Countries and Regions

	Table of Contents
p. 2 of 21 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Papua New Guinea : I. Country Performance Assessment

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A. Economic Performance Assessment

1. The Papua New Guinea (PNG) economy is extremely dualistic. An export-oriented, capital-intensive minerals sector is the major engine of economic growth, generating crucial export and taxation revenue, much of which supports a dominant public sector. A semi-subsistence sector provides a livelihood for 85 percent of a population characterized by enormous linguistic and cultural diversity. Utilizing the natural resource rents in a manner that ensures broad-based economic growth involving and benefiting the rural majority remains a difficult challenge for Government.

2. The 3.4 percent average annual real growth rate of gross domestic product (GDP) recorded during the 20-year period 1978-1998 conceals considerable year-to-year variation, resulting from various combinations of external economic shocks, natural disasters, and economic management problems. There has been little growth in the latter half of the 1990s, with real GDP in 1999 barely 3 percent higher than in 1994, not enough to compensate for population growth.

3. During 1997-1998, the economy was hard hit by drought, the effects of the Asian financial crisis, and low commodity prices. In 1999, real GDP is estimated to have grown by 3.8 percent, largely because of mining and petroleum growth of 14.1 percent. Signs of intensified macroeconomic instability became apparent early in the year, when the kina came under pressure at a time of seasonal downturn in export revenue. The pressure arose primarily from substantial unbudgeted public expenditure in December 1998 and January 1999, and the Government's failure to secure anticipated external finance from commercial sources and from the International Monetary Fund (IMF) and the World Bank. Government relied instead on borrowing from the Bank of Papua New Guinea (BPNG) that exceeded legal limits. Further deterioration in the already poor governance environment remained a fundamental concern, with Parliament suspended until 13 July and government business conducted in a non-transparent, unpredictable manner. The kina depreciated to an historic low of 0.3480 cents at 1 June, foreign exchange reserves dropped to a dangerously low level of one month of non-mineral imports cover, and inflation accelerated to an annual rate of 16 percent.

4. A new administration gained office on 14 July 1999, promising to restore integrity to state institutions, to stabilize the kina, to restore stability to the national budget, to privatize public enterprises where appropriate, and to ensure ongoing peace on Bougainville. A supplementary budget was introduced on 10 August that gained the endorsement of the IMF. This budget provided for cuts to national government's development expenditure; cessation of lump-sum payments for retrenchments under the poorly planned civil service reforms of the previous administration; and revenue-raising increases in gaming taxes, log export taxes, and excises on petrol, alcoholic beverages, tobacco, and luxury motor vehicles. The aim was to bring the overall fiscal deficit for 1999 down to 1.6 percent of GDP. The Government's policies and actions were endorsed by the international community at a Consultative Group Meeting held in early November 1999.

5. The 2000 budget presented to Parliament on 30 November 1999 elaborated the Government's new Structural Reform Program (SRP) intended to achieve the macroeconomic stabilization and structural adjustments necessary for sustained, broader-based economic growth. Both the budget and the SRP gained widespread support from the PNG and international communities and, if implemented successfully during 2000-2001, would considerably improve medium-term growth prospects. The IMF support for the Government's economic efforts has been confirmed by the provision of a stand-by agreement. The Government also has successfully concluded negotiations with the World Bank on a structural adjustment loan, focusing on financial sector reforms as well as governance issues. The loan was approved by the World Bank Board in June 2000.

6. With the new Government a new page appears to have turned for PNG. The Government appears committed to wide ranging reforms, and has had considerable success in attracting support. Internationally, the new relationships with IMF and World Bank, and renewed close support from Australia are encouraging. Internally, the Government now commands a substantial majority in Parliament and attracts wide support at grassroots level, despite attempting to introduce necessary, but difficult and often controversial policy changes. Assuming that this commitment and support can be sustained, the prospects for PNG would appear relatively good.

7. A significant development has been the maintenance of peace in Bougainville. Although progress on resolving the complex issues has been slow and difficult, it is encouraging that the talks are continuing.

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