How to Close Africa’s Climate-Finance Gap
With Kenya hosting the inaugural Africa Climate Summit this week, it is an opportune time for the continent's governments, the private sector, and multilateral lenders to begin removing systemic barriers to investment in sustainable development. Five bold reforms would ensure that the continent’s climate-finance needs are met.
CAIRO/GABORONE – Climate finance is inefficient, insufficient, and unfair. With debt levels and borrowing costs soaring, climate action must be funded through more equity investments and concessional financing. That means focusing on the needs of African countries, which are disproportionately vulnerable to climate change, despite contributing the least to creating the problem, in the creation and implementation of green-finance tools.
The sooner that leaders of advanced economies and international organizations understand what Africa needs to achieve a just energy transition and provide the required financing and technology transfers, the greater the chance that the world will reach net-zero emissions by 2050.
This week, Kenya is hosting the inaugural Africa Climate Summit, as well as Africa Climate Week, with the goal of increasing commitments and pledges to support climate-adaptation efforts and scale up renewable energy on the continent. That makes this an opportune time for governments, the private sector, and multilateral lenders to begin removing the systemic barriers to investment and development in African countries.
To meet the emissions targets set by the Paris climate agreement, Africa will need $2.8 trillion by 2030 – roughly equal to 93% of the continent’s GDP. But, with the continent’s combined public debt reaching $1.8 trillion in 2022, many African countries lack the fiscal space to mobilize domestic resources.
International investors should fill this gap by providing financing and technology transfers that will help build capacity and develop local industry, rather than merely continuing to exploit the continent’s natural resources. To that end, starting in Kenya this week and leading up to the United Nations Climate Change Conference (COP28) in Dubai in November and December, governments and financiers must begin implementing five critical reforms to ensure that Africa’s funding needs are met.
First, lenders must offer more concessional finance to emerging markets and developing economies (EMDEs). The World Bank and regional multilateral development banks (MDBs), supported by the climate-finance contributions of advanced economies, should provide loans to low- and low-middle-income countries at an interest rate of 1% and with a ten-year grace period and a 20-year repayment term for initiatives that boost climate resilience. Moreover, lending mechanisms such as the World Bank’s International Development Association, traditionally available only to low-income countries, should be extended to low-middle-income countries, and adopted by various multilateral institutions.
Interested in learning more about the sustainable development challenges faced by the Global South? Check out our latest virtual event, Africa’s Climate Agenda.
Governments and development agencies should also establish large and flexible pools of concessional capital earmarked for climate projects. And they should explore new avenues for international taxation to provide grants, rather than loans, when traditional private or public funding falls short.
Second, MDBs can implement credit-enhancement and credit-guarantee schemes to incentivize private-sector participation. Such assurances would mitigate project risks and bolster investor confidence, attracting much-needed private capital to Africa.
Third, creditors, including in the G20, must provide debt relief to low- and middle-income countries. Given that around 60% of low-income countries are in or at high risk of debt distress, suspending debt payments or, even better, canceling debts would greatly improve their ability to respond to the damaging effects of global warming. MDBs need to implement Climate Resilient Debt Clauses in loan contracts for poorer countries, which the World Bank announced this year. Moreover, debt-for-nature and debt-for-climate swaps could enable recipient countries to repay their debts by investing in biodiversity protection and climate action.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Building on its recent efforts to provide $100 billion in special drawing rights (SDRs) to climate-vulnerable countries, the International Monetary Fund should allocate an additional $100 billion in paid-in capital and redirect SDRs to MDBs, starting with the African Development Bank this month. This would be in line with the Marrakech Declaration, an initiative to reform the global financial architecture which is being developed at the request of African finance ministers.
Fourth, a multi-partner fund must be established to help mitigate foreign-exchange risks for private investors by providing cost-effective currency and country hedges for climate investments in Africa. Such a fund would significantly reduce the perceived risks of investing in EMDEs, even in the face of currency fluctuations.
Lastly, lenders should support the creation of a facility that accelerates existing projects and programs on the continent, especially those that preserve nature and help communities adapt to extreme weather events such as droughts, floods, and heatwaves. Multiple funders and investment instruments that already operate in Africa could set up such a facility, which would avoid the cumbersome process of establishing a new fund.
Progress on these five reforms has already been made. At the Summit for a New Global Financing Pact, held in Paris in June, Senegal secured $2.7 billion from developed countries to invest in renewable energy, and Zambia struck a deal to restructure $6.3 billion in debt.
Meanwhile, the African Risk Capacity Group, which offers parametric insurance against natural disasters, has already provided $720 million in coverage for 72 million people since 2014. We can substantially increase such assistance by quickly putting money into the Loss and Damage Fund established at last year’s COP27 climate summit in Egypt.
Innovative financing measures will help African countries recover from climate disasters, build resilience to future shocks, and complete the transition to cleaner energy – all of which can bring sustainable-development gains. But the continent needs a dramatic increase in funding to reap the full benefits of climate action.