Debt sustainability gets to the heart of climate finance
Considering that the world reached some worrying climate change milestones this year, the pressure was on for the global leaders converging at the COP28 conference in Dubai to make real, inclusive climate progress.
Climate finance was an important agenda item — some big climate funding announcements were made and task forces launched — but we still don’t have enough urgency on the issue at the heart of climate progress for Africa — debt sustainability.
As the WWF points out, COP28’s finance developments — the agreement on the Loss and Damage Fund to support countries affected by the climate crisis; a $30bn (about R568bn) catalytic fund from the UAE to unlock private finance for the global south; a $270bn green finance pledge from UAE banks; and commitments from multilateral development banks to unlock more than $180bn in additional climate finance and form a new task force to ramp up “debt-for-nature” swaps — are commendable.
But, to quote the WWF: “Developing countries need trillions not billions ... and there’s a gaping abyss between what’s been pledged and what’s required.”
In other words, the global effort to fund net zero — the point at which manufactured emissions are balanced globally with CO2 removals over a specific period — needs to be undertaken by deploying capital right now.
Sustainable sovereign debt — or government borrowing — is a fundamental imperative for African countries in any discussion about climate finance. Already highly indebted, low-income African countries will struggle to finance climate change mitigation, adaptation and resilience, even with an array of green loans at their disposal if the issue of healthy and sustainable debt is not addressed.
Climate change preparedness is now beyond urgent for global long-term environmental, social and economic sustainability. People can’t survive without clean air and water, healthy soil, food security, abundant natural resources, and safe, sustainable jobs and living conditions.
But the transition away from fossil fuel dependency, the development of new green industries and the conservation of natural resources and precious biodiversity are all costly, not only financially; there are human costs as well. The challenge is to move to net zero in a way that leaves nobody behind.
Those financial and human costs are even more crippling for highly indebted, low-income countries, and the finance those countries receive comes at higher risk-based interest rates.
Globally, 52 low- and middle-income developing economies are either in debt distress or at high risk of debt distress. Together, they account for more than 40% of the world’s poorest people, according to the UN’s 2023 Financing for Sustainable Development Report.
South Africa’s debt is expected to reach the dangerous debt-to-GDP ratio of 77% in the next two years.
Global law firm Allen & Overy and the Climate Finance Initiative estimate that $6.2-trillion will be required annually between now and 2030, and $7.3-trillion by 2050 to deliver net zero. These figures are corroborated by the UN, which also shared staggering figures about the net-zero funding gap last week.
The UN Framework Convention on Climate Change estimates that developing countries would require at least $6-trillion by 2030 to implement their nationally determined contributions as per the Paris Agreement — yet according to the Organisation for Economic Co-operation & Development, the actual climate finance flow (up until last week) was about $83bn. By 2030, the UN expects the annual adaptation needs in developing countries to be about $160bn-$340bn, while current adaptation flows are only about $35bn.
Citing the financial challenges emerging markets face, the UN says “the world is fast running out of time to rescue” the 2030 sustainable development goals.
We need to reimagine the financial products in use to develop the global green economy, and we can do so by putting to use the abundant natural assets that Africa and other global south nations have to offer. This could include vast green basins, open spaces ideal for wind and solar power, and expansive marine resources.
It’s perhaps a step in the right direction that multilateral development banks have launched a global debt-for-nature task force at COP28 to help protect vital ecosystems. Some banks are even pausing debt repayments for countries suffering climate impacts. The problem is that we need more concrete action to close the funding gap in a sustainable and not punitive way for Africa.
We don’t have to look too far for inspiration. This year Gabon announced the completion of the first debt-for-nature transaction in Africa to refinance $500m of its sovereign debt. That transaction enabled Gabon to contribute $125m in new funding for ocean conservation, supporting its commitment to protect 30% of its lands, freshwater systems and ocean by 2030.
Debt-for-nature swaps were a hot topic at the World Bank and IMF’s annual meetings in Marrakesh this year, and they offer a compelling prospect: a new way for countries to finance ESG or conservation projects without having to incur new debt, or where new debt is raised at far lower interest rates than they could achieve thanks to credit enhancement within the structure from a higher-rated entity with a wish to promote ESG-related activities or other conservation efforts.
The world is heading for a shallow recession in January 2024, when debt will become even more expensive.
After Covid many developing countries got themselves into tight fiscal spaces. It’s time to get out of them with innovative global finance solutions while coming to the party with greater austerity and financial discipline.