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Opinions of Thursday, 12 August 2021

Columnist: zuberu aliu

Climate change and cost of Ghana’s sovereign borrowing

Scientists believe the earth is warming quickly now than in the past Scientists believe the earth is warming quickly now than in the past

We observe wind, heat or cold, clouds, and other forms of events in the atmosphere. This mix of events occurs daily and changes over time at different locations. The pattern of change in these daily events has been observed over some decades and believe to have altered occurrences in the weather.

Scientists believe the earth is warming quickly now than in the past. Climate change has become an important issue for policymakers globally as it has a material impact on the economies of counties that are vulnerable to climate change risks.

Sovereign wealth funds, pension funds, and other investors use credit ratings to gauge the creditworthiness of countries including Ghana. This rating is to aid investors to identify the risk involved in investing within another country.

Fitch's credit rating for Ghana was last reported at B with a negative outlook. This outlook may be an indication of a high public debt level and low revenue base. This may make Ghana weaker in terms of the amount of debt the country can afford to issue.

Data from the International Monetary Fund (IMF) also demonstrate higher levels of public debt for Ghana from now and through to 2025. The IMF in its April 2021 Fiscal Monitor indicates that Ghana’s public debt stock is expected to hit 81.5% of Gross Domestic Product (GDP) by the end of this year.

The IMF further indicates that Ghana's debt to GDP ratio will surge to 83.2% in 2022, and then further to 84.8%, 86.0%, and 86.6% in 2023, 2024, and 2025 respectively.

The Government of Ghana continues to issue sovereign bonds in a bid to raising capital from investors in other to meet the developmental objectives of the country. The country continues to enjoy strong credibility from the global investor community with its ability to consistently raise multi-billion-dollar financing.

But will Ghana be able to maintain this positive outlook among investors as one of the countries vulnerable to climate change risks amidst calls for the assessment of sovereign borrowing to include climate change vulnerability?

Climate change could impact significantly on public finances. The Centre for Sustainable Finance (2020) reported on climate change and sovereign risk and concluded that [climate change] ‘raises the cost of capital of climate-vulnerable countries and threatens debt sustainability.

Developing countries that are vulnerable to the changes in climate will incur a risk premium on their sovereign debt. Ghana's vulnerability to climate change will impacts negatively on the country's ability to invest in climate adaptation and mitigation.

The impact of Ghana’s vulnerability to climate change is huge. The rate at which natural capital in this country is being depleted is markedly worrying. We continue to lose our forest at an unsustainable rate with the five northern regions risking increased desertification. People in many cities and towns battle to access potable water.

Ghana is becoming water-stress with increasing population and severe weather conditions. The exploitation of mineral resources continues unabated creating a serious threat to agriculture.

Climate change-related natural disasters also put a strain on Ghana's public financing. Extreme weather event like flood disrupts economic activities. Business days are lost and farmlands are usually washed away. Climate-related disasters adversely affect revenue mobilization. Jerry C., T.(2018) intimates that over about 50 years, 4 million people have been affected by floods, causing Ghana economic damage of over USD 780 million.

The cost associated with the flood in Ghana will not end now as the Intergovernmental Panel on Climate Change and World Bank predict increased flood events in frequency and severity in Ghana due to climate change.

The overall challenge associated with Ghana’s sovereign borrowing and climate is the consequences of public expenditure on climate change adaptation and mitigation programs.

Taking action to prepare for and adjust to both the current effects and predicted impact of climate change has a direct effect on the government budget. In like manner, investment in clean energy which is one of the climate change mitigation measures surely strains public finances.

Undoubtedly, some of the mitigation policies affect government revenue. Efforts are targeted at reducing carbon emissions in the fight against climate change. One of the ways of achieving this may be to institute a carbon tax. The Sustainable Development Goal (SDG13) calls for countries including Ghana to take action on climate change.

The SDG13 outlined some targets including improving education, awareness-raising, and human and institutional capacity on climate change mitigation, adaptation, impact reduction, and early warning. Achieving the targets on SDG 13 also has financial obligations.

Ensuring debt sustainability and financing climate resilience programs may limit Ghana’s access to the capital market, thus increasing the cost of Ghana’s sovereign borrowing.

For Ghana to sustain cost-effective sovereign borrowing, it's imperative to focus on reducing the country's vulnerability to climate change and increasing resilience. Investing in adaptation measures will aid in mitigating climate risks contributing to lowering the cost of sovereign borrowing.