Forex, debt and governance: the IMF assesses Papua New Guinea’s progress


A year ago, the International Monetary Fund commenced a program in Papua New Guinea, focused on improving government debt, foreign exchange shortages and governance. Business Advantage PNG sits down with the IMF’s Resident Representative in PNG, Sohrab Rafiq, to discuss progress on these three critical issues.

(From left) The IMF’s Sohrab Rafiq, with IMF Deputy Director Bo Li, PNG Prime Minister James Marape and IMF Deputy Division Chief for Asia Pacific Tahsin Saadi Sedik during the recent opening of the IMF’s Port Moresby office.

Business Advantage PNG: Has there been any change to the IMF’s program as a result of the change of Treasurer (the Prime Minister now being Treasurer)?

Sohrab Rafiq (IMF): The very simple answer to that is no. The IMF is apolitical. We work with whoever’s in office. As long as any government requests help, we will always be there.

On the 29th of February, we officially opened a new IMF office in the capital after over 20 years. The IMF’s commitment to the country is for the long-term. The new IMF office will serve as a hub for collaboration, providing invaluable support and expertise to the government and people of Papua New Guinea (PNG) as they navigate the complexities of economic development and the global economy.

Business Advantage PNG: The IMF’s December report made the observation that, generally speaking, the commitments that the government’s made as far as managing debt are concerned have been met and it’s under control …

Sohrab Rafiq (IMF): Under the program, what we do is we set ceilings on the amount of new external debt the government can accrue in any one fiscal year. All I can tell you is so far those they’ve not breached those ceilings. In that sense, from our perspective, their borrowing has been prudent within the limits set by the IMF program.

Then, on top of that, if you look at the fiscal deficit, it’s projected to come down in 2024 compared to 2023. And, in 2023, the fiscal deficit was smaller than 2022. In general, the fiscal direction from our perspective is going in the right direction.

“We would like to see the FX shortages removed because we agree it’s the single biggest impediment to growth and investment”

The other thing that I would note is that PNG had its first review and it successfully completed its first review. Most IMF programs actually don’t pass the first review. The fact that PNG got past the first review is actually quite a significant milestone. The second review will be coming up in a few months.

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This is not a typical IMF program, in the sense that some countries will wait to get into a crisis and, once they’ve gone into a crisis, then they’ll come and seek assistance from the IMF. In this case, there’s no crisis. The government just wanted help with their reform agenda, and that’s what we are here to support and provide assistance with. The most successful reforms are taken from a position of strength, which is what PNG is trying to do.

Business Advantage PNG: Do you have any projections for the cost of servicing government debt and what impact that’s going to have over the next 12 to 24 months?

Sohrab Rafiq (IMF): It’s going to be stable. It’s not going to rise in part because – and this is where IMF financing really helps – it’s typically at much lower interest rates.

The other important thing to note is that the IMF’s role in this program actually is to catalyse financing. In terms of the total financing package, we’re a one-third player in this: our financing is about US$1 billion. Typically, once you have an IMF program, it will catalyse the World Bank, Asian Development Bank, and financing from other bilateral donors such as Australia and so on. Because of that, the country can borrow more cheaply at concessional rates than it would otherwise.

Business Advantage PNG: Let’s talk about foreign exchange (FX) and the ongoing adjustment in the value of the kina. What can we expect over the next 12 months?

Sohrab Rafiq (IMF): In 2023, because of the IMF program target, there was more FX going into the market than previously because of a US 100 million FX intervention target, which the central bank met.

In 2024, the IMF program requires the Bank of Papua New Guinea (BPNG) to carry out FX interventions sufficient to clear FX payments for any essential goods. What this mean in practice is that it will help clear any stock of unmet import-related orders on the FX order book older than two months.

All this has meant there’s more FX going into the market, but there’s also more FX demand because of the backlog. If the BPNG wants to put more FX into the market than the program target, it can do so.

Under the IMF program, the BPNG has eliminated the requirement of a tax clearance certificate and associated red tape and published all regulations and directives regarding the FX market on their website.

“We want the government to rebuild its fiscal space, and prioritise spending on health, education and law”

From that perspective, the program is making FX availability easier and pushing to ensure the FX market works in an open and transparent way.

We would like to see the FX shortages removed because we agree it’s the single biggest impediment to growth and investment and so on.

Business Advantage PNG: By how much is the kina overvalued?

Sohrab Rafiq (IMF): Based on the report we published in December, what happened is the kina adjusted against the US dollar. The Aussie dollar also depreciated so that, on a trade weighted basis, the value of the kina remained quite stable.

Because of cross-currency movements elsewhere, we maintained that the exchange rate was overvalued by around 13 per cent.

Of course, things have changed since then so, in our next published report in mid-2024, we will have a revised measure of kina under/over misalignment.

Business Advantage PNG: Your December 2023 report also makes some assessments about the potential upside and downside risks in PNG. Which are the ones you think are the most important for investors to note?

Sohrab Rafiq (IMF): For us, it’s basically a drop in commodity prices. Natural disasters is another big one. Also, we are now entering El Niño, the first one in seven years. If you look at PNG’s inflation performance, historically, it’s been quite closely correlated with climate developments. If you’re going to have drier seasons, is that going to do something to inflation?

There’s an economic cycle which drives our program requirements. But we also know, as in any vibrant democracy like PNG’s, there’s a political cycle as well, that can also risk delays. Despite this, program performance so far has been excellent. It’s now about maintaining that policy reform momentum.

Business Advantage PNG: The other thing that’s notable about recent budgets is that the revenue side for the government has improved significantly?

Sohrab Rafiq (IMF): Yes. In the years preceding the program, revenues declined. Some of that was on the back of lower commodity prices. Revenues have picked up again, some of that is due to high commodity prices.

The challenge going forward is to ensure that these revenue increases are sustainable and, therefore, structural, in nature. We don’t want to see revenues falling again. We want the government to rebuild its fiscal space, and prioritise spending on health, education and law and order, including crucial physical infrastructure.

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