Papua New Guinea, hurt by commodities drop, on brink of Greek-style crisis

​Australia's nearest neighbour could be on the brink of a Greek-style fiscal crisis following one of the most spectacular budget blow-outs in regional history.

The projected budget deficit in Papua New Guinea's has been revised up, hitting 9.4 per cent, which is more than double last year's deficit and getting close to the 12.3 per cent figure which helped tip Greece into meltdown last year.

The budget implosion will come as a shock to leaders in PNG and also Australia, who have consistently played down the impact of corruption and sliding commodity prices.

In December the top adviser to PNG Prime Minister Peter O'Neill accused a former Australian Treasury officer, Paul Flanagan, of "political interference" when he warned that such a crisis could be coming.

Foreign Minister Julie Bishop assured reporters at the time that PNG was about to become the fastest growing economy in Asia, with GDP growth as high as 20 per cent.

“Huge revenues are going to be coming into PNG,” she said on December 14.

And PNG has since become Australia's largest aid recipient, overtaking Indonesia, with budget outlays expected to reach AUD$554 million this financial year.

But this week's mid-year budget estimate in PNG admits that the huge rivers of resource revenue have failed to materialise.

Instead, economic indicators have all turned south, with overall government revenue expected to shrink by a whopping 20.7 per cent this calendar year.

“This is a frightening document,” said Flanagan, in a fresh analysis which he released on Wednesday, showing that the looming crisis had exceeded even his pessimistic expectations.

The resulting budget deficit “would be the highest in PNG's history”, he said, surpassing the figures that pushed PNG into balance of payments and economic crises in the late 1990s.

“In Australia, such a rapid change in the estimated fiscal position would go well beyond being termed 'a budget crisis',” he said.

Economists say PNG could either slash spending on crucial services, risking a humanitarian crisis, or seek a bail-out from international partners.

PNG, like Australia, has been struck by collapsing commodity prices. But the impact of falling prices has been compounded by management problems at major resource projects, particularly the recently-nationalised Ok Tedi copper and gold mine.

And it has been compounded by a series of huge corruption scandals. Many of those scandals are closely connected with Australia, which has been accused of sheltering corrupt officials and turning a blind eye to laundered funds.

Last month Fairfax revealed video footage which showed Australian lawyers coaching clients on how to pay bribes “In dribs and drabs” and launder the proceeds in Australia.

A warrant was issued but not executed for the arrest of the Treasury Secretary Diari Vele on corruption charges recently.

Anti-corruption activists in PNG have claimed that Canberra has been compromised by its reliance on Prime Minister Peter O'Neill and the Manus Island asylum seeker detention centre.

Bishop told Fairfax she would not let Australia become a safe haven for proceeds of corruption in PNG.