Press Release No. 95/40

The International Monetary Fund (IMF) today approved an 18-month stand-by credit for Papua New Guinea totaling the equivalent of SDR 71.48 million (about $111 million) in support of the Government's 1995-96 economic reform program.

Background

Papua New Guinea experienced a serious economic crisis in September and October 1994 as a result of expansionary macroeconomic policies, culminating in the near exhaustion of its international reserves and the devaluation, followed by flotation, of the kina. Since that time, financial policies have been significantly tightened: the fiscal position has been brought into surplus through emergency measures to control expenditures, while interest rates have been raised substantially. Even so, the economic situation has remained difficult, reflected in low levels of international reserves and a downward pressure on the kina.

The Program for 1995-96

The main objectives of the 1995-96 economic program, which the stand-by credit supports, are to restore economic and financial stability and to encourage strong, broadly based, and sustainable growth. The program envisages a decline in non-mineral GDP growth to 1 percent in 1995, followed by a rebound to 4 1/2 percent in 1996; a containment of inflation to 14 percent in 1995, followed by a reduction to 5 percent in 1996; and a build up in international reserves to the equivalent of 3.3 months of imports by the end of 1996.

To attain these objectives, the program envisages a reduction of the central government deficit by more than one half to 1 percent of GDP in 1995 and 1996, through a combination of revenue increases and the restraint of current expenditures, including strict control of public sector wages and a reduction in the size of the civil service. Given the low level of public investment, a large increase in capital expenditures is targeted in the program. These measures are to be supported by tight monetary and wage policies to contain inflation and help restore exchange market stability.

Structural Reforms

The program envisages a strengthening of structural reforms, including the elimination of almost all import bans and quotas; tariff reform (accompanied by introduction of a national sales tax); phaseout of reserved activities; and removal of price controls. The Government also intends to accelerate the implementation of the privatization program.

Addressing Social Costs

The depreciation of the kina and higher commodity prices are expected to bolster production, income and employment, particularly in agriculture; this should also help to reduce the incentives for rural drift to the urban areas. The program also envisages a shift in central government outlays toward increased provision of basic government services, including primary and secondary education, primary health and hospital services, and agricultural support services.

The Challenge Ahead

Papua New Guinea's program is an ambitious attempt to combine macroeconomic stabilization with the structural reforms necessary to reverse the stagnation in real per capita income that has persisted for many years. Its successful implementation will depend importantly on continued resolute pursuit of sound financial policies and the structural reforms necessary to promote private sector development.

Papua New Guinea joined the IMF on October 9, 1975, and its quota¹ is SDR 95.3 million (about $148 million). It hasno outstanding use of IMF credit.

Papua New Guinea: Selected Economic Indicators   1992 1993 1994* 1995** 1996**   (percent change) Real economic growth 11.8 16.6 3.0 –4.7 0.6     (non-mineral) (3.8) (4.2) (5.3) (0.8) (4.6) Consumer prices (end of period) 5.0 4.8 6.5 14.0 5.0     (percent of GDP) Government budgetary balance      (deficit –) –5.6 –5.9 –2.3 –1.0 –1.1 Gross international reserves      (end–of–period) 3.1 1.8 1.3 2.0 3.3 Source: Papua New Guinean authorities; and IMF staff estimates and projections. * Projected. ** Program. 1. A member's quota in the IMF determines, in particular,the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.