Export quotas, duty-free facilities, and the ability to obtain loans with favourable terms won't exist as they do now once Bangladesh moves out of the least developed country (LDC) category, further complicating the country's transition, as well as that of Nepal and Bhutan amidst of an ongoing global crisis.
Among those three countries, Bhutan will complete this phase by next year (2023), and Bangladesh and Nepal are expected to graduate from LDC in 2026.
According to experts, multilateral funding and concessional lending should be enhanced during the transitional period to help South Asian countries graduate from the LDC status.
However, they also believe that, particularly in relation to Sustainable Development Goals, multilateral development financing is supply-driven and not always in response to countries' demands.
Experts were discussing these issues at a webinar titled "Multilateral Development Finance: Supporting an Inclusive and Sustainable Recovery in South Asia" co-hosted by the Centre for Policy Dialogue (CPD) and the Organization for Economic Co-operation and Development (OECD).
During the webinar, Kazi Nabil Ahmed, a member of the parliamentary standing committee, Foreign Ministry, said more money is needed to face challenges, as prices of energy and food increased after the pandemic and due to the Russia-Ukraine war.
According to him, multilateral and bilateral organizations should stand beside developing countries, providing concessional loans during the transitional period.
Earlier Debapriya Bhattacharya, a distinguished fellow at the Centre for Policy Dialogue (CPD) said that a smooth transition from LDC status is not easy, as concessional loans will not be available for middle-income countries. Coordination among bilateral and multilateral lenders is required so that separate funds are not allotted for the same objective.
Bhattacharya also said, in the South Asian region, Bangladesh, Nepal and Pakistan have a high dependency on multilateral funding while India maintains a negative balance in this regard as it is more interested in bilateral financing.
He added saying, though multilateral financing has been growing as per data from the OECD, there has been a deficit in core financing as a large share of the multilateral funds is going to climate change-related efforts.
The economist urges the global community to channel quality funds into the developing world to help overcome the two-pronged challenge of the pandemic and the Russia-Ukraine war.
OECD Unit Head (Policy Analysis and Strategy) Olivier Cattaneo and OECD Policy Analyst Jieun Kim gave the keynote presentation on an OECD report titled “Multilateral Development Finance 2022”.
In the presentation, Cattaneo said more funding helps to scale up multilateral development financing, but present risks in the whole system still remain.
The amount of money distributed by multilateral development organizations to support developing countries increased by 37% in 2020, the pandemic year.
He did acknowledge that the majority of those funds came from institutions like the World Bank Group (WBG), EU institutions, the UN, and other international development organizations and that they were used for climate finance.
Meanwhile, he said, there are two vicious cycles of multilateral development finance remedying which is imperative to safeguard multilateral effectiveness.
Firstly, it is the short-term versus long-term trade-off because short-term support is less effective in preparing for and preventing future crises and focuses on only short-term emergency response.
The second vicious cycle is the lack of system-wide accountability that led to weak responses to global challenges, increased fragmentation and complexity of the multilateral architecture, and lack of system-wide accountability.
CPD Executive Director Fahmida Khatun said though the global challenges intensified further after the Covid-19 pandemic and the Russia-Ukraine war, support from international communities to the developing world didn't increase at an expected level.
Instead, it has been more difficult for developing countries, especially for the ones graduating from least-developed countries (LDCs), to manage low-cost loans from multilateral development organizations.
“It will be more challenging for us to manage loans in the coming days in the backdrop of losing duty-free quota-free (DFQF) facility and low-cost loans from multilateral organizations,” she added.
Sachin Chaturvedi, director general of Research and Information System for Developing Countries (RIS), India notes that South Asia has been going through a major economic shift in recent years when some of India's neighbours are graduating from LDCs. "Under such circumstances, though we expected more, the contribution from the multilateral development system shrank by 8.5% between 2015 and 2020.”
It is true that the volume of foreign direct investment (FDI) has increased since the pandemic but a significant portion of it came as non-concessional loans in the field of climate change, green transformation etc. In the interim, access to capital from international financiers has been getting costlier, he added.
To finish his speech, he urged the developed world to lower the cost of transactions for sending remittances as it is a major sector of dependency for South Asian nations in terms of foreign-currency inflow.
Nisha Arunatilake of Sri Lanka mentioned the country needs data-driven policy planning for investment and capacity development to attain inclusive growth.
Paras Kharel from Nepal emphasized institutional capacity building for the policymakers in South Asia as three economies– Bangladesh, Nepal and Bhutan – during the transition period.
Mustafizur Rahman, a distinguished fellow at CPD, said the cost of funding has increased, as the country is going to graduate from LDC.
He said developing countries will struggle to receive funds for development after graduation.