UNCTAD’s Least Developed Countries Report 2023 has called on the global community to urgently address the critical financial challenges faced by the world’s 46 most vulnerable nations. Multiple global crises, the climate emergency, growing debt burdens, dependence on commodities and declining foreign investments into LDCs have strained their finances, jeopardising their progress towards the Sustainable Development Goals (SDGs), including a low-carbon transition. The upcoming Loss and Damage Fund, set to debut at the 28th UN climate change conference (COP28), could be a game changer if LDCs are among the main beneficiaries, enough resources are available, and disbursements are swift.
But their financing requirements go far beyond climate concerns, encompassing broader economic and social challenges. The report calls for a lasting, multilateral solution to the debt crisis in these countries and for the mobilisation of both the development and climate finance they require. It also underlines the pivotal role domestic agents can play, particularly central banks, in enhancing the mobilisation of national resources and steering financial flows towards a green structural transformation in these countries.LDCs’ shrinking fiscal space limits their ability to implement development policies and forces tough choices, such as choosing between paying their external debt or investing in health, education and climate action.
Fiscal space is essentially a government’s capacity to absorb drops in public revenue. Its decline in LDCs is evident in key indicators, such as their debt-to-GDP ratio, which grew from 48.5% in 2019 to 55.4% in 2022 (the highest since 2005). See more in the section on debt. Their fiscal space has been squeezed by global crises like the COVID-19 pandemic, the climate emergency and the war in Ukraine, which triggered food and energy price hikes worldwide. To cushion the blow, LDCs have borrowed and spent more to strengthen social safety nets and economic support, as at least 15 million more people in LDCs have fallen into extreme poverty since the pandemic. Their dependence on volatile commodities, such as oil, copper and cotton, contributes to the problem. Between 2019 and 2021, a staggering 74% of LDCs relied on these raw materials for at least 60% of their merchandise export earnings. When prices drop, their fiscal space shrinks drastically.
Urgent, bold action from the international community is critical to ensure LDCs have better access to affordable, long-term international financing, especially from public sources. While external financial support is important, LDCs must also enhance domestic resource mobilisation. For example, their median tax-to-GDP ratio stood at 11.6% in 2020, compared with 16.3% in other developing countries and 23.2% in developed countries.
