Bridging the financing gap to achieve SDGs requires mobilization of various financing sources
Passing the half-way point of the 2030 Agenda, it becomes increasingly clear that national policies aimed at fostering an investment-friendly environment can steer both private and public capital flows, including foreign direct investmentForeign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate) -—
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—-., towards the achievement of national development objectives and the SDGsSustainable Development Goal -—
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—-. However, bridging the financing gap to achieve the SDGs and facilitate long-term economic transformation requires effective mobilization and utilization of various financing sources.
These sources encompass government borrowing from international development finance institutions, private capital markets and flows, and international official support, among others. It’s crucial to recognize that different economic flows can yield vastly different impacts on short and long-term development, depending on their source, type, and volume. Hence, financing efforts should align with the national priorities of recipient countries and their efforts to implement the SDGs.
Many developing economies face challenges in mobilizing sufficient funds, often hindered by their inability to secure affordable borrowing for investment. Consequently, finding the appropriate mix and terms of financing is key to lasting effects on individuals, households and communities with the most pressing needs. Portfolio flows, given their volatile nature, pose particular challenges in this regard. As countries transition to higher income groups, losing eligibility for concessional finance (or part thereof) can exacerbate these challenges, creating a greater reliance on private financial markets.
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Resource disbursements for development more volatile in recent years
Sufficient financing remains a critical challenge for progress towards the 2030 Agenda. SDGSustainable Development Goal target 10.b seeks to “encourage official development assistanceOfficial Development Assistance (ODA) are resource flows to countries and territories which are: (a) undertaken by the official sector; (b) with promotion of economic development and welfare as the main objective; (c) at concessional financial terms (implying a minimum grant element depending on the recipient country and the type of loan). In addition to financial flows, technical co-operation is also included -—
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—-. and financial flows, including foreign direct investment, to States where the need is greatest”.
LDCsLeast developed country, LLDCsLandlocked developing country and SIDSSmall island developing states (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992. More information on UNCTAD official page. confront heightened challenges in achieving their development goals (figure 1). Total resource flowsIn the context of the IAEG-SDG, these flows quantify the overall expenditures that donors provide to developing countries, including official and private flows, both concessional and non-concessional. Specifically, they include ODA, OOFs and private flows -—
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—-. to LDCs and LLDCs exhibited slow growth post-2008, with heightened volatility during and after the COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-., recording their highest values ever in 2020. Despite a significant decline since then, total resource disbursements remained higher in 2021 than pre-COVID-19-levels, totaling $60.4 billion for LDCs and $37.2 billion for LLDCs. Funding for SIDS was more modest at $4.2 billion in 2021 with greater volatility observed around the peak in 2007. Since then, SIDS’ external financing has steeply declined, turning negative in 2013 and 2018 before rebounding somewhat in 2019. This was largely influenced by Mauritius which serves as an outward investment hub for the region. The decline and stagnation of external financing in 2020 and 2021 were less severe for SIDS compared to LDCs and LLDCs.
Figure 1. Sharp decline in total assistance for development after the COVID-19 pandemic for LDCs and LLDCs; for SIDS the flows remain stagnantSource: UNCTAD calculations based on data from -—
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Foreign direct investment to developing economies down by seven per cent in 2023
According to the World Investment Report -—
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—-, global FDIForeign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate) -—
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—-. fell by 2 per cent to $1.3 trillion in 2023 amid an economic slowdown and rising geopolitical tensions. FDI flows to developing economies fell by seven per cent in 2023 with respect to 2022, to $867 billion. By region, FDI flows to developing Asia decreased by 8 per cent and by three per cent to Africa, while dropping only by one per cent to Latin America and the Caribbean. FDI flows to LDCs rose to $31 billion, or 2.4 per cent of global flows.
The number of international investment projects in sectors relevant to the SDGs – including infrastructure, renewables, water and sanitation, food security, health and education – declined by 10 per cent, especially in agrifood systems, and water and sanitation. Additionally, SDG-relevant international project finance, crucial for infrastructure development, declined by 26 per cent.
Conversely, the number of SDG-related greenfield projects rose by two per cent. Growth was concentrated in developing economies, where the number of projects was up by 15 per cent, while in developed economies new project announcements were down 6 per cent. Greenfield project announcements in developing economies were highly concentrated; South-East Asia accounted for almost half, West Asia for a quarter and Africa registered a small increase, while Latin America and the Caribbean attracted fewer projects. Looking ahead, a modest increase in FDI flows in 2024 appears possible, as projections for inflation and borrowing costs in major markets indicate a stabilization of financing conditions for international investment deals. However, significant risks persist, including geopolitical risks, high debt levels accumulated in many countries, and concerns about further global economic fracturing -—
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In the post-pandemic world, developing economies remain in need of capital to fund their development and achieve the SDGs. However, capital is often scarce compared to the needs of countries. The box plots of figure 2 effectively summarize the distribution of external financing needs of countries by income level. A negative value denotes a lack of capital, while a positive value indicates a surplus, which countries can either hoard (reserves) or spend in the future. Despite some outliers, the majority of the distribution, including the median and average, shows a significant deficit in financing. For LICsLow-income developing countries, external financing needs average about $350 million per quarter or $1.5 billion per year. For lower-middle income developing countries, the average stands at about $700 million per quarter or $2.8 billion per year. These figures account for remittancesThe term remittances can refer to three concepts, each encompassing the previous one. “Personal remittances” are defined as current and capital transfers in cash or in kind between resident households and non-resident households, plus net compensation of employees working abroad. “Total remittances” include personal remittances plus social benefits from abroad, such as benefits payable under social security or pension funds. “Total remittances and transfers to non-profit institutions serving households (NPISHs)” includes all cross-borders transfers benefiting household directly (total remittances) or indirectly (through NPISHs) -—
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—-. and ODAOfficial Development Assistance (ODA) are resource flows to countries and territories which are: (a) undertaken by the official sector; (b) with promotion of economic development and welfare as the main objective; (c) at concessional financial terms (implying a minimum grant element depending on the recipient country and the type of loan). In addition to financial flows, technical co-operation is also included -—
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—-. already received. Though these amounts may seem modest to developed economies, they are crucial for poorer developing economies.
As discussed in the chapter on Financing development, ODA amounted to $223.7 billion in 2023, approximately half of the 0.7 per cent of GNIGross national income commitment by developed economies. Meeting the commitment would make a tremendous difference.
Figure 2. External financing needs for low-income and lower-middle income developing countriesSource: UNCTAD calculations based on -—
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Note: In descriptive statistics, box plots display the five number summary of a set of data (minimum, first quartile, median, third quartile and maximum). Here the simple average has been added to highlight the non-symmetric distribution. It is a convenient way to show skewness and the degree of dispersion and how data distribution varies over time in this case. Data for 2023 is partial and preliminary. The external financing needs are measured in terms of the current account deficit. In other words, it is the accounting sum of capital and financial accounts, the use of foreign reserves, and errors and omissions from the balance of payment.
Volatility of net capital flows to developing economies continues
Net capital flows to developing economies have remained extremely volatile (figure 3) since the 2008 crisis, with fluctuations exceeding $50 billion quarter over quarter. Since China launched the Road and Belt Initiative, it has become a significant supplier of capital for the countries of the global South, as reflected in the large outflows from 2014 onwards.
For low- and middle-income countries of the global South, the G20Group of Twenty Debt Suspension Initiative and the allocation of new SDRsSpecial Drawing Rights (SDR) -—
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—- by the IMFInternational Monetary Fund in the third quarter of 2021 provided considerable relief following the COVID-19 pandemic. Although capital flows rebounded at the end of 2022, preliminary data for 2023 indicate a slowdown in capital inflows. The current global financial conditions remain challenging for many developing economies. The recent postponement of interest rate cuts by the United States Federal Reserve has compelled some developing economies to maintain higher interest rates for longer than anticipated to prevent capital flight.
Figure 3. China has become a leading supplier of capital and low and middle-income developing countries benefited from the allocation of SDRs in 2021Source: UNCTAD calculations based on -—
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Note: Data for 2023 is preliminary
Outward investment promotion instruments increasingly integrate sustainability criteria
SDG target 17.5 encourages countries to promote investment in LDCs. While most outward FDI promotion regimes do not prioritize specific destination countries, some investment instruments from national promotion regimes limit eligibility to investments in developing countries. According to -—
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—- in 2023, at least 50 countries globally promote OFDIOutward foreign direct investment, including towards developing economies and LDCs (figure 4). OFDI promotion initiatives are prevalent in developed economies (79 per cent of them), and an increasing number of developing economies (14 per cent) are also supporting their firms to invest overseas. This reflects the increasing role of developing economies as capital provider and the strengthening of South-South relations.
Globally, the most common mechanisms to support OFDI include investment facilitation services (41 economies), followed by fiscal and financial support (38 economies), investment guarantees (31 economies), and state equity participation in foreign investment projects (23 economies) (figure 4).
Figure 4. In 2023 outward FDI promotion schemes towards developing economies, including LDCs, are predominantly provided by developed economiesSource: -—
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Most OFDI promotion initiatives do not differentiate between destination economies (figure 5). Among the 50 economies with established OFDI promotion mechanisms, only 18 developed economies (58 per cent) and 5 developing economies (26 per cent) have at least one instrument specifically designed to encourage OFDI in developing economies, including LDCs.
Several developed economies, especially in Europe, have integrated OFDI promotion schemes into their broader development assistance strategies. These countries actively engage their private sector in development cooperation initiatives, leveraging their strengths and capabilities to advance development goals, while promoting the growth and global competitiveness of domestic firms. Consequently, OFDI promotion schemes often incorporate eligibility criteria that emphasize benefits to the host country, particularly as regards investments targeting developing economies. Such criteria are featured in over half of the OFDI promotion instruments by developed economies and in 16 per cent of those in developing economies.
Figure 5. Among the criteria for accessing OFDI promotion mechanisms in 2023, “Home country benefits” remains the most importantSource: -—
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A long way towards aligning global investment flows with SDGs
The need for investment in SDGs, productive capacityUNCTAD defines productive capacities as consisting of the productive resources, entrepreneurial capabilities and production linkages that together determine a country’s ability to produce goods and services that will help it grow and develop -—
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—-, and climate mitigation and adaptation is pressing. According to UNCTAD's World Investment Report -—
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—- international investment in SDG-relevant sectors in developing countries increased in 2023, with more projects in infrastructure, agrifood systems, health and education. However, progress remains modest compared to 2015 when the SDGs were adopted. A review at the midpoint of the 2030 Agenda reveals that the investment gap across all SDG sectors has widened from $2.5 trillion in 2015 to more than $4 trillion per year in 2023. The largest gaps are in energy, water, and transport infrastructure.
The growing SDG investment gap in developing economies contrasts with positive sustainability trends in global capital markets -—
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—-. The sustainable finance market reached a value of $7 trillion in 2023. Sustainable funds saw positive net inflows, but with a reduced amount of $63 billion in 2023 (versus $161 billion in 2022). Sustainable bond issuance has also surged, growing five-fold over the past five years. The cost of achieving SDGs is not insignificant, requiring substantial efforts and dedication to bridge the gap -—
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—-. Key priorities for the market are increasing exposure to developing economies and addressing greenwashing concerns.
References
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