The Pacific Islands are facing a severe debt crisis which has been made worse by the Covid-19 pandemic and the resulting shutdown of the tourism industry. Research based on International Monetary Fund country reports shows that the average debt-to-GDP ratio of Pacific states rose from 32.9% in 2019 (pre-pandemic) to 42.2% in 2021. Fiji, Vanuatu and Palau all have -GDP ratios above 70%. An unprecedented Pacific Debt Conference, held last month in Suva to address the emerging problem, was badly needed.
From 5-8 April, the Pacific Islands Forum Secretariat and the United Nations Economic and Social Commission for Asia and the Pacific, together with Fiji and Tuvalu, hosted the conference, which brought together the governments of the islands of the Pacific and their creditor countries. The conference aimed to find solutions to both the debt crisis and the climate crisis, and was crucial in making the connection between the two. As research shows, the increasing pace and intensity of extreme weather events is making the Pacific’s debt situation increasingly precarious.
The IMF considers these debt burdens to be manageable. What really makes Pacific watchers nervous are climate-related extreme weather events, which are hitting Pacific economies harder and worsening the debt situation.
Disasters cause terrible damage to infrastructure such as roads, buildings, schools and power lines. These must be repaired and protected against disasters before the next storm, cyclone or flood. But Pacific islands should not be expected to take out loans to pay for reparations and resilience to climate disasters – this is a solution that is both morally indefensible and economically incoherent. After all, the Pacific Islands did not cause the climate crisis. Their creditor countries did.
So what should be done?
Australians need to think more ambitiously about non-loan financing for loss and damage.
The first solution would be an automatic disaster response that would also address debt issues. This would be a two-pronged answer:
- An immediate suspension of debt repayments for a set period – say two years
- And – this is essential – use these two years to negotiate the restructuring of the debt and, if necessary, its cancellation.
Second, Australia and other high-income countries should support Pacific-led climate initiatives such as the Pacific Resilience Facility (PRF). The PRF was established in 2021 with the intention of raising $1.5 billion from donor countries in a series of pledges later this year. Basically, because the PRF provides grants through disbursements from interest earned on the capital base, it does not create debt.
The list of planned FRP projects includes emergency centres, new piers, shipping lanes, quarantine centers and other small-scale, town and village level projects. These will simultaneously enrich the formal and informal economies.
One could contrast the PRF with the Australian Pacific Infrastructure Fund (AIFFP), to which the previous government doubled its budget allocation. Some AIFFP projects relate to renewable energies, in particular hydroelectricity and solar, but very few relate to the adaptation or improvement of the resilience of existing infrastructures. A much better use of Australian funds would be to invest in PRF.
Third, Australians need to think more ambitiously about loan-free financing for loss and damage. In Glasgow last year, high-income countries renewed their pledge to give $100 billion in climate finance to low-income countries. In reality, this is only part of what vulnerable countries, including small island states, need.
The Solomon Islands-China deal has focused Australia’s attention on the Pacific, and the Australian government has an opportunity to act as a better neighbor in the region. Australia could show leadership by making generous pledges to the Pacific Islands at the G20 and COP meetings in Bali and Egypt this year – and in doing so make clear its intentions that the Pacific and other small Developing island states are a priority destination for such a promise.
In the meantime, Pacific islands could consider establishing vehicles to receive debt-free finance to address climate-related loss, damage and adaptation measures, such as an expanded PRF or a separate grant-making institution controlled by the Pacific.
We know that debt swaps can be effective in helping to mobilize additional development and climate finance, but the evidence is mixed on their ability to reduce the debt burden.
Finally, a more global solution to the debt of the Pacific must be found. Many of the talks at the Suva conference advocated climate debt swaps and for Pacific islands to seek aid through the G20 common framework. However, the common framework does not work. Only three countries out of dozens in a precarious debt situation have requested it.
Inspiration can be found in the Heavily Indebted Poor Countries (HIPC) initiative of the 1900s and 2000s. Research shows that participating countries saw their average public debt-to-GDP ratio fall from 75% in 2006 to 40% 2012.
A new HIPC-style program, similar to the debt relief project for a green and inclusive recovery, could incorporate a multidimensional vulnerability lens for program access and focus on green recovery programs rather than just poverty reduction.
As for debt swaps, we need to be realistic about what they can accomplish. My organization helped promote Australia’s first and only debt swap, the Debt2Health deal with Indonesia. We know that debt swaps can be effective in helping to mobilize additional development and climate finance, but the evidence is mixed on their ability to reduce the debt burden. Moreover, China, the first bilateral creditor of the Pacific, is hardly interested in it.
Penny Wong, Australia’s new foreign minister, promised during her visit to the Pacific last week that Australia is “an unconditional partner” and will not impose “unsustainable financial burdens “.
The debt conference was clearly an important first step – it is now up to Australia and other creditors to help us find proactive, not reactive, solutions to these emerging challenges.