Papua New Guinea

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June 2016

Papua New Guinea’s per capita income and business climate lag behind its regional peers. Growth is above the Pacific Island average driven by strong LNG exports. But an ongoing shortage of foreign exchange and falling commodity prices are weighing heavily on growth.

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Economic outlook

Papua New Guinea was amongst the world’s fastest growing economies in 2015, but slumping global commodity prices, drought and chronic shortage of foreign exchange have weighed heavily on growth this year. The outlook will remain challenged, particularly as the government reduces spending to narrow the large fiscal deficit in response to the drop in commodity prices

A lack of foreign exchange is significantly constraining trade, with exporters to PNG reporting difficulty in converting Kina revenues into foreign exchange. It is also limiting imports of capital and intermediate goods which will weigh on domestic investment.

Long term, the development of LNG and mining projects will buttress growth. However, stronger productivity and new growth opportunities outside the resource sector requires significant improvements in governance and economic and social infrastructure.

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Thanks to the mining boom, PNG recently graduated to lower-middle-income status. However, the income is unevenly spread through the population. GDP per capita is forecast to reach a level by the end of the decade on par with Honduras.

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Business climate

PNG has an OECD country credit grade of 5 and speculative grade sovereign debt ratings from two ratings agencies. These ratings underline PNG’s vulnerability to business, financial and economic setbacks.

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PNG ranks poorly on the World Bank’s ease of doing business gauge — which measures regulation and red tape relevant to a domestic small to mid-sized firm – 145 out of 189 economies.  Enforcing contracts and gaining access to credit are very difficult; but getting an electricity connection is easier.

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PNG also scores poorly on the World Bank’s governance gauges, severely so for corruption and rule of law. PNG has over 800 languages and a population organised in small, fragmented social groups which can create political gridlock.

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Bilateral relations

PNG was Australia’s 19th largest trading partner in 2014-2015. Merchandise export receipts from PNG totalled A$2b, down 18% from a year earlier. Crude petroleum, and civil engineering equipment and parts were the major export items. Imports from PNG, mainly gold and crude petroleum, fell 1.5% to A$3.4b. Australia is PNG’s largest trade partner.

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Australia exported A$575m of services to PNG in 2014-2015 most of which were professional and technical services. PNG constitutes a small share of Australia’s tourism industry, with 57,000 arrivals in 2015 (1% of the total).

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PNG constitutes a small share of Australian investment abroad (less than 1% of the total in 2015). Australian investment in PNG reached $18.4b in 2015 mostly geared toward the natural resource sector.    Investment stocks in PNG have increased significantly since 2009, reflecting Australian investment in the PNG LNG project

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