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### Introduction and scope
- Guidance note focuses on small developing countries with populations of under 1.5 million.
- The Fund has 42 members with populations of fewer than 1.5 million, of which 33 are small developing countries.
- The note also considers “micro” states with populations of fewer than 200,000.
- The note draws on the March 2013 Board papers on small states and the associated Executive Board discussion, and reflects presentations to small states authorities during the 2013 Annual Meetings and regional IMF conferences in the Bahamas (September 2013) and Vanuatu (November 2013).
- Date: March 24, 2014.
- Approved By: Siddharth Tiwari.
- Drafted by Sarwat Jahan, with significant contributions from Xavier Maret, under a project supervised by Peter Allum and Seán Nolan (all SPR). The note benefited from consultations with small states authorities, inputs from members of the IMF’s Small Islands Club, and review by Fund departments and the World Bank.

### Five key thematic areas for policy dialogue (G.R.O.W.TH.)
- Growth and job creation:
  - Staff should ensure an explicit focus on growth in both surveillance and program-related work.
- Resilience to shocks:
  - Tailor macroeconomic policies to provide greater resilience to shocks; advise on fiscal frameworks, buffers, and contingency financing.
- Overall competitiveness:
  - Options include exchange rate adjustment (where possible), internal devaluation measures, business climate improvements, and regional initiatives.
- Workable fiscal and debt sustainability options:
  - Reducing very high debt burdens requires sustained fiscal consolidation, supporting policies, structural reforms; where infeasible, consider debt restructuring.
- Thin financial sectors:
  - Promote deeper, more competitive, yet sound financial sectors to support growth and policy transmission.

### Distinctive characteristics of small states — key findings
- Lack of economies of scale:
  - Fixed and indivisible costs limit domestic supply, leading to high trade openness, reliance on volatile trade tax revenues, and exposure to terms-of-trade shocks.
  - Narrow economic base and small market size contribute to high outward migration (“brain drain”) among the more highly educated.
- Provision of public goods:
  - Scale economies hamper provision of public goods; high public spending relative to GDP can coexist with under-provision of infrastructure.
  - Small absolute size of public policy agencies constrains capacity to design and implement policies.
- Macroeconomic volatility and exposure to shocks:
  - Vulnerable to industry-specific shocks and natural disasters; small islands (atolls) face particular climate change challenges.
  - Limited fiscal space, weak fiscal frameworks, shallow financial systems, and thin administrative capacity hamper shock management.
- Distinction between GDP and GNI:
  - High levels of foreign ownership mean GDP growth in foreign-owned sectors need not translate into GNI gains for nationals.
- Regional patterns and debt:
  - Caribbean: median public sector debt was 73 percent of GDP in 2012; Caribbean median incomes almost three times higher than PICs; indigenous ECCU banks structurally weak.
  - Pacific Island Countries (PICs): include some of the world’s poorest small states; one-third of PICs are defined by the World Bank as being in fragile situations; financial depth generally below other small states; more reliant on aid and face higher volatility in ODA flows and per capita income growth.
- Exchange rate regimes:
  - Pegged or heavily managed exchange rates are typical; some adopt foreign currency as tender (example: Kiribati).

### Key statistics and country-group indicators (medians, 2000–2010 unless noted)
- GDP Per Capita Growth (annual, percent):
  - Micro: 1.8
  - Other SS: 1.9
  - Other LICs and EMs: 3.0
- GDP Per Capita (current U.S. Dollars):
  - Micro: 551
  - Other SS: 2,785
  - Other LICs and EMs: 18,813
- Trade Openness:
  - Micro: 90
  - Other SS: 105
  - Other LICs and EMs: 73
- Government Expenditure (percent of GDP):
  - Micro: 31
  - Other SS: 36
  - Other LICs and EMs: 29
- Government Debt (percent of GDP):
  - Micro: 92
  - Other SS: 49
  - Other LICs and EMs: 47
- Net ODA Received:
  - Micro: 4.2
  - Other SS: 4.1
  - Other LICs and EMs: 4.6
- GDP growth:
  - Micro: 3.4
  - Other SS: 2.8
  - Other LICs and EMs: 2.7
- Current Account Balance to GDP ratio:
  - Micro: 5.5
  - Other SS: 5.0
  - Other LICs and EMs: 3.4
- Fiscal Balance to GDP ratio:
  - Micro: 2.9
  - Other SS: 2.8
  - Other LICs and EMs: 2.0
- Aid to GNI ratio:
  - Micro: 2.3
  - Other SS: 1.6
  - Other LICs and EMs: 0.9
- Private Capital Flows to GDP ratio:
  - Micro: 5.9
  - Other SS: 3.4
  - Other LICs and EMs: 2.2
- Note: Volatility is measured as a five-year backward-looking standard deviation (e.g., volatility reported for year 2000 is SD for 1996–2000).

### Operational guidance for Fund engagement
- Tailor engagement to specific country circumstances; “smallness” should inform but not dictate a standardized approach.
- Instruments and outreach:
  - PRGT eligibility decisions factor in small size; analytical perspectives shared via the “Small Islands Club”; regional technical assistance centers in the Caribbean and Pacific focus on capacity building; Fund participates in the Small States Forum (SSF).
- Program design and policy priorities:
  - Explicit focus on growth in surveillance and program work.
  - Resilience-enhancing macroeconomic policies for frequent natural disasters and external volatility.
  - Competitiveness strategies: exchange rate policy, internal devaluation, business climate reforms, and regional approaches.
  - Fiscal consolidation and structural reforms; consider debt restructuring where needed.
  - Promote deeper, more competitive, and sound financial sectors.

### Priorities for policy dialogue — Growth and job creation (A)
- Breadth and reporting of discussions:
  - Discuss effects of fiscal, monetary, and exchange rate developments on growth and employment; the outlook for economic growth (demand and supply side where data allow, with multipliers); and envisaged policies to support growth.
- Country specificity and conditionality:
  - Tailor growth agendas to critical impediments (energy costs, overvaluation, crowding out, infrastructure); focus conditionality on macro-critical, parsimonious measures.
- Competitiveness and fiscal implications:
  - Explore exchange rate adjustment or internal devaluation; move from industry-specific tax incentives to more broadly business-friendly tax systems; weigh additional public spending against financing and debt sustainability.
- Job creation and labor markets:
  - Address undiversified low-skill job opportunities, high unemployment, outward migration; consider measures to reduce public wage bill and strengthen private sector roles; draw on Guidance Note on Jobs and Growth Issues.

### Resilience to shocks (B)
- Macro analysis and risk management:
  - Prominence to potential shocks and transmission channels, including financial sector links; risks include supply and terms-of-trade shocks, revenue volatility, remittance vulnerability, and natural disasters.
- Balance between insurance options:
  - Consider self-insurance (fiscal and reserve buffers), external insurance (sovereign insurance, IFI/donor support), and pass-through to private sector (private insurance where available).
- Fiscal and external buffers:
  - Strengthen fiscal framework to insulate spending from revenue volatility; medium-term fiscal frameworks; broaden tax base and improve tax administration.
  - Explicit budget contingencies for temporary higher public spending; maintain space below public debt ceilings; fiscal rules with adjustment and return provisions.
  - Natural disaster funds, contingency reserves, or insurance policies; PFM procedures to define access and reporting.
  - Balance of payments buffers: contingent lines of credit or official reserve positions adequate for temporary draw-downs.
- Public finance management:
  - Monitor and transparently report emergency disaster assistance; treat future disaster-related public spending as a public contingent liability for cash and debt management; contain non-discretionary spending (e.g., wage bill).

### Sovereign insurance mechanisms and catastrophe risk pooling
- CCRIF (Caribbean Catastrophe Risk Insurance Facility):
  - 16 member governments can transfer hurricane and earthquake risk at a price lower than individual international market coverage and receive prompt cash payouts within two weeks or less after a covered event.
  - In practice, facilities required donor capitalization to reduce premia costs and remain an expensive insurance option.
- Pacific Catastrophe Risk Insurance Pilot Program:
  - Established that catastrophe risk insurance to Pacific economies can be provided at competitive prices if market standards are followed.
  - Regional cooperation among countries can halve costs of insurance premia.
  - Insurance covers only emergency losses and not loss of assets; needs to be complemented with other financial instruments.
- Disaster recovery and climate implications:
  - Recovery periods present opportunities for growth-enhancing reforms, job creation, and financial deepening.
  - Climate risks: low-lying atolls at risk from rising sea levels; countries subject to hurricanes, cyclones, and flooding may face more frequent and extreme events.
  - Financing and capacity: global pledges have resulted in very limited resource flows so far; financing arrangements are convoluted and capacity to access resources is limited.
  - Fund guidance: be sensitive to long-term climate implications for public investment; consider external financing or domestic revenue mobilization; tailor resilience-building advice for fragile small states with attention to political economy and IFI coordination.

### Overall competitiveness: structural constraints and exchange rate policy
- Structural inefficiencies:
  - High energy and transportation costs, limited private sector development, labor market rigidities.
- Policy options:
  - Facilitate domestic wage and price cuts (e.g., tourism sector); implement structural reforms (land tenure, remittance market reforms); assess fiscal devaluations; consider currency devaluation to address macro imbalances.
- Exchange rate considerations:
  - CGER–type analysis may not be well suited for tourism-dependent small states; high pass-through to inflation; pass-through to domestic wages and public sector wage policy matter; structural distortions and scale diseconomies may blunt supply responses; exchange rate adjustment can benefit foreign-owned sectors disproportionately—assess GDP vs GNI impacts.
- Regional cooperation:
  - Loss of trade preferences contributed to weaker growth performance; regional trade facilitation can reduce transaction costs; scope for cooperation in transport, joint marketing, and negotiating as a group; address potential fiscal challenges from regional integration by broadening the tax base and strengthening tax administration.

### Workable fiscal and debt sustainability options
- Restoring fiscal and public debt sustainability:
  - Tailor policy frameworks to individual country debt and macro situations; excessive debt burdens require stronger fiscal frameworks and sustained consolidation.
- Empirical factors associated with successful consolidation:
  - (i) the initial adjustment was larger; (ii) adjustment emphasized spending reductions—in particular on current expenditure; (iii) fiscal rules were present.
- Pace and composition of adjustment:
  - Account for fiscal multipliers, economic cycle position, short- vs. long-run concerns, and equity implications; strengthen social safety nets where warranted.
- Enablers of successful adjustment:
  - Capacity building, bold growth-enhancing structural and governance reforms, possibly more exchange rate flexibility, and public sector reform.
- Debt restructuring:
  - Considered where consolidation and growth are infeasible; drawbacks include potential adverse effects on long-term growth and financial stability where domestic financial sector links matter.
  - Fund role: design adjustment programs, determine financing envelopes, and encourage collective action clauses in international sovereign debt contracts.
- Public-private partnerships (PPPs):
  - Potential benefits: technology transfer, easing financing constraints, improved project management.
  - Challenges: PPPs are not often utilized in small states due to difficulties attracting private investment; teams should monitor quasi-fiscal risks and monopoly implications and consult FAD and World Bank.

### Thin financial sectors and financial sector development
- Priorities:
  - Deeper financial sectors, more competition, better service delivery, strengthened oversight.
- Data and assessment gaps:
  - Only about a quarter of small states (and no micro states) had a full FSAP in 2000-10, compared to about three-quarters of larger states.
- Policy objectives:
  - Support growth while providing a financial buffer for shocks; promote competition that fosters stability and efficient scale (example: East Caribbean Regional Governments Securities Market, RGSM); strengthen legal frameworks and implementation of international standards tailored to small markets and limited supervisory resources.
- Sovereign-fiscal linkages:
  - When fiscal positions are dominant in local markets, fiscal and debt management advice should reflect the sovereign’s role in financial development.

### Surveillance, analytical work, and capacity constraints
- Practical approaches:
  - Intensified reliance on cross-country work; focus on a narrower set of policy-relevant issues; cross-departmental approaches bringing experience from Caribbean, Pacific, and African small state clusters.
- Analytical emphasis:
  - Immediate policy-relevant issues with concrete implications; draw lessons from other countries; improve information systems and data dissemination with STA support.
- Outreach:
  - Regional conferences, Annual Meetings (Small States Forum), and cross-departmental events effective for dissemination and learning.

### Analytical priorities (Box 3)
- Investigate factors behind relative growth underperformance since the late 1990s.
- Assess effectiveness and transmission of exchange rate adjustments in highly open small states.
- Identify appropriate monetary and exchange rate regimes given administrative capacity constraints.
- Study global and regional spillovers and transmission channels across small state regions.
- Understand potential advantages of small size and precedents for overcoming scale diseconomies.
- Financial sector benchmarking and vulnerability diagnostics.
- Design fiscal rules adapted to volatility in revenues and expenditures.
- Investigate causes of higher aid volatility and roles for IFIs in donor coordination.
- Develop approaches for dealing with external shocks, natural disasters, and climate change.
- Implementation guidance: staff encouraged to focus analytical work on country needs.

### Annex highlights — Emergency assistance, financing arrangements, and debt restructurings
- Selected ESF/RCF approvals (2003–2013) — country / Approval Date / In millions of SDRs / Type / Event:
  - Comoros / 12/15/08 / 2.225 / ESF-RAC / Impact of higher fuel and food prices
  - St. Vincent and The Grenadines / 5/15/09 / 3.745 / ESF-RAC / Global economic slowdown effect on tourism and FDI.
  - Dominica / 7/10/09 / 3.340 / ESF-RAC / Hurricane & Global economic slowdown effect on tourism and FDI
  - St. Lucia / 7/27/09 / 6.945 / ESF-RAC / Global economic slowdown; tourism decline
  - Maldives / 12/4/09 / 8.2100 / ESF-HAC / Global economic slowdown
  - Samoa / 12/7/09 / 5.850 / ESF-RAC / Earthquake & Tsunami
  - St. Lucia / 1/12/11 / 3.825 / RCF / Hurricane Tomas
  - St. Vincent and The Grenadines / 2/28/11 / 2.125 / RCF / Hurricane
  - St. Vincent and The Grenadines / 7/25/11 / 1.215 / RCF / Torrential Rains
  - Dominica / 1/11/12 / 2.125 / RCF / Natural Disasters
  - Samoa / 5/15/13 / 5.850 / RCF / Cyclone Evan
- Selected ENDA approvals:
  - Grenada / 1/27/03 / 2.925 / ENDA / Hurricane
  - Grenada / 11/15/04 / 2.925 / ENDA / Hurricane
  - Maldives / 3/4/05 / 4.150 / ENDA / Tsunami
  - Dominica / 2/4/08 / 2.125 / ENDA / Hurricane
  - Belize / 2/18/09 / 4.725 / ENDA / Flooding
  - St. Kitts and Nevis / 5/15/2009 / 2.225 / ENDA / Hurricane
  - St. Lucia / 1/12/11 / 1.510 / ENDA / Hurricane
- Selected Fund financing arrangements (2003–2013) — preserve values exactly:
  - Dominica / PRGF / 2003 / 36 / 36 / 3 / 6894
  - Sao Tome & Principe / PRGF / 2005 / 36 / 36 / 3 / 340
  - Grenada / PRGF / 2006 / 36 / 48 / 16140
  - Djibouti / ECF / 2008 / 36 / 44 / 1380
  - Seychelles / SBA / 2008 / 24 / 13 / 18200
  - Sao Tome & Principe / ECF / 2009 / 36 / 36 / 335
  - Comoros / ECF / 2009 / 36 / 51 / 14153
  - Maldives / SBA / 2009 / 36 / 36 / 49600
  - Seychelles / EFF / 2009 / 36 / 48 / 26300
  - Grenada / ECF / 2010 / 36 / 36 / 975
  - Solomon Islands / SCF / 2010 / 18 / 18 / 12120
  - Antigua and Barbuda / SBA / 2010 / 36 / 36 / 68500
  - St. Kitts and Nevis / SBA / 2011 / 36 / 36 / 353590
  - Solomon Islands / SCF / 2011 / 12 / 12 / 550
  - Sao Tome & Principe / ECF / 2012 / 36 / 36 / 335
  - Solomon Islands / ECF / 2012 / 36 / 36 / 110
- Selected sovereign debt restructurings — key metrics:
  - Dominica (Start Date: 2003): NPV Reduction: 50 percent; Participation Rate: 78.5 percent; External yes; Domestic yes; Principal Haircut yes; Interest Haircut yes; IMF Arrangement at time: Yes.
  - Grenada (Start Date: 2005): NPV Reduction: 40–45 percent; Participation Rate: 90 percent (commercial); External yes; Domestic yes; Principal Haircut no; Interest Haircut yes; IMF Arrangement at time: No.
  - Belize (Start Date: 2006): NPV Reduction: 21 percent; Participation Rate: 100 percent (bond exchange); 98 percent of eligible debt; External yes; Domestic no; Principal Haircut no; Interest Haircut yes; IMF Arrangement at time: No.
  - Seychelles (Start Date: 2009): NPV Reduction: 75 percent; Participation Rate: 100 percent (bond exchange); 98 percent of eligible debt; External yes; Domestic no; Principal Haircut yes; Interest Haircut yes; IMF Arrangement at time: Yes.
  - St. Kitts and Nevis (Start Date: 2012): NPV Reduction: Above 50 percent; Participation Rate: 100 percent (external commercial debt and bonds); External yes; Domestic yes; Principal Haircut yes; Interest Haircut yes; IMF Arrangement at time: Yes.

### Fiscal rules and monetary policy guidance (Appendix boxes)
- Fiscal rules (Appendix Box 1):
  - Prerequisite: Strong PFM systems, medium-term framework, top-down budgeting, solid revenue forecasting.
  - Advice: Set a limit on general government structural deficit with well-defined escape clauses and enforcement mechanisms.
  - Country examples with national fiscal rules: Cabo Verde, Mauritius, Suriname, and the Maldives.
  - Maldives specifics: cap on overall deficit of 3.5 percent of GDP binding from 2016 onwards; combined with a debt ceiling to be set for 5 years by the Minister of Finance, starting from 60 percent of GDP in 2016.
  - Team considerations: consider headline balance rules where structural balance infeasible; large buffers; “debt brake” mechanisms; carefully designed escape clauses; broad coverage to avoid off-budget contingent liabilities.
- Monetary policy in small states (Appendix Box 2):
  - Constraints: shallow, non-competitive financial markets; absent interbank markets; poorly developed government securities markets; limited technical capacity.
  - Practical outcome: exchange rate often serves as the common anchor (managed exchange rate, peg, currency board, or full dollarization).
  - Strengthening anchors: strong international reserves and prudent fiscal policy; transparency and robust underwriting standards recommended.
- Devaluations (Appendix Box 3):
  - Empirical findings: external devaluations can boost growth and the external position; in many cases growth picks up quickly driven by investment and export growth, but in about half the cases three-year average growth slows in the medium term.
  - Devaluations in small states: larger inflation pass-through and smaller output response than in larger states; operate more through expenditure compression than switching.
  - Policy implications: maintain tight wage policies after devaluation; ensure fiscal sustainability; implement structural reforms; use targeted social safety nets to address consumption compression.
  - Empirical basis: event study of 78 devaluation events over 30 years, including 20 events in small states.

### Country cases: Kiribati and St. Kitts and Nevis
- Kiribati (Appendix Box 4):
  - Population: about 100,000.
  - Economy dependent on volatile fishing license fees, remittances, and donor assistance.
  - RERF (Revenue Equalization Reserve Fund) per capita balance is less than half of the 2000 level in real terms.
  - IMF advice: gradual and realistic pace of fiscal adjustment; avoid non-concessional borrowing; focus on fisheries and tourism; prioritize VAT introduction and SOE reforms; increase private sector opportunities.
- St. Kitts and Nevis (Appendix Box 8):
  - Population: around 50 thousand.
  - Tourism accounts for about half of exports of goods and services over the past 20 years; high sensitivity to single large investments and exposure to the US market.
  - Hurricane Georges (1998) caused damage estimated at 110 percent of GDP.
  - Policy response: tax concessions, loan guarantees, fiscal subsidies; government assumed debt of about 23 percent of GDP from the Sugar Company by 2005.
  - Program support: 36-month SBA for 590 percent of quota approved in July 2011; debt restructuring and fiscal adjustment aimed to reduce public debt to 105 percent of GDP by end-2013 and to 60 percent by 2020 (conditional on continued consolidation and recovery).
  - Priorities: build buffers, sustain structural reforms, strengthen investment climate, manage accumulated savings, and exercise prudence given external shock vulnerability.

*Staff Guidance Note on the Fund’s Engagement with Small Developing States; March 24, 2014.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Introduction and scope
- Guidance note focuses on small developing countries with populations of under 1.5 million.  
- The Fund has 42 members with populations of fewer than 1.5 million, of which 33 are small developing countries.  
- The note also considers “micro” states with populations of fewer than 200,000.  
- The note draws on the March 2013 Board papers on small states and the associated Executive Board discussion, and reflects presentations to small states authorities during the 2013 Annual Meetings and regional IMF conferences in the Bahamas (September 2013) and Vanuatu (November 2013).  
- Date: March 24, 2014.  
- Approved By: Siddharth Tiwari.  
- Drafted by Sarwat Jahan, with significant contributions from Xavier Maret, under a project supervised by Peter Allum and Seán Nolan (all SPR). The note benefited from consultations with small states authorities, inputs from members of the IMF’s Small Islands Club, and review by Fund departments and the World Bank.

### Five key thematic areas for policy dialogue (G.R.O.W.TH.)
- Growth and job creation:
  - With small states experiencing relative weak growth since the 1990s, Fund staff working on small states should ensure an explicit focus on growth in both surveillance and program-related work.
- Resilience to shocks:
  - Small states experience higher macroeconomic volatility and more frequent natural disasters. Staff should be ready to advise on how to tailor macroeconomic policies to provide greater resilience to shocks.
- Overall competitiveness:
  - Options to improve relative prices may include exchange rate adjustment (where possible) or measures supportive of internal devaluation (if not), and efforts to improve the business climate, including through regional initiatives.
- Workable fiscal and debt sustainability options:
  - With many small states having very high debt burdens, reducing debt to manageable levels requires sustained fiscal consolidation with supporting policies and structural reforms. In cases where the amount of adjustment needed to restore debt sustainability is not feasible or adequate financing is not available, debt restructuring may be needed.
- Thin financial sectors:
  - The promotion of deeper and more competitive, yet sound financial sectors contribute to economic growth in a macroeconomic stable environment and more effective policy mechanisms.

### Distinctive characteristics of small states — key findings
- Lack of economies of scale:
  - Fixed and indivisible costs in production limit domestic supply of goods and services, leading to high trade openness, heavy reliance on volatile trade tax revenues, and high exposure to terms-of-trade shocks.
  - Narrow economic base and small market size contribute to high outward migration (“brain drain”) among the more highly educated.
- Provision of public goods:
  - Scale economies hamper provision of public goods and services; small states may have high levels of public spending relative to GDP but still face under-provision of key infrastructure (ports, power, roads) that can hurt competitiveness.
  - Small absolute size of public policy agencies constrains capacity to design and implement policies.
- Macroeconomic volatility and exposure to shocks:
  - Narrow production and export bases make small states vulnerable to industry-specific shocks and natural disasters (earthquakes, hurricanes); small islands (atolls) face particular climate change challenges.
  - Ability to manage shocks is hampered by limited fiscal space, weak fiscal frameworks, shallow financial systems, and thin administrative capacity.
- Distinction between GDP and GNI:
  - Small states typically have high levels of foreign ownership in many sectors. Policies that boost GDP via expansion of predominantly foreign-owned sectors need not translate into increases in GNI (which captures welfare of nationals). Careful attention to distributional impacts on nationals is required.
- Growth performance:
  - Per capita income levels and social indicators of small states are broadly in line with larger developing peers on average, but since the late-1990s the average growth rate for small states has slowed even as larger developing countries accelerated.
- High public debt in some regions:
  - High public debt levels are notably a problem in the Caribbean, driven by costs of natural disasters, poor fiscal management, loss-making public enterprises, and sub-par economic growth. Middle-income status has limited access to HIPC/MDRI relief for some.
  - While PICs generally have modest debt levels, rising indebtedness in some countries is a concern.
- Financial sector characteristics:
  - Financial systems are typically shallow, concentrated, and foreign-dominated; lending opportunities are thin, and banks often lend disproportionately to the government, linking financial soundness to fiscal sustainability.
  - Nonbank financial institutions are important in some small states; high NPLs and low asset quality are prevalent in both banks and nonbank institutions.
  - Limited regulatory capacity for cross-border flows and for implementing international standards (including AML/CFT and tax transparency) increases reputational risks.
  - Small states are poorly served by global capital markets; international investors can be reluctant to take small-states exposures, resulting in illiquid markets for debt.

### Operational guidance for Fund engagement
- Tailor engagement to specific country circumstances; “smallness” should inform Fund policy analysis and advice but not determine a standardized approach.
- Fund recognition and instruments:
  - Small size factors into PRGT eligibility decisions and operational practice: Fund staff share analytical perspectives through the “Small Islands Club,” regional technical assistance centers in the Caribbean and Pacific focus on capacity building, and the Fund participates in the Small States Forum (SSF) during Annual Meetings.
- Program design and policy priorities:
  - Explicit focus on growth in surveillance and program work.
  - Advice on resilience-enhancing macroeconomic policies for frequent natural disasters and external volatility.
  - Competitiveness strategies including exchange rate policies (adjustment where possible), internal devaluation options, business climate reforms, and regional approaches.
  - Fiscal consolidation and structural reforms to reduce high debt burdens; consider debt restructuring where needed.
  - Promotion of deeper, more competitive, and sound financial sectors to support growth and policy transmission.

### Key statistics and country-group indicators (as presented)
- Country grouping and indicators (medians, 2000–2010 unless noted):
  - GDP Per Capita Growth (annual, percent):
    - Micro: 1.8
    - Other SS: 1.9
    - Other LICs and EMs: 3.0
  - GDP Per Capita (current U.S. Dollars):
    - Micro: 551
    - Other SS: 2,785
    - Other LICs and EMs: 18,813
  - Trade Openness:
    - Micro: 90
    - Other SS: 105
    - Other LICs and EMs: 73
  - Government Expenditure (percent of GDP):
    - Micro: 31
    - Other SS: 36
    - Other LICs and EMs: 29
  - Government Debt (percent of GDP):
    - Micro: 92
    - Other SS: 49
    - Other LICs and EMs: 47
  - Net ODA Received:
    - Micro: 4.2
    - Other SS: 4.1
    - Other LICs and EMs: 4.6
  - GDP growth:
    - Micro: 3.4
    - Other SS: 2.8
    - Other LICs and EMs: 2.7
  - Current Account Balance to GDP ratio:
    - Micro: 5.5
    - Other SS: 5.0
    - Other LICs and EMs: 3.4
  - Fiscal Balance to GDP ratio:
    - Micro: 2.9
    - Other SS: 2.8
    - Other LICs and EMs: 2.0
  - Aid to GNI ratio:
    - Micro: 2.3
    - Other SS: 1.6
    - Other LICs and EMs: 0.9
  - Private Capital Flows to GDP ratio:
    - Micro: 5.9
    - Other SS: 3.4
    - Other LICs and EMs: 2.2
  - Note on volatility measures: Volatility is measured as a five-year backward-looking standard deviation of a variable (for example, the volatility reported for the year 2000 is the standard deviation of a variable x from year 1996 to 2000).

### Analytical and operational implications
- Staff should pay particular analytical attention to:
  - Distinguishing GDP from GNI and assessing distributional impacts on nationals.
  - Fiscal and debt sustainability given higher debt levels in some small-state regions.
  - Financial sector soundness, supervision capacity, and market access constraints.
  - Disaster risk management, fiscal frameworks, and limited domestic financing capacity.
- Engagement tools:
  - Use a mix of surveillance, program design, capacity development, and coordination with other institutions and donors (including regional technical assistance centers and the World Bank) to address the five thematic areas.
- Tailoring and heterogeneity:
  - Small states are heterogeneous; staff should focus on particular economic needs of each country rather than adopting a one-size-fits-all approach.

*Staff Guidance Note on the Fund’s Engagement with Small Developing States; March 24, 2014.*

### 14.      Pegged or heavily managed exchange rates are typical for small states.

### 14.      Pegged or heavily managed exchange rates are typical for small states.

### Exchange rate regimes and motivations
- Fixed exchange rates provide a nominal anchor when options for an independent monetary policy are limited by administrative capacity or by weak monetary transmission mechanisms in shallow financial markets.
- Tight management of exchange rates is motivated by a desire to avoid volatility in thin foreign exchange markets and in the presence of sizeable foreign exchange inflows and outflows.
- High exchange rate pass-through to inflation strengthens the case for tight exchange rate management.
- Note: In addition, some small states like Kiribati adopt foreign currency as tender.

### Fragility and administrative capacity
- About one-fifth of small states are categorized as being in a fragile situation (Annex Table 1), compared to about one in eight for developing countries with populations of more than 10 million.
- Fragile situations further undermine administrative capacity through domestic conflict, fractious political settings, and questions of political legitimacy.
- Staff working on small countries in fragile situations are referred to the May 2012 “Staff Guidance Note on the Fund’s Engagement with Countries in Fragile Situations.”

### Heterogeneity across small states — regional characteristics (Box 1)
- Caribbean countries
  - The majority of small states in the Caribbean are upper middle-income (as defined by the World Bank).
  - Median incomes for the region are almost three times higher than in Pacific island countries (PICs).
  - Median public sector debt was 73 percent of GDP in 2012, almost three times the median for PICs.
  - Per capita growth performance has slumped since 2000, albeit remaining slightly ahead of PICs.
  - Commodity exporters (Guyana, Suriname, and Trinidad and Tobago) achieved faster growth.
  - No Caribbean small state is defined by the World Bank as being in a fragile situation, but the six ECCU countries are among the top 10 most disaster prone countries in the world as measured by disasters per land area or population.
  - Indigenous banks in the ECCU are structurally weak, with poor risk management practices, inadequate supervision and regulation, and capital shortfalls.
- Pacific Island Countries (PICs)
  - PICs include some of the world’s poorest small states; they are remote, widely dispersed, and lightly populated.
  - Poor connectivity and high transport costs limit integration into the broader Asian regional economy and export-led growth.
  - PICs are severely affected by natural disasters and are vulnerable to climate change, including rising sea levels.
  - One-third of PICs are defined by the World Bank as being in fragile situations (Annex Table 1).
  - PICs face major capacity constraints (even by small states standards), including low rates of school enrollment and low educational achievement.
  - Financial depth is generally below that of other small states, with limited access to private credit.
  - PICs are much more heavily reliant on aid than Caribbean small states and face higher volatility in ODA flows and in per capita income growth, terms of trade, current account balances, and fiscal revenues.

### Priorities for policy dialogue — Growth and job creation (A)
- The Executive Board and management have highlighted the need for an explicit focus on growth in the context of small states.
- Staff guidance for discussions and programs (Box 2) includes:
  - Breadth and reporting of discussions: discuss (i) effects of fiscal, monetary, and exchange rate developments on growth and employment; (ii) the outlook for economic growth (demand and supply side where data allow, with multipliers); and (iii) envisaged policies to support growth (macroeconomic policies including public investments, structural reforms).
  - Country specificity: tailor growth agendas to critical growth impediments (e.g., energy costs, overvaluation, crowding out, infrastructure), program goals, and government capacity.
  - Program conditionality: focus conditionality on measures to strengthen growth performance where needed to solve balance of payments problems and achieve medium-term external viability; conditionality should remain parsimonious and macro-critical.
  - Competitiveness: assess public sector dominance and scale economies; explore exchange rate adjustment or internal devaluation measures; consider moving from industry-specific tax incentives to a more broadly business-friendly tax system; consider regional initiatives.
  - Implications for fiscal adjustment: weigh additional public spending (or delayed consolidation) by available financing and implications for fiscal and debt sustainability.
  - Outreach: clarify the Fund’s role and commitment to an explicit growth agenda in program design.
- Improved growth performance typically requires a stronger private sector contribution:
  - Small states tend to feature large public sectors, state ownership of key assets, and extensive public intervention, which can deter private investment.
  - Rebalancing public and private roles and leveling the playing field for new private entrants are often needed.
  - Public infrastructure investments may be a priority if consistent with fiscal and debt sustainability.
  - Teams should draw on MDB expertise; supply responses to structural reforms may be slow given limited initial private sector roles.
- Job creation is a priority:
  - Small states feature sluggish growth, undiversified low-skill job opportunities, high unemployment rates, and outward migration of the better-educated (particularly in PICs).
  - Inward workers’ remittances support the balance of payments but reduce the growth dividend from educational investment.
  - Guidance on translating growth into job creation is provided in the “Guidance Note on Jobs and Growth Issues in Surveillance and Program Work.”
- Labor market institutions merit attention:
  - Significant brain drain, public sector dominance of formal employment, and relatively high wage levels are common.
  - Public wages and remittances may create a reservation wage that undercuts private sector hiring at competitive rates.
  - Measures to reduce the public wage bill can enhance overall competitiveness.
  - Long-term goals include larger private sector contribution, stronger productivity, better-paid jobs, and reduced migration of the better-educated.
  - Migration and remittances will continue to play an important role; options to maximize benefits should be considered.

### Resilience to shocks (B)
- Staff should advise small states to tailor macroeconomic policies to provide greater resilience to shocks and enhance sustainability, supported by Fund TA and capacity building.
- Macroeconomic analysis should give prominence to potential shocks and assess transmission channels, including via the financial sector.
  - Relevant risks include supply and terms of trade shocks to core industries, revenue volatility, vulnerability of workers’ remittance inflows to host-country cycles, and natural disasters.
  - Consider the appropriate balance between self-insurance (fiscal and balance of payments buffers), external insurance (sovereign insurance mechanisms or IFI/donor support), and pass-through to the private sector (backed by private insurance where available).
- Fiscal and external buffers are typically required to weather shocks:
  - Strengthen the fiscal framework to insulate budgetary spending from revenue volatility; fiscal policies have often been pro-cyclical.
  - Formulate fiscal policy in a medium-term fiscal framework and strengthen revenue collection by broadening the tax base and improving tax administration.
  - Explicit contingencies in the budget can help cover temporary higher public spending (e.g., disaster relief); the largest shocks will require access to debt financing and potentially contingency financing plans.
  - Where fiscal policy is guided by a public debt ceiling, maintain sufficient space below the ceiling to weather elevated borrowing needs.
  - Fiscal rules should ideally include provisions for adjusting targets (such as a deficit ceiling) in the event of an external shock and for returning to the rule in the post-shock period.
  - Natural disaster funds, general budget contingency reserves, or insurance policies can save resources in case of disasters; PFM procedures should clearly define access, reporting, and transparent allocation.
  - Balance of payments buffers can include contingent lines of credit or holding an official reserve position adequate for temporary draw-downs without destabilizing confidence.
- Strengthen public finance management to manage shocks:
  - Procedures for monitoring and transparent reporting of emergency disaster assistance may be needed to ensure repeated support from development partners.
  - Treat future disaster-related public spending as a public contingent liability for budgetary purposes to integrate risks into cash and debt management.
  - Containing non-discretionary spending (such as the public sector wage bill) enhances fiscal flexibility in the face of shocks.

*Staff Guidance Note on the Fund’s Engagement with Small Developing States — excerpt.*

### 25.      Sovereign insurance mechanisms are a new option, but typically provide only marginal

### _032414 - 25.      Sovereign insurance mechanisms are a new option, but typically provide only marginal

### Sovereign insurance mechanisms and catastrophe risk pooling
- Under the Caribbean Catastrophe Risk Insurance Facility (CCRIF), 16 member governments are able to:
  - transfer a portion of their hurricane and earthquake risk to the Facility at a price lower than what they would pay if they sought coverage individually in international insurance markets and lower than the cost of the capital they would need to hold or obtain in order to self insure; and
  - receive a prompt cash payout, within two weeks or less, following a covered event.
- In practice:
  - these facilities and schemes have required donor capitalization to help reduce the cost of premia to participating countries, and even on this basis prove to be an expensive insurance option.
- Pacific Catastrophe Risk Insurance Pilot Program (Japan, World Bank, Secretariat of the Pacific Community, Pacific Island Countries):
  - established that catastrophe risk insurance to the Pacific economies can be provided at competitive prices, as long as the program follows market standards;
  - established that regional cooperation among countries can halve the costs of insurance premia;
  - insurance covers only emergency losses and not the loss of assets, so it needs to be complemented with other financial instruments.

### Disaster recovery, resilience building, and climate change implications
- Recovery periods present opportunities to pursue growth-enhancing reforms, including:
  - inclusive job-creating growth and financial deepening to build social and economic buffers;
  - revisiting obstacles to growth that may be difficult to address in more stable environments.
- Climate change risks for small states:
  - Low-lying atolls (Kiribati, Tuvalu, and the Marshall Islands) are at risk from rising sea levels;
  - countries subject to hurricanes, cyclones, and flooding may experience more frequent and more extreme weather events in the coming years.
- Financing and capacity issues:
  - global pledges to help meet climate-related costs have resulted in very limited resource flows so far;
  - financing arrangements are convoluted, and lack of capacity is a problem in accessing climate change resources.
- Fund team guidance on fiscal space and climate-related public investment:
  - be sensitive to long-term implications of climate change for public investment needs of small states;
  - consider financing with external resources if available, or domestic revenue mobilization if not.
- Resilience-building advice for fragile small states should:
  - pay attention to political economy considerations;
  - tailor the nature and pace of reforms to the need for security and social cohesion as well as levels of capacity;
  - promote approaches conducive to sustained engagement with IFIs;
  - ensure close coordination with other IFIs and donors.

### Overall competitiveness: structural constraints and exchange rate policy
- Key structural inefficiencies limiting growth and competitiveness:
  - high energy and transportation costs;
  - limited private sector development;
  - labor market rigidities.
- Policy advice options:
  - facilitate domestic wage and price cuts to improve price competitiveness (e.g., tourism sector);
  - implement structural reforms to improve the business environment (e.g., land tenure reform, remittance market reforms);
  - assess desirability and feasibility of fiscal devaluations to improve competitiveness;
  - consider currency devaluation as an element to address broader macroeconomic imbalances.
- Exchange rate policy considerations:
  - CGER–type analysis may not be adequately tailored for tourism-dependent small states;
  - weigh potential adverse impact on inflation discipline against alternative costs of pursuing cost reductions;
  - openness of small states implies currency adjustment tends to quickly pass through to inflation via imported goods prices;
  - pass-through to domestic wages will influence eventual competitiveness impacts, potentially depending on public sector wage policy;
  - severe diseconomies of scale and structural distortions may blunt supply responses to price competitiveness improvements, requiring complementary structural policies;
  - exchange rate adjustment can benefit foreign-owned sectors disproportionately; staff should assess impacts on both GDP and GNI.
- Regional trade and cooperation:
  - loss of earlier trade preferences in advanced economy markets has been a key factor behind less favorable growth performance, particularly in the Caribbean;
  - regional trade facilitation programs can reduce transaction costs, though Pacific island remoteness raises regional trade costs;
  - Caribbean may benefit from regional trade infrastructure arrangements, expansion of Panama Canal–related container traffic, and proliferation of e-commerce;
  - scope for regional cooperation in air/sea transport, joint marketing, and negotiating as a group with large partners;
  - regional institutions can be politically attractive yet often fail to achieve concrete economies of scale;
  - potential fiscal challenges from regional trade integration (lost revenue) should be addressed by broadening the tax base and strengthening tax administration and compliance.

### Workable fiscal and debt sustainability options
- Restoring fiscal and public debt sustainability:
  - policy frameworks should be tailored to individual country debt and macroeconomic situations;
  - where debt burdens are excessive, restoring sustainability invariably requires stronger fiscal frameworks and sustained fiscal consolidation.
- Empirical factors associated with successful fiscal consolidation:
  - (i) the initial adjustment was larger;
  - (ii) adjustment emphasized spending reductions—in particular, on current expenditure;
  - (iii) fiscal rules were present.
- Pace and composition of adjustment should account for:
  - size of fiscal multipliers;
  - a country’s position in the economic cycle;
  - short- vs. long-run concerns;
  - the potential equity implications—measures to develop or strengthen social safety nets may be warranted.
- To succeed, fiscal adjustment typically needs:
  - capacity building activities;
  - bold growth-enhancing structural and governance reforms;
  - possibly more exchange rate flexibility;
  - public sector reform is likely to be a priority in many small states.
- Debt restructuring:
  - some small states may find debt sustainability through consolidation and growth alone infeasible, making debt restructuring a consideration;
  - drawbacks of restructuring include potential adverse effects on long-term growth and financial stability, especially where domestic financial sector links matter;
  - Fund role: help design adjustment programs to restore debt sustainability and determine financing envelopes; encourage inclusion of collective action clauses in international sovereign debt contracts.
- Public-private partnerships (PPPs):
  - potential benefits: technology transfer, easing financing constraints, improved project management;
  - PPPs are not often utilized in small states due to challenges attracting private investment;
  - Fund teams should be alert to quasi-fiscal risks and monopoly implications; consultations with FAD and World Bank staff are essential.

### Thin financial sectors and financial sector development
- Priorities:
  - deeper financial sectors, more competition, better service delivery, strengthened oversight.
- Data and assessment gaps:
  - a first challenge is compiling relevant financial sector data and performance indicators.
  - Only about a quarter of small states (and no micro states) have had a full FSAP in 2000-10, compared to about three-quarters of larger states.
- Policy advice objectives:
  - support improved growth performance while providing a financial buffer for shocks;
  - promote competition that fosters stability and achieves efficient scale (e.g., East Caribbean Regional Governments Securities Market, RGSM);
  - tailor strengthening of legal frameworks and implementation of international standards to small market challenges, limited supervisory resources, and reputational risks.
- When fiscal positions are important to financial development, fiscal and debt management advice should reflect the sovereign’s dominant role in local markets.

### Surveillance, analytical work, and capacity constraints
- Staff teams may need creative approaches due to staffing constraints, turnover, data gaps, and less frequent missions:
  - intensified reliance on cross-country work;
  - focus on a narrower set of policy-relevant issues.
- Cross-departmental approaches:
  - bringing together experience from different small state clusters (Caribbean, Pacific islands, African) can strengthen advice and outcomes;
  - policy issues can be tackled as part of multi-country studies with shared desk resources;
  - periodic sharing of departmental small states work agendas can identify joint projects.
- Analytical emphasis:
  - focus on immediate policy-relevant issues with concrete policy implications rather than basic research;
  - draw on lessons from policy implementation in other countries;
  - improve information systems and data dissemination with STA support where required.
- Outreach and dissemination:
  - regional conferences, Annual Meetings events (including the Small States Forum), and area departments REOs have been effective;
  - cross-departmental events can broaden learning opportunities for small states governments.

*STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES, INTERNATIONAL MONETARY FUND*

### Box 3. Analytical Priorities for Small States

### Box 3. Analytical Priorities for Small States

### Analytical priorities
- The factors behind the relative growth underperformance of small states since the late 1990s.
  - Investigate why small states failed to match the improved growth performance of larger states over the past 15 years.
  - Explore whether this reflects a failure to adopt macroeconomic and structural reforms, or whether pro-growth reforms were offset by regional developments (such as loss of trade preferences) disproportionately affecting clusters of small states.
  - Assess implications for small states’ growth strategies.
- The effectiveness of exchange rate adjustments in highly open small states.
  - Determine whether there are major differences in the exchange rate transmission mechanism that should inform policy design for external adjustment.
- Appropriate monetary and exchange rate regime.
  - Identify factors to consider when advising small states on desirable monetary and exchange rate regimes.
  - Consider whether small states should favor a monetary regime based on a simple monetary rule (i.e., rigid exchange rate or monetary targeting), given limited administrative capacity to operate an independent monetary policy.
- The impact of global and regional spillovers on small states.
  - Identify major transmission channels and how these vary across small state regions.
  - Build on existing Fund staff work on particular countries and country groups.
- Understanding potential advantages of small size.
  - Study development experience of highly successful small states and how they exploited particular advantages.
- Overcoming scale diseconomies.
  - Identify precedents and best practices for administrative cost-sharing or outsourcing arrangements to reduce administrative costs, particularly in micro states (example given: managing small state sovereign wealth funds).
- Financial sector benchmarking and vulnerabilities.
  - Use benchmarking to compare a country’s financial system to peers.
  - Diagnostics to clarify which financial services are underprovided and which sub-segments or instruments are underdeveloped.
  - Pinpoint vulnerabilities from interconnectedness intrinsic to being small and open.
- Designing fiscal rules for small states.
  - Tailor fiscal rules to small states given the volatility they experience in revenues and expenditures.
- Understanding and managing high aid volatility.
  - Investigate causes of higher aid volatility observed in small states.
  - Assess roles for the Fund, World Bank, or other IFIs in donor coordination or helping country authorities manage aid volatility.
- Dealing with shocks.
  - Develop approaches for small states to successfully deal with susceptibility to external shocks, including natural disasters and climate change.

### Implementation guidance (contextual note within source)
- In selecting analytical work, staff is encouraged to focus on the needs of their respective countries.1

_1 In selecting analytical work, staff is encouraged to focus on the needs of their respective countries._

*Source: Box 3. Analytical Priorities for Small States*

### Annex Table 2. List of Small States with Staff Monitored Programs

### Annex Table 2. List of Small States with Staff Monitored Programs (as of June 30, 2013)

### Staff Monitored Programs — program metadata and objectives
- Sao Tome & Principe
  - Approval Date: 1-Jan-02
  - Original Expiration Date: 30-Jun-02
  - Current Expiration Date: 31-Dec-02
  - Length in months: 66
  - Purpose: Provide a track record of policy implementation that could lead to a new PRGF arrangement.
  - Prior program: PRGF in 2005
  - Macroeconomic Objectives: Correct the fiscal and structural slippages that occurred in 2001 causing the PRGF to go off track and restablish a track record on policy implementation.
- Comoros
  - Approval Date: 1-Jan-05
  - Original Expiration Date: 31-Dec-05
  - Current Expiration Date: 31-Dec-06
  - Length in months: 12
  - Extension in months: 12
  - Purpose: Provide a track record of policy implementation that could lead to a PRGF arrangement.
  - Subsequent Program: EPCA in 2008; ECF in 2009
  - Macroeconomic Objectives: (i) restore the credibility of its economic management, (ii) put public finances back on a sound footing, (iii) improve financial intermediation, and (iv)accelerate structural reforms.
- Djibouti
  - Approval Date: 1-Jul-05
  - Original Expiration Date: 31-Dec-05
  - Current Expiration Date: 31-Dec-05
  - Length in months: 60
  - Purpose: Provide a track record of policy implementation that could lead to a PRGF arrangement.
  - Subsequent Program: PRGF in 2008
  - Macroeconomic Objectives: (i) streng then the fiscal position; (ii) reduce domestic arrears and (iii) establish a track record of policy implementation, including the promotion of good governance and transparency.
- Swaziland
  - Approval Date: 4-Apr-11
  - Original Expiration Date: 3-Oct-11
  - Current Expiration Date: Off-track
  - Length in months: 6
  - Purpose: Build a strong track record of fiscal consolidation and structural reforms to support the authorities’ possible request for a formal Fund arrangement in late 2011.
  - Macroeconomic Objectives: (i) reduce the deficit which will limit the debt-to-GDP ratio to around 35 percent; (ii) maintain the gross international reserves to safeguard external sustainability; (iii) strengthen public finance management; and (iv) protect priority spending in order to continue to make progress towards achieving the MDGs.

- Note: SMPs are sent to the Board for information not discussion.

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Annex Table 2 content extracted from the source PDF.*

### Annex Table 3. Fund Emergency Assistance in Small States (2003-2013) — ESF/RCF and ENDA/EPCA approvals (selected entries and amounts)
- Exogenous Shocks Facility (ESF) and Rapid Credit Facility (RCF) — selected approvals (country / Approval Date / In millions of SDRs / Type / Event)
  - Comoros / 12/15/08 / 2.225 / ESF-RAC / Impact of higher fuel and food prices
  - St. Vincent and The Grenadines / 5/15/09 / 3.745 / ESF-RAC / Global economic slowdown effect on tourism and FDI.
  - Dominica / 7/10/09 / 3.340 / ESF-RAC / Hurricane & Global economic slowdown effect on tourism and FDI
  - St. Lucia / 7/27/09 / 6.945 / ESF-RAC / Global economic slowdown; tourism decline
  - Maldives / 12/4/09 / 8.2100 / ESF-HAC / Global economic slowdown
  - Samoa / 12/7/09 / 5.850 / ESF-RAC / Earthquake & Tsunami
  - St. Lucia / 1/12/11 / 3.825 / RCF / Hurricane Tomas
  - St. Vincent and The Grenadines / 2/28/11 / 2.125 / RCF / Hurricane
  - St. Vincent and The Grenadines / 7/25/11 / 1.215 / RCF / Torrential Rains
  - Dominica / 1/11/12 / 2.125 / RCF / Natural Disasters
  - Samoa / 5/15/13 / 5.850 / RCF / Cyclone Evan
- Emergency Natural Disaster Assistance (ENDA) — selected approvals
  - Grenada / 1/27/03 / 2.925 / ENDA / Hurricane
  - Grenada / 11/15/04 / 2.925 / ENDA / Hurricane
  - Maldives / 3/4/05 / 4.150 / ENDA / Tsunami
  - Dominica / 2/4/08 / 2.125 / ENDA / Hurricane
  - Belize / 2/18/09 / 4.725 / ENDA / Flooding
  - St. Kitts and Nevis / 5/15/2009 / 2.225 / ENDA / Hurricane
  - St. Lucia / 1/12/11 / 1.510 / ENDA / Hurricane
- Emergency Post-Conflict Assistance
  - Comoros / 12/15/08 / 1.113 / EPCA / Conflict
- Note: The Rapid Financing Instrument has replaced the IMF’s previous emergency assistance policy that covered Emergency Natural Disaster Assistance and Emergency Post-Conflict Assistance.

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Annex Table 3 content extracted from the source PDF.*

### Annex Table 4. Fund Financing Arrangements for Small States (2003-2013) — selected approvals and durations
- Table fields: Country / Arr. Type / Year / Original Duration (Months) / Actual Duration (Months) / Total Amount Approved (in SDR mn) / Actual Approved Amount (% of quota at approval)
- Selected rows (preserve values exactly):
  - Dominica / PRGF / 2003 / 36 / 36 / 3 / 6894
  - Sao Tome & Principe / PRGF / 2005 / 36 / 36 / 3 / 340
  - Grenada / PRGF / 2006 / 36 / 48 / 16140
  - Djibouti / ECF / 2008 / 36 / 44 / 1380
  - Seychelles / SBA / 2008 / 24 / 13 / 18200
  - Sao Tome & Principe / ECF / 2009 / 36 / 36 / 335
  - Comoros / ECF / 2009 / 36 / 51 / 14153
  - Maldives / SBA / 2009 / 36 / 36 / 49600
  - Seychelles / EFF / 2009 / 36 / 48 / 26300
  - Grenada / ECF / 2010 / 36 / 36 / 975
  - Solomon Islands / SCF / 2010 / 18 / 18 / 12120
  - Antigua and Barbuda / SBA / 2010 / 36 / 36 / 68500
  - St. Kitts and Nevis / SBA / 2011 / 36 / 36 / 353590
  - Solomon Islands / SCF / 2011 / 12 / 12 / 550
  - Sao Tome & Principe / ECF / 2012 / 36 / 36 / 335
  - Solomon Islands / ECF / 2012 / 36 / 36 / 110

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Annex Table 4 content extracted from the source PDF.*

### Annex Table 5. Selected Recent Examples of Sovereign Debt Restructurings in Small States — key metrics and features
- Dominica (Start Date of Restructuring: 2003)
  - NPV Reduction: 50 percent
  - Participation Rate: 78.5 percent
  - Type of Debt Restructured / Treatment: External yes; Domestic yes; Principal Haircut yes; Interest Haircut yes
  - Interesting Features: Mandatory debt-management provision in the bond exchange.
  - IMF Arrangement at the Time of Restructuring: Yes
- Grenada (Start Date: 2005)
  - NPV Reduction: 40–45 percent
  - Participation Rate: 90 percent (commercial)
  - Type of Debt Restructured / Treatment: External yes; Domestic yes; Principal Haircut no; Interest Haircut yes
  - Interesting Features: Restructured debt that had government guarantees.
  - IMF Arrangement at the Time of Restructuring: No
- Belize (Start Date: 2006)
  - NPV Reduction: 21 percent
  - Participation Rate: 100 percent (bond exchange); 98 percent of eligible debt
  - Type of Debt Restructured / Treatment: External yes; Domestic no; Principal Haircut no; Interest Haircut yes
  - Interesting Features: First country since the 1930s to use collective action clause in a bond issued under the New York Law.
  - IMF Arrangement at the Time of Restructuring: No
- Seychelles (Start Date: 2009)
  - NPV Reduction: 75 percent
  - Participation Rate: 100 percent (bond exchange); 98 percent of eligible debt
  - Type of Debt Restructured / Treatment: External yes; Domestic no; Principal Haircut yes; Interest Haircut yes
  - Interesting Features: First time a partial guarantee from a multilateral organization (African Development Bank) was offered in the context of a sovereign restructuring.
  - IMF Arrangement at the Time of Restructuring: Yes
- St. Kitts and Nevis (Start Date: 2012)
  - NPV Reduction: Above 50 percent
  - Participation Rate: 100 percent (external commercial debt and bonds)
  - Type of Debt Restructured / Treatment: External yes; Domestic yes; Principal Haircut yes; Interest Haircut yes
  - Interesting Features: Partial guarantee from the Caribben Development Bank on the new debt instruments; Creation of a Banking Sector Reserve Fund to maintain banking sector stability during the restructuring; Creation of a Special Purpose Vehicle for debt secured by land.
  - IMF Arrangement at the Time of Restructuring: Yes

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Annex Table 5 content extracted from the source PDF.*

### Appendix Box 1. Fiscal Rules for Small States — guidance and country examples
- Conceptual overview and conditions for effective fiscal rules:
  - Prerequisite: Strong public financial management (PFM) systems (top-down budgeting, solid revenue forecasting, medium-term framework).
  - Relevant objective: Preserve debt sustainability.
  - Simplicity and transparency: Avoid complicated rules with multiple inconsistent targets or narrow coverage.
  - Resilience in the face of shocks: Allow budget to buffer adverse exogenous shocks.
  - Enforceability: Deviations should entail tangible costs for the government; examples include prohibition to submit inconsistent budgets, “debt brakes”, or direct sanctions.
- Fund’s central advice: Set a limit on the general government structural deficit with well-defined escape clauses and some form of enforcement mechanism.
- Small states — practical observations and country practices:
  - Small states with national fiscal rules to date: Cabo Verde, Mauritius, Suriname, and the Maldives.
  - Maldives: cap on the overall deficit of 3.5 percent of GDP binding from 2016 onwards; combined with a debt ceiling to be set for 5 years by the Minister of Finance, starting from 60 percent of GDP in 2016. Explicit escape clauses present in Maldives and Mauritius.
- Country-team considerations for small states:
  - Formulate rule in terms of headline budget balance where structural balance is infeasible.
  - In “normal times” consider a budget balance floor close-to-balance or in surplus and binding only ex-ante; large buffers needed given high volatility.
  - Set a “debt brake” to switch to “adjustment mode” after large ex-post deviations.
  - Carefully design escape clauses that accommodate significant shocks and high-quality investment projects.
  - Ensure broad coverage to avoid outsourcing fiscal policy to off-budget entities or generating contingent liabilities.
  - Consider expenditure ceilings on specific pressured categories (e.g., subsidies, wage bill) though generally not advised.

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Appendix Box 1 content extracted from the source PDF.*

### Appendix Box 2. Monetary Policy in Small States — implementation challenges and implications
- Preconditions and constraints for inflation-targeting or monetary-targeting frameworks:
  - Shallow and non-competitive financial markets raise spreads and impede interest rate pass-through.
  - Poorly functioning or absent interbank markets increase demand for precautionary central bank reserves.
  - Poorly developed government securities markets reduce scope for open market operations.
  - Limited technical capacity complicates oversight and complex central bank operations; central bank autonomy may be an issue.
- Common practical outcome: The exchange rate serves as a common anchor (managed exchange rate, peg, currency board, or full dollarization) given high trade openness and dependence on a single trading partner.
- Strengthening anchors: A strong international reserves position and prudent fiscal policy enhance credibility; fiscal volatility and limited financing options complicate matters.
- Supervisory and market limitations:
  - Limited scope for greater competition and capital market development.
  - Risk diversification is problematic in economies with few borrowers and tight interlinkages.
  - Policy recommendation: Favor greater transparency about interest rates and lending policy (e.g., require banks to publish rates) and ensure robust underwriting standards over blunt spread controls.

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Appendix Box 2 content extracted from the source PDF.*

### Appendix Box 3. Devaluations in Small States: How Effective? — empirical findings and policy implications
- Main empirical findings:
  - External devaluations can be effective in small states, providing a strong boost to growth and the external position.
  - After a decline in the year of the devaluation, growth picks up quickly in small states, driven largely by a very strong pickup in investment and robust export growth.
  - However, in about half of the cases three-year average growth slows down in the medium term following devaluations.
  - Devaluations in small states tend to have larger inflation pass-through and smaller output response than in larger states.
  - Devaluations operate more through expenditure compression than expenditure switching in small states because:
    - (i) exports respond less due to scale limitations and higher share of imported inputs;
    - (ii) less scope to switch expenditures from imports to domestic substitutes due to scale;
    - (iii) pass-through to inflation is significantly higher due to larger import content of consumption basket, causing adverse income and wealth effects and reducing consumption, labor income, and increasing poverty.
- Policy implications and recommendations for successful devaluations:
  - Maintain tight wage policies after devaluation to preserve gains from nominal adjustment.
  - Ensure credibility of the devaluation and supporting policies to avoid market expectations of further devaluation; fiscal sustainability is an important condition.
  - Implement structural reforms to remove bottlenecks to investment and address underlying competitiveness weaknesses.
  - Address consumption compression through appropriately targeted social safety nets, potentially using net income redistribution from the private sector to the government that frequently occurs following depreciations.
- Empirical basis: Event study of 78 devaluation events over 30 years, including 20 events in small states; supported by econometric approaches and simulations using the Fund’s Global Integrated Fiscal and Monetary model.

*Italic: STAFF GUIDANCE NOTE ON THE FUND’S ENGAGEMENT WITH SMALL DEVELOPING STATES — Appendix Box 3 content extracted from the source PDF.*

### Appendix Box 4. Kiribati: Donor—Supported Reform Program and IMF Involvement

### Appendix Box 4. Kiribati: Donor—Supported Reform Program and IMF Involvement

### Overview
- Kiribati is one of the most remote and poorest microstates in the Pacific, consisting of 33 islands with an overall population of about 100,000.
- The economy is highly dependent on volatile fishing license fees, remittances, and donor assistance.
- Kiribati relies on its sovereign wealth fund—Revenue Equalization Reserve Fund (RERF)—for financing the fiscal deficit.
- Climate change poses significant challenges because of low elevation of islands above the sea level.

### Economic challenges and vulnerabilities
- Major impediments to growth: remoteness, dispersion, and lack of scale.
- Key vulnerabilities:
  - Large structural fiscal deficits persist.
  - The RERF per capita balance is now less than half of the 2000 level in real terms.
  - High fiscal costs and imbalances arising from climate change risks.
  - Small private sector share in the economy due to remoteness and weaknesses in business climate.
- Priority sectors for growth identified: fisheries and tourism, where Kiribati has comparative advantage.

### IMF policy advice and macroeconomic framework
- Policy advice took into account limitations posed by remoteness and lack of scale; the pace of fiscal adjustment should be gradual and realistic given limited size of the private sector.
- The macro-framework did not envisage RERF stabilization in the short term, but with successful implementation of reforms it would be possible in the mid-2020s.
- Given high risks and vulnerabilities, including long-term risks from climate change, the IMF team advised that non-concessional borrowing should be avoided.
- Emphasis on increasing private sector opportunities as critical for fiscal revenues and employment growth.

### Fiscal and structural reforms supported
- Planned introduction of VAT:
  - Aims at increasing revenue and reducing reliance on customs duties, which must be decreased in the future according to Kiribati trade agreements.
- State-owned enterprise (SOE) reforms:
  - Took into account limited private sector capacity to provide some services (example: long-range maritime communication).
- Fisheries policy reform:
  - Targeted Kiribati’s most important natural resource to maximize growth and revenue impacts.

### Lessons for IMF teams and policy implications for small states
- Prevalence of the government sector and limited private sector opportunities may limit the pace and scope of feasible fiscal adjustment.
- Growth reforms should identify and target sectors where the country has a comparative or resource advantage (e.g., fisheries and tourism for Kiribati).
- IMF country teams need to be prepared to go into greater detail on government finances, national accounts, statistical issues, and the organization and functioning of important economic sectors when engaging with small states.

*Prepared by Sergei Dodzin, IMF mission chief for Kiribati.*

### Appendix Box 8. St. Kitts and Nevis: Trials and Tribulations of a Micro State

### Appendix Box 8. St. Kitts and Nevis: Trials and Tribulations of a Micro State

### Background and vulnerabilities
- Population: around 50 thousand.
- Economic concentration:
  - After earlier dependence on sugar, main industry is now tourism, accounting for about half of exports of goods and services over the past 20 years.
  - High sensitivity to single large investments: a single large hotel can substantially affect tourism arrivals and GDP growth; closure of a single hotel can have an adverse impact.
  - Within tourism, high dependence on the US market; decline in tourism after September 11, 2001 and a further downturn during the financial crisis of 2008-10.
- Natural disasters:
  - The country is highly vulnerable to hurricanes; several damaging hurricanes in the past two decades.
  - Hurricane Georges (1998) caused damage estimated at 110 percent of GDP.
  - Hurricane Omar (2008) forced a two-year closure for repair of the Nevis Four Seasons hotel (one of the island’s largest hotels, and its most luxurious). (Figure text also notes the Four Seasons Hotel was "closed for 1+ years".)
- Disaster-proneness: the six ECCU countries, including St. Kitts and Nevis, rank, on some measures, among the 10 most disaster-prone in the world.

### Government response and debt accumulation
- Policy measures used to support economic base and protect against shocks included tax concessions, loan guarantees, and fiscal subsidies.
- Support to the sugar sector:
  - Government covered growing losses of the sugar sector through budgetary transfers and debt guarantees.
  - Resulted in assumption of debt of about 23 percent of GDP from the Sugar Company by the time the industry was closed in 2005.
- Fiscal reforms and outcomes:
  - Introduction of VAT improved the fiscal position but debt continued to be unsustainable.
- Historical indicators (as presented in figures):
  - Public debt and primary balance dynamics shown in the chapter’s Figure 2 (public debt and primary balance in percent of GDP) highlight the accumulation of debt from the late-1990s.

### Stabilization program, support, and projected outcomes
- Reform timing and instruments:
  - Authorities began implementing an ambitious fiscal adjustment program from emid-2010.
  - The government’s reform effort, together with a debt restructuring plan, was supported by a 36-month SBA for 590 percent of quota, approved in July 2011.
  - Debt restructuring strategy included a debt-for-land swap.
- Fiscal and institutional measures under the program:
  - Strengthened tax administration.
  - Improved public financial management, including establishing a legal framework for procurement, and strengthening monitoring and audit procedures.
  - Wages were kept at their 2009 nominal level until late 2013.
  - Other expenditures were contained or reduced, including capital spending.
- Debt trajectory and projections:
  - Debt restructuring and fiscal adjustment were forecast to reduce public debt to 105 percent of GDP by end-2013.
  - The debt-to-GDP ratio is projected to decline to 60 percent by 2020, predicated on the continuation of the fiscal consolidation effort and economic recovery.

### Key lessons, future challenges, and policy priorities
- Future vulnerabilities:
  - St. Kitts and Nevis will remain vulnerable to natural disasters and global economic shocks.
- Priority policy directions:
  - Build buffers enabling the country to deal with unforeseen events without undermining fiscal performance as occurred in the late-1990s.
  - Complement debt reduction efforts with sustained focus on the structural reform agenda.
  - Strengthen the investment climate.
  - Design and implement policy and institutional arrangements for the efficient management of accumulated savings.
  - Exercise prudence in the face of external shocks; carefully consider what is affordable, taking uncertainty into account, and tailor policies accordingly.

*Prepared by Judith Gold. Source: Appendix Box 8 text provided in the supplied content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_032414.pdf_