Charting a comprehensive financial solution for resilient prosperity
Climate-related disasters are becoming more frequent and having devastating economic and development consequences for countries like Small Island Developing States (SIDS) that are vulnerable to climate impacts. IIED and partners are supporting these countries design a multifaceted response to address the interconnected challenges of climate change, debt and investment in resilience building.
Principal researcher (climate governance and finance team), Climate Change
Despite contributing less than 1% to global greenhouse gas emissions, Small Island Developing States (SIDS) are disproportionately affected by climate change. Their geographical characteristics make them especially susceptible to disasters, whose frequency and impact have escalated dramatically.
IIED’s research in 2023, ‘Sinking islands, rising debts’ showed that from 2011 to 2022, the affected population in SIDS increased by around 120%, and deaths per million rose by about 60%.
These disasters have devastating economic consequences. SIDS constitute two-thirds of the countries experiencing the highest relative annual losses from such events, with an increase of nearly 90% of disaster-related damage as a percentage of GDP from 2011-22.
Our analysis shows that the financial stability of SIDS is further compromised by escalating debt levels.
- Over 40% are nearing or already in debt distress
- An alarming 70% surpass the debt-to-GDP sustainability threshold of 40% (with six SIDS having debt-to-GDP ratios exceeding 100%), and
- Private debt has swelled from an average of 6.47% of GDP in the 2000s to 35.85% in the 2020s, often carrying higher interest rates.
The fiscal health of these nations is also deteriorating; the average fiscal deficit widened from -2.83% during 2007-09 to -4.53% during 2020-21.
This debt crisis impacts more than just finances, it limits investment in social services, social protection and resilience-building, exacerbating poverty and inequality. Furthermore, it hampers progress towards the global Sustainable Development Goals (SDGs) by diverting funds to debt servicing.
High sovereign debts can lead to reduced investment in social protection and resilience building. This, in turn, can lead to an even larger adaptation gap. It can prevent countries from breaking out of the downward spiral of multiple disasters that causes loss and damage and further debt.
To break this cycle, sufficient government budgets need to be freed to allow them to invest in rebuilding after a disaster, enhancing long-term resilience, and thereby reducing vulnerability, limiting loss and regaining debt sustainability.
What is IIED doing?
To address the interconnected challenges of climate change and debt, IIED proposed a multifaceted response through the creation of a Global SIDS Debt Sustainability Support Service – with the goal of supporting SIDS to execute a new financial agreement for resilient prosperity.
This service directly responds to the needs expressed by SIDS at the Cabo Verde Interregional Preparatory Meeting for the 4th SIDS Conference and the Alliance of Small Island States (AOSIS) Leaders' Declaration, which calls for the establishment of a dedicated debt treatment mechanism and ex-ante financing for systemic resilience building.
The design process of the support service was launched in December 2023 at COP28. To steer and guide the design process, IIED convened a strategic advisory group under the co-chairmanship of H.E. Prime Minister Gaston Browne of Antigua and Barbuda and H.E. President Dr Mohamed Muizzu of the Maldives.
The strategic advisory group includes prominent leaders and experts such as the chair of the Alliance of Small Island States (AOSIS) and SIDS finance and environment ministers. The group also includes representatives from the World Bank, Asian Development Bank, Caribbean Development Bank and United Nations Economic Commission along with international groups and local organisations, sustainable investment firms, finance experts, credit institutions, insurance and risk management and research institutions.
Working under the guidance of group members, the Global SIDS Debt Sustainability Support Service was designed with four interconnected elements:
- Layered approach to debt sustainability – creating fiscal space
- Future protection – insurance-linked anticipatory response
- Legal advice and capacity building – design of investment products and debt negotiations, and
- Longer-term resilience investment – climate finance, resilience, blue and green bonds.
The support service was officially launched at the 4th UN International Conference on Small Island Developing States and is a central component of the Antigua and Barbuda Agenda for SIDS (ABAS), a 10-year accord adopted by the conference to deliver a resilient future for SIDS.