Financing the Transformation into the World’s First Climate-Resilient Country: The Climate–Debt Nexus in Dominica

Dominica faces a climate–sovereign debt doom loop. The resources which Dominica urgently needs to invest in becoming the world’s first climate-resilient country are increasingly being diverted to repay debts, while its borrowing costs are rising partly due to climate-related vulnerabilities, leading to the country ranking amongst the top ten most heavily indebted Small Island Developing States (SIDSs). This Chapter highlights how financial mechanisms such as debt pause clauses, parametric insurance for sovereign debt, sovereign debt restructuring, and debt-for-climate swaps could mitigate the risks associated with the climate–debt nexus, easing liquidity pressures and unlocking fiscal space to fund climate resilience projects. Nevertheless, for countries with unsustainable debt, such as Dominica, these financial instruments would need to be part of a wider package of reforms to the global debt architecture. This will require future research on how the international community can improve Dominica’s access to mostly concessional long-term financing for its climate resilience strategy. Further studies would also be needed on the necessary reforms to the global financial architecture which would support Dominica and other high-debt, climate-vulnerable countries in addressing their interlinked climate–debt nexus.