Abstract

The unique economic characteristics and constraints facing small developing states were presented in a March 2013 Fund Board paper Macroeconomic Issues in Small States and Implications for Fund Engagement. While all small states have populations of under 1.5 million, they are a diverse group representing various income categories, but all of them face size-related constraints. The IMF has 33 members2 that are considered small developing states. Three out of four small states are islands or widely dispersed multi-island states, such as in the Pacific region; others are landlocked, and some are located far from major markets.

The unique economic characteristics and constraints facing small developing states were presented in a March 2013 Fund Board paper Macroeconomic Issues in Small States and Implications for Fund Engagement. While all small states have populations of under 1.5 million, they are a diverse group representing various income categories, but all of them face size-related constraints. The IMF has 33 members2 that are considered small developing states. Three out of four small states are islands or widely dispersed multi-island states, such as in the Pacific region; others are landlocked, and some are located far from major markets.

Based on the findings of the Board paper, the Fund produced a note in May 2014 that provides operational guidance on Fund engagement with small developing countries; including on how small country size might influence the use of Fund facilities and instruments, program design, capacity building activities, and collaboration with other institutions and donors.

Five key thematic areas (G.R.O.W.TH.) are identified as central to the policy dialogue:

  • Growth and job creation. Small states have experienced relative weak growth since the 1990s. An explicit focus on growth in both surveillance and program-related work is needed.

  • Resilience to shocks. Small states experience higher macroeconomic volatility and more frequent natural disasters. Macroeconomic policy advice needs to be tailored 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 contributes to economic growth in a stable macroeconomic environment and more effective policy mechanisms.

The guidance note also considers the special macroeconomic challenges faced by “micro” states, with populations of fewer than 200,000. In practice, many countries with populations larger than 1.5 million have characteristics of “smallness,” and this guidance note applies, in varying degrees, to these countries as well.

The guidance note is available at: http://www.imf.org/external/np/pp/eng/2014/032414.pdf.

Antigua & Barbuda | The Bahamas | Barbados | Belize | Bhutan | Cape Verde | Comoros | Djibouti | Dominica | Fiji | Grenada Guyana | Kiribati | Maldives | Mauritius | Micronesia | Montenegro | Palau | Republic of Marshall Islands | Samoa São Tomé and Príncipe | Seychelles | Solomon Islands | St. Kitts and Nevis | St. Lucia | St. Vincent and the Grenadines Suriname | Swaziland | Timor-Leste | Tonga | Trinidad & Tobago | Tuvalu | Vanuatu

1

Prepared by Sarwat Jahan, (Strategy, Policy, and Review Department).

2

The list of the 33 Small Developing States, according to the IMF definition, is presented below. These are IMF members with a population under 1.5 million excluding those defined as advanced market economies according to the World Economic Outlook, as well as fuel exporting countries classified by the World Bank Group as “high income” (Bahrain, Brunei Darussalam, and Equatorial Guinea).