Natural Disasters, Public Debt, and Fiscal Vulnerability: Evidence from Emerging and Developing Economies

Abstract

Natural disasters have become increasingly frequent and severe in recent decades, posing significant challenges to fiscal sustainability in emerging and developing economies. This paper investigates how natural disaster shocks influence public debt dynamics and fiscal vulnerability across a panel of emerging and developing countries over the period 2001–2025. Using a fixed-effects framework with Driscoll–Kraay standard errors to address cross-sectional dependence and serial correlation, the analysis examines both the direct fiscal impact of disasters and the role of initial debt levels in amplifying these effects. The results indicate that natural disasters tend to increase public debt levels, reflecting reconstruction expenditures and revenue disruptions following disaster events. More importantly, the debt-increasing effect is significantly stronger in countries with already high public debt burdens, suggesting the presence of a fiscal vulnerability mechanism in which limited fiscal space constrains governments’ ability to absorb shocks. Additional results highlight the importance of financial development and governance capacity in mitigating the fiscal consequences of disasters. These findings highlight the need for improved fiscal buffers, disaster-risk financing mechanisms, and resilient fiscal institutions in emerging and developing economies facing rising climate-related risks.