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Papua New Guinea: IMF Executive Board Concludes 2013 Article IV Consultation

Press Release No. 13/457 November 18, 2013

On November 11, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Papua New Guinea.

Papua New Guinea has achieved strong economic growth over the past decade, benefitting from high commodity prices, mineral investment inflows, sound macroeconomic policies, and financial sector stability. The construction of a large-scale liquefied natural gas (LNG) project has boosted growth and employment over the past few years. However, as the LNG project moves from the construction to production phase, the nonmineral sector faces a sharp slowdown, spotlighting the need for structural reforms and financial deepening to support more inclusive growth.

The current account deficit is expected to narrow sharply in 2013 as imports and income outflows decline with the winding down of LNG project construction. Capital inflows associated with the LNG project are also declining, and, together with falling commodity prices, have led to the depreciation of the kina since mid 2012. Pass-through effects from kina depreciation and increased government spending are likely to raise inflation to about 4 percent in 2013 from 2 percent in 2012, but underlying price pressure remains moderate. The Bank of Papua New Guinea has kept the policy interest rate unchanged since early 2013 given weakening nonmineral sector demand, but has issued central bank bills and raised cash reserve requirements to absorb excess liquidity in the banking system.

Papua New Guinea continues to face daunting development challenges, with power and transport infrastructure and basic education and health services remaining undersupplied. The change in growth composition further increases the need to accelerate structural reforms to diversify the economy. To deliver quicker development results and counter the slowdown in the nonmineral sector, the government increased expenditure substantially in 2013 to target its development enablers—law and order, health, education, and infrastructure. The 2013 budget envisages a fiscal deficit of 7.3 percent of GDP with a strong push to devolve spending to provincial, district, and local governments. However, capacity constraints have delayed project implementation and the quality of spending has been mixed.

Risks to economic growth in 2013-15 are broadly balanced, but tilted toward the downside over the longer term. A weak global economy could further dampen external demand and commodity prices, while global shale gas development could reduce LNG prices, with each potentially exerting pressure on government revenue, export earnings, and the kina. Lower LNG and mineral prices, together with uncertainty surrounding the ending of easy global monetary conditions, may also reduce future inflows of foreign direct investment.

Executive Board Assessment2

Executive Directors commended the authorities for achieving a strong economic performance over the past decade. While growth prospects remain favorable in the medium term, the expected slowdown in the nonmineral sector, uncertain mineral prices, and large development needs pose challenges. Structural reforms, accompanied by a prudent fiscal stance, will be needed to reduce vulnerabilities and promote more inclusive growth.

Directors saw some scope for fiscal support to growth in the short term, but cautioned that spending should stay in line with PNG’s absorptive capacity. While noting the need to allocate significant resources for development, they stressed the importance of fiscal consolidation over the medium term and improvements in spending quality. In this context, they welcomed the commitment to keeping public debt below 30 percent of GDP over the medium term.

Directors agreed that the current monetary policy stance is appropriate given low inflation and the slowdown in the nonmineral sector, but advised the authorities to stand ready to tighten policy should inflationary pressures arise. They welcomed efforts to absorb excess liquidity to strengthen monetary policy transmission and encouraged continued vigilance on financial sector risks in light of possible price corrections in the property market.

Directors noted the role of PNG’s floating exchange rate regime in helping absorb external shocks and maintaining a strong external position. They recommended close monitoring of private sector external debt and associated risks should LNG prices decline significantly.

Directors welcomed the authorities’ continued efforts to ensure better use of resource revenues, and their intention to join the Extractive Industries Transparency Initiative. They also supported plans to make the Sovereign Wealth Fund operational soon, while ensuring that resource revenues are not diverted away from the fund.

Directors encouraged the authorities to accelerate structural reforms to promote more inclusive growth. Priorities are to strengthen the agriculture and small- and medium-size enterprise sectors, broaden access to finance, create an enabling business environment, and develop human resources. It will also be important to improve the efficiency and ensure appropriate governance of public enterprises.

Directors called for efforts to address long-standing shortcomings in CPI and national accounts statistics and supported the provision of technical assistance in this area. They also encouraged swift action to ensure compliance with international standards for anti-money laundering and combating the financing of terrorism.