Tonga’s Balancing Act: Navigating a High-Stakes Debt Dilemma with China
Tonga is facing a precarious balancing act with its substantial debts to China. After a decade of delays, renegotiations, and unsuccessful discussions, the government has started repaying its hefty loans to China.
As Tonga heads towards repayment deadlines in the next five years, its debt burden is set to skyrocket, placing it among the highest in the world for debt-to-income ratio, following closely behind Bhutan, Laos, and Djibouti according to the latest report by the Lowy Institute.
Despite higher government revenues compared to other heavily indebted countries, the scale of Tonga’s repayments is overwhelming. This year, the country’s expenditure on debt servicing surpasses its health budget, with about 80% of these payments directed to China.
The amount owed to China is over US$120 million, approximately a quarter of Tonga’s annual GDP. The peak of these repayments will take up more than a fifth of Tonga’s non-aid government revenue.
Much of this debt, which needs to be cleared by 2028, is demanding severe fiscal austerity from the Tongan government. This comes at a time when Tonga is already grappling with the aftermath of the Covid-19 pandemic and the 2022 Hunga Tonga-Hunga Ha’apai volcanic eruption.
The austerity measures required to manage the debt will likely hinder Tonga’s recovery and limit crucial funding for health, education, and climate change adaptation.
The situation poses risks not only for Tonga but also for China and Australia. A debt crisis in Tonga could significantly damage China’s reputation in a region that is already cautious of its lending practices. For Australia, which has extended additional budget support to Tonga, the risks involve negative perceptions and potential over-reliance.
Tonga’s external debt originates mainly from a 2007 loan from China’s EXIM Bank, aimed at rebuilding the Nuku’alofa central business district after the 2006 pro-democracy riots. This loan significantly impacted Tonga’s financial stability, pushing its debt indicators beyond sustainable levels.
By 2011, Tonga’s external debt-to-GDP ratio, adjusted for concessionally, reached 41.5%, breaching the sustainability threshold set by the International Monetary Fund and the government’s own target.
Tonga’s efforts to renegotiate this debt, including securing extended grace periods, have only concentrated its debt repayments into an increasingly narrow time frame. Despite appeals for a meaningful renegotiation, China, by early 2023, showed no signs of further flexibility, likely due to its involvement in debt crises in other developing nations and a reluctance to set precedents.
In anticipation of these repayments, Tonga recorded five successive years of budget surpluses before the pandemic, setting up a Sinking Fund to manage the repayments. However, a series of calamities including tropical cyclones, the pandemic, and the volcanic eruption, have eroded Tonga’s fiscal reserves, presenting the country with a challenging financial situation.
China’s rigid stance on Tonga’s debt, which is relatively minor for Beijing but monumental for Tonga, reflects the larger challenges in China’s global financial engagements.
Meanwhile, Australia’s involvement is pivotal as its budget support is indirectly assisting Tonga in managing its debt repayments, thereby maintaining essential public services.
The current scenario also raises significant questions about Australia’s strategic role. Canberra’s decision to support Tonga reflects a strategic balance between assisting Tonga and managing the implications of any concessions in debt renegotiations with China.
This situation also begs the question: Where does New Zealand stand in all this, especially considering it has the largest Tongan community outside of Tonga and is Tonga’s closest neighbour?
New Zealand’s role, interests, and potential involvement in assisting Tonga through this financial challenge remain crucial aspects to consider.
In conclusion, Tonga, China, and Australia are all delicately navigating a complex debt scenario. Tonga’s vulnerability to natural disasters adds another layer of complexity to this situation.
Any new crisis in the near future could disrupt the fragile equilibrium between these three nations, altering the dynamics of this high-stakes debt dilemma.
