Public Information Notice: IMF Executive Board Concludes Macroeconomic Issues in Small States and Implications for Fund Engagement

April 1, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 13/39
April 1, 2013

On March 11, 2013, the Executive Board of the International Monetary Fund (IMF) held discussions of staff findings and proposals set forth in a paper entitled: “Macroeconomic Issues in Small States and Implications for Fund Engagement.”


The Fund previously examined small states issues in 2000, informed by a Joint Task Force Report of the Commonwealth Secretariat and World Bank. Small states continue to face many of the same challenges they did then, and the 2000 Small States Report remains the foundation for much of the work in this area, both inside and outside the Fund. However, the relative macroeconomic performance of small states has deteriorated since the late 1990s, and a fresh look is warranted. The staff paper describes the key characteristics of small states (both low and middle income countries); examines the particular macroeconomic challenges faced by microstates; reviews the Fund’s past engagement in small states; and, on that basis, presents a number of proposals to strengthen the effectiveness of Fund engagement.

Executive Board Assessment

Executive Directors welcomed the opportunity to undertake a preliminary review of the Fund’s engagement with small states. They underlined the diversity of small state experience, while also noting common challenges arising from diseconomies of scale in production and trade, lack of economic diversity, remoteness, and vulnerability to natural disasters. Directors noted that, despite these handicaps, the longer-term economic performance of small states has been generally good. They recognized, however, that small states have not matched the improved economic performance of larger countries since the late 1990s. With slower and more volatile growth than larger peers and higher public spending during this period, a number of small states now face high debt burdens and reduced policy buffers. The ability of small states to manage economic shocks has also been hampered by their weak financial systems. Micro states face particular challenges, marked by more volatile growth and external accounts and more costly banking services.

Directors noted that the evidence suggests that small states are generally well-served by the Fund’s surveillance, technical assistance, and financing facilities, especially after the 2009 reforms to the low-income facilities, and many Directors encouraged consideration of ways to continue to improve the Fund’s engagement with small states. Some Directors looked forward to discussing how possible further refinements in the low-income facilities and in PRGT eligibility could meet the needs of small states. Other Directors, however, stressed that the current facilities provide sufficient flexibility to meet small states’ needs. Directors concurred that Fund policy advice should help small states rebuild policy buffers to the extent possible and strengthen institutions and governance. Many Directors suggested that consideration be given to more frequent staff contacts in between Article IV consultations, as well as the possibility of increasing the frequency of the consultations. Some Directors encouraged the consideration of ways to strengthen staffing practices to enhance the Fund’s engagement with small states. Directors suggested the possible preparation of a staff guidance note for Fund engagement with small states or an annex to the existing guidance note for Article IV consultations.

Directors concurred that a strong analytical agenda, as well as an active dialogue with the small states communities, should inform the Fund’s policy advice to small states and help strengthen the design and traction of economic adjustment programs. Important priorities include fostering improved growth, promoting debt sustainability, further developing financial systems, assessing the effectiveness of exchange rate policies, and helping small states manage volatility associated with natural disasters and other shocks. In addition, strengthening regional initiatives to foster integration and cooperation will be key. Directors also saw merit in tailoring the Fund’s analytical tools to the needs of the small states.

Directors stressed the importance of technical assistance and training in helping small states build their capacities. They encouraged closer collaboration with other international institutions and development partners in meeting the needs of small states, based on their respective mandates and areas of expertise. Directors saw merit in staff exchanges to strengthen small states institutions. They also agreed that the Fund could sometimes play a coordinating role with other institutions, including through its resident representative offices.

Directors encouraged staff to discuss its analysis with small states and associated development partners. Following this outreach, they looked forward to discussing a more refined set of operational conclusions with resource implications.


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