PNG to seek $580m loan to fix ailing bottom line

Papua New Guinea is preparing to ask Australia for a new loan for up to $580m to help repair its ailing budget.

Papua New Guinea Prime Minister James Marape. Picture: AAP

Papua New Guinea is preparing to ask Australia for a new loan for up to $580m to help repair its ailing budget, with about $295m to be handed directly to the country’s MPs to spend ahead of national elections next year.

The looming request comes as new Lowy Institute analysis reveals Chinese aid to Pacific countries has crashed to its lowest level since 2012 at a time when Australian support for the region is at ­record levels.

Negotiations have been under way for months on a proposed loan of at least $390m – but potentially up to $580m – at 2 per cent interest.

It’s understood the request will be finalised by PNG Prime Min­ister James Marape in the coming weeks, together with an appeal for ongoing financial ­support.

“We expect there will soon be a high-level specific request,” a ­senior PNG government source said. “We will also be looking to have discussions about what happens in 2022.”

PNG’s mid-year financial update earlier in September revealed the government needed to raise $1.8bn in new external debt to meet a 2021 budget shortfall.

Among the yet-to-be-paid budget items is $295m in direct “service improvement program” grants to the country’s 111 members of parliament .

The funding scheme, put in place by former PNG prime minister Peter O’Neill, is supposed to inject government funds directly into the country’s remote areas, where the majority of the population lives.

Oversight of the scheme is ­notoriously poor, allowing the nation’s MPs to use the money to shore up voter support ahead of elections.

The Marape government is now under pressure from MPs to deliver the unpaid allowances ahead of next year’s May-June ­national poll.

Australia has provided two low-interest loans to PNG in recent times, consolidating them last year into a single $550m debt.

Australia borrows funds at 1.5 per cent interest and then ­charges PNG a further 0.5 per cent as a management fee. At ­a­ ­recent meeting with Josh Frydenberg, PNG Treasurer Ian Ling-Stuckey said he was employing a “tough hand” to put the country’s finances back on a sustainable footing after inheriting a budget black hole worth 15 per cent of national expenditure.

“Unlike Australia, PNG cannot get rapid access to budget ­financing to help fill such a budget hole,” he said.

“Domestic funds are very limited now (with) just two banks and super funds, and they don’t want more government debt,” he said.

“International markets are very expensive, especially now, with interest charges of over 10 per cent.”

International Development Minister Zed Seselja told The Australian in July that Australia would not “leave the people of PNG in the lurch”.

The Lowy Institute’s latest ­Pacific Aid Map, to be released on Wednesday, reveals a sharp fall in Chinese aid to the region in 2019.

Beijing committed $1.49bn to Pacific countries that year but paid out just $243m – down from $338m in 2018.

One-third of Chinese aid to the Pacific came in the form of grants, with the remainder in the form of loans.

“This is China’s lowest aid contribution to the region since 2012, and is despite China securing two new diplomatic alliances late in 2019,” the Lowy Institute’s Jonathan Pryke said.

“Preliminary analysis for 2020 gives no indication of a significant rebound in Chinese support, despite the Covid-19 crisis.”

Australia’s aid to Pacific countries hit a record $1.24bn, including $623m to PNG, $185m to the Solomon Islands and $123m to small island states.

Australian aid accounted for 42 per cent of total aid to the ­region.