Why do we need an MVI for vulnerable countries?

While the vulnerability of countries has been recognised since the beginning of development economics as a major challenge, it has become a stronger concern in recent decades with the increasing consequences of other types of shocks and global challenges, including climate change.

Climate-related disasters have almost doubled over the last twenty years, and resulting in increased inequalities within and between countries, with those contributing least to global emissions often experiencing the worst effects of the climate emergency.

The World Bank estimates that extreme weather is responsible for annual consumption losses of US$520 billion globally and (pre-COVID 19) pushed 26 million people into poverty every year.

COVID-19

Vulnerable countries were unprepared for the multidimensional impact of the global pandemic. Many SIDS, for example, had not recovered fully from the global financial crisis of 2008–2009 with economic growth rates averaging 0.65% a year in the following decade. When COVID-19 struck, they found themselves needing to tackle the serious economic and social repercussions of pandemic control measures.

Lockdown and physical distancing had a severe impact on business, pushing up unemployment across all sectors, and the fiscal measures instituted to alleviate the economic consequences have made access to finance even more difficult given the rising debt burdens of these countries.

Tourism decimated

Tourism income is the mainstay of many SIDS, and the significant revenue losses during the pandemic precipitated gross domestic product (GDP) declines in some SIDS of as much as 7.9%. Significant revenue losses and challenges were also experienced in the transportation, health and education sectors, as well as on the already-weak social protection systems. The impacts of the pandemic has required governments to shoulder huge financial costs in the form of fiscal stimuli for payroll support, grants to businesses, unemployment benefits, public assistance for those in the informal sector and other relief measures.

This has created new drivers of borrowing, at a time when the debt burden is already unsustainably high in many SIDS.

Debt

The implications of falling GDP and rising public debt, have restricted fiscal space at a time when it is most needed. The considerable debt burden of most SIDS has not been the result of fiscal slippage, rather it is largely attributable to the impact of climate change and disasters, which push up expenditures and require considerable rebuilding efforts.

While the debt burden of many SIDS is significant, the immediate concern is the high debt service costs, which limit governments’ ability to invest in implementing the sustainable development goals or the SAMOA Pathway, or address serious issues related to climate change.