debt swaps (for climate/nature/loss and damage); ii) insurance-based approaches to cover debt repayments while handling shocks; and iii) disaster clauses in borrowing terms to allow SIDS to prioritize recovery and defer debt servicing (principal and interest) to a later date (also called pause clauses). There are also proposals for parametric risk insurance to cover sovereign debt service payments in the event of a natural disaster, facilitated by a Global Fund to enable SIDS to pool risks as well as financing investments to strengthen their resilience (Bharadwaj, Mitchell and Karthikeyan, 2023).

This paper evaluates the challenges SIDS face, focusing on the nexus between vulnerability to climate change, requirements for investments in adaptation and public debt, and the implications for public policy. Vulnerability to climate change and public debt are clearly linked; one of the main reasons why many SIDS are assessed as being at high risk of debt distress in their most recent DSA is their vulnerability to large climate related negative shocks. However, that does not axiomatically mean that debt relief measures are optimal policy instruments to generate the fiscal space required to strengthen the resilience of the SIDS.

The organization of the rest of this paper is as follows: Section two examines the main climaterelated vulnerabilities of SIDS, using data from the international Disasters Database (EMDAT). It also provides an event study analysis of the macro-fiscal impact of some recent large cyclone disasters which struck SIDS in the Caribbean and Oceania. Section three discusses the investment requirements of the SIDS for adaptation to climate change, drawing on existing literature. Section four examines current levels of public debt in the SIDS and their risks of public debt distress, drawing on the assessments and data in their most recent DSAs. It also briefly examines the composition of public debt, differentiating between SIDS with higher and lower debt-to-GDP ratios. Section five discusses what type of external assistance most SIDS need to help them strengthen their resilience to climate change, and whether debt relief measures offer feasible and optimal instruments to deliver this objective. Section six provides a conclusion and main messages.

# **2. Vulnerability to climate related natural disasters**

This section examines the vulnerability of SIDS to climate change-related hazards, which is likely to increase over the long term, as the planet’s climate becomes warmer. SIDS are among the most highly exposed countries in the world to hazards from climate change (Hallegatte et al, 2018). This is illustrated by their ranking in the Notre Dame Global Adaptation Index (NDGAIN). One of the sub-indices of the overall ND-GAIN Index is exposure to climate change, which captures the physical factors external to the system that contribute to vulnerability—it is a component of vulnerability independent of the socio-economic context. Of the 192 countries ranked in this sub-index, 10 of the 19 countries in the most exposed decile are SIDS. Figure 1 shows the ranking of all of 36 EMDE SIDS which are ranked in the ND-GAIN sub-index of exposure to climate change.

3