Papua New Guinea: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext. After a decade of strong growth, Papua New Guinea (PNG) now faces a sharpslowdown in the nonmineral sector as construction winds down on a large liquefiednatural gas (LNG) project. LNG revenue increases are expected to be modest and oneoffover the near to medium term, posing challenges to meet the country's hugedevelopment needs while trying to maintain debt sustainability. PNG needs to createan enabling environment for sustained, inclusive growth in the post-boom era.Outlook and risks. Overall growth prospects remain generally positive, but theslowdown of the nonmineral sector has increased headwinds for job-creating growth.Inflation is expected to stabilize at lower levels than in the recent past. Risks toeconomic growth in 2013-15 are broadly balanced, but they are increasingly tiltedtoward the downside over the longer term, reflecting uncertainty over mineral pricesand investment and global shale gas development.Policy assessment. Policy discussions focused on resource revenue management,macroeconomic and financial stability, and structural reforms to engender sustained,inclusive growth. Key recommendations include:? Target a moderate fiscal deficit in 2014 in line with absorptive capacity and focuson improvement in spending quality. Over the medium term, constrain and smoothspending to stay below the government's debt ceiling of 30 percent of GDP.? Strengthen the interest rate channel of monetary policy transmission by reducingexcess liquidity. Closely monitor financial sector risks arising from possible pricecorrections in certain segments of the property market.? Improve transparency in the management of resource revenue; safeguardresources for the sovereign wealth fund; continue to reform public enterprises;improve the business environment; and strengthen the agricultural sector.? Take early action to address long-standing issues on economic statistics and antimoneylaundering and combating the financing of terrorism.