Around the world, small island developing states are facing an escalating crisis fueled by unsustainable debt repayments, exorbitant borrowing costs, and geopolitical competition. Despite an eagerness to invest in sustainable development at home, they are at the mercy of richer countries – and a changing climate.
MALÉ – A perfect storm is brewing over the tranquil blue waters of the world’s most picturesque islands. From the Caribbean to the Indian and Pacific Oceans, small island developing states (SIDS) are facing an escalating crisis fueled by unsustainable debt burdens, exorbitant borrowing costs, and geopolitical competition. Of the Climate Vulnerable Forum’s 68 member states, one-quarter are islands, and many are in or near debt distress, impeding their ability to invest in essential services, such as schools, hospitals, and roads.
This debt crisis has multiple causes. As the United States and Europe hiked interest rates to tackle inflation after the pandemic, investors poured into safe, relatively higher-yielding bonds in the West and avoided riskier investments in developing countries. And as developing countries were forced to refinance debt at the higher rates, they suffered huge capital outflows. At the precise moment when poorer countries were trying to stage a recovery from the pandemic and make a once-in-a-century switch to clean energy, the cost to borrow on international markets skyrocketed, and the money left for domestic priorities plunged.
Climate change makes all this worse. Many SIDS are on the front lines of rising sea levels, increasingly severe hurricanes, heat waves, water shortages, mass coral bleaching, and other climate risks. Climate-driven disasters not only damage supply chains and infrastructure; they also force SIDS to borrow heavily for reconstruction and adaptation. The result is a vicious cycle that forces already poor countries to accumulate more debt, even as their repayment capacity shrinks.
Nearly all SIDS economies rely on imported fossil fuels, including to generate electricity. Owing to fossil fuels’ price volatility, that electricity often is expensive, further draining public finances and foreign-currency reserves. But because higher borrowing costs have made financing for investments in renewable energy inaccessible, many SIDS are left with no other option.
Consider the following real-world example. When Germany recently tendered for a solar-power project, bids came in from interested companies pricing the project’s cost at $0.04 per kilowatt-hour of electricity produced. But in my country, the Maldives, solar bids typically come in at $0.15 per kWh – four times the price.
Nor do the difficulties stop there. High debt levels, a recent history of political instability, and the hangover from the pandemic have led ratings agencies to lower the Maldives’ credit rating to junk status. Commercial loans now carry eye-wateringly high interest rates. As the cost of capital has skyrocketed, even for public investments, most solar projects have become non-starters.
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Our predicament is not unique. Investors tend to perceive almost all SIDS as risky, given their high debt levels, political instability, weak legal systems, and currency risks. These factors all drive up risk premiums, often putting the costs of clean-energy projects out of reach.
Few outsiders understand how central the energy transition is for island states. For all the reasons outlined above, SIDS leaders are desperate to reduce their fossil-fuel imports and switch to renewables. Yet they are hamstrung by a global financial system that discourages them from taking decisive action.
Acknowledging this problem, the heads of both the International Monetary Fund and the World Bank recently called for debt relief for developing countries to help them quickly install clean energy. The message is welcome, but insufficient. SIDS also need development banks to help by underwriting the risks of clean-energy projects and reducing the cost of capital. Without such support, the vision of a sustainable, carbon-neutral future that most SIDS share will remain unrealizable.
Compounding these economic challenges is an increasingly polarized geopolitical environment, with SIDS increasingly finding themselves in the crosshairs of great-power rivalries. These tensions sometimes bring opportunities as richer countries compete for influence. Too often, however, SIDS are offered aid or investment only if they accept terms that will weaken the integrity of their political institutions and undercut their long-term interests.
Such geopolitical maneuvering tends to destabilize smaller players by turning them into pawns in a larger game. SIDS must navigate this terrain carefully to ensure that they do not trade long-term sovereignty and long-term stability for short-term gains.
We need an equitable and sustainable global financial system that does not penalize the most vulnerable. At the Climate Vulnerable Forum, we are demanding basic climate justice. Surely everyone can agree that those who contributed the least to the problem should not be left to shoulder the burden of adaptation and mitigation on their own.
We are also calling for an international system in which smaller countries’ rights and interests have the same weight as those of large countries. As the secretary-general of the Climate Vulnerable Forum, I urge global leaders to recognize the unique challenges faced by SIDS. We want to be able to contribute to climate-change mitigation, instead of being shackled by economic conditions that exacerbate our vulnerability. But that will require restructuring debt to sustainable levels, and unlocking affordable capital for clean energy and infrastructure. Given rising debts, rising geopolitical tensions, and rising sea levels, the future of the world’s paradise islands hangs in the balance.
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MALÉ – A perfect storm is brewing over the tranquil blue waters of the world’s most picturesque islands. From the Caribbean to the Indian and Pacific Oceans, small island developing states (SIDS) are facing an escalating crisis fueled by unsustainable debt burdens, exorbitant borrowing costs, and geopolitical competition. Of the Climate Vulnerable Forum’s 68 member states, one-quarter are islands, and many are in or near debt distress, impeding their ability to invest in essential services, such as schools, hospitals, and roads.
This debt crisis has multiple causes. As the United States and Europe hiked interest rates to tackle inflation after the pandemic, investors poured into safe, relatively higher-yielding bonds in the West and avoided riskier investments in developing countries. And as developing countries were forced to refinance debt at the higher rates, they suffered huge capital outflows. At the precise moment when poorer countries were trying to stage a recovery from the pandemic and make a once-in-a-century switch to clean energy, the cost to borrow on international markets skyrocketed, and the money left for domestic priorities plunged.
Climate change makes all this worse. Many SIDS are on the front lines of rising sea levels, increasingly severe hurricanes, heat waves, water shortages, mass coral bleaching, and other climate risks. Climate-driven disasters not only damage supply chains and infrastructure; they also force SIDS to borrow heavily for reconstruction and adaptation. The result is a vicious cycle that forces already poor countries to accumulate more debt, even as their repayment capacity shrinks.
Nearly all SIDS economies rely on imported fossil fuels, including to generate electricity. Owing to fossil fuels’ price volatility, that electricity often is expensive, further draining public finances and foreign-currency reserves. But because higher borrowing costs have made financing for investments in renewable energy inaccessible, many SIDS are left with no other option.
Consider the following real-world example. When Germany recently tendered for a solar-power project, bids came in from interested companies pricing the project’s cost at $0.04 per kilowatt-hour of electricity produced. But in my country, the Maldives, solar bids typically come in at $0.15 per kWh – four times the price.
Nor do the difficulties stop there. High debt levels, a recent history of political instability, and the hangover from the pandemic have led ratings agencies to lower the Maldives’ credit rating to junk status. Commercial loans now carry eye-wateringly high interest rates. As the cost of capital has skyrocketed, even for public investments, most solar projects have become non-starters.
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Project Syndicate is returning to Climate Week NYC with an even more expansive program. Join us live on September 22 as we welcome speakers from around the world at our studio in Manhattan to address critical dimensions of the climate debate.
Register Now
Our predicament is not unique. Investors tend to perceive almost all SIDS as risky, given their high debt levels, political instability, weak legal systems, and currency risks. These factors all drive up risk premiums, often putting the costs of clean-energy projects out of reach.
Few outsiders understand how central the energy transition is for island states. For all the reasons outlined above, SIDS leaders are desperate to reduce their fossil-fuel imports and switch to renewables. Yet they are hamstrung by a global financial system that discourages them from taking decisive action.
Acknowledging this problem, the heads of both the International Monetary Fund and the World Bank recently called for debt relief for developing countries to help them quickly install clean energy. The message is welcome, but insufficient. SIDS also need development banks to help by underwriting the risks of clean-energy projects and reducing the cost of capital. Without such support, the vision of a sustainable, carbon-neutral future that most SIDS share will remain unrealizable.
Compounding these economic challenges is an increasingly polarized geopolitical environment, with SIDS increasingly finding themselves in the crosshairs of great-power rivalries. These tensions sometimes bring opportunities as richer countries compete for influence. Too often, however, SIDS are offered aid or investment only if they accept terms that will weaken the integrity of their political institutions and undercut their long-term interests.
Such geopolitical maneuvering tends to destabilize smaller players by turning them into pawns in a larger game. SIDS must navigate this terrain carefully to ensure that they do not trade long-term sovereignty and long-term stability for short-term gains.
We need an equitable and sustainable global financial system that does not penalize the most vulnerable. At the Climate Vulnerable Forum, we are demanding basic climate justice. Surely everyone can agree that those who contributed the least to the problem should not be left to shoulder the burden of adaptation and mitigation on their own.
We are also calling for an international system in which smaller countries’ rights and interests have the same weight as those of large countries. As the secretary-general of the Climate Vulnerable Forum, I urge global leaders to recognize the unique challenges faced by SIDS. We want to be able to contribute to climate-change mitigation, instead of being shackled by economic conditions that exacerbate our vulnerability. But that will require restructuring debt to sustainable levels, and unlocking affordable capital for clean energy and infrastructure. Given rising debts, rising geopolitical tensions, and rising sea levels, the future of the world’s paradise islands hangs in the balance.