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HomeNewsLocal NewsWorld Bank Group shares Fiscal Challenges in Small States

World Bank Group shares Fiscal Challenges in Small States

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by Kevon Browne

St. Kitts and Nevis (WINN): Small states within emerging markets and developing economies (EMDEs) have experienced significant fiscal deterioration over the past decade, with 40% of the 35 EMDE small states either at high risk of or already experiencing debt distress. This is nearly double the rate of other EMDEs.

 

Impact of Natural Disasters and Global Recessions

 

Small states are particularly vulnerable to fiscal instability due to their exposure to natural disasters and global economic fluctuations. These events have a disproportionately severe impact on their fiscal and debt positions compared to other EMDEs. The COVID-19 pandemic exacerbated these vulnerabilities, increasing debt through larger fiscal deficits, significant economic contractions, and slow recoveries.

 

Persistent Fiscal Vulnerabilities

 

Small states face significant budgetary challenges due to common vulnerabilities. Many are tropical islands frequently hit by costly natural disasters, particularly storms and other weather-related events intensified by climate change. Their high economic openness and narrow export bases expose them to adverse external developments, including global recessions. These factors weaken their fiscal and debt positions more severely than other EMDEs.

 

From 2011 to 2023, the average government debt in small states increased by approximately 11 percentage points of GDP, with the debt-to-GDP ratio averaging 61% in 2023, higher than in other EMDEs. Persistent primary fiscal deficits drove rising debt levels, and the pandemic worsened this trend with larger deficits, significant economic contractions, and slow recoveries. Between 2020 and 2023, three-quarters of small states experienced weaker primary fiscal balances than their pre-pandemic averages.

 

Necessity for Comprehensive Reforms

 

The pandemic highlighted the need for small states to adopt more resilient fiscal frameworks. To better manage volatility and respond to external shocks, these frameworks should be more robust than those of other EMDEs. A well-designed, flexible, and enforceable rules-based fiscal framework with ample buffers can enhance fiscal resilience.

 

In addition to robust fiscal frameworks, reforms aimed at better utilising already high spending and enhancing revenue mobilisation are crucial. This includes greater reliance on efficient taxes and the repurposing of existing expenditures. The support of the international community remains vital. International aid and cooperation are essential in bolstering small states’ resilience, particularly against climate-change-related natural disasters expected to become more frequent and severe.

 

Building Resilience Together

 

The fiscal and economic challenges facing small states require a multifaceted approach. While internal reforms are essential, international support is critical in ensuring these states can build resilience against future shocks. Collaborative efforts are needed to implement rules-based fiscal frameworks, enhance revenue systems, and provide sustainable spending practices. Small states and the international community can better weather the storms and rebuild more robust, resilient economies by working together.

 

This comprehensive approach to fiscal reform and international cooperation will help small states navigate their unique challenges, fostering stability and growth in an increasingly uncertain global environment.

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