| Australian Financial Review | Extracts
SYDNEY - Australia will loan Papua New Guinea $442 million (K1 billion)) in direct budget assistance designed to secure essential government services and rebuff financial overtures from China.
The Morrison government agreed to the loan request from PNG prime minister James Marape, offering immediate financial support linked to his plans for longer-term economic reforms in the struggling nation.
A deal was agreed on Friday, said Alex Hawke, Australia’s minister for international development and the Pacific.
It will be provided by Export Finance Australia through its national interest account and will be structured to incur no cost to the Australian taxpayer or the federal budget bottom line.
In the past, Australian governments have baulked at providing direct budget support to PNG. It ended this practice in June 2000, opting instead to concentrate on funding of targeted aid programs.
PNG's economy has struggled amid a collapse in oil and gas prices, growing government debt and corruption problems.
The country owes more than K25 billion, with public debt making up about 30% of its gross domestic product.
Estimates of PNG's obligations to China alone run to more than $580 million, nearly 25% of the country's total external debt.
"This assistance reflects the Australian national interest in a stable and prosperous PNG, and it builds on our two countries’ strong economic partnership, which includes support for economic reform," Mr Hawke said.
"It will also benefit PNG and Australian businesses by increasing the availability of foreign exchange in the country and by supporting trade and investment.
"As PNG’s enduring partner and friend, we are committed to its development and wellbeing and we are pleased the government of PNG has taken the steps necessary to give us confidence in its economic reform agenda."
Australia typically works through multilateral organisations including the World Bank and International Monetary Fund when financing budget support.
The change in approach comes as China looms larger as a strategic competitor and generous financial patron in the Pacific, and as the Morrison government seeks to re-focus on the region as part of its ‘Pacific step-up’ policy.
After becoming prime minister in May, PNG said the government had asked Beijing for assistance with its debt, but Mr Marape later back-pedalled and gave assurances that other countries had been asked to help.
His predecessor Peter O'Neill resigned after months of unrest over his role in controversial UBS loans and the handling of a K37 billion gas project.
The Swiss investment bank funded the PNG government's moves to buy a 10% stake in Oil Search, which in turn used the money to buy into a gas field development.
PNG lost nearly K1 billion after the price of Oil Search shares slumped in line with the oil price.
A foreign exchange shortage in PNG has stifled private sector growth and the Australian government believes the economy will improve conditions for Australian companies selling to PNG and repatriating profits.
PNG has never defaulted on its debts, including on previous Australian loans.