UNCTAD proposes use of 1% of foreign exchange reserves to finance least developed countries

One percent of sovereign wealth fund assets from developing countries can lead to significant increase in development finance for Least Developed Countries (LDCs), according to the 2011 Least Developed Countries Report produced by the United Nations Conference on Trade and Development (UNCTAD).

“Channelling only a tiny part – 1% – of the $3.5 trillion of foreign exchange reserves held by developing countries in their sovereign wealth funds to least developed countries (LDCs) can lead to a significant increase in development finance for these countries,” the report says.

UNCTAD said this new proposal for increased South-South financial cooperation builds on the fact that using surplus financial resources from dynamic, emerging developing countries to fund development-oriented investment in LDCs can serve to build productive capacities to facilitate trade and support sustainable development.

The UN trade agency is of the opinion that to increasing access to financing for LDCs, such investments would provide sovereign wealth funds with an opportunity to further diversify their portfolios, given the declining prospects for increases in official development assistance from industrial countries facing fiscal austerity and possible limits for private flows due to the crisis in Europe.

“In this context, UNCTAD is proposing that developing countries with sovereign wealth funds invest 1% of their assets in regional development banks, for example in the form of increased paid-in capital. This should be done on a voluntary basis,” said the report.

The report states that generally, regional development banks have performed very well in providing effective development financing, but they require additional resources to fund crucial investments, and this approach could prove to be an optimal vehicle for channelling resources to LDCs.

“It could facilitate intensified regional infrastructure investment that can promote trade and provide finance for green technologies. The financial details must be drawn up on a regional basis. Lenders and recipients should agree jointly on precise mechanisms and levels, it said.

However, UNCTAD cautions that emerging possibilities for promoting South-South financing cooperation should be seen as a complement – not a substitute – to traditional official development assistance.

The new opportunities for South-South cooperation will only work if they are additional to, not a substitute for, traditional North-South development cooperation, it added.

By Ekow Quandzie

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