IMF Concludes 2022 Article IV Consultation and Review of Staff Monitored Program with Papua New Guinea

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Papua New Guinea.

On June 13, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Papua New Guinea, and the IMF Managing Director approved the completion of the Review of the Staff-Monitored Program with Papua New Guinea.

Papua New Guinea (PNG)'s economy is weathering the pandemic well, despite many challenges. After a decline in 2020, real GDP growth in 2021 was driven by the agricultural sector, buoyed by higher commodity prices and Government support. Output in the extractive sector in 2021 declined due to the closures of Ok-Tedi copper mine and Simberi and Porgera gold mines. Inflation in 2021 was at 5.7 percent, owing to freight charges and higher prices of imported goods and fuel, and domestic supply chain disruptions. The kina is still overvalued in real terms, and a shortage of foreign exchange (FX) in the non-resource sector persists. The 2021 fiscal deficit was lower than the budget projection, driven by higher tax revenues and foreign grants while tight control of expenditure was maintained.

Growth is projected to strengthen in 2022, before slowing to 3.0 percent over the medium term. Recovery is expected in the resource sector with Ok-Tedi and Simberi mines returning to normal operations in 2022, thanks to improved COVID preparedness. The reopening of the Porgera gold mine is assumed in late 2022, which will increase growth in 2023. The gradual easing of containment measures and higher capital spending by the government should support recovery in the non-resource sector. The war in Ukraine is impacting PNG through higher commodity prices and higher inflation, with the former leading to a stronger balance of payments and fiscal revenues, given that PNG is a large commodity producer.

Executive Board Assessment[2]

Executive Directors stressed that Papua New Guinea (PNG)'s economy has weathered the pandemic well despite many challenges, and that the medium-term outlook is positive, supported by the resource sector. Directors commended the authorities on their broadly satisfactory performance under the Staff Monitored Program (SMP). They agreed that the main policy priorities are to implement fiscal consolidation and strengthen the monetary policy framework and governance, as well as to promote climate resilience, gender equality, and inclusive growth. Directors welcomed the planned opening of the Fund's resident representative office in PNG to support this policy agenda. They noted that it will also be important to accelerate the COVID-19 vaccination campaign.

Directors encouraged continued fiscal consolidation to meet the requirements of the Fiscal Responsibility Act, strengthen debt sustainability, and rebuild buffers against future shocks. They stressed the importance of raising resource sector revenues and encouraged the adoption of a moderate ad valorem levy on future resource projects. Directors called for additional revenue mobilization and improvements in the payroll system to contain expenditures and increase space for needed social and development spending over the medium term. They urged the authorities to conduct and publish audits of COVID-19 related procurement contracts.

Directors underscored the importance of tightening monetary policy to avoid second-round effects if recent inflationary pressures from higher food and energy prices persist. They emphasized that a comprehensive approach to reinstating kina convertibility is needed, including a review of the monetary policy framework, improving liquidity management, and developing a plan to gradually allow greater exchange rate flexibility and remove exchange restrictions. Directors urged the authorities to address with support from Fund technical assistance the remaining weaknesses in the Central Banking Act related to mandate, governance, autonomy, transparency, and accountability. Directors also encouraged further measures to increase financial inclusion and financial sector development.

Directors welcomed the efforts to strengthen governance, including operationalization of the Independent Commission Against Corruption, and improvements in the AML/CFT framework and regulations. They underscored the importance of a sustained, multi-year 2 program to further improve governance, with close external support, including from the Fund.

Directors remarked that PNG is highly vulnerable to climate change and stressed that policies should focus on developing and financing climate adaptation projects, as well as reducing the rate of deforestation and reaching PNG's nationally determined contributions.