The IMF SDG Financing Framework
The IMF SDG Financing Framework
Considerable resources are needed to deliver on the Sustainable Development Goals (SDGs). The IMF has estimated the additional spending required to achieve the sustainable development goals (SDGs) in 5 sectors (health, education, water & sanitation, roads, electricity) (Gaspar and others 2019). A typical low-income development economy needs to increase spending in 2030 by about 15 percentage points of GDP. To address such large additional spending, countries would need to raise tax revenue and enhance spending efficiency. In addition, most will require additional financing, including from multilateral and bilateral official sources, and in the form of private investment.
The framework helps to illustrate different development plans that are consistent with achieving the SDGs. By varying assumptions on revenue mobilization and expenditure setting, the aim is to provide policymakers with a consistent approach to evaluating alternative development strategies to meet the 2030 Sustainable Development Agenda.
With a focus on simplicity, the framework imposes a set of accounting identities throughout the real, fiscal, and external sectors. In addition, through a production function, the framework ensures that growth is consistent with demographics and investment in physical and human capital. Specific assumptions for each component can be found in the Annexes.
The real sector
Uses an augmented neoclassical growth model with labor, human capital, and two types
of physical capital (public and private) (Atolia and others 2017). Public capital is a public
good in the production function, and the stocks of public and private capital increase with
investment and decline with depreciation. Human capital (education and health) is financed
from current spending on health and education and it diffuses into the economy as new cohorts
enter the labor force.
The fiscal sector
Tax-to-GDP increases with real per capita GDP growth assuming an elasticity of 0.45.
Any additional revenue is assumed to finance physical (roads, electricity, and water and
sanitation) and human (education and health) capital associated with the SDGs up to the
point at which the additional resources are enough to finance the additional spending
estimated by Gaspar and Others (2019). The fiscal balance is assumed to remain constant.
The deficit is financed by borrowing externally or domestically. The amount of net
external borrowing is exogenously determined by the user, with net domestic issuance as
the residual.
The external sector is exogenous
The current account balance is determined by the resources provided by foreign investors
through net foreign direct investment (FDI) and net public and private debt disbursements,
and by the path of foreign exchange reserve accumulation. While there is no monetary policy,
there is a monetary authority whose purpose is to buy foreign exchange reserves, financed
through negative dividends to the treasury, to maintain adequate reserve coverage.
Saving and investment
Household receive gross earnings (the output produced in the economy, net of interest and
dividend payments to foreign creditors and investors) and private transfers from abroad.
Households save a constant fraction of their after-tax income, which they can then either
lend to the government or invest in physical capital. Beyond domestic sources, private
investment can also be financed through external borrowing and FDI.
