Papua New Guinea has asked Australia for a $1.5 billion loan to help fund government spending.
The unusual request comes just weeks after PNG approached China to refinance its entire national debt.
Australia already gives PNG about $600 million a year in development aid, but has rejected previous requests for direct budget support.
However, with Australia trying to suppress growing Chinese influence in the Pacific, the Morrison government will need to carefully weigh the request.
Liberal MP Katie Allen, who was in PNG last week to look at how Australian aid money is spent, is open to the idea of offering the Pacific nation a direct loan.
“I do understand that they have some short to medium-term issues with regard to some liquidity in their economy,” Dr Allen told Sky News on Tuesday.
“I think it’s an important thing for Australia to partner with PNG to ensure that they can keep their head above water with regards to their economy going forward.”
Delighted to be able to show my new local MP @KatieAllenMP and former PMC colleague @DaveSharma the great education work of @savechildrenaus in the PNG highlands today funded by Australian Aid @dfat pic.twitter.com/FpvOVlTUKL
— Paul Ronalds (@PaulDRonalds) August 13, 2019
Australia usually prefers to provide aid for health and education programs.
But Dr Allen, a first-term MP and former medical researcher, talked up the importance of developing the relationship with Australia’s nearest neighbour.
“I’m a very strong proponent for us supporting PNG both in its health and education but also with regard to its economic strengths,” she said.
“In some ways it’s a border buffer, it’s an incredibly close partner to ours, and we have strong and close alliances with them but we need to increase these.”
Acting Labor leader Richard Marles said the government would need to consider the request very carefully.
“That is a very big request that’s been made by PNG – it’s not something that Australia has done for some time,” he told ABC Radio National.
Like Dr Allen, Mr Marles cautioned against taking a “fundamentalist” approach to delivering development assistance.
“It’s important we take each request on its merits and give it due consideration,” he said.
PNG Commerce Minister Wera Mori has hinted he will ask China for support if Australia turns him down.
But Mr Marles is reluctant to view the latest request as a contest between Beijing and Canberra for strategic dominance in the Pacific.
“I actually think it’s really important that we not engage with the Pacific by reference to China,” he said.
“I fear that sometimes Australia has gone about things, and as a result it doesn’t surprise me that you get comments of that kind coming back from the Pacific.
“We need to be focusing on the Pacific on its own terms – we can’t be there because we don’t want somebody else to be there.”