraint of recurrent costs boosted fiscal savings since 2002 relative to comparators. - Overall fiscal surpluses will continue through 2007–08. - The nonmineral deficit, measured on a cash basis, is now likely to further worsen as mineral revenue eases and spending increases. - Positive debt dynamics and some repayment lowered the public debt-to-GDP ratio to about 35 percent at end-2007, down sharply from a peak of 77 percent in 2002. - Directors encouraged approval of the proposed new Medium-Term Fiscal Strategy, focusing on maintaining a stable and sustainable non-mineral fiscal balance, and supported contracting new debt only on concessional terms. ### External sector and reserves - Large foreign exchange inflows from buoyant mineral exports boosted official reserves to over $2 billion at end-2007, equivalent to about 5 months of goods and services imports, and kept the current account balance in surplus. - Net international reserves (end-period, in millions of U.S. dollars): 399 (2003), 599 (2004), 765 (2005), 1,427 (2006), 2,100 (2007). - Reserves in months of goods and services imports: 2.1 (2003), 2.6 (2004), 2.4 (2005), 3.8 (2006), 4.7 (2007). - Current account (including grants, in millions of U.S. dollars): 159 (2003), 88 (2004), 207 (2005), 163 (2006), 262 (2007). - Exports, f.o.b. (in millions of U.S. dollars): 2,153 (2003), 2,554 (2004), 3,278 (2005), 4,205 (2006), 4,994 (2007). - Imports, c.i.f. (in millions of U.S. dollars): -1,435 (2003), -1,794 (2004), -2,462 (2005), -2,805 (2006), -3,346 (2007). ### Financial sector - The financial sector appears sound, based on backward-looking indicators. - Credit growth continues to be strong, though decelerating, reflecting improved growth prospects and low interest rates. - Directors welcomed indications that the financial sector remains sound and encouraged steps to deepen financial intermediation, strengthen supervision and regulation, and remove institutional rigidities such as weak enforcement of creditor rights and contracts. - Directors encouraged the authorities to request a Financial Sector Assessment Program. - Regarding the Development Bank, Directors recommended lending based on proper credit evaluation without political interference. ### Structural reforms and constraints - Progress on the structural reform agenda under the Medium-Term Development Strategy (MTDS) has stalled over the past year, particularly public sector reform. - Constraints to private activity remain formidable: unreliable basic utilities, poor transportation infrastructure, high crime, low public sector capacity, unclear licensing and regulation policies, weak human capacity, delays in work-visas, and land tenure issues. - Competitiveness of the nonmineral sector has not improved, resulting in little or no increase in nonmineral export volumes; agricultural exports were affected by bad weather. - Directors urged acceleration of structural reform and improvement of infrastructure: transportation, communication and power; legal and institutional framework; labor skills and education; and governance. They highlighted gains from opening state-owned enterprises to competition. ### Outlook and risks - Over the medium term, baseline outlook: return to moderate growth of about 3.5 percent, mainly reflecting onset of production at new mines. - Nonmineral growth expected to decelerate from current peaks to trend growth rates in the absence of structural reform. - Inflation should remain in the middle single digits. - Upside risks: further sustained higher commodity prices, crowding-in of private activity from increased public investment, additional production from existing or new gas and mining projects. - Downside risks: higher unproductive fiscal spending raising demand pressures and spur inflation; weaker global economy leading to lower commodity prices; no action or reversal of progress on structural reform agenda. - Policy prescription: pursue a fiscal-monetary policy mix that maintains macroeconomic stability, use mineral revenues productively, and undertake structural reforms to remove rigidities constraining private activity to raise and sustain productivity and investment. ### Executive Board assessment and recommendations - Directors commended recent strong economic performance reflecting prudent policies and high mineral export prices: accelerated growth, low inflation, and reduced external and fiscal vulnerabilities. - They welcomed one-off spending for infrastructure and social development in line with the MTDS and prepayment of public debt. - Directors stressed careful consideration of the scale of fiscal expansion over the medium term given absorptive and administrative capacity constraints and projected downturn in mineral revenue. - They welcomed plans to improve expenditure management capacity at the subnational level and underscored focusing expenditure on MTDS priorities. - Encouraged reinvigoration of public sector reforms: improve transparency and accountability (notably trust funds, publication of audited central government accounts, and public administration), limit tax exemptions, resume right-sizing initiative. - Considered the current stance of monetary policy appropriate for maintaining low inflation, noted readiness to tighten monetary policy if price pressures build, and agreed the managed floating exchange rate policy is appropriate while allowing flexibility if sustained pressures emerge. - Welcomed intentions to strengthen macroeconomic statistics and to implement the multi-donor technical assistance plan. ### Key statistics (selected) - Real GDP growth (percent change): 2.2 (2003), 2.7 (2004), 3.4 (2005), 2.6 (2006), 6.2 (2007). - Mineral: 2.8 (2003), 0.3 (2004), 5.0 (2005), -5.9 (2006), 4.1 (2007). - Nonmineral: 2.1 (2003), 3.1 (2004), 3.1 (2005), 3.7 (2006), 6.5 (2007). - CPI (annual average): 14.7 (2003), 2.1 (2004), 1.7 (2005), 2.3 (2006), 1.7 (2007) — Est. - Central government revenue and grants (percent of GDP): 29.2 (2003), 34.1 (2004), 34.8 (2005), 36.9 (2006), 37.8 (2007). - Central government expenditure and net lending (percent of GDP): 30.3 (2003), 32.4 (2004), 31.1 (2005), 30.1 (2006), 31.8 (2007). - Overall balance, cash basis (including grants): -1.8 (2003), 0.0 (2004), 3.8 (2005), 5.7 (2006), 6.0 (2007). - Domestic financing (net): 4.0 (2003), 1.8 (2004), -2.7 (2005), -4.3 (2006), -3.8 (2007). - Of which: Banking system: -0.9 (2003), 0.3 (2004), -1.2 (2005), -1.8 (2006), -3.9 (2007). - External financing (net): -2.1 (2003), -1.8 (2004), -1.1 (2005), -1.3 (2006), -2.1 (2007). - Domestic credit (end-period percentage change): -7.1 (2003), 0.7 (2004), 8.6 (2005), 19.4 (2006), 3.7 (2007). - Net credit to government: -8.3 (2003), 3.2 (2004), -13.9 (2005), -13.3 (2006), -75.3 (2007). - Credit to the private sector: -4.1 (2003), 0.9 (2004), 23.7 (2005), 38.2 (2006), 29.7 (2007). - Broad money (end-period percentage change): -4.4 (2003), 14.8 (2004), 29.5 (2005), 38.9 (2006), 24.7 (2007). - Interest rate (182-day T-bills, period average): 18.7 (2003), 3.1 (2004), 3.8 (2005), 3.4 (2006), 4.1 (2007). - Public external debt-to-GDP ratio (in percent): 42.9 (2003), 36.8 (2004), 25.8 (2005), 21.2 (2006), 17.8 (2007). - Public external debt-service ratio (percent of GNFS): 7.5 (2003), 8.7 (2004), 6.0 (2005), 3.5 (2006), 4.0 (2007). - Exchange rates (US$/kina, period average): 0.2814 (2003), 0.3104 (2004), 0.3224 (2005), 0.3272 (2006), 0.3332 (2007). - Exchange rates (US$/kina, end-period): 0.3000 (2003), 0.3200 (2004), 0.3230 (2005), 0.3300 (2006), 0.3400 (2007). - Nominal GDP (millions of kina): 12,567 (2003), 12,652 (2004), 15,263 (2005), 17,051 (2006), 18,551 (2007). *International Monetary Fund staff report for the 2007 Article IV Consultation with Papua New Guinea.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0898.pdf_