By Mahmoud Mohieldin, United Nations Special Envoy for the 2030 Agenda, and Benjamin Singer, Economic Affairs Officer, United Nations
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
This blog is also a part of a thread looking more specifically at the impacts of the COVID-19 crisis in terms of capital flows and debt in developing countries
Before the pandemic started, developing countries had been increasing their debt levels since the 2000s. By the end of 2019, 44% of IDA-eligible countries were already considered at high risk of or in debt distress. Debt servicing costs of least developed countries (LDCs) and low-income countries increased twofold from 2000 to 2019 to reach 13% of government revenue. A growing proportion of this debt was privately owned, or commercial.
Then the pandemic hit, sending countless public health systems, many already under pressure, into disarray. Up to 1.6 billion livelihoods – half the world’s workforce – have been lost. Health and unemployment benefit expenditures skyrocketed at the same time as the release of some US$9 trillion worth of stimulus packages.
Governments faced with huge pressure on public expenditure levels simultaneously saw their tax base collapse as lockdowns caused both productive activities and public consumption to stall. The near-shutdown of key components of the world economy such as tourism and the steep drop in commodity prices were especially harsh on tourism-dependent countries, including many Small Island Developing States (SIDS), and commodity exporters respectively. Many countries, both low and middle-income, now find their fiscal space squeezed on all sides to the extent that a wave of sovereign debt default has now become a major risk.
The debt emergency has tragically forced these countries to shift their focus away from longer-term plans to invest in the sustainable development goals to concentrate on their limited ability to service their debts in the coming months. In April, the G20 announced a moratorium on servicing official debt until the end of 2020 for the 76 countries eligible to IDA (mainly low-income and least developed countries) and Angola, offering a relief on an impressive US$11 billion in G20-held debt.
As of July, however, only 42 countries had requested to benefit from the Debt Service Suspension Initiative, representing US$5.3 billion in debts to be deferred. These same countries also still owe US$7 billion worth of multilateral debt and a further US$13 billion in commercial debt. In addition, many middle-income countries desperately in need of relief are not eligible, prompting many to call for the moratorium to be expanded to new countries and new types of debt, while others have urged it to be extended into 2021 and beyond.
Initiatives such as the G20 moratorium are major steps forward, but they are not sufficient to avert the debt crisis in the short term, or to ensure that the international community meets the SDGs in the longer term. A more inclusive and sustainable set of measures is urgently needed to put the world back on track to achieving the long-term goals it committed itself to. The United Nations 2030 Agenda for Sustainable Development, which includes the 17 SDGs and 169 associated targets, already provides the blueprint for the path to follow between now and 2030, also known as the “Decade of Action”.
To make sure that its 193 Member States remain on track, the United Nations held a high-level event on 28 May in which over 50 heads of state and government called for action to prevent the current crisis from becoming a deep recession. They highlighted four priority themes that have become the topics of a series of discussion groups in the UN open to all Member States and institutional partners: debt vulnerability; illicit financial flows; inclusive growth; and recovering better for sustainability.
In these discussion groups and beyond it will be crucial to help countries consider both the short-term aim of resolving the debt crisis and the longer-term objective of recovering better and more sustainably. In this respect, the pandemic has created an unprecedented opportunity to shift the paradigm away from business as usual – which resulted in the situation we face today – towards a more sustainable, low-emission and resilient development pathway. Below are three ways to achieve this at country level.
One way is to link debt relief and other short-term financial flows to a longer-term, sustainable recovery. Some countries have already taken steps in this direction: in May, Canada announced that businesses with annual revenues of $300 million or more requesting COVID-19 economic aid would be required to disclose their climate impacts and commit to making environmentally sustainable decisions.
And then, in a much-anticipated landmark agreement, the European Union adopted on 21 July 2020 a €750 billion aid package after over four days of acrimonious negotiations to help the EU recover from the coronavirus pandemic – in addition to agreeing on a US$1.074 trillion budget. Despite some watering down, it includes an ambitious €550 billion earmarked for achieving the bloc’s target of climate neutrality by 2050. Perhaps above all, it sends a strong message of solidarity and co-operation.
These examples are specific to high-income countries which have the capacity to release generous stimulus packages in record time, but two more instruments exist within reach of all countries that could link finance with a sustainable recovery.
Public budgets represent a very large proportion of domestic resources available for sustainable development. Integrating the SDGs into public budgets is not a simple exercise, mainly because of the inertia most of them are subject to, but given the importance of national budgets in determining where national funds are allocated, it can be a powerful means of ensuring that public domestic resources are allocated towards a sustainable recovery.
By 2018, 23 countries, both developing and developed, had already integrated the SDGs at different stages of the budget cycle – in redesigning budget classification systems, in mapping expenditures against SDGs or in designing a budget reporting dashboard SDG by SDG, to name a few. Integrating the SDGs into national budgets also sends a signal to investors – domestic and foreign – about the nature and purpose of finance that a country will want to attract, creating a snowball effect that further helps align financial flows towards sustainable development.
The second way for countries to invest in sustainable development at a systemic level is to design integrated national financing frameworks (INFFs), an instrument created by the United Nations for this very purpose. These country-owned financing frameworks bring together financing and related policies most relevant to addressing a country’s financing challenges. They look at the full range of financing sources and non-financial means of implementation that are available to countries and lay out a financing strategy to raise resources, manage risks, and achieve sustainable development priorities.
INFFs immediately gained popularity among countries as witnessed by the launch of 62 INFFs so far thanks to a partnership between the UN, the IMF and the European Union. The current context of the COVID-19 pandemic and looming debt crisis has made INFFs all the more relevant as they can help identify financing gaps, draw roadmaps to balancing public budgets and could act as a tool for debtor countries to negotiate debt burdens with creditors.
In the midst of all the human suffering these multiple crises have caused, we need both a clarion call and a message of optimism. We can create a sustainable future: financing resources are there and the means and the instruments are already at our disposal, but we must act now, while the window of opportunity is still open.