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The international community has made significant strides on the road to the 4th International Conference on Financing for Development (FfD4). On 17 January 2025, the UN released the draft outcome document for the upcoming Sevilla Conference. The set of multilateral agreements included in the document will become the main global policy framework for development finance, complementing earlier agreements such as the Addis Ababa Action Agenda and the Monterrey Consensus. So what does the zero draft include?
Debt takes centre stage
As predicted by many, the debt situation is playing a more prominent role in the latest FfD round. Last year, international organisations such as the UN Conference on Trade and Development (UNCTAD) and the World Bank rang the alarm bells that severe action on debt was needed, as rising debt service costs squeezed fiscal space overall and drove an increasing number of countries into acute crises. The zero draft suggests action on both sides – prevention and resolution of debt crises. For example, the following recommendations have been put forward:
- A working group to develop a set of principles on responsible sovereign lending and borrowing.
- A call on all creditors to include standardized state-contingent clauses in loan contracts.
- A working group to develop a model law on debt restructuring.
- An institutional home within an existing facility of an international financial institution to provide support on a large number of debt matters (basically Global Debt Authority).
- An intergovernmental process at the UN, with a view to closing gaps in the debt architecture and exploring options to address debt sustainability, including but not limited to a multilateral sovereign debt mechanism.
The chapter on debt appears to be the most substantial of the thematic chapters in the outcome document. This is certainly justified as the deteriorating debt situation can be seen as the major change in the conditions for development financing in the decade that has passed since the FfD3 conference in Addis Ababa.
International financial architecture reform high on the agenda
Closely related is the section that addresses systemic issues, essentially international financial architecture reform. This chapter contains a large number of reform actions to improve the work of international financial institutions, and the global credit system in general. For example, it makes the follow recommendations:
- IMF governance: Restore basic votes back to 1/9 – the total voting rights in the IMF.
- IMF facilities: Introduce a new IMF multilateral swap line and adjust borrowing limits.
- IMF surcharges: Suspend surcharges during disasters and exogenous shocks.
- The IMF’s Resilience and Sustainability Facility: Remove the requirement of an upper credit tranche programme.
- Special Drawing Rights (SDRs): Consider the issuance of new SDRs; encourage countries in a position to do so to rechannel 50 percent of current unused SDRs expeditiously; create a new playbook for SDR allocations.
- Credit ratings: Organise an annual special high-level meeting under the auspices of the UN’s Economic and Social Council (ECOSOC) for dialogue (with credit rating agencies).
- Risk-weighting: Carry out a review of the potential mispricing of risk in international risk-weighting frameworks used in regulation, such as Basel III, through the Financial Stability Board.
These policy actions primarily aim to facilitate better access to credit for developing countries, or to other sources of liquidity, such as Special Drawing Rights. A key lesson of the past decade and its multiple crises has been that the international credit system does not work for developing countries. Most importantly, these commitments aim to improve credit terms. While some countries had access to credit, the high interest rates – much higher for developing than for developed countries – were the reason why many countries fell into a debt trap. While FfD3 placed a strong focus on the quantity of finance to mobilize, it is obvious that FfD4 will pay more attention to improving the financial terms.
Domestic resources and taxes remain in the game
Tax revenue is the major non-debt-creating source of financing for development and public goods. FfD4 will complement negotiations on a Framework Convention on International Tax Cooperation (FCITC) that were mandated in response to political agreements made at FfD3. Their exact shape and content was specified in terms of reference adopted by the UN General Assembly in 2024. The zero draft contains both normative commitments as well as concrete policy innovations. For example:
- We commit to ensure progressivity and efficiency … as well as promoting and strengthening the taxation of high-net-worth individuals.
- We will promote both gender-responsive budgeting and gender-responsive taxation.
- We commit to ensure that international tax cooperation frameworks are beneficial to all parties. We resolve to strengthen the voice and representation of developing countries in the international tax architecture.
- We will continue to engage constructively in the negotiations on a United Nations Framework Convention on International Tax Cooperation.
- We will also consider extending reporting obligations to high-net worth individuals.
- We will work towards establishing a global beneficial ownership registry.
- We will explore implementing innovative taxes to mobilize resources for sustainable development, including in the form of global solidarity levies.
- We will establish an ECOSOC Special Meeting on Financial Integrity.
- We will explore the need for a multilateral mediation mechanism to support resolving challenges related to asset recovery and return.
International development cooperation disappoints
The UN’s Financing for Development process, since its beginnings in the early 2000s, has played a key role when it comes to driving improvements in both the quantity and quality of development cooperation. Over the years, official development assistance has risen substantially, agreements in improving aid effectiveness were made through Organisation for Economic Co-operation and Development (OECD)-led high-level forums, and new providers entered the arena through South-South cooperation. It was not sustainable, as real official development assistance (ODA) – the share actually available for development spending – remains far below target; development effectiveness saw a backlash in recent years; and even South-South Cooperation attracted criticism due to the wide use of non-concessional loans by some providers. Expectations were high that FfD4 would set both international development cooperation quantity and quality back on an upward trajectory, but the zero draft does not yet contain the credible steps needed to make this happen. It simply reaffirms existing targets on ODA quantity, and principles on development effectiveness, without containing credible mechanisms to ensure compliance. Worth mentioning are:
- We commit to increase the share of ODA programmed at the country level and focused on long-term sustainable development that responds to the needs and priorities of recipient countries, including by increasing the share of budget support in ODA.
- Expert technical discussions focused on issues such as coherent financing of development, climate and humanitarian needs and appropriate use of delivery modalities in different circumstances.
- Timely rechannelling of Special Drawing Rights (SDRs) via multilateral development banks (MDBs) by countries in a position to do so; at least five such countries should contribute to the SDR-based hybrid-capital channelling solutions by the African Development Bank and the Inter-American Development Bank by the end of 2025.
- Urgently scale up contributions to the Loss and Damage Fund.
Private finance shows no clear direction
Scaling up private investment to fill financing gaps has been perceived as a central policy objective since the adoption of the Agenda 2030 for Sustainable Development and the Addis Ababa Action Agenda in 2015. This has only been successful in the area of high-interest loans and bonds, which explains the surging debt service costs to private creditors that are burdening developing countries now. Attracting foreign direct investment has been less successful. The zero draft appears to continue with an approach that promotes financialization and asset-class-inflation, rather than real economy investments, while paying slightly more attention to the costs of investment than the Addis Ababa Action Agenda. It suggests the following:
- Promote the creation of new domestic investment vehicles, such as development-oriented venture capital funds, and innovative financial instruments, including thematic bonds (e.g. use-of-proceeds bonds like green, social, sustainability and Sustainable Development Goal (SDG) bonds, as well as sustainability-linked bonds), with sound regulatory frameworks and adequate risk management.
- Review of the possible unintended consequences of regulatory and prudential frameworks on micro-, small- and medium-sized company (MSME) lending in developing countries and explore the use of MSME carve-outs.
- The timely establishment of the International Investment Support Centre for Least Developed Countries.
- Re-evaluate credit rating methodologies and existing financial regulation, including capital requirements for guarantees and blended finance mechanisms, to ensure that guarantees are fairly valued in analysis and address possible unintended consequences for sustainable development investing.
Trade surprises
The trade chapter probably comes as the biggest surprise in the FfD4 document, as it does contain a number of concrete actions and innovations. This might be an acknowledgement that specialized fora for policy-making on trade, such as the World Trade Organization (WTO), are currently not working so well, despite the urgent need for reform. As key highlights, the zero draft suggests the following:
- Invite the WTO Director-General in collaboration with the UN Secretary-General to work with relevant actors to review the role of trade.
- Undertake reform of the mechanisms for investor-state dispute settlements in trade and investment agreements through a multilateral approach and establish an advisory support service for developing countries for international investment dispute settlements.
- Commit to scale up aid for trade infrastructure and facilitation with the objective of doubling Aid for Trade to LDCs by 2031 with at least 50 percent dedicated to building trade-related infrastructure.
- Invite the ECOSOC FfD Forum to consider the impact on sustainable development of unilateral economic, financial or trade measures that are inconsistent with the principles of international law and the Charter of the United Nations.
It also adds entirely new issues to the FfD agenda, such as critical minerals.
Data, monitoring and follow-up show an upward trend
While FfD3 already resulted in a stronger follow-up process, the past decade has proved that existing global governance was neither able to ensure that FfD commitments match FfD needs, nor that it can ensure implementation of agreed FfD commitments. The need for a stronger follow-up to the Seville Conference is therefore evident for the parties, and also a priority for Spain as host country of the conference. The zero draft contains some interesting innovations, including:
- a concise set of financing indicators to measure the progress and implementation ... with intergovernmental negotiation and agreement on the framework at the General Assembly in the second half of its 80th session.
- deeper substantive discussions at the ECOSOC FfD Forum through an in-depth review of the action areas in a biennial cycle.
- focal points for financing for development in finance and other relevant ministries, and cross-departmental platforms for financing for development policy coordination.
- countries to present Financing Action Reviews on progress and challenges at the ECOSOC FfD Forum, building on Integrated National Financing Frameworks (INFFs) where appropriate, in a similar format to voluntary national reviews.
The international community is tasked with deciding in 2029 when the next FfD conference will take place. This might lead to a five-year-cycle for the FfD conferences. It is obvious that the design of an adequate follow-up and accountability framework largely depends on the character and nature of the FfD4 outcome adopted in Seville. The less concrete and substantial the outcome is, the greater the pressure will be to get things done in the follow-up process.
Interim conclusion: Towards an aspirational or operational financing framework?
A key question to ask for the international community is therefore: should FfD4 lead to an aspirational or an operational financing framework? A key problem with the current zero draft is that the vast majority of items in the outcome document are phrased in aspirational language, with sentences that start with “we will” or “we commit to”. The whole document contains only six numerical targets, and a further six time-bound commitments (see Table 1).
Table 1: Numerical targets and time-bound commitments in the FfD4 zero draft
Numerical targets | Time-bound commitments |
---|---|
Paragraph 29: 15% tax-to-GDP ratio | 38: SDR rechannelling to MDBs by 2025
|
34: reduce remittance costs to less than 3% of amounts transferred by 2030 | 39: Climate finance by 2035
|
38: reach existing targets of 0.7% of ODA/GNI to developing countries, and at least 0.2% of ODA/GNI to LDCs | 45: LDC Aid for Trade by 2031
|
45: at least 50% aid for trade dedicated to building trade-related infrastructure | 53: WB Shareholding Review by 2025
|
53: restore basic votes back to 1/9 of the total voting rights in the IMF | 65: Monitoring framework by second half of 80th session of the UN General Assembly
|
54: rechannel 50% of current unused SDRs | 66: Decision on FfD5 by 2029
|
It is evident, however, that the international community has struggled to turn aspirational commitments into practical action in recent years, even when those commitments were adopted by unanimous consensus at a UN conference. Similarly, the ECOSOC Financing for Development Forums – the primary mechanism of the FfD process between the major conferences – have not demonstrated a strong track record when it comes to actual institution-building.
The zero draft proves that aspirational UN agreements often have little real-world impact, when it picks up several innovations agreed at previous UN conferences, and outlines practical steps for their implementation. For instance, the ‘global consensus on responsible lending and borrowing’ was already agreed in 2015 at FfD3 in Addis Ababa; the ‘Online University for LDCs’ was agreed in 2023 at LDC5 in Doha; and the ‘Debt Sustainability Support Service’ was agreed in 2024 at the SIDS4 conference in Antigua and Barbuda.
The key question is: what is the point in convening one UN conference when it is already clear that you need to convene a second one to ensure that the political agreements made at the first conference move just one small step forwards towards actual implementation? One of the key tasks for the negotiation process from now on will be to put more flesh to the vague bones of the new financing framework that the zero draft currently outlines.
The next milestone will be the Third Meeting of the Preparatory Committee in New York from 10-14 February 2025. The remaining steps on the road to Seville are outlined in a roadmap that was published alongside the zero draft. It remains to be seen whether the path is a smooth one.