Reviewing IMF 9 Structural Benchmarks and Performance Criteria for PNG

A Review of the Statement by Robert Nicholl, IMF Executive Director for Papua New Guinea and Rhoda Karl, IMF Advisor to Executive Director [International Monetary Fund, Asia and Pacific Dept, Country Report No. 23/126, published 29 March 2023]

Download the full report, click here (PDF, 1.7MB)

Introduction

On March 22, 2023, Robert Nicholl, the IMF Executive Director for Papua New Guinea, and Rhoda Karl, Advisor to Executive Director, released a statement that outlines the economic conditions in Papua New Guinea (PNG).

The statement addresses the progress PNG makes in meeting its quantitative and structural benchmarks, and its commitment to continue its economic reforms. 

This article provides an overview of the statement, highlights the nine Structural Benchmarks (SBs) and several Quantitative Performance Criteria (QPC) and indicative targets set by the authorities, and outlines the main ideas presented in the statement.

Overview of PNG

PNG is one of the most culturally diverse countries in the world with over 800 different languages spoken among its nine million people. 

However, much of the country is covered with rugged mountains and swamps, and access to government services and the formal economy remains a challenge for most of the population. 

The vulnerability to climate change and frequent natural disasters presents additional challenges to the country's economic development.

Economic Conditions

The PNG economy is on course to register a strong growth of 4.5 percent in 2022, driven by a strong recovery in the non-resource sector. 

Growth is expected to moderate to 3.7 percent in 2023 and converges to potential over the medium term, driven by higher private investment and the government’s public investment program. 

Inflation accelerated to 6.6 percent in 2022, but authorities used fiscal and monetary policy instruments to cushion the impact on the cost of living and anchor inflation expectations. 

The risks to the outlook for PNG are tilted to the downside due to weaker external demand, tighter global financial conditions, and climate-related natural disasters.

Structural Benchmarks and Quantitative Performance Criteria

The PNG authorities have committed to achieving nine Structural Benchmarks (SBs) and several Quantitative Performance Criteria (QPC) and indicative targets. 

The SBs include 

1. improving public financial management, 
2. implementing a fiscal responsibility law, 
3. improving the governance and performance of State-Owned Enterprises, 
4. strengthening monetary policy and exchange rate frameworks, 
5. improving the supervision of banks and non-bank financial institutions, 
6. improving access to finance for SMEs, 
7. improving data quality and compilation, 
8. enhancing revenue administration, and 
9. addressing the systemic and systematic corruption in PNG public service.

The QPCs and indicative targets include 

• fiscal consolidation, 
• revenue collection, 
• public debt management, 
• inflation, 
• international reserves, and 
• the balance of payments.

Blended ECF/EFF Financing Program

The financing program builds on the policy objectives of the last Staff Monitored Programs (SMP 2019 & SMP 2022). The IMF-monitored programs were to 

• progress further reforms to budget repair and fiscal consolidation, 
• improve governance, and 
• strengthen the monetary policy and exchange rate policy frameworks while addressing the prospective balance of payments needs. 

The program aims to leave PNG in a much stronger position economically, fiscally, and through reduced debt exposure.

Conclusion

In closure, the statement by Robert Nicholl, Executive Director for Papua New Guinea, and Rhoda Karl, Advisor to Executive Director, highlights the progress made by PNG in meeting its quantitative and structural benchmarks and its commitment to continue its economic reforms. 

The nine SBs and QPCs outlined in the statement provide a roadmap for PNG's economic development, and the financing program aims to leave the country in a much stronger position economically and fiscally. 

Despite the downside risks, the potential for significantly larger LNG revenues and the commencement of new extractive projects offer notable upside risks over the medium term.

Read about the Pros and Cons of the IMF Loan, click here on the IMAGE.

IMF Push Reforms in PNG with $918 million Short and Long Term Loans

The International Monetary Fund (IMF) has approved a 38-month Extended Credit Facility (ECF) and Extended Fund Facility (EFF) for Papua New Guinea (PNG) in the amount of SDR684.3 million, equivalent to $918 million, to address the economic impacts of multiple shocks, including low commodity prices, drought, earthquakes, and the COVID-19 pandemic.

See the definitions of ECF and EFF at the end of this article.

Reforms

The program aims to protect vulnerable groups and promote inclusive growth through debt sustainability, foreign exchange (FX) shortage alleviation, and enhanced governance and anti-corruption efforts. 

The IMF believes that the program will support and enhance PNG's credibility and improve its access to international financial markets.

What is not clear is what 'exactly' is/are changing and how the changes will affect the institutions and the people they serve.

Key Rates

The IMF loan will be subject to a 2.4% interest rate, lower than the current weighted average interest rate for external loans (2.8%) and domestic loans (7.2%). 

Repayment will be over a ten-year period, with a 5.5-year grace period.

It may seem like a good deal, but a loan is a loan. And, an IMF loan that comes with institutional reformations and conditions has a lot to be desired. 

If it sounds too good to be true, it probably is.

Pros and Cons of the IMF loans

Pros:

• The loan will provide much-needed financial support to the PNG government and enhance its credibility.
• The loan will help repair public finances and alleviate pressure on government spending.
• Priority areas for capital expenditure in the 2023 budget include transport, utilities, education and health.
• The IMF's support will improve PNG's access to international financial markets.

Cons:

• Phased disbursement of the loan will be conditional on progress against benchmarks that are yet to be made public. (This is IMF's secret weapon, it can do what it thinks is best, and as it pleases - not good for PNG.)
• The IMF will seek exchange-rate liberalisation, financial-sector deepening, and state-owned enterprise (SOE) reform under the new program, which may not align with recent steps taken by PNG to protect local industries through higher tariffs and ad hoc tax increases. This will be forced upon the PNG government whether it likes it or not!
• The loan does not significantly change risk around PNG's debt profile, which stands at K48.3bn.
• Continued policy reforms and international support are needed to address PNG's vulnerability to domestic and external shocks. (The details of the reforms are not clear)

 

Read about the 9 structural benchmarks that IMF is setting for PNG, Click Here.

IMF Push Reforms

The IMF's approval of the ECF and EFF is a significant development for PNG, but policy reforms and international support are still needed to address the country's vulnerability to economic shocks. 

While the loan's generous terms will help to contain repayment risk, the government must prioritize debt sustainability and FX shortage alleviation to address PNG's most pressing challenges.

Extended Credit Facility (ECF) and Extended Fund Facility (EFF) 

Notes on: ''The International Monetary Fund has approved a 38-month Extended Credit Facility (ECF) and Extended Fund Facility (EFF) for Papua New Guinea ''

The ECF and EFF are both lending arrangements that provide financial assistance to countries facing balance of payments difficulties. The ECF is a medium-term lending facility, while the EFF is a longer-term lending facility.

The ECF for PNG is designed to provide financial support to the country over a period of 38 months, while the EFF provides support over a longer period of time. The purpose of both facilities is to help PNG address its economic challenges while also implementing necessary structural reforms that can promote sustained economic growth and development.

The recent purported IMF debt facilities are a blended model pegged to 38 months and a further 10 years depending on IMF's ongoing situation analysis.

The policy conditions attached to both facilities include measures to strengthen public financial management, enhance revenue mobilization, improve the business climate, and address governance challenges. These reforms are intended to help restore macroeconomic stability and promote sustained economic growth and development in PNG.

The approval of both the ECF and EFF programs are conditional on IMF reforms in Papua New Guinea.