Increasingly a number of Pacific island countries are falling victim to predatory lending. An increasing amount of government revenues are being diverted to service debt repayments. The proportion of revenues may appear relatively low, but the monetary amounts are significant for small and fragile economies
Key messages:
- the Pacific has witnessed a sudden increase in borrowing to pay for ill-considered infrastructure projects
- much of the lending has been based on flawed analysis – the pacific can’t afford to keep making these mistakes
- tolerance for debt must be a lot lower – economies are too small and fragile to continue taking on more loans
- the rising cost of servicing debts means governments have less money to spend on services such as health and education
This discussion paper argues that there should be high-level talks with donors and multilaterals to see if bad loans can be effectively re-financed on a country-by-country basis. This, accompanied by grant-based budget support, itself linked to meaningful structural and institutional reform, would help avoid the real prospect of the financial collapse of several Pacific island states. If Pacific countries are to continue to develop, massive infrastructure investment is necessary, but it cannot be funded entirely by debt. The returns are too small, and the cost of failure too high. Moreover, without committing to long term maintenance requirements and funding these massive infrastructure investments will only end up as liabilities for Pacific governments