Ensuring Public Debt Sustainability in the Pacific Small Island Developing States

The risk of public debt distress in the Pacific small island developing States (PSIDS) had been high even before the COVID-19 pandemic. The pandemic has further pushed up public debt levels and the trend is likely to continue in the coming years, thus putting debt sustainability at a greater risk. To ensure public debt sustainability, PSIDS can consider various policy options. Improving tax administration, introducing social/green taxes, and enhancing public spending efficiency will help address fiscal deficit, and thus debt, concerns. Development of domestic capital markets can also be explored, at least in larger economies such as Fiji and Papua New Guinea, to take advantage of innovative financing instruments and modalities for deficit financing over the long term. Prudent and effective public debt management would promote policy credibility and reduce financing costs. Finally, greater use of risk-sharing disaster financing mechanisms would help PSIDS avoid fiscal shocks and a sudden rise in debt sustainability risks. Major creditor countries and multilateral development partners can do more to support debt sustainability in PSIDS. Among others, they can (a) offer generous debt relief; (b) make the global debt resolution architecture work better and simpler for debtors; (c) fulfil their commitments on development assistance; (d) consider and support debt for climate swaps; and (d) integrate debtor countries’ vulnerability to shocks into concessional loan decisions and debt risk assessments. While this policy brief highlights various good practices on fiscal and debt policies adopted by PSIDS, more support on strengthening technical capacity and institutional quality is needed.