Filling the finance gap for a green and inclusive recovery

To meet the Sustainable Development Goals, Asia and the Pacific needs to invest billions in clean energy, health, transportation and other areas in coming years. Where will the money come from?

Annual investment requirements for Asia and the Pacific from 2016-2030.

Decreased tax revenues and increases in public spending due to COVID-19 make it imperative for developing Asian countries to mobilize private capital for the vast investments needed to achieve the SDGs.

Developing countries in Asia have been focusing on green and inclusive growth in recent years, in part through a growing commitment to the SDGs. The region needs to invest $1.5 trillion annually from 2016 to 2030 to achieve the SDGs by 2030. This projection translates to about 4% of the region’s GDP, according the Economic and Social Commission for Asia and the Pacific.

A fundamental challenge facing developing economies in Asia is the financing of a green and inclusive recovery. The huge funding needs are often beyond the means of the public sector. Therefore, Asian economies must attract more private capital to close the funding gap by mobilizing resources from a much broader funding base. The participation of private capital can also foster risk sharing on green and social investments.

In 2020, government revenues declined in most Asia Pacific countries.

Our research indicates that COVID-19 has adversely affected revenue collection across developing countries in Asia, reducing the public spending on meeting the SDGs. Tax revenues will recover as the economy recovers, but the region’s output remains well below pre-COVID trend levels. Moreover, the pandemic may push some businesses into the informal economy, shrinking the tax base.

We also found that the pandemic may add substantially to the financing requirements of meeting the SDGs. The sharp economic downturn due to COVID-19 has a bigger impact on the poor and has likely exacerbated inequality. Lockdowns and other social distancing measures have a bigger impact on less-skilled workers than professionals and office workers who can work remotely from home.

Globally, developing countries need to invest as much as $4.5 trillion annually from 2015-2030 to meet the SDGs, according to the United Nations Conference on Trade and Development. Since annual investment is currently around $1.4 trillion, there is an annual financing gap of as much as $3.1 trillion.

Governments must take the lead in the region’s quest for a green and inclusive recovery from the pandemic, but they need help from the private sector. A conducive environment for private investment will attract much-needed capital and lay the foundation for broader private participation in sustainable development.

This blog post is part of a series by the Asian Development Blog.