Policy paper

Identifying solutions for resilient COVID-19 recovery: SIDS' access to finance, first roundtable outcome

Published 19 August 2021

This was published under the 2019 to 2022 Johnson Conservative government

Introduction

The Roundtable on SIDS Access to Finance – Identifying Solutions for Resilient COVID-19 Recovery was held in October 2020 as the first of two meetings to be convened by the UK, Fiji and Belize. The Roundtable process aims to promote a constructive dialogue on concessional ^{[footnote 1]} finance, setting out the challenges, and pointing to practical solutions that will support continued progress towards the Sustainable Development Goals.

The meeting brought together 250 participants over two days, timed to enable participation from stakeholders globally and bringing together: SIDS, bilateral development partners, multilateral organisations and civil society groups. Roundtable sessions were guided to focus on areas where consensus might potentially be found, and participants both voiced calls for reform and signalled a degree of caution.

The intention has been to produce an outcome document that addresses the main issues raised, rather than a simple record of the discussion. This note attempts to distil the rich and detailed conversation by focusing on three key themes which dominated the discussion (measures of development, debt and tailored systems).

It is a challenge to summarise strongly held views, however the note is intended to spur debate and proposals rather than point to a single answer. The options set out below therefore ask of stakeholders – what steps can we agree to take in order to move from problems to solutions on each of these themes?

The Co-Chairs propose that each of the three issues should be the subject of separate focused meetings among interested stakeholders to draft a shared call for action, which will be brought together and agreed at the second Roundtable.

Responses and additions are invited from participants and others and can be sent to: [email protected]

Context of the discussion

The first meeting heard details of the economic impact of COVID-19 on SIDS from both multilateral participants and from representatives of SIDS. Manuela Ferro of the World Bank reported that Small States will suffer more than other developing states from COVID economic impacts, and SIDS will suffer most, with some projected to experience unprecedented double-digit declines in real GDP and a slower recovery due to their heavy dependence on tourism․

Steep falls in GDP and impacts on employment, revenues and debt have underlined the existing OECD analysis placing SIDS at the top of the list of most economically vulnerable developing states. Characteristics for the most vulnerable SIDS are well known – narrow economies, high dependence on trade, proportionately high climate and disaster impacts, and high levels of national effort required for public sectors, although with low levels of overall capacity.

For these reasons the international community has affirmed through the SAMOA pathway and elsewhere, that SIDS are a special case for sustainable development. However, the representative from Cabo Verde pointed out that there is not yet a consensus on the practical meaning of a `special case’. The OECD has called for the rethinking of traditional models of development for SIDS, with a greater emphasis on tailored approaches. The roundtable discussion underlined the need to add substance to these ideas sooner rather than later. In opening the second day the Attorney General of Fiji, Aiyaz Sayed-Khaiyum, challenged development partners, arguing that in the face of climate change and economic vulnerability international actors cannot keep kicking difficult question on SIDS issues down the road.

Minister Sayed-Khaiyum called for new approaches to reduce the cost of accessing blended finance. The Prime Minister of the Cook Islands, Mark Brown talked of a three-pronged crisis – a health crisis, associated economic crisis and the existential threat of climate change, and he argued that we should leverage the current crisis to reset and re-orientate the development and financial landscape. Against this backdrop the Roundtable discussion was dominated by three themes on which SIDS have called for action and where there is scope for collaboration on solutions.

Theme 1: Measures of development

The DAC Chair set out the core dilemma framing this issue – development resources are finite, they must be rationed in the face of global challenges and the international community has committed to seek to prioritise the poorest states.

A 2011 IMF Working Paper provides an overview of attempts to accurately measure and capture development (itself not clearly defined). Ultimately none of the approaches adopted are without fault and most have significant weaknesses.

The various methodologies for measuring development are attempting to offer a comparative picture, is country x poorer than country y, when poverty is viewed in monetary, human development, resilience or other terms. This is then used to determine which states need preferential help to reach a common benchmark of development (represented by an income figure, human development performance etc). The assumption is that once the benchmark is achieved states have economic self-sufficiency, resilience and the ability to sustain growth. GNI per capita features as a measure of development for several sources of finance and was referenced by speakers on both days of the Roundtable. It takes average individual income levels as a proxy for the overall social, environmental and economic wellbeing of a state, with High Income ^{[footnote 2]} status representing the perceived achievement of being `developed’ (with its connotation of a self-sustaining and resilient trajectory).

The use of GNI per capita was challenged by several speakers, including Prime Minister Chastanet of St Lucia, who noted the broad technical view that the measure works poorly for small states. SIDS do not look like their income level peers in the ways that we would expect if GNI were accurately gauging overall economic strength. This includes higher dependence on ODA and greater vulnerability to economic shocks even as their incomes grow. Small populations, high costs, high trade dependency can all skew the degree to which income enables accurate comparisons between states. As the World Bank has put it: the development challenges that small states face likely mean that traditional income per capita measures do not adequately capture all the factors that could make small states eligible for concessional finance ^{[footnote 3]}. Elsewhere the Bank has simply stated that: It is broadly accepted that GNI per capita does not fully capture a country’s level of Development.

The Bank notes that GNI has proven useful, easily accessible and generally aligns with some human development measures, however others have found that it is less effective as a guide to areas such as resilience ^{[footnote 4]} (in addition to GNI the Bank includes vulnerability issues within its approach for IDA). The potential to capture a more balanced view of development, using an economic, environmental and social lens has been recognised for some time ^{[footnote 5]}. However, for some forms of concessional finance, including ODA, GNI per capita remains the sole criteria for eligibility.

For Development partners these questions on GNI per capita and small states present a complex challenge as to how to measure development while also recognising the uniqueness of states in special situations. Opinion is divided on the appropriateness of GNI alone as a measure and there remain perceived risks that change might shift the allocation of finite resources away from LDCs. The risks, however, are not clear- cut, already around 70% of ODA goes to non-LDC countries, and only around 3.5% of concessional finance goes to SIDS, which have a relatively low absorption capacity.

Levels of ODA to SIDS are higher per capita than for some other groups of states, however as a participant from the OECD pointed out, so is dependence on ODA (27% of external flows even at graduation). This perhaps suggests that while the weaknesses of GNI per capita as a measure are not negatively impacting allocations for ODA eligible SIDS, there is an impact in terms of withdrawal of ODA before SIDS have transitioned to other forms of finance, diversified their economies and achieved economic resilience. For donors, however, a problem in addressing these issues may be the perception that risks occur through the `precedent’ effect – the potential that donors would come under further pressure for change.

PM Mottley of Barbados stated that income measures do not sufficiently reflect the complexities of development as embodied in the SDGs. She pointed to the fact that resilience and underlying economic strengths offer a more practical understanding of the economic and social welfare of a state. PM Mottley reflected that an income based approach values lives and wellbeing purely on the basis of nominal monetary amounts – rather than real impacts and circumstances. The most economically and climate vulnerable states are potentially deemed as worth less than those elsewhere, given that they are judged to be able to cope in the face of climate and economic vulnerabilities despite evidence of structural economic challenges.

Areas for consensus based solutions

Options to explore through focused dialogue for a shared call for action are:

• GNI+ - There are providers of finance who use GNI in combination with other factors, either for all states (LDC transition) or particularly for small states (IDA Exception ^{[footnote 6]}) but application of these across the multilateral system is not systematic. There are learning opportunities from the institutions that currently go beyond GNI and we could explore these. Additional factors might relate to size, climate risks and economic factors. During the Roundtable several contributors argued for the use of a Multi-dimensional Vulnerability Index (MDVI) in addition to GNI per capita.

• GNI and Do No Harm – An alternative approach is to retain GNI per capita as the dominant measure of development, but with due diligence or do no harm assessments on readiness for graduation for the most vulnerable and dependent states, with options to adjust or taper graduation implementation where risks are high.

Theme 2: Debt

Prior to the COVID-19 economic crisis some SIDS already had higher than average debt levels compared to other developing states. Five SIDS received debt relief under the Heavily Indebted poor countries initiative, bringing their debt-to-GDP ratios down from a maximum of 250% to under 50% ^{[footnote 7]}. While other SIDS did not receive debt relief under HIPC, their debt-to-GDP ratios was elevated, ten percentage points of GDP higher than other developing countries, Caribbean states typically have the highest debt to GDP ratios of SIDS.

Of the countries which report to the World Bank’s Debtor Reporting System, there is a degree of variation by size and income level, with countries that have market access (e.g. Jamaica and Dominican Rep) having significant private sector exposure but most of the smaller have little to no private sector exposure. The largest creditor group of SIDS as a whole is the multilateral system (46%), followed by bilateral creditors (37%) and then the private sector (18%). COVID19 has had a marked impact on debt, with SIDS forecast to be the worst affected country group economically, including high unemployment due to the collapse of Tourism sectors, but lower government revenues. Some SIDS have been able to draw forward future allocations of concessional finance, others have been able to access IBRD support. SIDS have also repurposed approved grants and loans. Even so participants at the Roundtable reported the need to increase non-concessional borrowing (including overdraft facilities) due to immediate cash-flow issues. Increased borrowing has inevitably impacted debt to GDP ratios and credit ratings.

The Prime Minister of St Lucia discussed how his country had brought down its debt to GDP ratio, only to see revenues drop by approx. 40% in the wake COVID-19 impacts, with debt to GDP rising by 25%. He, and other SIDS participants, called for COVID-19 debt to be viewed as exceptional, not counted towards debt to GDP ratios. Some participants suggested four areas where international actors might consider measures and these have been further reflected in proposals by SIDS for a new Compact to address their challenges. These issues are:

1. Liquidity - access to the DSSI, SDRs for more SIDS
2. Debt cancellation for highly indebted countries
3. Wider range of mechanisms such as hurricane and disaster clauses
4. Multilateral debt workout mechanisms

A major vehicle for international debt response during the COVID-19 period has been the Debt Service Suspension Initiative (DSSI), for which 21 SIDS are eligible, however DSSI has been criticised by groups such as EURODAD over the scope and depth of the relief that it has offered. In November 2020 the G20 set out its revised plans on debt through the Common Framework for Future Debt Treatments beyond the DSSI. This new framework is significant in that it marks the first time traditional, Paris Club, creditors and emerging G20 creditors such as China have agreed to coordinated debt restructurings on a case-by-case basis. Only countries eligible for the DSSI and with unsustainable debt levels as assessed by the IMF and creditors will be eligible to restructure their debts under the Common Framework.

Areas for Consensus Based Solutions:

Options to explore through focused dialogue for a shared call for action are:

• Common Framework Success – Identify options to enhance the success of the Common Framework, including through technical support;
• COVID-19 Debt Dialogue – A SIDS focused process to explore both existing mechanisms, and to discuss SIDS concerns and to consider the specific debt challenges facing the group.

Theme 3: Tailored systems

During the Roundtable speakers pointed to the practical systemic problems that stand in the way of SIDS accessing finance for which they are eligible. SIDS government structures can be small in absolute terms and yet the footprint of providers of finance in their regions (and numbers of support staff) can also be low. Minister Barnett of Belize pointed out that the processes for accessing finance tend to be data heavy, whereas SIDS can often be data-light due to capacity constraints. This has been documented by the monitoring report of the Global Partnership for Effective Development Cooperation (GPEDC) which found that 56% of SIDS felt they would benefit from stronger statistical capacity to provide updates on progress with development programmes. And has been directly linked to challenges in accessing finance by the Independent Evaluation Unit of the GCF.

The process of implementing externally financed projects can also be process heavy and the capability of SIDS can be overstretched. The GCF has pointed to problems disbursing and implementing its programmes, which on average for SIDS are significantly delayed. The ADB has found that in some cases the success rate of programmes in SIDS can be lower than for FCAS contexts. Capacity constraints can also have a direct impact on which financing instruments are used by providers of development finance, with higher transaction costs and less reflective of the Paris Principles. The 2019 GPEDC report observed that: `in SIDS, country PFM systems are used for only 28% of funds disbursed to the public sector. This could be related to capacity challenges faced by some SIDS in setting up and operating PFM systems that can manage financial flows from various development partners.’ The UK’s Development Director for the Caribbean suggested that supporting capacity should be a priority for tailored approaches going forward.

Roundtable participants provided illustrations of how crises and shocks can put systems under pressure, yet SIDS have relatively few levers for adjustment and response. The impacts are likely to include losses of development gains, COVID-19 has been projected to potentially cost ten years of income growth. The UN Deputy Secretary General suggested that the COVID-19 crisis offered a once in a generation opportunity to respond, and to recalibrate approaches to the needs of SIDS (including in areas such as debt). The Maldives called for a set of mutually supportive responses that includes a focus on building resilience and economic diversification – but through approaches better tailored and designed for SIDS contexts.

Ireland indicated that the development community has underappreciated the systemic nature of the SIDS situation, with international actors needing to ask tough questions on approaches. Canada equally stressed the need for both long-term solutions and also a more coherent overall approach. These issues are important given that concessional finance include dimensions of both quantity and quality, resources must deliver effectively for SIDS. Efforts to simplify systems are not always straight-forward, and the Independent Evaluation of the GCF’s Portfolio with SIDS underline that even simplified processes can fail to deliver for SIDS, particularly where wider tailored policies and processes are not adopted and implemented.

Areas for consensus based solutions:

Options to explore through focused dialogue for a shared call for action are:

• Commitment to tailored approaches – Providers of finance can commit to a default towards building resilience and rigorous simplification, with acceptance of the higher transaction costs that tailored models suggest.

• Coherence and Alignment – OECD data suggests that concessional finance for SIDS can be spread thinly across a variety of sources. In small systems aid co-ordination and harmonisation can be made more challenging by low capacity and the remoteness of providers of finance.

• Given the importance of climate finance to SIDS there were calls to tackle issues around access, delivery and impact of climate finance.

Conclusion and next steps

The three themes set out above dominated the roundtable discussion, however, while there was shared understanding of the problems, the question of detailed action remained unresolved. The proposals put forward suggested that there is scope to explore specific changes to address the challenges of SIDS. However, stakeholders are not yet in the same place on what those changes might be.

The Roundtable process is a journey rather than a single leap, and further work is needed to determine whether a consensus on detailed change is possible – all actors are encouraged to engage until it is clear if they can accept detailed ideas for reform. As a result, the co-chairs propose to host further opportunities for stakeholders to engage at a more detailed level.

These further opportunities would comprise separate discussions on each of the three areas. Where possible further discussions could be carried forward through existing or already planned processes. However, for some issues, where dialogues do not already exist (such as Measures of Development), the co-chairs will host focused and informal meetings, open to all stakeholders. More detailed discussions will aim to encourage creative thinking and debate, valuing all perspectives and recognising that ultimately some participants may not be able to sign-up to a collective call to action.

As a positive example the Roundtable heard that new approaches are possible with several actors summarising processes to adapt to the unique needs of SIDS. The willingness to ask hard questions on all sides was also referenced by speakers, a point that was underlined in relation to the ongoing nature of economic vulnerability.

Lord Goldsmith closed the event by pointing to this as a shared opportunity, a chance to work together until solutions are found and delivered. The first Roundtable has helped to establish a focused set of problems which can be the starting point for a determined drive towards solutions. This is perhaps a prompt for all stakeholders to ask: What steps can stakeholders take to move from problems to solutions on the three themes above?

1. 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. ↩

2. Currently US$ 12,535, see https://blogs.worldbank.org/opendata/new-world-bank-country-classifications- income-level-2020-2021 ↩

3. World Bank Group Engagement with Small States: Taking Stock, p60, World Bank, 2016 ↩

4. See FCDO’s Laurin Janes work here, and OECD findings on vulnerability here. ↩

5. OECD members discussed technical challenge in relation to their own work and contexts in 2004. ↩

6. This Exception enables Small States to access concessional resources, including preferential lending terms, and most IDA-only small states receive grants based on criteria that capture issues such as vulnerability to natural disasters and debt. Small States also have access to IBRD’s most attractive terms. ↩

7. Comoros, Guinea-Bissau, Guyana, Haiti & Sao Tom and Principe ↩