The Australian Government is committed to deepening its engagement with the Indo-Pacific. A peaceful, stable and prosperous Indo-Pacific is in Australia’s long-term interest, but poverty, vulnerability to natural disasters and inequality threaten stability. With this in mind, the Government recently commissioned DFAT to review Australia’s development finance and to identify how it can better assist partner countries in achieving their development objectives by using new forms of finance[1]. This summary, specifically for the Pacific Island Centre for Development Policy and Research Pacific partner leaders, draws on the findings, recommendations, and implications for the region.
Key findings
- Development needs in the Indo-Pacific are growing, exacerbated by the COVID-19-related expenditure pressures: Australia acknowledges that the Pacific needs more support and funding. Pacific leaders may utilise this opportunity to access affordable funding alternatives, diversify debt portfolios or scale infrastructure projects
- Pacific urgently needs affordable, high quality and climate-resilient infrastructure: the focus of Australia’s assistance will be on climate-resilient infrastructure. This provides an opportunity for countries in the Pacific to obtain support for their infrastructure development initiatives
- Fiscal fragility and debt sustainability challenges mean grant aid and highly concessional sovereign finance will continue to be an important form of development finance for the Pacific: Australia acknowledges that government spending following the pandemic has created pressure for debt sustainability. Pacific leaders may continue to pursue concessional funding like budget support and grants to alleviate some of this pressure from the balance sheet
- Development finance expands the tools available to tailor Australia’s responses: while funding and support are appreciated, Pacific leaders should ensure policymakers build the capacity to understand how these hybrid debt instruments impact its balance sheet so that debt levels and repayment responsibilities are adequately managed.
Key recommendations
- Expand concessional assistance: broadening the use of hybrid financial instruments through existing mechanisms. Explore scaling efforts through strategic partnerships with philanthropic organisations and impact investors. Specifically for the Pacific, the review recommends that Australia continue to deploy concessional development finance for climate-resilient infrastructure
- Higher impact: Commit to introduce a requirement that new development finance investments have a gender equality objective. In addition, Australia should position itself in the region to tackle the climate challenge and broader infrastructure needs
- Strengthening reporting: Establishing an International Development Finance Advisory Committee to advise on its portfolio of development finance investments, including portfolio performance against development policy objectives. Furthermore, supporting greater transparency of Australia’s development financing through periodic public development finance update that includes reporting on development impact
Analysis – Implications for the Pacific
The review provides several implications for the Pacific:
- Concessional funding: budget support is back on the table for the Pacific. In addition, policymakers may take advantage of this opportunity by re-evaluating its infrastructure needs and collaborating with DFAT to identify new projects that can be funded or those that can be scaled through additional assistance. These programs also include capacity-building opportunities to complement the funding provided
- Impact criteria: Proposals and requests should include components of climate resilience, gender equality, and support for people living with disabilities. Funding and assistance will now include key performance indicators on these components
- Untapped pool: Southeast Asia benefits from infrastructure funding, budget support, SME finance, and renewable energy transition. The Pacific primarily benefits from the first two only. This provides an opportunity to re-evaluate SME development and renewable energy transition plans and explore how DFAT can assist in funding these programs
- Labour mobility: the scope of development finance review and recommendations does not explicitly mention support for labour mobility. The Pacific depends on remittances, a growing number sustained through the PALM Scheme. Policymakers can explore seeking additional support to strengthen pre-preparation programs and employability pathways
- Awareness: relevant government Ministries (finance, infrastructure, climate change, women empowerment, labour, etc.) should ensure they are updated with these developments, evaluations, and programs to position decision-makers to tap into opportunities as they become available.
Sakiusa Nabou, Research Assistant, PICDPR (on study leave at Griffith from Reserve Bank of Fiji).
The views expressed in this article are those of the author(s) and do not necessarily represent the position of the above-mentioned institution. For more information about Pacific Island economies, visit the Pacific Island Centre for Development and Policy Research.
[1] Full report – https://www.dfat.gov.au/sites/default/files/development-finance-review-2023.pdf
