Introduction

To successfully emerge from the legacy effects of the COVID-19 pandemic and inflationary effects of the war in Ukraine, green bonds or sustainable finance provide a unique lever for African countries that are plagued by over-indebtedness. So what is green finance? The World Economic Forum describes green finance as any structured financial activity – a product or service – created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms, and investments used to encourage the development of green projects or minimise the impact on the climate of more regular projects. Or a combination of both.

The United Nations Economic Commission for Africa demonstrates that a green recovery, based on green investments, can generate up to 420% better returns in gross value added and up to 250% better returns in job creation. Meanwhile, global sustainable bond issuance reached more than $1.1 trillion in 2021 and is expected to surpass $1.5 trillion in 2022. However, sovereign sustainable bond issuance is still quite limited, representing only 11% of the total in 2021.

According to the World Bank’s Guide to Developing a National Green Taxonomy, green finance taxonomies have become increasingly crucial for the development of sustainable development strategies across many sectors:

• Central banks and regulators use them to support their green refinancing and lending programs.

• Governments refer to them when designing national sustainable development strategies and developing green fiscal policies.

• Private banks align their activity reports with them to communicate with investors about their green engagement.
• Financial authorities can use green taxonomies as a prerequisite for developing their green bond markets.

Africa should pursue green bond issuances to lessen the impact of rising debt levels and growing infrastructure needs. If one looks at the CEMAC region, for example, widening deficits saw the public debt rise to 60% of GDP in 2021 even as this is expected to fall back to 50% by 2024. Even so, Cameroon raised XAF450 bln at a 5.95% interest rate, significantly lower than the initial 9.5% in 2015. While this was lauded as a success and a testament to the trust international investors have in Cameroon, it ignored the fact that these funds will be used to finance previous debts. Meanwhile, Some 15‑20 governments in Africa dedicated 20% or more of their annual revenue to servicing public-sector external debt in 2021. Over time, this is set to rise and will increase the chasm between Africa’s infrastructure needs and its investment policies. 

Even so, not all African countries are laggards. Ghana, Egypt, and South Africa already have green taxonomies that provide a roadmap for investors on how the proceeds of green bonds will be leveraged. Some African countries such as Nigeria, Seychelles, and Egypt have issued Green bonds recently.

Nigeria issued Africa’s first green bond in 2017, the first sovereign green bond certified under the CBS globally. Issued in local currency, the N10.69 billion (approximately US$30 million) issuance has a 5-year tenor and 13.48% fixed coupon rate. This was followed by a second issuance in 2019 for N15 billion (approximately US$41 million) with a tenor of 7 years and a higher coupon rate of 14.5%. Both bonds are listed on the Nigerian stock exchange and account for 0.16% of Nigeria’s federal government domestic debt stock as of March 2021 (Government of Nigeria, 2021). Both green bond issuances are part of the government’s larger green finance agenda to ensure regular funding for projects, aligned with Nigeria’s Nationally Determined Contribution (NDC) and Economic Recovery and Growth Plan (ERGP) and are a drop in the ocean in its planned NGN 150 billion (US$420 million) green bond program (LSEG Africa Advisory Group, 2018). 

• Seychelles issued the world’s first sovereign blue bond of US$15 million in 2018 with a coupon rate of 6.5%. The interest payable on the loan is reduced to 2.8% through credit enhancement means (such as a partial credit guarantee from the International Bank for Reconstruction and Development). The 10-year blue bond is expected to be redeemed in three equal installments of $5 million in 2026, 2027, and 2028. Since the total amount of the blue bond is low compared to other market bonds, it was privately placed with three socially responsible impact investors, namely Calvert Impact Capital, Nuveen, and Prudential, all US-based, and the reason why the bond was issued in US dollars. Bond proceeds will be used to manage sustainable-use marine protected areas and priority fisheries and to expand seafood value chains to maintain sector growth while fish stocks are rebuilding.
• Egypt issued the first US dollar sovereign green bond for Africa in 2020 with an issue size of US$750 million, a tenor of 5 years, and a coupon of 5.25% (close to where a standard Egypt USD with similar duration trades). Moreover, it had a credit rating of B(S&P)/B+ (Fitch). The bond was oversubscribed 5x and will contribute to the financing of $1.95 billion of public investment projects tagged as green by the government. These projects are split across six eligible categories, each aligned to one or more of the United Nations’ SDGs.

What lessons can we learn from these countries? 

1. All African Countries should subscribe to a green taxonomy: Every major African country should not rush to issue green bonds but first design green taxonomies that outline what types of investments are considered green. These green taxonomies should clearly define “Green bonds,” “What projects are considered green,” and how such projects will be executed differently to ensure greater transparency. 
2. Green bonds should be linked to achieving the Nationally Determined Targets set in the Paris Climate Agreement: Every African country should link Green bond issuances to the attainment of the UN sustainable development goals and the Nationally-Determined Targets for cutting emissions that were agreed upon under the Paris Climate Agreement. Rather than view this as some sort of “Greenwashing,” it will provide a roadmap for international investors to understand the relevance, urgency better, and salient Green bonds across Africa. This will equally generate more support from international organizations such as the United Nations, the international Monetary Fund, and the World Bank, which have repeatedly engaged in structural adjustment programs in African countries. 
3. Green Bonds will increase Africa’s attractiveness and make it more investment ready: Investors view Africa as a rugged terrain for investments, plagued by corruption, poor governance, and little accountability. As such, green bonds will accelerate the pace of financial and market-oriented reforms, facilitate financialisation and digitisation, and ensure that African countries can sustainably access international markets. 
4. Development can be sustainable and Green: The African Development Bank (AfDB) suggests that the continent’s infrastructure needs amount to $130–$170 billion annually. Rather than pursue traditional financing instruments, African countries should ensure that green and sustainability requirements are included and applied to every infrastructure project to ensure sustained progress that will unleash the country’s economic potential, address social issues such as poverty, unemployment, and gender equity and allow their finances to return towards acceptable levels sustainably. 

Henri Kouam

Founder & Executive Director

The french version of this article was first published by Defi Actuel on 07/12/2022