Australia pays growing price to keep Papua New Guinea on side

When Papua New Guinea’s Foreign Minister Justin Tkatchenko this week declared Australia “our traditional security partner, a partner of choice,” it was a victory of sorts for Canberra’s push to convince Pacific island nations it’s a better friend than China.

It’s also a victory that has come with increased financial risks and lack of transparency. 

Australia has loaned A$2.56 billion (U.S. $1.7 billion) to economically vulnerable Papua New Guinea since 2020 to plug repeated holes in its national budget, initially due to the shock from the COVID-19 pandemic. Australia also has become the largest lender to Pacific island nations overall.

“Geopolitical competition has been one of the driving factors, but it doesn’t completely explain the emergence of Australia as a lender” to Pacific island nations, said Mihai Sora, a Pacific analyst at the Lowy Institute think-tank.

“China is providing fewer loans in the Pacific these days – a combination of limited supply, but more importantly, limited demand from Pacific countries themselves. You can ask yourself – who would you rather owe money to, the Chinese Communist Party or the Australian government?” 

Papua New Guinea and Australia held their 30th annual ministerial consultations on Wednesday in Port Moresby where officials from both sides lauded what they said was a close and unique relationship. 

Tkatchenko, who to Australia’s alarm had earlier this year floated the possibility of security cooperation with China, told a joint press conference that the “government saw it crystal clear that we will continue to support and work and partner with Australia, now and in the future, for our security.” 

Australian Foreign Minister Penny Wong, in turn, said there had been a lot of discussion “about the importance of strategic trust and what that enables us to do in terms of our partnership.” In radio and television interviews ahead of and during the visit, she said Australia was in a “permanent contest” in the Pacific – a reference to China’s inroads with island nations.

Wong came bearing announcements on joint security and law-and-order programs under a A$200 million (U.S. $133 million) security deal signed in December by prime ministers James Marape and Anthony Albanese.

Australia is PNG’s largest aid donor and the Pacific country is this year again by far the region’s largest beneficiary, amounting to A$637.4 million.

China, which has grown its influence with Pacific island nations over several decades, has become Papua New Guinea’s largest source of imports and second-largest export market while PNG’s trade with Australia has declined over several years. 

Still, in the face of opposition from Australia, the U.S. and other nations, Beijing has been unable to advance security cooperation with Papua New Guinea despite reaching a landmark security agreement with PNG’s neighbor, the Solomon Islands, in 2022.

Wong was visibly irked at the joint press conference when a Papua New Guinean journalist asked her how long Australia would prop up its neighbor’s finances and why, despite the inflow of cash, it continues to suffer an impoverishment of basic services such as classrooms and hospitals.

In response, Wong only said she had received a presentation from Papua New Guinea’s Treasurer about reforms to how it manages its budget “and we respect the way in which you are working through those issues.”

Papua New Guinea is the most populous Pacific island country with an estimated 11.7 million people, but its economy is small, underdeveloped and vulnerable to shocks such as natural disasters and the financially ruinous riots and looting that rocked its capital early this year. 

On Thursday, Wong and other Australian ministers traveled to the Highlands province of Enga, which is prone to deadly tribal violence and where a landslide last month buried a village, killing dozens of people. 

The nation’s debt has ballooned in recent years and the government now spends more on interest payments than it does on either health or education. 

Australia’s loans to Papua New Guinea were criticized earlier this month by Carolyn Blacklock, a former managing director of state-owned utility PNG Power and adviser to Prime Minister Marape’s predecessor, Peter O’Neill.

It is impossible to know where the money is going and who is benefiting, said Blacklock, who now runs a firm that offers strategic advice to Pacific island governments.

Papua New Guinea has a reputation for corruption and the International Monetary Fund has warned it is at risk of debt distress, she said in an opinion article for Islands Business news site. 

“In this context, this spinning turnstile of loans looks irresponsible, enabling a debt-junkie government to hit up on more loans,” Blacklock said.

The communique from the Papua New Guinea-Australia ministerial meetings said PNG is expected to repay 510 million kina (A$196 million) of interest and principal to Australia in 2024, out of the more than A$2.5 billion loaned. 

The statement also said the need for Australian “budget support” – that is, loans – to Papua New Guinea is declining because the Pacific island country is repairing its finances. 

Australia’s 2024-2025 budget documents, released in May, estimate Papua New Guinea’s outstanding debt to Australia will total about A$1.3 billion at June 30 – a lower figure than that provided by the foreign affairs department. 

The difference is likely to reflect specific accounting required for concessional loans – which are made at below-market rates – and also shows that Papua New Guinea has not made significant repayments. 

Australia’s Treasury said it would provide a written response to BenarNews’ questions about the difference in loan amounts but had not done so by Friday.

The IMF last year agreed a U.S. $918 million loan facility for Papua New Guinea contingent on it implementing fiscal, economic and anti-corruption reforms. The most recent loan agreement between Australia and Papua New Guinea – in 2023 for A$600 million – was to cover the Pacific country’s budget deficit and help it achieve the overhaul required by the IMF.

Forecasts for smaller deficits in Papua New Guinea’s latest annual budget are based on “heroic” assumptions about future tax collections, according to an analysis by auditing and business services conglomerate PWC.

“Past and ongoing tax administration challenges demonstrate the risks of such a strategy, especially adding in the government’s historical issues with spending restraint,” the PWC report said. 

According to Sora, Australia will look to taper off its loans to Papua New Guinea, particularly if the IMF package kicks in.

“That said, Australia’s Pacific infrastructure financing facility, which provides a combination of loans and grants, is now a major feature of the country’s support to the Pacific,” he said. “And with respect to budget support, that measure is likely to stick around, and will be directed where needed.”