Country Profile Papua New Guinea

Papua New Guinea

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Papua New Guinea - February 2022

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

Chart 1 PNG At A Glance

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 2022 and 2026. Business climate is measured by the World Bank’s latest 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

PNG’s economy has struggled in the face of the COVID-19 pandemic, fiscal constraints, issues in the mining sector and external liquidity challenges. The IMF estimates the economy grew just 1.2% in 2021 following a 3.9% contraction in 2020.

Looking ahead, growth hinges on reopening of the Porgera gold mine and the path of the COVID-19 pandemic; persistent COVID-19 infections weigh on non-resources activity. Proceeds from external concessional loans have increased foreign exchange availability, though an overvalued exchange rate and ongoing foreign exchange shortages remain significant constraints on domestic confidence and investment. Overall, the IMF expects real GDP growth of 4% in 2022, helping economic output recover to pre-COVID levels.

Over the medium term, real GDP growth is expected to average about 3% per annum, driven by the non-mining sector. New growth opportunities outside the resources sector requires significant improvements in governance and economic and social infrastructure.

Risks to growth stem from weaker global demand weighing on commodity prices and slower-than-expected implementation of investment projects in PNG's extractive industries. Foreign exchange shortages, political uncertainty in the lead up to and beyond the 2022 election and policy implementation challenges all add downside risks to the outlook.

Chart 2 PNG Real GDP Growth

GDP per capita rose solidly in the early to mid-2010s, in large part supported by rising commodity prices and increasing construction and employment related to the PNG LNG project. But since 2014, lower commodity prices, the completion of PNG LNG construction, weakness in the non-mining sector and more recently, the COVID-19 pandemic, have held back income growth. Moreover, income is unevenly spread through the population. Until investment in the LNG and mining sectors picks up markedly, GDP per capita is likely to hover between US$3,000-US$3,500 in the next five years, according to IMF forecasts.

Chart 3 PNG Per Capita GDP

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.

Chart 4 PNG Risk Ratings
Chart 5 PNG Overall Risk Ratings

PNG ranks 120th out of 190 economies in the World Bank’s latest ease of doing business survey. Enforcing contracts, resolving insolvency and starting a business are more difficult relative to other Pacific Island countries. On the positive side, access to credit and obtaining protections for investors are somewhat easier compared to regional peers.

Chart 6 PNG Ease Of Doing Business

PNG has low scores on the World Bank’s governance indicators, including significant constraints in respect of the rule of law, government effectiveness and control of corruption. 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.

Chart 7 Governance Indicators

Risk of expropriation in PNG is moderate. This aligns with the low scores around contract enforceability in the ease of doing business survey and the weak rule of law scores in the 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.

 

Chart 8 PNG Expropriation Risk

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. The potential for political volatility immediately following the 2022 election and at the end of 2023 (when the 18-month constitutional grace period preventing parliamentary no-confidence motions against the government ends) is a risk to policymaking and investors’ confidence. Policies focused on increasing economic benefits from resource projects are likely to continue.

Chart 9 PNG Political Risk

Bilateral relations

PNG was Australia’s 22nd largest trading partner in 2020. Total goods and services exports to PNG totalled roughly $2.4 billion in 2020, down about US$700 million from 2019. The COVID-19 pandemic disrupted bilateral trade over the past couple of years.

Major Australian goods exports to PNG are crude petroleum, meat, civil engineering equipment and parts, specialised machinery and parts, and wheat. Goods imports from PNG largely consist of gold, crude petroleum, silver and platinum, coffee and spices.

Chart 10 Australia PNG Bilateral Trade

PNG accounts for a small share of Australia’s total service exports. The COVID-19 pandemic and associated international travel restrictions disproportionately hurt services trade over the past couple of years. Prior to the COVID-19 pandemic, about 50,000 PNG tourists visited Australia in 2019 (about 0.5% of total visitor arrivals). PNG’s student enrolments in Australia remains small but steady at 1,200 enrolments and above. The ongoing pandemic points to another year of uncertainty for education and tourism exports in 2022. 

Chart 11 PNG Tourist Arrivals
Chart 12 PNG Student Enrolments

PNG is a small investor in Australia ($1.1 billion in 2020). On the other side, Australian investment in PNG totalled $17.6 billion in 2020, making PNG Australia’s 20th largest investment destination. Most Australian investment is 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 light manufacturing, infrastructure and service delivery.

Chart 13 Australian Investment In PNG