Small Island Developing States (SIDS) are the most disaster-prone countries in the world. With an increasing frequency over time, they are regularly hit by severe storms and other disasters, causing on average an annual damage of 2.1 percent of GDP.
In the aftermath of disasters, reconstruction efforts require massive financial resources which are often covered through external borrowing. On top, small countries are highly dependent and exposed to economic shocks what results in a massive drop of GDP and exports during global crisis such as COVID-19.
In order to provide policy makers with tools to maintain debt sustainability, a better understanding of the options and the complexity between disaster response and debt is required.
This paper estimates the impact of multiple disasters on debt sustainability indicators in SIDS over the period 1980 to 2018. Applying a fixed-effects and a Synthetic Control estimator, the results indicate an only weak correlation between a severe natural disaster and external debt what can be related to the restrictions of already highly indebted SIDS to access adequate financing.
The paper discusses the implications for financing stronger resilience to disasters in the future and calls for stronger multilateral cooperation and greater flexibility in the accessibility to pre- and post-disaster financial instruments.
