A Growing Concern: Debt in Pacific Development Funding

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

Debt Loosening: A Shift Away From Grants

One key concern mentioned in the report is debt, with a growing use of loans rather than grants that do not need to be paid back. As stated by the Lowy Institute, “some 60 percent of infrastructure financing in the Pacific is now being financed by loans.”

The report found that while 75 percent of these loans are directed to the region’s largest economies, such as Papua New Guinea and Fiji, the remaining quarter is allocated to smaller economies, many of which already face elevated debt risks.

Total Official Development Finance Flows

The report also revealed that total ODF flows in 2022 remained 19 percent above pre-pandemic levels of 2019. However, ODF to the Pacific experienced its largest annual contraction on record, dropping by 18 percent.

This decline was largely due to the COVID-19 pandemic support to the region fading.

Australia and China in the Pacific Development Funding Scene

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.

China has regained its position as the second-largest bilateral donor, increasing its project commitments.

The Outlook for Development Support in the Pacific

The report concludes that development support in the Pacific is facing an uncertain future. Despite a surge in ODF during the pandemic, development support has become increasingly inadequate due to elevated regional needs, economic fragility, and heightened geopolitical pressures.

Forecasting major bilateral donor aid budgets indicates ODA – including grants and concessional loans – will flatline in coming years.

Challenges Ahead

The Lowy Institute report highlights the need for donors and Pacific governments to work together to secure critical development wins. The allocation of development budgets is increasingly shaped by geopolitical concerns, raising questions about trade-offs and sustainability.

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

Conclusion

The growing concern over debt in Pacific development funding highlights the need for donors and governments to reassess their approaches. As ODF flows continue to be shaped by geopolitical pressures, it remains to be seen how development support will evolve in the coming years.