Saturday, 25 May 2024

IMF approves $918M credit facility for Papua New Guinea

5 min read

 The International Monetary Fund (IMF)'s Executive Board today approved the 38-month arrangements under the extended credit facility and extended fund facility (ECF/EFF) for Papua New Guinea (PNG) amounting to SDR684.3 million ($918 million).

The programme seeks to protect the vulnerable and foster inclusive growth. The reforms will focus on strengthening debt sustainability, alleviating foreign exchange (FX) shortages, and enhancing governance and operationalising the anti-corruption framework.

In recent years, PNG has been hit by multiple shocks including low commodity prices from 2014 to 2020, a severe drought from 2015 to 2016, a major earthquake in 2018, and the COVID-19 pandemic from 2020 to 2021. These shocks softened growth and led to an aggravation of FX shortages and a build-up of public debt. PNG faces substantial development needs in order to tackle high poverty, with most of the population living in hard-to-reach rural areas and lacking access to basic infrastructure and services.

A recovery from the pandemic is now underway: real gross domestic product (GDP) is estimated to have grown by 4.5% in 2022 as most COVID-related restrictions were removed, allowing the non-resource sector to rebound. Growth in 2023 is projected to be 3.7 %, driven by the non-resource sector. Growth in 2024 is projected to accelerate to 4.4 %, driven by the expected reopening of Porgera gold mine. The post-pandemic recovery has also been supported by higher commodity prices, raising fiscal and export revenues, while causing domestic inflation to rise.

The medium-term outlook is positive. There are good prospects for new investments in the resource sector, which would boost growth, exports, and fiscal revenue collection. However, PNG is vulnerable to both domestic and external shocks, which is exacerbated by the buildup in public debt, ongoing FX shortages, and capacity constraints that impact the government’s ability to formulate and implement development policies.

At the conclusion of the Executive Board’s discussion, Kenji Okamura, deputy managing director, and acting chair said, “Papua New Guinea has experienced multiple external shocks and natural disasters in recent years. These events have adversely impacted economic growth, worsened foreign exchange shortages that hampered private sector development, and increased public debt. The country also has large development needs, including bringing down poverty and improving access to infrastructure and services in remote rural areas. To address these long-standing structural issues, PNG has undertaken wide-ranging reforms, supported by the IMF and other international partners, including under two Staff Monitored Programmes (SMPs).

Building on the progress under the SMPs, the authorities need to accelerate structural reforms to achieve resilient, inclusive, and sustainable growth. Debt vulnerabilities will be addressed by sustaining ongoing fiscal consolidation efforts while creating space to tackle development needs and preserve social spending. To reduce foreign exchange shortages, the authorities are committed to strengthening central bank operations and moving gradually to a market-clearing exchange rate. To foster greater transparency and accountability and strengthen the investment climate, the authorities will build on recent improvements to the anti-corruption and governance frameworks and make them effective.

The ECF/EFF arrangements will help address the balance of payment needs and rebuild the buffers needed to facilitate a gradual and orderly return to greater exchange rate flexibility. The programme will also go toward financing the budget, thereby supporting the authorities’ ambitious fiscal consolidation plans while avoiding a disruptive adjustment. It is also expected to play a catalytic role with other development partners. Given the institutional and technical capacity constraints faced by the authorities, reform measures supported by the program are streamlined, focused, and will be carefully sequenced. Timely capacity development and advice from the IMF will support reform implementation throughout the duration of the programme.

Re-disseminated by The Asian Banker

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