Persistent shortfalls in domestic savings in the least developed countries make them heavily dependent on external development finance. Among available sources of external development finance, the least developed countries are most dependent on official development assistance.

External finance should facilitate and pay for the structural transformation of least developed country economies. Therefore, official development assistance is essential for the least developed countries to achieve the Sustainable Development Goals and eventually escape aid dependence.

For that to happen, revitalization of the aid effectiveness agenda is needed to improve the quality of aid and its impact on development and take into account a significantly changed aid and development finance landscape.

A new architecture of aid for development has developed, with the (re)emergence of a wider number of actors, including the private sector, philanthropists, non-governmental organizations and Southern sources of development finance. It is also characterized by new financial instruments, all of which leads to increasing complexity, but also opacity.

This wider array of actors and instruments is not translating into meaningful increases in development finance from all sources. Critically, the linkages between external development finance and national development priorities are weakening. All of these developments seriously challenge the institutional capacities of the least developed countries.

Least developed country Governments need to assume the driver’s seat of their development agenda and take a more proactive role in managing the allocation of external development finance in alignment with national development priorities. This should include the adoption of a proposed “Aid Effectiveness Agenda 2.0”. On the other hand, the international community needs to step up its support towards this common goal.

Report by Unctad