Study indicates highly regulated financial sector and unfavorable collateral policy as major barriers in mobilizing private and public climate finance.
The study titled ‘Landscape of Climate Finance in Ethiopia’ prepared with the support of FSD Africa, the Children’s Investment Fund Foundation, and UK Aid has been presented in a knowledge series event hosted by FSD Ethiopia on Thursday March 24, 2023.
As indicated on the report, Ethiopia has a highly regulated financial sector, with limited access to foreign banks and investors and has high collateral requirements and limits to how much companies can borrow. This makes taking loans extremely inaccessible to small-holder farmers and agriculture SMEs, who are vulnerable to the impacts of climate change. As the report further cites, the National Bank of Ethiopia (NBE) has issued a new directive to ease out the requirements, but uptake has been slow.
Even though it has one of the lowest shares of GHG emissions in the world (0.04% in 2019), droughts and desertification are the most destructive natural hazards in Ethiopia, with climate models predicting 1.5-30°C warming by 2050. Projects show that drought-induced impacts on agricultural productivity could reduce Ethiopia’s GDP by up to 10% by 2045.
Also due to high risk low returns, high transaction cost, high interest rates, lack of risk mitigation solution there is a lack of bankable projects in these sectors and appropriate financial products.
According to Ethiopia’s NDC, it requires USD 316 billion (mitigation 87% and adaptation- 13%) by 2030 to implement its NDC. Out of this, 20% will be mobilized domestically and 80% will be needed from international sources. Mitigation Costs: The updated NDC estimates that USD 275.5 billion is required to implement the mitigation targets in Ethiopia from 2020 to 2030. Out of the total USD 275.5 billion, USD 80 billion will be required in CAPEX to finance the CRGE’s four pillars
Ethiopia has established a policy landscape coupling economic growth with climate change action, focusing on low-carbon energy development, conservation of forest reserves, and practicing climate smart agriculture. It created a National Adaptation Plan (NAP-ETH) and developed a resource mobilization strategy to secure resources for adaptation. However, the current landscape of climate finance in Ethiopia is dominated by international public financiers, as private finance from domestic and international investors lags.
The Government has started to transition through the Homegrown Economic Agenda and the New Investment Law, but there is still scope for unlocking private capital through measures such as the development of capital markets, the creation of the Ethiopian Securities Exchange, and the EIH. The NBE should leverage the potential of MFIs and digital financial services to increase energy access, and report recommend government to, enable, and empower prominent public and private financial actors providing favorable collateral and lending policies, project pipelines, and capacity building for MCFs.
“Ethiopia should establish a climate budget tagging system to track domestic public expenditure and international investments, develop a climate-related expenditure tagging and tracking system, and conduct a bottom-up climate finance needs assessment,” the report recommends.
Also according to the report even though the government has a top-down approach to implementing the CRGE Strategy, there is a lack of institutionalization of the CRGE facility at the regional, woreda, and kebele levels, resulting in higher impacts of climate projects.