LDCs should use foreign aid to safeguard their fiscal space: UNCTAD

The most impoverished nations are facing persistent shortfalls in domestic savings and should devise mechanisms for efficient disbursement, allocation and use of external finance to safeguard their fiscal space, the Least Developed Countries Report 2019 said.

It said the most impoverished nations in the world should use their finances from all external sources to transform their economies structurally so that they can cut, and eventually end, dependence on foreign aid.  

The Least Developed Countries (LDCs), a group of 47 nations including 15 of the 20 most aid-dependent countries in the world, need vibrant allocation of financial resources, project selection and the determination of priority areas and issues, the report said.

Bangladesh is the first historical case of pre-qualification for graduation through heightened performance under all three graduation criteria – per capita income, human assets, and economic vulnerability.

In the 2018 review list of LDCs, three Asian countries – Bangladesh, Laos and Myanmar – were found pre-eligible for graduation from LDC status.

Five countries have so far graduated from LDC status – Botswana in December 1994, Cape Verde in December 2007, the Maldives in January 2011, Samoa in January 2014, and Equatorial Guinea in June 2017.

"For LDCs to attain the Sustainable Development Goals and escape aid dependency, they need external finance that is targeted at the structural transformation of their economies," said UNCTAD Secretary General Mukhisa Kituyi.

"To make this possible, these countries should take ownership of their development agenda and manage the allocation of external development finance," he added.

The United Nations Conference on Trade and Development (UNCTAD), a global intergovernmental body in Geneva, released the report. 

The report highlighted that LDCs generate hardly one percent of global Gross Domestic Product (GDP) and their stake in the world economy remains marginal, despite having more than 13 percent of the planet's total population.

To finance capital accumulation, LDCs depend on foreign savings. In 2015-17, the resource gap, which is defined as the difference between domestic savings and gross fixed capital formation, in LDCs averaged eight percent of the GDP, according to UNCTAD data. 

External sources increased but little development finance

Official Development Assistance (Oda) disbursements to LDCs have increased by only two percent annually since the Istanbul Programme of Action of 2011. Oda was less than 30 percent of government expenditure in Bangladesh along with Angola, Bhutan, Lesotho, Myanmar, the Sudan and Yemen, the report said.

The sectoral composition of Oda continues to be biased towards social sectors, which absorb 45 percent of total aid compared to economic infrastructure and production sectors, which receive only 14 percent and eight percent respectively.

The net result is that LDCs have increasingly resorted to debt financing, more than doubling their external debt stock from $146 billion to $313 billion between 2007 and 2017. Currently, one third of LDCs are in debt distress or at high risk of debt distress. 

Fifty percent of LDCs recorded no current accounts surplus between 2002 and 2017.

LDCs should manage developed finance better

Previously, Oda did not overlap with commercial finance and investor strategies in LDCs. The report said lack of a standard definition of private sector engagement hinders provision of demonstration. 

LDCs should adopt policies to adequately manage relationships with traditional and emerging development sectors. In addition, the report recommends that LDCs clarify decision-making on the allocation of financial resources, project selection and the determination of priority areas and issues.

The report also suggested that LDCs should strengthen their state capacity to channel resources towards structural transformation and establish and strengthen institutions to undertake the financial analysis and planning and coordination for structural transformation.

According to the report, LDCs need to mobilise and allocate the financing required for long-term investment in new productive sectors and activities.

What are the least developed countries?

LDCs are low-income countries that have severe structural weaknesses to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets.

Currently, there are 47 countries on the list of LDCs which is reviewed every three years by the Committee for Development Policy, which is a group of independent experts that report to the Economic and Social Council of the United Nations.