Climate finance, debt and economic dependency in Africa

Date Published: 25 Sep 2024

Author: Dr. Thelma Arko

First published by Roape on 25 September 2024.

This blogpost examines how climate finance mechanisms and policies, while ostensibly designed to support sustainable development in Africa, have reinforced neocolonial economic structures and exacerbated financial vulnerabilities across the continent. To confront the challenges, Thelma Arko argues that African countries must strengthen regional integration and South-South cooperation to reduce dependency on external powers.

Despite their minimal contribution to greenhouse gas emissions, African countries bear a disproportionate burden of climate change impacts while struggling with mounting debt, limited fiscal space, and vulnerabilities in emerging carbon markets. This blogpost explores the interconnected dimensions of climate finance, debt, and economic challenges facing African economies, revealing how ostensibly well-intentioned climate finance initiatives have paradoxically reinforced neocolonial economic structures and deepened the financial vulnerabilities of African nations. 

The analysis exposes how climate finance mechanisms, carbon markets, and evolving global climate finance strategies, including the “new collective quantified goal on climate finance,” often serve to perpetuate global inequalities and maintain Africa’s economic dependency.  By synthesizing these multiple financial jeopardies, the article underscores the urgent need for a radical transformation of the global economic order. It argues for a fundamental break from the exploitative tendencies of global capitalism, advocating for African-led solutions that prioritize self-determination, equity, and sustainable development. 

The blogpost concludes by proposing strategies for African governments to assert their sovereignty, challenge existing power structures, and forge a new path towards economic liberation. These include demands for comprehensive debt cancellation, challenging the strategy of current market-based climate solutions, promotion of local autonomy and South-South cooperation, and exploration of alternative economic models.

Climate finance mechanisms, ostensibly designed to support sustainable development, have instead reinforced neocolonial economic structures and exacerbated the debt crisis in many African countries. This growing debt burden and the resulting constrained fiscal space are not mere coincidences but rather symptoms of a global economic order deliberately structured to perpetuate dependency and facilitate wealth extraction from the Global South. Carbon markets and other market-based climate solutions emerge, risking further entrenchment of global power imbalances and the commodification of nature and potentially deepening the financial vulnerabilities of African economies. The proposed “new collective quantified goal on climate finance” represents a shift in approach that, while aiming for inclusivity, may inadvertently increase pressure on already strained African economies. This calls for an urgent examination of global climate finance strategies. Addressing these interconnected financial jeopardies facing African economies requires a radical transformation of the global economic system encompassing comprehensive debt cancellation, rejection of market-based solutions, prioritization of African-led initiatives, and exploration of alternative economic models that serve the interests of African people. To achieve this, African countries must collectively assert their sovereignty, challenging existing power structures and forging a new path that prioritizes self-determination, equity, and sustainable development.

Despite Africa’s minimal contribution to greenhouse gas emissions, the continent disproportionately bears the brunt of climate change’s escalating impacts, underscoring the urgent need for significant financing to enable African countries, particularly vulnerable developing nations, to mitigate and adapt to these impacts. Acknowledging their historical responsibility for greenhouse gas emissions, developed nations in the global north pledged to mobilize USD$100 billion annually from 2020 to 2025 to support climate-related actions in developing countries. However, until recently, the failure of developed countries to fulfil this promise hindered Africa’s ability to build adaptive capacity and implement necessary measures for economic resilience against the impending consequences of climate change. With the transition from the Kyoto Protocol to the Paris Agreement, all countries, including developing nations, are required to contribute to reducing their emissions as outlined in their voluntary Nationally Determined Contributions (NDCs). Nonetheless, the achievement of most NDCs of developing countries is contingent upon receiving the promised climate finance.

Various actions and policies have been introduced to advance efforts to limit climate change. However, as most of these actions are structured within a capitalist system, they tend to perpetuate and exacerbate inequalities, inadvertently creating multiple financial jeopardies for African economies and challenging their development paths. While the pursuit of decarbonization and climate resilience is necessary, it has also exposed the deep-seated structural inequalities within the global economic order and given rise to new forms of economic precarity.

I am exploring the complex interplay between climate finance, policy actions, and their impacts on African economies. Firstly, the escalating debt burden of African economies has become a pressing issue, intensified by the ironic impact of climate finance mechanisms that were originally intended to foster sustainable development. Secondly, the mounting debt burden, coupled with economic challenges, constrains the financial resources available for climate action initiatives. Thirdly, the continent’s engagement with carbon markets introduces potential financial risks due to structural inequalities. Lastly, the proposed “new collective quantified goal on climate finance” presents a double-edged prospect. While it signals a promising shift towards inclusivity, there are concerns about further burdening developing nations that are already grappling with economic strain.

The Debt Burden

The debt situation in African economies is a pressing concern, hindering their ability to finance domestic spending and investment and complicating efforts to address climate change and achieve sustainable development. As of early 2023, the developing world faced an astonishing debt burden, totaling nearly USD$100 trillion. African countries have been among the hardest hit, facing a perfect storm of factors contributing to their financial distress.

Ironically, climate finance, intended to support vulnerable countries, has become a significant contributor to the growing debt burden of African economies. Despite assertions from developed countries that they met their climate finance goal in 2022 by providing USD$115.9 billion, a substantial portion (71%) of this funding has been in the form of loans. These non-concessional loans, with market-level interest rates, have inadvertently escalated the debt burden of vulnerable developing states. Consequently, these nations are now faced with a difficult choice between allocating resources to climate action or debt repayment, as debt servicing consumes a significant portion of their revenue.

The COVID-19 pandemic further exacerbated the debt situation in African economies. Governments incurred additional debt to shield their economies and provide relief to citizens. The subsequent energy crisis and the Russia-Ukraine war also played a role, leading to reduced capital inflows and increased outflows for African countries. This confluence of events pushed many African nations into a highly vulnerable financial position, with limited options for recovery.

Africa’s greater susceptibility to climate risk has resulted in higher interest rates on loans. As external official development assistance declined, many African governments turned to International Capital Markets for funding, attracted by initially low-interest rates. However, the rapid depreciation of local currencies against foreign currencies has further worsened the debt crisis, making repayment even more challenging.

The financial outlook for many African countries is dire. The ratio of public debt service costs to government tax revenue is projected to exceed 30% in many low-income developing countries. This means that a significant share of government revenue will be dedicated to debt repayment, leaving less for financing recovery, adapting to climate change, or investing in critical infrastructure. High debt burdens are also driving up the cost of capital, dampening investment prospects in sectors like energy, which are crucial for economic growth and climate action. The consequences of the growing debt burden are evident in the current high financial vulnerability and debt crisis of Zambia, which has defaulted on its international debt to unsustainable levels. Similarly, Ghana’s public debt-to-GDP ratio reached a concerning 82.1% in 2021, up from 58% in 2002.

The total debt in developing economies is now at a 50-year high, and nearly 60 per cent of the poorest countries are in or at high risk of debt distress. African countries find themselves trapped in a debt cycle, with some facing debt servicing exceeding half of their GDP. This leaves limited resources for social and economic development, including addressing climate change. Key African economies, such as South Africa and Nigeria, have also seen their debt burdens increase due to financial turmoil, including sharp currency devaluations caused by the coronavirus pandemic, severely constraining public finances.

In response to the pandemic, many African countries relaxed their monetary and fiscal policies, providing fiscal stimulus packages to support their economies. However, these measures unintentionally increased debt vulnerabilities, especially as public revenues declined. The recent commodity price shock has further strained government finances, forcing difficult choices between debt repayment and the affordability of essential goods like fuel, food, and fertilizer.

The International Monetary Fund (IMF) has intervened, providing relief through Enhanced Structural Adjustment Facility (ESAF) arrangements. However, these interventions frequently add to the growing debt burden, as debt service payments rise while revenues lag. This cycle of debt limits countries’ ability to invest in their future and address pressing challenges.

Limited Fiscal Space for Climate Action

The intersection of climate finance, debt, and economic dependency presents a complex situation, particularly for developing nations in Africa. While climate finance is crucial for funding climate action and investments in renewable energy infrastructure, it has inadvertently contributed to a mounting debt burden, constraining the fiscal space for countries already struggling with debt servicing. This debt crisis has far-reaching implications, and understanding the interplay between these factors is essential for devising effective solutions. While climate finance plays a vital role in driving climate action and promoting investments in renewable energy infrastructure, it has, unfortunately, contributed to the growing debt burden on countries, especially those in the developing world. This dynamic limits the fiscal space available for these nations to invest in much-needed sustainable development initiatives. The debt crisis has severe impacts, and African nations find themselves in a particularly vulnerable position as they grapple with the dual challenges of debt servicing and the slow economic growth caused by the COVID-19 pandemic and the consequences of climate change.

The COVID-19 pandemic has imposed an extra layer of strain on developing countries, exacerbating their financial precarity. It has led to escalating public debts and further reduced funding for essential services and pressing development needs. The path to global economic recovery has been fraught with challenges, including surging food and energy prices, rampant global inflation, and supply chain disruptions from the Russia-Ukrainian conflict. These factors have collectively diminished developing countries’ access to cheap credit and financial flows, further constraining their fiscal space.

The current dynamic has created a vicious cycle, hindering developing countries’ ability to invest in much-needed climate action and adaptation. As economies struggle with recession and rising unemployment, investing in renewable energy and climate resilience becomes increasingly difficult, especially for African nations. Adding to the challenge is the imbalance in climate finance allocation. While mitigation efforts have received significant attention and funding, adaptation and addressing “loss and damage” in the most climate-affected nations have been relatively neglected. This imbalance further exacerbates the financial strain on countries already struggling to cope with the impacts of climate change. Despite this, these same countries are expected to shoulder the financial burden of investing in expensive technology infrastructure for their energy transition.

Africa holds immense potential for renewable energy development, but realising this potential comes at a cost. The continent requires approximately USD$25 billion in annual investment to harness its renewable energy resources effectively. However, the high cost of debt servicing makes it practically impossible for many African countries to allocate sufficient funds for the deployment and expansion of renewable energy technologies. This imbalance hinders Africa’s ability to transition to cleaner energy sources and adapt to climate change.

Financial Vulnerabilities to the Carbon Markets

As African countries grapple with mounting debt and limited fiscal space for climate action, they are increasingly turning to alternative mechanisms for financing their climate initiatives. One such mechanism that has gained prominence is carbon markets. These markets are presented as offering both opportunities and challenges for African economies, but in reality, further complicate the financial landscape in the context of climate change mitigation and adaptation.

Carbon markets have emerged as a popular mechanism for meeting emission reduction targets, promising to generate reliable financial flows for renewable technology investments and support climate mitigation and adaptation efforts. However, these market-based approaches pose equality challenges. While they offer potential financial inflows that could alleviate some of the fiscal pressures, the structural inequalities within these markets could exacerbate the already precarious financial situations of these nations.

The Paris Agreement’s Article 6 allows high-emitting countries to engage in bilateral deals with low-emitting countries, typically in the Global South, to purchase emission credits generated through renewable energy or afforestation projects. These Internationally Transferred Mitigation Outcomes (ITMOs) require host countries to adjust their national emissions accounts accordingly, meaning they can no longer count these reductions towards their own Nationally Determined Contribution (NDC) targets.

This system creates several challenges for developing countries. There’s a risk of overselling credits, which could hinder a country’s ability to meet its own NDC commitments, potentially necessitating more costly or challenging measures to achieve these targets. Countries must, therefore, carefully balance their emissions reductions and authorisations to benefit from ITMO sales while staying on track with their NDCs.

The pricing structure of carbon credits adds another layer of complexity. Current pricing is unsustainable, with stark disparities between poorer and richer countries. Prices can range from less than USD$1 per ton in poorer nations to over USD$130 per ton of CO₂ in wealthier ones. This disparity raises questions about fairness and effectiveness in the carbon market system.

If prices are set too low, host countries risk underselling their mitigation outcomes, potentially receiving insufficient finance to support their sustainable development goals. The World Bank estimates the opportunity cost of selling a credit instead of keeping it for a country’s own NDC at USD$25 per credit. However, some African countries are setting much lower prices, around USD$ 4-5 per credit, just to attract investment.

Moreover, high-quality carbon projects often require significant initial investment, presenting another barrier for cash-strapped developing nations. This creates a precarious situation where these countries are expected to contribute to global climate mitigation efforts through potentially underpriced carbon credits while simultaneously bearing the brunt of climate change’s economic and environmental impacts. The delicate balance between emission reduction targets and financial incentives puts additional strain on countries already grappling with limited resources. Developing nations, especially in Africa, find themselves in a difficult position of trying to benefit from carbon markets while ensuring they don’t compromise their own climate goals or sustainable development objectives.

What are the Implications of the “New Collective Quantified Goal on Climate Finance”?

The proposed “new collective quantified goal on climate finance” (NCQG) represents a significant shift in approach that could have far-reaching implications for developing nations, particularly in Africa. This evolving strategy marks a departure from the Paris Agreement’s Article 9, which placed the primary responsibility for financial support on developed nations. Instead, it aligns more closely with Article 2.1, emphasizing universal action in redirecting finance flows towards low greenhouse gas emissions and climate-resilient development. While this shift aims to mobilize more resources for climate action, it raises critical questions about its impact on the financial stability of developing countries.

For African nations already struggling with unsustainable debt levels and limited fiscal room for manoeuvre, the NCQG’s broader approach to climate finance contributors could present and the following risks (and possibilities):

1. Potential for increased resources: The expanded pool of contributors could theoretically increase the overall funding available for climate action in Africa. This could help alleviate some of the fiscal pressures, potentially freeing up resources for debt servicing and domestic climate initiatives.
2. Risk of additional financial burden: However, the inclusion of developing countries as potential contributors could add to the financial strain on African economies. This expectation of contribution, even if minimal, could further limit the already constrained fiscal space these countries have for addressing climate change and meeting development goals.
3. Impact on debt dynamics: The shift towards market mechanisms and carbon trading under this new approach could interact with existing debt issues. While it might offer new avenues for generating climate finance, it could also expose African countries to new forms of financial risk, potentially exacerbating debt vulnerabilities.
4. Capacity challenges: The proposed core-periphery arrangement and emphasis on reshaping financial systems will require significant capacity building in developing countries. This need for enhanced financial and technical capacity comes at a time when many African nations are already struggling to balance climate action with economic recovery and debt management.
5. Implications for climate finance accessibility: The new approach could potentially alter the dynamics of climate finance accessibility. While it aims to increase overall funding, there’s a risk that the most vulnerable countries – often those with the highest debt burdens and least fiscal space – might find it more challenging to access these funds if they’re expected to contribute or compete in more complex financial mechanisms.

The implementation of the NCQG must consider the existing financial challenges faced by African countries and aim to complement, rather than complicate, efforts to address debt sustainability, expand fiscal space for climate action, and create fair and beneficial engagement with carbon markets. The success of this new approach will largely depend on how well it can integrate safeguards and support mechanisms that recognize and address the unique financial vulnerabilities of African economies. Only then can we hope to create a more sustainable model of climate finance that truly enables African nations to pursue effective climate action without compromising their economic development goals.

Conclusion

The continued exploitation of African economies by global financial institutions and the perpetuation of neocolonial structures demands urgent and radical redress. African governments must recognize that the current global capitalist order is fundamentally designed to maintain their dependency and subjugation. True economic liberation lies not in minor adjustments, but in fundamentally challenging these power structures and forging a new path that prioritizes self-determination, equality, and sustainable development. Breaking free from the chains of global financial domination requires not just courage and unity, but a revolutionary commitment to transformative change. African governments and peoples must chart their own path, guided by their unique histories, cultures, and aspirations, rejecting imposed “solutions” that serve external interests.

Delinking from the exploitative tendencies of global capitalism does not mean isolationism or rejection of international cooperation. Rather, it entails a strategic reorientation of economic policies and practices to serve the interests of African peoples and their long-term prosperity. This involves a comprehensive reassessment of existing debt structures, trade agreements, and investment frameworks that perpetuate massive global inequality and undermine African agency.

African governments should assert their sovereignty and collectively advocate for a just international economic order. Unsustainable debts are created by a profoundly unjust financial system and the exploitation of poverty, and the weak position of vulnerable African countries.  Fair, transparent and inclusive trade terms that challenge exploitative conditions imposed by global financial institutions are needed.

African countries must strengthen regional integration and South-South cooperation to foster mutual economic development and reduce dependency on external powers and present a united front and speak with one voice. The role of civil society and grassroots movements in demanding economic justice and holding both African governments and international institutions accountable is paramount. These movements must be supported and amplified to ensure that those in positions of power defend the interests of the common good.

Thelma Arko is currently a Postdoctoral researcher at Utrecht University, where she supports efforts to democratize the discourse around Just Transitions in Africa. 

Featured Photograph: Raya Azebo, Tigray – A man climbs a hill and looks out towards the sunset (26 June 2016).