— As the world is rocked by a confluence of crises, the global economic outlook for 2022 is becoming ever more uncertain and fragile. Prospects for sustainable development for all and achieving the Sustainable Development Goals (SDGs) by 2030 are bleak, particularly for developing countries.
The war in Ukraine is adding further stresses to a world economy still reeling from the COVID-19 pandemic and under growing strain from climate change. These cascading crises affect all countries, but the impact is not equal for all.
While some, mostly developed countries, had access to cheap financing to cushion the socio-economic impacts of the pandemic and invest in recovery, many others did not.
Massive recovery packages in rich countries contrast sharply with poor countries, which had to juggle essential expenditures. For many, education and development budgets had to be cut to respond to COVID-19.
The UN system’s 2022 Financing for Sustainable Development Report: Bridging the Finance Divide, finds that the ‘finance divide’ between rich and poor countries has become a sustainable development divide.
Growth prospects are severely constrained in the developing world – even before taking the war in Ukraine and its repercussions into account, 1 in 5 developing countries are not expected to return to pre-COVID income levels by 2023.
This situation is likely to get worse because the fallout from the war is exacerbating the challenges confronted by developing countries. Food and fuel prices are reaching record highs. This strains the external and fiscal balances of import-dependent countries.
Supply chain disruptions add to inflationary pressures, setting up a very challenging environment for Central Banks – rising prices combined with deteriorating growth prospects. Tighter financial conditions and rising global interest rates will make it increasingly difficult, and no doubt impossible for some, to roll over their existing commercial debt.
Many vulnerable countries will not be able to absorb the combined shocks of a disrupted recovery, rising inflation, and sharply rising borrowing costs. Sri Lanka has just defaulted, and more widespread debt distress may well be on the horizon – which is likely to put the Sustainable Development Goals out of reach.
The lack of adequate and affordable financing for developing countries is making timely realization of the 2030 Agenda increasingly difficult. Their governments often have few avenues to raise funds domestically, due to underdeveloped domestic financial markets. But borrowing from abroad is both risky and expensive, with some African countries paying over 8% on their Eurobond issuances in 2021.
As the 2022 Financing for Sustainable Development Report notes, the only way to achieve a more equitable recovery is to bridge this finance divide. It will take determined action, on several fronts.
First, developing countries will need additional concessional public financing. Bilateral providers and the international financial institutions have stepped up in response to the COVID-19 pandemic, but additional funding was not enough to prevent this divergent recovery. The fallout from the war in Ukraine is widening financing gaps and countries will need additional support.