## Press Release: IMF Approves US$115 Million Stand-By Credit for Papua New Guinea

_IMF News, March 29, 2000_

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## Bibliographic details
- Published: March 29, 2000

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### Approval and Financial Terms
- IMF approved a 14-month stand-by credit for Papua New Guinea equivalent to SDR 85.54 million (about US$115 million) to support the government's economic program for 2000-01.
- The first disbursement of SDR 10 million (about US$13.4 million) is available immediately.
- Papua New Guinea joined the IMF on October 9, 1975 and its quota is SDR 131.60 million (about US$177 million).
- Its outstanding use of IMF financing currently totals SDR 11.85 million (about US$16 million).

### Executive Board Commentary (Eduardo Aninat, Deputy Managing Director)
- Program objectives:
  - Restore macroeconomic stability.
  - Achieve sustainable growth by reducing inflation, strengthening the external position, and reducing the budget deficit.
  - Improve public sector governance, promote private sector development, and strengthen the financial system.
- Fiscal stance and contingencies:
  - Program envisages an overall fiscal deficit of 1½ percent of GDP, with a balanced budget in the coming year and beyond.
  - Strengthening control over government expenditure is a key fiscal reform measure.
  - Authorities would be prepared to take additional offsetting measures if government revenues fall below program targets.
- Monetary and financial measures:
  - Authorities have taken action to mop up excess liquidity that emerged in 1999.
  - Passage of a new Central Bank Act should facilitate conduct of monetary policy, enhance powers and independence of the central bank, and reduce government's recourse to central bank credit.
  - A new Banks and Financial Institutions Act will be adopted to strengthen financial sector supervision and regulation.
- Structural progress:
  - Rural Development Program to be replaced by the District Development Program Grant to enhance transparency, fairness and cost effectiveness.
  - A detailed framework for privatization of large public enterprises has been established.

### Background: Late 1990s Shocks and Fiscal Deterioration
- Shocks and impacts:
  - Severe drought, the Asian economic crisis, and export price declines for copper and gold.
  - Real GDP fell significantly; fiscal position deteriorated.
  - Tax revenue fell by 4½% of GDP in 1998, led by large declines in the petroleum sector.
  - Overall government deficit shifted from near balance in 1997 to an overall deficit equivalent to 2.1% of GDP in 1998 that widened in the first half of 1999.
  - Deficit financed mainly by recourse to central bank financing, causing significant decline in net official international reserves and the external value of the kina.
  - Annual rate of inflation rose to around 20% at the end of 1998 and early 1999.
- Policy response:
  - New administration formed in mid-1999 introduced a reform program and revenue/expenditure adjustments, producing a small overall surplus in central government operations during the second half of 1999.
  - The 2000 program seeks sustainable growth through restoration of macroeconomic stability and key structural reforms.

### Macroeconomic Policies Under the Program: 2000 Targets
- Growth and inflation:
  - Pickup in growth to about 4½%.
  - Reduction in inflation to 5% by the end of the year.
- Reserves and fiscal:
  - Increase in gross official reserves to $379 million.
  - 2000 budget targets overall government deficit of 1.5% of GDP in 2000, including clearance of all remaining government arrears.
  - Beyond 2000, the budget is expected to maintain a balanced position.
  - Contingency revenue measures to be implemented if budget targets are jeopardized.
- Monetary aggregates and actions:
  - Authorities reduced reserve money by 20% in January 2000.
  - For the year as a whole, reserve money is targeted to decline by 1.3%.

### Structural Reforms
- Public expenditure and governance:
  - Strengthen public expenditure control and enhance transparency and effectiveness of development spending.
  - Replace Rural Development Program with District Development Program Grant operating under new rules of delivery and accountability.
  - Government conducting a review of the tax system to enhance fairness and improve competitiveness and efficiency.
- Central bank and financial sector:
  - Central bank will no longer underwrite the issue of treasury securities at a predetermined price; it will receive the auction-determined interest rate from the government.
  - New Central Bank Act (CBA) drafted with IMF and Reserve Bank of Australia (RBA) assistance to strengthen independence and accountability and aim at price stability.
  - Revised Banks and Financial Institutions Act (BFIA) being prepared to strengthen licensing and supervision of banks and nonbank financial institutions; BFIA will outlaw pyramid-type schemes that emerged in 1999.
- Privatization and civil service:
  - Initiate privatization of large state enterprises.
  - Carry out comprehensive civil service reform.

### Financing Needs and Donor Support
- In addition to the IMF stand-by credit, reform program to be supported by financing from the World Bank and bilateral official contributions.
- Consultative group meeting held in Port Moresby on November 8-9, 1999.
- Donor support has firmed; expected that the financing gap of $180 million could be covered by the World Bank and through balance of payments support from bilateral donors.

### Papua New Guinea: Selected Economic Indicators, 1996-2001 (key figures preserved)
- Nominal GDP (1998): US$4.2 billion
- Population (1998): 4.5 million
- GDP per capita (1998): US$994
- Quota: SDR 131.6 million

- Real sector (percent change)
  - Real GDP growth: 1996: 2.9; 1997: -2.4; 1998: 1.4; 1999: 3.8; 2000: 4.5; 2001: 5.9
  - Mineral: 1996: -11.8; 1997: -21.0; 1998: 19.1; 1999: 14.1; 2000: 1.0; 2001: ...
  - Nonmineral: 1996: 8.3; 1997: 3.2; 1998: -2.7; 1999: 0.9; 2000: 5.6; 2001: (not provided)

- CPI (annual average): 1996: 11.6; 1997: 3.9; 1998: 13.6; 1999: 17.8; 2000: 14.6; 2001: (not provided)
- CPI (12 months): 1996: 5.3; 1997: 21.8; 1998: 20.0; 1999: 5.0; 2000: 4.0

- Central government budget (percent of GDP)
  - Revenue and grants: 1996: 26.1; 1997: 29.4; 1998: 25.8; 1999: 24.6; 2000: 25.1; 2001: 24.2
  - Expenditure and net lending: 1996: 26.5; 1997: 29.2; 1998: 27.9; 1999: 26.6
  - Overall balance, cash basis (excluding grants) 2/ 3/: 1996: -2.8; 1997: -4.0; 1998: -7.4; 1999: -7.2; 2000: -6.2; 2001: -3.9
  - Overall balance, cash basis (including grants) 2/ 3/: 1996: -0.3; 1997: 0.1; 1998: -2.1; 1999: -1.5; 2000: -0.1
  - Underlying balance 4/: 1996: 0.2; 1997: 0.4

- Money and credit (year-on-year percentage change)
  - Total domestic credit: 1996: 5.8; 1997: 22.7; 1998: 17.1; 1999: -0.7
  - Net credit to government: 1996: 19.2; 1997: 15.4; 1998: 11.2; 1999: -11.4; 2000: -22.1
  - Credit to the private sector: 1996: -7.8; 1997: 36.3; 1998: 29.0; 1999: 9.2; 2000: 13.8
  - Broad money: 1996: 31.3; 1997: 6.8; 1998: 1.8; 1999: 8.9; 2000: 8.8

- Balance of payments (US$ mn.)
  - Exports, f.o.b.: 1996: 2,603; 1997: 2,186; 1998: 1,849; 1999: 1,998; 2000: 2,234; 2001: 2,257
  - Imports, c.i.f.: 1996: -1,791; 1997: -1,972; 1998: -1,425; 1999: -1,505; 2000: -1,684; 2001: -1,909
  - Current account: 1996: 289; 1997: -263; 1998: 23; 1999: 55; 2000: -18; 2001: -112
  - Exceptional financing (net): 1996: 15; 1997: 25; 1998: 109; 1999: 180; 2000: 60
  - Overall balance: 1996: 382; 1997: -204; 1998: -189; 1999: 42; 2000: 128; 2001: 0

- Reserves and debt (end of year, US$ mn.)
  - Gross official reserves: 1996: 586; 1997: 380; 1998: 187; 1999: 204; 2000: 379; 2001: 483
  - Net international reserves: 1996: 532; 1997: 328; 1998: 139; 1999: 181; 2000: 307; 2001: 360
  - (In months of nonmining imports, c.i.f.): 4.9; 2.8; (years not mapped explicitly)
  - Medium- and long-term external debt (percent of GDP): 1996: 35.5; 1997: 40.8; 1998: 45.8; 1999: 43.8; 2000: 39.1; 2001: 32.4
  - Debt-service ratio (percent of external current receipts): 1996: 17.7; 1997: 17.0; 1998: 22.5; 1999: 27.3; 2000: 16.9; 2001: 14.2

- Exchange rates
  - US$ per Kina (end-period) 5/: 1996: 0.74; 1997: 0.57; 1998: 0.48; 1999: 0.37; 2000: 0.38
  - Nominal effective rate 6/: 1996: -5.4; 1997: -24.8; 1998: -20.9
  - Real effective rate 6/: 1996: -1.8; 1997: -11.2; 1998: -8.7

*Source: Press Release No. 00/23 — IMF (March 29, 2000).*

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