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04 Jun 20

COVID-19, the Sustainable Development Goals, and Blended Finance

COVID-19, the Sustainable Development Goals, and Blended Finance

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The COVID-19 pandemic threatens the achievement of the Sustainable Development Goals (SDGs). With investors withdrawing $90 billion from emerging markets in the first 3 months of 2020 (the largest outflow ever recorded), and with rising debt burdens in developing countries and depreciating local currencies, the sustainable development agenda faces a difficult landscape. The pandemic is also directing critical domestic resources away from financing the SDGs while worsening pre-existing development challenges in ways that are interlinked. People struggling to access food (SDG 2, Zero Hunger), for example, often suffer higher rates of underlying health conditions (SDG 3, Good Health & Well-Being) that make them more susceptible to developing severe COVID-19 symptoms. This is compounded by already-weak national healthcare systems under increased strain.

Blended finance has solutions that can be funded today to address the challenges and reduce the economic effects of COVID-19. Blended finance combines development funds (from governments and philanthropic foundations) and private sector investment to fund SDG projects. Around $15 billion of blended finance is mobilized annually, and with over 500 blended finance transactions having reached financial close, numerous projects demonstrate how to successfully direct funding to targeted objectives. Here, we discuss COVID-19’s impact on the SDG agenda. We also highlight challenges in the real economy that, on the basis of our own analysis and our conversations with the development community, have been identified as being well-conditioned for blended finance solutions. In subsequent publications, Convergence will explore the role that blended finance can play in counteracting some of these challenges. The time for blended finance at scale has truly arrived.

COVID-19 and the SDGs

What are the likely impacts of the COVID-19 pandemic on the sustainable development agenda? Its impact on SDG 3 (Good Health & Well-Being) may be most obvious, with developing economies unprepared for the pandemic due to persisting challenges such as relatively weak health systems, vulnerable supply chains, and difficulties with infection prevention and control. But what are the pandemic’s likely effects on some of the other SDGs?

Consider SDG 1 (No Poverty). Average incomes in one out of five countries globally were projected to decline ahead of the outbreak of COVID-19, mainly in Africa, Latin America and the Caribbean, as well as parts of Western Asia, and the pandemic is projected to further accelerate declines in per capita incomes. Commodity exporting developing countries, for example, already experiencing slowing growth in GDP per capita over the course of the decade, will be particularly impacted by the sustained weaknesses in commodity prices caused by the pandemic. Indeed, estimates suggest that global poverty could rise for the first time since 1990, potentially setting the world back a decade in achieving SDG 1. An analysis of COVID-19’s potential impact shows that the number of people living in poverty globally could increase by 85-135 million under a 5% contraction in per capita household incomes and consumption, by 180-280 million under a 10% contraction, and by 420-580 million under a 20% contraction.

The global economic contraction (forecast at 3% for 2020 by the IMF) and the related drop in international trade (currently estimated at 27% QoQ, for Q2 2020) will also directly threaten SDG 8 (Decent Work & Economic Growth), with 1.25 billion workers employed in sectors facing severe falls in output and lay-offs. Meanwhile, remittances from migrant workers are forecasted to decline by 20% in 2020, the sharpest decline in recent history, cutting crucial income sources for many households throughout the developing world, while social distancing measures may have an outsized effect on livelihoods in developing nations with large informal economies without adequate social safety nets.

The pandemic also threatens progress on SDG 2 (Zero Hunger). Current estimates suggest that an additional 130 million people in low and middle-income countries could face acute hunger risk because of COVID-19. Pandemic response measures, such as restrictions on movement, threaten to heighten logistical challenges within business supply chains, disrupting the transportation and processing of food, and potentially straining the agricultural sector’s capacity to meet demand and provide stable incomes to over one billion people globally in the long-term. Export-oriented agricultural production may also be stressed, impacting multiple levels of the supply chain and local, national, and regional economies. Net food importers may also come under pressure, particularly if their currencies further depreciate against the US dollar.

Recent gains in gender equality may also be threatened by COVID-19, affecting SDG 5 (Gender Equality). With women likelier to hold insecure jobs in the informal economy and generally earning and saving less, with lower access to social protections, they are disproportionately more impacted by economic shocks and are at a greater risk of suffering from lay-offs. Women’s incomes and labour force participation are thus threatened by the pandemic, while gender-based violence is also rising under lockdown conditions, with the experience of past epidemic scenarios such as Ebola suggesting that the negative impacts on women’s economic livelihoods are more longer-lasting than with men. Women are also likelier to be front-line health workers and health facility service-staff, increasing their exposure to the virus.

SDGs 7 (Affordable & Clean Energy) and 9 (Industry, Innovation, and Infrastructure) will also be affected by COVID-19. Developing economies already face a dearth of reliable and affordable energy for industrial and domestic uses. If governments make policy-based moves to shore up fossil-fuel plants, or otherwise redirect resources away from investments in renewable energy or boosting access to energy in favour of other near-term priorities, we could lose momentum in realizing SDG 7. For example, reduced access to electricity could limit the ability of health centres in developing countries (particularly in rural regions) to provide key services and support frontline health workers. Any reallocation of resources away from sustainable development in favour of near-term GDP growth that slows progress in developing renewable and clean energy technologies could also affect SDG 13 (Climate Action). Finally, COVID-19 has highlighted the need for disaster-resilient infrastructure to improve the ease of provision of transportation, connectivity and utility services.

In the table below, we present an overview of some of the key impacts of COVID-19 on the SDGs, while offering ideas for how we can begin to build back better for some of the SDGs in the post-pandemic economic reconstruction.

Table I (See also: UN, Shared Responsibility, Global Solidarity)

COVID-19 and Blended Finance

What role, then, can blended finance play in response to the myriad development challenges caused by COVID-19? Convergence has argued that blended finance can play an important role in the short, medium and long term response to the pandemic by accelerating economic reconstruction and improving pandemic resiliency, and by turbocharging our collective efforts towards achieving the SDGs. That is, blended finance must address the issue of risk to get private capital circulating again, scale-up existing approaches and recycle what works, and look to bolster the domestic financial sector to provide much-needed capital and liquidity.

What are the specific areas in which blended finance can act? Table 1 presented the far-reaching impact of COVID-19 on a range of SDGs. In actuality, the pandemic’s impact cannot be so neatly segmented. The SDGs are interconnected in important ways: firstly, a deficiency in one SDG can cause a deficiency in another, and secondly, the pandemic has caused developments that trigger multiple effects on a range of SDGs simultaneously. For example, riots and violence in countries around the world over the lockdown and severe economic dislocations risk raising countries’ risk premiums, making capital scarcer and more expensive, thereby contracting their economies and affecting a wide range of SDGs at once.

The key is to get capital circulating again. Therefore, in thinking through the blended finance solutions addressing COVID-19, and on the basis of our conversations with the development community, we have identified a selection of challenges in the real economy, affecting access to finance, which: (i) have worsened in the context of COVID-19, (ii) will affect multiple SDGs simultaneously, and (iii) blended finance can play an important role in countering. While the challenges and solutions presented in Table 2 may appear targeted primarily towards the development community, they each have a possible private sector angle. For example, while a typical international trade finance solution will involve a development finance institution providing guarantees of letters of credit, DFIs have found opportunities to offload some of this exposure to private sector companies (such as insurance companies), drawn to the relatively attractive yield and very low loss rates. We have also included two solutions, donor-supported conditional cash transfers and credit-enhanced COVID-19 bonds, which look to alleviate the difficulties faced by governments lacking the fiscal wherewithal to fund development outcomes or lacking the ability to easily raise financing on the international bond markets. Overall, the challenges and solutions in Table 2 are by no means exhaustive, but they do provide a sense of where development institutions looking to catalyze private investment can begin to focus their efforts in the fight against some of the key impacts of the pandemic.

Table II

The good news is that blended finance has created and implemented solutions for all of the challenges listed above. For each category, there are solutions that can mobilize financing in three phases: in the short term over the next 3 months, in the medium term over the next 12 months, and in the long term. One ‘elephant in the room’ challenge in the short term is limited private investor appetite: the large majority of potential cross-border investment will remain on the sidelines in the short term (although networks like the GIIN’s R3 Coalition are looking to counteract this). The benefit of blended finance here is that it mobilizes private investors across the whole spectrum of investment – real economy companies and financial investors, and domestic, regional and international investors. In addition, multilateral development banks and development finance institutions are committing, and have the financial firepower to step up activities in the short term, which can be tapered down as financial investors return in the medium and long term.

Our intention is to follow up this piece with separate analyses of some of the individual challenges mentioned here, providing a practical resource on the specific blended finance solutions that can be leveraged to contribute to the fight against the impacts of COVID-19 in developing countries. The time for blended finance at scale has truly arrived.

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