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

This paper examines the effectiveness of debt relief on external debt dynamics in response to large-scale natural disasters. Using a sample of 74 developing countries over the period 1990–2018, empirical results reveal a significant increase in the debt stock 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 demonstrates that initiatives aiming at restructuring public debt, such as agreements among official creditors, play an effective role in restoring debt sustainability in the aftermath of a natural disaster, 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 to absorb near-term liquidity shocks while stabilizing debt trajectories when face value reductions are unavailable. Likewise, official development assistance (ODA) has a limited impact on the debt accumulation resulting from high-intensity natural disasters. Finally, the results underscore that countries prioritizing negotiations as part of preventive restructuring with private creditors benefit from favorable conditions in the short term, without compromising access to new sources of financing.