World Bank resets support for small states

World Bank has launched a new strategy for small states, promising a more tailored approach for countries that face outsized economic risks from isolation, narrow domestic markets and repeated external shocks. The plan, unveiled on Friday by World Bank President Ajay Banga during the spring meetings in Washington, puts jobs, private investment and more flexible financing at the centre of support for small island economies and other small countries that struggle to convert limited scale into durable growth.

The initiative was presented to ministers and central bank governors from 50 small countries, reflecting the World Bank’s definition of a broader small-states group that includes countries with populations below 1.5 million as well as others in the Small States Forum facing similar structural constraints. Bank officials say the strategy is designed to move away from uniform prescriptions and towards country-specific and regional solutions that account for the higher cost of operating in such economies. The World Bank says work in small states can cost up to four times more than in larger countries, a factor that has long complicated project design and delivery.

Banga told officials the emphasis would be on helping governments attract private capital, improve regulation and remove barriers that hold back business expansion. The strategy focuses on sectors where the Bank believes employment gains can be strongest, including health, affordable energy, resilient infrastructure and micro and small enterprises. That marks a shift in tone from support framed mainly around vulnerability and resilience towards a model that ties resilience more directly to job creation and productive investment.

For many of these countries, the problem is not simply a shortage of financing. It is the interaction of geography, debt pressures, import dependence and climate exposure. Small states are especially vulnerable to swings in tourism, fuel prices and food costs, while a single storm or other disaster can wipe out months of household income and business investment. The World Bank’s own overview of small states describes them as highly exposed to economic crises, commodity price volatility, natural disasters and climate change because of their small populations and narrow economic bases.

The Bank is also highlighting regional partnerships as a way to offset limited local capacity. One example already under way is Tonga, where the World Bank is co-financing an urban resilience project with the Asian Development Bank under what it describes as a mutual reliance framework, the first such arrangement between multilateral development banks. Banga said similar agreements were planned for the Caribbean with the Inter-American Development Bank, signalling that the new strategy will rely not only on fresh lending but also on shared implementation and pooled expertise.

Another strand of the plan is better diagnosis of what prevents private-sector hiring. The Bank says deeper studies are being carried out in Barbados, Guinea-Bissau, Lesotho, Mauritius, Samoa and Seychelles to identify the constraints on private-sector-led employment. That reflects a broader theme in Banga’s tenure, where the Bank has sought to present jobs as the clearest route from development finance to visible economic gains. For small states, that means moving beyond emergency support and towards identifying investable sectors that can generate stable income in economies with very limited room for policy error.

The numbers underline why the Bank is trying to recast the debate. Reuters reported that the World Bank Group approved a record $3.3 billion in new commitments and guarantees for small states last year. In its fiscal 2025 annual reporting, the broader World Bank Group said IBRD and IDA portfolio net commitments to small states reached $6.1 billion, while IFC exposure stood at $119 million and MIGA exposure at $419 million. That suggests the institution is already scaling up support, even as it argues that old financing models remain poorly matched to the realities of smaller borrowers.

There are still questions over how far the strategy can change outcomes. Small states have long argued that global lending rules, income thresholds and project frameworks fail to capture their vulnerability. Countries with modest per-capita incomes can still be highly fragile because a disaster, trade shock or tourism slump can hit national output far harder than it would in a larger economy. The Bank’s new language appears to acknowledge that gap more openly, but delivery will depend on how much flexibility shareholders allow and whether private investors can be persuaded that small markets can still offer bankable returns.