Throughout the 2010s, several small island developing states (SIDS) in the Caribbean undertook substantial borrowing to finance climate-adaptation infrastructure, including sea defence walls and hurricane-resistant telecommunications networks. These projects were funded primarily through external commercial debt. However, a series of severe hurricane seasons combined with global supply chain disruptions has left several of these nations in severe debt distress.
By 2023, average public debt-to-GDP ratios across these island economies reached 95%. Crucially, economists highlight that the debt-service-to-revenue ratio has deteriorated dramatically. In the most heavily indebted SIDS, debt-servicing obligations now absorb more than 40% of all government tax receipts. This creates severe fiscal constraints, presenting a profound opportunity cost that compromises progress towards domestic public services, educational infrastructure, and poverty-reduction programmes.
With reference to Extract B, explain why 'opportunity cost' is a problem for governments of developing countries when servicing debt.
