Innovative financing for African economies to tackle debt, climate change and biodiversity loss
Key creditors of African countries, including China and international private investors, need to engage with innovative debt instruments to support indebted countries tackle the triple crisis of a high debt burden, climate change and nature loss. That’s the message of a new issue paper from IIED and UNECA.
Many African countries have borrowed heavily to respond to the COVID-19 pandemic and find themselves with an increasing debt burden.
The continent’s debt as a whole now stands at more than 70% of total GDP and debt servicing is often over 20% of government spending. At the same time, the challenges of climate change and biodiversity loss loom large, threatening prosperity and development.
Finding the way to tackle such major challenges head on requires innovative solutions, including new finance. These could be debt conversions to investment in climate adaptation and nature conservation programmes, or general purpose performance bonds for climate and nature.
But the authors of 'Innovative financing for Africa: harnessing debt for climate and nature' from IIED and the United Nations Economic Commission for Africa (UNECA), say that this will only work if countries are supported by the major international players of the G20, United Nations, International Monetary Fund (IMF), World Bank and African Development Bank.
The autumn meeting of the IMF and World Bank taking place this week is an opportunity to express support and agree more ambitious ways to deal with the combined impact of debt, climate and nature loss.
The issue paper points out that several countries in Africa are beginning to demand this kind of approach. Namibia, Cabo Verde and Gabon have all called for financial innovations; Benin has issued Africa’s first Sustainable Development Goal-linked performance bond for €500 million and Ghana is preparing a US$2 billion social and environmental performance bond.
The IIED and UNECA paper examines the benefits this approach could bring to climate resilience and environmental conservation through a system of key performance indicators to set the standard for what must be achieved in exchange for debt relief or reduction. It goes on to explore the roles that different organisations and people will need to play from the local level upwards to national, regional and international level.
And at the international level, the authors set out how organisations can contribute to a positive way forward:
- The IMF/World Bank/OECD and UN platform providing the necessary international architecture to support the debt instruments linked to climate and nature in African countries
- The G20-supporting African countries beyond the World Bank’s Debt Service Suspension Initiative to include a link with climate and nature outcomes and to identify ways to bring China and private creditors into the process, and
- International organisations, non-governmental organisations and private sector advisors offering financial and technical assistance to African stakeholders to develop debt instruments for climate and nature.