To leave no one behind, Least Developed Countries need new financing tools
14 Dec 2016 by Pedro Conceição, Director of Strategic Policy, UNDP Bureau for Policy and Programme Support and Philippe Orliange, Director of Strategy, Partnerships and Communication, AFD
At the UN General Assembly in September, 193 countries adopted the Sustainable Development Goals (SDGs), an ambitious new agenda for sustainable development to be achieved over the next fifteen years. The central aim of this “2030 Agenda” is to “leave no one behind”. And while it will be a challenge for all countries to meet the targets of the 2030 Agenda, it is clear that it will be especially difficult for the 48 Least Developed Countries (LDCs) most of which are in sub-Saharan Africa. These are countries where levels of deprivation are acute, infrastructure is inadequate, economies are vulnerable and capital is in short supply. To enable the transformation of these countries to middle-income status, considerable investments will be required within a short time-frame.
Many LDCs have made considerable social and economic progress over recent years: poverty has declined, more children are now in school, health indicators have improved and many have enjoyed sustained periods of unprecedented economic growth.
At the same time, considerable challenges remain. For example, LDCs remain very vulnerable to shocks and stresses, such as extreme weather events, fluctuations in commodity prices, and disease outbreaks – as the recent Ebola crisis in West Africa demonstrated. Shocks can cause significant development setbacks.
Additionally, it can be difficult for LDCs to mobilize adequate domestic resources for development, due to low levels of tax collection, and to attract sustained private investment in their economies because they are seen as a ‘riskier bet’. Many LDCs, therefore, remain heavily dependent on Official Development Assistance (ODA).
Yet current domestic resources and ODA combined will be insufficient to finance the 2030 Agenda. Against this background, LDCs’ abilities to harness and make effective use of a broader suite of financing instruments to fund their sustainable development becomes a development imperative.
Expanding the Financing Tool-Box
There is a “new age of choice” in development financing. Over the last fifteen years, new public and private development finance providers have emerged or expanded their international development activities, such as South-South Cooperation providers and philanthropic actors; more financial instruments have been developed and piloted, such as blended finance and green bonds; and more partnerships between public and private entities have been established.
The challenge for LDCs is how to harness the opportunities presented by a more diverse and sophisticated development financing landscape, and to do so in ways which maximize sustainable development benefits, build capacity, and minimize the risk of debt distress.
AFD and UNDP work on new solutions
How can LDCs make use of recent innovations such as blended finance, green bond financing, guarantee mechanisms, and local currency financing? Moreover, because LDCs’ economies remain vulnerable, would lending instruments that allow debt service payments to fall when a major shock strikes be useful to them? These are the questions that were taken up by UNDP and AFD teams in a new report financing sustainable development in the LDCs. The report aims to stimulate further discussions on financing solutions for the LDCs.
The report shows that there are plenty of opportunities for the LDCs to use a more diverse financing “toolbox”. It finds that there are numerous examples – from both within and beyond LDCs – where innovative financing approaches have been implemented and have achieved important sustainable development results.
Blended financing – the mixing of both public and private funds through a common investment scheme – has been used to catalyze financing for infrastructure investment, biodiversity conservation, and financing for small-scale water and electricity suppliers in Cambodia, Liberia, and other countries.
Meanwhile, several African LDCs, as well as Bangladesh and Timor-Leste, have made use of various forms of green financing, including green bonds, to fund investments in hydropower and climate resilient infrastructure, such as rural roads.
Guarantee mechanisms and local currency financing are also being used successfully by a number of LDCs, such as Burkina Faso, Mali, and Zambia, to support the development of the local private sector.
Financing instruments which allow debt service to fall when times are tough (and thereby shift some of the risk from borrower to lender) have also been used in seven Sub-Saharan African countries and are especially relevant to LDCs to reduce their vulnerability. The report urges other official finance providers to offer this kind of financing.
There are considerable opportunities to build on and scale-up the examples presented. However it is also clear that no single financing approach represents a ‘silver bullet’ solution,. Different sources of finance – and different financing instruments – are complementary.
Notwithstanding the opportunities presented by a more diverse development financing landscape, the report finds that these do not diminish the importance of continued efforts by LDCs to grow their economies, strengthen domestic revenue mobilization and use all resources more effectively. Donors should also meet their aid commitments to the LDCs. Making use of these new financing opportunities should be integrated into LDCs’ national development strategies.
The report will be presented to EU policymakers in Brussels on 15 December, and has already been discussed within the UN in New York and the Bretton Woods institutions in Washington DC. UNDP and AFD trust that this work will serve as a useful input to LDCs and their development partners on their path towards sustainable development.