The Pacific may have moved beyond the worst of the COVID-19 pandemic, but its economic consequences continue to weigh on governments across the region.

Once again, countries are facing rising debt levels.

In its 2026 Pacific Economic Update, the World Bank linked the current financial landscape to slower economic growth, narrowing fiscal space, climate disasters, high dependence on imported fuel, and an uncertain global economy.

According to Joey Tau, Coordinator of the Pacific Network on Globalisation (PANG), the region’s current debt problem must be understood historically and structurally.

“Over the past two decades, both internal and external developments have challenged the economic structures of Pacific Island states,” Tau states.

The region operates within a history of colonisation and has long been characterised as a group of “underdeveloped” small island states “faced with economic challenges”.

“It is under these conditions that debt has been something inherited from our colonisers, and we continue to struggle with.”

Public debt obligations

“Many Pacific Island countries continue to face challenges in meeting their debt obligations,” says Adam Wolfenden, PANG Deputy Coordinator.

The issue of public debt in the region is a serious concern, with “real-world implications” for the diversion of public funds away from other essential services.

The issue should not be reduced to simply “debt-trap diplomacy”.

According to Wolfenden, the terminology and implication that only certain donors are using funds for influence can distract from deeper questions about how borrowing is used to develop economies. It can also distract from how debt obligations impact public spending and economic sovereignty.

The region’s debt picture is mixed. The World Bank reports that average public debt-to-Gross Domestic Product (GDP) ratios declined modestly in 2025, with the average falling by 1.8 percentage points.

Between 2023 and 2025, the number of countries assessed at high risk of overall debt distress fell from five to three. However, four countries remain at high risk under the broader debt vulnerability analysis.

Fiji remains a notable example. Public debt stood at around 79 percent of GDP in

2025, the highest among the 11 countries covered in the report.

While this is below its pandemic peak, the World Bank notes that progress towards stabilising the country’s debt has stalled, exposing deeper questions about Fiji’s economic make-up and need for diversification.

Meanwhile, Solomon Islands’ public debt-to-GDP ratio has nearly doubled, increasing by approximately 14 percentage points since 2022 to reach 30 percent of GDP in 2025. Ongoing elevated fuel costs will continue to further strain government spending and government deficits.

As some Pacific countries move away from grant-only financing towards a greater share of concessional borrowing, the World Bank says maintaining debt sustainability will become more difficult.

The World Bank projects public debt to rise in 2026–2027 as fiscal deficits widen and growth moderates. For countries with limited financial buffers, concessional financing from multilateral institutions may become the primary avenue for covering financing gaps, despite the additional debt burden that will accompany this.

“The geopolitical competition in the Pacific has not necessarily led to greater access to resources for the region; rather, there is a global shrinking in the grants available, shifting more countries into lending financing,” says Wolfenden.

“This results in increased pressure on Pacific economies and political positioning.”

At the same time, he argues that development finance cannot be separated from strategic interests.

“Infrastructure investments are often associated with, or facilitate access to, raw materials in the region.”

“This can result in financing infrastructure that has a distinct dual-use, providing the donor government with more power over the loan recipient.”

“Donors may differ in the mechanisms for providing funds, but there is a shared understanding that debt creates opportunities for influencing the region.”

To illustrate, Wolfenden mentions that Australia’s development assistance is shifting to securitisation, compared to how the United States’ is withdrawing from the region while continuing to weaponise its trade policy. Such approaches “further undermine the Pacific.”

Who Benefits?

“Borrowing is important, but are we borrowing for the sake of actual tangible development?” asks Tau.

“As small island developing states, are we put in a position that encourages ongoing borrowing, so it becomes a habit where your economy is dependent rather than looking at other options?”

“It all comes down to the priorities and plan behind the borrowing,” he says.

Tau argues that instead of allowing external interests to determine national spending priorities, fiscal planning should “equate to human development, ensuring that infrastructure services are not just accessible to its urban centres, but basic services reach its rural majority.”

“Citizenry budgeting is necessary to establish whether public resources are being directed towards what communities actually need rather than depending on what a government chooses.”

“It needs to be people informing priorities.”

Regional responses

Climate change continues to damage infrastructure and place additional pressure on public finances.

In Tonga, for example, the economic impact of climate-induced events is disproportionately large, with the annual average loss estimated at TOP 178 million (USD 77 million), or 18.2 percent of GDP. That is more than the total education and health budgets combined.

This indicates that Tonga cannot fully absorb such losses on a yearly basis by itself.

“As the region continues to go through climate-induced impacts on infrastructure, what is the regional approach around ensuring that the Pacific doesn’t get into a debt spiral?” Tau asks.

It is especially challenging for Pacific governments facing growing spending needs while grant financing declines.

The World Bank recommends credible fiscal frameworks, stronger debt and cash management, improved revenue collection, better project selection and procurement, and more disciplined borrowing. However, these blanket suggestions aren’t always suitable in the Pacific context.

The World Bank also warns that climate adaptation, resilient infrastructure, water, energy, transport, and public services will require substantial financing.

This creates a difficult balance.

While grants are preferred, borrowing may be necessary to establish the infrastructure needed for economic growth potential. However, borrowing can leave governments more exposed to future crises, with excessive debt obligations undermining spending on other components of a growing economy, such as health, education, and targeted supports.

The World Bank therefore points to integrating disaster-risk financing and climate adaptation into fiscal planning.

For Tau, however, the response also needs to extend beyond national fiscal planning to regional mechanisms that can help countries absorb financial shocks caused by climate change.

“We will incur unprecedented or unprojected expenditure, and we have to be prepared for it,” he says.

 “We have to create an environment and facilities that, one, address this issue, but also sustain the region.”

Sovereignty and looking ahead

Ultimately, the Pacific’s debt challenge is a question of economic sovereignty. It asks whether Pacific governments have the space to determine their own development priorities and fund them without interference.

Wolfenden highlights the need for “greater economic and energy sovereignty in the region” in the face of inherited debt, global uncertainty, an erratic United States administration, the global fuel crisis, and climate change.

Tau similarly warns that the region’s sovereignty, including its ownership of state-owned enterprises, resources, access to resources and islands, is at risk if development priorities are not focused on long-term wellbeing.

“Fiscal policies need to project the realities of the economic status of a country. That means ensuring the wellbeing of its people first and foremost,” he says.