By Cleo Rose-Innes, Independent Advisor and Analyst  

Reaching net-zero fossil fuel emissions by 2050 appears increasingly achievable. Investments in clean energy continue to grow, and the International Energy Agency and others predict that fossil fuel consumption will be in permanent decline within the next five years.  

While this is good news for the planet and all those coping with climate change, it will reshape many economies, especially large African countries dependent on fossil fuels for fiscal and export revenue. 

It will have profound implications for Algeria, Angola and Nigeria, three economies where fossil fuels account for 80% or more of their export basket. Together these three countries account for a quarter of Africa’s population and a third of its GDP. They also play a vital role in the stability of their respective subregions. 

This is a predictable shock 

Without export revenue, these economies cannot pay for imports and external debt and without fiscal revenue they cannot finance even modest budgets. The Bretton Woods Institutions (BWIs), the International Monetary Fund (IMF) and the World Bank Group (WBG), were created to assist members with these two crises. The IMF ensures liquidity during a balance-of-payments crisis that risks disconnection from global trade while the WBG lends long-term low-cost finance to ensure sustained public investment during a fiscal crisis.  

The BWIs will have insufficient resources to respond to a shock of such magnitude, but they can act now to reduce the severity of this foreseeable future financing crisis. The mandate and tools exist but are not being used.  

The framing of ‘climate action’ in the BWIs obscures this problem 

The IMF recognises that managing the global transition away from fossil fuels requires assessment of country vulnerability to fossil fuel price declines from a fiscal, balance of payments and financial angle. 

The guidance notes to staff undertaking Article IV consultations recommend discussions with authorities on managing the transition, limiting exposure through diversification and protecting the financial system. 

However, the IMF is not systematically undertaking this analysis. Instead, both the IMF and WBG are focusing their country analysis, resources and policy advice on “greening”—changing the source of energy production (mitigation) in middle-income countries and preparing for climate shocks (adaptation) in low-income countries.  

This not a perfect substitute for the urgent and primary need of these oil exporters now—the discovery of future sources of growth to prepare for changes in demand for oil. Why create governance and policies to ensure that infrastructure is ‘climate resilient’ if there will be no fiscal revenue to build or maintain that infrastructure? 

Recommendations 

If net zero is reached by 2050, but no new sources of growth for economies export intensive in oil are found and they collapse, then one in four people on Earth will be living on an overheated continent struggling to make ends meet on incomes many multiples below the global average. 

Here are seven specific recommendations for IMF and World Bank Group leadership. These institutions must step up now to play their essential role in confronting the greatest shock and long-term financing challenge in Africa since the BWIs were created in 1944.  

1. The IMF must assess the vulnerability of oil exporters to the permanent decline in demand for oil from a fiscal, balance of payments, and financial angle. This should be made mandatory for African oil exporters. 
    
2. The IMF must sensitise the authorities to the likely timing, extent, and severity of the crisis, to inform domestic expectations and build support for reform.
   
   
3. Thereafter the IMF must work closely with the WBG and the larger system of multilateral development banks, to harmonise adjustment with programming to support the discovery of a new growth path.
    
4. IMF members must review how best to employ IMF resources given the significant shifts in trade flows, especially fossil fuels, and the growth, debt service and development implications.
    
5. The IMF, WBG and G20 members must ensure urgent agreement on the design of a sovereign debt restructuring mechanism to ensure that adequate capital investment is made to support a new growth path.
   
   
6. The WBG must pay at least as much attention to new institutional forms and policies to support the discovery of new growth opportunities (diversification) as is given to the impact of climate change (adaptation) in Africa. 
    
7. The WBG should not overestimate the potential of public-private partnerships to deliver infrastructure in Africa, learn lessons from the past, and undertake a more systemic approach to the creation of infrastructure, ensuring complementary investments to create employment, support sustainability and accelerate diversification.