Tonga, a small island nation with a population of just 107,000 and GDP of $426 million, has found itself at the center of the power struggle between China and the West in the South Pacific. The country is heavily indebted to Beijing – to the tune of 24 percent of GDP – and the first payment on a loan it took out a decade ago is due next month. But it’s trying to delay the payment as long as possible, or even to avoid it completely, by banding together with its South Pacific neighbors to pressure China into forgiving the debt it holds over islands in the region. Perhaps most important, it’s being egged on by New Zealand, which over the past few months has joined Australia to try to reduce China’s economic leverage in the South Pacific.
In 2008 and 2010, Tonga took out loans from the Export-Import Bank of China totaling approximately $120 million. Since then, it has been avoiding repayment. The first payments on the 2008 loan were due in 2013. At the time, Tonga asked China to convert the loan into a grant, but China refused. $120 million may not seem like much to trifle over, especially if you are the world’s second-largest economy, but Chinese loans to Tonga are part of a much larger Chinese strategy to entrap South Pacific nations with debt. Between 2006 and 2016, China lent more than $2.2 billion to countries in the South Pacific. Letting Tonga off the hook would have set a bad precedent and, more important, eliminated China’s leverage – which was the point of the loan in the first place.
It was only after the International Monetary Fund intervened that China agreed to a five-year grace period on repayment. That grace period is up in September, and now Tonga is once again trying to get out of repaying its Chinese debt – this time, by enlisting the help of its neighbors. In advance of next month’s Pacific Islands Forum leaders’ summit in Nauru, PIF foreign ministers met in Samoa on Aug. 10. In an interview on the sidelines of that summit, published by the Samoa Observer this week, Tongan Prime Minister Akilisi Pohiva said that at next month’s meeting, he would urge all Pacific island nations to sign a statement asking China to forgive billions in debt incurred by countries in the region.
Then, on Aug. 16, New Zealand Radio reported that New Zealand’s foreign minister had made the same suggestion at the foreign ministers’ meeting last week. (It was unclear whether New Zealand was encouraging Tonga to raise the issue or merely agreeing to the Tongan proposal.) The same day, Tonga’s prime minister doubled down on his position in an interview with the Australian Broadcasting Corporation. He told ABC that Tonga was not the only country facing this issue and that only if all the region’s nations banded together might China agree to waive repayments. This suggests Australia and New Zealand are either encouraging Tonga or tacitly supporting it.
At the moment, Tonga doesn’t seem willing to simply default on its debt to China. Last month, the Tongan government confirmed that it would begin making payments to Beijing in September – totaling roughly $6 million, according to the prime minister. The Tongan government budget, published on June 30, accounts for these payments and indicates that it will see a budget deficit of $5 million next year as a result. Notably, the five-year grace period China agreed to in 2013 did not change the 20-year maturity of the loans, which means Tonga’s payments will be significantly larger than they would have been in 2013. (At that time, they would have amounted to roughly 17 percent of government revenue.)
It’s unclear whether PIF nations will decide to confront China at next month’s summit. Either way, it’ll be a busy meeting. Rumors have already been circulating that members plan to expand the scope of their security cooperation, with Australia and New Zealand leading the charge for a better framework to help manage “emerging threats.” China hopes to increase its leverage over a number of Asian countries through debt, but the goodwill that money engenders evaporates when a lender comes to collect. If China forgives the debt, it will look weak. If it stands firm, it will look unsympathetic. Australia and New Zealand, on the other hand, must ensure unanimity among PIF nations – if even one country breaks ranks, Beijing can consider its strategy a success. In this normally sleepy part of the world, the repayment of a relatively small sum of money in a relatively insignificant island nation smaller than College Station, Texas, has become part of a power tussle between China and the West for the South Pacific.