Global crises could drive Africa to seek alternatives for climate finance

By AGGREY MUTAMBO

The war in Ukraine and the effects of the Covid-19 pandemic could lead African countries to seek alternative sources of financing for their clean energy projects.

A new report from the African Development Bank (AfDB) shows that most African countries are recovering from the economic downturn caused by the pandemic.

However, tough times lie ahead due to Russia’s invasion of Ukraine earlier this year, which saw a sharp rise in commodity and oil prices.

The impact on prices, and by extension the cost of switching to renewables, could have the strongest effects. Countries with key transition projects such as natural gas, solar and wind need to find finance away from traditional sources to avoid going into debt or disrupting the transition to cleaner energy.

The African Economic Outlook 2022 report shows that half of the countries most affected by climate change in the world are in Africa, citing Somalia, Kenya, Mozambique and Ethiopia which have recently been affected by the drought, locusts and unusual storms.

The East African region was on the cusp of switching from fossil fuels and coal to renewables such as solar power, but crises across the world mean funding for the projects may not arrive from so early. In the EAC, six of the seven partners require at least $120 billion by 2030 to fund their Nationally Determined Contributions, globally agreed national efforts to tame climate change in line with the Accord from Paris.

Advertising

In Kenya and Uganda, this means planting more trees, installing solar power plants, shutting down diesel generators, connecting villages to the national electricity grid and adopting cleaner modes of public transport.

Access to energy

“The Sustainable Development Goals have access to energy as a key objective. Because access to energy is fundamental to achieving all the other goals we have for 2030,” said AfDB Acting Chief Economist Kevin Urama at the launch of the report in Accra, Ghana on Wednesday. .

“Financing a just energy transition then becomes important for countries fighting against climate change. If we are able to do this in Africa, we will be a leader in building a new inclusive paradigm shift that is being explored,” he said.

Under a carbon credit system, Africa is expected to receive $4.8 trillion by 2050, or $173 billion per year. However, countries in the region have received paltry external funding for these projects under climate finance.

Kenya needs $64.9 billion by 2030, Tanzania $60 billion and Rwanda $11 billion. Kigali has launched a local green fund that has raised $217m, and Uganda’s climate budget has received just $94m over the past 20 years. These countries are all energy-deficit. In the region, Kenya has the highest number of people connected to the national grid with 75% of households. The other EAC partners, with the exception of Uganda, are below 50% and have high electricity tariffs, with a kilowatt hour costing around $0.20 in Kenya.

The region faces a dilemma, however: Professor Urama said any country that simply cuts off an energy source without first installing an alternative will hurt its GDP growth.

“[Energy] transitions take time. It’s not something that happens quickly. The countries that have run it have used gas as a transition fuel,” he said. “Natural gas is a central aspect of the ability to decouple from coal. This is why we continue to see this call from the AfDB that gas must remain a central part of the continent’s energy mix, without compromising the Paris Climate Agreement.

The AfDB estimates that there are at least 4.7 trillion cubic meters of natural gas in Mozambique and Tanzania. The Bank provided some financing for the projects. The report says completing these and other climate-related projects may require alternative sources.

Kenya and Rwanda have explored green climate funds.

The Bank is offering more instruments such as green bonds and loans, sustainability bonds and debt-climate swaps.

AfDB President Akinwumi Adesina has said the African Development Fund (ADF), the concessional lending arm of the Bank, is expected to use its accumulated equity of $25 billion as the main source of financing for related projects. to the climate.

“The Fund will provide greater leverage for donor contribution; excellent value for money for taxpayers in donor countries. The Fund will be more sustainable, as it will generate more income. The Fund will reduce countries’ debt because it will offer much lower concessional lending rates compared to the high interest rates countries get in global capital markets,” he said.

The ADF could take the route of the International Development Association (IDA), the World Bank’s concessional lender. Last year, it launched a 10-year sustainability bond that raised $2.14 billion, enabling its lending capacity to nearly double from $5 billion in 2020.

“With an ADF capital of $26 billion, the outlook could be for an additional $8-10 billion, which could drive lasting transformation, especially for fragile and transitional states on this continent,” said the Ghanaian President Nana Akufo-Addo, one of the proponents of alternative financing. “Such is the demonstrated power of the market that attracts the ADF.”

Reassignment of SDRs

The AfDB and the African Union have called for the reallocation of Special Drawing Rights (SDRs) owed to rich countries to lend to countries to deal with economic crises, as well as to support energy projects. Allocated by the International Monetary Fund (IMF), SDRs are special units equivalent to reserves of liquidity that countries can draw on to protect themselves in situations where alternative incomes fall. The IMF released 650 billion dollars following the Covid-19 pandemic. Africa has received only $33 billion, and the AfDB is targeting $277 billion for G7 countries.

“We are actively working with the IMF to find practical solutions to these problems. We should use SDRs more pragmatically, to support countries,” Adesina said. “Providing SDRs also through multilateral development banks has several advantages. First, multilateral development banks can take advantage of SDRs. At the African Development Bank, we can quadruple the leverage of SDRs. »

He said SDRs can be part of the Bank’s hybrid capital, as equity paid for through long-term loans.

“The leveraged SDRs will be used to provide additional capital and financing to development banks in Africa. SDRs can also be provided as concessional loans to the African Development Fund,” he added.