Overview

  • Small states face unique development challenges. Due to their small population (i.e., those with a population of 1.5 million or less) and economic base, these countries are particularly vulnerable to exogenous shocks, such as natural disasters and climate change. With limited economic opportunities and significant migration, they often face capacity constraints.

    The Small States Forum (SSF) is an important platform for high-level dialogue on how the World Bank Group (WBG) can help to address small states’ special development needs. The SSF comprises 50 members, including 42 countries classified as small states according to the World Bank definition and eight countries with relatively larger populations that share similar challenges.

    While sharing common challenges, the SSF is a very diverse group. There is high variation among members in terms of population size, income levels, geography and other features that result in a wide spectrum of development outcomes. A few examples are provided below:

    Population - Many SSF members are micro states (i.e., with a population of less than 200,000 people). Population size ranges from 10,000 people in Tuvalu to 2.9 million people in Jamaica.

    Geography - SSF countries are distributed across all regions and about two thirds are island states. The remaining one third includes five land-locked countries (Bhutan, Botswana, Lesotho, the Kingdom of eSwatini and San Marino).

    Remoteness - Several small states, particularly islands, are among the most remote in terms of distance to the nearest international markets (e.g., Pacific islands).

    Land area - A number of island states have a very small land area (e.g., Nauru has 20 square kilometers), while non-island states such as Namibia and Botswana have 4.5 and 3.1 times the area of all small island states combined, respectively.

    Fragmentation and dispersion - Some countries are archipelagos dispersed over a broad ocean area (e.g., Kiribati has an area of 810 square kilometers distributed in 35 atolls/islands spread over 3.6 million square kilometers of ocean).

    Vulnerability to natural disasters and climate change - Many small states are disproportionately vulnerable to a range of natural disasters, particularly those located in disaster-prone areas. About one third of small states are highly vulnerable to climate change, including rising sea- level and droughts.

    Debt burden - Significant growth volatility, relatively slower growth and weak fiscal management have contributed to substantial debt accumulation in many small states. Debt levels for these countries are on average higher than for other developing countries, although there is considerable diversity across individual countries. 

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    In light of these unique challenges, small states do not easily fit the standard development model where low-income and IDA-eligible countries become middle-income and IBRD states, and then transition to self-sufficiency and graduation. Instead, many small states find themselves caught in a gap between eligibility for concessional financing and self-sufficient capacity to take on sustainable financing at market interest rates. To meet small states’ unique constraints, international development institutions need to develop innovative solutions tailored to address their interrelated development and financing issues. The World Bank is committed to doing just that.

    Last Updated: Oct 10, 2019

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    Photo by Tom Perry, World Bank
    Strategy 
    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
    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.

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    • 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 15 million in IDA18, resulting in a massive scale up in IDA18 to US$2.1 billion.
    • With the recent re-classification of Fiji, there are 24 IDA-eligible SSF members of which 17 are Small Island Economies (SIEs) that receive IDA Credits on the most concessional lending terms that IDA offers, Small Economy Terms—at no interest, 40-year amortization, with a 10-year grace period. These countries will continue to receive Small Economy Terms in IDA19.
    • In IDA18, Small Economy Terms were extended to Small States that are not islands. Four Small States benefitted (Bhutan, Djibouti, Guyana, Timor-Leste). These four countries will continue to receive IDA Credits on Small Economy Terms during IDA19.
    • In terms of actual financing, total IDA commitments (including IDA financing windows) to the IDA-eligible SSF members increased from $604 million in IDA15 to about $1.2 billion in IDA17. As of August 31, 2019, actual IDA financing to SSF members stood at over $1.7 billion, including country allocations and other IDA financing windows.

     

    IBRD Financing of Small States

    Twenty-three SSF members have access to IBRD financing, of which 16 countries are IBRD-only SSF members and seven SSF members have access to both IBRD and IDA resources (Blend Countries). IBRD lending commitments to SSF between FY15-20 is $1.7 billion. In per-capita terms, Gabon has been the top IBRD borrower ($789), followed by Jamaica ($295) and Montenegro ($223). Some eligible small states do not borrow from IBRD because they may require credit enhancements (Nauru), or have limited borrowing headroom.

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    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. 

    Developing Innovative Disaster and Climate Financing Mechanisms

    The Bank Group is working with small states to develop innovative 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.

    Since its introduction in IDA 15, the IDA Crisis Response Window (CRW) has provided additional resources totaling $354 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 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. 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

    In March 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. Pursuant to the revised policy, Fiji was reclassified as an IDA-eligible country effective July 1, 2019.

    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.

    IFC is supporting economic diversification and building resilience in sectors such as finance, infrastructure, agriculture, tourism and services. IFC also offers various de-risking and credit-enhancing tools, and MIGA provides political insurance, especially in fragile states. Under its Small and Medium Enterprise (SME) Facility, IFC, in collaboration with the World Bank 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, 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: Nov 20, 2019



LENDING

Small States: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments


In Depth

Small States Forum 2018 - Building Resilience and Connectivity

This Forum fostered knowledge exchange on: disaster risk management and debt management in the face of shocks and technology, innovation and connectivity.

World Bank Group Engagement with Small States: Taking Stock

A stocktaking of World Bank Group activities, programs, lending, and trust funds targeted at small states.

Small States Clustered Country Program Evaluation

World Bank Engagement in OECS, Pacific Island Countries, Mauritius, the Seychelles, Cabo Verde, and Djibouti

Towards a Blue Economy: A promise for sustainable growth in the Caribbean

Better understanding of challenges and opportunities for a blue economy in countries that share the Caribbean Sea