A Growing Concern: Debt-Related Development Funding in the Pacific

A new report from Australia’s Lowy Institute has shed light on the growing concerns surrounding debt-related development funding in the Pacific. The seventh edition of the Pacific Aid Map, released last month, highlights the increasing reliance on loans rather than grants for infrastructure financing in the region.

A total of 37,000 projects are included in the report, covering official development finance (ODF) from 2008 to 2022. One key concern mentioned is debt, with growing use of loans that do not need to be paid back.

Debt and Development Financing in the Pacific

The report found that “some 60 percent of infrastructure financing in the Pacific is now being financed by loans.” This trend is concerning, as it suggests that the region’s economies are increasingly reliant on debt financing rather than grants.

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 these smaller economies already face elevated debt risks.

Australia’s Role in Pacific Development

Australia remains the region’s largest donor, with total ODF to the Pacific above 2019 levels. However, Australian grants have dropped slightly below their pre-pandemic average.

“After a pandemic lull, Beijing has narrowly displaced the United States in ODF spending and ramped up its project commitments,” the report said.

The Outlook for Development Support in the Pacific

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

Forecasting of major bilateral donor aid budgets indicates ODA – which includes grants and concessional loans – will flatline in coming years. This means that more will need to be done with less to secure critical development wins.

Challenges and Opportunities

The report highlights the challenges facing Pacific governments, including pressures on both donor and government budgets. However, it also notes that progress has been made on cross-cutting priorities such as gender equality, climate action, and aid localization efforts.

“Further work is needed” to build on these gains, according to the report.

Conclusion

The growing reliance on debt financing in the Pacific highlights the need for a more sustainable and equitable approach to development funding. As the region faces increasing economic fragility and geopolitical pressures, it is essential that donors and governments work together to ensure that development support is targeted and effective.

In conclusion, the Pacific Aid Map report provides a valuable insight into the challenges facing the region. As the global community continues to grapple with issues of debt, inequality, and climate change, it is more important than ever to prioritize sustainable and equitable development funding in the Pacific.