By Chibuzor Nwaneri
To mitigate the impact of climate change on sub-Saharan Africa (SSA), countries in the region have been urged to invest in areas like agriculture and social infrastructure to absorb the shocks.
The Deputy Managing Director, International Monetary Fund (IMF), Tao Zhang, who gave the advice recently, reiterated that investing in agriculture forms part of the resilience building to reduce the impact of climate shocks and provide a foundation for enduring economic growth.
Zhang, at the Banque de France, FERDI, and AFD conference, on the effectiveness of financial instruments as part of the climate policy toolkit in sub-Saharan Africa, said investments in climate-resilient infrastructure, especially in agriculture, is of paramount importance in the region.
“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,” he said.
He noted that 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.
Zhang believes that mobilizing external public financing, as well as private-sector resources, will be a key priority for many sub-Saharan African nations, and listed a few instruments or channels.
First, climate funds such as the Global Climate Fund (GCF), can provide substantial grant financing for both adaptation and mitigation projects while also catalyzing climate innovation and private-sector participation.
Aside from helping Malawian farmers and fishers build climate resilience, he said the GCF has supported other countries like Ghana, Kenya, Nigeria, and Uganda, to provide a fund for small and medium enterprises (SMEs), to provide farmers with innovative financial services—such as micro-insurance and mobile payments.
The GCF’s anchor equity investment helped de-risk the fund and subsequently attracted private investors, he explained.
However, he reiterated that countries in the region need high standards of governance, procurement, and financial management required by these types of climate funds. Accordingly, he urged the IMF and other development partners to help by providing capacity development and outreach on the progress sub-Saharan African countries have made in these key areas.
“The speed of vaccine rollout is not only a healthcare issue but is increasingly a differentiator of near-term, post pandemic economic recovery for African nations.“
Secondly, he said green bonds are another critical financial instrument for relatively high-return/low risk projects, such as green energy, which is popular in Kenya. But for most of SSA countries regarded as high risk, much of the success of green bonds will depend on improved debt management.
Zhang equally called for better information management, saying: “countries need to set up environmental information disclosure and establish green finance standards, and these should be harmonized internationally.”
Finally, he said; “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.”
Furthermore, he said insurance products could help a lot in building resilience, although their use in SSA is relatively limited, mostly due to “overly restrictive regulations—such as those barring investments in infrastructure projects—to be relaxed.”
He added that carbon or environmental credits are another potential source of financing, depending on how international markets for these credits evolve. They would also raise incentives to advance environmental protection.