USA, April 18 (IPS) – As the world is rocked by a series of crises, the global economic outlook for 2022 is becoming ever more uncertain and fragile. The prospects for sustainable development for all and achievement of the Sustainable Development Goals (SDGs) by 2030 are bleak, especially for developing countries.
The war in Ukraine is adding strain to a world economy still reeling from the COVID-19 pandemic and mounting pressure from climate change. These stratified crises affect all countries, but not all.
While some countries, mainly developed countries, have access to cheap financing to support the socioeconomic impacts of the pandemic and invest in recovery, many others do not.
The massive recovery packages in rich countries stand in sharp contrast to poor countries, which have to deal with essential expenditures. For many, education and development budgets have had to be cut in response to COVID-19.
UN system Financing for Sustainable Development Report 2022: Bridging the Financial Dividefound that the ‘financial divide’ between rich and poor countries has become a sustainable development divide.
The situation is likely to get worse as fallout from war is exacerbating the challenges facing developing countries. Food and fuel prices are hitting record highs. This strains the external and financial balances of countries that depend on imports.
Supply chain disruptions add to inflationary pressures, creating a very challenging environment for Central Banks – soaring prices combined with a worsening growth outlook. Tighter financial conditions and rising global interest rates will make it increasingly difficult for some, and certainly impossible, to service their existing commercial debt.
Many vulnerable countries will not be able to withstand the combined shocks of a disrupted recovery, rising inflation, and sharp increases in borrowing costs. Sri Lanka has just defaulted on its debt, and widespread debt accumulation is likely – which could potentially put the Sustainable Development Goals out of reach.
The lack of adequate and affordable financing for developing countries is making the timely implementation of the 2030 Agenda increasingly difficult. Their governments often have few avenues to raise capital domestically, due to the underdeveloped domestic financial markets. But borrowing from abroad is both risky and expensive, with some African countries paying more than 8% on their Eurobond issues in 2021.
As 2022 Sustainability Report Funding note, the only way to achieve a more equitable recovery is to narrow this fiscal divide. It will take an act of determination, on several fronts.
First, developing countries will need more concessional public financing. Bilateral suppliers and international financial institutions have ramped up their response to the COVID-19 pandemic, but additional funding has not been enough to prevent this divergent recovery. The aftermath of the war in Ukraine is widening the financial gap and countries will need more support.
An important first test of international solidarity will be on Official Development Assistance (ODA). Additional support for refugees from the conflict in Ukraine, while important, should not detract from the cross-border flow of ODA to other countries in need.
Development banks should provide a variety of cyclical long-term financing at affordable interest rates, easing financial pressures during crises. Donors must ensure that multilateral development banks see their capital increased and incentive schemes generously supplemented.
One immediate step that development banks and formal bilateral creditors can take on their own is to use state provisions more systematically in their own lending. This means automating debt repayment deadlocks, giving countries breathing space in crisis.
Development banks and development finance institutions at all levels can also work to strengthen the ‘development banking system’. National organizations tend to get smaller and smaller in the poorest countries. They will benefit greatly from capacity and financial support.
In turn, regional and multilateral development banks can benefit from national banks’ detailed knowledge of the local market.
Second, we must improve the costs and other borrowing terms that developing countries face in international financial markets. Excess returns for investors indicate market inefficiencies. We must close gaps in the international financial structure – the lack of a sovereign debt restructuring mechanism will add to uncertainty – and improve the transparency of both debtors and creditors.
Better transparency and information for investors can help reduce costs. Short-term credit ratings are also an issue. Rating agencies assess a country’s creditworthiness over a very short period of time, usually three years. Meanwhile, many public investments in sustainable development – in infrastructure, education or innovation – only pay off over a longer period of time.
Credit ratings are systematically biased towards long-term investments. As a result, they poorly serve investors with a long-term investment horizon, such as pension funds. Long-term sovereign ratings that take into account such investments, as well as long-term risks such as climate change, should complement existing assessments. Scenario analysis can help overcome the inherent difficulties of such long-term assessments.
Countries can also tap into growing investor interest in sustainability and climate action. Sovereign green bonds, which can sometimes be issued at a lower cost (“tree”), are a fast-growing market segment. A recent marine conservation commitment has helped Belize achieve more favorable terms with private creditors in debt restructuring.
Development finance institutions can also help by providing partial guarantees to sovereign borrowers, reducing interest rates in exchange for commitments to invest in the sustainable development goals and actions climate dynamics.
Third, many countries will need debt forgiveness to avoid a prolonged and costly debt crisis. Once debt has reached unsustainable levels, providing more credit, even if at favorable interest rates, will only delay the calculation.
Existing mechanisms to deal with indebted countries are clearly inadequate. The common framework established by the G20 in the fall of 2020 is a step in the right direction, but its shortcomings have become all too obvious.
The restructuring has not been completed; there is no good answer to dealing with commercial debt; and many highly indebted developing countries are not eligible for the Common Framework at all.
The G20 must step up efforts to more effectively implement and deliver the Common Framework. But as a more widespread debt crisis becomes a dreaded possibility, a more fundamental overhaul of the sovereign debt structure must also be on the table.
The United Nations could provide a neutral venue, bringing together creditors and debtors on equal footing to foster such discussions.
We at the UN believe that the SDGs can still be met. But without bold actions now on all fronts, the road ahead will be very bumpy. Timely and bold policy choices will help us get there.
Navid Hanif is the Director of the United Nations Office of Finance for Sustainable Development, Department of Economic and Social Affairs (UNDESA). He is also the UN Sherpa on G20 finance and key operations. He joined UNDESA in 2001. He was a Senior Policy Advisor in the Department of Sustainable Development and was a member of the team that attended the World Summit on Sustainable Development held in Johannesburg in 2002. served as the Director of the Policy Coordination Branch and later as the Office Manager for the Support of the Economic and Social Council (ECOSOC). He was the head of the first DESA strategic planning department established in 2010.
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