Annex B. Financing sustainable development in least developed countries (Annex)
This annex highlights the development and well-being indicators in least developed countries (LDCs). It provides an overview of the financing for sustainable development landscape in LDCs. It analyses how the financing for sustainable development mix differs across country groupings. It also examines the roles of the different sources of financing in LDCs, such as domestic resources and external finance – that is, development finance, remittances and private investment.
In the final year of the Istanbul Programme of Action, evidence shows that despite significant progress in certain areas, LDCs still face structural impediments to eradicating poverty through economic growth, structural transformation, the building of productive capacity or through increasing the share of exports (UN, 2020[3]). Moreover, LDCs have been hard hit by COVID-19 and the ensuing global economic downturn, exacerbating existing vulnerabilities.
As Table B.1 below shows, the latest available data show significant differences between LDCs and other developing countries across dimensions of human and social development, as well as economic and environmental sustainability. In 2017, 36% of the population in LDCs lived below USD 1.90 per day. LDCs severely lag behind across all human development dimensions, namely life expectancy, education and gross national income (GNI) per capita and gender equality. Women still face significant barriers to economic opportunities in LDCs, in particular in the informal sector, where 50% of women employees are unpaid, compared with 33% of men. Only 45% of the population in these countries had access to electricity in 2017 and merely 37% of the population use at least basic sanitation facilities, compared with more than double that in other developing countries. Moreover, a third of the population in LDCs still lack access to clean drinking water.
Table B.1 also shows that the economic sustainability outlook in LDCs is particularly worrying. In 2017, LDCs had a GNI per capita level of less than half that of other developing countries. While LDCs’ real GDP growth in 2018 beat that of other developing countries on average, real GDP growth per capita lags behind (3.1% for LDCs versus 3.6% for other developing countries). The agriculture sector plays a much more prominent role in LDCs’ economies (its value added represents almost 25% of GDP in 2017) with respect to other developing countries (almost 10% of GDP). As such, LDCs have made slow progress in the structural transformation of their economies and transitioning from sectors with low productivity to sectors with higher productivity.
The domestic credit provided by the financial sector in LDCs amounted to 29.6% in 2017, as opposed to 58.5% in other developing countries, which shows the low level of financial sector development. LDCs also show low levels of gross domestic savings and gross capital formation. LDCs still face major barriers in attracting investment and in developing the private sector. Improvements in the enabling environment have been observed in some cases, with the time and cost of business start-up procedures (as a share of GNI per capita) declining from about 89% in 2012 to almost 41% in 2019 (World Bank, 2019[4]). However, only five LDCs ranked among the top 100 in the 2018 Ease of Doing Business index.
LDCs’ share of global trade is marginal at around 1%. SDG target 17.11 calls for doubling the share of LDCs in global exports by 2020, a target that has not been achieved. LDCs are also less connected than other countries, with only two broadband connections per 100 people, compared with 11 in developing countries and 36 in developed countries (ITU, 2019[5]) and women are 33% less likely than men to access the Internet.
LDCs also lag behind in terms of environmental sustainability. While there is a relatively high renewable energy consumption across LDCs, the countries show signs of environmental degradation, namely in terms of forest area coverage and a faster rate of natural resource depletion than in other developing countries. Moreover, nine LDCs are small islands and developing states, which are highly vulnerable to the impacts of climate change and natural disasters. LDCs are disproportionately affected by natural disasters and the effects of climate change, with higher proportions of deaths caused by such events, and they bear significantly higher economic losses, compared with other countries.
Financing for sustainable development: LDCs versus other country groupings
Although financing challenges are common to all developing countries, LDCs face particular barriers. Financing investment through domestic resources is challenging for LDCs, which have low levels of income and domestic savings and often ineffective domestic resource mobilisation. Although tax revenues represent on average the largest source of financing for sustainable development in developing countries, tax revenues account for a much lower share of GDP in LDCs (14.2%), compared with lower middle-income countries (19.2%) and upper-middle-income countries (21.7%), as Figure A B.1 shows. For LDCs, external finance (i.e. development finance, remittances, foreign direct investment (FDI), private investment and other investment, with each having specific financing purposes) represents a larger share of the financing mix than domestic finance.
Note: LDCs = least developed countries; LMICs = lower middle-income countries; UMICs = upper middle-income countries
Source: Authors based on data collected for (OECD, 2020[8]) Global Outlook on Financing for Sustainable Development 2021.
External finance in LDCs
As Figure A B.2 below indicates, external finance represents a major source of financing for LDCs (16% of GDP in 2018), and has remained relatively stable throughout 2012–2018. Bilateral and multilateral development finance, which was stable over the same time (on average 5.7% of GDP), experienced a slight increase in 2018. Remittances represented, on average, over 4% of GDP in LDCs and also rose in 2018. Private investment inflows accounted on average for 6% of GDP in LDCs throughout the period, with FDI being the most prominent. However, these are also the most volatile source of external finance, experiencing a significant drop in 2017 and further decrease in 2018 (in relative terms). Further research highlights that, in 2019, FDI inflows to LDCs declined by 5.7% to USD 21 billion, accounting for merely 1.4% of global FDI. LDCs were the only country grouping to experience a drop in FDI flows in 2019, although with differences across countries (FDI increased only in African LDCs) (UNCTAD, 2020[9]).
Note: bilateral development finance is the sum of bilateral concessional (bilateral ODA) and bilateral non-concessional finance (bilateral other official flows) and bilateral export credits, in disbursements. Multilateral development finance is the sum of multilateral concessional (multilateral ODA) and multilateral non-concessional finance (multilateral other official flows and commitments from the International Finance Corporation and the Green Climate Fund as proxy for disbursement), in disbursement.
Source: Authors based on data collected for (OECD, 2020[8]) Global Outlook on Financing for Sustainable Development 2021 https://dx.doi.org/10.1787/e3c30a9a-en.
External indebtedness is a crucial issue for LDCs. According to the World Bank Group-IMF Debt Sustainability Framework, as of June 2020, six LDCs were classified as debt distressed, with an additional one in external debt distress, and 16 LDCs faced high risk of debt distress1 (World Bank and IMF, 2020[10]). The composition of the debt stock of LDCs also changed significantly in the last decade, with an increasing share of debt held by private and non-traditional bilateral creditors (notably China). This is likely to pose challenges to creditor co-ordination (UN, 2020[3]).
Moreover, in International Development Association (IDA)-eligible, low-income developing countries,2 commercial credit increased more than threefold from 2010 through 2019, going from 5% to 17.5% (of total external public debt) throughout the period, with the increase higher in “frontier economies” (low-income and LDCs with international bond issuance). In particular, 38% per cent of these countries’ external public debt is owed to private creditors, with 32% in bonds (UN/DESA, 2020[11]).
Development finance in LDCs
Looking specifically at development finance trends, Figure 2.1 in Chapter 2 shows that overall development finance to LDCs has been on an upward trend since 2015, with bilateral development finance largely exceeding multilateral.3 ODA, which is provided on concessional terms,4 largely dominates the official development finance landscape in LDCs. After a slight drop in 2016, ODA to LDCs has been rising since 2017, with total gross ODA disbursements reaching almost USD 59 billion in 2018 (or 5% of GDP). Preliminary data for 2019 suggest that, on a cash flow basis,5 net bilateral ODA flows to LDCs increased by 2.6% in real terms (OECD, 2020[8]). However, ODA provided to LDCs by DAC donors accounted for only 0.09% of the GNI of donor countries in 2018, well below their 0.15%–0.20% ODA-to-GNI commitment.6 This implies a shortfall of external development finance for LDCs (UN, 2020[12]). As illustrated in Figure 2.1 in Chapter 2, both bilateral and multilateral donors are also increasingly extending development finance at non-concessional terms, also referred to as other official flows (OOF),7 which reached an all-time peak in 2018, at USD 6 billion extended by bilateral donors, and USD 3.2 billion by multilaterals.
Notes
← 1. The six LDCs in debt distress (overall and external debt) are Mozambique, Sao Tome and Principe, Sudan, Somalia, South Sudan and Zimbabwe. The 16 LDCs in high risk of debt distress (overall and external debt) are Afghanistan, Central African Republic, Chad, Djibouti, Ethiopia, Gambia, Haiti, Kiribati, Lao People’s Democratic Republic, Liberia, Malawi, Mauritania, Sierra Leone, Togo, Tuvalu and Zambia.
← 2. Eligibility for IDA support depends on a country’s relative poverty, defined as GNI per capita below an established threshold and updated annually (USD 1,185 in the fiscal year 2021). Of the 47 LDCs, 45 are IDA-eligible. For further information, see https://ida.worldbank.org/about/borrowing-countries.
← 3. Bilateral donors include members of the Development Assistance Committee (DAC) and those countries reporting their development finance to the OECD. Multilateral donors comprise multilateral organisations such as agencies and funds of the United Nations system, international and regional financial institutions (e.g. the World Bank, regional development banks, etc) and vertical funds.
← 4. ODA mostly includes grant payments and, to a lesser extent, concessional loans (with grant element of at least 25%), with the primary objective to promote economic development and welfare in recipient countries.
← 5. In 2014, DAC members decided to modernise the reporting of concessional loans by assessing their concessionality based on discount rates differentiated by income group, and introducing a grant-equivalent system for calculating ODA figures. Here, official development finance flows are presented on a cash basis – that is, the actual cash flow between donor and recipient countries. For further information, see: https://www.oecd.org/dac/financing-sustainable-development/development-finance-data/ODA-2019-detailed-summary.pdf.
← 6. LDCs have exclusive access to international support measures, including for development co-operation. Donors made a long-standing commitment to provide the equivalent of 0.15 to 0.20% of their GNI in the form of ODA to LDCs, reiterated in the Addis Ababa Action Agenda and included in SDG target 17.2 (more at: https://www.un.org/ldcportal/commitments-regarding-oda-to-ldcs/).
← 7. OOF include loans that do not meet the concessionality criteria of ODA (having a grant element of less than 25%), grants for representational or commercial purposes, and export credits.