2023-11-20 10:27:07
In the global arena where the contours of financial stability are emerging, the Least Developed Countries (LDCs) stand at a decisive crossroads. Fiscal space, the essential backdrop to their economic future, proves to be the determining barometer of their resilience in the face of multiple challenges. With the complex dynamics of the fiscal space of LDCs, it becomes urgent to initiate concerted action to broaden their financial horizons.
Fiscal space, a central concept in the financial governance of a State, measures the capacity of a government to increase its spending or maintain a reduction in its revenues without jeopardizing its long-term budgetary or financial stability. In other words, it encompasses the government’s ability to achieve its fiscal policy objectives while preserving a manageable level of debt and ensuring the stability of its economy.
In the current context of Least Developed Countries (LDCs), this fiscal space becomes an essential parameter for assessing the resilience of growth and development trajectories.
The latest LDC Report 2023, released recently by the United Nations Conference on Trade and Development (UNCTAD), outlines recent trends in key indicators of fiscal space, such as debt volumes and composition, as well as the budgetary balances of LDC governments. It also assesses the capacity of these countries to meet their development financing needs in a context marked by multiple global crises.
An urgent call to action
The data presented in the report reveals that, despite the crucial importance of external financial flows, LDCs face major challenges. Official development aid (ODA) from developed countries remains significantly lower than promised commitments, thus creating a substantial gap. The Report also documents the disproportionate impact of climate change on LDCs, highlighting the urgent need for increased fiscal space for necessary investments in adaptation and to address climate-related loss and damage.
Current country commitments, falling short of the Paris Agreement targets, require a significant increase in non-debt-generating climate finance. The report also highlights the latest data on greenhouse gas emissions and climate vulnerability, highlighting the need for immediate action. Analysis of climate finance flows and the importance of the new Loss and Damage Fund for vulnerable countries, agreed at COP27 in 2022, reinforce the central message: LDCs are in pressing need of support to strengthen their space budgetary.
Without a substantial increase in this fiscal space, LDCs risk seeing their debts grow and their budget deficits widen, thereby diverting their attention from structural transformation agendas. This would seriously undermine progress towards achieving the Sustainable Development Goals (SDGs). To close the gap between ODA flows and SDG Goal 17, a rapid increase in grants is imperative, aligned with national priorities. Non-debt generating financing is thus emerging as a pressing necessity to preserve the growth and development prospects of LDCs, as is the essential increase in climate financing flows, including via the new Loss and Damage Fund, without increasing their debt burden or compromise their institutional capacities.
Between the anvil of debt and the hammer of crises
Crises, whether caused by economic slowdowns, recessions, natural disasters, fluctuations in commodity prices, or pressures linked to events such as the Covid-19 pandemic and the war in Ukraine, require a rapid response from LDC governments, while their ability to respond to these economic shocks relies largely on their fiscal space.
During situations of economic stress, this fiscal space makes it possible to apply recovery measures, expand social spending to protect the most vulnerable, finance humanitarian aid and rebuild essential infrastructure. Raw material exporting LDCs face the need to compensate for losses from falling prices, while net importers face rising costs for essential products such as food and fuel.
Furthermore, fiscal space is vital for implementing structural reforms and long-term investments aimed at strengthening the productive capacities of LDCs. Measuring this fiscal space involves assessing various indicators such as the level and composition of debt, as well as the government’s budget balance. Careful management of these elements is crucial, as high debt levels limit fiscal space, compromising the ability to respond to crises without increasing borrowing costs or risking a sovereign debt crisis.
The cumulative impact of global crises, including the Covid-19 pandemic, the start of the war in Ukraine and climate change challenges, has exacerbated pressures on LDCs’ fiscal space. Key indicators reveal a significant deterioration in the financial situation of these countries. For example, the median ratio of general government debt to gross domestic product (GDP) increased from 48.5% in 2019 to 55.4% in 2022, reaching its highest level since 2005. Despite a slight improvement in 2021, these figures underline the persistence of crises and their negative impacts on the fiscal space of LDCs. Fiscal balances have also been significantly affected, with a median budget deficit equivalent to 5% of GDP and 46% of tax revenues during the 2020-2022 period. A significant increase compared to the previous decade.
The composition of debt in LDCs has followed a worrying trajectory, with a decline in the share of concessional loans. In 2021, the share of these loans in total external public debt reached 57% in the median PMA, marking a decline of 2 percentage points compared to 2019 and an alarming decrease of 14 percentage points since 2010.
In conclusion, the Covid-19 crisis and other global crises have acted as catalysts, accentuating already present fiscal challenges. The fiscal space of LDCs is shrinking, compromising the capacity to initiate structural reforms and respond to crises. Faced with these realities, increased international support is crucial to expand the fiscal space of LDCs and guarantee their economic stability in the short and medium term.
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