Financing sub-Saharan Africa’s climate action requires Public Finance Management transformation
Lagos, 02 August 2023: PwC Africa’s newly released report, Financing Sub-Saharan Africa’s Climate Action: Implementing Green Public Finance Management (PFM) in Debt Distressed Countries, looks at the steps that indebted governments can take to transform their financial management at a time when the financing of climate action is at a crucial juncture. Across sub-Saharan Africa, governments need to find funding for addressing pressing climate change challenges, or risk long-term negative socio-economic impacts.
Sub-Saharan Africa has a lower carbon intensity (the amount of carbon dioxide [CO 2 ] emitted per unit of economic activity) than the global average and that of the G7 developed nations. The region also contributes only 3% of global greenhouse gas emissions. However, despite this smaller emissions footprint, sub-Saharan Africa is the most vulnerable region globally to the adverse effects of climate change.
Last year was a costly period for the sub-Saharan region in terms of climate change damage. For example, the floods in South Africa’s KwaZulu-Natal and Eastern Cape provinces were the third-most expensive climate disasters globally. Other major climate-related disasters included heavy rainfall and floods in West Africa, as well as Tropical Storm Ana and Tropical Cyclone Batsirai causing landfall in South and East Africa.
Jon Williams, PwC Africa International Development Leader, says: “The ongoing impact of the climate crisis already has many sub-Saharan African countries spending between 2% and 9% of their fiscal budgets in unplanned allocations to respond to extreme weather events. In the case of the 2022 floods in South Africa’s KwaZulu-Natal and Eastern Cape provinces, the national government appropriated more than US$430m in disaster relief to support rebuilding and humanitarian efforts in these coastal provinces.”
Looking ahead, Gbenga Adepetu, Partner, PwC Nigeria, says African countries need around US$2.8tn during 2020-2030 to implement their climate action commitments and Nationally Determined Contributions (NDCs). “As of last year African governments had committed just over US$250bn of domestic public resources, which equates to about 10% of the total cost. The remaining US$2.5tn is the region’s climate finance needs. This figure is equal to the value of its total GDP during 2022.”
Put differently, Adepetu explains that with US$2.8tn needed during this decade, Africa needs to spend money equivalent to 10% of its GDP until 2030 to implement climate action commitments (the region currently only spends an equivalent 5% of GDP on healthcare). “It is therefore evident that the global supply of bilateral and multilateral funding is not nearly enough to cover this,” he says. “At the same time, African governments are also unable to finance their climate responses beyond the 10% of cost already committed due to existing high levels of public debt.”
In 2022, total public debt across the region equaled US$1.1tn (more than double what it was in the preceding decade). Concerningly, some 22 sub-Saharan African countries were in, or at high risk of debt distress as of May 2023. Benson Okundi, Government and Public Sector Leader for East Market Area, says: “There are several key areas where governments can take action to increase revenue and reduce expenditure towards narrowing fiscal deficits, and reorientate their approach to debt management. Debt restructuring, reprofiling and relief options are high on the agenda at present, as many countries globally face crippling debt obligations in the wake of the fiscal challenges brought on by COVID-19.”
Okundi says that innovative restructuring options include debt-for-climate swaps: a mechanism that provides support to both budgetary relief as well as finance climate mitigation, and adaptation action. The Seychelles is the first country to complete a debt-for-climate swap specifically aimed at protecting its oceans. Major bilateral and multilateral creditors are also moving towards including climate resilient debt clauses into their financing deals that would allow debt repayments to be suspended when climate shocks disrupt supply chains and business operations.
With extensive experience in this area, PwC is providing support to public sector clients on righting their fiscal trajectory through Public Finance Management (PFM) transformation.
This is a necessary step towards:
1) freeing up domestic capital for the climate agenda; as well as
2) creating transparency and confidence around the management of fiscal funds that international funders will look for.
Simon Mutinda, Public Sector Consulting Leader for East Market Area, says: “African governments need to fix their PFM now to ensure they are ready and have more mature finance structures to effectively engage with international financiers as more climate funding becomes available.”
Moving beyond the traditional financial management structures, PwC is also advocating for Green PFM: the integration of a climate-friendly perspective into PFM practices, systems, and frameworks with the objective of promoting fiscal policies that respond to climate concerns.
“Citizens and lenders are demanding more from governments to improve and enforce PFM laws and systems,” says Adepetu. “To this end, it is crucial that governments across the world are supported by experienced experts in their transition to accrual accounting — which is essentially seen as a crucial tool for achieving fiscal transparency. Governments and relevant public sector institutions have to also enhance their readiness for green financing through the development of clear policies and strategies that align with national climate and environmental goals, as well as attracting private capital through green financing.”
It is crucial that sub-Saharan African governments prepare themselves to achieve the national goals they have adopted to address the region’s economic, social, technological and climate challenges. The international development community plays a key role in supporting this, and by understanding the financial cost of the climate challenge — now and in the future — and developing strategies to work around current public debt burdens, financing climate initiatives within the region will be possible sooner, rather than later.
*As a community of solvers, PwC Africa’s International Development practice is uniquely placed to support international donors and African governments in achieving inclusive and sustainable development outcomes. Our team is available for client engagements and media interviews across the entire sub-Saharan region.
