Small states are disproportionately vulnerable to an array of external shocks. These factors have played a major role — in Caribbean small states in particular — in constraining growth and driving up debt to unsustainable levels. Despite a decade of fiscal and structural policy reforms, debt and debt-servicing levels have remained stubbornly high and unsustainable. Recent debt sustainability analyses suggest that without unprecedented fiscal adjustment, pursuing fiscal and structural policy recommendations and complying with International Monetary Fund program conditionality will be insufficient to restore debt sustainability. New debt resolution tools are needed. Debt cancellation should be introduced as a third pillar in the international debt sustainability tool kit for the Caribbean region.
