Challenges to sustainable financing for South Asian countries | The Daily Star
12:00 AM, November 02, 2020 / LAST MODIFIED: 12:00 AM, November 02, 2020

Challenges to sustainable financing for South Asian countries

The global financial landscape has been under stress for a long time. Since the adoption of the 17 Sustainable Development Goals (SDGs) by the world leaders in 2015, efforts have been ongoing to mobilise resources to implement these goals.  Despite commitments by various governments and international organisations, there are large financial gaps in the developing countries. The United Nations Conference on Trade and Development (UNCTAD) estimated that the implementation of the SDGs by 2030 will require annual investment of about USD 3.3-4.5 trillion in the SDG-related sectors. But there will be an annual financial gap of about USD 2.5 trillion in implementing the SDGs. Similar estimations were also done by other international organisations. The International Monetary Fund (IMF) indicates that in the low and lower middle-income countries additional annual spending of USD 528 billion will be required to meet the targets of education, health, roads, electricity, and water and sanitation by 2030. 

Due to the Covid-19 pandemic, the challenges to achieving the SDGs have deepened. As of now, no country in the world is on track to meet all the goals by 2030. The financial gaps observed in a number of critically important sectors make the achievement of the SDGs more difficult. Investment needs in sectors such as power infrastructure, climate change mitigation, transport infrastructure, health and education, are also huge.

South Asian countries are no different in terms of facing financial constraints for developing and improving their physical and social infrastructure. This gap was high even before Covid-19 hit these countries. With the outbreak of the coronavirus pandemic, these economies have experienced significant economic disruptions. Contraction in outputs and interruptions in the supply chain in these economies have led to reduction in their gross domestic product (GDP). Recent (October 2020) estimates by the IMF reveals bleak growth prospects in all South Asian countries. It is projected by the IMF that in 2020, real GDP growth in Bangladesh will be 3.8 percent, in India negative (-) 10.3 percent, in Nepal 0.0 percent (no growth), in Pakistan negative (-) 0.4 percent and in Sri Lanka negative (-) 4.6 percent. Projections by the World Bank in June 2020 also shows poor prospect of growth in the region, in general.

The negative impact of the coronavirus pandemic is also being reflected in many other ways. Private investment and consumption have fallen. Indeed, private investment is not picking up in the region despite its high demand. Employment has also declined. South Asia's labour market is particularly vulnerable since about 75 percent of employment is in the informal sector. In Bangladesh, informal sector employment is 85.1 percent of total employment according to the Labour Force Survey 2016-17 of Bangladesh Bureau of Statistics. The pandemic has forced a reverse migration of these informal workers to the rural areas as they lost their jobs.

Therefore, since the Covid-19 crisis began, governments in the region have faced a dual challenge. On the one hand, they have to increase their resource base to continue their development expenditures, create employment, and achieve economic growth. On the other hand, they need to urgently increase social spending, particularly in healthcare and social protection.

However, substantive resource gaps deter these economies from spending what is required. Domestic revenue mobilisation effort has always been lower than expected in these countries. This is not only because of the low per capita income of people, but also because of low revenue-GDP ratio in these countries. Due to weak tax administration and poor tax infrastructure, tax net is narrow and tax evasion is high. Revenue as a percentage of GDP is only 13.2 percent in South Asia as opposed to the global average of 24.3 percent as of 2018. The pandemic may shrink revenue mobilisation further as income of individuals and businesses have reduced.

Due to a narrow domestic resource base, the South Asian countries have limited fiscal space. This has constrained the ability of governments in the region to fund their development initiatives and improve the quality of social services. Therefore, it is apprehended that many achievements made by these countries during the pre-Covid period may be reversed due to the Covid-induced economic hardship. Hence, not only is it important to make economic and social progress, but protecting the progress made during the last several decades is also a critical task for these countries.

Governments will have to work hard to generate more domestic resources and utilise them in a prudent manner. But the international community will also have to extend further support. Unfortunately, even before the pandemic, the prospect of external development finance such as direct investment (FDI), remittances and development assistance (ODA) were not encouraging. Covid-19 has further reduced these opportunities. According to the recent Investment Monitor report of the UNCTAD, due to the economic fallout from the pandemic, global FDI flows have declined to USD 399 billion or by 49 percent during the first half of 2020 compared to 2019. The Asian region saw the lowest decline of 12 percent due to the resilience of Chinese investment. However, the South Asian countries experienced a drop of their investment by 31 percent. And within South Asia, India has seen a decline of 33 percent of FDI inflow. At the current level of investment, the development objectives of the South Asian countries will not be fulfilled.

Though FDI still holds the most important source of external finance in developing economies, remittances and ODA are the major sources of external development finance for the least developed countries (LDCs). The role of remittances is prominent in Bangladesh and Nepal. Despite, Covid-19, higher remittance flow was observed both in Bangladesh and Nepal. However, given the uncertainty on global economic recovery, strong remittance flow is also unpredictable in the coming months.

The role of ODA has declined over time in the region. However, for social sectors such as health and education ODA still plays an important role, particularly in the South Asian LDCs. The recently published report on Multilateral Development Finance 2020 by the Organisation for Economic Cooperation and Development (OECD) highlights the significance of effective multilateral development financial system, to deliver on the promises of the Agenda 2030 and support the recovery of developing countries from the ongoing Covid-19 crisis. Despite such realisation, the developed countries have not fulfilled their commitment to provide 0.7 percent of their gross national income (GNI) as ODA. In 2019, only four countries, such as Denmark, Luxembourg, Sweden, and the United Kingdom had met this commitment.

The grim outlook for external development finance indicates that the South Asian countries will have to put in more effort to generate the required financing for the recovery of their respective economies from the pandemic and to protect their achievements. This should come through higher revenue and savings. But the need for international development finance cannot be undermined. The solution to the paramount development challenges faced by the South Asian countries requires sustainable financing through resources mobilisation from multiple sources.


Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.

Views expressed in this article are those of the author and do not necessarily reflect the position of her organisation.

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