Country Profile Papua New Guinea

Papua New Guinea

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Papua New Guinea

Last updated: February 2023

Papua New Guinea’s (PNG) per capita income lags most of its Pacific Island peers, while indicators of the business climate and growth are slightly stronger than in other Pacific Islands. Creditworthiness is on par with other Pacific Island countries. PNG’s natural resources wealth and continued support from bilateral and multilateral development partners remain important for economic prospects, business conditions and creditworthiness.

The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2023 and 2027. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.

Economic outlook

Economic growth accelerated to 3.8% in 2022 from 1.2% in 2021 on the back of rising production in the resources sector and high commodity prices.

The resources sector accounts for about one-third of GDP. As mining operations recover and high commodity prices continue to support export receipts, real GDP growth should further accelerate to 5.1% in 2023. Higher global commodity prices are supporting inflows of foreign exchange and enhancing local business activity while also supporting the government’s ability to meet external debt repayments. However, an overvalued exchange rate and ongoing, albeit easing, foreign exchange shortages remain a constraint on business confidence and investment. Businesses also face continued uncertainty about the repayment of government arrears, security and increasing capacity constraints driving up inflation.

The IMF approved a US$918 million (3.5% of GDP) 38-month financing package in March that will support reforms to address long-standing structural impediments to growth. To increase PNG’s resilience, the IMF program prioritises three reforms. First, addressing a high risk of debt distress via sustained fiscal consolidation. Second, operationalising anti-corruption frameworks. Third, gradually alleviating foreign exchange shortages by transitioning to a market clearing exchange rate (estimated to be overvalued by 13% in 2022). These reforms are critical to strengthen the business climate and diversify the economy.

Risks to the outlook are significant and tilted to the downside. A sharper than expected downturn in the global economy would hit PNG through lower commodity prices, hurting the balance of payments position and reducing government revenue. PNG is also vulnerable to natural disasters (flooding, landslides and earthquakes) as well as the impact of climate change. Political and social risks are also elevated as inflation rises. Mining and energy projects remain vulnerable to setbacks that can result in delays to investment. Violence in the highlands remains an ever-present risk to production and exports from existing resources projects.

The medium-term outlook is bolstered by investment in large resource projects, such as Papua LNG and P’nyang gas, which, if they materialise, will help support investment and employment. Development of these projects adds upside potential to the IMF’s average GDP growth forecast of 3% per annum from 2024-27. The Vision 2050 statement sets out the governments long-term strategy to improve human capital and institutions and reduce poverty to foster sustained economic growth.

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Almost 40% of the population lives in poverty. High Inflation, estimated at 6.6% in 2022, is hurting household incomes, particularly among the poor. Moreover, income is unevenly spread through the population. The IMF expects GDP per capita to rise and hover in a range between US$3,500-US$4,000 in the next five years.  

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Country risk

Country risk in PNG is high. PNG has an OECD country credit grade of 6 and sub-investment grade sovereign debt ratings from the major ratings agencies. These ratings underline PNG’s vulnerability to economic and financial shocks.

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PNG scores poorly on the Worldwide governance indicators, including significant constraints in respect of the rule of law, government effectiveness, control of corruption and regulatory quality. Such constraints can hurt business confidence, impede economic development, undermine policy formation and implementation and hinder social cohesion. Policy implementation and effectiveness continues to be bolstered by technical assistance from development partners and multilateral lenders providing support to the government’s administration.

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Risk of expropriation in PNG is moderate. This aligns with the weak rule of law score in governance indicators. This makes it harder for investors to settle investment disputes. The government’s resource-nationalist policy agenda could also weigh on the attractiveness of foreign investment in PNG.

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Political risk is moderate to high. Political risk reflects the potential for leadership challenges to inhibit progress of resource developments that leads to weaker outcomes for GDP growth, government finances and foreign exchange liquidity. Prime Minister Marape will benefit from an 18-month grace period following his re-election in August 2022, during which the opposition will not be able to table a no-confidence vote against the leader. This supports policy continuity in 2023. Policy challenges are significant, including meeting ambitious revenue and expenditure targets and reform commitments that are critical to unlocking concessional finance.

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Bilateral relations

PNG is Australia’s 25th largest trading partner. Total goods and services trade with PNG totalled roughly $4.8 billion in 2021, down about $1.2 billion from 2020. More than 4,000 Australian companies export to PNG. Major Australian exports to PNG are meat, special transactions and commodities, professional tech and other business services, civil engineering equipment and parts and wheat. Imports from PNG largely consist of gold, silver and platinum, crude petroleum and coffee.

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PNG accounts for a small share of Australia’s total service exports. PNG tourism to Australia has seen a strong recovery since PNG opened borders for international travel in July 2022. Another year of open international borders should support further recovery in Papua New Guinean demand for travel to Australia. PNG’s student enrolments in Australia remains small, but are steady at more than 1,100 enrolments per year.

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PNG is a small investor in Australia (around $1 billion in 2021). On the other side, PNG is Australia’s 17th largest investment destination. Australian investment in PNG totalled $24.8 billion in 2021, mostly in PNG’s resources sector, particularly gold mining and oil and gas; for instance, ExxonMobil Australia is the main operator of the PNG LNG project. Australian investment has also been directed towards PNG’s efforts to strengthen its health systems, economic recovery, infrastructure, education, gender equality and disaster reduction and response.

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