Navigating Climate Finance in Africa: Insights from the C3A Workshop
African landscape, Source: Unsplash
As Africa grapples with the dual challenges of climate change and economic growth, the continent stands at a pivotal crossroads. The Nairobi Declaration has positioned Africa as a promising destination for sustainable development investments. However, realizing this potential requires robust financing strategies, particularly through fiscal policies that promote investments in climate initiatives, mitigate risks, and facilitate a transition towards sustainability.
On October 17, C3A co-organized an online workshop with UNECA in collaboration with the Coalition of Finance Ministers for Climate Action titled “Climate and Nature financing in an African context” to discuss financing strategies and questioning the fiscal aspects of these transformations.
The Importance of Fiscal Policies
Fiscal sustainability is a necessary condition to attract investment in green projects. The energy transition will disrupt traditional revenue sources and demand increased state spending. The challenge lies in planning sound fiscal measures in an uncertain and already constrained environment. Many countries have already started implementing measures, for instance, Kenya has implemented tax incentives aimed at bolstering clean energy investments. South Africa’s innovative approach channels revenue from its carbon tax into funding eco-friendly projects.
Yet, African countries face significant challenges, including the intricate interplay between climate change, biodiversity loss, and macroeconomic performance. This workshop highlighted the urgent need to address the financial and fiscal implications of promoting green economic growth amid increasing climate disruptions.
Key Discussions from the Workshop
This event featured insights from various experts, shedding light on critical issues in climate finance.
Dr Olufunso Somorin (Regional Principal Officer at African Development Bank AfDB) emphasized that only 22% of the required infrastructure investment in Africa is currently financed. The AfDB aims to mainstream climate and nature considerations in all finance projects. AfDB's resources are predominantly allocated towards adaptation efforts today, yet there is a growing need to leverage AfDB funds as catalytic capital to reduce risks for private investors. To address financing gaps, the AfDB has experimented with up to 70 different financial instruments. Nonetheless, a major bottleneck exists on the supply side due to the limited bankability of proposed projects, which hinders their ability to attract necessary funding.
James Seward (Senior Financial Officer in the Capital Markets and Investments team of the World Bank Treasury) discussed various climate finance interventions across Africa. He highlighted Rwanda's pioneering sustainability-linked bond, Seychelles' blue bond, and debt-for-climate swaps in Gabon and Cape Verde. These innovative financial instruments showcase the diverse strategies being employed to enhance resilience and address climate challenges.
Nadia Ouedraogo from UNECA pointed out that most loans taken by African countries are not concessional, which increases fiscal tensions. Green, SDG, bonds have the potential to attract a broader investor base and support social objectives. Additionally, the AfDB has introduced hybrid bonds that incorporate an equity component.
Hon. Amos Lugoloobi (Minister of State Planning, Ministry of Finance Planning & Economic Development of Uganda) emphasized the country’s vulnerability to climate change, stressing the need for collaboration across sectors. Key aspects of this collaboration include green budgeting, stakeholder engagement, and benchmarking practices to enhance resilience.
A recurring theme was the capacity to absorb available funding. While some experts argued that certain countries may struggle with absorption, the consensus was that insufficient funding remains a critical barrier. Prioritizing resource mobilization must take precedence before addressing capacity issues.
Babacar Diouf (Technical Advisor at the Ministry of Finance, Senegal) presented insights on the regulatory framework for public financing, highlighting the establishment of a green budget tied to the finance law. Senegal’s new debt strategy emphasizes prioritizing climate action in its development plans, demonstrating a commitment to integrating sustainability into national policies.
Sam Mugume Koojo (Ministry of Finance, Uganda) outlined the climate-focused initiatives from his country, including Environmental Fiscal Reform, extraction taxation, carbon pricing, and green budget tagging. These efforts aim to align Uganda’s financial policies with sustainable development goals.
Zuzana Brixiova Schwidrowski (Director, Macroeconomics, Finance & Governance Division, UNECA) emphasized that fossil resources will continue to play a role in the coming decades, as transitioning to cleaner alternatives will take time. She mentioned the development of country platforms like the Just Energy Transition Partnership (JET-P) programs in South Africa and Senegal. Lastly, she highlighted the link between climate action and public debt, stressing the need for debt restructuring mechanisms to support climate objectives.
Challenges and opportunities: a promising future
The C3A workshop highlighted challenges and opportunities facing African economies as they navigate the complex landscape of climate finance. The discussions revealed a pressing need for innovative financing solutions, strengthened collaboration among stakeholders, and the integration of climate considerations into national budgets.
To effectively address the climate crisis, African nations enhance their financial strategies, levying diverse instruments to mobilize resources. Furthermore, engaging local finance entities and fostering dialogue between finance and climate experts are crucial for developing a comprehensive understanding of the challenges at hand.