The annual shortfall to reach the United Nations’ Sustainable Development Goals (SDGs) now tops $4 trillion. With only five years left to reach the lofty planet-wide objectives set in 2015, the UN’s fourth International Conference on Financing for Development (FfD4) presents a rare opportunity to address the shortcomings in the financial architecture underpinning global development, and galvanise private sector capital.
Receive Focus insights straight to your inbox
Against a backdrop of rising geopolitical tensions, economic uncertainty and the USA’s withdrawal from FfD4, the stakes couldn’t be higher at the conference in Seville, Spain. The world needs to move on from pledges to find practical solutions, especially in unlocking private capital at the scale needed to close the widening annual funding gap and get the SDGs back on track. This shift underscores the urgency of adopting a more resilient and future-proof model of sustainable finance.
Pictured: FfD4 is a once-in-a-decade meeting with at least 50 world leaders gathering in Seville, Spain to rethink development finance
Why the current model doesn’t work
Development finance has long leaned on concessional loans, official development assistance (ODA) and multilateral development banks. However, this model is fraying.
“More of that aid is now being used for climate projects, so countries are left with even less for other needs,” says Kuben Naidoo, Head of Corporate Payments at Investec SA. What was originally meant to be additional climate finance has ended up cannibalising general development funding.
The war in Ukraine has further diverted global attention and resources, drawing funds away from vulnerable regions that were already struggling to meet basic needs. Grants have declined. Infrastructure loans have increased modestly, but they seldom support critical services like public health or early childhood education.
Although some countries have responded by improving tax collection and diversifying revenue, the reality is that private sector funding remains stubbornly lacking.
Currency risk: The hidden barrier
One of the most fundamental, and often misunderstood, obstacles is currency risk. Most development projects earn revenue in local currency, yet funding is usually available only in foreign currencies like US dollars, British pounds or euros.
“This isn’t something the developing countries can control; it adds risk to their projects, which makes them more expensive,” explains Mark Stafford, Head of Global Markets at Investec Bank plc.
“So sustainable development projects that would otherwise be viable, are rendered unviable due to the currency risk.”
When local currencies depreciate, the burden of repaying foreign loans skyrockets. This has led to waves of debt distress in countries like Zambia, Ghana, Kenya and Nigeria, undermining progress and deepening financial vulnerability.
Public and private investors view this risk as a deterrent, especially given current regulatory capital requirements that penalise perceived risk regardless of underlying project fundamentals.
“Credit rating agencies apply uniform standards to countries with vastly different fundamentals,” says Stafford. “The investments in projects in developing countries typically come with higher capital than perhaps the data would suggest they should.”
This mispricing of risk, not just political or macroeconomic, but currency-based, has led to a structural mismatch in the global development finance ecosystem.
A proposed solution: The Delta Initiative
In the lead-up to the Financing for Development conference in Spain, three critical workstreams were convened to tackle the key barriers holding back private capital from development investment.
The UN’s Global Investors for Sustainable Development Alliance (GISD), of which Investec is a member, identified the following as the most urgent levers for reform:
- Blended finance
- Currency risk, and
- Alignment of long-term investment incentives
One of the potential solutions highlighted by the Currency Risk stream, co-led by Stafford, is the Delta Initiative, proposed by the European Bank for Reconstruction and Development and the Asian Infrastructure Investment Bank. It proposes a central platform to help development banks pool and manage currency risk, allowing them to extend local currency loans more reliably and affordably across multiple markets.
“The Delta Initiative would operate as a centralised risk management and expertise hub for development finance organisations and multilateral development banks. That then enables them to make local currency loans with much less friction than if they had to do all of this work themselves."
- Mark Stafford, Head of Global Markets at Investec Bank plc.
The platform relies on existing tools, such as hedging contracts, currency swaps and credit enhancements to shift risk to actors better equipped to bear it. Over time, the initiative also seeks to deepen local capital markets by encouraging banks, governments and private issuers to raise funding and issue longer-term debt in their own currencies.
Although not a silver bullet, Stafford believes the Delta Initiative is a strategic enabler that could help unlock billions in stalled capital and make long-term, infrastructure-led growth more feasible for low- and middle-income countries.
Fixing the system beyond currency risk
Still, currency risk is only part of the picture says Naidoo, former Deputy Governor of the South African Reserve Bank. A broader reset is needed to make development finance more effective, predictable and fit for purpose.
- Smarter procurement: Many countries need technical support to run efficient, transparent systems, particularly across Africa. “It’s not just corruption: many countries lack the technical skills. Fix that, and the system works better,” says Naidoo.
- More flexible finance: Development banks need greater flexibility to finance long-horizon infrastructure like transport or power grids, which often take years to become revenue-generating.
- Better regulation: Global regulatory frameworks must evolve to reflect the actual risks of projects rather than relying on blanket assumptions about entire countries or regions.
- Accurate credit ratings: “Two countries with similar GDP per capita can be rated the same, even if one manages its finances well and the other doesn’t,” says Naidoo. “But being equally poor doesn’t mean they carry the same risk.”
New institutions like the African Credit Rating Agency could play a role in bringing more nuanced, locally informed perspectives to the investment landscape, helping reduce unnecessary risk premiums.
Making development finance work in the real world
Local currency lending could be a crucial part of the answer, but the Delta Initiative is but one suggestion of a much wider reform effort to improve the impact of development finance.
What the SDGs need now is not another round of declarations, but real-world implementation. If multilateral reform remains slow, regional partnerships, between sovereign wealth funds, pension funds and national development banks, must step in to drive momentum.
As Stafford puts it, “If we address currency risk, we unlock a wave of viable, scalable investment, and I’m hopeful this will get off the ground, but it’s only a small piece in the larger puzzle that needs to be solved to deliver on the SDGs.”
Collaborative, sustainable finance can deliver real results, but success now depends on action, not promises.
Investec products you may be interested in
Browse further in