Storms and sustainability: Assessing the impact of natural disasters on debt sustainability in the Caribbean

Akeem Rahaman and Michelle Majid

Economic Analysis and Policy, 2025, vol. 85, issue C, 579-591

Abstract: The Caribbean remains one of the most vulnerable regions in the world, facing a plethora of issues including the increasing intensity and frequency of natural disasters, limited fiscal space, difficulty in accessing financing, and elevated debt levels. We formally assess the impact of natural disasters such as storms and flooding on debt sustainability using the fiscal reaction function. Our results show that debt remains sustainable when we account for natural disasters, albeit weakly. The results remain robust when we assess natural disasters with higher intensity. We attribute the favourable movement in the primary balance to the implementation of austerity measures, obtaining external aid payouts from catastrophe insurance after natural disasters, or having restricted fiscal space. For robustness, we investigate the impact of natural disasters on the debt-to-GDP ratio and find that the overall results remain consistent with the fiscal reaction function. Policy recommendations include greater adoption of credible and flexible fiscal rules, catastrophe bonds, and climate disaster clauses on financial instruments.

Keywords: Natural disasters; Hurricanes; Flooding; debt-to-GDP; Debt sustainability (search for similar items in EconPapers)
JEL-codes: H62 H63 Q54 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0313592624003606
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:85:y:2025:i:c:p:579-591

DOI: 10.1016/j.eap.2024.12.022

Access Statistics for this article

Economic Analysis and Policy is currently edited by Clevo Wilson

More articles in Economic Analysis and Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().