Papua New Guinea: Instability risks are on the rise as civil unrest is spreading amid socio-economic shocks

Event

Papua New Guinea has been facing civil unrest and rioting in the capital and across the country since the start of the year. This can largely be explained by poor socio-economic conditions and fuel shortages. The most violent events, unrelated to those factors, occurred in February in the Highlands’ Enga province, where tribal clashes led to the killing of more than 60 people. The state of emergency to restore law and order in the province has not been declared. Even so, PM Marape has requested security support from Australia, while increasing competitiveness between China and the USA regarding defence cooperation.  

Impact

Tribal fighting recurrently happens in the country, especially in the Highlands. However, this rare massacre shows violence has nevertheless escalated in the gold-rich Enga province. Mining projects regularly are at the root of conflicts because they fuel disputes with communities and landowners, and degrade the environment. Moreover, heightened availability of powerful weapons is another factor contributing to more lethal conflicts.

Besides this localised conflict risk, the widespread civil unrest and risk of further protests reflect the difficult socio-economic situation in the country. An principal issue is the discontent about fuel shortages, which add to the youth unemployment crisis and high cost of living. The government is currently giving priority to tackling this fuel crisis. According to the state fuel supply company Puma PNG, the source of the crisis lies in the constrained access to foreign exchange, explaining low stocks and imports. It has been a decade since the central bank decided to keep an overvalued kina by rationing the access to foreign exchange (excluding the resources-related and staple imports). That lead to delays and cross-border payment arrears. As a result, the country’s current imports have been harmed. This leads to an artificial and chronic double-digit current account surplus (18.6% of GDP in 2023) and foreign exchange reserves of above four months of import cover.

As long as they persist, fuel shortages will continue to hit the economy hard. That is especially difficult in a country known for its remote locations (and consequently high reliance on air transport) and slow transport explained by geography and poor infrastructure. Hence, the growth forecast of 5% of GDP for this year (up from 3% in 2023) will likely be revised downward. Meanwhile, to ease pressures, PM Marape will continue to ensure the economically key extractive sector is preserved from the crisis. To do so, he could seek further external aid from partners Australia and China. However, given the tense socio-economic context and difficulties to solve fuel shortages, instability risks are expected to remain high in the next months. Politically, this will translate into the opposition’s announced non-confidence motion against Mr Marape at the next parliament session end of May.

In this difficult context, Credendo’s ratings for the country’s short-term political risk (4/7) and business environment risk (E/G) have a negative outlook.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com