Policy-Based Lending
Achieving the 2030 Agenda through innovative financing tools
The COVID-19 pandemic has led to a severe decline in private and public investment globally, impacting sectors of high relevance for the achievement of the Sustainable Development Goals (SDGs). In developing economies, a double-digit decline of Foreign Direct Investment (FDI) compared to pre-pandemic levels was registered in already poorly financed sectors such as power, food, agriculture, and health in 2020.[1] The financial gap also widened for countries that are no longer eligible for official development assistance (ODA).
Globally, private investment alone decreased by 35%, from 1.5 trillion to 1 trillion USD the previous year, with a significant impact on sectors of key relevance for the SDGs. While the sharpest decline of FDI flow was seen in Europe, the effect of the pandemic on FDI differed immensely by region and was uneven across developing countries. In Latin America and the Caribbean, the flow fell by 45%, but by only 16% in Africa, whereas in Asia, it actually increased by 4%. Transitioning economies were affected by a decline of 58% in 2020.[2] According to a prognosis of the Organisation for Economic Co-operation and Development (OECD), the estimated annual SDG financial gap in developing countries might rise from 2.5 trillion to 4.2 trillion USD due to the COVID-19 pandemic.
The pandemic presents a unique opportunity to kick-start the urgent transformation required to achieve the 2030 Agenda and Paris Agreement. Recovering forward requires innovative, forward-oriented financing throughout all recovery measures to render economies and societies future-proof. It aims at enabling systemic change and sustainable, holistic reforms in partner countries. Policy-based lending tools can play an important role to address the structural causes of crisis and to create co-benefits and synergies between the economic, social, and environmental dimensions of sustainability. Policy-based lending is defined as funding provided to borrowing countries with the aim of supporting policy reforms and/or institutional changes.