The International Monetary Fund (IMF) Country Head, Mr. Sohrab Rafiq, recently gave an update on the multinational lender’s program with the Papua New Guinea government.
Mr. Rafiq highlighted the progress made in the IMF program, with successful completion of the first and second review missions, and underlined the importance of the IMF's concessional financing, offering affordable options for the PNG government.
Mr Rafiq’s presentation addressed the government's fiscal position, noting a decline in the fiscal deficit post-COVID, with projections indicating a return to a balanced budget by 2027, provided government implements policies effectively.
He also discussed foreign exchange (FX) issues, emphasizing evidence-based policymaking to guide advice on the exchange rate and FX matters.
“Based on 2023 actual fiscal numbers, the fiscal deficit now of the government of PNG is back where it was pre-COVID. Based on current projections and based on discussions that we've had on the policies that are in the pipeline, on the revenue-generating capacity of the government, on the spending, and so on, the fiscal deficit is projected to narrow over the coming years,” Mr. Rafiq said.
“Assuming that the policies are implemented and assuming that there's no large economic shock, by 2027 the government should be running a balanced budget, which is quite an achievement,” he added.
Mr. Rafiq also tackled head-on the misconceptions surrounding PNG’s debt situation in the media.
He addressed the prevalent notion that PNG's debt is alarmingly high, stating: "When compared with regional peers, PNG's debt is broadly in line and not exceptionally high. In fact, it's lower than countries like Fiji, Mongolia, and Malaysia, all of which are significant commodity exporters."
The Port Moresby Chamber of Commerce and Industry (POMCCI) hosted the Business Breakfast where the updates were shared, on May 10th at the Royal Papua Yacht Club, which also included commentary from Mr. Marcel Schroeder, PNG Country Economist of the Asian Development Bank.
Clarifying IMF's role and financing, Mr Rafiq said contrary to misconceptions, the Fund’s role is to advise and support the PNG government, not to undermine sovereignty. The IMF provides concessional financing at low interest rates to assist in fiscal management, he noted.
He also underscored the successful completion of the first two reviews of the IMF program in PNG, attributing it to the government's commitment to reform.
“The IMF is only here to advise and support the government. The ownership of the government, the ownership of the reform agenda belongs to the government.
Mr. Rafiq acknowledged the challenges of foreign exchange shortages and overvalued exchange rates in PNG. He explained the economic implications, such as reduced GDP growth and declining per capita income, citing empirical evidence from other countries.
He stressed the need for investment and highlighted the IMF's role in providing policy advice and financing to address these challenges.
“The kina has been depreciated against the US dollar, which is true. Whenever you are sort of looking at the exchanges, you need to look at what is your initial condition. Where are you starting? Where are we today? I don't think that's a controversial statement to make.”
“Now, what that means is that there's a persistent, more accumulation in the exchange rate because of the persistent mismatch of supply and demand for foreign currency. Because of this mismatch exists, the central bank, will have to come into the market and make interventions and try and enforce policies.”
Mr Rafiq reiterated, “There is not a single example of a country (in Asia-Pacific) that has diversified its economy with a normal value exchange. That's just a matter of historical record.”
Within the IMF, comprising 190 countries and in comparison, PNG is not the only country going through currency deficit and foreign exchange issues, he said.
“That's just empirical data. Now, with a normal value exchange rate, there's a mismatch of supply and demand in the foreign exchange market. The central bank has to intervene to try and clear that mismatch.
“Of course, unless you're an oil-rich dollar country that has trillions of dollars in foreign exchange and you can go on to intervene in the market at any rate and clear the market at any rate, unless you're a country like that, BPNG has to manage its foreign exchange reserves. And it can only intervene at the level that is sustainable for its balance and for its level of foreign exchange. And that's what produces the effects.”
Mr. Rafiq outlined the importance of gradual adjustments in the exchange rate to align with market levels, emphasizing the need for sustainable reforms. He reassured stakeholders that the IMF stands ready to support PNG in reversing economic challenges and promoting growth.
“If this country's average growth rate had been maintained at its pre-2014 level, the economy of PNG would be billions of dollars bigger than what it is today. Billions of dollars bigger than what it is today. Now, some of you may argue it's entirely coincidence that the declining of PNG's average GDP growth happens when the FX shortage has begun.”
“I've heard some people say this, that it's entirely coincidental. But if you look at the patterns in the data, it's an incredible coincidence that PNG's GDP growth began declining when the FX shortage began.”
Mr. Rafiq highlighted persistent supply-demand imbalances leading to FX interventions by the central bank. He stressed the need for a realistic exchange rate, citing examples from the Asia-Pacific region.
“And that's the cost that the FX shortages, which is the result of an overvalued exchange rate, that is the cost that's being imposed on this country. Now, based on current trends, if we assume this level of GDP growth, and we assume overvalued exchange rates, and we assume population growth of 3.5%, what it suggests is that this country is going to continue to get poorer."
Mr Rafiq added, “There's no investment. This is a cross-country comparison chart on foreign direct investment. There's only one country on this list that has had a persistently overvalued exchange rate and FX shortages. So no investment, very low levels of growth, declining per capita GDP.
“As I said, there's no example in the world of a country having diversified its economy with a normal market exchange rate, and you see that in the data for PNG as well.”
He also commented on IMF’s dedication to fostering global monetary cooperation, ensuring financial stability, facilitating international trade, promoting employment and sustainable economic growth, and reducing poverty worldwide.
Mr. Sohrab Rafiq emphasized the IMF's role in engaging with various stakeholders, including the business community and NGOs.
He further explained the method used by the IMF to gauge fiscal sustainability, the debt-to-GDP ratio, noting, "Despite an upward trend in recent years, projections indicate stabilization, contrary to media portrayals. This marks a significant departure from the pre-COVID era's sliding debt trajectory."
Attributing this stabilization to the government's reform agenda supported by the IMF, Mr Rafiq highlighted the Fund’s role in providing technical assistance on finance and expenditure policies.
He emphasized the concessional financing provided by the IMF, by which the arrangement for the current three-year program, the interest rate on PNG financing is 2.8% with an interest rate of 2.8% and a five-year grace period, contrasting it with the considerably higher rates in international capital markets.
"This concessional financing affords the government breathing room to implement reforms gradually, thereby avoiding undue strain on the economy," Mr. Rafiq stated.
He underscored the importance of IMF financing in bolstering foreign exchange reserves and attracting other sources of multilateral financial assistance.
