The crippling cost of debt financing for many developing countries has hamstrung their recovery from the COVID-19 pandemic, says a new report launched by the United Nations.
The report, entitled: 2022 Financing for Sustainable Development Report: Bridging the Finance Divide, finds that while rich countries were able to support their pandemic recovery with record sums borrowed at ultra-low interest rates, the poorest countries spent billions servicing debt, preventing them from investing in sustainable development.
The pandemic shock plunged 77 million more people into extreme poverty in 2021, and by the end of the year, many economies remained below pre-2019 levels.
The report estimates that in 1 in 5 developing countries’ GDP per capita would not return to 2019 levels by the end of 2023, even before absorbing the impacts of the Ukraine war.
“As we are coming up to the halfway point of financing the world’s Sustainable Development Goals, the findings are alarming,” UN Deputy Secretary-General, Amina Mohammed, said.
“There is no excuse for inaction at this defining moment of collective responsibility, to ensure hundreds of millions of people are lifted out of hunger and poverty. We must invest in access for decent and green jobs, social protection, healthcare and education, leaving no one behind.”
Bridging the Finance Divide says on average, the poorest developing countries pay 14 percent of revenue for interest on their debt, almost 4 times higher than developed countries, at 3.5 percent.
Globally, many developing countries were forced to cut budgets for education, infrastructure and other capital spending as a result of the pandemic. The war in Ukraine will exacerbate these challenges and create new ones, with higher energy and commodity prices, renewed supply chain disruptions, higher inflation coupled with lower growth, and increased volatility in financial markets.
For many developing countries, the war will likely lead to further increases in debt distress and increased hunger.
Before the war, the pandemic recovery gaps had already widened, with developing countries on average having only enough COVID-19 vaccine doses for 24 per 100 people, versus almost 150 per 100 people for developed countries.
Shockingly, in 2021, 70 percent of 10-year-olds in developing countries were unable to read a basic text, a 17 percent increase from 2019.
With food prices in 2021 already at their highest level in a decade, the UN fears the conflict in Ukraine risks dramatically worsening the economic outlook for many countries.
The rate of post-pandemic economic recovery in developed countries, however, points to a way forward for greater investment.
“The developed world proved in the last two years that millions can be lifted out of poverty by the right kind of investment – in resilient and clean infrastructure, social protection or public services,” said UN Under Secretary-General Liu Zhenmin, head of the Department of Economic and Social Affairs, which produced the report.
“The international community must build on that progress, and ensure developing countries can invest at similar levels, while reducing inequality and securing a sustainable energy transition.”
The report notes that there was some progress on poverty reduction, social protection and investment in sustainable development in 2021, driven by actions in developed and some large developing countries, including $17 trillion in COVID-19 emergency spending.
Positive performance includes:
- Increased funding of research and development, green energy and digital technologies, for example from the European Union’s Next Generation EU recovery plan and the Infrastructure Investment and Jobs Act in the USA.
- Rebounding of private investment in 2021 — with China and USA accounting for more than 50 percent of the improvement.
- Doubling of sustainable bond issuance to over $1 trillion, while sustainability-themed funds grew 62 percent from 2020.
- Private equity and venture capital investment in developing countries reached a record $230 billion (from $150 billion in 2020).