We present a dynamic small open economy model to explore the macroeconomic impact of
natural disasters. In addition to permanent damages to public and private capital, the disaster
causes temporary losses of productivity, inefficiencies during the reconstruction process, and
damages to the sovereign's creditworthiness. We use the model to study the debt sustainability
concerns that arise from the need to rebuild public infrastructure over the medium term and
analyze the feasibility of ex ante policies, such as building adaptation infrastructure and fiscal
buffers, and contrast these policies with the post-disaster support provided by donors. Investing
in resilient infrastructure may prove useful, in particular if it is viewed as complementary to
standard infrastructure, because it raises the marginal product of private capital, crowding in
private investment, while helping withstand the impact of the natural disaster. In an application
to Vanuatu, we find that donors should provide an additional 50% of pre-cyclone GDP in grants
to be spent over the following 15 years to ensure public debt remains sustainable following
Cyclone Pam. Helping the government build resilience on the other hand, reduces the risk of
debt distress and at lower cost for donors.
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