Fragile and Small Developing States: A Short Guide

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In 2021, the OPEC Fund split its portfolio into Ordinary Capital Resources (OCR) and Special Capital Resources (SCR). This enabled the institution to manage its resources and operations in the best possible way. 

While OCR includes partner countries with a higher level of economic development, the creation of the SCR special fund allowed the institution to grow its operations in the least developed countries by providing long-term and low-cost loans to support economic and social development. 

SCR partner countries display a range of factors: institutional weakness, fragility, conflict, and/or climate change precariousness. The OPEC Fund has developed a new approach to these so-called Fragile and Small Developing States (FSDS) with instruments that will help tackle some of the difficulties linked to their distinct conditions. This renewed approach is framed within a Performance Based Allocation (PBA) system, which demonstrates how the combination of larger, more consistent and reliable funding will help achieve these countries’ development goals while at the same time enabling the OPEC Fund to maximize its development impact. The PBA, in turn, is driven by the results calculated by the OPEC Fund’s annual Country Policy & Institutional Assessment (CPIA). 

Classification of FSDS 

There is no agreed definition of what constitutes an FSDS. However, they do share many common characteristics: they are typically low income, have certain fragilities, may also have experienced conflict, and may be a small island. The World Bank, IMF, Commonwealth and the UN generally use a small population of 1.5 million or less as the main defining feature1. Despite the diversity, the IMF and World Bank consider that several countries meet most of the criteria as set out in Table 1. This classification helps frame how the OPEC Fund thinks about and defines these states. However, population size is not always a helpful criterion as explained by the UN2: “Small states are incredibly diverse, with greatly varying sizes, populations, economies, natural resources, and vulnerabilities. Within the Forum of Small States at the UN, the population of member states ranges from less than 10,000 to more than 10 million. The unofficial category of ‘small states’ includes some of the most and least developed nations in the world, resource-rich and resource-scarce countries, and both island and landlocked states.” 

By including states that have high levels of fragility but are not “small” in terms of geographic size or population (such as the Democratic Republic of the Congo) or are landlocked, a more comprehensive understanding of small states can be reached (Table 2). By taking into account a country’s debt stock, debt servicing, and debt sustainability, this can further enhance the understanding of the key factors that help determine what a small state is. Essentially, all SCR countries are considered either fragile, conflict-affected, an island or small. 

Key development challenges 

FSDS face unique development challenges. While sharing common challenges associated with the small size of their economies and vulnerability to external shocks, FSDS represent a very diverse group of countries. A lack of economic scale, often remote location and particular geography (such as being landlocked), health-related emergencies, and vulnerability to climate change and natural disasters lead to particular needs that sometimes cannot be easily met. Moreover, with limited economic opportunities and significant migration, FSDS often face capacity constraints, further undermining their ability to grow and develop. 

FSDS share many wide-ranging and distinct characteristics: 

• Population: Many FSDS are micro states (i.e. with a population of less than 200,000) such as Tuvalu’s roughly 11,204 residents. While also being an island, Madagascar has a population of nearly 30 million, so although it does not meet the micro population criteria it is nonetheless a fragile island state (reflected in environmental risks and high levels of poverty). States such as DR Congo, with a population of nearly 90 million, also do not meet the small (geographic) state criteria – but considering the high level of fragility in the country (notably conflict and institutional weakness), it is a credible candidate for FSDS status. Overall, population size is an important determinant – either because a small population cannot drive or sustain a large and sophisticated economy, or vice versa a large population in a fragile state can sustain endemic poverty. Moreover, high GDP per capita is not a clear sign that a country is in a solid economic position and is also not fragile (for example, the Maldives, Grenada, Kyrgyz Republic).
• Geography: FSDS are distributed across all regions of the world and about two-thirds are island states. Many FSDS also have large, extensive and distinct geographical features such as mountain ranges, deserts, jungles and coastal expanses that inhibit transport, communications and connectivity. 
• Remoteness: Several FSDS, particularly islands, are among the most remote in terms of distance from international markets (e.g. the Pacific islands). At the same time, some larger states have internal areas that are remote and difficult to reach (for example Mali and Niger). 
• Land area: A number of island states have a very small land area (e.g., Nauru is just 20 km2), while non-island states such as Tajikistan and DR Congo have vast, empty areas that are difficult to traverse. 
• Fragmentation and dispersion: Some FSDS are archipelagos dispersed over a broad ocean area. Kiribati, with an area of 810 km2, is spread over 35 atolls/islands covering around 3.6 million km2 of ocean; while the Maldives has an area of nearly 300 km2 comprising a chain of 26 atolls spanning almost 90,000 km2. 
• Vulnerability to natural disasters and climate change: Almost all FSDS are disproportionately vulnerable to a range of natural disasters, particularly those located in disaster-prone areas (such as the Caribbean with volcanic eruptions, hurricanes and rising sea levels). About one-third of FSDS are highly vulnerable to climate change, including rising sea levels, flooding and droughts. Moreover, only a small portion of climate finance is deployed in FSDS countries, hence MDBs’ call for greater climate financing for these countries. 
• Shallow economies: Many FSDS do not have deep, broad economies with multiple sub-sectors each producing employment, tax revenues and export earnings. Instead, there are often just one or a few key sectors that generate revenues, such as hydrocarbons (Chad), minerals (Guinea), or tourism (most Caribbean islands). This lack of diversification creates strong interdependence with shifts in global commodity prices, which in turn leads to booms in fiscal and export revenues that are often not well-invested, and busts leading to slowing growth and rising poverty. 
• Debt burden: Significant growth volatility often associated with the impact of conflict, natural disasters, and other external shocks and weak fiscal management have contributed to substantial debt accumulation in many FSDS. Debt levels for these countries are on average higher than for other developing countries, although there is considerable diversity across individual countries. It is also important to recognize that, given their high and increasing debt levels, many FSDS are in urgent need of debt relief (the 2020-21 Debt Service Suspension Initiative provided an initial albeit temporary start3), which has repercussions on new lending. 

The above criteria aim primarily to be a starting point to help the OPEC Fund identify how to approach and strengthen its engagement in difficult and complex SCR partner country environments. Given the challenges faced by most of these countries, the OPEC Fund is seeking more ways to engage (aligned with Country Partnership Strategies) to help them achieve their development goals within the SCR resource envelope. This has led to the development of the OPEC Fund’s Country Policy and Institutional Assessment (CPIA) as a key input to the Performance Based Allocation (PBA) system (see below). 

Building resilience to the challenges that FSDS face includes access to more financial support and strengthening capacity through technical assistance grants and, where appropriate, innovative financial solutions to better manage SCR partner countries’ respective development strategies. Prior to the COVID-19 pandemic, FSDSs faced significant constraints in mobilizing sufficient resources to build the necessary productive resources and infrastructure they need for sustainability, on top of financing the costs of disaster recovery. 

In recognition of the need to mobilize sufficient resources, the OPEC Fund has a long-standing commitment to support FSDS development through innovative co-financing mechanisms, and more recently, stand-alone financing for program loans. This is particularly relevant for small economies (such as Botswana) given their vulnerabilities. 

SCR Strategy: Country policy and institutional assessment & performance based allocation system for FSDS 

Part of the solution in engaging more dynamically is provided by using the results generated by the OPEC Fund’s Country Policy and Institutional Assessment (CPIA) as a key input to the Performance Based Allocation (PBA) system. In essence, the CPIA and PBA system provide a solid foundation to help guide the OPEC Fund’s engagement with FSDSs that are facing difficult and complex situations in a manner tailored to their respective environments. 

In principle, the CPIA is an annual measurement of the quality of a country’s policies and institutions based on publicly available information and indicators, also providing insights into fragility and weakness. Many FSDSs have high levels of policy, institutional, and social fragility, as identified by the most recent CPIA. Overall, the CPIA provides a robust methodology for assessing SCR countries’ policies and institutions – the key tools that help support economic development. 

The CPIA country scores feed into the PBA system, which takes into account population size, GDP per capita, and other relevant criteria. Based on country needs, the PBA system allocates SCR resources to help determine the size of the funding envelopes over a three year period (in-line with the OPEC Fund’s rolling three year Business Plans). The PBA system provides welcome additional help for FSDS to overcome the challenges they face, particularly in the post-COVID environment. Moreover, the CPIA and PBA system ensures sound prioritization, selectivity, consistency, and suitability of financial and Grant support as and where needed. 

Those FSDS countries that are most in need, as recognized by the CPIA results, tend to receive a higher allocation of financial resources through the PBA system than would otherwise be the case. The primary purpose of the PBA system is to ensure that the OPEC Fund’s strategic and lending focus in FSDS countries is adapted and tailored to the diverse challenges faced by these countries. This is achieved by recognizing the nature and severity of development challenges, as well as the unique characteristics of each FSDS based on population size, geography and remoteness. 

This allows for the most appropriate potential level of funding per SCR partner country to address their specific challenges. Moreover, the outputs of the CPIA and PBA system enhance the OPEC Fund’s engagement with its smallest and most vulnerable partner countries by providing a fairer share of SCR financial resources, thereby helping to strengthen partnerships. 

Longer-term lending and support 

Despite SCR partner countries’ large financing needs, Multilateral Development Banks (MDBs) have not been able to provide full support because of various challenges (such as weak capacity, COVID-19, and disruptions from the war in Ukraine). The PBA system provides greater certainty that a systematic allocation of funds is available over the three-year business plan cycle to help meet these needs – certainty that was missing previously, which undermined the OPEC Fund’s longer term commitment to building stronger partnerships with SCR partner countries. 

With the expectation that the SCR financial resource envelope will rise in line with the forecast increase in OCR net income, the OPEC Fund now has the ability to engage more actively, underpinned by a solid PBA framework over the longer term. In turn, this should help drive a virtuous circle, whereby more consistent and planned lending envelopes will enable more partnerships to be developed, which in turn will leverage more funds that will generate higher levels of investment into SCR partner countries – stimulating resilient and sustainable growth, poverty reduction, and overall development effectiveness. This way a vicious circle is being transformed into a virtuous circle.