## _cr11117 ## Source details **Canonical URL:** [_cr11117](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11117.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11117.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11117.pdf.json) --- ### Introduction — overview and key context - Papua New Guinea has enjoyed 10 years of positive economic growth driven by greater political stability, sound macroeconomic policies, improved public finances, higher commodity prices, and the construction of a liquefied natural gas (LNG) project—a 190 percent of GDP investment. - Capacity constraints in infrastructure, skilled labor, and land, combined with rising consumer and asset price inflation, are threatening macroeconomic stability. - To lower the risk of overheating, firm fiscal and monetary policies are required, which may be challenging with elections upcoming in 2012. - Key policy priorities identified: - strict adherence to the allocations in the 2011 budget; - close coordination of monetary and fiscal policies; - integration of a sovereign wealth fund (SWF) into the macro framework; - improvements in public financial management and structural reforms. ### Recent economic developments and outlook (real activity, inflation, sectoral dynamics) - Real GDP growth: - estimated to have picked up from 5½ percent in 2009 to 7 percent in 2010. - Staff projects real GDP growth of 9 percent in 2011 due to LNG construction, buoyant commodity exports, start of production at the Ramu Nickel and Hidden Valley mines, and strong investor confidence. - In 2013/14, real GDP growth is projected to slow sharply as LNG construction and extraction from maturing oil fields and from the largest copper mine wind down. - LNG production starts in 2015, leading to a 20 percent level jump in GDP. - In the absence of further LNG plants and new mines, GDP growth is expected to converge to a 3–4 percent long-run trend rate. - Inflation: - Headline inflation reached 7.8 percent in December (2010). - Underlying inflation has trended up since mid-2009 to 6 percent and is increasingly driven by domestic demand and higher labor costs. - Staff expects inflation to accelerate in 2011 and headline inflation could temporarily rise into double-digits. - Sectoral and balance-sheet dynamics: - Mineral sector turnaround due to new mines and higher commodity prices; nonmineral economy buoyed by bank financing and construction, transport, and communication activity related to LNG. - Infrastructure shows capacity constraints; bottlenecks in skilled labor and land markets. - Risks to growth and inflation: - Upside risks: increased mining activity, early start of a second LNG project, stronger private investment, additional fiscal spending from trust accounts. - Downside risks: disruptions in mining, LNG project delays (mainly land disputes), social tension from rising income inequality, possible correction of very high real estate prices in Port Moresby and Lae. *Source: PAPUA NEW GUINEA 2011 ARTICLE IV REPORT — INTRODUCTION and POLICY THEME #1 (Fiscal Policy) sections.* ### POLICY THEME #1 — Managing the risk of overheating: Fiscal policy recent developments - 2009 fiscal episode: - Large fiscal stimulus in 2009 was unwound in 2010. - In 2009 the government relaxed restrictions on spending from trust accounts and the fiscal balance moved into a deficit of 9½ percent of GDP. - 2010 developments: - Global commodity prices rebounded and mineral revenue recovered; trust-account spending slowed; budget balance was almost achieved and the fiscal stance tightened. - Public debt trends: - Over the past 8 years, gross public debt fell from about 70 percent of GDP to below 30 percent of GDP. - For the first time the government allocated funding to meet annual obligations with superannuation funds and settled some arrears. - MTFS changes and staff caution: - Government modified MTFS rule to allow 100 percent of above-normal mineral revenues to be devoted to public investment in future budgets, as long as debt stays below 30 percent of GDP. - Staff recommends prudence: lower the debt threshold to 25 percent of GDP and include contingent liabilities in the debt ceiling calculation. ### POLICY THEME #1 — Staff fiscal recommendations (to lower demand pressure) - Tight budget implementation: - Strictly adhere to budget allocations for 2011. - Rigorously exploit savings opportunities and avoid the typical year-end spending rush. - Reallocate under-spent resources next year if needed. - Delay some development projects competing for scarce resources with private construction activities until after the LNG construction phase. - Debt and liabilities: - Save any windfall revenues from higher-than-budgeted mineral prices and set aside some savings for debt reduction or to cover future liabilities related to participation in the LNG project. - Develop a payment schedule for the remaining unfunded superannuation liabilities. ### Expectations about future mineral income and fiscal anchors - Once public revenues from LNG are affirmed, limited additional borrowing could be possible for well-identified development projects. - Suggested fiscal anchors: - Gross and net public debt-to-GDP ratios of below 25 percent could serve as medium-term fiscal anchors. - Prudence urged given past commodity booms and uncertainties around new LNG and mining projects. ### Public debt and liabilities (percent of GDP) — authorities’ views and staff calculations - Series (2006–2010 and 2016 Est./Proj.) — values preserved exactly as presented: - Public debt: 39.7, 33.6, 31.7, 32.1, 26.5, 13.8 - Of which: public domestic debt: 18.2, 16.9, 18.5, 19.2, 15.8, 6.8 - Of which: public and publicly guaranteed (PPG) external debt: 21.5, 16.6, 13.2, 12.9, 10.7, 6.9 - Public liabilities 1/: 8.6, 9.3, 8.7, 8.5, 24.4, 8.5 - Of which: LNG equity finance: ........., 19.4, 16.9, 5.9 - Of which: superannuation arrears: 8.6, 9.3, 8.7, 9.2, 7.5, 2.6 - Gross public debt and liabilities: 48.3, 42.8, 40.4, 60.6, 50.9, 22.3 - Government financial assets 2/: 8.5, 12.5, 16.8, 30.9, 29.7, 7.0 - Net public debt 3/: 39.9, 30.3, 23.6, 29.7, 21.1, 15.3 - Memorandum: Nominal GDP (Kina, billions): 16.9, 18.8, 21.6, 22.2, 25.4, 72.8 - Notes preserved: - 1/ Does not include guarantees to state-owned enterprises (SOE), which were estimated at 2.5 percent of GDP in 2008 (no updates available). - 2/ Includes government equity stake in the LNG project. - 3/ Gross public debt and liabilities less government financial assets. ### Monetary policy, liquidity, and inflation — actions and staff recommendations - BPNG policy rate: - Kept constant at 7 percent since end-2009. - 2010 actions and liquidity: - BPNG issued new central bank bills (CBB) totaling about 2 percent of GDP. - Cash reserve requirement increased in October from 3 to 4 percent. - Total liquidity in the banking system increased by almost 12 percent, mainly due to foreign exchange inflows. - Net foreign reserves increased by 19 percent. - CBB and Treasury bill rates fell by about 3 percentage points; weaker exchange rate and falling treasury rates indicate eased monetary conditions. - Staff inflation assessment: - Staff expects headline inflation to approach 10 percent in the short run and to stay elevated in the medium run. - Measured inflation likely to substantially underestimate true inflation. - Monetary policy recommendations: - Interest rates: raise the Kina Facility Rate (KFR) 3 to 4 percentage points above expected core inflation to provide an important signal. - Liquidity: consider further increases in the cash reserve requirement; reduce liquidity by raising the CBB rate gradually back to just below the KFR. - Exchange rate: tighter macroeconomic policies would help mitigate real appreciation; raising the KFR and letting markets determine the Kina exchange rate could shift real exchange rate adjustment from inflation to nominal exchange rate appreciation. - Operational note: pass-through of exchange rates to domestic prices is strong in PNG. ### Exchange rate assessment and external stability - Current account and reserves: - Staff estimates the current account deficit widened to 24 percent of GDP in 2010, reflecting LNG-related imports and income deficits. - Foreign reserves are estimated to be around US$3.2 billion by March 2011 and cover almost five months of imports of goods and nonfactor services. - Exchange rate movements: - NEER depreciated by more than 7 percent in 2010. - REER appreciated by 20 percent since early 2008 due to a positive inflation differential with trading partners. - Staff projections and risks: - Current account deficits will continue until 2015 when LNG production is expected to start; from 2015 LNG is likely to generate long-lasting current-account surpluses. - Debt sustainability analysis shows a moderate risk of debt distress under combined negative shocks. - Real exchange rate broadly in line with macro conditions in 2010, but moderately undervalued when projected LNG exports are factored in. - Box 2 baseline REER numeric signaling (preserved format): - MB approach 3/10.414.7-21.4 - ERER approach 4/......-2.1 - 2/ Staff projection of the underlying CA/GDP in 2017. - 3/ Based on a semi-elasticity of the CA/GDP with respect to the REER of -0.2. - 4/ Overvaluation is assessed relative to December 2010. - All results are expressed in percent. ### Managing resource revenue — SWF design and safeguards - Authorities’ plan: - Establish an SWF consisting of a consolidated pool of offshore funds with three coordinated and integrated funds: a savings fund, a stabilization fund, and an infrastructure fund. - All mineral revenues to be automatically deposited: LNG tax and other mineral and petroleum taxes and dividends allocated to savings and stabilization funds; LNG dividends to the infrastructure fund. - Drawdown arrangements under discussion; government created a Secretaries Committee and interdepartmental working group, chaired by Treasury. - Staff guidance: - Support SWF to manage volatility, contain real exchange rate appreciation, and improve transparency, accountability, and governance. - Implement the Santiago Principles to address accounting and record-keeping weaknesses. - Coordinate drawdowns guided by absorptive capacity, cyclical stabilization, and intergenerational equity. - Treasury and BPNG should lead in determining annual spending limits consistent with absorptive capacity and cyclical position; annual Ministerial agreement on overall spending amounts linked to the budget process recommended. ### Development strategy and public spending effectiveness - Government plans: - Medium-Term Development Plan (MTDP) shifts planning from expenditure-based to policy-focused, holding line agencies accountable for sector targets. - Government investing in land titling and making more land available; improving SOE capacity; need more competition and improved security. - Staff concerns: - Final spending from trust funds often not monitored by central agencies and can differ markedly from budgeted purposes. - Skilled staff retention and public financial management/monitoring remain constraints. ### Financial sector — structure, soundness, risks, and policy recommendations - Overview and indicators: - Three large banks mostly funded domestically; total deposits increased by almost 20 percent since 2009. - Loan-to-deposit ratio: about 49 percent. - Liquidity ratio: 57 percent of total assets. - NPL: 2.7 percent in June 2009 and 1.8 percent in September 2010. - Provisioning: almost doubled to over 200 percent. - Profitability of the largest superannuation fund: improved by more than 45 percent in 2010. - Financial access: 85 percent of the population lacks access to financial services. - Staff recommendations (regulatory and market): - Complete prudential standards and enhance supervisory tools; move to risk-based supervision; make compliance compulsory. - Formalize bank liquidity support arrangements and establish a discount window. - Reform payment and settlement systems and develop the local-government securities market. - Improve access to financial services and implement FSAP recommendations. - Key vulnerabilities: - High exposure to property markets; concentration of assets in government securities; need to guard against overexposure to property sector during LNG expansion. - FSAP priority actions (selected, priorities preserved): - Monitor and analyze emerging NPLs and counterparty concentration. — High/Medium priorities as presented. - Develop monitoring systems and stress testing for liquidity risk; clarify and formalize bank liquidity-support arrangements. — High - Complete supervisory regime and move toward Basel II in a phased approach. — High - Establish a Payment Systems Department and implement National Payments System Development Plan. — High - If SWF established, decide objectives, funding/withdrawal rules, institutional arrangements, and investment strategy. — High ### Debt sustainability analysis (DSA) — executive findings and projections - Assessment: - PNG assessed using the LIC DSA and remains at a moderate risk of debt distress, but public debt sustainability improved compared to 2010 due to stronger growth outlook. - Under baseline all external debt sustainability indicators remain well below thresholds. - Public debt projections and contingencies: - Baseline: PV of public sector debt projected to decline from 27 percent of GDP in 2010 to 13 percent of GDP in 2016 and to 7 percent of GDP by 2031. - Unfunded superannuation liabilities estimated at 7 percent of GDP by end-2010. - Contingent liabilities related to the LNG project estimated about 7 percent of GDP in 2015. - Contingent liabilities related to SOEs about 2.5 percent of GDP (based on 2008 estimates). - Policy implications: - Use some windfall revenues to pay down high interest rate public debt; develop payment schedule for unfunded liabilities. - Prudent borrowing and fiscal discipline emphasized given uncertainty on LNG timing and scale. ### Key macroeconomic projections and selected statistics (figures preserved) - Real GDP growth (2007–2011 sequence as presented): 7.2, 6.6, 5.5, 7.0, 9.0. - CPI (annual average, 2007–2011): 0.9, 10.7, 6.9, 6.0, 8.4. - CPI (end-period, 2007–2011): 3.2, 11.2, 5.7, 7.8, 9.5. - Central government operations (revenue and grants, percent of GDP, 2007–2011): 37.3, 32.6, 27.5, 32.5, 33.4. - Overall balance (including grants, 2007–2011): 9.0, 2.5, -9.6, -0.3, 1.0. - Gross public debt (2007–2011): 33.6, 31.7, 32.1, 26.5, 21.9. - Exports, f.o.b. (2007–2011, millions of U.S. dollars): 4,822; 5,817; 4,389; 5,824; 8,298. - Mineral exports (2007–2011): 3,673; 4,263; 3,403; 4,636; 6,607. - Gross official international reserves (2007–2011, millions of U.S. dollars): 2,087; 2,095; 2,623; 3,092; 3,459. - Nominal GDP (millions of kina, 2007–2011): 18,798; 21,594; 22,208; 25,421; 31,162. - Medium-term scenario highlights (2008–2016 selected projections preserved): - Real GDP growth (2008–2016): 6.6, 5.5, 7.0, 9.0, 5.5, 2.0, 4.0, 20.0, 5.0. - CPI (period average, 2008–2016): 10.7, 6.9, 6.0, 8.4, 8.7, 7.5, 6.5, 6.3, 6.8. - Gross public debt (percent of GDP, 2008–2016): 31.7, 32.1, 26.5, 21.9, 18.3, 18.3, 19.8, 14.5, 13.8. - Net official reserves (millions of U.S. dollars, 2008–2016): 2,093; 2,426; 2,895; 3,262; 3,637; 3,993; 4,359; 6,750; 9,764. - Commodity price assumptions (2008–2016 preserved): - Gold (U.S. dollars per ounce): 872, 973, 1,225, 1,427, 1,446, 1,478, 1,530, 1,596, 1,670. - Copper (U.S. dollars per ton): 6,963, 5,165, 7,538, 9,883, 9,838, 9,330, 8,330, 7,830, 7,830. - Oil (U.S. dollars per barrel): 97, 62, 79, 107, 108, 106, 105, 105, 106. ### Data, statistics, and institutional issues - Data adequacy: - "Data provision has some shortcomings, but is broadly adequate for surveillance." - Most affected areas: national accounts, fiscal accounts, and balance of payments. - National accounts and prices: - CPI based on weights thirty four years old; NSO intends to use the 2009/2010 Household Income Expenditure Survey to rebase the CPI. - Government finance statistics: - Annual GFS suffer from insufficient coverage; few records on use of trust accounts. - Balance of payments and monetary statistics: - Annual BOP derived from ITRS which is not tightly monitored; marked differences with partners’ trade data. - Monetary data being produced regularly; MFS mission scheduled for FY 2012 to introduce SRF for OFCs. - Table of common indicators: selected latest observation dates preserved (e.g., Exchange Rates: Date of Latest Observation 04/08/11; Household survey results expected first quarter of fiscal year 2012). ### Annexes and collaboration with World Bank - Fund and Bank coordination (February 2011–March 2012): - Fund leads on exchange rate, monetary policy, macro fiscal aspects; Bank leads on medium-term growth and public expenditure composition. - Joint and respective TA workstreams on SWF, statistics (HIES/CPI), FSAP follow-up, debt management, SME access to finance, and payments systems listed with timing (e.g., Presentation of analytical work on managing revenue volatility: April 2010; Support for developing SWF framework expected May–August 2011). - Executive Board conclusions (Public Information Notice, May 18, 2011): - Welcome strong growth; encourage consideration of tighter macroeconomic policies given rising inflationary pressures. - Recommend strict adherence to budget allocations and limit on trust-account spending. - Consider prudent to save windfall mineral revenues and use part to reduce government debt. - Support establishment of SWF with adherence to Santiago Principles and integration into budget/macro framework. *Source: PAPUA NEW GUINEA 2011 ARTICLE IV REPORT — INTRODUCTION and POLICY THEME #1 (Fiscal Policy) sections.* ### INTRODUCTION _____________________________________________________________________ 4 ### INTRODUCTION ### Overview and key context - Papua New Guinea has enjoyed 10 years of positive economic growth driven by greater political stability, sound macroeconomic policies, improved public finances, higher commodity prices, and the construction of a liquefied natural gas (LNG) project—a 190 percent of GDP investment. - Capacity constraints in infrastructure, skilled labor, and land, combined with rising consumer and asset price inflation, are threatening macroeconomic stability. - To lower the risk of overheating, firm fiscal and monetary policies are required, which may be challenging with elections upcoming in 2012. - Rich natural resources provide an opportunity to raise long-term growth and living standards, contingent on sound policy frameworks and implementation, including: - strict adherence to the allocations in the 2011 budget; - close coordination of monetary and fiscal policies; - integration of a sovereign wealth fund (SWF) into the macro framework; - improvements in public financial management and structural reforms. ### Recent economic developments and outlook - Real GDP growth: - estimated to have picked up from 5½ percent in 2009 to 7 percent in 2010. - Staff projects real GDP growth of 9 percent in 2011 due to LNG construction, buoyant commodity exports, start of production at the Ramu Nickel and Hidden Valley mines, and strong investor confidence. - In 2013/14, real GDP growth is projected to slow sharply as LNG construction and extraction from maturing oil fields and from the largest copper mine wind down. - LNG production starts in 2015, leading to a 20 percent level jump in GDP. - In the absence of further LNG plants and new mines, GDP growth is expected to converge to a 3–4 percent long-run trend rate. - Inflation: - Headline inflation reached 7.8 percent in December (2010). - Underlying inflation has trended up since mid-2009 to 6 percent and is increasingly driven by domestic demand and higher labor costs. - Inflation likely underestimated in official data due to inadequate accounting for rental increases and an outdated consumption basket. - Staff expects inflation to accelerate in 2011 and headline inflation could temporarily rise into double-digits driven by international food and energy prices, higher public spending, wage costs from a shortage of skilled labor, and rapidly increasing land-related prices. - Sectoral and balance-sheet dynamics: - Turnaround in the mineral sector due to new mines and higher commodity prices; nonmineral economy buoyed by bank financing and construction, transport, and communication activity related to LNG. - Infrastructure shows signs of capacity constraints; bottlenecks in skilled labor and land markets. - Risks to growth and inflation: - Upside risks: increased mining activity, early start of a second LNG project, stronger private investment, additional fiscal spending from trust accounts. - Downside risks: disruptions in mining, LNG project delays (mainly land disputes), social tension from rising income inequality, possible correction of very high real estate prices in Port Moresby and Lae. ### Authorities’ views - Authorities broadly agreed with staff’s economic outlook and inflation assessment. - Their outlook uses conservative assumptions and, unlike staff, assumes commodity prices return gradually to recent lows. - They agree official CPI measures understate inflation and plan to use the 2010 household income and expenditure survey to improve data quality and the CPI basket. - Real estate prices are about to peak; any correction is expected to be muted. ### Staff’s views (summary) - Staff projects 9 percent real GDP growth in 2011 and notes a sharp slowdown in 2013/14 absent new projects. - Staff expects headline inflation could rise into double-digits in 2011 and sees risk of high inflation becoming entrenched in expectations. - Staff expects a budget surplus of 1 percent of GDP for 2011 (staff assumptions include higher commodity prices than authorities and additional trust-account spending near but just below the MTFS ceiling). - Staff sees the pace of overall public spending as a risk to exacerbating inflationary pressures when LNG construction peaks, estimating a fiscal stimulus of about 3 percent of nonmineral GDP in 2011. - Staff notes uncertainty about how much of the 2009 trust-account withdrawals were actually spent versus remaining in the banking system awaiting election-period spending. ### Box 1 — The Impact of Food Price Movements on the Poor in PNG - Food price increases over the past year were moderate; imported food prices increased faster than domestically produced items in 2010. - Urban households, particularly the landless urban poor, benefited from low-priced rice imports. - Rural households near major cities (e.g., Port Moresby) became important food suppliers to urban populations; their incomes increased moderately in 2010, less than during 2008 food price surges. - Subsistence farmers and households far from urban centers were largely unaffected by urban price increases for domestically produced items. - Higher world demand for agricultural commodities benefited rural export regions: coffee price increases helped the Eastern and Western Highlands; high cocoa prices benefited East New Britain and Bougainville; oil palm areas (e.g., Hoskins project) enjoyed a price boom. - An elastic domestic supply response by substitute food producers will mitigate effects of projected increases in international food prices; econometric analysis by Mellor (2009) suggests a weak and temporary pass-through from import prices to domestic prices in major cities apart from Goroka, likely due to peri-urban farmers substituting between subsistence and market production. ### POLICY THEME #1––MANAGING THE RISK OF OVERHEATING ### A. Fiscal Policy — recent developments and assessment - 2009 fiscal episode: - The large fiscal stimulus in place in 2009 was unwound in 2010. - Windfall mineral revenues in earlier years were largely saved in trust accounts to pre-finance development expenditure or used to reduce public debt. - In 2009, the government relaxed restrictions on spending from trust accounts and the fiscal balance moved into a deficit of 9½ percent of GDP. - 2010 developments: - Global commodity prices rebounded and mineral revenue recovered; trust-account spending slowed; budget balance was almost achieved and the fiscal stance tightened. - Public debt trends: - Over the past 8 years, gross public debt fell from about 70 percent of GDP to below 30 percent of GDP. - Public debt is approaching a sustainable level and is below the average of low income countries in the Asian-Pacific region. - For the first time the government allocated funding to meet annual obligations with superannuation funds and settled some arrears. - Trust accounts and MTFS changes: - Historically, the MTFS rule used 30 percent of above-normal mineral revenues for debt reduction. - The government modified the MTFS rule to allow 100 percent of above-normal revenues to be devoted to public investment in future budgets, as long as debt stays below 30 percent of GDP. - Staff recommends prudence given falling oil and copper production and uncertainty on timing of LNG revenues, suggesting lowering the debt threshold to 25 percent of GDP (around current levels) and including contingent liabilities in the debt ceiling calculation. ### A. Fiscal Policy — staff recommendations - Tight budget implementation to reduce demand pressure: - Strictly adhere to budget allocations for 2011. - Rigorously exploit savings opportunities and avoid the typical year-end spending rush. - Reallocate under-spent resources next year if needed. - Delay some development projects competing for scarce resources with private construction activities until after the LNG construction phase to lower demand pressures, raise value for money, and improve service delivery. - Further net public debt reductions should be pursued to reduce vulnerability: - Save any windfall revenues that accrue from higher-than-budgeted mineral prices and set aside some of these savings for debt reduction or to cover future liabilities related to participation in the LNG project. - Develop a payment schedule for the remaining unfunded superannuation liabilities. *Source: PAPUA NEW GUINEA 2011 ARTICLE IV REPORT — INTRODUCTION and POLICY THEME #1 (Fiscal Policy) sections.* ### 16. Expectations about future mineral ### _cr11117 - 16. Expectations about future mineral ### Expectations about future mineral income and fiscal anchors - Once public revenues from LNG are affirmed, limited additional borrowing could be possible for well-identified development projects. - To avoid excessive lending, gross and net public debt-to-GDP ratios of below 25 percent could serve as medium-term fiscal anchors. - Prudent revenue assumptions are appropriate given PNG’s past experience with commodity price booms and uncertainties surrounding new LNG and mining projects. ### Public debt and liabilities (In percent of GDP) — Authorities’ views and staff calculations - 2006–2010 and 2016 (Est./Proj.) series (values given in percent of GDP): - Public debt: 39.7, 33.6, 31.7, 32.1, 26.5, 13.8 - Of which: public domestic debt: 18.2, 16.9, 18.5, 19.2, 15.8, 6.8 - Of which: public and publicly guaranteed (PPG) external debt: 21.5, 16.6, 13.2, 12.9, 10.7, 6.9 - Public liabilities 1/: 8.6, 9.3, 8.7, 8.5, 24.4, 8.5 - Of which: LNG equity finance: ........., 19.4, 16.9, 5.9 - Of which: superannuation arrears: 8.6, 9.3, 8.7, 9.2, 7.5, 2.6 - Gross public debt and liabilities: 48.3, 42.8, 40.4, 60.6, 50.9, 22.3 - Government financial assets 2/: 8.5, 12.5, 16.8, 30.9, 29.7, 7.0 - Net public debt 3/: 39.9, 30.3, 23.6, 29.7, 21.1, 15.3 - Memorandum: Nominal GDP (Kina, billions): 16.9, 18.8, 21.6, 22.2, 25.4, 72.8 - Sources: PNG authorities and IMF staff calculations. - Notes (as in source): - 1/ Does not include guarantees to state-owned enterprises (SOE), which were estimated at 2.5 percent of GDP in 2008 (no updates available). - 2/ Includes government equity stake in the LNG project. - 3/ Gross public debt and liabilities less government financial assets. ### Authorities’ views on the 2011 budget and public services - The authorities noted the 2011 budget strikes a balance between fiscal restraint, capacity constraints, pre-commitments, and development needs. - Ministers agreeing on a balanced budget in a pre-election year was challenging. - Many developing needs and funding of public services have been eroded in recent years, including security, education, health, and maintenance and rehabilitation of infrastructure. ### Monetary policy — actions and liquidity - BPNG policy rate: kept constant at 7 percent since end-2009. - In 2010: - BPNG issued new central bank bills (CBB) totaling about 2 percent of GDP. - Cash reserve requirement increased in October from 3 to 4 percent. - Total liquidity in the banking system increased by almost 12 percent, mainly due to foreign exchange inflows, including mineral taxes and dividends. - Net foreign reserves increased by 19 percent. - CBB and Treasury bill rates fell by about 3 percentage points. - Consequences: weaker exchange rate and falling treasury rates indicate eased monetary conditions; excess liquidity reduces monetary-policy effectiveness. ### Staff’s views on inflation and monetary policy - Inflation outlook: - Staff expects headline inflation to approach 10 percent in the short run and to stay elevated in the medium run. - Measured inflation likely to substantially underestimate true inflation. - Costs and risks of high inflation: harms households on fixed incomes, distorts price signals, reduces savings incentives, may lead to greater inflation volatility and weakened central bank credibility. - Monetary policy recommendations to contain inflationary pressures: - Interest rates: raise the Kina Facility Rate (KFR) 3 to 4 percentage points above expected core inflation to provide an important signal; caveat that policy rate has limited sway if liquidity remains abundant. - Liquidity: consider further increases in the cash reserve requirement; reduce liquidity by raising the CBB rate gradually back to just below the KFR. - Exchange rate: tighter macroeconomic policies would help mitigate real appreciation; raising the KFR and letting markets determine the Kina exchange rate could shift real exchange rate adjustment from inflation to nominal exchange rate appreciation. - Additional operational note: the pass-through of exchange rates to domestic prices is strong in PNG. ### Institutional coordination and authorities’ stance on monetary policy - Moving all new trust accounts to the BPNG facilitates fiscal and monetary policy coordination, gives BPNG better control over liquidity and market interest rates, and may reduce the need for high-cost CBB issuance. - Authorities broadly shared staff’s inflation forecast and acknowledged upside risks; they emphasized need for fiscal restraint. - BPNG reluctance to raise interest rates stemmed from concern about restraining private sector growth; they considered inflation below 10 percent tolerable during high growth and viewed current stance as appropriate while standing ready to tighten if inflation exceeded their comfort zone. - Authorities shared concerns about excess liquidity; proposed managing trust accounts in offshore bank accounts and considered further increases in the cash reserve requirement. ### Exchange rate assessment and external stability - Current account: - After surpluses, the current account shifted into deficit amid weak commodity prices in 2009. - Staff estimates the deficit to have widened to 24 percent of GDP in 2010, reflecting LNG-related goods and services imports and income deficits (higher compensation of foreign employees and higher dividend payments). - Current account deficits are largely financed by FDI and equity investments of LNG partners. - Reserves and coverage: - Foreign reserves are estimated to be around US$3.2 billion by March 2011 and cover almost five months of imports of goods and nonfactor services. - Exchange rates and real appreciation: - The nominal effective exchange rate (NEER) depreciated by more than 7 percent in 2010. - Over a longer horizon the NEER remained roughly flat, while a positive inflation differential with main trading partners led to an appreciation of the real effective exchange rate (REER) by 20 percent since early 2008. - Staff projections and risks: - Due to a fall in oil and copper production, current account deficits will continue until 2015 when LNG production is expected to start. - From 2015, LNG production and current-account surpluses are likely long-lasting. - Debt sustainability analysis shows a moderate risk of debt distress under a combination of negative shocks, strengthening the case for prudent borrowing and enhanced fiscal discipline. - The real exchange rate is broadly in line with macroeconomic conditions in 2010, but moderately undervalued when projected LNG exports are factored in. - Uncertainties about timing and scale of LNG production and lack of reliable data imply that exchange rate assessments provide only rough guidance. ### Box 2 — Exchange Rate Assessment (key points and baseline results) - REER movement: - REER: after appreciating by 4.7 percent in 2009, it rose by only 0.5 percent in 2010. - Staff estimates: - Point to an undervaluation of the Kina relative to medium/longer-term fundamentals. - Using projections for 2017 (when PNG’s output gap is expected to close) and an amended MB approach that accounts for LNG effects, staff conclude the REER is undervalued by about 20 percent relative to its projected value after LNG production begins. - ERER approach yields only a slight undervaluation but does not account for the structural break due to LNG production. - Baseline numeric results (as presented in source): - REER - NormProj. 2/Overvaluation - MB approach 3/10.414.7-21.4 - ERER approach 4/......-2.1 - 2/ Staff projection of the underlying CA/GDP in 2017. - 3/ Based on a semi-elasticity of the CA/GDP with respect to the REER of -0.2. - 4/ Overvaluation is assessed relative to December 2010. - All results are expressed in percent. ### Managing resource revenue — policy design and safeguards - Authorities’ plan: - Broad consensus to establish a sovereign wealth fund (SWF) consisting of a consolidated pool of offshore funds with three coordinated and integrated funds: a savings fund, a stabilization fund, and an infrastructure fund. - All mineral revenues to be automatically deposited: LNG tax and other mineral and petroleum taxes and dividends allocated to savings and stabilization funds; LNG dividends to the infrastructure fund. - Drawdown arrangements under discussion; government created a Secretaries Committee and interdepartmental working group, chaired by Treasury, to oversee establishment. - Staff support and recommendations: - Staff supported managing all resource revenues through an SWF to manage volatility, contain real exchange rate appreciation, and improve transparency, accountability, and governance. - Implementation of the Generally Accepted Principles and Practices--Santiago Principles recommended to address “poor state of accounting and record keeping” reported by the Auditor General. - Coordination of drawdowns from the three funds will be challenging; spending should be guided by absorptive capacity, cyclical stabilization requirements, and intergenerational equity. - Treasury and BPNG should lead in determining annual spending limits consistent with absorptive capacity and cyclical position. - Annual Ministerial agreement on overall spending amounts linked to the budget process is helpful; MTFS spending limits could serve as preliminary guideposts for medium-term drawdown limits. ### Development strategy and public spending effectiveness - Government plans: - New development plan focuses on addressing current supply constraints and raising effectiveness of core service delivery. - Medium-Term Development Plan (MTDP) shifts planning from expenditure-based to policy-focused, holding line agencies accountable for sector targets. - Staff’s views and implementation challenges: - Addressing supply constraints requires a more supportive environment for the private sector and revival of structural reform agenda. - Government investing in land titling and making more land available; improving SOE capacity; need more competition and improved security to attract business. - Realizing MTDP goals requires marked gains in effectiveness of public spending. - Final spending from trust funds often not monitored by central agencies and can differ markedly from budgeted purposes, as audits repeatedly report. - Government investing in stronger financial management, monitoring, and reporting systems; skilled staff retention remains a growing constraint. *Source: PAPUA NEW GUINEA — 2011 ARTICLE IV REPORT (excerpt).* ### 35. Papua New Guinea’s financial sector ### Papua New Guinea’s financial sector ### Overview and recent performance - The three large banks are mostly funded domestically, and their total deposits have increased by almost 20 percent since 2009. - Two large banks have well-performing Australian parents; the largest, Bank of South Pacific, is domestically owned. - All three large banks are well capitalized and highly profitable. - Banking-sector metrics: - Loan-to-deposit ratio: about 49 percent. - Liquidity ratio: 57 percent of total assets. - Non-performing loans (NPL): fell from 2.7 percent in June 2009 to 1.8 percent of total loans in September 2010. - Provisioning almost doubled to over 200 percent. - Profitability of the largest superannuation fund improved by more than 45 percent in 2010 after being hit by the global financial markets downturn. - Financial access: 85 percent of the population lacks access to financial services. ### Staff’s views and recommended regulatory reforms - Overall financial sector soundness assessed as satisfactory; regulation and supervision have been strengthened. - Main recommendations: - Complete the set of prudential standards and enhance available supervisory tools. - Move to a more risk-based approach in supervision and make compliance with prudential standards compulsory. - Formalize bank liquidity support arrangements and establish a discount window. - Reform payment and settlement systems. - Develop the local-government securities market. - Improve access to financial services. - Stress-tests undertaken during the 2010/11 FSAP missions indicate the banking system should be able to withstand moderate shocks. ### Risks and vulnerabilities - High exposure to property markets: - Banks and Authorized Superannuation Funds (ASF) are vulnerable to corrections in urban property markets, particularly in Port Moresby and Lae. - Need for banks to maintain high lending standards as credit demand associated with the LNG project and mining-sector expansion is likely to rise. - Concentration risks: - Absence of a liquid domestic government debt market and concentration of bank assets in government securities represent risks to banks’ balance sheets. - Integration and product gaps: - Expansion in the mineral sector is likely to spur foreign interest in PNG’s bond market. - Increased integration into the global economy requires new vehicles to manage foreign currency risk and new banking products. ### Authorities’ views and actions - Authorities report financial institutions are taking steps to lower exposure to property markets. - Financial institutions responded to higher perceived risk by tightening lending standards rather than raising lending rates. - All ASFs comply with prudential norms; the two largest have lowered their housing and property market exposure. - In cooperation with multilateral institutions, authorities started a National Payments project to strengthen clearance and settlement infrastructure. - Decision to move all new trust accounts to the Bank of Papua New Guinea (BPNG) was noted (see Staff Appraisal for recommended implementation). ### Staff appraisal and policy recommendations - Fiscal and macro policy: - Commendation for commitment to a medium-term fiscal framework (MTFS) that increases macroeconomic stability and reduces public debt, while noting implementation needs strengthening after 2009 slippages. - Tighter fiscal policies recommended during the LNG construction phase to reduce inflationary pressures. Specific measures include: - Limiting spending out of trust accounts to well below the 4 percent of GDP limit. - Using saving opportunities during budget implementation, including windfall mineral revenues. - Lowering the assumption of normal mineral revenue to 3 percent until LNG production commences. - Implement the government decision to allocate funds to meet superannuation obligations and publish a payment schedule for arrears. - Monetary and exchange-rate policy: - A tighter stance of monetary policy is required to contain inflationary pressures and reduce risk of higher inflation becoming entrenched in expectations. - Recommendations: raise the policy rate well above expected core inflation; further increase the cash reserve requirement; raise CBB rates; avoid further foreign exchange accumulation to limit liquidity creation. - Move to a more market-determined exchange rate to cushion demand shocks; a market-driven appreciation of the Kina would help reduce inflationary pressures from import prices. - Central bank and liquidity management: - Fully implement the decision to move all new trust accounts to the BPNG to give the central bank better control over domestic liquidity and market interest rates, and allow the BPNG to manage these accounts offshore. - Sovereign wealth fund (SWF) and resource revenue management: - Plans to manage resource revenues through an SWF are welcome. Key guidance: - Invest SWF assets offshore. - Fully integrate withdrawals into the budget process. - Ensure transparency, accountability, and good governance by adopting the Santiago Principles. - Integrate the SWF into the macro framework and support it with strong fiscal institutions, such as the MTFS and the Fiscal Responsibility Act. - Financial-sector safeguards: - Banks should be encouraged to maintain strict lending standards and guard against overexposure to the property sector. - FSAP recommendations should be implemented. ### Key statistics and indicators (preserved exactly as reported) - Total deposits increased by almost 20 percent since 2009. - Loan-to-deposit ratio: about 49 percent. - Liquidity ratio: 57 percent of total assets. - NPL: 2.7 percent in June 2009 and 1.8 percent in September 2010. - Provisioning: almost doubled to over 200 percent. - Profitability of the largest superannuation fund: improved by more than 45 percent in 2010. - Financial access: 85 percent of the population lacks access to financial services. - Fiscal limit cited: 4 percent of GDP (trust account spending limit). - Mineral revenue assumption recommendation: 3 percent until LNG production commence. - Exchange rate undervaluation estimate elsewhere in the report: 2–20 percent (context preserved). *Source: Papua New Guinea — 2011 Article IV Report, IMF staff assessment of Papua New Guinea’s financial sector.* ### 49. Staff recommends the next Article IV ### _cr11117 - 49. Staff recommends the next Article IV ### Staff recommendation - Staff recommends the next Article IV consultation be held on the standard 12-month cycle. ### Real sector: growth and inflation (selected figures) - Real GDP growth: 7.2, 6.6, 5.5, 7.0, 9.0 (2007–2011; Est./Proj. sequence as presented). - Mineral GDP growth: -0.1, -1.4, -1.7, 4.4, 9.3. - Nonmineral GDP growth: 8.1, 7.6, 6.3, 7.3, 8.9. - CPI (annual average): 0.9, 10.7, 6.9, 6.0, 8.4. - CPI (end-period): 3.2, 11.2, 5.7, 7.8, 9.5. - Nominal GDP (millions of kina): 18,798; 21,594; 22,208; 25,421; 31,162 (2007–2011). ### Central government operations: 2007–11 summary (percent of GDP) - Revenue and grants: 37.3, 32.6, 27.5, 32.5, 33.4. - Expenditure and net lending: 28.3, 30.1, 37.1, 32.8, 32.4. - Overall balance (including grants): 9.0, 2.5, -9.6, -0.3, 1.0. - Nonmineral balance (measured from above the line): 2/ -5.0, -7.4, -13.4, -7.3, -7.7. - Gross public debt: 33.6, 31.7, 32.1, 26.5, 21.9. - Domestic: 16.9, 18.5, 19.2, 15.8, 12.3. - External: 16.6, 13.2, 12.9, 10.7, 9.7. ### Money, credit, and interest rates (selected) - Domestic credit (percent change): 5.6, 15.7, 3.7, 4.7, 19.9. - Credit to the private sector (percent change): 34.3, 29.5, 15.1, 17.9, 25.0. - Broad money (percent change): 27.8, 7.8, 21.3, 10.0, 22.6. - Interest rate (182-day T-bills; period average): 4.4, 5.9, 7.2, 6.4, ... ### External sector and reserves (selected, U.S. dollars) - Exports, f.o.b.: 4,822; 5,817; 4,389; 5,824; 8,298 (2007–2011). - Mineral exports: 3,673; 4,263; 3,403; 4,636; 6,607. - Imports, c.i.f.: -2,629; -3,140; -2,871; -4,455; -5,480. - Current account (including grants): 208; 808; -649; -2,255; -2,420. - In percent of GDP: 3.3, 10.1, -8.0, -23.7, -21.2. - Gross official international reserves (millions of U.S. dollars): 2,087; 2,095; 2,623; 3,092; 3,459. - In months of nonmining imports, c.i.f.: 14, 11, 16, 11, 10. - In months of goods and services imports: 5, 5, 7, 5, 5. ### Table highlights: Summary of Central Government Operations, 2008–16 (selected projections; percent of GDP) - Revenue and grants (2008–2016 sequence): 32.6, 27.5, 27.5, 32.3, 33.4, 31.4, 29.5, 25.2, 17.6, 16.9. - Tax revenue (2008–2016): 26.7, 24.4, 25.3, 25.5, 26.6, 25.3, 24.0, 21.3, 14.9, 14.5. - Mineral taxes: 9.1, 3.1, 5.8, 5.6, 7.4, 6.6, 5.2, 2.1, 0.6, 0.5. - Nonmineral taxes: 17.5, 19.3, 19.5, 20.0, 19.2, 18.7, 18.8, 18.4, 13.9, 13.7. - Grants (2008–2016): 4.6, 4.0, 5.5, 5.3, 5.0, 4.4, 4.1, 3.9, 2.7, 2.4. - Total expenditure and net lending (2008–2016): 30.1, 37.1, 32.8, 32.4, 32.4, 31.0, 29.9, 28.6, 21.3, 18.4. - Overall balance (from above the line): 2.5, -9.6, -0.3, 0.0, 1.0, 0.4, -0.4, -3.4, -3.7, -1.4. - Nonmineral overall balance (above the line) (2008–2016): -7.4, -13.4, -7.3, -6.6, -7.7, -7.4, -6.5, -5.9, -4.4, -2.0. - Nominal GDP (in millions of kina, 2008–2016): 21,594; 22,208; 25,421; 28,718; 31,162; 36,021; 38,771; 43,129; 64,493; 72,779. ### Balance of payments: 2008–16 projections (selected, millions of U.S. dollars) - Current account balance (2008–16): 808; -649; -2,255; -2,420; -1,868; -1,078; -787; 1,324; 2,343. - Trade balance (2008–16): 2,677; 1,519; 1,368; 2,817; 3,473; 3,589; 3,421; 6,424; 7,817. - Exports (f.o.b.) (2008–16): 5,817; 4,389; 5,824; 8,298; 8,795; 8,241; 7,924; 10,815; 12,201. - Imports (c.i.f.) (2008–16): -3,140; -2,871; -4,455; -5,480; -5,322; -4,652; -4,503; -4,391; -4,383. - Capital and financial account balance (2008–16): -820; 1,162; 2,724; 2,787; 2,243; 1,435; 1,153; 1,068; 672. - Overall balance (including exceptional financing): 852; 946; 936; 937; 735; 636; 652; 2,392; 3,014. - Gross official reserves (end-year, millions of U.S. dollars) (2008–16): 2,095; 2,623; 3,092; 3,459; 3,834; 4,190; 4,556; 6,947; 9,962. - In months of imports of goods and services (2008–16): 5.1; 6.7; 5.3; 4.9; 5.5; 6.7; 7.7; 11.9; 17.7. ### Depository corporations and monetary aggregates (2008–11; end-period kina) - Bank of Papua New Guinea net foreign assets: 5,566; 6,554; 7,652; 9,249. - Reserve money: 1,620; 1,814; 2,016; 2,258. - Depository corporations (broad money, end-period): 9,700; 11,770; 12,942; 15,865. - Broad money (percent change, 12-month basis): 27.8, 7.8, 21.3, 10.0, 22.6. - Private sector credit (percent change, 12-month basis): 34.3, 29.5, 15.1, 17.9, 25.0. - Gross international reserves (in millions of US dollars): 2,095; 2,623; 3,092; 3,459. ### Indicators of external vulnerability (selected) - Gross public debt (end of period): 33.6, 31.7, 32.1, 26.5, 21.9 (2007–2011). - Broad money to gross reserves (ratio): 1.5, 1.7, 1.7, 1.6, 1.6. - Total short-term external debt to reserves (percent) 3/: 2.3, 2.2, 2.7, 2.6, 2.7. - Public external debt to GDP ratio (in percent): 16.6, 13.2, 12.9, 10.7, 9.7. - Exchange rate (per U.S. dollar; period average): 3.0, 2.7, 2.8, 2.7, ... ### Medium-term scenario (2008–16) — key projections - Real GDP growth (2008–2016): 6.6, 5.5, 7.0, 9.0, 5.5, 2.0, 4.0, 20.0, 5.0. - Mineral sector: -1.4, -1.7, 4.3, 9.3, 13.8, -3.2, 15.3, 151.1, 7.3. - Nonmineral sector: 7.6, 6.3, 7.3, 8.9, 4.6, 2.6, 2.9, 4.8, 4.3. - CPI (period average): 10.7, 6.9, 6.0, 8.4, 8.7, 7.5, 6.5, 6.3, 6.8. - Primary balance (measured from below the line): 5.6, -3.6, 2.0, 2.4, 1.7, 0.6, -2.4, -2.8, -0.5. - Gross public debt (in percent of GDP): 31.7, 32.1, 26.5, 21.9, 18.3, 18.3, 19.8, 14.5, 13.8. - Domestic: 18.5, 19.2, 15.8, 12.3, 9.0, 8.6, 10.1, 7.3, 6.8. - External: 13.2, 12.9, 10.7, 9.7, 9.4, 9.7, 9.7, 7.2, 6.9. - Net official reserves (in millions of U.S. dollars) (2008–16): 2,093; 2,426; 2,895; 3,262; 3,637; 3,993; 4,359; 6,750; 9,764. ### Commodity price assumptions (Medium-term scenario) - Gold (U.S. dollars per ounce): 872, 973, 1,225, 1,427, 1,446, 1,478, 1,530, 1,596, 1,670 (2008–2016). - Copper (U.S. dollars per ton): 6,963, 5,165, 7,538, 9,883, 9,838, 9,330, 8,330, 7,830, 7,830. - Oil (U.S. dollars per barrel): 97, 62, 79, 107, 108, 106, 105, 105, 106. ### Millennium Development Goals progress (selected indicators, 1990–2009) - Population, total (millions): 4.1, 4.7, 5.4, 6.1, 6.4. - GNI per capita, Atlas method (current US$): 830, 1,040, 620, 680, 1,180. - Primary completion rate, total (% of relevant age group): 48, 52 (years shown). - Immunization, measles (% of children ages 12-23 months): 67, 42, 62, 63, 58. - Maternal mortality ratio (per 100,000 live births): 340, 300, 290, 270, 250. - Improved sanitation facilities (% of population with access): 47, 47, 46, 47, 45. - Improved water source (% of population with access): 41, 41, 39, 41, 40. - Net ODA received per capita (current US$): 100, 79, 51, 44, 46. ### Appendix — Authorities' response to recent Fund policy advice (selected) - Monetary and Exchange Rate Policy: - Fund recommendation: "Monetary policy needs to be focused on emerging inflation pressures. The central bank should be tightening monetary policy now with a view to achieving real lending rates of around 6 percent." - Authorities' action: "The central bank kept the policy rate stable throughout the year at 7 percent." - Fiscal Policy: - Fund recommendation: "Delaying some infrastructure spending would ease overall demand pressures and help ensure that good value is achieved from this spending." - Authorities' action: "Spending outside the budget fell sharply, compared to" (text truncated in source). *Source: 2011 ARTICLE IV REPORT — PAPUA NEW GUINEA (IMF staff tables and projections as provided).* ### 2009. It is expected to be under the MTFS threshold of ### _cr11117 - 2009. It is expected to be under the MTFS threshold of ### Fiscal framework, MTFS, and mineral revenue - It is expected to be under the MTFS threshold of 4 percent of GDP. - Recommendation: lower the assumption of normal mineral revenue to 3 percent of GDP between now and 2014, when LNG production should commence. - Modification of the MTFS did not include the revision of the normal mineral revenue threshold. - 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. - Fiscal and monetary authorities meet regularly on a monthly basis. The authorities decided to open all new trust accounts at the BPNG. - The SWF needs to be integrated into the macro framework and thereby supported by other fiscal institutions, such as the MTFS and the Fiscal Responsibility Act. - The authorities plan to review the current MTFS in 2011. They have indicated that the new MTFS will incorporate new guiding principles governing the revenue from SWF. ### Financial Sector Policy - 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. - NPLs have decreased, while provisioning remains high. - Lending rates have increased little. - All commercial banks remain well capitalized and profitable. - Backward looking financial soundness indicators are all well above the prudential norms set by the BPNG. ### Structural reforms and Sovereign Wealth Fund (SWF) - Best way forward: a financing fund that directs all public spending through the budget, enhancing macroeconomic stabilization and ensuring high quality spending aligned with development objectives. - To minimize potential for currency appreciation that would undermine rural populations dependent on agriculture exports, the fund’s resources should be invested offshore. - Government decision: establish an SWF consisting of a consolidated pool of three offshore funds: a stabilization, savings, and infrastructure fund. - All expenditures are to go through the budget process. *Source: IMF staff. Advice from the 2010 Article IV Consultation.* ### Appendix 2 — Land reform: key facts and recommendations - Land tenure: Ninety-seven percent of total land in PNG is held under customary tenure, while only 3 percent is under formal tenure, mostly owned by the State. - Customary land supports more than 85 percent of the national population. - Poor administration and an inadequate legal framework have prohibited productive use of both customary land and alienated land. - National Land Development Program (NLDP) launched in 2007; PNG parliament passed two laws in 2009 aimed at mobilizing land for development. - Guiding principles of legislation: customary ownership never to be lost (remain with traditional landowners); any system of titling is as good as a state title. - Implementation of the NLDP has generally been slow; Office of Urbanization implementing pilot project areas to accommodate urban expansion on customary land under new laws. - Recommendation: government must remain committed to a nationally-owned reform process that is transparent and inclusive and engage in broad participatory consultations. ### Appendix 3 — Debt Sustainability Analysis (DSA): executive findings - PNG assessed using the low-income country debt sustainability analysis (LIC DSA). - PNG remains at a moderate risk of debt distress, but public debt sustainability has improved compared to the 2010 DSA assessment because of a stronger growth outlook. - Under the baseline scenario, all external debt sustainability indicators remain well below their applicable thresholds. - Stress tests: threshold for the present value of external public debt to GDP is breached only if commodity export prices in 2011–2013 are substantially below WEO forecasts and the government borrows to finance domestic consumption. - Overall public debt should continue its downward path under the baseline, but contingent liabilities related to the LNG project, arrears to public pension funds, and other domestic liabilities would delay this long-term adjustment. - Substantial deterioration in the primary balance would harm PNG’s debt performance. ### I. Background — public debt trends - Total public debt declined from 70 to 26 percent of GDP from 2001 to end-2010. - External public debt fell from 50 to 11 percent of GDP during this period. - Multilateral lenders (World Bank and AsDB) account for around 75 percent of PPG external debt; Japan and Australia are the largest bilateral creditors. - Private sector external debt at end-2010 is estimated at 13 percent of GDP. ### II. Economic outlook and DSA assumptions - Real GDP growth was 7 percent in 2010 after a modest slowdown in 2009, and is projected to accelerate in 2011. - Foreign reserves increased to around US$3.2 billion by March 2011, reflecting large inflows associated with equity injection and drawdown of loan funds for LNG project financing. - Baseline: commodity prices remain high over the medium term; real GDP moves in line with the LNG sector. - During LNG construction, elevated domestic demand and current account deficit will continue; with LNG production start in 2015, real GDP projected to jump by 20 percent and current account will move into a large and persistent surplus. ### III. External debt sustainability - Over the projection period, all baseline PPG external debt and debt service indicators stay well below policy-dependent debt burden thresholds. - PV of PPG external debt as a percentage of GDP is on a declining path and stays under 10 percent in the medium term, far below the 30 percent threshold. - PVs of PPG external debt-to-exports and debt-to-revenue ratios expected to stay below their applicable thresholds. - Additional financing needs for LNG project and current account deficit would be met with projected large FDI inflows, resulting in no extra debt burden created. - After 2015, external debt burden expected to fall faster due to large increase in exports and revenue from LNG production. - External sustainability threatened by poor fiscal policy in response to a large terms of trade shock. Using authorities’ more conservative export price estimates for 2011–2013 and allowing government borrowing to finance baseline consumption and imports would breach the PV of PPG external debt 30 percent of GDP threshold. - The price of gold is the most important price for external sustainability before LNG production. - Delays to the LNG project could generate adverse debt dynamics, even if PPG external debt indicators remain within thresholds. ### IV. Public debt sustainability - Baseline: public debt ratio will continue downward over medium and long term. - PV of public sector debt projected to decline from 27 percent of GDP in 2010 to 13 percent of GDP in 2016 and to 7 percent of GDP by 2031. - Key factors: economic growth and saving of commodity tax revenues. - Alternative scenarios: - Public debt-to-GDP ratio would rise to 30 percent in 2031 if there is a negative shock to real GDP growth in 2012–13 with permanently lower revenues and unchanged expenditures until 2031. - Keeping the primary fiscal surplus at 2.3 percent from 2011 through 2031 instead of moving into deficits would result in the PV of the public debt-to-GDP ratio falling to zero by 2016. - Unfunded superannuation liabilities estimated to be 7 percent of GDP by end-2010; these continue to grow given the decision in the 2009 and 2010 budgets not to fully fund the central government’s 8.4 percent employer contributions. - Contingent liabilities related to the LNG project are estimated to be about 7 percent of GDP in 2015. - Government should develop a firm payment schedule for unfunded liabilities. - Attention needed for possible need to backstop SOE borrowing; contingent liabilities related to SOEs amount to about 2.5 percent of GDP (based on 2008 Article IV DSA estimates). ### V. Conclusion and policy recommendations - PNG remains at moderate risk of debt distress, but PPG external debt sustainability has substantially improved due to high commodity prices and upcoming LNG production. - External PPG debt burden indicators stay well below indicative thresholds under the baseline and are resilient to most stress tests, but threatened by a large negative terms of trade shock coupled with a poor fiscal response. - Public debt sustainability is sensitive to growth shocks and saving of windfall revenues over the longer term; government needs to carefully consider the risk of accumulating public liabilities until LNG taxation revenues are realized. - Despite changes to the MTFS to allow 100 percent of windfall revenues for public investment, it would be advisable to use some portion of gains to pay down high interest rate public debt to insulate the economy from adverse debt dynamics after negative growth shocks. - One-off realizations of contingent liabilities would delay paydown of government public debt but would not generate unsustainable debt dynamics. ### Policy-based PPG External Debt Burden Thresholds for PNG — selected ratios and PNG's values - Thresholds and PNG's ratios: - PV of debt in percent of: GDP 30 | 2010 PNG's ratios 11.1 | 2011-16 8.5 | 2017-31 5.4 - Exports 100 | 2010 PNG's ratios 17.5 | 2011-16 12.7 | 2017-31 11.6 - Revenues 200 | 2010 PNG's ratios 41.2 | 2011-16 39.6 | 2017-31 34.5 - Debt service in percent of: Exports 15 | 2010 PNG's ratios 1.8 | 2011-16 1.2 | 2017-31 0.9 - Revenues 25 | 2010 PNG's ratios 4.1 | 2011-16 3.7 | 2017-31 2.6 *Source: IMF staff; 2011 Article IV Report — Papua New Guinea.* ### Appendix Box 1 Macroeconomic Assumptions Underlying the DSA ### Appendix Box 1 Macroeconomic Assumptions Underlying the DSA ### Real GDP growth and sectoral outlook - Real GDP growth is projected to be 8 percent on average over the medium term, above the historical average of 4 percent, and slow gradually to 3–4 percent in the long run. - In the medium term growth in the LNG and nonmineral sectors will offset the decline in copper and petroleum production. ### LNG project timing, capacity, and GDP/GNI impact - Construction of the LNG project will be finished and production and exports are expected to start in 2015, with a maximum capacity of 6.6 million tons of LNG produced per annum. - LNG production is estimated to raise the level of real GDP by about 20 percent in 2015. - Accounting for substantial income outflows, the LNG project is expected to increase annual GNI by about 8 percent. ### Inflation and capacity constraints - Inflation is projected to rise to 9 percent in the near term due to increasing domestic demand and near-term capacity constraints, while stabilizing at around 4 percent in the long run. ### External sector: current account, imports, and FDI - The current account (including grants) is estimated to be in deficit in 2010 and the deficit is expected to remain sizeable until 2015, primarily reflecting the strong import growth during the construction phase of the LNG project. - FDI inflows from foreign shareholders are projected to increase substantially and finance most of the imports. ### Grant element and external financing terms - 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 over the projection period. - Footnote: Grant-equivalent financing (in percent of GDP) decreases over time. From 2016 onwards, the majority of new AsDB disbursements are through OCR facilities, which carry a higher interest rate than ADF loans. ### Fiscal balance assumptions - The primary fiscal balance is projected to be in surplus of 2.3 percent of GDP in 2011 accounting for spending from the trust accounts. - In the medium term primary deficits are anticipated, but these turn into surpluses over the long run as LNG tax revenues are realized. *Source: Appendix Box 1 Macroeconomic Assumptions Underlying the DSA (from the provided content).* ### Appendix 4 Papua New Guinea—FSAP: Main Lessons and Take-Aways ### Appendix 4 Papua New Guinea—FSAP: Main Lessons and Take-Aways ### Context and overall assessment - FSAP mission visited Port Moresby in May 2010; findings updated during the 2011 Article IV consultations. - Mission backdrop: - Wide-spread optimism for the operation of the Liquefied Natural Gas (LNG) projects after 2014. - Mild impact of the financial crisis on PNG due largely to the broad insulation of the financial sector from the global financial markets. ### Financial sector structure and size - Total financial sector assets have grown to roughly 95 percent of GDP. - Institutions and regulators: - Four commercial banks. - Seven authorized superannuation funds (ASFs). - A number of other nonbank financial sector institutions licensed and regulated by BPNG. - General insurance companies regulated by the Insurance Commission. - The stock exchange regulated by the Securities Commission. - Dominant institutions: - Banks and superannuation funds dominate the financial sector. - Since early 2000 reforms, banks increased assets fivefold to almost K17 billion by end-2010. - Largest banks: nationally owned Bank of South Pacific, subsidiaries of two Australian banks, and a Malaysian bank. - State-owned National Development Bank (non-deposit taking) with primary function of providing accessible credit to people in rural areas. - Nonbanks total about K7.5 billion in assets; ASFs hold more than 70 percent of total nonbank financial assets. - Nonbank asset ranking by size: ASFs, savings and loans societies, finance and microfinance companies, insurance companies (including general, life, and broker). - Financial Sector Institutions — Total Assets (Source: BPNG and IMF staff estimates as of September 2010): - Commercial Banks — 16715.3 (In million Kina) — 68.3 (In percent) - National Development Bank — 200.5 (In million Kina) — 0.8 (In percent) - Authorized Superannuation Funds — 5450.8 (In million Kina) — 22.3 (In percent) - Other Nonbank Institutions — 2097.1 (In million Kina) — 7.9 (In percent) - Total — 24463.7 (In million Kina) — 100 (In percent) ### Financial inclusion and access to finance - Access levels: - Only about 10 percent of the population currently have access to formal financial services. - 17 percent of adults currently have access to formal financial services. - Around 85 percent of the adult population is excluded from the formal sector, largely those in rural communities. - Barriers: - Operational challenges and infrastructure weaknesses leading to high intermediation costs. - Policy actions and plans: - Authorities plan a financial literacy survey in partnership with the World Bank and UNDP during 2011 to inform projects aimed at extending financial services. - PNG Development Strategic Plan 2010–2030 identifies extension of microfinance banking services to all districts as a priority. - National payment system development program aims to encourage introduction and use of innovative, convenient, and cost-effective new retail payment instruments, with special focus on rural areas. ### Soundness and risks - Overall financial sector soundness described as satisfactory. - Indicators: - Generally well-capitalized and highly profitable financial sector. - Credit and market risks in the banking sector are relatively low. - Prevailing high levels of capital, low levels of nonperforming loans, and high provisions offset risks. - Caveats: - High capital ratios are appropriate to accommodate lending to larger clients and growing credit risk expected in the medium term. - High concentration of the financial sector, absence of secondary market for government securities, and lack of repo and discount windows require banks to maintain higher liquidity. ### Supervision, regulation, and institutional capacity - Progress: - Regulation and supervision of the banking sector has been strengthened since the 2000 reforms. - BPNG has been developing supervisory techniques. - Gaps and priorities: - Complete the suite of prudential standards and enhance supervisory tools to move toward a more risk-based approach. - Crisis management framework is incomplete; steps needed to put this in place. - Establishing an independent Payment Systems Department in BPNG is judged crucial to support regulation and oversight. - Legal framework does not recognize payment services as an independent activity; lack of an inter-bank real-time payment system with collateralized liquidity management creates systemic risks. - Clearing house operations remain manual and paper based. ### Markets, payment systems, and AML/CFT - Government securities market: - Primary market operations reflect best practice, but banks have limited incentives to canvass investors. - Smaller investors face hurdles: high minimum participation amounts and no opportunity for smaller investors to enter noncompetitive bids. - Exposure to international investors through the LNG projects may provide opportunities to attract nonresident investors. - Payment systems reforms needed: - Establish inter-bank real-time payment system with collateralized liquidity management. - Modernize clearing house from manual, paper-based operations. - AML/CFT: - Further developments should be pursued, including enacting legislation on terrorist financing. - Use existing supervisory powers to encourage banks to undertake detailed customer due diligence. - Recommendation: give BPNG responsibility for enforcing financial institutions’ obligations (see Attachment recommendations). ### Sovereign wealth fund - Government is considering establishment of a sovereign wealth fund given anticipated large revenues from LNG projects. - Recommendation: modalities need to be carefully designed; decide on objective(s), funding and withdrawal rules, institutional arrangements, organizational structure, roles and responsibilities, and investment strategy. ### Main FSAP recommendations (selected, with priority) - Banking Sector — Credit Risk: - Monitor current and emerging NPLs to assess the causes and macroeconomic impacts. — High - Conduct a thorough analysis of counterparty exposure concentrations, with full account of interconnectedness. — Medium - Conduct a thorough analysis of collateral and related exposures of lending to property valuations. — Medium - Banking Sector — Liquidity Risk: - Develop monitoring systems and stress testing that allow for a revised definition of liquid assets (without government securities). — High - Ensure that any steps to remove government deposits from banks are done with careful planning and consultation. — High - Clarify and formalize bank liquidity-support arrangements for each bank with the BPNG, including through repurchase arrangements for government securities. — High - Regulation and Supervision: - Complete the supervisory regime by publishing a full set of prudential standards, starting with risk management, market, and liquidity risk but also including governance, credit, and operational risk in the context of a phased move to Basel II. — High - Increase the range of administrative sanctions and make compliance with prudential standards compulsory, while developing a remedial action program. — High - Enhance the capacity of the supervisory staff through training, so that the BPNG can move to full risk-based supervision. — High - Conduct and document a full risk assessment as the basis for supervisory strategy. — Medium - BPNG to explore scope for technical assistance to centralize data management systems. — Medium - Systemically important institutions: - Arrangements for liquidity improvement and contingency planning should be made to reduce the risk profile, while the number of shareholders should be increased in a measured way. — Medium - Sovereign Wealth Funds: - If authorities opt for a SWF to manage future LNG project-related proceeds, decide on the objective(s), funding and withdrawal rules, institutional arrangements, including organizational structure, roles and responsibilities, and investment strategy. — High - Government Debt Markets: - Assess the broader public-sector debt obligations such as borrowing and guarantees. — High - Issue BPNG guidelines to market participants on sound procedures for repurchase transactions. — High - Introduce a requirement that all repos should be collateralized and introduce the Master Repurchase Agreement. — High - Transfer trust funds accounts to BPNG whilst carefully considering bank positions. — Medium - Payment Systems: - Implement the proposed National Payments System Development Plan. — High - Establish a Payment Systems Department in the BPNG, with oversight of all payment and securities settlement systems. — High - Insurance Sector: - Enhance co-operation with local and foreign supervisory authorities, and improve supervisory transparency. — High - Enhance the supervisory functions regarding offsite reporting and monitoring and onsite inspections. — Medium - Develop guidance on governance, risk management, and internal controls. — Medium - Financial Inclusion: - Establish a functional coordination mechanism on financial inclusion through a national consultative process. — Medium - AML: - Give BPNG responsibility for enforcing financial institutions’ obligations. — High - Complete and issue regulations on customer due diligence regime (especially with more focus on monitoring accounts). — High - Crisis Management: - Establish a discount-window lending program, including repurchase agreements. — High - Strengthen crisis preparedness by developing a contingency planning framework, including internal procedures on emergency liquidity assistance. — High *Source: Appendix 4 Papua New Guinea—FSAP: Main Lessons and Take-Aways (2011 Article IV Report).* ### ANNEX III. PAPUA NEW GUINEA RELATIONS WITH ### ANNEX III. PAPUA NEW GUINEA RELATIONS WITH THE WORLD BANK GROUP (As of April 29, 2011) ### Meetings and coordination - Fund PNG team led by Mr. Schule (mission chief) met with World Bank PNG team led by Ms. Bailey (country manager) on February 11, 2011, to identify macrocritical structural reforms and to coordinate the two teams’ work for the period February 2011–March 2012. - The Bank and Fund staffs continue to work closely together to support the agenda of enhancing economic growth by helping the country remove constraints. ### Near-term priorities and resource management - Authorities’ near-term priority: maintain macroeconomic stability and fiscal sustainability as pre-requisites for sustained growth. - LNG project developments and associated increased business activity create an opportune time to lift living standards, contingent on appropriate policies. - Key guidance to avoid the "paradox of plenty": - Effectively manage revenues from nonrenewable resources. - Spend resource revenues gradually over time to address development needs such as infrastructure, education, health, and law and order. - Be mindful of the economy’s absorption capacity. - Do not borrow against future LNG revenue to fund large infrastructure projects. - Hold accumulated assets offshore to avoid currency appreciation that would undermine the competitiveness of the non-resource tradable sector. ### Areas of collaboration and lead roles - Macroeconomic policy framework: - Fund leads on exchange rate issues, monetary policy, and macroeconomic aspects of fiscal policy. - Bank leads on medium-term growth prospects, composition of public expenditure, and structural policies to support growth. - Public financial management reforms: - Bank supports government initiatives on improved diagnostics including sectoral or overall PERs. - Fund leads on strengthening implementation of the MTFS, improving coordination between monetary and fiscal policy, and other PFM issues through the PFTAC. - Financial sector reforms: - Bank leads on programs to improve SME access to finance, including collaborative work with the IFC. - Fund leads on bank regulation and supervision, central bank accounting and internal audit. - Energy sector reforms: - Bank leads reforms to build a financially viable and efficient energy sector. - Fund monitors implications of quasi-fiscal losses for debt sustainability and monetary management. - Sovereign wealth fund: - Fund leads on guiding establishment of a SWF aligned to the budget. - Bank leads discussions regarding mechanisms for linking the SWF(s) to budget processes, investment planning, and the next generation of Medium-Term Fiscal and Debt Strategies. - Statistical system reforms: - Bank and Fund collaborate on strengthening the statistical authorities. ### Work programs and planned activities (February 2011–March 2012) - Bank Work Program (selected entries and timing as presented): - Country Assistance Strategy — Ongoing. - Statistics TA (household survey, development of revised CPI and national accounts consumption measure) — Household survey results expected first quarter of fiscal year 2012; other components to follow. - Supporting government develop a sovereign wealth fund framework — Presentation of analytical work on managing revenue volatility in April 2010; support for developing framework expected May–August 2011. - Anti-Money Laundering/ Terrorist Finance Assessment Mission — Mission in November 2010. - Analytical work, technical assistance and possible lending operations in the area of social services (including education) — Ongoing. - Debt Management Performance Assessment (DeMPA) — Draft report presented to government in December 2010; Final report, incorporating government comments, presented to government in February 2011. - SME Access to Finance IDA-IFC Risk-Sharing Facility with technical assistance – to support increased lending by commercial banks to national SMEs poised to benefit from large resource projects — Preparatory work starting in first half of fiscal year 2012; Implementation throughout fiscal year 2011 and 2012; Scheduled for Board consideration in May 2011. - Fund Work Program (selected entries and timing as presented): - Article IV consultations — February 2011; February 2012. - TA provision by FAD on SWF and mineral taxation — May 2011; May 2012. - TA provision by PFTAC on SWF model — May and July 2011. - Staff visit — July 2011. - Article IV consultations (repeat line in table) — July 2011; May 2012; June 2011; July 2011. - Joint Work Program: - Financial Sector Assessment Program — Joint mission in May 2010; FSSA report in May 2011. ### Key statistics and dates (preserved exactly) - Coordination period covered: February 2011–March 2012. - Meeting date: February 11, 2011. - Household survey results expected first quarter of fiscal year 2012. - Presentation of analytical work on managing revenue volatility: April 2010. - Support for developing SWF framework expected: May–August 2011. - Anti-Money Laundering/Terrorist Finance Assessment Mission: November 2010. - Debt Management Performance Assessment draft report: December 2010. - Final DeMPA report: February 2011. - SME facility preparatory work: first half of fiscal year 2012. - SME facility scheduled for Board consideration: May 2011. - Fund Article IV consultations: February 2011 and February 2012. - PFTAC SWF model TA: May and July 2011. - Joint FSAP mission: May 2010; FSSA report: May 2011. *ANNEX III. PAPUA NEW GUINEA RELATIONS WITH THE WORLD BANK GROUP (As of April 29, 2011).* ### ANNEX V. PAPUA NEW GUINEA STATISTICAL ISSUES ### ANNEX V. PAPUA NEW GUINEA STATISTICAL ISSUES ### A. Assessment of Data Adequacy for Surveillance - General assessment: - "Data provision has some shortcomings, but is broadly adequate for surveillance." - Most affected areas: national accounts, fiscal accounts, and balance of payments. - National accounts (NA): - NSO lacks sufficient staff with computer training. - Accuracy and reliability affected by inadequate source data. - BPNG and the Department of Treasury produce the most current data. - Mid-2000: NSO released National Income, Expenditure and Product, 1993–98 (compiled using the 1968 SNA). - NSO has been working to implement the 1993 SNA. - March 2004: NSO released preliminary national income, expenditure, and production accounts estimates for 1994–2002, rebased to 1998 prices; figures need substantial improvements. - 2006 STA multisector mission recommended against publication of the new GDP data until revisions are made. - Treasury has assumed estimating the NA for 2002 to the present; expenditure-side data are available until 2006. - Prices statistics: - NSO compiles a new quarterly wholesale price index (not published) and a quarterly consumer price index based on weights that are thirty four years old. - NSO intends to use the 2009/2010 Household Income Expenditure Survey (HIES) to rebase the CPI; survey documents are being prepared for publication. - Government finance statistics (GFS): - Annual GFS reported to STA suffer from insufficient coverage. - Central government tax revenue statistics are generally accurate and timely; nontax revenue and public expenditure data are deficient. - Development budget expenditures and utilization of grants and project loans are recorded with long lags; few records on the use of trust accounts. - Interest payment records are accurate, but timing issues exist regarding interest on discount securities. - Weaknesses contribute to discrepancies in domestic financing between monetary/debt estimates and fiscal records. - 2006 STA mission encouraged preparation of a list of public sector units to permit comprehensive delineation of government levels to help reconcile GFS with other datasets. - Monetary statistics: - Monetary data are now being produced and reported to STA regularly. - Prior MFS missions helped to: - finalize review of collection, compilation, dissemination procedures by BPNG; - develop a work program to implement MFSM methodology; - introduce SRFs for central bank, other depository corporations, OFCs monetary aggregates; - finalize an integrated monetary database for BPNG, STA, and APD. - A MFS mission is scheduled for FY 2012 to introduce the SRF for OFCs with complete institutional coverage. - Balance of payments (BOP) statistics: - Annual BOP derived from the ITRS, which is not tightly monitored despite BPNG reporting requirements. - Marked differences between official export/import data and trading partners’ reports. - Financial accounts data are poor due to major deficiencies in data collection, especially private external debt. - 2006 STA mission prioritized strengthening current account estimates (classification of investment earnings, trade credits, grant receipts, and enhancing source data for imports/exports). - Progress being made to implement PFTAC BOP mission recommendations (June 2008, November 2009); follow-up PFTAC BOP mission scheduled for FY 2012. - Detailed BOP statistics are under review to be released in the near future. ### B. Data Standards and Quality - Does not participate in the General Data Dissemination System. - No data ROSC is available. ### C. Reporting to STA - Government finance statistics last reported for publication in the Government Finance Statistics Yearbook and IFS for 1999–2002; cover only budgetary central government. - Monetary data are reported to STA for publication in IFS on a regular monthly basis. - Balance of payments data for 2009 were reported to STA for publication in IFS and BOPSY. - National accounts data for 2004 were reported to STA for publication in IFS. ### Table of Common Indicators Required for Surveillance (As of April 15, 2011) — selected entries (dates preserved) - Exchange Rates: Date of Latest Observation 04/08/11; Date Received 04/15/11; Frequency of Data D; Frequency of Reporting W; Frequency of Publication W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 04/08/11; Date Received 04/15/11; Frequency of Data W; Frequency of Reporting W; Frequency of Publication Q - Reserve/Base Money: Date of Latest Observation 02/11; Date Received 03/29/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q - Broad Money: Date of Latest Observation 02/11; Date Received 04/06/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q - Central Bank Balance Sheet: Date of Latest Observation 02/11; Date Received 03/29/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 02/11; Date Received 04/06/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q - Interest Rates: Date of Latest Observation 12/10; Date Received 01/11; Frequency of Data W; Frequency of Reporting W; Frequency of Publication Q - Consumer Price Index: Date of Latest Observation 09/10; Date Received 12/10; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of Latest Observation 12/10; Date Received 04/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 09/10; Date Received 12/10; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q - External Current Account Balance: Date of Latest Observation 09/10; Date Received 12/10; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q - Exports and Imports of Goods and Services: Date of Latest Observation 09/10; Date Received 12/10; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q - GDP/GNP: Date of Latest Observation 2009; Date Received 11/10; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A - Gross External Debt: Date of Latest Observation 2009; Date Received 02/11; Frequency of Data Q; Frequency of Reporting A; Frequency of Publication A - International Investment Position: N/A entries ### Central Government Operations: Key figures from Table 2A (2008–16) — selected series (values in percent of GDP unless otherwise indicated; exact numbers preserved) - Cash receipts from operating activities (2008–2016): - 2008: 32.8 - 2009: 27.6 - 2010: 32.6 - 2011: 33.4 - 2012: 31.4 - 2013: 29.5 - 2014: 25.3 - 2015: 17.7 - 2016: 16.9 - Taxes (2008–2016): - 2008: 26.8 - 2009: 22.6 - 2010: 25.4 - 2011: 26.6 - 2012: 25.4 - 2013: 24.1 - 2014: 20.6 - 2015: 14.5 - 2016: 14.2 - Grants (2008–2016): - 2008: 4.6 - 2009: 4.0 - 2010: 5.5 - 2011: 5.0 - 2012: 4.4 - 2013: 4.1 - 2014: 3.9 - 2015: 2.7 - 2016: 2.4 - Cash payments for operating activities (2008–2016): - 2008: 17.5 - 2009: 18.8 - 2010: 16.4 - 2011: 17.8 - 2012: 16.0 - 2013: 16.0 - 2014: 15.6 - 2015: 12.7 - 2016: 12.5 - Net cash inflow from operating activities (2008–2016): - 2008: 15.3 - 2009: 8.8 - 2010: 16.2 - 2011: 15.7 - 2012: 15.4 - 2013: 13.6 - 2014: 9.6 - 2015: 5.0 - 2016: 4.5 - Purchases of nonfinancial assets / fixed assets (2008–2016): - 2008: 12.8 - 2009: 18.4 - 2010: 16.5 - 2011: 14.7 - 2012: 15.0 - 2013: 13.9 - 2014: 13.0 - 2015: 8.6 - 2016: 5.9 - Net cash outflow: investments in NFAs (2008–2016): same as purchases above. - Cash surplus / deficit (2008–2016): - 2008: 2.5 - 2009: -9.7 - 2010: -0.3 - 2011: 1.0 - 2012: 0.4 - 2013: -0.4 - 2014: -3.4 - 2015: -3.7 - 2016: -1.4 - Net incurrence of liabilities (2008–2016): - 2008: 2.1 - 2009: 0.8 - 2010: -1.4 - 2011: -0.3 - 2012: -1.2 - 2013: 0.8 - 2014: 3.0 - 2015: 0.9 - 2016: 0.6 - Net cash inflow from financing activities (2008–2016): same as net incurrence of liabilities above. - Net change in the stock of cash (2008–2016): - 2008: 5.9 - 2009: -4.8 - 2010: -0.8 - 2011: 0.7 - 2012: -0.8 - 2013: 0.4 - 2014: -0.4 - 2015: -2.7 - 2016: -0.9 - Vertical check (difference between cash surplus/deficit and total net cash inflow from financial activities) (2008–2016): - 2008: -1.3 - 2009: -4.1 - 2010: -0.9 - 2011: 0.0 - 2012: 0.0 - 2013: 0.0 - 2014: 0.0 - 2015: 0.0 - 2016: 0.0 - Memoranda: - Nonmineral overall balance (above the line) (2008–2016): - 2008: -7.4 - 2009: -13.4 - 2010: -7.3 - 2011: -7.7 - 2012: -7.4 - 2013: -6.5 - 2014: -5.9 - 2015: -4.4 - 2016: -2.0 - Nominal GDP (in millions of kina) (2008–2016): - 2008: 21,594 - 2009: 22,208 - 2010: 25,421 - 2011: 31,162 - 2012: 36,021 - 2013: 38,771 - 2014: 43,129 - 2015: 64,493 - 2016: 72,779 - Trust accounts closing balance (2008–2016): - 2008: 15.0 - 2009: 6.7 - 2010: 7.2 - 2011: 4.2 - 2012: 3.7 - 2013: 3.4 - 2014: 1.9 - 2015: 0.0 - 2016: 0.0 ### Public Information Notice (PIN) — Executive Board Conclusions and Key Macroeconomic Indicators - Executive Board concluded the 2011 Article IV consultation with Papua New Guinea on May 18, 2011. - Background and near-term outlook: - Real GDP growth estimated to have picked up from 5½ percent in 2009 to 7 percent in 2010. - LNG project described as a "190 percent of GDP project." - Inflation reached 7.8 percent at end-2010 and was increasingly driven by domestic demand. - Monetary policy: policy interest rate kept at 7 percent since end-2009; short-term rates declined to around 3 percent; nominal effective exchange rate depreciated by more than 7 percent in 2010. - Current account deficit widened to 24 percent of GDP (2010); largely financed by FDI related to the LNG project. - External debt declined to about 11 percent of GDP at end-2010. - Executive Board assessment and recommendations (selected): - Welcome strong economic growth; near-term outlook generally favorable. - Encourage consideration of tighter macroeconomic policies given rising inflationary pressures. - Stress need for appropriately tight fiscal policy during LNG plant construction phase. - Welcome balanced 2011 budget; recommend strict adherence to budget allocations and limit on trust-account spending. - Consider it prudent to save windfall mineral revenues and use part to reduce government debt. - Commend allocation of funds to meet superannuation obligations; call to settle remaining arrears. - Recommend tighter monetary policy stance to address inflationary pressures. - Support greater exchange rate flexibility while preserving competitiveness of the non-mineral sector. - Support measures to reduce excess liquidity (including further increase in cash reserve requirement). - Call on authorities to implement decision to move all new trust accounts to the Bank of Papua New Guinea. - Welcome plan to manage resource revenues through a sovereign wealth fund (SWF); stress adherence to the Santiago Principles and strong fiscal institutions; integrate SWF use into budget and macro framework. - Urge reinvigoration of structural reforms to develop the non-mineral sector and ensure effective use of mineral resources to raise living standards. - Note financial sector remains sound; urge implementation of FSAP recommendations and efforts to improve access to financial services in rural communities. ### Selected Country Indicators (values preserved as presented) - Nominal GDP (2009): US$8 billion - Population (2009): 6.3 million - GDP per capita (2009): US$1,272 - Quota: SDR 131.6 million - Real GDP growth (2007–2011 Est./Proj.): - 2007: 7.2 - 2008: 6.6 - 2009: 5.5 - 2010: 7.0 - 2011: 9.0 - CPI (annual average) (2007–2011): - 2007: 0.9 - 2008: 10.7 - 2009: 6.9 - 2010: 6.0 - 2011: 8.4 - CPI (end-period): - 2007: 3.2 - 2008: 11.2 - 2009: 5.7 - 2010: 7.8 - 2011: 9.5 - Central government operations (percent of GDP): - Revenue and grants (2007–2011): 37.3, 32.6, 27.5, 32.5, 33.4 - Expenditure and net lending (2007–2011): 28.3, 30.1, 37.1, 32.8, 32.4 - Overall balance (including grants) (2007–2011): 9.0, 2.5, -9.6, -0.3, 1.0 - Nonmineral balance (2007–2011): -5.0, -7.4, -13.4, -7.3, -7.7 - Gross public debt (2007–2011): 33.6, 31.7, 32.1, 26.5, 21.9 - Domestic: 16.9, 18.5, 19.2, 15.8, 12.3 - External: 16.6, 13.2, 12.9, 10.7, 9.7 - Money and credit (percent change): - Domestic credit (2007–2011): 5.6, 15.7, 37.3, 4.7, 19.9 - Credit to the private sector (2007–2011): 34.3, 29.5, 15.1, 17.9, 25.0 - Broad money (2007–2011): 27.8, 7.8, 21.3, 10.0, 22.6 - Balance of payments (selected, in millions of U.S. dollars where given): - Exports, f.o.b. (2007–2011): 4,822; 5,817; 4,389; 5,824; 8,298 - Of which, Mineral (2007–2011): 3,673; 4,263; 3,403; 4,636; 6,607 - Imports, c.i.f. (2007–2011): -2,629; -3,140; -2,871; -4,455; -5,480 - Current account (including grants) (2007–2011 in millions): 208; 808; -649; -225; 5,2420 (note: source presents "5-2420" in line; preserve original presentation where ambiguous) - Current account (including grants) (In percent of GDP, 2007–2011): 3.3; 10.1; -8.0; -23.7; -21.2 - Net international reserves (2007–2011): - levels: 2,083; 2,093; 2,426; 2,895; 3,262 - (In months of goods and services imports): 5.4; 5.1; 6.2; 5.0; 4.6 - Gross official international reserves (2007–2011): 2,087; 2,095; 2,623; 3,092; 3,459 - Nominal GDP (millions of kina) (2007–2011): 18,798; 21,594; 22,208; 25,421; 31,162 - Exchange rates and indices: - US$/kina (period-average): 0.337; 0.370; 0.363; 0.375; ... - NEER (2000=100, end-period): 77.7; 95.0; 83.3; 78.3; ... - REER (2000=100, end-period): 98.7; 135.2; 116.1; 113.2; ... ### Authorities' Statements and Policy Actions (selected) - Fiscal: - Authorities forecast a balanced budget for 2011; withdrew the large fiscal impulse of 2009. - Commitment to a sustainable medium-term fiscal strategy (MTFS); emphasis on politically realistic fiscal rules. - Trust fund and off-budget accounts to be better integrated into budget and public financial management frameworks; 2012 Budget process to require agencies to report on trust accounts. - MTDP (2011–2015) to improve development spending quality and planning; harmonization between recurrent and development spending. - Monetary: - Authorities monitor inflation closely via monthly Bank of PNG, Treasury, and Treasurer meetings. - Steps to withdraw liquidity: require new government trust accounts to be opened with BPNG; allow contractors to hold offshore accounts for project imports; consider further increases in the cash reserve requirement. - Bank of PNG stands ready to tighten policy to contain inflation within single-digits; Bank expects inflation to fall short of this threshold in 2011, at 8.5 percent. - Steps to improve inflation data: use 2010 household income and expenditure survey to update CPI basket. - Exchange rate: - Authorities support a floating Kina; BPNG interventions guided by price stability objectives and to provide liquidity. - Authorities mindful of Kina appreciation impacts on rural exporters (85 per cent of population in rural areas) and on non-mineral sector competitiveness. - Sovereign wealth fund (SWF): - Government to establish an offshore SWF with three components: a savings fund, a stabilization fund, and an infrastructure fund. - SWF objectives: promote savings to finance future spending and smooth Government spending, insulate budget/economy from commodity price/output volatility, and provide capital for strategic infrastructure. - Funding sources: dividend and tax revenue from mineral projects and LNG. - SWF to operate in accordance with international standards and subject to legislative protection; comply with the Santiago Principles. - Legislation will require a two-thirds majority vote by Parliament to amend. - Cross-departmental Secretaries Committee (chaired by Secretary of the Treasury and including the Governor of BPNG) overseeing establishment; supported by inter-departmental working group. - Authorities committed to having SWF legislation in place before the 2012 elections. - Structural reforms: - Focus on land development (less than 5 per cent of land mass available in formal market), piloting mechanisms for land leasing, strengthening land administration, computerized titling, streamlining dispute resolution, Land Use Planning Scheme. - Improve law, order and justice: employ additional police and court officers, new police stations and village courts, more reliable payment of judicial officers, backlog reduction via additional judicial positions and community-level early resolution. - Diversify economy: support agriculture, livestock, forestry, fishing, manufacturing, tourism; develop SMEs via microfinancing, training, market access, reducing regulatory barriers. - Target infrastructure via ten 'economic corridors' for physical and social infrastructure development. - Financial sector: - System remains well-capitalised and profitable; limited off-shore borrowing, low loan-to-deposit ratios, high liquidity, low non-performing loans. - Banks have tightened lending standards and reduced exposure to property markets. - Authorities to implement FSSA recommendations, strengthen regulation and supervision, bolster crisis management framework. - National Payments project to strengthen clearance and settlement infrastructure and improve financial inclusiveness. - Financial inclusion initiatives: mobile banking and payments services, financial education, microfinance. *Source: ANNEX V. PAPUA NEW GUINEA STATISTICAL ISSUES (As of April 15, 2011) — IMF staff report materials included in the 2011 Article IV consultation documentation.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11117.pdf_