Expanding financing options to advance the 2030 Agenda in the least developed countries
28 Apr 2016 by Philippe Orliange, Director of strategy, partnerships and communication at the AFD and Pedro Conceição, Director of Strategic Policy at UNDP's Bureau for Policy and Programme Support
2015 was a milestone year for international cooperation on sustainable development. The Paris Agreement shows the commitment of the international community to tackle climate change. The 2030 Agenda, also adopted in 2015, puts forward 17 Sustainable Development Goals (SDGs) to protect people and planet.
Meeting the aspiration of leaving no one behind, and reaching the furthest behind first, implies focusing greater attention to those living in the Least Developed Countries. This group of countries includes those with the lowest levels of income per person, poor health and education levels, and high vulnerability to economic, health and other shocks and disasters.
In 2015 growth in developing countries registered its lowest rate since the 2008-2009 global financial crisis. World trade remains subdued amidst heightened financial market volatility and large capital outflows were registered in 2015, especially in commodity-exporting countries facing the challenge of low commodity prices. In particular, the economic slowdown, and outright recessions, in major emerging economies have had significant regional spillovers, through trade and remittances. Current growth patterns in the LDCs as a whole are not in line with the target of “at least 7 per cent GDP growth” as set out in SDG 8.
Addressing vulnerabilities implies the mobilization of a diverse set of financing mechanisms. While Official Development Assistance (ODA) will remain critical, innovative and blended finance are increasingly part of an expanded financing toolkit. Encouraging more concessional finance can help reduce economic barriers arising from vulnerabilities. Blending and innovative financing calls for more and deeper partnerships across financing actors and a wider use of co-financing mechanisms, and risk sharing instruments, such as guarantees.
Blended finance has the potential to leverage public funds and attract private investment in the LDCs. Other instruments include guarantees. LDCs and donors agencies should also be able to react quickly in the face of a crisis. To manage economic vulnerabilities, the financing tool-box for LDCs should also consider local currency instruments to manage risk. State-contingent financing instruments, like GDP-indexed bonds and counter-cyclical loans, can also be important elements of an expanded toolbox.
Building resilience in LDCs is not only important in case of economic shocks. LDCs are particularly vulnerable to the shocks caused by extreme weather events. Risk hedging instruments such as mutual insurance mechanisms could help reduce these vulnerabilities.
Financing the LDCs calls for not only better financing instruments but also a new way of thinking about development. This includes facilitating and simplifying access to international financing for local actors, which is among the priorities of AFD and UNDP’s common work. Actions supporting local authorities and civil society, including private actors, will be especially important. Credit lines for local banks and micro-finance facilities can be part of the menu of the financing options available to LDCs.
Addressing vulnerabilities also depends also on a sound macro-economic context at the international level since economic growth rates in the LDCs are strongly correlated with the health of the global economy overall. It is important to ensure a better coordination of macro-economic policies at the international level to support growth and investment in the LDCs.
The situation of LDCs stresses the urgency of measures to be taken, but also outlines that, with an expanded financing toolkit, and given the global availability of resources and ideas, the prospects for future growth and development in LDCs can be brighter than ever.