Papua New Guinea: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources: ore (gold, copper, silver, nickel, cobalt), hydrocarbons (oil, gas), agricultural products (coffee, cocoa, palm oil), wood and seafood products
- Plans to develop new gas fields and build liquefied natural gas production units (P'Nyang, Papua, Pasca A, Pandora), as well as new mines (Wafi-Golpu)
- 15% of the world's tropical rainforests
- Financial support from multilateral and bilateral partners
- Member of the Commonwealth and the Asia-Pacific Economic Cooperation forum
- Highly exposed to natural and climatic disasters
- Weak infrastructure network (roads, electricity, health)
- Weak budgetary resources (15% of GDP)
- Economy dependent on commodity exports (90% of total exports, more than one-quarter of value added locally, but 1% of budgetary revenues)
- Significant governance shortcomings: corruption, red tape delaying gas and mining projects, ambiguous land laws
- Low literacy rate, lack of skilled labor, rural poverty, tribal conflicts
- Difficulties in accessing foreign exchange
Mining recovery to drive growth
Papua New Guinea’s (PNG) economy began to recover in 2021, albeit slowly, after tax and monetary support kept it from contracting for two consecutive years. It will continue to suffer the effects of the pandemic in 2022, as the country remains highly exposed to the virus: the vaccination rate did not exceed 1% in October 2021 and is not expected to reach 60% until 2023. Rising cases forced the government to impose new restrictions in October 2021, which will probably be maintained until the beginning of 2022. Further measures may be introduced later, and while household consumption is expected to rebound, it may still be constrained by the climate of uncertainty. As a result, growth is expected to come mainly from the recovery of mining activity (10.3% of GDP in 2019). Activity at the Porgera gold mine is expected to resume upon completion of negotiations between the government and Barrick Niugini Ltd on the distribution of profits under the new lease, scheduled for early Q2 2022. In energy, PNG will focus on expanding natural gas extraction and liquefaction capacity through projects with foreign partners while maximizing its interests. Natural gas already accounts for more than a third of PNG’s exports. The agricultural sector, which employs 85% of the population mostly informally, and accounts for a quarter of GDP (2019), is expected to grow in 2022, as are fishing and forestry. Accordingly, the economy will rebound but without reaching its pre-crisis level.
At the end of 2021, the central bank was sticking with its accommodative monetary policy: the key interest rate, the Kina Facility Rate, was 3%, down from 5% in March 2020, and reserve requirements for commercial banks were set at 7%, compared with 10% previously. With inflation expected to rise slightly, the policy could be tightened.
The fragile fiscal situation, but the current account surplus maintained
After widening in 2020 owing to the closure of the Porgera gold mine and the arrival of the pandemic, the public deficit narrowed in 2021 on the back of increased revenues but remains extremely large. The government plans to correct the imbalance and is counting revenues to rise by more than expenditures. The revenue increase is expected to come from mining, thanks to the resumption of activity at Porgera and boosted capacity. The government also plans to increase non-commodity tax revenues (80% of revenues) by introducing bank and telecommunications taxes for firms with a large share of the domestic market. However, more than this will be needed to generate a budget surplus. Consequently, public debt is expected to continue to grow. It has tripled in less than a decade, with a considerable increase in bilateral debt, especially to China. The country is increasing the share of its external financing, prioritizing concessional multilateral debt, given the high cost of domestic debt (8.5% interest rate on average). The share of external debt in total debt has been rising steadily since 2017, making up almost the same percentage as domestic debt in 2021.
In 2021, higher prices for the primary exported commodities (gold, liquefied natural gas, wood) significantly improved the current account surplus. The resumption of investment-related imports and less favorable commodity prices (gold) could lead to a marginal deterioration in the trade and current account surpluses in 2022. In June 2021, foreign exchange reserves stood at a comfortable level, equivalent to 8.6 months of imports, and should continue to increase in 2022.
The government faces health and separatist challenges
James Marape’s government faces the COVID-19 crisis and the question of independence for Bougainville. The result of a November 2019 non-binding referendum held in this autonomous region (98% in favor of independence) led to negotiations between the government and the province. Ishmael Toroama, a former secessionist military commander, was elected president of Bougainville in August 2020. He has proposed a two- to three-year timetable for resolving the independence issue. The government is reluctant for Bougainville to become independent for fear of losing the province’s resources (copper reserves). Parliamentary elections will be held in June 2022.