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Overview

  • Small States face unique development challenges. Due to their small population and economic base, these countries are particularly vulnerable to exogenous shocks such as economic shocks, 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 associated with the small size of their economies and vulnerability to exogenous shocks, 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 11,792 people in Tuvalu to 2.96 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, Eswatini, Lesotho, and San Marino).

    Remoteness - Several SSF countries, 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 SSF countries 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, often associated with the impact of natural disasters and other exogenous shocks and weak fiscal management have contributed to substantial debt accumulation in many SSF countries. 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: Mar 31, 2021

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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 Financing of SSF Countries
    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 through (i) exceptional access to concessional resources, (ii) increasing financing volumes, and (iii) the highest concessionality.

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    Small Island Exception

    In 1985, the World Bank’s Board approved the Small Island (SIE) Economies Exception in recognition of small islands’ special characteristics (of size, remoteness, etc.) resulting in similar challenges to those faced by low-income countries. At the time, six Small Island Economies (SIEs) that were due to graduate from IDA were granted the Exception and remained IDA-eligible.*

    Currently, 16 Small Island Economies with GNI per capita above the IDA operational cut off receive special treatment from IDA under the exception, including 10 SIEs with IDA-only status and six Blend SIEs.**

    In March 2019, the SIE Exception Policy was revised to include (a) criteria for considering requests from IBRD-only SIEs to be reclassified as IDA-eligible; and (b) criteria for calibrating the terms on which IDA concessional resources are provided to SIEs. Pursuant to the revised policy, Fiji was reclassified as an IDA-eligible country effective July 1, 2019.

    *Dominica, Grenada, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Tonga.
    **IDA-only status (Kiribati, Micronesia, Marshall Islands, Maldives, Samoa, Sao Tome and Principe, Solomon Islands, Tonga, Tuvalu, Vanuatu); Blends (Cabo Verde, Dominica, Fiji, Grenada, St. Lucia, St. Vincent and the Grenadines). St. Kitts and Nevis (which was granted the exception in 1985) graduated to IBRD-only status in 1994.

    IDA has been the leading multilateral provider of concessional resources to small economies, accounting for 28 percent of multilateral official development assistance (ODA) to the SSF members in 2014-16.

    • Small States have particularly benefited from the past four IDA replenishments primarily due to an increase in IDA’s annual minimum 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$2.9 billion in lending commitments (including IDA financing windows).
    • With the recent re-classification of Fiji, there are 24 IDA-eligible SSF members of which 21 are Small States that receive either Grants and/or 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.
    • In IDA18, Small Economy Terms (originally applicable to Small Island Economies) were extended to the four IDA-eligible Small States that are not islands (Bhutan, Djibouti, Guyana, Timor-Leste). 
    • In terms of actual financing, total IDA commitments (including IDA financing windows) to IDA-eligible SSF members more than doubled in IDA18 relative to IDA17, increasing from $1.2 billion to over $2.9 billion. For IDA-eligible Small States, total IDA commitments more than tripled over the same period.

    IBRD Financing of Small States

    Twenty-three SSF members have access to IBRD financing, of which 16 countries are IBRD-only and seven have access to both IBRD and IDA resources (Blend Countries). IBRD lending commitments to SSF members between FY15-20 amounted to over $2.1 billion. In per-capita terms, Montenegro has been the top IBRD borrower ($898), followed by Gabon ($412) and Jamaica ($366).

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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 maturity premium increases. 

    Developing Innovative Disaster and Climate Financing Mechanisms

    The World Bank has an extensive track record of supporting the development and implementation of innovative financing mechanisms for crisis response and climate change which, given their vulnerabilities, are particularly relevant for small economies.

    Since its introduction in IDA15, the IDA Crisis Response Window (CRW) has provided additional resources totaling $399 million to help 22 eligible SSF members respond to severe natural disasters (e.g. tropical storms, floods, droughts) and currently to the unfolding COVID-19 pandemic.

    In 2018, Dominica received $50 million in CRW resources to help the reconstruction following Hurricane Maria, which resulted in damages estimated at 226 percent of GDP. Tonga also received $20 million from the CRW to address the adverse effects of the dual shocks of the COVID-19 pandemic and Tropical Cyclone Harold which devasted the island’s infrastructure in 2020.

    The Disaster Risk Management Development Policy Financing with a Catastrophe Drawdown Option (CAT-DDO) can provide immediate liquidity to countries in the aftermath of a natural disaster. As a policy instrument, it supports the systemic and institutional improvement of climate and disaster risk management through a transformative reform agenda. The funds are preapproved based on a sound disaster risk management program and an adequate macroeconomic framework. The CAT-DDO is available to both IBRD countries and IDA countries (since IDA18). In FY20, CAT-DDOs were approved for six SSF members in a total amount of $108 million.

    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). Since its launch in 2007, CCRIF has paid out US$150 million including the last pay out of approximately US$11 million for the Bahamas following Hurricane Dorian in 2019. The PCRAFI paid US$3.5 million to Tonga after Tropical Cyclone Gita in 2018.

    IFC and MIGA

    IFC is supporting economic diversification and resilience in Small States through investments in finance, infrastructure, agriculture, tourism and services. IFC’s Small States portfolio totaled $203 million in FY20, up from $169 million in FY19. The largest share of projects is going to Commercial Banking (47 percent), Microfinance (18 percent) and Tourism (10 percent), with small loan programs targeted at Small and Medium Enterprises (SMEs). Under its SME Facility, IFC, in collaboration with the World Bank Treasury, has set up a risk-sharing facility in São Tomé and Principe and plans to develop additional schemes for Cabo Verde and the Pacific Islands. Under the Agribusiness Facility, IFC has invested 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 also leverages the 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’s portfolio in Small States has increased significantly from $26 million in FY18 to $176 million in FY20. The largest portion of MIGA’s exposure is in Renewable Energy, Financial Inclusion, and Green Buildings. For Small States MIGA utilizes the Small Investment Program for projects below $10 million with no minimum project size.

    For more information, please see the brochure World Bank Group Support to Small States

    Last Updated: Mar 31, 2021

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    Impact on Small States

    While the spread of the COVID-19 infection has been contained in most Small States, the economic and social impact has been especially severe. Many small states are highly dependent on activities such as international tourism, which has sharply declined amidst the pandemic-induced global recession.

    In 2020, real GDP in Small States is estimated to have contracted between 7 and 8 percent compared to a 2.4 percent contraction in emerging markets and developing economies. Many Small States highly dependent on tourism have experienced a double-digit decline in their economic output. 

    The economic contraction has come with high social costs. Unemployment is estimated have reached 20 to 30 percent of the labor force in Small States relying on tourism. Female workers have been disproportionally affected due to their larger participation in sectors most impacted by the pandemic. 

    Moreover, the pandemic has exacerbated already high fiscal imbalances and debt vulnerabilities for many Small States, hampering their ability to adequately respond to the crisis.

    World Bank Group Response to COVID-19

    While the Bank Group has a range of crisis response financing and operational tools to support clients in addressing natural and economic shocks, the severe impact of the COVID-19 pandemic has prompted extraordinary measures. These include the rapid mobilization of IDA and IBRD financing, including through the Fast Track COVID-19 Facility (FTCF) under the Global COVID-19 Multiphase Programmatic Approach, and redeployment of resources to help respond to the crisis. The Bank is also supporting global initiatives to provide temporary debt service relief for poor countries which benefit IDA-eligible SSF countries.

    IDA. IDA is further scaling up resources to help eligible SSF countries cope with the health, social and economic impacts of the pandemic. Notably, IDA has enabled the frontloading of country allocations under IDA19 and has made available additional resources from the Crisis Response Window (CRW). Since the onset of the pandemic, IDA has provided about $64 million from the Facility to 11 SSF countries for health operations aimed at disease containment, diagnosis, and treatment while also strengthening health systems; including countries with relatively high infection rates (e.g. Cabo Verde, Djibouti, Maldives, São Tomé and Principe). The next phase of the Bank’s COVID-19 response focuses on addressing the pandemic’s economic and social impacts which have been especially severe in SSF countries highly dependent on tourism and supporting COVID-19 vaccination programs. Overall, $978 million in IDA financing has been approved to support SSF countries since the beginning of the pandemic, with $500 million geard to pandemic response.

    IBRD. With enhanced financing capacity and more affordable terms for IBRD-eligible Small States, IBRD is well positioned to help these countries respond to the COVID-19 pandemic. Since the onset of the pandemic, IBRD lending to SSF members under the FTCF has amounted to $35 million, funding health response operations in countries with relatively high numbers of cases (Suriname, Eswatini, Trinidad and Tobago). After several years of inactive lending, some IBRD-only Small States have resumed IBRD borrowing while others with active IBRD portfolios have expanded their programs in FY20 and FY21. Since the onset of the pandemic, IBRD financing for SSF countries has totaled $117 milion, mostly for pandemic response.

    Temporary debt relief. IDA-eligible SSF members can participate in the Debt Service Suspension Initiative (DSSI), endorsed by the Bank Group Governors at the 2020 Spring Meetings. The initiative aims at postponing bilateral debt service payments in low-income countries so that freed resources can be used to respond to the COVID-19 pandemic. The scheme initially covered debt service over the May-December 2020 period and was subsequently extended to January-June 2021. To date 14 SSF countries are participating in the DSSI thereby reducing debt service payments by $198 million in 2020 and $202 million in 2021, with potential savings ranging from 0.2 to 1.6 percent of GDP.

    Last Updated: Mar 31, 2021

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In Depth

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