NEW YORK — The global financial system must be overhauled for African countries to address climate challenges, the continent’s leaders have said — despite concerns that political upheavals may make potential investors wary.
African political and business leaders attending the United Nations General Assembly (UNGA) have stressed the need to drive investment to help the continent’s countries address the green energy transition, and therefore boost their economies, while also adapting to the extreme weather conditions.
Kenya’s President William Ruto, speaking at an UNGA side event earlier this week, said there was an inaccurate perception that investments in African countries are risky, unfairly holding back the flow of funds needed. Ruto said there was “a need to rethink, to reimagine and to reconfigure” the approach to financial markets.
Ruto said the building blocks of financial markets — such as credit rating agencies, sovereign debt analysis, and risk analysis — required a “rethink” and new approaches were needed to provide concessional finance.
Nigeria’s president also called for a change in approach to investment opportunities during his address to the General Assembly. “Continental efforts regarding climate change will register important victories if established economies were more forthcoming with public and private sector investment for Africa’s preferred initiative,” Bola Tinubu told delegates.
However, complaints about perceived risks come at a time when governance and rule of law is being scrutinized in West and Central Africa following a series of coups in the sub-region. Some African government officials and business leaders have expressed concerns behind closed doors that those flashpoints could potentially make the wider region unappealing to some investors.
African governments proposed reforms to international financial institutions to help fund climate change action, including new global taxes, in a document produced at the end of the three-day Africa Climate Summit in Kenya earlier this month. The Nairobi Declaration, as the plans are known, will form the basis of the negotiating position adopted by African countries at November’s COP28 summit.
The ability of African countries to fund their shift to renewable energy and better prepare for the impact of changing weather patterns has global significance because the continent plays an outsized role in the world’s response to climate change. That’s due to the abundance of minerals needed for the green energy transition, such as metals used in electric vehicle batteries, and also demographics — the continent’s rapidly growing population will make it the workforce of the future. And as economic activity grows, so too will its emissions.
Despite the global benefits, it’s clear that African countries are having to campaign hard for changes to an international financial system that typically sees the continent’s nations as risky but didn’t see the red flags in U.S. lending practices ahead of the 2007-2008 financial crisis. Underneath it all is a sense of frustration that the continent only contributes around 4% of global carbon emissions and has been hit hard by the effects of climate change — for example, in Libya’s recent floods and drought in the Horn of Africa.
There does seem to be a broad international acceptance that something needs to change. U.S. President Joe Biden, in his UNGA address, said though multilateral development banks were among the best tools to deliver “high-quality investment” in developing countries “reforming these institutions can be a game-changer”. And the diplomatic efforts we’ve seen from various countries to build ties with African nations suggests an understanding that advanced economies need the continent — and specifically its resources.
With African countries increasingly being given a voice to articulate their wishes, be it at the G20 or in the expanded BRICS bloc, and going into COP28 with a set of clearly articulated goals, it seems likely that some concessions will be made. History suggests the radical overhaul sought by Ruto and other leaders probably won’t happen anytime soon. However, piecemeal changes to improve access to finance for African countries that meet certain financial and political criteria does seem likely.
Room for Disagreement
Amaka Anku, who heads the Africa practice at political risk consultancy Eurasia Group, said the continent’s nations have a big role to play in changing risk perceptions, rather than merely relying on changes in global financial systems. “African countries have to do their part to streamline regulation requirements and border approvals, non-tariff barriers to trade and infrastructure — all those things you need to do to make an economy competitive,” she said. “That would help to attract investment.”
The View From The Private Sector
Hassanein Hiridjee, chief executive of pan-African conglomerate Axian group, said Africa is underfunded due to a form of “financial injustice” that overstates the risk of investing in the continent’s countries and relies on rules that date back to World War II. “We have to find a new solution for financing economies,” he said.
He said development finance institutions should introduce new tools to de-risk African investment such as innovations to ensure businesses can get their earnings out of a country or to protect them against currency depreciation. “The World Bank can’t do it alone,” he said.
Hiridjee acknowledged that the wave of coups in West and Central Africa, with concerns of a contagion spreading instability, threatened to stymie investment.
“In Africa, we must be more serious in terms of governance. Certain countries are doing well but others are not serious and they aren’t sending the right signals — but we’re all suffering as a result,” he said, stressing that countries with strong economies and a good track record on governance and social reforms should not be penalized because of the problems in other countries.
- The United Arab Emirates is considering creating a fund that could amount to tens of billions of dollars to spur clean energy investments worldwide that it plans to unveil at this year’s U.N. climate talks in Dubai, reports Politico.