Financing Peace & Stability

The Sudan crisis that exploded in April is a stark reminder of the far-reaching spillovers of violent conflict in today’s integrated global economy. Beyond the suffering of the Sudanese people, a full-blown conflict would further destabilize the region. Sudan’s neighbours, such as the Central African Republic, Chad, Ethiopia, Libya, and South Sudan, are already facing conflict, civil unrest, and food insecurity.

Such dynamics have intensified across Africa and the Middle East over the past decade. The antagonists vary—including violent extremist groups, community militias, rebel movements, and private mercenaries such as the Wagner Group. But the effects on people and economies are equally harmful. Deadly violence in Africa’s Sahel belt of nations just south of the Sahara—notably Mali and Burkina Faso—peaked in 2022, forcibly displacing 2.6 million people. Conflict forced the closing of thousands of schools and health centres.

Past IMF analysis has shown that conflict and insecurity may cause an economic contraction of up to 20Pct in the Sahel. Across sub-Saharan Africa, 30Pct of countries are considered conflict-affected, and a recent study estimated that annual growth was 2.5 percentage points lower than for countries at peace. These trends typically delay or impede crucial investments in transport, electricity, and digital connectivity that regional integration efforts could unleash, such as through the African Continental Free Trade Agreement.

Sudan is just one recent flash point in a worsening global fragility and conflict landscape aggravated by Russia’s invasion of Ukraine. If this situation persists, more than 60Pct of the world’s poor will live in fragile and conflict-affected states by 2030. Security, diplomatic, and humanitarian efforts will be critical to stop these trends. Therefore, the international community must scale up assistance and develop financing solutions that support peace and stability as global public goods—institutions, mechanisms, and outcomes that benefit more than one group of countries and extend to current and future generations.

Global Public Bads

This picture gets even more complex when we factor in phenomena that may exacerbate conflict. Not all conflict-affected countries are fragile, but state fragility—a mix of weak economic performance, low-capacity institutions, poor governance, extreme poverty, and limited public services—is often a precursor to violence. Fragile states have more difficulty mediating demands for security, justice, and inclusive growth. As a result, governments are perceived as not delivering impartially on the social contract and as lacking in trustworthiness and legitimacy compared with more stable countries. These dynamics often spark social unrest and violence.

Fragile states are more vulnerable to external shocks, such as food price inflation, pandemics, and climate-related risks. An influx of refugees can mean short-term financial pressure and long-term effects on an economy. If the institutional capacity for policy coordination is ineffective, labour market misallocations persist, and nations cannot reap the benefits newcomers may bring. Young people can be a vector for creativity and private-sector entrepreneurship. But in fragile states, youth often need to be more employed, educated, or trained. The situation is especially true for young women, who are also subject to gender-based violence.

The most vulnerable countries, thus, must respond to overlapping crises that further strain overstretched coping capacity. Their resilience is already low even as they face new tests. For example, the complex effects of climate change in the absence of adaptation can further exacerbate the drivers of fragility.

When nations fail, the ripple effects reach far and wide. Conflict and state fragility amount to global public bads, or the opposite of global public goods, as they harm many groups of countries over multiple generations.

Fragility, conflict, and related spillovers can be considered “non-excludable,” in economists’ terms, meaning that everyone in an affected country suffers from direct or indirect repercussions. They can also be regarded as “nonrivalrous”: when one nation is engulfed in fragility or caught up in conflict, it does not prevent others from following suit. Such contagion is usually what happens.

This year, the United Nations estimated it would take USD51 billion in humanitarian aid to support 339 million people affected by conflict and natural disasters. Their fate is inextricably linked to that of people in more prosperous countries. To change course, we must draw lessons from the past and recognize that the global trends of fragility and conflict warrant humility and realism. And then, we must think of the most effective ways to promote peace and stability as global public goods.

Peace and Stability Agenda

Resilience to pandemics, environmental protection, and global financial stability are among global public goods. But peace and stability are at the core. When fragility and conflict prevail, governments, international organizations, the private sector, and citizens cannot make progress on shared objectives. Conflicts drive fragmentation and cause reversals in trade, capital flows, and migration, undermining cooperation between countries.

Leaders and governments ensure that states and societies do not succumb to fragility and conflict. Humanitarian and peace actors often play a leading role in these contexts. However, conflict prevention and long-term stability are only sustainable with supportive and long-term engagement by international financial institutions (IFIs). Organizations such as the World Bank, the International Monetary Fund, and other IFIs are uniquely positioned to tackle the economic dimensions of fragility and conflict. Since no country is immune to global public bads, it takes a combination of global convening power, sharp analysis, and large-scale financing to tackle root causes, often about economics, political economy, and governance.

What types of interventions may contribute to peace as a global public good? Conflicts today last 30 years on average—twice as long as during the 1990s—because negotiated settlements often fail to resolve root causes. Interventions should focus first on prevention programmes and projects that help strengthen institutions, economies, and local communities. Traditional poverty alleviation and development programmes are not enough in settings where exclusion from access to power, economic opportunities, and security is entrenched for a significant portion of the population.

Policy advice and development projects must help extend public services like health and education to lagging regions. Such interventions will address enduring grievances that increase distrust in the state. Governance changes can help rebuild trust and mobilize domestic revenues by improving the management of natural resources and ensuring that public resources benefit most of the population, not just a few members of elite groups.

When the risks of conflict are high, targeted social protection programmes and the effects of economic policies on vulnerable populations can play a role in warding off social unrest. Economic gains should be shared broadly to avoid the politics of division and inequality and strengthen the credibility of policymakers. This is especially relevant for conflicts within a country, where it may take years for initial sparks to erupt into violence and where there may be a window of opportunity to act with foresight. International financial organizations have a pivotal role in helping tailor programmes to address the base causes of fragility and helping mitigate emerging crises.

If large-scale violence does break out, IFIs should remain engaged to prevent the collapse of the state and reduce the economic consequences of conflict. Such institutions can support essential services for the most vulnerable and deploy low-level technical capacity development to keep central banks and payment systems functioning. These systems are critical for humanitarian agencies channelling aid and the functioning of the private sector, which can be exceptionally resilient during crises.

What about countries affected by the spillovers of conflict, such as refugees? Three-fourths of nations hosting large refugee populations are low- and middle-income countries. Worldwide, the United Nations High Commissioner for Refugees found that a record level of 108 million people had been forcibly displaced as of the end of 2022. Governments must grapple with the needs of their people and find solutions that effectively integrate newcomers. In so doing, they provide a global public good in another form. But this work is expensive, and the international donor community must share the costs. Lessons from recent innovations show how support can be channelled to the state and the private sector. Job creation is one of the most effective vehicles for social integration.

Catalytic Funding

Potential mechanisms to support peace and stability as global public goods could build on previous innovations designed to help middle-income countries deal with refugees. A case in point is the Global Concessional Financing Facility (GCFF), created in 2016 to help Jordan and Lebanon deal with a surge of Syrian refugees with support from Canada, Denmark, Germany, Japan, The Netherlands, Norway, Sweden, the United Kingdom, the United States, and the European Union. Leveraging donor grants, the GCFF reduced borrowing costs for the two middle-income countries. Each dollar in donor grants unlocked seven dollars in concessional loans.

The GCFF was launched in 2016 by the World Bank, the UN, and the Islamic Development Bank to support middle-income countries receiving refugees. It provides concessional financing and improved coordination for development projects addressing the impact of refugees. The facility uses donor grants to reduce the interest rates on multilateral development bank loans to concessional levels for projects that benefit refugees and host communities. The GCFF has funded USD800 million in concessional credits, which has leveraged almost USD5.5 billion in financing to support refugees and host communities.

Countries often need to be more open to borrowing and taking on debt for refugees. Lowering the cost of loans can help decrease this hesitancy. Since the inception of the GCFF, Colombia and Ecuador have also tapped their resources in response to forced migration from Venezuela. The GCFF showed its adaptability in immediately supporting Moldova as it took in refugees from Ukraine. This mechanism has become increasingly relevant as more middle-income countries grapple with the effects of conflicts. It could be scaled up to fund prevention activities such as development programs and policy changes that reduce fragility and conflict risks.

The GCFF has two key features: concessional financing for middle-income countries providing a global public good and a catalytic role of leveraging grants sevenfold with low-cost loans. However, three other aspects of the facility offer essential lessons for encouraging global public goods.

First, the GCFF bridges the gap between humanitarian and development assistance. Second, it aims to strengthen host countries’ resilience and support host communities, not just refugees. For instance, the participation of the United Nations High Commission for Refugees allows for a more in-depth review of policies such as the right to work or access to services. Third, it creates a platform for development banks—such as the European Bank for Reconstruction and Development and the Islamic Development Bank—to enhance coordination at the country level.

In addition to innovative financing mechanisms, the scale of financing must be commensurate with affected countries’ needs. In 2016, Iraq faced a crisis of falling oil prices and rising security costs to combat the Islamic State of Iraq and Syria (ISIS). Leveraging USD500 million in donor guarantees from the United Kingdom and Canada allowed for a World Bank loan of USD1.5 billion. Just this year, financing assurances from the Group of Seven, the European Union, and other donors were used to provide IMF support for Ukraine to address the balance of payments problems and restore external viability following Russia’s invasion. While such guarantees are an effective way to scale up financing for countries providing a global public good, guarantees that allow private sector investment in fragile and conflict-affected states are also important. Consider, for example, the January 2023 guarantee to Somalia by the World Bank’s Multilateral Investment Guarantee Agency to promote investment in renewable energy.

A Way Forward: Double Down on Prevention

The scarring effects of violence on human and economic well-being are not restricted to fragile low-income states. A recent World Bank study found that conflicts have been most intense in middle-income countries, particularly in the Middle East and North Africa. Iraq, Libya, and Syria —which all suffered large-scale civil wars—were middle-income countries before violence erupted. Beyond the loss of life, violence caused deep recessions, drove up inflation, disrupted trade, and worsened fiscal conditions. These formidable challenges require country leadership and stepped-up support from the international community, especially since many vulnerable countries are also at risk of debt distress. Promoting peace and stability as global public goods can help make such tragedies less likely.

Within their mandates, international financial organizations need to put peace and stability at the heart of the global public goods agenda by catalyzing the following interventions.

Scaled-Up Assistance From the International Community With a Strong Focus on Prevention

Last year, the African Development Bank updated its fragile states strategy, and the European Investment Bank adopted its first. The World Bank and the Asian Development Bank have taken similar steps since 2020. Those strategies aim to tailor the IFIs’ engagement and activities to country-specific manifestations of fragility and conflict. Likewise, the IMF’s strategy focuses on supporting fragile and conflict-affected states to achieve economic stability, strengthen resilience, and promote inclusive growth. These principles also inform donor approaches that aim to improve capabilities to engage in peacebuilding and prevent violent conflict before it erupts, such as the U.S. Global Fragility Act. Economic reforms and development policies must be tailored to help reduce fragility and conflict risks.

Increased Concessional Financing

The IMF has already committed USD39 billion in funding to 24 fragile and conflict-affected countries since the start of the pandemic. It is now working to ensure that the Poverty Reduction and Growth Trust is sufficiently funded to assist low-income countries, many of which are affected by fragility and conflict. Supporting such nations also requires grants with incentives for prevention. Drawing on lessons from initiatives such as the GCFF, innovative mechanisms could be scaled up further.

A Broad Coalition of Humanitarian, Development, and Peace Actors

Such efforts have crystallized in addressing the COVID crisis, tackling the onset of climate change, and responding to forced displacement. But they are needed now more than ever to ensure that programs are aligned for peace and stability.

Beyond diplomatic, security, and humanitarian assistance, fragile and conflict-affected countries need scaled-up support at a reduced cost, with economic policy advice and programs tailored for prevention and resilience. Supporting fragile and conflict-affected states—where most impoverished people will be heavily concentrated in the future—and advancing a global public goods agenda are mutually reinforcing. An enduring foundation for poverty reduction and growth in support of fragile and conflict-affected states is the quintessential global public good.


11th Year • July 2023 • No. 119 EBR

Author

  • Franck Bousquet

    Is deputy director of the IMF’s Institute for Capacity Development and coordinator of the IMF’s engagement with fragile and conflict-affected states.

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Author

  • Franck Bousquet

    Is deputy director of the IMF’s Institute for Capacity Development and coordinator of the IMF’s engagement with fragile and conflict-affected states.