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. 

    Image

    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: Apr 09, 2019

  • Image
    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.

    Image

    • 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.

    Image
     

    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

Api


LENDING

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

*Amounts include IBRD and IDA commitments


In Depth

Small States Forum 2016 - Towards a Resilient and Equitable Future: ...

The Forum featured keynote addresses from World Bank Group President Jim Yong Kim, Minister Jean Paul Adam (Minister of Finance, Trade and the Blue Economy of the Republic of Seychelles and Chair of SSF), and UN Deputy ...

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

Additional Resources