Just over a decade ago, deadly riots in the capital of Tonga, Nuku’alofa, destroyed much of the small Pacific nation’s central business and government districts.
Out of the rubble, the government hatched a plan to rebuild the city, including constructing a new cruise ship wharf and renovating the Royal Palace–all bankrolled by a new lender, China.
The initial roughly $65 million (7 billion yen) in Chinese lending now exceeds $115 million–almost one-third of Tonga’s annual gross domestic product–as interest mounted and the government took out a second loan for road development across the country.
An onerous principal repayment schedule starts in September that will double Tonga’s debt financing bill has left the government scrambling.
Tonga’s precarious position is indicative of a wider debt-fueled hangover hitting small Pacific economies, stoking fears the region risks falling into financial distress and becoming more susceptible to diplomatic pressure from Beijing.
In particular, the loans give Beijing a lever in one of the most contested areas in the world over recognition of Taiwan, which has strong diplomatic ties to the region.
Reuters’ analysis of the financial books of 11 South Pacific island nations shows China’s lending programs have gone from almost zero to over $1.3 billion currently outstanding in a decade.
The documents show China is now the region’s biggest bilateral lender, although Australia’s significant aid programs mean it remains the largest financial backer in the South Pacific.
Chinese loans accounts for more than 60 percent of Tonga’s total external debt burden, and almost half the external debt of Vanuatu. In dollar figures, Papua New Guinea has the biggest debt to China, at almost $590 million, representing about one-quarter of its total external debt.
“Given the vulnerabilities of their economies, given the very few sources of revenues they have, they tend to be in many cases at high risk of debt distress,” World Bank director for the Pacific, Michel Kerf, told Reuters in a phone interview.
“Their debt is reaching the limit of what would be considered sustainable.”
Tonga plans to repay principal of about $5.7 million of its China loans in 2018-19; almost doubling the country’s annual external debt service bill and representing about 4 percent of its overall budget of $135 million.
Tonga’s financial challenges have already prompted the government to withdraw from hosting the 2019 Pacific Games, an Olympic Games-style event held every four years, sparking anger and legal action from the council responsible for organizing the games in the sports-mad nation.
Lopeti Senituli, political and media adviser to Prime Minister ‘Akilisi Phiva told Reuters Tonga is still negotiating with Beijing to see if it can get its debts forgiven, but is preparing to start payments.
China has showed no signs it will forgive debt, refusing Tonga’s request to do so in 2013, although it did suspend principal repayments for five years.
By: The Asahi Shimbun
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