## _cr10164 ## Source details **Canonical URL:** [_cr10164](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10164.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10164.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10164.pdf.json) --- ### Executive Summary — Background and Main Issues - Global downturn had only a mild impact on Papua New Guinea (PNG) because growth was supported by still strong terms of trade, an insulated financial sector, and an increase in public expenditure. - Growth expected to rebound in 2010 as construction begins on two liquefied natural gas (LNG) projects. - Inflation declined in 2009 but expected to accelerate in 2010 as imported inflation rises and domestic demand butts up against capacity constraints. - Near-term challenge: maintain macroeconomic stability in the face of a substantial demand shock from the construction of two major LNG projects. - Medium-term priority: ensure that windfall revenues from exhaustible resources are used effectively to raise living standards on a sustainable basis. ### Staff Views and Policy Advice - Fiscal policy - Staff endorsed the withdrawal of fiscal stimulus in the 2010 Budget. - Concerns about planned level of investment spending and slippages in implementation of the Medium-Term Fiscal Strategy (MTFS). - Advised integrating a sovereign wealth fund (SWF) into the macro framework as more effective for managing windfall resource revenue than current practice of using trust accounts managed outside the budget process. - Monetary policy - Monetary policy needs to focus on emerging inflation pressures and act preemptively to avoid high inflation becoming entrenched in expectations. - Called for better coordination of monetary and fiscal policy. - Financial sector and external stability - Recommend maintaining financial sector stability while managing macro implications of LNG-related demand pressures. - Implementation and institutional design - Emphasized improving implementation of the MTFS and integrating resource revenue management into the budgetary framework. ### Authorities’ Views and Implementation Challenges - Authorities agreed on key issues and broad policy advice but noted practical implementation challenges. - Fiscal explanations and constraints - Magnitude of deviation from framework in 2009 reflected a significant acceleration in spending following easing of constraints on trust account spending and international endorsement of fiscal stimulus. - Authorities indicated scope to delay some planned public investment expenditure. - A working group was established to develop a proposal for introduction of a sovereign wealth fund. - Absence of an informed public debate undermined incentives for Ministers to adhere to the fiscal framework. - Monetary policy stance - Authorities appeared somewhat resigned to accept higher inflation. - Central bank concerned about impact on its capital of using both the policy rate and bank bills to contain liquidity and thus domestic demand. ### Macroeconomic Backdrop — Key Developments and Indicators - Growth and inflation - Real GDP Growth: after expanding by almost 7 percent in 2008, GDP is estimated to have grown by just under 5 percent in 2009. - CPI inflation: peaked above 13 percent in the third quarter of 2008 and fell steadily to under 6 percent at end-2009. - Improved inflation performance primarily reflects moderation in food price inflation and a decline in energy prices, though non-tradable inflation pressures appear to have intensified. - Fiscal performance - Fiscal balance: shifted from a surplus of 2.5 percent of GDP in 2008 to a deficit of almost 8 percent of GDP in 2009. - Fiscal impulse: almost 13 percent of GDP in 2009. - Main cause: relaxation of constraints on trust account spending led to trust spending exploding in 2009; trust spending was the main factor shifting the fiscal balance. - Monetary stance and credit - Policy rate: increased from 6 to 8 percent in response to the 2008 inflation run-up; the Bank of Papua New Guinea (BPNG) lowered the policy rate by 100 basis points in December 2009. - Liquidity management: BPNG relied heavily on central bank bills to contain banking system liquidity, which expanded partly because of government trust account activity. - Real bank lending rates rose in late-2008 and 2009; credit growth eased from the high rates posted in 2007 and 2008. - Financial sector strength - Banking system: three large banks primarily deposit funded with no significant links to global capital markets. - Non-performing loans (NPLs): rose to 0.8 percent of total assets from a trough of 0.4 percent. - Provisioning and profitability: provisioning is high and banks remain profitable. - Pension funds: remain performing well but profitability has suffered given lower returns from some investments. - External position and reserves - Nominal effective depreciation: currency depreciated by 12 percent in nominal effective terms in 2009 (after appreciating in 2008). - External debt: small increase to 27 percent of GDP at end-2009. - Reserves: rebuilt during 2009 and now cover almost 12 months of non-mining imports. - FDI inflows associated with ongoing mineral sector projects provided foreign currency to bolster reserve accumulation. - Sectoral composition (share of nominal GDP, 2008) - Agriculture, Forestry and Fishing: 33% - Mineral: 28% - Manufacturing: 6% - Construction: 11% - Wholesale and Retail trade: 7% - Transport and Communication: 2% - Other: 13% ### Comparative Impact of the Global Crisis - PNG’s growth held up relatively well during the global crisis compared with many other Pacific island countries (PICs). - Reasons for relative resilience: - Financial sector insulation from global capital markets allowed credit growth to continue. - PNG relies less heavily on remittances and tourism income than other PICs; demand for PNG’s exports remained relatively strong. - Domestic demand supported by confidence effects from proposed LNG projects and increased public expenditure enabled by prior prudent fiscal policies. - Vulnerabilities: - Decline in commodity prices negatively affected external and fiscal positions in this resource-rich economy. ### Staff Appraisal (overarching assessment) - Immediate policy priority: contain inflationary pressures and coordinate monetary and fiscal policy to preserve macro stability amid LNG-related demand shocks. - Medium-term priority: effective and sustainable use of windfall resource revenues, including consideration of an SWF integrated into the macro-fiscal framework. - Strengthening implementation of the MTFS and improving public accountability and debate are critical to prevent future slippages. --- ### A. Outlook — Expansion with Upside Risks - Growth and inflation projections - GDP growth rebounding to roughly 8 percent in 2010 (staff and authorities). - Continued buoyant commodity export demand and the LNG construction phase expected to: - stimulate growth and strain domestic capacity; - fuel a pickup in inflation in 2010 due to domestic demand pressures, recovery in international commodity prices, and depreciation of the kina against the Australian dollar in 2009. - Growth expected to slow somewhat in 2011 largely due to resource depletion; domestic capacity in the nonmineral sector expected to remain strained. - Staff sees greater risk than the authorities that high inflation could become entrenched in expectations. - External position - Current account deficit forecast to widen over the next few years with LNG-related imports but expected to be financed with foreign direct investment (FDI). - Risks - Risks skewed to the upside on both activity and inflation; direct and indirect impacts from LNG construction and public spending from trust accounts held outside the budget could add more demand and inflation pressures than forecast in 2010. ### B. Fiscal Policy — Strengthening Implementation - Historical performance and 2009 slippages - Period of adherence to the MTFS yielded fiscal surpluses, declining public debt, and accumulation of public resources in trust accounts during the commodity price boom. - Concerns about slippages in 2009: - Roughly 8 percent of GDP was spent from trust accounts in 2009, twice the amount allowed under the MTFS. - International endorsement of fiscal stimulus encouraged Ministers to accelerate trust spending. - Authorities noted spending was from accumulated savings and not debt financed. - 2010 Budget and staff projection - Staff endorsed the 2010 Budget target of balance but noted additional spending likely from trust accounts held outside the budget. - Staff projection (assuming some underspending from development budget but half of remaining trust fund balances spent in 2010) contains a fiscal deficit of roughly 1 percent of GDP. - Staff suggested delaying some planned infrastructure spending to avoid capacity constraints, price pressures, and poor value. - Domestic capacity largely exhausted by LNG projects; construction sector capacity unlikely to be forthcoming from Australia. - Credibility and liability risks - Staff noted 2010 Budget undermined fiscal credibility by directing all above-normal mineral revenue to public investment (contrary to MTFS allocation of 30 percent to debt reduction) and failing to fully fund legislated pension obligations. - Public liability risks to increase during LNG construction phase: - Government has taken on significant unfunded liabilities associated with landowner agreements, currently representing about 8 percent of GDP. - Government has a completion guarantee for one project. - Staff recommended increasing public savings and reducing the MTFS normal mineral revenue assumption from 4 percent of GDP to 3 percent of GDP when reviewed, which would reduce the nonmineral deficit (ongoing-spending) to 3 percent of GDP and reduce the overall fiscal spending envelope. Authorities indicated the suggestion would be considered. ### MTFS — Key Principles (Box 2) - MTFS approved for 2008–12; nonmineral fiscal deficit constrained to fall within a range of 4 to 8 percent of GDP. - Principles: - Ongoing spending (recurrent and development) should be kept in line with “normal revenues” defined as the sum of nonmineral revenues and normal mineral revenues — the mineral revenues expected without a commodity-price boom, about 4 percent of GDP. - Ongoing spending limited to the sum of normal mineral revenues and nonmineral revenues. - Mineral revenues above 4 percent of GDP to be used for “one-off” expenditures, debt reduction (30 percent) and additional public investment (70 percent). - Amounts not used for debt reduction accumulate in trust accounts; in any year, no more than 4 percent of GDP can be spent from trust accounts on additional public investment. - Estimate of normal mineral revenues based on average from pre-boom years 1999–2003 and expected performance in 2010–12; government to reassess the 4 percent of GDP normal mineral revenue estimate every two years. ### C. Sovereign Wealth Fund (SWF) — Incorporation into Framework - Discussion and staff assessment - Considerable discussion of establishing an SWF to manage expected large increase in public revenue from LNG projects. - Staff assessment: a financing fund with both stabilization and saving objectives would serve best. - Financing fund should be directly linked to the budget’s non-mineral deficit and integrated within the budget process. - Avoid extrabudgetary spending, revenue earmarking, and rigid SWF operational rules. - SWF must be well integrated into the overall macroeconomic framework, likely needing redesign in light of expected LNG revenues. - Accumulated resources should be invested abroad with stringent transparency and accountability provisions to avoid imparting volatility domestically and to help minimize Dutch disease. - Implementation - Staff to work with a joint Treasury/BPNG working group to prepare an SWF proposal for the National Executive Council by end-June 2010. - Staff noted an SWF could be established before LNG revenues are realized and would be more effective than current use of trust accounts. ### Lessons from International Experience with SWFs (Box 3) - Natural resource revenues are volatile, uncertain, exhaustible, and could lead to Dutch disease; smoothing government expenditure and decoupling it from short-term volatility is challenging. - A financing fund linked to the non-mineral deficit and integrated with the budget is preferable. - Invest accumulated resources abroad; ensure transparency and accountability in line with IMF and OECD guidelines. ### D. Monetary Policy — The Appropriate Degree of Tightness - Outlook and authorities’ stance - Authorities agreed with staff on inflation outlook but were more sanguine about need to contain pressures. - Staff noted real interest rates had risen with the decline in inflation and credit growth had slowed, but inflation still forecasted to rise notably with a large domestic demand component increasing risk of entrenchment. - Staff argued preemptive containment would reduce net output cost relative to addressing entrenched inflation later. - Operational constraints and coordination - Authorities concerned that using policy rate and central bank bills to contain credit growth and domestic demand risked undermining the central bank’s capital base and credibility. - Coordination of monetary and fiscal policy needed: - In 2009, bank bills yielding between 6 and 7 percent were used to mop up liquidity from trust deposits yielding returns to the government between ½ to 1 percent, resulting in a large net loss for the public sector. - Authorities agreed it would be preferable to transfer remaining trust accounts to the BPNG and hold future above-normal mineral revenue at the central bank. - Authorities saw merit in Treasury and BPNG working together to determine how much above-normal mineral revenue could be spent each year based on capacity constraints. - Staff recommendation - Central bank should be tightening monetary policy now with a view to achieving real lending rates of around 6 percent and be prepared to maintain real lending rates around this level, or higher if significant overheating occurs. ### E. Financial Sector — Maintaining Stability - Current soundness - Financial sector remained sound; only sign of stress from global turmoil was a doubling of non-performing loans, but from a low base and with substantial loan-loss provisions so capital buffers remain large. - Much of the increase in NPLs sourced to a single loan at one bank; net loss expected to be quite small. - Main challenges and risks - Maintaining asset quality as credit demand likely to increase with LNG-related opportunities; lending standards could ease. - Expectation of a property-price boom in the capital region due to LNG-associated demand and relatively inelastic supply owing to land-availability constraints; anecdotal evidence suggested it was underway. - Limited domestic investment opportunities make overexposure to an inflated property market a risk for financial institutions. - Authorities indicated prudential guidelines constrain financial institutions’ property market exposures and recognized need to monitor and enforce these closely. - Supervision and assessments - Bank of South Pacific (BSP) to operate recently-purchased Colonial Bank of Fiji (CBF) as a branch; BPNG has agreement with Fijian authorities to receive adequate information for supervision. - Papua New Guinea will have its first Financial Sector Assessment Program during May 2010; staff will await outcome to make detailed regulatory and supervisory recommendations. ### F. Equilibrium Exchange Rate and External Stability - Staff estimates - Exchange rate broadly in line with fundamentals. - Since last year’s assessment of mild overvaluation, depreciation in the Kina and a projected improvement in the terms of trade have brought the currency back in line with fundamentals. - ERER approach points to a mild overvaluation of 3.4 percent. - External financing and debt sustainability - Large projected widening in the current account deficit associated with LNG projects expected to be FDI-financed; public external debt anticipated to increase only mildly and reflect concessional borrowing. - Debt sustainability stress tests indicate a moderate risk of debt distress under extreme scenarios with threshold levels violated for the present value of debt relative to GDP. - Government’s LNG completion guarantee and commitments to landowners increase risk of unfavorable medium-term debt dynamics. - Staff stressed need for enhanced fiscal discipline to maintain external debt sustainability during the LNG construction period. ### G. Fostering Sustainable Broad-Based Growth - Structural reform status - Structural reform implementation has slowed. - Development Strategic Plan (DSP) 2010-2030 recognizes need to shift growth sources to private nonmineral sector; stresses improvements in transportation, private micro-credit facilities, basic utilities, human capital, and law and order. - Decisive actions limited to communications sector, international air travel, and power. - State-owned enterprise (SOE) issues - SOE inefficiencies continue to drive up cost of doing business and constrain nonmineral growth. - Some SOE reform progress (e.g., commercialization of Papua New Guinea Banking Corporation through merger with Bank of South Pacific), but many SOEs operate without budget constraints or profit objectives, face political interference, and deliver CSOs without adequate compensation. - Audited SOE financial reports not yet public; many SOEs likely do not cover their cost of capital representing inefficient use of public funds. - Successful SOE reform requires independence from political directives, binding budget constraints, exposure to competition, full compensation for CSOs, and full accountability. - PPPs and reform priorities - Government committed to developing a CSO framework and progressing a national PPP policy (Cabinet endorsed National PPP policy in 2008) with potential to facilitate private infrastructure investment. - Successful PPP implementation and SOE reform expected to improve service delivery, reduce business costs, and create private sector investment opportunities essential for longer-term prosperity. - Interim fiscal costs associated with SOE restructuring likely but expected to be incurred gradually. --- ### Fiscal Framework Assessment and MTFS Enhancements - Assessment - Recent slippages in implementation have undermined the MTFS’s stabilization objective. - Spending from accumulated mineral revenue above the framework’s limit imparted a fiscal stimulus in 2009 larger than warranted. - Although the 2010 budget reduces the stimulus, planned level of spending is likely to be too expansionary given expected strength in private activity. - Spending from trust accounts outside the budget will add to demand pressures. - Recommendation: Delaying some infrastructure spending would ease overall demand pressures and help ensure good value. - MTFS enhancements given LNG construction - Recommendation 1: Lower the assumption of normal mineral revenue to 3 percent of GDP between now and 2014, when LNG production should commence. - Rationale: Reduce pressures from public spending during a period of strong private spending and use increased public savings to finance currently unfunded government liabilities. - Recommendation 2: Annual consultation between the monetary and fiscal authorities should determine how much of the 4 percent of GDP limit from above-normal mineral revenue can be spent. - Strengthening MTFS implementation - Strict adherence to the framework will help deliver fiscal prudence required to guard against unfavorable public debt dynamics from vulnerabilities such as potential LNG project delays, lower commodity prices, and weaker external demand. - SWF recommendation - Now is the time to develop an SWF to manage resource revenue. - Preferred design: a financing fund that directs all public spending through the budget, enhancing macroeconomic stabilization and ensuring high quality spending aligned with development objectives. - Operational principles: - Domestic absorption capacity should guide the rate of drawdown. - Invest the fund’s resources offshore to minimize potential for currency appreciation that would undermine the welfare of rural populations dependent on agriculture exports. - Integrate SWF into macro framework and support with MTFS and the Fiscal Responsibility Act. ### Monetary Policy and Coordination - Inflation and coordination with fiscal policy - Monetary policy needs to be focused on emerging inflation pressures. - Domestic demand will play a more important role in driving inflation up, implying a greater risk that high inflation could become entrenched in expectations. - Recommendation: Central bank should be tightening monetary policy now with a view to achieving real lending rates of around 6 percent and be prepared to maintain real lending rates around this level, or higher if significant overheating occurs. - Closer coordination of monetary and fiscal policy is desirable: - Public trust accounts should be moved to the BPNG and procedures to automatically deposit above-normal mineral revenue with the central bank should be introduced. - Expected benefits: better control over domestic liquidity and market interest rates, strengthened effectiveness of monetary policy, and reduced net cost to the public sector by limiting need to use high-cost central bank bills to remove excess liquidity. ### Financial Sector Soundness and Risks - Indicators suggest financial sector remains sound. - Safeguards - Banks should be encouraged to maintain strict lending standards as credit demand increases with LNG projects. - All financial institutions need to guard against overexposure to the property sector that could become significantly overvalued during the LNG construction phase. ### External Position and Reserves - Projected widening in the current account deficit is not expected to threaten external stability. - Exchange rate broadly in line with fundamentals and reserves remain adequate to address potential balance of payments needs. ### Development Spending, SOEs, and Reforms - To achieve the Development Strategic Plan it will be essential to better align development spending with priorities and reinvigorate the reform process. - Progress noted: increased competition in telecommunications, aviation, and power. - Remaining priorities: - More action needed for SOEs that will see considerable increases in demand for their services from the LNG projects. - Government commitment to implement a public-private-partnership policy is encouraging and could facilitate significant private investment in infrastructure. - Improvements to security and the business environment would also yield significant benefits. --- ### Headline Indicators and Projections (selected exact figures) - Nominal GDP (2008): US$7.8 billion - Population (2008): 6.2 million - GDP per capita (2008): US$1,267 - Quota: SDR 131.6 million - Real GDP growth (selected): 2.3 (2006); 7.2 (2007); 6.7 (2008); 4.5 (2009 est.); 8.0 (2010 proj.) - CPI (annual average): 2.4 (2006); 0.9 (2007); 10.7 (2008); 6.9 (2009 est.); 7.1 (2010 proj.) - CPI (end-period): -0.9 (2006); 3.2 (2007); 11.2 (2008); 5.7 (2009 est.); 8.5 (2010 proj.) - Central government operations (percent of GDP): - Revenue and grants: 37.2 (2006); 37.3 (2007); 32.6 (2008); 28.3 (2009 est.); 27.9 (2010 proj.) - Expenditure and net lending: 30.7 (2006); 28.4 (2007); 30.0 (2008); 35.7 (2009 est.); 29.5 (2010 proj.) - Overall balance (including grants): 6.5 (2006); 8.9 (2007); 2.5 (2008); -7.4 (2009 est.); -1.6 (2010 proj.) - Nonmineral balance: -7.8 (2006); -7.5 (2007); -7.4 (2008); -11.2 (2009 est.); -6.9 (2010 proj.) - Balance of payments (U.S. dollars, selected): - Exports, f.o.b.: 4,822 (2007); 5,823 (2008); 4,617 (2009 est.); 5,742 (2010 proj.) - Mineral exports: 3,673 (2007); 4,262 (2008); 3,516 (2009 est.); 4,584 (2010 proj.) - Imports, c.i.f.: -2,629 (2007); -3,148 (2008); -3,430 (2009 est.); -5,424 (2010 proj.) - Current account (including grants): 208 (2007); 805 (2008); -541 (2009 est.); -1,422 (2010 proj.) - Current account (percent of GDP): 3.3 (2007); 10.0 (2008); -6.8 (2009 est.); -16.1 (2010 proj.) - Gross official reserves (end-year, U.S. dollars): 1,988 (2008); 2,571 (2009 est.); 2,432 (2010 proj.); 2,299 (2011 proj.) - Money and credit (percent change): - Broad money: 38.9 (2006); 27.8 (2007); 11.2 (2008); 19.3 (2009 est.); 18.7 (2010 proj.) - Credit to the private sector: 38.2 (2006); 34.4 (2007); 39.4 (2008); 17.3 (2009 est.); 20.0 (2010 proj.) - Domestic credit: 19.4 (2006); 5.5 (2007); 31.3 (2008); 30.2 (2009 est.); 25.2 (2010 proj.) - Interest rate (182-day T-bills; period average): 3.7 (2006); 4.4 (2007); 5.9 (2008); 7.2 (2009 est.) - External vulnerability and public debt indicators: - Public external debt-to-GDP ratio: 21.4 (2006); 16.6 (2007); 13.2 (2008); 12.8 (2009 est.); 11.9 (2010 proj.) - Gross public debt (percent of GDP): 40.6 (2006); 35.0 (2007); 32.1 (2008); 32.4 (2009 est.); 29.0 (2010 proj.) - Net official reserves (millions of U.S. dollars): 1,986 (2008); 2,374 (2009 est.); 2,234 (2010 proj.) - Gross official reserves (months of imports of goods and nonfactor services): 4.4 (2007); 5.6 (2008); 3.8 (2009 est.); 3.2 (2010 proj.) --- ### Debt Sustainability Analysis — Summary and Risks (APPENDIX I) - Summary judgment and classification - Based on LIC DSA, Papua New Guinea is rated to be at a moderate risk of debt distress. - Baseline public DSA: overall public sector debt dynamics are sustainable given current size and evolution of domestic stock. - Key caveat: stress tests indicate vulnerabilities to shocks from slower export and economic growth, and inclusion of LNG contingent liabilities and other domestic liabilities would undermine long-term fiscal sustainability. - Policy implications: adherence to MTFS and establishment of an SWF for more efficient revenue management. - Historical and baseline figures - Public sector debt ratio: declined from 62 percent of GDP at end-2004 to an estimated 32 percent of GDP at end-2009. - PPG external debt: decreased to 13 percent of GDP at end-2009. - Private sector external debt: estimated at about 14 percent of GDP by end-2009. - External DSA findings - Baseline: all PPG external debt and debt service ratios stay well below policy-dependent thresholds. - PV of PPG external debt over GDP would remain around 11 percent in the medium term, below the 30 percent threshold. - Stress tests: debt burden breaches indicative thresholds under some shocks. - Specific stress test: A decline in export value growth in 2010–11 by one standard deviation below its historical average would raise the PV of public external debt-to-GDP ratio to 37 percentage points over the medium term, and only fall below the 30 percent threshold after 2018. - Other stress tests (lower FDI inflows; combination shocks) generate similar alarming debt patterns. - Public DSA findings - Baseline: public debt ratio projected to decline to 23.8 percent of GDP by 2015 and to about 14 percent by 2030. - Sensitivities: projected debt path particularly sensitive to changes in real GDP growth. - A negative shock to real GDP growth in 2011–12 would increase PV of public debt-to-GDP ratio close to 80 percent in 2030. - If a primary deficit of 5.8 percent in 2009 is assumed to be maintained for the projection period, PV of public debt-to-GDP ratio would be above 200 percent in 2030. - Contingent and other liabilities: - Unfunded superannuation liabilities: estimated about 9 percent of GDP by end-2009. - LNG project contingent liabilities: PV about 20 percent of GDP in 2014. - Exchangeable bonds: US$1.1 billion (option to exchange for equities in the Oil Search company). - Completion guarantee exposure: up to US$2 billion if the project fails. - SOE-related contingent liabilities: about 2.5 percent of GDP (based on end-2007 statements of nine SOEs); off-balance sheet liabilities may be significant. - Alternative scenario (all-other-liabilities): - Assumes pension and SOE liabilities about 10 percent of GDP in 2011 and all LNG contingent liabilities materialize in 2014 (about 20 percent of GDP). - Under this scenario, debt dynamics become unfavorable and add additional risks to public debt sustainability. - Selected numeric entries and thresholds (as presented) - Public debt ratio: 62 percent of GDP at end-2004; 32 percent of GDP at end-2009. - PPG external debt: 13 percent of GDP at end-2009. - Private sector external debt: about 14 percent of GDP by end-2009. - Real GDP growth: 4.5 percent in 2009. - Public debt ratio projection: 23.8 percent of GDP by 2015; about 14 percent by 2030. - Stress-test figure: PV of public external debt-to-GDP ratio would rise to 37 percentage points under a one-standard-deviation export value shock in 2010–11. - Unfunded superannuation liabilities: about 9 percent of GDP by end-2009. - LNG contingent liabilities (PV): about 20 percent of GDP in 2014. - Exchangeable bonds: US$1.1 billion. - Completion guarantee exposure: up to US$2 billion. - Policy-based PPG external debt burden thresholds for PNG (weak performer): - PV of debt-to-GDP ratio: 30 - PV of debt-to-exports ratio: 100 - PV of debt-to-revenue ratio: 200 - Debt service-to-exports ratio: 15 - Debt service-to-revenue ratio: 25 ### Macroeconomic Assumptions Underlying the DSA (Box 1) - Growth and inflation - Real GDP growth projected to be at 5.2 percent on average over the medium term, above the historical average of 2.9 percent, and slow to 3 percent in the long run. - Inflation projected to rise in the medium term due to increasing domestic demand and near-term capacity constraints, while stabilizing at around 3 percent in the long run. - LNG projects — timing and impact - Two LNG projects have a construction period of 5 years each, from 2010/11 to 2014/15. - Production and exports expected to commence in the second half of 2014, with a maximum capacity of about 60 million barrels of oil equivalent. - Peak impact of the projects estimated to be an increase of 25 to 30 percent in annual GDP growth. - These 30-year projects are estimated to increase annual GDP growth, through both direct and indirect channels, by about 15 to 20 percent on average. - Accounting for substantial income outflows, projects expected to increase annual GNI by about 9 percent. - External sector and financing - Current account (including grants) estimated to be in deficit in 2009 and projected to remain over the medium term until 2013, primarily reflecting strong import growth related with LNG construction. - FDI inflows from foreign shareholders projected to increase substantially. - Fiscal outlook and trust-account spending - Fiscal balance estimated to turn into a deficit in 2009 due to falling mineral revenues and spending of preceding years’ mineral windfall revenues. - Deficit financed by a rundown of resources held in trust accounts. - Over the medium term it is projected to remain balanced. - Footnote: Trust spending was main factor shifting fiscal balance from a surplus of 2.5 percent of GDP in 2008 to a deficit of almost 8 percent of GDP in 2009, resulting in a fiscal impulse of almost 13 percent of GDP. - Debt sustainability assessment and risks - Staff view: PNG should be considered at moderate risk of debt stress; baseline indicates external PPG debt indicators below thresholds but projected paths show vulnerability to slower export and economic growth; inclusion of LNG contingent liability and other domestic liabilities adds concerns. --- *Source: IMF staff — Executive Summary and report text (document _cr10164).* ### Executive Summary ...................................................................................................... ### _cr10164 - Executive Summary ### Background and Main Issues - The global downturn had only a mild impact on Papua New Guinea (PNG) because growth was supported by still strong terms of trade, an insulated financial sector, and an increase in public expenditure. - Growth is expected to rebound in 2010 as construction begins on two liquefied natural gas (LNG) projects. - Inflation declined in 2009 but is expected to accelerate in 2010 as imported inflation rises and domestic demand butts up against capacity constraints. - Near-term challenge: maintain macroeconomic stability in the face of a substantial demand shock from the construction of two major LNG projects. - Medium-term priority: ensure that windfall revenues from exhaustible resources are used effectively to raise living standards on a sustainable basis. ### Staff Views and Policy Advice - Fiscal policy - Staff endorsed the withdrawal of fiscal stimulus in the 2010 Budget. - Staff raised concerns about the planned level of investment spending and slippages in the implementation of the Medium-Term Fiscal Strategy. - Staff advised that integrating a sovereign wealth fund (SWF) into the macro framework could be more effective to manage windfall resource revenue than the current practice of using trust accounts managed outside the budget process. - Monetary policy - Staff stressed that monetary policy needed to be focused on emerging inflation pressures and act preemptively to avoid high inflation becoming entrenched in expectations. - Staff called for better coordination of monetary and fiscal policy. - Financial sector and external stability - Staff recommended maintaining financial sector stability while managing the macro implications of LNG-related demand pressures. - Implementation and institutional design - Staff views emphasized improving implementation of the Medium-Term Fiscal Strategy and integrating resource revenue management into the budgetary framework. ### Authorities’ Views and Implementation Challenges - The authorities agreed on the key issues and the broad policy advice but noted practical implementation challenges. - Fiscal explanations and constraints - The authorities noted that the magnitude of the deviation from the framework in 2009 reflected a significant acceleration in spending following easing of constraints on trust account spending and international endorsement of fiscal stimulus. - The authorities indicated scope to delay some planned public investment expenditure. - A working group was established to develop a proposal for the introduction of a sovereign wealth fund to manage resource revenue. - The authorities observed that the absence of an informed public debate undermined incentives for Ministers to adhere to the fiscal framework. - Monetary policy stance - On monetary policy, authorities appeared somewhat resigned to accept higher inflation. - This position in part reflected the central bank’s concern about the impact on its capital of using both the policy rate and bank bills to contain liquidity and thus domestic demand. ### Macroeconomic Backdrop — Key Developments and Indicators - Growth and inflation - Real GDP Growth: after expanding by almost 7 percent in 2008, GDP is estimated to have grown by just under 5 percent in 2009. - CPI inflation: peaked above 13 percent in the third quarter of 2008 and fell steadily to under 6 percent at end-2009. - Improved inflation performance primarily reflects moderation in food price inflation and a decline in energy prices, though non-tradable inflation pressures appear to have intensified. - Fiscal performance - Fiscal balance: shifted from a surplus of 2.5 percent of GDP in 2008 to a deficit of almost 8 percent of GDP in 2009. - Fiscal impulse: almost 13 percent of GDP in 2009. - Main cause: relaxation of constraints on trust account spending led to trust spending exploding in 2009; trust spending was the main factor shifting the fiscal balance. - Monetary stance and credit - Policy rate: increased from 6 to 8 percent in response to the 2008 inflation run-up; the Bank of Papua New Guinea (BPNG) lowered the policy rate by 100 basis points in December 2009. - Liquidity management: BPNG relied heavily on central bank bills to contain banking system liquidity, which expanded partly because of government trust account activity. - Real bank lending rates rose in late-2008 and 2009; credit growth eased from the high rates posted in 2007 and 2008. - Financial sector strength - Banking system: the three large banks are primarily deposit funded with no significant links to global capital markets. - Non-performing loans (NPLs): rose to 0.8 percent of total assets from a trough of 0.4 percent. - Provisioning and profitability: provisioning is high and banks remain profitable. - Pension funds: remain performing well but profitability has suffered given lower returns from some investments. - External position and reserves - Nominal effective depreciation: the currency depreciated by 12 percent in nominal effective terms in 2009 (after appreciating in 2008). - External debt: small increase to 27 percent of GDP at end-2009. - Reserves: rebuilt during 2009 and now cover almost 12 months of non-mining imports. - Foreign direct investment inflows associated with ongoing mineral sector projects provided foreign currency to bolster reserve accumulation. - Sectoral composition (share of nominal GDP, 2008) - Agriculture, Forestry and Fishing: 33% - Mineral: 28% - Manufacturing: 6% - Construction: 11% - Wholesale and Retail trade: 7% - Transport and Communication: 2% - Other: 13% ### Comparative Impact of the Global Crisis (Box 1 Highlights) - PNG’s growth held up relatively well during the global crisis compared with many other Pacific island countries (PICs). - Reasons for relative resilience: - Financial sector insulation from global capital markets allowed credit growth to continue. - PNG relies less heavily on remittances and tourism income than other PICs; demand for PNG’s exports remained relatively strong. - Domestic demand was supported by confidence effects from proposed LNG projects and increased public expenditure enabled by prior prudent fiscal policies. - Vulnerabilities: - Decline in commodity prices negatively affected external and fiscal positions in this resource-rich economy. ### Staff Appraisal (summary of overarching assessment) - The immediate policy priority is to contain inflationary pressures and coordinate monetary and fiscal policy to preserve macro stability amid LNG-related demand shocks. - The medium-term priority is the effective and sustainable use of windfall resource revenues, including consideration of a sovereign wealth fund integrated into the macro-fiscal framework. - Strengthening implementation of the Medium-Term Fiscal Strategy and improving public accountability and debate are critical to prevent future slippages. *Source: IMF staff — Executive Summary (document _cr10164).* ### 7. The near-term challenge will be to maintain macroeconomic stability during the ### 7. The near-term challenge will be to maintain macroeconomic stability during the ### A. Outlook—Expansion with Upside Risks - GDP growth rebounding to roughly 8 percent in 2010 (staff and authorities). - Continued buoyant commodity export demand and the LNG construction phase expected to: - stimulate growth and strain domestic capacity; - fuel a pickup in inflation in 2010 due to domestic demand pressures, recovery in international commodity prices, and depreciation of the kina against the Australian dollar in 2009. - Growth expected to slow somewhat in 2011 largely due to resource depletion; domestic capacity in the nonmineral sector expected to remain strained. - Staff sees greater risk than the authorities that high inflation could become entrenched in expectations. - Current account deficit forecast to widen over the next few years with LNG-related imports but expected to be financed with foreign direct investment (FDI). - Risks skewed to the upside on both activity and inflation; direct and indirect impacts from LNG construction and public spending from trust accounts held outside the budget could add more demand and inflation pressures than forecast in 2010. ### B. Fiscal Policy—Strengthening Implementation - Period of adherence to the Medium-Term Fiscal Strategy (MTFS) yielded fiscal surpluses, declining public debt, and accumulation of public resources in trust accounts during the commodity price boom. - Concerns about slippages in 2009: - Roughly 8 percent of GDP was spent from trust accounts in 2009, twice the amount allowed under the MTFS. - International endorsement of fiscal stimulus encouraged Ministers to accelerate trust spending. - Authorities noted spending was from accumulated savings and not debt financed. - Staff endorsed the 2010 Budget target of balance but noted: - Additional spending likely from trust accounts held outside the budget. - Staff projection (assuming some underspending from development budget but half of remaining trust fund balances spent in 2010) contains a fiscal deficit of roughly 1 percent of GDP. - Staff suggested delaying some planned infrastructure spending to avoid capacity constraints, price pressures, and poor value. - Domestic capacity largely exhausted by LNG projects; construction sector capacity unlikely to be forthcoming from Australia. - Staff noted 2010 Budget undermined fiscal credibility by directing all above-normal mineral revenue to public investment (contrary to MTFS allocation of 30 percent to debt reduction) and failing to fully fund legislated pension obligations. - Mechanisms to strengthen MTFS implementation discussed with few tangible suggestions; examples offered include embedding MTFS rules in Fiscal Responsibility Legislation or compelling the Treasurer to explain deviations to Parliament. Authorities skeptical about effectiveness without underlying political will and an informed public debate. - Public liability risks to increase during LNG construction phase: - Government has taken on significant unfunded liabilities associated with landowner agreements, currently representing about 8 percent of GDP. - Government has a completion guarantee for one project, creating incentive to meet landowner demands. - Staff recommended increasing public savings and reducing the MTFS normal mineral revenue assumption from 4 percent of GDP to 3 percent of GDP when reviewed, which would reduce the nonmineral deficit (ongoing-spending) to 3 percent of GDP and reduce the overall fiscal spending envelope to help ease demand pressures and address LNG-related liabilities. Authorities indicated the suggestion would be considered. ### Box 2. THE MEDIUM-TERM FISCAL STRATEGY - MTFS approved for 2008–12; nonmineral fiscal deficit constrained to fall within a range of 4 to 8 percent of GDP. - Principles: - Ongoing spending (recurrent and development) should be kept in line with “normal revenues” defined as the sum of nonmineral revenues and normal mineral revenues — the mineral revenues expected without a commodity-price boom, about 4 percent of GDP. - Ongoing spending limited to the sum of normal mineral revenues and nonmineral revenues. - Mineral revenues above 4 percent of GDP to be used for “one-off” expenditures, debt reduction (30 percent) and additional public investment (70 percent). - Amounts not used for debt reduction accumulate in trust accounts; in any year, no more than 4 percent of GDP can be spent from trust accounts on additional public investment. - Estimate of normal mineral revenues based on average from pre-boom years 1999–2003 and expected performance in 2010–12; government to reassess the 4 percent of GDP normal mineral revenue estimate every two years. ### C. Sovereign Wealth Fund (SWF) — Incorporation into Framework - Considerable discussion of establishing an SWF to manage expected large increase in public revenue from LNG projects. - Staff assessment: a financing fund with both stabilization and saving objectives would serve best. - Financing fund should be directly linked to the budget’s non-mineral deficit and integrated within the budget process. - Avoid extrabudgetary spending, revenue earmarking, and rigid SWF operational rules. - SWF must be well integrated into the overall macroeconomic framework, likely needing redesign in light of expected LNG revenues. - Accumulated resources should be invested abroad with stringent transparency and accountability provisions to avoid imparting volatility domestically and to help minimize Dutch disease. - Staff to work with a joint Treasury/BPNG working group to prepare an SWF proposal for the National Executive Council by end-June 2010. - Staff noted an SWF could be established before LNG revenues are realized and would be more effective than current use of trust accounts. ### Box 3. LESSONS FROM INTERNATIONAL EXPERIENCE WITH SWFS - Natural resource revenues are volatile, uncertain, exhaustible, and could lead to Dutch disease; smoothing government expenditure and decoupling it from short-term volatility is challenging. - A financing fund linked to the non-mineral deficit and integrated with the budget is preferable. - Invest accumulated resources abroad; ensure transparency and accountability in line with IMF and OECD guidelines. ### D. Monetary Policy—The Appropriate Degree of Tightness - Authorities agreed with staff on inflation outlook but were more sanguine about the need to contain pressures. - Staff noted real interest rates had risen with the decline in inflation and credit growth had slowed, but inflation still forecasted to rise notably with a large domestic demand component increasing risk of entrenchment. - Staff argued preemptive containment would reduce net output cost relative to addressing entrenched inflation later. - Authorities concerned that using policy rate and central bank bills to contain credit growth and domestic demand risked undermining the central bank’s capital base and credibility, partly due to experience using bank bills to remove excess market liquidity generated by government trust deposits. - Coordination of monetary and fiscal policy needed: - In 2009, bank bills yielding between 6 and 7 percent were used to mop up liquidity from trust deposits yielding returns to the government between ½ to 1 percent, resulting in a large net loss for the public sector. - Authorities agreed it would be preferable to transfer remaining trust accounts to the BPNG and hold future above-normal mineral revenue at the central bank. - Authorities saw merit in Treasury and BPNG working together to determine how much above-normal mineral revenue could be spent each year based on capacity constraints. ### E. Financial Sector—Maintaining Stability - Financial sector remained sound; only sign of stress from global turmoil was a doubling of non-performing loans, but from a low base and with substantial loan-loss provisions so capital buffers remain large. - Much of the increase in non-performing loans sourced to a single loan at one bank; net loss expected to be quite small. - Main challenge: maintaining asset quality. - During the financial crisis banks tightened lending standards and shortened loan maturity. - Credit demand likely to increase with LNG-related opportunities; lending standards could ease. - Expectation of a property-price boom in the capital region due to LNG-associated demand and relatively inelastic supply owing to land-availability constraints; anecdotal evidence suggested it was underway. - Limited domestic investment opportunities make overexposure to an inflated property market a risk for financial institutions. - Authorities indicated prudential guidelines constrain financial institutions’ property market exposures and recognized need to monitor and enforce these closely. - Bank of South Pacific (BSP) to operate recently-purchased Colonial Bank of Fiji (CBF) as a branch; BPNG has agreement with Fijian authorities to receive adequate information for supervision. CBF profitable but with lower rate of return than BSP. - Papua New Guinea will have its first Financial Sector Assessment Program during May 2010; staff will await outcome to make detailed regulatory and supervisory recommendations. ### F. The Equilibrium Exchange Rate and External Stability - Staff estimates suggest the exchange rate is broadly in line with fundamentals. - Since last year’s assessment of mild overvaluation, depreciation in the Kina and a projected improvement in the terms of trade have brought the currency back in line with fundamentals. - ERER approach points to a mild overvaluation of 3.4 percent. - Large projected widening in the current account deficit associated with LNG projects expected to be FDI-financed; public external debt anticipated to increase only mildly and reflect concessional borrowing. - Debt sustainability stress tests indicate a moderate risk of debt distress under extreme scenarios with threshold levels violated for the present value of debt relative to GDP. - Government’s LNG completion guarantee and commitments to landowners increase risk of unfavorable medium-term debt dynamics. - Staff stressed need for enhanced fiscal discipline to maintain external debt sustainability during the LNG construction period. ### Box 4. EQUILIBRIUM REAL EXCHANGE RATE - MB approach indicates the kina is not significantly different from its estimated equilibrium level; ERER approach points to a mild overvaluation of 3.4 percent. - Decomposition: MB approach — demographic factors and the oil trade balance main determinants of equilibrium current account; ERER approach — terms of trade and government consumption key factors. - Overvaluation assessed relative to January 2010; staff projection of underlying CA/GDP in 2014 referenced; semi-elasticity used of -0.42 in MB approach. ### G. Fostering Sustainable Broad-Based Growth - Structural reform implementation has slowed. - Development Strategic Plan (DSP) 2010-2030 recognizes need to shift growth sources to private nonmineral sector; stresses improvements in transportation, private micro-credit facilities, basic utilities, human capital, and law and order. - Decisive actions limited to communications sector, international air travel, and power. - SOE inefficiencies continue to drive up cost of doing business and constrain nonmineral growth. - Some SOE reform progress (e.g., commercialization of Papua New Guinea Banking Corporation through merger with Bank of South Pacific), but many SOEs operate without budget constraints or profit objectives, face political interference, and deliver CSOs without adequate compensation. - Audited SOE financial reports not yet public; many SOEs likely do not cover their cost of capital representing inefficient use of public funds. - Successful SOE reform requires independence from political directives, binding budget constraints, exposure to competition, full compensation for CSOs, and full accountability. - Government committed to developing a CSO framework and progressing a national PPP policy (Cabinet endorsed National PPP policy in 2008) with potential to facilitate private infrastructure investment, especially in utility and transport sectors. - Successful PPP implementation and SOE reform expected to improve service delivery, reduce business costs, and create private sector investment opportunities essential for longer-term prosperity. - Note: Interim fiscal costs associated with SOE restructuring likely but not quantified; expected to be incurred gradually to make reform politically acceptable. ### Box 5. STATE-OWNED ENTERPRISE REFORM - SOEs continue to impede growth; reforms and performance improvements achieved in some cases but most SOEs lack budget constraints or profit objectives. - Private sector investment introduced in telecommunications, aviation and power sectors; more needed for SOEs facing increased demand from LNG projects. - Development of a CSO framework and PPP policy expected to facilitate commercialization and private infrastructure investment. *Source: IMF staff and authorities discussion as presented in the provided content unit.* ### 24. We commend the authorities for maintaining a medium-term fiscal framework. ### 24. We commend the authorities for maintaining a medium-term fiscal framework. ### Fiscal framework: assessment and implementation issues - Recent slippages in implementation have undermined the framework’s stabilization objective. - Spending from accumulated mineral revenue above the framework’s limit imparted a fiscal stimulus in 2009 larger than warranted. - Although the 2010 budget reduces the stimulus, the planned level of spending is likely to be too expansionary given the expected strength in private activity. - Spending from trust accounts outside the budget will add to demand pressures. - Recommendation: Delaying some infrastructure spending would ease overall demand pressures and help ensure that good value is achieved from this spending. ### MTFS enhancements given LNG construction - The construction phase of the LNG projects will increase the difficulty of maintaining macroeconomic stability. - Recommendation 1: Lower the assumption of normal mineral revenue to 3 percent of GDP between now and 2014, when LNG production should commence. - Rationale: This would reduce pressures from public spending during a period of strong private spending and the increased public savings could be used to finance currently unfunded government liabilities. - Recommendation 2: Annual consultation between the monetary and fiscal authorities should determine how much of the 4 percent of GDP limit from above-normal mineral revenue can be spent. ### Strengthening MTFS implementation - The fiscal credibility built during years of adherence to the framework can be easily lost, reducing long-term growth prospects. - Strict adherence to the framework will help deliver the fiscal prudence required to guard against unfavorable public debt dynamics from vulnerabilities such as: - potential LNG project delays, - lower commodity prices, - weaker external demand. ### Sovereign Wealth Fund (SWF) recommendation - With LNG projects underway, now is the time to develop an SWF to manage resource revenue. - Preferred design: a financing fund that directs all public spending through the budget, thereby enhancing macroeconomic stabilization and helping to ensure high quality spending aligned with development objectives. - Operational principles: - Domestic absorption capacity should guide the rate of drawdown to maximize long-run development impact of LNG income. - To minimize potential for currency appreciation that would undermine the welfare of rural populations dependent on agriculture exports, the fund’s resources should be invested offshore. - The SWF needs to be integrated into the macro framework and supported by other fiscal institutions, such as the MTFS and the Fiscal Responsibility Act. ### Monetary policy: inflation and coordination with fiscal policy - Although inflation declined over 2009, monetary policy needs to be focused on emerging inflation pressures. - Compared to the recent episode of high inflation, domestic demand will play a more important role in driving inflation up, implying a greater risk that high inflation could become entrenched in expectations. - Recommendation: The central bank should be tightening monetary policy now with a view to achieving real lending rates of around 6 percent. - Further: To contain inflation and manage inflation expectations, they should be prepared to maintain real lending rates around this level, or higher if significant overheating occurs. - Closer coordination of monetary and fiscal policy is desirable. - Public trust accounts should be moved to the BPNG and procedures to automatically deposit above-normal mineral revenue with the central bank should be introduced. - Expected benefits: better control over domestic liquidity and market interest rates, strengthened effectiveness of monetary policy, and reduced net cost to the public sector by limiting the need to use high-cost central bank bills to remove excess liquidity. ### Financial sector soundness and risks - Indicators suggest that the financial sector remains sound. - To safeguard financial health: - Banks should be encouraged to maintain strict lending standards as credit demand increases in line with opportunities associated with the LNG projects. - All financial institutions need to guard against overexposure to the property sector that could become significantly overvalued during the LNG construction phase. ### External position and reserves - The projected widening in the current account deficit is not expected to threaten external stability. - The exchange rate is estimated to be broadly in line with fundamentals and reserves remain adequate to address potential balance of payments needs. ### Development spending, SOEs, and reforms - To achieve the Development Strategic Plan it will be essential to better align development spending with priorities and reinvigorate the reform process. - Progress noted: increased competition in telecommunications, aviation, and power. - Remaining priorities: - More action needed for state-owned enterprises that will see considerable increases in demand for their services from the LNG projects. - Government commitment to implement a public-private-partnership policy is encouraging and could facilitate significant private investment in infrastructure. - Improvements to security and the business environment would also yield significant benefits. *Source: _cr10164 - 24. We commend the authorities for maintaining a medium-term fiscal framework.* ### 33. Staff recommends the next Article IV consultation be held on the standard 12-month ### Staff recommends the next Article IV consultation be held on the standard 12-month cycle. ### Overview and headline indicators - Nominal GDP (2008): US$7.8 billion - Population (2008): 6.2 million - GDP per capita (2008): US$1,267 - Quota: SDR 131.6 million ### Real sector (selected growth and inflation) - Real GDP growth: 2.3 (2006); 7.2 (2007); 6.7 (2008); 4.5 (2009 est.); 8.0 (2010 proj.) - Mineral growth: -8.5 (2006); -0.1 (2007); -1.0 (2008); -1.8 (2009 est.); 5.5 (2010 proj.) - Nonmineral growth: 3.9 (2006); 8.1 (2007); 7.6 (2008); 5.3 (2009 est.); 8.2 (2010 proj.) - CPI (annual average): 2.4 (2006); 0.9 (2007); 10.7 (2008); 6.9 (2009 est.); 7.1 (2010 proj.) - CPI (end-period): -0.9 (2006); 3.2 (2007); 11.2 (2008); 5.7 (2009 est.); 8.5 (2010 proj.) ### Central government operations (selected ratios, percent of GDP) - Revenue and grants: 37.2 (2006); 37.3 (2007); 32.6 (2008); 28.3 (2009 est.); 27.9 (2010 proj.) - Expenditure and net lending: 30.7 (2006); 28.4 (2007); 30.0 (2008); 35.7 (2009 est.); 29.5 (2010 proj.) - Overall balance (including grants): 6.5 (2006); 8.9 (2007); 2.5 (2008); -7.4 (2009 est.); -1.6 (2010 proj.) - Nonmineral balance: -7.8 (2006); -7.5 (2007); -7.4 (2008); -11.2 (2009 est.); -6.9 (2010 proj.) ### Fiscal projections and medium-term (selected items, percent of GDP) - Revenue and grants (2010–15 series, percent of GDP): 28.3 (2010 est.); 29.8 (2011 budget); 27.9 (2012 proj.); 29.8 (2013 proj.); 29.8 (2014 proj.); 30.1 (2015 proj.) — note: table presents year-by-year series for 2009–15. - Mineral taxes (percent of GDP, sample years): 12.7 (2007); 9.1 (2008); 3.3 (2009); 4.4 (2010); 4.5 (2011); 3.9 (2012) - Grants (percent of GDP, sample years): 3.8 (2007); 4.6 (2008); 4.6 (2009); 5.2 (2010); 2.0 (2011) - Overall balance (from below the line): 6.5 (2007); 2.5 (2008); -7.4 (2009); 0.0 (2010); -1.6 (2011) ### Balance of payments (selected levels and composition, U.S. dollars) - Exports, f.o.b.: 4,822 (2007); 5,823 (2008); 4,617 (2009 est.); 5,742 (2010 proj.); 6,391 (2011 proj.) - Mineral exports: 3,673 (2007); 4,262 (2008); 3,516 (2009 est.); 4,584 (2010 proj.) - Nonmineral exports: 1,561 (2007); 1,101 (2008); 1,158 (2009 est.); 1,187 (2010 proj.) - Imports, c.i.f.: -2,629 (2007); -3,148 (2008); -3,430 (2009 est.); -5,424 (2010 proj.) - Current account (including grants): 208 (2007); 805 (2008); -541 (2009 est.); -1,422 (2010 proj.); -1,653 (2011 proj.) - Current account (in percent of GDP): 3.3 (2007); 10.0 (2008); -6.8 (2009 est.); -16.1 (2010 proj.) - Trade balance (2008–15 series, selected values): 2,675 (2008); 1,186 (2009 est.); 318 (2010 proj.); 793 (2011 proj.) - Gross official reserves (end-year, U.S. dollars): 1,988 (2008); 2,571 (2009 est.); 2,432 (2010 proj.); 2,299 (2011 proj.) ### Money and credit and banking sector (selected) - Broad money (percent change): 38.9 (2006); 27.8 (2007); 11.2 (2008); 19.3 (2009 est.); 18.7 (2010 proj.) - Credit to the private sector (percent change): 38.2 (2006); 34.4 (2007); 39.4 (2008); 17.3 (2009 est.); 20.0 (2010 proj.) - Domestic credit (percent change): 19.4 (2006); 5.5 (2007); 31.3 (2008); 30.2 (2009 est.); 25.2 (2010 proj.) - Interest rate (182-day T-bills; period average): 3.7 (2006); 4.4 (2007); 5.9 (2008); 7.2 (2009 est.) ### External vulnerability and public debt indicators - Public external debt-to-GDP ratio (percent): 21.4 (2006); 16.6 (2007); 13.2 (2008); 12.8 (2009 est.); 11.9 (2010 proj.) - Public external debt-service-ratio (percent of exports): 4.1 (2007); 2.5 (2008); 2.1 (2009 est.); 2.1 (2010 proj.) - Gross public debt (percent of GDP): 40.6 (2006); 35.0 (2007); 32.1 (2008); 32.4 (2009 est.); 29.0 (2010 proj.) - Net official reserves and gross official reserves (end-year, memoranda): - Net official reserves (millions of U.S. dollars): 1,986 (2008); 2,374 (2009 est.); 2,234 (2010 proj.) - Gross official reserves (millions of U.S. dollars): 1,988 (2008); 2,571 (2009 est.); 2,432 (2010 proj.) - Gross official reserves (months of imports of goods and nonfactor services): 4.4 (2007); 5.6 (2008); 3.8 (2009 est.); 3.2 (2010 proj.) ### Medium-term scenario and commodity assumptions (selected) - Real GDP growth (projected 2009–15 excerpt): 4.5 (2009 est.); 5.5 (2010 proj.); 3.0 (2011 proj.); 2.0 (2012 proj.); 8.0 (2013 proj.); 5.0 (2015 proj.) - Nonmineral overall balance (below the line, percent of GDP): -7.5 (2007); -7.4 (2008); -11.2 (2009 est.); -5.3 (2010 proj.); -6.9 (2011 proj.) - Assumed commodity prices (March 2010 WEO projection): - Gold (U.S. dollars per ounce): 697 (2007); 872 (2008); 973 (2009); 1,136 (2010); 1,150 (2011) - Copper (U.S. dollars per ton): 7,132 (2007); 6,963 (2008); 5,100 (2009); 6,500 (2010); 7,000 (2011) - Oil (U.S. dollars per barrel): 71 (2007); 97 (2008); 62 (2009); 78 (2010); 83 (2011) ### Policy recommendations and authorities' responses (summarized) - Monetary and exchange rate policy - Recommendation: With downside risks to inflation from a deteriorating external environment, the central bank should be prepared to loosen quickly if a larger-than-expected negative domestic impact materializes; allow the currency to adjust to help offset export income shocks and safeguard reserves. - Authorities' response/outcome: The downside risk did not materialize; policy rate was kept stable until year end when it was decreased by 100 bp to 7 percent in December 2009. Exchange rate moved flexibly. Reserves increased to the late-2008 level. - Fiscal policy - Recommendation: Monetary and fiscal authorities should cooperate so the cyclical position determines the magnitude of annual spending from trust accounts. - Authorities' response/outcome: Senior Treasury officials now meet regularly with senior BPNG officials; no explicit mechanisms yet to ensure above-normal mineral revenue spending is consistent with spare capacity. Staff are working with authorities to develop a formal modeling framework. - Financial sector policy - Recommendation: Banks should maintain strict lending standards and monitor borrowers’ servicing abilities given risks from declining commodity prices. - Authorities' response/outcome: Banks tightened lending standards by shortening average amortization periods. - Structural reforms - Recommendation: Reinvigorate public-sector reform on health, education, and law and order; ensure transparency of state-owned enterprises’ financial conditions and transfer returns to general government revenue; channel LNG-related revenues and public ownership proceeds through the budget to address development needs; improve compilation and dissemination of economic data. - Authorities' response/outcome: Government expanded PPP Task Force and approved national public-private partnership policy; began exploring creation of a sovereign wealth fund and established a working group in early 2010; progress on data compilation and dissemination has been disappointing. ### Millennium Development Goals (selected indicators, 1990–2008) - Poverty headcount ratio at $1.25 a day (PPP) (% of population): 36 (2008) - Primary completion rate, total (% of relevant age group): 48 (1990); 52 (1995) - Immunization, measles (% of children ages 12-23 months): 67 (1990); 42 (1995); 62 (2000); 60 (2005); 58 (2008) - Mortality rate, infant (per 1,000 live births): 69 (1990); 62 (1995); 57 (2000); 52 (2005); 50 (2008) - Maternal mortality ratio (modeled estimate, per 100,000 live births): 470 (2008) - Population, total (millions): 4.1 (1990); 4.7 (1995); 5.4 (2000); 6.1 (2005); 6.4 (2008) - GNI per capita, Atlas method (current US$): 790 (1990); 1,040 (1995); 2,620 (2000); 6,209 (2008) *Sources: Papua New Guinea authorities; IMF staff estimates and projections; Department of Treasury; Bank of Papua New Guinea; World Development Indicators database, 2010.* ### APPENDIX I: PAPUA NEW GUINEA: DEBT SUSTAINABILITY ANALYSIS ### APPENDIX I: PAPUA NEW GUINEA: DEBT SUSTAINABILITY ANALYSIS ### Summary judgment and risk classification - Based on the low-income country debt sustainability analysis (LIC DSA), Papua New Guinea is rated to be at a moderate risk of debt distress. - Baseline public DSA: overall public sector debt dynamics are sustainable given current size and evolution of the domestic stock. - Key caveat: stress tests of both external and public DSA indicate vulnerabilities to shocks from slower export and economic growth, and inclusion of LNG contingent liabilities and other domestic liabilities would undermine long-term fiscal sustainability. - Policy implications highlighted: adherence to the authorities’ Medium-Term Fiscal Strategy and establishment of a Sovereign Wealth Fund (SWF) for more efficient revenue management. ### I. Background - Papua New Guinea has been effectively reducing its public and external debt burden over past years. - Public sector debt ratio: declined from 62 percent of GDP at end-2004 to an estimated 32 percent of GDP at end-2009 (Table 1). - Public and publicly guaranteed (PPG) external debt: decreased from the peak of over 50 percent of GDP in 2001 to the current 13 percent of GDP (Table 2). - Over 90 percent of public external debt is with multilateral institutions such as the AsDB and World Bank; the rest mainly from Japan and Australia. - Private sector external debt: estimated at about 14 percent of GDP by end-2009. - Institutional classification: Papua New Guinea is rated as a weak performer for its policies and institutions for the purposes of the IMF-WB low-income country DSA framework; applicable thresholds for this category for external public debt are: - PV of debt-to-GDP ratio: 30 percent - PV of debt-to-exports ratio: 100 percent - PV of debt-to-revenue ratio: 200 percent - debt service-to-exports ratio: 15 percent - debt service-to-revenue ratio: 25 percent ### II. Economic outlook and underlying DSA assumptions - Global financial crisis impact: limited due to a relatively segmented financial market and strong recovery of commodity prices. - 2009 macro outcomes: - Real GDP growth slowed to 4.5 percent in 2009 accompanied by eased inflation. - External demand weakened in 2009 and led to a current account deficit for the first time since 2002. - Currency depreciated in both nominal and real terms by end 2009. - Vulnerability: Papua New Guinea is vulnerable to terms of trade shocks. - LNG projects: - Approval of two Liquefied Natural Gas (LNG) projects in December 2009 expected to improve outlook. - Construction phase from 2010 to 2014: increasing economic activities with rising imports mostly financed by FDI inflows. - Near-term challenge: maintain macroeconomic stability with limited economic capacity. - LNG project is included in the baseline scenario. ### III. External debt sustainability analysis (PPG external debt) - Baseline scenario main findings: - All PPG external debt and debt service ratios stay well below the policy-dependent debt burden thresholds under the baseline. - Baseline shows a slight increase in external debt burden in the medium term before declining in the long run (Table 3 and the text table), due to expected increase in disbursements of approved AsDB loans in the pipeline. - Because additional financing needs for the LNG project and the current account deficit would be met with projected large FDI inflows, the PV of PPG external debt over GDP would remain around 11 percent in the medium term, which is below the 30 percent threshold. - The PVs of PPG external debt-to-exports and debt-to-revenue ratios are expected to stay well below the indicative threshold levels over the projection period. - Stress-test findings and vulnerabilities: - Debt burden breaches indicative thresholds under some stress tests (Table 4 and Figure 1). - External debt sustainability is most vulnerable to shocks from lower export growth. - Specific stress-test result: A decline in export value growth in 2010–11, by one standard deviation below its historical average, would raise the PV of public external debt-to-GDP ratio to 37 percentage points over the medium term, and only fall below the 30 percent threshold after 2018. - Other stress tests (lower FDI inflows; combination shocks) generate similar alarming debt patterns. - Bound test B5 (combines four different shocks with smaller standard deviations than B1–B4) shows a similar pattern dominated by the export growth shock. - Risk drivers and scenarios: - Scenarios indicated by stress tests are non-trivial given uncertainty ahead. - Export demand could remain weak if global recovery is sluggish and a “double-dip” of commodity prices occurs. - Negotiations on land issues with local communities could delay construction of the LNG project; construction may not be fully launched before these issues are settled. ### IV. Public debt sustainability analysis (public and publicly guaranteed; includes domestic central government debt) - Baseline scenario: - With prudent fiscal policy and improved economic outlook, overall public debt dynamics are favorable. - Public debt ratio projected to decline to 23.8 percent of GDP by 2015 (Table 1). - Projected improvement driven by projected rapid economic growth, large FDI inflows associated with the LNG project, and continued prudent fiscal policy. - Public debt projected to decline further to about 14 percent by 2030. - Sensitivity and alternative scenarios: - Projected debt path is particularly sensitive to changes in real GDP growth (Table 2 and Figure 2). - A negative shock to real GDP growth in 2011–12 would increase the PV of the public debt-to-GDP ratio close to 80 percent in 2030. - Note: The GDP growth shock in 2011–12 is defined as the historical average of GDP growth rate minus one standard deviation. - Another permanent GDP growth shock (baseline GDP growth rate minus one standard deviation divided by the square root of the length of the projection period) would bring the Debt-to-GDP ratio above 70 percent in 2030. - If a primary deficit of 5.8 percent in 2009 is assumed to be maintained for the projection period, the PV of the public debt-to-GDP ratio would be above 200 percent in 2030. - The report notes a persistent primary deficit is unlikely (given unusual spending from the government trust account in 2009), but this underscores the need to ensure project progress while protecting priority spending in the event of a growth slowdown. - A decline in export growth would also exacerbate public debt burden. - Contingent and other liabilities that could undermine fiscal sustainability: - Government unfunded superannuation liabilities: estimated to be about 9 percent of GDP by end-2009; government has made partial repayment recently. - LNG project contingent liabilities: estimated in PV term to be about 20 percent of GDP in 2014. - 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 2014). - Under this scheme: creditor acquires exchangeable bonds amounting to US$1.1 billion with option to exchange for equities in the Oil Search company. - Under the completion guarantee, if the project fails, the government may have to pay up to US$2 billion to the creditor. - Other liabilities including settlements with landowners (negotiations ongoing) may also be significant. - SOE-related contingent liabilities: From 2008 Article IV DSA estimates, SOEs related contingent liabilities are about 2.5 percent of GDP when considering borrowings, various provisions, and other liabilities based on end-2007 financial statements of nine SOEs; information on off-balance sheet liabilities is limited and may be significant. - Alternative (all-other-liabilities) scenario: - Assumes pension and SOEs liabilities are to be covered in the 2011 budget (total about 10 percent of GDP) and all LNG contingent liabilities will materialize in 2014 (about 20 percent of GDP). - Under this scenario, debt dynamics become unfavorable and add additional risks to public debt sustainability. ### Selected numeric entries and thresholds (as presented) - Public debt ratio: 62 percent of GDP at end-2004; 32 percent of GDP at end-2009. - PPG external debt: 13 percent of GDP at end-2009. - Private sector external debt: about 14 percent of GDP by end-2009. - Real GDP growth: 4.5 percent in 2009. - Public debt ratio projection: 23.8 percent of GDP by 2015; about 14 percent by 2030. - Stress-test specific figure: PV of public external debt-to-GDP ratio would rise to 37 percentage points under a one-standard-deviation export value shock in 2010–11. - Unfunded superannuation liabilities: about 9 percent of GDP by end-2009. - LNG contingent liabilities (PV): about 20 percent of GDP in 2014. - Exchangeable bonds: US$1.1 billion (option to exchange for equities in Oil Search). - Completion guarantee exposure: up to US$2 billion if the project fails. - Alternative scenario assumptions: pension and SOEs liabilities about 10 percent of GDP in 2011; all LNG contingent liabilities about 20 percent of GDP in 2014. - Policy-based PPG external debt burden thresholds for PNG (weak performer): - PV of debt-to-GDP ratio: 30 - PV of debt-to-exports ratio: 100 - PV of debt-to-revenue ratio: 200 - Debt service-to-exports ratio: 15 - Debt service-to-revenue ratio: 25 *Source: APPENDIX I: PAPUA NEW GUINEA: DEBT SUSTAINABILITY ANALYSIS (IMF staff DSA text).* ### BOX 1. MACROECONOMIC ASSUMPTIONS UNDERLYING THE DSA ### BOX 1. MACROECONOMIC ASSUMPTIONS UNDERLYING THE DSA ### Growth and inflation projections - Real GDP growth is projected to be at 5.2 percent on average over the medium term, above the historical average of 2.9 percent, and slow to 3 percent in the long run. - Inflation is projected to rise in the medium term due to increasing domestic demand and near-term capacity constraints, while stabilizing at around 3 percent in the long run. ### Liquefied Natural Gas (LNG) projects—timing and impact - The two LNG projects have a construction period of 5 years each, from 2010/11 to 2014/15. - Production and exports are expected to commence in the second half of 2014, with a maximum capacity of about 60 million barrels of oil equivalent. - The peak impact of the projects is estimated to be an increase of 25 to 30 percent in annual GDP growth. - These 30-year projects are estimated to increase annual GDP growth, through both direct and indirect channels, by about 15 to 20 percent on average. - Accounting for the substantial income outflows, the projects are expected to increase annual GNI by about 9 percent. ### External sector and financing - The current account (including grants) is estimated to be in deficit in 2009 and the deficit is projected to remain over the medium term until 2013, primarily reflecting the strong import growth related with the construction phase of the LNG project. - FDI inflows from foreign shareholders are projected to increase substantially given the financing scheme of the project. - 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-equivalent financing (in percent of GDP) increases slightly in the near term before it declines in the long run, due to the expected large disbursement from the AsDB in the pipeline. ### Fiscal outlook and trust-account spending - The fiscal balance is estimated to turn into a deficit in 2009 due to falling mineral revenues and the spending of preceding years’ mineral windfall revenues. - The deficit is financed by a rundown of resources held in trust accounts. - Over the medium term it is projected to remain balanced. - Footnote: The deficit is estimated by Fund staff. The official 2009 budget outcome does not include the large amount of spending from the government trust account held outside the budget. The trust accounts consist of saving from mineral windfall revenues in past years to address development and debt reduction needs. However, since 2008 the government has relaxed constraints on trust account spending. Trust spending was the main factor shifting the fiscal balance from a surplus of 2.5 percent of GDP in 2008 to a deficit of almost 8 percent of GDP in 2009. The result was a fiscal impulse of almost 13 percent of GDP. ### Debt sustainability assessment and risks - It is the staffs’ view that Papua New Guinea should be considered at moderate risk of debt stress based on both external debt burden indicators and stress tests on public debt pattern. - Although the baseline scenario indicates that all external PPG debt burden indicators are below their indicative thresholds, the projected PPG debt paths show significant vulnerability against shocks from slower export and economic growth. - The inclusion of the LNG contingent liability as well as other domestic liabilities would also add concerns to long-term fiscal sustainability. ### Policy recommendations - Enhanced debt management with adherence to the Medium-Term Fiscal Strategy (MTFS) would be required to offset the underlying risks in public debt sustainability. - The staff encourages the authorities to improve implementation of the MTFS during the construction phase of the LNG project to guard against unfavorable public debt dynamics from vulnerabilities such as those arising from potential LNG project delays, lower commodity prices, and weaker external demand. - The staff also encourages the authorities to consider the establishment of a Sovereign Wealth Fund (SWF) to manage revenues from those projects more efficiently and to further strengthen debt management capacity. *Source: BOX 1. MACROECONOMIC ASSUMPTIONS UNDERLYING THE DSA, Staff Report for the 2010 Article IV Consultation—Informational Annex.* ### ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS ### ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS (As of March 31, 2010) ### 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: 125.49 SDR Million (100.00 percent) - Holdings: 116.21 SDR Million (92.60 percent) ### IV. Outstanding Purchases and Loans - None ### V. Financial Arrangements - 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 by year: - 2010: Principal 0.00; Charges/interest 0.03; Total 0.03 - 2011: Principal 0.00; Charges/interest 0.03; Total 0.03 - 2012: Principal 0.00; Charges/interest 0.03; Total 0.03 - 2013: Principal 0.00; Charges/interest 0.03; Total 0.03 - 2014: Principal 0.00; Charges/interest 0.03; Total 0.03 - Note: When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section. ### VII. Safeguards Assessments - The Bank of Papua New Guinea (BPNG) was subject to a transitional assessment under the Fund's Safeguards Assessments policy 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 Assessments 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 2008 Article IV consultation discussions were held during December 4–15, 2008. - It was concluded by the Executive Board on March 16, 2009 (IMF Country Report No. 09/112). - Papua New Guinea is on the 12–month cycle. ### X. Technical Assistance from Headquarters - 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. - December 2000 mission provided advice on reconciliation of large and volatile differences in fiscal reporting. - February 2002 mission assessed progress in improving fiscal transparency. - LEG: - November 1996 mission advised on legal framework for the National Value-Added Tax. - November 2005 mission advised on drafting of a tax administration law. - July 2006 mission provided a comprehensive program of assistance in development of the AML/CFT regime, including legislative drafting and capacity building. - August/September 2007 mission assisted in finalizing the terms of the Revenue Administration Bill. - MFD/MCM: - 2001–03: assistance via missions in bank supervision, financial sector restructuring, accounting framework, and monetary operations of the central bank. - A resident advisor was assigned to the BPNG research department for 15 months through August 2003. - Peripatetic technical assistance on bank regulation and supervision (2001–February/March 2007, July-August 2009, and February 2010). - Medium-term monetary policy formulation (October 2004 and September 2005). - Reserve management (June 2006–September 2007, March/July-August 2009, January-February 2010). - Internal audits (2004–August 2007). - Accounting (September/October 2006–February 2007, February-March/June-July/November 2009). - Liquidity management (January 2009). - Monetary and forex operations (July-August 2009, February 2010). - STA: - Four GDDS missions in 1995–96. - One inspection visit in April 2001. - February 2006 mission provided advice on compilation of national accounts. - May 2003 mission provided advice on balance of payments. - April 2005 mission reviewed monetary and financial statistics; follow-up in May 2006. - Multisector statistics mission in September 2006; high level STA visit in December 2007. - Follow-up missions in balance of payments in June 2008 and November 2009. - Follow-up missions in monetary and financial statistics in April 2008 and November 2009. ### XI. Resident Representative - None *Source: ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS (As of March 31, 2010)* ### 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 affected by inadequate source data. - Bank of Papua New Guinea (BPNG) and the Department of Treasury produce the most current data. - In mid-2000, 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 released preliminary national accounts for 1994–2002 rebased to 1998 prices. - 2006 STA multisector mission recommended against publication of the new GDP data until needed revisions are made. - Treasury has assumed 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). - Quarterly consumer price index based on weights that are thirty three years old. - Rebase of CPI intended based on planned Household Income Expenditure Survey (HIES), which has been delayed. - Government finance statistics: - Annual GFS reported to STA suffer from insufficient coverage. - Central government tax revenue statistics generally accurate and timely; nontax revenue and public expenditure data are deficient. - Development budget expenditures and utilization of grants and project loans recorded with long lags; few records on use of trust accounts. - Interest payment records accurate, but timing issues for interest on discount securities. - Weaknesses contribute to discrepancies in domestic financing between monetary/debt data and fiscal records. - 2006 STA mission encouraged preparation of a list of public sector units to permit comprehensive delineation of levels of government to reconcile GFS with other datasets. - Monetary statistics: - Monetary data now produced regularly and reporting to STA has improved. - Monetary and financial statistics missions (April 2005, May 2006, April 2008, and November 2009) assisted to: - finalize review of collection, compilation, and dissemination procedures by BPNG; - develop work program for full implementation of MFSM methodology; - prepare standardized report forms (SRFs) for central bank, other depository corporations, other financial corporations, and monetary aggregates; - finalize integrated monetary database meeting data needs of BPNG, STA, and APD. - Balance of payments: - Annual BOP data derived from International Transactions Reporting System (ITRS), which is not tightly monitored despite BPNG reporting requirements. - Marked differences between official export/import data and those reported by trading partners. - Financial accounts data of poor quality, especially private external debt. - 2006 STA mission prioritized strengthening current account estimates, including improved classification of investment earnings, trade credits, grant receipts, and enhancing source data for imports and exports. - Progress being made on recommendations from PFTAC’s BOP mission in June 2008; follow-up BOP mission in November 2009. - Detailed BOP statistics 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: - Data for 2005 were reported to STA for publication in the IFS and in BOPSY. - 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 April 09, 2010) — Key metadata - Exchange rates: Date of Latest Observation 03/19/10; Date Received 03/30/10; Frequency of Data D; Frequency of Reporting W; Frequency of Publication W - International reserve assets and reserve liabilities of the monetary authorities1: 03/19/10; 03/30/10; Frequency of Data W; Frequency of Reporting W; Frequency of Publication Q - Reserve/base money: Date of Latest Observation 03/10; Date Received 04/08/10; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q - Broad money: 03/10; 04/08/10; M; M; Q - Central bank balance sheet: 03/10; 04/08/10; M; M; Q - Consolidated balance sheet of the banking system: 03/10; 04/08/10; M; M; Q - Interest rates2: 03/17/10; 03/30/10; W; W; Q - Consumer price index: 12/09; 02/10; Q; Q; Q - Revenue, expenditure, balance and composition of financing3 – general government4: N/A; N/A; N/A; N/A; N/A - Revenue, expenditure, balance and composition of financing3 – central government: 04/10; 04/10; A; A; A - Stocks of central government and central government-guaranteed debt5: 09/09; 12/09; Q; Q; Q - External current account balance: 09/09; 12/09; Q; Q; Q - Exports and imports of goods and services: 09/09; 12/09; Q; Q; Q - GDP/GNI: 2008; 11/09; A; A; A - Gross external debt: 2008; 02/10; Q; A; A - International Investment Position6: (no dates provided) - Footnotes: - 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 Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA). ### Public Information Notice (PIN) No. 10/73 — Executive Board conclusions (June 10, 2010) - Background findings: - Macroeconomic performance improved; Papua New Guinea remains a poor country highly exposed to commodity price fluctuations. - GDP per capita remains low; improvement has lagged other low-income countries in the region. - Constraints: weak infrastructure, problems with governance, high crime. - Real GDP growth: eased to roughly 5 percent in 2009 from 7 percent in 2008. - Inflation: peaked in September 2008 at roughly 13 percent; fell to under 6 percent by end-2009. - Monetary policy: BPNG reduced policy rate in December 2009 after maintaining a tight stance since mid-2008. - Fiscal: 2009 fiscal expansion shifted fiscal balance into a deficit of almost 8 percent of GDP; 2010 Budget targets fiscal balance. - External: current account shifted into deficit in 2009 for the first time in six years; external debt rose modestly to about 29 percent of GDP at end-2009. - Executive Board assessment and recommendations: - Commendation for maintaining a medium-term fiscal framework; concern that recent slippages undermined stabilization objective. - 2009 spending from accumulated mineral revenue imparted a stimulus larger than warranted. - 2010 budget reduces stimulus but planned spending likely too expansionary given expected strength in private activity. - Spending from trust accounts outside the budget will add to demand pressures. - Recommendation: Delay some infrastructure spending to ease demand pressures and ensure good value. - LNG projects will increase macro stabilization challenges; enhancements to the Medium-Term Fiscal Strategy (MTFS) advised: - Prudently lower assumption of normal mineral revenue to 3 percent of GDP between now and 2014 (when LNG production should commence). - Use increased public savings to finance currently unfunded government liabilities. - Annual consultation between monetary and fiscal authorities to determine how much of the 4 percent of GDP limit from above-normal mineral revenue can be spent. - Strengthen implementation of the MTFS to preserve fiscal credibility and guard against unfavorable public debt dynamics from vulnerabilities (LNG delays, lower commodity prices, weaker external demand). - Develop a sovereign wealth fund (SWF) now that LNG projects are underway: - Prefer a financing fund that directs all public spending through the budget. - Invest the fund’s resources offshore to minimize potential currency appreciation effects on rural agriculture-dependent populations. - Integrate SWF into macro framework and support with MTFS and the Fiscal Responsibility Act. - Monetary policy should focus on emerging inflation pressures: - Domestic demand likely to play a greater role in driving inflation. - Central bank should be tightening monetary policy now with a view to achieving real lending rates of around 6 percent. - Be prepared to maintain real lending rates around this level, or higher if significant overheating occurs. - Closer coordination of monetary and fiscal policy is desirable: - Move public trust accounts to the BPNG. - Introduce procedures to automatically deposit above-normal mineral revenue with the central bank. - These measures would give BPNG better control over domestic liquidity and market interest rates and reduce net cost to the public sector. - Financial sector: - Indicators suggest the financial sector remains sound. - Banks should maintain strict lending standards as credit demand increases with LNG projects. - All financial institutions need to guard against overexposure to the property sector. - External stability: - Projected widening in the current account deficit is not expected to threaten external stability. - Exchange rate estimated broadly in line with fundamentals; reserves remain adequate. - Development strategy and reforms: - Essential to better align development spending with priorities and reinvigorate reform. - Progress: increased competition in telecommunications, aviation, and power. - Need more reform, especially in state-owned enterprises that will face increased demand from LNG projects. - Government’s commitment to implement a public-private-partnership policy is encouraging. - Improvements to security and the business environment would yield significant benefits. ### Papua New Guinea: Selected Economic and Financial Indicators, 2006–10 (selected figures) - Nominal GDP (2008): US$7.8 billion - Population (2008): 6.2 million - GDP per capita (2008): US$1,267 - Quota: SDR 131.6 million - Real sector (Percent change): - Real GDP growth: 2006 2.3; 2007 7.2; 2008 6.7; 2009 4.5; 2010 Est./Proj. 8.0 - Mineral: 2006 -8.5; 2007 -0.1; 2008 -1.0; 2009 -1.8; 2010 5.5 - Nonmineral: 2006 3.9; 2007 8.1; 2008 7.6; 2009 5.3; 2010 8.2 - CPI (annual average): 2006 2.4; 2007 0.9; 2008 10.7; 2009 6.9; 2010 7.1 - CPI (end-period): 2006 -0.9; 2007 3.2; 2008 11.2; 2009 5.7; 2010 8.5 - Central government operations (In percent of GDP): - Revenue and grants: 2006 37.2; 2007 37.3; 2008 32.6; 2009 28.3; 2010 27.9 - Expenditure and net lending: 2006 30.7; 2007 28.4; 2008 30.0; 2009 35.7; 2010 29.5 - Overall balance (including grants): 2006 6.5; 2007 8.9; 2008 2.5; 2009 -7.4; 2010 -1.6 - Nonmineral balance2/: 2006 -7.8; 2007 -7.5; 2008 -7.4; 2009 -11.2; 2010 -6.9 - Money and credit (percent change): - Domestic credit: 2006 19.4; 2007 5.5; 2008 31.3; 2009 30.2; 2010 25.2 - Net credit to government: 2006 -13.3; 2007 -82.3; 2008 -147.7; 2009 -843.5; 2010 84.7 - Credit to the private sector: 2006 38.2; 2007 34.4; 2008 39.4; 2009 17.3; 2010 20.0 - Broad money: 2006 38.9; 2007 27.8; 2008 11.2; 2009 19.3; 2010 18.7 - Interest rate (182-day T-bills; period average): 2006 3.7; 2007 4.4; 2008 5.9; 2009 7.2; 2010 ... - Balance of payments (In millions of U.S. dollars): - Exports, f.o.b.: 2006 4,324; 2007 4,822; 2008 5,823; 2009 4,617; 2010 5,742 - Of which: Mineral: 2006 3,506; 2007 3,673; 2008 4,262; 2009 3,516; 2010 4,584 - Imports, c.i.f.: 2006 -1,991; 2007 -2,629; 2008 -3,148; 2009 -3,430; 2010 -5,424 - Current account (including grants): 2006 442; 2007 208; 2008 805; 2009 -541; 2010 -1422 - (In percent of GDP): 2006 8.0; 2007 3.3; 2008 10.0; 2009 -6.8; 2010 -16.1 - Exceptional financing (net): 2006 0.0; 2007 0.0; 2008 0.0; 2009 0.0; 2010 0.0 - Gross official international reserves: 2006 1449; 2007 2087; 2008 1988; 2009 2571; 2010 2432 - (In months of nonmining imports, c.i.f.): 2006 12; 2007 14; 2008 11; 2009 12; 2010 7 - (In months of goods and services imports): 2006 4; 2007 4; 2008 4; 2009 6; 2010 4 - Public external debt: - Public external debt-service-ratio (percent of exports)3/: 2006 4; 2007 4; 2008 2; 2009 2; 2010 2 - Public external debt-to-GDP ratio (in percent)3/: 2006 21; 2007 17; 2008 13; 2009 13; 2010 12 - Exchange rates: - US$/kina (period-average): 2006 0.327; 2007 0.337; 2008 0.370; 2009 0.363; 2010 ... - US$/kina (end-period): 2006 0.330; 2007 0.353; 2008 0.373; 2009 0.370; 2010 ... - NEER (2000=100, end-period): 2006 79.3; 2007 77.1; 2008 82.3; 2009 83.8; 2010 ... - REER (2000=100, end-period): 2006 100.9; 2007 96.5; 2008 109.4; 2009 117.9; 2010 ... - Nominal GDP (millions of kina): 2006 16,897; 2007 18,798; 2008 21,626; 2009 21,784; 2010 24,620 *Sources: Papua New Guinea authorities; and IMF staff estimates and projections.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10164.pdf_