This week, World Bank President Ajay Banga is visiting Pacific small states, many of which rely heavily on the Bank’s concessional lending arm, the International Development Association (IDA). As IDA approaches its next three-year replenishment cycle—IDA21—Banga is advocating for a record $28–30 billion from donors to support a $100 billion replenishment goal. This ambitious target comes amidst economic challenges for many major donors, who face weak currencies and competing priorities. Nevertheless, robust funding for IDA is crucial for the world’s poorest countries, particularly small states where IDA accounted for nearly a third of official development assistance (ODA) between 2018 and 2022, compared to about a quarter in non-small states. Our newly published paper argues that beyond securing substantial funding, the World Bank should also focus on policy reforms to enhance IDA’s effectiveness in small states.
Small states are increasingly calling for reforms in the international development finance system due to their heightened vulnerability to climate change. Initiatives such as the Bridgetown Initiative led by Barbados and UN Secretary-General Antonio Guterres’ recent plea for urgent climate action at the Pacific Island Forum underscore this urgency. Despite their negligible contribution to global carbon emissions, these states face severe impacts from climate change, including extreme weather, ocean acidification, and rising sea levels, which threaten their livelihoods and economies.
However, small states are not a monolithic group, and their varying degrees of climate vulnerability are a topic of ongoing debate. For instance, Gross National Incomes (GNIs) per capita among small states range from under $1,600 in Comoros to over $30,000 in the Bahamas. There is no consensus on how to measure climate vulnerability, and different methodologies yield varied results. Our analysis shows no correlation between the UN’s Multidimensional Vulnerability Index (MVI) and the 2021 World Risk Index for small states. Both indexes highlight the vulnerability of small states to some extent, but they also display a wide range of scores among these countries, leading to inconsistent conclusions.
The IDA Small States Exemption (SSE) allows countries with populations under 1.5 million and GNIs per capita below the World Bank’s high-income threshold to access IDA resources. The SSE, which covers nearly a third of IDA-eligible countries, acknowledges that small states face challenges comparable to other IDA-eligible nations despite their higher per capita incomes. Many higher-income small states are excluded from IDA but are still considered vulnerable by the MVI. Our paper suggests that while the SSE serves as a de facto climate vulnerability criterion for lower-income small states, replacing it with the MVI could disadvantage many of these countries by limiting their access to IDA.
Small states need better options to scale up adaptation finance. While there is advocacy for providing adaptation financing on grant terms due to historical injustices, the required volume of grant finance has not materialized. Our paper proposes that small states be given the option to trade some IDA grant allocations for a larger volume of concessional loans, which could be beneficial for macro-critical adaptation investments. Recent IMF analysis indicates that concessional loans for adaptation might improve debt sustainability by enhancing resilience to climate-driven shocks. This option would need to be demand-driven, with careful case-by-case assessments of debt sustainability. Additionally, considering the generally good debt management among small states, we argue that IDA could contemplate stricter terms for countries with poorer debt management, potentially freeing up resources for the fund as a whole and indirectly benefiting small states.
Disaster financing is another critical concern for small states. Our paper reviews the World Bank’s disaster financing tools and the new Comprehensive Toolkit to Support Countries after Natural Disasters. Historically, small states have benefited from IDA’s disaster products when they offer new funding and allow countries to manage their access directly. However, these tools have been relatively small in scale compared to the disaster needs. New tools designed to scale up disaster financing mostly offer flexibility for using existing funds rather than providing additional resources. Ideally, these tools would offer greater flexibility and could be used in combination for more significant impact. Their effectiveness remains to be seen.
Finally, administrative reforms are essential for enhancing IDA’s effectiveness in small states. Given their limited institutional capacities, small states would benefit from reforms such as the SimplifIDA initiative, which aims to reduce the complexity of IDA’s policy framework, and the new World Bank Scorecard, which focuses on 22 performance indicators instead of 150. However, concerns persist about the Scorecard’s emphasis on absolute figures, which may disadvantage smaller populations, and persistent data quality issues. For instance, the World Bank’s Country Opinion Survey Program has only reached 56 percent of IDA small states due to poor coverage in Pacific Island microstates. Streamlining efforts and addressing data challenges will be crucial for maximizing impact.
As the IDA21 replenishment deadline approaches in December, it is vital to secure strong donor support and push for reforms that will enhance IDA’s impact. Over the past decade, IDA has become a lifeline for highly climate-vulnerable small states. Ensuring continued support and implementing necessary policy changes will be key to maintaining and improving this vital assistance.
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