This paper analyses the PNG economy by considering (1) macroeconomic stability; and (2) fiscal policy and debt.

From 2003 to 2015, Papua New Guinea experienced comparatively robust economic growth which underpinned increased formal sector employment and strong growth in government revenue. This performance was aided by high prices for PNG's commodity exports, supportive macroeconomic policy settings, and developments in the resources sector, the most notable being the construction of the PNG LNG Project and the first gas exports in 2014.

This prolonged period of robust economic growth has not, however, translated into improved social indicators or improved standards of living, particularly for PNG's rural majority (around 80 to 85 per cent of the population). Papua New Guinea failed to achieve any of the Millennium Development Goals and it is currently ranked a lowly 154 out of 188 countries on the UN Human Development Index, compared with Fiji's ranking of 91, Vanuatu's of 134 and Solomon Islands' of 156.

The robust economic performance fuelled rapid growth in government expenditure, which increased from K3 681 million in 2003 to K13 789 million in 2015 (nominal terms). However, the effectiveness of the greatly expanded government expenditure program is questionable, with concerns that too much has been spent on 'prestige' projects rather than on projects which will expand the productive capacity of the economy. Even the PNG Treasury has raised concerns over the effectiveness of funds transferred to the Provinces and Districts.

Following years of relatively strong economic growth, Papua New Guinea is now confronting a period of significantly weaker growth. This reflects a number of factors: weaker international commodity prices, declining oil production due to maturing oil fields, and the one-off boost in GDP growth due to gas exports which has passed. Over the medium term, the PNG Treasury is projecting modest economic growth of around 2.7 per cent, which is significantly below the estimated population growth rate of 3.1 per cent.