Co-designing a debt support service for Small Island Developing States

Despite contributing less than 1% to global greenhouse gas emissions, SIDS worldwide continue to be disproportionately affected by the climate crisis.

Due to a range of factors these small, geographically remote countries are particularly vulnerable to both climate disasters and slow-onset climate impacts.

Research by IIED shows that from 2011-22, the population affected by disasters in SIDS grew by around 120% and deaths per million rose by some 60%. In fact, SIDS make up two-thirds of countries experiencing the highest relative annual losses from such events, with disaster-related damage as a percentage of GDP surging by nearly 90% from 2011-22.

These disasters have devastating economic consequences for SIDS, many of whom already have limited resource bases. According to IIED analysis, escalating levels of debt are compromising the financial stability of SIDS, exacerbated by the climate crisis. More than 40% of SIDS are nearing or already in debt distress, while an alarming 70% surpass the debt-to-GDP sustainability threshold of 40%.

This debt crisis affects more than just finances: it limits investment in social services, social protection and resilience building, all of which exacerbates poverty and inequality. What’s more, it hampers progress towards the Sustainable Development Goals (SDGs) by diverting funds to debt servicing.

SIDS are caught in a vicious debt cycle: borrowing more and more money to pay for climate-related disasters not of their own making. Breaking free from this cycle is not just an economic imperative for SIDS, but a question of survival.

A transformative compact

Last year, IIED proposed the creation of a ‘Global SIDS Debt Sustainability Support Service’ with the goal of supporting SIDS with executing a new financial agreement for resilient prosperity. The proposal was grounded in IIED’s research, ‘Sinking islands, rising debts’, published in August 2023.

The design process for the support service began in December 2023 at COP28. A strategic advisory group (SAG) was set up to steer and guide the process: it was co-convened by IIED and co-chaired by His Excellency Gaston Alphonso Browne, Prime Minister of Antigua and Barbuda, and His Excellency Dr Mohamed Muizzu, President of the Maldives.

The advisory group membership included prominent leaders and experts, such as the chair of the Alliance of Small Island States (AOSIS), finance and environment ministers, and representatives of the World Bank, Asian Development Bank, Caribbean Development Bank and United Nations Economic Commission.

It also includes representatives of international groups, local organisations, sustainable investment firms, finance experts, credit institutions, insurance and risk management, and research institutions.

Four areas of focus

Following a series of SAG consultations, the group identified four interconnected areas of research to address the intertwined challenges of debt sustainability and climate resilience faced by SIDS. These areas would go on to form the basis of the Global SIDS Debt Sustainability Support Service:

1. Debt sustainability through a layered approach to debt management that creates fiscal space for SIDS, enabling them to redirect resources towards sustainable development and climate resilience. This includes debt relief, concessional financing and innovative financial instruments.
2. Future protection measures through insurance products and funding mechanisms that provide financial protection against climate-related losses, ensuring quick recovery from disasters without exacerbating debt situations.
3. Resilience investment by exploring new financial mechanisms and leveraging climate finance to enhance the resilience of SIDS.
4. Advisory and legal support to enhance the capacities of SIDS in debt restructuring and financial negotiations, building long-term legal and commercial skills within SIDS to navigate complex financial ecosystems.

This proposal gained buy-in and support from SIDS and a wider stakeholder base, through a series of dialogues and a side event at the World Bank Spring Meetings in April 2024.

Proposed timeline for the support service

A ‘significant milestone’

A significant milestone came in May 2024, at the 4th UN International Conference on Small Island Developing States (SIDS4) hosted by Antigua and Barbuda. There, the leaders of Antigua and Barbuda, and the Maldives, announced the groundbreaking launch of the support service.

The support service is a central component of the Antigua and Barbuda Agenda for SIDS. Co-created by IIED, it is designed to alleviate crippling levels of debt and build economic resilience among SIDS.

Describing the ‘transformative’ initiative, Antigua and Barbuda Prime Minister Browne, also the advisory group co-chair, said: “This service is a clarion call to action, uniting SIDS around a common strategy for prosperity and resilience in the face of adversity.

Maldives President Muizzu, also a co-chair, said: “The service must be SIDS-led and SIDS-owned. It must serve as a symbol of hope for sustainable development and economic growth. We must build on this foundation and ensure we harness the power of our collective resolve to chart a path towards resilient prosperity.”

Resilience and self-reliance

The Global SIDS Debt Sustainability Support Service is set to play an important role in addressing the unique challenges faced by SIDS, using the four areas of focus previously outlined by the advisory group.

The service takes a holistic approach. It places emphasis on capacity building, knowledge exchange and partnership development, in order to equip SIDS with the tools and resources to navigate their complex social, economic and environmental landscapes.

In the coming years, the support service will provide strategic advice on breaking the cycle of debt, as well as options for supporting new investment in climate-resilient infrastructure.

IIED believes it will go a long way towards addressing the full suite of financial issues facing SIDS. Importantly, it will also support SIDS to achieve their resilience goals while maintaining their self-reliance and environmental integrity.

The details of the approach are outlined in a comprehensive service design document, published to coincide with the launch. The document was authored by advisory group co-convenor Ritu Bharadwaj, team lead and IIED principal researcher.

Next steps: towards a more prosperous future

Behind the scenes, the Global SIDS Debt Sustainability Support Service has attracted praise and interest from stakeholders at multilateral level, including the International Monetary Fund.

Recently, as the result of IIED’s work on the SIDS debt service and on social protection, UN DESA invited IIED to moderate the first session of the Preparatory Committee for the Fourth International Conference on Financing for Development (FfD4), held in Addis Ababa, Ethiopia, in July 2024. IIED was also asked to organise a side event on the SIDS debt service, as part of FfD4.

In addition, a technical background note on debt sustainability and SDGs investment, prepared for FfD4, remarked that the support service “could be one model for, or the kernel of, a new facility… that supports a broader group of countries”.

As part of the operational phase for the support service, IIED published a paper on credit ratings in July 2024. Meanwhile, IIED recognises that significant cooperation is needed to put the support service into practice. As SIDS leaders decide how best to set it up, IIED continues to support the process, with the hope that it could be in place as early as 2025.

As Bharadwaj says: “With the ongoing support and engagement of SIDS communities, global partners and stakeholders across various sectors, the Global SIDS Debt Sustainability Support Service is expected to catalyse transformative change, ultimately driving progress towards a more resilient and prosperous future for SIDS.”