The world is under enormous and growing stress. Undoubtedly, one of the key challenges to achieving the Sustainable Development Goals (SDGs) over the next decade will be the ability to mobilize resources to finance them. Indeed, estimates by the Brookings Institution suggest that sub-Saharan Africa will need $574 billion per year until 2030 to finance the SDGs. While projected spending in a few countries, such as Botswana or Mauritius, will meet their SDG financing needs, for the vast majority of countries in the region, there is a substantial financing gap totaling $256 billion per year.
And we, the international community, are failing to respond adequately. The COVID-19 pandemic is still raging, now in its third year. The climate crisis continues unabated and largely unaddressed, pollution and biodiversity loss continue to threaten the health of the planet, and multiple geopolitical conflicts are devastating untold lives. The war in Ukraine is the latest in a cascade of crises for developing countries that continue to struggle to make development progress, achieve vaccine equity, and achieve a just and safe recovery. The cost of energy, food, and other commodities is rising, further intensifying volatility in global financial markets.
There is a great danger that, as our collective attention shifts to the conflict, we neglect other crises that will not go away.
It would be a tragedy if donors increased their military expenditure at the expense of Official Development Assistance and climate action. It would also be self-defeating. Without more international support and a strengthened multilateralism, the world will diverge further, inequality will soar, and prospects for an inclusive and prosperous future will be further undermined.
We must close the financing gaps that prevent so many countries from investing in recovery, climate action and the SDGs. Developed countries must meet their ODA commitments, particularly to Least Developed Countries. We must take full advantage of our public development banks to scale up long-term financing.
It is time to abandon short-term profit maximization for the few and move towards a long-term outlook that integrates economic, social and environmental justice and opportunity for all. To that end, we must align all financing policies with SDG and climate priorities—government budgets, tax systems, investments, regulatory frameworks and corporate reporting requirements. And we must change how we measure, and ultimately think of progress. In a world of interlinked and systemic risk, GDP is no longer an appropriate metric of how we measure wealth and shared prosperity. We must find ways to take vulnerabilities into account more systematically in the allocation of concessional financing and actions on debt.
To reverse the divergence in recovery and achieve the SDGs, countries will need reliable access to affordable financing from concessional and non-concessional (public, private, domestic and international) sources. A package of measures can help developing countries to mobilize affordable, long-term financing and spend the resources effectively to achieve policy objectives:
Spending mobilized resources effectively on shared priorities is a precondition for translating additional financing into development impact and enhanced fiscal capacity to service debt. This includes strengthening public investment efficiency and good governance more broadly and also linking investment and development partner support to country-owned, medium-term plans, for example, through an Integrated National Financing Framework;
Mobilizing additional public financing for investment in public policy priorities, such as raising domestic resources (see chapter III.A). Public development banks can play an important role, given their ability to lend long term and countercyclically at affordable rates;
Reducing borrowing costs and procyclical volatility of borrowing from commercial sources through: domestic actions to reduce risks and strengthen the enabling environment and international efforts to reduce volatility in global markets; improvements in the information ecosystem, including longer-term ratings and debt sustainability assessments; and exploiting the growing interest in sustainability Issues to reduce borrowing costs; and
Addressing debt overhangs to reduce debt burdens and free up resources for investment in climate action and the SDGs. These actions cut across the action areas of the Addis Ababa Action Agenda. Some of the detailed analysis and recommendations, as well as key complementary actions.
MOBILIZE FINANCIAL RESOURCES FOR DEVELOPING COUNTRIES
The quality of infrastructure governance and public investment management strongly impacts macroeconomic outcomes.
Existing assessments suggest that countries’ weaknesses tend to be most pronounced in institutions specific to public investment rather than public financial management functions that relate not just to infrastructure but to a broader set of issues.
One major reason to be hopeful for Africa’s progress is that the SDGs are in direct alignment with the African Union’s Agenda 2063—the continent’s long-term social and economic transformational blueprint for a prosperous continent. In fact, the two ambitious agendas align on over 85 percent of their goals, and African countries have shown enormous enthusiasm and endeavors in implementing the SDGs, with 90 percent of countries mainstreaming the SDGs into their national development plans.
At the same time, many weak links in the SDGs—largely due to the lack of a global governance structure—are waiting to be addressed. Despite data innovations embedded in the SDG formulation, the data gap remains wide and manifests into poor planning and, consequently, poor decision making and results. There is neither a defined reporting nor accountability mechanism, nor clarity on pathways and interventions, and little experience or scalable practice when it comes to social inclusiveness. Not much has been done in changing mindsets; we are continuing to do new things the old way. Like in decades past, key stakeholders continue to work in silos, duplicating interventions with little coordination. Finally, the world only agreed on goals and targets, leaving solutions to be developed locally.
The financing gap for SDGs is large for low-income countries, estimated to be, on average, in excess of 14 percent of GDP. Alone, sub-Saharan Africa’s annual additional spending requirements are estimated at 24 percent of the continent’s GDP, approximately $420 billion. This financing gap is a sizeable challenge for many Africa countries given that, as of 2018, over 20 of the 54 African countries are either in or at a high risk of debt distress. Compounding this challenge, official development assistance, though rising overall, is declining in per capita terms, and foreign direct investment has been dwindling in recent years. Furthermore, while more than a third of the required financing for the SDGs was expected to come from the private sector, the actual contributions from the private sector so far are significantly smaller, at only 4 to 8 percent.
Going forward, leaders at all levels must tackle the SDGs head-on with a comprehensive and interconnected approach to effectively optimize resources. Since such an approach seeks high-level horizontal and vertical coordination, it requires persistent and logically framed action plans for ensuring synergies. The domestication process must thus go beyond just mainstreaming the SDGs into national plans; it must now strive to contextualize both the target and its indicators to local socio-economic realities. Our strategy must be changed from the conventional present-to-future to future to-present planning, cascading from 2030 backward.
Financing constraints stand in the way of a “big push” investment drive for recovery, SDG progress and climate action. This investment push will need to include both public and private investment. Private investment is more appropriate for some sectors and investments than others, particularly those that offer competitive, risk-adjusted financial returns. Yet the cost of borrowing for private investment is not independent of that for sovereigns. Thus, a high sovereign borrowing not only affects public investment; it can also reduce the attractiveness of otherwise investable or “bankable” projects for private investors. Without addressing financing gaps, countries will forego investments with high social returns, which are critical for achieving the SDGs:
Many SDG investments, such as productive investments in physical capital and infrastructure have positive financial returns, but long gestation periods. They should thus find financing from investors with sufficiently long-time horizons, such as pension funds and/or public development banks. Investments in green infrastructure also have large output and employment multipliers and thus significant co-benefits for sustainable development;
Other investments may not have expected direct financial returns associated with them but may still stimulate economic growth and enhance fiscal capacity over the medium to long term. Public investments in health and education, for example, not only impact individual welfare but also growth prospects (although over long-time horizons of 15 years or more). These will likely need public financing;
Other investments may not directly enhance fiscal capacity, even in the long run, and may never deliver financial returns. However, they may still have large social returns, be indispensable to avert large costs (climate action), and/or deliver on shared global priorities such as poverty eradication—priorities that the international community has committed to supporting.
Achieving the efficiency and equity objectives laid out above will depend on how effectively mobilized resources are used, and on carefully managing associated risks. Equitable and sustainable growth provides the basis for revenue mobilization, reduced reliance on foreign savings, and achievement of development objectives in the long run. Higher growth rates also improve debt dynamics—if growth rates
exceed interest rates, public debt becomes sustainable at higher levels.
Debt financing can support recovery and growth, but it is no silver bullet. Rapid build-ups in debt often end in crises. About 50 percent of “debt booms”—periods of significant increases in debt-to-GDP ratios—have been accompanied by financial crises. For additional debt financing (or debt relief) to translate into positive long-term outcomes, risks have to be carefully managed and resources used well.
Access to more—and more diverse—sources of debt financing increases the burden on debt managers to carefully manage risk. Despite improvements, debt management capacity in some countries has not kept pace with the rising complexity of the financing landscape. This endangers countries’ ability to effectively manage the trade-off between the cost of borrowing and the associated risk of financial instruments.
Medium-term debt management strategies can help countries to meet their financing requirements, including those associated with investments in recovery, climate action and SDGs, and to manage their debt portfolios in a prudent manner.
Transparency is a precondition for effective debt management. Data gaps undermine countries’ ability to effectively manage their debt, and for borrowers and their creditors to assess the sustainability of debt. Enhancing debt transparency and the related capacities of developing countries has been a key focus of the international community, but important gaps remain. Closing these coverage gaps, for example, in relation to state-owned enterprises or on terms and conditions of lending, becomes a high priority when the demands on public financing increase in the context of a crisis response or an expansion of public investment.
The scale-up of financing must be accompanied by commensurate efforts to improve governance more broadly. Governance challenges often stand in the way of financial resources and policies being effectively translated into desired development outcomes. Measures of governance quality, such as the rule of law, the absence of corruption and the quality of institutions, are important determinants of the long-term growth prospects of countries and thus also of their capacity to carry debt.
The effective management of public resources is a central aspect of good governance. Lack of transparency and accountability, corruption and misuse of public financing undermine public trust in the state; at grand scale, corruption will have significant negative fiscal and macroeconomic implications. Reducing corruption, on the other hand, has been associated with higher tax revenue generation, substantively enhancing countries’ fiscal capacity. Sources of financing and their terms should match the characteristics of the investments or spending they are used for.
Debt financing is most appropriate for projects and investments that generate direct returns and/or enhance a country’s fiscal capacity over relevant time horizons, such as infrastructure investments. Other SDG priority areas, such as health and education, require increases in recurrent spending and, accordingly, sustained increases in domestic revenues.
The efficacy of additional public investments also depends on strengthened infrastructure governance and related public financial management processes. The efficiency of public investment is a key determinant of its growth and debt sustainability impacts, but evidence suggests that efficiency gaps are sizeable. On average, more than one third of resources are lost in the public investment process (when compared to best performers), with wide variations between countries.
The quality of infrastructure governance and public investment management strongly impacts macroeconomic outcomes. In developing countries with strong governance records, additional public investments tend to have stronger positive impacts on growth, the crowd in private investment and do not lead to rising debt ratios. Existing assessments suggest that countries’ weaknesses tend to be most pronounced in institutions specific to public investment rather than public financial management functions that relate not just to infrastructure but to a broader set of issues.
Strengthening public sector capacities in this area, including project appraisal, selection, implementation, and maintenance, is thus a priority. Public investment decisions should be guided by a country’s medium-term sustainable development strategies and plans. Public investment priorities should emerge from broader national development priorities, for example, as an investment strategy that is associated with a medium-term plan and that identifies priorities based on development objectives and cost estimates. This is likely to enhance policy coherence toward broader objectives such as structural transformation.
Linking public investment decisions to a medium-term fiscal and budget framework and debt management strategy can reduce the volatility of financing for capital expenditure. Stronger medium-term budget practices are associated with higher and less volatile public investment performance. Integrated National Financing Frameworks can help countries to align their investment strategies and related financing decisions with their overall development plans.
Any conditionalities associated with resources provided for the achievement of climate or SDG priorities must be anchored in such nationally determined and owned priorities and plans. There is great potential in exploiting shared interests and objectives around climate action and the SDGs to mobilize additional resources for developing countries. To ensure that such resources are indeed used for their intended purposes in an effective manner, they should be tied to nationally owned and developed strategies and plans, based on lessons learned over many years in the development effectiveness area. Integrated National Financing Frameworks can guide development partners and other actors in their support.