The good news is that you have plenty of room! This wall has so much potential!
The first thing I would do is take the flags down so you can assess the wall’s situation without distraction. Basements can feel a little cold or uninviting, especially if they feature small, up high windows like yours does.
Easy fix, though! Hang a tapestry or macrame wall hanging to bring some cozy texture into the space. This gives the vibe you’d get from curtain panels but won’t call attention to the window. This is also a great opportunity to bring some art onto the walls! Check Etsy for cool tapestries or macrame, or do this DIY Woven Dreamcatcher, but with a larger hoop or with a square frame instead to take up more wall space!