Metamorphosis: Kafka or Cytora?

Welcome to the latest local government finance blog from United Nations Capital Development Fund. Finance ministries, Central Bankers, and Local Governments from a group of developing countries are meeting on Thursday November 5th at the Local Finance Initiative annual board meeting to discuss strengthening domestic capital markets and promoting investment in local economic development by domestic banks.

This is the second of three blogposts leading up to the global board meeting which will highlight some of the local development finance issues that will be addressed. Today’s post is on financing local economic transformation. Yesterday’s post was about how the Local Finance Initiative applies geographical economics to finance at the (real) frontiers. Tomorrow we will look at financing urbanization.

We are living in unprecedented times – the 2020 global Coronavirus pandemic has totally dominated attention in all corners of the World. The economic effect of the 2020 means that 2021 will be a year of economic recovery. The speed and inclusiveness of that recovery remains to be seen. Will the recovery will be driven by pre-existing value chains or new ones? Most importantly, will the recovery continue the transformation of local economies, raising their productivity, diversifying their base and increasing their resilience to external shocks? Or will the economic transformation of developing countries be knocked backwards or sideways by a recovery that weakens fiscal space and reduces local productivity whilst nominally providing jobs? These are not simply academic questions. 2021 will also be the year of LDC V – the fifth UN conference on the Least Developed Countries which will set the new Programme of Action for the LDCs (PoA) for the period 2021 -2030, during which many of them are expected to graduate from LDC status. Graduation requires reaching a GNI per capita of $1,230 for three successive years and reaching a specified level on the Human Assets Index and Economic Vulnerability index. However sustainable graduation means more than passing statistical milestones. It means transforming local economies – through a metamorphosis into new economic structures.

Metamorphosis means more than growth

Growth is not the same as change. This is especially the case in countries that are rapidly urbanising without the concomitant productivity gains in urban areas and agricultural transformation in peri-urban and rural areas. Recent studies by UNCTAD and by the European Investment Bank suggest that this exactly what is happening in many current LDCs.

Perhaps for this reason the United Nations Committee for Development Policy recommends that LDC V adopt the theme “Expanding productive capacity for sustainable development” as a framework for the next PoA. Their analysis points to the longstanding vulnerabilities exposed by the Coronavirus pandemic (such as over exposure to single industries like tourism or extractive industries and an inability to produce locally basic essential products such as hand sanitizer). The Committee identifies “the limited development of productive capacities as a root cause of LDCs’ persistent challenges, including insufficient progress in resilience building, the failure to create decent and productive jobs, and limited technological upgrading.”

The United Nations Capital Development Fund, as one of the support measures for the LDCs works with local governments, ministries of finance and central banks to develop national platforms for building productive capacity financed through primarily domestic capital markets. The Local Finance Initiative deploys technical expertise in local economic development to engage directly with the private sector and primarily domestic banks to stimulate increases in productive capacities in specific local economies. This contributes to, inter alia, economic development initiatives, or area development programmes, or municipal development strategies, or building climate resilience.

Currently the Local Finance Initiative, is deployed in seventeen countries in cooperation with their central and local government institutions and domestic banks. These include broad support to Tanzania, Uganda, Benin, Gambia, Bangladesh, Nepal, Lesotho, Guinea Conakry and specific support to transactions in Mali, Senegal, Kenya, Cambodia, Mozambique, Morroco, Ghana, Sao Tome and Principe, Moldova. The Local Finance Initiative’s team of investment officers works with local developers and local public institutions to structure investments and bring them to financing through domestic banks and the domestic capital markets. Each transaction is identified with two key criteria in mind: Firstly, its transformational effect on the local economy in line with the CDP analysis; Secondly, its ability to change risk perception of domestic institutions and crowd in further local investment in line with sustainability and development effectiveness. The “dual key” investment approach and its pipeline were awarded a prize for innovation in SME finance by the International Finance Corporation during 2019.

The annual report that will be discussed at the board meeting is now online here. It highlights the work of the Local Finance Initiative during the 2017 – 2019.

Of course, during 2020 a key focus of LFI was COVID-19 using UNCDF’s Dual Key Rapid Response System. As the COVID-19 pandemic is inflicting economic harm in global markets, small and medium-sized enterprises stand the greatest risk of experiencing devastated impacts. Businesses in the service and manufacturing sectors were significantly impacted, due to the halting of operations, slow down of production inputs and demand on products and services, or their inability to implement preventative health measures imposed by the governments or due to the rise in operating costs due to adopting these additional health measures.

The SMEs sector is considered the backbone of the LDCs. Sustaining SMEs in local settings is also crucial to sustainable local economic development. In response to these challenges, UNCDF in collaboration with UN sister agencies and with local governments deployed the LFI approach and its Rapid Dual Key SMEs Grant System to support local governments in identifying SMEs in critical value chains that require injection of capital to sustain their operations due to their financial and development impact importance to local communities and local governments.

For example, in Senegal a partnership between UNDP, UNIDO, UNFPA, UNCDF, FAO, UNWOMEN utilised the Dual Key SMEs Grant System to contribute to the resilience of enterprises and to Support the prevention of COVID-19 by ensuring that the most vulnerable people have access to protective resources in Sandiara, Bargny, Ndiob, Ndiaffate and Mont Rolland localities. As a result, of 139 applications screened 20 SMEs passed through the Dual Key financial and technical impact criteria. At the national scale, UNCDF has worked with FONSIS, the sovereign wealth fund of Senegal to invest in the sectors that promote Women’s Economic Empowerment.

n Zanzibar, in UNCDF LFI partnered with UNDP to support the Government of Zanzibar and its local governments recover from the shock to the tourism industry by re-investing in other value chains such as such as Fishing and Aquaculture. 22 screened project developers aiming to secure required capital to sustain their operations.

Full credit to the Governments of Sweden, Tanzania and Norway, and the ONE UN Fund Tanzania for their generous support to the Local Finance Initiative during the period 2017–2019.

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