## pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states ## Source details **Canonical URL:** [pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states](https://www.imf.org/-/media/files/publications/pp/2017/pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states.pdf.json) --- ### Executive summary: scope, purpose, and thematic priorities - Scope and purpose - Focuses on small developing countries with populations of under 1.5 million. - The Fund has 43 members with populations of fewer than 1.5 million, of which 34 are small developing countries. - Also considers "micro" states with populations of fewer than 200,000. - Provides operational guidance on surveillance, financial support, program design, capacity building, and collaboration with other institutions and donors. - Updates the previous version published in May 2014; Date: December 11, 2017. - Key thematic areas for policy dialogue (G.R.O.W.TH.) - Growth and job creation: explicit focus on growth in surveillance and program work; small states experienced relatively weak growth since the 1990s. - Resilience to shocks: higher macroeconomic volatility and more frequent natural disasters; advise on tailoring macroeconomic policies and climate resilience. - Overall competitiveness: options include exchange rate adjustment or internal devaluation; improve business climate and regional initiatives. - Workable fiscal and debt sustainability options: many small states have very high debt burdens; sustained fiscal consolidation and structural reforms needed; consider debt restructuring if adjustment/financing infeasible. - Thin financial sectors: deepen competitive yet sound financial sectors to support macro stability and access to finance. - Recent Board papers and policy decisions incorporated - May 2015 Board paper on macro developments and selected issues in small developing states. - December 2016 Board paper on small states’ resilience to natural disasters and climate change. - May 2017 Board paper on enhancing financial safety net: new annual access limit of 60 percent of quota under the RCF and RFI for members experiencing urgent BoP needs from severe natural disaster-related damages. *Approved by Seán Nolan. Prepared by Mai Farid and Ermal Hitaj (SPR) under supervision of Peter Allum and Xavier Maret (SPR), in collaboration with AFR, APD, EUR, FAD, LEG, MCD, MCM, and WHD.* ### Scale economies, public goods provision, and administrative capacity (summary of findings) - Small states do not have populations large enough to support a full range of public goods and services despite high public spending relative to GDP; under-provision of ports, power, roads harms competitiveness. - Public policy agencies are limited in absolute size; capacity to design and implement policies is a challenge. - Comparative indicators and medians (2000-2016 or noted data availability): - GDP Per Capita Growth (annual, percent): Micro 1.5; Other SS 2.0; Other LIC and EM 2.7 - GDP Per Capita (current U.S. Dollars): Micro 470; Other SS 735; Other LIC and EM 2,01880 - Trade Openness: Micro 98; Other SS 103; Other LIC and EM 71 - Government Expenditure: Micro 34; Other SS 30; Other LIC and EM 26 - Government Debt: Micro 57; Other SS 48; Other LIC and EM 40 - Net ODA Received 1: Micro 9.7; Other SS 4.0; Other LIC and EM 2.7 - GDP growth: Micro 3.2; Other SS 2.1; Other LIC and EM 2.2 - Current Account Balance to GDP ratio: Micro 5.0; Other SS 4.0; Other LIC and EM 2.9 - Fiscal Balance to GDP ratio: Micro 2.7; Other SS 2.2; Other LIC and EM 1.8 - Aid to GNI ratio 1: Micro 2.7; Other SS 1.4; Other LIC and EM 0.7 - Private Credit to GDP ratio 3: Micro 3.3; Other SS 3.9; Other LIC and EM 2.6 - Volatility measured as five-year backward-looking standard deviation; data notes: Median of 2000-2014 or 2000-2015 in some cases. - Vulnerability highlights - Narrow production and export bases raise vulnerability to external shocks, especially in micro states. - One-third of small states are highly or extremely vulnerable to climate change in the lifetime of the current generation. - Constraints on shock management: limited fiscal space, weak fiscal frameworks, shallow financial systems, thin administrative capacity. - GDP vs GNI and distributional implications - High foreign ownership in many sectors can raise GDP without raising GNI; careful assessment required of income distribution and welfare impacts. ### Growth performance, public sector role, and labor market implications - Growth performance and priorities - Strengthened growth performance is a priority; since late-1990s average growth for small states slowed while larger developing countries accelerated; microstates face higher volatility. - Staff implications: present explicit growth focus in country staff reports; discuss sector-specific growth issues; limit Fund advice to macro/financial contributions to growth; be cautious in medium-term growth projections given slow supply response. - Public sector size and job creation - Small states often have large public sectors and state ownership; rebalancing public/private roles typically required. - Job creation is a priority given sluggish growth, high unemployment, and outward migration; remittances support BoP but reduce growth dividend from education. - Guidance reference: IMF, 2013f “Guidance Note on Jobs and Growth Issues in Surveillance and Program Work.” - Labor market and migration issues - Brain drain significant; public sector provides majority of formal employment and can set reservation wage; reducing public wage bill can enhance competitiveness. - Long-term goal: larger private sector, stronger productivity, better-paid jobs, reduced migration — requires structural transformation despite small scale constraints. ### Public debt, financial systems, exchange rates, and fragility - Public debt and regional note - Median public sector debt in the Caribbean was 80 percent of GDP in 2016 (Box 3). - Caribbean debt drivers: natural disaster costs, fiscal management gaps, loss-making public enterprises, sub-par growth. - PICs generally have more modest debt but rising indebtedness in some PICs is a concern. - Financial systems - Typically shallow, concentrated, and foreign-dominated; banks lend disproportionately to government linking financial soundness to fiscal sustainability. - Nonbank financial institutions (e.g., Caribbean credit unions) often have high NPLs and low asset quality. - Capacity constraints impede implementation of international standards (AML/CFT, tax transparency), exposing reputational risks for higher-risk activities. - Small states poorly served by global capital markets; illiquid debt markets prevail. - Exchange rate regimes and implications - Pegged or heavily managed exchange rates are typical; fixed rates provide nominal anchor when monetary policy options are limited. - Some small states adopt foreign currency as legal tender (example noted: Kiribati). - Fragility - Nearly one-third of small states are in a fragile situation; fragility undercuts administrative capacity via conflict, fractious politics, and legitimacy issues. ### Heterogeneity and regional characteristics (Caribbean vs PICs) - Caribbean specifics - Most Caribbean small states are upper middle-income; median incomes almost three times higher than PICs but gap has closed. - Median public sector debt 80 percent of GDP in 2016—almost three times the median for PICs. - Per capita growth in Caribbean small states has slumped since 2000. - Six ECCU countries among top 10 most disaster prone by disasters per land area or population. - Indigenous ECCU banks structurally weak with capital shortfalls. - Pacific Island Countries (PICs) specifics - PICs remote, dispersed, high transport costs; severely affected by natural disasters and climate change. - About one-third of PICs are defined by the World Bank as fragile. - PICs rely more on development assistance and face higher volatility in ODA flows and macro variables. - Selected indicators (1980-99 / 2000-16; private credit 2014/2015/2016 entries preserved) - Trade Openness: Caribbean SS 24 52; PICs 14 41 - Net ODA received (% of GDP): Caribbean SS 3.2 0.9; PICs 0.9 1.6 - Private Credit* (% of GDP): Caribbean SS 93 2 56 80; PICs 101 17 38 32 - Note: *Private credit (% of GDP) refers to domestic credit to private sector (% of GDP). ### Tourism and remittances: leverage for growth and stabilization - Findings on tourism - Tourism often dominated by large operators with weak linkages to domestic economy due to narrow production base and market size. - Policy options to enhance tourism spillovers: vocational education; strategic targeting of agriculture and services. - Remittances - Remittances typically a-cyclical19 and can support consumption stability in downturns. - Ways to facilitate remittance inflows: mobile banking; improved payment systems. - Diaspora bonds remain an option to finance public investment. - Explicit growth focus in Fund engagement (Box 4) - Staff should discuss: (i) effects of fiscal/monetary/exchange developments on growth and employment; (ii) outlook for growth (demand and supply, multipliers); (iii) vulnerability to natural disasters and climate change and associated macro effects; (iv) envisaged policies and ex ante disaster risk reduction strategies. - Country specificity: focus depends on critical growth impediments (energy costs, overvaluation, infrastructure, exposure to disasters), program goals, and capacity. - Program conditionality and competitiveness - Conditionality should remain parsimonious and macro-critical. - Explore effects of public sector dominance and scale economies on competitiveness. - Policy options to improve relative prices: exchange rate adjustment (if possible); internal devaluation measures (if not). - Move from industry-specific tax incentives to a broad-based lower-rate system where appropriate; regional initiatives can reduce tax competition (example: the Nauru agreement in the PICs). - Growth-friendly fiscal frameworks should: - (i) preserve strong fiscal fundamentals; - (ii) minimize fiscal rigidity and lower recurrent spending to create fiscal space for capital spending; - (iii) improve spending mix towards human and capital investments; - (iv) adopt budget and investment practices to foster returns on capital spending. ### Resilience to shocks, natural disasters, and climate change - Resilience guidance - Identify shocks and transmission channels: natural disasters, supply/terms-of-trade shocks, revenue volatility, remittance vulnerability. - Balance self-insurance (fiscal and BoP buffers), external insurance (sovereign insurance, IFI/bilateral support), and private sector risk reduction. - Adequate fiscal and external buffers typically required; 2016 policy paper provides framework to build buffers as part of disaster contingency planning20. - Fiscal rules and public finance management - Fiscal rules should include adjustment provisions post-shock (Appendix Box 2)21. - Public finance management: monitor and transparently report emergency assistance; treat future disaster-related spending as public contingent liability; contain non-discretionary spending. - Sovereign insurance and disaster financing - Sovereign insurance typically provides marginal risk mitigation and can be expensive even with donor support; insurance covers emergency losses but not asset loss and needs complementing instruments (Appendix Box 3). - Financing needs segmented by timing: urgent (under three months); short term (under one year); medium term (over one year). - Use recovery moments to pursue growth-enhancing reforms: climate-smart public investment; financial deepening; revisiting growth obstacles. - Climate change implications - Low-lying atolls (Kiribati, Tuvalu, Marshall Islands) face sea level rise; hurricane/cyclone/flood-prone countries face more frequent/extreme events22. - Long-term disaster mitigation plans costly; global pledges exist but disbursements limited and access constrained by capacity. - Fund teams should consider financing of long-term public investment needs (external resources if available, or domestic revenue mobilization if not). - Resilience advice in fragile situations - Tailor TA and CD to achieve fiscal stability and secure “own” resources; tailor pace of reforms to security, social cohesion, and capacity; ensure coordination with IFIs and donors. ### Integrating macroeconomic implications of structural reforms and workable fiscal/debt options - Core analytical focus: assess structural reforms’ impact on growth, productivity, employment, and inequality; tailor analysis to small states and leverage regional knowledge. - Workable fiscal and debt sustainability options - Restoring fiscal and public debt sustainability key challenge, notably in the Caribbean. - Empirical correlates of successful consolidation: larger initial adjustment; emphasis on spending reductions—particularly current expenditure; presence of fiscal rules. - Fiscal consolidation can have negative short-term growth effects in prolonged low-growth environments. - Fiscal ROSCs undertaken in over half of larger countries but only 20 percent of small states. - Policy guidance: balance consolidation with growth promotion; consider fiscal multipliers, cycle position, and social safety nets; support adjustment with capacity building and structural reforms. - Key statistic on citizenship program inflows - In class-leader St. Kitts and Nevis inflows to the public sector alone neared 25 percent of GDP in 2013. ### Citizenship programs, debt restructuring, PPPs, and thin financial sectors - Citizenship programs - Substantial inflows in several small states (St. Kitts and Nevis, Dominica, Antigua and Barbuda, Comoros); risks include sudden stops, external vulnerabilities, misuse, and financial stability threats. - Recommendation: manage carefully with transparency and accountability. - Debt restructuring and Fund role - Some small states may require restructuring if consolidation/growth/financing insufficient. - Fund role: design adjustment programs to restore debt sustainability and determine financing envelope; leave restructuring details to debtor and advisors. - Encourage enhanced collective action clauses and modified pari passu in international sovereign bonds. - PPPs - Can provide technology transfer and financing but underused due to difficulties attracting private capital; carry quasi-fiscal risks. - Control approaches: strengthen MOF gatekeeping, independent appraisal, risk-related guarantee fees, risk-allocation frameworks, and budgeting for potential fiscal exposure. - Consult FAD and World Bank on PPP issues. - Thin financial sectors and correspondent banking - Priorities: deepen financial sectors, increase competition, improve service delivery, and strengthen oversight. - About one-third of small states and one micro state had a full FSAP since 2000–17 vs about three-quarters of larger states. - Disruption of Correspondent Banking Relationships (CBRs) raises remittance costs and inclusion risks. - Policy guidance: address causes of CBR withdrawals, enhance AML/CFT compliance, consider mobile banking, and explore consolidation of small banks. ### Surveillance, analytical priorities, and tools - Surveillance and analytical work - Country teams may need cross-country analysis and focused policy work to overcome staffing constraints and data gaps. - Emphasize immediate policy-relevant analysis rather than basic research; use regional cooperation and RTACs for dissemination and learning. - Analytical priorities (Box 5 highlights) - Factors behind growth underperformance since late 1990s. - Effectiveness of exchange rate adjustments in highly open small states. - Appropriate monetary and exchange rate regimes and simple monetary rules. - Financial sector benchmarking and vulnerability diagnostics. - Designing fiscal rules tailored to revenue/expenditure volatility. - Managing high aid volatility. - Building resilience to natural disasters and climate change; adequacy of buffers; contingency/financing plans including insurance and catastrophe bonds. - Analytical toolkits and climate-related tools - Provide easy-to-use economic tools and streamlined Fund tools for limited data environments. - CCPA (IMF-World Bank) pilots assess macro and sectoral climate policy aspects; integrate disaster/climate risk into standard Fund analysis. - Revised LIC DSF toolkit to be fully operational in 2018 to better assess disaster/climate shock implications for debt. ### Debt sustainability assessments (DSAs), disasters, and external buffers - DSAs and disasters - Post-disaster recovery programs often include debt-financed elements; amount and terms should be carefully reviewed. - Rapid debt accumulation common after a series of disasters; DSAs should incorporate risks of further disasters over projection period. - For long-horizon tools (e.g., LIC DSF up to 20 years), adjustments for disaster effects are critical; country teams encouraged to include customized scenarios. - Integrating disasters/climate into macro-frameworks (Box 6) - Macro baselines should reflect performance factoring in future disasters; approaches include historic averages and tailored adjustments. - Alternative shock scenarios: “average” disaster vs tail risks (50- or 100-year events) with multi-year post-disaster projections. - Reserve adequacy tools can be adjusted for disaster impact; ARA-CC methodology likely most relevant to small developing states. - Macro-financial linkages - Bank savings provide private sector buffer; disasters can raise NPLs and undermine financial functioning (example: Vanuatu 2015 voluntary suspension of debt service for two–three months and emergency borrowing facility activation). - External buffers and reserve adequacy - Balance of payments typically deteriorates after a disaster; financing relies on remittances, grants, borrowing, and reserve drawdowns. - ARA tools can incorporate expected shocks, structural changes, alternative scenarios, and risk aversion. ### Program design, Fund facilities, access changes, and rapid financing - Eligibility and access - All Fund members eligible to access GRA resources; 20 of the 34 small states eligible for concessional financing under the PRGT. - Quota increases under the 14th General Quota Review largely implemented in January 2016. - Key changes to access and concessionality - July 2015 PRGT changes: raising access norms, annual and cumulative normal access limits by 50 percent in quota terms across concessional facilities; rebalancing concessional vs non-concessional funding in blended arrangements from 1:1 to 1:2; increase access to fast-disbursing support under RCF and RFI; set RCF interest rate at zero percent for PRGT-eligible countries. - February 2016 GRA changes: access limits in SDR terms increased by average of 45 percent; annual and cumulative limits set at 145 percent and 435 percent of new quotas respectively. - Quota revisions: cumulative quotas doubled to SDR477 billion; individual member quota increases varied from 39 to 220 percent. - Among the 34 small states: quota increase ≥100 percent for 13 members (increasing access in SDR terms by at least 50 percent for PRGT-eligible and 45 percent under the GRA); remaining 21 had average quota increases of 41 percent with corresponding access limit increases in SDR terms of 3 and 5 percent under the GRA and PRGT respectively. - November 2016 guidance on access for PRGT-eligible members - PRGT-eligible members have right to access GRA resources on same conditions as others; staff advise borrowing from PRGT up to limits before seeking GRA resources. - One third of PRGT-eligible members are presumed blenders; non-presumed blenders may seek wholly concessional support or blend subject to assessment. - Access norms indicative; case-by-case determination using standard criteria. - Building a track record and rapid financing - SMPs: four small states implemented SMPs on five occasions over past 13 years (Comoros twice, Djibouti, São Tomé and Príncipe, and Swaziland); four of five SMPs led to Fund financing. - RCF and RFI: provide rapid financing without phasing ex post conditionality; small states frequent users. - Emergency assistance 2003–16: provided on 22 occasions to 10 different countries; St. Lucia, St. Vincent and the Grenadines, and Dominica each made three drawings. - More than half emergency assistance followed climatic shocks; June 2017 Executive Board approved new annual access limit of 60 percent of quota under RCF and RFI for countries experiencing urgent BoP needs from severe natural disaster-related damages of at least 20 percent of GDP. ### UCT-program based financing, PSI/PCI, social safeguards, and structural conditionality - Usage of UCT-quality program financing - Used on 20 occasions by 11 different small states over 2003–16. - Majority (13 programs) financed by PRGT resources; seven programs used GRA resources. - Most programs three-year duration (or longer in some instances); access levels varied from modest to large multiples of quota (Maldives, Antigua and Barbuda, St. Kitts and Nevis in 2009–2011). - PSI and PCI - PSI: Cabo Verde only small state to use PSI; three-year PSI approved 2006 extended to fourth year; concluded June 2010 with successor PSI approved November 2010. - PCI: available to all members; duration six months to four years; no ex ante qualification criteria; approval requires that Program Statement meet UCT conditionality standards, member committed to implement, and member not seeking Fund financial support at approval. - PCI monitoring: review-based; deviations do not automatically disrupt reviews; Board assessment required for completion of reviews with deviations. - Social safeguards and PRGT documentation - PRS central to IMF-supported programs in LICs and small states. - PRGT documentation streamlined June 2015: Economic Development Document (EDD) replaces earlier PRS docs. - Executive Board May 2017 reviewed social safeguards experience and good practices: noted room to improve design/use of program spending floors and that specific reform measures used sparingly but effective. - Early collaboration with development partners recommended to strengthen social safeguards. - Structural conditionality and data monitoring - Structural reform ambitions under programs may need narrower focus consistent with capacity; conditionality in fragile cases should match implementation capacity. - Data constraints often challenge surveillance; programs may include strengthened data provision as a key goal. ### Capacity development (CD), RTACs, and TA/training metrics - CD guiding principles - Long-term investments needed; tailor TA and training to country needs and absorption capacity; consider regional or outsourced solutions where national solutions infeasible. - Resident or peripatetic regional macroeconomic advisors can develop hands-on skills. - Monitor implementation of TA recommendations and evaluate CD using results-based management and common evaluation frameworks. - Role of RTACs - CARTAC and PFTAC particularly important; regional approach enables peer learning and is supported by development partners. - South-South cooperation via regional experts encouraged. - Other approaches - Expand staff exchange options and secondments; Fund coordination role in TA and partner engagement. - Empirical TA and training metrics (FY2015–16) - Technical Assistance (Person Years of Field Delivery): - Caribbean: FY2015 12.7; FY2016 16.3 - Asia-Pacific: FY2015 8.8; FY2016 8.8 - Other Regions: FY2015 8.7; FY2016 8.1 - Small States Total: FY2015 30.2; FY2016 33.2 - IMF Total: FY2015 287.6; FY2016 302.5 - SS in percent of IMF total: FY2015 10.5; FY2016 11.0 - Training (Participant Weeks): - Caribbean: FY2015 625.3; FY2016 765.3 - Asia-Pacific: FY2015 651.0; FY2016 521.6 - Other Regions: FY2015 341.4; FY2016 494.7 - Small States Total: FY2015 1617.7; FY2016 1781.6 - IMF Total: FY2015 14423.3; FY2016 19518.2 - SS in percent of IMF total: FY2015 11.2; FY2016 9.1 - Training (Number of Participants): - Caribbean: FY2015 812.0; FY2016 783.0 - Asia-Pacific: FY2015 597.0; FY2016 456.0 - Other Regions: FY2015 252.0; FY2016 353.0 - Small States Total: FY2015 1661.0; FY2016 1592.0 - IMF Total: FY2015 11369.0; FY2016 14457.0 - SS in percent of IMF total: FY2015 14.6; FY2016 11.0 - Note: Small states receive significantly more CD through TA and training than larger peers when scaled by population. ### Coordination with development partners - Multi-partner engagement required, notably World Bank and United Nations. - Good practices - Coordinate based on comparative advantage; draw on World Bank expertise in labor competitiveness, innovative financing, energy, and tourism linkages. - Joint missions and periodic macro reports where useful; Fund can lead coordination among IFIs. - Discuss timing of aid flows to reduce volatility; reallocation across time can reduce spending volatility without changing total aid. - Constraints: World Bank work program in higher-income small states is small; Fund staff may need to fill advisory gaps. ### Annex Table 5 — Fund financing arrangements for small states (verbatim entries, 2003–2016) - Source: Monitoring of Fund Arrangements (MONA) Database. http://www.imf.org/external/np/pdr/mona/index.aspx. - Selected verbatim table lines (country, arrangement type, year, original duration, actual duration, total amount approved in SDR mn, actual approved amount (% of quota at approval)): - Dominica PRGF 2003 36 36 368 94 - São Tomé and Príncipe PRGF 2005 36 36 363 340 - Grenada PRGF 2006 36 48 164 140 - Djibouti 1/ ECF 2008 36 44 242 140 - Seychelles SBA 2008 24 13 18 200 - São Tomé and Príncipe ECF 2009 36 36 363 335 - Comoros ECF 2009 36 51 141 153 - Maldives SBA 2009 36 36 364 9600 - Seychelles EFF 2009 36 48 263 00 - Grenada ECF 2010 36 36 369 75 - Solomon Islands SCF 2010 18 18 12 120 - Antigua and Barbuda SBA 2010 36 36 368 500 - St. Kitts and Nevis SBA 2011 36 36 365 590 - Solomon Islands SCF 2011 12 12 125 50 - São Tomé and Príncipe ECF 2012 36 36 363 335 - Solomon Islands ECF 2012 36 40 110 - Seychelles EFF 2014 36 36 361 1105 - Grenada ECF 2014 36 35 14 120 - São Tomé and Príncipe ECF 2015 36 36 364 60 - Suriname SBA 2016 24 11 34 2265 - Note: 1/ Includes augmentation. ### Appendix Box 4 — Risk Financing Toolkit (segmentation, buffers, external options) - Segmentation of financing needs by timing - Urgent financing needs: under three months. - Short term needs: under one year. - Medium term needs: over one year. - Domestic financing and deposit buffers - Domestic instruments suitable for less costly disasters; government deposit buffers can cover early response. - Some Pacific countries aim to maintain a deposit buffer equivalent to three months of recurrent spending. - Disaster scale definitions and financing sources - Large Disasters: more than 35 percent of GDP. - Middle-range Disasters: 2 to 35 percent of GDP. - Small Disasters: 1 percent of GDP or less. - Sources of financing by disaster scale (Yes/No format in toolkit) - Reserve drawdown: Large — No; Middle-range — No; Small — No. - Domestic bank financing: Large — No; Middle-range — Yes; Small — No. - External grant financing: Large — Yes; Middle-range — Yes; Small — No. - External loan financing: Large — Yes; Middle-range — Yes; Small — No. - Remittances: Large — Yes; Middle-range — No; Small — No. - Sample adequacy statistics (number of disaster events = 8 each) - Average losses (percent of GDP): Large 48; Middle-range 3; Small 0.6 - Additional ext. financing (percent of GDP): 2/ Large 22; Middle-range 4.5; Small -1.8 - Notes: Sources IMF and EM-DAT; 2/ Cumulative change in annual average financing for disaster year and three following years compared to annual average financing three years prior; over-financing of middle-range disasters due to one outlier (Seychelles). - Contingent credit and insurance options - Contingent lines of credit can reduce ex ante financing uncertainty; examples include compact agreements and World Bank CAT DDO (Seychelles only small state negotiating coverage). - IMF RCF and RFI are not fully contingent (subject to conditions) but absence of Fund-supported program can facilitate rapid disbursement. - Downsides: ex ante fiscal costs uncertain; fiscal impact may be deferred until debt service. - Insurance and innovative risk transfer - Traditional indemnity insurance limited; non-life premium payments average just 1 percent of GDP for typical small states. - Parametric insurance: quick-disbursing options contract based on severity thresholds; can be costly while market develops; pooling regionally can yield scale. - Catastrophe (CAT) bonds: investors receive generous coupon payments and principal forgiven if parametric trigger met, freeing resources for disaster response. - Consider mandatory catastrophe insurance, public-private partnerships, and strengthening private market regulation and supervision. *Staff Guidance Note on the Fund’s Engagement with Small Developing States — excerpts preserved exactly as provided.* *Source: Staff Guidance Note on the Fund’s Engagement with Small Developing States (pp. 11–16, excerpts and selected sections preserved exactly as provided).* ### EXECUTIVE SUMMARY ### STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — EXECUTIVE SUMMARY ### Scope and purpose - Focuses on small developing countries with populations of under 1.5 million. - The Fund has 43 members with populations of fewer than 1.5 million, of which 34 are small developing countries. - Also considers "micro" states with populations of fewer than 200,000. - Provides operational guidance on Fund engagement with small states, including implications for surveillance, financial support, program design, capacity building, and collaboration with other institutions and donors. - Updates the previous version published in May 2014 and incorporates modifications from Board papers and Executive Board discussions since the March 2013 Board papers on small states. - Date: December 11, 2017. ### Key thematic areas for policy dialogue (G.R.O.W.TH.) - Growth and job creation - Small states have experienced relatively weak growth since the 1990s. - Fund staff working on small states should ensure an explicit focus on growth in both surveillance and program-related work. - Resilience to shocks - Small states experience higher macroeconomic volatility and more frequent natural disasters. - Staff should advise on tailoring macroeconomic policies to provide greater resilience to shocks and climate change. - Overall competitiveness - Options to improve relative prices may include exchange rate adjustment (where possible) or measures supportive of internal devaluation (if not). - Efforts to improve the business climate, including through regional initiatives, are relevant. - Workable fiscal and debt sustainability options - Many small states have very high debt burdens. - Reducing debt to manageable levels requires sustained fiscal consolidation with supporting policies and structural reforms. - If the amount of adjustment needed to restore debt sustainability is not feasible or adequate financing is not available, debt restructuring may be needed. - Thin financial sectors - Developing deeper and more competitive, yet sound, financial sectors contributes to macroeconomic stability. - Stronger financial sectors enhance the effectiveness of policy interventions and strengthen competitiveness by improving business access to financial services. ### Recent relevant Board papers and policy decisions incorporated - May 2015 Board paper on “Macroeconomic Developments and Selected Issues in Small Developing States,” focusing on fiscal frameworks, external devaluation, and financial inclusion. - December 2016 Board paper on “Small States’ Resilience to Natural Disasters and Climate Change—Role for the IMF,” discussing climate vulnerabilities and policies for risk reduction, mitigation and adaptation, disaster preparedness and response, and financing options. - May 2017 Board paper on “Large Natural Disasters—Enhancing the Financial Safety Net for Developing Countries,” which led to Board approval of a new annual access limit of 60 percent of quota under the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) for members experiencing urgent balance of payments needs arising from severe natural disaster-related damages. ### Distinctive characteristics and vulnerabilities highlighted - Narrow economic base, high levels of openness, shallow financial systems, exchange rate regime rigidities, and weaker institutional capacity. - These features contribute to high vulnerability to shocks, subdued growth performance, and unsustainable debt dynamics. - Disproportionate vulnerability to natural disasters and climate change contributes to: - Lower investment levels. - Lower per capita income levels. - Higher poverty. - A more volatile revenue base. ### Operational guidance and engagement principles - Staff should tailor engagement to specific country circumstances; "smallness" is one important factor but insufficient alone to determine policy. - The note is a primer for staff new to small states and a consolidated overview for experienced teams. - Emphasizes coordination with regional technical assistance centers (RTAC) and other Fund departments and external partners. ### Notable classification and subgroup information (as presented) - UN SIDS grouping includes 38 UN member states participating in the Alliance of Small Island States (AOSIS). - World Bank small states grouping includes 50 countries: countries with a population of 1.5 million or less, or members of the Small States Forum. - Sub-groupings of small states (examples and thresholds): - Tourism based: exports of tourism services exceed 15 percent of GDP and 25 percent of total exports. Approximately half of the small states are tourism based, rising to three-quarters in the Caribbean region. - Commodity exporters: at least 20 percent of total exports in 2008–2012 were natural resources. Twenty percent of small states are in this group. - Fragile situations: weak institutional capacity measured by a three-year average CPIA score below 3.2 and/or presence of peace-keeping or peace-building operations; nearly one-third of small states are in a fragile situation. - Micro states: populations below 200,000; almost half of all small states are micro states and combined account for about 10 percent of the total population of all small states. - Two countries listed as not falling into the above analytical groupings: Montenegro and Swaziland. ### Organization of the guidance note (summary of sections) - Distinctive characteristics and vulnerabilities of small states. - Priorities for policy dialogue (Growth and Job Creation; Resilience to Shocks; Overall Competitiveness; Workable Fiscal and Debt Sustainability Options; Thin Financial Sectors). - Surveillance and analytical work. - Program design, Fund facilities and instruments. - Capacity development. - Coordination with development partners. - Appendices present analytical work on topics including fiscal rules and monetary and exchange rate policy. _Approved by Seán Nolan. Prepared by Mai Farid and Ermal Hitaj (SPR) under supervision of Peter Allum and Xavier Maret (SPR), in collaboration with AFR, APD, EUR, FAD, LEG, MCD, MCM, and WHD. Research assistance by Corinne Stephenson and Yining Zhang; production assistance by Merceditas San Pedro-Pribram._ ### 9. Scale economies hamper the provision of public goods and services. Small states do not ### pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states - 9. Scale economies hamper the provision of public goods and services. Small states do not ### Scale economies, public goods, and administrative capacity - Small states do not have populations large enough to support a full range of public goods and services, despite high levels of public spending in relation to GDP. - Under-provision of key public infrastructure (ports, power, roads, etc.) can adversely impact competitiveness. - Public policy agencies are limited in absolute size; capacity to design and implement policies can be a challenge. ### Comparative indicators and volatility (2000-2016, median; percent of GDP where indicated) - Country Groups / Indicators Micro Other SS Other LIC and EM - GDP Per Capita Growth (annual, percent): 1.5 2.0 2.7 - GDP Per Capita (current U.S. Dollars): 470 735 2,01880 - Trade Openness: 98 103 71 - Government Expenditure: 34 30 26 - Government Debt: 57 48 40 - Net ODA Received 1: 9.7 4.0 2.7 - GDP growth: 3.2 2.1 2.2 - Current Account Balance to GDP ratio: 5.0 4.0 2.9 - Fiscal Balance to GDP ratio: 2.7 2.2 1.8 - Aid to GNI ratio 1: 2.7 1.4 0.7 - Private Credit to GDP ratio 3: 3.3 3.9 2.6 - Volatility is measured as a five-year backward-looking standard deviation of a variable (e.g., volatility reported for the year 2000 is the standard deviation of variable x from 1996 to 2000). - Data notes: Median of 2000-2014 or 2000-2015 in some cases due to data availability. ### Vulnerability to external shocks, natural disasters, and climate change - Narrow production and export bases increase vulnerability to external shocks and macroeconomic volatility, especially in micro states. - One-third of small states are highly or extremely vulnerable to climate change in the lifetime of the current generation. - Small states are disproportionately vulnerable to natural disasters (earthquakes, hurricanes) because of location and lack of geographic scale for diversification. - Constraints that hamper shock management include: - Limited fiscal space - Weak fiscal frameworks - Shallow financial systems (less scope to rely on domestic financing) - Thin administrative capacity (complicates disaster mitigation and recovery) - References to vulnerability measurement: Commonwealth Vulnerability Index; World Bank project to operationalize vulnerability metrics; Maplecroft climate change vulnerability index; Notre Dame (ND-Gain) vulnerability and readiness index; IMF 2011 analytical tool (growth decline vulnerability index). ### GDP versus GNI and distributional implications - Small states typically have high levels of foreign ownership in many sectors (banking, hotels, resource extraction). - Policies that boost GDP via expansion of predominantly foreign-owned sectors need not translate into increases in GNI (which captures welfare of nationals). - Careful attention is required to assess income distribution effects when evaluating national policies. - Example: If all hotels are foreign-owned, primary local input is semi-skilled labor, and the sector benefits from significant tax holidays, a fall in wage levels could promote investment but leave nationals worse off unless employment elasticity to wage cuts is very high. ### Growth performance and priorities - Strengthened growth performance is a priority for small states. - Per capita income levels and social indicators of small states are broadly in line with larger developing country peers on average. - Since the late-1990s, average growth for small states has slowed while that for larger developing countries has accelerated; microstates experience higher volatility. - Policy implications: - The Executive Board and management highlighted an explicit focus on growth in the context of small states; this should be presented in country staff reports. - Staff should discuss sector-specific growth issues and consult other development partners; staff need to be conversant with dominant industries (tourism, offshore financial sector, resource extraction). - Staff should limit policy advice to the Fund’s mandate, emphasizing macroeconomic and financial environment contributions to growth; rely on other development institutions for detailed industry advice. - Given limited initial private sector roles, supply response to structural reforms may be slow; teams should be cautious in developing medium-term growth projections. ### Public sector size, private sector role, and job creation - Small states tend to feature large public sectors, state ownership of key assets, and extensive public intervention — sometimes deterring private investment. - Rebalancing public and private roles is typically required; leveling the playing field for new private entrants is important. - Public infrastructure investments may be a priority if consistent with fiscal and debt sustainability. - Job creation is a priority: - Small states face sluggish growth, limited job opportunities, high unemployment rates, and outward migration of better-educated workers (particularly in PICs). - Remittances support balance of payments but reduce the growth dividend from educational investments. - Guidance on translating growth into job creation is provided in the “Guidance Note on Jobs and Growth Issues in Surveillance and Program Work” (IMF, 2013f). ### Labor market institutions and migration - Brain drain is significant; the public sector provides the majority of formal sector employment and wage levels can be relatively high. - Public employment and public wages may affect labor markets and wage-setting in the rest of the economy. - Public wages and high remittances may create a reservation wage that undermines private sector hiring at competitive wage rates. - Measures to reduce the public wage bill can enhance competitiveness. - Long-term goal: larger private sector contribution, stronger productivity growth, better-paid jobs, reduced migration of better-educated — typically requiring structural transformation and diversification, constrained by small scale. - Migration and remittances will remain important; options to maximize benefits should be considered. ### Public debt, financial systems, exchange rates, and fragility - High public debt burdens threaten sustainability, notably in the Caribbean; median public sector debt in the Caribbean was 80 percent of GDP in 2016 (Box 3). - Caribbean debt problems traced to natural disaster costs, fiscal management gaps, loss-making public enterprises, and sub-par growth. - Many Caribbean small states are middle-income and not eligible for HIPC/MDRI debt relief; some have benefited from Paris Club and other debt relief. - PICs generally have more modest debt levels, but rising indebtedness in some PICs is a concern. - Financial systems in small states are typically shallow, concentrated, and foreign-dominated; lending opportunities for banks are thin. - Banks tend to lend disproportionately to the government, linking financial soundness to fiscal sustainability. - Nonbank financial institutions are important in some small states (e.g., Caribbean credit unions) but often suffer high NPLs and low asset quality. - Weak institutions for supervision and regulation increase risks and potential bailout costs. - Capacity constraints impede implementation of international standards (AML/CFT, tax transparency), exposing reputational risks for higher-risk activities (offshore sectors, citizenship by investment). - Small states are poorly served by global capital markets; international investors may be reluctant due to volatility and disproportionate costs of monitoring small transactions, resulting in illiquid debt markets. - Pegged or heavily managed exchange rates are typical: - Fixed exchange rates provide a nominal anchor when independent monetary policy options are limited by administrative capacity or weak transmission in shallow financial markets. - Tight exchange rate management aims to avoid volatility in thin foreign exchange markets and large FX inflows/outflows, given high exchange rate pass-through to inflation. - Some small states adopt foreign currency as legal tender (example noted: Kiribati). - Fragility: - Nearly one-third of small states are categorized as being in a fragile situation, compared to about one in eight for developing countries with populations over 10 million. - Fragile settings further undercut administrative capacity through conflict, fractious politics, and legitimacy issues. - Staff guidance on fragile situations referenced: May 2012 “Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations” and IMF 2017f “Building Fiscal Capacity in Fragile States.” ### Heterogeneity and regional characteristics (Box 3) - Considerable heterogeneity exists across small states; comparisons between Caribbean and PICs illustrate differences: - Caribbean small states tend to have higher per capita incomes but higher public debt burdens. - Over 2000–2016, PICs GDP per capita growth doubled while Caribbean income growth fell markedly relative to previous decades. - PICs are much more reliant on development assistance than Caribbean counterparts. - Box 3 regional specifics: - Caribbean: - Most Caribbean small states are upper middle-income. - Median incomes are almost three times higher than in PICs, though the gap has closed over the past decade. - Median public sector debt (80 percent of GDP in 2016) is almost three times the median for PICs. - Per capita growth in Caribbean small states has slumped since 2000. - Six ECCU countries are among the top 10 most disaster prone countries by disasters per land area or population; natural disasters significantly affect growth and debt. - Indigenous banks in the ECCU are structurally weak, with poor risk management, inadequate supervision, and capital shortfalls. - Pacific Island Countries (PICs): - Asia and Pacific region includes some of the world’s poorest small states. - PICs are remote, widely dispersed, lightly populated, with poor connectivity and high transport costs limiting export-led growth. - PICs are severely affected by natural disasters and climate change; about one-third of PICs are defined by the World Bank as being in fragile situations. - PICs face major capacity constraints (e.g., low school enrollment, low educational achievement). - Financial depth in PICs is generally below other small states; limited access to private credit impedes inclusive growth. - PICs are more heavily reliant on aid and typically face higher volatility in ODA flows, per capita income growth, terms of trade, current account balances, and fiscal revenues. - Table: Selected Indicators of Small States in the Caribbean and Asia Pacific (selected entries) - Trade Openness (X+M/GDP) 1980-99 / 2000-16: - Caribbean SS: 24 52 - PICs: 14 41 - Net ODA received (% of GDP) 1980-99 / 2000-16: - Caribbean SS: 3.2 0.9 - PICs: 0.9 1.6 - Private Credit* (% of GDP) (2014/2015/2016): - Caribbean SS: 93 2 56 80 - PICs: 101 17 38 32 - Note: *Private credit (% of GDP) refers to domestic credit to private sector (% of GDP). ### Priorities for policy dialogue: Growth and job creation (overview) - Policies to strengthen growth and job creation are a priority. - Staff implications: - Explicit focus on growth should be presented in country staff reports. - Discuss growth issues for specific sectors and consult development partners; acquire sectoral expertise on dominant industries. - Emphasize Fund’s mandate areas (macroeconomic and financial environment) and draw on MDBs for infrastructure and industry advice. - Rebalancing of public and private roles often needed; in some cases public infrastructure investment is warranted if consistent with fiscal/debt sustainability. - Supply response to structural reforms may be slow; exercise caution in medium-term growth projections. - Job-creation guidance: - Address high unemployment and outward migration; consider macro policies that help translate growth into employment (see IMF, 2013f Guidance Note on Jobs and Growth). - Investigate labor market institutions: public employment share, public wages, wage settlement processes, and reservation wages linked to remittances. - Measures to reduce public wage bill may enhance competitiveness; aim for structural transformation and diversification where feasible. - Consider migration and remittance policies to maximize benefits. *Staff Guidance Note on the Fund’s Engagement with Small Developing States, pp. 11–16* ### 24. Tourism and remittances could be better leveraged to support growth and stabilize ### 24. Tourism and remittances could be better leveraged to support growth and stabilize output. ### Tourism and remittances: findings and policy options - In many small states, tourism tends to be dominated by large operators, and have rather weak linkages to the domestic economy. - Linkages are conditioned by the narrow production base and market size. - Policy options to enhance tourism spillovers: - vocational education; - strategic targeting of agriculture and services. - Remittances are described as typically a-cyclical 19 and could help support consumption stability in downturns. - Ways to facilitate remittance inflows: - mobile banking; - improved payment systems. - Diaspora bonds remain an option to finance public investment. *Box citations and references preserved exactly: 17; 18; 19.* ### Explicit growth focus in Fund engagement (Box 4): breadth and country specificity - Fund staff should explicitly discuss the growth agenda with authorities, covering: - (i) effects of fiscal, monetary, and exchange rate developments on growth and employment; - (ii) the outlook for economic growth (if data allow, from both the demand and the supply side, and with a discussion of multipliers); - (iii) vulnerability to natural disasters and climate change and associated macroeconomic effects (lower investment, lower GDP per capita, higher poverty and more volatile revenue base); - (iv) envisaged policies and ex ante disaster risk reduction strategies to build resilience and support growth (macroeconomic policies including public investments, structural reforms, etc.). - Country specificity: focus and ambition depend on most critical growth impediments and vulnerabilities (examples given: energy costs, overvaluation, crowding out, infrastructure, exposure to natural disasters, and climate change), program goals, and government preferences and implementation capacity. ### Program conditionality and competitiveness - Program conditionality should focus on measures to strengthen growth performance where needed to solve a balance of payments problem and achieve medium-term external viability while fostering sustainable economic growth. - Conditionality guidance: - Not intended to extend or intensify overall Fund conditionality; - Conditionality should remain parsimonious and macro-critical. - Competitiveness assessment: staff should explore effects of public sector dominance and scale economies on competitiveness and assess whether sub-par growth reflects unduly elevated cost levels. - Policy options to improve relative prices: - exchange rate adjustment (if an option); - measures supportive of internal devaluation (if not). - Efforts to improve business climate could include moving from industry-specific tax incentives to a more generally business-friendly system with a broad base and lower tax rates. - Regional initiatives: reduce tax competition or maximize revenue for fishing licensing fees (example: the Nauru agreement in the PICs) 3/ . - Authorities may complement broad-based reforms with steps to remove obstacles to growth for key sectors (skills, infrastructure, regulation). ### Fiscal implications and growth-friendly fiscal frameworks - Growth focus should be consistent with macroeconomic stability goals needed to underpin confidence and durable growth. - When additional public spending, risk-reducing investment, and contingency planning (or delayed fiscal consolidation) could have positive growth impact, assessment should consider available financing, including contingency financing plans, and implications for fiscal and debt sustainability. - Growth-friendly fiscal frameworks should aim to: - (i) preserve strong fiscal fundamentals; - (ii) minimize fiscal rigidity and lower recurrent spending to create fiscal space for growth-enhancing capital spending; - (iii) improve the spending mix towards human and capital investments; - (iv) adopt budget and investment practices to foster returns on capital spending. 4/ ### Climate change policy assessment and outreach - Climate Change Policy Assessment (CCPA): IMF and WB collaborating on pilot assessments of macroeconomic and sectoral aspects of climate change policies of small states to showcase efforts and improve access to global climate funding in the context of national climate change strategies and Paris Agreement commitments. - Areas where Fund analysis can help: - mitigating carbon emissions through carbon taxation and energy subsidy reforms; - efficiently managing costly public risk reduction investments. - Outreach: clarify Fund role and commitment to include explicit growth agenda and resilience building aimed at ex ante disaster risk reduction strategies in program design. - 2015 Guidance Note for Surveillance under Article IV Consultation provides operational guidance on structural issues in surveillance, including climate change. 7/ ### Resilience to shocks: macroeconomic analysis and buffers - Staff should give prominence to potential shocks and identify sources and transmission channels: natural disasters, supply and terms of trade shocks to core industries, revenue volatility, and vulnerability of remittance inflows to cycles in host countries. - Consider balance between: - self-insurance (fiscal and balance of payments buffers), - external insurance (formal sovereign insurance mechanisms or optional IFI and bilateral donor support), - private sector involvement in risk reduction backed by private insurance. - Adequate fiscal and external buffers are typically required to weather shocks. - The 2016 policy paper provides a conceptual framework and implementation roadmap to build adequate buffers as part of disaster contingency planning. 20 - Strengthen fiscal framework to “see through the cycle” and insulate budgetary spending from revenue volatility. - Pace of buffer accumulation should be considered from a cost-benefit assessment; more gradual accumulation can draw on new revenue measures or provision for future natural disasters in the annual budget. - Financing shocks: - small shocks: explicit contingency in the budget; - larger shocks: access to debt financing; - balance of payments buffers: contingent lines of credit or official reserve draw-downs. ### Fiscal rules, public finance management, and sovereign insurance - Fiscal rules should include provisions for adjustment in event of an external shock and mechanisms to bring policies back into compliance post-shock (Appendix Box 2). 21 - Public finance management measures: - monitoring and transparent reporting of emergency disaster assistance to ensure continued development partner support; - treat future disaster-related public spending as a public contingent liability for budgetary purposes to integrate risks into cash and debt management; - contain non-discretionary spending (such as the public sector wage bill) to enhance fiscal flexibility. - Sovereign insurance mechanisms: - new option but typically provide only marginal risk mitigation; - facilities have required donor capitalization to reduce premia costs and prove expensive even with donor support (Appendix Box 3); - insurance covers only emergency losses, not loss of assets, and needs complementing financial instruments. ### Disaster financing needs and use of recovery moments for reform - Fund can assist countries to identify disaster-related financing needs, quantifying needs based on disaster risk and fiscal impact. - Financing needs can be segmented by timing: - urgent (under three months); - short term (under one year); - medium term (over one year). - Segmentation helps identify scale of fiscal buffers, access to financing, and/or risk transfer arrangements. - Programs for recovery or ex ante resilience-building are opportune for pursuing growth-enhancing reforms: - climate-smart public investment; - financial deepening; - revisiting growth obstacles that are harder to address in lower-risk environments. ### Climate change risks and fiscal implications - Climate change poses specific risks for small states; low-lying atolls (Kiribati, Tuvalu, and the Marshall Islands) face sea level rise; hurricane-, cyclone-, and flood-prone countries may face more frequent/extreme events. 22 - Risks require long-term disaster mitigation plans that can be costly to public resources. - Global pledges of sizeable resources exist but disbursements have been very limited, financing arrangements convoluted, and access limited by lack of capacity. - Fund teams should be sensitive to long-term implications of climate change for public investment needs and consider how these might be financed (external resources if available, or domestic revenue mobilization if not). ### Resilience advice for fragile situations - For small states in fragile situations, guidance should draw on Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations (IMF, 2012a) and Building Fiscal Capacity in Fragile States—Case Studies (IMF, 2017f). - Policy advice for resilience in fragile contexts should: - (i) pay attention to political economy considerations; - (ii) tailor TA and capacity building in fiscal policy management to achieve fiscal stability, financial control and secure “own” resources with due consideration to the state of fragility; - (iii) tailor the nature and pace of reforms to needs for security and social cohesion and levels of capacity; - (iv) promote approaches conducive to sustained engagement with IFIs; - (v) ensure close coordination with other IFIs and donors. ### Overall competitiveness: structural challenges and policy recommendations - Key structural inefficiencies: high energy and transportation costs, limited private sector development, and labor market rigidities. - Policy advice may include: - facilitating domestic wage and price cuts to improve price competitiveness (e.g., in tourism sector); - structural reforms to improve business environment (e.g., land tenure reform, remittance market reforms). 24 , 25 - Staff should assess desirability and feasibility of internal fiscal devaluations to improve competitiveness. 26 - Currency devaluation remains an element of the policy toolkit to address broader macroeconomic imbalances in several countries. ### Exchange rate policy and competitiveness considerations - Exchange rate adjustment assessment should weigh potential adverse impact on inflation discipline against costs of pursuing cost reductions. - Important considerations in small states: - openness implies currency adjustment quickly passes through to inflation via imported goods prices; - if domestic production has an import component (e.g., foodstuffs for hotels), imported-price pass-through can erode competitiveness gains; - impact depends on degree of pass-through to domestic wages, which may be influenced by public sector wage policy given the state's signaling role; - where diseconomies of scale and structural distortions are severe, price competitiveness improvements may not elicit a large supply response and must be combined with structural policies; - exchange rate adjustment can disproportionately benefit foreign-owned sectors, so staff should assess impacts on both GDP and GNI. - In assessing competitiveness of tourism-dependent economies, staff should go beyond EBA-lite type analysis that is often not adequately tailored for small states. 27 ### Regional trade and cooperation - Regional trade and cooperation can be valuable: - loss of earlier trade preferences in advanced markets contributed to weaker growth performance (noted particularly in the Caribbean); - Pacific island economies face high cost of regional trade due to remoteness, but regional trade facilitation programs can reduce transaction costs; - Caribbean may benefit from regional trade infrastructure arrangements, including exploiting regional container traffic growth post-Panama Canal expansion and e-commerce proliferation to reduce prices and circumvent local monopolies. - Regional collaboration options: - promote access to common external markets; - reduce cost of public service delivery via regional cooperation in air/sea transport (air traffic control); - market the region jointly; - negotiate as a group with large trade partners and companies. - Caveat: regional institutions can be politically attractive but often fail to achieve concrete economies of scale. - Fiscal challenges from regional trade integration (lost revenue) should be addressed by broadening the tax base and strengthening tax administration and compliance. *Staff Guidance Note on the Fund’s Engagement with Small Developing States (excerpts preserved exactly as provided).* ### 37. The Fund has stepped up its efforts to better integrate macroeconomic implications of ### STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES ### Integrating Macroeconomic Implications of Structural Reforms - Core analytical focus: assessing the impact of structural reforms on growth, productivity, employment, and inequality. - Staff working on small developing states with narrow economic base should ensure Fund analysis and policy advice aims to facilitate structural reforms—examples include energy subsidy reform, labor market policies, fiscal structural reforms, infrastructure investment, insolvency reform, and financial deepening—to contribute to fostering competitiveness and boosting growth. - Tailor analysis to small developing states’ specific circumstances and leverage regional knowledge of policy experiences. ### Workable Fiscal and Debt Sustainability Options Findings: - Restoring fiscal and public debt sustainability are key challenges, notably in the Caribbean. - Empirical correlates of successful fiscal consolidation: (i) the initial adjustment was larger; (ii) adjustment emphasized spending reductions—in particular, on current expenditure; and (iii) fiscal rules were present. - Fiscal consolidation can have negative short-term impact on growth in prolonged low-growth environments and potential long-term impact through low investments. - Fiscal ROSCs have been undertaken in over half of larger countries but only 20 percent of small states. Policy guidance: - Balance fiscal consolidation with promoting growth, especially in heavily indebted countries. - Consider size of fiscal multipliers, position in the economic cycle, and short- vs. long-run concerns when composing and pacing fiscal adjustment. - Develop or strengthen social safety nets to limit equity implications of fiscal adjustment. - Support fiscal adjustment with capacity building, bold growth-enhancing structural and governance reforms, and possibly more exchange rate flexibility. - Countries not under market pressure should proceed with gradual fiscal consolidation anchored in a credible medium-term plan. - Greater focus on ROSCs and PEFAs to formulate policy dialogue. Key statistic: - Citizenship program inflows: in class-leader St. Kitts and Nevis inflows to the public sector alone neared 25 percent of GDP in 2013. ### Citizenship Programs Findings and cautions: - Citizenship programs have been a source of substantial inflows in several small states (St. Kitts and Nevis, Dominica, Antigua and Barbuda, Comoros). - Risks: inflows can be vulnerable to sudden stops, exacerbate external vulnerabilities, be misused for criminal purposes, and threaten financial stability. Policy recommendation: - Manage citizenship programs carefully, ensuring transparency and accountability to maintain program reputation and spread gains into the longer term. ### Debt Restructuring and Fund Role Findings: - Some small states may not achieve debt sustainability through fiscal consolidation and growth alone; available financing and capacity to sustain adjustment may be insufficient. - Drawbacks to restructuring include impacts on long-term growth (dependent on future financial market access) and financial stability (composition of debt and links to domestic financial sector). Fund role and guidance: - Fund recommends members avoid default by remaining current on debt obligations to the extent possible. - When authorities pursue debt restructuring, the Fund leaves details to the debtor and its advisors but can help design an adjustment program to restore debt sustainability and determine the financing envelope informing creditor deliberations. - For small states with limited capacity, Fund support in designing adjustment programs can be particularly valuable. - Encourage inclusion in international sovereign bonds of enhanced collective action clauses and modified pari passu endorsed by the Executive Board to facilitate orderly debt restructuring. ### Public-Private Partnerships (PPPs) Findings: - PPPs can offer technology transfer, ease financing constraints, and improve project management, but are not often utilized in small states owing to challenges attracting private investment. - PPPs carry important quasi-fiscal risks and implications for monopoly power. Approaches to control PPP fiscal risks: - (i) Ensure control over approval of PPPs and strengthen the Ministry of Finance gatekeeping role in assessing risks and fiscal sustainability. - (ii) Careful appraisal through independent review of project feasibility and charging risk-related guarantee fees (where provided). - (iii) Ensure risk-allocation framework assigns risks to parties best able to control them. - (iv) Identify and budget for costs and potential fiscal exposure during decision-making. - Consult relevant staff in Fiscal Affairs Department (FAD) and the World Bank on PPP issues. ### Thin Financial Sectors Findings: - Priorities: deeper financial sectors, more competition, better service delivery, and strengthened oversight. - About one-third of small states and one micro states, have had a full Financial Sector Assessment Program (FSAP) since 2000–17, compared to about three-quarters of larger states. - The goal for Fund policy advice and capacity development: support improved growth performance while providing a financial buffer to manage shocks. - Example: East Caribbean Regional Governments Securities Market (RGSM) consolidates regional trading of debt instruments for member states of the ECCU, creating a single regional financial space. Policy guidance: - Tailor efforts to strengthen legal frameworks and implement international standards to small market challenges, limited supervisory resources, and reputational risks. - Where sovereign fiscal positions dominate local markets, policy advice on fiscal and debt management should account for implications for financial development. - Ensure recommendations for deepening financial sectors occur with adequate supervision and regulation. ### Correspondent Banking Relationships (CBRs) Findings: - Disruption of CBRs has affected ease and cost of remittances to some small states and presents risks to financial stability and inclusion. - Consequences: increased use of more expensive and less transparent remittance channels, and potential lower growth and resilience to shocks. Policy guidance: - Continue supporting member countries to address issues leading to and arising from withdrawal of CBRs and monitor risks to tackle adverse impacts. - Use surveillance, FSAPs, and capacity development (TA and training) to enhance monitoring of CBRs and strengthen legal, regulatory, and supervisory frameworks. - Encourage small states to improve domestic compliance with international AML/CFT standards. - Consider alternatives for remittance flows such as mobile banking. - Consolidation of small-sized banks could help ensure sufficient transaction flows and economies of scale for due-diligence processes. ### Surveillance and Analytical Work Findings: - Country teams may need creative approaches (cross-country analysis, focus on narrower policy-relevant issues) to overcome staffing constraints, data gaps, and lower mission frequency relative to larger countries. - Cross-departmental analytical approaches yield synergies by bringing together experience across Caribbean, Pacific islands, and African clusters. - Given limited policy analysis capacity in small states, emphasis should be on immediate policy-relevant analysis rather than basic research. Policy guidance: - Tackle policy issues as part of multi-country studies with shared desk resources where staffing is limited. - Periodic sharing of departmental small states work agendas to identify joint projects. - Support improved information systems and adequate data dissemination with STA assistance. - Use regional conferences, Annual Meetings-linked events (including Small States Forum), and area departments' REOs for dissemination. - Cross-departmental events to broaden learning opportunities; outreach typically led by area departments and regional TA centers. ### Analytical Priorities (Box 5) Possible priorities for further analytical work include: - Factors behind relative growth underperformance of small states since the late 1990s. - Effectiveness of exchange rate adjustments in highly open small states and differences in exchange rate transmission mechanisms. - Appropriate monetary and exchange rate regimes for small states; consideration of simple monetary rules given limited administrative capacity. - Impact of global and regional spillovers and variation of transmission channels across small state regions. - Understanding potential advantages of small size and lessons from highly successful small states. - Overcoming scale diseconomies: precedents and best practices for administrative cost-sharing or outsourcing arrangements (e.g., managing small state sovereign wealth funds). - Financial sector benchmarking and vulnerability diagnostics to identify underprovided services and interconnectedness vulnerabilities. - Designing fiscal rules tailored to small states given revenue and expenditure volatility. - Understanding and managing high aid volatility: causes and role for Fund, World Bank, and IFIs in donor coordination or helping authorities manage aid volatility. - Dealing with shocks: building resilience to natural disasters and climate change; adequacy of fiscal and external buffers; contingency plans and financing plans including insurance, catastrophe bonds, or grants for small, moderate and severe disasters. ### Analytical Toolkits and Climate-Related Tools Findings and guidance: - Provide small state authorities with relatively easy-to-use economic tools (spreadsheet or econometric software) to guide policy analysis where domestic policy-making capacity is thin. - For complex Fund tools (e.g., Debt Sustainability Analysis (DSA) templates, exchange rate assessment tools), authorities may welcome workshop presentations on usage. - Consider developing more streamlined versions of Fund tools for limited data environments and augment toolkits with small state–specific issues. - The Fund has developed tools to assess small states’ risks and vulnerabilities related to natural disasters, including collaboration with the World Bank on Climate Change Policy Assessment (CCPA) to assess preparedness for climate change. - Integrate natural disaster and climate change risks into standard Fund analysis; some small states have participated in Fund climate pilots and CCPA pilots focusing on macro-critical priorities related to climate mitigation and adaptation. - The CCPA is a joint IMF-World Bank assessment accompanying a country’s Article IV consultation or program review as a stand-alone selected issue paper to the Executive Board to help develop coherent policy frameworks and catalyze climate change financing. *Staff Guidance Note on the Fund’s Engagement with Small Developing States (excerpt provided).* ### 50. Debt sustainability assessments take on additional importance in disaster-vulnerable ### 50. Debt sustainability assessments take on additional importance in disaster-vulnerable countries. ### Debt sustainability assessments (DSAs) and disasters - Post-disaster recovery and rebuilding programs typically often include a debt-financed element; the amount and terms of such financing should be carefully reviewed. - Rapid debt accumulation is not uncommon in countries experiencing a series of disasters; this may reflect a weak underlying fiscal stance or looser scrutiny of borrowing plans in a post-disaster setting. - DSAs should be based on assumptions about trend economic growth and the future fiscal stance that incorporate the risks of adverse shocks from further disasters over the projection period. - For projections, such as those used for the LIC Debt Sustainability Framework (DSF) that can cover a period as long as 20 years, adjustments to reflect potential disaster effects are critical. - Country teams are encouraged to include customized country scenarios in DSAs. ### Integrating natural disasters and climate change into IMF macro-frameworks and risk analysis (Box 6) - Macro criticality: Fund analysis (of the macro framework, debt sustainability, external imbalances, etc.) should make specific allowance for shocks from natural disasters and climate change in the short- or medium- to long-term. - Data sources and perspectives: Staff will usually need to combine EM-DAT data, country economic data, and perspectives from country experts; assumptions adopted should be clearly documented. - Macro baselines: Medium- to long-term baselines used for assessing policy sustainability (e.g., DSAs) should reflect economic performance not just in good years but also factoring in the economic impact of future natural disasters. Approaches include using historic averages for key variables to develop tailored adjustments based on assumed risks and transmission channels. - Alternative shock scenarios: Assess policy implications using scenarios calibrated to reflect “average” and/or “tail risk” natural disasters. - Financial risks, reserve adequacy, and general equilibrium modeling: Tailored approaches can explore financial sector risks (following practices applied in recent FSAPs); the current reserve adequacy tool can be adjusted to reflect disaster impact; and the Debt, Investment, and Growth (DIG) model could be used to explore the dynamic adjustment path following a disaster. ### Alternative shock scenarios and projection horizons - The alternative shock scenarios provide the dynamic response to a large shock: - A standard scenario would involve an “average” disaster. - Tail risks could be explored by modelling the sort of disaster that might occur once every 50 or 100 years. - The scenario would trace the immediate and subsequent response of key macro variables, typically spanning several years of post-disaster reconstruction. - The revised LIC DSF toolkit, which will be fully operational in 2018, will provide easier assessment of the implications of natural disasters and climate change shocks on debt. ### Macro-financial linkages - Savings in the banking system provide an important buffer for the private sector to weather disasters. - Bank asset quality could suffer if disasters impact clients (e.g., crop destruction leading to higher non-performing loans). - Severe disasters may undermine the normal functioning of the financial system in the short run, delaying recovery (example: Vanuatu’s 2015 responses included voluntary suspension of debt service over two–three months and activation of an emergency borrowing facility and other liquidity measures by the central bank). ### External buffers and reserve adequacy - External sector assessments should take into account buffers needed to cope with vulnerability to natural disasters: the balance of payments typically deteriorates after a disaster, with financing relying on remittances, external grants and borrowing, and possible reserve drawdowns. - Fund reserve adequacy assessment tools can be tailored for disaster-prone countries: - Of the Excel-based ARA templates, the ARA-CC methodology for credit-constrained economies is likely most relevant to small developing states. - The tool and approach can take into account: (i) expected shocks (e.g., future disasters); (ii) structural changes (e.g., investing in resilience); (iii) alternative scenarios (e.g., a natural disaster in the next year); and (iv) risk aversion (e.g., precautionary incentives because of higher vulnerability to natural disasters). ### Program design, Fund facilities, and instruments for small states - All Fund members are eligible to access GRA resources; 20 of the 34 small states are also eligible for concessional financing under the PRGT. - New access limits policies under the GRA and the PRGT were approved over 2015–17; quota increases under the 14th General Quota Review were largely implemented in January 2016; the Fund clarified guidance on existing access policies as they relate to PRGT-eligible members in November 2016. ### Key changes to access and concessionality - Executive Board measures in July 2015 expanding access to PRGT resources included: - Raising access norms, annual and cumulative normal access limits by 50 percent in quota terms across the concessional facilities for all PRGT-eligible countries. - Rebalancing the funding mix of concessional to non-concessional financing under blended arrangements from 1:1 to 1:2 for presumed blenders. - Increasing access to fast-disbursing support under the RCF for PRGT-eligible countries and the RFI to all members; setting the interest rate on RCF loans at zero percent for PRGT-eligible countries to increase concessionality. - Similar increases for access under the GRA in February 2016: - Access limits in SDR terms under the GRA were increased by an average of 45 percent. - Annual and cumulative access limits were set at 145 percent and 435 percent of the new quotas, respectively. - Quota revisions in early 2016: - Doubling of cumulative quotas of Fund members to SDR477 billion. - Increase of individual member quotas varied from 39 to 220 percent. - Among the 34 small states, the quota increase was greater than or equal to 100 percent for 13 members, ensuring an increase in access in SDR terms by at least 50 percent for PRGT-eligible members and 45 percent under the GRA. - The remaining 21 small states had individual quota increases averaging 41 percent with corresponding access limit increases in SDR terms of 3 and 5 percent under the GRA and PRGT, respectively. - November 2016 guidance on access for PRGT-eligible members: - A PRGT-eligible member has the right to access GRA resources on the same conditions as any other Fund member; staff will continue to advise PRGT-eligible members to borrow from the PRGT up to applicable limits before seeking GRA resources. - One third of PRGT-eligible members are presumed blenders; non-presumed blenders may seek wholly concessional support up to applicable access limits or blend subject to assessment of BoP need, program strength, capacity to repay, and debt sustainability. - Access norms are indicative guidance and access should be determined case-by-case using standard criteria. ### Building a track record and rapid financing - Staff-monitored programs (SMPs) can help small states establish or re-establish a track record of policy implementation; over the past 13 years, four small states implemented SMPs on five occasions (Comoros (twice), Djibouti, São Tomé and Príncipe, and Swaziland). - In four out of five cases the SMP was successfully completed and led to use of Fund financing; Swaziland’s SMP went off track and was not followed by a Fund arrangement. - Rapid financing is available through the RCF (established in 2009 for PRGT-eligible countries) and the RFI (established in 2011 for both PRGT- and non-PRGT eligible members). - The RCF and RFI provide rapid financing without phasing ex post conditionality or reviews; they suit transitory and limited financing and adjustment needs or where UCT-quality programs are not possible. - Small states are frequent users of the RCF; during 2003–16 emergency assistance was provided on 22 occasions, to 10 different countries. - St. Lucia, St. Vincent and the Grenadines, and Dominica each made three drawings over the decade. - More than half of the emergency assistance was provided following climatic shocks (hurricanes and flooding) and earthquakes. - In June 2017 the Executive Board approved a new annual access limit of 60 percent of quota under the RCF and RFI for countries experiencing urgent BoP needs arising from severe natural disaster-related damages of at least 20 percent of GDP. *Staff Guidance Note on the Fund’s Engagement with Small Developing States (excerpt).* ### 61. UCT-program based financing. ### 61. UCT-program based financing. ### Usage of UCT-quality program financing - The Fund’s financing in support of UCT-quality programs has been used on 20 occasions by 11 different small states over the period 2003–16 (Annex Table 5). - Program financing types: - The majority (13 programs) were financed by PRGT resources (under the PRGF, SCF, and ECF). - Seven programs used GRA resources (under the SBA and EFF). - Duration and regional coverage: - For both concessional and GRA financing, most programs were for a three-year period (or longer, in a few instances). - Usage has been regionally diversified. - Access levels: - Financing has varied from relatively modest levels to large multiples of quota (for Maldives, Antigua and Barbuda, and St. Kitts and Nevis in 2009, 2010, and 2011, respectively). - Note: In both Antigua and Barbuda and St. Kitts and Nevis, the high level of access was necessary to support the debt restructuring operations. In Maldives, however, high level of access was necessary to address the impact of the global economic crisis and restoring macroeconomic stability. ### Policy Support Instrument (PSI) and Policy Coordination Instrument (PCI) - PSI: - The Fund's framework for PSIs is designed for qualifying LICs that are PRGT-eligible and do not need Fund financial assistance but can benefit from close cooperation with the Fund in preparation and endorsement of their policy frameworks. - Cabo Verde is the only small state that has used the PSI. - Fund support under the PSI for a three-year program was approved in 2006 and subsequently extended to a fourth year. - The PSI was successfully concluded in June 2010 and a successor 15-month PSI was approved in November 2010 with the two reviews completed. - PCI: - A new Policy Coordination Instrument (PCI), similar to the PSI but available to all members, has been approved to strengthen the Global Financial Safety Net (GFSN) and the Fund’s toolkit. - The PCI is a non-financial instrument designed for countries seeking to unlock financing from multiple sources and/or to demonstrate a commitment to a reform agenda. - Duration: - The PCI has a duration of six months to four years, and may be extended to an overall maximum period of four years. - There is no limit on the number of successor PCIs. - Eligibility and approval conditions: - The PCI is available to all Fund members, and with no ex ante qualification criteria. - A member’s request for a PCI may only be approved by the Fund if the Fund is satisfied that: - (i) the member’s policies in its Program Statement meet the standards of UCT conditionality; - (ii) the member demonstrates sufficient commitment to implement the program; and - (iii) the member does not need and is not seeking Fund financial support at the time of approval of a PCI. - Monitoring and review: - The PCI follows a review-based approach to monitoring program conditionality: deviations from quantitative and reform targets will not automatically disrupt reviews as do PCs, and waivers are not required. - The completion of a program review under the PCI would require a Board assessment that any deviation from a quantitative or reform target was either minor or temporary, or sufficient corrective action has been taken to achieve the objectives of the program. ### Poverty reduction strategies (PRS) and social safeguards in IMF-supported programs - Role of PRS: - PRS are central to IMF-supported economic programs in LICs and small states. - PRS assess poverty challenges, describe how macroeconomic, structural and social policies and programs can promote growth and reduce poverty, and outline external financing needs and the associated sources of financing. - Reforms to documentation: - The PRS documentation required under the PRGT for Extended Credit Facility (ECF) and PSI-supported programs was streamlined in June 2015 and replaced by the submission of an Economic Development Document (EDD). - The EDD, issued to the Board with an assessment letter of the World Bank, may take two forms: - (i) an existing national development plan or strategy documents documenting a member’s PRS; or - (ii) a newly prepared document on the member’s PRS. - Executive Board review: - The Executive Board reviewed in May 2017 the experience of social safeguards in PRGT and PSI-supported programs and made recommendations on good practices. - Social safeguards findings: - Social safeguards examined are split into two groups: - (i) use of program floors on social and other priority spending; and - (ii) measures designed to protect vulnerable groups. - The paper found that there is room to improve the design and the use of program spending floors and that specific reform measures have been used sparingly, yet are often the most effective tool for supporting vulnerable groups. - Early collaboration with other development partners (e.g., the World Bank), ideally during surveillance, could strengthen existing social safeguards and help improve the design of specific social safeguards measures under Fund-supported programs. ### Structural conditionality and data monitoring - Structural conditionality: - Given the limited capacity of small states governments, the structural reform ambitions under Fund-supported programs may need to be more narrowly focused and prioritized, in coordination with other development partners. - Capacity for policy design and implementation will be particularly constrained in small states that are also in a fragile situation. - Conditionality in fragile cases should be consistent with capacity for policy consultation, design, and implementation (see paragraph 16). - Data monitoring and reporting: - Institutional capacity is relevant also for data monitoring and reporting under Fund-supported programs. - The lack of high quality data is often a challenge for macroeconomic surveillance, and programs may include strengthened data provision as a key goal. - Program design may need to be tailored to the breadth and timeliness of existing data reporting. ### Capacity development (CD) - General: - Investments in capacity development will be needed for many years. - Monitoring and evaluation of technical assistance (TA) and institutional capacity building should receive careful attention in Fund surveillance, and will be facilitated by efforts to strengthen the Fund’s monitoring and evaluation frameworks for CD activities. - Constraints on absorption: - Absorption capacity and resource availability will be constraining factors. - Officials in small states have over-burdened agendas, and finding time for capacity development, including TA and training, is difficult. - Other risks: shifts in political priorities, lack of resources to absorb CD due to high staff turnover and shortages in certain skills. - Guiding principles for CD approaches: - Capacity development through TA and training needs to be tailored to each country’s needs and absorption capacity. - CD needs to be informed and guided by surveillance and possibly provided at the regional level given commonalities among regional small states. - Capacity development ambitions need to be realistic, with capacity supplementation temporarily unavoidable in some instances before capacity building can be effective. - Where national solutions are not workable, explore regional or other “outsourced” solutions—for example, reserve or debt management might be delegated to regional financial institutions. - Developing implementation capacity is critical. Resident or peripatetic regional macroeconomic advisors may be useful in developing hands-on skills, particularly at an early stage. - Monitoring implementation of TA recommendations and evaluation of capacity development are important and will be facilitated by the implementation of the new results-based management and the common evaluation frameworks for all Fund CD activities. - Role of regional TA centers (RTACs): - CARTAC in the Caribbean and PFTAC in the Asia-Pacific region are particularly important. - A regional approach offers opportunities for peer-to-peer learning through workshops, seminars, attachments, and internships, while maintaining a focus on region-specific needs. - Regional capacity development is supported by development partners who finance much of the RTAC budget, either in general terms or through dedicated support for specific programs (e.g., Japan’s support for the improvement of external sector statistics in the Asia and Pacific Region). - South-South cooperation can be supported by drawing on regional experts to deliver TA programs. - Other approaches to strengthen macroeconomic capacities: - Staff exchanges: options for economists from small states to join the Fund as special appointees could be expanded; explore secondments of Fund staff to regional small states institutions and resident or regional CD advisors. - Fund coordination: scope for Fund staff to play a more active role in coordinating the involvement of other development partners in the macroeconomic sphere, consistent with the Fund’s macroeconomic focus. ### Empirical TA and training metrics (FY2015–16) - Technical Assistance (Person Years of Field Delivery): - Caribbean: FY2015 12.7, FY2016 16.3 - Asia-Pacific: FY2015 8.8, FY2016 8.8 - Other Regions: FY2015 8.7, FY2016 8.1 - Small States Total: FY2015 30.2, FY2016 33.2 - IMF Total: FY2015 287.6, FY2016 302.5 - SS in percent of IMF total: FY2015 10.5, FY2016 11.0 - Training (Participant Weeks): - Caribbean: FY2015 625.3, FY2016 765.3 - Asia-Pacific: FY2015 651.0, FY2016 521.6 - Other Regions: FY2015 341.4, FY2016 494.7 - Small States Total: FY2015 1617.7, FY2016 1781.6 - IMF Total: FY2015 14423.3, FY2016 19518.2 - SS in percent of IMF total: FY2015 11.2, FY2016 9.1 - Training (Number of Participants): - Caribbean: FY2015 812.0, FY2016 783.0 - Asia-Pacific: FY2015 597.0, FY2016 456.0 - Other Regions: FY2015 252.0, FY2016 353.0 - Small States Total: FY2015 1661.0, FY2016 1592.0 - IMF Total: FY2015 11369.0, FY2016 14457.0 - SS in percent of IMF total: FY2015 14.6, FY2016 11.0 - Note: Small states receive significantly more capacity development through TA and training than larger peers when scaled by population. ### Coordination with development partners - Need for multi-partner engagement: - Support for small states will need to involve other international institutions and development partners, in particular the World Bank and the United Nations. - Good practices for inter-agency cooperation: - Inter-agency cooperation should reflect the Fund’s comparative advantage and the relative expertise of counterparts; aim to establish areas of comparative advantage and ensure consistency in policy advice. - Country teams could draw on World Bank expertise and projects in macro-critical areas such as labor market competitiveness, innovative financing (including debt-for-nature), energy, and improving economic linkages with the tourism sector. - Close collaboration with other institutions would be particularly useful in identifying solutions to regional challenges and pursuing regional approaches to overcome size-related challenges (e.g., promoting trans-border financial sector development). - Staff can involve other IFIs to provide staffing in Fund missions where external expertise would complement the work of the Fund. - Staff can discuss the timing of aid flows to reduce unnecessary volatility; reallocation across time has the potential to reduce spending volatility without changing total aid. - Joint missions may provide benefits with each institution taking the lead role in areas of comparative expertise; the Fund can play a lead role in collaboration among IFIs in their engagement with small states even where others take the lead. - Collaboration on capacity building: - The Fund should remain closely engaged with a country’s development partners to design and implement a well-coordinated set of policies and to coordinate responses to TA needs. - Where useful and requested by the member, staff could produce periodic reports on macroeconomic developments and policies and quarterly and annual reports of RTACs—particularly PFTAC and CARTAC—on capacity building efforts. - Constraints to consider: - Fund staff should be cognizant of other IFIs constraints: the World Bank’s work program in small states with relatively higher income per capita is very small, so Fund staff will likely need to bridge the gap by formulating advice to small states. *Staff Guidance Note on the Fund’s Engagement with Small Developing States — Excerpts (sections 61–72, Capacity Development, Coordination with Development Partners, and Annex Tables summaries).* ### Annex Table 5. Fund Financing Arrangements for Small States ### Annex Table 5. Fund Financing Arrangements for Small States (2003–2016) ### Overview - Source: Monitoring of Fund Arrangements (MONA) Database. http://www.imf.org/external/np/pdr/mona/index.aspx. - Note: 1/ Includes augmentation. ### Fund financing arrangement entries (verbatim table lines) - CountryArr. TypeYear Original Duration (in months) Actual Duration (in months) Total Amount Approved (in SDR mn) Actual Approved Amount (% of quota at approval) - DominicaPRGF2003 3636894 - São Tomé and Príncipe PRGF2005 3636340 - GrenadaPRGF2006 364816140 - Djibouti 1/ ECF2008 364422140 - SeychellesSBA2008 241318200 - São Tomé and Príncipe ECF2009 3636335 - ComorosECF2009 365114153 - MaldivesSBA2009 363649600 - SeychellesEFF2009 364826300 - GrenadaECF2010 3636975 - Solomon IslandsSCF2010 181812120 - Antigua and BarbudaSBA2010 363668500 - St. Kitts and NevisSBA2011 363653590 - Solomon IslandsSCF2011 1212550 - São Tomé and Príncipe ECF2012 3636335 - Solomon IslandsECF2012 3640110 - SeychellesEFF2014 363611105 - GrenadaECF2014 363514120 - São Tomé and Príncipe ECF2015 3636460 - SurinameSBA2016 2411342265 *Source: Monitoring of Fund Arrangements (MONA) Database.* ### Appendix Box 4. Risk Financing Toolkit ### Appendix Box 4. Risk Financing Toolkit ### Segmentation of financing needs - Financing needs could be segmented by date to identify necessary fiscal buffers, access to financing, and/or risk transfer arrangements: - Urgent financing needs: under three months. - Short term needs: under one year. - Medium term needs: over one year. ### Domestic financing and deposit buffers - Government deposits and access to domestic bank financing provide buffers for shocks, but have financial sector liquidity implications that need to be managed. - These domestic instruments are best suited for less costly disasters. - Central and commercial bank financing: - Central and commercial bank financing may provide a limited buffer against shocks. - Central bank financing of the budget should be strictly limited on account of risks of fiscal dominance that could undermine monetary policy effectiveness. - Scope to borrow from domestic commercial banks is also likely to be limited, as liquidity in the system may not be adequate to provide additional fiscal financing at a time when the banking system faces other financing and liquidity needs due to the disaster. - Overall, domestic borrowing is likely to be most useful in the context of small-scale disasters. - Government deposit buffers: - Provide an alternative to domestic borrowing. - Designed to cover early disaster response needs without compressing other priority spending until other sources can be mobilized. - In some disaster-vulnerable countries in the Pacific, governments aim to maintain a deposit buffer equivalent to three months of recurrent spending. - Such buffers could be in the form of deposits in the government’s general fund, a “virtual” contingency fund within the general fund, or a dedicated fund for natural disasters. ### Sources of post-disaster fiscal and balance-of-payments financing (by disaster scale) - Disaster scale definitions: - Large Disasters: more than 35 percent of GDP. - Middle-range Disasters: 2 to 35 percent of GDP. - Small Disasters: 1 percent of GDP or less. - Sources of financing (Yes/No responses listed by disaster scale): - Reserve drawdown: Large — No; Middle-range — No; Small — No. - Domestic bank financing: Large — No; Middle-range — Yes; Small — No. - External grant financing: Large — Yes; Middle-range — Yes; Small — No. - External loan financing: Large — Yes; Middle-range — Yes; Small — No. - Remittances: Large — Yes; Middle-range — No; Small — No. - Adequacy of BoP financing to cover losses (sample statistics; number of disaster events = 8 for each category): - Number of disaster events: 8 (Large), 8 (Middle-range), 8 (Small). - Average losses (percent of GDP): 48 (Large), 3 (Middle-range), 0.6 (Small). - Additional ext. financing (percent of GDP): 2/ 22 (Large), 4.5 (Middle-range), -1.8 (Small). - Notes: - Sources: IMF and EM-DAT data. - 1/ Balance of payments data provided information on reserve drawdown and remittances; fiscal data provided information on domestic bank financing; and fiscal and BOP data provided information on external grant and loan financing. - 2/ Cumulative change in annual average financing for disaster year and three following years compared to the annual average financing three years prior to the disaster. The over-financing of middle-range disasters is due to one outlier (Seychelles). ### External borrowing and insurance (contingent credit and risk transfer) - Contingent lines of credit: - Reduce ex ante disaster financing uncertainty. - Can be arranged with bilateral, multilateral, and commercial creditors. - Examples: - Bilateral: Marshall Islands, Micronesia, and Palau benefit from compact agreements with the United States offering access to emergency support from relevant U.S. agencies.1/ - Multilateral: World Bank’s CAT DDO offers a pre-approved line of credit for countries experiencing disasters; currently available only for middle income countries, and the Seychelles is the only small state that has negotiated coverage.2/ - The World Bank, with G20 financing, established a Pandemic Emergency Financing Facility using catastrophe bonds, reinsurance, and a cash window to protect poor countries against pandemics. - IMF instruments: - Financing under the IMF’s RCF and RFI are not fully contingent, as they are subject to conditions for access;3/ however, the absence of a Fund-supported program helps facilitate rapid disbursement. - Downsides: - Ex ante fiscal costs of disaster relief remain uncertain. - Fiscal impact may be deferred until debt service falls due. - Insurance and other risk transfer arrangements: - Insuring public assets reduces uncertainties associated with direct exposure to disaster risks. - Encouraging insurance of private property reduces the likelihood that the public sector will be called on to cover private losses. - Prompt insurance compensation reduces downtime for productive assets, reduces disruption of infrastructure, and indemnifies producers for income losses. - Traditional indemnity insurance: - Not widespread in small states due to high costs, underdeveloped markets, and limited competition. - Premium payments for non-life cover average just 1 percent of GDP for typical small states. - Belize and Grenada rely on traditional insurance against severe natural disasters. - Evidence suggests traditional insurance has been more successful and sustainable under public-private partnerships. - Implementation considerations: contingent risks to the budget need careful monitoring; private market regulation and supervision would need strengthening; consider some level of mandatory catastrophe insurance. - Innovative approaches: - Parametric insurance: - Functions as an options contract paying out when a pre-specified severity threshold is exceeded (e.g., storm, flood, earthquake intensity). - Quick-disbursing but can be costly while the market develops. - Economies of scale may be achieved by pooling cover at a regional level. - Catastrophe (CAT) bonds: - Issued by disaster-vulnerable countries as financing instruments. - Investors receive a generous coupon payment and agree to forgive bond principal in the event of a disaster measured by a parametric trigger, releasing resources from debt service to finance disaster response. *Appendix Box 4. Risk Financing Toolkit — Staff Guidance Note on the Fund’s Engagement with Small Developing States* --- _Source: https://www.imf.org/-/media/files/publications/pp/2017/pp121117-2017-staff-guidance-note-on-the-fund-s-engagement-with-small-developing-states.pdf_