Papua New Guinea WT/TPR/S/62
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. Papua New Guinea (PNG) is an archipelago of some 600 islands located in the south-west
Pacific Ocean just north of Australia.  It comprises predominantly the eastern half of New Guinea,
where it borders on the Indonesian province of Irian Jaya, and many other islands, including
especially New Britain, New Ireland and Bouganville.  PNG has an area of approximately463,000 square kilometres, with a mainly Melanesian population of about 4.5 million.  The diversity
of the population, and thus the country, is reflected in the fact that some 800 different dialects and
spoken, although English is the official language.  The country became internally self-governing in
December 1973, having been administered as an Australian territory under the United Nations since
1945, and fully independent in September 1975.
2. PNG is by far the largest and most heavily inhabited South Pacific island, and is richly
endowed in natural resources, including minerals, oil, forests, and fish.  However, the economy
remains heavily reliant on subsistence agriculture.   While GDP per capita in 1998 of approximately
US$900 places PNG in the middle of Pacific island countries, it has not kept pace with lower-middle
income Asian countries.  Its declining social indicators are among the poorest in the world, wellbehind other comparable lower-middle income economies, and are characteristic of lower income
countries (Table I.1).  The United Nations regards PNG as a developing country;  it ranks in the lower
third of countries on the UN human development index.
3. Annual per capita income grew slowly post-independence until the 1990s when expansion of
the mining sector generated substantial economic growth ahead of population growth (Table I.2).
Income per head fell substantially in the late 1980s and in 1995 and 1997.  Apart from the mining and
construction sectors, the formal economy has shown little growth.  Incomes remain barely abovesubsistence for most of the population, with some 85% living in rural areas dependent on simple
agriculture.  Moreover, despite achieving periods of successful economic growth based on natural
resources, Papua New Guinea has been unable to improve its social conditions.  These have further
deteriorated in recent years in the light of poor delivery of key social services, such as health and
education, and low investment in human and rural development.  Chronic law and order problemspersist and poverty is increasing.
4. Improved governance combined with streng thened institutional arrangements and more
effective public administration are fundamental to lifting the economic and social performance of the
PNG economy.  Without these changes, it will continue to perform well below potential, and benefits
from long overdue and urgently needed economic reforms will be muted.  Continued politicalinstability and lack of political commitment will seriously undermine such efforts.
5. PNG is a dualistic economy;  the relatively prosperous "enclave" mining sector contributes
most to economic growth and has few spill over effects on the rest of the economy.  The modern,
foreign-owned capital-intensive mining sector, which exports its entire output and accounts for most
private investment – but a small share of employment – exists within what is essentially a subsistenceand non-growing economy.  Although traditional agricultural export crops of coffee, copra, cocoa and
more recently, oil palm products, as well as logging still account for around 30% of GDP, the most
striking structural change in the economy has been the growth of the mining and petroleum sectors
and the relative stagnation of agriculture, the mainstay of the economy.  Mining, and especially
petroleum, accounted for over one fifth of GDP in  1997, and contributed almost two thirds of export
receipts and around one fifth of government revenue.WT/TPR/S/62 Trade Policy Review
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Table I.1
Main economic and social indicators
Area 463,000 sq. km Urban share of population 16.3%
Population (1997) 4.5 million Nominal GDP at current prices (1997) K 6.8 billion or
US$4.8 billion
Per capita income (1998 current US$) US$890
Annual population growth (1996) 2.3% GDP at factor cost 1997 (at 1983 prices)
of which:US$2,332.4 million
- Mining (including petroleum) 20%
- Agriculture, forestry & fishing 28%
- Manufacturing 9%
- Services 43%
Life expectancy at birth (1996) 58 years Total formal employment (1990)
of which:157,475
- Agriculture, forestry & fishing 23%
- Mining 3%
- Manufacturing 12%
- Services 62%
Crude birth rate per '000 (1996) 32 Enrolment ratio in education (1996)
- Primary 80
- Secondary 14
- Tertiary ..
Infant mortality rate per '000 (1996) 62 Energy consumption per capita 232 kg. of oil equivalent
Adult literacy (1996) 71%
.. Not available.
Source : Asian Development Bank (1997a), Country Economic Review of Papua New Guinea ;  International Monetary
Fund (1999), Staff Report for the 1999 Article IV Consultations , April; World Bank (1998), World Development
Indicators ;  and Papua New Guinea Government (1998), 1999 Budget Papers , Vol. 1, "Economic and
Development Policies", November.
Table I.2
Economic performance, 1994-98
1994 1995 1996 1997 1998a
US$ million
GDP at current market prices 4,599 4,832 5,280 4,656 3,581
Real GDP (1983 prices) 2,940 2,570 2,708 2,332. 1,778
Annual percentage change (in domestic currency)
Real GDP growth 5.2 -2.9  4.0 -4.6 2.4
Real GDP growth per capita 2.2 -3.4 1.4 -8.6 0.4
Table I.2 (cont'd)Papua New Guinea WT/TPR/S/62
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1994 1995 1996 1997 1998a
Per cent
Inflation (CPI) 2.9 17.3 11.6 3.9 13.6
Interest rates
- Commercial bank loans 10.0 15.4 10.2 10.6 17.9
- Treasury bills (182 days) 10.8 21.5 9.2 14.5 20.5
- Term deposits 4.5 9.4 4.0 5.1 8.1
Broad money growth (M3) -0.2 13.8 31.8 6.8 1.8
Per cent of GDP
Government deficit -2.3 -0.8 0.5 0.1 -1.8
 - Revenue (including grants) 26.1 26.4 27.3 32.8 30.0
 - Expenditure 28.4 27.3 26.8 32.7 31.8
Balance of payments
 - Current account (including grants) 10.9 17.1 5.5 -6.4 0.1
 - Capital account -11.2 -13.4 1.6 1.9 -4.1
 - Overall balance -1.8 3.2 6.5 -4.8 -3.9
External public debt 26.4 26.4 24.5 31.6 35.9
Per cent of external current receipts
Debt service ratio 32.8 25.2 17.7 17.1 24.4
Memorandum items
International reserves
 - US$ million 95 268 549 355 194
 - Months of non-mineral imports c.i.f. 0.9 2.8 5.1 3.0 2.1
a Estimate.
Source : Papua New Guinea authorities;  Bank of Papua New Guinea (1998), Quarterly Economic Bulletin , September;
and International Monetary Fund estimates.
6. Merchandise exports and imports averaged 49% and 27% of GDP respectively over the
period 1992-97, with little variation in more recent years (Chart I.1).  These shares are somewhat low
relative to other comparable economies in the region.  However, while dependant on mining exports,
PNG’s trade is less narrowly based than othe r neighbouring islands.  Its three-product export
concentration ratio of 65% – comprising crude oil, gold, and logs – in 1997 is well below the averageof other Pacific island economies of 80%.
1  Nevertheless, these products, together with coffee, copper
and palm oil, accounted for 90% of exports in 1997.  There are few manufactured and fish exports.
Despite attempts to diversify its export mix, Papua New Guinea remains vulnerable to external
developments affecting primary commodities.
(2) RECENT ECONOMIC PERFORMANCE
7. Papua New Guinea has faced a number of complex developmental challenges since
independence.  Despite relatively abundant mining, forestry, and fishing resources, PNG has not
fulfilled anywhere near its economic potential.  The economy’s performance has been mixed at best,
partly due to a number of domestic and international shocks, but primarily because of government
economic mismanagement, especially during the 1990s.  The relatively steady macroeconomicmanagement that was characteristic of the country after independence has since given way to major
periods of destabilizing policies that have undone earlier accomplishments, thereby undermining
                                                     
1 World Bank (1995).WT/TPR/S/62 Trade Policy Review
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economic growth.  Moreover, structural weaknesses across major areas of the economy, such as in
trade and foreign investment, continue to seriously retard economic performance, despite repeated
intentions by governments to embark on major microeconomic reform.  The economy currently
suffers from chronic macroeconomic instability and serious structural flaws and is in urgent need of
reform.  Unless decisive action is taken, another financial and economic crisis would appear to be
looming.
2025303540455055
1992 1993 1994 1995 1996 1997(Per cent)
Source :     Data provided b y the authorities of Pa pua New Guinea.Chart I.1
Merchandise trade as a share of GDP, 1992-97
Exports
ImportsTotal
8. Government policies after independence centred on import substitution and other
interventionist measures designed to promote industrialization. High and disparate tariffs along withquantitative import restrictions were introduced.  The Government also played an active role in
developing industries by adopting restrictive investment and other "domestication" policies aimed at
promoting home industries, including, in particular, greater processing of natural resources, such as
logs and fish.  Many of the structural problems that currently confront the PNG economy and,
undermine its performance are due to these policies.
9. The economy’s macroeconomic position deteriorated badly after 1989 following the twin
shocks from the Bougainville crisis, which resulted in the "long-term" closure of the Panguna mine,and sharp falls in world prices for key commodities.
2  Although the Government’s reform programme
helped turn the economy around in the early 1990s, economic growth was mainly due to a resource
boom, led principally by the Porgera gold mine and the commencement of oil production from the
Kutubu oilfield.  Real growth rates rose to 12% and 17% in 1992 and 1993, respectively.  However,
these years also saw unsustainable fiscal expansion as the then Government actively pursued
                                                     
2 The closure of the Panguna copper and gold mine had serious repercussions on the economy.  At the
time, it was contributing one third of total exports and 15% of government revenue.Papua New Guinea WT/TPR/S/62
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budgetary deficits as a means of stimulating broad-base d growth.  Fiscal deficits rose to almost 6% of
GDP in 1992 and 1993, and the Government’s commitment to fundamental institutional and
economic reforms waned.
10. These destabilizing macroeconomic policies precipitated an economic and financial crisis in
1994.  Public debt escalated from 43% of GDP in 1991 to 55% in 1994, and the Government’s
financial position became increasingly untenable in the light of unsustainable Central Bankborrowings and accumulated arrears.  Major fiscal corrections followed, but were too late to avert a
crisis on the external account.  Faced with a loss of investor confidence, capital flight and rapidly
dwindling foreign reserves, which at one stage fell  to well under two weeks of imports, the exchange
rate was floated.  Negative 3% growth occurred in 1995.
11. The need for fundamental reform was acknowledged in 1995 when the Government agreed
with the World Bank and the IMF to undertake a Structural Adjustment Programme in the wake of a
self-induced financial and economic crisis.
3   As well as prudent macroeconomic reforms, the
programme called for widespread measures aimed at improving the structural performance and
competitiveness of the economy, such as trade and investment liberalization, public sector reform, and
sustainable development of the important forestry sector.  Some of these policy reforms wereintroduced in the midst of the crisis, such as the floating exchange rate system, while some others
were contained in the 1995 Budget.  However, while macroeconomic stability was largely restored in
1995-96, implementation of the key structural reforms was short-lived.  Implementation of the
programme stalled during 1996.  As had become P NG practice, many of the programme’s structural
reforms were either excessively delayed, "watered down", or not implemented as the crisis situation
passed.
12. Although macroeconomic stability was temporarily restored in 1995-96, the country’s current
economic situation remains critical due mainly to a prolonged relapse of serious macroeconomic
mismanagement.  This has coincided with severe economic shocks that have also weakened the
economy, still vulnerable from the adverse effects overhanging from previous expansionary fiscal
policies and deep-seated structural rigidities.  These shocks included the cyclone damage to the copra
and cocoa crop in early 1997, followed by the harsh drought that gravely affected agricultural and
mineral production.  International copper, gold and, until recently, oil prices have also declined
significantly, and world timber prices slumped in the wake of the Asian economic crisis.  The PNG
economy contracted in real terms during 1997 by almost 5%.  Only modest real growth, of around
2%, is expected in 1998.
13. The pace and extent to which the economy rebounds will depend crucially on the incoming
Government of July 1999 taking the necessary corrective policy actions to restore market confidence
and avert a possible financial crisis.  The adverse economic effects of recent shocks, which were
beyond the government’s control, have been compounded by the inept macroeconomic policies of
past governments.  More prudent monetary and fiscal policies are needed to address concerns of rising
inflation, which is currently over 20% annually, and dwindling external reserves, as well asincreasingly unsustainable fiscal deficits financed by inflationary Central Bank borrowings. Faced
with serious cash-flow problems due to large shortfalls  in official external financing, government debt
escalated during the 1990s, peaking at 64% of GDP in 1997, before falling to an estimated 52% in
1998 (Chart I.2).  Central Bank credit rose above statutory limits in late 1998 and government arrears,
including to provincial governments and commercial statutory authorities, accumulated to an
                                                     
3 Financial support for the programme was provided by loans from the World Bank, the Asian
Development Bank and a stand-by credit facility from the IMF.  Papua New Guinea’s bilateral aid donors alsoendorsed the programme and some, such as Japan and Australia, provided financial support.WT/TPR/S/62 Trade Policy Review
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estimated K 160 million in April 1999, equivalent to 2% of GDP.4   Without urgent corrective action,
the nation’s precarious fiscal position risks being worsened by the previous Government’s unrealistic
1999 Budget, released in November 1998, which relies heavily on access to significant external
borrowings.
010203040506070
1 9 9 21 9 9 31 9 9 41 9 9 51 9 9 61 9 9 71 9 9 8(Per cent)
Source :     Data provided b y the authorities of Pa pua New Guinea.Chart I.2
Public debt as a share of GDP, 1992-98
Total
Domestic
14. In June 1999, prior to being removed from office in July, the previous Government had
belatedly taken steps to implement an Econom ic Recovery Package aimed at reinforcing
macroeconomic stability by tightening budgetary disciplines.  However, in view of the difficult
political situation and its impending exit from office, the package was essentially stillborn.Recognizing the untenable fiscal position, the new Government acted swiftly to introduce a
supplementary budget, in August 1999, to redress the mounting budget deficit as part of its
comprehensive stabilization package (Chapter II).  While the new Government’s budgetary position
also relies upon access to external funding, the Government has moved expeditiously to engage in
discussions with the IMF and the World Bank to secure concessional finance for the budget and to
implement structural economic reforms.
(3) M
ACROECONOMIC POLICIES
15. PNG’s dependence on primary commodities poses particular policy challenges for the
Government.  Without appropriate macroeconomic and structural policies, the economy’s
vulnerability to international conditions will accentuate.  Such policy reforms are needed if the
                                                     
4 This includes arrears on pension-related payments, estimated at end 1998 to be K 75 million.  The
capacity of clearing all arrears by end 1999, as official ly intended, will depend on the Government gaining
access to external funds.Papua New Guinea WT/TPR/S/62
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economy in general is to take full advantage of the potential provided by its rich resource base.  This
requires fiscal discipline to ensure that additional tax revenues generated from resource booms are
used appropriately.  Better managing the effects of the so-called "Dutch-disease" from resource
booms will be important to the longer term development of the PNG economy (Box I.1).
Box I.1:  Managing the sectoral  effects of the "Dutch disease"
Small resource-rich economies like PNG are prone to the so-called "Dutch disease" which has important
implications for the macro-management of the economy .  Dutch Disease is a term coined by economists to
describe a situation encountered by the Netherlands following development of new natural gas reserves in the
North Sea.
What happened in the Netherlands was that the development of natural gas production was associated with
depressed performance of the manufacturing sector.  This situation was not unique to the Netherlands, but has
been found to have occurred in many other countries, such as Britain, Norway, Australia, and Mexico, that
have benefited from rich mineral developments.  PNG is also thought to be affected.
The Dutch disease stems from the exchange rate effects on the rest of the economy of large mineral exports
and inflows of foreign direct investment needed to develop substantial resource projects.  These inflows
appreciate the country’s exchange rate thereby reducing the international competitiveness of manufactured
goods, both in export markets and domestically against imports.  Resources flow out of the manufacturing
sector into the mineral sector, and manufacturing cont racts.  The mineral sector attracts labour and capital
away from manufacturing by bidding up wages and interest rates.
Catching the Dutch disease is not necessarily a problem.  However a relatively small industrial sector is likely
to be a natural outcome of having a rich resource base.  Thus, efforts to control the exchange rate or to
promote industrialization through import protection are likely to be counterproductive. Resources must come
from somewhere else in the economy if the mining sector  is to expand.  There is nothing inherently right or
wrong about shifting resources from manufacturing into mining.  A contracting manufacturing sector can be
associated with strong growth in other sectors and should not therefore be seen as an undesirable outcome.
The Dutch disease effects are accentuated in PNG by the large amount of aid inflow it receives.  Such
windfall gains are likely to further undermine the competitiveness of the manufacturing sector.
Source :  WTO Secretariat.
(i) Fiscal policies
16. At the heart of Papua New Guinea’s economic crisis has been expansionary fiscal policies,
leading to unsustainable budget deficits financed mainly by heavy Central Bank borrowings.  Large
fiscal deficits of almost 6% of GDP precipitated the 1994 economic crisis, for example, and the fiscal
disciplines restored in 1996 and 1997, culminating in small surpluses in each of those years, havesince slackened.  The larger than expected budget deficit rose to well over 2% of GDP in July 1999,
and would have escalated to above 3% for the year in the absence of any new fiscal measures;  these
budget deficits are well above the 1% limits agreed with international institutions under the Structural
Adjustment Programme.  These deficits, which adversely affect the economy, were being financed
mainly through the banking system, especially the Central Bank.
17. The previous Government’s 1999 Budget strategy crucially depended on securing external
finance of some US$100 million.  Funding from multilateral institutions was not forthcoming due to
policy disagreements, and the incoming Government  inherited a precarious budgetary position.  The
previous Government attempted to meet the shortfa ll by means of commercial overseas borrowings ofWT/TPR/S/62 Trade Policy Review
Page 8
US$60-120 million and by raising funds through an international bond issue.  None of these
contingencies eventuated, and the new Government appears to have put these plans on hold, instead
looking for institutional as well as donor suppo rt.  Commercial borrowings would have entailed
onerous terms that could have accentuated the Government’s already critical debt situation.5  Public
debt remains high, amounting to almost K 4 billi on or some 52% of GDP in 1998, down from 64% in
1997 (Chart I.2).  Over half is domestic debt, held mainly with the banking system.  This liquidityoverhang and large domestic financing requirement threatens future economic stability and
performance.
18. The new Government sees reducing public debt as a high priority in helping to stabilize the
currency, restore budgetary stability, and remove obstacles to investment and growth.  It intends to
reduce domestic debt substantially using the expected proceeds of a revised privatization programmeof major state enterprises for completion by 2002, expected to raise K 3 to 5 billion.  In addition, the
August supplementary budget restructured governme nt finances aimed at controlling the burgeoning
government deficit to 1.7% of GDP in 1999 (Chapter II).  To avoid accentuating domestic pressures
on the banking system, the Government intends to finance the 1999 deficit of K 265.7 million,
projected in the supplementary budget, entirely from external sources.
19. Fiscal discipline has also suffered from a lack of budgetary checks and controls.  Budgets are
often premised on overly optimistic expenditure and revenue projections that cannot be met in
practice.  There is a lack of transparency and accountability in budgetary management, and large
payments, such as the Rural Development Fund intr oduced in the 1999 Budget and retained in the
supplementary budget, are frequently left to the discretion of politicians, without adequate fiscal
scrutiny. Funding of losses of public enterprises has also become obscured and subject to
non-transparent quasi-fiscal arrangements.  The budget preparation cycle and financial managementprocesses are not working, such that budget overruns and malpractices are common.  Governance and
public confidence was further eroded by the political uncertainty and budgetary implementation
problems that followed the previous Government’s decision in December  1998, shortly after passing
the 1999 Budget, to adjourn Parliament for political reasons until July 1999, when a new government
was elected by Parliament.
(ii) Monetary policies
20. Monetary policy has accommodated expansionary fiscal deficits through Central Bank credit.
The entire 1998 Budget deficit of 2%, for example, was financed by the Central Bank, despite such
borrowing exceeding statutory limits.
6   High public debt levels strain not only government finances,
but also the banking system.  Central and commercial banks are heavily exposed to governmentsecurities, and business loans have been crowded out.  Over 85% of domestic public debt, equivalent
to almost K 2 billion in 1998, was held with the banking system in Treasury Bills, with about half
being held by the Central Bank (Table I.3).
21. Monetary expansion has continued, despite the Central Bank’s 1999 statement that monetary
policy would remain tight to curb rising inflation.  Monetary policy was loosened in the first half of
1999 by efforts to cover the Government’s financing requirements without significantly raising the
                                                     
5 The European loan was expected to be available in 1998.  However, negotiations were held up due to
the onerous terms being set by the foreign bank, including a short repayment period and what amounted to an
effective mortgaging of Papua New Guinea’s future mineral tax receipts.
6 Statutory limits in the Central Banking Act apply both to the yearly flow of central bank credit to the
government and to the stock of such debt outstanding at the end of the year.  The annual limit on new credit is10% of estimated ordinary budgetary revenues and 20% on the stock of year-end debt.  These limits may, withministerial directive, be raised to 12.5% and 25%, respectively, for up to six months.Papua New Guinea WT/TPR/S/62
Page 9
already high level of bank credit.  The minimum cash reserve requirement on commercial bank
deposits was cut from 10% to 5% and the minimum liquid asset requirement raised from zero to 15%.
Although the banks’ initially raised their holdings of  Treasury bills, these changes raised the capacity
of the banking system to expand credit.
Table I.3
Public debt liability, 1992-98
(K million)
1992 1993 1994 1995 1996 1997 1998
Domestic debt 824 1,037 1,425 1,606 1,970 2,252 2,218
Bank of Papua New Guinea 376 308 612 634 622 951 1,068
Commercial banks 363 498 433 756 1,132 1,062 907
Superannuation funds 69 73 121 102 81 87 87
Commodity stabilization funds 0 120 194  0 0 0 0
Other 15 39 65 113 129 130 156
External debt 1,121 1,283 1,537 1,718 1,811 2,093 1,764
International agencies 918 1,011 1,279 1,476 1,579 1,938 1,698
Other 203 271 259 243 213 155 66
Total public debt 1,945 2,319 2,961 3,324 3,781 4,344 3,982
Source : Papua New Guinea authorities.
22. Illegal levels of Central Bank credit to fund the budget, involving also financing of losses by
public enterprises and quasi-fiscal activities, have undermined fiscal and monetary management and
weakened the perceived independence of the Central Bank.  Prior to the latest appointment by the
incoming Government, there had been three Central Bank Governors in the past two years.  There
appears to be an increasing haziness of the boundaries between monetary and fiscal operations,
including the funding of public enterprises.  This is undermining the credibility of the monetary
system and its capacity to assist in economic stabilization.
23. Private investment is also being stifled by the high interests rates of around 18% to 20%,
which have also been high in real terms during recent years.  Upward pressure on interest rates is
being perpetuated by the high public borrowings from the Central Bank, along with efforts to support
the kina by stemming capital outflows and direct ly intervening in the foreign exchange market.
Inflationary pressures, which are expected to intens ify as the price effects of the currency devaluation
flow through the economy, are also contributing to high nominal interest rates.
(iii) Exchange rate policies
24. PNG has had a floating exchange rate since abandoning the fixed rate regime (the so-called
"hard kina" policy that pegged the kina to a trade-weighted basket of currencies) in October 1994
when kina trading was suspended due to the economic and balance-of-payments crisis.7  T h e
Government is committed to a market determined exchange rate, but has followed a policy of regularintervention in the foreign exchange market to support the kina in the face of severe downward
                                                     
7 While the "hard kina" policy may have promoted macroeconomic stability and generally maintained
external balance, it contributed significantly to domestic stagnation and growing official unemployment.  Iteffectively locked-in a highly non-competitive exchange rate and perpetuated the high cost structure inheritedby PNG at independence, which was unsustainable given PNG’s labour productivity levels (Duncan et al, 1998).WT/TPR/S/62 Trade Policy Review
Page 10
pressure.8   While the exchange rate used in the 1999 Budget of US$0.40 is not a target, substantial
intervention occurred by the Central Bank in the first half of 1999 when the kina fell to a record low
level of US$0.29.  The Central Bank spent some K 60 million supporting the currency, and official
external reserves, excluding balances held in the Mineral Resources Stabilization Fund, fell to one
month of non-mineral export cover in June 1999.
25. By 1998, the kina had devalued in nominal terms across major currencies by around 40%.
However, due to PNG having higher inflation rates than its main trading partners, the kina’s real
devaluation was less pronounced, at around 22%.  Since then, the kina has continued to depreciate
substantially.  For example, its value had fallen in nominal terms against the US$ by another 40% as
of mid 1999.  The real devaluation of the kina has substantially improved Papua New Guinea’s
international competitiveness, making its products cheaper both on world and domestic markets.Provided domestic wage and price pressures can be contained, the benefits to the economy of having a
lower market-determined exchange rate can be significant.
9
26. Many transactions, including debt servicing, foreign aid, and mineral and oil tax receipts are
excluded from the currency market, and are directed in foreign currency through the Central Bank.
After recording substantial balance-of-payment surpluses in 1995 and 1996, of around 3% and 7%,deficits occurred in 1997 and 1998, of around 5% and an estimated 4%, respectively (Tables I.2
and I.4).
27. Papua New Guinea does not maintain restrictions on payments and transfers for current
international transactions, having accepted the obligations of Article VIII, Sections 2, 3 and 4 of the
International Monetary Fund when it joined in November 1975.
10   Only the six commercial banks are
licensed as foreign exchange dealers.  Delays of up to several days can be experienced in executing
large orders.  The Central Bank has delegated substantial foreign currency powers to authorizeddealers who publish rates for all current transactions within a maximum spread between the buying
and selling rates of 2%.  Traders may take out forward exchange cover with dealers at
market-determined rates, subject to prudential limits set for dealers on their uncovered forward
position.
28. Foreign exchange control is administered by the Central Bank (Table I.5).  Overall policy is
determined by the Government with advice from the Central Bank.  Under the previous Government’s
Economic Recovery Package of June 1999, exporters not surrendering export proceeds to the Central
Bank within the required time period would be liable  to a fine of K 100,000 or forfeit of 25% of the
funds involved.  In addition, the surrender period allowed for agricultural and forestry exports would
be reduced from six months to three, and for mining exports from three months to two.
                                                     
8 The Bank of Papua New Guinea interprets its stat utory responsibility of promoting monetary stability
to include a stable exchange rate.  No exchange rate ta rgets are used.  Exchange rate movements in PNG are set
by the Central Bank in consultation with the Minister of Finance.  Intervention in the foreign exchange market,based on the U.S. dollar, occurs regularly to support the kina at the discretion of the Bank’s Governor.  In the
1999 Budget, the Government stated that it was the policy of the Bank of PNG to intervene in support of the
currency.  The auction system initially introduced when the kina was floated was replaced with a screen-basedinterbank trading system in August 1995.
9 Empirical evidence suggests that the competitiveness effects of a devaluation can be significant in
Papua New Guinea, with only about half of the price advantages being reflected in higher inflation, and thatsupply responses by copra and cocoa growers to the higher post-devaluation prices had been significant (Duncan
et al., 1998).  There were also signs that some timber processing activities, were benefiting from the devaluation
(Duncan and Lawson, 1997).  Other modelling work has also  suggested that a real devaluation of some 6% is
likely to raise the economy’s GDP by 1.5% (Fallon et al., 1995).
10 Papua New Guinea has maintained exchange restrictions against Iraq since August 1990 pursuant to
United Nations resolutions.Papua New Guinea WT/TPR/S/62
Page 11
Table I.4
Balance of payments, 1994-98
(US$ million and percentage change)
1994 1995 1996 1997 1998a
Current account 593 845 289 -258 16
Merchandise trade balance 1,192 1,293 813 218 451
Exports (f.o.b.) 2,756 2,825 2,603 2,191 1,842
Imports (c.i.f.) 1,564 1,532 1,791 1,972 1,391
Services (net balance) -685 -609 -690 -673 -642
Private unrequited transfers (net balance) -115 -108 -53 -32 -6
Official unrequited transfers 201 238 219 229 213
Capital account -604 -661 84  76 -163
Investment (net) 74 475 226 23 130
Overall balance -98 159 344 -194 -157
Memorandum items Percentage change
External reserves (changes) -33 182 105 -35 19
Terms of trade
Export price index 16.6 40.3 -1.4 10.8 ..
Import price index
Nominal effective exchange rate -16.9 -12.5 -0.1 -10.5 ..
Real effective exchange rate -18.1 0.4 1.8 -6.3 ..
.. Not available.
a Estimate.
Source : Bank of Papua New Guinea (1998), Quarterly Economic Bullet , September;  and IMF (1999).
Table I.5
Exchange controls
Item Arrangements
A.  Payments and receipts
Prescription of currency
requirementsContractual commitments to non-residents expressed in foreign currency must be paid in the
currency specified.  Export proceeds may be received in any foreign currency.
Gold trade Gold exports must be licensed.  For large mines, the licences are contained in the mining
agreements.  Specific export licences are required from the Central Bank (BPNG) for alluvial gold.
B.  Resident accounts
Foreign exchange accounts Resident business entities require BPNG approval to hold such accounts domestically, except for
term deposits under 90 days.  Accounts held abroad require approval.
Domestic currency accounts Convertible into foreign currency.
C.  Non-resident accounts
Foreign exchange accounts Permitted.
Domestic currency accounts Permitted, subject to approval, and may be converted into foreign currency.
D.  Imports and import payments
Documentation requirements Authorized dealers can approve applications for import transactions not subject to quotas or
licensing.  Payments up to K 5,000 can be made on presentation of invoice.  Higher amounts also
require shipping documents and customs documentation.
Table I.5 (cont'd)WT/TPR/S/62 Trade Policy Review
Page 12
Item Arrangements
E.  Exports and export proceeds
Repatriation requirements Proceeds must be received within six months from export date for agricultural and forestry
products, and within three months for minerals and oil.
Surrender requirements Export proceeds must be sold to an authorized dealer.
Export licences Required for logs, pearls, fishery and marine products, woodchips, sandalwood, rattan, coffee,
cocoa, and copra.  Minimum export price guidelines apply to log exports.
F.  Payments for  invisible transactions and current transfers
Controls on payments Controls apply, but approval is usually granted, provided supporting documentation is given.
Dealers can approve up to K 500,000 per year for individuals and companies.  Higher amounts,
except for trade-related and debt-services payments, must be referred to BPNG.  For payments
exceeding K 50,000 per year, a certificate of tax payment is required.
G.  Proceeds from  invisible transactions and current transfers
Repatriation requirements Yes.
Surrender requirements Residents cannot dispose of foreign exchange earnings from any source without BPNG approval.
Restrictions on use of funds BPNG approval needed to dispose of foreign currency proceeds, other than sale by authorized
dealer in PNG, or for its retention.
H.  Capital transactions
Controls on capital and money
market instrumentsNo restrictions on inward portfolio investment.  Dealers can approve outward investments by
residents of up to K 500,000 per annum.  Higher amounts require BPNG approval.  Investment
income must be returned to PNG as received.  Amounts above K 50,000 a year require prior tax
clearance.
On capital market securities Residents can buy abroad shares or other securities, bonds, money market instruments.
On collective investmentsecuritiesBPNG approval required on purchase abroad by residents, and sale or issue abroad by residents.
Controls on credit operation No controls on commercial credit by residents to non-residents.  Permission needed on commercial
credit to residents from non-residents.  Dealers may approve unlimited offshore foreign currencyborrowings by residents, other than businesses involved in the forestry sector or mineral resources,
provided the term is greater than one year and the interest rates and fees do not exceed those
specified by the BPNG.  Repayment of principal is subject to six-month moratorium from date of
disbursement.  A maximum debt-to-equity ratio of 5:1 applies to net outstanding borrowing
Controls on liquidation of directinvestmentProceeds can be transferred subject to tax clearance certificates.
Lending locally in foreign
currencySubject to presentation of commercial invoices for bona fide transactions.
Source : IMF (1998), Annual Report on Exchange Arrangements and Exchange Restrictions,  Washington, D.C.
(4) MAIN DOMESTIC STRUCTURAL POLICY ISSUES
(i) Trade and taxation policies
29. The government revenue base has been heavily skewed towards direct income taxes and
indirect trade taxes, which together account for some 90% of tax collections.  Most, 60%, comes from
income tax, mainly standard company tax payments and higher company taxes levied on mining and
oil companies.  Trade taxes, especially tariffs, account for around one third of tax revenue.
30. The tax and tariff reform package implemented on 1 July 1999 enabled substantial
across-the-board tariff reductions to be funded by the introduction of a 10% VAT and by extending
the coverage of excise taxes to a range of "luxury" goods, such as motor vehicles.  Shifting the tax
burden from discriminatory trade taxes to a broadly based consumption tax is a significant policyPapua New Guinea WT/TPR/S/62
Page 13
reform that should enhance economic welfare through improved resource-use efficiency.11  W h i l e
such taxes can have the disadvantage of being regressive, falling heaviest on lowest income groups, so
too were the tariffs they partially replaced, with many of the highest tariffs, of over 75%, applied to
food and other staple items.  Consequently, the adverse effects on lower income groups of the tariff
and tax reform package are likely to be minimal overall, and may even benefit them as prices of many
staple items fall.  This outcome is likely to be re inforced by the extension of excise taxes to "luxury
goods", and the inclusion in the VAT of most servi ces that were previously untaxed, many of which
are consumed mainly by higher income groups.  In this regard, however, exclusion from the VAT of
educational, medical and public road transport from the VAT justified for equity reasons may, based
on PNG consumption expenditure patterns, add to the regressivity of the new tax system.12
(ii) Foreign investment policies
31. Outside the mining and petroleum sectors, PNG has attracted little foreign investment.
Although the stock of foreign equity holdings increased in 1997 and represented an estimated 40% of
GDP, mining and petroleum accounted for around 80% of foreign ownership (Chart I.3).  The
proportion of foreign equity to GDP falls to well below 10% if these sectors are excluded.  Australian
investors held an estimated two thirds of this foreign equity stock in 1997, along with investors fromthe Bahamas (7%), United Kingdom (6%), Malaysia (4%) and the United States (4%).
32. If PNG’s economic performance is to be improved, it is important that its trade and other
economic reforms be complemented with investment-friendly policies that facilitate, rather than
obstruct, foreign investment.  The Government is  committed to reviewing existing policies with the
aim of facilitating and encouraging foreign investment through a revised national investment policy.
Foreign investment is also seen as an important means of developing domestic industries to replace
imports and to facilitate the transfer of skills.  At the same time, however, the Government is keen toencourage more local participation in projects through either joint or locally owned ventures.
33. Access to foreign direct investment is especially important for PNG to successfully develop
its service industries, such as tourism.  The high cost and inefficient provision by state monopolies of
utility services, such as electricity, telecommunications, and transport, is of major concern and itself a
disincentive for foreign investment.  Since most of these services are traded internationally throughcommercial presence by foreign providers, invest ment restrictions amount to barriers on services
trade.  The current Government has announced that major utility services are to be privatized and
opened to competition, including from abroad.  PNG is committed to removing the state monopoly on
telecommunications in 2002.
                                                     
11 While trade taxes can be a substantial source of revenue to governments, they tend to be
economically costly.  They are likely to impede the efficient allocation of resources.  In a small, poor countrylike PNG, however, where tax administration and enforcem ent are serious problems, trade taxes may be seen as
having some advantages.  Nevertheless, tariff rates should still be as uniform as possible to avoid distortions inconsumption patterns.  A broadly based consumption tax on goods and services, such as the value-added tax
implemented in PNG, has the advantage of taxing consumption of domestic and imported products equally,
thereby removing protection and improving resource allo cation.  It would also reduce the burden imposed on
exports of having to pay tariff-inflated prices on imported and domestic inputs.  The VAT, by zero-ratingexports and providing a tax credit for any VAT paid on  inputs, effectively exempts exports from the tax.
12 Gibson (1998).WT/TPR/S/62 Trade Policy Review
Page 14
Sector(Per cent)
Other East Asia consists of Hong Kong, China; Japan; Singapore; and South Korea.
Data provided by the authorities of Papua New Guinea.Chart I.3
Foreign equity holdings by sector and country of ownership, 1997
Countr y
Forestry
4
Banking, insurance 
and finance
  5Mining and petroleum
79
Manufacturing
3Other  3Agriculture
5
Retail
1Other
6
Bermuda
3
Bahamas
7
Malaysia
4
Other East Asiaa
4Canada  2
United Kingdom
6
United States
4Australia
64
a
Source :  
34. Trade and investment liberalization provide the most effective means of ensuring competitive
domestic markets that deliver goods and services efficiently at world prices to consumers anddownstream processors.  This will improve the nation’s productivity, on which all economic growth
ultimately depends.  However, making PNG an attractive destination for foreign direct investment
will require much more than making its investment policies transparent and investor friendly or
providing elaborate investment incentives, which are unlikely to be effective.  A new approach to
economic policies is needed to provide the macroeconomic and political stability that helps promotean efficient business environment conducive to private sector development.
(iii) Labour market policies
35. PNG considerably deregulated the labour market in 1992 when the Minimum Wages Board
unified rural and urban wages through a significant reduction in the urban minimum wage, but only
for new employees.  This ended indexation of urban minimum wages to price increases, which hadcreated wide gaps between the two minimum wages.  The decision also emphasized the need for wage
levels to be determined by productivity gains.  This was an important change as real labour costs in
PNG had escalated to non-competitive levels.  For example, unit labour costs in PNG, which from
1970 to 1989 ranged between 80-100% of the U.S. level, rose above those levels during 1990 to 1994,
despite major differences in productivity between the two countries.
13  Since 1994, price increases
following the currency devaluation have lowered real wages.
36. The Minimum Wages Board is currently sitting to review minimum wage levels and wages
policy generally.  Since PNG’s future development is based on labour-intensive activities, the real
cost of labour will have an important bearing on the capacity of its products to compete on overseas
markets, and for PNG to attract foreign investme nt.  In particular, its labour costs must remain
                                                     
13 Duncan and Lawson (1997).Papua New Guinea WT/TPR/S/62
Page 15
competitive with neighbouring labour-rich Asian economies.  It is therefore important that wage
increases continue to reflect labour productivity improvements, including in the public sector, which
has considerable spill-over effects on the private sector.  The economic costs of excessive real wage
increases relative to productivity growth will be larger official unemployment.
(iv) Policy challenges
37. Papua New Guinea currently faces formidable development constraints as well as a difficult
and uncertain economic future, partly as a result of external factors beyond its control, including the
recent collapse in world prices for key exports following the Asian crisis and the legacy of the 1997
drought.  However, the effects of these external shocks have been accentuated by inappropriate
economic policies.  Prolonged periods of economic mismanagement and macroeconomic as well as
political instability have taken a heavy toll on the economy, culminating in large swings in PNG’seconomic performance during the 1990s.  An urgent priority for the new Government is to take
corrective action to restore macroeconomic stability and to reduce public debt.  This, together with
improved transparency and public accountability, is essential to economic development and to
restoring investor confidence.
38. Sound stabilization policies must be accompanied by major microeconomic reforms designed
to remove structural rigidities that are impeding the efficient functioning of markets and business
activities in general.  These include removing inefficient and anti-competitive trade and investment
restrictions, as well as making fundamental changes to improve governance and to strengthen basic
institutional arrangements needed for the private sector to operate efficiently.  This includes
establishing clear ownership rights over land and other property as well as transparent and well
defined rules on doing business, together with adequate enforcement.  Improved law and order is
imperative as security concerns and costs, estimated at 1.5% of GDP, are a major constraint to PNG'sdevelopment.
14  A recent survey found that the four main concerns of the private sector that retarded
investment were crime and theft, corruption, poor infrastructure, and policy instability.15
39. While Papua New Guinea has repeatedly embraced the need for trade liberalization and other
structural reforms, progress has been slow.  Such reforms have tended to be short-lived and jettisoned
when the crisis is over.  A large unfinished agenda exists under the Structural Adjustment Programmeadopted by the Government in 1995 (Chapter II).   Many of these market-opening measures were
reiterated in the Medium Term Development Strategy 1997-2002, as well as in the previous
Government’s 1999 Budget and subsequent Economic  Recovery Package.  A concerted effort is
needed to ensure that these long overdue reforms are implemented with renewed vigour.  In this
regard, the tax and phased tariff reform programme, introduced from July 1999, are integral elementsthat the new Government could complete and build upon.  The reform agenda is in place.  Its
implementation, in a sustained and committed manner, is now urgently needed.
40. Papua New Guinea relies heavily on foreign aid, equivalent to some 9% of GDP or
US$80 per head, making it one of the largest recipients of aid in the region.  These relatively large
inflows must be controlled to avoid contributing to macroeconomic instability.  About two thirds of
                                                     
14 A recent study of business costs concluded that PNG’s law and order problem and resulting security
concerns were having the most adverse impact on the business environment and in need of the most urgentattention (Duncan and Lawson, 1997).  This was because business costs increased substantially when the
indirect costs were taken into account.  These were found to be several times higher than the estimated 3%
direct increase in business costs from security expenses.  Indirect costs of the law and order problem identified
included constraining marketing areas, raising employ ment costs, reducing the intensity of use of capital
equipment and generally occupying a large proportion of management’s time.
15 Institute of National Affairs (1999).WT/TPR/S/62 Trade Policy Review
Page 16
foreign aid is supplied by Australia, originally as untied budgetary support but progressively being
replaced with programme aid from 1992 to 2000.  A new aid treaty, completed with Australia in
May 1999, set a maximum annual indicative planning figure for Australian aid of $A300 million from
2000 to 2003.  Other important bilateral aid donors include the EU (under the Lomé Convention),
Japan, New Zealand, and China.  Aid funds are also provided multilaterally by the World Bank, the
IMF, ADB, and UNDP.
41. While foreign aid is essential to the future well-being of PNG, it should not undermine the
need for fundamental economic restructuring and policy reform.  Foreign aid and technical assistance
programmes can facilitate these reforms, provided external financial assistance is at a level and in a
coordinated manner that minimizes its potentially adverse economic effects.  Foreign aid can
compound the "Dutch disease" effects for PNG from resource booms, thereby making economicmanagement more difficult, and obstructing economic restructuring as well as contributing to
unproductive rent-seeking activities by private and public sector interests.  Long-term aid dependency
can itself be a major constraint to PNG’s economic development.
(5) M
ERCHANDISE TRADE PERFORMANCE
(i) Commodity pattern of trade
42. Papua New Guinea’s commodity trading patterns are heavily concentrated both for exports
and imports.  Over 95% of exports continue to be primary commodities of minerals, especially crude
oil, gold and copper, as well as logs and palm oil.  Other important exports include coffee, cocoa and
copra.  The main change in export composition from 1985 to 1997 was the growing share of minerals
– from 54% to 59% of total merchandise exports – relative to traditional agricultural commodities,
which declined from 36% to 23% (Chart I.4).  With in minerals, the predominant change has been the
commencement and growth of crude oil exports since 1991, to 28% in 1997, and the fall in the exportshares of gold and copper from 36% and 18% in 1985 to 23% and 8% in 1997.
43. In 1994, the last year for which data are available, imports continued to be dominated by
manufactured products, both for consumption and as inputs for exports (Chart I.4).  Imports
comprised mainly machinery and transport equipment (29%) as well as other manufactured goods,
such as textiles and clothing (22%).  Other major import groups in that year were food and liveanimals (13%), chemicals (6%) as well as fuels and lubricants (3%).  Major imports included heavy
equipment and machinery, basic foods and raw materials, textiles and clothing, and motor vehicles.
The share of machinery and motor vehicles fell substantially, from 42% in 1989.Papua New Guinea WT/TPR/S/62
Page 17
Chart I.4
Composition of merchandise trade
19851997(a)    Ex ports
Gold
36Palm oil
7
Tea
1
Cocoa
7
Copper
18Coffee
13Forest products
8
Total:   US$0.96 billion Total:   US$2.19 billion
(b)    Im ports
Chemicals
6Other 
3 Machinery & transport 
equipment
42
Food & live 
animals
15
Other 
manufactures
29Other
27Machinery & transport 
equipment
29
Other 
manufactures
22Mineral fuels
& lubricants
3
Food & live animals
13Chemicals
6
Total:   US$1.34 billion Total:   US$1.56 billionPer cent
Copper
8
Mineral fuels
 & lubricants
5Fish products
1
Copra & copra oil
   7Other
2
Gold
23Palm oil
7
Cocoa
2
Petroleum oil
28Coffee
11Forest products
14Copra & copra oil
        3Other
4
Source :  Data provided by the authorities of Papua New Guinea.19891994WT/TPR/S/62 Trade Policy Review
Page 18
Chart I.5
Merchandise trade by destination and origin
19941997(a)    Exports
Hong Kong, China
    1   
Australia
35New Zealand
3Other
12China
5
Japan
28
(b)    Imports
Singapore
9Other 
10 EU15
3
New Zealand
3Australia
47Japan
7EU15
3
Australia
51New Zealand
4Singapore
8Per cent
United
States
9
Japan
13United States
3EU15
12Singapore
   1
Rep. of Korea   3China   2
Singapore   3
Australia
41New Zealand
0.4Japan
13Hong Kong, China  3Other
7.6
Source :  Data provided by the authorities of Papua New Guinea.19901997EU15
18
China   2Hong Kong, China
   2 Hong Kong, China   2Rep. of Korea
1Other
11
United States
14United States
10
Total:   US$1.11 billion Total:   US$1.97 billionTotal:   US$2.76 billion Total:   US$2.19 billionPapua New Guinea WT/TPR/S/62
Page 19
(ii) Regional pattern of trade
44. Merchandise trade of Papua New Guinea remains heavily concentrated in Oceania and Asia,
but to a slightly lesser extent than previously.  The share of export to Australia, the main single
market, rose from 35% to 41% during the period 1994 to 1997, while the share to Japan, the next most
important market, fell from 28% to 13% (Chart I.5) .  Export shares to Singapore, Hong Kong, China,
the Republic of Korea, the United States and the United Kingdom increased.  An increasing share ofexports, from 12% to 18%, has gone to EU markets, principally Germany and the UK, presumably
reflecting Lomé preferences.  Almost three quarters of PNG exports in 1997 went to the top three
markets of Australia, Japan and the EU (Chart I.5).
45. Imports are increasingly being sourced predominantly from Australia, which accounted for
51% of imports in 1997 compared with 47% in 1990, followed by the United States (up from 10% to14%);  Singapore (down from 9% to 8%);  Japan (down from 13% to 7%);  and New Zealand (up
from 3% to 4%).  Together, these countries accounted for well over three quarters of imports in 1997
(Chart I.5).
(6) O
UTLOOK
46. With its precarious external position and its currency under downward pressure,
Papua New Guinea is facing a difficult economic outlook.  This situation is the consequence of
external factors, involving the Asian crisis, the drought, and depressed international commodity
prices, which are estimated to have cost the PNG economy around US$650 million, equivalent to
15.5% of GDP, in lost export earnings since 1997.16  The present economic situation is not due solely
to external factors, however, it is also the result of internal factors, notably poor economic
management culminating in bouts of macroeconomic instability.
47. Crucial, in the short term, will be the Govern ment’s ability to secure the necessary external
finance to underpin its budget strategy and to implement the reform programme.  Re-engaged
discussions with the World Bank, the IMF, and major aid donors, following the change in government
and the new Government’s stated commitment to economic reform, are encouraging.
48. The economy’s performance in the immediate future will also depend on how quickly it
recovers from the effects of the Asian crisis, which reduced the purchasing power of GDP in PNG byan estimated 12.4%.
17  World log prices collapsed in its aftermath, and international prices for key
minerals, especially copper, gold and, until recently, oil also softened substantially.  These induced
sharp falls in tax revenue from minerals and logs, and inward foreign direct investment fell.  PNG was
one of the Pacific island economies most badly affected by the Asian crisis because of the importance
of mineral and log exports (Table 1.6).  Although these Asian economies are recovering, the adverseeffects will be felt for some time by PNG.
49. In the medium to longer term, the performance of the PNG economy will be determined
mainly by the growth of the resource sectors, especially the mining and petroleum sector.  Although
recent substantial increases in the world price of crude oil, to around US$19 per barrel, are promising,
prospects for other commodity prices are less bright.  Gold and copper prices are likely to remaindepressed for some time, and the outlook for forestry exports remains bleak.  Moreover, although
domestic prices of traditional agricultural commodities, such as coffee, copra and oil palm, have been
helped by the substantial currency depreciation, worl d prices are expected to recover slowly.  Thus,
the short to medium term economic prospects for PNG are modest at best and subject to significant
                                                     
16 World Bank (1998).
17 Asian Development Bank (1999a).WT/TPR/S/62 Trade Policy Review
Page 20
risk related both to external and internal factors.  Foreign direct investment, which is heavily geared to
the mining and petroleum sector, declined substantially in 1998, and is expected to fall further
in 1999.
50. Turning the present economic situation around is linked not only to improved external factors
but also to restoration of macroeconomic stability, investor confidence, and a more conducive
business environment generally.  This implies impl ementing key structural reforms and strengthening
institutional and governance processes, as well as redressing the serious law and order problem and
improving national and provincial governmental fiscal arrangements.
Table I.6
Key effects of the Asian crisis on PNG economy
Type of effect Assessment
Commodity export exposure Major adverse impact on commodity prices (particularly oil and copper) and log volumes and
prices.  The total shock (after allowing for import leakages) is around 7% of GDP.
Tourism effects Negligible.
Other net external income effects Foreign grants will increase in kina terms.
Import effects Depreciation raises the costs of most imports.  The reduction in world price of oil provides a
small boost to purchasing power.
Investment effects Mining and forestry investments are weaker, but mining investment will recover.
Overall impact on GDP or external income Net shock after allowing for cheaper fuel imports and import leakages of a decline in G DP of
about 7%  (from what it otherwise would be).  A devaluation of 30% has alleviated pressuresbut the economy is still under serious pressure in the aftermath of a major drought and the
impact of the Asian crisis and other factors that have weakened commodity prices.
Price effects Inflation rose from 5.3% in 1997 to 21.8% in 1998, partly reflecting the impact of the
devaluation of some 30% but also the impact of the drought.
Employment effects The most visible impact has been an initial loss of jobs in logging of 5,000 but this has been
subsequently reduced somewhat as logging activity has picked up.  The impact on mining
employment will be negligible.
Government budget The budget deficit rose from a budgeted 1.2% of GDP to an outcome of 1.6% of GDP in
1998.  The most important factor was lower log export taxes.  Low oil prices are continuingto create significant budgetary pressures.
Source: Asian Development Bank (1999a), An Update on the Impact of the Asia n Financial Crisis on PDMC Economies ,
Office of Pacific Operations, April.