## _cr09112 - Executive Summary

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### Executive summary: main points
- Background:
  - Papua New Guinea is feeling the impact of the global crisis primarily through collapsing commodity prices.
  - Growth is expected to slow in 2009, and the outlook remains uncertain.
  - Positive sentiment associated with the prospective Liquefied Natural Gas (LNG) project is spurring domestic demand.
  - A sound fiscal position and a relatively insulated financial sector mean the economy is better placed than many to weather the storm.
- Main issues:
  - The main challenge is to cope with a rapidly deteriorating external environment while ensuring that the accumulated mineral windfall is used effectively to support sustainable growth.
- Staff views:
  - Given the external environment, staff endorse some fiscal loosening in 2009, but are concerned about the magnitude and the quality of public spending.
  - The current monetary stance is appropriate, but policy should react quickly to shifts in balance of risks to inflation and growth.
  - The kina appears mildly overvalued and should be allowed to adjust to help offset the impact of declining commodity prices on export incomes.
- Authorities’ views:
  - Broad agreement on most issues and the required policy responses.
  - Monetary policy should remain focused on price stability given the current outlook.
  - Authorities see merit in allowing the exchange rate to adjust but emphasize smoothing exchange rate movements to anchor inflation expectations.
  - Authorities are mindful of maintaining medium-term fiscal sustainability but face mounting pressures to spend some of the accumulated mineral windfall given development needs.

### I. Macroeconomic backdrop — context and current setting
- Context and vulnerabilities:
  - Papua New Guinea remains a poor country highly exposed to commodity price fluctuations.
  - Binding constraints: weak infrastructure, governance problems, high crime constrain nonmineral sector growth.
  - Economy highly vulnerable to swings in commodity prices given their importance for exports and public revenue.
- Recent performance and indicators:
  - Real GDP grew by 6.5 percent in 2007, driven by nonmineral sector growth of 7.3 percent (especially construction and communications).
  - Leading indicators suggest activity continued to expand rapidly in 2008.
  - CPI inflation accelerated in late-2007, reaching nearly 13.5 percent (y/y) in September 2008, driven mainly by rising food and energy prices with limited indicators of broad-based inflation pressures.
- Fiscal performance:
  - Mineral windfall largely saved and public debt reduced.
  - Reliance on mineral revenue increased; nonmineral deficit remained high.
  - Estimated fiscal surplus for 2008: 4.5 percent of GDP, down from 8 percent in 2007.
  - 2009 budget envisages a reversal to a deficit due to expected drop in mineral revenues and higher planned expenditure.
- Monetary and financial conditions:
  - Policy rate increased four times since June 2008 by a total of 200 basis points to 8 percent.
  - High inflation has reduced real lending rates.
  - Credit growth accelerated to 41 percent (y/y) in December 2008 from 34 percent (y/y) at end-2007.
  - Banks are very liquid and largely isolated from international capital markets; spillovers from global turmoil limited.
  - Kina Securities Index about 40 percent below its peak in June (as of end-2008).
- External position:
  - External debt reduced to about 27 percent of GDP at end-2008.
  - Official foreign exchange reserves rose to US$2.7 billion in early August 2008, later drawn down to about US$2 billion in the second half of 2008 to resist depreciation pressures.
  - Real effective exchange rate appreciated since August 2008, primarily because of depreciation in the Australian dollar against the U.S. dollar.

### II. Policy discussions — focus areas and outlook
- Near-term and medium-term priorities:
  - Near term: cope with a rapidly deteriorating external environment while using the accumulated mineral windfall effectively to support sustainable growth.
  - Medium term: strengthen the private nonmineral sector to close the development gap with regional peers and reduce external vulnerability.
- Outlook (staff projections):
  - Real GDP: 7.0 (2008), 3.9 (2009), 3.7 (2010), 3.3 (2011), 3.0 (2012), 2.4 (2013)
  - Mineral GDP: 4.8 (2008), 2.6 (2009), 4.2 (2010), 3.0 (2011), 0.1 (2012), -2.4 (2013)
  - Nonmineral GDP: 7.2 (2008), 4.1 (2009), 3.7 (2010), 3.4 (2011), 3.3 (2012), 2.9 (2013)
  - CPI inflation (eop): 11.2 (2008), 5.3 (2009), 4.8 (2010), 4.5 (2011), 4.0 (2012), 3.5 (2013)
  - Current account balance (percent of GDP): 2.8 (2008), -6.7 (2009), -4.7 (2010), -4.3 (2011), -3.9 (2012), -3.1 (2013)
  - Overall fiscal balance (percent of GDP): 4.5 (2008), -2.0 (2009), -1.5 (2010), -1.5 (2011), -1.0 (2012), -1.3 (2013)
  - Nonmineral fiscal balance (percent of GDP): -6.7 (2008), -7.2 (2009), -6.2 (2010), -6.0 (2011), -5.7 (2012), -6.0 (2013)
- Forecast commentary:
  - Staff project growth to ease to under 4 percent in 2009 from an estimated 7 percent in 2008, with slowdown in both nonmineral and mineral sectors.
  - Authorities slightly more optimistic, expecting LNG-related sentiment to stimulate nonmineral sector via higher investment.
  - Staff expect inflation to ease quickly as commodity-price declines feed through; BPNG officials note domestic price pressures may persist given LNG confidence boost and increased public spending envisaged in 2009 budget.
  - LNG project final approval not expected until end-2009 and therefore not included in staff’s baseline forecast.

### Fiscal policy — managing mineral wealth and the 2009 budget
- Medium-Term Fiscal Strategy (MTFS) design and limits:
  - Core MTFS rule: constrain the nonmineral deficit to be no more than 8 percent of GDP.
  - Ongoing-spending nonmineral deficit cap: cannot exceed 4 percent of GDP—the assessed structural ratio of mineral revenue to GDP.
  - MTFS allows additional public investment of up to 4 percent of GDP from accumulated past surpluses, provided it is directed toward achieving Medium-Term Development Strategy (MTDS) goals.
  - Mineral revenues above 4 percent of GDP: used for “one-off” expenditures, debt reduction (30 percent) and additional public investment (70 percent).
  - Government to reassess the 4 percent of GDP estimate every two years.
- 2009 Budget stance and risks:
  - Fiscal balance expected to deteriorate to -2 percent of GDP from an expected surplus of 4.5 percent of GDP in 2008.
  - DSIP allocation in 2009: 356 million kina (1.8 percent of GDP) financed with accumulated surpluses held in trust accounts.
  - Prior DSIP allocations in 2007–08: 890 million kina (4.2 percent of GDP), of which only 0.2 percent of GDP had been spent as of end-September 2008.
  - Given easing of constraints on spending from DSIP trust accounts, total envelope to be spent under DSIP could amount to 6 percent of GDP in 2009.
  - Minimum wage increase: total increase in the minimum wage is 170 percent, phased in over 40 weeks starting mid-February through mid-October.
- Staff assessment and recommendations:
  - Staff agreed some fiscal loosening appropriate in 2009 but concerned about magnitude and quality of public spending.
  - Staff judged the fiscal stance too expansionary given the cyclical position; recommended aiming for a balanced budget on staff’s definition.
  - Use of trust funds in 2009 budget not fully consistent with MTFS: portions financed with accumulated windfall revenue lack mechanisms to ensure resources are directed toward MTDS priority public investment.
  - Capacity constraints and near absence of reporting and accountability in local governments raise concerns about spending efficiency.
  - Staff caution: given outlook for commodity prices and limited prospects for additional windfall revenues, importance stressed on safeguarding accumulated revenues and using them effectively to achieve development needs.

### Revenue, tax policy and administration
- Staff advice:
  - Continued tax reform to reduce budgetary dependence on mineral revenues.
  - Strengthen tax administration and rationalize corporate tax incentives to improve nonmineral revenue buoyancy and efficiency.
  - Concern about growing list of ad hoc tax concessions undermining the tax base.
- Authorities’ position:
  - Incentives seen as necessary to stimulate growth; committed to maintain current tax base and avoid ad hoc future concessions — future concessions to be granted only under existing laws.

### Public investment, LNG project implications, and related projections
- Staff advice:
  - Be cautious regarding planned public investment in the LNG project due to potential pressure on the country’s debt position.
  - Channel dividends from the public’s equity stake in the project through the budget to ensure they are directed toward development needs.
- Box: GDP Impact of the LNG Project (key quantitative estimates)
  - Total Project Cost: US$11–13 billion
  - State's equity participation: US$1.1 billion
  - State's completion guarantee: US$2.0 billion
  - Capital investment: 55% of total cost
  - Labor investment: 45% of total cost
  - Construction phase: 85% of total cost
  - Production phase: 15% of total cost
  - Maximum Capacity: 60 mboe per year*
  - Impact on GDP (per year):
    - Construction period: 0.8 percent of GDP
    - Peak production period: 25–30 percent of GDP
    - Overall period: 15–20 percent of GDP
  - Project expected to increase annual GNI by about 9 percent.
  - Production expected to commence in late 2013, with a maximum capacity of about 60 million barrels of oil equivalent; the 30-year project estimated to increase GDP, through both direct and indirect channels, by about 15 to 20 percent. The impact during the 5-year construction phase will be relatively small.
  - Note: * mboe: million barrel of oil equivalent.

### Monetary policy, inflation, and exchange rate
- Monetary stance and guidance:
  - Current monetary stance viewed as appropriate.
  - Policy should respond quickly to shifts in risks to inflation and growth.
  - Advice: central bank should keep its policy rate on hold until more certainty about domestic inflation pressures; be prepared to loosen quickly if leading indicators suggest domestic demand will slow sharply or the inflation outlook improves.
- Recent actions and indicators:
  - Policy rate increased by a total of 200 basis points to 8 percent by December 2008.
  - Headline: inflation reached 13.5 percent (year-on-year) in September 2008.
  - CPI (annual average): 10.7 (2008 Est.), 8.2 (2009 Proj.); CPI (end-period): 11.2 (2008 Est.), 5.3 (2009 Proj.).
  - Staff assessment: the kina is mildly overvalued; encouraged greater exchange rate flexibility.
- Exchange rate assessment:
  - NEER (2000=100, end-period): 80.7 (2005), 78.0 (2006), 77.7 (2007), 95.0 (2008 Est.)
  - REER (2000=100, end-period): 104.2 (2005), 98.0 (2006), 98.7 (2007), 135.2 (2008 Est.)
  - Box: Equilibrium Real Exchange Rate (key quantitative results)
    - MB approach overvaluation: 3/ -1.9 -3.1 3.0 (table row shows: REER NormProj. 2/Overvaluation MB approach 3/-1.9-3.13.0)
    - ERER approach overvaluation: ......16.3
    - Medium-term ERER approach: implied overvaluation 16 percent.
    - Given statistical uncertainty, overvaluation of 3 percent under MB approach is not significantly different from zero.
    - Overvaluation assessed relative to January 2009.

### Financial sector — resilience, risks, and recommendations
- Resilience:
  - Financial sector insulated from direct effects of global turmoil due to banks funded primarily via domestic deposits.
  - Superannuation funds weathered turmoil well; expectations of positive returns in 2008 due to domestic investments, particularly real estate.
  - Financial intermediation remains very low: credit to the private sector represents less than 20 percent of GDP.
- Risks and vulnerabilities:
  - Primary risk is asset quality given expected declines in export incomes and rapid prior credit growth.
  - Rapid credit growth: 41 percent (y/y) in December 2008.
  - Revival of the Development Bank could direct funds by political interests, generating hidden fiscal liabilities.
- Recommendations:
  - Continue monitoring liquidity and exposure; banks should maintain strict lending standards and monitor borrowers’ servicing abilities carefully.
  - Staff supported transfer of part of government’s trust accounts from private banks to the BPNG to reduce liquidity and ease credit growth.
  - Authorities reported progress on credit monitoring, including establishment of a credit and data bureau.
  - Authorities welcomed an FSAP tentatively scheduled for late-2009 and confirmed willingness to undertake a self-assessment prior to the FSAP.

### Debt sustainability, contingent liabilities, and DSA conclusions
- Public debt dynamics and baseline:
  - Public sector debt declined from about 71½ percent in 2002 to under 34 percent of GDP in 2007; by end-2008, estimated at about 26½ percent of GDP with public external debt about 12 percent.
  - Baseline DSA (does not include the LNG project) envisages a gradual increase in public debt-to-GDP ratio in the medium term, peaking at 30 percent, then declining to 22½ percent in the long run.
- Contingent liabilities and sensitivities:
  - Unfunded civil service liabilities amount to about 11 percent of GDP at end-2008.
  - LNG project related contingent liabilities estimated in PV terms at about 20½ percent of GDP in 2013 (exchangeable bonds US$1.1 billion and completion guarantee up to US$2 billion).
  - SOE-related contingent liabilities preliminarily estimated at about 2.5 percent of GDP (end-2007 data) excluding unknown off-balance-sheet items.
  - Sensitivity tests: a shock to real GDP growth during 2009–10 equal to historical average minus one standard deviation would bring PV of public debt-to-GDP ratio to 71 percent in 2028.
  - Terms-of-trade shock (export prices declining by 20 percent compared to January 2009 WEO assumption) would project PV of external PPG debt-to-GDP to breach the 30 percent threshold in the medium term.
- Policy guidance:
  - Continued prudent management of debt over the medium and long term required.
  - Strengthen debt management capacity and safeguard accumulated windfall revenues.

### Structural reform, public service delivery, and statistical capacity
- Structural priorities:
  - MTDS (2005–10) recognizes need to shift growth toward private nonmineral sector; stresses increasing exports of nonminerals and manufactures.
  - Needed improvements include transportation, micro-credit, power and telecommunications, human capital, and reduction of crime.
  - Implementation of structural reforms has slowed; decisive actions lacking except in communication sector.
  - Example: extraordinary improvements in communication services following competition in cellular market.
- Public service delivery and investment climate:
  - Enforcing contracts, dealing with licenses, and obtaining credit are more cumbersome relative to regional peers; security is a significant barrier.
  - Sectoral composition (Share of Nominal GDP, 2007):
    - Agriculture, Forestry and Fishing: 36%
    - Mineral: 27%
    - Construction: 10%
    - Other: 13%
    - Wholesale and Retail trade: 6%
    - Manufacturing: 6%
    - Transport and Communication: 2%
- Macroeconomic data and statistics:
  - Progress limited on improving quality and timeliness of macroeconomic data.
  - NSO lacks sufficient capacity; Treasury producing national accounts for 2002 to present.
  - Balance of payments data quality improving; monetary statistics reporting to STA improved.
  - Staff urge intensive efforts to address shortcomings; authorities agreed but offered no timetable to resolve institutional impasse over statistical responsibilities.

### Key quantitative tables and selected indicators (highlights)
- Real GDP growth (percent): 2005: 3.6; 2006: 2.6; 2007: 6.5; 2008 (Est.): 7.0; 2009 (Proj.): 3.9
- CPI (end-period): 2007: 3.2; 2008 (Est.): 11.2; 2009 (Proj.): 5.3
- Central government overall balance (from above the line, percent of GDP): 2007: 8.2; 2008 (Est.): 4.5; 2009 (Proj.): -2.0
- Nonmineral balance (from below the line, percent of GDP): 2007: -6.8; 2008 (Est.): -6.7; 2009 (Proj.): -7.2
- Credit to the private sector (end-period percent change): 2007: 34.4; 2008 (Est.): 41.0; 2009 (Proj.): 21.3
- Net international reserves (end-period, millions of U.S. dollars): 2007: 2,083; 2008 (Est.): 2,090; 2009 (Proj.): 2,140
- Current account (percent of GDP): 2007: 1.8; 2008 (Est.): 2.8; 2009 (Proj.): -6.7
- Public external debt-to-GDP ratio (percent): 2007: 16.7; 2008 (Est.): 12.2; 2009 (Proj.): 14.7
- Selected commodity price assumptions (January 2009 WEO projection):
  - Gold (US$/oz): 697, 872, 880, 890, 905, 925, 940 (2007–2013)
  - Copper (US$/ton): 7,132, 6,963, 3,500, 3,800, 4,000, 4,200, 4,400 (2007–2013)
  - Oil (US$/barrel): 71, 97, 50, 60, 65, 67, 69 (2007–2013)

### Staff appraisal and final policy recommendations (summary)
- Macroeconomic position:
  - PNG entered the global financial crisis with savings of mineral windfalls, large current account surpluses, lower public debt, increased exchange rate flexibility, and limited bank exposure to global markets.
- Overall policy guidance:
  - Some fiscal loosening in 2009 is warranted, but staff recommend a less expansionary stance than envisaged and emphasize protecting the quality of spending and medium-term fiscal sustainability.
  - Monetary stance appropriate; be prepared to loosen quickly if domestic demand and inflation pressures ease more than expected or if downside domestic impacts materialize.
  - Allow the kina to adjust to help offset export income shock and safeguard foreign reserves, while smoothing volatility to anchor inflation expectations.
  - Maintain strict bank lending standards and monitor nonperforming loans.
  - Accelerate structural reforms (health, education, law and order), improve transparency of SOEs, and strengthen macroeconomic statistics.

*Source: Executive Summary and Sections I–II of the IMF staff report _cr09112 - Executive Summary_*

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

### _cr09112 - Executive Summary

### Executive summary: main points
- Background: Papua New Guinea is feeling the impact of the global crisis primarily through collapsing commodity prices. Growth is expected to slow in 2009, and the outlook remains uncertain. Positive sentiment associated with the prospective Liquefied Natural Gas (LNG) project is spurring domestic demand. A sound fiscal position and a relatively insulated financial sector mean the economy is better placed than many to weather the storm.
- Main issues: The main challenge is to cope with a rapidly deteriorating external environment while ensuring that the accumulated mineral windfall is used effectively to support sustainable growth.
- Staff views:
  - Given the external environment, staff endorse some fiscal loosening in 2009, but are concerned about the magnitude and the quality of public spending.
  - The current monetary stance is appropriate, but policy should react quickly to shifts in balance of risks to inflation and growth.
  - The kina appears mildly overvalued and should be allowed to adjust to help offset the impact of declining commodity prices on export incomes.
- Authorities’ views:
  - Broad agreement on most issues and the required policy responses.
  - Monetary policy should remain focused on price stability given the current outlook.
  - Authorities see merit in allowing the exchange rate to adjust but emphasize smoothing exchange rate movements to anchor inflation expectations.
  - Authorities are mindful of maintaining medium-term fiscal sustainability but face mounting pressures to spend some of the accumulated mineral windfall given development needs.

### I. Macroeconomic backdrop — context and current setting
- Context:
  - Macroeconomic performance has improved, but Papua New Guinea remains a poor country highly exposed to commodity price fluctuations.
  - Recent improvements: GDP growth performance improved notably in the last several years; until recently, inflation remained low due to favorable terms-of-trade and improved macroeconomic management.
  - Binding constraints: unattractive investment environment (weak infrastructure, governance problems, high crime) constrains nonmineral sector growth.
  - Vulnerability: economy highly vulnerable to swings in commodity prices given their importance for exports and public revenue.
- Current economic setting:
  - Growth and inflation:
    - Real GDP grew by 6.5 percent in 2007, driven by nonmineral sector growth of 7.3 percent (especially construction and communications).
    - Leading indicators suggest activity continued to expand rapidly in 2008.
    - CPI inflation accelerated in late-2007, reaching nearly 13.5 percent (y/y) in September 2008, driven mainly by rising food and energy prices with limited indicators of broad-based inflation pressures.
  - Fiscal performance:
    - Fiscal balance strengthened until recently: mineral windfall largely saved and public debt reduced.
    - Reliance on mineral revenue increased; nonmineral deficit remained high.
    - Estimated fiscal surplus for 2008: 4.5 percent of GDP, down from 8 percent in 2007.
    - 2009 budget envisages a reversal to a deficit due to expected drop in mineral revenues and higher planned expenditure.
  - Monetary conditions:
    - Policy rate increased four times since June 2008 by a total of 200 basis points to 8 percent.
    - High inflation has reduced real lending rates.
    - Despite some sterilization, large increase in foreign reserves through August contributed to easing credit conditions.
    - Credit growth accelerated to 41 percent (y/y) in December 2008 from 34 percent (y/y) at end-2007.
  - Financial sector resilience:
    - Spillovers from global financial turmoil have been limited; banks are very liquid and largely isolated from international capital markets.
    - As of end-2008, Kina Securities Index about 40 percent below its peak in June, mirroring regional equity declines.
  - External position:
    - Real and nominal effective exchange rates stable since 2003 through mid-August 2008; improved terms-of-trade produced current account surpluses.
    - Preliminary data to Q3 2008 suggest current account surplus widened further, though late-2008 commodity price declines may reverse this.
    - External debt reduced to about 27 percent of GDP at end-2008.
    - Official foreign exchange reserves rose to US$2.7 billion in early August 2008, later drawn down to about US$2 billion in the second half of 2008 to resist depreciation pressures in the Kina/U.S. dollar rate.
    - Real effective exchange rate appreciated since August 2008, primarily because of depreciation in the Australian dollar against the U.S. dollar.

### II. Policy discussions — focus areas and outlook
- Near-term and medium-term priorities:
  - Near term: cope with a rapidly deteriorating external environment while using the accumulated mineral windfall effectively to support sustainable growth.
  - Medium term: strengthen the private nonmineral sector to close the development gap with regional peers and reduce external vulnerability.
- Discussions focused on:
  - Managing accumulated fiscal surpluses to direct the mineral windfall toward broad-based growth.
  - Guarding against persistently high inflation.
  - Assessing financial sector stability.
- Outlook (staff and authorities):
  - Consensus that activity is slowing in line with global developments.
  - Staff projections:
    - Real GDP: 7.0 (2008), 3.9 (2009), 3.7 (2010), 3.3 (2011), 3.0 (2012), 2.4 (2013)
    - Mineral GDP: 4.8 (2008), 2.6 (2009), 4.2 (2010), 3.0 (2011), 0.1 (2012), -2.4 (2013)
    - Nonmineral GDP: 7.2 (2008), 4.1 (2009), 3.7 (2010), 3.4 (2011), 3.3 (2012), 2.9 (2013)
    - CPI inflation (eop): 11.2 (2008), 5.3 (2009), 4.8 (2010), 4.5 (2011), 4.0 (2012), 3.5 (2013)
    - Current account balance (percent of GDP): 2.8 (2008), -6.7 (2009), -4.7 (2010), -4.3 (2011), -3.9 (2012), -3.1 (2013)
    - Overall fiscal balance (percent of GDP): 4.5 (2008), -2.0 (2009), -1.5 (2010), -1.5 (2011), -1.0 (2012), -1.3 (2013)
    - Nonmineral fiscal balance (percent of GDP): -6.7 (2008), -7.2 (2009), -6.2 (2010), -6.0 (2011), -5.7 (2012), -6.0 (2013)
  - Staff project growth to ease to under 4 percent in 2009 from an estimated 7 percent in 2008, with slowdown in both nonmineral and mineral sectors.
  - Authorities slightly more optimistic, expecting LNG-related sentiment to stimulate nonmineral sector via higher investment.
  - Staff expect inflation to ease quickly as commodity-price declines feed through; BPNG officials note domestic price pressures may persist given LNG confidence boost and increased public spending envisaged in 2009 budget.
  - LNG project treatment: final approval not expected until end-2009 and therefore not included in staff’s baseline forecast.
- Boxed themes referenced (titles only as part of discussion focus): The Global Financial Turmoil: The Impact on Papua New Guinea; The New Medium-Term Fiscal Strategy; The 2009 Budget; GDP Impact of the LNG Project; Equilibrium Real Exchange Rate.

### Policy implications and staff recommendations (summary)
- Fiscal:
  - Endorse some fiscal loosening in 2009 in light of external conditions, while emphasizing concern about magnitude and quality of public spending.
  - Ensure mineral windfall is directed toward sustainable, broad-based growth and preserve medium-term fiscal sustainability.
- Monetary and exchange rate policy:
  - Current monetary stance viewed as appropriate.
  - Policy should respond quickly to shifts in risks to inflation and growth.
  - Allow the kina to adjust (it appears mildly overvalued) to help offset declining commodity prices’ impact on export incomes, while smoothing movements to anchor inflation expectations.
- Financial sector:
  - Continue monitoring liquidity and exposure, given banks’ high liquidity and limited direct exposure to international capital markets.
  - Be alert to equity market spillovers and maintain safeguards given rapid credit growth (41 percent y/y in December 2008).

*Source: Executive Summary and Sections I–II of the IMF staff report _cr09112 - Executive Summary_*

### 9.      There was broad agreement that downside risks dominate, albeit with some

### _cr09112 - 9.      There was broad agreement that downside risks dominate, albeit with some

### Global outlook and risk balance
- Broad agreement that downside risks dominate the outlook; outlook highly vulnerable to additional weakening in the terms of trade and further softening in external demand.
- Upside risk: expectations that the LNG project will move forward may have a larger-than-expected positive impact on domestic demand.

### Fiscal Policy — Managing Mineral Wealth
- Staff commended adoption of the Medium-Term Fiscal Strategy (MTFS).
- Core MTFS rule: constrain the nonmineral deficit to be no more than 8 percent of GDP.
- Ongoing-spending nonmineral deficit cap: cannot exceed 4 percent of GDP—the assessed structural ratio of mineral revenue to GDP.
- MTFS allows additional public investment of up to 4 percent of GDP from accumulated past surpluses, provided it is directed toward achieving Medium-Term Development Strategy (MTDS) goals.
- Staff view: MTFS strengthens the fiscal framework but could be fine-tuned to reduce procyclicality by using the cyclical position of the economy explicitly to determine the amount of excess mineral revenue to be spent each year.

Box: The New Medium-Term Fiscal Strategy (summary of design principles)
- Nonmineral fiscal deficit constrained to fall within a range of 4 to 8 percent of GDP.
- Ongoing spending (including recurrent and development spending) should be kept in line with “normal revenues.”
- Normal revenues = nonmineral revenues + normal mineral revenues (about 4 percent of GDP).
- Mineral revenues above 4 percent of GDP should be used for “one-off” expenditures, debt reduction (30 percent) and additional public investment (70 percent).
- In any year, no more that 4 percent of GDP can be spent from the trust accounts on additional public investment.
- Estimate of normal mineral revenues based on average from 1999–2003 and expected performance in 2010–12; government to reassess the 4 percent of GDP estimate every two years.

### 2009 Budget — stance, risks, and staff assessment
- Staff agreed some fiscal loosening appropriate given external environment, but concerned about magnitude.
- Fiscal stance: although the 2009 deficit expected to fall within MTFS limits, staff judged the fiscal stance too expansionary given the cyclical position; aiming for a balanced budget on staff’s definition would be more prudent.
- Staff concern: given the revenue outlook, the level of public spending in the budget cannot be maintained without undermining debt sustainability.
- Use of trust funds in 2009 budget not fully consistent with MTFS: portions financed with accumulated windfall revenue lack mechanisms to ensure resources are directed toward MTDS priority public investment.
- Capacity constraints and near absence of reporting and accountability in local governments raise concerns about spending efficiency.
- Political pressures: authorities face demands to increase visible local spending (notably through the District Service Improvement Program).

Box: The 2009 Budget (key points and staff projections)
- Fiscal stance is expansionary: fiscal balance expected to deteriorate to -2 percent of GDP from an expected surplus of 4.5 percent of GDP in 2008.
- Risks that budget underestimates increase in expenditure:
  - DSIP allocation in 2009: 356 million kina (1.8 percent of GDP) financed with accumulated surpluses held in trust accounts.
  - Prior DSIP allocations in 2007–08: 890 million kina (4.2 percent of GDP), of which only 0.2 percent of GDP had been spent as of end-September 2008.
  - Given easing of constraints on spending from DSIP trust accounts, total envelope to be spent under DSIP could amount to 6 percent of GDP in 2009.
  - Minimum wage increase: total increase in the minimum wage is 170 percent, phased in over 40 weeks starting mid-February through mid-October.
- Staff projections vs Budget (in percent of GDP) — Summary of Central Government Operations, 2008–2009:
  - Revenue and grants: Staff Proj. 32.6, Budget 31.5, Staff Proj. 27.1
  - Revenue: Staff Proj. 29.1, Budget 26.7, Staff Proj. 23.8
  - Mineral: 11.2, 3.6, 5.3
  - Nonmineral 1/: 17.9, 23.1, 18.6
  - Grants: 3.5, 4.6, 3.3
  - Total Expenditure: 28.1, 31.5, 29.1
  - Recurrent: 18.2, 18.5, 18.4
  - Development: 6.0, 13.1, 10.7
  - o/w DSIP 2/: 0.2, 1.8, 1.7
  - APE 3/: 3.8, 0.0, 0.0
  - Overall balance: 4.5, 0.0, -2.0
  - Memorandum items:
    - Trust funds balance 4/: 16.6, 14.7, 14.7
    - Estimated fiscal impulse: 5.2, ..., 6.5
- Sources: PNG authorities and Fund staff projections and estimates.
- Footnotes from box:
  - 1/ The 2009 budget records as revenue $600 million kina previously accumulated in trust accounts. Under the IMF presentation, this amount is recorded as positive financing.
  - 2/ District Service Improvement Program.
  - 3/ Additional priority spending.
  - 4/ Stock.
- Staff caution: given outlook for commodity prices and limited prospects for additional windfall revenues, importance stressed on safeguarding accumulated revenues and using them effectively to achieve development needs.

### Revenue base and tax policy recommendations
- Staff advice: continued tax reform to reduce budgetary dependence on mineral revenues.
- Key measures: strengthen tax administration and rationalize corporate tax incentives to improve nonmineral revenue buoyancy and efficiency.
- Concern: growing list of ad hoc tax concessions undermines the tax base.
- Authorities’ position: incentives seen as necessary to stimulate growth; committed to maintain current tax base and avoid ad hoc future concessions — future concessions to be granted only under existing laws.

### Public investment and LNG project implications
- Staff advised budget plans be cautious regarding planned public investment in the LNG project due to potential pressure on the country’s debt position.
- Emphasized channeling dividends from the public’s equity stake in the project through the budget to ensure they are directed toward development needs.

Box: GDP Impact of the LNG Project (summary of key quantitative estimates)
- Total Project Cost: US$11–13 billion
- State's equity participation: US$1.1 billion
- State's completion guarantee: US$2.0 billion
- Capital investment: 55% of total cost
- Labor investment: 45% of total cost
- Construction phase: 85% of total cost
- Production phase: 15% of total cost
- Maximum Capacity: 60 mboe per year*
- Impact on GDP (per year):
  - Construction period: 0.8 percent of GDP
  - Peak production period: 25–30 percent of GDP
  - Overall period: 15–20 percent of GDP
- Accounting for substantial income outflows, project is expected to increase annual GNI by about 9 percent.
- Production expected to commence in late 2013, with a maximum capacity of about 60 million barrels of oil equivalent; the 30-year project estimated to increase GDP, through both direct and indirect channels, by about 15 to 20 percent. The impact during the 5-year construction phase will be relatively small.
- Source: PNG Treasury.
- Note: * mboe: million barrel of oil equivalent.

### Monetary Policy — guarding against persistently high inflation
- Staff view: current monetary stance appropriate but policy must react quickly to changing circumstances.
- Rationale: imported inflation to fall rapidly given declining commodity prices, but fiscal stimulus for 2009 and still rapid credit growth may fuel nontradables inflation.
- Advice: central bank should keep its policy rate on hold until more certainty about domestic inflation pressures; be prepared to loosen quickly if leading indicators suggest domestic demand will slow sharply or the inflation outlook improves.
- Authorities: broadly agreed but considered loosening unlikely in near term; noted domestic capacity stretched and anecdotal evidence of rapidly rising real estate prices; noted planned fiscal easing and minimum wage increase could impart significant domestic inflation pressure.
- Staff supported transfer of part of government’s trust accounts from private banks to the BPNG to reduce liquidity and ease credit growth; authorities negotiating transfer of remaining trust accounts.
- Footnote on trust accounts: government’s trust accounts are an inexpensive source of funds for the banks as interest of only 1 percent is paid on these deposits.

### Financial Sector — coping with global financial turmoil
- Agreement that the financial sector is insulated from direct effects of global financial market turmoil due to banks funded primarily via domestic deposits.
- Primary risk: asset quality — concerns about debt-servicing capabilities given expected declines in export incomes and rapid prior credit growth.
- Mitigating factor: credit expansion largely to banks’ long-term customers.
- Authorities reported progress on credit monitoring, including establishment of a credit and data bureau.
- Staff concern: revival of the Development Bank might direct funds by political interests generating hidden fiscal liabilities; authorities noted the Development Bank has remained both small and profitable.
- Superannuation funds: have weathered turmoil well; despite large holdings in mining, oil, and other equities that dropped substantially, funds still expecting positive returns in 2008 due to continued strong performance of other domestic investments, particularly real estate.
- Financial intermediation remains very low: credit to the private sector represents less than 20 percent of GDP.
- Structural rigidities: weak enforcement of contracts and credit rights hinder intermediation.
- Authorities welcomed an FSAP tentatively scheduled for late-2009 and confirmed willingness to undertake a self-assessment prior to the FSAP.

### Exchange Rate assessment and external stability
- Staff estimates suggest mild overvaluation of the kina in line with recent deterioration in the terms of trade; mission encouraged greater exchange rate flexibility.
- Policy tradeoff: allowing currency to adjust would help offset export income shock and safeguard foreign reserves; authorities prefer slower exchange rate adjustment to anchor inflation expectations given extraordinary global volatility and high domestic inflation.
- External debt: declined to about 27 percent of GDP in 2008 due to large current account surpluses and early debt repayment.
- Debt sustainability analysis: risk of debt distress is moderate, but broader public-sector obligations and vulnerability to terms-of-trade shocks could produce highly unfavorable debt dynamics.
- Box: Equilibrium Real Exchange Rate (key quantitative results)
  - MB approach overvaluation: 3/ -1.9 -3.1 3.0  (table row shows: REER NormProj. 2/Overvaluation MB approach 3/-1.9-3.13.0)
  - ERER approach overvaluation: ......16.3
  - Medium-term ERER approach: implied overvaluation 16 percent.
  - Given statistical uncertainty, overvaluation of 3 percent under MB approach is not significantly different from zero.
  - Contributions: demographic factors and trade oil surpluses main determinants of equilibrium current account under MB approach; change in terms of trade key factor determining equilibrium exchange rate.
  - Overvaluation assessed relative to January 2009.
- Alternative scenarios include the LNG-project scenario and other liabilities.

### Structural reform and fostering sustainable, broad-based growth
- MTDS (2005–10) correctly recognizes need to shift growth toward private nonmineral sector; stresses increasing exports of nonminerals and manufactures.
- Needed improvements to catch up with peers:
  - address weak transportation system,
  - encourage private micro-credit facilities,
  - improve basic utilities such as power and telecommunications services,
  - increase human capital,
  - reduce crime.
- Implementation of structural reforms has slowed; decisive actions lacking except in communication sector.
- Example of reform benefit: extraordinary improvements in communication services following introduction of competition in the cellular phone market.
- Government plans review of the development strategy in late 2009.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 27.      The authorities agreed with this assessment. They noted that the political

### _cr09112 - 27.      The authorities agreed with this assessment. They noted that the political

### LNG project, mineral sector, and nonmineral growth
- Staff assessment: the prospective LNG project could provide a permanent boost to GDP growth, provided the resulting revenues and dividends were directed toward addressing development needs.
- Characteristics of the mineral sector:
  - Operates as an “enclave” with limited direct spillovers to other sectors.
  - Key linkage to the nonmineral sector is via revenues to the public budget.
- Projection and scenario logic:
  - If the LNG project goes forward, it will result in a large, one-time increase in the level of GDP once production commences.
  - Without significant progress on the reform front, GDP growth will revert to trend in the following years.
  - To permanently raise long-term growth in the nonmineral sector, the resulting revenues and public ownership proceeds must be channeled through the budget and directed toward effectively addressing development needs.
- Authorities’ stance: political commitment toward accelerating these reforms has been minimal because focus has been almost entirely directed toward the LNG project.

### Public service delivery, private investment climate, and security
- Mission emphasis: notable improvements to public service delivery and the private investment climate are central to addressing development needs.
- Specific bottlenecks cited:
  - Enforcing contracts, dealing with licenses, and obtaining credit are relatively more cumbersome compared to other countries in the region, according to the World Bank ease-of-doing-business database.
  - Security issues continue to be a significant barrier to private sector activity.
- Sectoral composition (Share of Nominal GDP, 2007, Source: PNG Treasury):
  - Agriculture, Forestry and Fishing: 36%
  - Mineral: 27%
  - Construction: 10%
  - Other: 13%
  - Wholesale and Retail trade: 6%
  - Manufacturing: 6%
  - Transport and Communication: 2%

### Macroeconomic data and statistical capacity
- Progress is limited on improving the quality and timeliness of macroeconomic data.
- Institutional issue highlighted:
  - The department of National Planning and Monitoring (currently responsible for the National Statistic Office (NSO)) has been unwilling to transfer the compilation and dissemination of economic statistics from the NSO to the BPNG, as advised by the December 2007 STA mission.
- Staff position: intensive efforts are needed to address shortcomings in the quality and timeliness of macroeconomic data.
- Authorities’ response: they agreed but offered no indication of when or how the impasse might be resolved.

### Staff appraisal — macroeconomic position and external environment (paragraphs 31–33)
- Initial conditions at onset of the global financial crisis:
  - Windfall mineral revenues had been largely saved.
  - Large current account surpluses and the early repayment of public debt had improved the external debt position.
  - Exchange rate flexibility had increased.
  - The banking system had only limited exposure to global financial markets.
- Impact of global slowdown:
  - Deterioration in international economic conditions is having an impact, albeit milder than in many other countries.
  - Main channel: lower export revenues owing to the collapse in commodity prices, worsening domestic and external balances.
  - Buffers: prospective LNG project and relative insulation of banks from global financial markets.

### Monetary and fiscal stance (paragraphs 33–38)
- Monetary policy:
  - Monetary stance is appropriate, but caution is needed moving ahead.
  - Risk: domestic price pressures could prevent a rapid decline in inflation despite decline in food and energy prices.
  - Recommendation: central bank should be prepared to loosen quickly if a larger-than-expected negative domestic impact materializes.
- Medium-Term Fiscal Strategy:
  - If fully implemented, it will help maintain macroeconomic stability.
  - Insulating recurrent spending from abnormal fluctuations in mineral revenues will facilitate planning and help guard against procyclical fiscal policy.
  - Macroeconomic stability would be enhanced if monetary and fiscal authorities cooperated to ensure the cyclical position of the economy determined the magnitude of annual spending from trust accounts.
- Fiscal policy in 2009:
  - A looser fiscal policy seems warranted in 2009, but concerns remain about the magnitude and the quality of spending.
  - Recommendation: reduce public spending in 2009 so as to achieve a balanced budget by staff definition to avoid stimulating inflation.
  - Concern: if planned level of expenditure is maintained over the medium term, fiscal sustainability will be threatened.
  - Capacity constraints and almost no oversight or accountability mechanisms raise concern about achieving appropriate value for money, especially with increased district-level spending.
- Mineral windfall management:
  - More discipline is needed in spending the mineral windfall accumulated over the last few years.
  - The windfall should be safeguarded and directed toward achieving the Medium-Term Development Strategy objectives and be available to support growth should the impact of the global slowdown be larger than expected.
- Exchange rate:
  - Indicators suggest the currency is mildly overvalued.
  - Recommendation: allow the currency to adjust to help offset the impact on export incomes and to safeguard foreign currency reserves.
- Financial sector:
  - Financial sector has been relatively immune to the global financial crisis due to banks being funded primarily via domestic deposits.
  - Risk: declining commodity prices could stress debt-servicing capabilities, driving up nonperforming loans.
  - Recommendation: banks should maintain strict lending standards and monitor borrowers’ servicing abilities carefully.

### Structural reforms and policy priorities (paragraphs 39–40)
- Urgent need: accelerate the pace of structural reform.
- Priority areas: public-sector reform program on health, education, and law and order needs reinvigoration to make meaningful progress toward development objectives.
- State-owned enterprises (SOEs):
  - Complete transparency of the financial conditions of SOEs and full transfer of their returns to general government revenue are necessary to ensure the government has the resources to implement the reform agenda.
- LNG-related revenues:
  - Reiterated: if the LNG project proceeds, to permanently raise long-term growth in the nonmineral sector, the resulting revenues and public ownership proceeds must be channeled through the budget and directed toward effectively addressing development needs.
- Macroeconomic data:
  - The government must press ahead with Fund recommendations on the compilation and dissemination of economic data as they form the cornerstone for sound macroeconomic policy.

*Source: _cr09112 - 27.      The authorities agreed with this assessment. They noted that the political*

### 41.      Staff recommends the next Article IV consultation be on the standard 12-month

### _cr09112 - 41.      Staff recommends the next Article IV consultation be on the standard 12-month

### Real sector and prices
- Nominal GDP (2007): US$6.39 billion
- Population (2007): 6.3 million
- GDP per capita (2007): US$1,012
- Real GDP growth:
  - 2005: 3.6
  - 2006: 2.6
  - 2007: 6.5
  - 2008 (Est.): 7.0
  - 2009 (Proj.): 3.9
- Mineral sector growth:
  - 2005: 5.0
  - 2006: -5.9
  - 2007: 0.2
  - 2008 (Est.): 4.8
  - 2009 (Proj.): 2.6
- Nonmineral sector growth:
  - 2005: 3.4
  - 2006: 3.8
  - 2007: 7.3
  - 2008 (Est.): 7.2
  - 2009 (Proj.): 4.1
- CPI (annual average):
  - 2005: 1.8
  - 2006: 2.4
  - 2007: 0.9
  - 2008 (Est.): 10.7
  - 2009 (Proj.): 8.2
- CPI (end-period):
  - 2005: 4.7
  - 2006: -0.9
  - 2007: 3.2
  - 2008 (Est.): 11.2
  - 2009 (Proj.): 5.3

### Central government operations (percent of GDP) and fiscal balances
- Quota: SDR 131.6 million
- Revenue and grants:
  - 2005: 34.9
  - 2006: 36.7
  - 2007: 37.3
  - 2008 (Est.): 32.7
  - 2009 (Proj.): 27.1
- Expenditure and net lending:
  - 2005: 31.2
  - 2006: 30.0
  - 2007: 29.2
  - 2008 (Est.): 28.2
  - 2009 (Proj.): 29.1
- Overall balance, cash basis (including grants) (from above the line):
  - 2005: 3.7
  - 2006: 6.7
  - 2007: 8.2
  - 2008 (Est.): 4.5
  - 2009 (Proj.): -2.0
- Overall balance, cash basis (including grants) (from below the line):
  - 2005: 3.8
  - 2006: 5.6
  - 2007: 7.2
  - 2008 (Est.): 4.5
  - 2009 (Proj.): -2.0
- Nonmineral balance (from below the line):
  - 2005: -4.7
  - 2006: -7.6
  - 2007: -6.8
  - 2008 (Est.): -6.7
  - 2009 (Proj.): -7.2

### Money, credit, and interest rates
- Domestic credit (end-period percentage change):
  - 2005: 8.6
  - 2006: 19.4
  - 2007: 5.5
  - 2008 (Est.): -3.1
  - 2009 (Proj.): 15.7
- Credit to the private sector:
  - 2005: 23.7
  - 2006: 38.2
  - 2007: 34.4
  - 2008 (Est.): 41.0
  - 2009 (Proj.): 21.3
- Broad money (end-period percentage change):
  - 2005: 29.5
  - 2006: 38.9
  - 2007: 27.8
  - 2008 (Est.): 11.4
  - 2009 (Proj.): 17.7
- Interest rate (182-day T-bills; period average):
  - 2005: 3.8
  - 2006: 3.7
  - 2007: 4.4
  - 2008 (Est.): 6.0

### Balance of payments and external accounts (U.S. dollars)
- Exports, f.o.b.:
  - 2005: 3,278
  - 2006: 4,207
  - 2007: 4,750
  - 2008 (Est.): 5,397
  - 2009 (Proj.): 4,197
- Of which mineral exports:
  - 2005: 2,467
  - 2006: 3,391
  - 2007: 3,709
  - 2008 (Est.): 4,104
  - 2009 (Proj.): 3,063
- Imports, c.i.f.:
  - 2005: -2,462
  - 2006: -2,805
  - 2007: -3,331
  - 2008 (Est.): -3,794
  - 2009 (Proj.): -3,521
- Current account (including grants):
  - 2005: 205
  - 2006: 128
  - 2007: 112
  - 2008 (Est.): 228
  - 2009 (Proj.): -546
- Current account (in percent of GDP):
  - 2005: 4.1
  - 2006: 2.3
  - 2007: 1.8
  - 2008 (Est.): 2.8
  - 2009 (Proj.): -6.7
- Overall balance:
  - 2005: 315
  - 2006: 661
  - 2007: 657
  - 2008 (Est.): 550
  - 2009 (Proj.): 0

### Reserves and external debt
- Net international reserves (end-period; millions of U.S. dollars):
  - 2005: 765
  - 2006: 1,425
  - 2007: 2,083
  - 2008 (Est.): 2,090
  - 2009 (Proj.): 2,140
- Reserves (in months of goods and services imports):
  - 2005: 2.4
  - 2006: 3.8
  - 2007: 4.7
  - 2008 (Est.): 4.3
  - 2009 (Proj.): 4.7
- Public external debt-service-ratio (percent of exports):
  - 2005: 6.0
  - 2006: 3.5
  - 2007: 4.1
  - 2008 (Est.): 2.5
  - 2009 (Proj.): 2.1
- Public external debt-to-GDP ratio (in percent):
  - 2005: 25.4
  - 2006: 21.1
  - 2007: 16.7
  - 2008 (Est.): 12.2
  - 2009 (Proj.): 14.7

### Exchange rates and nominal GDP (kina)
- US$/kina (period-average):
  - 2005: 0.3273
  - 2006: 0.3288
  - 2007: 0.3416
  - 2008 (Est.): 0.3731
- US$/kina (end-period):
  - 2005: 0.3230
  - 2006: 0.3310
  - 2007: 0.3618
  - 2008 (Est.): 0.3735
- NEER (2000=100, end-period):
  - 2005: 80.7
  - 2006: 78.0
  - 2007: 77.7
  - 2008 (Est.): 95.0
- REER (2000=100, end-period):
  - 2005: 104.2
  - 2006: 98.0
  - 2007: 98.7
  - 2008 (Est.): 135.2
- Nominal GDP (millions of kina):
  - 2005: 15,195
  - 2006: 17,132
  - 2007: 18,716
  - 2008 (Est.): 22,246
  - 2009 (Proj.): 22,362

### Medium-term scenario and projections (2007–13)
- Current account balance (2007–2013, millions of U.S. dollars):
  - 2007: 112
  - 2008: 228
  - 2009: -546
  - 2010: -393
  - 2011: -373
  - 2012: -346
  - 2013: -283
- Exports, f.o.b. (2007–2013):
  - 2007: 4,750
  - 2008: 5,397
  - 2009: 4,197
  - 2010: 4,646
  - 2011: 4,920
  - 2012: 5,130
  - 2013: 5,298
- Mineral exports (2007–2013):
  - 2007: 3,709
  - 2008: 4,104
  - 2009: 3,063
  - 2010: 3,481
  - 2011: 3,682
  - 2012: 3,885
  - 2013: 4,021
- Imports, c.i.f. (2007–2013):
  - 2007: -3,331
  - 2008: -3,794
  - 2009: -3,521
  - 2010: -3,759
  - 2011: -3,970
  - 2012: -4,114
  - 2013: -4,207
- Net international reserves (end-year, millions of U.S. dollars) projection:
  - 2007: 2,083
  - 2008: 2,090
  - 2009: 2,140
  - 2010: 2,242
  - 2011: 2,361
  - 2012: 2,490
  - 2013: 2,621
- Current account (in percent of GDP) (2007–2013):
  - 2007: 1.8
  - 2008: 2.8
  - 2009: -6.7
  - 2010: -4.7
  - 2011: -4.3
  - 2012: -3.9
  - 2013: -3.1
- Growth and prices (change in percent) projections:
  - Real GDP:
    - 2007: 6.5
    - 2008: 7.0
    - 2009: 3.9
    - 2010: 3.7
    - 2011: 3.3
    - 2012: 3.0
    - 2013: 2.4
  - CPI (period average):
    - 2007: 0.9
    - 2008: 10.7
    - 2009: 8.2
    - 2010: 5.0
    - 2011: 4.6
    - 2012: 4.2
    - 2013: 3.7
- Assumed commodity prices (January 2009 WEO projection):
  - Gold (US$/oz): 697, 872, 880, 890, 905, 925, 940 (2007–2013)
  - Copper (US$/ton): 7,132, 6,963, 3,500, 3,800, 4,000, 4,200, 4,400 (2007–2013)
  - Oil (US$/barrel): 71, 97, 50, 60, 65, 67, 69 (2007–2013)

### Public finances and debt (medium term)
- Total revenue and grants (percent of GDP, 2007–2013):
  - 2007: 37.3
  - 2008: 32.7
  - 2009: 27.1
  - 2010: 26.5
  - 2011: 26.6
  - 2012: 27.0
  - 2013: 27.3
- Total expenditure (percent of GDP, 2007–2013): around 29.1–28.0 range with:
  - 2007: 29.2
  - 2008: 28.2
  - 2009: 29.1
  - 2010: 28.1
  - 2011: 28.1
  - 2012: 28.0
  - 2013: 28.6
- Primary balance (measured below-the-line):
  - 2007: 9.1
  - 2008: 6.3
  - 2009: -0.1
  - 2010: 0.0
  - 2011: 0.2
  - 2012: 0.7
  - 2013: 0.5
- Nonmineral balance (percent of GDP, measured below-the-line):
  - 2007: -6.8
  - 2008: -6.7
  - 2009: -7.2
  - 2010: -6.2
  - 2011: -6.0
  - 2012: -5.7
  - 2013: -6.0
- Overall balance (measured below-the-line):
  - 2007: 7.2
  - 2008: 4.5
  - 2009: -2.0
  - 2010: -1.5
  - 2011: -1.5
  - 2012: -1.0
  - 2013: -1.3
- Gross public debt (in percent of GDP) 2007–2013:
  - 2007: 33.7
  - 2008: 26.6
  - 2009: 29.5
  - 2010: 29.4
  - 2011: 29.6
  - 2012: 29.9
  - 2013: 29.8
  - Domestic vs External components (2007):
    - Domestic: 17.0
    - External: 16.7

### Banking system and monetary accounts (2005–09)
- Bank of Papua New Guinea net foreign assets (end-period, in millions of kina):
  - 2005: 2,367
  - 2006: 4,319
  - 2007: 5,908
  - 2008 (Est.): 5,317
  - 2009 (Proj.): 5,971
- Reserve money (end-period, in millions of kina):
  - 2005: 935
  - 2006: 1,138
  - 2007: 1,842
  - 2008 (Est.): 1,621
  - 2009 (Proj.): 2,342
- Monetary survey: Broad money (end-period, in millions of kina):
  - 2005: 5,069
  - 2006: 7,041
  - 2007: 8,995
  - 2008 (Est.): 10,017
  - 2009 (Proj.): 13,901
- Broad money (annual percentage change):
  - 2005: 29.5
  - 2006: 38.9
  - 2007: 27.8
  - 2008 (Est.): 11.4
  - 2009 (Proj.): 17.7
- Broad money velocity:
  - 2005: 3.0
  - 2006: 2.4
  - 2007: 2.1
  - 2008 (Est.): 2.2
  - 2009 (Proj.): 1.6

### Summary of central government operations (detailed 2007–09 items)
- 2007 (Auth. / Est. / Proj. / Staff Proj. / Budget / Staff Proj. shown in table; representative figures):
  - Revenue and grants (2007 Auth.): 37.3; (2009 Staff Proj.): 27.1
  - Total revenue (2007 Auth.): 33.5; (2009 Staff Proj.): 23.8
  - Tax revenue (2007 Auth.): 31.3; (2009 Staff Proj.): 22.3
  - Mineral taxes (2007 Auth.): 12.8; (2009 Staff Proj.): 4.8
  - Grants (2007 Auth.): 3.9; (2009 Staff Proj.): 3.3
  - Total expenditure and net lending (2007 Auth.): 29.2; (2009 Staff Proj.): 29.1
  - Recurrent expenditure (2007 Auth.): 19.3; (2009 Staff Proj.): 18.4
  - Development expenditure (2007 Auth.): 9.9; (2009 Staff Proj.): 10.7
  - Overall balance (from above the line) (2007 Auth.): 8.2; (2009 Staff Proj.): -2.0
  - Overall balance (from below the line) (2007 Auth.): 7.2; (2009 Staff Proj.): -2.0
  - Domestic financing (net) (2007 Auth.): -5.0; (2009 Staff Proj.): 1.9
- Memorandum item: Nominal GDP (in millions of kina):
  - 2007: 18,716
  - 2008 (Est.): 21,554
  - 2009 (Proj.): 22,291
  - Further entries: 21,161; 22,364 (as shown)

### Indicators of external vulnerability and financial indicators
- Gross public debt (end of period, percent of GDP):
  - 2005: 47.7
  - 2006: 39.1
  - 2007: 33.7
  - 2008 (Est.): 26.6
  - 2009 (Proj.): 29.5
- Broad money (percent change, 12-month basis):
  - 2005: 29.5
  - 2006: 38.9
  - 2007: 27.8
  - 2008 (Est.): 11.4
  - 2009 (Proj.): 17.7
- Private sector credit (percent change, 12 month basis):
  - 2005: 23.7
  - 2006: 38.2
  - 2007: 34.4
  - 2008 (Est.): 41.0
  - 2009 (Proj.): 21.3
- Exports (percent change, 12-month basis in U.S. dollars):
  - 2005: 28.4
  - 2006: 28.3
  - 2007: 12.9
  - 2008 (Est.): 3.6
  - 2009 (Proj.): -22.2
- Imports (percent change, 12-month basis in U.S. dollars):
  - 2005: 37.2
  - 2006: 13.9
  - 2007: 18.8
  - 2008 (Est.): 13.9
  - 2009 (Proj.): -7.2
- Gross official reserves (millions of U.S. dollars):
  - 2005: 764.9
  - 2006: 1,427.4
  - 2007: 2,086.6
  - 2008 (Est.): 2,092.0
  - 2009 (Proj.): 2,141.8
- Gross official reserves (months of nonmining imports, c.i.f.):
  - 2005: 5.1
  - 2006: 8.2
  - 2007: 10.7
  - 2008 (Est.): 9.7
  - 2009 (Proj.): 11.1
- Public external debt to GDP ratio (in percent):
  - 2005: 25.4
  - 2006: 21.1
  - 2007: 16.7
  - 2008 (Est.): 12.2
  - 2009 (Proj.): 14.7
- Public external debt service to exports (percent):
  - 2005: 6.0
  - 2006: 3.5
  - 2007: 4.1
  - 2008 (Est.): 2.5
  - 2009 (Proj.): 2.1
- Exchange rate (per U.S. dollar; period average) sample: 3.1, 3.0, 2.9, 2.7 (years shown)

### Millennium Development Goals progress (selected indicators)
- Poverty headcount, national (% of population) (1990 benchmark and later): ...38 ... ... ...
- Primary completion rate, total (% of relevant age group): 51 52 56 54 ...
- Youth literacy rate (% ages 15–24): 69 ...... 67 ...
- Immunization, measles (% of children ages 12–23 months): 67 42 62 60 65
- Infant mortality rate (per 1,000 live births): 69 64 60 55 54
- Under 5 mortality rate (per 1,000): 94 87 80 74 73
- Prevalence of HIV, total (% of population aged 15–49): ......0.3 2.0 1.5
- Access to an improved water source (% of population): 39 39 39 39 40
- Access to improved sanitation (% of population): 44 44 44 44 45
- Aid per capita (current US$): 100 79 51 45
- Debt service (% of exports): 18 10 86 6
- Fixed line and mobile phone subscribers (per 1,000 people): 79 141 5 15 ...

Source: World Development Indicators database, September 2008.

### Authorities’ response to recent Fund policy advice (selected items)
- Monetary and exchange rate policy recommendation: "Stand ready to tighten monetary policy given the expectation of a looser fiscal stance."
  - Policy action reported: "The policy interest was increased during the second half of year 2008. To better control liquidity part of the funds in trust accounts held at private banks has been transferred to the BPNG."
- Exchange rate recommendation: "The exchange rate should be allowed to move flexibly as needed, should upward pressure be sustained or downward pressure unexpectedly materialize."
  - Policy action reported: "Exchange rate daily volatility has increased since" 

*Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates and projections.*

### 2007. However, reserves have been drawn down to

### _cr09112 - 2007. However, reserves have been drawn down to

### Fiscal Policy
- A new proposal to update the medium term fiscal strategy (MTFS) should be approved to replace the current policy under the existing MTFS.
- The new MTFS was approved in July 2008.
- Policy objective: contain actual cash expenditure to more sustainable and stable levels, while ensuring that windfall revenue is used for well-designed MTDS-prioritized spending and debt reduction.
- Windfall revenue has been partly used for early repayment of debt.
- Spending at the provincial and district level has been allocated outside the MTDS priority areas.
- Proposals to increase public borrowing to fund large-scale investment projects are a concern.
- Public borrowing has increased to fund the LNG project.
- The resumption of public sector reform plans is urgently needed to help improve implementation capacity, and strengthen monitoring, accountability, and transparency.
- Progress has been limited and it appears to lack political will.

### Financial Sector Policy
- Need to overcome underlying structural rigidities that are constraining development, including weak enforcement of contracts and creditor rights.
- Progress has been slow, although some actions have been made on improving credit monitoring, including the establishment of the credit and data bureau that provides data to inform credit decisions.
- The authorities have requested an FSAP that is tentatively scheduled for the fall of 2009.
- Guidance on the revived development bank:
  - Should not engage in expensive borrowing and expansion into microfinance should comply with due diligence and commercial criteria.
  - The development bank has remained very small and profitable.

### Structural Reforms and Statistics
- Broader reforms are necessary to lift medium-term growth by boosting productivity, and to strengthen international competitiveness and resilience to external shocks.
- Progress has been disappointing.
- Intensive efforts to improve macroeconomic statistics to address shortcomings in the quality, coverage and timeliness of macroeconomic data.
- Limited progress has been made in improving the quality of macroeconomic data, with the exception of the bop data where progress has been substantial.

### INTRODUCTION (Papua New Guinea: Debt Sustainability Analysis)
- Papua New Guinea has made significant progress in reducing its public debt burden.
- However, Papua New Guinea still remains at moderate risk of external debt distress over the medium and long term.
- External debt burden indicators on public and publicly guaranteed (PPG) external debt are below their indicative thresholds under the baseline scenario, but some indicators would breach their thresholds if the terms of trade deteriorates further or LNG project related contingent liabilities are materialized.
- Compared to the 2007 Article IV DSA, given the change in the global outlook, this analysis shows that Papua New Guinea exhibits more vulnerability to external shocks.
- The inclusion of domestic debt as well as several contingent liabilities also shows risks to long-run fiscal sustainability.
- Box 1 summarizes the macroeconomic framework underlying the baseline analysis.

### PUBLIC DEBT SUSTAINABILITY ANALYSIS
- Public sector debt decline:
  - From about 71½ percent in 2002 to under 34 percent of GDP in 2007.
  - By end-2008, it is estimated that public debt declined further to about 26½ percent of GDP with public external debt about 12 percent.
- Drivers of improvement: prudent fiscal policy, favorable terms of trade, appreciation of the kina against the U.S. dollar, lower interest rates, and sustained economic growth since 2003.
- Public external debt:
  - Declined from the peak of over 50 percent of GDP in 2001 to below 17 percent at end-2007.
  - External debt to multilateral institutions accounts for about 65 percent of public external debt, with Japan as the main bilateral creditor.
- Private sector external debt is estimated at about 14 percent of GDP at end-2007.
- Baseline scenario (does not include the LNG project):
  - Envisages a gradual increase in the public debt-to-GDP ratio in the medium term due to additional financing needs on the external side from the sharp deterioration of the terms of trade and corresponding current account.
  - All debt burden indicators remain well below the thresholds and are expected to decline in the long run.
  - Public domestic debt burden expected to continue to decline given expectation of continued prudent fiscal policy and favorable debt dynamics.
  - Public debt-to-GDP ratio projected to peak at 30 percent in the medium term, then gradually decline to 22½ percent in the long run.
- Sensitivity:
  - Standard alternative scenarios and bound tests indicate that the projected debt path is particularly sensitive to changes in real GDP growth and further deterioration of terms of trade.
  - A shock to real GDP growth during 2009–10, equal to the historical average of GDP growth rate minus one standard deviation, would bring the present value (PV) of the public debt-to-GDP ratio to 71 percent in 2028.
  - This highlights the need to manage expenditures prudently, while protecting priority spending, in the event of a growth slowdown.
- Other liabilities and contingent liabilities:
  - Fiscal sustainability is sensitive to other liabilities arising from several sources.
  - Unfunded civil service liabilities amount to about 11 percent of GDP at end-2008, and will remain sizeable though the government has made partial repayment recently.
  - LNG project related contingent liabilities are estimated to be, in PV term, about 20½ percent of GDP in 2013.
    - These liabilities arise from the issue of exchangeable bonds to finance the state’s equity participation (in 2009) and the state’s completion guarantee for debt financing (by 2013).
    - Under this scheme, the creditor acquires exchangeable bonds, amounting to US$1.1 billion, with the option to exchange the bonds for equities in the Oil Search company. If the share price remains below this strike price, the state will have to pay to the creditor the difference between the market price and the face value of the bond.
    - Under the completion guarantee, if the project fails, the government will have to pay up to US$2 billion to the creditor.
  - Borrowings by SOEs are also estimated to be significant and growing, although information is limited.
    - Preliminary estimates for SOE related contingent liabilities, based on end-2007 financial statements of nine SOEs, are about 2.5 percent of GDP when we consider borrowings, various provisions, and other liabilities. However, there is no information on the off-balance sheet liabilities which also may be significant.
  - Other contingent liabilities arising from the government’s commitments under the memorandum of agreement with landowners are also reported to be significant and the government needs to pay some liabilities in near future to allow the LNG project to move forward.

### EXTERNAL DEBT SUSTAINABILITY ANALYSIS
- Under the baseline scenario:
  - All PPG external debt and debt service indicators remain below the policy-dependent debt burden thresholds.
  - Debt burden indicators are expected to increase in the medium term before declining in the long run.
  - Additional financing needs arising from the deterioration of the terms of trade and corresponding current account would raise the PV of PPG external debt over GDP from below 11 percent in 2008 to 12 percent in the medium term, which is still well below the 30 percent threshold.
  - The PVs of PPG external debt-to-exports and debt-to-revenue ratios are also expected to increase accordingly in the medium term, but still well below the indicative threshold levels.
- Under standard stress tests:
  - The debt burden is expected to increase, but all debt burden indicators remain below their indicative thresholds.
  - Alternative scenarios with key variables at their historical averages in 2008–28 show a reduction of the debt burden because of the current account surpluses and FDI inflows in recent commodity booming years.
- Country-specific scenario (terms of trade shock):
  - External debt sustainability would be vulnerable to a terms of trade shock.
  - If export prices decline further, by 20 percent compared to the January 2009 WEO price assumption for 2009–13, the PV of external PPG debt-to-GDP ratio is projected to breach the 30 percent threshold in the medium term, due to the deterioration of current account and corresponding additional financing needs.
  - Other debt and debt service indicators would rise significantly for the same period, though they are not expected to breach their indicative thresholds.

*Source: IMF Staff.*

### Box 1. Macroeconomic Assumptions Underlying the DSA

### Box 1. Macroeconomic Assumptions Underlying the DSA

### Core macroeconomic assumptions
- Real GDP growth
  - Projected to be at around 3.8 percent in the near term and then slow to about 2½ percent in the medium and long term—above the recent historical average of 2 percent.
  - Moderate growth in the nonmineral sector, including in agriculture, and several mining projects coming on stream will offset a steady decline in petroleum and copper production.
  - The large Liquefied Natural Gas (LNG) project under consideration is not incorporated in the baseline scenario.
- Inflation
  - Projected to peak in 2008 because of the rise in food and energy prices until July, and subsequently stabilize at around 2 percent in the long run.
- Current account
  - The current account surplus (including grants) will turn into a deficit in the near and medium term, primarily reflecting continued strong growth of capital imports related to investment projects as well as the impact of global economic slowdown.
- Grant element of loans and concessional financing
  - The grant element of loans is expected to decline. As per capita income rises, the share of external financing provided on concessional terms is expected to decline gradually over the projection period.
  - Footnote: Grant element of new public borrowing increases slightly in the near term, before it declines in the long run, due to the relatively large disbursement commitment from the AsDB in the pipeline.
- Fiscal balance and financing
  - The fiscal balance is projected to turn into a deficit in 2009 and to remain in deficit over the medium term, due to falling mineral revenues and the spending of preceding years’ mineral windfall revenues.
  - The deficit is expected to be financed by a run down of resources held in trust accounts.
- Reserves and additional financing
  - Considering that PNG currently has comfortable level of reserves, the staff assume that additional financing needs would be filled by additional concessional external borrowings and the use of reserves.
  - If the import coverage of reserves falls below 3 months, all financing needs are assumed to be filled by additional external borrowings.

### Staff conclusion on debt-risk and policy guidance
- Risk assessment
  - Papua New Guinea still remains at moderate risk of external debt distress over the medium term.
  - Though external PPG debt burden indicators are well below their indicative thresholds under the baseline scenario, the projected PPG debt paths point to a significant vulnerability against the terms of trade shock and slower economic growth.
  - The inclusion of the liabilities arising from several sources raises concerns about long-term fiscal sustainability.
- Policy recommendations
  - Continued prudent management of debt over the medium and long term will be required to mitigate the risks to public debt sustainability.
  - Staff encourages the authorities to build on recent steps and move forward to strengthen debt management capacity.

### Selected quantitative projections and indicators (baseline and highlights from tables)
- Key baseline macro assumptions (selected)
  - Real GDP growth (in percent): 3.6; 2.6; 6.5; 2.1; 2.6; 7.0; 3.9; 3.7; 3.3; 3.0; 2.4; 3.9; 2.4; 2.4; 2.4
  - Inflation rate (GDP deflator, in percent): 15.9; 9.9; 2.6; 8.1; 5.4; 11.1; -3.3; 2.5; 2.0; 2.0; 2.4; 2.8; 3.7; 5.6; 4.0
  - Average nominal interest rate on forex debt (in percent): 2.8; 3.1; 3.2; 3.5; 0.5; 3.8; 2.3; 2.2; 2.1; 2.0; 1.9; 2.4; 1.6; 1.8; 1.7
  - Grant element of new public sector borrowing (in percent): 43.5; 43.3; 46.3; 45.6; 46.2; 46.3; 45.2; 37.5; 25.4
- Debt burden indicators (selected)
  - PV of public sector debt in percent of GDP (illustrative row): 30; 15.2; 11.8; 11.3 (table displays multiple period averages)
  - PV of debt in percent of exports: 100; 19.2; 19.3; 22.6 (table displays multiple period averages)
  - PV of debt-to-revenue ratio (in percent) examples: 86.3; 77.9; 98.0; 98.5; 97.2; 95.1; 92.5; 83.9; 72.2 (periods vary)
  - Debt service-to-revenue and grants ratio (in percent) examples: 34.0; 28.7; 33.5; 26.5; 20.7; 18.2; 19.3; 18.9; 19.5; 12.8; 11.2
  - Gross financing need 2/ (percent of GDP) examples: 36.0; 18.9; 11.0; 7.2; 5.7; 8.4; 6.9; 6.7; 5.9; 3.8; 2.6
- Sensitivity / stress-test outcomes (selected baseline vs. stress)
  - PV of Debt-to-GDP Ratio (baseline projections shown): 25 (2008); 27 (2009); 26 (2010); 26 (2011); 26 (2012); 25 (2013); 24 (2018); 19 (2028)
  - Under scenario A3 (Permanently lower GDP growth 1/): PV of Debt-to-GDP Ratio rises to 33 (2018) and 57 (2028)
  - Bound test B1 (Real GDP growth at historical average minus one standard deviation in 2009–10): PV of Debt-to-GDP Ratio rises to 48 (2018) and 73 (2028)
  - PV of Debt-to-Revenue Ratio (baseline): 78 (2008); 98 (2009); 98 (2010); 97 (2011); 95 (2012); 92 (2013); 84 (2018); 72 (2028)
  - PV of Debt-to-Exports Ratio (baseline): 27 (2008); 21 (2009); 18 (2010); 19 (2011); 19 (2012); 20 (2013); 13 (2018); 11 (2028)
  - Sensitivity extremes: several stress tests (e.g., terms of trade deterioration, large depreciation, permanent lower growth) produce materially higher ratios in 2018 and 2028 across PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue metrics.

*Source: Box 1. Macroeconomic Assumptions Underlying the DSA, _cr09112.*

### ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS

### ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS (As of January 31, 2009)

### I. Membership Status
- Joined October 9, 1975; Article VIII

### II. General Resources Account
- Quota: 131.60 SDR Million (100.00 percent)
- Fund holdings of currency: 131.16 SDR Million (99.67 percent)
- Reserve position in Fund: 0.44 SDR Million (0.33 percent)

### III. SDR Department
- Net cumulative allocation: 9.30 SDR Million (100.00 percent)
- Holdings: 0.07 SDR Million (0.77 percent)

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements (historical)
- Stand-by, Approval 7/31/91, Expiration 9/30/92, Amount Approved 26.36 (SDR Million), Amount Drawn 0.00 (SDR Million)
- Stand-by, Approval 7/14/95, Expiration 12/15/97, Amount Approved 71.48 (SDR Million), Amount Drawn 35.34 (SDR Million)
- Stand-by, Approval 3/29/00, Expiration 9/28/01, Amount Approved 85.54 (SDR Million), Amount Drawn 85.54 (SDR Million)

### VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Forthcoming principal: 2009 0.00, 2010 0.00, 2011 0.00, 2012 0.00, 2013 0.00
- Charges/interest: 2009 0.06, 2010 0.05, 2011 0.05, 2012 0.05, 2013 0.05
- Total: 2009 0.06, 2010 0.05, 2011 0.05, 2012 0.05, 2013 0.05

### VII. Safeguards Assessments
- Under the Fund's safeguards assessment policy, the Bank of Papua New Guinea (BPNG) was subject to a transitional assessment based on its Stand By Arrangement approved in March 2000 and expired in September 2001.
- The transitional assessment was completed on May 4, 2001 and made recommendations to alleviate identified weaknesses.
- Currently, the BPNG is not subject to the safeguards policy.

### VIII. Exchange Rate Arrangement
- Papua New Guinea has a floating exchange rate arrangement; the exchange rate of the kina is determined in the interbank market in which authorized banks participate.
- Papua New Guinea has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions.

### IX. Article IV Consultation
- The 2007 Article IV consultation discussions were held during November 1–14, 2007.
- Concluded by the Executive Board on February 15, 2008 (IMF Country Report No. 08/98).
- Papua New Guinea is on the 12–month cycle.

### X. Technical Assistance from Headquarters (selected items by department)
- FAD:
  - Joint FAD/PFTAC mission in March 2000 assisted in preparing a Report on the Observance of Standards and Codes Fiscal Transparency Module, published in October 2000.
  - Mission in December 2000 advised on reconciliation of differences in fiscal reporting.
  - Mission in February 2002 assessed progress in improving fiscal transparency.
- LEG:
  - Mission in November 1996 advised on legal framework for the National Value-Added Tax.
  - Mission in November 2005 advised on drafting of a tax administration law.
  - Mission in July 2006 provided comprehensive assistance on AML/CFT regime, including legislative drafting and capacity building.
  - Mission in August/September 2007 assisted in finalizing the terms of the Revenue Administration Bill.
- MFD/MCM:
  - Mission in November 2001 reviewed foreign exchange management.
  - Mission in June 2001 assessed the monetary policy implementation framework.
  - Assistance (2001–03) on bank supervision, financial sector restructuring, accounting framework and monetary operations of the central bank.
  - Resident advisor to BPNG research department for 15 months through August 2003.
  - Technical assistance through peripatetic visits on bank regulation and supervision (2001–February/March 2007), medium-term monetary policy formulation (October 2004 and September 2005), reserve management (June 2006–September 2007), internal audits (2004–August 2007), accounting (September/October 2006–February 2007), and liquidity management (January 2009).
- STA:
  - Four missions in 1995–96 on compilation of national accounts.
  - Mission reviewed monetary and financial statistics in April 2005; follow-up missions in May 2006 and April 2008.
  - Multisector mission in September 2006 and high-level STA mission in December 2007.

### XI. Resident Representative
- None

*Source: ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS (As of January 31, 2009)*

### ANNEX V: PAPUA NEW GUINEA—STATISTICAL ISSUES

### ANNEX V: PAPUA NEW GUINEA—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected areas are: national accounts, fiscal accounts, and balance of payments.
- National Accounts:
  - The National Statistical Office (NSO) lacks sufficient staff with computer training.
  - Accuracy and reliability are affected by inadequate source data.
  - The Bank of Papua New Guinea (BPNG) and the Department of Treasury produce the most current data.
  - In mid-2000, the NSO released "National Income, Expenditure and Product, 1993–98" compiled using the 1968 System of National Accounts.
  - NSO has been working to implement the 1993 SNA.
  - In March 2004, the NSO released preliminary national income, expenditure, and production accounts estimates for 1994–2002, rebased to 1998 prices.
  - The 2006 STA multisector mission recommended against publication of the new GDP data until needed revisions are made.
  - The Treasury has assumed the role of estimating the NA for 2002 to the present.
- Price statistics:
  - NSO compiles a new quarterly wholesale price index (which it does not publish) and a quarterly consumer price index based on weights that are thirty five years old.
  - NSO intends to use the planned Household Income Expenditure Survey (HIES) to rebase the CPI; HIES has been delayed for a long time.
- Government finance statistics (GFS):
  - Annual GFS reported to STA suffer from insufficient coverage.
  - Central government tax revenue statistics are generally accurate and timely; nontax revenue and public expenditure data are deficient.
  - Development budget expenditures and utilization of grants and project loans are recorded with long lags.
  - Few records on the use of accrual trust accounts are available.
  - Interest payment records are accurate, but there are timing issues regarding recording of interest on discount securities.
  - Weaknesses contribute to discrepancies in domestic financing between estimates from monetary and debt data and those derived from fiscal records.
  - The 2006 STA multisector mission encouraged authorities to prepare a list of public sector units to permit a comprehensive delineation of levels of government to help reconcile GFS with other datasets.
- Monetary statistics:
  - Monetary data are now being produced on a regular basis and reporting to STA has improved.
  - Three monetary and financial statistics missions (April 2005, May 2006, and April 2008) visited Papua New Guinea which helped to:
    - finalize the review of the collection, compilation, and dissemination procedures of monetary statistics by the BPNG;
    - develop a work program to facilitate full implementation of the methodology recommended in the Monetary and Financial Statistics Manual (MFSM);
    - prepare the standardized report forms (SRFs) for reporting monetary data of the central bank, other depository corporations, and monetary aggregates;
    - finalize the integrated monetary database that meets the data needs of the BPNG, STA, and APD.
  - Due to importance of other financial corporations (OFCs), a follow-up mission is scheduled for early 2009 to introduce the SRF for the OFCs based on newly introduced call report forms to obtain balance-sheet data and compile a financial corporations survey.
- Balance of payments:
  - Annual BOP data are derived from the International Transactions Reporting System (ITRS), which is not tightly monitored despite BPNG reporting requirements.
  - Marked differences exist between official data on exports and imports of goods and those reported by trading partners.
  - Financial accounts data are of poor quality because of major deficiencies in data collection, especially private external debt.
  - Quarterly data are also published by the BPNG.
  - The 2006 STA multisector mission identified priority to strengthen current account estimates, including improved classification of investment earnings, trade credits, and grant receipts and enhancing source data for imports and exports.
  - Progress is being made to implement recommendations from PFTAC’s BOP mission in June 2008.
  - Detailed BOP statistics are under review to be released in the near future.

### II. Data Standards and Quality
- Does not participate in the General Data Dissemination System.
- No data ROSC is available.

### III. Reporting to STA
- Government finance statistics:
  - Last reported for publication in the Government Finance Statistics Yearbook and in International Financial Statistics for 1999-2002 and cover only budgetary central government.
- Monetary data:
  - Reported to STA for publication in the IFS and IFS Supplement on Monetary and Financial Statistics on a regular monthly basis.
- Balance of payments:
  - Balance of payments data for 2005 were reported to STA for publication in the IFS and in BOPSY.
- National accounts:
  - National accounts data for 2004 were reported to STA for publication in the IFS.

### PAPUA NEW GUINEA: TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE (As of February 18, 2009)
- Exchange rates
  - Date of Latest Observation: 02/13/09
  - Date Received: 02/17/09
  - Frequency of Data: D
  - Frequency of Reporting: W
  - Frequency of Publication: W
- International reserve assets and reserve liabilities of the monetary authorities1
  - Date of Latest Observation: 02/13/09
  - Date Received: 02/17/09
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: Q
- Reserve/base money
  - Date of Latest Observation: 12/08
  - Date Received: 02/09/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: Q
- Broad money
  - Date of Latest Observation: 12/08
  - Date Received: 02/09/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: Q
- Central bank balance sheet
  - Date of Latest Observation: 12/08
  - Date Received: 02/09/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: Q
- Consolidated balance sheet of the banking system
  - Date of Latest Observation: 12/08
  - Date Received: 02/09/09
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: Q
- Interest rates2
  - Date of Latest Observation: 12/31/08
  - Date Received: 02/06/09
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: Q
- Consumer price index
  - Date of Latest Observation: 09/08
  - Date Received: 11/08
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Revenue, expenditure, balance and composition of financing3 — general government4
  - Date of Latest Observation: N/A
  - Date Received: N/A
  - Frequency of Data: N/A
  - Frequency of Reporting: N/A
  - Frequency of Publication: N/A
- Revenue, expenditure, balance and composition of financing3 — central government
  - Date of Latest Observation: 07/08
  - Date Received: 09/08
  - Frequency of Data: M
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Stocks of central government and central government-guaranteed debt5
  - Date of Latest Observation: 09/07
  - Date Received: 11/07
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External current account balance
  - Date of Latest Observation: 09/08
  - Date Received: 12/08
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Exports and imports of goods and services
  - Date of Latest Observation: 09/08
  - Date Received: 12/08
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- GDP/GNI
  - Date of Latest Observation: 2007
  - Date Received: 11/08
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Gross external debt
  - Date of Latest Observation: 2007
  - Date Received: 11/08
  - Frequency of Data: Q
  - Frequency of Reporting: A
  - Frequency of Publication: A
- International Investment Position6
  - (No dates given in table)

Notes (as provided):
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.
- 3 Foreign, domestic bank, and domestic nonbank financing.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
- 7 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

### Public Information Notice (PIN) No. 09/44 — IMF Executive Board Concludes 2008 Article IV Consultation with Papua New Guinea (April 3, 2009)
- On March 16, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Papua New Guinea.1
- Background findings highlighted:
  - Macroeconomic performance has improved, but Papua New Guinea remains a poor country highly exposed to commodity price fluctuations.
  - GDP per capita remains low and improvement has lagged other low-income countries in the region.
  - An unattractive investment environment, due primarily to weak infrastructure, problems with and governance, and high crime curtails development.
  - Real GDP grew by 6.5 percent in 2007, on the back of strong growth in the nonmineral sector.
  - Leading indicators suggest activity continued to expand rapidly in 2008.
  - After remaining in the low single digits during 2004–07, CPI inflation accelerated in late-2007, reaching nearly [text ends].

*Source: ANNEX V: PAPUA NEW GUINEA—STATISTICAL ISSUES (As of February 18, 2009).*

### 13.5 percent (year-on-year) in September 2008.

### _cr09112 - 13.5 percent (year-on-year) in September 2008.

### Inflation and monetary policy
- Headline: inflation reached 13.5 percent (year-on-year) in September 2008.
- Central bank action:
  - The Bank of Papua New Guinea (BPNG) increased the policy interest rate during the second half of 2008.
  - Kina Facility Rate was progressively raised by 200 basis points, to 8% by December 2008.
- Monetary conditions and real rates:
  - Monetary conditions remain accommodative as rising inflation has reduced real lending rates.
  - Real interest rates expected to return to positive territory over the next few months in line with the forecast decline in inflation to around 6%.
- Risks and guidance:
  - Despite declines in food and energy prices, domestic price pressures could prevent a rapid decline in inflation.
  - Staff and Directors advised to monitor developments closely and be prepared to ease monetary policy if domestic impact becomes more negative than expected.
  - Authorities noted staff recommendation that the Bank of PNG be prepared to loosen quickly if leading indicators suggest domestic demand and inflationary pressures ease more than expected.
- Exchange rate policy:
  - The authorities have slowed exchange rate depreciation to moderate inflationary pressures.
  - Staff assessment: the kina is mildly overvalued; Directors generally viewed that the currency should be allowed to adjust to the sharp decline in commodity prices to offset export income losses and safeguard reserves.
  - Real effective exchange rate appreciated over the last year; NEER (2000=100, end-period) reported as 80.7 (2005), 78.0 (2006), 77.7 (2007), 95.0 (2008).
  - REER (2000=100, end-period) reported as 104.2 (2005), 98.0 (2006), 98.7 (2007), 135.2 (2008).

### Fiscal policy and Medium-Term Fiscal Strategy (MTFS)
- Recent fiscal stance:
  - Fiscal balance in recent years: fiscal surplus estimated at 4½ percent of GDP for 2008, down from 8 percent in 2007.
  - The authorities saved the bulk of recent windfall mineral revenues and repaid public debt.
- MTFS design and rules:
  - MTFS (2008–2012) defines ‘normal revenues’ as non-mineral revenues plus mineral revenues equal to 4% of GDP.
  - Additional mineral revenues above this norm: 70% to fund public investment projects and 30% to repay debt.
  - Caps actual public investment expenditure sourced from additional revenue in any year to 4% of GDP; remainder to be saved.
  - Fiscal Responsibility Act (2006): Government cannot increase the level of net public sector debt.
- 2009 Budget and priorities:
  - 2009 Budget framed amid significant declines in budgeted revenues and absence of any ‘additional revenue’ due to falls in export prices.
  - Development spending targeted to seven priority areas with an increasing share: 82.7% in 2009.
  - District Services Improvement Program (DSIP) funding increased to help overcome administrative capacity constraints in 89 districts.
  - Authorities agreed staff recommendation to fine-tune the Framework to take explicit account of the cyclical position when determining excess mineral revenue to be spent.
- Fiscal sustainability guidance:
  - Directors agreed some easing in fiscal policy warranted in 2009 but encouraged a less expansionary stance than envisaged and careful prioritization to protect spending quality and medium-term fiscal sustainability.
  - Authorities acknowledged staff concerns on sustainability of budgeted spending and agreed to monitor and adjust at midyear review if necessary.
- Revenue administration reforms:
  - Institutional reforms initiated in tax administration: risk-based auditing and enforcement, and decentralised revenue collection with provincial revenue offices.
  - Authorities exploring technical assistance options through PFTAC.

### Real economy and growth projections
- Recent and projected growth:
  - Real GDP growth: 3.6 (2005), 2.6 (2006), 6.5 (2007), Est. 7.0 (2008), Proj. 3.9 (2009).
  - Mineral sector growth: 5.0 (2005), -5.9 (2006), 0.2 (2007), 4.8 (2008), 2.6 (2009).
  - Nonmineral sector growth: 3.4 (2005), 3.8 (2006), 7.3 (2007), 7.2 (2008), 4.1 (2009).
  - Statement: GDP growth expected to remain robust in 2009, but more subdued than the very strong performance of the last two years; continued strength in mining and agricultural sectors expected to offset declines in petroleum.
  - The coming year should see continuation of solid growth, albeit at a lower rate than the 7.2% achieved in 2008.
- Inflation measures:
  - CPI (annual average): 1.8 (2005), 2.4 (2006), 0.9 (2007), 10.7 (2008), 8.2 (2009).
  - CPI (end-period): 4.7 (2005), -0.9 (2006), 3.2 (2007), 11.2 (2008), 5.3 (2009).

### External sector, reserves, and debt
- External position:
  - Improved terms of trade delivered a sequence of current account surpluses that reduced external debt to about 27 percent of GDP at end-2008.
  - However, owing to the collapse in commodity prices, lower export revenues are worsening domestic and external balances.
- Balance of payments (millions of U.S. dollars):
  - Exports, f.o.b.: 3,278 (2005), 4,207 (2006), 4,750 (2007), 5,397 (2008), 4,197 (2009).
  - Of which: Mineral: 2,467 (2005), 3,391 (2006), 3,709 (2007), 4,104 (2008), 3,063 (2009).
  - Imports, c.i.f.: -2,462 (2005), -2,805 (2006), -3,331 (2007), -3,794 (2008), -3,521 (2009).
  - Current account (including grants): 205 (2005), 128 (2006), 112 (2007), 228 (2008), -546 (2009).
  - Current account (percent of GDP): 4.1 (2005), 2.3 (2006), 1.8 (2007), 2.8 (2008), -6.7 (2009).
  - Overall balance: 315 (2005), 661 (2006), 657 (2007), 5 (2008), 50 (2009).
- Reserves and external debt:
  - Net international reserves (millions of U.S. dollars): 765 (2005), 1,425 (2006), 2,083 (2007), 2,090 (2008), 2,140 (2009).
  - Months of goods and services imports: 2.4 (2005), 3.8 (2006), 4.7 (2007), 4.3 (2008), 4.7 (2009).
  - Public external debt-service-ratio (percent of exports): 6.0 (2005), 3.5 (2006), 4.1 (2007), 2.5 (2008), 2.1 (2009).
  - Public external debt-to-GDP ratio (percent): 25.4 (2005), 21.1 (2006), 16.7 (2007), 12.2 (2008), 14.7 (2009).
- Exchange rates:
  - US$/kina (period-average): 0.3273 (2005), 0.3288 (2006), 0.3416 (2007), 0.3731 (2008).
  - US$/kina (end-period): 0.3230 (2005), 0.3310 (2006), 0.3618 (2007), 0.3735 (2008).

### Financial sector resilience and risks
- Resilience to global turmoil:
  - To date, spillovers from the global financial market turmoil have been limited.
  - Banks are very liquid and largely isolated from international capital markets; banks funded primarily via domestic deposits.
  - Stock market weakened since its peak in June 2008 in line with regional markets.
- Vulnerabilities and recommendations:
  - Decline in commodity prices poses indirect risks to banks via incomes and debt servicing.
  - Directors encouraged authorities to ensure banks maintain strict lending standards and carefully monitor debt-servicing abilities and non-performing loans.
  - Directors supported the authorities’ request for a Financial Sector Assessment Program (FSAP) and authorities expressed interest in participating in the FSAP later in the year.
  - Authorities progressing consolidation of public sector trust accounts at the Bank of PNG to remove excess liquidity from the system.

### Structural reforms, development strategy, and institutional capacity
- Development priorities:
  - Medium-Term Development Strategy (MTDS) to guide development spending; 82.7% share to seven priority areas in 2009: primary and preventive health care; HIV/AIDS prevention; basic education; development-oriented adult education; transport; promotion of income-earning opportunities; and law and justice.
  - Authorities committed to addressing administrative and capacity constraints that have caused shortfalls against MTDS annual targets.
- Resource projects and public participation:
  - Public equity investment planned in proposed major LNG project scheduled to come on line in late 2013 to reflect public interest.
  - Public-Private Partnership (PPP) approach adopted; Asian Development Bank assisting PPP framework development.
- Structural and public-sector reforms:
  - Directors encouraged acceleration of structural reform in health, education, and law enforcement.
  - Need for greater transparency of the financial conditions of state-owned enterprises and full transfer of their returns to general government revenue.
- Data and institutions:
  - Directors stressed the need to press ahead with improvement of economic statistics; implementation of institutional changes to improve quality and timeliness of macroeconomic data has proven problematic but remains a priority.

### Executive Board assessment and recommendations
- Overall assessment:
  - Executive Directors noted Papua New Guinea was in a relatively favorable position at the onset of the global financial crisis, commending authorities for saving mineral windfalls and repaying public debt.
  - Directors observed limited bank exposure to global markets but noted the impact of deteriorating international conditions via commodity price collapse.
- Policy recommendations:
  - Current prudent monetary stance appropriate; monitor inflation and be ready to ease if domestic impact stronger than expected.
  - Allow exchange rate to adjust to commodity price changes to protect export incomes, reserves, and external stability.
  - Fully implement MTFS to reduce risks from volatile mineral revenue.
  - Monetary and fiscal authorities should cooperate so cyclical position determines spending from accumulated windfall revenues.
  - Windfall revenues should be directed toward Medium-Term Development Strategy objectives and to support growth if global slowdown impact is larger than expected.
  - Adopt less expansionary fiscal stance in 2009 than planned if domestic capacity constraints, especially at district level, risk inflation; protect quality of public spending through careful prioritization.
  - Ensure banks maintain strict lending standards and monitor non-performing loans; support FSAP participation.
  - Expedite structural reforms and increase transparency of state-owned enterprises finances.

*Source: IMF staff report and Executive Board discussion on Papua New Guinea (Article IV), March 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09112.pdf_