Financing for Sustainable Development: Money and the Right Policies

IMF Blog, June 11, 2015

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The United Nation’s Sustainable Development Goals replace the Millennium Development Goals and broaden development to embrace economic, social, and environmental issues.
The world has become increasingly interconnected since the early 2000s; global trade flows have increased steadily in the past two decades (Chart 1).
Many frontier economies are rapidly integrating with global financial markets:
- In 2014, Côte d’Ivoire, Ghana, Kenya, Senegal, Vietnam and Zambia issued government bonds totaling about US$7 billion.
Official development assistance has declined as the main source of capital flows to developing countries:
- Official development assistance dropped from 1.6 percent of developing countries’ collective GDP in 1990 to 0.7 percent of GDP in 2012 (Chart 2).
Increased integration raises exposure to external shocks such as swings in global commodity prices, capital flows, and changes in exchange rates.

To fund development needs and build resilience against shocks, many developing countries need both higher revenues and better-managed tax collection and administration.
Country experiences show domestic policy can yield large results (Chart 3):
- Peru increased its domestic tax ratio from 6 to 13 percent of GDP over the 1990s, and stabilized it at about 17 percent since 2010.
- Other examples of important strides include Tanzania and Vietnam.
There is substantial scope to strengthen domestic resources while addressing environmental concerns through:
- Energy price reform.
- Carbon pricing.
The IMF supports countries to:
- Strengthen capacity to raise money at the national level.
- Reform energy taxation and subsidies, among other measures.
Major advanced and emerging market economies can assist via collective action:
- Fulfilling foreign aid commitments to support the most vulnerable.
- Enhancing international tax cooperation.
- Reviving the global trade liberalization agenda.
- Agreeing national targets for reducing CO2 emissions at the climate change summit in Paris in December 2015.

Money alone is insufficient; countries need policies tailored to their circumstances to translate and implement the Sustainable Development Goals.
Needed policy objectives include:
- Maintaining an attractive environment for investment.
- Making effective use of available resources on priority areas such as health and education.
- Helping countries recover and rebound from severe external shocks.
Policy measures should:
- Raise the contribution from domestic resources to fund goals.
- Ensure borrowed funds and tax revenues are used effectively to address infrastructure gaps and promote inclusion.
- Support growth that is strong, sustained, and broadly shared, while keeping debt levels sustainable.
Roles and responsibilities:
- Countries are in the driver’s seat for their development goals.
- More advanced economy partners should adopt measures to foster stable global economic and financial conditions.
- International institutions act as technical advisors and support teams working with countries.

The IMF is working with developing countries to strengthen resilience in a more connected world.
The IMF is exploring options to:
- Refine financing facilities to boost access to IMF concessional resources for the poorest and most vulnerable countries.
- Provide stronger safety nets for countries that have access to foreign capital markets and are exposed to capital flow shocks.
These reforms aim to enable developing countries to be better prepared to handle economic shocks while pursuing their development objectives.

Source: Financing for Sustainable Development: Money and the Right Policies — Min Zhu, Sarwat Jahan, June 11, 2015