With the failure of the global financial system to effectively cushion the impacts of current global crises on the Global South — the COVID-19 pandemic, the war in Ukraine and the ongoing climate emergency — the UN today called for the urgent need for a significant increase of finance for sustainable development.
Today’s poly-crises are compounding shocks on developing countries – in large part because of an unfair global financial system that is short-term, crisis-prone, and that further exacerbates inequalities,” warned UN Secretary-General António Guterres on the occasion of the launch of the SDG Stimulus released today.
“We need to massively scale up affordable long-term financing by aligning all financing flows to the SDGs and improving the terms of lending of multilateral development banks,” stressed the Secretary-General. “The high cost of debt and increasing risks of debt distress demand decisive action to make at least $500 billion dollars available annually to developing countries and convert short term lending into long term debt at lower interest rates,” he said.
A financial system that works for all
Halfway to the 2030 Agenda deadline, progress on the Sustainable Development Goals (SDGs) – our roadmap out of crises – is not where it needs to be.
To reverse course and make steady progress on the Goals, the SDG Stimulus outlines the need for the international community to come together to mobilize investments for the SDGs – but, in so doing, create a new international financial architecture that would ensure that finance is automatically invested to support just, inclusive and equitable transitions for all countries.
The current global financial system – originally created to provide a global safety net during shocks – is one in which most of the world’s poorest countries saw their debt service payments skyrocket by 35% in 2022.
The “great finance divide” continues to proliferate, leaving the Global South more susceptible to shocks. Developing countries don’t have the resources they urgently need to invest in recovery, climate action and the SDGs, making them poised to fall even further behind when the next crisis strikes – and even less likely to benefit from future transitions, including the green transition.
As of November 2022, 37 out of 69 of the world’s poorest countries were either at high risk or already in debt distress, while one in four middle-income countries, which host the majority of the extreme poor, were at high risk of fiscal crisis.
Accordingly, the number of additional people falling into extreme poverty in countries in or at high risk of entering debt distress is estimated to be 175 million by 2030, including 89 million women and girls.
Even prior to the recent rise in interest rates, least developed countries that borrowed from international capital markets often paid rates of 5 to 8 per cent, compared to 1 per cent for many developed countries.
SDG Stimulus Offers
The SDG Stimulus aims to offset unfavorable market conditions faced by developing countries through investments in renewable energy, universal social protection, decent job creation, healthcare, quality education, sustainable food systems, urban infrastructure and the digital transformation.
Increasing financing by $500 billion per year is possible through a combination of concessional and non-concessional finance in a mutually reinforcing way.
Reforms to the international financial architecture are integral to the SDG Stimulus. As highlighted in the Addis Ababa Action Agenda, financing sustainable development is about more than the availability of financial resources. National and global policy frameworks influence risks, shape incentives, impact financing needs, and affect the cost of financing.
The SDG Stimulus outlines three areas for immediate action:
First, tackle the high cost of debt and rising risks of debt distress, including by converting short-term high interest borrowing into long-term (more than 30 year) debt at lower interest rates.
Second, massively scale up affordable long-term financing for development, especially through strengthening the multilateral development banks (MDB) capital base, improving the terms of their lending, and by aligning all financing flows with the SDGs.
Third, expand contingency financing to countries in need, including by integrating disaster and pandemic clauses into all sovereign lending, and more automatically issue SDRs in times of crisis.
Central role of International Financial Institutions
The international financial institutions remain at the heart of this agenda. Of immediate urgency, there are three important ways in which the Multilateral Development Banks can act.
First, the MDBs must massively expand the volume of lending, including concessional lending. This can be achieved through increasing their capital bases, better leveraging of existing capital and implementing recommendations of the G20 Capital Adequacy Framework Review, and re-channeling Special Drawing Rights (SDRs) through MDBs. As long as countries remain in need of urgent resources the SDG Stimulus will also call for a new round of SDRs.
Second, MDBs must improve the terms of their lending, including through longer-term lending, lower-interest rates, more lending in local currencies, and the inclusion of all vulnerable countries in lending programmes.
Third, MDBs – as well as all public and private actors – must explicitly incorporate the SDGs into their framing, their operations and all stages of the lending process and disaster and pandemic clauses must be integrated into all debt contracts to provide immediate relief in times of crisis.
This means adopting a transition approach, which aligns investments with the SDGs while also considering specific country and development contexts, and the trade-offs that may be involved on the path towards a more resilient, just, and inclusive global economy.
At the national level, the UN also stands ready to support, including through supporting the development and application of SDG-aligned Integrated National Financing Frameworks (INFFs).
Member States – including the Group of Twenty (G-20) – must play their part. It is clear that the G20 Common Framework for Debt Treatment (CF) has failed.
The SDG Stimulus calls for providing immediate relief to all countries in need, including through debt suspensions, re-profilings, exchanges and write-downs where necessary, as well as the creation of a permanent mechanism to address sovereign debt distress.
As underscored by the UN Secretary-General, the SDG Stimulus, while ambitious, is achievable: “Investing in the SDGs is both sensible and feasible: it is a win-win for the world, as the social and economic rates of return on sustainable development in developing countries is very high.”
But to make this happen, “urgent political will to take concerted and coordinated steps to implement this package of interconnected proposals in a timely manner is critical.”
A Bretton Woods 2.0 is sorely needed, both to fulfil the function for which it was originally designed for and to prepare the world, and its vulnerable people, as we head into uncertain terrain.
The link to the SDG Stimulus document is here.
