Papua New Guinea is falling short of its potential

Papua New Guinea is falling short of its potential

Falling commodity prices alongside poor political governance have meant that Papa New Guinea, rich in natural resources, is seemingly not fulfilling its potential.

Papua New Guinea is one of the poorest and most isolated countries in the world. Yet it has experienced sustained economic growth in recent years. The country is rich in gold, oil, gas, copper, silver and timber.

The extraction of these natural resources accounts for 60% of its GDP whilst it’s other main economic sector, agriculture, employs up to 85% of the population.

The revenues from this commodity-based economy have not translated into strong economic development and improvements to living standards. Despite maintaining an average annual growth rate of 6.5% over the past 10 years, the country is blighted by corruption and poor fiscal management by the government.

The country has also been dealt a bad hand due to the fall of commodity prices and the effects of the El Nino. Yet the abundance of resources within Papa New Guinea means that it has the potential to develop quickly in the future, but this potential will only be realized by strong actions by its government.

Fall in Commodity Prices

Papua New Guinea’s commodity-based economy was hit hard by the collapse in global commodity prices in late 2014.

Growth in Papua New Guinea commodity prices


The government has little control over this event. The fall in prices has impacted the country’s revenue streams. The price of oil, for example, was almost 50% lower in July 2015 than in November 2014.

With the World Bank lowering its forecast for crude oil prices, it seems that the Papua New Guinea will continue to suffer from its reliance on natural resources. This is further demonstrated by a 67% collapse in Asian gas prices, which brings little hope to a country where almost 40% of its population live below the poverty line.

Investment and Government Spending

Despite the fall in commodity prices, ventures into the production of liquefied natural gas in the country are expected to drive economic growth. Liquefied natural gas production provides direct revenue for the government and local investors. The benefits are reaped by how the government then reinvests this revenue into the economy.

However, the issue at hand is that the government is simply not taking advantage of foreign direct investment in this sector.

Low corporation taxes coupled with widespread corruption with regard to illegal payments to international firms have meant that the benefits of exporting Papua New Guinea’s natural resources are not being felt by its population.

The government has also overspent due to expecting larger predictive revenues from its commodities. Whilst it would be harsh to criticise the government for increased fiscal spending given the unforeseen decline in commodity prices, its priorities must be questioned.

Instead of investing in social development of its people, it took out a loan of $1.2 billion to invest in Oil Search, whose share price dropped 17%.

The Papua New Guinean government now faces the challenge of reducing its expenditure whilst protecting primary services. News of clinics being forced to close due to a lack of government funding is cause for concern.

Lack of economic and social development

One of the main criticisms of the government is that it has failed to significantly invest into the country’s infrastructure, education and health. All three of these sectors would contribute to both increased growth and raise the standard of living.

The wealth that has been created, through the exportation of Papua New Guinea’s natural resources, is concentrated and skewed towards urban areas. Moreover, the government has critical constraints; these are weaknesses in the delivery of public services, failing to control corruption and a poor supply of basic services such as water and electricity.

It has also faced criticism over its handling of the detrimental impact of El Nino. The difficulty government officials have in reaching those in affected areas is down to the failure of the government to initially invest in the country’s infrastructure.

Papua New Guinea should be able to take advantage of the abundance of natural resources at its disposal. Whilst the fall in commodity prices is an unfortunate blow- the government has failed to capitalise on previous years of steady economic growth.

It must act to translate the benefits of foreign investment in Papua New Guinea’s economy to its wider population, or the country will continue to fall short of its potential.

About Author

Devesh Rasgotra

Devesh Rasgotra is a specialist in South-East Asian affairs. His experience includes working at the International Institute for Strategic Studies where his focus was on maritime security in South-East Asia. He holds his MSc in International Relations from the London School of Economics.