Policy paper

Small island developing states (SIDS) and access to finance: statement and call to action, 7 October 2021

Published 19 October 2021

This was published under the 2019 to 2022 Johnson Conservative government

Introduction

1. The Roundtable Process on SIDS Access to Finance – Identifying Solutions for Resilient COVID-19 Recovery began at the SIDS Summit in September 2019 as an aspiration for a more constructive and evidence-based dialogue on the unique challenges facing SIDS. It culminated in a High-Level Meeting on the 7 October 2021 at which the themes in this Call to Action were discussed.

2. The Co-Chairs are grateful that during this two-year process we have seen a willingness to engage on these issues by a wide range of stakeholders, enabling an open conversation on questions which can sometimes be contentious.

3. The starting point for these discussions has been the acute climate and economic issues facing vulnerable SIDS. Due to their circumstances the international community has, as early as 1992, determined that SIDS are a special case for sustainable development ^{[footnote 1]}. A SIDS specific sustainable development agenda has existed since the 1994 Barbados Programme of Action. Moreover, SIDS are one of the groups of states that are in “special situations” for Agenda 2030.

4. For vulnerable SIDS the scale of their underlying structural issues ensures that endogenous resources and capabilities are insufficient to overcome the challenges that they face, particularly in the face of accelerating climate change and exogenous shocks such as the 2008 world economic financial crisis and the current fallout from COVID-19. In 2021 the OECD summarised these structural constraints by saying that SIDS are: “Vulnerable to external shocks due to their unique structural characteristics. For SIDS, small, dispersed populations hamper the creation of sizable domestic markets and lead to capacity constraints. Their remoteness determines that as a group they are less than one third as well connected as other developing countries, and this reduces their access to international markets and competitiveness. As a result, most SIDS rely on small, undiversified economies and often face high debt levels, many of them also relying on the rest of the world for remittances, official development assistance (ODA) and financial services. These economic vulnerabilities are interrelated and reinforced by the climate and environmental challenges, such as increasingly frequent extreme weather events, rising sea levels, ocean acidification, loss of ocean oxygen and ecosystem degradation.”

5. These problems have been further underlined by the impact of COVID-19, economically SIDS will suffer most, with some experiencing unprecedented double-digit declines in real GDP and a slower recovery due to their heavy dependence on tourism․

The roundtable process

6. Economic and climate vulnerability, coupled with the challenge of diversifying small economies, have left SIDS particularly dependent on concessional ^{[footnote 2]} finance, including up to the point of ODA graduation. However, SIDS have pointed to significant problems, including the quality of resources that they receive, access criteria, and problems in accessing affordable finance after graduating from ODA.

7. In October 2020 the first international Roundtable on SIDS Access to Finance for a Resilient Post-COVID-19 Recovery, set out these challenges in greater detail, and tentatively pointed to practical solutions. The meeting brought together 250 participants over 2 days including: SIDS, bilateral development partners, multilateral organisations and civil society groups (read the outcome document).

That discussion pointed to 3 key issues, these are:

• how development is measured, and how eligibility is determined
• debt
• overly bureaucratic systems, and the failure to tailor approaches

8. These same issues have been raised in subsequent discussions and international fora, including at the World Bank Annual Meetings, HLPF and UNGA. These same challenges also featured in regional Dialogues organised in the Pacific, Caribbean and New York during 2021.

COP26: a turning point for SIDS

9. The Co-Chairs are conscious that as the international community approaches COP26 we collectively expect SIDS to continue to manage and protect unique and fragile biodiversity, including through their stewardship of over one third of the global ocean. Manmade climate change is already adversely affecting their coastal areas and the natural resources that underpin their economies, leading to increased risks and experiences of catastrophic natural disasters. ^{[footnote 3]}

10. The challenge of adaptation and resilience is immediate, and often more acute for SIDS than for many other states. The international community needs to do more to help SIDS, which represent 25% of developing states, respond to these growing challenges. These issues have often been raised on the road to Glasgow, including during the March 2021 Climate and Development Ministerial.

11. An often-repeated point from SIDS is that while there has been opportunity to discuss these issues not enough has happened to resolve them – words are not enough. As the Attorney General of Fiji, Aiyaz Sayed-Khaiyum, has argued: in the face of climate change and economic vulnerability, international actors cannot keep kicking difficult question on SIDS issues down the road.

The call to action

12. As we prepare to gather together in Glasgow to discuss our mutual responsibilities on climate, the Co-Chairs recall that in 2018 the OECD asked international actors to better tailor their approaches to the needs of SIDS. Following this in 2020 OECD-DAC members committed to improve their policies and programmes in relation to SIDS. The Co-Chairs believe that as we look to post-COVID19 recovery, now is the time to take forward these aspirations, to improve access and the quality of support. These changes can be achieved through steps which are consistent with international commitments, while acknowledging the challenging international landscape due to the impact of COVID-19.

Action point 1: measures of development and eligibility

13. The Co-Chairs recognise that development resources are finite, they must be rationed in the face of global challenges, and development partners are committed to: respond to countries most in need, to support Agenda 2030, including states in special situations, and to ensure efficient access to finance ^{[footnote 4]} . The co-chairs believe that these are mutually supportive goals, encompassing the poorest and the most vulnerable states.

14. Roundtable dialogues have acknowledged that ultimately none of the approaches adopted by international actors on eligibility to finance are without fault, and most have significant weaknesses. GNI per capita is a measure of development used by several providers of finance, often because it offers a source of data available for most states ^{[footnote 5]}.

15. The weight of evidence indicates that GNI per capita (GNI) does not adequately capture the development position of smaller states. During the Roundtable process Multilateral Development Banks (MDBs) and International Financial Institutions (IFIs) explained that as a result they predominantly do not use GNI per capita as the sole criterion for small states.

16. The weakness of GNI creates a potential moral and development dilemma, for those development partners who rely exclusively on GNI per capita, particularly if small states are exiting concessional finance and aid before achieving self-sufficiency and without the resilience of their income level peers.

17. This position is a very real risk for SIDS. The OECD notes that by one measure UMIC SIDS remain 73% more vulnerable than other UMICs. SIDS also exit ODA while on average still uniquely dependent on aid flows, which arguably links to wider finance problems, including indebtedness after graduation. Transitions without resilience compound the challenge for low-capacity states in relation to climate change. For SIDS it is often the combination of abrupt transitions out of concessional finance, along with poor quality, rather than the volume of assistance, that is their greatest challenge

18. The Co-Chairs are conscious that SIDS account for a small proportion of global ODA (approx. 3.5%), and the costs of addressing timeframe and transition problems would be comparatively low (even if they were provided with longer timeframes to better manage transitions the cost would be approx. 0.2% of ODA ^{[footnote 6]}). More flexible approaches to transitions would also be consistent with the OECD-DAC’s delay in the date of effect of graduation in 2020, in light of the ongoing COVID-19 crisis. The Co-Chairs note that some Roundtable participants have voiced fears over the precedents that might be set. However, the experience of the criteria used by MDBs and IFIs suggests that this can be managed.

19. The Co-Chairs are aware that there has been much discussion of the potential role of Multi-dimensional Vulnerability Indices (MVIs) as a tool to balance the weaknesses of GNI per capita when determining access to finance. The 2021 report on implementation of the SAMOA Pathway from the UN Secretary General has pointed to the potential of these instruments. The Co-Chairs note that international organisations have indicated that technically there is potential for both measures to co-exist, or for the proxy-measures used by MDBs/IFIs to help inform the graduation process ^{[footnote 7]}. As a result, the co-chairs call on those international financing bodies and fora that do not currently reflect the unique challenges of SIDS in their approaches to:

• set out recommendations to their members on how the risks posed to SIDS through the use of GNI per Capita and aid graduation processes should be mitigated, so that their transition from finance takes into account their unique vulnerabilities and challenges

• review and report on the potential for an MVI to inform their graduation and transition processes from ODA

Action point 2: debt

20. The Co-Chairs have been reminded through these dialogues that prior to the COVID-19 crisis the average debt to GNI ratio of SIDS was significantly higher than that of other developing countries ^{[footnote 8]}. Given SIDS’ low economic diversification, constrained fiscal space and vulnerability to external shocks, the COVID-19 crisis has affected SIDS particularly severely ^{[footnote 9]}. Some SIDS have been able to draw forward future allocations of concessional finance, others have been able to access flexible crisis financing windows that IFIs and bilateral development partners have established. The Co-Chairs applaud the decision of the World Bank Group to show flexibility in enabling the use of International Bank for Reconstruction and Development funding for the worst affected High-Income SIDS.

21. The impact of lower foreign currency earnings, in part due to falling travel receipts which were down 70% in 2020, is likely to make the servicing of debts increasingly challenging in the coming years ^{[footnote 10]}.

22. The Co-Chairs therefore welcome the suspension of debt service payments from eleven SIDS to their official bilateral creditors under the G20 Debt Service Suspension Initiative (DSSI). However, to achieve a comprehensive and sustainable solution to their debt vulnerabilities some SIDS may require more substantive debt treatments and we recognise the important role of debt relief, including on a case-by-case basis under the Common Framework for Debt Treatment beyond the DSSI, or through other mechanisms such as debt swaps, where appropriate.

23. Addressing debt vulnerabilities and increasing fiscal space will be critical to enable SIDS to recover from the COVID-19 crisis and to invest in their own resilience. To help achieve this goal, we call on:

• all creditors, including the Multilateral Development Banks and the Private Sector, to rapidly explore and appropriately roll out potential Climate Resilient Debt Instruments to increase SIDS’ financial resilience by providing automatic payment suspension in the event of external shocks

• creditors to consider requests for debt treatment under existing frameworks in a timely manner and whilst recognising the specific factors which contribute to increased debt vulnerability in SIDS

• the World Bank and IMF to finalise the design of their Global Platform on Debt, Climate and Nature, taking special note of the needs of SIDS with regards to access affordable and sustainable climate finance and recognising the global significance of their contribution to our ecosystems

• development partners and international organisations to provide more Technical Assistance, either by strengthening existing facilities or establishing dedicated facilities where necessary, ^{[footnote 11]} to support SIDS access affordable international finance and help manage their debts effectively

Action point 3: tailored systems

24. The Co-Chairs heard during the Roundtables that access to finance challenges include both the burdensome bureaucratic systems and the quality of resources on offer. SIDS’ government structures are generally small in absolute terms, dealing with providers of finance who often have limited staff in their respective regions.

25. The mismatch between complex provider systems and SIDS capacity can have very real impacts - limiting access to the finance nominally available, skewing the type of programmes funded and potentially reducing impact for climate and economic resilience. The Co-chairs noted that independent reviews of the Green Climate Fund point to problems disbursing and implementing its programmes, which on average for SIDS are significantly delayed. While the 2020 Scorecard for the Global Environment Facility reported that while resource utilisation for Least Developed Countries had reached 85%, for SIDS it was only 65%, and for Climate Change initiatives it was only 47% ^{[footnote 12]}. In addition, the lack of harmonisation for accessing finance across funds places a heavy burden on SIDS who may need to rely on external institutions to broker access on their behalf.

26. Aid to SIDS is often fragmented, with small allocations from regional or global programmes and poorly targeted on underlying challenges such as building economic diversification and economic and climate resilience. In spite of the heightened importance of donor coordination and harmonisation when working in SIDS, aid co-ordination across donors is often weak.

27. The Co-Chairs therefore welcome the discussion held by the Contact Group of Development Ministers in September 2020 on these issues. The Contact Group discussed the establishing of both guidance and principles to help improve aid impacts in SIDS. In December 2020 their Senior Officials formally commissioned work to develop these tools.

28. To avoid duplication the Roundtable Co-Chairs are supporting the process initiated by the contact group. This work brings together major bilateral development partners, SIDS and multilateral bodies and is supported by a Technical Advisory Group of four SIDS, four development partners, the UN systems, The World Bank and the OECD.

29. The process of delivering these principles, and the draft guidance, is being undertaken with the support of a virtual secretariat that brings together UNOHRLLS, UNDP, UNDESA and the OECD.

30. This work is co-chaired by development partners (Canada and the UK) and AOSIS. The intention is to have draft guidance and principles available for consultation and discussion later in 2021. The principles will be subject to thorough review by donors, international bodies, and AOSIS members. The Co-Chairs call on providers of concessional finance to:

• commit to taking context as their starting point, responding to those groups of states in special situations with attention to their unique needs and problems. For SIDS, actors must have sensitivity to local capability and the need to build both economic and climate resilience

• adopt and abide by the principles for improved aid impact in SIDS once they are mutually agreed among SIDS, development partners, and international institutions

Co-chairs conclusion

31. The impact of climate change combined with COVID19 underlines that SIDS are unable to endogenously resolve their vulnerabilities. The Co-Chairs recognise that problems within the international concessional finance system aggravate these challenges, and also create additional risks for SIDS. These problems represent a historic lack of action by international actors to adopt processes, systems and rules that are accurate, effectively calibrated and appropriate to SIDS needs.

32. The Co-Chairs underline that the continuation of these problems cannot be justified, the evidence of the issues is well documented, and the arguments against action are not credible. It is time to recognise the problems of this group of states and to respond.

33. In relation to SIDS this means action on how development is assessed, action on debt, and action to tailor systems within the multilateral system. The steps to be taken could take several forms, further technical work will be needed to define solutions. The Co-Chairs therefore ask Roundtable participants to align with and support these suggested actions across the fora, international bodies and processes of which they are members. The Co-Chairs believe that if the international community wants to respond to the climate challenges of SIDS then COP26 represents a moment for agreement on action, with steps that can be delivered well within the timeframe of the SAMOA Pathway, and before we meet again for COP27.

1. Indeed the IDA Small Island Economy Exception was introduced as early as 1985 and has allowed continued eligibility to IDA’s concessional financing to SIEs even as their income levels exceed the IDA threshold ↩

2. Concessional finance is normally taken to mean grants and soft loans – however there are a wide variety of mechanisms through which this can be disbursed, such as MDBs, ODA support from bilaterals, special funds, within blended finance or through support provided in kind. The variations of forms of finance are matched by variations in rules, processes and eligibility ↩

3. https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_Full_Report.pdf ↩

4. See the OECD-DAC High Level Meeting Communique 2017 and 2020, Paris Declaration, Article 9:4-9, the Midterm Review of the SAMOA Pathway Political Declaration 2019, and the Addis Ababa Agenda for Action. ↩

5. For example states lose access to ODA when their GNI per capita passes the High Income threshold, currently US$ 12,535, see https://blogs.worldbank.org/opendata/new-world-bank-country-classifications-income-level-2020-2021 ↩

6. FCDO Economists calculations – approx. annual ↩

7. In addition to combining GNI per capita with vulnerability indicators, the World Bank, for example allows IBRD graduates to apply for exceptional access during financial distress as in the case of the Bahamas and Barbados recently. With respect to IDA, the World Bank has established a framework and criteria for IBRD-only small states to become IDA-eligible (as in the case of Fiji in 2019) ↩

8. https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-SIDS-2018-Highlights.pdf ↩

9. Piemonte, C. (2021), “The impact of the COVID-19 crisis on external debt in SIDS” OECD, Paris: https://www.oecd.org/dac/financing-sustainable-development/External-debt-in-small-island-developing-states(SIDS).pdf ↩

10. https://unctad.org/news/small-island-developing-states-face-uphill-battle-covid-19-recovery ↩

11. where necessary to fill specific gaps for SIDS not currently addressed through existing facilities ↩

12. Global Environment Facility 2020 Scorecard p2 and p9 ↩