2. Global Economic Developments

The October 2025 World Economic Outlook mentions that global growth was projected to slow down from 3.3 per cent in 2024 to 3.2 per cent in 2025 and 3.1 per cent in 2026. Advanced economies were to grow by around 1.5 per cent, and emerging market and developing economies – which include most small states – were to grow at just above 4 per cent.¹

The economies of small island developing states (SIDS) are forecast to grow at an aggregate rate of 2.8 per cent in both 2026 and 2027, down from an estimated 3.5 per cent in 2025. International tourism continues to expand, albeit more slowly than during the post-pandemic rebound, supporting economic activity in many countries. However, structural vulnerabilities – including high exposure to climate shocks, limited economic diversification and elevated debt burdens – remain pronounced, and public debt and external sustainability also featured prominently. According to the World Bank, as at September 2025, 11 of 37 SIDS were classified as being in, or at high risk of, debt distress.²

For small states, the combination of narrow economic bases, high exposure to external shocks (commodity price swings, tourism downturns, natural disasters) and limited fiscal and monetary policy space meant that even modest global headwinds could translate into outsized domestic impacts.

For example, roughly 40 per cent of SIDS are at high risk of, or already in, debt distress. By comparison, more than 50 per cent of the world’s low-income countries are in a similar situation. This dynamic imposes constraints on investment for resilience, forcing public budgets to balance reconstruction with development needs.³

2.1 Shifting global policy debates

In 2025, the policy environment evolved in important ways, with several themes particularly relevant for small states.

• Global financing for development and vulnerability metrics. At the FfD4 conference and related forums, small states advocated for recognition of structural vulnerability – not just low income – as a criterion for concessional finance.
• Debt-for-climate and resilience-linked instruments. The increasing emphasis on linking debt restructuring, climate adaptation/mitigation obligations and institutional support reflect a shift in global finance architecture.
• Climate finance and adaptation. The COP30 ‘Global Mutirão’ decision called for scaling up climate finance for developing countries to at least US$1.3 trillion by 2035, staying on a pathway to mobilise at least US$300 billion per year by 2035 (with developed countries taking the lead). It also stressed the need for public, grant-based and highly concessional adaptation finance for SIDS – alongside efforts to at least triple adaptation finance by 2035.⁴
• Digital economy, blue/green growth and trade policy. In many small states, the aspiration to leverage the blue economy (oceans, fisheries, marine services) and digital trade has gained momentum. At the same time, rising trade barriers and investment uncertainty globally pose risks to small states with open trade regimes.

These debates matter because they shape the frameworks, eligibility and cost of finance, and they influence how small states engage with multilateral and private sector investors.

2.2 Why these developments matter for small states

For the 33 Commonwealth small states, the headwinds and policy shifts of 2025 underscore the urgency of building resilience across economic, financial and environmental dimensions. The implications include the following.

• The need to diversify beyond a narrow economic base (tourism, a few commodities) to buffer external shocks.
• The imperative of strengthening public financial management, debt sustainability and fiscal buffers, given elevated debt vulnerabilities.
• The opportunity to tap emerging instruments (sovereign blue bonds, debt-for-nature swaps, digital services exports) but only if enabling institutional frameworks and investor confidence are in place.
• The strategic significance of being part of multilateral advocacy networks (for example, the Commonwealth) that can help shape and access global reform agendas (on finance, vulnerability, climate) on fairer terms.

2.3 Priorities for 2026

As we move into 2026, the lessons from 2025 are clear: resilience must be built on fairness, inclusion and foresight. The global growth slowdown, tightening financing conditions and elevated vulnerability of small states demand proactive responses. Key priorities include the following.

• The need to translate global commitments on vulnerability recognition, concessional finance and reform of the international financial architecture into concrete flows and accessible mechanisms for small states.
• The importance of deepening regional and Commonwealth co-operation to share experience, build capacity and leverage collective voice in multilateral fora.
• The need to strengthen institutional and technological capacities – in digital trade, blue economy governance, disaster risk resilience, blended finance readiness – to manage risk and attract investment.

The Commonwealth will continue to remain deeply committed to amplifying the voice of small states and ensuring that global reforms deliver tangible, lasting benefits for their people and economies.

Footnotes

^{1 International Monetary Fund (IMF) (2024), Economic Outlook. https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025 |  [back]}

^{2 United Nations Department of Economic and Social Affairs (2026), ESCAP World Economic Situation and Prospects 2026. https://unctad.org/publication/world-economic-situation-and-prospects-2026 | [back]}

^{3 Foreign, Commonwealth and Development Office (UK) (2025, January 17), Small Island Developing States: Vulnerability Note. https://www.gov.uk/government/publications/small-island-developing-states-vulnerability-note-2025/small-island-developing-states-vulnerability-note | [back]}

^{4 See for example Caldwell, M, Laxton, V., Alayza, N. and Larsen, G. (2025, December 18), ‘COP30 Laid a Path to $1.3 Trillion in Climate Finance. What’s Next?’, World Resources Institute. https://www.wri.org/technical-perspectives/cop30-progress-1-3-trillion | [back]}