Australia and multilateral banks now dominate Pacific lending as China's role shifts

A growing share of regional support is shifting from grants to loans, led by Australia’s expanding infrastructure pipeline and the major multilateral banks. China, once the region’s largest lender, maintains low post-pandemic lending volumes.

Australia has emerged as a major lender to the Pacific. Budget support operations in PNG and a growing pipeline of projects funded through the Australian Infrastructure Financing Facility for the Pacific (AIFFP) have made it the region’s largest source of new lending since 2021, with $2.4 billion in new loan agreements signed over the period (Figure 5).

This shift deepens a broader movement towards loan financing that began with the MDBs in the late 2010s. In 2024, more than two-thirds of multilateral commitments to the region were provided as loans. The ADB and World Bank account for most of this, with the former committing a record $1.3 billion in new Pacific lending in 2024 and the World Bank stepping up its lending to PNG, Fiji, Solomon Islands, and Vanuatu. This pattern has been reinforced by intermittent large loans from the Asian Infrastructure Investment Bank (AIIB) and the International Monetary Fund (IMF).

By contrast, China’s role as a regional lender has declined significantly. From 2010 to 2019, China signed around $3.6 billion in loans to Pacific countries, accounting for more than one-third of all lending deals in the region and making it the region’s largest lender by total deal size (Figure 6). This translated into an average of $228 million in annual disbursements over the decade. However, since 2020, China has committed just $390 million in new loan deals, with average annual disbursements of $91 million, less than half previous levels.

Excluding budget support, lending to the Pacific by all development partners has been concentrated on infrastructure, particularly strategic infrastructure. Defined broadly as including investments in ports, airports, telecommunications networks, and power generation assets, strategic infrastructure has been the fastest-growing area of Pacific development finance over the past decade (Figure 7). Infrastructure rose from just 15% of development finance to the region in 2008 to more than one-third by 2019. Strategic infrastructure has driven much of this growth, accounting for more than half of all new infrastructure commitments since 2020. This trend reflects both the region’s substantial infrastructure financing gap and increasing strategic competition, which has seen Australia and other partners expand their engagement in a sector previously dominated by China.

The broader shift towards loans raises questions about financing adequacy, particularly as Pacific budgets come under renewed pressure from external shocks. Debt sustainability concerns are widespread but may be overstated given the highly concessional lending most Pacific countries receive, which typically carries long grace periods and low effective interest rates. In some cases, higher borrowing reflects improving fundamentals, for example when multilateral banks automatically shift financing from grants to concessional loans as a country’s debt sustainability rating improves.

Yet a trade-off nonetheless remains between managing debt risks, even on concessional terms, and meeting the region’s substantial development financing needs. That balance looks different across the region. Larger Pacific economies with broader revenue bases can potentially absorb concessional loans to meet their development needs. Smaller economies, particularly atoll and microstates, have much less scope and remain structurally dependent on grants.