Luiz Edgard Oliveira

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. These proposed financing mechanisms would allow bilateral development partners to utilize committed but undisbursed climate adaptation funds in ways that help small states reduce or manage debt servicing obligations while also supporting continued investment in climate adaptation to reduce climate vulnerabilities. Debt-for-climate adaptation swaps would see bilateral creditors pay down debt owed to multilateral creditors by small states, with small states then reallocating avoided debt repayments to climate adaptation projects and programs. Climate adaptation development policy financing would involve the provision of sector or general budget support to small states by multilateral or bilateral creditors (potentially tied to debt service or early debt repayments), conditional on implementation of policy measures to address climate vulnerability risks. In this paper we 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. We 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. We 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. We 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 (or are accompanied by) macroeconomic and structural reforms to address the underlying imbalances driving rapid debt accumulation.

Mobilizing more revenue is a priority for sub-Saharan African (SSA) countries. Countries have to finance their development agendas, and weak revenue mobilization is the root cause of fiscal imbalances in several countries. This paper reviews the experience of low-income SSA countries in mobilizing revenue in recent decades, with two broad aims: identify empirical norms of how much and how fast countries have been able to mobilize more revenue and empirical determinants (panel estimates) of revenue mobilization. The paper finds that (i) the frequency distribution of changes in revenue ratios for SSA low-income countries (LICs) peaks at a pace of about ½-2 percentage points of GDP in the short-to-medium term and at a pace of about 2-3½ percentage points of GDP over the longer term, and that (ii) almost all SSA-LICs managed to increase revenue ratios by more than 2 percentage points of GDP in the short-to-medium term, at least once in the last two decades. The sustainability of large increases in revenue ratios can be an issue, in particular for fragile countries. The panel estimates suggest that structural factors, such as per capita GDP, share of agriculture in GDP, inflation, degree of openness, and rents received from natural resources, are important determinants of tax revenue.