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Climate Finance Forgets Africa’s Cities

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Cities, according to World Bank estimates, account for about 70% of carbon emissions globally. This makes them key in climate change mitigation and adaptation. But, as Astrid R.N. Haas argues, the current architecture of institutions and funds for climate is not designed to work at a sub-national level. It cuts out cities from climate finance flows. The problem is most pronounced on the African continent – the fastest urbanising and among the most vulnerable to climatic change.

Under the Paris Agreement, which came into force in 2016, countries agreed to reduce their greenhouse gas emissions and work together to adapt to the effects of climate change. To act on this, and codify their individual commitments, each country submitted its so-called Nationally Determined Contribution. These clearly spell out the climate actions they intend to undertake to limit global warming to below 2℃, compared to pre-industrial levels. The first contributions were officially submitted in 2020. They are meant to be updated every five years.

Based on the cost estimates from the 51 African countries that submitted their plans in 2020, the financial burden of achieving their contributions is about US$2.8 trillion between now and 2030. The same African governments have cumulatively pledged to contribute about US$264 billion of this from their own national coffers. This means the missing gap is still US$2.5 trillion.

Part of the answer is climate finance. This is being discussed as part of the Paris Agreement negotiations, and is a key theme of the COP27 conference in Sharm el-Sheikh, Egypt. This finance can come from a variety of sources – public, private, or other. But it is specifically earmarked for activities and investments linked to mitigating or adapting to the effects of climate change.

The current architecture of the institutions and funds that provide climate finance is, however, not designed to work at a sub-national level. Therefore across the globe, cities are being left out. This situation is even more pertinent for African cities as Africa is both the fastest urbanising continent in the world and among the most vulnerable to climatic change. Yet the continent is receiving, by far, the lowest climate finance flows overall.

Africa is losing out, its cities even more

Estimates put global climate finance flows for 2019 at US$622 billion. This is significantly below global needs. And the lowest proportion of these flows, an estimated 3%, is coming to the African continent. By comparison, 43.6% is directed at East Asia and the Pacific. Yet Africa is contributing least to the global greenhouse gas emissions. And it’s the most vulnerable to the impacts of climate change overall. This meagre proportion is even more concentrated within the continent. It’s estimated that 40% of climate finance went has gone to just five countries. They are Egypt, Morocco, Nigeria, Ethiopia and Kenya.

Cities are receiving only a trickle of this money. The reason is that the global climate finance architecture is biased towards national and regional institutions. This prevents cities from accessing it easily. For example, 2019 data from Africa shows that the largest source of climate finance was multilateral development finance institutions. They accounted for about US$11.5 billion of climate finance flows. But these institutions are mostly mandated to work at a national level. They can’t lend directly to cities.  It’s the same for dedicated multilateral climate funds, such as the Green Climate Fund. The fund is the largest dedicated source of climate finance. But most of the entities accredited to it are either national, regional or international.

On top of this, the fund has no mechanism to lend directly to sub-national entities. The second constraint for cities has to do with the fact that climate finance is dominated by loans. For Africa, loans made up about 57% of the overall financial flows in 2019. Yet across Africa most cities cannot access loans, because of legislative constraints and low creditworthiness.

Loans are primarily directed at activities that can generate a return. This means funding is strongly biased towards mitigation activities as these tend to generate better returns than those for adaptation. As such, financing for mitigation makes up around two-thirds of total flows. Loans also are likely to exclude funding many of the public services and infrastructures that cities are required to provide. These may not generate the economic returns needed to attract this form of finance.

Finally, sectorally, only about 4.5% of total climate finance flows in Africa in 2019 went to addressing the large and growing infrastructure deficit. This is particularly concerning for rapidly growing African cities as current cities need retrofitting. And two-thirds of Africa’s cities are yet to be built between now and 2050. In addition, infrastructure will need to be built in a way that ensures it’s resilient to the effects of the climate change. The upfront investment for this may be slightly more expensive, by some estimates, approximately 3% of total construction costs. But future benefits could be up to four times larger than these costs of investment.

The future

Cities are the frontline of tackling some of the most severe effects of climate change. They are also at the forefront of achieving a low emissions and climate resilient future. Globally, cities account for approximately 70% of carbon emissions. The hopes are high that COP27 – given that it’s being held in Africa – can deliver actions to tackle the climate emergencies that are critical to the African continent. This will necessarily include increasing the overall climate finance flows.

However, merely increasing the financing available will not be sufficient. The financing must find its way to cities. Some solutions include ensuring the multilateral development banks and climate funds can develop dedicated local financing mechanisms that allow them to directly meet the needs of cities. At national levels governments will also need to do more work to ensure both that their Nationally Determined Contributions directly reflect urban priorities and that these receive the dedicated attention and financing required.

At a city level, cities need to urgently work on improving their creditworthiness so that when legislation permits, they are in a financial position to take on loans in particular. As former United Nations secretary general Ban Ki-moon famously said: “Our struggle for global sustainability will be won or lost in cities.”

That’s why it’s so important to start making sure there is enough money to support this struggle.

Astrid R.N. Haas is a Fellow, Infrastructure Institute, School of Cities, University of Toronto

Courtesy: The Conversation


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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