With the number of people living in extreme poverty forecast to rise in sub-Saharan Africa and declining aid and external investment flows to that region, donors need to better understand the potential of investing their aid to mobilise private investment (known as ‘blended finance’) and the impact this has on the eradication of extreme poverty.
Based on findings from my new report, I unpack the key issues donors should consider when deciding how much aid to invest in blended finance and how best to do it.
‘Billions-to-trillions’ is a myth
Donors argue that by investing aid in blended finance, they can mobilise or ‘leverage’ many more multiples of private finance for investment in the Sustainable Development Goals (SDGs), which would not happen otherwise.
The reality is very different. While it does leverage additional private investment, the sums are not huge. On average, one dollar of public investment from multilateral development banks (MDBs) and bilateral development finance institutions (DFIs) mobilises just 75 cents of private investment in low- and middle-income countries. This falls to 37 cents in low-income countries (LICs).
Clearly this approach is not mobilising significant resources. The much-hyped talk around the potential of blended finance to shift the financing needle ‘from billions to trillions’ is clouding decision-making about how best to invest in aid. Donors should have more realistic expectations about how much private money they can mobilise this way.
