Thursday, April 18, 2024
Money TalksDebt-for-climate swap: Africa’s last resort?

Debt-for-climate swap: Africa’s last resort?

Finance is hardly suffice in Africa even during normal times, let alone at a time when the continent is wrangling to fix the immediate effects of COVID-19, the climate crisis, the Russian-Ukrainian war, inflation, instability, and the enormous challenge of maintaining stable fiscal and monetary policies. These transient whirlwinds of events necessitate prompt action and financial support in order to mitigate the negative effects they have on the continent.

This past week, African finance ministers gathered at the Skylight Hotel in Addis Ababa for the 55th Conference of Ministers (CoM2023), where they discussed in detail their frantic search for alternative financing venues. Most notably, it seems it has now gone beyond the ministers’ ability to secure funding to lessen the devastating effects of the climate crisis.

Frustrated, Mohamed Maait, the Egyptian finance minister, said, “What I am asking every day and every hour is where I can get the money to protect our people from climate extremes,” to fellow ministers during the two-day conference in Addis Ababa.

African countries are spending between two percent and nine percent of their budgets to combat drought, floods, cyclones, and other extreme weather events, according to a recent UN report. However, the African Development Bank (AfDB) estimates that each year Africa will need between USD 100 billion and USD 127 billion to address the continent’s climate financing gap.

Further, Africa is only able to tap into three percent of the international climate finance market due to the high cost of capital. Several African nations are reportedly feeling the effects of the ongoing climate crisis like a domino effect, despite having done nothing to cause it.

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Climate change, the war in Ukraine, and a slowing global economy have caused Africa’s economic growth rate to drop from 4.6 percent in 2021 to just 3.6 percent in 2022, according to the UN report.

Without rain for five straight seasons, over 30 million people in eastern Africa are in immediate need of emergency humanitarian aid. In particular, Ethiopia, Somalia, and Kenya are on a knife’s edge.

More than 225 people were killed by a cyclone that hit Malawi and Mozambique, and over 100,000 people were forced to flee their homes.

Ethiopia’s finance minister, Ahmed Shide, is worried that Africa even won’t be able to achieve the SDGs.

“Most African economies have been doing well in the past few decades, and we were on track to meet most of the SDGs until multiple global and local shocks threatened to unravel several years of socio-economic gains,” he told the ministers gathered during the Conference.

On the other hand, African economies struggle to service external debts owed to developed economies, which are also blamed for refusing to accept responsibility for the climate crisis caused by developing countries.

The ministers’ alternative solution is an authentic win-win situation. There is a growing consensus among African leaders that debt-for-climate swapping is necessary.

An alternative economic instrument called a “debt-for-climate swap” allows a country’s external debt to be reduced in exchange for the debtor’s commitment to green economy investments. In contrast to the carbon trading model, this enables debtors to pay off their debt by planting trees, among other green economy endeavors.

Experts agree that using a ‘debt for climate adaptation swap’ to restructure a country’s existing debt portfolio can help African countries reduce their debt burden and adapt more easily to climate change. This would provide them with fiscal breathing room, enable the creation of new jobs, and allow for the retention of forex.

There has been little acceptance of the plan from major polluters and lenders like the United States, Europe, and China, although it is just one of several alternative green economy financing models discussed at CoM2023.

Prime Minister Abiy Ahmed (PhD) also urged for “collective call for a fast and predictable global framework of debt restructuring that is conducive to accelerating sustainable, inclusive green growth in Africa” at the 36th AU summit last February.

“Many African nations are actively working to protect the environment through reforestation and investing heavily in hydroelectric power plants to produce clean energy,” he said, claiming that Africa is ahead of the rest of the world in crucial areas for humanity and that this leadership should be formally recognized and institutionalized.

Maati also emphasized the importance of a united front from Africa in talks with developed economies. In anticipation of the upcoming launch of the “Sustainable Debt Coalition for Africa” in Cairo, he urged the Economic Commission for Africa (ECA) and African countries to participate.

The program is meant to provide a diplomatic opportunity to align key performance indicators for debt restructuring and new funding.

The current total external debt of Africa is just half the USD 1.4 trillion in climate finance that Africa needs up to 2030. In 2021, Africa’s debt to its external creditors reached USD 645 billion, double what it was in 2013. Currently, 21 African nations are either experiencing or are at risk for debt distress.

The number of sub-Saharan countries exceeding the debt service risk thresholds is projected to double, from 10 now to eighteen in 2024.

The debt service payments for African countries are also expected to reach USD 69 billion in 2023. This is due to projections that show annual debt service will increase from USD 45 billion in 2022 to USD 58 billion in 2026. It is predicted that Ethiopia’s annual debt service, currently at an average of USD two billion per year, will double over the next two years.

As of early 2021, Ethiopia, Ghana, Namibia, and Tunisia requested for debt relief under the G20 Common Framework for Debt Treatments beyond Debt Service Suspension Initiative (DSSI). But they are still waiting for a decision from the rich countries.

Ethiopia owes about USD 27.8 billion to external creditors, with about USD 13 billion owed to China.

Other novel approaches to funding are gaining traction as well, including carbon credits. The ECA estimates that nature-based carbon credits, at a value of USD 120 per ton of carbon sequestered, could raise up to USD 82 billion for Africa.

Alternatives to climate finance in Africa include bonds and blended finance, which combines development funds and private capital. However, industrialized countries are still hesitant despite pledging USD 100 billion annually in climate financing for Africa.

Meanwhile, Africa’s budgets are getting thinner as a result of the price tag for reducing the negative effects of the climate crisis.

“Unlike much of the rest of the world, African countries had limited ability to use fiscal and monetary policies to dampen their negative effects on their populations. And subsequent efforts to regain the lost ground have been frustrated by adverse external developments,” Abebe Aemro Selassie, director of the International Monetary Fund’s Africa department, said during the 2023 Oxford Center for the Study of African Economies Conference on March 20, 2023.

Revenues make up about 79 percent of total government spending in sub-Saharan Africa, with borrowing making up another 19 percent and grants and/or other concessional budget support making up the remaining two percent.

Even those African economies with manageable debt positions, according to Abebe, may be forced into insolvency due to a lack of funds. However, Abebe finds this discouraging regarding debt restructuring possibilities.

The ongoing issues with the Common Framework, according to Abebe, “clearly show that external creditors, especially countries, have even less sway over the pace at which debt restructuring can happen.”

He says that this is even more frustrating when the official creditors can’t agree on a needed debt treatment, which prevents the IMF from providing timely support to countries during periods of acute distress.

The west’s reluctance to swap Africa’s debt from climate adaptations is deliberate, argues Samson Hailu, an independent researcher. He says this is a win-win scheme both for the western countries that are causing the climate crisis and for African countries that are unable to pay their debt.

“The developed countries came up with a precondition, which is human rights. They demanded that if African countries want to benefit from the debt-climate swap scheme, they have to embrace western human rights standards like LGBT rights. The debt-for-climate swap method is a very creative and unique one. But it stuck because the West attached the human rights issue to it.”

For him, Africa is willing to embrace human rights, but not with the west’s definition of human rights. “Several African countries have already embarked on reforestation programs to recover the naked continent. So Africa will not lose anything,” concluded Samson.

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