Pacific island nations turn to AIIB as Covid-19 sinks economies

Sydney

PACIFIC island nations are turning to China-led agencies to plug funding gaps in their pandemic-ravaged budgets after exhausting financing options from traditional Western partners, stoking fears of the region's growing dependence on Beijing.

The Cook Islands, a tiny country of around 20,000 people in the South Pacific, turned to the Beijing-backed Asian Infrastructure Investment Bank (AIIB) late last year, after loans from the US and Japanese-led Asian Development Bank (ADB) and grant from close ally New Zealand fell short.

The US$20 million AIIB loan to the Cook Islands was the second to a strained Pacific economy in the last few months, after Fiji secured a US$50 million facility, signalling the arrival of a development bank closely linked to China's Belt and Road Initiative to the Pacific.

Vanuatu, with a population of 300,000, also announced last week that it had accepted a US$12 million grant from the Chinese government.

While most Pacific island countries have used their natural borders to combat Covid-19 infections, they have faced economic hardship given their reliance on international tourism, a sector that abruptly shut as the pandemic struck.

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China's growing reach in the region is unsettling for the US and its allies, who have been the dominant powers in the Pacific since World War II.

Despite being small, Pacific states boast strategic ports and air strips and control vast swathes of resource-rich ocean. They also represent a vote in some international forums.

Fletcher Melvin, the president of Cook Islands' Chamber of Commerce, said: "China is very willing to lend money to any Pacific island nation. As much as Australia and New Zealand have encouraged the islands to look to them first, it's been a lot easier getting money out of China."

One of the most remote outposts of World War II, the Cook Islands has a free-association agreement with New Zealand and shared citizenship, though it is its own country.

Almost a third of the Cook Islands' NZ$215 million (S$205.6 million) external debt now lies with Beijing-linked bodies, AIIB and China's Exim Bank, up from 16 per cent before the pandemic.

The Cook Islands expects to require additional borrowings of NZ$71.2 million over the next three years to cover shortfalls, documents show.

Jon Fraenkel, a professor in comparative politics at Victoria University of Wellington, said that Fiji, which has one of the biggest Pacific economies, was desperate for foreign funds after it entered the pandemic in a weak financial position.

The Cook Islands has previously defended its economic ties to China, which has funded several projects, including a water-supply system.

The ADB said in a statement that late last year, it provided an additional US$20 million loan, which was the "country limit" for the small island nation.

The New Zealand government said it provided a NZ$22 million grant through its aid programme.

After getting what it could from those sources, the Cook Islands then sought funding from AIIB, sources with knowledge of the financing talks told Reuters.

"If the AIIB becomes the primary lender to the Pacific and the region's economic recovery is driven by Chinese lending, then certainly there will be cause for significant concern that economic dependence could be exploited," said Anna Powles, a senior lecturer in the Centre for Defence and Security Studies at Massey University based in Wellington. REUTERS