Because once upon a time.........it was the POPE who controlled a large swath of power......like a KING, which included large territories.
But over the years, and power shifts later........the Pope became less and less important, and more or less became boxed in, within Vatican City.......his last seat of Power. When Italy became a Unified Country..............they had to arrange a special deal with the POPE that left him in charge of his little area........a King, of sorts, within the Kings Kingdom. So they declared his little Popedom.......seperate , and allowed him to keep his little seat of Power.