Building resilience and reducing vulnerability in small states

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1 Building resilience and reducing vulnerability in small states Jeffrey D. Lewis Director, Economic Policy, Debt and Trade Department World Bank

2 Why makes small states different from other countries High vulnerability Typically concentrated exports High import dependence Significance of remittances Importance of aid Vulnerability to natural disasters and effects of climate change (especially islands and coastal states) Limited resilience / restricted policy space Many moderately to highly indebted, with weak debt management capacity Difficult to control inflation due to high levels of imported goods (especially food and fuel) Economic impact of natural disasters large relative to size economy and policy buffers High cost of trade due to remoteness especially for Pacific island states

3 Many small states moderately to highly indebted Amongst IDA countries, all but one of small states at moderate to high risk of external debt distress, in many cases due to weak exports (e.g., Comoros, Haiti, Sao Tome and Principe, Solomon Islands, Tonga) (joint Bank-Fund DSAs) Of 15 countries at high risk of external debt distress, 9 are island states Among WB clients, 21 out of 53 countries with moderately high to high risk to domestic or external debt sustainability are small states (of which 14 island states)

4 25 Many small states (especially island states) are at moderate to high risk of debt distress Post-HIPC CP Benin Cameroon Ethiopia Liberia Madagascar Senegal Tanzania Uganda Zambia Non-HIPC Bangladesh Cambodia Kenya Myanmar Vanuatu 22 Post-HIPC CP Burkina Faso Central African Rep Côte d'ivoire Gambia, The Guinea Guinea-Bissau Malawi Mali Mauritania Mozambique Nicaragua Niger Rwanda Sierra Leone Togo Non-HIPC Kyrgyz Republic Lao PDR Lesotho Nepal Solomon Islands South Sudan Tonga 15 Post-HIPC CP Afghanistan Burundi Comoros Congo, DR Haiti Sao Tome & Principe Low Moderate High In debt distress Source: Joint Bank-Fund LIC-DSAs Interim period HIPC Chad Non-HIPC Kiribati Maldives Marshall Islands Micronesia, FS Samoa Tajikistan Tuvalu Yemen, Rep Many small states in moderate and high risk of debt distress category 3 Pre-HIPC DP Eritrea Somalia Sudan

5 Impact of natural disasters in Caribbean states

6 Some additional issues for small higher-income countries Majority of Commonwealth states are: middle- and high-income countries (according to WB s income classification) not eligible for IFI concessional resources or debt relief Commonwealth states have had to rely on bonds Complicated debt restructuring process Increased indebtedness of the small states to private creditors Some small states also relied heavily on domestic debt

7 Global context Two trends: Tapering off of quantitative easing by US Fed and gradual improvement of euro area debt crisis as economic outlook tentatively improves Falling food and fuel prices Only few small states (Fiji, Jamaica and Montenegro) have maturing eurobonds between now and 2017, and may be negatively impacted by tapering Due to importance of net food and fuel imports and remittances many small states may benefit from improved global context Further strengthening of global recovery could help small states with significant tourism sectors

8 Build resilience Macro/budget management Prudent macroeconomic management best positions the economy against shocks and facilitates rapid donor response Sound budget management maximizes value from resources Debt headroom Maintaining a cushion between current debt levels and debt distress thresholds provides room to use concessional loans to mitigate the impact of shocks on the economy Asset buffers Build prudential reserves Catastrophe loans/bonds/contingent credit lines Reduce vulnerability Facilitate use of alternative energy to reduce oil dependence Facilitate natural resource/tourism industry development Expand labor market access to secure remittances

9 Proposals on financial instruments to small states Debt swaps for climate change adaptation and mitigation Challenge: not new net resource transfers Vulnerability as a criteria for eligibility to access concessional resources World Bank initiatives: In IDA-17 lending terms to small island states exempted from lowering maturity and grace of regular IDA terms Annual minimum base allocation increased from SDR 3 million to 4 million, which likely benefits mostly small states Countercyclical loans (IDA-17 Crisis Response Window) Resilience building as a policy condition for international financial institution lending

10 The Comprehensive Debt Framework The framework is structured around four pillars, reflecting the fundamental causes and symptoms of high debt in small states. 4 pillars for reducing long term debt: Enhancing private sector led growth Improving fiscal management Mitigating fiscal impact of natural disasters on debt and fiscal profile Restructuring debt portfolios 3 instruments for debt restructuring A: Debt buy-back operation B: Debt for debt swap C: Debt equity/asset swap