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TWN
Info Service on Finance and Development (Nov23/02) Geneva, 8 Nov (D. Ravi Kanth) — The 46 Least Developed Countries (LDCs) are apparently mired in a systemic crisis with their combined gross domestic product being ten percent lower in 2023 as compared to pre-pandemic levels, requiring a huge mobilization of international assistance and resources for implementing the Sustainable Development Goals (SDGs), the United Nations Conference on Trade and Development (UNCTAD) has said. The 46 LDCs include Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Comoros, the Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, South Sudan, Sudan, Togo, Uganda, United Republic of Tanzania, Zambia, Afghanistan, Bangladesh, Bhutan, Cambodia, Lao People’s Democratic Republic, Myanmar, Nepal, Timor-Leste, Yemen, Haiti, Kiribati, Solomon Islands, and Tuvalu. In its Least Developed Countries Report 2023, with the theme “Crisis-resilient development finance” and released on 7 November, UNCTAD called for a multi-pronged reform of international financial institutions, including the much-needed delivery of urgent climate finance, to alleviate the specific difficulties and challenges faced by the LDCs. “If reforms of the international financial architecture fail to materialize, or if they do not adequately address the specific conditions of LDCs, these countries are unlikely to reach the (United Nations) Sustainable Development Goals”, warned Ms Rebeca Grynspan, the Secretary-General of UNCTAD, in her foreword to the report. According to UNCTAD, failure to reform the international financial architecture “would jeopardize the 2030 Agenda because the LDCs are the litmus test for the success or failure of those Goals.” “The international community is called upon to take effective actions to finance the sustainable development of LDCs, thereby respecting the 2030 Agenda’s plea to leave no one behind,” Ms Greenspan argued. When asked whether the high-interest rate regime being put in place by the United States Federal Reserve undermined the growth prospects in the LDCs and increased their debt vulnerabilities, Ms Grynspan cited the figures provided by the Federal Reserve to say that every point increase in the US interest rates would reduce the growth of developing countries by 0.8 percent. With the US rates having almost quintupled, the effect on these economies seems staggering, she said, suggesting that even if there are no further increases in the interest rates, the situation would continue to remain grim for the LDCs. Worse still, the US interest rates apparently worsened the debt situation of the LDCs and led to the devaluation of their currencies while causing high inflation in their economies, she said. LDCs HIT BY MULTIPLE CRISES According to the UNCTAD report, the LDCs are apparently caught in a downward loop amidst “multiple crises of climate change, growing human conflicts, geoeconomic fragmentation, and a cost-of-living crunch.” The continued impact of these crises, according to the report, has “led to a reversal of years of growth and development progress in LDCs, including in key areas of the Sustainable Development Goals, such as poverty eradication, nutrition, health, education and gender equality.” It said that “LDCs as a group experienced a sharp slowdown in economic growth in 2020 and 2021. In 2023, their combined gross domestic product (GDP) was 10 percent lower than the level it would have reached if the pre-pandemic (2010-2019) growth trend had been sustained. GDP per capita would have been 16 percent higher in 2023 than current estimates if growth had reached the 7 percent target set in LDC programs of action.” “As a consequence of the economic slowdown,” the report said, “the total number of extremely poor in the LDCs is estimated to have risen, with at least 15 million more people living in extreme poverty than prior to the pandemic.” It highlighted the enormous funding gaps and development challenges being faced by the LDCs. For the LDCs to achieve a GDP growth rate of 7 percent, as planned prior to the COVID-19 pandemic, they require an investment of around $462 billion annually. That would imply a 55 percent increase in investments relative to actual investments in 2019 (prior to the COVID-19 pandemic). According to the report, “to achieve a more ambitious development goal – structural transformation, proxied by the doubling of the share of manufacturing in GDP (Goal target 9.2) – LDCs would have to spend an estimated $1,051 billion annually, which would require their economies to grow at an unlikely annual rate of 20 percent during the 2020s.” “UNCTAD estimates that the gap in financing for the Sustainable Development Goals alone in all developing countries, including LDCs, is now about $4 trillion per year – up from $2.5 trillion in 2015 when the Goals were adopted.” The climate finance needs of LDCs “are growing as the world is lagging far behind in meeting the targets of the Paris Agreement” of 2015. Citing the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance, the report said that “the cost of implementing the nationally determined contributions (NDCs) of developing countries amounts to $6 trillion through 2030, a far cry from the $100 billion annual climate finance target of the Copenhagen Accord and the $21 billion-$83 billion of actual climate finance flows in 2020.” According to the report, although the LDCs “have made ambitious plans to address climate change in their NDCs,” the implementation of such plans critically depends on “external finance, technology transfer, and capacity-building.” Arguably, the LDCs need more finance for adaptation in the form of grants rather than loans in order to avoid “a climate debt trap.” Sadly, “more than a third of climate-related financial flows to the LDCs is delivered through loans, which adds to their mounting debt burdens,” the report argued. CHALLENGING EXTERNAL FINANCING CONDITIONS According to the report, the LDCs face challenging external financing conditions with international financial aid having become very complex in the current global context. According to the report, “the number of actors has increased to include philanthropists, development finance institutions, the private sector and non-governmental organizations (NGOs), alongside traditional donors.” Without naming China, it said: “Other developing countries have emerged as new sources of public development finance, the number of international vertical funds has been expanding rapidly, and there has been fragmentation and a proliferation of institutions and entities in the international climate finance architecture.” In short, it said “the emergence of new partners and funding vehicles no doubt broadens the development finance landscape.” UNCTAD said that given the specific and varying selection criteria, invariably the financing results in “high transaction costs and a heavy administrative burden for recipient countries, many of which have limited resources and institutional capacities. Consequently, it effectively limits their access to such finance, and affects the overall performance of the international financial aid architecture.” Further, “LDCs also face challenges in terms of their agency over decisions that shape international financial flows, in particular ODA, private credit, portfolio flows and FDI.” Invariably, said UNCTAD, “such decisions are typically taken in the main financial centers by private agents or donor Governments, where LDCs are conspicuously absent.” As a result, the report noted that “external financial flows are not always aligned with LDCs’ national development goals and objectives”, which means that “LDC Governments have difficulty in retaining ownership of their development agendas and coordinating financial flows that have major impacts on their economies.” Moreover, it said growing geopolitical tensions compound the difficulties for LDCs to create synergies between different development partners and different sources of external finance. Despite new initiatives having been taken by the international community for improving external financing for LDC development, the report said that “they lag behind the level of ambition needed to address the acute financing challenges confronting these countries.” “As a result, the international community has so far failed to adequately respond to the looming financing crisis in LDCs,” the report suggested. CLIMATE FINANCE It is well established that the developing countries and LDCs contributed marginally to the current existential global climate crisis. However, the developing countries and the LDCs remain most vulnerable to the climate crisis as witnessed in Pakistan and several other countries over the past three years. According to the report, in 2021, “there were 17 LDCs among the 20 countries with the highest level of vulnerability and lowest level of readiness to tackle the effects of climate change. They are also the country group least able to leverage investments in adaptation actions.” Little wonder that “LDCs require more fiscal space for investments in adaptation and financing to cover the costs of loss and damage resulting from extreme weather events.” In this context, the report said that “climate finance for LDCs needs to improve along each of its main dimensions: quantity, quality and access.” More disturbingly, it said that “the quantity of climate finance flows to LDCs has fallen short of international commitments and even shorter of actual needs in LDCs.” Despite their disproportionate vulnerability, the report noted that “LDCs received a share of total climate finance flows in 2016-2020 that roughly corresponds to their population share in the group of developing countries – equivalent to an annual average of $12.6 billion.” The report argued that “the Loss and Damage Fund, currently in the making within the UNFCCC, could play an important role if its design and operationalization take into account the specific needs of the LDCs.” “Indeed, if its implementation does take LDC specificities into account, the Fund has the potential to significantly boost the resilience of LDCs as they strive to achieve the Sustainable Development Goals while standing at the forefront of the impacts of climate change,” the report argued. It remains to be seen whether COP28, to be held later this month in Dubai, will provide a pathway to realizing the Loss and Damage Fund or whether the hopes of the developing countries and LDCs will be marooned once again by the advanced countries, who created the problem of climate change. +
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