Small island developing states and their vulnerability to the climate, debt and COVID-19 crisis

“We are all in the same storm, but in different boats? Undoubtedly some of us are in a leaky dorey. (…) The precarious debt position of SIDS is no secret. (…) This unsustainable position was before SIDS had to weather the pandemic and disasters during this year’s cyclone and hurricane season. This has escalated sovereign debt distress in many countries, further setting back the prospects of economic growth and sustainable development.“[1]

[1] Statement on behalf of the Alliance of Small Island States (AOSIS) under Item 19: Sustainable development, http://test.aosis.org/blog/wp-content/uploads/2020/10/5.-Sustainable-Development-incld-SAMOA-Pathway_AOSIS-Statement_Final.pdf.

Kristina Rehbein Erlassjahr Kopi

Kristina Rehbein, Director and Policy Coordinator of Erlassjahr/Jubilee Germany (Photo Erlassjahr)

Small Island Developing States (SIDS) are a diverse group of countries that share particular challenges to sustainable development. There is no universally agreed definition for SIDS. Depending on the criteria used to define SIDS, the number of countries that qualify for the definition can differ. There are seven alternative classifications from different international and regional institutions, ranging from 58 to 18 countries that are included as SIDS[1].

The main feature all share is their high vulnerability to economic and environmental shocks outside their control and their relatively poor ability to respond to such shocks. An early definition at the Rio Earth Summit 1992 describes their characteristics as “small size, limited resources, geographic dispersion and isolation from markets”, which “place them at a disadvantage economically and prevent economies of scale”[2]. More recent definitions identify the main characteristics as small population sizes and remote location from economic markets, lower economies of scale and higher costs for provision of state services, economic openness, which makes them vulnerable to external economic conditions and at the same time lack of economic diversification, slow and volatile economic growth and high environmental and climate vulnerability.[3] All those characteristics point to unique vulnerabilities that make SIDS a special case when it comes to achieving sustainable development and the special constraints they face in doing so.

[1] See a very extensive discussion on how to classify SIDS: https://dgff2021.unctad.org/un...

[2] See United Nations (1992): “Report of the United Nations Conference on Environment and Development”. Volume I No. A/CONF.151/26/Rev.l (Vol. l). Para 17.124.

[3] See Sian Herbert (2019): “Development characteristics of Small Island Developing States”, University of Birmingham, https://opendocs.ids.ac.uk/ope....

Most SIDS belong to the middle-income country category. Some even count as high-income countries, such as Antigua and Barbuda and Barbados, only very few count as least developed countries, such as Haiti and Tuvalu. Due to their income status, most of the SIDS are not eligible for concessional financing, neither have most of them been eligible for multilateral debt relief initiatives such as the HIPC initiative and MDRI, while borrowing costs are high. Given this, their special vulnerabilities have recently been at the centre of policy discussions.

SIDS vulnerability to natural disasters

SIDS are proportionally more vulnerable to natural disasters compared to other countries[1]. The Eastern Caribbean region, for example, has the world-wide highest likelihood to experience devastating hurricanes. Historically seen, countries like Antigua and Barbuda or Dominica experience a heavy storm every 7 years. In 2016, the IMF calculated that the economic cost of the average natural disaster during 1950-2014 was equivalent to 13 percent of GDP for small states, of which most are SIDS, compared to less than 1 percent for larger states[2]. If damage and losses in relation to overall economic productivity are being taken as basis for calculating vulnerability, 14 from 15 most vulnerable countries are SIDS[3]. Due to their small size, every extreme weather event almost always affects the entire country, posing a systemic risk and making it more difficult for SIDS to absorb economic losses on their own. Caribbean SIDS, given their high susceptibility to hurricanes, loose a greater share of their GDP due to natural disasters than SIDS from other regions, an average 2.8 per cent of their annual GDP.[4] Those numbers mask the massive loss and damage caused by single extreme events for these countries. Hurricane Maria, in 2017, destroyed more than 200 percent of GDP in the Caribbean country Dominica. Cyclone Pam, ravaging through the Pacific region, affected more than 70 percent of the population in Vanuatu and caused damages amounting to more than 60 percent of GDP. Just 5 years later, at the beginning of the COVID-19-pandemic Vanuatu has again been hit by a category 5 cyclone in April 2020, causing a humanitarian crisis in the country. The worst climate-related natural disasters over the last 50 years, such as storms, floods or droughts, in terms of economic damage, have almost exclusively occurred in SIDS.[5]

The macroeconomic and fiscal impact of natural disasters is multifold: from negative short-term effects on growth as damage to central infrastructure results in foregone production and output losses, declining tax revenues while at the same time expenditures rise, the need for higher borrowing due to fiscal imbalances and the generally higher indebtedness of SIDS. Some experts even find that medium- and long-term negative effects of weather-related disasters, such as cyclones, remain persistent: tropical cyclones can lead to losses that are not recovered even 20 years after the storm strikes.[6] Reconstruction is costly, diverting resources from other areas important to sustainable development. Climate change and a continued rise in global temperatures are likely to further increase the frequency and intensity of natural disasters.

SIDS vulnerability to debt crises

The increasing vulnerability to natural disasters meets most SIDS in an already dire debt situation. SIDS are among the most indebted developing countries in the world. Overall, SIDS debt levels are considerably higher compared to other developing countries. In 2019, the external debt relative to GDP accounted for 62 per cent in SIDS compared to 29 per cent in all developing countries[7]. Overall, SIDS also face a higher likelihood of debt distress compared to other developing countries. UNCTAD assesses different levels of debt distress and found a particular high-risk level in Barbados, Cabo Verde, Jamaica, Antigua and Barbuda, Dominica, Sao Tome and Principe, St. Vincent and the Grenadines, Maldives, Grenada and the Bahamas[8], considering, among other indicators, Public Debt-to-GDP and debt service to government revenues. According to the Global Sovereign Debt Monitor of Jubilee Germany, from the 38 UN members, that are classified as SIDS according to the UN OHRLLS[9], only one country has an uncritical debt situation according to a set of debt indicators[10].

Economic losses from natural disasters also have a heavy impact on the debt situation and the debt-carrying capacity of countries. Correlating the 20 countries with the highest climate-induced losses between 1998 and 2017, and the rating of their risk of debt distress according to the categories of Jubilee Germany, 17 of the 20 countries are critically indebted. 13 of them are SIDS[11]. If the average annual climate-induced loss and damage is being looked at as a percentage of total debt, it shows that extreme climate events can be important drivers of debt in vulnerable countries: For example in Fiji, annual climate-induced losses between 1998 and 2017 are equivalent to 14 percent of total debt, in the case of Dominica, the ratio is over 65 percent.[12] In Samoa for instance, after the dramatic natural disasters from 1990 and 1991, such as Cyclone Val, external debt as a percentage of GDP jumped from 60 percent in 1989 to 105 percent in 1993.[13] While the debt level in Vanuatu consistently declined between 2002 and 2013, after cyclone Pam in 2015, the debt level increased again from 20 percent to 44 percent in 2018.[14]

Besides the disproportionate impacts from natural disasters, the low economic diversification in many SIDS exposes them to the higher risk of public debt distress, given their particularly high exposure to external economic shocks. Their narrow economies made them particularly vulnerable to the global economic fallout of the COVID-19 pandemic, heavily increasing the risk of a debt crisis. SIDS are among the worst hit developing economies in economic terms: in 2020, their GDP dropped by 6.9 percent compared to 4.8 percent in all other developing countries[15]. Most of the countries with the highest drops in GDP in 2020 were SIDS, such as Barbados with a drop of 11.6 percent, the Maldives with 18.6 percent or Fiji with a gigantic 21 percent. This is mainly due to their heavy reliance on sectors such as tourism and fisheries, the former which entirely collapsed due to world-wide lockdown measures to contain the pandemic.

SIDS vulnerability to the inefficiencies in creditor-led debt crisis management

At the beginning of the pandemic, debt relief as an instrument to create additional fiscal space in support to countries to deal with the health and economic crisis, caused by the COVID-19 virus, was at the top of the political agenda. The IMF offered debt service relief through its Catastrophe Containment and Relief Trust (CCRT) to 29 poor countries. However, only three SIDS have benefited from the debt service relief from the IMF’s CCRT, Haiti, Sao Tome and Principe and the Solomon Islands. Other highly vulnerable SIDS were excluded, such as Vanuatu: In April 2020, Vanuatu was dramatically hit by the category 5 cyclone Harold. Before the pandemic, the risk of debt distress was moderate. Potential shocks that could lead to a high risk or even to debt distress were, according to the IMF, a slowdown in tourism, natural disasters in the context of climate change and lower demand from China of Vanuatuan export goods. Between March and April 2020, Vanuatu experienced all three of those shocks, threatening an appropriate response to the pandemic and damage caused by the cyclone. In 2020, Vanuatu had to repay 3 million US Dollar to the IMF. However, due to the eligibility thresholds being linked to per capita income and not the level of vulnerability and debt risks, Vanuatu, the second poorest country in the South Pacific, was too “rich” to be included in the CCRT.

In April 2020, the G20 adopted the debt service suspension initiative (DSSI) for 73 developing countries, which initially applied only to debt service payments in 2020, but was subsequently extended until end of 2021. In November 2020, the G20 furthermore decided on a debt relief framework, the Common Framework on debt treatments beyond the DSSI, to enable debt restructurings in cases, where debt suspension is not enough. Similar to the CCRT, eligibility is granted by per capita income, not according to debt problem or other vulnerabilities. The only countries which are eligible to benefit from the DSSI and Common Framework are those which either qualify for loans from the World Bank’s International Development Association (IDA), or which have the status of a Least Developed Country (LDC). In terms of SIDS, 21 qualify. However, it is questionable, whether the initiatives reach all those who need support. If the seven (in terms of economic structure and in terms of specific threats posed by external shocks relatively homogenous) Eastern Caribbean States are being taken as example, we see that the costlier countries have been excluded from the initiative: Antigua and Barbuda, Barbados (both high-income countries) and St. Kitts and Nevis were not eligible. Antigua and Barbuda would have been the country in which the DSSI would have achieved the biggest impact both in absolute terms and relative to economic output (compared to the other 6).[16]

In terms of the debt problem, the DSSI has been offered to those countries in the region which had the least critical debt situation in relation to economic output. The states of Antigua & Barbuda as well as Barbados had significantly more critical levels of debt, both internal and external, than the four which were offered the DSSI. In addition, Saint Kitts & Nevis, excluded as well, had by far the most critical indicator in terms of overall external debt. Also, when it comes to the health impact of COVID-19 as well as the economic fallout, the initiative does not reach those who need it most: Antigua and Barbuda had the highest number of infections per 100,000 inhabitants, compared to the other 6 countries in late summer 2020. All countries of the Eastern Caribbean, if in- or excluded, experienced a heavy economic slump due to the economic fallout of the pandemic. While equally affected, this does not mean that they are equally receiving relief.

“SIDS solutions for SIDS challenges” – the response from SIDS and civil society

If we take a look at national insolvency laws, it does not matter whether the insolvent debtor is rich or poor. Indeed, this would be a breach of a fundamental principle of the rule of law, namely that the application of legal standards must not depend on the repute or income of an individual. In general, it would make sense not to define specific groups of countries at all. Instead, in principle, all countries should have the possibility of access to a temporary suspension of payments in the event of a serious external shock. If at all, eligibility should be granted according to vulnerabilities and needs of a debtor. The Association of Small Island States (AOSIS) has therefore proposed to develop and utilize a multi-dimensional vulnerability index, in order to address sovereign debt challenges as well as assess the access to concessional finance. In the outcome document of the 2021 UN Financing for Development Forum, member states requested the assessment of the potential use of such an index for improving the access to concessionary financing as well as in terms of debt restructurings for SIDS.

Given the unequal treatment of countries in need and the systemic risk SIDS face, AOSIS called for action on debt relief as early as July 2020. In their statement[17], they demand a comprehensive and systemic approach, from immediate debt suspension to a debt workout mechanism in the medium term. In October 2020, AOSIS has reaffirmed the need of a new “compact” for SIDS, including access to cheaper finance and “a collective and sustainable response for addressing sovereign debt distress in the long-term”[18].

Given the lack of political action to date, such as on the limited eligibility to the DSSI and G20 Common Framework, AOSIS again called for a “systemic debt shake up” in April 2021, criticizing that “more than half of the world’s small island states don’t even qualify for this debt relief, due to outdated and illogical criterion. […] We are squeezed on all sides, yet due to the arbitrary designation of ‘middle-income’ status, many of us are told that we do not need assistance. This is ludicrous in a year when our debt-to-GDP ratios are beyond maxed out and when even in the best of times, a hurricane can easily wipe out an entire year’s GDP in one fell swoop.”[19] They call for debt suspension to be extended as long as it is needed to “come up with a fairer, more inclusive system that will help us build resilience to the effects of climate change and achieve sustainable development.”

Given the lack of political will by the international community, despite the crisis of the century, to provide quick and substantial debt cancellation in support of the recovery from the COVID-19 shock, there may be no other way for developing countries than to defend their own interests with more force. Besides the political initiatives by AOSIS, there have been others, such as from individual countries (e. g. Pakistan[20]) to other special groups of particularly vulnerable states, such as the public articulation of finance ministers of the African Union[21]. Those initiatives provide the basis for larger ad-hoc coalitions to create the momentum for more progressive change, which may also include individual progressive creditor governments. The initiatives by debtor countries deserve all the support by global civil society.

Already in 2017, the regional network Jubilee Caribbean proposed a debt relief initiative for heavily indebted Caribbean states, which suggests to transform the existing debt, i.e., the debt servicing already planned for in the public budgets, into an instrument of emergency and reconstruction aid in the event of a natural disaster. Not only Jubilee Caribbean, also UNCTAD just a few months ago[22] proposed a two-step approach, including a debt service moratorium, as well as re-assessing medium- and long-term debt sustainability in a debt restructuring procedure that would enable the entire foreign debt of the country concerned to be restructured to the extent necessary.

[1] See latest evidence in the IMF World Economic Outlook April 2021, p. 27.

[2] IMF (2016): „Small States’ Resilience to Natural Disasters and Climate Change – Role for the IMF”, IMF Policy Paper, https://www.imf.org/external/np/pp/eng/2016/110416.pdf.

[3] See erlassjahr.de (2020): „Der nächste Sturm kommt mit Sicherheit: Entschuldung als Krisenreaktion in Zeiten des Klimawandels“, p. 3, https://erlassjahr.de/wordpress/wp-content/uploads/2020/08/Fachinfo-64-Der-na%CC%88chste-Sturm-kommt-mit-Sicherheit-1.pdf.

[4] See https://dgff2021.unctad.org/si...

[5] Anja Slany (2020): “Multiple disasters and debt sustainability in Small Island Developing States”, UNCTAD Research Paper No 55, https://unctad.org/system/files/official-document/ser-rp-2020d14_en.pdf.

[6] IMF World Economic Outlook April 2021, p. 28.

[7]https://dgff2021.unctad.org/si...

[8]https://unctad.org/news/small-...

[9]https://www.un.org/ohrlls/cont...

[10] Which is East Timor. For 3 countries, no debt data was available. All other countries have a slightly critical, critical or very critical debt level: https://erlassjahr.de/wordpress/wp-content/uploads/2021/03/GSDM21-online.pdf.

[11] See Thomas Hirsch (2021): “Climate change, Debt and COVID-19 – Analysing the Triple Crisis with a New Climate Disaster and Debt Risk Indicator and Building Forward for a Resilient Recovery, Based on Climate Justice”, https://erlassjahr.de/wordpres... p. 15.

[12] Ibid., p. 16.

[13] Anja Slany (2020): “Multiple disasters and debt sustainability in Small Island Developing States”, UNCTAD Research Paper No 55, https://unctad.org/system/file..., p. 17.

[14] Ibid., p. 19.

[15] OECD (2021): “COVID-19 pandemic: Towards a blue recovery in small island developing states”, https://www.oecd.org/coronavirus/policy-responses/covid-19-pandemic-towards-a-blue-recovery-in-small-island-developing-states-241271b7/.

[16] erlassjahr.de (2020): „A debt moratorium – but for whom? How, in 2020, debt relief is not helping those who need it most”, Focus paper 3, https://erlassjahr.de/wordpres... p. 8.

[17] “AOSIS statement on debt”, https://www.aosis.org/wp-content/uploads/2021/04/200710-UN-Doc-A-74-943-Statement-on-Debt.pdf.

[18] Statement on behalf of the Alliance of Small Island States (AOSIS) under Item 19: Sustainable development, http://test.aosis.org/blog/wp-content/uploads/2020/10/5.-Sustainable-Development-incld-SAMOA-Pathway_AOSIS-Statement_Final.pdf.

[19] AOSIS (2021): Small Island States call for a systemic debt shake up at IMF and World Bank Meetings

https://www.aosis.org/release/small-island-states-call-for-a-systemic-debt-shake-up-at-imf-and-world-bank-meetings/.

[20]https://embassyofpakistanusa.o...

[21] See https://www.reuters.com/articl...

[22]https://unctad.org/news/small-...



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