Financing the SDGs in Small Island Developing States

First, the good news

According to the UNDP Human Development Report (HDR) 2023/2024 “Breaking the gridlock: Reimagining cooperation in a polarized world”, two Small Island Developing States (SIDS) continue to excel on the human development index, with Mauritius ranking high at 72nd globally with an HDI of 0.796, and the Seychelles at 0.802, ranking very high in the 67th position out of 193 nations. These achievements are no mean feat. Both countries have invested in education, universal access to healthcare and are both leaders in climate action, aiming to build resilience to the significant environmental shocks that are inherent to life in a Small Island Developing State.

The HDR also notes that when adjusted for inequality in income and gender, both Mauritius and Seychelles show a loss in their HDI ranking. And so, there is more work to be done for these countries to continue their positive trajectory towards attaining the Sustainable Development Goals (SDGs).

The last mile – financing the SDGs

The HDR proposes a reimagining of the 21st century international cooperation architecture towards global goods enabling transfer of resources from rich countries to poorer ones.

But there is a problem. For Mauritius and Seychelles, ranked as upper middle-income and high income, respectively, they are precluded from accessing concessional financing within the current official development assistance and international finance architecture. This means that notwithstanding their HDI ranking, they continue to grapple with securing the necessary finance at affordable rates to invest in reducing inequality and addressing the existential threats posed by climate change. The paradox is that the more successful they become in some areas, the less likely they are to gain support where they need it most.

The Capital As Force for Good The Solutions to the SDG Gap 2023 report suggests that achieving the SDGs now requires US$132-175 trillion. This is a significant increase from the projected US$80-112 trillion in 2015, when the goals were first adopted. The projected global funding shortfall is a staggering US$103-137 trillion, which requires 20 percent of annual global GDP. To close this gap, there is need to access about 40 percent of the US$440 trillion in global gross liquid assets, but current efforts to bridge the public-private financing gap still fall short, particularly for countries like Mauritius and Seychelles where the international finance architecture still limits access.

What can be done?

Financing the SDGs requires a reallocation of existing investments, mobilizing new capital, and reprioritizing spending for impact. And for countries like Mauritius and Seychelles, alternative sources of finance must be found. According to the 2022 Global Impact Investing Network (GIIN) the impact investing market in 2022 stood at US$ 1.164 trillion in assets. Given the escalating vulnerabilities and increasing fiscal deficits, SIDS like Mauritius and Seychelles could pursue impact investment.

Where wealth owners are either inadequately informed about opportunities in the global south, where their money can be invested sustainably and profitably, or the finance architecture disadvantages some jurisdictions see as too risky an investment, there is a need to drive the impact investment narrative. There are clear opportunities to invest in sectors such as sustainable agriculture, renewable energy, conservation, and basic services such as housing, healthcare, and education. This approach, however, requires consensus among stakeholders who own, manage, host, and trade capital.

Finding cheap money

According to the GIIN report, over 50 percent of liquid wealth is held by individuals, driving almost 60 percent of global GDP and is disproportionately concentrated in the global north with limited mechanisms to channel it to the global south. A substantial portion of this wealth, US$315 trillion (88 percent), is also managed by the finance industry, including pension funds, while US$196 trillion in total assets is directly controlled by corporations. But for the global south, and Africa in particular, the cost of capital continues to exceed other regions. According to the OECD 2023 analysis regarding Africa’s Development Dynamics, the average cost of capital for energy projects in 2021 was about seven times higher in Africa than in Europe and North America. This is despite higher returns in Africa.

According to an April 2023 UNDP study “Lowering the Cost of Borrowing in Africa – The Role of Sovereign Credit Ratings” part of the story is about unfair and adverse credit ratings based on subjective or unreliable data, which often drive a higher perception of risk. At the same time, reliability of data needs to be addressed, as it remains a significant barrier to new investments. Dialogue between governments and the private sector on legal, policy, and institutional mechanisms to lower the cost of capital, and investing in more and better data is also essential to reduce transaction costs, improve sustainability assessments, and increase investor confidence.