Decoding the Future is a new editorial series explaining various topics emerging from the Summit of the Future and the Pact of the Future. Experts within the UN system will help break down a complex topic in simple and succinct ways sharing their insights as to what can help reach the 2030 ambitions.
This interview on understanding the international financial architecture and its reform is explained by Carmen Arguello, Sustainable Development Officer for the UN Resident Coordinator System based at the UN Development Coordination Office.
Q: Where the world stands, what is the biggest concern when it comes to financing for sustainable development?
Carmen Arguello (CA): Let’s start by framing what we mean by financing for sustainable development. We have a framework that is the Addis Ababa Action Agenda on Financing for Development, that was agreed by Member States and adopted in 2015. In 2024, more than half-way to 2030, we have a U$4 trillion in financing for development gap which is unthinkable. This is the gap that is needed by developing countries to finance their development priorities- the SDGs. This includes domestic public and private resources, including tax revenues; foreign resources, including trade, international private finance, debt. It’s very important to understand that none of these sources alone can fix the problem. Countries need to rely on efficient tax and domestic revenues that are also used for the right purposes and are effective. Countries must leverage private financing; countries should count on Official Development Assistance and we must absolutely strengthen the capacity of countries to plug into the global trade markets as engines for development.
Q: Many developing countries are struggling with high levels of debt. How does this impact their ability to achieve the Sustainable Development Goals (SDGs)?
CA: Public debt can be vital for development, but when countries are paying 20-30 per cent of their GDP in servicing that debt, it's unsustainable and countries are at risk of debt distress. Some countries don't have the ability to fulfill their financial obligations while also covering all the basic needs of the population. Countries in debt distress or countries that have defaulted can face a number of implications that can go from losing market access and suffering higher borrowing costs to harming growth and investment.
There should be a consensus on how much debt is sustainable for any given country without jeopardizing investments in the SDGs.
Through the Bridgetown Initiative, promoted by Barbados, there’s been a lot of discussion around how funding is loaned and repaid and how creditors must have the capacity to also adapt to the needs of developing countries to stop them from spiraling into a debt crisis. For instance, when a small island developing state is hit by successive disasters like floods, droughts and hurricanes and there's massive destruction, how do creditors respond to that? Are the interest payments on finance suspended? Is it cancelled or restructured? If you're facing an emergency of this magnitude, then you need some space to invest in rebuilding. If countries don’t have the capacity to fulfill their financial obligations or they have very high servicing rates, that takes fiscal space away from the SDGs.
Q. Can you give us a glimpse into some of the ideas that are emerging from global discussions about reforming the international financial architecture?
CA: The bottom line is that the institutions that we have as part of that international financial architecture, particularly the Bretton Woods Institutions (the IMF and the World Bank), are not responding to the needs of the current world because they were created in a different moment in life, in history. They haven't been updated since they were created, so there's a need to catch up with the different contexts and cascading crises that the world is facing, be more flexible and adaptive.
The call for reforming the international financial architecture has many different components. But some of the more relevant ones have to do with transforming the governance of international financial architecture. For example, the way the IMF works in some sense and how countries are represented. Criteria like economic openness, GDP, existing reserves etc., which help calculate IMF quotas, have implications not only on who is represented in decision-making in these institutions, but also who is able to access resources and on what scale. At the end of the day the countries that can get more liquidity from the IMF are not those that need it the most.
A second point is that these international institutions don't have a supervisory entity or authority that brings enhanced coherence, and there is a proposal to create an apex body to coordinate their work.
At the center of the debate on reform of International Financial Architecture is the discussion around unsustainable debt and enhancing debt crisis resolution for those countries that have reached a moment when they cannot repay their debt commitments.
Additionally, and very importantly for SDG acceleration, the Secretary General has advocated for an increase in development lending and concessional terms, essentially, improving the terms of how these resources are being lent to countries. There is a discussion about increasing paid-in capital and more efficiently using balance sheets to increase available resources from Multilateral Development Banks to $500 billion a year.
There are other parts of the discussions on reform of International Financial Architecture related to changing the business model of Multilateral Development Banks and ensuring that the poorest benefit from them. Further, there are also discussions about global tax norms and transparency and about massively increasing climate finance.
Q: What did the Summit of the Future offer on these issues?
CA: The Pact of the future has captured many of the elements from this discussion on Reform of International Financial Architecture. I think the expectation is that the Summit has shifted the needle a little in moving towards a more coherent, more inclusive international financial architecture that is more agile in responding to the needs of countries. The World Bank has developed what they call the “Evolution Roadmap” which identifies entry points for change within the World Bank Group, and certainly, this is a starting point but there is room to be more ambitious.
Further, the Summit also tees up the 4th Financing for Development Conference happening next year, where the international community will have an opportunity to recommit to a transformative agenda, leveraging and aligning the resources of public and private sectors with investments and policies that enable SDG acceleration.
Q. How can new and innovative finance be unlocked?
CA: Recently, the UN and other partners, including impact investors, banks and capital markets have been using thematic bonds as a way to ensure resources are flowing towards SDG implementation. “Blue”, “green” and “orange” bonds are being issued keeping specific targets on climate, on the health of the oceans, on women’s empowerment at the center of financial transactions. Another good example is the use of debt swaps. So rather than just saying ‘yes, your debt is erased’, creditors, particularly developed countries are willing to repurpose portions of debt, if in turn they are invested into the SDGs. Rather than paying the creditors, countries can use those resources for climate action, for education, for health, and so on. And then a third instrument at the country level is public-private partnerships. How governments are creating the enabling environments for private sector to invest in education, in health, in non-traditional sectors is very important. Private sector is very risk averse, and we need to find ways to de-risk those investments. It's not only about grants that developing countries can access, but also about diverse partners investing in key sectors.
The most critical message is that not one of these sources alone can fix the problem of financing sustainable development. Only by striking the right mix of sources of finance can we make a difference.
Q. What can development coordination offer for this and what can resident coordinators in countries do for directing greater investments and helping countries navigate this changing financial landscape?
CA: The added value of the UN development system is in supporting countries in mobilizing domestic resources, making them more efficient and aligned with human rights and sustainable development goals, aiming at enabling governments to create a more just and sustainable future for all people. Resident Coordinators can play a pivotal role in supporting engagement with private sector and broadening the views of developing countries to regional integration, to trade and so on.
The role of the RC system is precisely in building trust and convening the right partners around the table to make the deals happen.
We live in a very interconnected world, but at the country level we continue to work in silos. The Resident Coordinator has that overview of who is working on what, what partners at the country level are working on what sectors and what are those interlinkages between these sectors that can unleash greater impact at country level.
Resident Coordinators must continue to pull together the expertise and robust portfolio offered by the UN System to aid countries in mobilizing SDG financing. Resident Coordinators and their teams act as brokers of catalytic partnerships between public and private sector, between international financial institutions, capital markets and governments to prioritize investments in SDG acceleration, leaving no-one behind. This is the kind of catalytic action we need.
