1. State of Development Finance in the Global South

The global south, particularly Africa, faces an acute financing gap for its development needs. The continent requires an estimated $1.3 trillion annually to achieve the Sustainable Development Goals (SDGs) by 2030, yet current financing flows fall drastically short. Africa’s infrastructure deficit alone demands a minimum of $130–170 billion per year, while climate adaptation and mitigation require an additional $50 billion annually. Despite these needs, financing challenges continue to mount, with financing sources such as foreign aid and concessional financing not keeping up with the increasing needs, while private investment remains insufficient.

A troubling trend is the withdrawal of traditional development partners, particularly the United States. Recent budget cuts have significantly reduced U.S. foreign aid, including programs under USAID and the African Development Fund (ADF-17). These reductions come at a time when African nations are grappling with post-pandemic recovery, climate shocks, and debt distress. The U.S. retreat exacerbates an already precarious situation, forcing developing countries to seek alternative financing sources—often at higher costs. 

Meanwhile, Official Development Assistance (ODA) from OECD countries has plateaued, failing to meet the long-standing target of 0.7% of Gross National Income (GNI). Military spending including the funding of the war in Ukraine and increased of defense budgets in countries such as Germany and the United Kingdom has come at the expense of ODA budgets that would have been spent on development initiatives in the global south. Financing commitments, such as the $100 billion per year climate financing pledge from developed nations, remain unfulfilled. These trends leave developing countries struggling to finance essential programs such as infrastructure, healthcare, education, and climate resilience.

2. Key barriers to mobilizing development finance in the south

Several factors underline the development financing challenges being faced in the global south. For Africa, the rising debt burden, capital flight, weak domestic revenue mobilization, and the high cost of borrowing are among the key factors. These factors, explained below, require urgent action covering policy and institutional reforms at both domestic and international levels.

1. Weak domestic resource mobilization

Many developing countries struggle to generate sufficient domestic revenue. This is largely due to having narrow tax bases that rely heavily on a small private sector that is aggressively taxed to extract as much revenue as possible for the government. This problem is compounded by weak tax administration systems that enable widespread evasion and avoidance of tax. Additionally, illicit financial flows (IFFs)—estimated at $88.6 billion annually from Africa alone—further limit revenue mobilization and promote loss of the much-needed foreign currency. 

The shallow nature of domestic capital markets in developing countries also constrains domestic resource mobilization for development financing. These markets often remain embryonic and government-dominated, failing to adequately serve private sector needs or attract sufficient long-term finance^[1]. Key structural deficiencies include limited liquidity and high transaction costs which deter investments. For instance, in Sub-Saharan Africa, domestic credit to the private sector stands at only 33% of GDP—far below the 192% in the US, 82% in Europe, and 177% in East Asia—reflecting critically underdeveloped financial intermediation^[2]. This market shallowness manifests in glaring financing gaps, particularly for infrastructure. Consequently, private sector infrastructure (and social) financing in emerging economies remains underutilized.

• Capital Flow Reversals

A major challenge for the Global South is the net outflow of capital. In recent years, debt servicing and profit repatriation by multinational corporations have exceeded new inflows of Foreign Direct Investment (FDI) and concessional loans. According to the UN Conference on Trade and Development (UNCTAD), in 2023 Africa experienced net negative resource transfers of up to US$25 billion, meaning more money left the continent in interest and dividend payments than entered through new investments^[3]. This trend is driven by rising debt servicing costs, including for Eurobonds issued at high interest rates; declining FDI due to global economic uncertainty and risk aversion; profit repatriation by foreign firms, which drains foreign exchange reserves.

• Weak Official Development Assistance (ODA)

Official Development Assistance (ODA) remains critical for low-income countries, but it faces systemic challenges. According to the OECD, only four OECD countries—Denmark (0.71%), Luxembourg (1.00%), Norway (1.02%), and Sweden (0.79%)—met the 0.7% GNI target in 2024, while total ODA fell by 7.1% to $212.1 billion amid global economic pressures^[4]. The decline of ODA to developing countries has been in part due to a growing focus on military spending, particularly in response to the war in Ukraine and shifting U.S. defense priorities, which have spurred increased defense budgets in key donor nations like the UK and Germany. Additionally, aid fragmentation has intensified, with rising earmarking and tied aid reducing effectiveness.

The failure to scale up ODA, combined with unmet commitments (such as the US$100 billion annual pledge for climate financing) forces developing nations to rely on more expensive commercial borrowing, exacerbating debt crises. This has resulted in most countries in Africa having to spend more on debt servicing than on crucial sectors such as health, education, social protection and infrastructure. 

• High Cost of Capital for African Countries

African sovereigns face significantly higher borrowing costs than their peers with similar credit history. Perceived risk premiums, often inflated by credit rating agencies, impose substantial costs with an “Africa premium” of about 2.9 percentage points above fair borrowing rates^[5]. Weak fiscal positions driven by low tax and export revenues also contribute to the higher African risk premium. Furthermore, currency volatility in most economies magnifies these pressures with exchange rate depreciations contributing to a 2.2-percentage-point rise in Africa’s public debt-to-GDP ratio in 2024^[6].

3. A Shifting Landscape of Financing

Traditional development partners like the World Bank and International Monetary Fund (IMF) continue to play a central role in global development finance but have increasingly faced criticisms about their effectiveness. These institutions have been widely criticized for imposing austerity-linked conditionalities that often require recipient countries to implement harsh fiscal austerity measures, such as cutting public spending on essential services. These conditions have been shown to stifle economic growth and worsen social outcomes, particularly harming vulnerable populations who rely on public services like health and education. Additionally, developing countries remain inadequately represented in the governance structures of these institutions, with voting power heavily skewed toward the US, Europe, and Japan. This imbalance limits the voice and influence of low- and middle-income countries in decision-making, perpetuating a system where major policies and leadership appointments reflect the interests of wealthier nations rather than the needs of borrowers^[7].

With these criticisms developing countries, particularly in African have increasingly looked for alternatives and China has emerged as one of those alternatives. China’s Belt and Road Initiative (BRI) has emerged as a major alternative source of development finance, particularly for infrastructure projects, offering loans without the stringent policy conditions typical of the World Bank and IMF. In 2024 alone, China’s BRI engagement reached record levels with over $70 billion in construction contracts and $51 billion in investments across 149 countries, cumulatively surpassing $1.17 trillion since 2013. This scale of financing has helped fill the infrastructure gap in many low- and middle-income countries, especially in sectors like hydropower in Africa. 

However, this alternative comes with significant risks. BRI loans are often non-concessional and collateralized, secured through commodity revenues and cash deposits held in Chinese accounts, which restrict borrower countries’ fiscal autonomy and complicate debt management. The lack of transparency around lending terms and project agreements further exacerbates concerns about governance and accountability. Moreover, these financial dependencies can create geopolitical vulnerabilities, as debt distress might lead to asset seizures or political leverage by China. Thus, while China’s role addresses the financing shortfall left by traditional donors, it introduces new challenges related to debt sustainability, transparency, and sovereignty for recipient countries^[8],[9].

4. Addressing development financing gaps in the south

The above challenges coupled with the changing landscape of development financing in the global south require urgent action to ensure that developmental needs are not beyond reach. Such action needs to be collective, with all actors playing their part. Below are some of the actions that need to be undertaken. 

For National Governments in the Global South

• Strengthen domestic revenue mobilization through progressive taxation, investment in tax administration including digital payment systems, and anti-corruption measures.
• Develop local capital markets to reduce reliance on foreign currency debt. There should also be a deliberate attempt to deepen capital markets to include more non-banking financial institutions such as pension funds. Furthermore, governments should minimize the crowding out of the private sector by over-borrowing on the domestic markets. 
• Strategically leveraging new forms and sources of financing such as China’s BRI. Governments should harness China’s financial power through targeted complementarity, aligning initiatives like BRI with domestic priorities. To minimize the risk of increasing future debt vulnerabilities, countries should prioritize smaller-scale, high-impact infrastructure over mega-projects that can rapidly increase debt. 

For official development partners

• Fulfill ODA and climate finance commitments, including the $100 billion pledge.
• Expand debt relief initiatives and undertake reforms of the current debt relief initiatives, particularly the Common Framework on Debt treatments to ensure that all countries that need relief are covered and that debt relief comes in a timely and adequate manner.
• Support the call for reforming credit rating agencies to reduce unjustified risk premiums, and assist developing countries with building capacity for engaging with and addressing credit ratings.  

For International Financial Institutions (IFIs):

• Increase concessional lending through the World Bank’s IDA and IMF’s RST. Furthermore, increase pledges to ADF-17 to make sure that its replenishment reflects the development needs that it seeks to address.
• Enhance SDR rechanneling to MDBs for leveraging development finance.

For Global Bodies (G20, UN):

• Advocate for fairer global tax rules to curb illicit financial flows.
• Establish a multilateral debt restructuring mechanism to address sovereign insolvencies.
• Promote transparency in lending, including through a global debt registry.

5. Conclusion

Financing development in the Global South requires a multifaceted approach that will address challenges facing developing countries including capital flight, domestic revenue mobilization, weak ODA and high cost of capital. Urgent action is required so that the SDGs will not remain out of reach for millions of people in the global south. For this, the international community must prioritize equitable, sustainable financing to ensure no country is left behind.

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^[1] “Demekas, Dimitrios G.; Nerlich, Anica. 2020. Creating Domestic Capital Markets in Developing Countries: Perspectives from Market Participants. EMCompass, no. 77;. International Finance Corporation. http://hdl.handle.net/10986/33617

^[2] See World bank Data. https://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS?end=2016&locations=ZF-Z7-US-8S-Z4&start=2016&view=map

^[3] United Nations Conference on Trade and Development (UNCTAD). A World of Debt: It Is Time for Reform. Report 2025. Geneva: United Nations, 2025. https://unctad.org/publication/world-of-debt

^[4] See OECD data on https://www.oecd.org/en/topics/policy-issues/official-development-assistance-oda.html

^[5] Gbohoui, W., Ouedraogo, R. and Some, Y.M. (2023). Sub-Saharan Africa’s risk perception premium: in the search of missing factors. IMF WP 23/130, Washington DC, USA.

^[6] See Finance for Development Lab debt decomposition: https://findevlab.org/new-tool-public-debt-decompositions-in-emerging-economies/

^[7] Brettonwoods Project, What are the main criticisms of the World Bank and the IMF? https://www.brettonwoodsproject.org/2019/06/what-are-the-main-criticisms-of-the-world-bank-and-the-imf/

^[8] Nedopil, Christoph (February 2025): “China Belt and Road Initiative (BRI) Investment Report 2024”, Griffith Asia Institute and Green Finance & Development Center, FISF, Brisbane. DOI: 10.25904/1912/5784

^[9] BRI Monitor, Examining Transparency In Chinese Lending. (Policy Brief): https://brimonitor.org/wp-content/uploads/mcusercontent/d4e11ae1-76a3-d2fa-d1f6-3a3bdfc0a227/BRI_Monitor_Policy_Brief_July27_FINAL_PDF.pdf