Blog: Achieving Resilient Fiscal Sustainability for SIDS

05 April 2024

A blog by Ruth Kattumuri, Mac Banda and Richard Ough from the Economic, Youth & Sustainable Development Directorate of the Commonwealth Secretariat.

The year 2024 provides a crucial opportunity to accelerate action and implementation strategies to ensure resilient fiscal sustainability and stronger risk mitigation arrangements against exogenous shocks for Small Island Developing States (SIDS). The EU Copernicus Climate Change Service evidence shows that global warming during February 2023 to January 2024 reached 1.52C. This suggests growing existential threat for SIDS with potentially frequent and more severe hurricanes. Mauritius, for example has already experienced three successive cyclones in 2024.

SIDS constitute rich cultural heritage and diversity spanning across different regions in the Caribbean, the Pacific, and Africa. SIDS have strong global interlinkages based on their heritage, culture, economic and geopolitical locations. Many are actively engaged in building resilience for adaptation and mitigation against their existential threats. Belize and Malta, for example have been diversify their tourism industries, whilst Mauritius has been undertaking economic diversification.

Furthering Fiscal Sustainability

General government debt accumulation in most SIDS is significant. During the covid-19 pandemic, SIDS registered a sharp debt increase in terms of absolute values and as a share of GDP leading to debt distress levels in some SIDS economies.  Consequently, SIDS have taken the lead in pursuing innovative financing instruments that reduce public debt and create the necessary fiscal space for essential investments, including economic diversification, especially those related to climate resilience.

The Commonwealth Secretariat is a longstanding advocate for special criteria required to support the development needs of SIDS including through the Commonwealth Universal Vulnerability Index and our close collaboration with the UN Multidimensional Vulnerability Index.

There are additional opportunities for SIDS to enhance their growth and resilience through investing in green infrastructure, innovations and digital transformations for inclusive and sustainable development. This can be done through diversifying their economies and sectors; investing in financial technologies; better mobilising domestic own-source revenue; attracting greater foreign direct investment including diaspora investment; introduction of new climate levies;  developing blended financing instruments; enhancing access to global development and climate finance; and forging strong partnerships with public, private and international financial institutions. Further, enhancing regional and inter-regional collaborations will enable the development of resilient infrastructure and strengthen integration with global value chains.

Concurrently SIDS require adequate and equitable financing mechanisms that are fit for purpose, recognise their extreme vulnerability and are responsive to their specific needs and contexts. Some of the recent initiatives such as the reallocation of Special Drawing Rights (SDRs) and the development of financing instruments such as the IMFs Resilience Support Trust (RST), the Loss and Damage Fund (LDF) and Debt Service Pause Clauses are positive developments. Further, the LDF should be distinguished from humanitarian and disaster management funds. Additionally, these instruments require transparent, and effective mechanisms for approval and disbursement, and adequate financing. 

Another challenge that SIDS face is the inefficient allocation of resources and the reprofiling of debt obligations. The cost of servicing high public debt has been crippling efforts to achieve the SDGs, due to the limited fiscal space that SIDS have. The Commonwealth Secretariat welcomes the Common Framework for Debt Treatment initiative to effectively alleviate debt distress and the initiatives advocated by the G20 in collaboration with multilateral financial institutions. A comprehensive approach provides opportunities to strengthen possible remedies that address resource volatility in SIDS. 

Thus there is urgent collaboration needed for fiscal sustainability for SIDS as follows:

  • Significant increase in access to Development and Climate finance. The Commonwealth Climate Finance Access Hub strongly supports SIDS with technical assistance and capacity building with accessing global climate finance.
  • As there is no ‘One size fits All’, consideration should be made to regional exposure and economic activities, for example, Pacific and Caribbean SIDS will sometimes require different and distinct solutions.
  • The ‘Pause Clause’ is a welcome introduction but more needs to be done to define pre-agreement on the terms to be built into the financial instruments at the contractual stage.
  • Debt sustainability analysis (DSA) should be fit-for-purpose and equitable by including SIDS climate change vulnerability when determining the financing envelope and debt relief measures necessary for recovery.
  • State-contingent debt instruments (SCDIs) would be important for improving effective financing and reproofing debt obligations.
  • Innovative debt swaps for resilient infrastructure development options could provide subsidies toward meeting climate goals.
  • Risk management instruments such as guarantees, and credit enhancement products have maximised leverage of public capital compared to equity and debt/loan capital. IFIs can explore options for risk-mitigating financial instruments such as guarantees, insurance and local currency hedging which can de-risk financing programmes and private sector investments.
  • Forging strong partnerships to support structural resilience for SIDS. Instruments such as SDG bonds could be helpful, and determining operational mechanisms including criteria such as Economic, Social and Governance (ESG); as well as capacity building for strengthening institutions toward enabling access to multilateral development finance and private sector investments.
  • Adopting debt management tools such as the Commonwealth Meridian System provide a framework for comprehensive, transparent, and timely monitoring and management of public debt. Commonwealth Meridian is currently used by 24 SIDS.

The upcoming meeting of Commonwealth Small States Advocacy Champions on the sidelines of the World Bank and IMF Spring meetings, followed by the UN SIDS4 conference in Antigua and Barbuda in May holds significant promise for advancing initiatives aimed at bolstering the resilience of these gems in our oceans.