By Jonathan Barrett and Praveen Menon
SYDNEY/WELLINGTON (Reuters) - Pacific island nations are turning to the China-backed AIIB development bank to plug funding gaps in their pandemic-ravaged budgets after exhausting financing options from traditional western partners, stoking fears the region is becoming more dependent on Beijing.
The Cook Islands, a tiny country of around 20,000 people in the South Pacific, turned to the Asian Infrastructure Investment Bank (AIIB) late last year after a loan from the Asian Development Bank (ADB) and a grant from close ally New Zealand fell short, two sources with knowledge of the talks said.
The US$20 million loan to the Cook Islands was the AIIB's second to a strained Pacific economy in the last few months, after Fiji secured a US$50 million facility, signalling its arrival in the Pacific region.
The multi-lateral lender said the loans to Fiji and Cook Islands were co-financed with the U.S. and Japanese-led ADB.
"The objective is to minimise the pandemic's uncertain socio-economic impact on AIIB members given their heavy dependence on the international tourism market," it said.
Vanuatu, with a population of 300,000, also announced in January that it had accepted a US$12 million grant from the Chinese government.
While most Pacific island countries have used their natural borders to combat COVID-19 infections, they have faced economic hardship given their reliance on international tourism, a sector that abruptly shut as the pandemic struck.
China's growing reach in the region is unsettling for the United States and its allies, who have been the dominant powers in the Pacific since World War Two.
Despite being small, Pacific states boast strategic ports and air strips and control vast swathes of resource-rich ocean. They also represent a vote in some international forums.
"China is very willing to lend money to any Pacific island nation. As much as Australia and New Zealand have encouraged the islands to look to them first it's been a lot easier getting money out of China," said Fletcher Melvin, president of Cook Islands' Chamber of Commerce.
The Cook Islands became an AIIB member last year. More than 100 countries are members of the multi-lateral bank, with the noteable exceptions of the United States and Japan. China, which proposed the idea of setting up the AIIB, is the biggest stakeholder.
The lender, which began operations in 2016, is often closely linked to China's Belt and Road Initiative (BRI). The AIIB says while there is an overlap in mandates of the bank and the BRI to benefit the region, the BRI is not part of its project decisions.
One of the most remote outposts of World War Two, Cook Islands has a free association agreement with New Zealand and shared citizenship, though it is its own country.
Almost one-third of Cook Islands' NZ$215 million ($153.2 million) external debt now lies with Beijing-linked bodies, AIIB and China's Exim Bank, up from 16% before the pandemic.
Cook Islands expects to require additional borrowings of NZ$71.2 million ($50.74 million) over the next three years to cover shortfalls, budget documents show.
Jon Fraenkel, professor in comparative politics at Victoria University of Wellington, said Fiji, which has one of the biggest Pacific economies, was desperate for foreign funds after it entered the pandemic in a weak financial position.
The Cook Islands has previously defended its economic ties to China, which has funded several projects, including a water supply system. Its government did not respond to requests from Reuters for comment.
The ADB said in a statement to Reuters that late last year it provided an additional US$20 million loan, which under its internal rules took its lending to the "country limit" for the small island nation.
The New Zealand government said it provided a NZ$22 million ($16 million) grant through its aid programme. It does not provide loans to governments.
That left a funding gap, two sources with knowledge of the talks told Reuters. The AIIB collaborated with the ADB to contribute a US$20 million loan to create the financing package.
"If the AIIB becomes the primary lender to the Pacific and the region's economic recovery is driven by Chinese lending, then certainly there will be cause for significant concern that economic dependence could be exploited," said Anna Powles, senior lecturer in the Centre for Defence and Security Studies at Massey University based in Wellington.
(Reporting by Jonathan Barrett and Praveen Menon; Editing by Simon Cameron-Moore and Neil Fullick)