Funding for sustainable development is stuck

IMF / World Bank Spring Meetings is a time when the focus is on financing for sustainable development. This year, it was clear that the main channels were stuck.

To see why, it is important to start with understanding the key elements of sustainable development financing. There are many channels, each with its own driver.

As Table 1 below shows, external funding in support of the Sustainable Development Goals ranges from $ 500 billion to $ 600 billion. These figures include a variety of sources of funding for sustainable investment, including aid, loans and personal flows. We combine Net Official Development Assistance (ODA) for funds that cannot be used for sustainable development investments: donor administrative costs, refugee charges in the country, and humanitarian assistance. The rest – approximately what is called country programmable assistance – can be used to invest in achieving the Sustainable Development Goals (SDGs).

If developing countries can build better project pipelines and improve their policies and institutional frameworks, and if developed economies provide political and financial support to keep financial channels open, then the agenda can move forward.

The nature of the official flow is reasonably understood. It is less easy to classify personal flows, which we can divide into five categories: (i) lending to sovereign and their enterprises through bond market and syndicated bank credits; (ii) personal philanthropy, which is now in significant proportions; (iii) private financing of investment projects in co-financing with multinational corporations (chief organizer of the International Finance Corporation); (iv) Individual management of infrastructure (mostly in power generation, but also toll roads and hospitals); And (v) affects investment in various sectors.

Small channels of development financing are closing or showing little chance of improvement in the short to medium term. For example, although there is much excitement about environmental, social, and governance investments and sustainable bonds, this money rarely flows to developing countries and there is a growing backlash against “greenwashing”. The private philanthropist is large but not organized in a systematic way and responds to the preferences of individual donors without resorting to the SDGs. Much in the form of kind grants. And the flow of big emerging economies like China and India has slowed dramatically, started – in the case of China – before the epidemic, and is now increasingly small as recipient countries sheltered investment projects. From a policy standpoint, without the involvement of these lenders in debt relief (see below), very little can be done by policy makers to provide more resources in the short term.

For this reason, the actual policy debate revolves around three main channels that account for about two-thirds of the flow: personal loans to companies, including aid, government non-consensual debt, and sovereign or sovereign guarantees. Policymakers need to find ways to unclog these channels.

Table 1: Broadly defined net international development finance contribution (current USD, billion)Contribute to the broadly defined net international development financing (current USD, billion)Source: Author Count, OECD Statistics, World Bank International Debt Statistics, United Nations Financial Statistics, Boston University Global Development Policy Center, Ministry of External Affairs, Government of India, Indiana University Lily Family School of Philanthropy And the Global Impact Investing Network (GIIN).


It is commendable that developed economies continue to grow in aid even as their own internal conditions worsen. Growth from countries such as Germany, Sweden, Norway, the United States and France has increased overall support from Development Assistance Committee countries in 2020 and 2021. Multilateral assistance has grown exponentially through the IMF’s Poverty Reduction and Growth Trust and the much-needed countersyclical funding from the World Bank Group’s International Development Association (IDA). In 2021, aid continues to grow and important international funds, including the IDA and the Green Climate Fund, are replenished.

However, aid to some important countries, especially the United Kingdom, declined in 2020 and again in 2021. Overall, excluding the Covid-19 vaccines, real aid increased by 0.6 percent in 2021. At one point, it is commendable that aid continues to grow in every donor country despite the real budget constraints. At other levels, however, the increase in aid seems modest. ODA growth was modest in 2020 – less than 0.1 percent of the $ 12 trillion spent by governments of donor countries on their internal fiscal stimulus packages in 2020.

During the spring meeting, the pressure on aid was evident. Officials, particularly from Europe, have spoken of the need to offset donor costs for the accommodation of Ukrainian refugees from the aid budget. Afghanistan, which was expected to be the main focus of the talks before February 24, was rarely brought in, and in March received less than 2 2 billion in applications for UN humanitarian funds – 45 percent less than the estimated amount needed. Afghanistan now has one of the highest infant and child mortality rates in the world.

The humanitarian crisis, the Ukraine war, the impact on the food and energy crisis, the potential debt crisis, and the ongoing need for vaccination and epidemic-related spending, obscure the prospects for increased support for sustainable development.

Government non-concessional loans

Public financial institutions have disbursed $ 60 billion by 2020, almost entirely from multilateral institutions that have increased countersyclean funding in response to the COVID-19 epidemic. Even this, however, did not prevent a bipartisan world recovery: rich countries have largely restored their pre-epidemic output levels, while developing countries are still far short. Of further concern is that the epidemic forced governments in many developing countries to cut investment costs and close schools, compromising the prospects for future growth.

Against this background, a major announcement at the Spring meeting was the approval of the IMF’s Resilience and Sustainability Trust (RST) facility, which was partially financed by the redistribution of Special Drawing Rights (SDRs) issued to rich countries in the initial response. To the epidemic. The RST aims to raise SDR 33 billion (equivalent to about $ 45 billion). The big improvement, however, is not the amount of funds but the terms: a 20-year term of the loan, a 10-year grace period and the interest rate slightly above the SDR interest rate, which is currently 0.5 percent.

Another big announcement was the World Bank Group’s second surge financing package, which aims to provide $ 170 billion in sustainable development funding in the 15 months from April 2022 to 2023. However, the World Bank warns that this program will significantly reduce availability. The capital of the International Bank for Reconstruction and Development (IBRD) is the World Bank’s main lender in middle-income countries. IBRD will be forced to reduce its debt by one-third in FY 2024 and beyond under current estimates.

Other multilateral development banks face the same problems as IBRD. They have borrowed enough to respond to the epidemic, looking to the future to make them less capitalized. Due to this, the way to provide more unconditional loans has been blocked.

Private capital

The spring meetings were a fair part of the warning about the impending debt crisis in developing countries, and indeed, the credit ratings of major corporations show that the risks are increasing. Between 2020 and 2021, at least one of the three major rating agencies in 42 developing countries downgraded their credit rating and an additional 33 downgraded their outlook. The general framework for debt treatment seems to be stuck outside the debt service suspension initiative. Only three countries are participating (Chad, Ethiopia and Zambia) and in each case negotiations have been going on for a long time, progress has been measured through process changes rather than actual results.

As a sharp reminder of why credit ratings are important, consider that developing countries with investment grade ratings pay an average real interest of 3.6 percent on borrowing from the capital market; Those with less than an investment grade rating pay an additional 10 percentage points of interest. At this interest rate, it becomes very difficult to maintain the creditworthiness. The only option for a finance minister is to avoid new borrowings and try to limit the fiscal deficit. This is why developing countries complained about their lack of financial space during the spring meeting. Given this situation in the financial markets, there is considerable frustration that developing countries will be able to return to the capital markets profitably.

The way forward

This assessment of what hinders long-term financing for development points to three key areas for policy action:

  1. Assistance remains the mainstay of sustainable development financing, but it is in such short supply that it must be leveraged – by guaranteeing, financing institutional innovation, or providing new capital to development organizations.
  2. International financial institutions are an effective way to raise capital but are quickly running out of headrooms. They will soon need new capital, otherwise middle-income developing countries will have few options. Minor improvements in margins may be possible through balance sheet optimization, but this is a distraction from the basic need for additional funding.
  3. Private finance can only be revived if the new flow is protected from the legacy of existing debt. This means expediting the exercise of debt or using guarantees and risk pooling and transfer of risk, preferential treatment for funds used for core SDGs and climate investments and / or off-sovereign balance sheets lending to public resources funds or development banks.

If developing countries can build better project pipelines and improve their policies and institutional frameworks, and if developed economies provide political and financial support to keep financial channels open, then the agenda can move forward. Big ask – no wonder the mood at the spring meeting was bad.

Leave a Reply

Your email address will not be published.