Sustainable Development Finance Assessment
Sustainable Development Finance Assessment will adapt, extend and enhance UNCTAD gap analysis tool to estimate the impact of meeting the 2030 Agenda on developing countries’ long-term debt sustainability in the context of the COVID-19 crisis. The country-specific debt sustainability assessments will move away from sequential prioritization of meeting short-run external debt obligations - which have become even more stressful in the midst of the economic fallout of COVID-19 - to a longer-term debt framework that enable developing countries to both meet their debt obligations in the long-run and to attain the SDGs, starting with Pakistan and Sri Lanka.
This background paper analyzes the interplay of environmental vulnerabilities, natural disasters and high levels of public debt for the mobilization of resources towards climate change adaptation and mitigation efforts in the Caribbean region. Countries in the region represent an interesting case study given their characteristics. First, countries in the Caribbean share a series of structural features which renders them vulnerable to external shocks beyond their control. These include, high degrees of economic specialization, natural resource-based economies, limited economic resources, and high transportation costs2 . Second, while natural disasters associated with climate change are expected to have impact across countries of all income levels, tropical storms have a disproportionally large impact over countries in the Caribbean. The destruction wrought by the recent wave of hurricanes highlights the high degree of environmental vulnerability faced by countries in the region and the importance of developing an effective policy framework to tackle 2 ECLAC. (2011). Study on the vulnerability and resilience of Caribbean Small Island Developing States (SIDS). Retrieved from https://www.cepal.org/publicaciones/xml/4/45364/LCARL.354.pdf 3 these vulnerabilities. Third, the long term environmental challenges of countries in the Caribbean are compounded by high levels of public debt. Taken together, these factors combine to create a vicious economic cycle. Countries in the region recurrently use public debt to absorb the impact of external shocks and natural disasters. In turn, higher levels of public debt constrain their capacity to effectively address their vulnerabilities. As a result, each new wave of shocks and disasters simultaneously amplifies these vulnerabilities while weakening domestic response capacity. Thus, an effective framework for climate change adaptation and mitigation in the Caribbean must consider measures to address debt vulnerabilities of countries in the region and provide them with the policy space required for a sustainable development policy.
The Trade and Development Report 2019 suggests that meeting the financing demands of the Agenda 2030 requires rebuilding multilateralism around the idea of a Global Green New Deal, and pursuing a financial future very different from the recent past. The place to begin building such a future is with a serious discussion of public financing options, as part of a wider process of repairing the social contract on which inclusive and sustainable outcomes can emerge and from which private finance can be engaged on more socially productive terms.
Global Financial Safety Nets, SDRs and Sustainable Development Finance: Can the options on the table deliver needed fiscal space?14 April 2021
Responding to – and recovering from – the shock of the pandemic requires enhanced capacity to diagnose fragilities, identify resources and design appropriate policy responses. Toward these aims, this policy briefing highlights 2 tools – the Global Financial Safety Net and the Sustainable Development Finance Assessment, both outputs of the DA-Project, which provide more information on short-and long-term financial alternatives for developing countries. In this context, the role that a new SDR allocation can play is also explored.
There is no simple or single panacea to expanding fiscal space, and developing countries will need to employ a wide range of policies to return to a sustainable development path and achieve the 2030 Agenda, supported by an international community willing to address the inherent asymmetries of the international monetary and financial system, of which the SDRs are a useful, but insufficient part.
Chapter III.E – Debt and debt sustainability
The debt of developing countries continued to rise in 2019—albeit at a slower pace—and, with it, the risks to debt sustainability. Forty-four per cent of low-income and least developed countries (LDCs) are currently assessed as being at high risk of external debt distress or already in debt distress. COVID-19 and related global economic and commodity price shocks could significantly increase this number. For example, several African countries reliant on oil exports could find themselves in debt distress.
This chapter first examines debt trends at the global level and in developing countries, exploring developments of debt risk assessments, and the underlying changes to public and private debt levels and the composition of debt. The remainder of the chapter explores policy options to mobilize finance for SDG investment while maintaining sustainable debt, through responsible borrowing and lending (debt sustainability assessments, debt management, transparency, and sustainable finance principles), innovative financing instruments, and debt crisis resolution.
In this work, a framework to assess external debt and financial sustainability and public sector sustainability through the lens of the achievement of the Sustainable Development Goals (SDGs) is presented. The approach differs in some key areas from the International Monetary Fund’s (IMF) Debt Sustainability Analysis (DSA), placing the external constraints and the resulting possible growth rate at centre stage. This in turn provides information on the fiscal space available to policy makers with which to achieve the SDGs through public investment.
In this work we provide an alternative framework to assess external finance sustainability (that encompasses external debt sustainability) and public sector sustainability through the lens of the achievement of the Sustainable Development Goals (SDGs). In this way, the approach differs in some key areas from the International Monetary Fund’s (IMF) Debt Sustainability Analysis (DSA) and mainstream approaches. We call our approach Sustainable Development Finance Assessment (SDFA). External finance sustainability and debt sustainability (both external and public) is a key issue in the debate regarding the achievement of the SDGs. The pursuance of SDGs is, in general, connected with the need of public investment and fiscal policy. This, of course, may increase both public sector debt as well as external debt and liabilities, creating potential long run solvency problems.
In our framework, there is a specific connection between public sector debt and external debt that hinges on the level of growth that is compatible with the balance of payments constraint. This emphasis on growth being externally constrained is a key departure of our model. For every developing country that does not issue a reference currency used in international transactions (predominantly, the US dollar, the key-currency in the current international monetary and financial system), the external constraint is the main economic constraint on output and growth. Public sector sustainability is, then, subject to this external constraint. Public sector sustainability - given the external constraint - determines the policy space available for the pursuance of SDGs through public investment.
This paper is divided as follows. Section II briefly discusses the main ideas behind our framework. Section III presents the SDFA model for external accounts and section IV for public sector sustainability. Section V concludes this work with a consideration of the connections between both external finance and public sector sustainability and the achievement of the SDGs.
 For a critical assessment of the IMF DSA, see UNCTAD (2021) Sustainable Development Finance Assessment Framework, forthcoming.
The aim of this short paper is to add a dynamic model to the UNCTAD Sustainable Development Finance Assessment (SDFA) framework (Bhering, 2021), using the contribution of Vaggi and Prizzon (2013) using foreign debt as a point of departure.
Vaggi and Prizzon (2013) develop a geometry of debt sustainability (GDS) focused on the foreign debt instead of the public debt as in Pasinetti (1998)’s seminal paper on the GDS. The authors present the notion of Non-Interest Current Account (NICA) and demonstrate how domestic and foreign deficits work out. Another crucial idea is that a country is able to decrease its primary deficit by reducing expenditures as well as raising taxes and the outcome can be seen in the short run, but changing the net trade balance takes time and the evolution of the NICA is not under the control of each country. Moreover, Vaggi and Prizzon (2013) demonstrate that even in the case of total cancellation, a country that improves both GDP growth rate (g) and NICA is going to re-accumulate new debt. Therefore, although a higher rate of growth is important, the improvement of NICA is imperative to guarantee the long run sustainability of foreign borrowing for developing countries.
This paper is an output from the project “Response and Recovery: Mobilising financial resources for development in the time of COVID-19”, which is co-ordinated by the Debt and Development Finance Branch of UNCTAD and jointly implemented with ECA, ECLAC and ESCAP. This project is one of the five UN Development Account short-term projects launched in May 2020 in response to the COVID-19 crisis.
The project aims to enable low-income and middle-income developing countries (LICs and MICs) from Africa, Asia-Pacific, and Latin America and the Caribbean to diagnose their macro-financial, fiscal, external financial and debt fragilities in the global context, and design appropriate and innovative policy responses to the COVID-19 pandemic leading toward recoveries aligned with the achievement of the Sustainable Development Goals (SDGs).
The pandemic brought forward the problems of indebtedness built over the past years, themselves reflections of long-standing, structural patterns in the global economy. The purpose of the policy brief is to summarise the state of the debt debate as it unfolded from the onset of the pandemic to July 2020.
The fourth session of the Intergovernmental Group of Experts on Financing for Development will be held from 25 to 27 January 2021 in room XIX of the Palais des Nations, Geneva, from 11 a.m. to 1 p.m. and 3 to 5 p.m. each day.
At the fourth session, discussions will address the following: Addressing systemic issues – strengthening the coherence and consistency of multilateral financial, investment, trade and development policy
More information on registration, agenda, etc. can be found here: https://unctad.org/meeting/intergovernmental-group-experts-financing-development-fourth-session .
Enhancing understanding of external financial liquidity and sustainability:
Global Financial Safety Net Tracker and Sustainable Development Finance Assessment
Tuesday, 13 April 2021 – 2 to 3 p.m. (Geneva time)
The COVID-19 pandemic has exacerbated the economic, financial and debt vulnerabilities of low-income and middle-income developing countries (LICs and MICs), leaving their economies ravaged and floundering, and potentially undoing progress made toward sustainable development and the achievement of Agenda 2030. In response to the onset of the pandemic, the UN launched several development account projects including Response and Recovery: Mobilising financial resources for development in the time of Covid-19 co-ordinated by UNCTAD and in partnership with regional commissions, ECA, ECLAC and ESCAP. The project aims to enable member countries to diagnose their fragilities in the global and regional context and identify and design appropriate policy responses leading toward recovery and return to the development path.
The virtual seminar aims to enhance understanding of aspects of external financial liquidity and sustainability by showcasing two developments of the COVID-19 project:
- The UNCTAD-Boston University-Freie Universität Global Financial Safety Net Tracker, which tracks liquidity provision for all UN member states from different sources – including the IMF, Regional Financial Arrangements and bilateral central bank swaps.
- The Sustainable Development Finance Assessment (SDFA) – a framework which examines the capacity of developing countries to achieve the most significant SDGs in a way that is compatible with external financial and public debt sustainability.
The programme of the meeting is attached. Participants are encouraged to register through the following link: Meeting Registration - Zoom