Financing Peace and Stability

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A course toward prosperity depends on international community support for peace as a global public good.
Published on June 27, 2023.
The Sudan crisis that exploded in April is cited as a stark reminder of the far-reaching spillovers of violent conflict in today’s integrated global economy.
If current trends persist, more than 60 percent of the world’s poor will live in fragile and conflict-affected states by 2030.

Deadly violence in Africa’s Sahel peaked in 2022, forcibly displacing 2.6 million people and forcing the closing of thousands of schools and health centers.
Past IMF analysis: conflict and insecurity may cause an economic contraction of up to 20 percent in the Sahel.
Across sub-Saharan Africa, 30 percent of countries are considered to be conflict-affected.
A recent study estimated that annual growth in conflict-affected countries was 2.5 percentage points lower than for countries at peace.
Conflicts today last 30 years on average—twice as long as during the 1990s—because negotiated settlements often fail to resolve root causes.
The United Nations estimated it would take $51 billion in humanitarian aid to support 339 million of the world’s people who are affected by conflict and natural disasters.
Three-fourths of nations hosting large refugee populations are low- and middle-income countries.
The United Nations High Commissioner for Refugees found that a record level of 108 million people had been forcibly displaced as of the end of 2022.

Fragility is a mix of weak economic performance, low-capacity institutions, poor governance, extreme poverty, and limited public services and is often a precursor to violence.
Fragility and conflict act as “global public bads”: they are nonexcludable and nonrivalrous, producing cross-border spillovers and contagion.
Fragile states are more vulnerable to external shocks (food price inflation, pandemics, climate-related risks) and to fiscal and institutional strains from refugee inflows.
Youth unemployment and lack of education/training, especially for young women, amplify risks of unrest.
Climate change in the absence of adaptation can further exacerbate drivers of fragility.

Prevention-focused interventions should strengthen institutions, economies, and local communities and extend public services (health, education) to lagging regions to address enduring grievances.
Governance reforms should improve management of natural resources and ensure public resources benefit broad populations to rebuild trust and mobilize domestic revenues.
Targeted social protection and attention to distributional effects of economic policies can help ward off social unrest when conflict risks are high.
If large-scale violence occurs, IFIs should remain engaged to prevent state collapse and reduce economic consequences by supporting basic services and maintaining central banks and payment systems essential for humanitarian aid delivery and private sector functioning.
Host-country support and integration of refugees—especially via job creation—provide global public goods but are costly and require donor burden-sharing.

The GCFF was launched in 2016 by the World Bank, the UN, and the Islamic Development Bank to support middle-income countries receiving refugees.
The facility uses donor grants to reduce interest rates on multilateral development bank loans to concessional levels for projects that benefit refugees and host communities.
Key GCFF metrics and features:
- The GCFF so far has funded $800 million in concessional credit, which in turn has leveraged almost $5.5 billion in financing to support refugees and host communities.
- Each $1 in donor grants unlocked $7 in concessional loans.
- The GCFF bridges humanitarian and development assistance, strengthens resilience of host countries and host communities (not just refugees), and creates a platform for development bank coordination at the country level.
The GCFF has been adapted by Colombia and Ecuador (Venezuelan migration) and immediately supported Moldova (refugees from Ukraine).
Examples of other catalytic guarantees:
- Leveraging $500 million in donor guarantees from the United Kingdom and Canada allowed for a World Bank loan of $1.5 billion for Iraq in 2016.
- January 2023: World Bank’s Multilateral Investment Guarantee Agency provided a guarantee to Somalia to promote investment in renewable energy.

Scale up assistance from the international community with a strong focus on prevention; tailor IFI engagement to country-specific manifestations of fragility and conflict.
- Examples: the African Development Bank, the European Investment Bank, the World Bank, the Asian Development Bank, and the IMF updated or focused strategies to support fragile and conflict-affected states.
Increase concessional financing:
- The IMF has already committed $39 billion in financing to 24 fragile and conflict-affected countries since the start of the pandemic.
- Ensure the Poverty Reduction and Growth Trust is sufficiently funded to assist low-income countries affected by fragility and conflict.
- Support grant financing with incentives for prevention and scale up innovative mechanisms drawing on lessons from the GCFF.
Build a broad coalition of humanitarian, development, and peace actors to align programs for peace and stability.
Promote guarantees and instruments that scale up financing and crowd in private sector investment in fragile and conflict-affected states.
Tailor economic policy advice and programs to reduce fragility and conflict risks, recognizing many vulnerable countries are also at risk of debt distress.

Italic line: Financing Peace and Stability — Franck Bousquet, Analytical Series (F&D Magazine).