Economic Recovery Program
  Report No: ; Type: Report/Evaluation Memorandum ; Country: Papua New Guinea; Region: East Asia And Pacific; Sector: Macro/Non-Trade; Major
                                                 Sector: Economic Policy; ProjectID: P039826


             PAPUA NEW GUINEA: Economic Recovery Program Loan (Loan 3934-PNG)

         The Papua New Guinea Economic Recovery Program Loan (ERP), supported by Loan 3934-PNG
for US$50 million, was approved in FY96. The loan closed on January 15, 1997, three months later than
the original schedule. The recovery program was also supported by an ongoing International Monetary
Fund stand-by arrangement for US$107 million, and loans from the Export-Import Bank of Japan and the
Government of Australia for US$45 million and $50 million, respectively. The Implementation
Completion Report (ICR) was prepared b@ the East Asia and Pacific Regional Office. The Borrower's
comments are included as an appendix.

        The immediate objective of the ERP was to support the stabilization program, by bringing inflation
under control and restoring growth. At the structural level, the pro--ram sought to: improve fiscal
management to enhance the transparency in the use of public resources; promote private sector
development through a more liberalized trade and licensing framework; improve sustainable and more
transparent resource usage in the forestry sector; and improve public service delivery through a
restructuring of public expenditures, emphasizing the provision of basic public services.

         Growth and budgetary balance were achieved. Moreover, the latter was achieved in a way that
provided greater protection for the poor. In addition, under the program some progress was made on
implementing economic reforms that had been initiated, with little success, under an earlier adjustment
loan. Tariffs were significantly reduced, and the licensing requirements for firms eliminated. Nevertheless,
there were significant delays in implementing reforms and reversals of many that were implemented.
Widespread support for the reforms was initially lacking. Indeed, the second tranche was released a year
late, only after demonstrating that the legal basis for transparent private sector development of the forestry
industry would be maintained.

        The ICR rates the project outcome as satisfactory, institutional development as partial (or modest),
sustainability as uncertain, and Bank performance as satisfactory. OED agrees with these ratings. Besides
contributing to more sustainable growth and budgetary balance, the project's effects on realizing a more
sustainable, transparent development of the rain forest appears to be a major accomplishment. On the other
hand, fiscal management remains ineffective and difficult to monitor. Ownership of some reforms remains
weak, and civil service reform remains elusive. Price controls are still extensive, and the institutional
framework for achieving sustainable management of forest resources remains fragile. As a result of all
these problems, the economy continues to remain vulnerable to macroeconomic instability and
unsustainable development.

The project offers evidence of two important lessons. First, Bank engagement of the NGO community
can be very important for developing borrower ownership. The frequent reversals on policies suggest that
in Papua New Guinea project ownership was initially lacking. The Bank’s investment of significant staff
resources in engaging the NGO community ultimately helped to realize the ownership necessary for
project success. Second, in a country with a demonstrated lack of implementation capacity and a record
of policy reversals, it is not clear that quick-disbursing loans are effective instruments for development
effectiveness.

         The ICR is of satisfactory quality, but only marginally so. It should have given more emphasis to
the lessons learned from the evaluation of the previous adjustment loan. It should also have more fully
discussed the role that the loan played in catalyzing NGOs to help maintain greater government
transparency and accountability.

        Because of the project's innovative engagement of the NGO community to further the transparency
with which forestry resources are used, further analysis of the loan may yield important lessons about this
process. An audit may, therefore, be very productive.