Strategy Photo by Tom Perry, World Bank
The World Bank Group has a longstanding and growing commitment to supporting small states’ development efforts. Small states are a priority for the entire Bank Group, including the International Development Association (IDA), the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA).
IDA has been the lynchpin of Bank support to small states. In recognition of their vulnerability due to small size and often geographical isolation, IDA has extended special treatment to small states in terms of access, financing volumes, and concessionality.
- IDA has been the leading multilateral provider of development assistance to small economies, accounting for 28 percent of multilateral official development assistance (ODA) to the SSF members in 2014-16.
- Small economies have been the largest beneficiaries of the past four IDA replenishments primarily due to a ten-fold increase in IDA’s annual base allocation from SDR 1.5 million in IDA15 to SDR 3 million in IDA16, SDR 4 million in IDA17, and SDR 15 million in IDA18.
- In per capita terms, IDA17 financing to eligible small states was five-times higher than to all IDA countries.
- Core allocations to the 23 IDA-eligible SSF members increased from $0.9 billion in IDA17 to about $1.8 billion under IDA18.
- Total IDA commitments to the 23 IDA-eligible SSF members increased from $604 million in IDA15 to about $1.2 billion in IDA17. Total IDA commitments to this group in the first year of IDA18 alone were $500 million.
Other new features of IDA18 include:
- The increase in the annual minimum base allocation enhances support to smaller countries, many of which are vulnerable and fragile.
- Provision of highly concessional financing terms (40-year repayment terms with 10 years grace) for all IDA-eligible small states. In addition to the small island countries that received these terms in IDA 17, four new countries benefit from the expansion of these favorable lending terms to all IDA-eligible small states: Bhutan, Djibouti, Guyana, and Timor-Leste.
- Provision of financing under the regional IDA program at terms fully harmonized with each country’s concessional core financing. This adjustment greatly benefits small states at moderate risk of debt distress, as they can access regional IDA financing on a 50/50 mixture of grants and credits. In addition, financing for the program increased to SDR5 billion.
- Adjustment to the eligibility criteria for the 20 percent cap on national contributions to regional IDA projects is linked to small state status, rather than to the size of a country’s annual allocation—that is, eligibility for the cap is extended to all small states under IDA 18. All IDA-eligible small states benefit from this more favorable leveraging formula under the regional IDA program.
- Small States Fragile and Conflict States (8 countries). Aggregate financing for these countries increased by about 250 percent, from US$0.2 billion in IDA 17 to US$0.6 billion in IDA 18.
IBRD and complementary funding
IBRD financing is available to 23 IBRD- eligible SSF countries, which include 19 small states. Total IBRD lending commitments to this group in FY15-17 amounted to over $1 billion, with Jamaica and Gabon each accounting for over one third, followed by Botswana with 10 percent. In per-capita terms, Seychelles has been the top IBRD borrower ($70), followed by Gabon ($43) and Jamaica ($35). Some eligible small states do not borrow from IBRD because they may require credit enhancements (Nauru, Palau), or have limited borrowing headroom.
Thanks to the Capital Increase policy package endorsed by IBRD shareholders in 2018, eligible small states benefit from a doubling of their IBRD base allocation and a waiver from price increases. These policies are helpful for those small states that have limited headroom to borrow from IBRD or may be too highly indebted.
Complementing IBRD and IDA resources, the World Bank acts as financial trustee for over 20 financial intermediary funds – large multilateral financial mechanisms that support global initiatives – that are available to small states eligible for IBRD and IDA support. The World Bank also acts as trustee to donor-financed resources. The WBG is working with small states to develop novel financing mechanisms for climate and disaster response. Some of these mechanisms are particularly relevant for IBRD small states that are not eligible for IDA financing. For example, the World Bank is supporting the mobilization of climate finance in small states through blue bonds, starting with a prototype of the world’s first blue bond in the Seychelles. Green bonds provide another opportunity for small states to raise climate financing. In October 2017, Fiji, a small island state exposed to floods and tropical cyclones, became the first emerging market to issue a sovereign green bond.
The World Bank also supports mechanisms to insure against the cost of natural disasters, releasing funds that would otherwise be used for post-disaster expenditure to finance long-term development instead. Regional catastrophe insurance pools allow small states to secure ex-ante cost-effective financing for a rapid response to an event, and access international insurance on competitive terms. Since its introduction in IDA 15, the IDA Crisis Response Window (CRW) has provided additional resources totaling $309 million to help several SSF members respond to a range of severe natural disasters, including tropical storms, floods and droughts. The Catastrophe Drawdown Option (CAT-DDO) is a Development Policy Financing instrument that can provide immediate liquidity to countries in the aftermath of a natural disaster. The funds are preapproved based on a sound disaster risk management program and an adequate macroeconomic framework. The CAT-DDO has been available to IDA countries starting in IDA18. The Bank has also supported the establishment of two successful regional risk insurance pools–the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI).
Small states also tap Bank-administered financial intermediary funds for climate adaptation and disaster-related assistance. The World Bank administers the Global Facility for Disaster Reduction and Recovery (GFDRR), a global partnership that helps developing countries reduce their exposure to natural hazards and adapt to climate change.
Small States Exception
On March 26th 2019, the Board approved explicit criteria for considering requests from IBRD-only Small Island Economies (SIEs) to be reclassified as IDA-eligible SIEs pursuant to the Small States Economies Exception based on the following criteria: 1) per capita income at or below the Graduation Discussion Income ($6,795 in FY 19); 2) Vulnerability to natural disasters or long-term impact of climate change; 3) limited creditworthiness for accessing commercial debt; 4) constrained access to IBRD resources.
IFC and MIGA
Private investment is a key driver of any country’s economic development. However, small states face challenges in attracting private investment due to their small market size, limited economic opportunities, and often remoteness. The Bank Group seeks to promote private investment in small states through its private arm, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) as well as by strategically leveraging IDA and IBRD financing.
Using new and existing platforms, the IFC is promoting private investment in small states, with a focus on fragile states. Under its Small and Medium Enterprise (SME) Facility, IFC, in collaboration with Treasury, has set up a risk-sharing facility in Sao Tome and Principe and plans to develop additional schemes for Cabo Verde and the Pacific Islands. Under the Agribusiness Facility, $16.7 million was invested in 2017 to support the Solomon Islands (tuna sector), Guinea-Bissau (fruits and vegetables), while in Bhutan IFC has invested in a semi-green field company to produce hazelnuts for export. IFC is also providing advisory services on Public-Private Partnerships (PPPs) to nine small states on airports, power, water and sewerage. The IFC is also leveraging the new IDA PSW, effective July 2018, including to support housing finance in West Africa (benefitting Guinea-Bissau), risk-sharing in the Pacific and a private sector telecom operator in Comoros. MIGA promotes private foreign investment through the provision of political risk insurance. MIGA currently supports projects in Djibouti, Gabon, Jamaica and Namibia.
For more information, please see the brochure World Bank Group Support to Small States
Last Updated: Apr 09, 2019