Debt relief instruments and external debt dynamics following natural disasters in developing countries

Abstract

This paper examines the effectiveness of debt relief in shaping external debt dynamics in the aftermath of large-scale natural disasters. Using a sample of 74 developing countries over the period 1990–2018, the empirical results reveal significant increase in debt stocks following high-intensity natural disasters. This accumulation is particularly pronounced in low-income countries, while the effects observed in upper-middle-income countries depend on the severity of the disasters. The analysis shows that initiatives aimed at restructuring public debt, such as agreements among official creditors, play an effective role in restoring debt sustainability after natural disasters, provided that a reduction in the nominal amount of debt is granted. Similarly, the study highlights the critical need to reschedule debts after natural disasters. Net Present Value (NPV)-based strategies implemented immediately post-disaster – particularly those involving maturity extensions – prove essential for absorbing near-term liquidity shocks while stabilizing debt trajectories when face value reductions are unavailable. By contrast, official development assistance (ODA) has only a limited impact on mitigating debt accumulation resulting from high-intensity disasters. Finally, the results suggest that countries engaging in preventive restructuring negotiations with private creditors benefit from more favorable conditions in the short term, without jeopardizing access to new financing sources.