January 16th, 2022.

News of the Tsunami hitting Tonga after the volcanic explosion is just reaching the UK. I sincerely hope that the nation and people can recover and the death toll (if any) is low.

By raising the following issues, I am not being unsympathetic, but being 12,000 miles away hope that I can give a dispassionate assessment of the situation.

I see that Australia and New Zealand are in the process of assessing what aid is needed and the means of delivering that aid to the islands. I would like to see what aid comes in from China.

Tonga is already heavily indebted to China and is in danger of defaulting on its loans.

It is forecast that in a couple of years nearly 16% of Tonga’s GDP will go to servicing these loans. Much of Tonga’s income comes from remittances from Tongans living and working in Australia and New Xi-land New Zealand. (37.16% in 2019 according to the World Bank).

After the 2006 riots destroyed downtown Nuku’alofa it was rebuilt with loans from China, starting the increasing dependence of Tonga on China.

The riots in November 2006 caused the destruction of a significant portion of Nuku’alofa’s CBD, following which the government took up a USD$119 million loan for the reconstruction effort.

Repayment had been deferred to this year upon the request of Tonga’s government.

This week, prime minister ‘Akilisi Pohiva said government would start repaying the principal loan with provision in this year’s budget.

According to him, government had in the meantime paid around US$16 million in interest.

Mr Pohiva said Tonga would keep on asking China to divert the loan into a grant.

Source RNZ,  4:10 pm on 13 July 2018

The International Monetary Fund (IMF) country report on Tonga in December 2020 basically said that Tonga’s risk of default on all foreign loans was high.

The risk of debt distress rating for Tonga has been maintained at high. Tonga’s indebtedness has gradually declined since end-FY20152 as a much-needed fiscal consolidation started in FY2016 and continued through FY2020 notwithstanding the Covid-19 pandemic. The present value (PV) of the external debt-to-exports ratio is expected to temporarily breach the indicative threshold under the baseline scenario in FY2021 mainly due to the decline of exports triggered by the pandemic. Moreover, without new grant commitments, both external solvency indicators (i.e., the PV of the external debt-to-GDP ratio and of the external debt-to-exports ratio) are expected to breach their respective thresholds under the baseline scenario starting in FY2029, reflecting the deteriorating fiscal position due to the pandemic, large spending needs, lower grant inflows as existing commitments are fully disbursed, and rising debt repayments to multilateral development banks and China Eximbank over the medium- and long-term.

Furthermore, Tonga’s debt obligations are largely external, and half of its total public debt is to China, with a sharp spike in debt repayments due from FY2024 onwards. Total public and publicly guaranteed (PPG) external debt stood at USD184 million (about 36 percent of GDP) as of end-June 2020, accounting for 85 percent of total public debt. Outstanding debt to all multilateral creditors stood at USD75 million (about 15 percent of GDP), some 41 percent of the total external debt stock. The single largest creditor remains the Export-Import Bank of China (China Eximbank) accounting for 58 percent of total external debt stock. Tonga started repayments to China Eximbank in FY2019 with larger repayments coming due starting in FY2024.

In an ominous statement the IMF stated The years FY2021–24 are assumed to be disaster-free to simplify the policy discussion of the near-term outlook. From FY2025 onwards, the baseline incorporates the average long-term effects of natural disasters and climate change by lowering annual GDP.

Source IMF TONGA STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION AND REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS. December 18, 2020.

All this has implications for Tonga. Where is the immediate aid going to come from? Will China give aid, free from conditions? Will they restructure the current debt? Where are the funds for reconstruction going to come from?

Given the reliance of Tonga on remittances, where are the funds coming from to service current debt and pay for any reconstruction needed to repair any damage from the Tsunami? Any aid or grants given by China has been given without strings, unlike Western democracies who generally link aid to requiring changes in civil society, extension of democracy etc. On the other hand, whilst giving aid relatively free from strings, China also gives loans free from any social change requirements. They do however extend loans on commercial terms which may be demanding in interest levels and repayment requirements on default – “The Debt Trap”. Any restructuring of debt under these conditions may require political considerations in return.

Whilst offering humanitarian support to the islands, the situation offers a golden opportunity for New Zealand, Australia, and the USA to recover lost ground in the Pacific, diplomatically and economically. If they can resist the temptation to link aid and reconstruction funds to stringent conditions regarding reform and civil society conditions, then they have a golden opportunity to push back against Chinese influence in the South Pacific whilst providing much needed humanitarian support to Tonga.

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Dr Lion Red

Brought up in a far-left coal mining community and came to NZ when the opportunity arose. Made a career working for blue-chip companies both here and overseas. Developed a later career working on business...