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Environmental vulnerability and debt sustainability in the Caribbean: do we have enough tools to address catastrophic risk?

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UNCTAD
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Key points

• The increasingly frequent occurrence of natural disasters due to climate change put the debt sustainability and socioeconomic stability of vulnerable developing countries at risk.

• The international community should review and enhance the tools available to such countries to maintain debt sustainability and mobilize resources for climate change adaptation and developmental transformation.

• Measures should include the review of the criteria for the prioritization of official development assistance and concessional lending, the improvement of insurance schemes and the establishment of a global disaster mechanism under the auspices of the United Nations.

The devastating impact in the Caribbean region of the hurricane season in 2017 has put the spotlight on the wide-ranging consequences of environmental vulnerability in developing countries. Rather than being an exception, these types of events are expected to become more frequent and intense due to climate change. In this context, limited capacity to mobilize domestic resources, combined with insufficient multilateral financing facilities, create conditions in which developing countries may be unable to adequately invest in climate change adaptation needs and catastrophic risk insurance. Consequently, large-scale natural disasters put the environmental, economic and social viability of environmentally vulnerable countries at risk. The international community should therefore review the tools available to address catastrophic risk, in order to support successful climate change adaptation in developing countries. This policy brief analyses the interplay of such economic dynamics in the Caribbean.

Introduction

The economic impact of climate change is set to increase over the next century, along with the growing frequency and intensity of climate-related natural disasters. In this regard, countries in the Caribbean are particularly vulnerable, as highlighted during the recent hurricane season. The longterm environmental challenges faced by these countries are compounded by high levels of external economic vulnerability and public debt.
These factors combine to create a vicious cycle. Countries in the Caribbean recurrently use public debt to absorb the impact of external shocks and natural disasters.
In turn, higher levels of public debt constrain capacity to effectively address vulnerabilities. As a result, each new wave of shocks and disasters simultaneously amplifies vulnerabilities and weakens domestic response capacity.