AS NATIONS across the world continue to cope with the economic downturn, one country in the region often neglected by the international media has chalked up an economic success story that few can match.

Papua New Guinea’s economy has grown by an average of 8 per cent annually over the last 10 years, and is on track to expand by an estimated 9.9 per cent this year. Commodity exports – a key source of government revenues – are at historic highs, and public debt has fallen from about 70 per cent of gross domestic product a decade ago to just 25 per cent. 

Much of the recovery from the crisis years of the 1990s is attributable to a US$15 billion (S$18 billion) liquefied natural gas (LNG) project led by ExxonMobil.

But there have also been structural reforms, notably the opening up of the telecommunications and air transport markets. These moves have encouraged broad- based growth by deepening economic linkages between previously isolated settlements.

Yet, with a GDP per capita of just US$2,000, Papua New Guinea remains one of the poorest and most sparsely populated countries in the world. Covering nearly half a million square kilometres, and with 600 islands and 700 different languages, it is home to 6.9 million people, nearly half of whom are under the age of 15.

There is also a large informal sector that relies on subsistence farming and other small-scale economic activity. An estimated 40 per cent of the population live on less than US$1 a day.

Like many of the less developed parts of eastern Indonesia – Papua New Guinea’s nearest neighbour, economic development efforts face enormous obstacles, not the least of which is inadequate infrastructure. A World Bank report earlier this year noted that developing infrastructure, particularly electricity, telecoms, road and other transport, “continues to be a critical pre-condition for accelerated private sector-led growth”.

To deal with this problem, officials are set to make a bold gamble. Three months ago, Prime Minister Peter O’Neill’s government announced that China’s Exim Bank had offered Papua New Guinea a 6 billion kina (S$3.6 billion) loan to finance its development programmes.

Critics fear such a loan is too big to repay. Papua New Guinea’s budget is about 10 billion kina and, in September, Port Moresby announced a 500 million kina deficit. The government, however, argues that it has little choice.

Interviewed on Radio Australia in September, Mr O’Neill said he believed many observers were underestimating Papua New Guinea’s growth potential. Moreover, “infrastructure in the country is declining to a state where some infrastructures are not able to cope”, he argued.

“Do you want us to allow our infrastructures to continue declining? Do you want us to allow the economy to slow down and that there is no economic growth in the country?” he asked. In such a situation, he continued, unemployment would also rise, leading to other social problems.

As for servicing the loan, Mr O’Neill pointed out that, by 2014, the Papua New Guinea government would begin receiving its first revenues from the LNG project.

The tone of a recent World Bank report, however, suggests caution. It noted that several of the economy’s underlying drivers appear to have peaked. Weakening global commodity prices, in particular, will soon have a dampening impact on rural incomes and government revenues. The booming construction sector, said the report, could be expected to wind down after work on the massive LNG project was completed.

Papua New Guinea’s exports include oil, gold, copper ore, logs, palm oil, coffee and cocoa.

When it comes to the need for infrastructure spending, Mr O’Neill has a point. But the reliance on future growth to service loan repayments would make more sense if it was accompanied by a wider programme of economic reform. Out of 183 countries, Papua New Guinea’s World Bank ranking for the ease of doing business stands at 101, a deterioration from last year’s 97. The country performed particularly poorly when it came to enforcing contracts (163) and resolving insolvency issues (116).

Other issues that need to be tackled include reducing licensing and regulatory burdens on business, and improving the performance of state-owned enterprises. Something also needs to be done about the serious shortage of skilled workers. Papua New Guinea students spend an average of just four years in school.

The high crime rate is yet another issue requiring attention.

Papua New Guinea is fortunate in having huge reserves of natural gas with which to fund development projects. But with many countries in the region working hard to improve their competitiveness, it cannot afford to stand still if it wants to broaden its economic base.

(C) Singapore Press Holdings Limited