Regions and Countries

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Country Strategy and Program Update 2002-2004: Papua New Guinea

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1. The political situation in Papua New Guinea (PNG) remains volatile, with political jockeying in the run-up to elections in July 2002. New legislation to strengthen the role of political parties will improve stability after the elections. The Prime Minister, who came to power in July 1999, continues to attract strong support from the international community. Although the country’s fiscal and external positions improved in 2000, economic conditions have been difficult in 2001, with oil output and nonmineral activity declining. Appendix 1 provides economic indicators. With international support, however, the Government has had considerable success in implementing a macroeconomic stabilization program and structural reforms.

2. Poverty is significant, with 37 percent of the population living in poverty, nearly all in rural areas. PNG ranks last in the Pacific on the United Nations Development Programme’s (UNDP’s) human development and poverty indices, reflecting past underfunding of essential services and the difficulty of providing them across remote and scattered regions. The situation is worsened by rapid population growth. Social and environment indicators are in Appendix 2.

3. The Asian Development Bank (ADB) strategy for PNG continues to focus on reducing poverty by (i) improving governance, (ii) developing the private sector, and (iii) enhancing human capital. To improve governance, ADB is helping strengthen public financial and general public sector management by focusing on performance and outputs and enhancing operations of good-governance institutions. To enhance private sector development, ADB is helping improve sector policy and institutional frameworks (e.g., road sector management), strengthen factor productivity (e.g., skills development), and enhance market access (e.g., rural transport infrastructure). Better governance and public sector management will improve social indicators. ADB will remain involved in policy development, especially in health and in water supply and sanitation, and continue to promote infrastructure investments and improve social service delivery. Gender and population issues will be a significant focus.

4. General policy and institutional performance, which has not been good in the past, has recently improved with the adoption of wide-ranging reforms. For purposes of Asian Development Fund (ADF) allocation, performance assessment will be linked to success in implementing the reforms. The key parameter for ADF assistance will be improvement in administrative management, measured by progress in public sector reform and economic management. The base case scenario, which assumes that the recent pace of improvement in governance and economic management is maintained, calls for an ADF allocation of about $50 million in 2002–2004. The overall program for PNG calls for about 3–4 loans each year, totaling about $60 million, and technical assistance (TA) of about $3 million each year.

I. Development Situation

A. Recent Political and Social Developments

5. The political scene remains extremely volatile, with members of Parliament switching political allegiances in anticipation of the July 2002 elections. Legislation introduced in November 2000 will strengthen the position of political parties and is expected to increase stability after the elections. The majority party has been consolidating its position and now has an unprecedented majority. The Prime Minister continues to attract strong support from the international community.

B. Economic Assessment and Outlook

6. The economic situation continues to be difficult. The Government that took office in July 1999 made stabilization its main macroeconomic objective and is implementing an economic program supported by the International Monetary Fund (IMF), other multilateral agencies, and bilateral funders. Performance under the IMF program has generally been satisfactory.

7. Fiscal and external positions improved in 2000. The overall Government deficit was substantially reduced to 1.4 percent of gross domestic product (GDP), the current account surplus widened, and official international reserves strengthened to three months of nonmineral imports. Although the kina depreciated by 12.5 percent in US dollar terms by year-end, the rate of inflation declined to 10 percent by year-end, compared to the target of 5 percent. Real GDP grew by only 0.3 percent, with nonmineral output declining by 0.3 percent.

8. Economic conditions have been difficult in recent months. The economy remains stagnant, with oil output and nonmineral activity declining. A significant increase in the Government’s financing requirements, along with political uncertainties, affected business confidence and contributed to exchange rate pressures.

9. Structural reforms have made progress. The Government is completing reviews of selected departments to define core functions and appropriate staffing. About 1,700 staff were retrenched in 2000 (with full retrenchment benefits). Preparations for privatization of state-owned enterprises are underway. Financial sector reforms have made progress, with legislation just passed to improve the regulatory framework for the pension industry. The competition policy is being reviewed.

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