Towards a multidimensional vulnerability index

Most Small Island Developing States (SIDS) are still not eligible for concessional financing because they are classified as middle- or high-income countries. But they are more vulnerable than income data alone might suggest. SIDS face severe structural challenges due to their remoteness, economic concentration, and dependence on external flows such as remittances, foreign direct investment, and tourism revenues. The COVID-19 pandemic has greatly exacerbated these vulnerabilities by restricting travel, collapsing investment and tourism, and weakening the economies from which remittances are sent. This paper constructs a multidimensional vulnerability index (MVI) to account for both longterm structural vulnerabilities as well as the recent weaknesses uncovered by the pandemic. Using 11 indicators for 126 countries (including 34 SIDS), the MVI demonstrates that all but 5 SIDS are far more vulnerable than their income level would suggest. Using the MVI, estimate that non-LDC SIDS would save close to 1.5% of GDP annually if their long term external public and publicly guaranteed (PPG) debt was funded at the same average interest rate of LDC-SIDS. This analysis implies the urgent need to reconsider eligibility for concessional financing to SIDS on vulnerability rather than just income criteria.