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### INTRODUCTION — Overview and Staff Appraisal
- PNG has seen solid GDP growth over the past decade driven by sound macroeconomic policies, improved public finances, moderate inflation, and attractive conditions for foreign investors in the mining and petroleum industries.
- The current resource investment boom and prospective resource revenues require management to benefit the whole country, including structural and other policies to assist the required transition in the economy.
- To preserve macroeconomic stability and promote inclusive development it is important to combine steady, affordable growth in government spending with improvements in public financial management, expenditure effectiveness, and structural reforms.
- Staff appraisal: Prudent fiscal and monetary policies have achieved macroeconomic stability; maintaining these achievements necessitates steady, affordable spending growth and better public financial management.
- Key projection highlighted: Annual GDP growth is projected to average around 5 percent after LNG production reaches full capacity.

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- Findings and recent performance:
  - Real GDP estimated to have expanded by about 9 percent in 2011.
  - Headline inflation peaked just below 10 percent in Q2 2011 and eased to 7 percent at year-end 2011.
  - The kina appreciated by 21 percent in nominal effective terms during 2011.
  - Capacity pressures and sector-specific skilled labor shortages increased underlying inflation.
  - Temporary mine closures and dwindling oil production dampened overall output growth in 2011.
- Staff projections:
  - 2012: real GDP projected to grow at 8 percent.
  - 2013: growth likely to weaken to about 4 percent as LNG construction winds down and maturing mines slow.
  - 2014: LNG production expected to start.
  - 2015: LNG production expected to reach full capacity, raising real GDP by about 20 percent when full capacity is reached; GNI will rise by less because of dividend outflows.
  - Thereafter, annual GDP growth projected to average around 5 percent.
- Risks to outlook:
  - Downside: intensification of the European debt crisis; lower commodity prices reducing government revenue; tighter financing conditions for multinationals deterring FDI; weaker trading-partner activity reducing traditional exports and rural incomes; delays/disruptions to mining sector and the LNG project.
  - Upside: elections could lead to higher-than-planned public spending in 2012; additional mining and LNG projects may be realized in the medium term.
- Authorities’ view: Broad agreement with staff assessment; authorities’ tolerance for inflation is higher than in the pre-LNG construction period.

### PNG LNG PROJECT — Key figures (Box on LNG projects)
- Construction began in 2010; first LNG shipment scheduled for 2014.
- Employment and inputs:
  - More than 14,300 workers employed by the project; PNG nationals account for 60 percent.
  - LNG-related goods imports amounted to US$2 billion in 2011.
  - Mineral sector service and income payments to foreign workers increased by US$3½ billion between 2008 and 2011.
- Financing and ownership:
  - US$15.7 billion construction costs financed by 30 percent equity and 70 percent debt.
  - Government owns a 16.8 percent stake; landowners own 2.8 percent; government also owns 15 percent of Oil Search.
- Production and costs:
  - Annual output of 6.6 million tons fully contracted to buyers from Japan, mainland China and Taiwan POC.
  - Projected production costs: about US$1 billion annually for goods imports and payments to foreign workers.
  - Expected operational life: 30 years.
- Fiscal timing:
  - Fiscal revenues from the LNG project projected to begin in 2018 and peak in 2024.
  - LNG-related government revenues projected to grow to around 10 percent of non-mineral GDP by 2024 as extended depreciation allowances are used up.

### MANAGING ECONOMIC VOLATILITY — Fiscal Policy
- Recent fiscal developments:
  - After a large fiscal deficit in 2009, the budget returned to surplus in 2010.
  - Gross public debt declined to 25 percent of GDP in 2011 from over 70 percent of GDP in 2002.
  - Taking into account superannuation arrears and financing of the government’s LNG equity stake, gross public debt and non-contingent liabilities amounted to 45 percent of GDP in 2011.
  - The LNG project completion guarantee was another 18 percent of GDP.
- Selected public debt and liabilities (percent of GDP, 2011):
  - Gross public debt: 25.2
  - Gross public debt and non-contingent liabilities: 45.8
  - Government assets: 25.9
  - Net public debt: 18.9
  - Contingent liabilities (government completion guarantee for LNG project, memorandum item): 30.3
- Staff fiscal assessment and 2012 projection:
  - Staff projects a fiscal deficit of 2½ percent of GDP for 2012.
  - Government targets a balanced budget; authorities' revenue projections are based on an optimistic commodity price forecast for 2012.
  - One-off administrative expenditures for the 2012 elections amount to 1 percent of GDP.
  - Tax policy measures estimated to cost 0.3 percent of GDP.
- Staff recommendations on 2012 spending:
  - Advise reducing planned spending growth by 1½ percent of GDP in 2012 (e.g., delaying some non-critical infrastructure projects and reducing spending out of trust accounts) to limit inflationary impact.
- Medium-term fiscal strategy (staff-advised elements):
  - Move away from a quasi-balanced budget toward a steady real expenditure path.
  - Reduce planned spending in 2012 and preserve trust account balances for use in later years.
  - Increase real spending per head at a steady rate until 2020; staff assesses increasing real spending per head by about 1½ percent per year is consistent with stabilization of gross public debt and non-contingent liabilities.
  - Allow limited borrowing if revenues are insufficient during 2013–17 without hurting debt sustainability.
  - Revise the planned medium-term expenditure path periodically in future MTFSs in line with updated government revenue estimates.

### MEDIUM-TERM FISCAL OUTLOOK — Select numerical paths (from tables)
- Examples from staff and authority panels (exact figures preserved):
  - Total revenue (millions of Kina): 2011: 899; 2012: 944; 2013: 4310 (table shows two columns/versions).
  - Total expenditure (millions of Kina): 2011: 885; 2012: 6102.
  - Nonmineral overall balance (percent of GDP): -6.6 (2011), -8.0 (2012), -7.1 (2013) in one panel.
  - Overall balance (percent of GDP): 0.5 (2011), -2.5 (2012), -2.0 (2013) in one panel.
  - Trust accounts balance (percent of GDP): 6.0 (2011), 4.4 (2012), 2.0 (2013).
  - Gross public debt (percent of GDP): 25.2 (2011), 23.2 (2012), 21.3 (2013) in one panel.
  - Real per capita spending (Kina): 262 (2011), 278 (2012), 269 (2013) in one panel.

### RESOURCE TAXATION AND FISCAL REVENUES
- Current tax concessions in the resource sector are granted on a case-by-case contract basis.
- Preliminary staff findings: average effective tax take in the resource sector corresponds to the low side of fiscal regimes globally.
- Since the 2003 Oil and Gas Policy regulation, the Additional Profits Tax (APT) has not been payable for oil and gas activities, except for specific arrangements in the gas sector (LNG project). APT is not applicable for the mining sector.
- Significant tax revenues from the LNG project are not expected before 2021–22, largely owing to accelerated depreciation allowances.
- Authorities expressed interest in Fund technical assistance to review the current resource taxation regime.

### SOVEREIGN WEALTH FUND (SWF) — Design and Rules (Box 4)
- Parliament approved the Organic Law on the SWF in late February 2012.
- Law envisages a consolidated pool of two offshore funds: Stabilization Fund (SF) and Development Fund (DF).
- Key design features:
  - A single governance framework.
  - Offshore investment and onshore management.
  - Integration with the fiscal framework and the budget.
  - Accountability and transparency rules based on the Santiago principles.
- SWF contributions and withdrawal rules (as specified by the law):
  - Contributions to the SF include all mineral and petroleum revenues, earnings from investments, and other government contributions.
  - Withdrawals from the SF will go through the budget process and should not exceed the 15-year moving average of mineral and petroleum revenues as a share of non-mining revenues.
  - Annual contributions to the DF will be no less than the guaranteed minimum allocation based on the expected average of the LNG project dividends determined by the parliament, earnings from investments, and other government contributions.
  - Withdrawals from the DF: no clear rule defining withdrawals, except funds are to be made available to support development plans in accordance with an act of parliament.
- Revenue scenarios and “new normal” revenue levels (FAD TA 2011 assumptions):
  - Decline in non-LNG natural resource revenue to 3 percent of non-mineral GDP.
  - LNG revenues projected to average about 3½ percent of non-mineral GDP over 2015−30 in the low revenue scenario.
  - Low revenue scenario yields a ‘new normal’ of about 6½ percent of non-mineral GDP.
  - Higher revenue scenario: new normal could reach 14 percent of non-mineral GDP.
- Staff recommendations:
  - Set withdrawal rules in conjunction with the new MTFS.
  - Clarify integration of the development fund with the budget process and minimize the risk of a “parallel budget.”
  - Consolidate all existing trust accounts with the SWF once established.
  - Note: SWF will not solve all expenditure management problems; expenditures must be better aligned with development priorities.

### MONETARY POLICY, LIQUIDITY, AND EXCHANGE RATE
- BPNG policy actions in 2011:
  - Raised the KFR policy rate by 75 basis points to 7¾ percent.
  - Increased commercial banks’ cash reserve requirements (CRR) by 200 basis points to 6 percent.
  - Issued central bank bills (CBBs) to mop up banking sector liquidity.
- Exchange rate and inflation developments in 2011:
  - The kina appreciated by 21 percent in nominal effective terms throughout 2011.
  - The stronger kina and decline in global food prices in late 2011 dampened import price inflation.
  - Annual headline CPI inflation declined to about 7 percent at the end of the year from near 10 percent in Q2.
- Staff projections and advice:
  - Over the medium term, absent further tightening, inflation projected to remain above the Bank of PNG’s 5 percent reference value.
  - Staff projects inflation at about 7 percent over the medium term given election-year spending and continued LNG construction.
  - Anchor inflation expectations at the Bank of PNG’s 5 percent reference value by continuing a tight policy stance.
  - Short-term tool: raise the CRR for commercial banks to sterilize inflows; less costly than issuing CBBs.
  - Enhance effectiveness of interest rate policy via greater exchange rate flexibility, appropriate combination of CRR and CBBs, and a SWF that reduces liquidity build-up.
  - Maintain coordination between fiscal and monetary policy; holding trust accounts at the Bank of PNG would facilitate liquidity management.

### EXTERNAL POSITION, EXCHANGE RATE ASSESSMENT, AND RESERVES
- Current account and reserves:
  - Current account deficit widened to 36 percent of GDP in 2011.
  - Kina appreciated by 27 percent in real effective terms during 2011.
  - Kina appreciated by 22 percent against the U.S. dollar and 24 percent against the Australian dollar during 2011.
  - Bank of PNG reserves rose by 40 percent to US$ 4.3bn by end-2011.
- External debt and private sector:
  - Private external debt grew to 82 percent of GDP in 2011.
  - Private external debt jumped by 70 percent of GDP since 2008 as LNG partners drew down loans.
- Staff assessments:
  - Current account deficit projected to remain high at 28 percent in 2012 and then fall as LNG construction ends.
  - Mineral balance will turn positive in 2014; LNG production will generate an overall current account surplus thereafter, with increased dividend outflows.
  - Real exchange rate assessed to be on the weak side (modestly undervalued) relative to medium-term fundamentals.
  - Public external debt sustainability assessment improved; baseline PPG external debt indicators stay well below thresholds.
- Authorities’ views:
  - Authorities use more conservative price assumptions than staff and project the current account will remain in deficit due to income outflows.
  - Authorities see low risk of debt distress from declining public external debt ratio and private external debt growth; expect private debt paydown from 2014 and accelerated public debt reduction after 2020 when LNG revenues materialize.

### DEBT SUSTAINABILITY ANALYSIS — Main findings
- Baseline DSA outcomes:
  - PV of public sector debt declines from 24 percent of GDP in 2011 to 11 percent of GDP in 2017 under baseline projections.
  - Domestic public debt paid off in 2020; assets accumulated in a sovereign wealth fund measuring 29 percent of GDP by 2032.
  - From 2018 onwards, projected LNG-related revenues enter the budget without commensurate spending increases, resulting in long-term surpluses of about 4 percent of GDP.
- Stress tests:
  - Public external debt sustainability maintained under standard stress tests.
  - Unstable debt dynamics only generated under scenarios combining a very poor fiscal policy response to a substantial terms of trade shock and conservative post-2013 export price estimates; PV of PPG external debt breaches 40 percent of GDP only in 2018 under that combined adverse scenario.
  - Low-probability, high-impact scenario: cancellation of the LNG project would derail debt reduction if current expenditure plans are maintained.
- Sensitivity exercise:
  - Keeping the primary fiscal deficit at zero from 2012 through 2032 (instead of moving into large surpluses) would result in PV of public debt at 13 percent of GDP by 2017, rising to 46 percent of GDP by 2032.
- Non-contingent liabilities and contingent guarantees:
  - Government’s unfunded superannuation liabilities estimated at 7 percent of GDP by end-2011.
  - Government issued a completion guarantee for the LNG project of K 5.4 billion, amounting to 18 percent of GDP in 2011.
  - Realization of these liabilities together with LNG cancellation would place public debt on an upward path; loss of LNG revenues could raise PV of public debt to 33 percent of GDP by 2032 under unchanged expenditure plans.

### KEY RISKS AND POLICY RESPONSES (Box 6 — Selected scenarios and policy guidance)
- Identified principal risks:
  - COMMODITY PRICES FALL — Risk: Medium; Impact: Medium.
    - Policy responses: Allow exchange rate depreciation; use trust account balances or borrow to smooth temporary shocks; cut medium-term expenditure if permanent.
  - NEW MINERAL PROJECTS / INVESTMENT BOOM (Dutch disease) — Risk: High; Impact: High.
    - Policy responses: Address Dutch disease via rural infrastructure support; sequence projects to avoid capacity constraints; avoid excessive tax concessions; apply APT; save revenue in SWF; raise CRR during construction.
  - LNG DELAYS / COSTS INCREASE — Risk: High; Impact: Low (LNG costs increase listed Risk: High, Impact: Low).
    - Policy responses: Monitor private debt and amortization schedules; prevent over-heating; fund cost increases under US$150m from 2012 budget funds or issue debt if costs rise more.
  - LNG PROJECT FAILS — Risk: Low; Impact: High.
    - Policy response: Curtail expenditure plans sharply; recommend fiscal consolidation.
- Policy priorities across scenarios:
  - Enhance safeguards against excessive spending, especially around elections.
  - Allow exchange rate flexibility to aid adjustment.
  - Use trust account balances or borrowing to smooth temporary revenue shortfalls.
  - Strengthen resource taxation and application of Additional Profits Tax to mining; avoid excessive concessions.
  - Save part of resource revenues in SWF; set withdrawal rules consistent with MTFS.
  - Maintain monetary tightness (raise CRR) during construction-driven inflows; resist monetary accommodation of fiscal largesse.

### FINANCIAL SECTOR, COMPETITION, AND STATISTICS
- Competition and SOEs:
  - More competition would benefit consumers and raise efficiency.
  - Authorities encouraged to strengthen enforcement of competitive behavior, replace existing monopolies, and proceed with SOE reforms.
  - Introduction of exclusive production rights and import protection for rice would hurt consumers.
- Financial sector health and supervision:
  - Financial sector remains sound; banks have high capital adequacy ratios and should be resilient to Euro area contagion.
  - Banks need to maintain appropriate lending standards and further reduce exposure to the real estate sector.
  - Financial supervision quality is high; authorities should implement remaining 2011 FSAP recommendations.
- Macroeconomic data and surveillance:
  - Urgent need to tackle structural deficiencies in provision of national statistics.
  - Gaps in national accounts, fiscal accounts, and balance of payments complicate policy-making and Fund surveillance; immediate reform and strengthening of agencies required.
- Selected financial and macro indicators (exact figures preserved where cited):
  - Real GDP growth (2012 Est.): 7.7 (percent).
  - Nonmineral growth (2012 Est.): 7.2 (percent).
  - CPI (annual average) 2012 Est.: 6.8 (percent); CPI (end-period) 2012 Est.: 6.8 (percent).
  - Nominal GDP (2010): US$10 billion.
  - Population (2010): 6.5 million.
  - GDP per capita (2010): US$1,521.
  - Total revenue and grants (2012 Est.): 27.5 (percent of GDP).
  - Expenditure and net lending (2012 Est.): 30.0 (percent of GDP).
  - Overall balance (including grants) (2012 Est.): -2.5 (percent of GDP).
  - Nonmineral balance (2012 Est.): -8.0 (percent of GDP).
  - Gross public debt (2012 Est.): 23.2 (percent of GDP): Domestic: 13.5; External: 9.7.
  - Exports, f.o.b. (2012 Est.): 7,788 (millions of U.S. dollars); Mineral exports: 5,968; Nonmineral exports: 1,819.
  - Imports, c.i.f. (2012 Est.): -6,463 (millions of U.S. dollars).
  - Current account (including grants) (2012 Est.): -4,374 (millions of U.S. dollars) = -28.4 (percent of GDP).
  - Gross official reserves (end-year, 2012 Est.): 4,296 (millions of U.S. dollars); months of goods and services imports: 4.7; months of non-mining imports: 13.1.
  - Net official reserves (medium-term scenario) projected: 6,315 (millions of U.S. dollars) by 2015; 10,548 (millions of U.S. dollars) by 2017.
  - Real GDP projections (selected): 2013 Proj. 4.0 (percent); 2014 Proj. 7.7 (percent); 2015 Proj. 20.0 (percent).
  - Nominal GDP projections (millions of U.S. dollars): 2015 Proj. 25,046; 2016 Proj. 26,138; 2017 Proj. 27,152.
  - Assumed commodity prices (April 2012 WEO): Gold (U.S. dollars per ounce) 2012: 1,569; 2013: 1,711; 2014: 1,731; Copper (U.S. dollars per ton) 2012: 8,823; Oil (U.S. dollars per barrel) 2012: 104; 2013: 115.
- Statistical issues and metadata gaps:
  - NSO lacks sufficient staff and computer training; CPI weights are thirty-five years old; national accounts rebasing and source-data weaknesses persist.
  - Government finance statistics have insufficient coverage; few records on the use of trust accounts.
  - Balance of payments financial account data are weak, especially private external debt and FDI.
  - PNG participates in the GDDS since February 2012.
  - Table of common indicators shows latest observations: Exchange Rates (03/30/12), International Reserve Assets (01/31/12), GDP/GNP latest observation: 2009.

### AUTHORITIES’ RESPONSE AND ACTIONS (selected)
- Monetary and exchange rate policy:
  - BPNG increased policy rate twice to 7.75 percent and increased CRR twice by 200 basis points to 6 percent; issued CBBs.
  - Nominal effective exchange rate appreciated by 21 percent.
- Fiscal policy and trust accounts:
  - Authorities achieved a small budget surplus and report spending outside the budget in line with MTFS thresholds.
  - Superannuation arrears outstanding at about K2 billion not yet fully funded.
  - Little progress in moving trust accounts to BPNG; authorities plan to develop a finance instruction to guide use of DSIP trust accounts.
- SWF:
  - Authorities proposed a draft organic SWF law with offshore investments, full integration with fiscal and budget framework, and commitments to transparency and good governance in line with international best practices.
- Financial sector actions and BPNG SDP 2012-2015:
  - Plans to support secondary market development, strengthen supervision, create a financial stability analysis unit, and introduce new open market operation measures.
  - Authorities plan to inject 130 million Kina to the National Development Bank and provide tax incentives for banks to expand regional branches.

### EXECUTIVE BOARD HIGHLIGHTS (Public Information Notice No. 12/53, June 1, 2012)
- Commendations: Authorities praised for achieving macroeconomic stability and sustainable fiscal position.
- Key Board recommendations (selected):
  - Combine steady, affordable growth in government spending with improved public financial management.
  - Further monetary tightening likely needed to anchor inflation expectations at BPNG’s 5 percent reference value.
  - Reduce excess liquidity by raising banks’ cash reserve requirements and limiting reserve accumulation.
  - Greater exchange rate flexibility recommended.
  - Strengthen resource sector revenue collection, streamline tax concessions, and apply APT to mining activities.
  - Establish SWF with withdrawal rules set in accordance with MTFS and consolidate trust accounts.
  - Urgently tackle structural deficiencies in national statistics.

*Source: IMF staff report excerpt — INTRODUCTION and selected sections from "2012 ARTICLE IV REPORT PAPUA NEW GUINEA" (_cr12126, excerpt).*

### INTRODUCTION  __________________________________________________________________________________  4

### INTRODUCTION

### Overview
- PNG has seen solid GDP growth over the past decade driven by sound macroeconomic policies, improved public finances, moderate inflation, and attractive conditions for foreign investors in the mining and petroleum industries.
- The current resource investment boom and prospective resource revenues require management to benefit the whole country, including structural and other policies to assist the required transition in the economy.
- To preserve macroeconomic stability and promote inclusive development it is important to combine steady, affordable growth in government spending with improvements in public financial management, expenditure effectiveness, and structural reforms.

### Staff appraisal (introductory)
- Prudent fiscal and monetary policies have achieved macroeconomic stability; maintaining these achievements necessitates steady, affordable spending growth and better public financial management.

### Key projection highlighted
- Annual GDP growth is projected to average around 5 percent after LNG production reaches full capacity.

---

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK

Findings and recent performance
- Real GDP is estimated to have expanded by about 9 percent in 2011.
- Headline inflation peaked just below 10 percent in the second quarter of 2011 and eased to 7 percent at year-end 2011.
- The kina appreciated by 21 percent in nominal effective terms during 2011.
- Capacity pressures and sector-specific skilled labor shortages have increased underlying inflation.
- Temporary mine closures (natural disasters) and dwindling oil production dampened overall output growth in 2011.

Staff projections
- 2012: real GDP projected to grow at 8 percent.
- 2013: growth likely to weaken to about 4 percent as LNG construction winds down and maturing mines slow.
- 2014: LNG production expected to start.
- 2015: LNG production expected to reach full capacity, raising real GDP by about 20 percent when full capacity is reached; GNI will rise by less because of dividend outflows.
- Thereafter, annual GDP growth projected to average around 5 percent.

Risks to outlook
- Downside: intensification of the European debt crisis, lower commodity prices reducing government revenue, tighter financing conditions for multinationals deterring FDI, weaker trading-partner activity reducing traditional exports and rural incomes, delays/disruptions to mining sector and the LNG project.
- Upside: elections could lead to higher-than-planned public spending in 2012; additional mining and LNG projects may be realized in the medium term.

Authorities’ view
- Authorities broadly agreed with staff’s assessment of the outlook and inflation, noting European debt crisis intensification would hurt growth and that inflation pressures are likely to persist due to capital inflows and heightened activity related to the LNG project; authorities’ tolerance for inflation is higher than in the pre-LNG construction period.

Box on LNG projects (key figures)
- PNG LNG Project construction began in 2010; first LNG shipment scheduled for 2014.
- More than 14,300 workers employed by the project; PNG nationals account for 60 percent.
- LNG-related goods imports amounted to US$2 billion in 2011.
- Mineral sector service and income payments to foreign workers increased by US$3½ billion between 2008 and 2011.
- US$15.7 billion construction costs financed by 30 percent equity and 70 percent debt; government owns a 16.8 percent stake; landowners own 2.8 percent; government also owns 15 percent of Oil Search.
- Production: annual output of 6.6 million tons fully contracted to buyers from Japan, mainland China and Taiwan POC.
- Projected production costs: about US$1 billion annually for goods imports and payments to foreign workers.
- Expected operational life: 30 years.
- Fiscal revenues from the LNG project projected to begin in 2018 and peak in 2024; LNG-related government revenues projected to grow to around 10 percent of non-mineral GDP by 2024 as extended depreciation allowances are used up.

---

### MANAGING ECONOMIC VOLATILITY — A. Fiscal Policy

Recent fiscal developments
- After a large fiscal deficit in 2009, the budget returned to surplus in 2010 due to higher-than-expected commodity prices and greater spending discipline.
- Gross public debt declined to 25 percent of GDP in 2011 from over 70 percent of GDP in 2002.
- Taking into account superannuation arrears and financing of the government’s LNG equity stake, gross public debt and non-contingent liabilities amounted to 45 percent of GDP in 2011.
- The LNG project completion guarantee was another 18 percent of GDP.

Selected public debt and liabilities (percent of GDP as presented)
- Gross public debt: 25.2 (2011)
- Gross public debt and non-contingent liabilities: 45.8 (2011)
- Government assets: 25.9 (2011)
- Net public debt: 18.9 (2011)
- Contingent liabilities (government completion guarantee for LNG project): 30.3 (memorandum item for 2011)

Staff fiscal assessment and 2012 projection
- Staff projects a fiscal deficit of 2½ percent of GDP for 2012.
- Government targets a balanced budget; authorities' revenue projections are based on an optimistic commodity price forecast for 2012.
- Authorities do not include net withdrawals from trust accounts in their calculation of fiscal deficits.
- One-off administrative expenditures for the 2012 elections amount to 1 percent of GDP.
- Tax policy measures estimated to cost 0.3 percent of GDP.

Staff recommendations on 2012 spending
- Recognized election-related spending needs but advised a reduction in planned spending growth by 1½ percent of GDP in 2012 (e.g., by delaying some non-critical infrastructure projects and reducing spending out of trust accounts) to limit inflationary impact.

Fiscal framework adaptation for resource revenues
- The increasing importance of resource revenues warrants adaptation of the fiscal framework.
- The 2008–2012 Medium-Term Fiscal Strategy (MTFS) helped reduce public debt but was less successful in insulating public spending from commodity price volatility; real public spending per head has fluctuated substantially.
- Authorities plan to introduce medium-term budgeting and a sovereign wealth fund (SWF); the 2013–17 MTFS is under discussion and should outline guiding principles for future spending.

Staff-advised medium-term fiscal strategy (elements)
- Move away from a quasi-balanced budget approach toward a steady real expenditure path.
- Key elements recommended:
  - Reduce planned spending in 2012 and preserve trust account balances for use in later years.
  - Increase real spending per head at a steady rate until 2020 to provide stable financing for essential services and development targets and to help smooth domestic consumption. Staff assesses that increasing real spending per head by about 1½ percent per year is consistent with stabilization of gross public debt and non-contingent liabilities.
  - Allow limited borrowing if revenues are insufficient during 2013–17 without hurting debt sustainability.
  - Revise the planned medium-term expenditure path periodically in future MTFSs in line with updated government revenue estimates, particularly when there is more certainty on LNG revenues.

Medium-term fiscal outlook (select numerical paths from tables)
- Baseline and alternative scenarios present detailed projections (examples):
  - Total revenue (in millions of Kina) for 2011: 899; 2012: 944; 2013: 4310 (table shows two columns/versions—staff and authorities—both reproduced in source).
  - Total expenditure (in millions of Kina) for 2011: 885; 2012: 6102; other years shown in table.
  - Nonmineral overall balance (percent of GDP) examples: -6.6 (2011), -8.0 (2012), -7.1 (2013) in one panel; alternative panel shows -6.6 (2011), -6.7 (2012), -7.2 (2013).
  - Overall balance (in percent of GDP) examples: 0.5 (2011), -2.5 (2012), -2.0 (2013) in one panel; alternative panel shows 0.5 (2011), -1.2 (2012), -2.1 (2013).
  - Trust accounts balance (in percent of GDP) examples: 6.0 (2011), 4.4 (2012), 2.0 (2013) in one panel.
  - Gross public debt (in percent of GDP) examples: 25.2 (2011), 23.2 (2012), 21.3 (2013) in one panel; alternative scenario shows 26.6 (2011), 24.2 (2012), 22.6 (2013).
  - Real per capita spending (in Kina) examples: 262 (2011), 278 (2012), 269 (2013) in one panel; alternative shows 262 (2011), 266 (2012), 270 (2013).

Scenario analysis (staff guidance)
- Staff advised a medium-term strategy that targets a smooth path for real public spending growth commensurate with medium-term revenue projections rather than matching spending cuts to temporary revenue slowdowns.
- Staff assesses that a steady increase of real per capita spending by about 1½ percent per year is consistent with stabilization of gross public debt and non-contingent liabilities.

---

_Source: IMF staff report excerpt: INTRODUCTION and selected sections from "2012 ARTICLE IV REPORT PAPUA NEW GUINEA"._

### 13.      The authorities could generate

### 13.      The authorities could generate

### Resource taxation and fiscal revenues
- Current tax concessions in the resource sector are granted on a case-by-case contract basis.
- Preliminary staff findings suggest the average effective tax take in the resource sector corresponds to the low side of fiscal regimes in the world.
- Since the issuance of the 2003 Oil and Gas Policy regulation, the Additional Profits Tax (APT) has not been payable for oil and gas activities, except for specific arrangements made for activities in the gas sector, such as the LNG project. Similarly, the APT is not applicable for the mining sector.
- Significant tax revenues from the LNG project are not expected before 2021–22, largely owing to accelerated depreciation allowances.
- Authorities expressed interest in Fund technical assistance to review the current resource taxation regime and, if necessary, present reform proposals.

### Authorities’ views on commodity assumptions and fiscal planning
- Authorities noted that the commodity price assumptions were based on consensus forecasts.
- Past use of conservative assumptions led to revenue under-projections and supplementary budget submissions in each of the last four years, prompting parliamentary questions about budget projection accuracy.
- Authorities broadly agreed with staff advice to move toward steady and affordable real expenditure increases, but cautioned that containing public spending in an election year is a challenge (referring to 2012).
- Authorities will monitor implementation of public investment projects and consider ways to control expenditure, including oversight and careful management of trust accounts funds, including district improvement funds.
- Authorities believe moving toward more sustainable and effective medium-term budgeting will enable better planning and smoothing of public spending.

### Monetary policy: recent actions and outlook
- Bank of PNG policy actions in 2011:
  - Raised the KFR policy rate by 75 basis points to 7¾ percent.
  - Increased commercial banks’ cash reserve requirements (CRR) by 200 basis points to 6 percent.
  - Issued central bank bills (CBBs) to mop up banking sector liquidity.
- Exchange rate and inflation developments in 2011:
  - The kina appreciated by 21 percent in nominal effective terms throughout 2011.
  - The stronger kina, combined with the decline in global food prices in late 2011, dampened import price inflation.
  - Annual headline CPI inflation declined to about 7 percent at the end of the year from near 10 percent in the second quarter.
- Staff projections and advice:
  - Over the medium term, in the absence of further tightening, inflation is projected to remain above the Bank of PNG’s 5 percent reference value.
  - During 2012, election-year government spending and continued LNG construction will generate inflation pressures; staff projects that entrenched expectations will keep inflation at about 7 percent over the medium term.
  - Inflation expectations should be anchored at the Bank of PNG’s reference value; anchoring would reduce the cost of fighting future inflationary shocks and could be achieved by continuing the Bank of PNG’s tight policy stance.
  - In the short term, the authorities can raise the CRR for commercial banks; this measure is less costly for taxpayers than issuance of CBBs and has been used elsewhere to sterilize capital inflow-driven liquidity growth.
  - Measures to enhance the effectiveness of interest rate-based monetary policy include: a more flexible exchange rate; an appropriate combination of quantitative tools including the CRR and CBBs to mop up domestic liquidity; and a SWF that reduces liquidity build-up in the banking system to help achieve an effective interest-rate transmission channel over the medium term.
  - Greater exchange rate flexibility would provide a buffer against external and domestic demand shocks, although some intervention to limit short-term volatility may be appropriate.
  - Coordination between fiscal and monetary policy is crucial: maintaining expenditure discipline in 2012 would reduce excess demand, and holding trust accounts at the Bank of PNG instead of commercial banks, and rationalizing government working accounts in banks, would facilitate liquidity management.

### Authorities’ views on monetary policy and liquidity management
- The Bank of PNG agreed that inflation is likely to remain above the 5 percent reference value, but is concerned that allowing the exchange rate to appreciate further would hurt traditional exporters.
- The Bank of PNG sees a risk of elements of Dutch disease developing due to LNG construction-driven exchange rate appreciation potentially hurting the rural sector.
- The Bank of PNG is comfortable with an inflation rate below 10 percent at a time of high economic growth.
- The Bank of PNG projects banking sector liquidity to remain elevated as foreign exchange inflows continue from LNG construction and commodity tax revenues accruing to the government.
- Authorities have instructed commercial banks to transfer all trust accounts to the Bank of PNG, but transferring funds from committed projects’ accounts at commercial banks to the central bank is difficult.
- To improve coordination, authorities are developing a finance instruction to guide the use and management of trust accounts, particularly working accounts; these procedural guidelines are short-term solutions, and trust accounts will cease to exist once the SWF is established.

### Exchange rate assessment and external stability
- Current account and reserves:
  - The current account deficit widened to 36 percent of GDP in 2011.
  - The rise in imports of LNG construction materials worsened the trade balance; compensation of foreign workers led to large negative balances for services and income.
  - The kina appreciated by 27 percent in real effective terms during 2011.
  - The kina appreciated by 22 percent against the U.S. dollar and 24 percent against the Australian dollar during 2011.
  - Bank of PNG reserves rose by 40 percent to US$ 4.3bn by end-2011.
- External debt and private sector:
  - Private external debt grew to 82 percent of GDP in 2011.
  - As LNG project partners and subcontractors drew down loans to finance construction inputs, the level of private external debt has jumped by 70 percent of GDP since 2008.
- Staff projections and assessments:
  - The current account deficit is projected to remain high at 28 percent in 2012 and then fall as the LNG construction phase comes to an end.
  - The mineral balance will turn positive in 2014, and LNG production will generate an overall current account surplus from the following year, although dividend outflows will also increase.
  - The real exchange rate is assessed to be on the weak side relative to medium-term fundamentals; staff’s judgment of a modest undervaluation is based on the assessment that the increase in LNG-related exports will dominate the reversal in construction-related capital inflows over the medium term.
  - The exchange rate assessment is sensitive to commodity price assumptions and fiscal policy; the current exchange rate is even more undervalued relative to a medium-term scenario where the authorities implement staff’s recommended expenditure profile.
  - Staff’s public external debt sustainability assessment for PNG has improved due to progress in developing fiscal institutions and public debt reduction over the past decade.
  - Regarding the private sector, the recent increase in external debt is related to operations by large multi-national companies; staff projects that it will be repaid steadily once LNG production begins in 2014.
- Authorities’ views on external outlook:
  - Authorities agreed the current account deficit will remain substantial until LNG construction is completed.
  - For the medium term, authorities use more conservative price assumptions than staff and project that the current account will remain in deficit owing to substantial income outflows in the form of mineral company dividends.
  - Authorities agreed there is low risk of debt distress from the declining ratio of public external debt to GDP or from the recent growth in private external debt. LNG project completion should result in paydown of private sector debt from 2014, and it should accelerate public debt reduction after 2020, when substantial LNG revenues materialize.

### Managing resource revenue and the Sovereign Wealth Fund (SWF)
- The establishment of the SWF will help manage resource revenue volatility.
- Implementation details are still to be determined, particularly the relationship between the SWF withdrawal rules and the new MTFS.
- The institutional framework for the SWF is guided by international best practice adapted to the PNG context:
  - a single governance framework;
  - offshore investment and onshore management;
  - integration with the fiscal framework and the budget;
  - accountability and transparency rules based on the Santiago principles.

*International Monetary Fund — 2012 Article IV Report: Papua New Guinea (excerpt).*

### Box 4. Papua New Guinea: Medium-Term Fiscal Strategies and the Sovereign

### Box 4. Papua New Guinea: Medium-Term Fiscal Strategies and the Sovereign Wealth Fund

### Medium-Term Fiscal Strategies (MTFS) — past and objectives
- The 2002−07 MTFS was a stabilization and structural reform program. Its balanced budget target was achieved in 2004, three years ahead of schedule, but progress on structural reforms was slow.
- The 2008−12 MTFS added rules to limit the fiscal impact of volatility in resource revenue:
  - Resource revenue above a ‘normal’ level (4 percent of GDP) was required to be used for infrastructure development (70 percent) and debt reduction (30 percent).
  - Annual spending out of trust accounts was capped at 4 percent of GDP.
  - Together these rules imposed an 8 percent of GDP limit on the non-mineral budget deficit.
- The MTFS objective: smooth government expenditure and decouple it from short-term volatility of natural resource revenues.

### Sovereign Wealth Fund (SWF) — establishment and design
- Parliament approved the Organic Law on the SWF in late February 2012.
- The law envisages a consolidated pool of two offshore funds:
  - Stabilization Fund (SF)
  - Development Fund (DF)
- Key design features tied to international best practice and domestic considerations:
  - A single governance framework to manage the two funds.
  - Offshore investment and onshore management.
  - Integration with the fiscal framework and the budget.
  - Accountability and transparency rules based on the Santiago principles.
- Implementation details remain to be determined, in particular the relationship between the SWF withdrawal rules and the new MTFS.

### SWF contributions and withdrawal rules (as specified by the law)
- Contributions to the SF will include:
  - All mineral and petroleum revenues,
  - Earnings from its investments,
  - Other government contributions.
- Withdrawals from the SF:
  - Will go through the budget process.
  - Should not exceed the 15-year moving average of mineral and petroleum revenues as a share of non-mining revenues.
- Annual contributions to the DF will be no less than the guaranteed minimum allocation based on the expected average of the LNG project dividends determined by the parliament, earnings from its investments, and other government contributions.
- Withdrawals from the DF:
  - No clear rule defining withdrawals, except that funds are to be made available to support the development plans of the government in accordance with an act of parliament.

### Revenue scenarios and implied “new normal” revenue levels
- Based on the SF withdrawal rule, the drawdown of funds would be equal to about 6 percent of non˗mineral GDP in 2011, largely corresponding to the lower revenue scenario in the 2011 FAD TA report.
- The 2011 FAD TA report assumptions:
  - Decline in non-LNG natural resource revenue to a long-run level of 3 percent of non-mineral GDP.
  - On top of this, LNG revenue are projected to average about 3½ percent of non-mineral GDP over 2015−30 in the low revenue scenario.
  - Low revenue scenario yields a ‘new normal’ of about 6½ percent of non-mineral GDP.
  - In a higher revenue scenario the new normal could reach 14 percent of non-mineral GDP.

### Staff views and policy recommendations
- Staff support setting up an SWF and recommend:
  - Setting withdrawal rules in conjunction with the new MTFS.
  - Clarifying integration of the development fund with the budget process and minimizing the risk of creating a “parallel budget.”
  - Once the SWF is established, consolidating all existing trust accounts with the fund.
- Additional staff observations:
  - Medium-term resource revenues may not be substantially higher than in the recent past.
  - The SWF will not solve all long-standing problems of expenditure management; expenditures need to be better aligned with development priorities.
  - The SWF provides a strong framework for insulating public expenditure from volatility in resource revenue, and for improving transparency, accountability, and good governance.
  - Withdrawal rules should be set in accordance with the new Medium-Term Fiscal Strategy.

### Authorities’ views (on SWF and withdrawals)
- The authorities emphasized that the SWF should address economic and social development in line with the development goals of the government.
- They noted that withdrawals would finance specific projects instead of providing cash hand-outs.

*Source: Box 4. Papua New Guinea: Medium-Term Fiscal Strategies and the Sovereign Wealth Fund — _cr12126 (excerpt)_*

### 56.      More competition would benefit

### 56.      More competition would benefit

### Competition, consumers, and SOE reform
- More competition would benefit consumers and raise efficiency.
- Authorities are encouraged to strengthen enforcement of competitive behavior and replace existing monopolies.
- The introduction of exclusive production rights and import protection for rice would go in the wrong direction and hurt consumers.
- The authorities should proceed with SOE reforms.

### External sector assessment
- The current account deficit is largely financed by FDI and is not expected to threaten external stability.
- The exchange rate is estimated to be modestly undervalued.
- Reserves are adequate to address potential balance-of-payments needs.

### Financial sector health and supervision
- The financial sector remains sound.
- Banks have high capital adequacy ratios and should be resilient to contagion from the Euro area.
- Banks need to maintain appropriate lending standards and further reduce exposure to the real estate sector.
- Financial supervision has been of high quality, and the planned enhanced cooperation among supervisors is welcome.
- The authorities should implement the remaining 2011 FSAP recommendations.

### Macroeconomic data and surveillance
- The authorities need to urgently tackle structural deficiencies in the provision of national statistics.
- Gaps in macroeconomic data provision complicate PNG’s public policy-making and Fund surveillance.
- This requires immediate reform and strengthening of the relevant government agencies.

### Article IV timing
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Box 6. Papua New Guinea—Key Risks and Policy Responses

- COMMODITY PRICES FALL
  - REAL ECONOMY
    - Real commodity output is largely inelastic
    - If a permanent price decline in minerals, resource sector investment falls
    - Lower inflows reduce aggregate demand and inflation
    - POLICY: Cushion blow to export-sensitive sectors
  - EXTERNAL SECTOR
    - 10 percent decline hits export revenues by similar percentage
    - If a price decline for minerals, foreign ownership of mines cushions shock as dividend outflows fall by half of lost profits
    - If a permanent price decline in minerals, FDI inflows dry up
    - POLICY: Allow exchange rate to depreciate and dampen Kina impact of lower US dollar revenues
  - GOVERNMENT SECTOR
    - Commodity tax revenues and dividends decline, especially if copper price falls (pre-2014) or LNG prices fall (post-2014)
    - LNG price decline increases government liability on IPIC bond
    - POLICY: Use trust account balances or borrow to smooth expenditure if price decline is temporary, cut medium-term expenditure if permanent
  - MONETARY AND FINANCIAL SECTOR
    - Lower inflows reduce excess liquidity in banking sector
    - If a permanent price decline in minerals, less resource sector workers come to PNG and property prices fall
    - If very large shock, slowdown leads to higher NPLs
    - POLICY: Adjust CRR according to inflation outlook

- EXTERNAL SECTOR (LNG delays / import effects)
  - EXTERNAL SECTOR
    - First shipment of LNG may be delayed beyond 2014
    - Higher spending on imported goods and factor services
    - Projected US$2 bn slowdown in imports in 2015 not realized
    - Delayed achievement of current account surplus
    - More debt disbursement inflows but IPIC FDI threatened
    - POLICY: Monitor private debt and amortization schedules
  - REAL ECONOMY
    - Higher construction activity and capacity constraints if capital costs increase
    - Higher spending by landowners if they receive extra funds from government to smooth production
    - POLICY: Prevent over-heating
  - GOVERNMENT SECTOR
    - Government must pay IPBC’s and landowners’ 6% cost share
    - More capital depreciation after 2014, tax revenues rise slower
    - Additional landowner payments may be necessary
    - If LNG output delayed, government liability to IPIC may rise
    - POLICY: Fund cost increases under US$ 150m from funds provided in 2012 budget, issue debt if costs rise more
  - MONETARY AND FINANCIAL SECTOR
    - Higher inflows and payments to landowners exacerbate excess liquidity in banking sector
    - Inflation may increase as capacity constraints reached
    - POLICY: Adjust CRR according to inflation outlook

- NEW MINERAL PROJECTS (investment boom and Dutch disease)
  - REAL ECONOMY
    - Investment boom in resource sector
    - Landowner unrest, compensation required
    - Traditional exporters crowded out
    - Good experience with government spurs yet more investment
    - POLICY: Address Dutch disease by infrastructure support for rural areas, sequence projects to avoid capacity constraints
  - EXTERNAL SECTOR
    - Current account surplus not realized in 2015 as imports needed for new construction, FDI surges to finance this
    - When production begins, larger surplus realized
    - Traditional exporters crowded out by Dutch disease
    - POLICY: Allow exchange rate appreciation to stem inflation pressures
  - GOVERNMENT SECTOR
    - IPBC debt issuance needed to fund government equity share
    - Medium term mineral tax revenues and dividends increase
    - Project completion guarantees add to contingent liabilities
    - POLICY: Avoid excessive tax concessions, apply additional profits tax on mineral profits, save some revenue in SWF
  - MONETARY AND FINANCIAL SECTOR
    - Project financing will be financed by FDI, it will not flow through banking sector
    - Higher inflows during construction and production exacerbate excess liquidity, making monetary policy difficult
    - Inflation pressures surge
    - POLICY: Raise CRR during construction period

- COMMODITY PRICES FALL
  - Risk: Medium
  - Impact: Medium

- NEW MINERAL PROJECTS
  - Risk: High
  - Impact: High

- LNG COSTS INCREASE
  - Risk: High
  - Impact: Low

*Papua New Guinea — 2012 Article IV Report*

### Box 6. Papua New Guinea—Key Risks and Policy Responses (Concluded)

### Box 6. Papua New Guinea—Key Risks and Policy Responses (Concluded)

### Government sector risks and policy responses
- Spike in government spending above plans for 2012 elections.
- Pressure on agreements signed by past governments.
- Extreme case: LNG project affected, liabilities realized.
- POLICY: Enhance safeguards against excessive spending.
- Tax revenues slip as economy slows.
- SOEs’ property investments may impose contingent liabilities on government.
- POLICY: Borrow to smooth temporary fall in revenues.
- Completion guarantee of US$2.5 billion must be paid.
- Oil Search shares fall in value, government must pay shortfall owed to Abu Dhabi’s IPIC in 2014, maybe through new debt.
- Medium-term mineral revenues fall from 10 to 3 percent of non-mineral GDP, debt sustainability at risk.
- POLICY: Borrow temporarily, slash medium-term spending.

### Real economy risks and policy responses
- Consumers, firms suffer capital loss on homes and savings.
- Businesses with mortgage liabilities may have negative equity.
- Economy slows down as consumption, residential investment fall, saving rises.
- POLICY: Limit fallout to other sectors.
- No LNG production, no GDP jump of 20 percent in 2015.
- Sunk costs of the project are only partially recovered as equipment is dismantled and re-exported.
- Sectors servicing LNG project and workers slow down.
- Future LNG and mineral projects put into doubt.
- POLICY: Reforms to regain trust of foreign investors.
- Decline in private investment, boost in fiscal spending.
- Business environment hurt by political intrusion, security risks.
- POLICY: Insulate environment for private business, continue structural reform agenda.

### External sector risks and policy responses
- FDI inflows into LNG construction will continue.
- Foreign involvement in housing investment is low.
- Domestic residents and banks may send capital abroad.
- POLICY: Allow capital outflows to push down exchange rate and boost the economy through export sector.
- Projected medium-term current account surpluses disappear.
- Fall in LNG exports partly mitigated by lower imports of goods and factor services.
- FDI from IPIC of US$1.6 bn in 2014 does not materialize.
- Other FDI and debt inflows fall over the medium term.
- POLICY: Allow depreciation to aid non-LNG exporters.
- For moderate spillovers, non-LNG investment slows.
- Extreme case: LNG project inflows and outflows halted, IPIC cancels planned US$1.6 bn FDI into Oil Search in 2014.
- POLICY: Limit impact on FDI, maintain exchange rate flexibility.

### Monetary and financial sector risks and policy responses
- Each 10 percent price drop raises banks’ NPL ratio, and lowers return on assets, by 1-2 percentage points.
- Super-funds suffer decline in return on assets of 1½ points.
- Big banks can absorb 40 percent drop, smaller entities suffer.
- Distressed sales and in the extreme, credit crunch.
- POLICY: Ensure continued capital adequacy and provisioning for bad loans, be ready to provide liquidity to banks.
- No direct hit to banking sector since no loans to PNG LNG.
- Property price plunge hurts banks, superannuation funds and landowner companies.
- Slowdown in real activity and decline in entry of foreign companies reduces demand for loans and increases NPLs.
- POLICY: Lower CRR if banks’ capital plunges.
- Liquidity surges as fiscal largesse transferred through banks.
- Property prices on edge as firms cautious but politicians spend.
- Pressure for politically-driven lending generates higher NPLs.
- POLICY: Resist monetary accommodation of fiscal spending, maintain supervisory standards for bank lending.

### Risk scenarios and assessed risk/impact
- LNG PROJECT FAILS
  - Risk: Low
  - Impact: High
- PROPERTY PRICES CRASH
  - Risk: Medium
  - Impact: Medium
- POLITICAL FIGHTS SPILL OVER
  - Risk: Low
  - Impact: High

### Macro performance highlights (selected figures and trends)
- Real GDP growth: 2012 Est. 7.7 (percent).
- Nonmineral growth: 2012 Est. 7.2 (percent).
- Mineral sector volatility can produce large swings: example cited "no GDP jump of 20 percent in 2015" under LNG failure.
- Commodity Price Index (2010=100) and individual commodity indices show increases supporting terms of trade.
- CPI (annual average) 2012 Est. 6.8 (percent); CPI (end-period) 2012 Est. 6.8 (percent).
- Contribution to CPI inflation includes food, fuel, rent and electricity, transportation, other.

### Fiscal performance and projections (selected figures)
- Nominal GDP (2010): US$10 billion.
- Population (2010): 6.5 million.
- GDP per capita (2010): US$1,521.
- Total revenue and grants (2012 Est.): 27.5 (percent of GDP).
- Expenditure and net lending (2012 Est.): 30.0 (percent of GDP).
- Overall balance (including grants) (2012 Est.): -2.5 (percent of GDP).
- Nonmineral balance (2012 Est.): -8.0 (percent of GDP).
- Gross public debt (2012 Est.): 23.2 (percent of GDP).
  - Domestic: 13.5 (percent of GDP).
  - External: 9.7 (percent of GDP).
- Trust accounts movements show past withdrawals (2009 raiding) and a "small buffer against volatility and shocks."

### Monetary stance (selected figures and trends)
- Policy rate movements: policy rate rose, but Central Bank Bills (CBB) rate did not rise significantly.
- Reserve and liquidity metrics:
  - Central bank bills (in billions of Kina) rose over 2008–2011; sterilization ratio and CRR tracked alongside.
  - Broad money growth in 2012 Est.: 13.3 (percent change, 12-month basis).
  - Private sector credit growth 2012 Est.: 7.5 (percent change, 12-month basis).
- Exchange rate appreciation and falling global food prices helped contain inflation.

### External position (selected figures and projections)
- Exports, f.o.b. (2012 Est.): 7,788 (millions of U.S. dollars).
  - Mineral exports (2012 Est.): 5,968 (millions of U.S. dollars).
  - Nonmineral exports (2012 Est.): 1,819 (millions of U.S. dollars).
- Imports, c.i.f. (2012 Est.): -6,463 (millions of U.S. dollars).
- Current account (including grants) (2012 Est.): -4,374 (millions of U.S. dollars) = -28.4 (percent of GDP).
- Gross official reserves (end-year, 2012 Est.): 4,296 (millions of U.S. dollars).
  - In months of goods and services imports (2012 Est.): 4.7 (months).
  - In months of non-mining imports (2012 Est.): 13.1 (months).
- Net official reserves (medium-term scenario) projected to reach 6,315 (millions of U.S. dollars) by 2015 and 10,548 (millions of U.S. dollars) by 2017.

### Banking sector indicators (selected figures)
- Dominated by three banks; total assets and deposits reported as of August 2011.
- Banks’ profitability: return on assets and return on equity remained high.
- NPLs to Total Loans and Capital adequacy ratio reported as low NPLs and high capital adequacy.
- Provisioning to NPLs remained high.
- Superannuation funds generated a net loss in 2011; ASF Earnings and Kina Securities Index trends shown.

### Medium-term scenario (selected projections and commodity assumptions)
- Real GDP projections:
  - 2013 Proj. 4.0 (percent); 2014 Proj. 7.7 (percent); 2015 Proj. 20.0 (percent).
- Nonmineral growth projected: 2015 Proj. 6.2 (percent).
- CPI (period average) projected 2015 Proj. 6.5 (percent).
- Central government operations (percent of GDP) projections:
  - Total revenue and grants 2015 Proj. 19.2 (percent).
  - Total expenditure 2015 Proj. 18.8 (percent).
  - Overall balance 2015 Proj. 0.3 (percent of GDP).
- Nominal GDP (millions of U.S. dollars) projections: 2015 Proj. 25,046; 2016 Proj. 26,138; 2017 Proj. 27,152.
- Assumed commodity prices (April 2012 WEO projections):
  - Gold (U.S. dollars per ounce): 2012 1,569; 2013 1,711; 2014 1,731; 2015 1,759; 2016 1,789; 2017 1,825; 2018 1,872.
  - Copper (U.S. dollars per ton): 2012 8,823; 2013 8,460; 2014 8,501; 2015 8,436; 2016 8,349; 2017 8,246; 2018 8,150.
  - Oil (U.S. dollars per barrel): 2012 104; 2013 115; 2014 110; 2015 103; 2016 97; 2017 93; 2018 91.

### Key policy recommendations (summarized)
- Enhance safeguards against excessive spending, especially around elections.
- Limit fallout from property price crashes to other sectors.
- Allow capital outflows to facilitate exchange rate adjustment and support exporters.
- Borrow temporarily to smooth revenue shortfalls; slash medium-term spending if contingent liabilities materialize.
- Ensure capital adequacy and provisioning; be ready to provide liquidity to banks.
- Lower CRR if banks’ capital plunges.
- Promote reforms to regain trust of foreign investors and insulate environment for private business.
- Resist monetary accommodation of politically-driven fiscal largesse; maintain supervisory standards for bank lending.
- Maintain exchange rate flexibility to limit impact on FDI and support non-LNG exporters.

*International Monetary Fund — Box 6. Papua New Guinea—Key Risks and Policy Responses (Concluded), from the 2012 Article IV report.*

### APPENDIX I: PAPUA NEW GUINEA—AUTHORITIES’

### APPENDIX I: PAPUA NEW GUINEA—AUTHORITIES’ RESPONSE TO FUND POLICY ADVICE

### Monetary and Exchange Rate Policy
- Fund recommendation: Monetary policy needs to be tightened to contain inflationary pressures and reduce the risk of higher inflation becoming entrenched in expectations.
- Authorities’ actions:
  - The BPNG increased its policy rate twice to 7.75 percent last year.
  - Issued CBBs to mop up liquidity.
  - Cash reserve requirement increased twice by a total of 200 basis points to 6 percent.
  - The nominal effective exchange rate appreciated by 21 percent.

### Fiscal Policy
- Fund recommendation: Tighter fiscal policies during the construction phase of the LNG plant are needed to reduce inflationary pressures.
- Authorities’ actions:
  - A small budget surplus was achieved.
  - Spending outside the budget was in line with the MTFS, and is expected to be under the MTFS threshold of 4 percent of GDP.
- Superannuation obligations:
  - Fund recommendation: The government’s decision to allocate funds to meet its superannuation obligations should be implemented as planned. It should develop a payment schedule for remaining unfunded superannuation liabilities.
  - Authorities’ action: Met current obligations but did not allocate funding for the outstanding arrears prior to 2010, which stands at about K2 billion.
- Trust accounts and financial management:
  - Fund recommendation: The decision to move all new trust accounts to the BPNG should be fully implemented.
  - Authorities’ action: Little progress so far. Authorities plan to further strengthen financial and reporting systems, closely monitor spending from trust accounts, consider ways to exercise expenditure control if required, and plan to develop a finance instruction to guide the use of DSIP trust accounts.
- Sovereign Wealth Fund (SWF):
  - Fund recommendation: The SWF needs to be integrated into the macro framework and supported by other fiscal institutions, such as the MTFS and the Fiscal Responsibility Act; invest its assets offshore; fully integrate withdrawals into the budget process; and ensure transparency, accountability, and good governance by adopting the Santiago Principles.
  - Authorities’ action: Plan to review the current MTFS in 2012 to incorporate new guiding principles governing SWF revenue. Proposed a draft organic SWF law with offshore investments, full integration with the fiscal and budget framework, and transparency, accountability, and good governance in line with international best practices.

### Financial Sector Policy and Regulation
- Fund recommendations and authorities’ responses (selected):
  - Encourage banks to maintain strict lending standards and guard against overexposure to the property sector.
    - Authorities’ action: Lending interest rates have increased somewhat and credit growth has slowed. Financial institutions have reduced their exposure to real estate.
- FSAP-related measures and crisis management (priorities and timing extracted from authorities’ response):
  - Monitor current and emerging NPLs with regard to loan duration and sectoral impacts of macroeconomic changes; Priority: High; Time frame: Medium term.
  - Conduct a thorough analysis of counterparty exposure concentrations, with a full definition of interconnectedness; Priority: Medium; Time frame: Short term.
  - Conduct a thorough analysis of collateral and related lending exposures to property loans; Priority: Medium; Time frame: Short term.
  - Develop monitoring systems and conduct stress tests that assume alternative definitions of liquid assets; Priority: High; Time frame: Short term.
  - Ensure that any withdrawal of government deposits from the banking system is done with careful planning and adequate consultation; Priority: High; Time frame: Short and Medium term.
  - Formalize bank liquidity support arrangements with the BPNG, including through repurchase agreements for government securities stock; Priority: High; Time frame: Short term.
  - Centralize data management systems; Priority: Medium; Time frame: Medium Term.
  - Conduct and document a full risk assessment as the basis for the supervisory strategy; Priority: Medium; Time frame: Short term.
  - Publish a full set of prudential standards, starting with risk management, market and liquidity risk, but also including governance, credit, and operational risk. Financial statement reporting also needs further standardization; Priority: High; Time frame: Medium term.
  - Increase the range of administrative sanctions and make compliance with prudential standards compulsory; Priority: High; Time frame: Medium term.
  - Enhance the capacity of the supervisory staff through training, so that the BPNG can move to full risk-based supervision; Priority: High; Time frame: Medium term.
  - Make arrangements for liquidity improvement and contingency planning that reduce the risk profile; Priority: Medium; Time frame: Medium term.
  - Establish a discount window lending program, including repurchase agreements; Priority: High; Time frame: Short term.
    - Note: The BPNG SDP 2012-2015 plans to introduce new open market operation measures.
  - Strengthen BPNG’s crisis preparedness by developing a contingency planning framework, including internal procedures on emergency liquidity assistance; Priority: High; Time frame: Short term.
    - Note: Discount window has been established.
  - Consider the development of a deposit protection scheme; Priority: Low; Time frame: Long term.
    - Note: Currently there is no plan on deposit protection scheme.
  - Estimate the scale of broader public-sector debt obligations, such as borrowing and guarantees; Priority: High; Time frame: Short Term.
    - Authorities’ action: Plan to include debt borrowed by the Independent Public Business Corporation (IPBC) to the government debt to help estimate broader public-sector debt obligations.
  - Issue BPNG guidelines to market participants on sound procedures for repurchase transactions; Priority: High; Time frame: Short Term.
  - Review the regulatory infrastructure, keeping in mind principles to ensure market integrity and price reporting, to allow seamless over-the-counter trading; Priority: Medium; Time frame: Medium Term.
  - Introduce a noncompetitive segment of the auction for smaller investors; Priority: Medium; Time frame: Medium Term.
    - Authorities’ action: BPNG plans to use the TAP facility for trade of securities in small amounts to encourage small investor participation.

- BPNG Strategic Development Plan (SDP) 2012-2015 (selected objectives and actions reported by the authorities):
  - Aim to support development of the secondary market and enhance liaison with market participants.
  - Aim to improve financial system stability by: 1) consolidating and improving staff strength and skills and supervisory methods; 2) maintaining and enhancing a two-way process of effective supervision and compliance with prudential framework; 3) encouraging and requiring financial institutions to strengthen risk management capabilities; 4) developing analysis of financial system stability and resilience of systemically important institutions to enable monitoring.
  - Plan to create a unit for financial stability analysis; stress tests will be conducted to conduct risk assessment on the financial sector.
  - BPNG has standing discount facilities to support banks and other financial institutions with liquidity; currently, major commercial banks have ample liquidity and facilities have not been used.
  - The BPNG SDP 2012-2015 aims to increase focus on regulation and supervision of small institutions for financial inclusion and to reform the payment system and improve related supervision.

### Payment Systems, AML, and Financial Inclusion
- Payment systems:
  - Implement the proposed National Payment System Development Program; Priority: High; Time frame: Medium term.
  - Establish a Payment Systems Department in the BPNG, and exercise oversight of all payment and securities settlement systems; Priority: High; Time frame: Medium term.
  - Develop regulations/guidelines for mobile payments and securities settlements; Priority: Medium; Time frame: Medium term.
  - BPNG SDP 2012-2015 envisages reforming the current payment system, and improving related supervision.
- AML/CFT and supervisory enforcement:
  - Give BPNG responsibility for enforcing financial institutions’ obligations; Priority: High; Time frame: Short term.
    - Note: The FIU is currently under the Police Department. The BPNG has not got enforcing authority, but the FIU will conduct regular meetings with BPNG to get information.
  - Complete the customer due diligence regime (especially with more focus on monitoring accounts); Priority: High; Time frame: Short term.
  - Issue regulations on customer due diligence; Priority: High; Time frame: Short term.
    - Note: The FIU has issued guidelines on customer due diligence under s14 of the Proceeds of Crime Act 2005.
- Financial inclusion:
  - Establish a functional coordination mechanism on financial inclusion, including all the government departments and agencies; Priority: Medium; Time frame: Short term.
  - Set up a national consultative process; Priority: Medium; Time frame: Short term.
  - Commence specific data collection on financial inclusion; Priority: Medium; Time frame: Medium term.
  - Authorities’ actions/plans: Ministry of Finance plans to inject 130 million Kina to the National Development Bank and provide tax incentives for banks to invest in regional branches to improve services in rural areas.

### Insurance Sector
- Measures:
  - Enhance supervisory functions regarding offsite reporting and monitoring and onsite inspections; Priority: High; Time frame: Short term.
  - Develop guidance on governance, risk management, and internal controls; Priority: Medium; Time frame: Medium term.
  - Implement the International Association of Insurance Supervisors’ principles, as appropriate to the PNG setting; Priority: Medium; Time frame: Medium term.
  - Authorities’ actions: BPNG increased onsite inspections on superannuation funds and life insurance companies; BPNG is working with the Office of Insurance Commissioner to strengthen cooperation in general life insurance supervision.

---

### APPENDIX 3: PAPUA NEW GUINEA—DEBT SUSTAINABILITY ANALYSIS

### Background and Recent Debt Developments
- PNG reduced its risk of public debt distress from moderate to low since the 2011 Article IV Consultation, reflecting reduction in public external debt over the past decade and enhanced debt capacity after a World Bank policy and institutional rating upgrade.
- Total public debt declined from 71 to 25 percent of GDP from 2001 to 2011.
- External public debt fell from 50 to 10 percent of GDP during this period.
- Multilateral lenders (World Bank and AsDB) account for about 75 percent of PPG external debt; bilateral creditors account for the bulk of the remainder.
- Private external debt rose sharply in the run-up to LNG construction:
  - Private external debt jumped to an estimated 82 percent of GDP in 2011 from 12 percent of GDP in 2008, driven by medium- and long-term debt draw-downs by the mineral and gas sectors and mainly related to the LNG project.
  - Staff apportioned LNG project financing in line with Esso Highlands’ financing plans: 30 percent equity, 70 percent debt.

### Economic Outlook and DSA Assumptions
- Key drivers through 2015: LNG construction, commodity price developments, and spending associated with the 2012 elections.
- Real GDP growth: increased to 9 percent in 2011, projected at 8 percent in 2012, slowing to 4 percent in 2013.
- Large current account deficits (about 30 percent of GDP) during 2010–12 are mostly financed by FDI and loan drawdowns by the mineral sector.
- Private sector external debt expected to peak at 96 percent of GDP in 2013.
- PNG’s current account is most sensitive to the price of gold; mineral tax revenues derive mostly from copper and oil sectors before 2015.
- From 2015:
  - LNG production will push up real GDP by 20 percent in 2015, and generate a persistent current account surplus.
  - LNG revenues used to pay down the mineral sector’s external debt and provide dividend payments to shareholders abroad and in PNG.
  - Fiscal revenues from LNG are projected to materialize from 2018 and total mineral revenues will reach around 10 percent of non-mineral GDP by 2024 (between the low and moderate revenue scenarios identified in FAD’s technical assistance report for PNG’s sovereign wealth fund).

### External Debt Sustainability Findings
- Baseline scenario:
  - All PPG external debt and debt service indicators stay well below the policy-dependent debt burden thresholds.
  - The 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 40 percent threshold.
  - The PVs of PPG external debt-to-exports and debt-to-revenue ratios are also expected to stay below their applicable thresholds.
  - After 2015, the external debt burden is expected to fall even faster due to the large projected increase in GDP, exports and revenue from LNG production.
- Stress tests:
  - Public external debt sustainability is maintained under all standard stress tests.
  - Unstable debt dynamics are only generated under a staff-constructed scenario with:
    - A very poor fiscal policy response to a substantial terms of trade shock, and
    - Use of the PNG authorities’ conservative estimates for export prices for the post-2013 period, together with an imposed permanent reversal of the WEO-projected 16 percent gas price increase between 2011 and 2012.
  - The imposed gas price decline and authorities’ conservative export price estimates amount to a substantial negative shock to the mineral balance relative to the baseline, growing to 12 percentage points of GDP by 2016 and remaining at that level afterward.
  - Combining the shock with a government decision to borrow extensively abroad to finance baseline levels of real consumption and imports (instead of allowing economic adjustment) can produce unstable public external debt dynamics; even then, the PV of PPG external debt breaches the 40 percent of GDP threshold only in 2018.
  - Until 2015, prices of gold and copper are the most important for external sustainability; thereafter, the LNG price is the dominant factor.
- Low-probability, high-impact scenario:
  - Cancellation of the LNG project would derail progress in debt reduction if current expenditure plans are maintained.

*Source: IMF Staff.*

### 7.      Delays to the LNG project would

### _cr12126 - 7.      Delays to the LNG project would

### Impact on public and private external debt dynamics
- Delays to the LNG project, or a fall in LNG prices, would generate adverse public and private debt dynamics, even if PPG external debt indicators remain within the thresholds.  
- Staff projects that when LNG production begins, private sector external debt will be paid down, falling to 21 percent of GDP by 2024.  
- Delays to the project, or lower LNG prices, would set back the private sector amortization schedule envisaged in the DSA.

### Baseline public debt projections and timeline
- Under staff’s baseline projections:
  - The PV of public sector debt continuously declines from 24 percent of GDP in 2011 to 11 percent of GDP in 2017.  
  - The projected downward trend in public debt is aided by the jump in real GDP owing to full-scale LNG production from 2015.  
  - From 2018 onwards, large projected LNG-related revenues enter the budget without a commensurate increase in government expenditure, resulting in long-term surpluses of about 4 percent of GDP.  
  - Domestic public debt is paid off in 2020 and assets are accumulated in a sovereign wealth fund, which measures 29 percent of GDP by 2032.  
- Under a temporary negative shock to real GDP growth in 2013-14 followed by permanently lower revenues and unchanged expenditures, the PV of public debt to GDP would remain at 11 percent by 2032 (staff note: such a scenario would likely not materialize because the authorities would adjust fiscal policy).

### Sensitivity to fiscal policy and alternative scenario
- Keeping the primary fiscal deficit at zero from 2012 through 2032, instead of moving into large surpluses over the medium term as in the baseline, would result in:
  - PV of public debt at 13 percent of GDP by 2017, and rising to 46 percent of GDP by 2032.  
- Staff characterize this scenario as unrealistic but use it to quantify the sensitivity of the public debt outlook to the LNG revenue projections.

### Non-contingent liabilities, SOEs, and LNG project cancellation risks
- Realization of non-contingent liabilities related to superannuation arrears and SOEs, together with the cancellation of the LNG project, would generate unstable debt dynamics.  
- Specific estimates and assumptions:
  - Government’s unfunded superannuation liabilities are estimated to be 7 percent of GDP by end-2011.  
  - Staff assumes SOEs’ debt-to-GDP ratio is equal to the 2.5 percent of GDP estimated in 2008.  
  - The government has issued a completion guarantee for the LNG project of K 5.4 billion, amounting to 18 percent of GDP in 2011.  
- The public balance sheet would have to absorb the loss if the project is abandoned. Realizations of the above liabilities would not of themselves derail the downward trend in public debt ratios, but the loss of LNG revenues would put public debt on an upward path under current expenditure plans, to a PV of 33 percent of GDP by 2032.

### Conclusion and debt-distress assessment
- Since the 2011 SR, PNG has successfully reduced its risk of public external debt distress from medium to low.  
- The commendable public debt performance is projected to continue under the authorities’ spending plans, indicating sustained reduction in both domestic and external public debt over the medium and long term, even during the 2013–17 period of transitionally low fiscal revenues.  
- For expositional purposes in the report, it is assumed that domestic debt is fully paid down first and after that, assets are accumulated in a sovereign wealth fund.

*Source: _cr12126 - 7.      Delays to the LNG project would*

### 12.      PNG’s debt dynamics remain stable

### 12.      PNG’s debt dynamics remain stable

### Main findings on debt dynamics and stress testing
- PNG’s debt dynamics remain stable under standard stress-testing, and would only become unstable in the aftermath of low probability catastrophic shocks.
- A severe and permanent shock to gold, copper, oil and gas prices, coupled with a loss of fiscal discipline and extensive foreign borrowing to maintain consumption and imports at baseline levels, would generate an unsustainable debt path.
- Realization of non-contingent liabilities related to superannuation arrears and SOEs would delay any progress in debt reduction.
- In the low risk but high impact scenario where the LNG project is cancelled, loss of associated fiscal revenues would ratchet up public debt, assuming that current expenditure plans remain unchanged.
- In the LNG cancellation event, staff would advise that expenditure plans be curbed sharply downward.

### Macroeconomic assumptions underlying the DSA (Box III.1)
- 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.
- Over the medium term, growth in the LNG and non-mineral sectors will offset the decline in copper and petroleum production.
- Construction of the LNG project will pass its peak phase in 2013, and be finished by 2014.
- Production and exports are expected to start in 2014 and reach full capacity in 2015, with a maximum capacity of 6.6 million tons of LNG produced annually.
- Staff estimates that LNG production will 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 is projected to decline to 7 percent in the near term due to the end of PNG production. It will stabilize at 6.5 percent by 2017, and at around 5 percent in the long run (after 2021).
- The current account is in deficit in 2011 and the deficit is expected to remain sizeable until 2015, reflecting strong import growth as well as services and income deficits associated with LNG construction. FDI and medium- to long-term debt inflows are financing most of the imports.
- The grant element of loans is expected to decline. As GDP per head rises, the share of external financing provided on concessional terms is expected to decline slightly over the projection period.
- The primary fiscal balance is estimated to be in surplus of 1.5 percent of GDP in 2011, accounting for spending from the trust accounts. Over the medium term small primary deficits are anticipated, but these turn into large surpluses especially after 2022, as LNG tax revenues are realized.

### Scenarios and stress-test outcomes (selected)
- Catastrophic price decline shock is identified as the most extreme stress test in several figures (the test that yields the highest ratio in 2022).
- Failure of the LNG plant is noted as the most extreme stress test in other figures.
- Identified alternative scenarios include:
  - A1. Real GDP growth and primary balance at historical averages.
  - A2. Primary balance fixed to zero.
  - A3. Permanently lower GDP growth.
  - A4. Superannuation arrears, SOEs and LNG project cancellation.
- Bound tests include shocks to real GDP growth, primary balance, real depreciation, and increases in other debt-creating flows (e.g., one-time 30 percent real depreciation in 2013; 10 percent of GDP increase in other debt-creating flows in 2013).

### Key quantitative indicators and projections (selected exact figures)
- Public sector debt (percent of GDP): 31.5 (2009); 25.6 (2010); 25.2 (2011); projections include 13.5 (2016), 13.0 (2017), 12.5 (2018-32 average shown as 12.5).
- o/w foreign-currency denominated: 12.5 (2009); 10.4 (2010); 9.8 (2011); projected 7.1 (2016–2018) and 6.2 (2018-32 average).
- Change in public sector debt: -0.2 (2009); -5.9 (2010); -0.4 (2011); projected -4.9 (2016), -0.6 (2017), -0.5 (2018).
- Primary fiscal balance (percent of GDP) examples: surplus of 1.5 percent in 2011 (noted in Box III.1); Primary deficit that stabilizes the debt-to-GDP ratio: 7.8 (2009), 1.5 (2010), -1.1 (2011), 3.3 (2012), 2.8 (2013), 3.5 (2014), 4.9 (2015), -0.4 (2016), -1.5 (2017), -0.6 (2018), -2.4 (2022).
- Revenues and grants (percent of GDP): 27.3 (2009); 31.3 (2010); 29.8 (2011); projected 19.0 (2016), 19.2 (2017), 19.6 (2018).
- Primary (noninterest) expenditure (percent of GDP): 34.9 (2009); 26.9 (2010); 28.3 (2011); projected 19.0 (2016), 18.2 (2017), 17.6 (2018).
- Automatic debt dynamics contribution examples: 1.1 (2009); -3.8 (2010); -3.8 (2011); projected -3.9 (2016), -0.4 (2017), -0.3 (2018), 0.1 (2022), 1.9 (2032).
- Gross financing need (percent of GDP): 17.6 (2009); 4.5 (2010); 5.0 (2011); projections include 1.9 (2016), 0.8 (2017), -0.2 (2018), -3.7 (2022), -4.1 (2032).
- PV of public sector debt (selected values): 24.0, 21.9, 19.9, 17.1, 12.5, 11.9, 11.4 (years shown in table).
- Key macro assumptions (selected exact values):
  - Real GDP growth (in percent) historical and projections: 6.1 (2009), 7.6 (2010), 8.9 (2011); projections include 20.0 (2015, reflecting LNG production impact), 5.4 (2016), 4.9 (2017), 8.3 (2012-17 average noted as 8.3), and long-run values of 3.0, 3.0, 3.2 in table.
  - Inflation rate (GDP deflator, in percent): historical series include -2.6 (2009), 9.9 (2010), 4.9 (2011); projected long-run around 5.0 (after 2021) as noted in Box III.1.
  - Grant element of new external borrowing (percent): examples in projections show values such as 26.9, 26.1, 24.4, 25.6, 23.2 across projection years in Table III.1.
- External debt and related indicators (selected exact values from Table III.3):
  - External debt (nominal) series include 55.0, 67.2, 91.9, 95.0, 105.6, 87.9, 60.6, 56.4, 52.4, 32.4, 27.5 (table entries).
  - o/w public and publicly guaranteed (PPG) external debt: 12.5, 10.4, 9.8, 9.7, 9.8, 9.2, 7.1, 7.1, 7.1, 6.2, 4.5 (table entries).
  - PV of external debt (percent of GDP) examples: 90.7, 93.7, 104.2, 86.6, 59.5, 55.4, 51.3, 31.5, 26.8 (table entries).
  - Debt service-to-exports ratio (percent): 13.4, 14.7, 15.7, 16.5, 15.3, 31.0, 19.6, 17.0, 19.9, 22.7, 23.5 (table entries).
  - Total gross financing need (Billions of U.S. dollars): 1.4, 2.5, 3.9, 4.3, 3.3, 3.1, -0.2, -0.6, -0.3, 0.3, 0.4 (table entries).
  - Nominal GDP (Billions of US dollars): 8.1, 9.9, 12.7, 15.4, 16.1, 18.2, 25.0, 26.1, 27.2, 35.1, 56.7 (table entries).

### Policy implications and recommendations (as presented)
- If catastrophic price shocks occur or LNG revenues fail to materialize, fiscal consolidation would be required to restore debt sustainability—specifically, sharp downward curbing of expenditure plans is recommended in the event of LNG cancellation.
- Recognition that realization of non-contingent liabilities related to superannuation arrears and SOEs would delay debt reduction suggests the need for addressing those liabilities to improve the debt path.
- Rebasing the national accounts to a more recent year is recommended to correct the GDP deflator effects noted for 2014–15; rebasing would push up projected real GDP growth in 2014–15, reduce the GDP deflator and increase the imputed average real interest rates.

*Source: 2012 ARTICLE IV REPORT PAPUA NEW GUINEA — Chapter 12 and accompanying DSA tables and Box III.1*

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

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

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

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

### SDR Department
- Net cumulative allocation: 125.49 SDR Million (100.00 percent allocation)
- Holdings: 9.52 SDR Million (7.58 percent allocation)

### Outstanding Purchases and Loans
- Outstanding: 0.00 SDR Million (0.00 percent quota)

### Latest Financial Arrangements
- Stand-by; Approval Date: 3/29/2000; Expiration Date: 9/28/2001; Amount Approved: 85.54 SDR million; Amount Drawn: 85.54 SDR million
- Stand-by; Approval Date: 7/14/1995; Expiration Date: 12/15/1997; Amount Approved: 71.48 SDR million; Amount Drawn: 35.34 SDR million
- Stand-by; Approval Date: 7/31/1991; Expiration Date: 9/30/1992; Amount Approved: 26.36 SDR million; Amount Drawn: 0.00 SDR million

### Projected Payments to Fund (SDR million; based on existing use of resources and present holding of SDRs)
- Forthcoming principal: (no principal amounts shown)
- Charges/interest:
  - 2012: 0.13
  - 2013: 0.18
  - 2014: 0.18
  - 2015: 0.18
  - 2016: 0.18
- Total:
  - 2012: 0.13
  - 2013: 0.18
  - 2014: 0.18
  - 2015: 0.18
  - 2016: 0.18

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

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

### Article IV Consultations
- The 2010 Article IV consultation discussions were held during February 10–21, 2011.
- Concluded by the Executive Board on May 18, 2011 (IMF Country Report No. 11/117).
- Papua New Guinea is on the 12–month cycle.

### Technical Assistance from Headquarters
- FAD:
  - Joint FAD/PFTAC mission in March 2000 assisted in preparing a Report on the Observance of Standards and Codes Fiscal Transparency Module, published in October 2000.
  - December 2000 mission provided advice on reconciling large and volatile differences in fiscal reporting between the Treasury Department and the Bank of Papua New Guinea.
  - February 2002 mission assessed progress in improving fiscal transparency.
  - May 2011 joint FAD/PFTAC mission provided advice on sovereign fund management.
- LEG:
  - November 1996 mission advised on legal framework for the National Value-Added Tax.
  - November 2005 mission advised on drafting a tax administration law.
  - July 2006 mission provided a comprehensive assistance program for AML/CFT regime including legislative drafting and capacity building.
  - August/September 2007 mission assisted in finalizing terms of the Revenue Administration Bill.
- MFD/MCM:
  - 2001–03 assistance via missions on bank supervision, financial sector restructuring, accounting framework, and monetary operations of the central bank.
  - A resident advisor assigned to BPNG research department for 15 months through August 2003.
  - Peripatetic visits on bank regulation and supervision (2001–February/March 2007, July–August 2009, and February 2010).
  - Missions on medium-term monetary policy formulation (October 2004 and September 2005).
  - Reserve management assistance (June 2006–September 2007, March/July–August 2009, January–February 2010).
  - Internal audits assistance (2004–August 2007).
  - Accounting assistance (September/October 2006–February 2007, February–March/June–July/November 2009).
  - Liquidity management (January 2009).
  - Monetary and forex operations (July–August 2009, February 2010).
- STA:
  - Four GDDS missions in 1995–96.
  - Inspection visit in April 2001.
  - National accounts advice mission in February 2006.
  - Balance of payments advice mission in May 2003.
  - Monetary and financial statistics review in April 2005; follow-up in May 2006.
  - Multisector statistics mission in September 2006; high level STA visit in December 2007.
  - Follow-up missions in balance of payments in June 2008 and November 2009.
  - Three follow-up missions in monetary and financial statistics in April 2008, November 2009 and May 2010.
  - STA mission visited PNG in January 2012 to provide technical advice on preparation of GDDS metadata.
  - Another STA mission on regional finance statistics planned in May 2012.

### Resident Representative
- None.

*ANNEX I: PAPUA NEW GUINEA—FUND RELATIONS (As of March 31, 2012).*

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

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

### A. Assessment of Data Adequacy for Surveillance
- General
  - Data provision has some shortcomings, but is broadly adequate for surveillance.
  - Severely affected area is national accounts with fiscal accounts and balance of payments of concern as well.
- National accounts
  - The National Statistical Office (NSO) lacks sufficient staff with computer training.
  - Accuracy and reliability of the data are affected by inadequate source data.
  - The Bank of Papua New Guinea (BPNG) and the Department of Treasury produce the most current data.
  - In mid-2000, the NSO released National Income, Expenditure and Product, 1993–98 compiled using the 1968 System of National Accounts.
  - NSO has been working to implement the 1993 SNA.
  - In March 2004, the NSO released preliminary national income, expenditure, and production accounts estimates for 1994–2002, rebased to 1998 prices.
  - The 2006 STA multisector mission recommended against publication of the new GDP data until needed revisions are made.
  - The Treasury has assumed the role of estimating the NA for 2002 to the present.
  - Expenditure side data are available until 2006.
- Prices statistics
  - NSO currently compiles a new quarterly wholesale price index (which it does not publish) and a quarterly consumer price index based on weights that are thirty-five years old.
  - NSO intends to use the 2009/10 Household Income Expenditure Survey (HIES) to rebase the CPI.
  - The survey documents are currently 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 are available.
  - Interest payment records are accurate, but there are timing issues regarding recording of interest on discount securities.
  - Weaknesses contribute to discrepancies in domestic financing between monetary/debt estimates and fiscal records.
  - The 2006 STA mission encouraged authorities to prepare a list of public sector units to permit comprehensive delineation of levels of government to help reconcile GFS with other datasets.
- Monetary statistics
  - Monetary data are now produced and reported to STA on a regular basis.
  - Previous MFS missions helped to:
    - finalize review of collection, compilation, and dissemination procedures of monetary statistics by the BPNG;
    - develop a work program to facilitate full implementation of MFSM methodology;
    - introduce standardized report forms (SRFs) for reporting monetary data of the central bank, other depository corporations, other financial corporations (OFCs) monetary aggregates;
    - finalize the integrated monetary database that meets the data needs of the BPNG, STA, and APD.
  - A MFS mission is scheduled for FY 2013 to introduce the SRF for OFCs with complete institutional coverage.
- Balance of payments statistics
  - Annual BOP data are derived from the International Transactions Reporting System (ITRS), which is not tightly monitored despite BPNG reporting requirements.
  - Marked differences exist between official data on exports and imports of goods and those reported by trading partners.
  - Financial accounts data are of poor quality because of major deficiencies in data collection, especially private external debt and foreign direct investment.
  - Quarterly data are published by the BPNG.
  - The 2006 STA mission identified priority: strengthen current account estimates by improving classification of investment earnings, trade credits, and grant receipts and enhancing source data for imports and exports.
  - Progress is being made to implement recommendations from PFTAC BOP missions in June 2008 and November 2009.
  - A follow-up PFTAC BOP mission is scheduled for FY 2012, but not yet fielded.

### B. Standards and Quality
- PNG participates in the General Data Dissemination System (GDDS) since February 2012.

### C. Reporting to STA
- Government finance statistics
  - Last reported government finance statistics for publication in the Government Finance Statistics Yearbook and in International Financial Statistics for 1999–2002 and cover only the budgetary central government.
- Monetary data
  - Reported to STA for publication in IFS on a regular monthly basis.
- Balance of payments data
  - Balance of payments data for 2010 were reported to STA for publication in IFS and BOPSY.
- National accounts data
  - National accounts data for 2004 were reported to STA for publication in IFS.

### Table of Common Indicators Required for Surveillance (As of March 30, 2012) — Selected metadata
- Exchange Rates
  - Date of Latest Observation: 03/30/12
  - Date Received: 03/15/12
  - 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: 01/31/12
  - Date Received: 03/15/12
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: Q
- Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System
  - Date of Latest Observation: 01/12
  - Date Received: 03/15/12
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: Q
- Interest Rates
  - Date of Latest Observation: 01/12
  - Date Received: 03/15/12
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: Q
- Consumer Price Index
  - Date of Latest Observation: 12/11
  - Date Received: 03/15/12
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Revenue, Expenditure, Balance and Composition of Financing — General Government
  - Date of Latest Observation: N/A
  - Date Received: N/A
  - Frequency of Data: N/A
  - Frequency of Reporting: N/A
  - Frequency of Publication: N/A
- Revenue, Expenditure, Balance and Composition of Financing — Central Government
  - Date of Latest Observation: 12/11
  - Date Received: 03/12
  - 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: 12/11
  - Date Received: 03/12
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance; Exports and Imports of Goods and Services
  - Date of Latest Observation: 12/11
  - Date Received: 03/12
  - 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: 2011
  - Date Received: 03/12
  - Frequency of Data: Q
  - Frequency of Reporting: A
  - Frequency of Publication: A
- International Investment Position
  - Date of Latest Observation: N/A
  - Date Received: N/A
  - Frequency of Data: N/A
  - Frequency of Reporting: N/A
  - Frequency of Publication: N/A
- Notes:
  - 1 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); and Not Available (N/A).
  - 2 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 3 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.
  - 4 Foreign, domestic bank, and domestic nonbank financing.
  - 5 The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments.
  - 6 Including currency and maturity composition.
  - 7 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
  - 8 Lack of capacity prevented the authorities from providing the data.

### Executive Board Assessment — Key points (Public Information Notice No. 12/53, June 1, 2012)
- Economic developments and policy context
  - Real GDP is estimated to have increased to about 9 percent in 2011 from about 7.6 percent in 2010.
  - Headline inflation peaked just below 10 percent in Q2 2011, eased to 7 percent at year-end.
  - After a large fiscal deficit in 2009, the budget returned to surplus in the last two years.
  - The Bank of PNG raised its policy rate by 75 basis points to 7¾ percent.
  - Commercial banks’ cash reserve requirements were increased by 200 basis points to 6 percent.
  - The nominal effective exchange rate appreciated by 21 percent in 2011.
  - The current account deficit widened to 36 percent of GDP in 2011.
  - Public external debt declined to 9.8 percent of GDP by end-2011.
- Executive Board conclusions and recommendations
  - Commended authorities for achieving macroeconomic stability and a sustainable fiscal position.
  - Medium-term outlook remains positive; risks broadly balanced and predominantly resource-sector related.
  - Policy recommendations:
    - Combine steady, affordable growth in government spending with improvements in public financial management and expenditure effectiveness.
    - Adopt structural reforms and a flexible monetary policy.
    - Further monetary tightening likely needed to anchor inflation expectations at Bank of PNG’s 5 percent reference value.
    - Reduce excess liquidity by raising banks’ cash reserve requirements and limiting reserve accumulation.
    - Greater exchange rate flexibility would provide an important buffer against external shocks.
    - Fiscal policy should target a smooth expenditure path and tighter control of expenditure growth in the current election year.
    - Promote resource sector contributions to public revenues by strengthening revenue collection, reinforcing internal revenue and customs services, streamlining tax concessions, and applying the Additional Profits Tax to mining activities.
    - Establish the SWF with withdrawal rules set in accordance with the new Medium-Term Fiscal Strategy and consolidate all existing trust accounts with the fund.
    - Develop a multi-year budget for selected expenditures and invest in reform of key ministries responsible for planning and service delivery.
    - Strengthen enforcement of competitive behavior, replace existing monopolies, and avoid exclusive production rights and import protection for rice.
    - Proceed with SOE reforms.
    - Maintain appropriate lending standards, reduce exposure to the real estate sector, and implement remaining 2011 FSAP recommendations.
    - Urgently tackle structural deficiencies in the provision of national statistics; immediate reform and strengthening of relevant government agencies required.

### Selected Economic and Financial Indicators, 2008–12 (highlights)
- Nominal GDP (2010): US$10 billion
- Population (2010): 6.5 million
- GDP per capita (2010): US$1,521
- Quota: SDR 131.6 million
- Real GDP growth (Percent change): 2008: 6.6; 2009: 6.1; 2010: 7.6; 2011 Est.: 8.9; 2012 Proj.: 7.7
- Mineral growth (Percent change): 2008: -1.4; 2009: -1.7; 2010: -2.0; 2011 Est.: -11.8; 2012 Proj.: 13.7
- Nonmineral growth (Percent change): 2008: 7.6; 2009: 7.0; 2010: 8.5; 2011 Est.: 10.8; 2012 Proj.: 7.2
- CPI (annual average): 2008: 10.7; 2009: 6.9; 2010: 6.0; 2011 Est.: 8.4; 2012 Proj.: 6.8
- CPI (end-period): 2008: 11.2; 2009: 5.7; 2010: 7.8; 2011 Est.: 6.9; 2012 Proj.: 6.8
- Central government operations (In percent of GDP)
  - Revenue and grants: 2008: 32.6; 2009: 27.3; 2010: 31.3; 2011 Est.: 29.8; 2012 Proj.: 27.5
  - Expenditure and net lending: 2008: 30.1; 2009: 36.9; 2010: 28.2; 2011 Est.: 29.4; 2012 Proj.: 30.0
  - Overall balance (including grants): 2008: 2.5; 2009: -9.6; 2010: 3.1; 2011 Est.: 0.5; 2012 Proj.: -2.5
  - Nonmineral balance: 2008: -7.4; 2009: -13.3; 2010: -3.6; 2011 Est.: -6.6; 2012 Proj.: -8.0
- Gross public debt (In percent of GDP): 2008: 31.7; 2009: 31.5; 2010: 25.6; 2011 Est.: 25.2; 2012 Proj.: 23.2
  - Domestic: 2008: 18.5; 2009: 19.1; 2010: 15.2; 2011 Est.: 15.4; 2012 Proj.: 13.5
  - External: 2008: 13.2; 2009: 12.5; 2010: 10.4; 2011 Est.: 9.8; 2012 Proj.: 9.7
- Money and credit (Percent change)
  - Domestic credit: 2008: 15.7; 2009: 37.3; 2010: 4.9; 2011 Est.: -5.2; 2012 Proj.: 18.2
  - Credit to the private sector: 2008: 29.5; 2009: 15.1; 2010: 18.1; 2011 Est.: 7.3; 2012 Proj.: 7.5
  - Broad money: 2008: 7.8; 2009: 21.3; 2010: 10.2; 2011 Est.: 17.4; 2012 Proj.: 13.3
- Interest rate (182-day T-bills; period average): 2008: 5.9; 2009: 7.2; 2010: 6.4; 2011 Est.: 6.8
- Balance of payments (In millions of U.S. dollars)
  - Exports, f.o.b.: 2008: 5,685; 2009: 4,511; 2010: 5,843; 2011 Est.: 7,047; 2012 Proj.: 7,788
    - Of which: Mineral: 2008: 4,275; 2009: 3,441; 2010: 4,444; 2011 Est.: 5,215; 2012 Proj.: 5,968
  - Imports, c.i.f.: 2008: -3,140; 2009: -3,258; 2010: -4,261; 2011 Est.: -6,186; 2012 Proj.: -6,463
  - Current account (including grants): 2008: 674; 2009: -1325; 2010: -2532; 2011 Est.: -4605; 2012 Proj.: -4374
    - (In percent of GDP): 2008: 8.4; 2009: -16.4; 2010: -25.6; 2011 Est.: -36.4; 2012 Proj.: -28.4
  - Exceptional financing (net): 2008–2012: 0.0 each year
  - Gross official international reserves (In millions of U.S. dollars): 2008: 2,095; 2009: 2,623; 2010: 3,092; 2011 Est.: 4,323; 2012 Proj.: 4,296
    - (In months of nonmining imports, c.i.f.): 2008: 9; 2009: 11; 2010: 10; 2011 Est.: 16; 2012 Proj.: 14
    - (In months of goods and services imports): 2008: 5; 2009: 6; 2010: 5; 2011 Est.: 5; 2012 Proj.: 5
- Public external debt
  - Public external debt-service-ratio (percent of exports) 2/: 2008: 3.4; 2009: 1.8; 2010: 1.4; 2011 Est.: 1.3; 2012 Proj.: 1.5
  - Public external debt-to-GDP ratio (in percent) 2/: 2008: 13.2; 2009: 12.5; 2010: 10.4; 2011 Est.: 9.8; 2012 Proj.: 9.7
- Exchange rates
  - US$/kina (end-period): 2008: 0.373; 2009: 0.370; 2010: 0.379; 2011 Est.: 0.467
  - NEER (2005=100, end-period): 2008: 117.9; 2009: 101.5; 2010: 100.1; 2011 Est.: 121.4
  - REER (2005=100, end-period): 2008: 125.7; 2009: 111.7; 2010: 114.8; 2011 Est.: 146.1
- Nominal GDP (millions of kina): 2008: 21,601; 2009: 22,331; 2010: 26,395; 2011 Est.: 30,167; 2012 Proj.: 34,297

*Source: IMF staff report extract — ANNEX V: PAPUA NEW GUINEA—STATISTICAL ISSUES (2012).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12126.pdf_