Turning Debt into Climate Action: Africa’s Path to Sustainability
To address the impacts of climate change, government and business leaders meeting at a high-level event, cohosted by AfriCatalyst and Open Society Foundations (OSF), have unveiled a novel financial strategy that could become the continent’s go-to mechanism when seeking climate finance.
Experts agree that African nations – already losing 9% of their GDPs to climate-related disasters – require a whopping $300 billion annually to meet their combined climate goals. However, the international private financing system has become costly due to poor credit ratings stemming from structural issues and bias, thus limiting the amount of foreign direct investment flowing to the continent. Moreover, domestic revenues in Africa remain low and inadequate to support climate adaptation goals. The average revenue-to-GDP ratio in Africa is 23%, compared with 45% in the European Union.
At the event, held on the sidelines of the Africa Climate Summit, speakers implored the continent to take up the debt-for-climate swaps mechanism, illustrating its power to change Africa’s financial scene. This new mechanism offers countries a chance to negotiate with their creditors to restructure their debt in exchange for investments in climate-resilience projects, simultaneously offering solutions to address both crippling debt burdens and the climate crisis.
“Debt for climate and nature swaps are highly innovative climate financing instruments. They can assist countries in restructuring their debt, extending maturities, or lowering interest rates, thereby freeing up valuable resources that can be directed towards combating climate change,” AfriCatalyst Chief Executive Officer Daouda Sembane said.
Shifting the paradigm
Ibrahima Cheick Diong, United Nations Assistant Secretary-General and Director-General of Africa Risk Capacity Group (ARCG) stressed the need for innovative thinking regarding climate finance. He suggested the creation of a “Triple A” framework focusing on Adaptability, Affordability, and Accessibility as key criteria of climate finance solutions.
“Business as usual cannot continue; innovation must take place,” stated Diong, emphasizing how adaptation and mitigation efforts may work hand-in-hand to protect the environment. Debt-for-climate swaps offer one solution that may bridge financial interests with environmental objectives.
“Africa Export-Import Bank (Afrexim Bank) has established a $500 million fund to back climate projects. By offering concessional funding, grant funding, and guarantees to investors we hope they’ll view projects differently,” averred Denys Denya, Executive Vice President of Finance Administration and Banking Services at Afrexim Bank.
Despite Africa being responsible for only a fraction of global emissions, it is particularly hard hit by climate change, according to Vera Songwe, a non-resident fellow at the Brookings Institute. She stressed the significance of effective governance and policy reform for encouraging climate-focused investments.
“Africa needs to reform the global financing architecture to secure funding, with domestic resource mobilization from carbon markets being key. A successful carbon market could yield $50-180 billion,” according to Songwe, emphasizing how transparent carbon markets stimulate investment.
Philanthropy and Multilateral Support
Amadou Hott, Special Envoy for the President of the African Development Bank (AfDB), highlighted the important role philanthropy plays in meeting Africa’s climate challenges. Philanthropic capital not only helps close talent gaps but also provides crucial guarantees that enhance the value of green projects.
“This will enhance the creditworthiness of projects and make commercial banks and private equity to be comfortable. The way we have structured the Alliance for Green Infrastructure in Africa, is in line with how the partnerships should be done to mobilize climate finance at scale, we are looking at the entire value chain. We need upstream work from governments to set the right planning, vision and strategies to ensure we have NDCs,” said Hott.
Even since launching the Africa Carbon Markets Initiative (ACMI) at COP27 seven months ago, Africa’s vast carbon sinks such as Congo Forest have remained underexploited. Dr. Mahmoud Mohieldin, UN Climate Change High-Level Champion for COP27 called upon African countries to explore these carbon-rich resources to gain greater financing through carbon markets.
Mohieldin noted, about Africa, that bankable and investable projects exist but require improved business environments, regulatory incentives, and marketing opportunities; further emphasizing the necessity of integrated financial frameworks as well as diverse funding sources in support of mitigation and adaptation initiatives.
AfriCatalyst’s Vision for Africa
AfriCatalyst, a global development advisory firm based out of Dakar, Senegal, has become a champion of climate finance innovation across Africa. During the summit, AfriCatalyst released its groundbreaking policy paper entitled, “Upscaling Debt for Climate & Nature Swaps in Africa.”
The paper presents strategies to restructure Africa’s debt by sustainable development goals and climate resilience, through debt-for-climate swaps that offer win-win solutions for both external creditors and African nations. Such swaps promote collaboration while strengthening networks.
As Africa strives to acquire innovative climate finance solutions, this innovative strategy may prove pivotal to overcoming the burden of mobilizing sufficient climate finance.