Papua New Guinea's budget has revealed Australia's $440 million loan "replaces" a proposed Chinese-backed loan, contradicting the Federal Government's public claim the deal was "completely unrelated" to China.

Key points: PNG budget papers reveal the Australian spend replaces a Chinese offer

PNG budget papers reveal the Australian spend replaces a Chinese offer The country's debt-to-GDP ratio has reached 42 per cent

The country's debt-to-GDP ratio has reached 42 per cent Former PM Peter O'Neill has been criticised for fiscal mismanagement

The PNG Government handed down its budget on Thursday, revealing dire levels of debt weighing on the nation's economy.

PNG Prime Minister James Marape had courted both Australia and China for loans in recent months to help cover day-to-day expenses.

Last week, the Coalition took the unusual step of providing a major loan to support PNG's budget, but denied it was aimed at edging out China from controlling more debt in the Pacific.

"It's completely unrelated," Finance Minister Mathias Cormann told the ABC on Monday.

"We have a longstanding relationship with Papua New Guinea, it's in our national interest for Papua New Guinea to have a stable fiscal system and fiscal outlook."

But PNG's budget papers show the loan "replaces" an alternative offer backed by China.

"....an Export Finance Australia (EFA) Budget Support loan of US$300 million (K967.7 million) which replaces the proposed China Development Bank loan....."

Mr Marape met with China's ambassador to PNG Xue Bing in Port Moresby in August. ( Image: Supplied )

Questioned about the loan on Friday, Foreign Minister Marise Payne insisted it was provided as a matter of friendship.

"Prime Minister Marape sought financial support from Australia and our contribution, our loan, is in response to that request," she said.

"That of course does not exclude PNG from seeking financing from other sources ... our decision was about supporting a close neighbour and friend."

PNG may explore IMF debt help

PNG has been the top beneficiary of Australian aid in recent years. ( ABC News, Jarrod Fankhauser )

The $440 million loan appears to be a temporary, stopgap solution to assist PNG until it can refinance all of its debt, potentially with the assistance of the International Monetary Fund (IMF).

Delivering the budget speech to PNG's Parliament yesterday, Treasurer Ian Ling-Stuckey said he was "exploring the option" of an IMF bailout.

"Working with the IMF will lift PNG's profile and credibility ... it will open the doors for more good, cheap financing," Mr Ling-Stuckey said.

That could see PNG's debt to Australia, as well as the Asian Development Bank and the World Bank, re-financed with more favourable interest rate and repayment terms.

The budget lists one of the options as: "Possible Australian budget support facility that could re-finance the 2019 EFA facility."

This suggests a quick repayment of the $440 million loan and negotiation of a new, longer-term arrangement for financial support.

"For too long, we have been pursuing expensive forms of debt," Mr Ling-Stuckey said. "My priority is accessing cheaper financing for our budget."

He described the $440 million loan from Australia as a "cheap, good debt from a long-standing and trusted partner".

'No more fake budgets'

Former prime minister Peter O'Neill is accused of almost letting his country become a "failed state". ( AAP: Lukas Coch )

The PNG Government has blamed the parlous state of PNG's budget squarely on former prime minister Peter O'Neill, who was ousted by Mr Marape in May.

Mr Ling-Stuckey said an interrogation of Papua New Guinea's finances revealed the budget was in far worse shape than Mr O'Neill had let on.

The budget deficit for 2020 is now projected to be the largest ever, blowing out to 4,631.1 million Kina ($2 billion), with the nation's debt-to-GDP ratio reaching 42 per cent.

Mr O'Neill had "quietly dug a very deep economic hole for this nation," Mr Ling-Stuckey said.

"Under the former prime minister, PNG was headed towards becoming a failed state."

Mr Ling-Stuckey vowed that under new leadership, there would be "no more fake budgets".

PNG's economic fortunes will not be easy to turn around.

Reliance on the resources sector has seen PNG's revenue suffer as global oil and gas prices have fluctuated.

Some of the nation's bills are several years in arrears, foreign investment is limited and economic growth forecasts have been scaled back.

The Marape Government hopes debt refinancing, major economic and infrastructure reforms and developing the nation's agriculture sector will set a new direction for PNG.