IMF Executive Board Concludes 2016 Article IV Consultation with Papua New Guinea

IMF News, January 30, 2017

Source details

Canonical URL

IMF Executive Board Concludes 2016 Article IV Consultation with Papua New Guinea

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: January 30, 2017

Overview

• The Executive Board concluded the Article IV consultation with Papua New Guinea on November 29, 2016, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
• Papua New Guinea is facing headwinds from low commodity prices and recovery from a major drought, which have weighed on economic growth, weakened the external position, and created fiscal challenges.
• Foreign exchange (FX) remains in short supply but inflows have recently picked up somewhat; the gross foreign reserve position is expected to remain broadly stable.
• Revenues fell short of the budget in response to recent commodity price declines, prompting Parliament to pass a supplementary budget 2016 entailing expenditure cuts.
• Inflation has increased somewhat, partly reflecting the exchange rate depreciation.

Economic outlook and risks

• After strong economic growth driven by the new liquefied natural gas (LNG) project coming on stream in 2014-15, underlying growth is expected to slow due to base effects from the commencement of LNG production and modest growth in the non-resource sector.
• The large LNG exports and import compression caused by the shortage of FX led to a strong current account surplus, largely offset by financial account outflows consistent with project development agreements.
• Inflation is expected to continue edging upwards in the near term due to gradual exchange rate depreciation and prices of seasonal agricultural items.

Risks:

• Near-term risks are tilted to the downside:
  • Fiscal retrenchment may have a greater impact on the economy than currently expected.
  • Limited availability of FX continues to constrain imports and economic activity.
  • A further drop in commodity prices would weaken the external and fiscal positions.
  • Natural disasters, climate change and weather-related shocks pose continual downside risks.
• Over the medium term, risks are more balanced due to upside potential of new resource sector projects.

Executive Board assessment and policy recommendations

Findings:

• PNG has been hit hard by the drop in world commodity prices and a major drought.
• Authorities responded with fiscal tightening and a combination of modest exchange rate depreciation and FX sales.
• Strong growth from PNG LNG has tailed off amidst weak non-resource sector growth.
• Inflation has begun to pick up reflecting earlier exchange rate depreciation and increases in prices of seasonal agricultural items.
• Prudent macroeconomic policies are essential for maintaining debt sustainability and safeguarding the external position.

Fiscal policy recommendations:

• Additional fiscal adjustment is needed to ensure debt sustainability over the medium term.
• The authorities should be commended for promptly passing a supplementary 2016 budget; further adjustment may be needed in view of financing constraints.
• Passage of a prudent 2017 budget should be commended; it will facilitate continued fiscal consolidation over the medium term, anchored by the existing 30 percent public debt-to-GDP fiscal anchor.
• The pace of adjustment should balance maintaining debt sustainability against the costs of excessive fiscal adjustment in terms of growth and poverty reduction.
• Greater revenue mobilization would create fiscal space for expenditures to address development and social needs.
  • Measures drawn from the National Tax Review should be adopted going forward.
  • In the near term, efforts should be undertaken to improve tax compliance.
  • There is considerable scope for improving the fiscal regime for extractive industries.
• Government expenditure quality should be improved through public financial management (PFM) reform.
  • Further PFM reforms should build upon the recently published public expenditure and financial accountability (PEFA) document and successes in rolling out the new information management system to encompass cash management issues.
  • The sovereign wealth fund should be put into operation as soon as possible to help improve transparency and ensure resource revenue is used consistent with macroeconomic stabilization and saving for future generations.

Monetary and FX policy recommendations:

• Greater exchange rate flexibility and a more efficient and transparent FX allocation mechanism are urgently needed.
  • Lack of exchange rate flexibility has impeded PNG’s adjustment to sharply lower world commodity prices, weakened the external and fiscal positions, and reduced the growth contribution from net exports.
  • Pass-through of more rapid exchange rate depreciation into inflation would need to be countered through monetary policy tightening, but transmission channels are impeded by excessive banking system liquidity, implying the need for measures to absorb excess liquidity.
• Staff does not recommend Fund approval of:
  • retention of the exchange restriction arising from FX prioritization and rationing of FX,
  • the tax clearance certificate requirement, and
  • the multiple currency practices (MCPs),

because they are not temporary and lack a timetable for elimination.

Structural reforms and statistics

• An acceleration of structural reform is key for private sector development, supporting PNG’s inclusive growth strategy.
  • The business environment, particularly for agriculture and SMEs, needs strengthening through better infrastructure, access to financing, and law and order.
• More decisive action is needed to improve macroeconomic statistics.
  • Noteworthy progress has been made to strengthen national accounts and government finance statistics.
  • Priorities for further reform include balance of payments, international investment position, and debt data.

Selected economic and financial indicators, 2012–17 (key figures preserved)

• Nominal GDP (2015): US$21.2 billion 1/
• Population (2015): 7.6 million
• GDP per capita (2015): US$2,745
• Quota: SDR 131.6 million

(Percentage change)

• Real GDP growth: 2012: 6.1; 2013: 4.7; 2014: 7.4; 2015: 6.6; 2016 Est.: 2.5; 2017 Proj.: 3.0
• Resource 2/: 2012: -11.3; 2013: 8.6; 2014: 93.1; 2015: 47.0; 2016 Est.: 2.1; 2017 Proj.: 3.7
• Nonresource: 2012: 7.3; 2013: 4.5; 2014: 2.2; 2015: 2.6; 2016 Est.: 2.8
• CPI (annual average): 2012: 5.0; 2013: 5.2; 2014: 6.0; 2015: 6.9; 2016 Est.: 7.5
• CPI (end-period): 2012: 5.8; 2013: 2.9; 2014: 6.7; 2015: 6.3; 2016 Est.: 7.0

(In percent of GDP) Central government operations:

• Revenue and grants: 2012: 21.3; 2013: 20.9; 2014: 21.7; 2015: 18.3; 2016 Est.: 17.4; 2017 Proj.: 16.7
• Of which : Resource revenue: 2012: 1.4; 2013: 2.4; 2014: 1.1; 2015: 0.8
• Expenditure and net lending: 2012: 22.4; 2013: 27.8; 2014: 28.3; 2015: 23.4; 2016 Est.: 21.8; 2017 Proj.: 19.4
• Net lending(+)/borrowing(-): 2012: -1.2; 2013: -6.9; 2014: -6.5; 2015: -5.1; 2016 Est.: -4.4; 2017 Proj.: -2.8
• Nonresource net lending(+)/borrowing(-): 2012: -3.7; 2013: -8.3; 2014: -8.9; 2015: -6.2; 2016 Est.: -5.2; 2017 Proj.: -3.8

Money and credit (percentage change):

• Domestic credit: 2012: 37.7; 2013: 40.9; 2014: 23.5; 2015: 15.8; 2016 Est.: 4.9; 2017 Proj.: 5.3
• Credit to the private sector: 2012: 12.1; 2013: 17.5; 2014: 3.5; 2015: 3.4; 2016 Est.: 5.7; 2017 Proj.: 8.0
• Broad money: 2012: 10.9; 2013: 5.6
• Interest rate (182-day Treasury bills; period average): 2012: 7.1; 2013: 7.6

(Billions of U.S. dollars) Balance of payments:

• Exports, f.o.b.: 2012: 8.8; 2013: 8.9; 2014: 8.3
• Of which: Resource: 2012: 3.8; 2013: 6.8; 2014: 6.2
• Imports, c.i.f.: 2012: -7.7; 2013: -4.1; 2014: -2.7; 2015: -3.0; 2016 Est.: -3.3
• Current account (including grants): 2012: -6.7; 2013: 0.7; 2014: 2.3; 2015: 1.5; 2016 Est.: -36.1; 2017 Proj.: -31.5
• Gross official international reserves (in months of goods and services imports): 2012: 4.6; 2013: 3.2; 2014: 4.0; 2015: 1.9; 2016 Est.: 1.7; 2017 Proj.: 1.8

Government debt:

• Government gross debt: 2012: 19.1; 2013: 25.0; 2014: 28.1; 2015: 30.4; 2016 Est.: 33.5
• External debt-to-GDP ratio (in percent) 3/: 2012: 6.4; 2013: 10.3; 2014: 12.3
• External debt-service ratio (percent of exports) 3/: (not specified numerically in source)

Exchange rates and indices:

• US$/kina (end-period): 2012: 0.4755; 2013: 0.4130; 2014: 0.3855; 2015: 0.3325; 2016: …
• NEER (2005=100, end-period): 2012: 124.6; 2013: 120.6; 2014: 114.2; 2015: 116.4
• REER (2005=100, end-period): 2012: 128.1; 2013: 126.9; 2014: 123.5; 2015: 131.2
• Terms of trade (2010=100, end-period): 2012: 116.2; 2013: 113.9; 2014: 106.2; 2015: 100.2; 2016 Est.: 92.6

Nominal GDP (in billions of kina):

• Total: 2012: 44.3; 2013: 47.5; 2014: 54.7; 2015: 59.0; 2016 Est.: 61.9; 2017 Proj.: 68.7
• Nonresource nominal GDP: 2012: 38.3; 2013: 41.4; 2014: 44.4; 2015: 47.9; 2016 Est.: 52.1; 2017 Proj.: 57.5

Sources: Department of Treasury; Bank of Papua New Guinea; and IMF staff estimates and projections.

IMF Communications Department, January 30, 2017 — IMF Executive Board Concludes 2016 Article IV Consultation with Papua New Guinea

References

• Papua New Guinea and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home