Blog: Small islands need debt relief to pay for climate change

High levels of debt mean some of the countries most vulnerable to climate change can’t afford to prepare

This article was originally published by the Guardian

By Gail Hurley and Nik Sekhran

When the Pacific island of Samoa hosted the United Nations’s third International Conference on Small Island Developing States (Sids) in September 2014, the entire island was decorated with the flags of fellow small islands and with children’s paintings of forests and marine life. Outside shops and homes banners read “welcome” and “there is hope”.

Rarely does an entire nation get behind something as wholeheartedly as the Samoans did. It was a novelty for an island nation of 190,000 to host more than 3,000 people from around the world. But Samoa’s embrace of the event was also indicative of the scale of what is at stake. Climate change threatens to not only undo years of development progress in small islands but to potentially erase whole countries and cultures. Writing in the Guardian this summer, the Prime Minister of Samoa said simply: “we are drowning.”

Sids’ climate change adaptation needs are among the highest in the world when measured as a proportion of national output. As the United Nations Development Programme (UNDP) explained recently to the Guardian, the upfront costs of such investments are simply too high for small economies to bear.

And by almost any measure, Sids are the most heavily indebted countries in the world (although there are important differences among countries). In 2013, Sids’ debt to GDP ratios stood at, on average, 64.3% as compared to 34.4% for developing countries as a whole. In the Caribbean, debt ratios are higher still. Public debt levels amounted to, on average, over 80% of GDP in 2013.

But with small populations and limited political influence, small islands are not typically high on larger and wealthier countries’ priority lists. Less than 3% of OECD donors’ development aid is allocated to Sids, and their share has steadily declined over recent years. Aid is also heavily concentrated in just a few countries, such as Haiti, the Solomon Islands and Timor-Leste. South-South Cooperation has expanded – China has become an important provider of financial assistance in the Caribbean and the Pacific – but financing gaps are still high.

Sids are also, in many ways, success stories. Barbados and the Seychelles enjoy high per capita incomes and several – including the Bahamas, Fiji, Mauritius, and Trinidad and Tobago – rank highly on the UNDP’s Human Development Index. The flip-side is they are then locked-out of concessional finance (loans extended at below-market rates). Many Sids must rely on private finance to meet fiscal deficits and fund development. Such sources of funds, however, are more expensive, short-term, volatile, and may not expand opportunities for real sustainable development.

Many Sids experience increasingly frequent extreme weather events, resulting in serious development setbacks and heavy reconstruction costs. In 2004, Hurricane Ivan caused damage estimated at over 200% of GDP in Grenada, and in the same year, the Indian Ocean tsunami left some parts of the Maldives almost entirely submerged. With climate funds so desperately needed but incredibly complex to access, the conditions for a perfect storm in the form of high public debt are created.

So what can be done? The UNDP works with partners around the world to draw attention to these realities, and to explore constructive solutions.

We believe that for some countries, comprehensive debt relief will be required in order to restore debt sustainability. The details of such a debt relief programme still require further work, but we can draw on valuable lessons learned from the Heavily Indebted Poor Countries (HIPC) Initiative, which recently expanded debt cancellation to some of the world’s poorest countries. Debt swaps for climate change adaption may also be useful to some Sids, as they attempt to increase spending in invaluable areas such as marine conservation. Of course, debt cancellation should be additional to development aid and not detract from the resources available to other developing countries.

We also believe we need to take another look at the rules on eligibility for concessional finance. We ask whether it is appropriate for countries disproportionately exposed to extreme weather events and climate change to rely on more expensive and volatile sources of funds. Should we not also take countries’ vulnerabilities into consideration? And if so, how?

It will also be important to think about how the international community can simplify access to climate finance in the future so that small countries (as well as the poorest) are not overwhelmed. And are there innovative financial products and services which could be useful and made available to Sids?

In the run-up to the third UN conference on financing for development which will take place in Addis Ababa in July 2015, we will be working with other partners, such as the OECDCaricom, the Pacific Island Forum Secretariat and the Commonwealth Secretariat to look at how we can improve the current financing for development architecture for small island economies. We warmly welcome inputs from other stakeholders as we collectively explore all the options on the table. As proud custodians of some of the world’s most precious natural resources, our oceans (and more), the fate of small island developing states concerns us all.

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