The rapidly deteriorating state of Papua New Guinea’s economy is presenting serious challenges for the PNG government, which is already struggling to finance its 2020 budget.
But another factor looms as an equal, if not more serious, challenge. At a time of fiscal vulnerability, PNG is getting entangled with Chinese debt—which will inevitably involve some difficult decisions for the Australian government down the line.
A series of assessments of the state of the economy by banks and ratings agencies in recent weeks presents a very bleak picture. The PNG budget deficit is now projected to be over K7 billion (A$2.7 billion) in a total expenditure budget of K18 billion (A$7 billion). The PNG government hasn’t yet managed to fully finance the deficit, so it might even be higher than recent projections.
At the same time, there are signs that PNG may be at risk of increasing indebtedness to China.
The state enterprises minister, Sasindran Muthuvel, recently revealed that PNG owes China, principally through the Exim Bank of China, more than K1.6 billion (A$621 million) for communications projects alone—most of which have been carried out by Huawei. The government-owned communications company, Telikom PNG, is running up heavy operating losses which are linked to the projects Huawei has carried out. Its debts are reported to be more than K2 billion (A$777 million).
The loans include almost K1 billion (A$388 million) for the Kumul submarine communications cable linking PNG’s major centres. The project has been widely criticised for neglecting to account for the impact of earthquakes and the cable suffered multiple breaks during a tremor in May last year.
And despite all the promises about lower consumer charges and faster internet delivery, neither seems to have been delivered.
In addition, the K200 million (A$75 million) Exim Bank loan for the PNG national data centre for work carried out by Huawei must also be added to the debt total. The centre is not only a potential security risk, but is virtually non-operational, causing the relevant minister to suggest PNG shouldn’t have to repay the loan.
Then there’s the China-funded PNG national identity document project. It has stalled, with probably just one million of PNG’s eight million citizens having an identity card. Using the excuse of the Covid-19 pandemic, the PNG government has put the project on hold.
So, in the communications area alone, the amount owed to the PRC, principally through Exim Bank, is around K3 billion (A$1.2 billion), much more than official figures suggest.
But communications is just one area in which the China ‘debt-trap diplomacy’ is impacting PNG. The picture looks much worse when road construction, ports and airports are included.
Work is underway on the development of the Kavieng International Airport in New Ireland at a cost of almost K200 million (A$78 million). And work is continuing on the redevelopment of the vital Highlands Highway at a cost of close to K500 million (A$194 million). Both projects are being carried out by Chinese state-owned companies.
And construction of the signature national court complex is running well behind schedule. It’s another project being built by a Chinese company and will cost at least K480 million (A$186 million).
Reports on the quality of the roadwork and other infrastructure projects undertaken by Chinese companies across PNG indicate that the quality of construction is variable.
But it doesn’t stop there.
Some years ago, the Shenzhen Energy Group and Sinohydro were selected by PNG Power—another government-owned entity in poor financial shape—to construct the massive Ramu 2 hydro power project.
The project, which will cost at least K8 billion (A$3.1 billion), has had to be guaranteed by the PNG government under a loan from China.
Such a loan would almost certainly be beyond the capacity of PNG Power to repay and the project has been stalled for at least the last year, resulting in threats from the selected tenderers to cancel it.
The Australian government has been lobbying heavily against the project, and has put forward as an alternative a series of smaller power projects funded by a group of countries led by Australia.
But the Ramu 2 project is not dead. It has powerful backing within the PNG cabinet—and the Chinese ambassador continues to lobby strongly for it.
Late last year, Australia gave the PNG government a loan of around K1 billion (A$388 million), basically to finance the budget shortfall. It has already agreed to delay repayment. And more recently it allowed around K50 million (A$19 million) to be drawn down in cash from the aid budget to help the PNG government out.
If China applies pressure on PNG to make significant repayment on loans running into billions of dollars, the fiscal position will be even worse than it already is.
Australia has rightly been working with the International Monetary Fund, the World Bank and other donor countries and agencies on a package that would essentially provide ‘structural adjustment support’ for PNG. But any such package would have tough conditions that might be unpalatable to PNG Prime Minister James Marape and his government ahead of an election in less than two years.
The Australian government is likely to be watching the deteriorating economic and fiscal outlook in PNG with growing alarm.
It also has to watch closely when Beijing starts calling in its extensive loans to the government and government-owned corporations, and pre-empt the kinds of concessions China may try to extract from PNG in return for further extensions or loan forgiveness.
Australia’s own budget deficit and national debt in light of the response to Covid-19 are eye-watering, making any decision to help PNG further very difficult politically, at least for the foreseeable future.