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The papers in this series aim to provide a vehicle for publishing preliminary results on Macroeconomics and Fiscal Management (MFM) topics to encourage discussion and debate. This paper explores two new financing mechanisms that multilateral and bilateral development agencies could consider deploying to address problems of debt sustainability in small states. In this paper the authors provide an initial assessment of these proposals, informed by analysis of small state indebtedness and recent debt dynamics. Proposed financing instruments are predicated on assumptions that small states face high levels of indebtedness, and that reducing debt levels while increasing climate resilience could sustainably reduce such vulnerabilities. The authors find that levels of indebtedness vary widely across small states. Analysis of small state debt dynamics shows that small state debt accumulation has been driven by large primary and current account deficits and slow economic growth. Debt reduction from new mechanisms can only be expected to be sustainable, therefore, if countries simultaneously address the macroeconomic imbalances driving debt accumulation. The authors demonstrate that, while exposure to natural disasters is likely to have exacerbated economic management challenges in some small states, such exposures are unlikely to be the only important cause of indebtedness. The authors conclude that proposed new financing instruments can potentially help reduce small state debt burdens and gain fiscal space for climate adaptation but will not present a sustainable solution to problems of small state debt risks unless they involve macroeconomic and structural reforms to address the underlying imbalances driving rapid debt accumulation.

The paper finds a moderate evolution in public debt ratios since debt relief among heavily indebted poor countries (HIPC) and multilateral debt relief initiative (MDRI) recipient countries in Sub-Saharan Africa, with certain exceptions. For eight countries the authors find rapid rates of debt accumulation, which can return them to pre-HIPC debt levels in only a few years. Short-term domestic debt has, despite early fears, in general not filled the borrowing space created by debt relief. However, external debt accumulation on commercial terms in some cases presages repayment spikes, which may combine with short-term domestic obligations to amplify refinancing risk and cause abrupt reductions in public spending, with damaging consequences for development. Finally, despite reduced debt, African economies continue to be commodity dependent and prone to shocks. As global interest rates and commodity prices revert to historically more customary levels, these countries should remain prudent: avoid tax-base erosion, prevent large recurrent spending hikes, and invest wisely in growth, by executing projects effectively to enhance infrastructure. These fiscal fundamentals will be as important for debt sustainability as how much is borrowed and on which terms.

The explosive growth of green bonds in the capital markets is increasingly attracting attention from investors. This surge in interest has created a demand for accessible information on the green bond market. This primer was created in response to this demand and covers the principles of this relatively new financial instrument. The following intends to serve as a guide for those interested in better understanding the nature of green bonds. The content will aim to distinguish green bonds from other traditional financial instruments. It will also provide insight into the potential of green bonds to mobilize new sources of climate finance. This paper includes the following highlights: understanding bonds (chapter one); understanding green bonds (chapter two); and benefits and potential.

The global financial crisis of 2008-2009 required most sovereign debt managers to adapt to rapidly changing market circumstances, by changing the mix of borrowing instruments and adopting techniques that minimize the impact of severe market dislocations and increased risk aversion. These actions, allied to prudent macroeconomic and debt management policies implemented by government in the years preceding the crises, were critical in helping countries meet their financing needs without undue strain on the financial markets. This toolkit draws on the approaches taken by a range of countries and provides sovereign debt policy makers with a rich set of potential actions to address crisis periods. A practical illustration on the use of some of these actions is conducted by analyzing the measures taken by Romania, Serbia and Turkey as a response to the recent crises. Authors draw lessons from these experiences and examine what other measures included in the toolkit could have been used to boost the crisis response impact in these economies, respecting country-specific contexts.

This edition of the Middle East and North Africa (MENA) regional economic update concerns the region recovering from the financial crisis along with the global economy. Growth in 2010 is expected to be 4.4 percent region-wide, driven by domestic absorption as well as a positive contribution from external demand. The recovery from the crisis differs by country depending on initial conditions and the intensity of the impact via the three principal channels through which the global financial crisis affected MENA economies-the financial sector, the price of oil, and the balance of payments, reflecting the impact on trade, remittances and Foreign Direct Investment (FDI) flows. The Gulf Cooperation Council (GCC) countries are leading the regional recovery as oil prices have rebounded and the GCC financial sector is stabilizing. Developing oil exporters felt the impact of the crisis, and now the recovery, largely through the oil price channel, due to the limited integration of their banking sectors into global financial markets and the importance of oil in their exports. The oil importers were affected by the crisis through the secondary effects on trade, remittances, and FDI flows, so their recovery will depend crucially on the recovery in key markets, especially the EU and the GCC countries. High unemployment has been a problem in MENA for years, and the crisis has dimmed prospects for improvements in the near term. Ample oil and gas resources, a youthful and growing workforce, and a growing momentum to look for ways to diversify their economies imply that the growth potential of the region is high, but MENA countries continue to face formidable longer term challenges. Ensuring access to finance without compromising financial stability will be a major challenge in MENA, although issues related to weak regulatory systems, corporate governance and overdependence on the banking system also loom large. Key problems of the business environment in MENA include policy and regulatory uncertainty and discretion in implementing reforms which prevent a level playing field for all firms and encourage the pursuit of privileged access. These problems, coupled with barriers to entry and exit, have created an environment of stagnation. Addressing these issues will require applying rules and regulations consistently and without discrimination among firms and introducing reforms that promote business dynamism, private investment, and innovation.