Managing the COVID-19 pandemic threatens to be a critical challenge for developing economies especially in Africa. While developed economies have planned large fiscal stimulus packages to help households and businesses avert bankruptcy, developing economies in Africa have continued to experience limited access to finance. Most African countries have been having risky investment profiles and an exposure to challenges including higher borrowing, fluctuating inflationary spikes, scarce international investors and dwindling sources of foreign incomes that limit their access to fresh capital injections. Overall, these impediments limit the fiscal space African economies need to manage the current pandemic.
Most developing economies have remained unprepared as characterised by weak health systems, vulnerable supply chains, and difficulties to prevent and control infections. . Given this context, stakeholders in the fight against COVID-19 ought to consider how blended finance may play an important assisting role in the medium-to-long-term recovery of health systems and economies, especially in the developing world
Blended finance which is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development is a model being promoted by the Organization for Economic Cooperation and Development's Development Assistance Committee (OECD DAC) to avail more resources for development projects. Blended finance has been touted as one way to help mobilize additional financing for developing economies (mostly in Africa) toward COVID-19 vaccine development, by allocating the risks and returns among public, philanthropic, and private investors.
Whilst blended finance is problematic on risk allocation and on the fiscal sustainability of developing economies, it may play an important role in the medium-to-long term response to COVID-19 in two ways: (i) by accelerating economic reconstruction, improving pandemic resilience and responding to the global health crisis;(ii) by enhancing collective efforts of all development actors towards achieving Sustainable Development Goals (SDGs).
Given opportunities, risks and challenges that are posed by blended finance in financing for development, AFRODAD proposes that African governments, development partners and CSOs consider the following in order to effectively fight COVID-19:
- Strengthen Development Coordination Systems - Governments should strengthen development coordination systems to ensure effective development cooperation in tackling COVID-19. This should be coupled with reconstruction that requires every government’s best leadership to set out regulations and policies that encourage investment, both domestic and foreign.
- Address Risks Posed by Blended Finance -In any shock, investment shuts down not just because of risk, but because of investors’ inability to estimate the new level of risk. Addressing both economic and political risks would be very catalytic in getting abundant private sector capital back into circulation. Guarantees, first-loss protection, off-take commitments and advance market commitments are critical instruments in addressing the pandemics’ shock on economies.
- Scale Up Official Development Assistance - The OECD DAC countries should step up aid efforts and re-commit to the 0.7% of GNI ODA target. We urge donors and philanthropic organizations to also double-up on any initiative they have implemented with the private sector which has worked sustainably.
- Support Financial Intermediaries - Blended finance should be channeled to financial intermediaries though wholesale funding (preferably in local currency), risk sharing on loan portfolios and trade finance, and subscribing equity where possible. This should however not lead to unsustainable debts for borrowing countries.
- Get people back to work – The private sector should understand that COVID-19 has evolved the way institutions work. Multi-stakeholder’s cooperation are now required more than ever and businesses ought to engage with governments, civil society and donors concerning plans that will quickly restore jobs..
- Urgently Offer Sustainable Solutions to Revive Economies – Financial institutions, especially development banks, should play their immediate role in structuring liquidity facilities, revolving credit lines, and short-term trade finance in lower income countries. However, with donors’ support with first loss cushion, the amount of blended capital may increase and be urgently mobilised for struggling economies. .
- Track and Monitor Development Finance Disbursements - Civil Society should track budget support, financial disbursements and monitor procurement policies and systems through open data digital platforms. This will promote fiscal responsibility and accountability by governments that utilise blended capital. Additionally, CSOs should play an oversight role using various social accountability tools to deter corrupt practices throughout emergency relief interventions and beyond whilst influencing policy formulation and implementation.