Papua New Guinea: The Interplay of Political Uncertainty, Economic Hurdles, and Navigating Tricky Foreign Relations

PNG's geopolitical rise in 2023 facing uncertainty in 2024. Political stability, economic growth, and fiscal challenges analyzed.

Cover Image Attribute: Man in Blue color, Papua New Guinea / Source: KIRKLAND PHOTOS

 Papua New Guinea (PNG) marked a significant milestone in 2023, asserting its growing geostrategic significance in the East Asia region. Noteworthy developments included the signing of a Defence Cooperation Agreement with the United States and a security pact with Australia aimed at addressing concerns over China's expanding military influence in the Pacific. The nation also played host to leaders from Australia, India, France, Indonesia, and Hungary, engaging in discussions on diverse issues such as environmental conservation, trade, and education assistance.
This international visibility was made possible by a period of political stability at home, enabling PNG to advance its interests globally. However, this stability faces an imminent threat as the grace period, a safeguard against votes of no confidence following the country's elections, concludes in February 2024. The absence of a clear successor to Prime Minister James Marape further adds to the uncertainty.
Marape's coalition government, with 103 seats in the 118-seat parliament, currently holds a dominant position. His party, PANGU, contributes 53 members to this coalition, giving Marape considerable influence over legislative and policy matters. Despite this apparent stability, challenges to Marape's leadership persist both within and outside his coalition.

Image Attribute: The file photo of PNG's PM James Marape at the Lowy Institute, dated 2019
While the economy has shown resilience, with the International Monetary Fund (IMF) estimating a three percent growth in real GDP for 2023 and projecting a five percent growth for 2024, uncertainties loom. The realization of high growth in 2024 hinges on the success of new resource projects, the schedules of which remain uncertain. The US$10 billion Papua Liquefied Natural Gas project's investment phase, planned for 2024, awaits confirmation, while progress in establishing the Wafi-Golpu gold mines has stalled.
To gain a more accurate perspective on the economy, it's crucial to look beyond the resource sector. According to IMF estimates, real non-resource GDP is expected to grow by 4.6 percent in both 2023 and 2024. However, this growth must surpass the population growth rate of 3.1 percent to prevent a decline in per capita incomes and average living standards.
Despite positive economic growth, job creation has not kept pace. Formal employment, representing approximately one-tenth of PNG's workforce, contracted in 2023, driven by job losses in the construction and manufacturing sectors.
In the realm of fiscal policy, the government's 2024 budget outlines higher revenue and spending targets. Government revenue is projected to increase by 14.7 percent in 2024, fueled by a substantial rise in income, profit, and capital gains taxes. The planned spending of almost 27.4 billion kina (US$7.4 billion) marks an 8 percent increase from 2023. The resulting fiscal deficit has decreased by 1 billion kina to 4 billion kina (US$1 billion), aligning with the government's plan to achieve fiscal balance by 2027. While a positive development, past experiences of unmet revenue targets and cost overruns cast a shadow over the reliability of PNG's 2024 budget estimates.

Chart Attribute: Papua New Guinea - Gross Domestic Product (GDP) 2018-2028 / Source: Statista

Efforts to reduce the fiscal deficit are seen as a positive step to ease PNG's debt profile, which currently stands at 52.8 percent of GDP. Prime Minister Marape's approach of shifting to deficits has contributed to lower interest rates on domestic government securities. Despite this, the IMF categorizes PNG as at high risk of debt distress, particularly due to concerns surrounding state-owned entity debt, which accounts for under 7 percent of GDP and combined with public debt breaches PNG's legislated debt limit of 60 percent.
Marape's administration has notably engaged with the IMF since 2019, a departure from previous governments. This engagement has facilitated Australia's emergence as PNG's largest bilateral creditor, overtaking China, as it has provided consistent budget support since 2019. The flexibility demonstrated by Australia in repayments during challenging times contrasts with China's stance, making Australia the preferred lender. The IMF-supported loan program has also led to significant reforms, including the requirement for a roadmap to transition to a market-determined exchange rate, resulting in the devaluation of the PNG kina.
However, the devaluation has not been sufficient to align the nominal exchange rate with its true value. Operating under a de facto crawling pegged exchange rate since 2014, PNG's central bank, the Bank of PNG (BPNG), faces challenges in rationing the availability of foreign exchange (forex). A forex shortage has emerged as a significant obstacle for businesses, impacting the imports of crucial resources such as petrol, diesel, and aviation fuel, leading to fuel shortages and the suspension of domestic flights. To address this issue, BPNG must raise its monthly forex issue above the current limit of US$100 million to clear a backlog of forex orders valued as high as US$1.2 billion.
PNG's economic recovery post-COVID-19 pandemic, coupled with political stability, has positioned the country to host significant international figures, address fiscal deficits, and implement reforms in the exchange rate. These strides represent positive developments. However, the nation now confronts a phase marked by political instability, posing a potential threat to the hard-earned progress in economic growth, diplomatic engagements, fiscal management, and currency reforms. The impending political uncertainty casts a shadow over the sustainability of these achievements and introduces a level of risk that could impact the overall trajectory of Papua New Guinea's economic and political landscape. 

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