Ahead of the upcoming third conference of the Malaga Global Coalition for Municipal Finance from 5-6 October 2023 to be held in Malaga, Spain, the United Nations Capital Development Fund (UNCDF) will be producing a policy brief series featuring the five areas of the Malaga Coalition agenda. This is the first of the series, highlighting the importance of recognizing and elevating the role of intergovernmental fiscal transfers in national and international development.

The Malaga Global Coalition for Municipal Finance created by UNCDF and UCLG in collaboration with FMDV advocates for a global financial ecosystem that works for cities and local governments. Based on the outcomes of the first two Malaga Coalition Conferences, five elements of the financial ecosystem have been identified as the policy agenda towards the Third Conference: intergovernmental fiscal transfers, own source revenue, domestic capital markets for long-term debt financing, city friendly equity finance, and a guarantee fund for cities.

These five interlinked elements will create an ecosystem for sustainable subnational financing, ensuring that external investment is balanced with strengthened local revenue and capital markets, and further reinforced with mechanisms to defray sovereign credit rating risk.

IGFTS are the largest and most important source of revenue for local governments in most countries, including developed and developing countries at both urban and rural levels. According to a review of 96 countries, IGFTs constitute over 50 percent of total revenues of local governments, which illustrates the significance of IGFTs and the associated development implications. IGFTs offer a number of positive socioeconomic impacts, including addressing fiscal vertical imbalances; initiatives for leveling out fiscal needs and variations in SNG revenue potential and geographic equity, application of minimum standards for public services to ensure accountability, addressing interjurisdictional spillovers, and advancing overall economic stabilization. Vertical fiscal imbalance is typically caused by unmatched revenue and expenditure levels for local governments, decentralization of expenditure assignments compared to revenue streams, limited or unproductive tax bases at local level, regional tax competition over capital, labor, and business, and national government taxation limiting subnational revenue-raising potential. This can be addressed by IGFT modalities, such as unconditional grants or revenue-sharing models, decentralization of some taxes, and tax abatement, by providing more room for for subnational governments to expand their tax revenues and fiscal space.

Read about the importance of IGFT's in this policy brief