Approved by: Prepared by the staff of the International Abebe Adugna and Marcello Estevão (IDA) Development Association (IDA) and the Krishna Srinivasan (IMF) International Monetary Fund (IMF). 1,2 PAPUA NEW GUINEA: JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS Risk of external debt distress High Overall risk of debt distress High Granularity in the risk rating Sustainable Application of judgment No Papua New Guinea (PNG) remains at high risk of debt distress under the Low-Income Country Debt Sustainability Framework (LIC DSF), with weak debt-carrying capacity. While the planned fiscal consolidation helps address debt vulnerabilities exacerbated by the global COVID-19 shock, the risk of both external and public debt distress continues to be assessed as high. Over the medium-term, public debt enters a downward trend and the projected temporary breaches of sustainability indicators can mostly be addressed by debt management operations as well as improvements in revenue generation, a key pillar of the new Staff-Monitored Program (SMP). The Debt Sustainability Analysis (DSA) suggests that PNG is susceptible to exports and exchange rate shocks, signaling serious downside risks to the debt outlook in a global environment of high uncertainty. To lower the risk of debt distress and ensure debt sustainability, gradual fiscal consolidation, including boosting revenues, and steadfast structural reforms to promote private sector growth would be needed. Conditional on the implementation of policy measures included in the SMP, PNG’s external and overall debt is judged as sustainable. 1 >>> 1. The coverage of public debt in the DSA is unchanged from the previous (June 2020) DSA (Text Table 1). The segments the public sector captured in the DSA include the central government, state and local government, and to some extent guarantees to other entities in the public and private sector, including parts of state-owned enterprises (SOEs). However, debt numbers do not fully capture implicit government guaranteed debts of SOEs and unfunded superannuation liabilities relating to pensions.3 For the purpose of this DSA, the coverage of public sector debt remains unchanged from the last DSA, which was prepared in June 2020 in the context of a request to access the IMF’s Rapid Credit Facility (RCF). Given continued difficulties in capturing and assessing SOE risks, a contingent liabilities stress test is included in this DSA, assuming 9 percent of GDP as SOE debt is not captured in official public debt data, and 3 percent of GDP for other elements of general government (mainly unfunded superannuation liabilities related to pensions. Separately, according to the World Bank’s PPP database, the PPP capital stock in PNG is zero and, therefore, no default shock is triggered. A financial market shock of 5 percent is added, reflecting the average fiscal cost of financial crisis in low-income countries. With these assumptions, the cumulative shock in the contingent liabilities stress test amounts to 17 percent of GDP—compared to 7 percent under default assumptions. Subsectors of the public sector Sub-sectors covered 1 Central government X 2 State and local government X 3 Other elements in the general government 4 o/w: Social security fund 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) 8 Non-guaranteed SOE debt 1 The country's coverage of public debt The central government plus social security, central bank, government-guaranteed debt Default Used for the Reasons for deviations from the default analysis settings Unfunded superannuation liabilities, relating 3.0 2 Other elements of the general government not captured in 1. 0 percent of GDP to pensions. 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 9.0 SOE sovereign guarantee in dispute. 4 PPP 35 percent of PPP stock 0.0 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5.0 Total (2+3+4+5) (in percent of GDP) 17.0 2 >>> 2. During 2017-2020, public debt build-up was mainly due to external loans and the creditors composition has been shifting from commercial loans to official multilateral and bilateral financing. Domestic financing through T-bills and T-bonds has been stable over time. Text Figure 1 shows the evolution of domestic and external debt, broken down into instruments (left chart), and the composition of debt by creditor group (right chart) with categories official multilateral, official bilateral Paris Club, official bilateral Non-Paris Club, commercial lenders, and use of IMF credit. Shocks from the pandemic, including terms-of-trade shocks to main exports (mainly LNG and metals), have reduced the 2020 current account surplus and exacerbated fiscal deficits, resulting in a gross nominal public debt path that is higher than at the time of the 2019 Article IV consultation and the 2020 request for access to the RCF. However, expensive commercial loans have been replaced with official multilateral and bilateral financing at more favorable conditions which helps improve external debt burden indicators. Public and publicly guaranteed (PPG) external debt figures used for this DSA are consistent with the information in the WBG International Debt Statistics. 3. SDR 252 million (US$357 million, or 95.7 percent of quota) allocated to PNG. The authorities have decided to use the SDR allocation in its entirety to support the 2021 budget. The SDR allocation is included in public debt numbers for the purpose of this DSA (international reserves with the central bank increase only temporary for a few months until the SDRs are converted into hard currency and used by the treasury for budget support), and the associated debt service of 0.05 percent of the amount outstanding is reflected as well. 4. PNG is an IDA blend country, with total IDA19 allocation is SDR 178.4 million. IDA’s Performance-Based Allocation (PBA) for PNG benefitted from resource frontloading amid a shortening of IDA19 to two years as well as an intra-regional reallocation for SDR 0.6 million, approved in November 2021. The IDA decision to graduate a country to IBRD-only status is based on an assessment of the country’s macroeconomic prospects, risk of debt distress, vulnerability to shocks, institutional constraints, 3 >>> and levels of poverty and social indicators. Ongoing efforts under the Sustainable Development Finance Policy (SDFP) can help improve PNG’s creditworthiness and allow future access to full IBRD borrowing. As part of the SDFP, PNG has satisfactorily implemented the Performance and Policy Actions (PPA) for fiscal year 2021. 5. PNG has participated in the G-20 Debt Service Suspension Initiative (DSSI) and the suspension granted by lenders is included in this DSA. The following amounts have been considered in the analysis: a total of US$ 312.4 million for May-December 2020, and US$ 35.8 million for January-June 2021. Prospective debt service suspension between July and December 2021 is not included. 6. The IDA Sustainable Development Finance Policy (SDFP) supports PNG in addressing key debt vulnerabilities. Fiscal risks from explicit and implicit contingent liabilities of the state-owned enterprise (SOE) sector are substantial. To improve the reporting of state guarantees, the World Bank is providing technical support to PNG’s Department of Treasury and help amend the 2016 State Guarantee Policy document with a view to improve debt transparency and reporting practices. 7. Economic activity in 2020 was significantly disrupted by the pandemic (Text Table 2). Real GDP in 2020 is estimated to have contracted by 3 ½ percent due to weak demand for PNG’s key exports and extended mine closures as well as the effects of mobility restrictions and changes in consumption patterns. The pre-crisis forecast (2019 Article IV Staff Report) had 2020 GDP growth at 2.0 percent. Headline inflation (period-average CPI) rose to 4.9 percent in 2020, reflecting spikes in food and medical prices and the depreciation of the kina. As lower export revenues were partly offset by weaker import demand (down 19 percent), the 2020 current account surplus remained largely unchanged from 2019. Gross international reserves increased by 17 percent from 2019. However, the budget had to be supported by official bilateral and multilateral partners, including by the Fund through a disbursement under the RCF. 8. The resurgence of COVID-19 weakens the outlook for 2021. PNG has one of the lowest COVID- 19 vaccination rates in the world (merely 2 percent of the population is fully vaccinated, estimated based on number of doses administered, as of mid-November 2021), owing mainly to demand factors, particularly, widespread vaccine hesitancy. In the beginning of 2021, the country was hit by two consecutive COVID-19 waves which, among other things, caused reductions in resource sector output. By July, Covid-19 case numbers dropped considerably, suggesting a recovery in resource sector production. But already in September, a third COVID-19 wave hit PNG, with record case numbers, and resource production could not resume as anticipated, consequently lowering expectations for 2021 export receipts. Given the persistence of the COVID-19 shock on PNG, domestic demand continues to be subdued, with substantially weaker import growth than forecasted earlier. At 5.0 percent, 2021 inflation (period average consumer price index) is expected to turn out significantly higher than projected in the previous DSA (3.7 percent), driven by high medical and food prices as well as persistent bottlenecks in global supply chains. The current account surplus continues to be large, and above 20 percent, owing mainly to strong global demand for PNG’s exports goods. Increased spending needs to battle the COVID-19 pandemic have driven the primary fiscal deficit to an estimated 6 percent in 2021. 9. Fiscal assumptions for 2022 under the SMP include a gradual consolidation while ensuring space for needed spending is preserved (Text Table 3). PNG’s National Economic Council (NEC) has approved a fiscal framework that targets an overall deficit of 6 percent of GDP, which has been published in the government’s 2022 Budget Strategy Paper. This framework underpins the budget legislation and envisages an improvement in domestic revenues, driven by a cyclical improvement in tax revenues and policy measures taken to increase the contribution from SOEs following the passage of the Non-Tax 4 >>> Revenue Bill while expenditures will be focused on supporting the recovery, continuing the shift toward capital spending, adequately financing education, and the one-off allocation for the organization of the elections. Macroeconomic performance in 2022 will ultimately depend on how successfully PNG can roll out vaccines and incentivize vaccination. DSA Vintage 2020 2021 2022 2023 2024- 1/ Real GDP growth y/y (in percent) 2021 -3.5 1.7 4.8 4.3 3.1 2020 -1.7 0.3 1.4 3.7 3.2 Resource sector 2021 -5.5 6.1 14.0 7.1 0.2 2020 -13.8 14.6 9.5 4.3 3.4 Non-resource sector 2021 4.7 10.1 6.6 8.8 7.7 2020 2.9 4.2 6.0 8.4 6.8 Memo: Pre-crisis medium-term projection 2/ 2.0 2.8 2.9 3.2 Inflation, annual average (consumer prices, percent) 2021 4.9 5.0 5.6 4.7 4.5 2020 3.7 3.6 4.9 4.1 2.9 Current account balance (percent of GDP) 2021 21.2 20.2 22.6 21.0 18.5 2020 14.6 18.6 17.6 16.5 14.0 Growth of exports of G&S (US$, in percent) 2021 -20.4 11.0 15.1 4.7 3.2 2020 -10.1 15.9 3.7 3.2 2.9 Growth of imports of G&S (US$, in percent) 2021 -20.7 2.2 8.7 9.4 4.4 2020 11.9 9.3 9.4 4.5 2.7 Primary balance (percent of GDP) 2021 -6.0 -5.1 -3.7 -2.7 0.0 2020 -3.7 -2.5 -1.7 -1.2 0.0 Government revenues (excluding grants, percent of GDP) 2021 12.5 12.7 13.8 14.0 14.9 2020 13.3 14.7 15.1 15.4 16.6 Source: PNG authorities; IMF staff estimates and projections. Notes: 1/ Average refers to 2024-2041 (2021 DSA) and 2024-2040 (2020 DSA). 2/ Pre-crisis projection in 2019 Article IV Staff Report. 10. Medium- to long-term projections include higher inflation and fiscal deficits—but also stronger exports growth and continued large current account surpluses. At 3.1 percent, the long-term potential real growth estimate remains essentially unchanged from the 2020 DSA. Inflation is projected to remain significantly higher, however, at around 5 percent annual average, owing largely to imported inflation from global markets. As strong global demand for PNG’s export goods is expected to persist over the medium-term, and with resource-sector projects that have been delayed by the pandemic coming on stream, the current account surplus is forecast to remain very large. The macroeconomic scenario further anticipates continued primary deficits but has built in a significant amount of fiscal consolidation compared to the 6 percent deficit projected for 2021, consistent with the SMP targets. Progress in boosting revenue generation has not lived up to expectations, and the projections now assume both slower and smaller increases in revenues, including over the long-term. 11. Link between economic growth, public debt, and fiscal policy: The main near-term risk continues to be the pandemic. A new variant (Omicron) that started spreading globally adds to these concerns. In the absence of faster progress on vaccinations, further restrictions and lockdowns are possible, with the attendant impact on growth and external inflows, particularly if the resource sector is forced to shut down again due to a high number of infections. With limited sources of financing available in an adverse scenario and continued pressing social and development needs, the room for significant policy 5 >>> adjustment is relatively limited. If growth deteriorated significantly compared to the projections, further debt buildup may be needed to finance the budget and maintain government services. On the upside, higher commodity prices or a decision to go ahead with several resource projects, including Papua LNG, P’nyang LNG and the Wafi Golpu mining project, could boost growth and fiscal revenues over the medium term. 2020 2021 2022 Difference 1/ Actual Budget Revised Prog. pp. Revenue 14.2 14.0 14.4 15.6 1.2 Tax revenue 11.5 12.0 11.7 12.3 0.6 Of which: From cyclical improvements 0.6 Of which: From policy adjustments 0.0 Non-tax revenue 1.0 0.9 1.0 1.5 0.5 Of which: From cyclical improvements 0.1 Of which: From policy adjustments 0.4 Grants 1.7 1.1 1.8 1.8 0.0 Expenditure 22.7 21.2 21.8 21.6 -0.2 Expense 18.6 17.1 17.6 16.6 -0.9 Compensation of employees 6.8 6.2 6.4 6.0 -0.4 Use of goods and services 6.3 6.3 6.5 6.0 -0.4 Of which: COVID-19 spending 2/ 0.6 0.6 0.6 0.0 -0.6 Of which: General election expenditure 0.8 0.8 Interest 2.5 2.4 2.2 2.3 0.1 Others 3/ 2.9 2.2 2.5 2.3 -0.2 Net acquisition of non-financial assets 4.1 4.1 4.2 5.0 0.8 Net lending (+)/borrowing (-) -8.6 -7.1 -7.4 -6.0 1.3 Memo item: Nominal GDP (billions of kina) 85.3 92.7 93.1 101.0 Sources: Country authorities, IMF staff. 1/ Difference for 2022 relative to the revised fiscal projection for 2021. 2/ COVID-19 related spending was allocated as a contingency in the 2021 Budget and is being booked as spending on goods and services. Some reallocation could occur when the Final Budget Outcome is reported in 2022. 3/ Includes grants to regional governments, social spending and other current spending not elsewhere classified. 12. Financing mix: For domestic financing, the DSA assumes that the composition of T-bills and T- bonds remains unchanged compared to the past five years. For the near-term, the DSA considers existing commitments and, from 2025, the DSA assumes that, on average, one-third of the financing needs are covered from official multilateral and bilateral resources, while the rest is domestic financing, with a balanced mix of bonds and T-bills. During the SMP, there is a zero limit to new non-concessional external borrowing (NCB) by the Department of Treasury and Bank of Papua New Guinea; multilateral and official bilateral financial support is exempted from this limit. NCB may be allowed only in exceptional circumstances, which may be warranted when financing is needed for a project integral to the authorities’ development program for which concessional financing is not available, or when non-concessional borrowing is used for debt management operations that improve the overall public debt profile. For 2022, IDA operations of SDR 111 million are envisioned to be delivered and to be entirely financed through PNG’s PBA. This DSA assumes that IDA financing continues to be extended on blend credit terms. 6 >>> 13. PNG’s debt carrying capacity is assessed as weak. According to the October 2021 World Economic Outlook and Country Policy and Institutional Assessment (CPIA), PNG’s Composite Indicator (CI) index is 2.63, indicating weak debt-carrying capacity (Text Table 4). Hence, the applicable thresholds are 30 percent for the present value (PV) of external debt-to-GDP ratio; 140 percent for the PV of the external debt-to-exports ratio; 10 percent for the external debt service-to-exports ratio; 14 percent for the external debt service-to-revenue ratio; and 35 percent for the PV of public debt-to GDP ratio, respectively. Calculation of the CI Index Components Coefficients (A) 10-year average values CI Score components Contribution of (B) (A*B) = (C) components CPIA 0.385 2.966 1.14 43% Real growth rate (in percent) 2.719 2.629 0.07 3% Import coverage of reserves (in percent) 4.052 42.419 1.72 65% Import coverage of reserves^2 (in percent) -3.990 17.994 -0.72 -27% Remittances (in percent) 2.022 0.366 0.01 0% World economic growth (in percent) 13.520 3.078 0.42 16% CI Score 2.64 100% CI rating Weak Applicable thresholds APPLICABLE APPLICABLE EXTERNAL debt burden thresholds TOTAL public debt benchmark PV of total public debt in PV of debt in % of percent of GDP 35 Exports 140 GDP 30 Debt service in % of Exports 10 Revenue 14 14. Scenario stress tests: As indicated in the section on public debt coverage, a contingent liabilities stress test is included to account for SOE debt not captured in official public debt data. In the context of the previous SMP, which expired in end-June 2021, the authorities initiated an SOE reform program to reduce the backlog of audited annual financial statements and to strengthen SOE oversight and improve understanding of fiscal risks. This program includes a detailed review of SOE debt and government guarantees and is also expected to improve the reporting of public debt. Further, given the size and importance of PNG’s resource sector (with a share of commodities in total exports of goods and services of 96 percent), a commodity price shock is included in the DSA. Considering the high price volatility over the past two year, the fuel price shock is set at 35 percent (compared to the default shock of 27 percent) and the shock to non-fuel commodity prices is set to 21 percent—with 20 percent for base metals and precious metals, and 22 percent for agricultural commodities other than grain (price shocks to grain like wheat, corn, and soybeans, are not relevant for PNG and, therefore, not included in the stress test). 7 >>> Mitigating factors are included as well, and at default values (2 percent for fuel, and 27 percent for non- fuel). Separately, a third stress test is included to simulate market financing pressures, using standard assumptions, including for exchange rate depreciation (15 percent). 15. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its threshold. There is a small breach in 2026, and a relatively large breach in 2028, when a bullet payment for the 2018 Eurobond is due. The authorities do not plan, at least not at this juncture, to roll over this bond. After 2028, the indicator remains close to the threshold and the marginal breaches of the threshold are merely short-lived (one year). The projections further show one small and short-lived breach of the debt service-to-exports ratio, which is discounted as well, and on the same grounds. The present value of the debt-to-GDP ratio as well as the debt-to-exports ratio are below their respective thresholds over the entire projection horizon, and on a clear downward trend. 16. Stress tests point to vulnerabilities in PNG’s external debt dynamics particularly with respect to exports shocks, which would cause threshold breaches for all four external sustainability indicators. Changes in policy and the structure of the economy manifests in a divergence between the historical scenario and the baseline. 17. As in the past, the assessment of debt dynamics is hampered by large residuals from external financial flows from money transfer by resource companies via offshore accounts. 18. Public debt ratios have increased substantially in recent years and reached almost 50 percent of GDP in 2020. Starting from this level means that the public debt sustainability indicator is in breach of the threshold for countries with weak debt-carrying capacity (that is, 35 percent of GDP) during the first half of the projection horizon but, with public debt coming down, meets the threshold from 2031. Similarly, the debt-to-revenue ratio sees a continuous downward trend over the projection horizon. 19. PNG remains at “high” risk of external and overall debt distress. The (mechanical) external debt distress rating as well as the overall debt distress rating are “high”, owing to the breaches of sustainability thresholds discussed in the previous section. No staff judgement has been applied to these ratings. 20. Debt service on existing loans, paired with relatively weak revenue generation, are expected to almost double the debt service-to-revenue ratio over the medium term. However, as debt service reduces and revenues increase, and barring further shocks to demand growth, the indicator enters a significant downward trend from its peak in 2026. 21. Stress tests show that adverse shocks to exports constitute the main risk to public debt sustainability. Further, the historical scenario indicates that it will be challenging to reduce debt from current levels and that reforms, including those envisaged in the SMP, are essential for supporting the sustainability of public finances. 22. Debt dynamics are assessed as sustainable. Public debt is expected not to increase significantly in the near term and to enter a clear downward path over the medium term. Also, the projected temporary 8 >>> breaches of sustainability indicators can be prevented by debt management operations as well as by boosting revenue generation. The external debt-to-GDP and debt-to-exports ratios are below their thresholds over the entire projection horizon. Public external and overall debt is judged to be sustainable conditional on the implementation of the policy measures part of the SMP. 23. The authorities took note of Staff’s assessment that PNG remains at high risk of debt distress. In discussions, the authorities agree that large financing requirements to dampen the effects of the COVID-19 pandemic on PNG’s economy have left their mark on public debt. Fiscal consolidation and conservative financing strategies will help support the sustainability of PNG’s debt going forward. 9 >>> 10 >>> Table 2. Papua New Guinea: Public Sector Debt Sustainability Framework, Baseline Scenario, 2018-2041 (In percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2018 2019 2020 2021 2022 2023 2024 2025 2026 2031 2041 Historical Projections Public sector debt 1/ 36.7 41.5 49.0 56.0 58.4 58.5 58.3 57.1 56.6 35.6 14.4 26.3 50.8 Definition of external/domestic Residency- of which: external debt 15.2 18.0 23.0 24.9 25.3 25.5 24.2 24.4 23.9 15.9 5.5 6.7 22.4 debt based of which: local-currency denominated Change in public sector debt 2.0 4.7 7.5 7.0 2.4 0.1 -0.2 -1.2 -0.5 -3.8 -0.7 Is there a material difference Identified debt-creating flows 0.0 2.8 8.4 6.9 2.8 0.6 0.1 -0.8 -0.1 -3.3 -1.5 3.8 -0.8 No between the two criteria? Primary deficit 0.2 1.9 6.0 5.1 3.7 2.7 1.1 0.0 -0.6 -2.6 -1.2 2.5 0.1 Revenue and grants 17.7 16.3 14.2 14.4 15.6 15.6 15.9 16.2 15.9 16.2 15.0 16.1 15.6 of which: grants 2.3 2.1 1.7 1.8 1.8 1.6 1.5 1.5 1.4 1.0 0.7 Public sector debt 1/ Primary (noninterest) expenditure 18.0 18.2 20.2 19.6 19.3 18.3 17.1 16.3 15.3 13.6 13.8 18.6 15.8 Automatic debt dynamics -0.2 0.9 2.4 1.8 -1.0 -2.1 -1.0 -0.9 0.5 -0.7 -0.3 of which: local-currency denominated Contribution from interest rate/growth differential 0.1 0.7 2.6 1.8 -1.0 -2.1 -1.0 -0.9 0.5 -0.7 -0.3 of which: foreign-currency denominated of which: contribution from average real interest rate 0.0 2.2 1.1 2.6 1.6 0.4 0.7 0.8 2.1 0.4 0.2 of which: contribution from real GDP growth 0.1 -1.6 1.5 -0.8 -2.6 -2.4 -1.7 -1.7 -1.7 -1.2 -0.5 70 Contribution from real exchange rate depreciation -0.3 0.3 -0.2 ... ... ... ... ... ... ... ... 60 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Residual 2.0 1.9 -0.9 0.1 -0.4 -0.5 -0.3 -0.4 -0.4 -0.5 0.8 1.0 -0.4 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 54.5 57.4 58.8 58.0 57.5 56.1 54.3 34.1 14.8 2021 2023 2025 2027 2029 2031 PV of public debt-to-revenue and grants ratio … … 384.6 397.8 377.5 371.7 361.6 345.5 341.3 210.4 99.0 Debt service-to-revenue and grants ratio 3/ 103.0 109.8 140.0 65.9 75.2 102.2 114.0 124.8 134.9 91.7 41.7 Gross financing need 4/ 18.5 19.8 25.9 14.6 15.4 18.6 19.3 20.3 20.9 12.2 5.1 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 70 Real GDP growth (in percent) -0.3 4.5 -3.5 1.7 4.8 4.3 3.0 3.0 3.0 3.0 3.3 3.9 3.2 60 Average nominal interest rate on external debt (in percent) 2.6 3.9 2.7 13.0 3.4 3.7 3.2 2.9 8.1 1.3 1.9 3.0 4.4 Average real interest rate on domestic debt (in percent) -0.2 9.4 3.5 0.4 4.1 -0.3 1.1 1.8 2.2 2.3 1.9 4.6 0.5 50 Real exchange rate depreciation (in percent, + indicates depreciation) -2.8 1.9 -1.2 … ... ... ... ... ... ... ... 1.0 ... 40 Inflation rate (GDP deflator, in percent) 9.8 1.1 5.5 7.2 3.6 3.8 3.2 3.1 3.1 3.3 3.4 4.3 5.4 30 Growth of real primary spending (deflated by GDP deflator, in percent) 10.3 5.8 7.0 -1.5 3.5 -1.4 -3.8 -1.9 -2.7 3.1 3.5 4.1 -0.4 20 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -1.7 -2.9 -1.5 -1.8 1.4 2.5 1.3 1.2 0.0 1.2 -0.5 -2.0 1.4 10 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2021 2023 2025 2027 2029 2031 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central, state, and local governments, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 11 >>> PV of debt-to GDP ratio PV of debt-to-exports ratio 90 300 80 250 70 60 200 50 150 40 30 100 20 50 10 Most extreme shock: Exports Most extreme shock: Exports 0 0 2021 2023 2025 2027 2029 2031 2021 2023 2025 2027 2029 2031 Debt service-to-exports ratio Debt service-to-revenue ratio 25 40 35 20 30 25 15 20 10 15 10 5 5 Most extreme shock: Exports Most extreme shock: One-time depreciation 0 0 2021 2023 2025 2027 2029 2031 2021 2023 2025 2027 2029 2031 Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Stress Terms of marginal debt Combined CL Yes Avg. nominal interest rate on new borrowing in USD 1.3% 1.3% Natural disaster n.a. n.a. USD Discount rate 5.0% 5.0% Commodity price Yes No Avg. maturity (incl. grace period) 17 17 Market financing No No Avg. grace period 6 6 Note: "Yes" indicates any change to the size or interactions of * Note: All the additional financing needs generated by the shocks under the stress tests are the default settings for the stress tests. "n.a." indicates that the assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 12 >>> Figure 2. Papua New Guinea: Indicators of Public Debt Under Alternative Scenarios, 2021-2031 PV of Debt-to-GDP Ratio 80 70 60 50 40 30 20 Most extreme shock: Exports 10 0 2021 2023 2025 2027 2029 2031 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 600 200 180 500 160 140 400 120 300 100 80 200 60 40 100 Most extreme shock: Growth Most extreme shock: Exports 20 0 0 2021 2023 2025 2027 2029 2031 2021 2023 2025 2027 2029 2031 Baseline Most extreme shock 1/ TOTAL public debt benchmark Historical scenario Borrowing assumptions on additional financing needs resulting from the stress Default User defined tests* Shares of marginal debt External PPG medium and long-term 13% 13% Domestic medium and long-term 42% 42% Domestic short-term 45% 45% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.3% 1.3% Avg. maturity (incl. grace period) 17 17 Avg. grace period 6 6 Domestic MLT debt Avg. real interest rate on new borrowing 2.0% 2.0% Avg. maturity (incl. grace period) 2 2 Avg. grace period 1 1 Domestic short-term debt Avg. real interest rate 0.2% 0.2% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 13 >>> Table 3. Papua New Guinea: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021-2031 (In percent) Projections 1/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 PV of debt-to GDP ratio Baseline 26 26 25 23 23 22 21 18 17 16 14 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 26 36 45 52 59 65 71 75 79 81 82 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 26 28 29 27 27 25 25 21 20 18 17 B2. Primary balance 26 26 26 24 24 23 23 20 19 17 16 B3. Exports 26 35 47 45 44 42 42 38 36 32 29 B4. Other flows 3/ 26 26 26 24 24 22 22 19 18 16 15 B5. Depreciation 26 32 34 32 32 29 29 25 24 22 20 B6. Combination of B1-B5 26 34 36 34 34 31 31 27 26 23 21 C. Tailored Tests C1. Combined contingent liabilities 26 27 27 26 27 26 26 23 23 21 20 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 26 31 35 34 35 34 34 32 30 29 27 C4. Market Financing 26 Threshold 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 67 62 62 60 62 61 62 54 52 49 47 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 67 88 112 134 157 183 206 223 241 256 268 0 67 59 56 51 50 46 43 32 28 23 19 B. Bound Tests B1. Real GDP growth 67 62 62 60 62 61 62 54 52 49 47 B2. Primary balance 67 62 64 63 65 65 66 58 57 55 52 B3. Exports 67 108 180 179 183 184 185 173 169 156 145 B4. Other flows 3/ 67 63 64 62 64 63 63 56 54 51 48 B5. Depreciation 67 62 67 65 67 66 67 59 58 54 51 B6. Combination of B1-B5 67 89 78 101 104 103 104 94 90 84 79 C. Tailored Tests C1. Combined contingent liabilities 67 65 67 68 72 73 75 69 69 67 66 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 67 89 100 99 102 102 102 96 96 93 90 C4. Market Financing 67 Threshold 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 10 3 4 5 4 8 4 12 6 7 7 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 10 3 5 7 6 10 7 15 12 16 18 0 10 3 4 5 4 8 3 11 4 4 2 B. Bound Tests B1. Real GDP growth 10 3 4 5 4 8 4 12 6 7 7 B2. Primary balance 10 3 4 6 4 8 4 12 6 8 7 B3. Exports 10 4 7 11 9 15 9 21 15 22 21 B4. Other flows 3/ 10 3 4 5 4 8 4 12 6 7 7 B5. Depreciation 10 3 4 6 4 8 4 12 6 8 8 B6. Combination of B1-B5 10 4 5 8 6 11 6 16 10 12 12 C. Tailored Tests C1. Combined contingent liabilities 10 3 4 6 4 8 4 12 6 8 7 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 10 4 5 7 5 10 5 14 8 11 11 C4. Market Financing Threshold 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 31 9 11 15 11 20 11 28 13 15 14 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 31 9 13 18 15 25 16 35 26 34 37 0 31 9 11 14 10 19 9 27 9 8 5 B. Bound Tests B1. Real GDP growth 31 10 13 17 13 23 13 33 16 18 16 B2. Primary balance 31 9 11 15 11 20 11 29 14 16 15 B3. Exports 31 9 13 18 14 24 14 33 21 30 28 B4. Other flows 3/ 31 9 11 15 11 20 11 28 13 16 14 B5. Depreciation 31 11 14 19 14 25 14 36 17 21 19 B6. Combination of B1-B5 31 10 13 18 13 23 13 33 19 22 20 C. Tailored Tests C1. Combined contingent liabilities 31 9 11 15 11 20 11 29 14 16 15 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 31 10 14 18 14 23 13 31 18 23 22 Threshold 14 14 14 14 14 14 14 14 14 14 14 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 14 >>> Table 4. Papua New Guinea: Sensitivity Analysis for Key Indicators of Public Debt , 2021-2031 Projections 1/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 PV of Debt-to-GDP Ratio Baseline 57 59 58 58 56 54 47 44 41 37 34 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 57 58 57 56 56 55 58 57 56 54 53 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 57 65 72 73 74 74 67 66 64 62 60 B2. Primary balance 57 61 63 62 60 59 51 48 45 41 38 B3. Exports 57 66 76 75 74 72 64 61 57 51 46 B4. Other flows 3/ 57 59 59 58 57 55 47 44 41 38 34 B5. Depreciation 57 63 61 59 56 54 46 42 39 34 30 B6. Combination of B1-B5 57 59 61 61 60 58 51 48 46 42 39 C. Tailored Tests C1. Combined contingent liabilities 57 75 73 72 70 68 60 57 53 50 46 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 57 62 65 69 72 73 68 67 65 63 61 C4. Market Financing 57 TOTAL public debt benchmark 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 398 378 372 362 345 341 314 287 259 231 210 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 398 372 366 355 343 346 387 368 351 334 327 0 66 47 64 59 64 66 64 71 66 68 66 B. Bound Tests B1. Real GDP growth 398 414 451 454 448 458 444 422 401 377 365 B2. Primary balance 398 392 402 390 372 368 341 312 283 253 232 B3. Exports 398 425 488 474 454 450 428 396 360 317 286 B4. Other flows 3/ 398 379 375 365 349 345 318 290 262 234 213 B5. Depreciation 398 409 393 374 351 339 312 278 246 213 189 B6. Combination of B1-B5 398 379 387 380 366 365 341 315 289 261 242 C. Tailored Tests C1. Combined contingent liabilities 398 482 471 455 433 428 403 370 338 305 282 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 398 440 461 482 476 483 465 431 410 387 375 C4. Market Financing 398 Debt Service-to-Revenue Ratio Baseline 66 75 102 114 125 135 117 124 107 101 92 A. Alternative Scenarios A1. Key variables at their historical averages in 2021-2031 2/ 66 75 102 112 120 128 128 133 112 105 94 0 66 47 64 59 64 66 64 71 66 68 66 B. Bound Tests B1. Real GDP growth 66 81 122 144 164 183 175 184 170 167 161 B2. Primary balance 66 75 109 130 141 149 132 136 118 111 101 B3. Exports 66 75 103 116 127 137 119 126 112 113 102 B4. Other flows 3/ 66 75 102 114 125 135 117 124 107 102 92 B5. Depreciation 66 71 99 111 119 132 111 125 104 100 89 B6. Combination of B1-B5 66 74 105 118 130 142 127 134 118 113 104 C. Tailored Tests C1. Combined contingent liabilities 66 75 152 178 173 183 164 162 142 132 119 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 66 85 117 132 154 177 169 174 162 161 157 C4. Market Financing Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 15 >>> Figure 3. Papua New Guinea: Drivers of Debt Dynamics - Baseline Scenario External debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 200 80 Residual 150 Previous DSA proj. 70 DSA-2015 Interquartile 100 100 range (25-75) Price and 60 exchange rate 50 50 Real GDP growth 0 Change in PPG 40 debt 3/ 0 30 Nominal interest rate -100 20 -50 Median Current 10 account + FDI -100 0 -200 Change in 5-year 5-year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 PPG debt 3/ Contribution of Distribution across LICs 2/ historical projected -150 unexpected change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual 40 Current DSA Previous DSA proj. 30 DSA-2015 Interquartile 80 Other debt 25 range (25-75) creating flows 70 20 Real Exchange 20 60 rate depreciation 50 15 Real GDP growth Change in debt 40 10 0 30 Real interest rate 5 20 10 Primary deficit 0 -20 Median 0 Change in debt 5-year 5-year -5 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Distribution across LICs 2/ historical projected Contribution of -10 unexpected change change 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 16 >>> Figure 4. Papua New Guinea: Realism tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 8 2 14 Distribution 1/ 6 12 Projected 3-yr adjustment 3-year PB adjustment greater In percentage points of GDP 4 than 2.5 percentage points of 10 GDP in approx. top quartile In percent 2 8 1 0 6 -2 4 -4 2 -6 0 0 2015 2016 2017 2018 2019 2020 2021 2022 Baseline Multiplier = 0.2 Multiplier = 0.4 more -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. Public and Private Investment Rates (percent of GDP) 8 6 4 2 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA 17 >>>