Addressing Debt Vulnerabilities in Small States : The Potential Role of New Financing Instruments
The papers in this series aim to provide a vehicle for publishing preliminary results on Macroeconomics and Fiscal Management (MFM) topics to encourage discussion and debate. This paper explores two new financing mechanisms that multilateral and bi...
| Main Authors: | , , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/03/26067070/addressing-debt-vulnerabilities-small-states-potential-role-new-financing-instruments http://hdl.handle.net/10986/24009 |
| Summary: | The papers in this series aim to provide
a vehicle for publishing preliminary results on
Macroeconomics and Fiscal Management (MFM) topics to
encourage discussion and debate. This paper explores two new
financing mechanisms that multilateral and bilateral
development agencies could consider deploying to address
problems of debt sustainability in small states. In this
paper the authors provide an initial assessment of these
proposals, informed by analysis of small state indebtedness
and recent debt dynamics. Proposed financing instruments are
predicated on assumptions that small states face high levels
of indebtedness, and that reducing debt levels while
increasing climate resilience could sustainably reduce such
vulnerabilities. The authors find that levels of
indebtedness vary widely across small states. Analysis of
small state debt dynamics shows that small state debt
accumulation has been driven by large primary and current
account deficits and slow economic growth. Debt reduction
from new mechanisms can only be expected to be sustainable,
therefore, if countries simultaneously address the
macroeconomic imbalances driving debt accumulation. The
authors demonstrate that, while exposure to natural
disasters is likely to have exacerbated economic management
challenges in some small states, such exposures are unlikely
to be the only important cause of indebtedness. The authors
conclude that proposed new financing instruments can
potentially help reduce small state debt burdens and gain
fiscal space for climate adaptation but will not present a
sustainable solution to problems of small state debt risks
unless they involve macroeconomic and structural reforms to
address the underlying imbalances driving rapid debt accumulation. |
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