NZ Minister Concerned About Pacific Debt Levels to China

FILE PHOTO: New Zealand Foreign Minister Nanaia Mahuta speaks during a session of the UN Human Rights Council, which voted to hold an urgent debate about Russia's deadly invasion of Ukraine at Kyiv's request, amid widespread international condemnation of Moscow's attack, in Geneva, Switzerland February 28, 2022. Fabrice Coffrini/Pool via REUTERS

New Zealand Foreign Minister Nanaia Mahuta has sounded a warning over debt levels among the Pacific nations, saying it is a key area of vulnerability that needs to be addressed.

Speaking to TVNZ’s Q+A program on July 17 said she was concerned about the way development in the Pacific was being funded, particularly by China.

“There’s a level of indebtedness that sits across the whole of the Pacific to financial institutions, including the way in which China has funded into certain countries,” Mahuta said. “This is a key area of vulnerability that should be addressed, and we need to find different ways to work together on the challenges that sit within the Pacific.”

Currently, the Pacific is seeing increasing levels of debt with the Economic and Social Commission for Asia and the Pacific (ESCAP) warning in April 2022 that the risk of public debt distress is considerably high in almost all Pacific small island developing states.

The Pacific Islands Forum and ESCAP recognised (pdf) that most of the region’s debt is held by China and the Asian Development Bank, with ESCAP estimating Pacific governments owed China an estimated $1.6 billion.

Beijing’s Trojan Horse Infecting Developing Countries

The comments from Mahuta come after the economic collapse of Sri Lanka, which prompted the foreign minister to warn Pacific leaders of the need to be mindful of “economic vulnerability” in their countries.

A country’s economic vulnerability has been blamed partly on commitment to Beijing’s Belt and Road Initiative, which has been promoted as a 21st Century version of the Silk Road, but has, in reality been a trojan horse for debt-trap diplomacy, according to experts.

The Centre for Strategic and International Studies in Washington D.C. explained that Belt and Road infrastructure loans are often predatory in nature, with many countries not seeing any cash flow benefits for their country. Instead, the loans are “disbursed directly to the Chinese contractor firm that implements the construction project abroad—a closed circle.”

The loans are also often compounded by high-interest rates and short repayment times. They are also frequently secured with some form of collateral (including infrastructure assets) rather than with commodity export revenue, according to David Wren of the Australian Strategic Policy Institute’s analysis publication, The Strategist.

In fact, in 2017, after the Sri Lankan government found it could not service a $1.3 billion loan from Beijing, it handed over 70 percent control of its Hambantota Port to a Chinese state-owned firm for a 99-year lease.

According to Reuters, Sri Lanka still owes China $5 billion this year on infrastructure loans; however, they note the actual figure may be double.

Strategic-Trap Diplomacy

Asanga Abeyagoonasekera, the former founding director-general of the National Security Think Tank in Sri Lanka, has tied the current crisis in his home country directly to his government’s forward-leaning embrace of China.

“Looking at the dynamics, I can clearly say that the Chinese have carried out ‘strategic-trap diplomacy’ in Sri Lanka, a more dangerous form than ‘debt trap diplomacy,” he wrote in an analysis on April 26 for the Institute for Security and Development Policy.

He argues that strategic-trap diplomacy is the next step beyond debt-trap diplomacy where Beijing influences other facets of government.

“In the case of a strategic trap, the creditor country not only focuses its assistance on credit and excessive loans but simultaneously intervenes in the nation’s human rights, political and security sphere. China offers financial loans to trap nations like Sri Lanka and offers human rights protection, support to alter the existing democratic political model towards an autocratic model and military assistance,” he said.

Abeyagoonasekera warned other Belt and Road partner governments to consider the risk of falling into the “same political-economic crisis as Sri Lanka.”

NZ Says It Will Assist Poorer Nations With Their Debt

Meanwhile, the NZ foreign minister signalled in her interview that the Ardern government would explore how it could assist Pacific nations manage their debt problems.

“We are engaging in aid approach especially when we think about the way in which other development partners fund projects in the Pacific, ” she said.

“The way New Zealand funds is largely by grant funding. We would like to see the opportunity of development partners to look towards greater coordination of its efforts.”

The Ardern government has said it will spend NZ$650 million (US$400 million) over the 2020-25 period in the Pacific, which Mahuta says could be an opportunity to explore other ways of engagement in the Pacific.