Prospective IMF loan to push reforms in PNG

The government of Papua New Guinea (PNG) is in talks with the International Monetary Fund (IMF) for a Kina3.3bn (US$940m) loan under a proposed 38-month program. 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.

The proposed loan is expected to help repair public finances and alleviate pressure on government spending. It will also provide assurance that the targeted fiscal deficit for 2023, equivalent to 4.6% of GDP, will be met. While high commodity prices have helped to buffer public revenue, cost-of-living pressures have 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. The phased disbursement of the loan will be conditional on progress against benchmarks that are yet to be made public. The IMF is expected to seek exchange-rate liberalization, financial-sector deepening, and state-owned enterprise (SOE) reform under the new program.

The loan does not significantly change the 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. However, 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.

The IMF loan will generate some controversy in local politics, but disbursement is not expected to be compromised. 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 program.

Overall, the proposed IMF loan is a significant step towards PNG’s economic recovery and could help to attract further investment in the country. However, the government will need to balance the implementation of IMF-recommended reforms with the need to protect local industries and manage its debt obligations.

The actual IMF-recommended reforms are still sketchy at present.

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