Concessional finance must be scaled up for Nigeria and other Sub-Saharan Africa countries that have limited resources or fiscal space to tackle their vulnerability to climate-related shocks, in order to strengthen their resilience to climate change and to help speed the green energy transition.
This was the position established in the latest International Monetary Fund, IMF’s Regional Economic Outlook: Sub-Saharan Africa Analytical Note, seen by Energy Day at the weekend.
EnergyDay gathered that the concessional climate finance is market-rate funding from grants, loans, or other instruments aimed at supporting climate-related development objectives.
According to the IMF, it would cost much to address the climate change crisis in sub-Saharan Africa, a vulnerable region and the world’s smallest contributor to global greenhouse gas emissions.
The analysts in the note reviewed by EnergyDay, particularly explored some available options, highlighting the untapped resources currently available from multilateral climate funds, including the demand for new ways of connecting public, private, and concessional finance to lift investment and close the gap between resources and needs.
The IMF’s note further affirmed that scaling up climate finance will entail steps to address existing bottlenecks—including on the part of recipient countries—in order to ensure that committed funds are used swiftly and effectively. Africa needs $50 billion per year by 2050 for adaptation.
IMF revealed that climate change challenges are threats to the lives and livelihoods of millions worldwide, especially the vulnerable people in Nigerian and other African countries.
It said, ” The climate shocks in Africa often amplify existing social tensions and food-security concerns. Out of the world’s 10 most vulnerable countries, 8 are in sub-Saharan Africa (ND-GAIN 2023)”
IMF however warned that adopting the same carbon-intensive path taken by other economies for energy demand in sub-Saharan Africa (which is expanding dramatically over the next few decades) would potentially undermine the international community’s effort to contain global warming.
The IMF note emphasised that Africa cannot and should not be expected to shoulder the burden of addressing the climate crisis through both adaptation and mitigation alone.
It said, ” Global solution to climate change will need to consider the region’s concerns and interests. And it must ensure that sub-Saharan Africa gets the resources it needs to both protect its people and secure a swift energy transition.
“On simple equity grounds, Africa has contributed little to the accumulation of greenhouse gases but is nonetheless the world’s most vulnerable region to global warming.
“On efficiency grounds, climate action is a clear example of a global public good, whereby concessional funding can narrow the gap between the private costs faced by the region and the social benefits enjoyed by the rest of the world, especially on mitigation.
“And in practical terms, concessional finance still dominates the flow of climate finance to the region, making it the most promising funding source in the immediate term,” the report noted.
Estimating the amount of money required to address mitigation and adaption of the climate change in Africa, IMF said the costs vary but are generally daunting.
It said, “For the African continent alone, adaptation costs could reach $50 billion per year by 2050—equivalent to 1.6 percent of current GDP—even in a two-degree Celsius scenario (GCA 2021).
“And mitigation costs for a clean energy transition in Africa have been estimated at about $190 billion per year until 2030 (IEA 2022).
” In current circumstances few, if any, countries in sub-Saharan Africa have the resources to meet these needs. Local public resources are limited, given practical limits on domestic revenue mobilization, elevated debt levels, tighter global financial conditions, and rising borrowing costs.
IMF affirmed that Nigeria and other African country cannot afford to tackle climate change by taking on further debt, but would require concessional financial support, which comes in the form of grants or concessional loans, mainly from major bilateral donors, multilateral development banks (MDBs), and multilateral climate funds.
.”In 2020, concessional climate flows received by the region totaled $15.7 billion, well short of the region’s needs but amounting up to 70 percent of total climate flows (Figure 1) and almost a fourfold increase from a decade ago.
CLIMATE FINANCE vs OFFICIAL DEVELOPMENT ASSISTANCE
IMF however warned that as climate financing may risk crowding out funding for other important development goals.
According to IMF, concessional climate finance should be additive, coming on top of current aid flows, rather than replacing them.
It said, “As concessional climate flows are rising, this comes against an overall decline in official development assistance (ODA)—as a larger share of a shrinking envelope.
“Over the past few decades, for example, total ODA flows into sub-Saharan Africa have fallen from more than 6 percent of recipient GDP in the early 1990s, to about 2½ percent currently.
” And going forward, despite the temporary surge in ODA during the COVID-19 pandemic, tighter global financial conditions suggest that official aid flows will likely shrink further over the near term.
“It should be noted that concessional finance is by itself unlikely to meet the region’s transition and adaptation needs, as the amounts required to fund adaptation and mitigation are immense
“Still, concessional funding can nonetheless play a critical role in expanding access to private sector capital—for example, by accelerating high-priority projects that can help unlock follow-on private investment or by allowing for risk-sharing arrangements that address the most pressing concerns of risk-averse investors.
CLIMATE FUND UNTAPPED BY NIGERIA AND OTHERS
IMF also confirmed that multilateral climate funds estimated to have reached a totaled $35 billion (from $43 billion in pledges by bilateral donors or multilateral financial institutions) represent a largely unused pool of finance at a time when spending and investment needs are increasingly urgent
According to the IMF, while only $28 billion has been set aside for approved projects, with less than $11 billion disbursed so far, less than $3 billion has been disbursed to sub-Saharan Africa, despite the approval of $7 billion. Thus, a significant backlog of unused deposited funds remains
IMF however noted that beside its new Resilience and Sustainability Facility (RSF), bilateral agencies and international organizations have a critical role in supporting countries to strengthening and building capacity, which would raise their access to all sources of concessional climate finance.
It also urged the government of Nigeria and others to identify and fund pipeline of credible, climate-related, and “bankable” projects, which can, in the short term, help them directly access already-deposited funds that are sitting unused in the climate funds.
IMF said the authorities should enhance their governance and legal frameworks, promote the development of local financial institutions that can identify green projects, and work with partners toward the accreditation of implementing entities who meet the varying requirements of the climate funds.
It also recommended that the accreditation processes and requirements for accessing the climate funds should be streamlined, noting the high compliance costs for sub-Saharan African countries, particularly for small and fragile states.
The IMF however emphasised that focus should be on areas where strong local capacity can translate into strengthened financial safeguards, with the aim of channeling funds more swiftly and efficiently to economies in greatest need.