Series Introduction

 

Countries in the Middle East and North Africa are projected to be at greater risk than other regions to the disastrous impacts of climate change. They are already experiencing rising temperatures and more frequent extreme weather events, which not only affect human well-being but also pose significant economic risks. The region is still reeling from the economic impact of the Covid-19 pandemic and geopolitical tensions. In these circumstances, mitigating and adapting to the impacts of climate change without adding to soaring public debt would require innovative solutions. Debt instruments such as green bonds and debt-for-climate swaps could play a pivotal role in securing climate finance for countries in the region.

 

 

 

The Middle East and North Africa (MENA) region is considered a climate change hotspot, where the impacts of climate change are expected to be greater than in other regions.[1] Climate models predict that climate change will cause severe heatwaves, reduction of rainfall, increase in flash floods and extended droughts in the region. Some countries are already experiencing the impacts as temperatures have increased across the region by an average of 0.8°C over the past 20 years and are projected to increase by 2.5°C by 2050.[2] Extreme high temperatures of up to 56°C could become the norm in a world where the global average warming has reached 4°C above pre-industrial levels. Summer temperatures are expected to be up to 8°C warmer in parts of the region by the end of the century.[3] On the other hand, both droughts and floods will worsen due to climate change. The Mediterranean coasts will receive significantly less rain in a warming world while significantly more rain will be expected in the Arabian peninsula. A few countries such as Tunisia, Oman and Egypt may also face a 1.2 m sea-level rise by 2080.[4]

Countries in the region will have to adapt to these new challenges by a timely transition to low-carbon technologies in order to fulfil their targets and commitments towards mitigating the impact of climate change, i.e., reducing carbon emissions or enhancing carbon sinks. Such a transition may be painful to their economies in the short term but is critical for their competitiveness in the long term. Apart from mitigation measures countries also need adaptation measures, notably, investments in climate-resilient infrastructure and capacity building to withstand the inevitable climate shocks. However, both mitigation and adaptation will require significant investments from MENA countries, some of which are already struggling with constrained budgets and stretched resources.

The UN Framework Convention on Climate Change (UNFCCC) Needs-based Climate Finance Project attempted to quantify and analyse the finance needs for Arab countries to tackle climate change only to come to overwhelming findings. According to its findings, Arab countries have estimated their climate finance requirements to range between US$436 billion and US$478 billion by the year 2030. However, climate finance flows to the region are estimated at only US$5.1–7.4 billion a year. Furthermore, mitigation has been receiving the lion’s share of climate finance in the region, with 3.5 times more public international climate finance going to projects such as renewable energy despite repeated calls for elevating adaptation finance. Despite being one of the most water-scarce regions in the world, Arab states receive only 6%of international public finance flows for adaptation.[5]

According to the Intergovernmental Panel on Climate Change (IPCC), countries in the region will be the most affected by climate change, and the most in need of investment in adaptation.[6] However, the paucity of finance flows is not their only struggle. Many countries still face various access barriers climate funds and slow disbursements of approved funds. Additionally, finance flows to the region are concentrated in a few countries, although needs are identified across many countries within the region, particularly in the less developed countries (LDCs) and fragile states. Lastly, loans remain the dominant form of climate finance flows, whereas more concessional instruments and grants are required to assist in meeting adaptation needs.[7]

 

Climate Change as an Economic Risk

Climate change does not only pose significant planetary and human health risks but also economic risks. Losses to life and property in the Middle East are set to worsen if the region fails to adapt to higher temperatures and extreme weather events. According to the International Monetary Fund, since the year 2000, climate disasters have resulted in direct material damages averaging US$2 billion a year in the Middle East and Central Asia.[8] The IMF also predicts that an immediate decline in per capita economic growth of about 2% could occur with every 1°C temperature increase in the future in five of the hottest countries in the MENA region, namely, Bahrain, Djibouti, Mauritania, Qatar, and the United Arab Emirates. The World Bank estimates that climate-related water scarcity will cost Middle Eastern nations between 6% and 14% of their GDP by 2050, due to water-related impacts on agriculture, health, and incomes.[9] Therefore, significant additional spending and investments are needed for adaptation. These additional expenses are estimated to go up to 3.3% of GDP per year for individual countries over the next 10 years. At the same time, fiscal space is limited in many countries, particularly in the aftermath of the COVID-19 pandemic and the Ukraine-Russia war, necessitating a mix of domestic policy reforms and greater international support. It is expected that continued climate change will exacerbate current stresses on water, food and energy availability, particularly in countries with low resilience such as the LDCs and fragile and conflict-affected states. It is also expected to increase public debt, a considerable and growing challenge in the region.

 

Potential Spinoffs in Tackling Climate Change

Climate change risks could be averted and in some cases be used as opportunities to create more resilient economies. Since energy transition is at the heart of a low-carbon economy, new and cleaner technologies have enormous potential for creating jobs, eradicating poverty and improving health while the improved energy access would allow for reducing the gender divide in terms of education, health, livelihoods and empowerment. In other words, combatting climate change can reinforce almost all 17 Sustainable Development Goals.^[10]

Looking at economic benefits, the New Climate Institute estimates that the transition to a low-carbon regime could deliver a direct global economic gain of US$26 trillion by 2030, compared with remaining in the business-as-usual mode, and could generate more than 65 million new low-carbon jobs by 2030.[11] Another report highlights a climate investment potential of US$23 trillion in emerging economies by 2030, of which US$265 billion could be within three MENA region countries (Egypt, Jordan and Morocco).[12] The investments identified would not only tackle the climate challenge but also promote and support sustainable development by focusing on transport, energy, and waste. Others have identified even larger opportunities in green finance that could reach US$2 trillion in the countries of the Gulf Cooperation Council.[13]

 

Debt Instruments for the MENA Region

Several studies have examined climate finance for the region, either taking stock of sustainable finance practices and the current status of climate financing,[14] analysing the opportunities for climate investments,[15] or identifying the best financial instruments for selected countries to accelerate their energy transition.[16] However, as the region in general suffers from widening current account deficits, and public debt since the outbreak of the Covid-19 pandemic has grown to US$1.4 trillion, equivalent to 60% of the region’s GDP, the two debt instruments described below could serve as ideal sources of funding for climate action.[17]

 

Debt-for-Climate Swaps

One instrument with large potential in the region is debt-for-climate swaps. This is an innovative financial instrument that reduces a developing country’s debt stock or debt service in exchange for a commitment on or investments in national climate adaptation and mitigation programmes. These are voluntary transactions whereby the donor(s) cancels some or all of the debt owed by a developing country’s government. The bad debts of countries in the region could be traded off to build resilience and reduce greenhouse gas (GhG) emissions. Such arrangements offer clear financial and climate benefits for debtors (and for the creditors involved as it reduces the risk of what economists term “moral hazards”). However, debt-for-climate swaps are not only useful for countries in debt distress; they can also benefit countries that have high but not necessarily unsustainable debt burdens.

Several governments within the region have been struggling with public debt, and the Covid-19 pandemic has further increased debt across the region. Government debt increased sizably between 2019 and 2020, with some countries even having debt-to-GDP ratios above 70%. Countries with high gross debt positions across the MENA region include Sudan at 284%, Bahrain at 117%, Egypt at 94%, Jordan at 92%, Tunisia at 87%, and Morocco at 77%.[18] Countries within the region could therefore benefit significantly from debt swaps.

However, reaching an agreement on debt swaps has proven to be a difficult process, with creditors often requiring close moni­toring and strict commitments in order for countries to secure such swaps. As difficult as it may be, debt swaps could play a crucial role in climate finance in the region. A recent report estimated that US$4 billion could be reduced in existing debt for the MENA region through debt and climate swaps while US$33 billion worth of new climate- and nature-linked debts could be issued.[19] Although no country within the region has used debt-for-climate swaps yet, countries like Egypt, Morocco, Jordan and Yemen have already used debt-for-development swaps.[20] Extending on these experiences and with the support of regional actors such as the UN Economic and Social Commission for Western Africa (UNESCWA) — which has an initiative to finance climate and sustainable devel­opment projects using debt-for-nature and debt-for-climate swaps — the MENA region can create a success story from tackling its climate challenge while reducing its public debt.

Green Bonds and Green Sukuk

Another set of financing instruments are green bonds and green sukuk, which have been on the rise in recent years, seeing a 49% growth rate in the five years before 2021. A green bond is a debt financing instrument that is issued by national, regional or multinational public entities as well as private corporations to raise capital specifically to support climate-related or environmental projects. Green sukuk are similar to green bonds, except that they are shari’a compliant. Proceeds from a sukuk issuance must be used only for halal business activities and the revenue accruing to sukuk holders must only be derived from the earnings generated by the sukuk asset itself.

With its current growth trajectory, the global green bond market’s cumulative issuance could exceed the US$2 trillion mark by 2023.[21] Similar to the global market, the MENA region has witnessed an increase in green bonds, with issuance jumping 122% from 2020 to 2021.[22] More players are now in the market issuing green bonds, including Riyad Bank, National Bank of Kuwait, Qatar National Bank, Majid Al Futtaim Properties, and Banque Centrale Populaire.[23] Although green bonds do not directly reduce a country’s debt burden, due to their flexibility and ability to help reduce shocks such as the economic consequences of the Covid-19 pandemic, they are proving to be one of the region’s stron­gest opportunities to mobilise private capital towards sustainable investments.

Green sukuk made its debut in 2019, when the Islamic Development Bank issued a US$1.18 billion bond, with proceeds going towards renewable energy, clean transportation, and energy efficiency. Owing to the success of its first green sukuk issuance, the bank raised US$2.5 billion in 2021 with its “Sustainability Sukuk”.[24]

 

Conclusions

A window of opportunity to stop GhG emissions and potentially devastating climate change effects still exists and depends on rapid climate action. This action will depend on mobilising all available resources, most importantly, financial resources. However, even if emissions are stabilised in future, climate changes over the past several decades will continue to have devastating effects in the MENA region. Thus, even as they transition to low-carbon economies, governments in the region would need to adapt to the climate change effects that are already upon us by investing in climate-resilient infrastructure, ranging from building flood defences to improving road surfaces that have deformed in high temperatures. For the LDCs and fragile states within the region, international support will play a crucial role to deliver on mitigation targets and launch adaptation measures. Now, arguably, is the time to utilise the region’s full potential of climate investments that can support a transition to low-carbon and resilient economies while achieving other development ambitions. This includes expanding on instruments that remain underutilised, such as green bonds, while exploring new and innovative finance methods, such as debt swaps. Additionally, as multiple challenges evolve, including water and food security, energy security, economic shocks and with them financing risks, regional collaboration can become critical in attracting sources of finance and securing the necessary funds to advance climate resilience. 

 

 

 

*      Mr Moustafa Bayoumi is a Research Fellow in Energy, Climate Change, and Sustainable Development at the Anwar Gargash Diplomatic Academy (AGDA) in Abu Dhabi. Before joining AGDA, he worked as an Associate Researcher at the Mohammed bin Rashid School of Government in Dubai, where he led sustainable development policy research. Prior to that, he was a Research Assistant at Stockholm Environment Institute (SEI) in Sweden. He holds a master’s degree in sustainable development from Uppsala University, Sweden. His research interests include climate finance and adaptation to climate change impacts in the MENA region.

 

Image: Micheile dot com on Unsplash.

 

_{End Notes}

[1] Lelieveld, J., Proestos, Y., Hadjinicolaou, P., et al, “Strongly Increasing Heat Extremes in the Middle East and North Africa (MENA) in the 21st Century”, Climatic Change 137, 245–260 (2016), https://doi.org/10.1007/s10584-016-1665-6.

[2] Lelieveld, J., Proestos, Y., Hadjinicolaou, P., et al, “Strongly Increasing Heat Extremes”.

[3] Waha, K., Krummenauer, L., Adams, S., et al, “Climate Change Impacts in the Middle East and Northern Africa (MENA) Region and their Implications for Vulnerable Population Groups”, Reg Environ Change 17, 1623–1638 (2017), https://doi.org/10.1007/s10113-017-1144-2.

[4] Waha, K., Krummenauer, L., Adams, S., et al, “Climate Change Impacts”.

[5] UN Framework Convention on Climate Change (UNFCCC), “Technical Assessment of Climate Finance in the Arab States”, 2022, https://unfccc.int/sites/default/files/resource/UNFCCC_NBF_TA_AS_final.pdf.

[6] IPCC, Climate Change 2022: Impacts, Adaptation, and Vulnerability: Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, 2022), https://www.ipcc.ch/report/ar6/wg2/.

[7] UNFCCC, “Technical Assessment of Climate Finance”.

[8] IMF, “Feeling the Heat: Adapting to Climate Change in the Middle East and Central Asia”, 2022, https://www.imf.org/-/media/Files/Publications/DP/2022/English/ACCMECAEA.ashx.

[9] World Bank, “Beyond Scarcity: Water Security in the Middle East and North Africa”, 2017. https://openknowledge.worldbank.org/handle/10986/27659.

[10] Fuso Nerini, F., Sovacool, B., Hughes, N. et al., “Connecting Climate Action with Other Sustainable Development Goals”, Nat Sustain 2, 674–680 (2019), https://doi.org/10.1038/s41893-019-0334-y.

[11] New Climate Economy, “Unlocking the Inclusive Growth Story of the 21st Century: Accelerating Climate Action in Urgent Times”, 2018, https://newclimateeconomy.report/2018/wp-content/uploads/sites/6/2018/09/NCE_2018_FULL-REPORT.pdf.

[12] International Finance Corporation (IFC), “Climate Investment Opportunities in Emerging Markets: An IFC Analysis”, 2016, https://www.ifc.org/wps/wcm/connect/59260145-ec2e-40de-97e6-3aa78b82b3c9/3503-IFC-Climate_Investment_Opportunity-Report-Dec-FINAL.pdf?MOD=AJPERES&CVID=lBLd6Xq.

[13] PwC, “Middle East Green Finance: A US$2 Trillion Opportunity”, Strategy&, PwC, 2022, https://www.strategyand.pwc.com/m1/en/strategic-foresight/sector-strategies/financial-services/middle-east-green-finance/middle-east-green-finance.pdf.

[14] UN Environment Program (UNEP), “Promoting Sustainable Finance and Climate Finance in the Arab Region”. 2021, https://www.unepfi.org/wordpress/wp-content/uploads/2021/01/Sustainable-Arab-Finance-Report-Jan-2021.pdf.

[15] IFC, “Climate Investment Opportunities”.

[16] Beyer, J., and Bayoumi, M., “Financing a Green Transition in the Middle East”, Mohammed bin Rashed School of Government, 2022, https://mbrsgcdn.azureedge.net/cmsstorage/mbrsg/files/b5/b5ad5ba5-d4bf-472f-b0a6-aa58cb137851.pdf.

[17] UN Economic and Social Commission for Western Africa (UNESCWA), “Climate/SDGs Debt Swap — Donor Nexus Initiative”, 2022, https://www.unescwa.org/debt-swap.

[18] IMF, “Gross Debt Position as a Per Cent of GDP”, 2022, https://www.imf.org/external/datamapper/G_XWDG_G01_GDP_PT@FM/ADVEC/.

[19] Patel, S, Averting the Crises: How a New Approach to Debt Could Raise US$400 Billion for Climate and Nature (International Institute for Environment and Development (IIED), 2022), http://pubs.iied.org/21001IIED.

[20] UNESCWA, “Climate Finance in the Arab Region”, 2019, https://digitallibrary.un.org/record/3880291/files/E_ESCWA_SDPD_2019_TP.10-EN.pdf?ln=en.

[21] Climate Bonds Initiative, 2022, https://www.climatebonds.net/.

[22] Zawya.com, “Green, Sustainable Debt Issuance in MENA Hit US$18bln in 2021”, 6 January 2022, https://www.zawya.com/en/markets/green-sustainable-debt-issuance-in-mena-hit-18bln-in-2021-lzfpdlbn.

[23] UNFCCC, “Technical Assessment of Climate Finance”.

[24] Islamic Development Bank. “Islamic Development Bank Issues Largest Sustainability Sukuk Ever”, 25 March 2021, https://www.isdb.org/news/islamic-development-bank-issues-largest-sustainability-sukuk-ever