Subnational Finance to Accelerate the COVID-19 Response and Recovery

Policy Support on Local Government Finance for COVID-19 Response and Recovery

To finance their pandemic response, local governments rely on three major sources: their own revenues, intergovernmental transfers, and subnational borrowing. In this context, the United Nations Capital Development Fund (UNCDF) provides policy and regulatory support to local government finance for LDCs to ensure that local governments can rebuild their local fiscal space and local economies for pandemic response and recovery by channelling necessary resources to meet the needs of the health and financial crises, and strengthen their capacity to continue delivering essential services to their citizens. The support contributes to SDG 17 (Partnerships for the Goals) on financial resource mobilization and SDG 1 (No Poverty) as well as the Istanbul Programme of Action (IPoA) Priority Areas 1 (Productive capacity), 2 (Agriculture, food security and rural development), 5 (Human and social development), 6 (Multiple crises and other emerging challenges), 7 (Mobilizing financial resources for development and capacity-building) and 8 (Good governance at all levels). 

In March 2020, UNCDF launched the Guidance Note for Immediate Local Government Finance Responses to the COVID-19 Pandemic. It is based on UNCDF’s expertise in local government finance, lessons learned from China and the Republic of Korea, and experience from country pilot schemes in Bangladesh and Senegal. Five editions were published, and each was translated into the six UN official languages and shared widely with partners and government counterparts in LDCs and developing countries through UN networks, UNCDF local government finance blog1 and podcast2. 

Key recommendations for local governments include own source revenues (OSRs) and financial management, performance-based intergovernmental fiscal transfers (IGFTs), Operational Expenditure Block Grants (OEBGs), Small and Medium Enterprise (SME) economic recovery support, subnational borrowing, and philanthropic finance. For example, UNCDF provided technical support in Bangladesh to modify the formula-based fiscal transfer system to include a COVID-19 protocol certified by the relevant authorities. With resources from Sweden and the European Union, UNCDF has successfully channelled US$169,000 through the fiscal transfer system to 72 local governments as an Emergency OEBG to purchase sanitizing materials, masks, and gloves as well as to print publicity materials on COVID-19 and social distancing. This model has been shared and replicated in other countries including Uganda, Mozambique and Somalia, to mitigate the impact of COVID-19. 

Furthermore, UNCDF launched the Rebuilding Local Fiscal Space initiative in September 2020. Experiences have shown that four factors have impacted local government fiscal space – 1) loss of OSR, 2) a non-conducive IGFT system with insufficient tools and instruments to respond, 3) loss of local economic development, and 4) increase in costs of service delivery and additional mandates for local governments. The objective of this initiative is to provide tools and recommendations on the improvement of local fiscal space in light of the COVID-19 challenges through a case-by-case review and analysis of the four factors above in six participating municipalities: Chandpur (Bangladesh), Kumasi (Ghana), Chiapas (Mexico), Telița (Moldova), Chefchaouen (Morocco) and Gulu (Uganda).  

This initiative includes three phases: 1) the diagnostic phase, consisting of a preliminary study on the impact of the pandemic on the fiscal and economic health of the participating cities; 2) designing and testing new mechanisms and tools to enhance fiscal space and strengthen local economies based on phase 1 results; and 3) stakeholder engagement to validate the revenue mechanisms developed and piloted in phase 2 for national roll-out.  

UNCDF and ODI actively engaged the participating local governments while undertaking consultations and data collection. Phase 1 culminated in a global knowledge sharing conference in November 2020 where key findings were presented. The study validated the considerable contraction of local fiscal space and local economy, such as significantly reduced OSR, decreases and lack of flexibility in IGFTs, and limited opportunities to mobilize additional funding in the short term. Participants further shared their perspectives on the fiscal challenges they face in light of COVID-19 and exchanged knowledge on their coping mechanisms with other Southern countries at the event. The conference resulted in the addition of Harare (Zimbabwe) to the initiative given their similar situation and extensive exchanges with Uganda. 

This initiative is currently in phase 2 with the aspiration to include more local governments from developing countries to accelerate their economic and fiscal recovery. South-South cooperation and exchange is an important element of the initiative because participating local governments can seek synergies and learn from each other through knowledge products and the annual knowledge sharing conference. As most local governments are confronted with the contraction of fiscal space, particularly in developing countries and LDCs, this initiative would be a highly replicable model for other interested local governments to design policy reforms and mechanisms that rebuild local fiscal space for pandemic recovery. It is also an excellent platform for knowledge sharing and South-South cooperation in local development finance.