What Financial Choices for Africa in the Face of Climate Change?
Remarks by Tao Zhang, Deputy Managing Director, IMF
Banque De France – Ferdi – AFD Conference
July 1, 2021
Many thanks to the Banque de France, FERDI, and AFD for organizing this conference and for giving me the opportunity to speak about the effectiveness of financial instruments as part of the climate policy toolkit in sub-Saharan Africa.
We all agree that building resilience to climate change is of paramount importance in the region.
Part of this resilience building involves investments in climate-resilient infrastructure—especially in agriculture—which will reduce the impact of climate shocks and provide a foundation for enduring economic growth.
But climate resilience also requires social spending. Investing in healthcare and education translates into a more resilient and productive population, and strengthened social safety nets will help minimize the adverse impact of climate shocks and create buffers that can compensate for lost income in the wake of climate-induced disasters.
All this, however, costs money, and with high debt levels, especially post-pandemic, many countries in the region lack the needed fiscal space. Some room can be generated by shifting the composition of spending—gradually reducing energy subsidies, for instance, could free significant resources while also supporting a greener economy. And of course introducing carbon taxes or increasing existing fuel taxes can raise revenues while contributing to mitigation efforts. At the same time, it will be important to use some of the resources generated to protect vulnerable segments of the population.
There is thus no doubt that mobilizing external public financing, as well as private-sector resources, will be a key priority for many sub-Saharan African nations. Let me highlight a few instruments or channels that I think are particularly important.
First, climate funds can provide substantial grant financing for both adaptation and mitigation projects while also catalyzing climate innovation and private-sector participation. Recently, through the UNDP, the Global Climate Fund (GCF) has helped upgrade Malawi’s climate information and early warning systems. This, combined with advances in mobile access, has been instrumental in helping Malawian farmers and fisherfolk build climate resilience.
Similarly, in Ghana, Kenya, Nigeria, and Uganda, the GCF has supported a fund for SMEs, where the SMEs provide farmers with innovative financial services—such as microinsurance and mobile payments. The GCF’s anchor equity investment helped de-risk the fund and subsequently attracted private investors.
Of course, countries in the region need high standards of governance, procurement, and financial management required by these types of climate funds. Here, the IMF and other development partners can help by providing capacity development and outreach on the progress sub-Saharan African countries have made in these key areas.
Second, green bonds are another critical financial instrument that I’d like to highlight. These are typically earmarked for relatively high-return / low risk projects, such as green energy. In Kenya, access to electricity increased from 40 to 70 percent over five years mainly using small, off-grid solar-powered energy plants. A low-cost, pay-as-you-go, mobile-money model made the system easy to expand, especially in rural areas, and 10 times more jobs were created than in traditional utilities.
For countries with high risk premia, as is the case for much of sub-Saharan Africa, the success of green bonds will depend on improved debt management.
Better information is another important prerequisite: countries need to set up environmental information disclosure and establish green finance standards, and these should be harmonized internationally.
Finally, I should note a few other tools and channels. As SSA financial markets become more sophisticated and risk premia decline, a range of other financing options may emerge, which should help the government, firms, and households too in making the investments they need—people will be able to construct more resilient homes and good sanitation, access safe drinking water, and empower themselves through education and health care.
Insurance products are particularly exciting, as they could be immensely helpful in building resilience, though their use in SSA is relatively limited now. One key here is for overly restrictive regulations—such as those barring investments in infrastructure projects—to be relaxed.
Carbon or environmental credits could be another potential source of financing, depending on how international markets for these credits evolve. They would also raise incentives to advance environmental protection.
In sum, we at the IMF believe that financial instruments and channels like the ones I’ve just mentioned can play an absolutely critical role in helping sub-Saharan Africa build resilience against climate change. And I’m thus truly delighted to see an event like this one, dedicated to this important topic.
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