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Private sector investment key to close little fiscal space in climate action

Private sector investment key to close little fiscal space in climate action

Climate Resilience

Recently, the topic of climate resilience has been hotly debated, with many developing nations emphasizing the urgent need to take action on adaptation measures.

 

The International Finance Corporation (IFC), a financial organization, has stressed that this must be accompanied with investments.

 

The company states in its most recent analysis on climate action that previous efforts by poor nations to combat climate disasters have been hampered by a lack of adequate fiscal headroom to adapt at the necessary levels.

 

“With African governments’ budgets stretched and little fiscal space, public investment will not be enough to meet the climate adaptation needs, further underscoring the need for private sector investments,” IFC says.

It therefore calls on governments and development financial institutions to encourage and promote more private investment through the available derisking instruments such as policy measures.

Kenya is currently grappling with efforts to cut the country’s account deficit which has been under pressure by the rising commodity prices on the back of Ukraine Russia war.

The deficit which was estimated at an equivalent of 5.9 per cent of Gross Domestic Product (GDP) at the end of the 2022 calendar year, could picture the government’s failure to meet some of its planned expenditures.

This then averted the nation to external borrowing which has further piled pressure on the mounting debt hitting Sh8.7 trillion mark in September.

According to data from the National Treasury, spending across the 2022/23 financial year was estimated at Sh3.358 trillion against revenues projected at Sh2.462 trillion.

This leaves behind a financing hole estimated at Sh862.9 billion which then would mean emerging concerns such as climate disasters would have to depend on external funding.

Impacts of climate change such as drought has affected more than 2.5 million people in the country hence responding to it is inevitable.

“Fostering private sector investment in the mitigation and adoption actions has an essential role to play, and interest in, ramping up adaptation investments that will help adjust developing nations economically to the new climate reality,” IFC says.

The firm further notes that there is need to ramp up climate adaptation investments.

Cumulatively, in Africa since 1990 to 2019, droughts and floods have respectively lowered African countries’ GDP levels by 0.7 per cent and 0.4 per cent on average.

Therefore, upfront private sector investments in climate adaptation between now and 2040 could amount to about four per cent of Africa’s GDP.

This is close to $100 billion (Sh12.2 trillion), or $5 billion (Sh610 million)a year.

This is an upper bound estimate, possible on the investment being commercially viable with the necessary technologies available and a favourable investment climate, IFC says in part.

“It will be essential to keep foremost in minds that climate adaptation is an investment opportunity for the private sector, not just a cost , and that Africa is where the need and potential is greatest,” IFC adds.

Although, action on climate adaptation in Africa is noted to be an area with significant investment risks. Real and perceived, which can serve as a disincentive for investors.

These include uncertainty over the frequency and severity of future natural disasters and difficulties in accessing adaptation technologies and long-term financing.

Governments therefore in conjunction with international development entities are urged to foster more investment-friendly environments.

This for example, by devise risk-sharing facilities that encourage the private sector to invest more in green technologies, as well as climate-smart and disaster-resilient platforms, infrastructures, and services.

 

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