Foreign Minister Nanaia Mahuta says Pacific Island nations need "debt relief" from development partners, and China has increased the region’s indebtedness.

The Government’s efforts in the Pacific have been criticised this week, as China’s foreign minister Wang Yi launched an ambitious bid to secure a wide-ranging deal with 10 Pacific nations.

The overt intention of Wang’s trip was to cement China’s position as a key development partner in the region, however details of the agreement China pitched to the Pacific countries – who declined to sign – showed it wanted to involve itself in security, law enforcement, and other aspects of Pacific life.

Mahuta, in an interview on Wednesday, said New Zealand could not compete with development partners the size of China or the United States. But she intended to advocate for Pacific nations facing high rates of national debt.

"The Pacific is becoming an increasingly contested space, there are a lot of development partners who are seeing the Pacific as strategically important.

“We have to have another conversation around economic vulnerability, the indebtedness of the Pacific, and debt relief strategies.

"I'm talking in general, about all development partners. China in the way that they provide concessional loans have increased the level of indebtedness, I'm sure, at a regional level.”

The Government promised $75 million in budgetary support for Pacific Island nations facing “fiscal crises” in the 2022 Budget. This was in addition to $325m in Covid-19 economic support provided to the region’s countries since the pandemic began.

Mahuta said New Zealand's total spending across the Pacific was $590m in 2021/22, and $524m in 2020/21.

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"This has been a really difficult time for them, and we need to support their ability to keep the backbone of their economy still turning over as they were awaiting the opening of borders.”

She said the Government would rather invest in development projects, rather than paying off countries’ debt, and a regional debt relief strategy was needed.

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"There needs to be a strategic conversation around debt relief, especially for development partners who are interested in partnering into the Pacific.

"The way that we provide development assistance is by way of grant rather than loans, and we are sensitive to the level of indebtedness that the Pacific (nations) have.”

Rising levels of debt across the Pacific have been front of mind for the Pacific Island Forum, which held a conference on the issue in April.

A research paper put together for the forum’s conference showed, for some Pacific nations, debt has escalated in recent years due to the cost of natural disasters and the pandemic.

In 2021, Fiji had debt equating to 86.7% of GDP. Samoa was at 49%, Tonga at 46.3%, and Cook Islands at 45.7%.

By comparison, the most recent Treasury forecasts have New Zealand's debt as growing to 19.9% of GDP in 2023/24, before it decreases.

Tonga, Samoa, and Vanuatu​ are among the heavily indebted to China. Tonga owed more than 50% of its public debt to China.

The forum’s paper said Pacific debt was primarily held by international institutions and countries including Australia, New Zealand, Japan, and China.

“Terms on such loans tend to be very favourable, although strings may be attached and, in some cases, lending through PPPs [public-private partnerships] may be opaque and costly.

Before the pandemic, Pacific nations were considered by the International Monetary Fund and World Bank as being of “high risk of debt distress” due to their limited access to financial markets and the low capacity of their public institutions.

The Pacific Island Forum was expected to hold a meeting of regional leaders in July.