World's most impoverished nations must use aid to transform economies, Unctad says

Least developed countries account for 15 of the 20 most aid-dependent nations in the world

Protesters march during an opposition demonstration commemorating the Battle of Vertieres Day, the last major battle of the Second War of Haitian Independence, and demanding the resignation of President Jovenel Moise, in Port-au-Prince, Haiti, on November 18, 2019. 
 Haiti's long-suffering population has faced an extra burden for more than a week: closed service stations and lines of motorists hoping to buy even a few drops of petrol during a fuel shortage that's getting worse. / AFP / Valerie Baeriswyl

The most impoverished nations in the world should direct their finances from all external sources to prioritise national development so they can cut, and eventually end, dependence on foreign aid.

Least developed countries (LDCs), a group of 47 nations including 15 of the 20 most aid-dependent states in the world, need clearer allocation of financial resources, project selection and the determination of priority areas and issues, the United Nations Conference on Trade and Development, a global intergovernmental body in Geneva, said in a report on Tuesday.

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

“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.

Angola, Benin, Burkina Faso, Central African Republic, Djibouti, Haiti, Lesotho, Rwanda and Sierra Leone are among the least developed countries in Africa, while Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, Myanmar, Nepal and Yemen make up the list from Asia. Comoros, the Solomon Islands and Tuvalu are among the island nations classified as least developed.

These countries generate barely 1 per cent of global gross domestic product and their stake in the world economy remains marginal, despite having more than 13 per cent of the planet's total population.

These poorer countries are largely dependent on financial aid. In the 2015-17 period, the resource gap – defined as the difference between domestic savings and gross fixed capital formation – for the group, averaged 8 per cent of GDP. For nearly half of the least developed states, resource gaps were above 15 per cent of GDP, according to Unctad data.

The organisation is now calling for an "Aid Effectiveness Agenda 2.0" to supplement the 2005 Paris Declaration on the quality of assistance and its impact on development. With now greater pressure on aid budgets after the global financial crisis, disbursements of official development assistance (ODA) to the world's poorer nations have increased by only 2 per cent per year since the Istanbul Programme of Action of 2011 and remains far below internationally-agreed figures.

The international community needs to step up its support and “traditional donors should adhere to existing commitments to dedicate between 0.15 per cent and 0.2 per cent of their gross national income as ODA to LDCs, up from current levels of just 0.09 per cent”.

"These commitments were reaffirmed by the global goals adopted by all nations in 2015," according to Unctad. If nations had stuck to a target of contributing 0.2 per cent of gross national income, ODA would have been $58.3bn higher in 2017, it added.

Although there has been a rise in the number of foreign aid actors and the availability of aid instruments, actual development finance has not grown substantially, which has resulted in "more complexity and opacity for the most impoverished nations", the report said. ODAs continue to be biased towards social development, which absorbs 45 per cent of total aid, compared to economic infrastructure and production, which receive only 14 per cent and 8 per cent, respectively.

“Critically, the linkages between external development finance and national development priorities are weakening,” said Rolf Traeger, head of Unctad’s least-developed countries’ section.

To drive their economic development agendas, poorer have increasingly resorted to debt financing, more than doubling their external debt to $313 billion (Dh1.15 trillion) in 2017 to $146bn in 2007. One third of these nations are either in debt distress or at high risk of distress.

“This threatens debt sustainability and economic development potential. These developments are further weakening the limited state capacities,” Mr Traeger said.