Staying afloat: ensuring public debt sustainability in the Pacific islands

Excerpt from unescap.org

The risk of public debt distress is considerably high in almost all Pacific small island developing States (PSIDS). The debt levels in most PSIDS were on a rising trajectory since early 2010s and are projected to increase further in the coming years. More recently, the COVID-19 pandemic and the multifaceted implications of the Russia-Ukraine conflict have aggravated the public debt situation in PSIDS. Several potential solutions need to be considered and adopted simultaneously on urgent basis. These include measures to strengthen fiscal positions and debt management, explore various deficit and emergency financing avenues, and pursue debt relief measures with the support of creditors and multilateral development partners.

Creditors and multilateral development partners can do more

Since the pandemic began in 2020, PSIDS have benefited from some support provided by the international community. Through the G20-led Debt Service Suspension Initiative (DSSI), the potential debt service savings in Fiji, Papua New Guinea, Samoa and Tonga are estimated at 0.3-2.8 per cent of GDP in 2021. PSIDS also received $430 million following a new allocation of special drawing rights by the IMF in August 2021 to help developing countries meet their external debt service payments.

Despite these measures, creditors and multilateral development partners can take at least three further actions to ensure public debt sustainability in PSIDS.

First, generous debt relief should be considered. During 2020-2021, deeper economic contractions in PSIDS, relative to other Asia-Pacific subregions due to the pandemic, mean that many vulnerable households are being pushed back into extreme poverty. It is also worth highlighting that PSIDS contribute only marginally to climate change but are heavily affected by climate-induced natural disasters.

Much of the government debt in PSIDS are external debts owed to the Asian Development Bank and China. Even before the pandemic, China helped ease debt burden for its debtors by cancelling about $3.4 billion of loans to Africa. Similar treatment may be considered for PSIDS where public debt owed to China is around $1.6 billion or less than 1 per cent of what the global economies owe to China.