A globe surrounded by piles of coins to demonstrate the challenges of financing for development. Photo by mattjeacock / iStock / Getty Images Plus via Getty Images.
Seville 2025 and the power of local institutions
As global leaders meet in Seville for the Fourth International Conference on Financing for Development, discussions centre on reshaping the international financial system. But the biggest barriers to development finance are often domestic, and strengthening local institutions often matters as much as reforming global ones. Explore this collection of IGC research on the institutions and systems needed to close financing gaps and unlock sustainable growth in developing countries.
Developing countries face an enormous financing challenge. In 2024, UNCTAD estimated that the annual gap between current investment and what is needed to achieve the Sustainable Development Goals (SDGs) by 2030 at USD 2.5-4 trillion. As geopolitical tensions continue to squeeze aid budgets, this gap is unlikely to narrow.
This month, more than 50 global leaders are meeting in Seville for the UN’s Fourth International Conference on Financing for Development. As before, the conversations are focused on reshaping global financial architecture – but they can only go so far if the underlying systems for collecting, managing, and deploying public funds remain weak and countries still face persistent issues in accessing and managing revenue to achieve long-term, sustainable growth.
Addressing these issues will require change on multiple levels – reforming multilateralism, improving debt systems, enhancing tax revenue, and attracting private capital. What will this look like for those trying to put these ideas into practice, in systems that can prevent them from managing funds well?
Why credible states matter
The importance of strong state systems and institutions to manage finances cannot be understated. Effective public systems are more likely to be efficient, instil confidence, and create fairer and more transparent fiscal systems. Weak institutions, by contrast, can undermine public trust, stall progress and lead to the misuse of funds.
The IGC has supported research from Bangladesh, Sierra Leone and the Democratic Republic of Congo which highlights that weak tax systems and frequent revenue shortfalls have increased vulnerability to economic shocks and led to more dependence on foreign aid, concessional loans and other sources of external funding for public services like schools, hospitals, and roads.
Bangladesh
Bangladesh has one of the lowest tax collection rates in South Asia. This is due to the fact that there is limited tax compliance, with few individuals and businesses paying direct tax, and a high reliance on indirect taxes like VAT, which negatively affects the poorest communities. The underperformance of tax collection systems doesn't just constrain revenue – it limits the government's ability to implement pro-poor fiscal policies and fund public investments aimed at reducing inequality.
IGC-supported researchers have proposed changes that include broadening the tax base, digitising the tax system, strengthening tax enforcement and building trust among taxpayers. This could unlock more funds in Bangladesh to allocate towards development priorities.
Sierra Leone
Sierra Leone has been collecting around 10% of GDP in taxes for the past decade, compared to the average 16% collected by 36 other African countries in the region. Contributing factors include its large informal economy, limited digitisation, a fragmented tax system, and disproportionately low tax payments by wealthier individuals and property owners.
Improving tax enforcement in customs, VAT, excise, and domestic taxes – as well as enhancing staff capacity, investing more in digitising processes, and property tax reforms – could help address this deficit, potentially unlocking fiscal space of 1-2% of GDP.
Democratic Republic of Congo
In the Democratic Republic of Congo (DRC), traditional financing models often fail to meet the needs of the market due to high perceived risk, currency mismatches, institutional fragility, and weak enabling environments.
Research from the IGC’s State Fragility Initiative reveals how blended finance mechanisms, results-based financing, and tools like Peace Renewable Energy Credits can be used to finance climate-aligned investments such as solar mini-grids. Early experiences – such as mini-grid technology set up by companies like Nuru in eastern DRC – demonstrate how these market-based environmental credit instruments can unlock private investment in sustainable infrastructure while supporting clean energy goals.
Managing foreign exchange risk
Another persistent barrier to investment in many developing countries and fragile states is foreign exchange risk. While many public and private investments are financed in dollars or euros, revenues are earned in local currencies that may be volatile and prone to depreciation. This mismatch deters investment, raises costs, and constrains development finance.
As a result, reliance on foreign-currency lending effectively shifts currency risk onto the borrowers least able to absorb it, deepening their economic vulnerability and limiting the scale of financing available for the SDGs.
Development finance institutions need to take a more proactive role in managing foreign exchange risk – including providing access to local currency lending, introducing hedging instruments adapted to fragile markets, and building partnerships with central banks and local financial institutions to stabilise funding channels.
To unlock the trillions for the SDGs, we cannot overlook the importance of the systems and tools needed to deliver them – from strong states and institutions to effective tax administration. Investing in local institutions will help money reach those who need it most.