Approved by: Prepared by the staff of the International Manuela Francisco and Lalita Moorty (IDA) Development Association (IDA) and the and Thomas Helbling and Jarkko Turunen International Monetary Fund (IMF) (IMF) 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.1,2 External debt risks are elevated due to liquidity risk associated with the bullet payment on the existing Eurobond in 2028 and higher official bilateral and multilateral debt service payments in the first half of the forecast horizon. Domestic debt vulnerabilities are also elevated contributing to persistent breaches of the PV of overall debt to GDP ratio. The planned fiscal consolidation helps address debt vulnerabilities, while the risks of external and overall public debt distress are assessed as high. Over the medium-term, public debt would trend downward, while the breaches of liquidity indicators can be addressed by debt management operations and enhanced revenue generation. The Debt Sustainability Analysis (DSA) suggests that PNG is susceptible to trade-related and contingent liabilities shocks, as well as climate change, underscoring downside risks to the public debt outlook. Fiscal consolidation, structural reforms fostering private sector growth, and addressing climate risks would lower the risk of public debt distress and support sustainability. Conditional on the implementation 1 This DSA has been prepared jointly by the International Monetary Fund and the World Bank, in accordance with the LIC- DSF, approved by the Executive Boards of the IMF and the International Development Association. 2 The Composite Indicator (CI) of 2.57 is based on the latest available information —April 2024 IMF World Economic Outlook (WEO) and the World Bank’s Country Policy and Institutional Assessment (CPIA) for 2022 indicating a “weak” capacity to carry debt. 1 >>> of the authorities’ planned fiscal consolidation and conservative financing strategies, public debt is assessed as sustainable. 1. The coverage of public debt in the DSA is unchanged from the previous (November 2023) DSA (Text Table 1). The segments of the public sector captured in the DSA include the central government, state and local government, and 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 purposes of this DSA, the coverage of public sector debt remains unchanged from the last DSA, which was prepared in November 2023 in the context of the IMF ECF/EFF program first reviews. 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 (the stock of explicit government guarantees is around 1.3 percent of GDP), and 3 percent of GDP for other elements of general government (mainly unfunded superannuation liabilities related to pensions, which are projected to be 2.1 percent of GDP in 2023). 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. Currency is used to define external debt, while there is no material difference with the currency denomination criteria in PNG. Subsectors of the public sector Subsection 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, state, and local governments, government-guaranteed debt Default Used for the analysis Reasons for deviations from the default settings Unfunded superannuation liabilities 3 2 Other elements of the general government not captured in 1. 0 percent of GDP relating to pensions 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 9 SOE sovereign guarantee in dispute 4 PPP 35 percent of PPP stock 0 Default used 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5 Default used Total (2+3+4+5) (in percent of GDP) 17 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 3 Comprehensive data on the debt stock of SOEs in PNG is not publicly available. The ADB have been supporting the authorities with a three-year program (2020-2023) aiming to reform the governance of state-owned enterprises, increase their financial transparency and ensure financial sustainability. This included providing advice on the overarching policy and legal framework for SOEs, leading to the adoption of an amended Kumul Consolidated Holdings Act in 2021. 2 >>> 2. Between 2017 and 2023, the stock of public debt in PNG increased from around 24 billion Kina to almost 58 billion Kina. This was mainly due to external loans (which account for almost two thirds of the increase), while the creditor composition has been gradually shifting away from commercial loans towards official multilateral and bilateral financing (Text Table 2). This contributes to the improvement of debt sustainability indicators in the medium term. Public and Publicly Guaranteed (PPG) external debt figures used for this DSA are consistent with the information in the World Bank’s International Debt Statistics. Debt Stock (end of period) Debt Service 2023 2023 2024 2025 2023 2024 2025 (In US$ million) (Percent total debt) (Percent GDP) 5/ (In US$ million) (Percent GDP) Total 15925 100 54 5157 5087 5138 17 16 16 External 7954 50 27 484 637 947 2 2 3 Multilateral creditors 2/, 3/ 4086 26 14 225 277 411 1 1 1 IMF 886 6 3 6 27 69 0 0 0 World Bank 569 4 2 31 30 49 0 0 0 ADB 2515 16 8 181 213 283 1 1 1 Other Multilaterals 116 1 0 7 8 10 0 0 0 Bilateral Creditors 2/ 3296 21 11 204 312 488 1 1 1 Paris Club 2137 13 7 92 182 357 0 1 1 o/w: Australia 1713 11 6 77 169 321 0 1 1 Non-Paris Club 1159 7 4 112 129 131 0 0 0 o/w: China EXIM 1159 7 4 90 97 100 0 0 0 Bonds 500 3 2 41 42 42 0 0 0 Commercial creditors 72 0 0 14 7 7 0 0 0 Other international creditors 0 0 0 0 0 0 0 0 0 Domestic 7971 50 27 4673 4449 4191 15 14 13 Held by residents, total n/a n/a n/a n/a n/a n/a n/a n/a n/a Held by non-residents, total n/a n/a n/a n/a n/a n/a n/a n/a n/a T-Bills 3794 24 13 3830 3661 3361 12 12 10 Bonds 3396 21 11 685 641 674 2 2 2 Loans 782 5 3 158 148 155 1 0 0 Memo items: Collateralized debt 2/, 4/ n/a n/a n/a n/a n/a n/a n/a n/a n/a Contingent liabilities 669 4 2 n/a n/a n/a n/a n/a n/a Nominal GDP 30729 1/As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA. 2/Some public debt may not be shown in the table due to confidentiality clauses/capacity constraints. 3/"Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears) 4/Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF- World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral. 5/Debt ratios are constructed by converting external debt to Kina using end-period exchange rate and dividing by Kina GDP. 3. The IMF’s general allocation of Special Drawing Rights (SDRs) became effective in August 2021, with SDR 252 million (US$ 357 million, or 95.7 percent of quota) allocated to PNG. The 3 >>> authorities used the full SDR allocation to support the 2021 budget. They used the SDR allocation to replace costly financing, which has helped reduce the budget deficit. For the purpose of this DSA, the SDR allocation is included in total public debt while the associated debt service for the amount outstanding is also reflected. 4. The IMF arrangements approved by the Board in March 2023 continues to support PNG’s reform agenda, helping protect the vulnerable and fostering inclusive growth, in line with the authorities’ Poverty and Growth Reduction Strategy. These facilities total SDR 684.3 million under the IMF’s Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. The program builds on progress under the past SMPs (2020/21 and 2021/22), focusing on addressing structural impediments to growth and poverty reduction. Program objectives focus on (i) strengthening debt sustainability through a multi-year fiscal consolidation program while making room to meet critical social and development needs, (ii) enhancing the legal and operational framework of the BPNG to alleviate FX shortages and transition to a market-clearing exchange rate, and (iii) build on improvements to governance and the anti-corruption framework. 5. A new 24-month Resilience and Sustainability Facility (RSF) will support authorities’ plans to address climate-related risks and associated investment costs in PNG. The disbursements associated with the RSF would reach SDR 197.4 million (75 percent of quota) by the end of 2026. The reform measures associated to RSF aim at (i) supporting climate mitigation policies, (ii) enhancing disaster risk management efforts, (iii) integrating climate considerations into public investment management processes, and (iv) supporting the development of green and inclusive finance. 6. PNG is an IDA blend country, with total IDA20 allocation at SDR 173.7 million. PNG is currently eligible to access the Regional Window, the Crisis Response Windows, the Private Sector Window, and the SUW-SMLS after the country recovered a set-aside in place during FY24 due to unmet FY23 PPAs (see below). 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, and levels of poverty and social indicators. 7. The IDA Sustainable Development Finance Policy (SDFP) supports PNG in addressing key debt vulnerabilities. As part of the SDFP, PNG is subject to debt-related Performance and Policy Actions (PPAs). For fiscal year 2022, these were aimed at limiting non-concessional borrowing and operationalizing the 2021 State Guarantee Policy, both of which were satisfactorily implemented. PNG had two SDFP PPAs for fiscal year 2023: (i) a US$ 1 billion PPG external borrowing limit for new non- concessional long-term contractual obligations, which applies continuously throughout FY23, and (ii) to improve management of fiscal risks by both approving a revised on-lending policy (which introduces credit risks assessments and strengthens enforcement arrangements, recording and reporting requirements) and refraining from any new on-lending until the revised policy is adopted. PNG missed both actions in FY23, so the country was subject to a set-aside of 20 percent from its FY24 IDA country allocation. In June 2024, the country satisfactorily met four PPAs, including additional ones due to non-performance in the previous period, and recovered the set-aside at the start of FY25. 4 >>> 8. Growth in 2024 is expected to be driven by a rebound in the resource sector (Text Table 3). After a strong recovery in 2022, real GDP growth softened to 3.0 percent in 2023, driven by a contraction in the resource sector (-1.6 percent), while growth in the non-resource sector remained resilient (4.7 percent). Real growth likely bounced back in 2024 to 4.5 percent, driven by a rebound in resource sector activities as the Porgera gold mine resumed production, along with resilient growth in the non-resource sector. Economic growth would remain dynamic in 2025 (4.6 percent), reflecting strong growth in the resource sector as gold production reaches full capacity, and resilient growth in the non-resource sector, supported by a more competitive agricultural sector and improved access to foreign exchange. Following elevated inflation in 2022 (5.3 percent), average inflation decelerated to 2.3 percent in 2023, as global commodity prices moderated and supply chain constraints eased. For 2024, average inflation is expected to moderate to 1.3 percent mostly due to a steep drop of betel nut prices, which has more than offset the passthrough of the Kina depreciation to domestic prices. The current account balance is estimated to have moderated to 12.7 percent of GDP in 2023, from 14.4 percent of GDP in 2022. 4 In 2023, goods exports volumes are estimated to have contracted by almost 12 percent compared to 2022, as commodity prices retreated from recent peaks, while imports shrank at a similar pace. Higher commodity prices and some improvements in quantities underpin assumptions for an increase in nominal exports in 2024, while imports remain sluggish. DSA Vintage 2024 2025 2026 2027-2029 Real GDP growth y/y (in percent) 2024 ECF/EFF third rev. 4.5 4.6 3.5 3.1 2023 ECF/EFF first rev. 5.0 3.1 3.1 3.1 Resource sector 2024 ECF/EFF third rev. 5.0 3.8 1.5 0.2 2023 ECF/EFF first rev. 6.3 0.1 0.1 0.2 Non-resource sector 2024 ECF/EFF third rev. 4.4 4.8 4.2 4.1 2023 ECF/EFF first rev. 4.6 4.1 4.1 4.0 Inflation, annual average (consumer prices, percent) 2024 ECF/EFF third rev. 1.3 5.1 4.3 4.4 2023 ECF/EFF first rev. 4.0 4.8 4.8 4.5 Current account balance (percent of GDP) 2024 ECF/EFF third rev. 9.8 11.8 11.1 9.2 2023 ECF/EFF first rev. 16.3 16.7 14.8 10.8 Growth of exports of G&S (US$, in percent) 2024 ECF/EFF third rev. 4.1 11.8 4.1 3.2 2023 ECF/EFF first rev. 4.8 3.6 2.9 3.0 Growth of imports of G&S (US$, in percent) 2024 ECF/EFF third rev. -9.2 5.3 3.8 3.3 2023 ECF/EFF first rev. 0.5 3.1 2.7 3.2 Primary balance (percent of GDP) 2024 ECF/EFF third rev. -1.5 0.0 1.3 2.6 2023 ECF/EFF first rev. -1.5 -0.2 0.9 2.2 Government revenues (excluding grants, percent of GDP) 2024 ECF/EFF third rev. 16.9 17.6 17.9 18.7 2023 ECF/EFF first rev. 16.4 17.1 17.4 18.4 Source: PNG authorities; IMF staff estimates and projections. 4 Previously published current account data in PNG overstated the balance due to long-standing challenges in classifying large income account outflows, including external debt service payments related to resource projects, under the financial account rather than the current account. Fund technical assistance (TA) in external sector statistics aimed at correcting this misclassification, while work is ongoing on improving quality of data. In this regard, authorities have initiated an inter-agency working group on external sector statistics including representatives from the NSO, Treasury Department, PNG Customs Service and the BPNG to secure efficient inter-agency external sector data provision and to improve the consistency of external sector statistics with other official statistics. 5 >>> 9. The medium-term baseline macroeconomic forecasts are broadly unchanged from the November 2023 DSA (Text Table 3). In line with previous DSAs, the long-term potential real growth rate is estimated at around 3 percent,5 while inflation is projected to reach an annual average of 4.4 percent in the medium term. Resilient global demand for PNG’s export goods would persist over the medium -term, so the current account surplus is forecast to remain strong —albeit moderating from recent highs, to around 10 percent of GDP. 10. The medium-term baseline also assumes rapid progress on fiscal consolidation, as envisaged by the authorities. This is appropriate to strengthen debt sustainability and build a fiscal buffer. While continued primary deficits are anticipated in the short term (Text Tables 3 and 4), the projection builds in a significant fiscal consolidation, which would result in primary surpluses as early as 2026. This is consistent with the authorities’ plans to meet the requirements of the Fiscal Responsibility Act, which specifies government debt should be maintained at no more than 40 percent of GDP over the long term. To contain expenditure growth, the authorities are committed to reducing current expenditure as a share of non-resource GDP, and to enhancing expenditure efficiency through payroll management improvements, stronger expenditure controls, and more efficient cash management practices. Meanwhile, revenue mobilization is a critical component of the planned consolidation in a context of elevated development needs. Revenue is expected reach 18.7 percent of GDP in 2024 and would increase towards 19 percent of GDP in the medium term, mainly based on the implementation of the Medium-Term Revenue Strategy (MTRS). The latter describes the authorities’ revenue reform priorities and include introducing amendments to the Income Tax Act (ITA), streamlining and gradually phasing out the Infrastructure Tax Credit scheme, and narrowing the scope of the exemptions in Special Economic Zones. From 2025 onward, the authorities also project an increase in tax revenues from the PNG LNG project as tax exemptions expire. Further, the authorities see scope for significantly higher dividends after loan amortization for the project is completed but this is not yet included in the baseline in full. Achieving a balanced budget by 2027 would lower the risks from significant debt service obligations on external borrowing coming due in 2028. 11. The main downside risks to the baseline projection include: natural disasters (including those related to climate change), lower global growth, and social or political instability. PNG is vulnerable to natural disasters (earthquakes and volcanic eruptions) as well as the impact of climate change (flooding, landslides, droughts, and rising sea level). 6 Lower global growth would likely impact PNG through lower commodity prices, with adverse consequences for the balance of payments and budget through lower resource revenue. Further political and social instability could hinder economic growth by undermining the implementation of the reforms and deteriorating the business environment. With limited sources of financing available in an adverse scenario, and continued pressing social and development needs, the room for significant policy adjustment is relatively limited. Engagement with the IMF through the ECF/EFF and RSF arrangements provides an important anchor for the authorities to advance their reform 5 Expected new resource projects are not included in the (authorities’ or staff’s) baseline, explaining the low resource sector growth in the medium term. Higher growth in the resource sector due to new projects is therefore a major upside risk to the baseline projection. 6 Authorities are working closely with partners to develop climate mitigation and adaptation programs through the Green Climate Fund; develop green financing standards through the BPNG; and fund the UN Climate and Biodiversity Trust Fund in our 2023 budget. Moreover, there is a continued and growing need for support in this area. 6 >>> agenda, including for climate adaptation and mitigation. If growth deteriorated significantly compared to the projections, further debt buildup may be needed to finance the budget and maintain government services. Upside risks also exist and include higher-than-expected commodity prices, or start of any of several major projects, including Papua LNG, P’nyang LNG or the Wafi Golpu mining, which are not yet in the baseline scenario. 2024 2025 2026 Revenue and grants (percent of GDP) 18.7 19.3 19.6 Taxes 15.7 15.7 16.0 Grants 1.8 1.7 1.7 Other revenue 1.2 1.8 1.9 Expenditure (percent of GDP) 22.6 21.9 21.0 Expense 18.6 18.1 17.4 Compensation of employees 6.0 5.8 5.5 Use of goods and services 5.9 5.5 5.3 Interest 2.5 2.6 2.6 Other 4.2 4.2 4.0 Net acquisition of nonfinancial assets 4.1 3.8 3.5 0.0 0.0 0.0 Gross operating balance 2.6 3.8 4.8 Net lending (+)/borrowing (-) -3.9 -2.6 -1.3 Primary balance (percent of GDP) -1.5 0.0 1.3 Source: PNG authorities; IMF staff estimates and projections. 12. The LIC DSA’s realism tools indicate that the government’s primary balance adjustment is moderately ambitious. At about 3.0 percent, the 2024-2026 cumulative adjustment of the primary balance is within the top 20 percent of historical experiences, relative to peers. Much of this adjustment would take place during 2025-2026 (Figure 4). Meanwhile, baseline growth projection is somewhat higher than the implied path consistent with the range fiscal multipliers, due to supply side improvements in the mineral sector and low historical correlation between fiscal consolidation and non-resource growth.7 13. Financing mix: For domestic financing, the DSA assumes that over the forecast horizon, the composition of T-bills and T-bonds is broadly balanced, approaching 50 percent of new issuances corresponding to T-bills by the end of the decade.8 For the near-term, the DSA considers all existing commitments. Although the profile of domestic debt, with a high concentration in short-term Treasury bills, raises concerns over rollover risks, short-term liquidity risks and reliance on domestic financing fall throughout the projection horizon because the level of newly issued debt falls markedly as fiscal deficits 7 The reopening of the Porgera gold mine would contribute to strong growth in the resource sector. 8 In 2024, domestic financing has relied largely on T-bills (close to 90% of issuances year-to-date), exceeding initial plans, due to the significant tightening of liquidity conditions, particularly affecting T-bond issuances. In this environment, the authorities are auctioning longer-dated bonds at market-determined yields and relying on more external financing than planned earlier in the year. 7 >>> are replaced by surpluses, particularly after 2027. While the trend in the projection period remains constant, continued development of the domestic debt market is necessary to increase liquidity and transition towards greater reliance upon domestic financing sources, including a shift to longer maturities. 14. PNG’s debt carrying capacity is assessed as weak. According to the April 2024 World Economic Outlook and the 2022 Country Policy and Institutional Assessment (CPIA), PNG’s Composite Indicator (CI) is 2.57, indicating weak debt-carrying capacity (Text Table 5). 9 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. Components Coefficients (A) 10-year average values CI Score components Contribution of (B) (A*B) = (C) components CPIA 0.385 2.865 1.10 43% Real growth rate (in percent) 2.719 2.622 0.07 3% Import coverage of reserves (in percent) 4.052 42.748 1.73 67% Import coverage of reserves^2 (in percent) -3.990 18.274 -0.73 -28% Remittances (in percent) 2.022 0.003 0.00 0% World economic growth (in percent) 13.520 2.909 0.39 15% CI Score 2.57 100% CI rating Weak Classification based on Classification based on the Classification based on the two Final current vintage previous vintage previous vintage Weak Weak Weak Weak 2.57 2.58 2.56 9 At 2.57 PNG’s CI is close to the weak/medium threshold of 2.69. 8 >>> 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 15. 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. 10 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 few years, the fuel price shock is set at 35 percent (slightly larger than the default shock), and the shock to non-fuel commodity prices is set to 25 percent —with 20 percent for base metals and precious metals, and 35 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). Mitigating factors are included as well, and calibrated close to default values (2 percent for fuel and 39 percent for non-fuel). PNG’s single outstanding Eurobond (maturing in 2028) activates the market financing module. Finally, given PNG’s vulnerability to climate change, and in the context of the RSF arrangement request, the tailored natural disasters stress test was also conducted (see the Climate Change Risks section for a discussion of the results). 16. Under the baseline scenario, the debt-service to revenue indicator is projected to breach its threshold. A relatively large breach in 2028 arises due to the bullet payment for the US$500 million Eurobond, which was issued in 2018. Marginal breaches also arise between 2025 and 2031 as the debt- service-to-revenue ratio surpasses 14, the relevant threshold value, due to higher official bilateral and multilateral debt service payments given larger share of FX debt and a weaker Kina relative to the previous DSA. This liquidity indicator falls below the threshold in the second part of the forecast horizon. In the baseline scenario, the present value of debt-to-GDP ratio as well as debt-to-exports and debt service-to- 10 During the 2021 SMP, 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 . 9 >>> export ratios remain below their respective thresholds over the entire projection horizon. The solvency indicators, which remain below their respective thresholds, are on a downwards trend from 2026 onwards. 17. 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 debt indicators. Changes in policy and the structure of the economy manifests in some differences between the historical and the baseline scenarios. Particularly, the historical scenario shows a faster fiscal consolidation than the baseline. Meanwhile, the natural disasters tailored stress test only leads to marginal and short-lived breaches in the PV of debt-to-GDP ratio, while breaches in the debt service-to-revenue ratio are only resolved by the beginning of the next decade. The market financing risk module indicates a moderate risk of heightened liquidity pressures primarily due to elevated GFNs. However, a heightened market stress event would not have a substantial impact of debt burden indicators as few future external debt disbursements are projected on commercial terms (Figure 5). PNG’s relatively elevated sovereign spreads (which have nonetheless remained containted since the ECF/EFF approval) likely reflect the perceived risks due to the country’s characteristics (small and undiversified export base, small revenue base, elevated political uncertainty, vulnerability to shocks). 18. Although residuals remain relatively large, the current DSA shows an improvement to the assessment of debt dynamics with smaller residuals (Table 1 and Figure 3). With support of Fund TA, updates to BOP data addressed some issues that led to overestimating the residuals, such as long- standing challenges in classifying large income account outflows, including external debt service payments related to resource projects, under the financial account rather than the current account. Some data quality issues persist, which likely continue to drive positive residuals from external financial flows which persist into the projection period as a consistent accounting framework is used. 19. Public debt PV ratios increased substantially in recent years, and are expected to moderate in coming years from close to 52 percent of GDP recorded last year. Amid the recent global shocks, there was a large increase in domestic debt and related debt service, which contribute to the elevated overall debt burden and debt service indicators (Figure 2). 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 remainder of the decade. Under the baseline scenario, the public debt-to-GDP ratio is on a downward trajectory and will fall towards 50 percent of GDP by 2025 and approach the 40 percent of GDP legal limit by the end of this decade. This downward trend in the public debt-to-GDP ratio arises through stronger real GDP growth and smaller fiscal deficits relative to the past 5 years, as the authorities’ fiscal consolidation efforts persist (Figure 3). 20. The high concentration of domestic debt in short-term bills and an undiversified base of creditors, highlights rollover risks. Half of the public domestic debt is held by the banking sector, illustrating PNG’s high bank-sovereign nexus. At end-2023, commercial banks held about 13 percent of GDP of T-bills and T-bonds. In line with the high concentration of the banking sector in PNG —four commercial banks, with one bank accounting for roughly two thirds of the total financial system assets — the largest bank, with which many government agencies keep their deposit accounts, held 58 percent of 10 >>> all government securities at end-2023. The rest of public domestic debt is mostly held by superannuation (pension) funds. Lastly, the central bank has been holding a stable and limited portfolio of government securities (1.7 percent of GDP at end-2023), which is capped under the IMF’s ECF/EFF arrangement (quantitative performance criterion). 21. Diversifying the issuance structure by issuing longer term Treasury bonds would lower these risks, make debt service costs more predictable, and help with financial deepening effort (Figure 2).11 In addition, the fall in the level of short-term debt, from an estimated peak just above PGK15 bn in 2024, is a mitigating factor for liquidity risks. The residuals from unidentified debt creating flows recorded in 2021, are not anticipated to be repeated (Figure 3) as the government has taken several steps to improve recording and reporting of debt. 12 The fall in domestic debt comes amid an ambitious fiscal consolidation in the baseline under the program, such that domestic public debt-to-GDP and its related service are expected to fall, approaching the median of LICs over the next decade (Text Table 6). Domestic debt to GDP ratio Domestic debt service to revenues incl. grants Net domestic debt issuance 1/ 30 120 4.0 15.0 25 3.0 100 10.0 2.0 20 80 5.0 1.0 15 60 0.0 0.0 10 40 -5.0 -1.0 5 20 -10.0 -2.0 0 0 -3.0 -15.0 2019 2021 2023 2025 2027 2029 2031 2033 2019 2021 2023 2025 2027 2029 2031 2033 2019 2021 2023 2025 2027 2029 2031 2033 Historical realizations As a ratio to GDP (LHS) Median of average projected values over the first five years of the forecast period As a ratio to domestic debt stock in prev. year (RHS) across countries using the LIC DSF with non-zero domestic debt, end-2023 Borrowing Assumptions (average over 10-year projection) Value Shares in new domestic debt issuance Medium and long-term 53% Short-term 47% Borrowing terms Domestic MLT debt Avg. real interest rate on new borrowing 4.0% Avg. maturity (incl. grace period) 6 Avg. grace period 3 Domestic short-term debt Avg. real interest rate 3.3% Sources: Country authorities; and staff estimates and projections. 1/ Net domestic debt issuance is an estimate based on the calculated public gross financing need net of gross external financing, drawdown of assets, other adjustments and domestic debt amortization. It excludes short-term debt that was issued and matured within the calendar year. 11 Authorities are assessing available options, including debt-for-nature swap operations, with analysis still at an exploratory stage. 12 This includes the state guarantee policy initiated during the 2021 SMP . 11 >>> 22. Stress tests point to several vulnerabilities for public debt (Figure 2 and Table 4). As for external debt, the most extreme shock impacting the PV of public debt is a shock to exports. Under this shock scenario, the PV of public debt-to-GDP ratio peaks at 71.6 percent of GDP in 2026, more than double the 35 percent benchmark and substantially above the starting level of 51.3 percent of GDP in 2024, before gradually decreasing over the next years. The tailored stress test for the combined contingent liability shock causes a deterioration in public debt metrics, felt most acutely through the total public debt service-to-revenue ratio. This analysis suggests contingent liabilities represent an important source of vulnerabilities in PNG. The trajectory of the PV of the public debt-to-revenue ratio is impacted most by the exports shock, reflecting the strong reliance upon commodity exports within PNG. 23. PNG is one of the most vulnerable nations to climate change and to climate-related natural disaster shocks, especially floods, droughts, landslides, and rising sea levels. Climate change is expected to have significant adverse effects on PNG’s lives and livelihoods, with severe risks to food and water security, ecosystems, and critical infrastructure. These risks apply both to urban populations in coastal areas, exposed to a rise in sea levels and more intense weather events, as well as rural, remote populations, exposed to lower agricultural crop yields and heightened risks of landslides. These consequences would affect PNG’s economic output by hindering overall growth and employment, contributing to food insecurity, putting livelihoods at risk, and increasing inflationary pressures from staples. In the absence of additional adaptation efforts and under a high emissions scenario, climate change could trigger a loss of PNG’s annual GDP of 4 percent by 2050 and 15 percent by 2100. 13 Additionally, public spending needs would be pressured by reconstruction costs and cash transfers to support affected populations, while the disruptions of economic activities may also lead to decreased fiscal revenues. The resulting worsening in fiscal balances would lead to higher public debt. Finally, lower agricultural production would translate in diminished exports, while reconstruction efforts boost imports of intermediate inputs, both leading to worsening balance of payments outcomes. 24. A natural disaster stress test for PNG illustrates the risks to debt sustainability of an extreme climate event. The tailored natural disaster stress test is inspired by historical events which have impacted growth, caused losses and damages, and required public expenditure for recovery and reconstruction. However, given the expectation that such events will likely continue to grow in intensity and frequency, the calibration assumes a shock to GDP growth equal to the expected impact on GDP by 2050 in a high emissions scenario. Hence, the calibration employs the standard 10 percent of GDP one-off shock to external PPG debt-GDP ratio, a one-off 4 percentage points decline in real GDP growth, and the standard 3.5 percentage points shock on exports growth. Results illustrate the limited scope for meeting additional financing needs in the stress scenario without putting pressure on external debt liquidity indicators in a protracted manner (Table 3) and jeopardizing overall public debt sustainability (Table 4). 13 Asian Development Bank (2013), The Economics of Climate Change in the Pacific. This report shows the impact of climate change on PNG’s economy is expected to be broadly neutral until at least 2030 because of initial gains in the agriculture sector from warming conditions. 12 >>> This highlights the need to expedite institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private contributions to address climate-related investments. 25. Additionally, an alternative scenario was calibrated to assess the effects of climate change and adaptation policies on debt sustainability over the long term. It is important to note that there is considerable uncertainty on the global emissions trajectory as well as long-term climate and macroeconomic modeling. Notwithstanding this limitation, the scenario is based on the simulations of the effects of climate change on macroeconomic variables, while factoring the effects of adaptation policies (including the investment spending associated with these policies and their positive effects). The analysis takes as a starting point the baseline scenario, adding onto it ADB’s pessimistic (higher emissions) scenario (see ¶23) which considers a permanent GDP level loss compared to the baseline case of no climate change of 4 percent by 2050. The alternative scenario assumes that annual adaptation needs (by 2030) to upgrade and retrofit existing infrastructure and to invest in coastal protection are financed with public resources (with a mix of 55 percent external and 45 percent domestic financing). The cost of these additional investments is estimated at 2 percent of GDP every year for the next 10 years. 14 These investments are assumed to mitigate the impact on the GDP level by 2040 to a loss of only 2 percent. Additionally, fiscal revenues decrease relative to the baseline in proportion to lower activity, exports fall by ½ of the estimated losses of agricultural production according to ADB (i.e., a fall of 5 percent relative to the baseline each year), while the bulk of adaptation investments relies on imported goods (e.g. construction materials) given PNG’s production matrix. 26. In the climate alternative scenario, external and domestic debt indicators edge higher relative to the baseline scenario (Figures 1 and 2). Relative to the baseline, external public debt solvency indicators increase, with PV of debt-to-GDP breaching the relevant threshold, before returning to a downward path. Moreover, the debt service-to-revenue ratio shows protracted breaches extending through the first 10 years of the forecast horizon, when the bulk of adaptation investments occur. Regarding overall public debt, the solvency indicator would fail to return below the 35 percent of GDP threshold during the relevant forecast horizon, highlighting the risks to debt sustainability arising from climate change when adaptation policies are fully financed with public resources. In addition, we note that if a shock of magnitude similar to the one calibrated for the natural disasters stress test were to occur under this alternative scenario, PNG’s public debt would assume an unsustainable path. 27. In spite of the positive spillovers, addressing climate change challenges would put debt sustainability at risk. This means that authorities should strive to increase the climate responsiveness of existing investment plans while aiming at mobilizing additional, highly concessional, climate financing and private sector solutions supported by market incentives. Availability of development partner support is essential to calibrate the envelope of public participation in adaptation efforts consistent with preserving debt sustainability and retaining the public debt risk ratings in PNG. The implementation of reforms anchored in the requested IMF RSF would help in this effort while safeguarding debt sustainability by: (i) supporting climate mitigation policies, (ii) enhancing disaster risk management efforts, (iii) integrating climate considerations into public investment management processes, and (iv) supporting the development of green and inclusive finance. By supporting enhancements in PNG’s climate policies, reform measures 14 IMF (2021), Fiscal Policies to Address Climate Change in Asia and the Pacific . 13 >>> under the RSF will enhance climate responsiveness of PNG’s public investment and accelerate mobilization of private financing and support in this direction. 28. PNG remains at “high” risk of external and overall debt distress. The (mechanical) overall debt distress rating is “high”, owing to the multiple breaches of sustainability benchmark under the baseline scenario, as discussed in previous sections. The increase in public debt during the recent external shocks also constitutes a rollover risk that authorities aim to address by improving financing terms (e.g., by issuing longer-term securities). Likewise, the external debt distress rating is unchanged from previous DSAs at high risk, given breaches in the debt service-to-revenue ratio discussed before. 29. Debt service on existing loans, paired with relatively weak revenue generation, are expected to almost double the debt service-to-revenue ratio by 2024. However, as debt service reduces and revenues increase, and barring further shocks to demand growth, the indicator enters a downward trend from this peak. 30. Stress tests show that adverse shocks to exports, commodity prices and contingent liabilities constitute the main risks to public debt sustainability. Further, while the historical scenario indicates that it is possible to reduce external debt from current levels, shrinking overall debt remains challenging, so that reforms, including those already implemented during the recent SMPs and the EFF/ECF, are essential for supporting the sustainability of public finances. Market financing risks continue to be relevant, with the GFN threshold breached, pointing to moderate market financing pressures. 31. Debt dynamics are assessed as sustainable. Public debt is expected to remain elevated in the near-term and to enter a clear downward path over the medium-term. Also, the projected temporary breaches of external liquidity indicators can be mitigated by debt management operations. 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 authorities plans for further fiscal consolidation and conservative financing strategies (such as substituting costly financing with concessional financing from multilateral and bilateral partners). These plans and strategies are supported by the PV limit on new external borrowing under the Fund’s ECF/EFF programs and the non-concessional borrowing ceiling that PNG adheres to under the World Bank’s SDFP. 15 This baseline sustainability assessment also relies upon higher future resource revenue as tax exemptions expire from 2026 onwards. 32. The authorities noted the Staff’s assessment that PNG remains at high risk of debt distress but remains sustainable under the baseline projection. In discussions, the authorities agreed that large 15 The SDFP ceiling for IDA FY24 is consistent with the CY23 and CY24 ceiling under the IMF ECF/EFF arrangements. The SDFP ceiling for FY25, currently in preparation, will be consistent with the CY24 and CY25 ceilings under the Third Reviews of the ECF/EFF arrangements. 14 >>> financing requirements to dampen the effects of the COVID-19 pandemic on PNG’s economy left their mark on public debt. Additionally, the redemption of the US$ 500 million Eurobond in 2028, issued in 2018, alongside higher interest rates relative to history are key risks. The authorities remain optimistic about their capacity to continue delivering a fiscal consolidation path, which includes improved mining revenues. They also highlighted their intent to continue implementing the strategy of substituting costly financing with concessional financing from multilateral and bilateral partners to improve PNG’s debt profile. The authorities noted interest costs of domestic securities have increased, and average maturities of new issuances shrunk over the past year as the market adjusted to lower liquidity conditions. They also highlighted the importance of more proactive debt and cash management practices, improved coordination with the central bank, and the implementation of the medium-term revenue strategy as mitigating factors which will reduce risks in the medium-term. The authorities are committed to fiscal consolidation and conservative financing strategies to support the sustainability of PNG’s debt going forward. 15 >>> Actual Projections Average 8/ Historical Projections 2021 2022 2023 2024 2025 2026 2027 2028 2029 2034 2044 External debt (nominal) 1/ 62.8 51.8 48.9 54.2 54.0 54.2 52.6 50.2 48.9 38.2 23.3 71.7 47.9 Definition of external/domestic debt Currency-based of which: public and publicly guaranteed (PPG) 25.0 23.5 26.8 30.6 31.4 32.5 30.6 28.0 25.5 11.6 1.9 15.4 24.0 Is there a material difference between the No two criteria? Change in external debt -7.0 -11.0 -2.9 5.3 -0.1 0.2 -1.7 -2.3 -1.4 -2.0 -0.9 Identified net debt-creating flows -24.9 -29.4 -11.9 -14.1 -16.1 -14.7 -13.5 -11.9 -11.6 -9.5 -10.8 -18.2 -12.1 Non-interest current account deficit -13.9 -16.2 -14.9 -11.4 -13.4 -12.5 -12.5 -11.0 -10.7 -8.5 -7.4 -15.9 -10.8 Deficit in balance of goods and services -17.6 -19.9 -18.0 -21.4 -24.3 -24.5 -24.5 -24.4 -24.3 -21.1 -16.2 -17.7 -23.3 Exports 42.2 47.0 43.1 43.6 46.7 46.8 46.7 46.6 46.6 41.4 30.6 Debt Accumulation Imports 24.6 27.1 25.1 22.2 22.4 22.3 22.2 22.2 22.3 20.3 14.4 5.0 40 Net current transfers (negative = inflow) -1.0 -0.4 -0.9 -0.9 -0.8 -0.8 -0.8 -0.7 -0.7 -0.6 -0.3 -1.0 -0.7 of which: official -1.7 -1.2 -1.2 -1.2 -1.2 -1.1 -1.1 -1.0 -1.0 -0.8 -0.4 4.0 35 Other current account flows (negative = net inflow) 4.8 4.2 4.0 10.9 11.8 12.8 12.8 14.1 14.3 13.1 9.1 2.8 13.2 Net FDI (negative = inflow) -6.3 -4.0 -0.8 -2.1 -1.9 -1.8 -1.7 -1.5 -1.4 -1.3 -3.5 -2.3 -1.5 3.0 30 Endogenous debt dynamics 2/ -4.7 -9.3 3.8 -0.6 -0.8 -0.4 0.6 0.6 0.5 0.4 0.1 Contribution from nominal interest rate 1.3 1.7 2.2 1.5 1.6 1.4 2.2 2.2 2.1 1.6 0.9 2.0 25 Contribution from real GDP growth 0.3 -3.0 -1.6 -2.1 -2.4 -1.8 -1.6 -1.6 -1.5 -1.2 -0.8 1.0 20 Contribution from price and exchange rate changes -6.4 -8.0 3.2 … … … … … … … … Residual 3/ 17.9 18.4 9.0 19.3 15.9 14.9 11.9 9.6 10.2 7.5 9.8 13.8 11.1 0.0 15 of which: exceptional financing 0.0 0.0 -0.6 -0.8 -1.2 -0.7 0.2 0.3 0.3 0.3 0.0 -1.0 10 Sustainability indicators -2.0 5 PV of PPG external debt-to-GDP ratio ... ... 23.7 27.0 28.1 28.9 27.2 24.6 22.4 9.6 1.1 PV of PPG external debt-to-exports ratio ... ... 54.9 62.0 60.1 61.7 58.2 52.8 48.0 23.3 3.5 -3.0 0 PPG debt service-to-exports ratio 4.2 2.1 3.7 4.8 5.3 6.4 6.6 9.5 6.4 5.2 1.1 2024 2026 2028 2030 2032 2034 PPG debt service-to-revenue ratio 13.8 6.5 9.5 12.5 14.1 16.8 16.9 23.6 15.7 10.5 1.7 Gross external financing need (Million of U.S. dollars) -1616.9 -2218.3 653.1 -2146.8 -1913.9 -2078.6 -911.6 24.6 -570.0 -832.2 -6435.4 Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) -0.5 5.7 3.0 4.5 4.6 3.5 3.1 3.1 3.1 3.2 3.5 3.8 3.5 GDP deflator in US dollar terms (change in percent) 10.1 14.7 -5.8 -1.5 -0.2 0.3 0.7 0.2 -0.2 2.9 2.2 0.3 0.9 Effective interest rate (percent) 4/ 2.1 3.3 4.2 3.3 3.1 2.8 4.2 4.2 4.3 4.2 4.0 3.3 3.9 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) 20.3 34.7 -10.8 4.1 11.8 4.1 3.6 3.0 3.0 2.8 3.4 10.2 4.0 of which: Private Growth of imports of G&S (US dollar terms, in percent) 21.9 33.3 -9.9 -9.2 5.3 3.8 3.4 3.3 3.3 3.1 2.6 0.0 2.4 60 Grant element of new public sector borrowing (in percent) ... ... ... 8.4 13.1 14.4 10.9 5.9 17.9 37.9 28.5 ... 23.5 Government revenues (excluding grants, in percent of GDP) 12.8 15.3 16.9 16.9 17.6 17.9 18.4 18.8 19.0 20.5 20.5 15.2 19.1 50 Aid flows (in Million of US dollars) 5/ 1411.5 773.8 991.0 635.0 598.7 741.1 640.1 625.7 618.4 710.8 959.9 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.3 2.2 2.3 1.8 1.7 1.6 1.4 1.1 ... 1.8 40 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 31.2 39.4 39.6 62.6 55.8 89.1 98.7 99.2 ... 73.6 Nominal GDP (Million of US dollars) 26,113 31,653 30,729 … … … … … … … … … Nominal dollar GDP growth 9.5 21.2 -2.9 3.0 4.4 3.9 3.8 3.3 3.0 6.2 5.8 4.1 4.4 30 Memorandum items: 20 PV of external debt 7/ ... ... 45.8 50.6 50.7 50.6 49.1 46.8 45.7 36.2 22.4 In percent of exports ... ... 106.1 116.0 108.5 108.1 105.2 100.5 98.1 87.4 73.2 10 Total external debt service-to-exports ratio 33.2 28.0 41.4 15.3 20.3 17.6 24.8 27.0 22.8 19.7 12.5 PV of PPG external debt (in Million of US dollars) 7284.2 8548.0 9273.0 9905.2 9693.3 9055.3 8479.0 4734.6 964.3 0 (PVt-PVt-1)/GDPt-1 (in percent) 4.1 2.3 1.9 -0.6 -1.8 -1.6 -1.6 -0.3 2024 2026 2028 2030 2032 2034 Non-interest current account deficit that stabilizes debt ratio -6.9 -5.2 -12.0 -16.7 -13.2 -12.7 -10.8 -8.6 -9.3 -6.6 -6.5 Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ 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. 16 >>> Actual Projections Average 6/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2034 2044 Historical Projections Public sector debt 1/ 52.6 48.2 53.7 53.9 52.6 50.9 48.0 45.3 42.5 28.8 25.1 39.8 42.3 Definition of external/domestic of which: external debt 25.0 23.5 26.8 30.6 31.4 32.5 30.6 28.0 25.5 11.6 1.9 15.4 24.0 Currency-based debt of which: local-currency denominated Change in public sector debt 3.9 -4.4 5.5 0.2 -1.3 -1.6 -2.9 -2.7 -2.8 -2.6 1.7 Is there a material difference Identified debt-creating flows 0.4 -5.4 4.9 -1.4 -1.9 -2.0 -2.9 -2.9 -2.9 -2.2 1.7 1.6 -2.4 No between the two criteria? Primary deficit 4.4 2.9 1.8 1.5 0.0 -1.3 -2.5 -2.6 -2.6 -2.0 2.1 2.9 -1.7 Revenue and grants 15.1 16.6 17.9 18.7 19.3 19.6 20.0 20.4 20.6 21.9 21.5 16.9 20.6 of which: grants 2.3 1.3 1.0 1.8 1.7 1.7 1.7 1.6 1.6 1.4 1.0 Public sector debt 1/ Primary (noninterest) expenditure 19.5 19.6 19.8 20.2 19.3 18.3 17.5 17.8 18.0 19.9 23.6 19.8 18.9 Automatic debt dynamics -4.0 -8.3 3.0 -2.9 -1.9 -0.7 -0.4 -0.3 -0.3 -0.2 -0.4 of which: local-currency denominated Contribution from interest rate/growth differential -2.7 -6.8 -0.1 -2.9 -1.9 -0.7 -0.4 -0.3 -0.3 -0.2 -0.4 of which: foreign-currency denominated of which: contribution from average real interest rate -2.9 -4.0 1.3 -0.6 0.4 1.1 1.1 1.2 1.1 0.8 0.4 of which: contribution from real GDP growth 0.3 -2.8 -1.4 -2.3 -2.3 -1.8 -1.5 -1.5 -1.4 -1.0 -0.8 60 Contribution from real exchange rate depreciation -1.3 -1.5 3.1 ... ... ... ... ... ... ... ... 50 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 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 40 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 30 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 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 3.5 1.0 0.6 1.7 0.6 0.4 0.0 0.2 0.1 -0.4 0.0 1.3 0.1 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 51.4 51.3 49.7 47.7 44.9 42.3 39.7 26.9 24.3 2024 2026 2028 2030 2032 2034 PV of public debt-to-revenue and grants ratio … … 287.0 274.5 257.9 243.1 224.2 207.1 192.2 122.8 113.0 Debt service-to-revenue and grants ratio 3/ 110.6 92.9 93.7 86.0 80.7 68.3 51.6 48.9 37.8 22.6 57.1 Gross financing need 4/ 21.1 18.4 18.6 17.5 15.5 12.1 7.8 7.4 5.1 2.9 14.4 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 1 Real GDP growth (in percent) -0.5 5.7 3.0 4.5 4.6 3.5 3.1 3.1 3.1 3.2 3.5 3.8 3.5 1 Average nominal interest rate on external debt (in percent) 2.3 2.6 3.3 4.2 4.5 4.4 4.3 4.3 4.3 4.1 2.5 1.3 4.3 1 1 Average real interest rate on domestic debt (in percent) -9.0 -11.5 5.8 -4.0 -1.3 1.6 2.0 2.4 2.5 2.8 1.6 -0.4 1.9 1 Real exchange rate depreciation (in percent, + indicates depreciation) -6.3 -6.6 13.8 … ... ... ... ... ... ... ... 2.4 ... 1 n.a. Inflation rate (GDP deflator, in percent) 11.6 15.0 -3.6 5.7 5.4 3.4 3.1 2.8 2.8 2.9 2.2 5.0 3.0 0 Growth of real primary spending (deflated by GDP deflator, in percent) -7.1 6.1 3.9 6.7 -0.2 -1.4 -1.4 5.0 4.1 4.4 5.9 1.1 3.6 0 0 Primary deficit that stabilizes the debt-to-GDP ratio 5/ 0.5 7.3 -3.6 1.2 1.3 0.3 0.4 0.1 0.2 0.6 0.5 1.4 0.5 0 PV of contingent liabilities (not included in public sector debt) 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0 2024 2026 2028 2030 2032 2034 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 Currency-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. 17 >>> PV of debt-to GDP ratio PV of debt-to-exports ratio 70 200 180 60 160 50 140 40 120 100 30 80 20 60 40 10 Most extreme shock: Exports 20 Most extreme shock: Exports 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Debt service-to-exports ratio Debt service-to-revenue ratio 20 35 18 30 16 14 25 12 20 10 15 8 6 10 4 5 2 Most extreme shock: Exports Most extreme shock: Exports 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Historical scenario Most extreme shock 1/ Threshold 1 Climate change alternative scenario Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests* Tailored Stress Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Terms of marginal debt Combined CL Yes Avg. nominal interest rate on new borrowing in USD 3.5% 3.5% Natural disaster No Yes USD Discount rate 5.0% 5.0% Commodity price 2/ Yes No Avg. maturity (incl. grace period) 25 25 Market financing No No Avg. grace period 5 5 Note: "Yes" indicates any change to the size or interactions of the default * Note: All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG settings for the stress tests. "n.a." indicates that the stress test does not apply. external MLT debt in the external 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 2034. 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. 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. 18 >>> PV of Debt-to-GDP Ratio 80 70 60 50 40 30 20 Most extreme shock: Exports 10 0 2024 2026 2028 2030 2032 2034 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 400 120 350 100 300 80 250 200 60 150 40 100 20 Most extreme shock: Combined contingent liabilities 50 Most extreme shock: Exports 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Most extreme shock 1/ TOTAL public debt benchmark Historical scenario 1 Climate change alternative 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 12% 12% Domestic medium and long-term 46% 46% Domestic short-term 41% 41% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 3.5% 3.5% Avg. maturity (incl. grace period) 25 25 Avg. grace period 5 5 Domestic MLT debt Avg. real interest rate on new borrowing 4.0% 4.0% Avg. maturity (incl. grace period) 6 6 Avg. grace period 3 3 Domestic short-term debt Avg. real interest rate 3.3% 3.3% * 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 2034. 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. 19 >>> Projections 1/ 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PV of debt-to GDP ratio Baseline 27 28 29 27 25 22 20 17 14 12 10 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 27 26 23 18 10 3 0 0 0 0 0 A2. Alternative Scenario : Climate change 28 30 32 31 30 29 28 27 25 24 22 B. Bound Tests B1. Real GDP growth 27 31 34 32 29 26 23 20 17 14 11 B2. Primary balance 27 29 31 29 27 25 23 20 18 15 13 B3. Exports 27 39 57 56 53 51 48 45 40 36 32 B4. Other flows 3/ 27 30 33 32 29 27 24 22 19 16 13 B5. Depreciation 27 36 40 38 35 32 29 25 22 18 15 B6. Combination of B1-B5 27 37 42 40 37 35 32 29 25 22 19 C. Tailored Tests C1. Combined contingent liabilities 27 30 31 30 28 26 24 21 19 17 14 C2. Natural disaster 27 30 32 30 28 26 24 21 19 16 14 C3. Commodity price 27 36 44 44 43 43 42 40 37 35 32 C4. Market Financing 27 31 32 30 27 25 22 19 16 13 11 Threshold 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 62 60 62 58 53 48 43 38 33 28 23 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 62 55 49 38 22 6 0 0 0 0 0 A2. Alternative Scenario : Climate change 64 68 71 70 67 65 63 61 60 59 56 B. Bound Tests B1. Real GDP growth 62 60 62 58 53 48 43 38 33 28 23 B2. Primary balance 62 61 66 63 58 54 49 44 40 36 32 B3. Exports 62 103 176 171 164 157 150 142 132 121 111 B4. Other flows 3/ 62 65 71 68 62 58 53 47 42 37 32 B5. Depreciation 62 60 68 64 59 54 49 44 39 34 29 B6. Combination of B1-B5 62 83 80 92 86 81 75 68 61 55 48 C. Tailored Tests C1. Combined contingent liabilities 62 64 67 64 59 55 51 47 43 39 35 C2. Natural disaster 62 64 67 64 59 55 51 47 42 38 34 C3. Commodity price 62 93 111 107 102 98 93 90 87 83 81 C4. Market Financing 62 60 62 58 53 48 43 38 33 28 23 Threshold 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 5 5 6 7 10 6 6 6 6 6 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 5 5 6 6 9 5 5 4 3 1 0 A2. Alternative Scenario : Climate change 5 6 7 7 10 7 8 7 8 7 7 B. Bound Tests B1. Real GDP growth 5 5 6 7 10 6 6 6 6 6 5 B2. Primary balance 5 5 7 7 10 7 7 7 7 6 6 B3. Exports 5 7 11 14 18 13 13 14 17 16 15 B4. Other flows 3/ 5 5 7 7 10 7 7 7 7 7 6 B5. Depreciation 5 5 6 7 10 7 7 6 7 6 6 B6. Combination of B1-B5 5 6 8 9 12 9 9 9 9 9 8 C. Tailored Tests C1. Combined contingent liabilities 5 5 7 7 10 7 7 7 7 6 6 C2. Natural disaster 5 5 7 7 10 7 7 7 7 6 6 C3. Commodity price 5 7 9 9 13 9 9 9 10 10 10 C4. Market Financing 5 5 6 7 10 6 6 6 6 6 5 Threshold 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 12 14 17 17 24 16 15 14 13 12 10 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 12 14 16 16 21 12 11 8 6 3 0 A2. Alternative Scenario : Climate change 13 14 17 18 25 17 17 16 16 15 14 B. Bound Tests B1. Real GDP growth 12 15 20 20 28 18 18 16 15 14 12 B2. Primary balance 12 14 17 17 24 16 16 15 14 13 12 B3. Exports 12 15 21 24 31 23 22 23 25 23 21 B4. Other flows 3/ 12 14 17 18 25 17 16 15 15 14 12 B5. Depreciation 12 18 21 22 31 21 20 19 18 16 15 B6. Combination of B1-B5 12 15 20 21 28 20 19 19 19 17 15 C. Tailored Tests C1. Combined contingent liabilities 12 14 17 17 24 16 16 15 15 13 12 C2. Natural disaster 12 15 18 18 25 17 16 15 15 14 12 C3. Commodity price 12 16 22 24 31 22 21 21 22 20 19 C4. Market Financing 12 14 17 17 24 16 15 14 13 12 10 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. 20 >>> Projections 1/ 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PV of Debt-to-GDP Ratio Baseline 51 50 48 45 42 40 37 35 32 29 27 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 51 53 54 55 57 58 58 58 59 60 61 A2. Alternative Scenario : Climate change 53 53 53 52 52 51 51 50 49 48 46 B. Bound Tests B1. Real GDP growth 51 56 60 60 60 60 60 61 61 61 61 B2. Primary balance 51 54 59 56 54 51 49 47 44 41 39 B3. Exports 51 59 72 69 67 64 62 59 55 51 47 B4. Other flows 3/ 51 52 52 49 47 44 42 39 36 33 31 B5. Depreciation 51 54 51 47 44 40 37 33 29 25 22 B6. Combination of B1-B5 51 52 56 54 52 50 48 46 44 41 39 C. Tailored Tests C1. Combined contingent liabilities 51 66 64 61 59 56 54 52 49 46 44 C2. Natural disaster 51 62 61 59 57 55 53 51 49 47 45 C3. Commodity price 51 54 57 59 61 63 64 64 64 64 65 C4. Market Financing 51 50 48 45 42 40 37 35 32 29 27 TOTAL public debt benchmark 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 275 258 243 224 207 192 176 161 147 134 123 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 275 275 276 277 278 282 276 273 274 278 280 A2. Alternative Scenario : Climate change 284 277 272 262 254 248 241 234 228 223 212 B. Bound Tests B1. Real GDP growth 275 286 302 294 289 286 280 277 275 274 275 B2. Primary balance 275 282 300 281 263 249 231 215 201 188 176 B3. Exports 275 306 365 344 326 312 293 274 252 232 214 B4. Other flows 3/ 275 269 266 247 229 215 198 182 167 153 140 B5. Depreciation 275 284 262 238 215 196 174 154 135 117 100 B6. Combination of B1-B5 275 272 287 270 254 242 227 213 201 189 179 C. Tailored Tests C1. Combined contingent liabilities 275 344 327 307 289 274 255 239 224 211 199 C2. Natural disaster 275 321 308 291 276 264 249 236 225 215 206 C3. Commodity price 275 317 326 332 327 321 309 297 295 294 294 C4. Market Financing 275 258 243 224 207 192 176 161 147 134 123 Debt Service-to-Revenue Ratio Baseline 86 81 68 52 49 38 36 29 27 24 23 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 86 82 74 63 64 58 58 57 61 65 67 A2. Alternative Scenario : Climate change 86 81 69 53 52 42 42 36 34 33 33 B. Bound Tests B1. Real GDP growth 86 87 82 68 67 58 58 56 58 60 62 B2. Primary balance 86 81 80 72 61 49 50 47 45 40 37 B3. Exports 86 81 70 56 54 42 40 36 36 33 31 B4. Other flows 3/ 86 81 69 52 50 39 37 31 28 26 24 B5. Depreciation 86 77 69 53 53 40 38 31 28 25 23 B6. Combination of B1-B5 86 80 71 61 57 45 44 40 40 37 36 C. Tailored Tests C1. Combined contingent liabilities 86 81 107 72 62 57 61 59 51 44 42 C2. Natural disaster 86 84 95 68 61 55 56 53 49 45 44 C3. Commodity price 86 93 80 62 68 57 54 48 51 55 58 C4. Market Financing 86 81 68 52 49 38 36 29 27 24 23 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. 21 >>> 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 150 80 Residual 30 Previous DSA proj. 100 25 70 DSA-2018 Interquartile range (25-75) Price and 20 60 exchange rate 50 15 50 Real GDP 10 Change in PPG growth 0 40 debt 3/ 5 30 Nominal interest rate -50 0 20 -5 Median Current -100 10 account + FDI -10 0 -150 -15 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Change in PPG debt 3/ 5-year 5-year Contribution of Distribution across LICs 2/ historical projected -20 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) 40 Current DSA Residual Previous DSA proj. 40 DSA-2018 Interquartile 80 30 range (25-75) Other debt creating flows 30 70 20 60 Real Exchange rate 20 depreciation 50 10 Real GDP Change in debt 40 growth 10 30 0 Real interest rate 20 0 -10 10 Primary deficit -10 Median 0 -20 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Change in debt Distribution across LICs 2/ 5-year 5-year Contribution of -20 unexpected historical projected 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. 22 >>> Figure 4. Papua New Guinea: Realism tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 7 2 14 Distribution 1/ 6 Projected 3-yr adjustment 5 12 In percentage points of GDP 3-year PB adjustment greater 4 than 2.5 percentage points of 10 3 GDP in approx. top quartile In percent 2 8 1 1 6 0 -1 4 -2 -3 2 -4 0 0 2018 2019 2020 2021 2022 2023 2024 2025 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 size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is real GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP Growth (percent of GDP) (percent, 5-year average) 8 5 4 6 3 2 4 1 0 Historical Projected (Prev. DSA) Projected (Curr. DSA) 2 -1 -2 0 -3 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA Contribution of government capital Sources: Country authorities; and staff estimates and projections. 23 >>> GFN 1/ EMBI 2/ Benchmarks 14 570 Values 18 486 Breach of benchmark Yes No Potential heightened liquidity needs Moderate 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon. 2/ EMBI spreads correspond to the latest available data. PV of debt-to GDP ratio PV of debt-to-exports ratio 35 160 30 140 120 25 100 20 80 15 60 10 40 5 20 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Debt service-to-exports ratio Debt service-to-revenue ratio 12 25 10 20 8 15 6 10 4 5 2 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Market financing Threshold Sources: Country authorities; and staff estimates and projections. 24 >>>