Papua New Guinea WT/TPR/S/239 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Papua New Guinea (PNG) is well endowed with na tural resources, such  as minerals, oil and 
gas, forests and fish, but remains a developing dualistic economy heavily reliant on subsistence 
agriculture.  Its average GDP per capita was just over US$1,000 in 2007.  It relies heavily on trade, 
and is vulnerable to world commodity price moveme nts.  PNG's latest ranking on the UNDP's Human 
Development Index is 148th (a low-ranked medium human devel opment country).  This reflects poor 
social indicators, which have not met the Millennium Development Goals.   
2. PNG's growth since its initial Trade Policy Revi ew in 1999 has been robust, peaking at 7.2% 
in 2007 and remaining at 4.5% in 2009, despite th e global financial crisis.  Services have been the 
main source of growth, their nominal share of GDP rising from 35.2% in 2003 to 38.1% in 2009.  While the share of mining (including oil and gas) in GDP rose from 18.3% in 2003 to 28.1% in 2008, it slumped to 20.9% in 2009.  The share of agricultu ral, forestry and fishing fell from 37.2% to 34.5% 
over the same period, while that of manufacturing remained constant at some 6% (6.5% in 2009).  
3. Relative macroeconomic stability, until recen tly, has helped sustain growth, but 
microeconomic reforms have waned since 2006.  Bu dgetary outcomes have been threatened by the 
Government's strong fiscal stimulus in 2009 to counter  the impact of the global financial crisis (GFC).  
This was financed using trust account funds in excess of the 4% of GDP limit on expenditure of 
additional mineral revenue, and resulted in very expansionary fiscal policy, which has fuelled 
inflation (fiscal deficit of some 10% of GDP if  off-budget spending from trust accounts is included).  
Closer coordination between mone tary and expansionary fiscal po licies would assist macroeconomic 
management and help ensure disciplined government spending.   
4. PNG's development prospects are uncertain, with income per head stagnating.  Its success in 
fostering sustainable broad-based growth and a di versified economy will in large part depend on its 
successfully implementation of much-needed policy and related reforms to encourage investment, 
especially foreign, improve productivity and theref ore competitiveness.  However, PNG will remain 
heavily dependent on mining for exports and tax receipts for the foreseeable future.  While recent 
economic growth, earlier reforms and the commencem ent of a massive LNG project hold promise, 
PNG faces many challenges.  These include improvi ng governance, reducing corruption, kick-starting 
the reform process supported by  improvements to significantly lower the very high costs of doing 
business, such as enhancing the efficiency utilities and building public infrastructure, all substantial 
impediments to investment and private sector growth. 
5. The economy is now more outward looking, with  import restrictions, especially tariffs, 
reduced and relatively few formal non-tariff barrier s overall, although with some notable exceptions 
(Chapter II(4)).  Notwithstanding, PNG's trade policy has in principle aimed at the "domestication" of 
value added in agriculture, minerals, and manufactur ing, including foodstuffs, to promote processing, 
import substitution, and to diversify the economy away from mineral and petroleum extraction.  A 
major economic challenge confrontin g PNG with also potential trade po licy implications is to manage 
the "Dutch disease" effects of the kina's apprecia tion from the forthcoming mining boom and the large 
inward  foreign investment in LNG and other projects.  This is likely to reduce the competitiveness of 
import-competing activities and traditional exports, thus  requiring significant structural adjustment in 
the non-mining economy.  The Government believes that resorting to tariff increases or other 
protection, including export assistance, to resist such  change would be best avoided.  However, no 
major trade policy changes have occurred since 2006  when the Tariff Reduction Program started in 
1999 finished on schedule;  subsequent programs ha ve been deferred, the latest in 2010 until 2011 in WT/TPR/S/239 Trade Policy Review 
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response to macro-economic concerns, including  the slowing economy from the GFC and lower 
mineral tax revenues due to declining commodity prices (Chapter III(2)(ii)).  The Government has 
recently decided to establish an offshore Soverei gn Wealth Fund to hold government revenues from 
the LNG projects, aimed at assisting macroeconomic management. 
(2) RECENT ECONOMIC DEVELOPMENTS  
6. PNG's strong growth performance since 2000 h as continued despite the GFC.  After a 
moderate slowdown to 2.3% in 20 06, growth jumped to an impressi ve 7.2% in 20 07, and although 
slowing subsequently, was a buoyant 4.5% in 2009 (Tab le I.1).  Most of this growth has come from 
the non-mining sector, which in 2009 grew by 5.2% (T able I.2).  The oil a nd gas sector recorded 
negative growth in recent years (-9.2% in 2009) and growth in the mineral sector has been low (1.1% 
in 2009).  Services have provided most economic expansion, growing an average 7.7% in 2009 
(11.1% in 2007), boosted by telecommunications inv estment, and growth of 25.2% in "transport, 
storage and communication" in 2009 (41.4% in 2007) .  Growth was also strong in construction (9.5% 
in 2009 and 16% in 2007 and "wholesale and retail trade" (4.7 % and 10%), helped by substantial 
mining investment. 
7. Reflecting these sectoral growth disparities, th e nominal share of services in GDP rose from 
35.2% in 2003 to 38.1% in 2009 (Table I.2).  While  the mining (including oil and gas) sectors' share 
had risen from 18.3% in 2003 to 28.1% in 2008, it slumped to 20.9% in 2009 due to falling world commodity prices, especially for oil and copper.  The sh are of "agricultural, forestry and fishing" fell 
from 37.2% to 34.5% over the same period, while th at of manufacturing remained constant at some 
6% (6.5% in 2009).  There has been strong employm ent growth overall, particularly in services as 
well as mining (albeit from a narrower base).  The BPNG's Employment Index increased by 4.2% in 2009 (5% for the non-mineral sector).   
8. Inflation, as measured by the Consumer Price Index (CPI) increased markedly in 2008 to a 
"headline" rate of 10.8%, but is estimated to have fallen to 6.9% in 2009.  This was helped by low 
global demand, reduced imported infl ation due primarily to falling world food and fuel prices, lagged 
domestic price effects of the kina's nominal a ppreciation until 2009, and tighter monetary policy 
in 2009. 
Table I.1 
Selected macroeconom ic indicators, 2003-10  
  2003 2004 2005 2006 2007a 2008a 2009b 2010b 
National accounts (% change) 
Real GDP 2.2 2.7 3.9 2.3 7.2 6.7 4.5 7.5 
Real GDP (non-mining) 2.8 0.3 4.3 3.9 8.1 7.6 5.2 8.1 
   XGS/GDP (%) (at current market price) 62.4 66.7 68.0 75.9 74.8 72.0 47.0 54.1 
   MGS/GDP (%) (at current market price) 33.7 37.2 31.3 36.0 41.5 38.9 30.7 60.9 
Prices and interest rates (%) 
Inflation (CPI, % change)c 
14.7 2.2 1.7 2.9 0.9 10.8 6.9 7.0 - 8.0 
   BPNG trimmed mean 12.6 2.0 3.1 1,1 3.9 11.2 5.1 7.5 
   Exclusion-based 16.6 3.2 -0.1 0.4 7.5 11.1 7.1 9.0 
Loans rated 8.8 12.1 10.7 10.2 9.3 8.8 10.2 .. 
Savings deposit ratee 1.6 1.1 0.8 1.0 1.6 1.6 2.2 .. 
Table I.1 (cont'd) Papua New Guinea WT/TPR/S/239 
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  2003 2004 2005 2006 2007a 2008a 2009b 2010b 
Money and credit (end period)f (% change) 
Monetary base .. .. .. 21.7 61.8 -12.0 11.9 15.3 
Narrow money (M1) 6.7 30.8 35.2 25.6 29.9 11.9 7.8 .. 
Broad money (M3) -4.4 14.8 29.5 39.0 27.3 11.2 19.3 21.3 
Credit to private sector -4.1 0.9 23.7 38.3 34.3 39.4 20.8 23.0 
Exchange rate         
K/US$ (annual average) 3.55 3.22 3.10 3.06 2.96 2.70 2.75 2.83g 
Real effective exchange rate (2007=100) .. .. 97.3 97.9 100.0 118.6 121.3 .. 
 (% of GDP, unless otherwise indicated) 
Overall fiscal balance -1.2 1.7 0.1 3.1 2.5 -2.2 -0.2 2.1 
Total revenue and grants 29.2 34.1 35.3 37.4 37.4 32.7 30.5 31.7 
   Tax revenue 21.3 25.4 24.8 29.2 31.1 26.6 22.2 24.8 
      Mining and petroleum taxes 4.0 5.8 7.1 11.5 12.4 9.1 3.4 5.7 
   Non-tax revenueh 1.9 1.9 1.9 2.5 2.3 2.2 3.4 1.7 
   Grants 5.9 6.7 8.6 5.7 4.0 3.9 4.9 5.2 
         
Expenditure and net lending 30.3 32.4 35.2 34.2 34.9 34.9 30.7 29.6 
   Recurrent expenditure 21.3 22.4 20.2 17.8 18.6 17.4 19.1 16.3 
   Development expenditure 9.0 10.1 12.4 9.2 7.1 7.5 10.8 13.3 
   Additional investment/priority expenditure .. .. .. .. .. .. 0.8 0.0 
Government total debt (end-period) 64.6 60.0 48.1 39.8 33.6 31.3 31.3 24.9 
   Domestic debt  21.7 25.1 22.5 18.4 16.9 18.3 18.7 13.7 
External sector         
Current account balance  3.9 4.7 13.3 8.0 2.9 9.9 -7.4 -47.0 
Net merchandise trade  28.7 29.5 36.8 40.4 33.4 33.3 19.2 -6.8 
Services balance -18.0 20.2 -17.8 -21.0 -23.1 -17.3 -20.9 -16.0 
Financial account -1.5 -2.5 -12.0 2.9 4.7 -12.9 15.1 40.3 
   Foreign direct investment 0.8 0.7 0.6 -0.1 1.4 -0.4 5.3 .. 
Balance of payments  1.5 2.6 2.0 11.6 8.5 -2.8 7.8 -3.0 
Merchandise exports (% change) 22.8 7.6 22.0 24.9 9.6 11.3 -22.8 6.3 
Merchandise imports (% change) 0.8 11.2 0.6 28.6 28.2 8.8 -6.7 68.3 
Gross international reserves (US$ million) 490.9 64 3.6 763.8 1,413.6 1,999.8 1,970.4 2,610.5 2,284.0 
   in months of imports 4.9 5.6 6.0 8.5 9.1 7.9 10.9 4.4 
Total external debt (US$ million) 1,380.6 1, 369.4 1,243.8 1, 182.3 1,062.7 1, 043.9 1,028.3 1,066.7i 
   of which concessionary debt 1,328.8 1,316.6 1,192.2 1,141.8 1,026.2 1,003.5 995.6 1,039.6i 
Debt service ratioj 7.7 8.7 6.0 3.5 4.8 4.3 4.7 .. 
.. Not available. 
a Estimate. 
b Projection. c Headline level. 
d Weighted average for overdrafts and fully drawn loans. 
e Weighted average for passbook and term deposits (under K 50,000). f Monetary base includes currency in circulation and commerci al bank deposits.  M1 equals the sum of currency outside 
depository corporations and transferable deposits.  M3 e quals the sum of M1 plus other deposits (quasi money). 
g Rate for the first week of June 2010. h Property income comprising mainly dividends, esp ecially from the mining and petroleum sector.  
i Based on the exchange rate for the first week of June 2010. 
j Ratio of external debt (held by the Central Government, BP NG and statutory authorities) serv ice to exports of goods and 
services. 
Source:  BPNG, Quarterly Economic Bullet in, Statistical Tables , March 2010, 2 July 2010.  Viewed at:  
http://www.bankpng.gov.pg/statis tics-mainmenu-121/484-qeb-statistical-table s.html;  Government of PNG (2010), 
2010 National Budget , Vol. 1 Economic and Development Policies, for the year ending 31 December 2010;  and 
Government of PNG (2010), Mid Year Economic and Fiscal Outlook Report 2010.  Viewed at: 
http://www.treasury.gov.pg/index.html. WT/TPR/S/239 Trade Policy Review 
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Table I.2 
Basic economic and social indicators, 2003-09 
 2003 2004 2005 2006 2007a 2008a 2009b 
Real GDP, market prices (K million, 1998 pri ces) 7,896 8,111 8,625 8, 823 9,454 10,083 10,539 
Real GDP, market price (US$ million, 1998 pri ces) 2,224 2,535 2,782 2, 883 3,194 3,734 3,832 
Current GDP, market price (K million) 12, 567 12,652 15,095 16,8 97 18,796 21,626 21,782 
Current GDP, market price (US$ million) 3, 540 3,929 4,869 5,52 2 6,350 8,010 7,921 
GDP per capita , current market price (K) .. .. .. .. 3,055 .. .. 
GDP per capita, current market price (US$) .. .. .. .. 1,032 .. .. 
Share of main sectors in GDP at current prices  (%) 
Agriculture, forestry and fishing 37.2 34.0 34.0 32.1 32.2 32.6 34.5 
Oil and gas  .. .. 13.8 13.7 13.2 13.1 7.1 
Mining and quarrying 18.3c 19.5c 13.7 16.7 16.5 15.0 13.8 
Manufacturing 6.7 6.9 6.3 5.9 5.8 5.9 6.5 
Services 35.2 36.4 32.3 31.7 32.3 33.3 38.1 
 Electricity, gas and water 1.9 2.2 2.0 2.0 2.0 1.9 2.1 
 Construction 9.2 9.6 8.4 8.7 9.5 10.5 12.5 
 Wholesale and retail trade 6.9 7.3 6.4 6.3 6.4 6.6 7.3 
 Transport, storage and communication 2.4 2.5 2.1 2.0 2.0 2.1 2.8 
 Finance, real estate, business services 3.4 3.4 3.3 3.5 3.5 3.6 4.0 
 Community, social and personal services 11.4 11.4 9.8 9.2 8.9 8.6 9.4 
GDP by economic activity, at constant 1998 prices  (Annual % change) 
Agriculture, forestry and fishing 5.0 4.6 2.4 1.7 4.2 4.3 2.3 
Oil and gas  ..c .. .. -3.4 -5.1 -8.3 -9.2 
Mining and quarrying 2.8c 0.3c 5.0 -10.7 2.3 2.2 1.1 
Manufacturing 4.8 2.3 10.0 4.0 6.0 6.0 4.5 
Services .. 0.5 3.4 7.2 11.1 10.8 7.7 
 Electricity, gas and water 13.4 4.3 2.7 1.3 4.0 6.8 5.0 
 Construction 5.4 3.2 4.8 12.0 16.0 15.0 9.5 
 Wholesale and retail trade 2.6 3.2 4.0 8.4 10.0 7.0 4.7 
 Transport, storage and communication 2.1 2.6 3.0 4.9 41.4 39.9 25.2 
 Finance, real estate, business services -3.4 -3.4 5.0 9.7 5.0 6.0 5.5 
 Community, social and personal services -3.5 -2.4 1.7 3.0 4.0 3.0 2.0 
.. Not available. 
a Estimates. 
b Projections. 
c Includes oil and gas. 
Source: Government of PNG (2010), 2010 National Budget , Vol. 1 Economic and Developm ent Policies, for the year 
ending 31 December 2010;  and IMF (2009), Papua New Guinea: Selected Issues and Statistical Appendix , 
Country Report No. 09/13, April.  Viewed at:  http://www.imf.org/external /pubs/ft/scr/2009/cr09113.pdf.  
(3) MACROECONOMIC POLICIES AND DEVELOPMENTS  
(i) Fiscal policy 
9. Despite broadening the tax base, especially by introducing the 10% G oods and Services Tax 
(GST), extending excise taxes to certain goods (esp ecially motor vehicles), and reducing dependence 
on tariff revenue (currently below 3% of tax recei pts), the national Budget heavily relies on highly 
variable mineral and petroleum taxes and, to a le sser extent, dividends.  Th e Medium Term Fiscal 
Strategy (2008-12) (MTFS) pr ovides the framework for managing fiscal policy and government 
spending.  The Fiscal Responsibility Act 2006 also re quires the Government Budget to be balanced.  
However, recent fiscal policy has been very  expansionary financed by trust funds.1  
                                                      
1 Government of PNG (2010b), p. 3. Papua New Guinea WT/TPR/S/239 
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10. A key provision of the MTFS is the annual limit on the spending of mineral and petroleum 
revenue (comprising mining taxes,  dividend withholding taxes, and mining and petroleum dividends), 
set at 8% of GDP, designed to account for highly variable mineral revenue and to promote fiscal discipline (Box I.1).  Mineral revenue is transferred to many trust funds for future spending outside 
the national Budget.  In 2009, spending from trus t accounts breached by as much as 2 percentage 
points the 4% of GDP MTFS limit for expenditure of additional mineral revenue, and largely financed 
the Government's substantial fiscal stimulus in response to the GFC.
2  Including such off-budget 
spending increased the fiscal deficit to some 10% of GDP, well above the small official recorded 
deficit.  The BPNG has expressed inflationary con cerns over the fast drawdown of trust funds, and 
feels more stringent measures are needed to c ontrol spending, especially leading into the 2012 
national elections.3  Given the many ad hoc tax concessions granted, the IMF has urged PNG to 
rationalize corporate tax incentives to improve non-mineral revenues and efficiency.4 
Box I.1: Budgeting of mineral revenues 
The Medium Term Fiscal Strategy 2008-12 constrains the non-mineral fiscal deficit to within a range 
of 4% to 8% of GDP, based on (a) ongoing spending (including recurrent and development spending) being 
kept in line with "normal revenues" (sum of non-mineral revenues and normal mineral revenues i.e. mineral revenues expected without a commodity-price boom, about 4% of GDP).  Ongoing spending is 
limited to the sum of normal mineral revenues  and non-mineral revenues (b) mineral revenues above 4% of 
GDP should be used for "one-off" expenditures, debt  reduction (30%), and additional public investment 
(70%).  Unused funds accumulate in trust accounts to be drawn down ov er time.  In any year, a maximum 
of 4% of GDP can be spent from the trust accounts on additional public investment. 
The estimate of normal mineral revenues  is based on the average from the pre-boom years of 1999-2003 
and the expected performance in 2010-12 based on planned production and IMF commodity price 
forecasts.  The appropriateness of the 4% GDP estimate  of normal mineral revenues is to be reassessed 
biennially.  The 2010 National Budget concluded th at this figure remained broadly appropriate given 
projected mineral revenues of at leas t 4% of GDP, which would be considered as part of the 2010 mid-term 
review of normal mineral revenue.  
Source: IMF (2009), Papua New Guinea: 2008 Article IV Consultation – Staff Report , Country Report No. 09/112, 
p. 11;  and Government of PNG (2010), 2010 National Budget,  Vol. 1, Economic and Development Policies, 
p. 148. 
 
11. Tax revenue is forecast to grow by almost 28% in 2010, after declining in 2009 by 16%, due 
mainly to a fall of almost two thirds in mining and petroleum taxes.5  Tax revenue (i ncluding mineral 
and petroleum taxes) was estimated to be 22.2% of GDP in 2009, down from 31.1% in 2007.  It is 
projected to rise to 24.8% of GDP in 2010.  Gove rnment expenditure (and net lending) fell as a share 
of GDP from a peak of 35.2% in 2005 to 30.7% in 2009 (34.9% in 2008).  It is forecast to increase by 14.0% in 2010, but fall as a share of GDP to 29.6%.  Most of this is due to development expenditure, 
which is projected to grow by 46.0% in 2010 to  reach 13.3% of GDP (10.8% in 2009).  The fiscal 
deficit fell from 2.2% of GDP in 2008 to 0.2% in 2009.  The Budget is projected to be in surplus 
in 2010, at 2.1% of GDP, largely based on rebo unding mineral revenues.  A potential drag on the 
Budget is the Government's mounting unfunded su perannuation liability, estimated at K 1.87 billion 
at the end of 2008. 
12. According to the BPNG, the Government's failu re to implement an initial understanding to 
move its trust account funds from commercial banks  to the BPNG has substantially raised the 
                                                     
 
2 Government of PNG (2010b). 
3 BPNG (2010). 
4 IMF (2009). 
5 Government of PNG (2010a). WT/TPR/S/239 Trade Policy Review 
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challenges and costs of monetary policy manage ment, including issuing K 1.567 billion in Central 
Bank Bills (CBBs) in 2009 to mop up excess liquidity.6  The Government recently decided to 
establish an offshore Sovereign Wealth Fund (S WF) to absorb mineral revenues from the LNG 
projects, which the BPNG notes should help limit upw ard exchange rate pressures and promote fiscal 
discipline.7  It feels that until then, windfall mineral tax revenues are best kept in offshore foreign 
currency accounts, thus reducing their impact on dom estic liquidity, exchange rates, and inflation.8 
(ii) Monetary and exchange rate policies 
13. The BPNG, which is, in principle, independent, is responsible for monetary policy and price 
stability.  The Governor issues se mi-annual monetary policy statements that detail its stance for the 
next six months (the latest was released at e nd March 2010).  BPNG defines price stability as a non-
volatile single digit or low level of inflation, such  as from 5% to 6%, supported by stable interest and 
exchange rates.9  Monetary policy is conducted using th e variable reserve money currency in 
circulation plus commercial bank de posits.  The main instrument is the Kina Facility Rate (KFR), 
supported by open market operations involving Re purchase Agreement (Repo) transactions with 
commercial banks, auctioning of CBBs to licensed ot her depository corporations, and sale of Treasury 
Bills to the public.10  With inflation easing in the second-half of 2009, monetary policy was relaxed by 
reducing the KFR from 8% (raised in two equal st eps from 6% in May 2008 and December 2008) to 
the current rate of 7% in December 2009.  Nevertheless, inflation remains "uncomfortably high", driven by strong domestic demand and very high government spending from trust funds.
11  T h e  
headline inflation rate is estimated to rise to 7-8% in 2010 due to continued and increasing demand 
pressures from commencement of the LNG project, implementation of minimum wage rises in late 
2009 and early 2010, and a slightly higher imported inflation.12  Broad money supply (M3) is 
expected to rise by 21.3% in 2010 and private-sect or credit by 23%.  The BPNG has acknowledged 
the difficulty of controlling inflation given expected high growth rates associated with large expenditure on the LNG and other mining projects,  and has called for closer coordination and 
cooperation between fiscal and monetary policies to  mitigate such pressures,  including prudent fiscal 
policy to ensure expenditure fa lls within the budget framework.
13  The IMF also believes that the lack 
of coordination has undermined monetary policy effectiveness.14  Scarcity of skilled labour required 
for mining developments is also placing upward pr essure on wages, which is spilling over into other 
sectors. 
14. PNG has a floating exchange rate regime, in whic h the kina's value is determined against the 
U.S. dollar in the interbank market.15  The authorities indicated that  the BPNG intervenes in the 
currency market only to smooth out fluctuations that  may otherwise adversely affect trade, and has no 
                                                      
6 BPNG (2010b). 
7 The joint Treasury and BPNG Sovereign Wealth Fund Working Group, established in March 2010, 
submitted a report to the NEC at end-June 2010, outlining suggestions on how best to implement the 
Government's decision. 
8 BPNG (2010b). 
9 BPNG (2010a).  The Governor also indicated that higher inflation rates of up to 10% would be 
consistent with price stability at high growth rates. 
10 The KFR is the official benchmark rate that  signals BPNG's monetary policy stance and is 
announced monthly. 
11 Government of PNG (2010b), p. 10. 
12 BPNG (2010b).  The projected headline inflation rate for 2010 was reduced from 8% to 7% in the 
Government's  Mid-Year Economic and Fiscal Outlook Report 2010 (Government of PNG, 2010a). 
13 BPNG (2010b). 
14 IMF (2010). 
15 PNG has accepted the IMF obligations of Article VIII, Sections 2, 3, and 4, and maintains an 
exchange system free of restricti ons on payments and transfers for current international transactions. Papua New Guinea WT/TPR/S/239 
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targeted rate. Nevertheless, the BPNG also uses the exchange rate to help achieve its overall objective 
of price stability.  Hence, factors such as domestic liquidity management, foreign currency exposure limits of commercial banks, and imbalances in the flow  of foreign exchange in the domestic market 
may require the BPNG to interven e.  The BPNG intervened substa ntially in the foreign exchange 
market between 2005 and June 2010, se lling U.S. dollars to buy a total of K 3.1 billion.  This covered 
mainly imbalances in foreign currency inflows by  slowing the kina's de preciation and preventing 
adverse effects on the kina currency cross rates, a nd in 2010 to reduce domestic liquidity.  The kina's 
real effective exchange rate has appreciated substa ntially especially since July 2008, reflecting mainly 
PNG's higher inflation rates than Austra lia and other major trading partners.
16  While these pressures 
subsided in 2010, thereby easing competitive pressu res on import-substituting and export industries, 
this is likely to be temporary.  Renewed upwar d exchange rate pressures from increased investment 
inflows and mining export receipts are likely to generate  structural adjustment pressures in the rest of 
the economy, especially if inflation accelerates as expected.17  
(4) KEY STRUCTURAL POLICY CHALLENGES  
15. PNG's success in fostering sustainable broad- based growth will in large part depend on its 
successful implementation of much-needed policy a nd related reforms to improve productivity and 
investment, especially foreign.  Such reforms pr ovide the best path to generate non-mining growth, 
including in services, and economic diversification.   However, PNG will remain heavily dependent on 
mining for exports and tax receipts for the foreseea ble future, which offers major potential provided 
the mining "boom" is correctly managed along with the associated pressures for st ructural adjustment.  
Structural reforms have slowed with waning political commitment compounded by the preoccupation 
with the LNG projects.18  
(i) "Dutch disease" 
16. Dutch disease, in the context of PNG, refers to the potential economic effects of the kina's 
real appreciation induced by the mineral boom, whic h will substantially increase inflows of foreign 
investment and export receipts.  As a result, PNG's tradeable import-substitution and traditional 
export industries may lose international competit iveness, while non-traded sectors, especially 
services, are likely to expand.  Thus, manufacturing activities, including food processing, and traditional primary export industries, especially co ffee, cocoa, palm oil, copra and logs, will face 
competitive pressures to structurally  adjust, and some may contract.
19 
17. This is likely to intensify pressure on the Governme nt to protect affected industries, such as to 
provide or maintain tariffs on import-substitutio n activities, and export assistance to traditional 
exporters.  However, such policies would be c ounter-productive, compounding the kina's appreciation 
by reducing imports and encourag ing exports.  The best response is to macro-manage the Dutch 
disease effects to ensure that the mining benefits are used productively, including sound fiscal policies 
                                                      
16 The IMF's exchange rate assessment suggests th e kina is somewhat over-valued, suggesting that 
faced with sharp declines in  commodity prices, as occurr ed in 2009, greater flexib ility in the exchange rate 
regime, to allow the kina to depreciate, would help offset the impact on export incomes (IMF, 2009a). 
17 The kina exchange rate is a commodity currency highly dependent on world commodity prices.  For 
example, one empirical study found th at a 10% rise in commodity prices caused an immediate 4% appreciation 
followed by a further 6% in two quarters (BPNG, 2009). 
18 IMF (2009b). 
19 BPNG (2010b). WT/TPR/S/239 Trade Policy Review 
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to cope with the inflows, and that the necessary structural adjustment occurs, facilitated by micro-
economic reforms to improve efficiency and lower the costs of doing business.20 
18. The extent of the kina appreci ation will depend on how much liquidity rises due to the mining 
boom.  In the construction stage, most inflows are likely to be channelled back overseas through 
greater imports, thus reducing the appreciation.  Also, many investment funds will initially remain 
offshore as most financing transactions will occu r between foreign currency accounts (allowed under 
the Central Banking (PNG LNG Project Exemption) Regulation 2008).  Keepi ng mineral tax revenues 
abroad through a Sovereign Wealth Fund (SWF) or  offshore accounts is also likely to cushion the 
kina's appreciation.  
(ii) Reducing the costs of doing business, and infrastructure development 
19. PNG is an expensive country in which to do business.  This impedes investment, domestic 
and foreign, and private-sector development.   In 2010, PNG's ranking slipped to 102nd (out of 183) 
from 95th in 2009 on the World Bank's Ease of Doing Business index.21  Broad-based micro-economic 
and deregulatory reforms, including promoting comp etition and simplifying and reducing the costs of 
"red tape", would facilitate private-sector growth.  The Government is examining ways of doing this 
in conjunction with the Investment Promotion Author ity, and is facilitating use of customary land for 
development purposes (Chapter II(6)(i)).  The high cost of doing business in PNG is also affected by widespread political and official corruption, allegedly especially rife in some sectors (e.g. forestry).  
Recent anti-corruption efforts include PNG ratifyi ng the UN Convention Against Corruption (signed 
in 2004), giving the Ombudsman Commission greater  oversight of major corruption cases, and 
establishing the Financial Services Unit under the National Fraud and Anti-Corruption Directorate 
in July 2007.
22 
20. Economic growth and development are hamper ed by inadequate, largely state-owned 
infrastructure, and associated bottlenecks.  Infr astructure deficiencies include the high cost and 
unreliable supply of public utilities (e.g. electricity ), law and order problems resulting in high security 
and insurance costs, high road and maritime transpor t costs and associated inadequate networks and 
services.  In order to boost private investment and management in major infrastructure projects worth 
at least K 50 million, the Government has formed  a National Public Private Partnership (PPP) 
Pipeline.  Private-sector partners will be selected  through open competitive tenders using output-based 
specifications.  The PPP Centre will be formed unde r the Treasury to help line agencies to transact 
projects and will be the gate-keeper of PPP projects,  ensuring that procedures and guidelines are met.  
This approach is also being applied to state-ow ned public utilities, instead of privatization, and 
procedures are being implemented to impr ove their performance and accountability.  
(iii) Public sector reforms 
21. Public-sector reforms are a key component of  the Government's National Strategic Plan 
2010-50, which is being implemented largely by th e Department of the Prime Minister and NEC 
through the Public Sector Reform Management Unit (PSRMU).  A key aspect is to develop an 
appropriate Service Delivery Mechanism Mode l for bottom-up planning and improved service 
delivery.  Work on developing the model is expected to begin in 2010.  An im portant pre-requisite for 
improved service delivery has been to change th e system of inter-governmental financing, 
                                                      
20 Government of PNG (2010b). 
21 World Bank online information, Doing Business:  Measuring business regulation,  PNG.  Viewed at: 
http://www.doing business.org/ExploreEconomies/?economyid=150. 
22 PNG was ranked 151st (out of 180 countries) in Transpar ency International's 2008 Corruption 
Perceptions Index.  Reports of large missing public funds abound (Transparency International, 2009). Papua New Guinea WT/TPR/S/239 
 Page 9 
 
 
commencing with the 2009 Budget, to provide provi ncial governments with more funds to match their 
service delivery responsibilities (Organic Law on  Provincial Governments and Local Level 
Governments, July 2008, and the Intergovernme ntal Relations (Functi ons and Funding) Act, 
March 2009).  The changes focus on meeting the costs of provincial and local governments of basic 
service delivery.  The Fiscal Responsibility Act ensu res greater economic and financial transparency 
and accountability by strengthening the medium-t erm budgetary framework and providing guidelines 
for conducting fiscal policy and promoting macro-economic stability.  It provides for limiting state ownership and direct participation in service deliver y to core areas where a clear rationale exists for 
public intervention, and for a regulatory structure supportive of the private sector. 
22. Ongoing reforms to the public sector are aimed at improving efficiency through downsizing 
and adopting best practices and good governance.  L ong-standing retrenchment of public servants is 
continuing.  The Government is also impl ementing the Public Expenditure Review and 
Rationalization (PERR) programme to better contro l expenditures.  The PERR has focused on fiscal 
sustainability and restoring the integrity of budge t institutions and systems.  This has included 
implementing the Integrated Financial Management System.  The District Treasury Roll-out Program, 
started in 2004, is being extended, and efforts ar e being made to improve oversight of statutory 
authorities. 
(5) B
ALANCE OF PAYMENTS  
23. PNG's current account surplus has fluctuated substantially since 2003, reaching highs as a 
share of GDP of 13.3% and 9.9% in 2005 and 2008, respectively (Tables I.1 and I.3).  This reflected 
large, but variable, surpluses in the trade balanc e of up to 40.4% of GDP in 2006, due mainly to 
strong export growth, until exports (especially of minerals and petroleum), slumped by 24% in 2009 
when the trade surplus fell to 19.2% of GDP, and th e current account balance became negative (-7.4% 
of GDP).23 
24. The balance of payments is expected to deterior ate from a surplus of 7.8% of GDP in 2009 to 
a deficit of 3% in 2010.  This mainly reflects a ju mp in the current account deficit in 2010 to 47%, due 
to increased imports associated with the LNG projects.  This is expected to be offset by rising capital 
and financial account surpluses due to inflows, a nd a drawdown of foreign reserves, which are 
expected to fall from 10.9 months of im port cover in 2009 to 4.4 months.   
(6) DEBT 
25. The Government's strategy is to reduce debt to  sustainable levels, change its composition to 
reduce financial risk to more prudent levels, and to develop the domestic debt market (Medium Term 
Debt Strategy 2010-14).  The Fiscal Responsibility Act also provides for no increase in debt levels.  
Public debt as a share of GDP has declined continuously since 2003, reaching 31.3% in 2008 
and 2009, and is expected to fall further to 24.9% in 2010 (Table I.1).  Over half of public debt is domestically held. 
                                                     
 
23 The emerging current account deficit consists of  a savings investment imbalance in PNG, with 
investment exceeding savings.  This gap is financed mainly by inward foreign investment in the capital account.  WT/TPR/S/239 Trade Policy Review 
Page 10 
 
 
Table I.3 
Balance of payments, 2003-09 
(K million) 
      2003 2004 2005 2006 2007 2008 2009 
Current account 496.0 597.0 2,009.0 1,354.2 550.2 2,145.0 -1,611.0 
Merchandise trade balance 3,611.0 3,374.0 5,559.0 6,767.0 6,282.3 7,196.0 4,192.0 
 Exports 7,842.0 8,437.0 10,291.0 12,851.0 14,079.0 15,675.0 12,101.0 
 Imports -4,231.0 -4,703.0 -4,732.0 -6,084.0 -7,796.7 -8479.4 -7,909.0 
Services, net balance -2,263.0 -2,561.0 -2,683.0 -3,554.2 -4,339.9 3,747.6 -4,559.0 
 Exports 829.0 656.0 938.0 965.1 1,069.4 980.0 511.0 
 Imports 3,092.0 -3,217.0 -3,621.0 -4,519.3 -5,409.3 -4,727.6 -5,070.0 
Income balance -1,699.0 -1,406.0 -1,670.0 -2,462.1 -2,133.9 -1,740.0 -1,721.0 
 Credit 58.0 64.0 81.0 214.9 309.4 230.0 123.0 
 Debit -1,757.0 -1,470.0 -1,751.0 -2,677.0 -2,443.3 -1,970.0 -1,849.0 
Current transfer balance 847.0 830.0 803.0 603.5 741.7 436.0 477.0 
 Credit 1,137.0 1,080.0 1,093.0 999.5 1,218.8 1,060.0 1,046.0 
 Debit -290.0 -250.0 -290.0 -396.0 -477.1 -624.0 -569.0 
Financial account -183.0 -313.0 1,714.0 618.0 1,001.0 -2,796.0 3,294.0 
Foreign direct investment, net 371. 0 83.0 84.0 -24.0 261.0 -82.0 1,154.0 
Net errors and omissions 53.0 46.0 -1.0 -14.0 41.0 53.0 40.0 
 Overall balance 366.0 330.0 296.0 1,958.0 1,592.0 -598.0 1,701.0 
Source: BPNG (2010), Quarterly Economic Bulletin, Statistical Tables .  Viewed at: http:// www.bankpng.gov.pg/statistics-
mainmenu-121/484-qeb-statistical-tables.html. 
(7) DEVELOPMENTS IN TRADE  
26. As a small island economy heavily reliant on tr ade, PNG's exports and imports (excluding 
services) constitute a relatively high share of GDP, reaching as much as 75.9% in 2006 and 41.5% 
in 2007, respectively.  However, these shares fe ll substantially in 2009, to 47.0% and 30.7% 
respectively.  The share of exports is estimated to rise to 54.1% in 2010, and that of imports to jump 
to 60.9%, due to projected sharp growth associ ated with the construction of LNG facilities. 
(i) Services 
27. PNG traditionally records a large services trade de ficit, equivalent to 20.9% of GDP in 2009 
(peaking at 23.1% in 2007);  the deficit is expect ed to be 16% of GDP in 2010.  The main services 
imports are in transportation, other business services,  construction, and finance (including insurance).  
Exported services are mainly in minor construction and other business services. Papua New Guinea WT/TPR/S/239 
 Page 11 
 
 
Chart I.1
Product composition of merchandise trade, 2003 and 2009
2003 2009
(a)    Exports (f.o.b.)
Cocoa   3.3
Total:   US$2,181.4 million Total:  US$4,297.1 million
(b)    Imports (c.i.f.)Refined petroleum 
products
3.2
Total:   US$1,191.8 million Total:   US$2,822.2 millionPer cent
Logs  3.2Logs
4.8Fish products  1.6Other
3.0
Palm oil 
6.0Copper
17.1
Source :  Data provided by the PNG authorities.Cocoa  2.8
Fish products  1.8
Crude oil
21.1Copper
18.3Palm oil 
5.4
Coffee   3.9
Crude oil
13.6
Gold
36.3Gold
45.4Other 
5.3
Coffee   3.9
Other
8.1
Industrial supplies 
n.e.s
17.2
Consumer
 goods n.e.s.
12.0
Transport 
equipment
9.8Machinery & 
capital equipment
19.5Fuel & 
lubricants
17.3Food & beverages
16.2Food & beverages
12.8
Fuel & 
lubricants
14.3
Machinery & 
capital equipment
23.8Transport 
equipment
12.0Consumer
 goods n.e.s.
12.0Other
4.4
Industrial supplies 
n.e.s
20.7
 WT/TPR/S/239 Trade Policy Review 
Page 12 
 
 
Chart I.2
Direction of merchandise trade, 2003 and 2009
2003 2009
(a)    Exports (f.o.b.)
Total:   US$2,181.4 million Total:  US$4,297.1 million
(b)    Imports (c.i.f.)
Other 
10.2
China
4.6
Singapore
6.6United States
  9.6
China
5.1    Malaysia  1.9
Singapore
11.4
Total:   US$1,191.8 million Total:   US$2,822.2 millionPer cent
Japan
12.8
New Zealand  5.2Australia
45.7
Singapore  2.1Other 
13.3
Source :  Bank of Papua New Guinea online information.   Viewed at:  http://www.bankpng.gov.pg/images/
                 stories/ qeb_tables/2010/March _2010/QEB _Table _8.17.B and 8.18.B.xls [16 Au gust 2010];  and data 
                 provided by the PNG authorities.Japan
3.4China   3.4
China  6.7
Japan
4.8Other
10.8
Australia
42.4  Germany  5.1Other
12.0
United States  2.7
Philippines
3.5United Kingdom   
2.5
Japan
14.5Spain  2.8
Malaysia  2.3Australia
54.8
Indonesia  2.0
New Zealand  2.8Philippines
7.3Australia
47.0
Korea, Rep. of
3.8
Korea, Rep. of 
5.4
United States
22.1Germany   6.6
Singapore  2.8
 Papua New Guinea WT/TPR/S/239 
 Page 13 
 
 
(ii) Merchandise 
(a) Composition of trade 
28. PNG's merchandise exports comprise mainly pr imary products of minerals, crude oil, 
agriculture, fish, and timber (Chart I.1);  together , these accounted for 97% of exports in 2009 (94.7% 
in 2003).  While this makes PNG vulnerable to world commodity prices, it reflects its resource 
richness and substantial development potential.  Go ld, the main export, represented 45.4% of total 
exports in 2009 (36.3% in  2003);  gold, copper an d crude oil accounted for over three-quarters of 
exports in 2009 (up slightly from 2003).  The ma jor change in commodity patterns has been the 
falling share of crude oil exports from 21.1% in 2003 to 13.6% in 2009, and the rising share of the 
gold from 36.3% to 45.4% over the same period.  During this time, PNG began exporting refined 
petroleum products (3.2% of exports in 2009).  Import composition has changed little since 2003.  
Imports are mainly inputs, i.e. machinery and capita l equipment (23.8% in 2009), industrial supplies 
n.e.s. (20.7%), and fuel and lubricants (14.3%),  followed by consumer goods (consumer goods n.e.s. 
12.0% and food and beverages (12.8%) in 2009.24  Transport equipment (12.0% in 2009) is used both 
by consumers and producers. 
(b) Direction of trade 
29. PNG trades mainly with Australia, which acc ounted for 47.0% of exports and 42.4% of 
imports in 2009 (45.7% and 54.8% in 2003, respectivel y) (Chart I.2).  The next most important export 
markets are Japan (14.5% in 2009), and the Philippines (7.3%) which has become PNG's third ranking export destination, while the shares of China, German y and Korea have fallen.  Next to Australia, the 
most important sources of imports are the United States (22.1% in 2009), Singapore (11.4%), and 
China (5.1%).  This reflects majo r changes in import patterns since 2003, as the relatively low shares 
of the United States (9.6%) and Singapore (6.6%) have  since risen substantially, mainly at Australia's 
expense. 
(8) F
OREIGN DIRECT INVESTMENT  
30. Foreign direct investment (FDI) is important to PNG, but levels have been disappointing, 
especially outside the mineral and petroleum s ector.  In 2007, FDI to talled US$1,413.5 million 
(22.4% of GDP), and while higher than in 2003 (US$838.3 million), it declined as a share of GDP 
(23.7% in 2003) (Table I.4).25  Consistently, well over two thirds goes into mining and petroleum 
(73.6% in 2007) and the remainder is mainly in ma nufacturing, agriculture, and forestry.  PNG relies 
heavily on foreign equity, especially in mining and petroleum;  the stock of FDI fell from 57.1% of 
GDP in 2000 to 36.7% in 2007, and 28.6% in 2008.26 
31. Well over half of PNG's FDI is from Australia ( 55.1% in 2007) (Table I.5).  The main other 
sources in 2007 were the United Kingdom, Bahamas, Malaysia, and Singapore. 
                                                      
24 n.e.s. stands for "not elsewhere specified."  
25 However, FDI inflows are reported by UNCTAD to have been US$96 million in 2007 (1.5% of 
GDP) and minus US$30 million in 2008 (UNCTAD, 2009).  The source of this discrepancy is unclear. 
26 UNCTAD (2009). WT/TPR/S/239 Trade Policy Review 
Page 14 
 
 
Table I.4 
Foreign direct investment, by sector, 2003-07 
(US$ million and %) 
Sector 2003 2004 2005 2006 2007a 
Total (US$ million) 838.3 978.9 1,067.7 1, 336.9 1,413.5 
 (%) 
Agriculture 6.5 6.2 5.9 4.7 5.2 
Forestry 4.3 4.8 3.9 3.2 3.1 
Fisheries 1.7 1.6 1.5 1.3 1.2 
Mineral and petroleum 73.1 71.0 67.4 73.4 73.6 
Manufacturing 4.8 6.8 11.5 9.3 9.1 
Retail 1.1 1.0 0.9 0.9 0.9 
Transportation 0.2 0.2 0.2 0.1 0.1 
Bank, insurance, finance 3.8 3.6 4.0 3.2 3.3 
Hotels and restaurants 0.3 0.3 0.3 0.2 0.2 
Other  4.1 4.5 4.4 3.6 3.1 
Total foreign equity as a share of GDP 23.7 24.9 21.8 23.9 22.4 
a Preliminary. 
Source: PNG  Department of Commerce & Industry (2008), Statistical Digest , p. 65;  and the PNG authorities. 
Table I.5  
Foreign direct investment, by  country of origin, 2003-07 
(US$ million and %) 
Sector 2003 2004 2005 2006 2007a 
Total (US$ million) 838.3 978.9 1,067.7 1, 336.9 1,413.5 
   %   
Australia 54.2 52.6 50.5 55.7 55.1 
Bahamas 6.4 6.0 5.7 4.6 4.5 
Bermuda 2.2 2.1 2.0 1.6 1.6 
Canada 1.4 1.3 1.3 1.1 2.3 
Hong Kong, China 1.7 2.1 2.0 1.7 1.7 
Japan 3.9 3.4 3.2 2.6 2.6 
Malaysia 5.7 5.4 5.1 4.2 4.1 
Republic of Korea 2.2 2.0 1.2 1.0 0.6 
Singapore 4.8 4.9 4.9 4.0 3.9 
United Kingdom 5.3 4.9 5.5 4.4 4.9 
United States 1.6 1.5 1.5 1.2 1.1 
Other 10.7 13.7 17.1 17.9 17.7 
a Preliminary. 
Source: PNG  Department of Commerce & Industry (2008), Statistical Digest , p. 66;  and the PNG authorities. 
(9) OUTLOOK  
32. With LNG production expected to commence in 2 014, real growth is expected to jump to 
8.4% in that year, after falling to 2.1% in 2013 (6.2% in 2011).  The 30-year LNG production project 
is officially projected to almost double real GDP, to over K 18 billion, and to generate tax revenue of 
K 67 billion (US$32 billion).  The fishery sector, especially processing, is also expected to be a strong source of growth.  Headline inflation is expected to  remain high, but to fall to 7% in 2012.  The 
current account deficit is expected to remain high, at 42%, in 2012. Papua New Guinea WT/TPR/S/239 
 Page 15 
 
 
33. PNG's economic outlook will depend largely on wo rld economic developments, especially in 
commodity prices, such as oil, gas, and mine rals.  The commencement of LNG and other major 
mining projects bodes well for its prosperity, pr ovided the Government maintains macroeconomic 
stability and pushes ahead with much needed micro-economic and othe r reforms to improve 
productivity and economic governance.  A major asp ect of this will be avoiding the Dutch disease 
effects associated with the mining boom, by ensuri ng that the related structural adjustment pressures 
on the rest of the economy are correctly managed,  which may not mean preventing the currency from 
appreciation.  Overseas experience shows meeting such  challenges can be difficult, but failure will be 
a missed opportunity for PNG citizens.  WTO Memb ers can help by ensuring open markets for its 
exports, but fundamental domestic reforms lie at th e heart of PNG's economic development.  Greater 
technical assistance and international aid must play a major role, but needs to be provided in a more 
targeted and efficient manner to help PNG achie ve its priority reforms and not compound its 
economic problems (e.g. accentuating the "Dutch disease" effects).