October 22, 2022
The “worst is yet to come” warning from the International Monetary Fund this month could not have been more ominous.
The annual meetings of the boards of governors of the IMF and the World Bank were expected to be frank; however few expected that they would forecast that as much as a third of the global economy could contract this year, amid a cost-of-living crisis fueled by inflation and exacerbated by factors such as Russia’s war in Ukraine.
Given such a dire outlook, in which economies as large as those of the UK and the US are lurching, markets and investors alike see opportunity in underdeveloped, high-growth territories, of which Africa host a great many. The continent is naturally endowed to both power and feed the international markets; however, this is dependent on focusing on sustainable finance.
Africa is home to some of the fastest-growing markets. Thanks to its expanding economy, industrial sectors and demographics, it holds huge potential for investors. With the global population expected to reach 12 billion by the end of the century, Africa, which has more than one-quarter of the world’s total arable land, is central to feeding the planet.
However, the potential of Africa’s red earth does not end there. Eleven African nations rank among the top 10 sources of at least one mineral resource. There is no doubt that Africa’s natural endowments are strong but as the continent develops at a dizzying pace, it is the shift away from mining and agriculture to other industries, such as renewable energy, retail commerce, tourism and communication, that provide exciting opportunities for upscaling.
As the continent has started to transition from a traditional economy to a knowledge-based economy, investments in green industries, digital technology, ecommerce, banking and other services will play a notable role and provide the main opportunities for investors.
There is no doubt that, against a turbulent global backdrop, countries in the region are grappling with their own challenges, with limited fiscal space to mitigate negative economic impacts. However, given that the opportunities they offer are so great, it is important that they are provided with the support to mitigate these challenges and harness their economic potential.
The most significant frontier of this challenge is in energy. The International Energy Agency estimated in its World Energy Outlook 2021 that more than $30 trillion is needed by the end of the decade for a green transition to take place effectively around the globe.
The dynamics of this in Africa are different, however; the continent contributes less than 3 percent of global greenhouse gas emissions but it has the greatest potential in the world to generate energy from renewables. According to the International Renewable Energy Agency, Africa’s renewable energy potential is 1,000 greater than its projected electricity demand.
However, Africa’s great renewables potential is at the mercy of climate-change shocks given that seven of the 10 countries most vulnerable to climate shock are in African.
Therefore despite the continent’s potential to feed the world, exposure to climatic shocks will jeopardize this. At present, more than 95 percent of farming relies on rain-fed agriculture and so is prone to extreme weather variability.
With 19 African economies currently in debt distress, investors must support the continent in mitigating and adapting to climate change. Building climate-resilient economies based on green and renewable energy sources is key for Africa. This can only be achieved through international cooperation and partnerships in which African countries are supported, through capacity building and access to affordable financial resources, to undertake the transition. Projects in this space offer double-digit returns for investors but without global partnerships such projects are not possible.
At the Casablanca Sustainable Finance Dialogue this week, Lamia Merzouki, the deputy general manager of Casablanca Finance City Authority and co-chair of the UN Development Program’s Financial Centers for Sustainability, said: “Though Africa provides huge growth opportunities, how they can really be leveraged is through sustainable finance. The pressures of climate change are so pressing that any investment in Africa must be reflective of these challenges or the continent’s great potential will not be reached.”
Transitioning from hydrocarbons in Africa also offers opportunities for global finance. However, this is not possible without constructive partnerships. At present more than 80 percent of Africa’s energy consumption is generated from natural gas, coal and oil, and 20 percent of African countries are exporters of these sources themselves.
Given that transitioning will come at the expense of lost foreign-exchange earnings and government revenues, transitioning to green and renewable energy sources will carry significant costs. Fortunately, Africa’s consumption of energy is the lowest in the world, with only 40 percent of households having access to electricity.
However, with Africa’s population expected to grow from 1.3 billion to 2.6 billion by 2050, the pressures on energy consumption will grow higher. Therefore it is critical that sustainable public-private partnerships be sought. Consequently, innovative approaches to attracting and steering financial flows consistent with a pathway toward low-carbon and climate-resilient development are crucial.
Climate change presents a $3 trillion investment opportunity in Africa by 2030 and 75 percent of the investment is expected to come from the private sector, to complement public-sector financing. However, ensuring that pledges materialize is what matters.
Amid worrying global circumstances, Africa’s natural resources, for so long a cause of pain and conflict, now sit at the heart of the continent’s economic transition, alongside the potential to support global energy and food security.
For this to take place, the mobilization of climate financing for adaptation, resilience building and development is key to ensuring that sustainable economies are created.
Rising food and fuel prices and tightening financial conditions can only be mitigated by cooperation between the private sector and African governments to provide the economic development the country requires.
Without investment, the effects of climate change risk compromising the great potential that Africa offers to the global economy.
- Zaid M. Belbagi is a political commentator and an adviser to private clients between London and the GCC. Twitter: @Moulay_Zaid
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