IMF Executive Board Concludes 2017 Article IV Consultation with Papua New Guinea

IMF News, December 29, 2017

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Bibliographic details

• Published: December 29, 2017

Overview and recent developments

• Date: December 29, 2017.
• In 2015-16, growth of the Papua New Guinea (PNG) economy slowed sharply, to under 3 percent, in response to falls in major export commodity prices, the completion of the huge PNG LNG pipeline project, and a severe drought.
• In 2017 economic activity remained subdued.
• Declining tax revenues and a substantial fiscal deficit, together with an increasing debt-to-GDP ratio, were driven by slow growth, generous tax treatment of the LNG project, the drought, and weak tax administration.
• Inflation was boosted to over 6 percent by drought effects but is beginning to ease.
• PNG is running a large current account surplus but is experiencing large financial account outflows related to project debt repayments, resulting in a shortage of foreign exchange (FX).
• FX reserves have declined gradually to around $1.7 billion (covering 5 months of imports).
• A new government, elected in July, introduced a Supplementary Budget in September with measures to narrow the fiscal deficit.
• Outlook on unchanged fiscal and monetary policies:
  • Several more years of economic stagnation.
  • Growth expected to remain under 3 percent.
  • Inflation expected to continue easing.
• Near-term risks are tilted to the downside, reflecting potential fiscal deficit financing difficulties and increasing distortions associated with the FX shortage.
• Medium-term risks are more balanced due to upside potential from new resource sector projects and possibly a pickup in commodity export prices.

Executive Board assessment and policy recommendations

• Directors noted causes of weak growth since 2016: weak prices for major export commodities, a severe drought, and the end of a major investment project.
• Large financial account outflows related to project debt repayments contributed to a foreign exchange shortage.
• Directors recommended decisive steps to strengthen fiscal and balance of payments positions.
• Fiscal policy:
  • Strong commitment to fiscal consolidation over the medium term is essential to reduce the debt-to-GDP ratio and lower the risk of debt distress.
  • Fiscal consolidation should involve expenditure measures, including streamlining public sector employment and payroll.
  • Prioritize spending on education, health care and infrastructure.
  • Implement a medium-term strategy to increase revenues to support higher and more inclusive growth.
• Exchange rate and monetary policy:
  • Increased exchange rate flexibility is needed to address the foreign exchange shortage and to offset the output effects of fiscal consolidation.
  • Recommended a gradual approach to exchange rate adjustment and flexibility to balance the impact on inflation in the short run.
• Structural reforms:
  • Implement structural reforms to strengthen PNG’s non-resource sectors.
  • Development strategy should include measures to ensure PNG benefits more substantially from its natural wealth.
• Other recommendations:
  • Continue efforts to improve macroeconomic statistics for completeness, timeliness and accuracy.
  • Continue to improve the effectiveness of the AML/CFT framework.

Key indicators and projections (selected from Table 1)

• Nominal GDP (2016): US$21.1. billion 1/
• Population (2016): 7.9 million
• GDP per capita (2016): US$2,657
• Quota: SDR 131.6 million (14th Review: SDR 263.2 million)

Real sector (Percentage change)

• Real GDP growth: 2013: 3.8; 2014: 12.5; 2015: 8.0; 2016: 2.4; 2017 Est.: 2.2; 2018 Proj.: 2.5
• Resource 2/: 2013: 5.1; 2014: 71.5; 2015: 43.2; 2016: 6.4; 2017 Est.: 4.4; 2018 Proj.: 3.5
• Non-resource: 2013: 3.6; 2014: 3.3; 2015: -1.2; 2016: 0.9; 2017 Est.: 1.4; 2018 Proj.: 2.1
• Agriculture, forestry and fishing (share): 2013: 19.3; 2014: 17.8; 2015: 17.0; 2016: 17.4; 2017 Est.: 18.1; 2018 Proj.: 18.7
• Mining and quarrying (share): 2013: 10.4; 2014: 9.1; 2015: 6.6; 2016: 7.5; 2017 Est.: 7.9; 2018 Proj.: 7.9
• Oil and gas extraction (share): 2013: 3.2; 2014: 11.3; 2015: 19.7; 2016: 17.6; 2017 Est.: 15.4; 2018 Proj.: 14.5
• CPI (annual average): 2013: 5.0; 2014: 5.2; 2015: 6.0; 2016: 6.7; 2017 Est.: 2.6
• CPI (end-period): 2013: 2.9; 2014: 6.3; 2015: 3.4

Public finances (In percent of GDP)

• Revenue and grants: 2013: 20.7; 2014: 21.0; 2015: 17.2; 2016: 15.6; 2017 Est.: 15.0; 2018 Proj.: 14.9
  • Of which : Resource revenue: 2013: 2.3; 2014: 1.0; 2015: 0.6; 2016: 0.5
• Expenditure and net lending: 2013: 27.6; 2014: 27.3; 2015: 21.2; 2016: 20.2; 2017 Est.: 18.2; 2018 Proj.: 18.0
• Net lending(+)/borrowing(-): 2013: -6.9; 2014: -6.3; 2015: -4.0; 2016: -4.6; 2017 Est.: -3.2; 2018 Proj.: -3.1
• Non-resource net lending(+)/borrowing(-): 2013: -8.3; 2014: -8.6; 2015: -5.0; 2016: -5.2; 2017 Est.: -3.8; 2018 Proj.: -3.6

Money and credit (percentage change)

• Domestic credit: 2013: 40.9; 2014: 23.5; 2015: 15.8; 2016: 24.6; 2017 Est.: 5.8
• Credit to the private sector: 2013: 17.5; 2014: 7.2; 2015: 4.2; 2016: 3.0
• Broad money: 2013: 10.9; 2014: 9.0; 2015: 8.5
• Interest rate (182-day T-bills; period average): 2013: 5.3; 2014: 7.1; 2015: 7.4; 2016: 4.8

Balance of payments (In billions of U.S. dollars)

• Exports, f.o.b.: 2013: 8.8; 2014: 8.4; 2015: 7.8
  • Of which: Resource sector: 2013: 6.8; 2014: 6.5
• Imports, c.i.f.: 2013: -6.5; 2014: -4.5; 2015: -2.7; 2016: -2.4; 2017 Est.: -2.5; 2018 Proj.: -2.6
• Current account (including grants): 2013: 0.3; 2014: 3.1; 2015: -30.8; 2016: 1.3; 2017 Est.: 13.3; 2018 Proj.: 15.2
• Gross official international reserves: 2013: 13.9; 2014: 14.4; 2015: 2.8; 2016: 1.9; 2017 Est.: 1.7
• In months of goods and services imports: 2013: 4.3; 2014: 5.9; 2015: 5.5; 2016: 5.4

Public debt and external metrics

• Government gross debt: 2013: 24.9; 2014: 27.1; 2015: 28.9; 2016: 33.3; 2017 Est.: 35.4; 2018 Proj.: 37.0
• External debt-to-GDP ratio (in percent) 3/: 2013: 6.2; 2014: 8.9; 2015: 10.2
• External debt-service ratio (percent of exports) 3/: 2013: 1.1; 2014: 1.6

Exchange rates and terms of trade

• US$/kina (end-period): 2013: 0.4130; 2014: 0.3855; 2015: 0.3325; 2016: 0.3150
• NEER (2005=100, end-period): 2013: 120.6; 2014: 114.2; 2015: 116.4; 2016: 104.2
• REER (2005=100, end-period): 2013: 127.0; 2014: 123.6; 2015: 131.4
• Terms of trade (2010=100, end-period): 2013: 99.3; 2014: 86.1; 2015: 70.6; 2016: 94.9; 2017 Est.: 85.0; 2018 Proj.: 84.8
• Nominal GDP (in billions of kina): 2013: 47.7; 2014: 56.6; 2015: 63.6; 2016: 67.3; 2017 Est.: 70.2; 2018 Proj.: 73.2
• Non-resource nominal GDP (in billions of kina): 2013: 41.2; 2014: 45.0; 2015: 46.8; 2016: 50.4; 2017 Est.: 53.8; 2018 Proj.: 56.8

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

IMF Executive Board Concludes 2017 Article IV Consultation with Papua New Guinea, December 29, 2017.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Papua New Guinea and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.imf.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home