With Papua New Guinea’s government debt set to rise to over 40 per cent of GDP due of the COVID-19 crisis, the International Monetary Fund’s PNG Mission Chief, Scott Roger, explains how the IMF is helping the country get back on a sustainable financial course.

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Since the LNG boom faded in about 2013, Papua New Guinea’s economy has under-performed, according to the IMF’s Scott Roger.

‘It has seen lacklustre growth in both the resource and non-resource sectors,’ he said, while addressing a special Business Advantage PNG online briefing last week.

‘There has been little success in achieving sustained fiscal consolidation. As a result, there has been a string of deficits and rising public debt. The country has had chronic foreign exchange shortages, with exchange restrictions which reflect an overvalued exchange rate.’

In response to these long-term issues, Roger said, the Marape-Steven government in late 2019 initiated an IMF Staff Monitored Program (SMP) in order to have a comprehensive overhaul of government policies. ‘

The SMP is different to many other programs the Fund offers,’ Rogers explained. ‘It does not include money.

‘We agreed completely that cleaning up the arrears is important, but we considered that less urgent than, say, paying teachers or paying for hospital care.’

‘It needs to reflect the authority’s [the government’s] priorities. Our job is to put those priorities into a coherent program that is sustainable from a medium-term perspective. We couldn’t endorse a program that is ultimately unsustainable.’

Debt and deficit

The IMF’s Scott Roger.

Roger told the briefing that the first priority is fiscal consolidation: controlling government debt and deficits.

The aim is to bring PNG’s debt-to-GDP ratio down from around 40 per cent to – over the longer term – the 30 per cent stipulated in the Fiscal Responsibility Act.

To achieve that outcome, it’s necessary to bring the government’s wage bill ‘under control’. It’s also necessary, Roger says, to control or reduce the government’s various Service Improvement Programs – ‘not because they are necessarily bad but because there has been very little accountability for how the money was being spent.’

In making choices about what government spending to cut, it was important to identify what Rogers referred to as non-core spending, ‘essentially lower priority spending’.

Roger said one of those non-core spending areas is the arrears – unpaid bills – owed by the government to the private sector and state-owned utilities, estimated by some to be as much a K1 billion.

‘We agreed completely that cleaning up the arrears is important, but we considered that less urgent than, say, paying teachers or paying for hospital care. If the money is available, it is an excellent way to spend the money.

‘Similarly, with some of the development spending we considered that to be less of a priority. If the money was available, we did not want to stop the government spending on that, but it is to be considered outside the core.’

Floating kina?

A second area of attention, according to Roger, is monetary and exchange rate reform. Waiting for foreign exchange orders to be met, often for many weeks, is a long-term feature of business life in PNG.

‘The government wants to restore kina convertibility. Our view is it requires reducing the backlog of unfilled foreign exchange orders, adjusting the exchange rate to the market clearing level and removing exchange restrictions and impediments to the restoration of inter-bank trading.

‘A medium term revenue strategy is needed to raise sustainable revenue to government.’

‘If you move back towards a flexible exchange rate you need to have more control over monetary policy, so that means strengthening the central bank’s monetary operations and giving the central bank another tool to influence monetary conditions: the interest rate.

‘To do this, the central bank needs to provide proper incentives for the banks to use the inter-bank market rather than [have them] come to the central bank for money in the first instance if they are short of liquidity.’

Structural reforms

Roger said the third emphasis of the SMP is structural reform. This includes collecting more tax revenue.

‘A medium term revenue strategy is needed to raise sustainable revenue to government in order to conduct the kind of investment in basic infrastructure that is needed for development of the economy. The government has to be able to afford that.’

Reforming the State Owned Enterprises (SOEs) to increase their ‘efficiency and accountability’ is also on the list and Roger said there needs to be a ‘broader improvement in governance and a reduction of corruption to improve the business environment and to increase the efficiency of public spending.’ That will require better ‘transparency of government operations’.

Papua New Guinea has received US$364 million (K1.2 million) interest-free loan from the IMF’s Rapid Credit Facility to address its ‘urgent Balance of Payment need and shortfall in fiscal revenues,’ according to Roger.

He noted some of the targets on fiscal performance and debt in the SMP will be missed because of the COVID-19 crisis, but stressed that this would not change the direction of reform.