Debt is crippling Africa’s just net-zero transition potential

Yemi Kale argues debt is crippling Africa’s just net-zero transition, advocating for concessional financing and reforms as a means to help African countries better fund health, education, and climate resilience projects.

 

Too many African countries are facing existential crises, where human capital and socioeconomic development targets for quality health and education are at risk given the harsh realities of debt overhang and sovereign debt sustainability.

Nearly 30 African countries are at medium-to-high risk of sovereign debt default, as their rising domestic debt burdens crowd out anemic local private enterprises from the capital markets, and foreign debt burdens drag them toward international insolvency.

Given the historically elevated base rates maintained by central banks the world over to tame runaway inflation, several highly indebted African countries are experiencing the downside of excessive commercial foreign currency borrowings. Learning from this, African countries need to have better access to concessional financing, such as grants and low-interest loans, to reduce their reliance on commercial borrowing.

This can be achieved through increased aid flows, the expansion of concessional financing facilities, and the reform of Multilateral Development Banks (MDBs) to make them more responsive to the needs of African countries.

Advocating for reforms and green finance

African countries must remain vigilant in terms of advocating for reforms to MDBs and development finance institutions that support their economies, particularly in light of global calls for increased funding for climate adaptation and mitigation projects.

Africa’s just and sustainable transition to a low-carbon economy will require significant resources and investment, as well as new institutional arrangements to ensure that these resources are used effectively and equitably. Mobilizing the resources needed requires a combination of financial instruments and institutional arrangements that can support the transition to a more sustainable and equitable economy.

Green finance instruments such as green bonds, green loans, and green investment funds can help channel capital toward environmentally friendly projects and initiatives. These instruments provide financial incentives for investors to support sustainable development and can help mobilize resources for a just transition.

However, cash-strapped African countries struggle with financing basic healthcare, essential education, and other quality of life-enhancing services to their populations. Recently, Kenyan President William Ruto, African Development Bank President Akinwumi Adesina, African Union Commission Chairperson Moussa Faki Mahamat, and Chief Executive of the Global Centre on Adaptation Patrick Verkooijen made a powerful case for a pause in crippling interest payments so African countries could have the breathing space to invest in core development programs and climate resilience projects.

This proposal is entirely meritorious and equitable, given that while the African continent is the one most exposed to climate change, its countries are least responsible for global greenhouse gas emissions.

Debt restructuring and private-sector finance

Ethiopia’s, Ghana’s, and Zambia’s sovereign debt defaults underscore the risks that rising interest rates, in pursuit of inflation-targeting, pose for ambitious development plans unduly reliant on financing from foreign commercial debt. Twenty African countries are either bankrupt or teetering on the brink of high external debt distress. The frequency of Eurobond issuances — a bond issued in a foreign currency — by African sovereigns has attenuated, with only few nations such as Benin, Côte d’Ivoire, and Kenya tapping into the liquidity of global capital markets so far in 2024.

African nations must make committed efforts to lobby global finance institutions for debt restructuring and relief as a necessary precondition to the transformative development initiatives occasioned by the climate crisis. This includes extending maturities, reducing interest rates, and, in some cases, seeking debt forgiveness, debt rescheduling, or debt swaps.

In this regard, Chad, Ethiopia, Ghana, and Zambia’s participation in the G20 Common Framework for restructuring sovereign debt is promising — it may deliver positive outcomes for indebted nations in terms of the treatment of official bilateral and commercial debt. However, while these measures can alleviate immediate financial pressures and create space for economic recovery, caution is advised since there are potential negative consequences that impact on credit rating and potential access to future financing needs.

Private sector finance on the African continent lacks the depth, incentives, and other capabilities to drive lower concessional financing for African sovereign obligors, as well as unbanked African firms. All too often, perceptions of an “African premium” discourage investors other than the risk-seeking private finance that has regularly been courted by the allure of excess profits accruing to winning investments in mining, industry, telecommunications and tech-enabled businesses.

African countries must actively court private climate finance to support their transitions to net zero over the next three decades. When well-articulated, the wealth and wonders of successfully betting on Africa’s economic rise may tempt the brave of heart to invest in the rich and diverse climate finance opportunities abounding from Cairo to Cape Town, from Nairobi to Niamey.

Finally, it is hoped that the ongoing reforms of MDBs and Development Finance Institutions (DFIs) will enhance their capacity to complement private finance, particularly in terms of providing lower interest costs, longer repayment periods, and the policy support/technical assistance that is often simultaneously provided alongside lending operations.

Dr. Yemi Kale is Group Chief Economist and Managing Director of Research and International Cooperation at Afreximbank. This op-ed article was originally published on Devex. The views expressed in it are those of the author and do not necessarily reflect African Newspage’s editorial policy.