## ppea2024035 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [ppea2024035 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024035.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2024/english/ppea2024035.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2024/english/ppea2024035.pdf.json) --- ### Purpose and scope - Provides operational guidance on the Fund’s engagement with small developing states (SDS). - Updates the previous version published in December 2017. - Applies across surveillance, financial support and program design, capacity development (CD), and collaboration with other institutions and donors. - Introduces a Country Engagement Box for Article IV staff reports to enhance strategic engagement and traction. - Staff should tailor engagement to specific country circumstances. - Date on document: July 8, 2024. ### Core thematic areas for policy dialogue - Five thematic areas: - (i) Promoting Sustained, Inclusive and Resilient Growth and Job Creation; - (ii) Confronting Risks and Building Resilience; - (iii) Strengthening Fiscal Frameworks and Debt Sustainability; - (iv) Enhancing Monetary and Exchange Rate Policy Frameworks; and - (v) Deepening the Financial Sector While Ensuring Strong Oversight. - Evolving areas of engagement: climate change, gender and inclusive growth, governance, and digitalization. - Guidance on tailoring surveillance, CD, and lending to SDS circumstances, including toolkits and addressing data gaps. ### What is new in the 2024 Staff Guidance Note - New areas of IMF engagement and applications to SDS: climate change, gender and inclusive growth, governance, digitalization. - Helps tailor latest Fund guidance on surveillance, lending, and CD to SDS circumstances and toolkits. - Emphasizes traction and good practices to support traction with SDS members. - Updated guidance on engagement with development partners. - Guidance for SDS teams on preparing a Country Engagement Box for Article IV Staff Reports. - Innovations stem from the Management Implementation Plan responding to Board-endorsed IEO recommendations. ### Definitions and membership scope - The Fund has 43 small state members with a population under 1.5 million, of which 34 are considered SDS after removing advanced economies and high-income fuel exporters. - GN applies to “microstates,” a subset of SDS with population of less than 200,000. - Many countries with population of more than 1.5 million may share “smallness” characteristics and find the GN relevant. - World Bank Small States Forum (SSF) includes 50 states. - UN Small Island Developing States (SIDS) consists of 39 UN member states. - Annex I clarifies differences between SDS and the Fund’s operational concept of a “small state.” ### Key characteristics of SDS and implications - Fundamental characteristic: smallness (land area and population) leading to: - Lack of economies of scale. - Higher vulnerability to shocks affecting the entire country. - Higher degree of openness relative to EMs and LIDCs. - High exposure to climate change and natural disasters. - Scarcity of natural endowment relative to larger countries. - More prominent public sector role and more severe capacity constraints than average LIDCs. - Heterogeneity across SDS remains important. - Among 34 SDS, 26 are island countries; all 14 microstates are island countries. - Remoteness and fragmentation limit access to markets, financing, and technology; increase costs of public service provision and infrastructure. ### Economic structure, volatility, and external exposure - Twenty-one of the 34 SDS rely on a single driver of growth (tourism, agriculture, or exports of a single commodity), with a few more having a large financial sector. - Average real GDP per capita growth in SDS is only somewhat smaller than EMs and LIDCs, but growth in SDS economies is significantly more volatile. - Trade openness of SDS is nearly twice as high as that of LIDCs. - Between 2000-23, the average trade deficit (in percent of GDP) in SDS was almost 10 percentage points larger than the current account deficit, indicating a prominent role for income flows (e.g., remittances or official grants). - Reserves: - SDS hold an average of 4 months of imports between 2000-23, similar to LIDCs and lower than EMs (5 months). - Reserves in SDS have been increasing since the mid-2000s. - Energy dependence: many SDS are highly dependent on imported fossil fuels for power systems, increasing vulnerability to oil price volatility and underscoring need for investment in lower-cost and lower-carbon energy. ### Climate vulnerability and economic impacts - Small island states face risks of land and capital loss from sea level rise; population exposure to floods and storm surges. - Natural disasters (1960-2020) in SDS: - accounted for 55 percent of global natural disasters causing 20-30 percent of GDP in damages and 70 percent of natural disasters with damages exceeding 30 percent of GDP. - Fiscal impact (sample of twelve Pacific Island countries): natural disasters raised government spending by 14-21 percent of GDP over three years (Nishizawa and others 2019, IMF 2024c). - Repeated disasters and climate-driven productivity losses may lower medium term growth prospects. - Sea-level rise: coastal protection is effective but requires public financing and may create large fiscal risks; flexible approaches combining protection and planned relocation can minimize fiscal pressures but require long-term planning and involve ethical and distributional trade-offs. ### Labor markets, public sector, and human development - Public sector relatively large in SDS—exceeding LIDCs—originated to fill market gaps and provide social protection; state ownership of key assets amplifies public sector impact. - Informality and employment: - ILO estimates: median proportion of informal employment in total employment is 31.5 percent for SDS, compared to 1.7 percent for AEs, 28 percent for EMs, and 82 percent for LIDCs. - Self-employment (WDI, 2022): median is 34 percent for SDS, compared to 13.7 percent for AEs, 31 percent for EMs, and 73 percent for LIDCs. - Of the 23 SDS with ILO unemployment estimates, 10 had double digit average unemployment rates between 2000-21, with a mean of 17.3 percent. - Human development: - Median mean years of schooling: females 9.3 years and males 9.1 years in SDS; LIDCs: females 4.6 and males 6.3 years; EMs: 9.9 years for both females and males. - Capacity constraints and governance: institutional under-staffing, turnover, emigration, data limitations; state regulation combined with weak capacity can elevate rent-seeking and corruption risks. - Institutional quality metric: median CPIA score for SDS covered by the database (19 PRGT eligible SDS plus Guyana and Fiji) is 3.25; benchmark median for all countries is 3.21 for 2022 (min 1.6, max 4.1). ### Priorities for policy dialogue: Promoting sustained, inclusive, resilient growth and job creation - General guidance: engagement should follow operational guidance for full membership, including the Guidance Note for Surveillance Under Article IV Consultations (IMF 2022a). - Sectoral and industrial policy advice: - Acquire greater sectoral expertise and deeper sectoral analysis where economies rely on a single growth driver. - Distinguish between GDP and GNI due to high foreign ownership. - Prioritize horizontal policies improving business environment before industrial (vertical) policies; if industrial policy pursued follow IMF (2024a) guidance (evaluate design, safeguards, fiscal implications, SOE roles; analyze special economic zones linkages). - Trade and regional integration: reduce trade costs via upgraded trade-related infrastructure and improved institutions; assess risks from trade disruptions and structural global changes. - Labor market and job creation: - Analyze public employment and public wages impacts. - Consider calibrating public sector wage bill to enhance competitiveness and private sector job creation. - Long-term goal: larger private sector role, stronger productivity, more and better-paid private sector jobs, reduced informality, and reduced migration of better-educated segments. - Address youth unemployment via education investment, improved access to secondary and tertiary education, structural policies, and measures to encourage job formality (IMF, 2019). - Facilitate access to finance for SMEs. - Migration and remittances: outward migration can harm labor markets; remittances can mitigate BoP shocks (Kpodar and others 2021); staff should discuss policies to optimize migration-related opportunities. - Governance and corruption: guided by The Role of the IMF in Governance Issues (IMF 1997) and the Framework for Enhanced Fund Engagement on Governance (IMF 2018d); combine advice and conditionality with tailored CD where capacity is limited. - Gender integration: guided by the Interim Guidance Note on Mainstreaming Gender at the IMF (IMF 2024b); narrow gender gaps to boost growth and resilience; policies to promote female labor force participation, entrepreneurship, access to education/healthcare/social protection/finance/legal rights; raise women’s digital literacy and access to digital finance; apply gender lens to fiscal policy and infrastructure investment. ### Confronting climate risks and building resilience - Holistic approach: adaptation and resilience-building best when part of holistic development strategy anchored in authority plans and involving public/private sectors. - Fiscal policy to enable climate-resilient investment: - Use pricing instruments, market mechanisms, removal of implicit/explicit subsidies. - Strengthen social safety nets. - Remove barriers and incentivize private adaptation investment. - Synergies with PIM and infrastructure governance (Bellon and Massetti 2022). - Disaster resilience strategies: - Diagnostic-based strategies on three pillars: structural, financial, post-disaster/social resilience. - Integrate adaptation into macro-fiscal frameworks and link to Debt Sustainability Analysis. - Sea-level rise actions: recommend analysis of costs and benefits of adaptation options to inform public spending and trade-offs. ### Energy dependence, transition opportunities, and carbon pricing - Many SDS dependent on imported fossil fuels; susceptible to international price shocks and pressures on fiscal positions where subsidies exist. - Low-carbon transition opportunities: - Reduce fossil fuel dependence, move to cheaper/cleaner renewables, lower oil imports, improve current account, reduce inflation/fiscal volatility, potentially lower electricity prices and boost competitiveness (notably geothermal potential in some SDS). - Constraints to renewables: - Access to finance for upfront costs; cost of capital in SDS can be much higher than in AEs. - Scarcity of land; offshore wind may be viable for island economies. - Carbon pricing options: - carbon taxes, emissions trading systems (ETS), feebates, environmental fiscal reforms, higher excises on fuels based on CO2 content. - Carbon pricing can raise revenues often 1 to 3 percent of GDP. - Revenues can fund public investments and SDG-related expenditures; a portion should finance targeted transfers to poorest households to offset energy price impacts. - Implementation guidance: carbon taxes can be built into pre-existing fuel excise systems; ETS may be too complex for capacity-constrained settings. - Fossil fuel subsidy reform: - Reform can reduce emissions and free fiscal space; consider automatic fuel price and electricity tariff adjustments; couple reforms with social protection and productive investment measures. - Emissions measures for fossil fuel producers: - Standards/regulations to restrict flaring, leak detection and repair; fines for non-compliance; potential taxes on methane and CO2 on extraction. ### Climate finance: gaps, instruments, and prerequisites - Large investment needs exceed available financing; scaling up requires effective climate policies, innovative financing, a list of investable projects, and larger investor base. - OECD finding: between 2016-2020 Pacific Island Countries had access to less than $0.5 billion out of the $100 billion per year pledged by advanced economies to developing economies. - SDS face challenges accessing multilateral climate funds; development partners are important. - Policy measures to attract private climate funding: strengthen macro fundamentals, deepen capital markets, reform institutional/investment/governance frameworks, close data gaps. - Fiscal CD recommendations: strengthen PFM and PIM through diagnostics like climate C-PIMA; use diagnostics for climate-related financial stability issues. - Innovative instruments (to be discussed, not endorsed): green and catastrophe bonds, debt-for-nature and debt-for-climate swaps, climate resilient debt clauses, international carbon crediting, climate-related insurance schemes. - Instruments with greater risk absorption (equity, guarantees) and pooling can crowd-in private capital; standardization needed to enhance scale and tradability. ### Strengthening fiscal frameworks and debt sustainability - MTFF should: - Recognize priorities (reducing debt vulnerabilities, enhancing fiscal resilience, supporting climate adaptation/mitigation). - Set medium-term aggregate objectives (debt limits, surplus targets, deficit ceilings, broad expenditure limits). - Create adequate fiscal buffers for agile responses. - Fiscal rules: clear credible anchor, shock-adjustment provisions, credible return paths. - Fiscal councils can strengthen credibility where capacity allows. - Pace of buffer accumulation should consider frequency of shocks, investment needs, borrowing capacity, assistance availability, and cost of maintaining buffers. - Link revenue mobilization and spending reforms with MTFF; tailor to SDS capacity. - Effective collaboration with development partners is crucial for coordinated CD delivery. ### Fiscal policy challenges, revenue mobilization, and CBI/RBI risks - Revenue challenges: - Narrow base, large informal sectors, more than one-third of gross revenues from non-tax revenue (volatile), complex tax systems with high rates and exemptions, under-staffed revenue administrations lacking ICT investment. - Domestic revenue mobilization may be impacted by participation in trade facilitation protocols. - Spending challenges: - Capacity and governance weaknesses leading to weak fiscal management and poorly targeted subsidies. - Consequences: rapid accumulation of debt liabilities; high public debt, high output volatility, and elevated country risk keep interest rates high and create financing challenges; reliance on bank financing and sovereign-bank nexus can crowd out private financing. - Banking sector data: December 2022, fraction of banking sector’s assets held by public sector about 12 percent for SDS, compared to 19 percent in LIDCs. - Policy options to strengthen revenue mobilization: - Tax policy: broaden base, remove exemptions, remove reduced VAT rates, streamline incentives, strengthen real property taxation, simplify legislation. - Revenue administration: strengthen management, governance, systems, data management for risk analysis, enhance compliance and taxpayer services, focus on large taxpayer segment. - Invest in human capital, ICT, digitalization. - Anchor reforms within a medium-term agenda; consider regional approaches for economies of scale. - Citizenship and Residency by Investment (CBI/RBI) programs: - Prevalent in some SDS (examples listed in source). - Can raise revenue and growth but revenues uncertain/volatile; create integrity, corruption, tax, reputational risks; can affect tax transparency and CBRs. - Recommended safeguards: risk assessment/management, effective vetting of applicants and sources of funds, transparency, enhanced AML/CFT safeguards, strengthened international cooperation. - Staff should encourage treating CBI/RBI revenue as windfall gains and monitor trends such as digital residency programs. ### Improving spending efficiency, PFM, SSNs, and GovTech - Strengthening PFM: - Streamline and reprioritize recurrent spending to create fiscal space and buffers for disaster-related expenditures. - Contain non-discretionary spending (e.g., public sector wage bill). - Treat future disaster-related public spending as public contingent liability for budgetary purposes. - Enhance debt management capacity. - Social spending and SSNs: - Advice should consider existing SSNs, capacity to absorb additional spending, and social/political preferences. - SSNs underdeveloped in SDS; PFM and governance gaps limit capacity; geography adds challenge. - Align SSNs with fiscal and debt sustainability; refer to Operational Guidance Note for IMF Engagement on Social Spending Issues (IMF 2024d). - Digitalization and GovTech: - GovTech can improve revenue mobilization, expenditure efficiency, service delivery, fiscal transparency, and social outcomes (Amaglobeli and others 2023). - Benefits conditional on proper design, institutional strengthening, data security and privacy safeguards. - Constraints: low internet connectivity, lack of expertise, cyber risk; digitalization should adapt to low-connectivity environments. ### Monetary, exchange rate policy, reserve adequacy, and capital flows - Monetary policy challenges: - Susceptibility to shocks, underdeveloped financial markets, capacity constraints; central banks often have multiple objectives and limited independence. - Monetary transmission weak: low financial development, thin interbank markets, poorly developed government securities markets, dollarization. - In 2022, three-quarters of SDS imposed restrictions on capital market securities, direct investment and real estate transactions. - As of 2022, 30 out of 34 SDS use the exchange rate as the nominal anchor (fixed exchange rates); only two have floating exchange rates. - Policy implications: - Advice should account for prevalence of pegs and institutional constraints. - Central banks should prioritize transparent coherent frameworks with price stability as primary objective (IMF 2015b). - Strengthen central bank independence and adopt prudent fiscal policies to contain fiscal dominance and quasi-fiscal risks. - Traditional reserve money targeting can help when domestic markets are underdeveloped. - Reserve adequacy and buffers: - Account for pegs and higher volatility when assessing reserve adequacy. - Build strong policy buffers; sufficient international reserves key to coping with shocks and maintaining a credible peg. - Consider small island specificities (e.g., Mwase 2012). - Dollarized SDS may need more reserves; account for FX interventions by central bank. - Capital flows and macroprudential measures: - Limited shock absorption capacity may require assessment of CFMs and MPMs guided by The Institutional View (IMF 2022e). - SDS may face tighter constraints due to fixed regimes, strengthening the case for preemptive CFM/MPMs, but these should not sustain unsustainable pegs. - Supervision capacity over CFMs/MPMs is key; prioritize simple resilience-boosting approaches (e.g., high capital and liquidity buffers). - IPF frictions (shallow FX markets, unhedged currency mismatches, inflation expectations de-anchoring) may limit full operationalization of Integrated Policy Framework. - Prioritize warranted monetary and fiscal adjustment to preserve financial and price stability given capacity and communication constraints. ### Deepening the financial sector and ensuring oversight - Financial sector characteristics: - Often shallow, concentrated, and foreign owned with under-developed institutional frameworks; lack of credit bureaus; some SDS are financial centers with offshore sectors serving mostly non-residents. - Weak supervisory capacity, limited data, conflicting mandates, infrequent enforcement, weak legal authority. - Policy focus: - Deepening must go hand-in-hand with stronger regulation and supervision; tailor policies to country-specific systemic risk. - CD should focus on core stability issues: bank supervision, data collection/analysis, legal framework reform. - Diagnostic tools: - FSAP and FSSR are potential diagnostics; FSAP intensive and suitable for larger SDS; FSSR useful where low-capacity requires careful prioritization and sequencing. - Financial integrity and CBRs: - ML/TF risks include high-risk sectors (offshore, CBI), opaque corporate structures, capacity constraints; risks can lead to illicit activity, instability, reputational risks, and FATF listings. - CBRs have declined significantly more in SDS than in most groups, raising remittance costs, slowing transactions, and risking complete loss of CBRs for some SDS. - Staff should support SDS with comprehensive risk understanding, prioritized mitigation, focused AML/CFT supervision, stakeholder dialogue, tailored CD, and innovative solutions (e.g., draft IMF-World Bank framework for safe payment corridors). - Digital money and fintech: - Offer opportunities for inclusion and efficiency but adoption should be gradual with clear legal/regulatory frameworks, AML/CFT safeguards, and attention to monetary/financial conditions. - Unbacked crypto assets unsuitable as official currency. - Staff should emphasize ML/TF risk understanding and strengthen AML/CFT preventive measures; Fund TA/training can support addressing integrity implications of CBDC and crypto assets. ### Surveillance, analytical tools, and data - Surveillance should be tailored to SDS circumstances using SRDSF, LIC-DSF, and EBA-lite flexibly. - Make full use of internal resources to bring cross-country insights; consolidate experience across Caribbean, Pacific, Africa. - New tools: - GaR methodology: assesses risks to growth distribution and can be tailored to SDS; empirical applications include ECCU and Trinidad and Tobago examples. - Big Data and AIS: - AIS data used to complement customs data, measure trade flows, and detect turning points; PortWatch platform provides AIS-derived real-time trade estimates for ports and critical passages. - Leverage AIS and other Big Data to strengthen surveillance, early warning, and trade nowcasting. ### Capacity Development (CD): integration, tailoring, and modalities - CD investments critical; CD should be integrated with surveillance and lending and tailored to absorptive capacity. - Coordination: area departments lead coordination in line with 2018 and 2024 CD Strategy reviews. - Mechanisms to enhance integration: - Country Engagement Box and Country Engagement Strategies to articulate CD priorities. - Resource allocation and RBM processes, internal CD dashboards, leveraging field staff (Resident Representatives, RCDCs). - Country teams required to clear CD briefs and review outputs. - Principles for tailoring CD: - Consultation with authorities and stakeholders; realistic interventions; proper sequencing; leverage flexible CD resources and modalities (training, in-country advisors, RCDCs, hybrid delivery); emphasize institutional capacity building in use of LTXs; strengthen leadership capacity and change management. - Regional training and RCDCs: - PFTAC example: regional macro training, LTX experts, peer-to-peer learning; RCDCs critical as regional knowledge hubs (CARTAC, PFTAC major CD providers). - Climate CD products: - Fiscal management (green PFM, C-PIMA, Q-CRAFT), financial sector climate integration, data/statistics (climate indicators), legal/anti-corruption guidance, macroeconomic modeling tools (ND-DDT, DIGNAD, Climate Macroframeworks Toolkit). ### Lending, program design, and instruments relevant for SDS - No facility dedicated to SDS; staff have flexibility within current lending policies to meet SDS needs. - Historical use: extensive use of Emergency Financing (RCF, RFI) for exogenous shocks and capacity constraints. - As of May 2024: - 19 SDS are eligible to concessional resources under the PRGT. - All SDS are eligible for borrowing under the Resilience and Sustainability Trust (RST). - Facilities and features: - EF instruments (RCF/RFI): rapid BoP support for exogenous shocks or where UCT-quality programs not needed/feasible. - UCT-quality arrangements: - ECF (PRGT): 3-5 years, for protracted BoP problems; can include PPFGs. - EFF (GRA): maximum duration 4 years; does not allow PPFGs. - Higher-income PRGT-eligible countries presumed to blend PRGT with GRA resources (IMF 2021f). - Other instruments: SBA, SCF, SLL, FCL, PLL as applicable. - PRGT and grants: - Access to CCRT grants for debt relief under catastrophic natural disasters or fast-spreading health disasters (example: four SDS benefitted during 2020 pandemic). - Non-financing instruments and track-record building: - PCI: non-financing UCT-quality instrument to signal reform commitment and catalyze financing. - SMP: preferred for track-record building when capacity limited; 2022 amendment allows PMB in selected cases. ### Resilience and Sustainability Facility (RSF) and RSF Reform Measures (RMs) - RSF purpose: affordable long-term financing for reforms reducing macro-critical climate/pandemic risks; complements PRGT and GRA lending toolkits. - RSF design and safeguards: - Requires concurrent UCT-quality program for policy safeguards. - Normally approved concurrently with approval/completion of a review of a qualifying UCT program with at least 18 months remaining. - RSF arrangements can accompany non-financing instruments like PCI. - Design of RSF Reform Measures (RMs): - RMs should be strong (criticality, ambition, depth) yet tailored to SDS circumstances; build on Country Engagement Strategy/Box diagnostics. - Implementing climate reforms in weak-capacity SDS is extremely challenging and requires extensive CD. - Apply parsimonious conditionality and careful prioritization of RMs; consider tailored solutions in RST comprehensive review in 2026 (IMF, 2024c). - Program design considerations: - Account for policy tradeoffs due to limited policy space and capacity. - Build macro-frameworks on realistic assumptions; link fiscal adjustment to social protection where SSNs weak. - External financing often critical; liaise with IFIs and development partners to assess financing envelope. - High shock exposure requires robust contingency planning, flexibility, and actionable mitigation measures; consider augmentation of arrangements after shocks. - Use incremental RMs and CD to support deep reforms; recognize PPFGs under ECF to add realism. ### Tailoring conditionality, monitoring, and coordination with partners - Structural Benchmarks (SBs): - Tailor SBs to sequence reforms accounting for limited capacity; break deep reforms into intermediate steps; ambitious SBs could be supported by increased disbursements. - Align long-term reform agendas with national plans, CD plans, and partner coordination. - Data, transparency, and monitoring: - Assess authorities’ capacity to measure and monitor QPCs and Indicative Targets; consider using below-the-line data where above-the-line fiscal data have long lags. - Technical Memorandum of Understanding must contain detailed accurate descriptions of performance criteria. - Greater use of ITs may be appropriate in volatile contexts; large deviations due to disasters addressed by waivers, PC modifications, and adjustments during reviews. - Coordination with development partners: - Necessary to avoid overburdening authorities and to leverage sectoral expertise and local presence of partners (World Bank, MDBs, regional development banks). - Collaborate on CD and joint assessments (FSAPs, DSAs) and coordinate missions and CD to improve sequencing and absorption. - Engage CSOs, think tanks, and academia for institutional and analytical background. - Example joint TADAT assessments cited in source. ### Country Engagement Box (Annex II) — purpose and guidance - Purpose: articulate high-level considerations underpinning staff’s engagement strategy with SDS; foster integration of surveillance, lending, and CD; recognize domestic constraints. - Scope: discuss country engagement issues three years into future, consistent with medium-term Article IV perspective; should not duplicate Policy Note or Staff Report. - Preparation and content: - Area Departments lead preparation with Functional Department inputs; not required for SDS that are also FCS. - Start from staff’s assessment of authorities’ medium-term objectives; recognize capacity/institutional/financing constraints to guide sequencing. - Specify staff engagement plan, CD priorities, collaboration with development partners, and a forward-looking agenda to sequence data improvements and analytical work. - Frequency: integrated into Article IV process at lower frequency; prepare/update once every three years for annual Article IV countries or every other Article IV for 24-month cycle countries; normally not exceed one page. ### Data gaps, new frameworks, and Big Data use - Severe data gaps and limited capacity create surveillance challenges across standard and new topical areas (climate, digitalization, gender). - New data adequacy assessment framework (IMF 2024g), endorsed January 2024 and implemented starting February 2024, allows more granular evaluation of data weakness and should inform CD priorities. - Leverage alternative/new data sources (e.g., AIS) and Fund data initiatives to complement official statistics, improve trade nowcasts, and monitor disruptions. - PortWatch: AIS-derived real-time trade estimates platform with pages for 1,469 ports and 24 critical maritime passages; offers data, maps, interactive query tool, and APIs. ### Gender and inclusion (Annex III) - Digital inclusion and financial access: - Gender-focused digital inclusion can equip women with digital skills, online banking and mobile financial services, enabling entrepreneurship, remote work, and access to markets, education, and health. - Economic diversification and female entrepreneurship: - Enhancing female participation can mitigate reliance on single sectors and foster job creation and socio-economic development; requires addressing barriers to credit, land, networking. - Labor market balance and public-sector dominance: - Ensure equal opportunities, equal pay, gender-sensitive recruitment, and support for women in leadership to improve labor market efficiency and private sector competitiveness. - Gender-aware fiscal policy and infrastructure: - Apply gender lens to fiscal policy and infrastructure investments (transport, ICT, energy) to enhance mobility and participation. - Women’s role in climate resilience: - Empowering women enhances community resilience and local adaptive capacity; involve women in planning and decision-making for environmental management and disaster preparedness. *Source: Guidance Note on the IMF’s Engagement with Small Developing States (selected excerpts from ppea2024035).* ### EXECUTIVE SUMMARY ### ppea2024035 - EXECUTIVE SUMMARY ### Purpose and scope - Provides operational guidance on the Fund’s engagement with small developing states (SDS). - Updates the previous version published in December 2017. - Applies to the Fund’s engagement across surveillance, financial support and program design, capacity development (CD), and collaboration with other institutions and donors. - Introduces a Country Engagement Box for Article IV staff reports to enhance strategic engagement and traction. - In applying this guidance, staff should continue to tailor their engagement to specific country circumstances. - Date on document: July 8, 2024. ### Core thematic areas for policy dialogue - The note centers on five thematic areas: - (i) Promoting Sustained, Inclusive and Resilient Growth and Job Creation; - (ii) Confronting Risks and Building Resilience; - (iii) Strengthening Fiscal Frameworks and Debt Sustainability; - (iv) Enhancing Monetary and Exchange Rate Policy Frameworks; and - (v) Deepening the Financial Sector While Ensuring Strong Oversight. - Also outlines evolving areas of engagement and their application to SDS: climate change, gender and inclusive growth, governance, and digitalization. - Provides advice on tailoring Fund guidance on surveillance, CD, and lending to SDS circumstances, including on the use of toolkits and addressing data gaps. ### What is new in the 2024 Staff Guidance Note - Outlines new areas of IMF engagement and applications to SDS including climate change, gender and inclusive growth, governance, and digitalization. - Helps country teams tailor the latest Fund guidance on surveillance, lending, and capacity development to SDS circumstances, including on the use of toolkits. - Stresses the importance of traction and discusses good practices in supporting traction with SDS members. - Provides updated guidance to country teams on engagement with development partners. - Provides guidance for SDS teams on preparing a Country Engagement Box for Article IV Staff Reports. - Innovations stem from the Management Implementation Plan in response to Board-Endorsed Recommendations from the Independent Evaluation Office Evaluation Report on IMF Engagement with Small Developing States. ### Contributors and approvals - Approved By: Rishi Goyal (SPR). - Prepared by the Interdepartmental Working Group on Small Developing States (SDS WG) with named contributors across SPR, AFR, APD, EUR, FAD, ICD, LEG, MCD, MCM, STA, WHD, and under the guidance of Jarkko Turunen (SPR). - Production assistance: Ingrid Rego (SPR). ### Definitions and membership scope - The Fund has 43 small state members with a population under 1.5 million, of which 34 are considered SDS after removing advanced economies and high-income fuel exporters. - The GN also applies to “microstates,” a subset of SDS with population of less than 200,000. - Many countries with population of more than 1.5 million may share “smallness” characteristics and find the GN relevant. - The World Bank engages with small states through the Small States Forum (SSF), which includes 50 states. - The Small Island Developing States (SIDS) grouping of the United Nations (UN) consists of 39 UN member states. - Annex I clarifies differences between SDS and the Fund’s operational concept of a “small state.” ### Key characteristics of SDS - Smallness (small land area and population) is the fundamental characteristic and leads to: - Lack of economies of scale. - Higher vulnerability to shocks affecting the entire country. - Higher degree of openness compared to emerging markets (EMs) and low-income developing countries (LIDCs). - High exposure to climate change and natural disasters. - Scarcity of natural endowment relative to larger countries (arable land, biodiversity, variety of minerals). - A more prominent role for the public sector and more severe capacity constraints than average LIDCs. - Heterogeneity remains important across SDS. ### Island and remoteness implications - Among the 34 SDS, 26 are island countries that are remote, have small land area, or are archipelagos dispersed over a broad ocean area. - All 14 microstates are island countries. - Remoteness and geographic fragmentation limit access to markets, financing, and technology; hinder development of domestic markets and institutions; and increase costs of public service provision and infrastructure. ### Economic structure, volatility, and external exposure - Lack of economies of scale often produces a narrow economic base, limiting growth potential and amplifying macroeconomic volatility. - Twenty-one of the 34 SDS rely on a single driver of growth (tourism, agriculture, or exports of a single commodity), with a few more having a large financial sector. - Average real GDP per capita growth in SDS is only somewhat smaller than that of EMs and LIDCs, but growth in SDS economies is significantly more volatile than in these country groups. - Volatility manifested in larger growth declines in SDS during the global financial crisis and the COVID-19 pandemic (see Figure 1 in source). - High trade openness; trade openness of SDS is nearly twice as high as that of LIDCs. - SDS have higher current account and trade deficits relative to comparison groups. - Between 2000-23, the average trade deficit (in percent of GDP) in SDS was almost 10 percentage points larger than the current account deficit, suggesting a prominent role of income flows (e.g., remittances or official grants) in financing the current account. - The large current account deficit in SDS is characterized by volatility exceeding those in EMs and LIDCs, driven by less predictable trade and income flows. - Despite a more volatile external sector, SDS tend to hold a similar level of reserves as LIDCs—an average of 4 months of imports between 2000-23, but lower than the 5-month average of EMs. - Notably, reserves in SDS have been increasing since the mid-2000s. - Many SDS are highly dependent on imported fossil fuels for their power systems, increasing vulnerability to oil price volatility and underscoring the need for investment in lower-cost and lower-carbon energy production. ### Organization of the Guidance Note (structure) - Section 2: unique economic characteristics of SDS and heterogeneity. - Section 3: priorities for policy dialogue. - Sections 4–6: operational guidance on surveillance, CD, and financial support and program design, with reference to existing GNs. - Section 7: collaboration with other institutions and donors. - Annexes include: Definitions of Small States (I), Guidance on the SDS Country Engagement Box (II), Intentional Gendered Policies (III), Recent Fund Program Engagement with SDS (IV), Data Gaps in SDS (V), and References. *Source: EXECUTIVE SUMMARY (Guidance Note on the IMF’s Engagement with Small Developing States), ppea2024035 - EXECUTIVE SUMMARY.* ### 8. Despite their minimal contribution to global warming, SDS are also disproportionately ### 8. Despite their minimal contribution to global warming, SDS are also disproportionately vulnerable to shocks and spillovers originating from climate change (Figure 2) ### Climate vulnerability and economic impacts - Small island states: risk of losing a substantial share of land and capital due to sea level rise; population exposure to floods and storm surges. - Natural disasters (1960-2020) in SDS: - accounted for 55 percent of global natural disasters causing 20-30 percent of GDP in damages and 70 percent of natural disasters with damages exceeding 30 percent of GDP. - Repeated disasters and climate-driven productivity losses may lower medium term growth prospects. - Fiscal impact of severe natural disasters (sample of twelve Pacific Island countries): natural disasters raised government spending by 14-21 percent of GDP over three years (Nishizawa and others 2019, IMF 2024c). - Climate change and natural disasters can disrupt food supply, raise food imports and transport costs, fuel food price inflation, and exacerbate food insecurity. - Potential large long-term fiscal risks from sea-level rise in small island states: - Coastal protection is effective but requires public financing and may create large fiscal risks. - More flexible approaches combining protection and planned relocation can minimize fiscal pressures but require long-term land use planning and involve ethical and distributional trade-offs. ### Structural characteristics and labor market outcomes in SDS - Public sector: - Relatively large size in SDS—exceeding those in LIDCs—originated to fill gaps from small market size and to provide social protection; high fixed costs in service provision contributed as well. - State ownership of key economic assets amplifies public sector impact on the economy. - Informality and employment: - ILO estimates: median proportion of informal employment in total employment is 31.5 percent for SDS, compared to 1.7 percent for AEs, 28 percent for EMs, and 82 percent for LIDCs. - Self-employment (WDI, 2022): median level of self-employment as a proportion of total employment is 34 percent for SDS, compared to 13.7 percent for AEs, 31 percent for EMs, and 73 percent for LIDCs. - Of the 23 SDS for which the ILO provides unemployment rate estimates, 10 had double digit average unemployment rates between 2000-21, with a mean of 17.3 percent. - Unemployment especially high among youth and women; inclusiveness challenges persist despite some gender performance advantages relative to LIDCs. - Human development and gender: - Moderate Human Development Index levels indicate critical development needs for both men and women. - Median mean years of schooling: females 9.3 years and males 9.1 years in SDS, compared to 4.6 and 6.3 years for LIDCs, and 9.9 years for both females and males for EMs (as noted). - Capacity constraints and governance: - Institutional under-staffing, high staff turnover, and emigration of qualified staff constrain fiscal, monetary, exchange rate, and financial policy capacity; data limitations are more acute. - State regulation combined with weak institutional capacity can elevate rent-seeking and governance/corruption risks. - Heterogeneity across SDS: - Caribbean SDS: on average richer, rely more heavily on tourism. - Pacific Island SDS: much less developed and host most SDS fragile states. - Lower income SDS: tend to have larger public sectors, higher fiscal deficits, greater dependence on non-tax revenue, receive more ODA, run higher trade deficits, and have particularly low credit to private sector. - Higher income SDS: accumulated larger stock of public debt, especially in Caribbean SDS; microstates stand out as having higher current account deficits than others. - Institutional quality metric: - Median CPIA score for SDS covered by the database (19 PRGT eligible SDS plus Guyana and Fiji) is 3.25; benchmark median for all countries is 3.21 for 2022, with minimum and maximum values being 1.6 and 4.1, respectively. ### Priorities for policy dialogue: Promoting sustained, inclusive, and resilient growth and job creation - General guidance: - Staff engagement should be guided by operational guidance for the full membership, including the Guidance Note for Surveillance Under Article IV Consultations (IMF 2022a). - Sectoral and industrial policy advice: - Macro-critical reforms should focus on sectoral advice and coordination with development partners where needed. - Country teams should acquire greater sectoral expertise and conduct deeper sectoral analysis, especially where economies rely on a single key growth driver. - Distinguish between GDP and GNI due to high levels of foreign ownership in many sectors. - Prioritize horizontal policies that improve the general business environment before resorting to industrial (vertical) policies. - If industrial policy is pursued, follow IMF (2024a) guidance: evaluate design, safeguards against rent-seeking and corruption, fiscal implications of tax breaks, and role of state-owned enterprises; for special economic zones analyze linkages to the domestic economy. - Trade and regional integration: - Trade integration and regional cooperation can enlarge market size and diversify risks. - Reducing trade costs via upgraded trade-related infrastructure and improved national and regional institutions is needed. - Staff should help authorities assess opportunities and manage risks from trade disruptions and structural global changes (e.g., climate change, new technologies, geoeconomic fragmentation). - Labor market and job creation: - Analyze how public employment and public wages affect labor markets and wage-setting processes. - Consider calibrating public sector wage bill to enhance competitiveness and private sector job creation. - Long-term goal: larger private sector contribution to growth, stronger productivity, more and better-paid private sector jobs, reduced informality, and reduced migration of better-educated segments. - Address youth unemployment via investments in education, improved access to secondary and tertiary education, structural policies to improve labor market institutions and flexibility, and measures to encourage job formality (IMF, 2019). - Facilitate access to finance for small- and medium-sized enterprises to support growth and job creation. - Migration and remittances: - Outward migration can adversely impact labor markets and growth but remittances can mitigate balance of payments shocks (Kpodar and others 2021). - Staff should discuss policies to optimize migration-related opportunities. - Governance and corruption: - Good governance and addressing corruption vulnerabilities are critical for private sector-led growth. - Engagement guided by The Role of the IMF in Governance Issues (IMF 1997) and the Framework for Enhanced Fund Engagement on Governance (IMF 2018d). - Advice should be tailored to SDS characteristics and political economy constraints; combine policy advice and program conditionality with tailored capacity development where capacity is limited. - Gender integration: - Integrate gender considerations into public policy strategies, guided by the Interim Guidance Note on Mainstreaming Gender at the IMF (IMF 2024b). - Narrowing gender gaps can increase economic efficiency and productivity, boost growth, and strengthen resilience. - Policies to promote female labor force participation, entrepreneurship, access to education, healthcare, social protection, finance, and legal rights can diversify the export base and enhance stability. - Raising women’s digital literacy and access to digital finance can reduce remoteness barriers and enable participation in the global digital economy. - Implement fiscal policy and infrastructure investment with a gender lens to ensure broad-based benefits; data limitations may constrain diagnosis and prescriptions. ### Confronting climate risks and building resilience — adaptation, fiscal measures, and policy links - Holistic approach: - Adaptation and resilience-building policies are most effective when part of a holistic development strategy involving public and private sectors, anchored in existing authority plans. - Fiscal policy to enable climate-resilient investment: - Fiscal reforms should aim to enable climate-resilient investment and attract private investment; promote efficient private adaptation. - Fiscal tools could include pricing instruments (e.g., natural resource or water pricing), market mechanisms (e.g., water markets), and removal of implicit and explicit subsidies. - Strengthen social safety nets to protect vulnerable populations. - Adaptation reforms overlap with clean water, sanitation, agriculture, and infrastructure; have synergies with improved public investment management and infrastructure governance (Bellon and Massetti 2022). - Discuss removing barriers to private adaptation and provide incentives for private adaptation investment. - Comprehensive disaster resilience strategies: - Vulnerable countries could develop disaster resilience strategies grounded in a diagnostic of vulnerabilities and resting on three pillars: structural, financial, and post-disaster/social resilience. - Such strategies support ex-ante planning, coordinate development partner work pre- and post-disaster, and help catalyze donor support (IMF 2019). - Country teams encouraged to discuss integration of adaptation into macro-fiscal policy frameworks and improving the investment environment to attract private financing. - Adaptation and resilience discussions should be linked to Debt Sustainability Analysis and consider policy implementation capacity and development context. - Sea-level rise actions: - Staff teams could raise sea-level rise issues with authorities and recommend concrete steps to assess risks. - Recommend analysis of costs and benefits of alternative adaptation options as a starting point for decisions involving public spending and societal/generational trade-offs. *Source: Guidance Note on the IMF’s Engagement with Small Developing States (excerpt provided).* ### 23. For SDS reliant on fossil fuels as the main source of energy, policy discussions could ### 23. For SDS reliant on fossil fuels as the main source of energy, policy discussions could ### Energy dependence, risks, and opportunities - Most SDS are dependent on imported fossil fuels, leaving them susceptible to international price shocks and uncertainties surrounding global fossil fuel demand and supply. - SDS are among the most energy dependent countries in the world. - A surge in oil prices can rapidly cause a deterioration in their terms of trade, an increase in imports, and a surge in inflation; in countries with fuel price subsidies, it can weaken fiscal positions and debt sustainability. - The transition to low-carbon energy offers SDS an opportunity to: - reduce fossil fuel dependence, - move to cheaper, cleaner, and more efficient renewable energy, - lower oil imports and improve current account positions, - reduce vulnerability to global oil price fluctuations and lower negative impacts on inflation and fiscal revenues, - potentially lower electricity prices and boost competitiveness, enabling diversification into energy-intensive industries (notably for SDS with geothermal potential where potential renewable energy production could be greater than current energy needs). - Constraints to adopting renewable energy in SDS: - Ability to access finance for investment in renewable energy, given large upfront costs and uncertain returns; cost of capital in SDS can be much higher than in advanced economies. - Availability of land can be scarce in SDS; offshore wind may be a potential solution for island economies. - Box Figure definitions and data sources: Energy dependency ratio is defined as net energy imports divided by gross available energy. Sources: UN Energy Statistics Database, UN Comtrade, and IMF staff estimates. ### Policy focus for fossil-fuel-reliant SDS - Domestic emissions reductions and adoption of low-carbon technologies should be central in policy discussions. - Fiscal policy should: - support domestic emissions reduction, - encourage adoption of low-carbon technologies, - help those most vulnerable to changes from the transition. ### Fossil fuel exporters, remittance-dependent SDS, and tourism-exposed countries - Assessment of vulnerabilities from a long-term decline in fossil fuel demand should include impacts on: - revenues, exports, and financial flows (thus debt sustainability), - SOE finances, employment, and financial sector exposure. - Broader macroeconomic risks from the low-carbon transition can be mitigated by accelerating structural reforms to support economic diversification. - Country teams should discuss authorities’ transition management plans, including: - establishing fiscal frameworks and maintaining/boosting revenue streams, - strengthening debt management, - containing financial sector exposures (including exposure to stranded assets, if applicable), - exploring policy options for sustainable finance. - For SDS heavily dependent on remittances and other financial flows from fossil fuel exporters, teams should discuss sensitivity of the current account and fiscal revenues to changes in fossil fuel-related flows. - Tourism destination countries may be impacted via exposure to global fuel price fluctuations, trends in eco-tourism, and the carbon footprint of travel. ### Carbon pricing and emissions-reducing instruments - Carbon pricing options include: - carbon taxes, - emissions trading systems (ETS), - feebates, - environmental fiscal reforms, - higher excises on fossil fuels based on their CO2 content. - Implementation guidance for capacity-constrained SDS: - Carbon taxes can be built into pre-existing fuel excise systems applied at the point of import or refining of fuels. - ETS may be too complex to implement and monitor in capacity-constrained settings. - Revenue potential and use: - Carbon pricing can raise substantial revenues in SDS, often 1 to 3 percent of GDP. - Revenues can fund public investments and expenditures to achieve Sustainable Development Goals (SDGs). - A portion of revenues should be used for targeted transfers to the poorest households to alleviate negative impacts on poverty from increasing energy prices, for example by scaling up existing conditional and unconditional cash transfer programs present in many SDS. - A well-designed carbon tax can be simple to administer if building on existing excise tax regimes. ### Fossil fuel subsidy reform - Reform can reduce emissions and free up fiscal space. - Fiscal measures could include automatic fuel price and electricity tariff adjustments to reflect the real cost of supply. - Reforms should be coupled with measures to alleviate adverse social and economic impacts, including: - policies to strengthen the social welfare system, - reduce distortionary taxes, - bolster productive investments. ### Additional emission-reducing measures for fossil fuel producing SDS - Consider standards and regulations to restrict non-routine flaring and require proven, low-cost abatement options (e.g., leak detection and repair). - Couple regulations with fines for non-compliance and potentially a tax on methane and CO2 emissions on fossil fuel extraction to incentivize emissions reductions. ### Climate finance: gaps, instruments, and policy prerequisites - Large climate investment needs are not matched by financing; scaling up requires effective climate policies, innovative financing structures, a list of investable projects, and a larger investor base. - OECD finding: between 2016-2020 Pacific Island Countries had access to less than $0.5 billion out of the $100 billion per year pledged by advanced economies to developing economies. - SDS face challenges gaining or increasing access to climate financing from multilateral climate funds; Development Partners play an especially important role given private solutions are not always feasible. - Policy measures to attract private climate funding: - strengthen macroeconomic fundamentals, - deepen capital markets, - reform institutional, investment, and governance frameworks, - close data gaps. - Fiscal capacity development recommendations: - strengthen public financial management (PFM) and public investment management (PIM) through diagnostics like the climate C-PIMA, - use diagnostics that address climate-related financial stability issues. - Innovative climate finance instruments SDS may consider (staff should discuss opportunities and challenges without endorsing use): - green and catastrophe bonds, - debt-for-nature and debt-for-climate swaps, - inclusion of climate resilient debt clauses in borrowing agreements, - international carbon crediting, - climate-related insurance schemes. - Instruments with greater risk absorption (equity investments and guarantees) and pooling of projects/resources can help crowd-in private capital; standardization is needed to enhance scale, tradability, liquidity, and index inclusion. ### Strengthening fiscal frameworks and debt sustainability - Managing high volatility and frequent natural disasters requires a credible medium-term fiscal framework (MTFF) that: - recognizes diverse priorities (reducing debt vulnerabilities, enhancing fiscal resilience, supporting climate adaptation and mitigation), - sets medium-term aggregate fiscal objectives (e.g., debt limits, surplus targets, deficit ceilings, broad expenditure limits), - creates adequate fiscal buffers for agile responses to large adverse shocks. - Properly designed fiscal rules should have a clear and credible fiscal anchor, provisions to adjust targets in case of shocks, and credible paths to return to targets in the medium term. - SDS can strengthen credibility and transparency by setting up fiscal councils where capacity allows and encouraging independent analysis and forecasts. - Pace of accumulation of fiscal buffers should be calibrated to frequency of shocks, development investment needs, borrowing capacity and assistance availability, and financial cost of maintaining buffers. - Link medium-term revenue mobilization and other spending reforms with the MTFF, tailored to SDS circumstances and limited capacity. - Effective collaboration with development partners is crucial to coordinate efforts and enhance capacity development (CD) delivery. ### Fiscal policy challenges and revenue mobilization - Challenges on the revenue side: - narrow economic base concentrated in a few formal sectors, - large informal sectors eroding the tax base, - more than one-third of gross revenues come in the form of non-tax revenue (resource sector revenue, inflows from citizenship or residency by investment programs, or foreign aid), which are usually volatile and may be limited or unsustainable long term. - tax systems are often complex with high tax rates and widespread exemptions. - revenue administrations suffer from under-staffing and lack investment in ICT and digitalization, creating opportunities for non-compliance or delayed compliance. - Domestic revenue mobilization may be impacted by participation in trade facilitation protocols. - Challenges on the spending side: - capacity constraints and governance weaknesses can lead to weak fiscal management and poorly targeted subsidies, leaving substantial room to improve spending quality and efficiency. - Consequence: persistent fiscal challenges have led to rapid accumulation of debt liabilities; high public debt, high output volatility, and elevated country risk keep interest rates high and increase financing challenges; reliance on bank financing and the sovereign-bank nexus can create financial stability risks and crowd out private financing. - IMF Monetary and Financial Statistics data: in December 2022, on average, the fraction of banking sector’s asset held by public sector is about 12 percent for SDS, compared to 19 percent in LIDCs. ### Policy options to strengthen revenue mobilization - Tax policy reforms: - broaden the tax base by removing exemptions, - remove reduced VAT rates, - streamline tax incentives, - strengthen real property taxation, - simplify legislation and regulations. - Revenue administration reforms: - strengthen management, governance, systems, and core functions, - build data management capabilities for risk analysis, - enhance tax compliance, - improve taxpayer services, - focus on actively managing the large taxpayer segment. - Invest in human capital, ICT, and digitalization. - Anchor revenue reforms within a medium-term agenda for targeted, incremental, and sustainable implementation; consider regional approaches (e.g., for ICT projects) to exploit economies of scale. ### Broader tax policy assessment and specific risks - Staff should assess tax policy in a broader macroeconomic context (e.g., plans to compensate for revenue losses if joining regional/international trade agreements). - Citizenship and Residency by Investment (CBI/RBI) programs: - prevalent in some SDS (examples include Antigua and Barbuda, Dominica, Grenada, Montenegro, St. Kitts and Nevis, St. Lucia, Vanuatu, among others), - can raise fiscal revenue and economic growth but revenues are uncertain and volatile, - can create economic, integrity, corruption, tax, and reputational risks (e.g., corruption, real estate distortions, exploitation for fraud, money laundering, circumvention of financial sanctions), - can affect tax transparency and Correspondent Banking Relationships if reputational and integrity risks are severe. - Recommended safeguards for CBI/RBI programs: - risk assessment and risk management (including for the financial sector), - effective vetting of applicants and their sources of funds, - transparency in operation and management, - enhanced AML/CFT safeguards, - strengthened international cooperation to prevent forum shopping and avoid a race to the bottom. - Staff should encourage authorities to treat revenue from CBI/RBI programs as windfall gains and closely monitor emerging trends such as digital residency programs. *Guidance Note on the IMF’s Engagement with SDS (sections 23–33, Boxes 2–3).* ### 34. Improving the efficiency of public spending will, in many SDS, require stronger PFM, ### 34. Improving the efficiency of public spending will, in many SDS, require stronger PFM, ### Strengthening PFM to manage public and disaster-related spending - Streamlining and reprioritizing recurrent spending is a key measure to create fiscal space for priority spending, including to build buffers for natural disaster-related expenditures. - Containing non-discretionary spending (such as public sector wage bill) can be particularly important given its relatively large size in SDS. - Development partners may require procedures that allow for monitoring and transparent reporting of the use of emergency disaster assistance to provide repeated support. - Future cost of disaster-related public spending can be treated as public contingent liability for budgetary purposes, helping to integrate risks into cash and debt management frameworks. - Enhancing capacity in debt management can also help contain the overall spending envelope. ### Social spending and social safety nets (SSNs) - Staff’s advice on social spending needs to take full account of: - the status of the existing social safety nets (SSNs), - capacity to absorb additional social spending, - social and political preferences. - Staff should refer in general to the Operational Guidance Note for IMF Engagement on Social Spending Issues (IMF 2024d). - SSNs tend to be underdeveloped in SDS and gaps in PFM and governance set limits to authorities’ capacity to absorb additional social spending. - Fragmented internal geography of SDS adds further to the challenge. - Staff should carefully assess which objectives can be achieved building on the existing systems and which would require more involved efforts. - Staff needs to be mindful of data limitations, especially in the early stages of the discussions with the authorities. - The already large non-discretionary spending in many SDS underline the necessity of aligning SSNs with fiscal and debt sustainability. ### Digitalization and GovTech in fiscal operations - Digitalization by adopting Government Technology (GovTech) in fiscal operations can strengthen public finance by improving revenue mobilization, expenditure efficiency, service delivery, fiscal transparency, and social outcomes (Amaglobeli and others 2023). - Benefits from digitalization will materialize only if it is designed and implemented properly and accompanied by efforts to strengthen institutions. - Changes in regulations and established processes would need to safeguard data security and privacy to protect sensitive information. - Issues that may hinder the adoption of GovTech in some SDS include low internet connectivity and the lack of expertise among government officials. - Digitalization needs to adapt to an environment with low connectivity and exposure to cyber risk. ### Conduct of monetary and exchange rate policy: challenges and guidance - Key challenges: - Susceptibility of SDS to shocks, underdevelopment of financial markets, and capacity constraints complicate monetary policy design. - Central banks in SDS often have multiple objectives in addition to price stability (including economic growth, financial sector development, and exchange rate stability); central bank independence tends to be limited. - Monetary policy transmission is often weak due to low financial development, thin interbank markets, poorly developed government securities markets, and dollarization. - Many SDS have exchange controls and/or partially closed capital accounts; in 2022, three-quarters of SDS imposed restrictions on capital market securities, direct investment and real estate transactions. - As of 2022, the vast majority of SDS (30 out of 34) use the exchange rate as the nominal anchor and have fixed exchange rates and only two have floating exchange rates. - Policy implications and recommendations: - Staff’s policy advice should account for the prevalence of exchange rate peg and other institutional constraints. - Central banks need to prioritize the development of transparent and coherent policy frameworks, with price stability as the primary objective (IMF 2015b). - The use of the exchange rate as the nominal anchor could often be suitable given SDS characteristics; monetary and other economic policies need to be consistent with the chosen exchange rate arrangement and geared towards supporting it. - Staff should be aware of the risk of fiscal dominance and consider various forms of quasi-fiscal interventions by the central bank and their implications. - Strengthening central bank independence and adopting prudent fiscal policies are main measures to contain risks; traditional reserve money targeting can help when domestic financial markets are severely underdeveloped (IMF 2015b, Box 1). ### Reserve adequacy and buffers - When assessing reserve adequacy, staff should properly account for exchange rate pegs and higher volatility of SDS economies. - Policy advice should consider the importance of building strong policy buffers; having sufficient international reserves is key to coping with frequent and adverse exogenous shocks and maintaining a credible peg. - In line with Assessing Reserve Adequacy—Further Considerations (IMF 2013a), attention should be paid to country circumstances (e.g., size and composition of debt, nature of shocks). - The small islands metric combines different reserve needs allowing for small island specificities (e.g., vulnerability to natural disasters) (Mwase 2012). - Dollarized SDS may need to hold more reserves; policy advice should account for foreign exchange interventions by the central bank. ### Capital flows, macroprudential measures, and the IPF - Limited shock absorption capacity related to capital inflows, including those arising from climate finance, may require staff to assess the appropriateness of using capital flow management (CFM) and macroprudential measures (MPM). - Work should be guided by The Institutional View on the Liberalization and Management of Capital Flows (IV) (IMF 2022e). - The use of inflows CFMs, CFM/MPMs, outflows CFMs and preemptive CFM/MPMs on debt inflows continue to be guided by the IV. - SDS may face tighter policy constraints due to fixed exchange rate regime, which could strengthen the case for preemptive CFM/MPMs; however, these measures should not be used to help maintain unsustainable currency pegs. - Supervision capacity over CFMs and MPMs (i.e., closing loopholes) is key for effectiveness; guidance on capital flow liberalization should consider SDS characteristics and the role of CFMs in supporting the exchange rate peg. - In line with the Guidance Note on Macroprudential Policy—Considerations for LICs (IMF 2014), staff’s advice should prioritize simple approaches that increase resilience (e.g., imposing high capital and liquidity buffers) rather than active recalibration of macroprudential policy settings. - When multiple instruments are used in response to exogenous shocks, staff should consider limited capacity to fully operationalize the Integrated Policy Framework (IPF); many SDS face IPF frictions (shallow FX markets, unhedged currency mismatches, inflation expectations de-anchoring). - Given institutional, policy, communication, and capacity constraints, SDS should generally prioritize the warranted adjustment of monetary and fiscal policies to preserve financial sector and price stability. ### Deepening the financial sector and ensuring oversight - Characteristics and challenges: - Financial sectors in SDS are often shallow, concentrated, and foreign owned, with under-developed institutional frameworks. - Shallow and non-competitive financial markets hinder financial sector deepening and raise spreads between lending and deposit rates. - Lack of credit bureaus is an important gap in credit risk management for many SDS. - Weak supervisory and regulatory capacity, limited data availability, conflicting mandates, infrequent enforcement actions, and weak legal authority hamper oversight. - Some SDS are financial centers with relatively sophisticated offshore sectors that serve mostly non-residents. - Policy focus: - Efforts to deepen the financial sector should go hand-in-hand with promoting stronger financial regulation and supervision. - Financial policies should be tailored to country-specific characteristics and sources of systemic risk; where relevant data gaps should be closed. - CD activities should focus on core stability issues—enhancing supervision of banks, enhancing data collection and analysis, and redressing the legal framework. - Diagnostic tools: - The Financial Sector Assessment Program (FSAP) and the Financial Sector Stability Review (FSSR) are potential diagnostic tools to identify necessary reforms and needed CD support. - The FSAP process is intensive and may be appropriate only for larger SDS with more complex financial systems and a strong appetite for engagement. - The FSSR can be especially useful in SDS where a low-capacity environment necessitates careful reform prioritization and sequencing; it can be undertaken in SDS classified as a low- or lower-middle-income but may be considered for other countries on a case-by-case basis. ### Financial integrity, ML/TF risks, and correspondent banking relationships (CBRs) - ML/TF risks: - Major ML/TF risks and vulnerabilities include prevalence of higher-risk sectors and activities (e.g., non-resident oriented offshore sectors, citizenship by investment programs), opaque corporate structures established by professional enablers, and capacity and resource constraints. - These risks can lead to illegal activities, financial instability, cycles of bubbles and busts, reputational concerns, and possible public listings by Financial Action Task Force (FATF). - Financial integrity issues negatively impact the business climate and inclusive and sustainable economic growth. - Staff engagement and safeguards: - Staff teams should engage with authorities on policies to mitigate ML/TF risks, discussing policy priorities (e.g., the national risk assessment, macroeconomic implication of ML/TF risks) and mitigation measures. - Key policy lines and safeguards include proper implementation of preventive financial sector licensing, supervisory measures and customer due diligence, transparency of beneficial ownership, and cross-border cooperation and information exchange. - Staff should advise authorities with disproportionately large financial sector or service industries to allocate resources for supervision and enforcement according to the larger size of the supervised sector. - Correspondent Banking Relationships: - Pressures on CBRs continue to be a concern for some SDS and may reduce formal financial flows, remittances, and trade. - CBRs in SDS have declined significantly more than in most other groups and are continuing to fall, leading to a rising concentration of remaining CBRs, increased remittance costs, lower speed of transactions, and risk of complete loss of CBRs for some SDS. - Staff should support SDS in implementing policies to alleviate CBR pressures via comprehensive risk understanding, prioritized risk mitigation given limited resources, focused AML/CFT supervision, facilitation of stakeholder dialogue, targeted policy advice, and tailored CD. - Innovative solutions (e.g., a draft framework proposed by IMF and World Bank staff to enable identification of a safe payment corridor) could decrease regulatory compliance and costs of cross-border payments, alleviating risk-profitability considerations of correspondent banks. ### Digital money, fintech, and financial integrity implications - New digital money and fintech may offer opportunities to improve financial inclusion and efficiency, but adoption should be gradual and consider: - development of digital technology, business models, use cases, and legal and regulatory compliance; - clear legal and regulatory framework on legal status of digital money, obligations of service providers, rights and obligations of users, and responsibilities of supervisory authorities; - monetary and financial conditions such as existence of a national currency and maturity of domestic payment systems. - Unbacked crypto assets are not suitable as official currency and means of payments and should not be supported by the official sector for this purpose. - Staff should emphasize strengthening the understanding of ML/TF risks specific to digital money, application of AML/CFT preventive measures and supervision, and investigation/prosecution of ML/TF activities involving digital money. - Fund TA and training can support SDS in addressing financial integrity implications of central bank digital currency (CBDC) and crypto assets. ### Surveillance and analytical work - Staff should tailor surveillance to SDS circumstances. - The Fund’s core surveillance tools, namely the SRDSF, LIC-DSF and EBA-lite, come with built-in flexibility to allow tailored applications. - Partnership with the authorities and coordination with development partners can help enhance traction. - Staff should make full use of the Fund’s internal resources to bring the cross-country angle to country-level analysis. *Source: Guidance Note on the IMF’s Engagement with SDS (excerpt).* ### Box 4. Digital Money: Opportunities and Challenges for SDS ### Box 4. Digital Money: Opportunities and Challenges for SDS ### Opportunities of digital money for SDS - New digital money and fintech may offer SDS opportunities to improve financial inclusion and efficiency. - Digital platforms (such as mobile money, new retail fast payment solutions, or CBDC) may offer lower fees, stimulate competition, or fill gaps among pre-existing services, offer functionality in offline environments, and/or operate on a variety of hardware devices, including feature phones. - Digital money has the potential to: - streamline transactions and redefine domestic payments; - empower individuals in underserved regions by providing access to financial services and government support; - help facilitate international payments, reduce remittances costs, and mitigate the adverse impacts of CBRs’ withdrawals. - Digital money may have remote and digital onboarding processes, addressing barriers related to onboarding and geographic location. ### Implementation challenges and contextual constraints in SDS - Challenges with digital money are likely to be more amplified in SDS given low capacity, low scalability prospects, and infrastructure challenges. - Barriers that may complicate implementation or realization of benefits include: - low financial literacy; - trust issues; - unstable electricity; and - other infrastructural challenges. - SDS face heightened challenges related to the scale of viable markets, and limited resources and capacity. - Supportive policies—such as developing electricity and telecommunications infrastructure, and improving financial literacy education—may be difficult given resource constraints. - Many SDS struggle with the resourcing and capacity constraints for the development of protections (regulatory, data protection, cybersecurity). ### Financial integrity, stability, and criminal misuse risks - Robust regulatory oversight and frameworks are imperative to limit financial integrity, financial stability, and consumer protection risks that may arise with fintech and digital money. - Data protection and cybersecurity threats must also be appropriately managed. - Without effective measures to safeguard financial integrity and mitigate the ML/TF risks, digital money may result in financial and economic disruptions. - Despite their advantages, publicly and privately issued forms of digital money are susceptible to criminal misuse, particularly where they feature anonymous transacting, have global reach, and are widely adopted as a means of exchange. - Without proper mitigation measures, digital money can facilitate serious crimes including ML/TF. - Presently, most SDS have inadequate frameworks to address the ML/TF risks related to digital money (FATF 2023), have weak AML/CFT regimes, inadequate AML/CFT supervision, and limited law enforcement capacity. - New or elevated ML/TF risks connected to digital money could exacerbate existing deficiencies, resulting in illicit financial flows, which, in turn, could threaten financial sector stability and contribute to further pressures on CBRs. - That warrants cautious adoption of digital money, its strict regulation, and robust supervision. ### CBDC developments and lessons in SDS - Some SDS have introduced or are at advanced stages of development of CBDCs. - Examples and experience: - The Bahamas pioneered the CBDC with the Sand Dollar in 2020. - The Eastern Caribbean Currency Union (ECCU) followed with the Dcash pilot in 2021. - These countries adopted CBDCs to boost financial inclusion for communities in remote islands and to strengthen the resilience of the payments system to natural disasters and pandemics. - Implementation lessons: - A slow take-up and disruptions in access to CBDCs highlight the importance of investing in public awareness and robust infrastructure to promote CBDC adoption. - In January 2024, the ECCU closed the Dcash pilot and initiated development of a more advanced CBDC (Dcash 2.0). ### Implications for IMF engagement and policy stance - It is important to weigh the opportunities that new digital money and fintech solutions offer with the challenges of the SDS context. - Given the risks, cautious adoption, strict regulation, and robust supervision of digital money are warranted in SDS. - Staff engagement should consider these trade-offs when advising authorities, and the need for capacity building, infrastructure investment, and stronger AML/CFT frameworks should inform policy priorities and conditionality. *Source: Box 4. Digital Money: Opportunities and Challenges for SDS (excerpt).* ### 56. Enhanced coordination with IFIs and regional institutions (including MDBs) in cross- ### ppea2024035 - 56. Enhanced coordination with IFIs and regional institutions (including MDBs) in cross- ### Coordination with IFIs, regional institutions, and external partners - Findings - Enhanced coordination with IFIs and regional institutions (including MDBs) in cross-cutting issues may help address implementation challenges. - Beyond joint assessments (such as FSAPs and DSAs) or financing provision, staff should rely more on external partners in macro-critical areas beyond the Fund’s core expertise (e.g., sectoral, social and employment policies). - Engaging with regional bodies—the Pacific Islands Forum Secretariat or CARICOM—where countries share experiences, build expertise, promote mutual learning, and develop joint policy options could foster learning and enhance impact. - Closer coordination on policy advice and CD with other stakeholders present in-country could strengthen topic complementarity, improve sequencing, and facilitate absorption. - A forward-looking agenda agreed with the SDS authorities and outlined in the Country Engagement Box should provide space and time to address data needed to support analysis and to increase country knowledge. - Recommendations / Policy guidance - Staff should engage regional bodies and external partners for experience-sharing and joint policy development. - Country Engagement Box should include a forward-looking agenda negotiated with authorities to sequence data improvements and analytical work. ### Cross-country synergies and staff use of internal resources - Findings - Staff are encouraged to make full use of internal resources to bring cross-country angles to country-specific work. - Synergies can be achieved by consolidating experience from different small states within the Caribbean, the Pacific, and Africa, and across regions. - Example: On issues like CBR, Pacific country teams could benefit from Caribbean countries’ experience, whose financial systems tend to be more developed. - Collaboration between teams and across departments is needed to best utilize limited resources given data limitations and methodological challenges. - Other analytical tools developed by Fund staff are often flexible enough to be tailored for SDS (see Box 7 on Growth-at-Risk (GaR) and Box 8 on Big Data/AIS). - Recommendations / Policy guidance - Explore inter-team and inter-department collaboration to pool expertise and resources. - Tailor existing analytical frameworks and tools to SDS specifics and leverage recent data innovations. ### Addressing data gaps and statistical capacity - Findings - Severe data gaps, limited capacity, and macroeconomic volatility create special challenges for Fund surveillance in SDS. - Data gaps exist not only in standard surveillance areas but also in newer areas like climate, digitalization, and gender. - Many SDS face broad-based data limitations: lack of financial and human resources in statistical agencies and associated weaknesses in source data and compilation processes (see Annex V). - Given limited authority capacity and recruitment/retention problems, staff need to discuss sequencing and prioritization of policies to achieve best outcomes. - Collaboration with development partners on addressing data gaps may be key for some SDS; Country Engagement Box could help ensure a common understanding (Annex II). - New tools and frameworks - Strengthened frameworks for data adequacy assessment: - The new data adequacy assessment framework ( IMF 2024g ), endorsed by the Board in January 2024 and being implemented starting from February 2024, will allow a more granular evaluation of areas of data weakness. - Statistics CD provision: - Staff should assess the capacity of the authorities in complying with the new requirements and engage with the authorities to explore ways to strengthen data provision and underlying data compilation processes needed for improving data adequacy. - The new data adequacy assessment frameworks should inform CD priorities across all topical areas of macroeconomic statistics, as well as in data dissemination. - Alternative data sources: - Staff should take advantage of innovative and new Fund data initiatives from which SDS can benefit, such as the use of Automatic Identification System (AIS) data (Box 8). ### Box 7 — Assessing Growth-at-Risk (GaR) in SDS (summary of methodology and applications) - Methodology and advantages - The IMF’s GaR methodology assesses risks to the growth outlook (Adrian and others 2019; Prasad and others 2019). - It combines data-reducing techniques, quantile regression, and local projection methods to determine drivers of growth, construct probability distributions, and simulate shock impacts on the baseline forecast. - Advantages: - Goes beyond point forecasts to consider the entire growth distribution. - Provides a framework for analyzing key drivers of future GDP growth and their relative importance across horizons. - Helps quantify systemic risk impact on future GDP growth to guide macroprudential policy (Bespalova and Rousset 2019). - Can be tailored to SDS specifics. - Applications and empirical insights - Eastern Caribbean Currency Union (ECCU) (Komatsuzaki and Brito 2019): - Data divided into five categories: (i) credit growth; (ii) financial soundness indicators (FSIs); (iii) external real shocks; (iv) global financial conditions; and (v) natural disasters. - Empirical results: - Credit growth boosted short-term (one year ahead) growth but reduced medium-term (three years ahead) growth, implying prudential policy relevance. - Natural disasters decreased concurrent growth but had no significant future impact. - External real shocks had strong negative impact at all horizons, especially when the economy was booming. - Tight global financial conditions had strong negative impact in the short-term, especially in “bad” times. - Domestic FSIs did not impact future growth. - Trinidad and Tobago (IMF 2023l): - GaR analysis adjusted to capture various external and domestic shock sources (e.g., financial, real, energy). - Results indicated modal growth in 2023 could decline relative to the baseline due to: a domestic financial shock resulting in higher NPLs, a shock to natural gas price, an external financial shock (proxied by the VIX), and a U.S. growth shock. - Note - Box includes a figure titled “GaR in Trinidad and Tobago: Baseline and Shock Scenarios” showing the conditional probability function of real GDP four quarters ahead. ### Box 8 — The Use of AIS Data in Surveillance (Big Data) - Findings on Big Data and AIS - Big Data defined as nontraditional sources with high-volume, high-velocity, and high-variety (“3Vs”) (Hammer and others 2017). - Big Data offers high frequency and granularity that can enhance bilateral and multilateral surveillance, especially where statistical capacity is limited (IMF 2018c; IMF 2021b). - AIS data are a prime example: - AIS is required by the International Maritime Organization (IMO) for all ships greater than 300 gross tons on international voyages. - Onboard AIS transponders transmit periodic radio messages with position, speed, draft, destination, and navigation status, receivable by terrestrial stations or satellites. - Uses and Fund applications - AIS data used to complement customs data, measure trade flows more timely, and detect turning points in economic cycles. - Fund analytical and surveillance uses cited: Arslanalp and others (2019, 2021, 2024), Cerdeiro and others (2020), October-2023 WEO (IMF 2023o), 2020 External Sector Report (IMF 2020b), Deb and others (2020), Cerdeiro and Komaromi (2020), Komaromi and others (2022). - SDS surveillance benefits: - AIS-based indicators (port calls, shipments in metric tons) provide timely information complementary to official statistics. - Examples: IMF (2023m) and Cugat (2023) featured monthly nowcasts of trade flows and estimated economic disruptions; IMF (2021e) featured trade nowcasts for an SDS (Djibouti) with discussion on port contract dispute and competition from other ports. - PortWatch platform: - Developed by the Fund with Oxford University to provide AIS-derived real-time trade estimates and monitor trade disruptions. - Features dedicated pages for each of the 1,469 ports and 24 critical maritime passages like the Suez Canal and Strait of Hormuz. - Offers data, maps, and applications; access via direct downloads, an online interactive query tool, and APIs for programmable integration. - Recommendation - Leverage AIS and other Big Data sources to complement official statistics and strengthen surveillance, early warning, and trade nowcasting in SDS. ### Capacity Development (CD) — integration with surveillance and tailoring to absorptive capacity - Findings - Investments in CD remain critical to meet SDS demand and needs. - CD to SDS should be closely integrated with surveillance and lending and tailored to local circumstances and absorptive capacity. - Institutional capacity constraints in SDS (over-burdened officials, weak reform governance) limit CD absorption and implementation of recommendations. - Integrating CD with surveillance and lending - Area department country teams should lead coordination efforts in line with the 2018 and 2024 Reviews of the Fund’s Capacity Development Strategy (IMF 2018e, IMF 2024h). - Important collaborative actions: - Identify capacity constraints and CD priorities. - Coordinate across the CD project lifecycle. - Include CD assessment in surveillance and program processes. - Engage regularly with development partners to avoid duplication, increase synergies, and reduce risks of overstretching authorities’ absorptive capacity. - Mechanisms to enhance integration: - Country Engagement Box and Country Engagement Strategies: recognize domestic constraints and articulate CD priorities consistent with medium-term surveillance and lending objectives. - Resource allocation and Results-Based Management (RBM) processes: area departments articulate regional and country priorities; country teams provide insights into risk assessments consistent with surveillance/program risks. - Internal CD dashboards: include detailed RBM data and regional/country dashboards to help area departments assess capacity, identify reform priorities, and provide inputs to CD design and implementation. - Leveraging field staff: Resident Representatives and Regional Capacity Development Center (RCDC) staff should keep CD project managers informed of changing field conditions. - Country teams required to clear CD briefs and review CD outputs; involvement varies with project importance to surveillance/program objectives. - Aligning CD with absorptive capacity - Principles for tailoring CD (consistent with Staff Guidance Note on IMF Strategy for Fragile and Conflict-Affected States): - Consultation: consult SDS authorities and stakeholders when assessing reform priorities and absorptive capacity; agree explicitly on targeted results; HQ staff should consult field staff, civil society, and other organizations; disseminate CD outputs to foster ownership and coordination. - Realistic interventions: consider domestic constraints (including staff strength); where national solutions are not workable, consider regional or “outsourced” solutions. - Proper sequencing: when capacity is limited, integrate training with TA; start with basic needs and gradually address more demanding objectives when conditions exist; be prepared to pause delivery and sequencing if prior steps are not implemented. - Leveraging flexible CD resources and modalities: deploy training, in-country resident advisors, RCDCs, headquarter staff, and virtual/in-person/hybrid delivery strategically; HQ better suited for strategic diagnostics and multi-year projects; RCDCs effective for early hands-on assistance; consider peripatetic experts where in-country advisors are not feasible; collaboration among HQ, RCDC, LTXs, and STXs is critical; customize training and consider regional courses and training-of-trainers where turnover is high. - Emphasizing institutional capacity building in LTX use: LTXs should not replace authorities’ staff; use LTXs to transfer knowledge sustainably and document advice (manuals, procedures). - Strengthening leadership capacity: CD can target organizational capacity, reform governance, and change management, including peer-to-peer engagements using RCDC networks. *Italic: Guidance Note on the IMF’s Engagement with SDS — selected excerpts from the supplied content unit.* ### Box 9. Training to Build Capacity for TA, Surveillance, and Lending in SDS: ### Box 9. Training to Build Capacity for TA, Surveillance, and Lending in SDS ### Regional approach and training delivery - PFTAC member countries are mostly small developing states with numerous economic challenges requiring improved macro-forecasting capacity and better tools for macroeconomic management. - The recent addition of a macroeconomics frameworks LTX expert from Institute for Capacity Development (ICD) at PFTAC complements the macroeconomic advisor from the Asia and Pacific Department (APD), enabling a ramping up of capacity development (CD) with TA well supported by training. - PFTAC typically delivers one or two regional macroeconomic training courses for the Pacific Islands countries annually, leveraging its two macroeconomic LTXs and the Singapore Training Institute (STI). - Training delivered by regional centers: - Provides core tools required by officials to absorb TA from ICD and APD macroeconomic experts. - Is designed to educate officials to produce and deliver analysis and policy advice to decision makers. - Enhances officials’ ability to competently interact with IMF officials undertaking staff and Article IV visits. - Example: a PFTAC-led customized macroeconomic diagnostics course, supported by STI, was delivered in Tonga to PFTAC member countries in August 2023 using local examples from Samoa, Vanuatu, and Tokelau for practical sessions. - Joint missions and collaboration between macroeconomic LTXs strengthen alignment between CD, surveillance, and program objectives. ### Role of RCDCs and regional cooperation - RCDCs are critical in providing CD, identifying priorities for member countries in their program documents, subject to funding availability. - RCDC-based experts can, in some cases, more efficiently deliver CD than headquarter-based staff. - RCDCs serve as regional knowledge hubs and communication channels with CD recipients. - A significant proportion of CD to SDS is provided via RCDCs—mainly CARTAC and PFTAC. - Advantages of a regional approach: - Opportunities for peer-to-peer learning through workshops, seminars, attachments, and internships. - Focus on region-specific needs while leveraging regional experts to deliver TA programs. - Coordination between area and functional departments is key when engaging RCDC LTXs for support. - Note on costs and benefits: While start-up costs of peer-to-peer workshops can be high, the expected payback over time is a much stronger regional cohort. ### Focus areas for Fund CD in SDS - Core institutional capacity areas: - public finances - monetary and financial systems - macroeconomic statistics - legal frameworks - macroeconomic frameworks - CD is also expanded in areas presenting challenges and opportunities to SDS, including climate change, debt, digital money, gender and inclusion, and governance and anti-corruption. ### Climate change — CD products and tools - Climate CD is critical, especially in the context of an RSF, to address vulnerabilities. - Available climate CD products include: - Fiscal Management: - Integrate climate considerations in public financial management (green PFM). - Assess impact of climate change on public infrastructure through the C-PIMA. - Analyze climate-related fiscal risks and develop disaster risk strategies and financing. - Support climate change fiscal risk management (for example, by quantifying climate change fiscal risk using the Fiscal Affairs Department Q-CRAFT tool and reporting on climate change fiscal risks in the Fiscal Risk Statement). - Analyze environmental, fiscal, economic, and distributional impacts of carbon pricing and other mitigation policies using the Climate Policy Assessment Tool. - Climate Policy Diagnostics focus on assessing key macro-fiscal issues (enabling institutions, mitigation policy, adaptation policy) and Fund CD supports implementation with hands-on assistance. - Financial Sector: - Integrate climate issues into financial sector CD, covering climate finance and financial risks in TA activities. - Provide tools for country analysis of climate risk in the financial sector, stress testing, and strengthening climate information architecture. - Data and Statistics: - Use climate change indicators dashboard, macroeconomic statistics, and innovative data collection techniques to anticipate economic shocks. - Provide courses on macro-relevant environmental and climate change statistics to familiarize authorities with climate-related indicators. - Legal Frameworks, Financial Integrity, and Governance and Anti-Corruption: - Provide guidance on legal frameworks, financial integrity safeguards, and governance and anti-corruption considerations related to climate policies and programs. - Macroeconomic Modeling: - Equip countries with tools and models to integrate climate change and climate policies into macroeconomic frameworks. - Tools include the extension of the Public Debt Dynamics Tool that includes effects of natural disasters (ND-DDT); general equilibrium models such as the DIGNAD model; and the Climate Macroframeworks Toolkit. ### Other CD priorities relevant to SDS - Monetary and Capital Markets Department: - Supports SDS central banks in building coherent quantitative frameworks for monetary policy and improving operations and communications through tailored TA and training. - Provides CD on fintech and digitalization, including digital money (e-money and CBDC), crypto asset regulation, fintech in banks, modernizing payment systems, and CBDC. - Fiscal Affairs Department: - Provides CD on GovTech solutions for public finance, strengthening institutional capacity through strategic and operational support, peer-to-peer activities, training, and analytical work related to digitalization in public finance. - Staff guidance: - Encourage SDS to engage early on CD and to access courses and online resources available on the IMF website. ### Lending and program design — general guidance - No facility dedicated to SDS, but staff have ample choice and significant flexibility within current lending policies to meet SDS needs. - Overarching policy objectives for most SDS—sustainable growth and resilience building—can be supported by tailoring program design and conditionality. - Staff should carefully account for capacity constraints and vulnerability to exogenous shocks when designing programs. - Staff should leverage flexibility in existing policies and refer to Guidelines on Conditionality and Operational Guidance Note on Program Design and Conditionality when choosing facilities or instruments. ### Facilities and instruments most relevant for SDS - Historical use: - SDS made extensive use of Emergency Financing (EF) instruments, namely the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI), due to vulnerability to exogenous shocks and higher capacity requirements for UCT-quality programs. - As of May 2024: - 19 SDS are eligible to the Fund’s concessional financial resources under the Poverty Reduction and Growth Trust (PRGT). - All SDS are eligible for borrowing under the Resilience and Sustainability Trust (RST). - EF instruments: - Provide rapid financial support for urgent BoP needs from exogenous shocks (commodity price shocks, natural disasters, epidemics, plummeting tourist arrivals) or non-exogenous events (post-conflict, fragile situations). - Appropriate when UCT-quality program is not necessary (transitory BoP needs resolvable within one year with no major policy adjustments) or not feasible (lack of capacity or insufficient time). - RCF/RFI can provide outright disbursement/purchase for fast, temporary financial support. - UCT-quality arrangements: - Longer-term facilities like the ECF (for PRGT-eligible SDS) and the EFF offer the most flexibility and are typically suitable for SDS. - ECF arrangements under the PRGT can be approved for 3-5 years and aim to enable members with a protracted BoP problem to make significant progress toward stability consistent with poverty reduction and growth; successor arrangements can be requested. - ECF-supported programs can include projected post-program financing gaps (PPFGs) if additional time is needed and adequate safeguards exist. - The EFF: - Is the counterpart of the ECF under the non-concessional General Resources Account (GRA). - Maximum duration is 4 years. - Does not allow PPFGs. - Higher-income PRGT-eligible countries are presumed to blend PRGT-financing with GRA resources (IMF 2021f). - Other instruments: - Stand-By Arrangements (SBA) and Standby Credit Facility (SCF) address short-term BoP needs but are less frequently used by SDS. - Short-term Liquidity Line (SLL), Flexible Credit Line (FCL), and Precautionary and Liquidity Line (PLL) are available for countries with strong fundamentals and frameworks. - PRGT-eligible SDS and grants: - Access to Catastrophe Containment and Relief Trust (CCRT) grants for debt relief under two windows: catastrophic natural disasters and fast-spreading major public health disasters with international spillover potential. - Examples: the Catastrophe Containment window was used extensively during the 2020 pandemic; four SDS benefitted from it (Comoros, Djibouti, São Tomé and Príncipe, and Solomon Islands). - Eligible catastrophic disasters are defined in the policy (e.g., directly affecting at least one-third of the population, destroying more than a quarter of productive capacity, or causing damage deemed to exceed 100 percent of GDP). ### Non-financing instruments and track-record building - Policy Coordination Instrument (PCI): - A non-financing UCT-quality instrument enabling members to signal commitment to reforms or unlock financing from other official or private creditors. - Can help catalyze additional financing or secure reform gains. - A country with an on-track PCI can request EF support if urgent BoP needs arise while the PCI is underway, or receive financial support under an SBA and/or SCF without cancelling the PCI. - PCI can be used by SDS requesting financing under the RSF. - Staff-Monitored Program (SMP): - Preferred method for track-record building when an SDS lacks capacity to implement a UCT-quality program. - SMPs can be used concurrently with EF instruments if financing is needed and the country qualifies. - Successful SMPs can lead to a Fund financing arrangement, repeated emergency financing, or resumption of a previously off-track arrangement. - SMPs are informal agreements between national authorities and Fund staff, approved by Fund Management to monitor policy implementation before requesting financial support; generally shared with, but not endorsed by, the Executive Board. - 2022 amendment: SMP policy allows for limited Executive Board involvement in selected cases called Program Monitoring with Board Involvement (PMB) (IMF, 2022c). ### Resilience and Sustainability Facility (RSF) - Purpose: - Provides affordable long-term financing to countries undertaking reforms to reduce macro-critical risks related to climate change and pandemic preparedness, strengthening prospective BoP stability. - Complements PRGT and GRA lending toolkits by focusing on structural challenges needing extended horizons. - Design and safeguards: - RSF requires a concurrent UCT-quality program to ensure adequate policy safeguards and support a stable macroeconomic environment. - An RSF arrangement is normally approved concurrently with the approval of, or completion of a review of, a qualifying UCT program (financing: SCF, ECF, SBA, EFF, FCL, PLL; or non-financing: PCI) with at least 18 months remaining until its expiration. - Drawing arrangements are not mandatory; an RSF could accompany a non-financing instrument like the PCI. - Staff guidance: - Teams should review the efficacy of the Fund’s wider instruments (especially ECF and EFF) and explore UCT-quality programs with targeted conditionality aligned with SDS capacity. - Teams should engage early with the World Bank and other development partners to identify critical vulnerabilities, country constraints, and assess potential access to climate finance. *Source: Box 9. Training to Build Capacity for TA, Surveillance, and Lending in SDS (Guidance Note on the IMF’s Engagement with SDS).* ### 79. Given the capacity constraints of many SDS members, staff teams should pay particular ### 79. Given the capacity constraints of many SDS members, staff teams should pay particular attention to the design of RSF Reform Measures (RMs) ### Design of RSF Reform Measures (RMs) - RMs should be strong, measured by criticality, ambition, and depth, yet tailored to SDS circumstances (Box 4 in IMF 2023g). - Build on analysis from the Country Engagement Strategy (for SDS that are also FCS) and the Country Engagement Box (for the others). - Use close coordination with key stakeholders and comprehensive diagnostics (Annex III and ¶¶76,77 in IMF 2022d) to ensure RMs are aligned with broader engagement strategy, properly sequenced, and tailored to country needs and absorptive capacity. - Recognize that implementing climate change–related reforms is extremely challenging in weak-capacity SDS and requires extensive CD; see previous section and Box 2 in IMF (2024c). - Apply parsimonious use of conditionality and careful prioritization of RMs addressing key climate/pandemic preparedness challenges. - Consider potentially tailored solutions for SDS in the comprehensive review of the RST in 2026 (IMF, 2024c). ### D. Key Considerations for Program Design - When setting pace, timing, and composition of macroeconomic adjustment, staff should: - Account for policy tradeoffs due to limited policy space and capacity. - Build macro-frameworks on realistic assumptions to avoid overoptimism or proposals that ignore social and capacity constraints. - Fiscal capacity constraints: - Limited fiscal capacity can reduce achievable adjustment on revenue or spending sides, at least in the short run. - Lack of well-functioning social safety nets could necessitate linking fiscal adjustment and/or phasing out distortionary subsidies with social spending conditionality to mitigate temporary negative impacts on the vulnerable. - External financing: - In many SDS, external financing from development partners can be a critical determinant of the financing envelope. - Staff should liaise with IFIs and development partners to assess available external financing when projecting BoP needs and calibrate the balance between adjustment and financing in the program. - Shock exposure and contingency planning (¶81): - High exposure to exogenous shocks (e.g., destructive and recurrent natural disasters) requires strengthening program robustness and early contingency planning. - Program design should be flexible, focus on actionable mitigating measures, and include robust contingency plans to facilitate rapid response after shocks. - Staff could prepare in advance, in collaboration with authorities, ways to deploy support swiftly when shocks hit, including plans to rapidly liaise with other IFIs and development partners. - In the event of an exogenous shock like a natural disaster, staff could consider augmentation of the existing arrangement to create fiscal space for the response. - Longer-term programs and incremental RMs (¶82): - Tailor programs to highly uncertain environments by building reform measures incrementally. - Explicit recognition of PPFGs under an ECF arrangement allows for increased realism when preparing the macro-framework (see IMF 2023k). - Design should incorporate CD delivered over the program to support deep reforms via successive intermediate steps and ramping-up of capacity. - When a successor ECF arrangement is requested, use the Country Engagement Box or Strategy (for FCS) to ensure consistency and continuity. ### E. Tailoring Conditionality and Leveraging Flexibility in Program Design - Structural Benchmarks (SBs) (¶83): - SBs can be tailored to guide a carefully sequenced reform agenda that accounts for limited capacity. - Staff should exercise judgement in selecting which RMs become SBs based on criticality for program objectives. - Consider breaking high-depth reforms into intermediate steps as multiple SBs to facilitate compliance and maintain parsimony of individual conditionality. - Ambitious SBs could be supported by increased disbursements or purchases under the program. - Longer-term structural reform agendas should align with authorities’ national development plan, country engagement strategy, CD plans and delivery, and be coordinated with IFIs and development partners. - Data, transparency, and monitoring (¶84): - Limited statistical capacity requires assessing quality and timeliness of data provided under the program. - Weak transparency and governance could limit accountability and monitoring by the authorities. - Staff should assess authorities’ capacity to measure and monitor Quantitative Performance Criteria (QPC) and Indicative Targets (ITs). - Example: with long lags in above-the-line fiscal data provision, staff could explore using below-the-line data to monitor the fiscal deficit. - Use diagnostic tools and appropriate TA to build capacity and set up safeguard mechanisms for program monitoring. - The Technical Memorandum of Understanding must contain detailed and accurate descriptions of performance criteria. - Measures for highly volatile economies (¶85): - For SDS exposed to heightened uncertainty or reduced capacity (e.g., after a natural disaster), greater use of ITs may be appropriate for monitoring program performance. - Large or lasting deviations in the macroeconomic situation due to natural disasters should be addressed by waivers, modifications of PCs, and adjustments during program reviews. ### Coordination with Development Partners - Importance and rationale (¶86): - Coordination with other institutions, development partners, and CSOs is necessary for consistent and effective Fund engagement with SDS members. - The Fund benefits from sectoral expertise and the stronger local presence of other institutions (e.g., World Bank, other MDBs, regional development banks). - Other institutions and bilateral partners often have greater local footprints and are better aware of on-the-ground developments. - Close coordination avoids overburdening authorities with mission visits and CD/TA. - Engagement with CSOs, think tanks, and academia can provide institutional and analytical background and enhance Fund policy advice. - In engagement with the World Bank and Regional Financing Arrangements, the Fund’s main role is to assess macroeconomic conditions and advise on actions to restore macroeconomic stability. - Collaboration on CD (¶87): - Staff is encouraged to collaborate with development partners, including bilateral partners, particularly on CD. - Example joint TADAT assessments in several SDS: - Bhutan and Maldives jointly with Asian Development Bank staff. - Suriname jointly with Inter-American Development Bank and Inter-American Center of Tax Administrations staff. - Guyana with US Treasury’s Office of Technical Assistance staff. - Trinidad and Tobago with the Netherlands Tax Administration staff. - Assessment results inform country reform plans and coordinated development partners’ CD interventions. - Guidance frameworks: - Staff teams should remain guided by existing guidelines on collaboration with different institutions, organizations and in specific areas (see referenced IMF-World Bank documents in footnote 22). ### Annex I. Definitions of Small States - Two IMF concepts for countries with less than 1.5 million population: - Small States: used as one qualification criterion in Fund lending operations. - Small Developing States (SDS): an analytical group to cover issues faced by small and micro developing countries, regardless of eligibility for certain Fund lending facilities. - Historical thresholds and criteria: - The concept of Small States was established in the 2010 Board Paper Eligibility to Use the Fund’s Facilities for Concessional Financing (IMF 2010); originally population below 1 million per World Bank WDI. - For the PRGT, entry/exit cut-offs for small states set at two and three times the IDA operational cut-off, respectively. - 2012 PRGT Review raised population threshold to 1.5 million to align with World Bank’s definition. - 2013 PRGT Review classified countries with less than 200,000 population as “microstates” with entry/graduation criteria set at five/six times the IDA threshold. - SDS composition and changes: - The concept of Small Developing States was introduced in IMF 2013c to focus on developing small states, excluding 7 advanced economies (Andorra, Cyprus, Estonia, Iceland, Luxembourg, Malta, and San Marino) and 3 high-income fuel-exporting countries (Bahrain, Brunei Darussalam, and Equatorial Guinea). - In 2017, the SDS group had 34 members. - Recent WDI data: Trinidad and Tobago and Equatorial Guinea exceed 1.5 million; Equatorial Guinea excluded based on income levels; Trinidad and Tobago remains classified as an SDS given marginal population differences and authorities’ data. - Result: the list of SDS countries remains the same as in 2017. - RST income threshold note (footnote 1): - For the RST, the income threshold for eligibility is 25 times the 2021 IDA operational cutoff, as opposed to 10 times for other countries. - External groupings: - UN’s Small Island Developing States (SIDS) grouping includes 39 states and 18 associate members of UN regional commissions. - The Small States Forum (SSF) is a World Bank platform for high-level dialogue on engagement with small states. ### Annex II. Guidance on the SDS Country Engagement Box - Purpose and scope (points 1–2): - The Box aims to articulate the high-level considerations underpinning staff’s engagement strategy with SDS, fostering integration of surveillance, lending, and CD activities, and recognizing domestic constraints. - It should discuss country engagement issues three years into the future, consistent with the medium-term perspective of Article IV consultations, and not duplicate the Policy Note or Staff Report. - Area Departments lead preparation with inputs from Functional Departments; a Box is not required for SDS that are also FCS. - Content guidance (points 3–7): - Start from staff’s overarching assessment of authorities’ medium-term policy objectives and priorities; relevant inputs include national development plans or poverty reduction strategies. - Recognize domestic constraints: capacity constraints, institutional constraints, financing constraints; these guide selection and sequencing of priorities and engagement modalities. - Specify staff engagement plan to help authorities accomplish longer-term reform agenda, including policy areas of focus and complementarity/sequencing of surveillance, lending, and CD; internalize short-term uncertainty factors (e.g., natural disasters, electoral cycle). - Emphasize CD given common capacity constraints; refer to existing CD Country Strategy Note (mandatory for heavy users); identify a selective list of priority CD areas and consult Regional Capacity Development Centers. - Discuss collaboration with key development partners, especially on climate diagnostics if considering an RSF arrangement; focus on synergies and avoiding duplication; consider emerging areas such as digital transformation and inclusion. - Frequency and integration with Article IV (point 8): - The Box should be integrated into the regular Article IV process but at a lower frequency. - Could be included as a box or an annex in the Policy Note and Staff Report; normally should not exceed one page. - Prepare (and update) once every three years for countries with annual Article IV consultations or every other Article IV Consultation cycle for countries on a 24-month cycle. - Area Departments should engage early with Functional Departments; staff should discuss the Box with authorities to build shared understanding of the medium-term agenda. - The Box will be shared with the authorities, Executive Directors, and external stakeholders as part of the Staff Report; implementation takes effect starting with Policy Notes circulated for review once the SDS guidance note takes effect. *GUIDANCE NOTE ON THE IMF’S ENGAGEMENT WITH SDS, INTERNATIONAL MONETARY FUND.* ### Annex III. Intentional Gendered Policies Can Help Address SDS- ### Annex III. Intentional Gendered Policies Can Help Address SDS-specific Issues ### Digital inclusion and financial access - Geographic remoteness and fragmentation in SDS significantly impede access to education, economic opportunities, and connectivity to global markets. - Gender-focused digital inclusion and financial access can catalyze socio-economic transformations by: - Equipping women with digital skills and access to online banking and mobile financial services to leapfrog traditional structural barriers. - Enabling women to participate in entrepreneurship, e-commerce, and remote work previously constrained by geographic isolation. - Creating pathways for women to access broader markets, education, and health services online, driving innovation, enhancing productivity, and fostering economic resilience against external shocks. ### Economic diversification and female entrepreneurship - Economic vulnerability in SDS, often from reliance on single sectors such as tourism, agriculture, or fisheries, can be mitigated by enhancing female participation and entrepreneurship. - Women, when provided equitable access to resources, education, and training, can drive economic diversification by venturing into underrepresented or innovative sectors. - Encouraging female entrepreneurship: - Fosters job creation and stimulates local economies. - Contributes to overall socio-economic development. - Requires addressing systemic barriers such as access to credit, land, and networking opportunities. ### Labor market balance and public-sector dominance - In SDS where the public sector often dominates employment, creating a balanced and competitive labor market is essential for economic vitality and innovation. - Addressing gender disparities involves ensuring women have equal opportunities for employment and career advancement in both public and private sectors. - Policy measures include: - Equal pay for equal work. - Gender-sensitive recruitment practices. - Support for women in leadership roles. - Benefits include enhanced labor market efficiency, increased private sector competitiveness, and reduction of artificially high reservation wages in the public sector. ### Gender-aware fiscal policy and infrastructure investment - Incorporating a gender lens into fiscal policy and targeted infrastructure investments is strategic for addressing gender-specific challenges while promoting sustainable development. - Allocating fiscal resources with a gender lens ensures infrastructure projects—such as transportation, information and communication technology (ICT), and energy—meet the needs of women and men equitably. - Example: Safe and reliable public transportation can significantly increase women’s mobility and their ability to participate in the labor market or access educational and healthcare opportunities. - Gender-aware budgeting and infrastructure: - Enhances the effectiveness of public spending by addressing the needs of the entire population. - Drives economic growth by enabling full participation of women in the economy. - Contributes to more inclusive and resilient economic development. ### Women’s role in climate resilience and disaster preparedness - In SDS exposed to climate change and natural disasters, empowering women is pivotal for enhancing community resilience (Two-Pager on Climate and Gender, 2023). - Women’s involvement in agricultural practices and resource management positions them to lead adaptation and response to environmental challenges. - Ensuring women have access to education and healthcare equips them to implement sustainable farming techniques and manage natural resources wisely. - Involving women in planning and decision-making for environmental management and disaster preparedness yields more effective and inclusive strategies. - Better educated and healthier women are more likely to spearhead initiatives that build local capacity to withstand and recover from environmental shocks, strengthening SDS adaptive capacity to slow-moving climate risks. *Annex III. Intentional Gendered Policies Can Help Address SDS-specific Issues* ### References ### References ### Integrated Policy Framework and Macrofinancial Models - Adrian, T., C. J. Erceg, M. Kolasa, J. Linde, and P. Zabczyk. 2021. “A Quantitative Microfounded Model for the Integrated Policy Framework.” IMF Working Paper 21/292, International Monetary Fund, Washington DC. - Adrian, T., C. J. Erceg, J. Linde, P. Zabczyk, and J. Zhou. 2020. “A Quantitative Model for the Integrated Policy Fr amework.” IMF Working Paper 20/122, International Monetary Fund, Washington DC. - Basu, S. S., E. Boz, G. Gopinath, F. Roch, and F. D. Unsal. 2020. “A Conceptual Model for the Integrated Policy Framework.” IMF Working Paper 20/121, International Monetary Fund, Washington DC. - Basu, S. S., E. Boz, G. Gopinath, F. Roch, and F. D. Unsal. 2023. “Integrated Monetary and Financial Policies for Small Open Economies.” IMF Working Paper 23/161, International Monetary Fund, Washington DC. - Prasad, A., S. A. Elekdag, P. Jeasakul, R. Lafarguette, A. Alter, A. X. Feng, and C. Wang. 2019. “Growth at Risk: Concept and Application in IMF Country Surveillance.” IMF Working Paper 19/36, International Monetary Fund, Washington DC. - Adrian, T., N. Boyarchenko, and D. Giannone. 2019. “Vulnerable Growth.” American Economic Review 109(4), 1263–89. ### Big Data, Nowcasting, and Trade Monitoring - Arslanalp, S., S. Choi, P. Kamali, M. McKetty, R. Koepke, M. Ruta, A. Sozzi, and J. Verschuur. 2024. "Nowcasting Trade and Monitoring Geoeconomic Fragmentation from Space." IMF Working Paper (forthcoming), International Monetary Fund, Washington DC. - Arslanalp, S., R. Koepke, and J. Verschuur. 2021. “Tracking Trade from Space: An Application to Pacific Island Countries.” IMF Working Paper 21/225, International Monetary Fund, Washington DC. - Arslanalp, S., M. Marini, and P. Tumbarello. 2019. “Big Data on Vessel Traffic: Nowcasting Trade Flows in Real Time.” IMF Working Paper 19/275, International Monetary Fund, Washington DC. - Cerdeiro, D. A. and A. Komaromi. 2020. “Supply Spillovers During the Pandemic: Evidence from High-frequency Shipping Data.” IMF Working Paper 20/284, International Monetary Fund, Washington DC. - Cerdeiro, D. A., A. Komaromi, Y. Liu, and M. Saeed. 2020. “World Seaborne Trade in Real Time: A Proof of Concept for Building AIS-based Nowcasts from Scratch.” IMF Working Paper 20/57, International Monetary Fund, Washington DC. - Hammer, C., D. C. Kostroch, and G. Quiros-Romero. 2017. “Big Data: Potential, Challenges and Statistical Implications.” IMF Staff Discussion Note 17/06, International Monetary Fund, Washington DC. - Komaromi, A., D. A. Cerdeiro, and Y. Liu. 2022. “Supply Chains and Port Congestion Around the World.” IMF Working Paper 22/59, International Monetary Fund, Washington DC. - Cugat, G. 2023. “Solomon Islands Selected Issues: Big Data and High Frequency Surveillance for Pacific Islands Countries—An Application to Solomon Islands.” IMF Staff Country Report, International Monetary Fund, Washington DC. ### Climate, Climate Finance, and Debt Instruments - Ando S., F. Roch, U. Wiriadinata, and C. Fu. 2022. “Sovereign Climate Debt Instruments: An Overview of the Green and Catastrophe Bond Markets.” IMF Staff Climate Note, International Monetary Fund, Washington DC. - Belianska A., N. Bohme, K. Cai, Y. Diallo, S. Jain, G. Melina, P. Mitra, M. P. Ribeiro, and S. Zerbo. 2022. “Climate Change and Select Financial Instruments: An Overview of Opportunities and Challenges for Sub-Saharan Africa.” IMF Staff Climate Note, International Monetary Fund, Washington DC. - Bellon, M. and E. Massetti. 2022. “Economic Principles for Integrating Adaptation to Climate Change into Fiscal Policy.” IMF Staff Climate Note, International Monetary Fund, Washington DC. - Chamon M., E. Klok, V. Thakoor, and J. Zettelmeyer. 2022. “Debt-for-Climate Swaps: Analysis, Design, and Implementation.” IMF Working Paper 22/162, International Monetary Fund, Washington DC. - Fouad M., N. Novta, G. Preston,T. Schneider, and S. Weerathunga. 2021. “Unlocking Access to Climate Finance for Pacific Island Countries.” IMF Departmental Paper 21/20, International Monetary Fund, Washington DC. - OECD. 2023. “Climate Finance Provided and Mobilized by Developed Countries in 2013-21: Aggregate Trends and Opportunities for Scaling-up Adaptation and Mobilized Private Finance.” OECD Report, Paris. - Parry, I. 2019. The Case for Carbon Taxation. IMF Finance and Development (December), 16–19. ### Correspondent Banking, Remittances, and Financial Access - Alwazir, J., F. Jamaludin, D. Lee, N. Sheridan, and P. Tumbarello. 2017. “Challenges in Correspondent Banking in the Small States of the Pacific.” IMF Working Paper 17/90, International Monetary Fund, Washington DC. - Erbenova, M., Y. Liu, N. Kyriakos-Saad, A. L. Mejia, J. G. Gasha, E. Mathias, M. Norat, F. Fernando, and Y. Almeida. 2016. “The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action.” IMF Staff Discussion Note 16/06, International Monetary Fund, Washington DC. - Stuart, A., J. Alwazir, Y. Liu, S. Roger, S. Guo, C. Nguyen, E. Mathias, and J. Pampolina. 2019. “Report on the Pacific Roundtables: Actions to Address Correspondent Banking and Remittances Pressure.” IMF Departmental Paper 19/06, International Monetary Fund, Washington DC. - Kpodar, K. R., M. Mlachila, S. N. Quayyum, and V. Gammadigbe. 2021. “Defying the Odds: Remittances During the COVID-19 Pandemic.” IMF Working Paper 21/186, International Monetary Fund, Washington DC. - International Monetary Fund and World Bank. 2021. “A Draft Framework for Money Laundering/Terrorist Financing Risk Assessment of a Remittance Corridor.” IMF-World Bank Report, Washington DC. ### Fiscal Policy, Debt, and Reserve Adequacy - Caselli F., H. R. Davoodi, C. Goncalves, G. H. Hong, A. Lagerborg, P. A. Medas, A. D. M. Nguyen, and J. Yoo. 2022. “The Return to Fiscal Rules.” IMF Staff Discussion Notes 2022/02, International Monetary Fund, Washington DC. - Lledo V.D., P. Dudine, L. Eyraud and A. Peralta-Alva. 2018. “How to Select Fiscal Rules: A Primer.” IMF How To Note, International Monetary Fund, Washington DC. - Nishizawa H., S. Roger, and Huan Zhang. 2019. “Fiscal Buffers for Natural Disasters in Pacific Island Countries.” IMF Working Paper 19/152, International Monetary Fund, Washington DC. - Mwase, N. 2012. “How Much Should I Hold? Reserve Adequacy in Emerging Markets and Small Islands.” IMF Working Paper 12/205, International Monetary Fund, Washington DC. - Xu X., A. El -Ashram, and J. Gold. 2015. “Too Much of a Good Thing? Prudent Management of Inflows under Economic Citizenship Programs.” IMF Working Paper 15/93, International Monetary Fund, Washington DC. - Chinn M. and H. Ito. 2006. “What Matters for Financial Development? Capital Controls, Institutions, and Interactions.” Journal of Development Economics 81(1), 163-192. ### IMF Policy Papers, Guidance Notes, and Institutional Reports - International Monetary Fund (IMF). 1997. “Good Governance: The IMF’s Role.” IMF Policy Paper, Washington DC. - ———. 2002. “Guidelines on Conditionality.” IMF Policy Paper, Washington DC. - ———. 2010. “Eligibility to Use the Fund’s Facilities for Concessional Financing.” IMF Policy Paper, Washington DC. - ———. 2011. “Revenue Mobilization in Developing Countries.” IMF Policy Paper, Washington DC. - ———. 2012. “Eligibility to Use the Fund’s Facilities for Concessional Financing, 2012.” IMF Policy Paper, Washington DC. - ———. 2013a. “Assessing Reserve Adequacy—Further Considerations.” IMF Policy Paper, Washington DC. - ———. 2013b. “Eligibility to Use the Fund’s Facilities for Concessional Financing, 2013.” IMF Policy Paper, Washington DC. - ———. 2013c. “Macroeconomic Issues in Small States and Implications for Fund Engagement.” IMF Policy Paper, Washington DC. - ———. 2014. “Staff Guidance Note on Macroprudential Policy—Considerations for Low-income Countries.” IMF Policy Paper, Washington DC. - ———. 2015a. “2015 Guidelines on the IMF Staff Engagement with Civil Society Organizations.” IMF Policy Paper, Washington DC. - ———. 2015b. “Evolving Monetary Policy Frameworks in Low-income and Other Developing Countries.” IMF Policy Paper, Washington DC. - ———. 2016a. “Guidance Note on the Assessment of Reserve Adequacy and Related Considerations.” IMF Policy Paper, Washington DC. - ———. 2016b. “Small States’ Resilience to Natural Disasters and Climate Change—Role for the IMF.” IMF Policy Paper, Washington DC. - ———. 2017. “Collaboration between Regional Financing Arrangements and the IMF.” IMF Policy Paper, Washington DC. - ———. 2018a. “2017 Staff Guidance Note on the Fund’s Engagement with Small Developing States.” IMF Policy Paper, Washington DC. - ———. 2018b. “Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries.” IMF Policy Paper, Washington DC. - ———. 2018c. “Overarching Strategy on Data and Statistics at the Fund in the Digital Age.” IMF Policy Paper, Washington DC. - ———. 2018d. “Review of 1997 Guidance Note on Governance—A Proposed Framework for Enhanced Fund Engagement.” IMF Policy Paper, Washington DC. - ———. 2018e. “2018 Review of the Fun’'s Capacity Development Strategy.” IMF Policy Paper, Washington DC. - ———. 2019. “Building Resilience in Developing Countries Vulnerable to Large Natural Disasters.” IMF Policy Paper, Washington DC. - ———. 2020a. “Eligibility to Use the Fund’s Facilities for Concessional Financing, 2020.” IMF Policy Paper, Washington DC. - ———. 2020b. External Sector Report. Washington DC. - ———. 2021a. “2021 Comprehensive Surveillance Review—Background Paper on Traction.” IMF Policy Paper, Washington DC. - ———. 2021b. “2021 Comprehensive Surveillance Review—Modalities for Modernizing Surveillance.” IMF Policy Paper, Washington DC. - ———. 2021c. “2021 Comprehensive Surveillance Review—Overview Paper.” IMF Policy Paper, Washington DC. - ———. 2021d. “Catastrophe Containment and Relief Trust—Fifth Tranche of Debt Service Relief in The Context of The COVID-19 Pandemic.” IMF Policy Paper, Washington DC. - ———. 2021e. “Djibouti—Staff Report for the 2021 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2021f. “Fund Concessional Financial Support For Low-Income Countries—Responding To The Pandemic.” IMF Policy Paper, Washington DC. - ———. 2021g. “Republic of Marshall Islands—2021 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2022a. “Guidance Note for Surveillance under Article IV Consultations.” IMF Policy Paper, Washington DC. - ———. 2022b. “Guyana—2022 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2022c. “Proposal for a Staff-Monitored Program with Executive Board Involvement.” IMF Policy Paper, Washington DC. - ———. 2022d. “Proposal To Establish a Resilience and Sustainability Trust.” IMF Policy Paper, Washington DC. - ———. 2022e. “Review of The Institutional View on the Liberalization and Management of Capital Flows.” IMF Policy Paper, Washington DC. - ———. 2022f. “St. Lucia—Staff Report for the 2022 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2022g. “Staff Guidance Note on the Sovereign Risk and Debt Sustainability Framework for Market Access Countries.” IMF Policy Paper, Washington DC. - ———. 2022h. “Staff-Monitored Programs—Updated Operational Guidance Note.” IMF Policy Paper, Washington DC. - ———. 2022i. “The Bahamas—2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2022j. “The IMF Strategy for Fragile and Conflict-affected States.” IMF Policy Paper, Washington DC. - ———. 2023a. “2023 Handbook of IMF Facilities for Low-Income Countries.” IMF Policy Paper, Washington DC. - ———. 2023b. “Guyana—Staff Report for the 2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023c. “Implementation Plan in Response to the Board-endorsed Recommendations from the IEO Evaluation Report on IMF Engagement with Small Developing States.” IMF Policy Paper, Washington DC. - ———. 2023d. “Integrated Policy Framework—Principles for the Use of Foreign Exchange Intervention.” IMF Policy Paper, Washington DC. - ———. 2023e. “Palau—Staff Report for the 2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023f. “Republic of Marshall Islands—2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023g. “Resilience and Sustainability Facility—Operational Guidance Note.” IMF Policy Paper, Washington DC. - ———. 2023h. “Review of the Role of Trade in the Work of the Fund.” IMF Policy Paper, Washington DC. - ———. 2023i. “Samoa—2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023j. “St. Kitts and Nevis—Staff Report for the 2023 Article IV Consultation.” IMF Staff Country Reports, Washington DC. - ———. 2023k. “Staff Guidance Note on The Implementation of The IMF Strategy for Fragile and Conflict-affected States (FCS).” IMF Policy Paper, Washington DC. - ———. 2023l. “Trinidad and Tobago—Staff Report for the 2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023m. “Tuvalu—2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023n. “Vanuatu—Staff Report for the 2023 Article IV Consultation.” IMF Staff Country Report, Washington DC. - ———. 2023o. World Economic Outlook Chapter 3: Fragmentation and Commodity Markets—Vulnerabilities and Risks. October. - ———. 2024a. “Industrial Policy Coverage in IMF Surveillance—Broad Considerations.” IMF Policy Paper, Washington DC. - ———. 2024b. “Interim Guidance Note on Mainstreaming Gender at The IMF.” IMF Policy Paper, Washington DC. - ———. 2024c. “Interim Review of the Resilience and Sustainability Trust and Review of Adequacy of Resources.” IMF Policy Paper, Washington DC. - ———. 2024d. “Operational Guidance Note for IMF Engagement on Social Spending Issues.” IMF Policy Paper, Washington DC. - ———. 2024e. “Operational Guidance Note on Program Design and Conditionality.” IMF Policy Paper, Washington DC. - ———. 2024f. “Policy Coordination Instrument—Updated Operational Guidance Note.” IMF Policy Paper, Washington DC. - ———. 2024g. “Review of the Framework for Data Adequacy Assessment for Surveillance.” IMF Policy Paper, Washington DC. - ———. 2024h. “Review of the Funds Capacity Development Strategy—Towards a More Flexible, Integrated, and Tailored Model.” IMF Policy Paper, Washington DC. ### Other Empirical and Policy Studies - Allen, C., C. Casas, G. Ganelli, L. Juvenal, D. Leigh, P. Rabanal, C. Rebillard, J. Rodriguez, and J. T. Jalles. 2023. “2022 Update of the External Balance Assessment Methodology.” IMF Working Paper 23/47, International Monetary Fund, Washington DC. - Amaglobeli, D., R. A. de Mooij, A. Mengistu, M. Moszoro, M. Nose, S. Nunhuck, S. Pattanayak, L. R. del Paso, F. Solomon, R. Sparkman, H. Tourpe, and G. Una. 2023. “Transforming Public Finance Through GovTech.” IMF Staff Discussion Note 23/04, International Monetary Fund, Washington DC. - Bespalova, O. and M. V. Rousset. 2019. “Macrofinancial Linkages and Growth at Risk in the Dominican Republic.” IMF Working Paper 19/246, International Monetary Fund, Washington DC. - Deb, P., D. Furceri, J. D. Ostry, and N. Tawk. 2020. “The Economic Effects of COVID-19 Containment Measures.” IMF Working Paper 20/158, International Monetary Fund, Washington DC. - Fernando, F., J. Pampolina, and R. Sykes. 2021. Citizenship for Sale. IMF Finance and Development (June), 50–52. - FATF. 2023. “Targeted Update on the Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers.” FATF Report, Paris. - FATF/OECD. 2023. “Misuse of Citizenship and Residency by Investment Programmes—A Joint FATF/OECD Report.” FATF and OECD Report, Paris. - Independent Evaluation Office of the International Monetary Fund (IEO). 2022. “IMF Engagement with Small Developing States.” IEO Evaluation Report, Washington DC. - International Monetary Fund and World Bank. 2001. “Strengthening IMF-World Bank Collaboration on Country Program and Conditionality.: IMF-World Bank Policy Paper, Washington DC. - International Monetary Fund and World Bank. 2007. “Enhancing Collaboration: Joint Management Action Plan (Follow-up to the Report of the External Review Committee on IMF-World Bank Collaboration).” IMF-World Bank Policy Paper, Washington DC. - International Monetary Fund and World Bank. 2022. “Guidance Note on Information Sharing between IMF and World Bank Staff.” IMF-World Bank Policy Paper, Washington DC. - Kazandjian, R., L. Kolovich, K. Kochhar, and M. Newiak. 2019. “Gender Equality and Economic Diversification.” Social Sciences 8(4), 118. - Komatsuzaki, T. and S. Brito. 2019. “Financial Conditions and Growth at Risk in the ECCU.” IMF Working Paper 19/247, International Monetary Fund, Washington DC. - Parry, I. 2019. The Case for Carbon Taxation. IMF Finance and Development (December), 16–19. - Xu X., A. El -Ashram, and J. Gold. 2015. “Too Much of a Good Thing? Prudent Management of Inflows under Economic Citizenship Programs.” IMF Working Paper 15/93, International Monetary Fund, Washington DC. *Source: ppea2024035 - References* --- _Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024035.pdf_