Prime Minister Jacinda Ardern talks with Fijian Prime Minister Frank Bainimarama during the Pacific Islands Forum in 2019. Photo / Supplied.
The Government set aside $75 million in Budget 2022 to help Pacific island countries avoid debt crises similar to what is playing out in Sri Lanka.
But Treasury warned that funding might not be enough, and said New Zealand needs to be ready to stump up more money to help Pacific island nations grapple with potential debt crises.
That warning has been echoed by many Pacific island countries, who recently convened a conference to highlight the risk elevated debt levels pose to their countries.
In the wake of the pandemic, Pacific island nations grappled with severe fiscal and economic crises, in part thanks to the damage done to tourism, a key industry in many islands. New Zealand sent FJ$58.9 million ($42.2m) to the Fijian Government last year to assist with its budget, just shy of the FJ$61.3m ($43.1) sent the year before (Australia sent just over twice as much each year).
This sort of aid is not unprecedented, but it is unusual. Usually, governments fund individual aid projects rather than just handing money over to the government to be spent in its budget.
Treasury identified there was a "risk" more money could be needed to support "Pacific Fiscal Crises", beyond the $75m set aside this year.
"The Government is committed to strengthening the long-term resilience of Pacific Island countries, while responding to the immediate impacts of Covid-19 and has been providing emergency budget support (including $75 million allocated in Budget 2022) through grant financing to Pacific Island countries facing fiscal crises due to the continuing impact of Covid-19," Treasury warned in Budget documents.
"This enables Pacific Island countries to lead their own Covid-19 response and recovery without increasing their debt. The need for, and scale of, additional emergency budget support depends in part on the countries' domestic revenues and may exceed what is provided for in the fiscal forecast," it said.
The warning came from the Budget Economic and Fiscal Update, one of a pair of forecasts published each year by Treasury.
These forecasts look at costs the Government is likely to incur in the future.
Treasury also publishes a list of "risks" to those forecasts, which detail possible alternative scenarios that could upend the Treasury's basic assumptions of what will happen in the coming years. These are not "risks" to the Crown's solvency, but risks that things might not pan out quite as forecast.
Answering the call for more funding for the Pacific was one such risk. Treasury first sounded the alarm in its December 2021 forecasts.
A spokesperson for Mfat confirmed the outlook for Pacific fiscal crises had worsened as global interest rates rise with higher inflation.
While the payments are not unprecedented, it would be unusual for New Zealand to be effectively subsidising the functioning of a foreign government for an extended period of time.
The payments have widespread support. National leader Christopher Luxon told the Herald on Wednesday he was broadly supportive of the aid spend.
"That is important. It is more important that we work out what is needed and we support those goals," Luxon said.
The Greens went further, with foreign affairs spokeswoman Golriz Ghahraman saying the Government should look at lifting the debt of developing countries.
This is difficult for New Zealand, as the Government does not currently hold the debt of any Pacific country.
"Lifting developing world debt … has become critical now in the Pacific," Ghahraman said.
"The impact of Covid has been on the collapse of economies in that area rather than sickness itself. We need to lead in a way that empowers the Pacific rather than to get into a power contest with China," she said, when asked about China's growing diplomatic push in the Pacific.
Ghahraman said New Zealand should be talking to international organisations about debt cancellation.
"We haven't seen New Zealand leading on talking to our partners, the IMF or the World Bank on cancelling their debt. We know this is really high-cost debt," she said.
Debt is firmly on the agenda in the Pacific.
In April, the Pacific Islands Forum convened a conference on debt management, where Pacific Island finance ministers and heads of government warned that high debt levels could become unmanageable - particularly as interest rates rise.
One of the countries to be hardest hit was the Cook Islands, which experienced an estimated peak-to-trough fall in nominal GDP of close to 32 per cent during the pandemic, despite the Government supporting the economy with a stimulus package of 20 per cent of GDP.
Those debts, and the costs of servicing them as interest rates rise, have the Pacific spooked. Cook Islands Prime Minister Mark Brown told PIF's debt conference the pandemic had required $228m in borrowing, which had doubled net debt to 43.5 per cent of the Cooks' GDP
Brown told the conference those costs were going to be a problem, as they would "severely impact our capacity to invest in, let alone maintain our infrastructure and will be a dampener to our attempts to fast track economic growth".
"It will hamper our efforts to meet mounting social obligations as prosperity levels drop," he said.
A spokesperson for Mfat said the Government was aware of elevated debt risks, and the threat this poses to the ability of governments in the Pacific to provide services to their citizens.
"There continues to be uncertainty about the scale of the ongoing economic impacts of the Covid-19 pandemic in the Pacific region," the spokesperson said.
"The potential impacts include elevated debt risk and a reduced ability to provide basic services, which in turn can impact on recovery, social cohesion and stability. Aotearoa New Zealand will consider additional financing to support economic recovery where it is needed," they said.
"The Covid-19 pandemic has had an unprecedented economic impact on the region and so New Zealand's response is tailored to this crisis.
"New Zealand has for many years worked with a number of Pacific countries on economic reform including the provision of budget support and we would see this continuing as they recover from the impacts of this crisis," they said.
This is not just a problem for a relatively small pacific economy like the Cook Islands, much larger economies like Fiji are also struggling.
Ratings agencies are circling, warning governments to keep a lid on spending and strengthen their balance sheets.
Ratings agency Fitch's report on the Fijian Government's 2022 Budget warned the medium-term focus for the Government would need to be on "deficit and debt reduction", which would be "limiting" to the "government's scope to increase spending".
This creates a political problem for Pacific island countries who want to invest in social spending, without triggering a debt crisis that leads to the scenes currently playing out in Sri Lanka, where the Government recently defaulted on international debts of more than US$50billion ($78b).
The debt crisis threatens to become a diplomatic issue, with countries like Australia and New Zealand increasingly called on, and perhaps increasingly eager to spend money to ward off China's growing influence in the Pacific.
The New Zealand Defence force has a budget shortfall of $130 million.