West Africa Economic Outlook 2023: Recent macroeconomic trends and prospects (2)
In general, the policy direction that needs to be pursued to sustainably address external sector exposure should be around expanding the export base (away from primary to secondary commodities through domestic value addition); mineral resource beneficiation to retain employment opportunities locally as mineral exports out of the region are mostly done in raw forms; diversifying export destinations, among others steps, by enhancing regional integration; and improving domestic resource mobilization and consolidation of public finance to bridge the saving investment gap.
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Fiscal imbalances are major drivers of external imbalances in many countries in the region.
Boosting private finance for climate and green growth. As the world faces the urgent challenge of climate change and the depletion of its natural resources, there is a growing imperative for businesses and governments to act toward sustainable and green growth.
West Africa has enormous potential to achieve green growth, green industrialization being the most obvious pathway.
Besides, the rationale for green growth across the region is quite comprehensive: climate change impacts and risks, natural capital depletion, poverty and food insecurity, as well as limited employment creation and many capital-intensive enclaves.
West Africa ranks amongst the most vulnerable regions to climate change and environmental hazards in the world. In fact, out of the fifteen countries that make up the ECOWAS/West African region, four (Guinea-Bissau, Mali, Liberia, and Niger) are ranked among the ten most vulnerable countries to climate change and environmental hazards in the world.
This high level of vulnerability has been worsened by the Covid-19 pandemic and other epidemics like Ebola that have affected various countries in the region.
With the region hosting a third of the population of the entire African continent, the economic and livelihoods conditions of a large part of the African population are at stake.
The West African region is also notorious for developmental challenges such as recurrent power outages, poor transport and health infrastructure, skills deficiencies, trade, and tariff barriers as well as high rates of unemployment, especially among its youthful population.
All these challenges make the transition to green growth economies an imperative for the West African region.
Also, West African countries that have made considerable strides in attaining green growth such as Côte d’Ivoire, Ghana, Nigeria, and Senegal are more resilient to the adversities of climate change since green growth is positively correlated to climate change resilience outcomes.
Investing in green growth is the best pathway for West African countries seeking to build resilience and achieve the SDGs.
However, the path towards a green transition in the context of the triple crises of COVID-19, climate change, and the war in Ukraine, presents a significant challenge for many countries across the continent.
For West Africa, a mix of policy interventions should be considered to accelerate the region’s economic growth amid the existing and emerging shocks, boost private sector financing for climate and green growth, and harness natural capital as a complementary financing option for climate and green growth.
Finance is critical to West African countries’ transition to green growth, although the region is still very much reliant on public sector finance which is insufficient.
The need for private sector financing has become very imperative in the region. Financing flows for climate action in West Africa reached an average of $7.9 billion in 2019/2020. Public finance in West Africa ($6.8 billion, or 87 percent of the total) was on average more than six times the private finance ($1.03 billion, or 13 percent).
West Africa collectively require an estimated USD 36.3 billion per year over the period between 2020 and 2030 to implement their current NDCs.
That is a total of around $400 billion for the entire period. Hence, the annual climate financial gap is estimated at 28.5 billion.
Private sector financing is now key to achieving green growth across Africa in general and West Africa in particular.
By 2030, West African countries are expected to have several billion dollars’ worth of investment opportunities arising from climate change.
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A significant portion of this investment is projected to be sourced from private sector financing, which will complement public sector financing efforts.
To boost private sector financing for climate and green growth, innovative private sector finance instruments and mechanisms should be at the heart of the green growth and climate change finance agenda in West Africa.
Unlocking private sector finance will require the region to engage with emerging innovative financing instruments and direct private climate finance towards sectors and regions that not only generate the lowest risks and highest returns for private sector investors, but also the greatest impact for green growth outcomes.
Harnessing natural capital as a complementary financing option for climate and green growth.
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West Africa is blessed with huge natural capital including crude oil, natural gas, minerals, forests
and wildlife.
It hosts Guinean forests, one of Africa’s eight global biodiversity hotspots.
Three of its countries, Nigeria, Niger and Ghana are listed amongst the top ten African countries with the best natural resources.
Senegal and Burkina Faso are located in the Sudano-Sahelian zone and, therefore, are relatively rich in natural resources.
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As a region, West Africa is endowed with underexplored mineral resources, especially in Burkina Faso and Côte d’Ivoire, which are the least-explored countries within the Birimian Greenstone Gold Belt which stretches across Ghana, Côte d’Ivoire, Guinea, Mali, and Burkina Faso .
However, the exploitation and mismanagement of these resources have also contributed to political instability, corruption, and poverty in many countries in the region. Dependence on natural resources has also led to a lack of economic diversification, making the region vulnerable to fluctuations in global commodity prices.
To address these challenges, West African governments need to employ effective natural resource policies and instruments to finance sustainable and green economic growth in the region.
This includes utilizing optimal fiscal instruments to maximize resource rents; controlling illegal, unreported, and unregulated fishing and curbing the high rate of deforestation; building robust negotiation capacity and expertise; and building transparent and accountable institutions to govern their resources and guard against corruption, illicit trade, and illicit financial flows.
In this regard, West Africa can utilize various policy measures to effectively shift towards a development Model driven by natural capita.
The region will need a combination of policy actions encompassing the following: (i) investments in data collection for improved valuation, (ii) implementation of natural capital accounting to keep track of the most important stocks of natural capital, (iii) serious implementation of a range of fiscal instruments on both renewable and non-renewable resources; (iv) investments in the capacity, technology, approaches and tools needed to benefit from best practices in exploration and licensing initiatives, and international agreements; and (v) deep institutional reforms to reduce illicit financial flows and corruption, improve transparency and implement best practices when it comes to natural resource governance.