Tonga's loans from the Export-Import Bank of China are unlikely to be forgiven or restructured, and Australian budget support is in effect covering the repayments, independent researcher Jack Salmon wrote on the Devpolicy Blog.
Salmon has worked for five years in Hong Kong and holds an MSc in International Development from the London School of Economics. His work focuses on development finance and Chinese lending in the Pacific.
Chinese assistance to the region has shifted over the past decade towards grants rather than loans, with new lending concentrated in Melanesian countries, he wrote. But for countries such as Tonga, loans taken out in the late 2000s are now entering the steepest phase of their repayment cycle.
China has cancelled a large amount of developing-country debt, Salmon wrote, but almost all of it was interest-free loans administered through the Ministry of Commerce and later the China International Development Cooperation Agency, an instrument used for smaller projects and technical cooperation.
The debt now pressing on Pacific budgets is different, he wrote. Tonga, Samoa and Vanuatu borrowed for large infrastructure, including a wharf, road networks, government buildings and the rebuilding of a central business district, financed by the Export-Import Bank of China, or Eximbank.
Beijing classes those terms as concessional: 2 per cent interest, about five years' grace and a twenty-year maturity. They fall short of the 35 per cent grant-element threshold the International Monetary Fund and World Bank use to define concessional borrowing, Salmon wrote.
Beijing subsidises the interest rate, but the principal sits with Eximbank, which carries the exposure on its own balance sheet and answers to its own financial sustainability requirements, he wrote.
Tonga is the extreme case. Its two outstanding Eximbank loans came to about 30 per cent of GDP: US$96.1 million in 2023 dollars, lent in 2007 to rebuild the Nuku'alofa central business district after the 2006 riots, and US$55.3 million in 2010 for the third phase of the national road improvement programme.
Repayments began only in the 2019 financial year, after two extensions of the grace period. Over 2024 to 2028 they are forecast to average 2.8 per cent of GDP a year, about 80 per cent of all Tonga's external debt service, Salmon wrote.
Samoa faces repayments to China averaging 1.2 per cent of GDP over the same period, about half its external debt service, and Vanuatu about 1.0 per cent. Samoa is not assessed at high risk of debt distress, while Vanuatu's external risk is rated moderate and its overall risk remains high, he wrote.
Writing off Tonga's balance would cost Eximbank little, Salmon wrote, but the bank lends on near-identical terms across dozens of countries, and forgiveness in one case would raise pressure for write-offs where larger sums are at stake. Chinese lenders also work under no comparable-treatment requirement of the kind binding Paris Club creditors.
Tonga's request to suspend its 2020 obligations under the Debt Service Suspension Initiative was accepted and extended through 2021, worth 1.4 per cent of GDP in the 2021 financial year, he wrote. The joint World Bank and IMF analysis of February 2021 shows later obligations rising instead.
In those projections, payments in the 2023 financial year rise from 0.8 to 1.1 per cent of GDP and in 2024 from 2.8 to 3.1 per cent. The arrangement deferred payments rather than extending maturities, Salmon wrote.
Canberra has provided extra budget support that helped keep Tonga's repayment schedule viable, and Tonga has asked for Australian help in seeking a restructuring from Beijing, he wrote. Australia has no more purchase on Eximbank's balance sheet than Tonga does.
Budget support is fungible, so no Australian money can be tied to an Eximbank repayment, Salmon wrote, but funding that keeps the Tongan budget solvent while 2.8 per cent of GDP a year leaves it for Beijing makes Canberra the indirect payer on debts it had no part in incurring.