TACKLING THE 'COST OF CAPITAL' CRISIS IN SMALL VULNERABLE NATIONS

This policy brief builds upon previous work conducted by the Resilient and Sustainable Islands Initiative (RESI) concerning debt sustainability in Small Island Developing States (SIDS). The findings highlight that, despite individual differences and regional variations, SIDS collectively bear some of the highest debt burdens among developing countries. This situation is partly attributable to challenges in accessing concessional financing. Many SIDS rely heavily on official development assistance (ODA), yet several are no longer eligible, and the number of ineligible states continues to grow. The study reveals that, unlike other countries where external shocks typically lead to liquidity challenges, SIDS are facing prolonged issues of debt sustainability that are exacerbated by recurring and intensifying climate-related shocks. This scenario is further complicated by the high cost of capital that SIDS encounter when seeking funds for relief, recovery, and long-term development efforts. This policy brief outlines how reducing the cost of capital in SIDS can free up finance for climate resilience and ultimately reduce aid dependence. Measures needed to achieve this include a SIDS credit guarantee mechanism and strengthened debt negotiation capacity.