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.

 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.  

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.

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.

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.