The following is an amended version of a presentation given by Jubilee's Executive Director, Luke Fletcher, at the Pacific Debt Conference on 8 April 2022. The ideas were partly drawn from a pre-conference paper we prepared with our partners EURODAD, the Jubilee Debt Campaign and Erlassjahr.
Pacific Islands are facing a serious debt crisis that has been worsened by the Covid-19 pandemic and the resulting shutdown of the tourism industry. The average debt-to-GDP ratio for Pacific states has risen from 32 per cent before the pandemic to 40 per cent now. Clearly, this month's unprecedented debt conference in Suva, Fiji, was sorely needed.
On 5-8 April, the Pacific Island Forum Secretariat and the UN Economic and Social Commission for Asia and the Pacific, along with Fiji and Tuvalu, hosted the conference, which brought together Pacific Island governments and their creditor nations. The conference was aimed at finding solutions to both the debt and climate crises, and was crucial to establishing the link between the two. As research shows, the rising rate and intensity of extreme weather events make the Pacific’s debt situation ever more precarious. The International Monetary Fund considers these debt loads to be manageable. What really makes Pacific-watchers nervous is the fact that climate-related extreme weather events are bringing further hits to Pacific economies and making the debt situation worse.
Natural disasters do terrible damage to infrastructure such as roads, buildings, schools and power lines. These need to be repaired and disaster-proofed before the next storm, cyclone or flood. But Pacific Islands should not be expected to take out loans to pay for climate disaster repairs and resilience—that is both a morally indefensible and an economically incoherent solution. After all, Pacific Islands did not cause the climate crisis. Their creditor countries did.
So, what should be done?
The first solution would be an automatic response to natural disasters that also addresses debt questions. This would be a two-pronged response:
- First, an immediate suspension of debt repayments for a defined period—say two years;
- Second—and this is critical—use those two years to negotiate debt restructuring and, where necessary, cancellation.
Second, Australia and other high-income countries should support Pacific-led climate initiatives such as The Pacific Resilience Facility (PRF). The PRF was set up in 2021 with the intention of raising $1.5 billion from donor countries in a pledge round later this year. Crucially, because the PRF gives grants through disbursements that come from the interest earned on the capital base, it does not create debt.
The PRF’s list of intended projects consists of emergency centres, new jetties, navigation lanes, quarantine centres and other small scale, town and village-level projects. These will enrich both the formal and informal economies simultaneously.
We might contrast the PRF to the Australian Infrastructure Financing Fund to the Pacific (AIFFP), to which the Australian government recently doubled its budget allocation. Some AIFFP projects are for renewable energy including hydro and solar, but very few are for adaptation or improving resilience of existing infrastructure. A much better use of Australian funds would be to invest in the PRF.
Third, we need to think more ambitiously about loan-free finance for loss and damage. At Glasglow last year, high-income countries renewed their commitment to giving $100 billion in climate finance to lower-income countries. In reality, this is just a portion of what vulnerable countries, including small island states, need.
The China-Solomons deal has focused Australian attention on the Pacific, and there is an opportunity for the Australian government to act as a better neighbour in the region. Australia should show leadership by making generous pledges to Pacific Islands at the G20 and COP meetings in Bali and Egypt this year—and in doing so make it clear that small island states in the Pacific are a priority of ours.
In the meantime, Pacific Islands might consider setting up vehicles for receiving debt-free finance to deal with climate related loss, damage and adaptation measures such as a scaled up PRF or a separate, Pacific-controlled grant-making institution.
Finally, there needs to be a more comprehensive solution to Pacific debt. Many of the talks at the conference advocated debt-for-climate swaps and for Pacific Islands to seek help through the G20’s Common Framework.
The Common Framework is, however, not working. Only three countries out of dozens that are in precarious debt situations have applied for 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 ratios fall from 75% in 2006 to 40% in 2012.
A new HIPC-type scheme, similar to the proposed Debt Relief for a Green and Inclusive Recovery, could incorporate a multidimensional vulnerability lens for access to the scheme and focus on green recovery programs rather than poverty reduction alone.
As for debt swaps, we should be realistic about what they can achieve. My organisation was involved in advocating for Australia’s first and only debt swap, the Debt2Health agreement with Indonesia. We know that debt swaps can be effective in helping mobilise additional finance for development and for climate, but the evidence is mixed when it comes to their ability to reduce debt burdens. Moreover, China, the largest bilateral creditor to the Pacific, has not shown much interest in them.
The debt conference was clearly an important first step. It is now up to Australia and other creditors to ensure that we find proactive solutions to the intertwined challenges of debt and climate change in the Pacific.
Photo by Timothy Ah Koy on Unsplash