Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity, and the Pacific Catastrophe Risk Assessment and Financing Initiative—have helped some small-states governments cushion the fiscal impact of natural disasters (World Bank 2022). For example, the destruction caused by Hurricane Beryl in July 2024 triggered payouts from the CCRIF for several Caribbean islands, including Grenada, Jamaica, St. Vincent and the Grenadines, and Trinidad and Tobago. These regional initiatives could be expanded to global risk pooling to boost efficiency, further diversify risks, and extending support beyond the initial response phase (Ciullo et al. 2023). Adding catastrophic bonds—which provide compensation to the issuer when predefined natural disaster risks are realized—to disaster risk financing options could further strengthen financial resilience in small states (OECD 2024).

Rising debt and borrowing costs have increased debt-servicing burdens and heightened the urgency of addressing unsustainable debt. Almost one-third of small states have defaulted or restructured debt since 2003, including two (Belize and Suriname) since the pandemic (Asonuma and Trebesch 2016; Erce, Mallucci, and Picarelli 2022). In most cases, these countries received support from international financial institutions, along with debt relief from creditors. Around one-quarter of small states benefited from IMF support for policy programs during 2011-23, including five countries since the pandemic. Debt relief and restructuring processes, including the G20 Common Framework, need to recognize the unique challenges facing small states. They should also take into account the increasingly diverse creditor landscape—particularly the crucial role of non-Paris Club members, especially China, an increasingly important lender which has been involved in debt-restructuring negotiations with several small states (Horn, Reinhart, and Trebesch 2022). The international community can also help improve debt sustainability by working to enhance debt transparency across the world, including by increasing the availability of relevant statistics and by promoting better transaction-disclosure practices (Maslen and Cigdem 2022).

Finally, the international community can continue to support small states through tailored technical assistance. Small states have limited institutional capacity. Like many EMDEs, they may lack the technical know-how required to implement in a timely manner adequate fiscal reforms—including strengthening domestic revenue mobilization, reforming SOEs, establishing a sovereign wealth fund and implementing fiscal rules (Balasundharam and Khadan 2024; Heller 2022). Overall, small states have made good progress in some aspects of climate change adaptation planning. In other areas, however, they appear to be lagging other EMDEs (UNEP 2023). Limited economic data, such as reliable macroeconomic statistics and household surveys, often hinder evidence-based policy making in these countries. A weak civil service and complex bureaucratic processes erode government efficiency and contribute to delays in policy reforms (Lafuente and Molina 2018).

# **5. Conclusion**

The unique structural characteristics of small states constrain their fiscal policy. They include high trade openness, limited economic diversification, narrow tax bases, obstacles to providing public goods and services at scale, and vulnerability to external shocks—particularly those arising from climate-change-related natural disasters and global recessions. Many small states, particularly 21