Regions and Countries

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p. 5 of 5 BACK | NEXT I. Summary of Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV. Portfolio Management Issues V. Country Performance and Assistance Levels

Country Strategy and Program Update 2004-2006: Papua New Guinea

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V. Country Performance and Assistance Levels

A. Lending Level Proposed

1. Asian Development Fund Lending Levels

28. PNG is classified in category B2, with access to some ADF loans. Since the 2000 review, per capita incomes have continued to decline, which would argue for a move to category B1. The situation is being reviewed in the context of the ADB-wide review of country classifications. In 2002, the World Bank Group decided to allow PNG access to International Development Agency (IDA) resources; only IDA lending is envisaged over the medium term.

29. The level of ADF funds allocated to PNG is linked to its performance with respect to fiscal management (outturns versus appropriations, deficit), public sector management (turnover of agency heads), sector management (road maintenance, fisheries and forestry governance, health and education nonsalary expenditures per capita, HIV/AIDS program), and portfolio management.

30. The proposed base-case 3-year rolling ADF allocation is now fixed at $60 million for 2004–2006. The actual allocation will depend on performance against the agreed-upon triggers. ADB will assist the Government to improve performance against each trigger. The base case assumes that there is little short-run improvement in the overall development situation. In particular, there is little evidence of real commitment to reform, implying a continuing poor macroeconomic framework, continuing instability and social unrest, a continuing gap between policy formulation and implementation, continuing deterioration in service delivery and infrastructure, and continuing disinvestments by the private sector. The base case assumes that portfolio performance does not change. The low case assumes an accelerated deterioration in economic and political conditions and that the at risk ratio is deteriorating. Clearly, the volume of ADF assistance would depend on the circumstances. However, an indicative level of ADF lending under the low scenario would be about $30 million in 2004–2006. In contrast, the high case assumes rapid and successful implementation of the existing reform program and expansion of the reform agenda, together with significant improvement in the at risk ratio. Absorptive capacity would slowly increase, justifying a modest increase in ADF assistance to about $75 million in 2004–2006. The indicators and triggers will be kept under review. The lending scenarios and performance targets are described in Appendix 1, Table A1.13. Should ADF resource availability be significantly constrained during 2004 (the last year of ADF VIII), the ADF lending program for the year will be reviewed accordingly. The 2005 and 2006 ADF lending program will depend on the outcome of the ADF replenishment discussions.

2. Overall Lending Level

31. PNG’s absorptive capacity is limited and its external debt ratios are high. PNG also has access to other sources of external assistance, in particular to grants. Therefore, a modest OCR lending program is envisaged. OCR lending also needs to reflect absorptive and debt carrying capacities, which will vary with overall performance. Therefore, it is envisaged that the OCR lending program would vary with the different performance scenarios. Under the base case, OCR lending would total about $30 million–$40 million over 2004–2006, rising to $60 million– $70 million under the high case, and falling to $0–$15 million under the low case. Total OCR and ADF lending, under the base case, would amount to $90 million–$100 million (Appendix 1, Table A1.11). Significant cofinancing is envisaged. Flexibility in the scope and volume of ADB lending will be essential.

B. Nonlending Program

32. The TA pipeline and proposed economic, thematic, and sector work program (Appendix 1, Table A1.12) have been designed to support the main areas of emphasis of the lending program. The indicative TA program for 2004–2006 amounts to $2.0 million each year. The advisory TA and the economic, thematic, and sector work will focus on reducing poverty and improving governance. Given the large needs for capacity building and sector analysis, grant cofinancing will be sought to ease the constraint of the reduced TA indicative planning figure.

C. Summary of Changes to Lending and Nonlending Program

33. The envisaged program is an evolution from earlier plans, reflecting the more pessimistic assessment of the base case, with the changes primarily affecting timing, reflecting the relative stability of the ADB strategy for PNG. The most significant changes are proposed further reductions in the volume of OCR lending and the nonlending program, reflecting reduced absorptive capacity and resource availability.²

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