New Report Raises Concerns About Debt-Related Development Funding in the Pacific

A new report from Australia’s Lowy Institute has shed light on growing concerns about debt-related development funding in the Pacific region. The seventh edition of the Pacific Aid Map, released last month, covers official development finance (ODF) from 2008 to 2022 and includes data on more than 37,000 projects.

Debt Financing Becomes a Growing Concern

One key concern mentioned in the report is debt, with the growing use of loans rather than grants that do not need to be paid back. The report states that “some 60 percent of infrastructure financing in the Pacific is now being financed by loans.” This is a significant shift from previous years, where grants and concessional loans made up a larger proportion of ODF.

Impact on Small Economies

The majority of these loans are directed towards the region’s largest economies, such as Papua New Guinea (PNG) and Fiji. However, a significant portion – around 25 percent – is allocated to smaller economies, many of which already face elevated debt risks. This raises concerns about the sustainability of these loans and their impact on the region’s economic stability.

Australia Remains Largest Donor, but Grants Have Decreased

Australia remains the region’s largest donor, with total ODF to the Pacific above pre-pandemic levels. However, Australian grants have dropped slightly below their average in 2019. This decrease is a concern, as it may impact the region’s ability to access concessional funding.

China Returns as Second-Largest Bilateral Donor

The report also notes that China has narrowed its gap with the United States in ODF spending and ramped up its project commitments. This shift is significant, as it reflects a changing landscape in development aid.

Uncertain Outlook for Development Support

Despite a three-year pandemic-induced surge in ODF, the outlook for development support in the Pacific remains uncertain. The report states that development support has become “increasingly inadequate” and is caught between elevated regional needs, economic fragility, and heightened geopolitical pressures.

Challenges Ahead

The report forecasts that major bilateral donor aid budgets will flatline in coming years, leaving donors with more pressure to deliver critical development wins. This raises questions about the trade-offs and sustainability of the current course. Furthermore, the allocation of development budgets is increasingly shaped by geopolitical concerns, which may impact the region’s ability to access funding.

Progress on Cross-Cutting Priorities

Despite these challenges, the report notes that progress has been made on cross-cutting priorities such as gender equality, climate action, and aid localization efforts. However, further work is needed to address these issues effectively.

In conclusion, the new report from the Lowy Institute highlights growing concerns about debt-related development funding in the Pacific. As the region faces increasing economic and geopolitical pressures, it is essential that donors and governments prioritize sustainability and transparency in their aid delivery.