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Info Service on Finance and Development (Apr26/01) Penang, 10 Apr (Kanaga Raja) — Development finance is moving in the wrong direction, with gains not only stalling but reversing on account of weakened global cooperation, rising protectionism, intensifying geopolitical tensions, repeated climate-related shocks, and a growing backlash against multilateralism, the United Nations has warned. This is the main conclusion highlighted by the United Nations in the Financing for Sustainable Development Report 2026, which assessed progress on the Sevilla Commitment – the blueprint for action on financing for sustainable development agreed at the Fourth International Conference on Financing for Development (FFD4) in 2025. According to the UN, it seeks to close the $4 trillion annual financing gap by scaling up investment, putting focus on sustainable development impact, and reforming the international financial architecture to strengthen multilateralism. The report found that an increasing number of developing countries – especially the poorest and most vulnerable – are confronting large unmet UN Sustainable Development Goal (SDG) spending needs amid an overall financing squeeze. They are simultaneously facing falling aid, rising costs from environmental degradation and climate impacts, high costs of capital, and high debt service. For example, these countries are facing heavy debt burdens, with debt service reaching 20-year highs in 2024. They are also facing falling financial aid: official development assistance (ODA) dropped 6% in 2024 to $214.6 billion and is projected to fall by 10-18% in 2025, and up to 25% for least developed countries (LDCs). Furthermore, foreign direct investment (FDI) fell 11% in 2024 to $1.5 trillion, marking a second consecutive year of decline. Even before the latest economic disruptions caused by the closure of the Strait of Hormuz, trade and geopolitical tensions had driven steep tariff increases and placed economic costs on developing countries, said the UN. It said average tariffs on LDC exports surged from 9% to 28% in 2025, while for developing countries excluding China, average tariffs increased more than eight-fold, from 2% to 19%. “Global development requires working together for common goals to avoid reversing the gains of what has been painstakingly built,” said UN Deputy Secretary-General Amina J. Mohammed. She said: “Implementing the Sevilla Commitment is our best chance to demonstrate the global community’s enduring commitment to cooperation and to unlock the finance needed to keep the promise of the Sustainable Development Goals.” In his remarks at the press launch of the Financing for Sustainable Development Report (FSDR) 2026 on 9 April, Li Junhua, UN Under-Secretary-General and head of the UN Department of Economic and Social Affairs, said the main message in the report is clear and urgent: “Development progress is imperilled by global fragmentation, geopolitical tensions and conflict. Developing countries are trapped in a catastrophic financing “squeeze” from compounding shocks. The implementation of the Sevilla Commitment represents the best hope to close widening financing gaps and achieve the SDGs.” Li said with only four years remaining to deliver the SDGs, a massive scale-up in investments is needed; instead, regrettably “the financing gap is widening.” In this regard, he said that development aid is falling sharply: in 2025, 25 countries decreased their Official Development Assistance (ODA), leading to a 23 percent overall drop from 2024 to 2025, the largest annual contraction on record. Only four countries met the 0.7 per cent target – Denmark, Luxembourg, Norway, and Sweden. Based on preliminary data, ODA is expected to further decline by another 5.8 percent in 2026, he added. Developing countries, especially the poorest, face mounting debt pressure, with debt service burdens hitting 20-year highs, Li pointed out. “The international financial system has not provided sufficient, long-term financing on affordable terms for sustainable development.” Li also said that multilateralism itself is under threat, with powerful nations redrawing trade and investment alliances, often at the expense of the poorest countries, undermining the very foundations of global cooperation. These challenges were recognized at the Fourth International Conference on Financing for Development in Sevilla, where UN Member States agreed on the ambitious Sevilla Commitment, he noted. However, he said that the FSDR 2026 shows that these pressures have intensified, with a financing “squeeze” and increasing fragmentation exacerbated by conflicts. The recent conflict in the Middle East, for instance, has triggered a significant shock to an already fragile global economy, he added. “While the ultimate impact will depend on the conflict’s duration and severity, and the resulting arrangements for shipping and trade, we are already seeing clear repercussions for developing countries in relation to energy, food, trade and debt sustainability.” Despite these headwinds, Li also pointed out that the FSDR 2026 reveals the resilience and determination of the global community. Against this backdrop, he shared some positive insights: * First, global growth was unexpectedly resilient in 2025, at 2.7 percent, while still below the pre-pandemic 3.2 per cent level. Certain regions and countries performed exceptionally well, with South Asia leading at 5.6 per cent. * Second, the value of South-South trade has increased substantially, now accounting for 54 per cent of total developing country exports. * Third, renewable energy investment reached a historic US$2.2 trillion in 2024, finally surpassing investments in fossil fuels. Li reiterated that implementing the Sevilla Commitment remains the only viable path to bridging the financing gap towards the SDGs. MAJOR CHALLENGES The FSDR 2026 highlighted three major challenges threatening long-term sustainable development prospects: first, the difficult macroeconomic environment; second, a financing “squeeze”, particularly for the poorest and most vulnerable countries; and third, growing fragmentation, defined as a policy-driven reversal of global economic integration, which has created high levels of uncertainty, with potentially high economic and social costs. It said global growth remained resilient in 2025, but the conflict in the Middle East injects new uncertainty to the outlook. It said prior to the outbreak of this conflict, global growth was projected to hold broadly steady in 2026 despite a challenging global macroeconomic environment – marked by elevated trade tensions and higher United States tariffs, geopolitical conflicts, and heightened policy uncertainty. The report cautioned that while the global economy has continued to show resilience, supported by easing financial conditions, firm labour markets, and robust consumer spending, this resilience could be undermined through higher energy prices, second-round effects on inflation expectations, tighter financial conditions and other transmission channels. Growth prospects are highly uneven, and longer-term prospects remain constrained by limited fiscal space, high public debt, and subdued investment, it pointed out. It said projections of growth for 2026 made prior to the most recent events had varied across developing regions, ranging from 5.6 per cent growth for South Asia to 2.4 per cent for Latin America and the Caribbean. According to the report, new growth drivers such as rising investment in artificial intelligence (AI)-driven technologies and the expansion of digital trade are beginning to shape the outlook. “However, the scope and distribution of these benefits remain uncertain, as adoption and capacity vary widely across countries and sectors.” At the same time, the report said elevated interest rates and high debt burden, coupled with eroded business confidence stemming from policy uncertainty, geopolitical tensions and trade restrictions, have dampened broader public and private investment. It said economic fragmentation and persistent inequalities – both between and within countries – continue to pose downside risk on longer-term growth and persist as significant challenges to sustainable development progress. The report said the conflict in the Middle East threatens to deliver a significant new shock to the already fragile global economy, with the ultimate impact hinging on the conflict’s duration and severity. Beyond the toll on the affected region, spillover risks from elevated energy prices, rising inflation and financial market volatility are substantial. The conflict is also putting upward pressure on sovereign bond yields. A protracted conflict would also carry major implications for food security, tourism, and remittances, given the region’s role as a major fertilizer trade route, transit hub, and source of remittances, it added. The report further stressed that the moderation of global inflation is at risk. A further decline in global inflation had been projected for 2026-27, primarily aided by lower energy and food prices. It said that these trends may now reverse, with elevated global energy and food prices due to the conflict in the Middle East representing the most immediate upside risk, compounded by exchange rate depreciation in many developing economies. Renewed trade frictions, more fragmented supply chains, and climate-related shocks could also slow the pace of disinflation and add uncertainty to the short-term outlook, it suggested. Global financial conditions eased in 2025, but many developing economies continue to face elevated borrowing costs and market volatility has increased since the outbreak of the conflict in the Middle East. Major central banks’ policy easing and a depreciating United States dollar supported capital flows to developing economies, albeit with notable regional differences. Many developing economies continue to face high debt-service burdens, and their financing conditions remain sensitive to shifts in global risk appetite, said the report. “The uncertainty around the global inflation outlook also complicates major central banks’ decisions on policy rates, with implications for global financial conditions and borrowing cost for developing countries. Elevated asset valuations, particularly in technology and AI-related sectors, raise the likelihood of abrupt market corrections with potential cross-border spillovers, the report cautioned. Vulnerabilities in non-bank financial institutions – including limited transparency in their lending activities – further add to systemic risk, it said. With regards to the Sustainable Development Goals (SDGs), the report said that progress remains slow and uneven, with only about one-third of global targets on track or show moderate progress. While global extreme poverty fell modestly in 2025, the pace of poverty reduction has decelerated significantly over the past decade, it noted. “Slower poverty reduction, insufficient to keep pace with population growth, translates into higher concentration of global poverty in sub-Saharan Africa and conflict-affected countries. Income convergence between developing and developed economies has also weakened since the pandemic.” Moreover, the report said that growth paths among developing economies are diverging, with some of the poorest countries increasingly falling further behind. The global economic outlook remains fragile with GDP growth estimated at 2.8 per cent in 2025. Following a projected slight decline to 2.7 per cent in 2026, global growth is forecast to recover modestly to 2.9 per cent in 2027, it added. However, the report warned that these projections may be revised downward should the conflict across the Middle East persist. Over the medium term, the pace of global expansion is expected to remain well below the 2010-2019 average of 3.2 per cent, constrained by several structural factors – most notably high debt levels, limited fiscal space and elevated borrowing costs which restrict investment in productive capacity, it said. Nevertheless, the global economic performance in 2025 was better than previously anticipated despite new trade frictions and a sharp increase in US tariffs. Furthermore, global economic activity proved resilient, bolstered by the front-loading of shipments, inventory build-up amid trade policy uncertainty, and sustained consumer demand, underpinned by monetary easing and robust labour markets. The UN said that the recent boom in AI investment has supported global growth but introduces downside risk. Concentrated largely in the United States, this investment surge has boosted domestic activity and generated positive spillovers globally, it noted. “However, the pace and scale of investment raise concerns. Increased reliance on debt financing could amplify shocks, particularly if returns disappoint or financial conditions tighten,” it cautioned. Growth in developed economies was projected to remain modest in 2026-2027, reflecting a balance between supportive policies and persistent structural challenges, but the conflict in the Middle East creates uncertainty around these projections, said the report. It said that in the United States, GDP was forecast to edge up to 2.0 per cent in 2026 and 2.2 per cent in 2027, driven by rising investment in equipment – particularly in AI-related sectors – and robust consumer demand, underpinned by expansionary fiscal and monetary policies, though the prospect of further policy rate cuts is now less certain. In the European Union, growth was projected at 1.3 per cent in 2026 and 1.6 per cent in 2027, supported by consumer spending amid rising real wages. However, the report said higher US tariffs, geopolitical uncertainty, and long-standing structural constraints – including competitiveness challenges, high energy costs, slow technological diffusion, and population ageing – continue to weigh on potential output. Growth prospects vary widely across developing regions, potentially exacerbated by varying exposure to the spillovers from the conflict in the Middle East, it added. In Africa, growth was projected to rise to 4.0 per cent in 2026, supported by stronger investment and moderating inflation. However, f iscal pressures, high debt-servicing costs, and declining official development assistance (ODA) constrain policy space. The report said in East Asia, GDP growth was expected to ease from an estimated 4.9 per cent in 2025 to 4.4 per cent in 2026 as the boost from export front-loading fades, while domestic demand remains resilient, supported by monetary easing and fiscal expansion. South Asia was projected to maintain robust momentum, with growth projected at 5.6 per cent in 2026, led by India’s strong consumption and investment demand, it added. In Western Asia, growth was projected to strengthen to 4.1 per cent in 2026 as oil exporters were expected to benefit from the unwinding of OPEC Plus production cuts and ongoing economic diversification efforts, but escalating hostilities across the region pose a significant downside risk to that pre-conflict outlook. The report said in Latin America and the Caribbean, growth was forecast to remain fairly steady at 2.4 per cent in 2026, underpinned by private consumption, stable commodity prices and improved financial conditions, though the region remains vulnerable to geopolitical tensions and US trade policy shifts. It said the outlook remains very challenging for vulnerable country groups, as limited economic diversification, high debt levels, climate-related shocks, and ODA reductions already weigh on growth prospects. These risks could be further compounded by the energy and food price shocks and possibly higher inflation and tighter financing conditions, even as some commodity-exporting countries may benefit from higher prices, the report underlined. It said in the least developed countries (LDCs), growth was projected to rise to 4.7 per cent in 2026, supported by improved macroeconomic stability and robust agricultural output in several large economies. However, growth remains below pre-pandemic averages and continues to fall well short of the SDG target of 7 per cent. Many LDCs have lower per capita GDP than they did pre-pandemic. Higher US tariffs and the expiration of the African Growth and Opportunity Act (AGOA) are hampering export prospects, particularly for labour-intensive manufacturing. The report said landlocked developing countries (LLDCs) were projected to grow by 4.8 per cent in 2026, amid divergent commodity price developments and persistent logistical bottlenecks. It said that Small Island Developing States (SIDS) were projected to experience a slowdown in growth to 2.8 per cent in 2026 – as narrow economic bases, elevated debt burdens, and high exposure to climate shocks continue to constrain activity. Nearly one-third of SIDS are classified as being in, or at high risk of, debt distress, underscoring the need to support these countries in addressing their debt challenges, and to expand access to concessional finance, for example, by considering multi-dimensional vulnerabilities in allocations, it added. “Slower income convergence between developed and developing countries has contributed to persistently high global inequality, which could dampen global demand and growth potential.” It said average GDP per capita growth has followed a downward trend across most developing regions. Africa and East Asia have experienced notable declines in income growth, while South Asia remains the only region showing sustained gains. The gap in per capita income with developed countries widened in nearly half of developing countries during 2020-2024, resulting in the highest share since the five-year period of 1995-1999. Rising economic fragmentation carries substantial risks for longer-term growth and economic resilience, the report warned. A reduction in trade, loss of economic activity and diminished production efficiency put downward pressure on growth, it said. It said that a shift away from an interconnected global trading regime toward more domestically-oriented value chains – through higher import tariffs, additional constraints on international sourcing and subsidies to domestic production – could reduce global trade by over 18 per cent and global output by more than 5 per cent after five years, with some countries at risk of losing up to 12.2 per cent of GDP. “Output volatility is estimated to increase in more than half of the economies, suggesting “relocalizing” value chains may also reduce resilience to shocks.” Longer-term costs could be even greater once reduced knowledge diffusion associated with less global trade is taken into account, with lower-productivity countries and those with stronger ties to innovative countries bearing the largest losses, it concluded. +
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