Making an exception: maintaining ODA eligibility for Small Island Developing States

This working paper is by the Resilient and Sustainable Islands Initiative (RESI) within the Global Risks and Resilience programme at ODI Global.

Small Island Developing States (SIDS) face a graduation framework that isn’t working for them. With 11 set to graduate from official development assistance (ODA) eligibility in the coming years, the case for reform is urgent.

Working Paper – Making an exception: maintaining ODA eligibility for Small Island Developing States

SIDS face structural vulnerabilities that will always limit their ability to generate sustained growth and sufficient domestic tax revenues for critical resilience-building investment. They are also highly exposed to more frequent, severe extreme weather events due to climate change, resulting in escalating losses and fiscal impacts. As a result, SIDS face significant challenges when they reach the income threshold for ODA eligibility: forced to borrow at higher interest rates, debt levels rise dramatically, and climate shocks further tighten fiscal space exactly when SIDS need to invest in recovering and strengthening infrastructure, basic services, local businesses and communities.

This working paper presents three scenarios for graduation reforms that would benefit SIDS, showing viable options for a group of countries that, due to their structural vulnerabilities and high climate exposure, do not quite fit the underlying assumptions of ODA graduation. It makes the case that the benefits to SIDS far outweigh the costs to development partners of sustaining support beyond graduation.

In an era of declining ODA and difficult decisions on the purpose and focus of development assistance, an exception for SIDS could have an outsized impact on these small and vulnerable nations, providing the resources and fiscal space needed for urgent resilience investments.

Key Messages

• The special circumstances of Small Island Developing States (SIDS) are not formerly recognised in the graduation framework of the Organisation for Economic Co-operation and Development’s Development Assistance Committee (OECD DAC). SIDS’ structural vulnerabilities limit their ability to generate sustained growth and mobilise sufficient tax revenues, while their exposure to frequent extreme weather events and severe climate change impacts results in escalating losses and fiscal stress.
• Historically, SIDS that are no longer eligible for official development assistance (ODA) have seen dramatic reductions in concessional finance, they have borrowed at much higher rates to recover from disasters and build resilience, and they have quickly faced debt distress.
• ODA graduation assumes lower need for development assistance – but this does not stand for SIDS. Representing half of all countries set to graduate in the next 10 years, SIDS clearly need special consideration within ODA eligibility frameworks.
• The existing income-based graduation framework could be adjusted in three ways: 1) a ‘GNI plus’ framework based on income per capita plus multidimensional vulnerability, 2) an ODA climate finance exception for SIDS, and 3) a contingency safeguard.
• Analysis of the fiscal impacts on SIDS of ODA withdrawal and climate shocks versus the costs to donors of continuing ODA, of applying an ODA climate finance exception, and/or of reinstating ODA eligibility when a disaster occurs suggests these mechanisms could produce outsized benefits to SIDS.