Net Zero Central Banking in Africa’s Diverse Economies

Challenges, Opportunities and Policy Options

December 18, 2023Published by LSE Grantham Institute

Greening Africa’s diverse economies is a strategic imperative for net zero and now is a “defining moment” for African central banks to shape the continent’s sustainable future, according to this report. Prepared for the Grantham Research Institute, it explains what central banks can do to leverage national and regional strengths, and mitigate climate-related financial risks.

Meeting the region’s growing demand without jeopardising net zero will require its economies to “leapfrog emitting technologies” in their development “by investing in sustainable, low-carbon sectors, infrastructure and technologies at scale”.

According to the report, Africa has 45% of global renewable energy potential. Separate analysis has shown that the continent is home to 60% of the world’s solar resources, 30% of its mineral resources, and the world’s fastest growing population.

However, currently 70% of its energy investments go to fossil fuels, which generate three-quarters of the region’s electricity.

The authors – Reuben Wambui, Joseph Feyertag and Pierre Monnin – stress the critical role central banks can play in reversing this trend. They propose various policy options, including establishing green supervisory guidelines, improving climate risk management, and deepening sustainable finance markets, but stress that nationally tailored approaches are needed.

Many African economies are growing rapidly and have an abundance of transition critical materials, as well as biodiversity hotspots and natural carbon sinks, including the second largest tropical forest in the Congo Basin. However, low-value raw material exports and over-exploitation of natural resources currently constrain their social and economic benefits.

Compounding these issues, the region is highly exposed to physical climate risks, such as changing rainfall patterns threatening the region’s predominantly rainfed agriculture, as well as transition risks, particularly where states rely heavily on fossil fuels.

However, economic issues such as high public debt, limited fiscal space and substantial exchange rate risks are hampering essential adaptation investment in a just and green transition. There are also specific challenges and opportunities tied to the diverse monetary policy frameworks, exchange rate arrangements, and levels of development and financial infrastructure of individual nations.

As such, there is no “one size fits all” solution, say the authors, who present a topology for categorising the 54 African economies based on their economic and climate-based  opportunities and risks.

In countries with high economic and climate risks, the authors say central banks should focus on assessing the social, economic, and financial consequences of climate change, the opportunities of net zero, and measures that can increase climate and financial resilience.

In states with untapped transition opportunities, such as the Democratic Republic of Congo, central banks should develop the market infrastructure and expertise needed to mobilise sustainable finance. This could enable domestic value addition, for instance by financing sustainable low-carbon technology manufacturing rather than relying solely on mineral exports.

The report states that nations with both high financial resilience and transition opportunities, such as Botswana, Namibia, Morocco and the Seychelles, could “lead transition initiatives in the region”.

Finally, the authors urge all central banks to use their expertise to push for effective international climate finance initiatives. During the Africa climate summit in September, leaders identified a loss and damage fund, multilateral development banking reform, special drawing rights, debt pause clauses, and debt-for-nature swaps as key to addressing regional financing needs.

This page was last updated December 18, 2023

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