Pacific Island nations are highly vulnerable to debt distress, with Tonga carrying one of the heaviest burdens. The Pacific is the most aid-dependent region in the world, and like many countries in the region, Tonga’s limited economic capacity has forced it to depend heavily on international loans and aid. Tonga is saddled with more than $100 million in debt to China due to previous civil unrest, with repayment due by 2030.
Against the backdrop, debt-for-nature swaps present an innovative solution to not only repay Tonga’s loans but also contribute to its conservation measures. These swaps can offer Tonga significant financial benefits while channeling funds into critical environmental conservation and climate resilience projects. While this financing tool has been successfully implemented elsewhere, it has yet to be applied in the Pacific Islands. Environmental organizations and development banks seeking to enhance climate and conservation efforts through sovereign debt restructuring should prioritize Tonga.
Following the 2006 civil unrest in Tonga, the nation undertook extensive reconstruction in its capital, Nuku’alofa, where 80 percent of the city needed rebuilding. As the Tongan government sought external funding for reconstruction efforts, China offered the most substantial loan. Former Finance Minister Dr. ‘Aisake Valu Eke acknowledged that the government’s acceptance of the Chinese loan was a consequence of the dire financial circumstances created by the civil unrest, stating, “If there was no public riot in 2006, there would be no loan from China. We were forced into this situation.”
While China has begun incorporating more grant-based community initiatives into its engagement with the Pacific Island countries, it continues to offer loans for infrastructure projects, maintaining a financial approach that still carries debt-related risks. The World Bank classifies Tonga as being at a high risk of overall debt distress and it now faces one of the highest debt repayment burdens in the world relative to its GDP, largely due to loans from China. Chinese financed infrastructure projects in Tonga show alarming signs of financial strain, with 85 percent exhibiting debt distress. Tonga must repay $104 million in loans by 2030 to China, creating major financial obstacles. Although negotiations resulted in an extension of the interest-only payment period, the overall repayment deadline remained unchanged.
The prioritization of debt payments to meet the 2030 deadline has resulted in reduced funding for other areas, including conversation. As Eke, the former Tonga finance minister, stated, “Pacific countries have some of the highest costs in the world in terms of climate adaptation needs. But these are things that have to be deprioritized to deal with the debt.”
Tonga boasts a rich and diverse biodiversity, home to over 675 species of animals, more than 415 species of plants, and more than 170 species of coral. However, the World Bank has highlighted the severe pressures facing Tonga’s biodiversity and natural environment, warning of potential species loss for fish, coral, birds, and terrestrial life without robust conservation efforts. In 2022, the World Bank reported that only about 0.06 percent of Tonga’s territorial waters are designated as part of a marine protected area.
The World Wildlife Fund introduced the concept of debt for nature swaps in 1984 after recognizing that many biologically rich countries were simultaneously grappling with severe financial challenges from foreign debt. The financing tool entails acquiring foreign debt, converting it into local currency, and directing the funds toward conservation initiatives. Successful implementation thus depends on the willingness of debt-holders – whether commercial banks or governments – to sell the debt at a discounted price.
Since Bolivia carried out the first debt-for-nature swap in 1987 countries from around the world, including Gabon, the Seychelles, and the Philippines, among others, have followed suit. In December 2023, the Inter-American Development Bank (IDB) and the U.S. International Development Finance Corporation (DFC) led the establishment of a global task force with the objective of increasing the number and size of debt-for-nature swaps worldwide. The task force comprises the Asian Development Bank, the African Development Bank, France’s Agence Française de Développement, the European Investment Bank, the Green Climate Fund, and the Global Environment Facility.
Similarly, in October 2024, at the United Nations Biodiversity Conference, six environmental organizations – Conservation International, The Nature Conservancy, The Pew Charitable Trusts, Re:wild, The Wildlife Conservation Society, and the World Wildlife Fund – acknowledged the high costs of combating biodiversity loss and climate change and united to promote debt-for-nature swaps as a key solution.
Despite workshops and conferences highlighting this financial tool, and even the International Monetary Fund signaling its usefulness in the Pacific Islands, there have no concrete steps from key stakeholders to move beyond discussion and actually implement it in the region. Given its debt to China, Tonga serves as a prime candidate in the region to undertake a debt-for-nature swap deal.
This debt restructuring tool would offer Tonga significant benefits. First, it would improve liquidity, allowing the government to allocate more resources toward education, healthcare, and infrastructure. If the current trajectory holds, at its peak, Tonga will dedicate more than one-fifth of its non-aid government income to debt repayment. Tonga’s financial situation has “increased the risk of disruptions to essential services and declining living standards, particularly for the most vulnerable.”
By lowering its debt ratio, Tonga would also strengthen investor confidence and improve its creditworthiness, making it a more attractive destination for external financing and private sector investment. This, in turn, would increase its access to capital, allowing the government and businesses to secure funding for long-term economic development projects. Greater investment opportunities would help fuel job creation, which is particularly critical as the COVID-19 crisis and the 2023 volcanic eruptions reshaped the employment landscape, industry priorities, skills, and working conditions.
Additionally, debt restructuring can reduce exposure to foreign currency risk, minimizing trade losses due to exchange rate volatility. In 2023, Tonga’s total trade volume was $279 million, underscoring the need for financial strategies that protect against currency fluctuations in a small economy.
Lastly, enhanced conservation efforts toward the country’s ecosystems protect biodiversity, maintain ecological balance, and safeguard the environment for future generations. This is crucial, given that, as previously noted, Tonga is home to more than 1,250 species of animals, plants, and coral combined, showcasing its rich biodiversity. Increased funding for local sustainable development would promote economic growth while minimizing environmental impact.
Tonga, burdened by a significant debt load primarily from China, faces a critical juncture. While China has altered its approach in the region, the legacy of past debt-financed projects continues to hinder the country’s development and exacerbate its vulnerability to climate change. Moreover, excessive financial dependence on China leaves Tonga open to bullying and coercion, whether through political influence, economic exploitation, or pressure to enter military agreements that may not align with its national interests. If China refuses to sell the debt at a discounted price and Tonga spirals into a severe debt crisis, Beijing would face significant international backlash for exacerbating the financial distress of one of the Pacific’s most vulnerable nations.
Development banks and environmental organizations should prioritize a debt-for-nature swap deal with Tonga as it is a promising pathway for the nation to alleviate its debt burden, enhance environmental conservation, and improve its long-term resilience. Successful implementation in Tonga could serve as a model for other debt-distressed nations in the region, paving the way for a more sustainable and equitable future.