The Emerging Debt Problems of Small States

image of The Emerging Debt Problems of Small States
In recent years there has been a significant rise in the indebtedness of small states. However, unlike major debtors and the Heavily Indebted Poor Countries (HIPCs), the emerging debt problems of small, mainly middle income, states have received little international recognition and attention.

Thirteen small middleincome Caribbean economies are amongst the most indebted thirty emerging market economies in the world. Similar conditions apply in a number of other small economies in Africa, the Indian Ocean and the Pacific.

Dinesh Dodhia examines the history of this indebtedness, its likely causes in different economies, and prospects for dealing with the debt problem in the future. He argues that there is a need for a comprehensive international framework to deal with it, covering:

• fiscal discipline in small states themselves

• improved debt recording and debt management

• insurance and grant financing mechanisms that respond to the challenges posed by natural disasters

• continued grant and concessional financing for small states

• adequate compensation for preference erosion, and

• support for the efforts of small states to promote private investment for diversification and growth.

This is the first substantial investigation of a newlyrecognised international problem.



Factors Responsible for Rising Debt Indicators in Small States

Box 3.1 provides an analytical underpinning explaining the rise in public debt. It shows how both endogenous dynamics (GDP growth, real interest rate and exchange rate changes) and exogenous factors (including the fiscal balance and other debt creating or reducing factors) play a role. In particular, it demonstrates the debt ratio-increasing role of fiscal deficits, and real interest rate and exchange rate changes and the debt ratioreducing role of growth of GDP.


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