Dr Hyginus ‘Gene’ Leon: Securing financing for developing countries to achieve SDGs

It’s basic mathematics: you can’t solve a trillion-dollar problem with a million dollars. Yet, as we countdown to the 2030 deadline for achieving the UN’s Sustainable Development Goals (SDGs), that is what small-island developing states (SIDS), particularly those with low- and middle-income economy status, are being asked to do. 

The UN Global Compact Action Platform on Financial Innovation for the SDGs estimates that between $3tn and $5tn of investment is required annually for developing countries to meet these goals. This presents a monumental challenge for us at the Caribbean Development Bank (CDB), where our mandate is to drive sustainable development for our borrowing member countries (BMCs), most of which are classified as SIDS. 

While SIDS are not homogenous, they face similar vulnerabilities, such as limited resources and export concentration, small populations, high costs per capita for essential services, and high-impact costs from severe exposure to environmental hazards and external economic shocks. At the same time, development financing is limited, and international capital markets require high premia, given country risk profiles. 

In the Caribbean, we are faced with legacy structural weaknesses, climate-change effects, a prolonged impact from the Covid-19 pandemic, and the economic and financial fallout from the Russia–Ukraine conflict. Covid-19 underscored how risks and vulnerabilities are intertwined.

The pandemic caused unrelenting pressures on healthcare and education systems. It resulted in lower government revenues and less foreign exchange earnings. The cessation of activity due to lockdowns triggered massive unemployment, increased poverty levels, and raised social tensions and violence. Notwithstanding the mounting debt challenges, substantial investment is required for our economies to recover and reposition into resilient, sustainable economies.

In my ongoing advocacy, I have emphasised that access to adequate and affordable finance is indispensable for effecting sustainable development. Further, it is critical to distinguish among the types, purposes and conditions of finance based on a country’s needs and requirements. As we manage our challenges, there is a need to underscore the necessity for a suite of financial instruments capable of addressing internal coherence for macroeconomic stability and temporal consistency for balancing short-term needs for rescue and recovery and longer-term necessities for repositioning the development imperative. 

With crises, the most immediate need for developing economies is financing for rescue, with flexible terms and fast disbursement times to meet immediate liquidity requirements. Once the primary threats have been contained, the next order of business is recovery financing to jumpstart, resuscitate or rebalance economic activity. Once rebalancing is underway, the focus must expand to deal with repositioning the economy for the long term by addressing persistent structural weaknesses and transforming economic, social, institutional and environmental structures to enhance competitiveness and productivity. This requires multiple mechanisms and approaches, including concessional and non-concessional financing, public and private sector partnerships, as well as contingent and non-contingent financing instruments.

Using the triplicate focus of rescue, recovery and repositioning, the CDB is designing a financing ecosystem to underwrite the sustainable development agenda of our BMCs. Yet, to truly transform these societies and economies, we will need to direct all our efforts at building resilient ecosystems in the region. This means solidifying all dimensions of resilience (productive capacity, social, institutional, environmental and financial), so that our societies can rebound from major shocks and enjoy a more sustainable welfare path in the future. 

Range of sources

This takes us back to my opening point — the issue of adequate financing and the adage that money does not grow on trees. My view is that financing should come from several sources: intentional public savings; increased intermediation and investment of private national saving for development purposes; more concessional financing; and better deployment of existing concessional finance. I would like to focus on two key initiatives that can more effectively deploy existing resources.

First, the channelling of special drawing rights (SDRs) to multilateral development banks (MDBs). In 2021, the International Monetary Fund (IMF) made a general allocation of $650bn in SDRs to its members. The IMF issues and allocates SDRs to help meet a long-term global need for supplemental reserve assets, and the 2021 general allocation was intended to provide members with additional liquidity to tackle the significant threats posed by the impacts of Covid-19.

But all threats are not equal, as advanced and developing countries have been unevenly impacted by the pandemic, and have also had uneven access to finance recovery. While $13tn has already been spent in advanced countries on fiscal and monetary measures to accelerate recovery, the UN Conference on Trade and Development has projected that developing countries would require at least $2tn to avoid a lost decade. Closer to home, the CDB estimates that even if we double the current level of investment in our BMCs, we will only reduce poverty levels by 50%. 

Given the general view that most high-income countries do not necessarily require most of their allocations, I have supported the view that some of the SDR allocation should be directed to developing countries, and have proposed that developed countries re-allocate 2% of their excess SDR holdings to finance development in regions such as the Caribbean. The funding should be for:

• Addressing developmental challenges;
• Anchoring an integrated development framework that promotes partnerships between the public and private sectors, bridges stabilisation and creates long-term sustainable and resilient development;
• Safeguarding the public value of the funding through governance and implementation capacity policies that help promote growth while reducing risk.

In my opinion, this unifying perspective is critical for providing inclusive and sustainable solutions for transformative development and is best provided by an MDB.

Proven track record

In the case of CDB, there is no agency better placed to guide policy, determine the specifics of investments and manage use of resources to drive the turn-around of Caribbean economies. We have earned this position through our track record of successfully attracting and sustaining investments for the region for more than 50 years. We could utilise the SDR financing to tailor instruments, and crowd regional and international private capital into local financial markets to allow our BMCs to unlock sources of finance normally deemed inaccessible or unaffordable. CDB can also engineer and repackage investment risks, co-opt private capital for strategic public and commercial undertakings, and bring its additionality to bear on financial closings for complex development projects.

Second, the allocation criteria for concessional finance must be more effective. While existing structural vulnerabilities limit the potential growth of countries, the onset of a natural hazard (the Caribbean is among the most vulnerable to these hazards) pushes countries downward from their already constrained growth path, adversely impacts vulnerabilities and adds a new challenge — the recovery duration to pre-hazard conditions.

On top of that, while hazards may destroy productive capacity, debt accumulation related to building that capacity remains unchanged. Fundamentally, at the time of greatest need, market financing is most costly. Yet, although hazards do not discriminate according to income classification, eligibility to concessional finance is generally based on pre-hazard national income levels. 

What if we could benchmark eligibility and access to concessional finance on a broader concept of internal resilience capacity (IRC)? The IRC measure would capture pre-shock vulnerabilities (initial conditions), the type and intensity of the shock and the factors that constrain a rebound to pre-shock levels. These could include the ability to undertake stabilisation policies, adequacy and quality of finance, and impediments to and/or facilitators for post-shock rebuilding of institutional and productive capacity.

This would provide a more equitable means for allocating existing concessional finance based on need/resilience capacity. Moreover, it embeds the potential to integrate the foundational frameworks of debt sustainability, investment-growth nexus and resilience building into a vulnerability and resilience assessment tool that can be utilised for creating sustainable and resilient economies. CDB is at the forefront of pioneering these tools.

However, CDB’s capacity to make a difference is contingent on access to adequate and affordable financing. The spirit and purpose of achieving the SDG goals is to create beneficial life conditions for all, while preserving the planet for future generations. However, if countries start at varying distances from the target, with unequal conditions and capacities, it is unreasonable to assume we will all reach the finish line at the same time. Ultimately, if we fail to address the handicaps faced by some, we cannot achieve victory for all. 

Dr Hyginus ‘Gene’ Leon is president of the Caribbean Development Bank.