China’s ‘debt-trap diplomacy’ is about to challenge Papua New Guinea - and Australia

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.