The world needs international cooperation and global partnerships complete with active participation and engagement of governments, civil society, private companies, and more. We need not just more aid but aid that targets those most in need; private investment that’s aimed at development; and better mobilisation and allocation of domestic revenues in developing countries to meet the needs of their populations.
Unfortunately, donors are currently failing to keep their funding commitments and resources like foreign direct investment (FDI) to Africa and domestic revenues as a share of gross domestic product are declining. The global community, now more than ever, needs to work together to make sure international commitments are kept and resources are reaching the poorest and most vulnerable.
The financing needs to achieve the Sustainable Development Goals are immense. However, current development finance trends in Africa are worrying. Despite several renewed commitments, most donors are falling short on their aid commitments, particularly to those most in need, while domestic revenues and foreign direct investment have declined in recent years. In addition to reversing these trends, efforts to boost statistical capacity and policy reform; improve access to information and communications technology; and make better use of trade for inclusive growth and poverty reduction are essential.
Smart use of aid could help unlock other sources of finance to build infrastructure and lay the groundwork for continued and sustainable growth and attract private investments. It’s good that aid, on the whole, is increasing. However, donor countries have to make sure that aid fulfills its primary aim — to eradicate poverty. In order to do so, aid can’t be diverted away from the poorest and most vulnerable countries, which often have limited capacity to raise domestic revenues or attract other financial flows and therefore rely on aid. Donors should also keep their financing commitments. There’s a huge financing gap to achieve the SDGs, and both existing and additional resources — like new technology, building capacity, and other financial resources — need to be mobilised.
Aid, also known as Official Development Assistance (ODA), plays a unique role in the fight against poverty. It is the main external financial flow explicitly targeting economic development and improving welfare. This was why wealthy countries committed to spend 0.7% of their gross national income (GNI), and, in recognition of their unique needs, donor countries also committed to spend 0.15-0.20% of their GNI on least developed countries (LDCs). At the Financing for Development Conference in Addis Ababa in 2015, countries reaffirmed these commitments and the Addis Ababa Action Agenda (AAAA) included a commitment to reversing the declining share of aid going to LDCs and a suggestion to allocating 50% of ODA to these countries.
In 2017, global ODA flows from OECD Development Assistance Committee (DAC) countries reached $146.6 billion, representing a 0.6% fall in real terms. On average, DAC countries are moving further away, not closer, to meeting their global commitments – in 2017, the global ODA was only 0.31% of their collective GNI and only five countries met the 0.7% target. The share of aid going to the poorest countries continued to decline with only 28% of global aid going to the LDCs in 2017. This is in part due to the increasing pressure donor countries are facing at home to cut aid spending which have resulted in trade-offs between providing development assistance and addressing other national priorities such as supporting refugees at home. These costs, also known as in-donor refugee costs, are increasing. In 2017, DAC donors spent $14.2 billion on in-donor refugee costs – this is money that never reached developing countries. Counting this money as aid could mean overestimating the amount actually going towards fighting poverty and saving lives in developing countries. Countries must absolutely do their part to support refugees seeking shelter and safety, but this money should be additional and not at the expense of aid.
The cost to achieve the global goals is huge and private finance will play a key role in helping to fill this financing gap. Unfortunately, the share of foreign direct investment (FDI) currently going to African countries is small – just 3% of global FDI in 2016 and 75% of the FDI inflows to Africa were directed at only six countries. ODA can help countries struggling to attract private investment, such as LDCs and fragile states, by ‘blending’ concessional (ODA) and private finance. However, countries must take care that any aid money that is used for private sector activities contributes to development. It must also target sectors and countries most in need to make sure that these sparse concessional resources are used for poverty reduction.
For many African countries, their own budgets account for the majority of public resources and in 2015, African countries mobilised over 10 times more in domestic resources than the total aid they received from DAC countries. Countries must raise money domestically, for example via tax, in order to provide effective public services. There are many things hindering the ability of governments to effectively raise revenue, such as the fall in oil prices, large informal sectors, complex tax codes, weak administrative capacity, and illicit flows. It is estimated that developing countries lose over $138 billion annually due to tax exemptions. . To mobilise domestic revenue effectively, governments must fight tax evasion and avoidance, reform harmful tax incentives, strengthen administrative capacity, and curb corruption.
Another drain in developing country finances is debt. Many developing countries spent years repaying billions of dollars in loans, which became a serious barrier to poverty reduction and economic development in many poor countries. Governments began taking on new loans to repay old ones. Many countries ended up spending more each year to service debt payments than they did on other sectors, such as health and education. Despite debt cancellation programmes, such as the ‘Heavily Indebted Poor Country’ (HIPC) scheme and the ‘Multilateral Debt Relief Initiative’ (MDRI), introduced by wealthy countries to relieve debt burdens, many countries are re-accumulating debt and still spend a significant portion of their resources servicing their debt. Over a decade later, 40% of low income countries are facing debt challenges. There are 8 countries in debt distress, double the number in 2013. Servicing this debt also has become more expensive, increasing by 60% since 2013. Although debt may be an important source of development financing for African countries, these funds must be invested effectively in development projects and the funds must be prudently managed to prevent future crises.
The global community needs to work together and bring different development finances together more effectively in order to meet the immense, and increasing, global need. ODA remains a vital part of that, especially for LDCs and fragile states that face the greatest challenges, often tackling both extreme poverty and instability at the same time. These countries also have limited capacity to mobilise domestic resources and face difficulty attracting other external financing for long-term development. Donors need to prioritise aid, keep international commitments, and reverse the trend of declining support to the poorest countries to achieve the global goals.