Executive summary

This 2020 edition of the UNCDF-OECD Blended Finance in the Least Developed Countries (LDCs) report analyses the state of blended finance in LDCs and its role in recovering and building forward better from the COVID-19 crisis. The report also provides a range of expert insights on the opportunities, innovations and risks of deploying blended finance in LDCs, and proposes an Action Agenda to chart a new path to further the mobilisation of support and resources for LDCs. Main takeaways include the following.

LDCs are facing mounting pressure to respond to the COVID-19 pandemic, with widening financing gaps to achieve the Sustainable Development Goals (SDGs). The health crisis is still unfolding in LDCs, at an uncertain yet alarming pace and with a variety of far-reaching implications across countries. What is clear is that all LDCs face severe socio-economic impacts from the global economic crisis, due to domestic and global demand shocks (see Chapters 2 and 3 on the impact of COVID-19 in LDCs).

With development finance accounting for a prominent share of the financing for sustainable development in LDCs, official development assistance (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 recommit to achieving their targets in light of the unprecedented impact of the COVID-19 pandemic and ensuing economic crisis in LDCs (see Chapter 2 on the state of financing for sustainable development in LDCs).

Although increasing in volume, only 6% of private finance mobilised by development finance interventions between 2012 and 2018 was in LDCs. In 2018 alone, USD 3.8 billion was mobilised in LDCs, accounting for about 7.5% of the total. Multilateral institutions mobilised the largest share of private finance in LDCs (see Chapter 3 on the state of blended finance in LDCs).

Guarantees have continued to be the instruments that mobilised the highest share (46%) of private finance in LDCs in 2017–2018, although to a lesser extent than in previous years. Guarantees were followed by direct investment in companies, and special purpose vehicles, which mobilised 24% of the private finance mobilised in LDCs in 2017–2018.

Private finance mobilised in LDCs is concentrated in a handful of revenue-generating sectors with higher profitability prospects, such as energy, banking and financial services. Sectors such as agriculture and water and sanitation are less targeted, despite their crucial role in LDCs’ economies.

While grant support remains critical in the immediate and short-term response to the COVID-19 crisis, 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 support LDCs to start building a pipeline of bankable projects that both accelerate the achievement of the SDGs and can attract investors’ attention. For blended finance to be effective for the COVID-19 recovery, the wide range of actors involved (donors, DFIs, multilateral development banks, impact and commercial investors, local financial institutions, national and local governments, etc.) should focus on supporting national development priorities, including job creation and SME-development, emphasise gender equality, support health systems, and target sectors that are critical for inclusive, resilient and sustainable development.