Fiscal Policy for Sustainable Debt in Papua New Guinea

The risk of distress, amounting to the need to run smaller primary deficits to that of the past at the expense of public expenditure, rise with an increase in interest rates and a fall in the rate of growth of GDP. [...] Equation (3) shows that the evolution of the primary deficit as a ratio of GDP depends on the past levels of concessional and domestic debt, the applicable interest rates, the rate of growth of GDP, the levels of foreign and domestic inflation, and the willingness of foreign and domestic creditors to acquire public debt. [...] This is less so in Scenario II where the weighted average of concessional and domestic debt is taken with the weights being equal to the difference in the rate of growth of nominal GDP to the respective interest rate. [...] The performance in terms of the size of the primary balances over the past decade suggests that neither of these scenarios are likely without substantial tightening of fiscal policy over the future to keep debt within the FRA ceiling. [...] For PNG in particular, a debt sustainability analysis undertaken by the IMF in the leadup to the pandemic had concluded that the “risk of external public debt distress remains moderate and the risk of distress in the overall public debt is also moderate”, but then went on to caution that the space to absorb shocks were limited (IMF, 2020; pp.