An Agenda for Debt Sustainability in SIDS

According to the theoretical and empirical literature, some amount of debt can be beneficial to developmental outcomes provided that the capital borrowed is productively employed, but high levels of debt tend to be deleterious to such outcomes (Tennant 2014). The now well-established debt overhang hypothesis posits that the growth-inducing benefits of low to moderate levels of external debt are eventually reversed as debt accumulates beyond a certain threshold (Deshpande 1997; Husain 1997). This threshold is theorized to occur when there is a debt overhang—the presence of debt sufficiently large that creditors do not expect with confidence to be fully repaid.