How Has the Pandemic Affected Small Island Nations?

A hotel owner in Samoa whose operations have been halted during the pandemic (Asian Development Bank).

By Rishi Kulkarni

Island economies face a unique set of opportunities and challenges due to their often remote locations, small geographic size, and heightened exposure to the effects of climate change. The pandemic has brought about a new, but familiar set of challenges for island economies. The COVID-19 pandemic can be likened to a long, drawn-out natural disaster, which most island nations have experienced. .

The most severe problems caused by the pandemic have been a decline in tourism and difficulty in dealing with debt traps and other financing situations. Even though most island countries did a good job of containing the virus within their borders, the effects of the pandemic everywhere else in the world have reverberated through their economies and have caused harsh consequences. 

The Impact on Tourism

For most island economies, tourism is an essential staple of the economy. Overall, tourism accounts for 30 percent of GDP for small island developing states. The effects of the pandemic on tourism are clear-cut; an ongoing pandemic means that restricting travel is essential to prevent the spread of the virus. This is especially important for small islands, where higher caseloads would be difficult to manage with the sparse availability of hospital space and medical supplies. International tourism was expected to decline by 30 percent in 2020 according to the World Tourism Organization, which would deal a devastating blow to the economies of small islands. 

Declining tourism directly impacts income and employment in the hotel and transportation industries and will also cause tourism tax revenues to decrease. It is difficult to repurpose tourism infrastructure for some other use to make up for lost tourism revenue because it is so specialized. This is also a result of the difficulty of diversification in island economies. Tourism serves as an economic lifeline for most small island countries; the detrimental effects of the pandemic’s impact on tourism are further complicated by how tourism plays into foreign investment and trade deficits. 

Financing Difficulties
In island nations, the tourism sector is generally the largest recipient of foreign direct investment (FDI). This helps supplement the large trade deficit that most islands maintain; FDI from tourism counts for exports, while imports include essential goods such as food and oil. The rest of the deficit is filled by external borrowing. While tourism exports have declined, imports have remained steady because the demand for food in island countries is inelastic. Combined with inflation of food prices caused by a shock to global supply chains, this has created an increased reliance on external debt. Excessive external debt was already an issue for island nations, but the problem has worsened because of the pandemic. Now, islands have to spend a larger proportion of their revenues on debt servicing and payments. 

Additionally, many larger countries have been unwilling to lend capital since the pandemic started. This has forced island economies to resort to lending from private creditors with higher interest rates and fewer debt suspension opportunities. Small island economies are projected to need about $5.5 billion to recover losses related to the pandemic; this is a devastating cost for most countries that are already overburdened with debt. This can only be alleviated if zero-interest lending options are extended to island countries and debt payment suspension is enacted. 

Island economies have been put in a very difficult situation by the pandemic. The recovery will start when tourism begins to ramp up again, but there is no telling how long it will take for travel to return to pre-pandemic levels. One additional consideration is that the economic weakness caused by the pandemic also weakens the ability of island nations to respond to national disasters. Until the international community can mobilize more funds and ease the debt burden for small island countries, the negative effects of high external debt will continue to take their toll on these nations. As it stands, island economies are at risk of being completely overwhelmed.