Ahead of the upcoming third conference of the Malaga Global Coalition for Municipal Finance from 5-6 October 2023 to be held in Malaga, Spain, the United Nations Capital Development Fund (UNCDF) is producing a policy brief series. This policy brief is explaining the importance of strengthening subnational government finance data for local financial resilience and sustainable transformation in LDCs

Structural transformation is a key driver to prosperity and least developed countries (LDCs) are not an exception. This requires continued support to improve fiscal space, build domestic capital markets, strengthen currencies and invest in climate resilient and inclusive infrastructure and services. It is now broadly recognized that subnational governments play a critical role in achieving the sustainable development agendas including the SDGs, the Paris Agreement and the New Urban Agenda. Yet as notably emphasized in paragraph 34 of the Addis Ababa Action Agenda, local authorities that are being delegated by national government to implement investments in sustainable development often lack adequate technical and technological capacity, financing and support. Although most LDCs have undergone fiscal decentralization reforms in the last decades, the scope of local government budgets matching their responsibilities vary a lot across countries.

First, local governments in LDCs rely heavily on central government transfers and stay very dependent from central government; Secondly, the scope of their contribution to infrastructure and service delivery is very small. Their expenditures account for less than 6% of GDP on average. With extremely low share of local investment in GDP and total public investment, local governments in LDCs remain unable to cope with huge investment needs and to achieve structural transformation.

There have been very limited data on subnational governance and finance in standardized and comparative forms, particularly in the LDCs. Without this information, it is difficult to assess LDC local governments’ fiscal capacity, local development needs and efficiency of local financing mechanisms. Furthermore, the loss of local fiscal space due to the COVID-19 pandemic not only leaves the already-constrained local government finance in deficit, but also limits the ability of local governments to pursue blended finance options.

Given the importance of local fiscal space in sustainable development and economic recovery, it is necessary to collect local financial data and design targeted, data-driven and evidence-based mechanisms to strengthen local governments’ capacity to plan, finance and implement localized investments through fiscal decentralization, innovative municipal finance, and structured project finance.

Read about the importance of strengthening subnational government finance data for local financial resilience and sustainable transformation in LDCs in this policy brief.