Six Pacific countries are at a high risk of debt distress in part due to government spending to respond to the COVID-19 crisis, the World Bank said in a report on Thursday.
The report, titled Raising Pasifika, said fiscal consolidation was needed in Kiribati, Republic of the Marshall Islands (RMI), Federated States of Micronesia (FSM), Samoa, Tonga and Tuvalu because these countries lack domestic debt markets and access to international capital markets.
Among other countries in the region, Vanuatu is rated at medium risk, while Palau and Nauru’s debt is sustainable, the report noted.
“While public debt levels as a share of GDP remain modest across most of the region, the PIC9’s economic geography and volatile revenue bases mean debt distress risks remain elevated,” it said.
Debt has surged in the region since 2019 as the tourism-dependent economies were hit by COVID border closures, trade was hurt by logistical challenges and weather events caused damage. The World Bank last month said that Fiji must also take urgent action to reduce its debt burden.
Stephen Ndegwa, World Bank Country Director for Papua New Guinea & the Pacific Islands, said reducing debt, strengthening revenue and improving the quality of government spending are critical areas for Pacific countries to address.
The report said continued access to grants in line with pre-pandemic trends is also essential to find capital investment projects for sustainable development and climate resilience.
The World Bank report recommends that, together with more efficient spending, improvements to tax collection must be a priority for Pacific governments to ensure individuals and businesses are contributing their fair share to the region’s economies.
It also said that Pacific countries should allocate more to social assistance and protection measures. “These investments would help reduce poverty and inequality, while also supporting communities in tough times, including in the aftermath of climate-related disasters or major economic shocks, such as the region saw from the COVID-19 pandemic and the recent natural disasters in Tonga and Vanuatu,” it said.