The state of blended finance in LDCs: main takeaways

LDCs are facing mounting pressure to respond to the COVID-19 pandemic, with widening financing gaps to achieve the SDGs. While health impacts are unfolding in LDCs at an uncertain yet alarming pace and with great variety across countries, all LDCs face severe socio-economic impacts from the global economic crisis, due to domestic and global demand shocks, significant drops in FDI and remittances, supply chain disruptions, collapse in oil and commodity crisis, tourism shocks, and others.

With development finance accounting for a prominent share of the financing for sustainable development mix in LDCs, ODA continues to be a critically important source of finance for these countries. Donor governments are falling short of their commitment on ODA to LDCs and they should strive to achieve their targets in the future in light of the unprecedented impact of the COVID-19 pandemic and ensuing economic crisis on LDCs.

LDCs continue to receive the lowest, although increasing in volume, share of only 6% of private finance mobilised by official development finance interventions. Multilateral institutions mobilise the largest share of private finance in LDCs, although bilateral donors are also increasingly engaging in blended finance in LDCs through their DFIs.

Guarantees continue to be the instrument that mobilised the highest amounts of private finance in LDCs in 2017-2018, although to a lesser extent than previous years. High risk premia continue to be a critical barrier to attracting commercial investment in LDCs. Guarantees are effective risk mitigation instruments that should be further scaled up in the future in LDCs.

Private finance mobilised in LDCs is concentrated in a handful of revenue-generating sectors, such as energy and banking and financial services. While sectors such as agriculture and water and sanitation are to date infrequently targeted, despite their crucial role in LDCs’ economies, a track record of blended finance transactions in such sectors in LDCs is developing, which could spur the replication and scalability of such projects through demonstration effects.

While in the immediate and short-term response to the COVID-19 crisis, grant support is and remains critical, blended finance can play a key role to support LDCs in mobilising resources for the medium-to-long term recovery. This will require immediate action to start building a pipeline of bankable projects aligned with LDCs’ national development strategies and their emerging Integrated National Financing Frameworks, that can attract investors’ appetite. For blended finance to be effective for the COVID-19 recovery, the wide range of actors involved (donors, DFIs, MDBs, impact and commercial investors, local financial institutions, etc) should coordinate on how to address underserved actors and sectors, e.g. target MSMEs, provide decent and sustainable jobs, invest in sustainable infrastructure, promote gender equality and support health systems as well as the transition towards digital economies.