The World Bank’s IDA Is a Vital Lifeline for Pacific Islands and Other Small States

This week World Bank President Ajay Banga is visiting Pacific small states, many of which benefit from the Bank’s concessional lending arm, the International Development Association (IDA). As IDA approaches its next three-year replenishment cycle, IDA21, Banga is seeking a record $28–30 billion from donors to support his headline number of a $100 billion replenishment—a big ask for many major donors facing weak currencies, economic headwinds, and other competing priorities. Still, a well-funded IDA remains crucial for the world’s poorest countries, especially in small states where it accounted for nearly a third of official development assistance (ODA) from 2018–2022, compared to roughly a quarter in non-small states. As our newly published paper argues, beyond strong funding, the Bank should also prioritize policy reforms to maximize IDA’s impact in small states.

Small states have been at the forefront of recent calls to reform the international development finance architecture, largely due to their vulnerability to climate change. Examples include the Bridgetown Initiative led by Barbados and UN Secretary-General Antonio Guterres’ urgent call for swifter climate action at last week’s Pacific Island Forum. Small states have contributed negligible carbon emissions to the global total, yet are at the forefront of experiencing the impacts of climate change, including extreme weather, ocean acidification, and rising sea levels. These impacts threaten livelihoods and economies.

Yet small states are a heterogeneous group of countries, and whether this heterogeneity extends to these countries relative climate vulnerability is a major point of debate. For example, GNIs per capita range in small states from less than $1,600 in Comoros to over $30,000 in the Bahamas. There is no agreed-upon approach to measuring climate vulnerability, and different methodologies produce different outcomes for small states. For example, Figure 1 below highlights that for small states there is no pattern between the UN’s new Multidimensional Vulnerability Index (MVI) and the 2021 World Risk Index. Both these indexes prioritize the vulnerability of small states to some degreerelative to other vulnerability indexes available, yet both indexes still have small states ranging across the available scores, and there no correlation between countries across the two indexes. Both indexes have higher scores implying greater vulnerability.

This debate on small states’ relative climate vulnerability is increasingly pivotal to these countries’ access to international development finance. The IDA Small States Exemption (SSE) allows countries access to IDA if they have populations under 1.5 million and GNI per capita below the World Bank’s high-income country threshold. The SSE covers nearly a third of countries with IDA access and recognizes that the unique characteristics of small states—including their size, limited economic base, and remoteness—results in these countries having comparable challenges to other IDA-eligible countries with lower per capita incomes. The SSE costs the international community relatively little, with these countries receiving just three percent of IDA’s total envelope. Figure 2 below shows that many higher-income small states are excluded from IDA. Many of these countries are considered vulnerable in the new MVI. Our paper shows that the IDA SSE functions like a climate vulnerability criterion for many lower-income small states that are vulnerable across other climate indexes access to IDA. We also show that using the MVI in place of the SSE could potentially create worse financing outcomes for many of these lower-income countries who are unlikely to be considered vulnerable under the MVI and would therefore possibly lose access to IDA under such a proposal. Going forward, questions remain as to whether the MVI could be incorporated into IDA’s eligibility criteria. Presently, it seems unlikely the global community would support this, as such a change could result in adding new countries to IDA that on average have GNI per capita of nearly fifteen times that of the FY24 IDA cut-off.

A key element of small states’ climate advocacy is to scale up concessional adaptation finance. Our paper highlights that these countries disproportionately use IDA’s concessional funds for adaptation compared to non-small states. Figure 3 below shows that between 2015 and 2022, SSE countries generally had a higher proportion of their IDA commitments tagged as adaptation finance compared to non-SSE countries. Given the scale up in IDA’s financing over this period and that IDA’s financing programs are demand-driven, this finding could potentially indicate that if small states were to receive more concessional finance, they would be more likely to allocate it to adaptation than other countries. We also highlight that small states disproportionately use IDA for place-based investments, while non-small states tend to use IDA to invest more in people-based investments. Our paper argues that going forward, small states may benefit from increasing their investment in human capital and social protection systems as part of their adaptation programming.

Small states need options to better scale up adaptation finance. Many developing countries advocate for adaptation financing to be provided on grant terms given historic injustices, yet the volume of grant finance needed has not been forthcoming. Given this, our paper makes the case for careful consideration for giving small states the ability to trade off some of their IDA grant allocation for a larger volume of concessional loans in cases where additional financing is needed for macro-critical adaptation investments. Recent analysis by the IMF highlights that in some circumstances, concessional loans for adaptation can enhance debt sustainability by improving the economy’s resilience to future climate-driven shocks. Such an option would need to be made available to small states on a demand-driven basis, while the debt sustainability implications would need to be assessed carefully case-by-case. Additionally, given the relatively good debt management in most small states, we argue that in the future, IDA could consider further hardening its terms for countries with poorer debt management. This would likely free up considerable resources for IDA as a whole and incidentally benefit small states.

Another key concern for small states is disaster financing. Our paper explores the World Bank’s programming in this space to date and the new Comprehensive Toolkit to Support Countries after Natural Disasters. Historically small states have benefited the most from IDA’s disaster products when they provide new funding and when countries can control their access (rather than being dependent on a disaster meeting a predefined trigger). IDA’s disaster tools have typically been small relative to the scale of the disaster and the funding needed to respond. New tools designed to scale up financing in disasters mostly provide flexibility for using existing funding, rather than new resources. These tools range in the size of their response and the degree of control countries have in using them. Ideally, these new tools will provide countries with greater flexibility for using their World Bank funds and could be deployed together for a greater impact. As these tools are new, their usefulness is untested.

Lastly, we argue the Bank should focus on key administrative reforms, including improving data quality in small states, to improve effectiveness. Given their limited institutional capacities, small states could gain from reform efforts within the IDA21 policy package, including the SimplifIDA initiative aimed at reducing the complexity of IDA’s policy framework, and the new World Bank Scorecard, which narrows the focus to 22 performance indicators, down from 150. However, concerns remain about the Scorecard’s focus on absolute figures, which may disadvantage countries with smaller populations, alongside perennial data quality issues that hinder coverage in these states. For instance, the World Bank’s Country Opinion Survey Program has only reached 56 percent of IDA small states, largely due to poor coverage in Pacific Island microstates. Streamlining efforts and resolving data challenges will be crucial for greater impact.

A successful IDA21 replenishment is needed to sustain essential development and climate support in small states, but key policy reforms would also improve the World Bank’s effectiveness in these countries. Over the last decade, IDA has grown to become a vital source of support for highly climate-vulnerable small states. But with financial pressures on IDA, strong donor support is required for this to continue. As December’s replenishment deadline nears, President Banga’s visit to Pacific small states also offers a prime opportunity for donors and small state recipients themselves to push for reforms that will maximize IDA’s impact.