On November 26, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Papua New Guinea.
INVC NEWS
Washington, D.C.
In 2018 growth of the Papua New Guinea (PNG) economy was adversely affected by a large earthquake, which temporarily halted production in much of the resource sector. Although APEC activities and good agricultural harvests have provided some offset, overall GDP growth for the year is estimated to be close to zero, but recover to 3.8 percent in 2019 as resource output returns to normal. Weak demand and improved agricultural supply have continued to contribute to an easing of inflation to around 4½ percent. PNG continues to face a shortage of foreign exchange, despite a large current account surplus. Large resource export revenues are almost entirely offset by resource project debt repayments and dividends. The shortage has led to rationing of foreign exchange, which has dampened growth. International reserves stood at $1.7 billion at end-2017, equivalent to 5 months of imports.
The main macroeconomic challenges for the government are to finish putting in place policies that will help promote economic stability, and to strengthen its long-term development framework. In 2017-18, the new government made important progress in narrowing the fiscal deficit, and adopted a medium-term revenue strategy. But progress on fiscal consolidation has stalled, and the debt-to-GDP ratio is well above the medium-term target. The monetary authorities have begun to address the foreign exchange problem by facilitating exchange rate adjustment, increasing the supply of foreign exchange, and strengthening the monetary framework.
Near-term risks to the outlook are roughly balanced. A weakening of global growth could lower commodity export prices, dampening growth and making fiscal adjustment more difficult, but reforms to exchange rate policy could have a more favorable impact on growth than expected.
Over the medium term, risks are more to the upside owing to the likelihood that new resource sector projects will begin to get underway.
Executive Board Assessment[2]
Executive Directors observed that growth in 2018 has continued to be sluggish, reflecting low commodity prices and the effects of a large earthquake that disrupted oil, gas, and mineral exports. They took positive note that economic growth is expected to be stronger in 2019. In this context, Directors agreed that strengthening macroeconomic policies and implementing structural reforms would help reduce risks and support inclusive longer-term economic growth.
Directors welcomed the confirmation of the government’s long-term debt/GDP target of 30 percent and the adoption of a zero non-resource primary balance as a medium-term objective. The adoption of an expenditure rule consistent with the revenue target would help reconcile the fiscal targets and guide budget policy. Directors noted that the recent issuance of a debut sovereign bond is a positive development, and welcomed the authorities’ intention to use the funds to improve the domestic public debt profile and help resolve foreign exchange shortages. Directors also welcomed the progress in strengthening public financial management.
Directors encouraged the government to continue to strengthen its fiscal framework, and noted that in the near term, additional fiscal consolidation is needed to reduce the risk of debt distress. This could be achieved through a combination of increases in revenue and reduction in spending, particularly on the government wage bill and grants. In this connection, Directors welcomed the government’s strong commitment to strengthen domestic revenue mobilization through implementation of its Medium-Term Revenue Strategy, the significant increase in tax revenue through efforts to strengthen compliance, and tighter government payroll controls.
Directors agreed that the greater exchange rate flexibility that has been pursued in recent months should be continued in order to support growth in the non-resource sector. Eliminating the backlog of foreign exchange orders and strengthening liquidity management and foreign exchange operations would support the re-establishment of an interbank foreign exchange market. Carefully monitoring the impact of foreign exchange measures on the financial sector will be important.
Directors encouraged the authorities to seek better terms in negotiations for new resource projects and to develop a framework for managing resource revenues. The development of the non-resource sector should be fostered through provision of public services and infrastructure and be taken into account in revenue mobilization. Directors also supported the elimination of corruption and strengthening of governance as an important part of Papua New Guinea’s development strategy, and commended recent progress in this area.
Directors welcomed improvements in macroeconomic statistics, but noted that further progress is needed to improve data completeness, timeliness, and accuracy, and supported provision of additional technical assistance in this area.
