Prospective IMF loan to push reform in PNG
Originally published by the Economist Intelligence Unit.
The government of Papua New Guinea (PNG) is in talks with the IMF on the provision of a Kina3.3bn (US$940m) loan under a proposed 38‑month programme. The loan will be provided at a concessional rate and will be in the form of budget support, with disbursements dependent on progress against certain metrics.
Why does it matter?
The proposed loan will assist in repairing the public finances and will alleviate pressure on government spending. Priority areas for capital expenditure in the 2023 budget include transport, utilities and health, but the government often struggles to deliver on such commitments. The budget support also provides some assurance that the targeted fiscal deficit this year, equivalent to 4.6% of GDP, will be met. A period of high commodity prices has helped to buffer public revenue, but cost-of-living pressure has created pressure on expenditure.
The IMF will use the loan to push for market-oriented reforms that will strengthen PNG's economy and business environment. Phased disbursement of the loan will be conditional on progress against benchmarks that are yet to be made public. EIU believes that the IMF will seek exchange-rate liberalisation, financial-sector deepening and state-owned enterprise (SOE) reform under the new programme. These generally align with the goals of the current PNG government and an 2020‑21 IMF staff-monitored programme on fiscal reform that was seen as successful. Yet there will be areas of contestation. Recent steps to protect local industries through higher tariffs and to implement ad hoc tax increases in some sectors are unlikely to chime with IMF recommendations.
The loan does not significantly change risk around PNG's debt profile. The government has been shifting deficit financing to foreign, concessional sources. 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. These generous terms will help to contain repayment risk, and a positive outlook for new resource projects points to future public revenue flows. Still, there are concerns related to PNG's ability to meet obligations associated with a debt stock of Kina48.3bn (equivalent to about 50% of GDP) at end‑September 2022. These include a low level of foreign-exchange reserves, contingent SOE liabilities and the economy's vulnerability to fluctuations in commodity prices. Interest costs are expected to comprise about 10% of public expenditure in 2023.
The IMF loan will generate some controversy in local politics but we do not expect that to compromise disbursement. The government will use the loan to push reforms in several areas, but it is unlikely to fully meet all the goals set by the programme.