How to manage a $1.6 billion debt and other challenges?


    By Samantha Magick

    Pacific finance and trade leaders will have critical meetings this week to discuss how they can rebuild the region’s economies following the economic devastation wrought by COVID-19.

    Managing increasing debt burdens will be high on the agenda.

    “We sure live in some very challenging times. The last 18 months have been, perhaps, one of the toughest periods for our region, for our countries and most especially, our peoples,” Pacific Islands Forum Secretary General, Henry Puna told Forum Economic Officials last week.

    Puna warned that the global pandemic has plummeted Pacific island nations into “unprecedented levels of debt and growing inequality.”

    PIF Senior Adviser- Economics, Denton Rarawa recently told journalists: “Pacific Island countries have incurred new additional debt of US$1.6 billion; that’s just because of their responses to the COVID-19 pandemic.”

    According to figures collated from the International Monetary Fund and other national sources, Pacific Islands will this year amass debt as a percentage of GDP of between 83.6% in Fiji, to 11.8% in Tuvalu.

    Cook Islands, Palau, Papua New Guinea, Samoa, Tonga and Vanuatu will all have projected debt as a percentage of GDP of between 40 and 50% this year. The cost of servicing debt has also increased for some economies due to increased borrowing from commercial sources.

    And the COVD crisis has exacerbated challenges already faced by the region’s economies including vulnerability to disasters and climate change, and the inherent limitations of their small size.

    When necessity becomes the mother of invention: Debt for climate swaps

    These multiple threats have prompted a call for new and innovative approaches to addressing debt in the short to medium term, and enabling long-term improvements in living standards for the people of Forum Island countries.

    This week Ministers will be asked to consider ‘debt for climate’ swaps, potentially employing the Pacific Resilience Facility as a vehicle to offset Pacific debts to creditors.

    “The idea is, instead of repaying that, or servicing the debt to the external creditor, the country can put its money into the Pacific Resilience Facility and contribute the equivalent of each debt servicing costs into the Pacific Resilience Facility, that will be used to build resilience against disasters,” Rarawa said.

    A second option would see Pacific Island countries invest in community resilience, “and the cost of the money that spent on those can be treated as repaying the external creditor,” Rarawa said.

    “If that is successful, then that will be very positive, it will be a win-win situation, where Pacific Island countries will address the external debt situation, but at the same time, address the climate change problems that they face every year.”

    The Forum Secretariat is also proposing the convening of a Regional Debt Conference to bring together debtor countries and creditors to discuss debt relief, debt restructuring etc. Rarawa has flagged the possibility of partnering with “non-traditional” partners such as Middle East and Eastern European countries that are not currently Forum Dialogue Partners.

    Ensuring debt doesn’t bite generations to come

    The issue of growing debt is of concern to the Pacific Network on Globalisation (PANG). “I think that there needs to be a lot of attention being paid to debt specifically, and this big push for countries to take up more and more loans, particularly infrastructure-based loans,” warns PANG Coordinator Maureen Penjueli.

    “There are some really critical situations for countries like Vanuatu, Tonga and Samoa and Fiji because of the maturity of loans specifically with China. There have been some grace periods but there is very little articulation, at least from our governments at this stage, on whether they will be asking for debt forgiveness or debt cancellation. And I think that this is quite critical.

    “We’ve got to position ourselves that any kind of economic recovery, its basis cannot be for more and more debt in our region because that would just bite all of our generations to come on the basis of recovery.”

    Penjueli says direct budgetary support from Australia and New Zealand means “the incursion into our countries’ policy spaces will become critical”, that is, that they will want to have a say in how that money is spent. She says while there is an assumption that direct budget support is primarily going into the health sector and civil service salaries now, “it’s very hard to see how the funds are being spent and where they’re being spent.”

    She also wants to see scrutiny of infrastructure loans, particularly those being championed by multilateral banks and financial institutions, such as loans for deep-water ports. Port projects in locations such as Manus Island in PNG have become the literal and symbolic site of the geopolitical and strategic contest between China and Australia/the U.S in the Pacific region.

    Private sector support

    Support for the private sector will also be on the agenda this week. Pacific Trade Invest has been running regular surveys on the impact of the pandemic on business, with the most recent (May 2021) showing 84% of respondents reporting a negative impact on their business.

    “69% are confident that their businesses will survive the COVID-19 crisis and that’s actually up from 58% in the previous survey, so that is a significant bump in confidence,” said PTI Trade and Investment Commissioner, Caleb Jarvis, although he expects this confidence to erode with new data from Fiji, which is grappling with devasting health and economic impacts of a second wave of infections.

    Air freight costs have risen by up to 300% since the start of the pandemic, and airfreight reliability has declined, prompting PTI to focus on sea freight. Through its PTI Freight Assistance Package it provides small grants to exporters. “It is a 50-50 cost-share arrangement, and it has been really well received, and it’s just a very pragmatic way of providing support to businesses,” Jarvis said.

    This week Ministers will also be asked to consider a regional effort to reduce freight costs, building on the Pacific Humanitarian Pathway (PHP). Originally designed to move Personal Protection Equipment, medical equipment and vaccines around the region, there are now discussions about how it can be used to move high-value and highly-perishable fisheries and other products at subsidised rates. Given the likelihood that borders will remain shut for some Pacific island nations for the remainder of this year, and the return to tourism as a significant source of income seems a long way off yet, finding ways to support other export industries is critical if there is going to be any semblance of recovery.