IMF proposes new framework to help low-income nations achieve sustainable development goals

Plan focuses on investment in social development and physical capital in health, education, roads, electricity, water and sanitation

The IMF is proposing a new macroeconomic framework for developing nations that allows them to evaluate their policy choices for long-term growth and for achieving their SDGs. Reuters

The International Monetary Fund is proposing a new macroeconomic framework for developing nations that allows them to evaluate policy choices and will help them achieve sustainable development goals (SDGs) despite the economic setbacks posed by the pandemic.

“Reforms to enhance spending efficiency are critical in an environment of scare resources,” the IMF said in a staff note on Thursday. “There is significant scope to increase the impact of investment on growth by enhancing public investment management.”

The new tool analyses development and financing strategies of low-income countries and evaluates them for macroeconomic consistency.

Reforms to enhance spending efficiency are critical in an environment of scare resources

The framework focuses on investment in social development and physical capital in health, education, roads, electricity and water and sanitation – key areas for sustainable and inclusive growth that account for the largest outlays in most government budgets.

The pandemic and resultant lockdown measures tipped the world economy into its worst recession since the 1930s. Its impact on the world's poor has been especially harsh and may have pushed about 100 million people into extreme poverty in 2020 alone, according to the UN. In some regions poverty could rise to levels not seen in 30 years, the UN warns.

Although, the world economy is expected to bounce back strongly with 6 per cent expansion this year, the recovery is uneven and less pronounced in developing nations. With significantly reduced economic activity, livelihoods lost and children prevented from attending schools, spending priorities in these countries have changed, derailing progress on SDGs.

The IMF has applied its framework to Cambodia, Nigeria, Pakistan and Rwanda. On average, these nations need an additional annual financing of over 14 per cent of their gross domestic product, some 2.5 percentage points per year above the pre-pandemic level, to meet their SDGs by 2030.

“Such domestic reforms can generate enough resources to fill up to half of our case study countries’ SDG spending needs. But even with such comprehensive domestic reforms, the SDGs will be significantly delayed –by a decade or more according to our estimates – without further action,” senior IMF officials Abdelhak Senhadji, Dora Benedek, Edward Gemayel and Alexander Tieman said in a separate blogpost.

The setback in achieving the SDGs could be much larger if the pandemic results in permanent economic scarring.

“We estimate that the long-lasting damage to an economy’s human capital … could increase the development financing needs by an additional 1.7 percentage points of GDP per year,” they said.

These countries must now balance urgent spending to protect lives and livelihoods with longer-term investments, the fund said.

“It will not be easy” though as they will have to continue “attending to the matter at hand” of managing the pandemic and at the same “pursue a highly ambitious reform agenda”, according to the IMF blogpost.

The Washington-based fund, which has provided emergency financing of $110 billion to 86 countries, including 52 low-income recipients since the pandemic started, said the focus should be on fostering growth to generate additional resources for long-term development.

Low-income countries will have to strengthen their capacity to collect taxes, which is vital to pay for the basic public services. Cambodia has achieved that in the 20 years leading up to the pandemic, increasing its tax revenue from less than 10 per cent of GDP to around 25 per cent, the IMF said.

Enhancing efficiency of spending and strengthening the institutional framework to boost private investments would also help these nations.

However, even with radical reforms, these countries need “decisive and extraordinary support” from the international community, including private and official donors and international financial institutions to build sustainable economies.

If official development aid is gradually increased from the current 0.3 per cent to the UN's target of 0.7 per cent of gross national income, many low-income developing countries could be in a position to meet their development objectives by 2030.

“This is why it is critical for the international community to step up,” IMF officials said.

“Providing such assistance may be a tall order for policymakers in advanced economies, who are likely more focused right now on domestic challenges. But helping development is a worthy investment with potentially high returns for all.”