‘Climate change threatens stability in Nam’

Climate change may threaten financial and macroeconomic stability in Namibia, the Bank of Namibia (BoN) warned in its latest Annual Report, released last week.

The weather phenomenon may threaten systemic financial stability if a number of key financial institutions or markets are simultaneously affected by shocks.

Such impacts may cause losses at financial institutions to spill over into the real economy, causing damage to businesses and households in the form of restricted credit, lower asset values and reduced trade, the BoN said.

Similarly, climate change can directly affect fiscal positions through its impact on tax bases and spending programmes, the central bank added.

Namibia is a net carbon sink and absorbs more greenhouse gas emissions (GHGs) than it emits.

The country needs to undertake adaptive measures to cope with the adverse effects of climate change, which have significant fiscal cost implications, according to the BoN.

“Adaptation policies, which are intended to increase the resilience of the economy (such as the erection of safer, more sustainable buildings and infrastructure), require temporary increases in public expenditure.

“As long as the revenues from mitigation policies are not sufficient to finance this expenditure, government actions designed to fight climate change and improve fiscal sustainability in the long run may have adverse effects on budget balances in the short to medium term,” the BoN said.

Impact

The impact of climate change on food insecurity in Namibia is expected to be aggravated and extend even further in the future, increasing food prices and reducing food production, the BoN noted.

“The frequency of droughts already appears to be increasing, with one year of drought conditions recorded in the 1980s, three recorded in the 1990s, two in the 2000s, and three in the 2010s,” it said.

The most recent of these involved the near failure of the 2018/19 rains when most of Namibia experienced severe drought conditions, measured as a combination of negligible rainfall, poor vegetation conditions, high surface temperatures, and low soil moisture.

An estimated one third of Namibians suffered food shortages, 90 000 livestock died between October 2018 and June 2019, and the City of Windhoek declared a water crisis.

Last year, it is estimated that around 700 000 Namibians were food insecure, which necessitated the allocation of N$643 million to the Office of the Prime Minister for drought relief in the Mid-term Budget Review in October.

Growth

The economic literature shows that extreme weather events tend to have a negative effect on economic growth, and that in some cases this effect lasts for up to several years.

Reasons include damage to the economy’s stock of physical and infrastructural capital, the impact on the labour force (including through displacement or migration), and losses in productivity (for example, due to breakdowns in supply linkages).

Expert studies found that global growth will be hindered by rising operational costs as global temperatures rise. The authors reviewed various studies in their paper and found that a worst-case impact of a 1% reduction in gross domestic product (GDP) growth per year could be realised.

Research also suggests that only a collective effort to enact strict carbon emissions policies has the potential to reduce the long-term financial repercussions of climate change, and that the impact will be disproportionately damaging to developing economies.

“This is evident in the prediction of the World Bank Climate Change Portal (2021) that, in the absence of mitigation and adaptation measures, Namibia’s GDP could be reduced by 6.5% annually,” the BoN said.

Public finance

Extreme weather events may place a direct and indirect burden on public finances, according to the central bank.

“The budgetary impact can be direct, both through higher public expenditure associated with relief measures, repairs, and maintenance of infrastructure, and also prevention measures, or indirect, through an eroding revenue base resulting from output loss or higher public expenditure on social payments owing to lowered incomes.”

Governments may take action to limit the negative effects of climate change, mainly through mitigation and adaptation policies.

Mitigation policies, embedded primarily in emissions trading schemes, carbon taxes, and other charges on pollution externalities, are deployed to decrease GHG emissions.

Adaptation policies, which are intended to increase the resilience of the economy (for example, by erecting safer and more resilient buildings and infrastructure), require temporary increases in public expenditure.

Financial institutions

Macroeconomic effects of climate change on the economy have negative implications for the financial system, increasing financial risks through physical and transition risks, the BoN said.

“The financial system’s role in helping people rebuild (by honouring claims after disasters) highlights its importance to improving resilience to climate change. The negative effects of climate change on the economy also materialise through consumers honouring their debt obligations.”

Climate change affects the financial system through two main channels, according to the central bank.

The first is the physical risks which arise from damage to property, infrastructure and land.

The second, the transition risk, results from changes in climate policy, technology, and consumer and market sentiment during the adjustment to a lower-carbon economy.

Exposures can vary significantly from country to country. Lower- and middle-income economies are typically more vulnerable to physical risks.

Physical risks for financial institutions can materialise either directly, through their exposures, or indirectly, through the economy-wide effects of climate change.

For financial institutions, physical risks can materialise directly through their exposures to corporations, households, and countries that experience climate shocks, or indirectly through the effects of climate change on the wider economy and feedback effects within the financial system.

Exposures manifest themselves through increased default risks of loan portfolios or lower values of assets.

Adaptation challenges

Namibia has limited financial and technological resources, one consequence of which is a lack of investment in education and skills development, the BoN stated.

“Namibia’s limited financial and technological transfer capacity could hinder [climate change] adaptation efforts. Moreover, the transport and communications infrastructure in the rural areas of the country is poor, and access to basic services like sanitation, healthcare, electricity, and potable water is insufficient.”

Another adaptation challenge is the lack of infrastructure that caters to climate change.

Major infrastructural deficits include a lack of roads and bridges; hospitals; stormwater drainage systems (in informal settlements); grain storage facilities; tractors; water pumps; and government vehicles.

There is also insufficient access to technologies such as drought-resistant seeds and rainwater harvesting tanks, and limited access to climate change data and adaptation options.

“Most rural farming communities are not aware of initiatives that are meant to assist them with information. Many of these barriers are linked to financial resource and capacity deficits.”

The majority of the adaptation strategies reflected in the Nationally Determined Contribution (NDC) are not well captured in current medium-term fiscal planning and budgeting in Namibia, the BoN said.

“On its own, the government will not be able to carry out and fund all activities. Nevertheless, all government ministries and agencies can use their current budgets and seek to integrate climate adaptation actions into their current budget items.”

Recommendations

The financial sector regulators will need to be at the forefront of climate change policies by integrating climate-related risks into supervision and financial stability monitoring, the BoN suggested.

“Macro- and micro-prudential policies should recognize systemic climate risk, for example, by requiring financial institutions to incorporate climate risk scenarios into their stress tests.”

The BoN can support the development of green bonds in the economy.

By providing credit facilities and (partial) guarantees, the development financing institutions could support targeted financing mechanisms to encourage smallholder farmers and agricultural enterprises to engage in smart agriculture that mitigates climate change.

The BoN can also leverage technological financial developments (FinTechs) to support climate change-related funding.

Fiscus

From the fiscal side, it is important for the government to strengthen resilience by investing in adaptation and building fiscal buffers, the BoN said.

This would involve investing in climate resilience and weather-proofing economic activities to minimise rises and falls associated with the business cycle.

Such actions would include the building of dams to harness water, the installation of boreholes for irrigation, and solar and wind power to avoid overreliance on hydro- and coal-powered energy systems.

There is also a need for prioritising public investments that mitigate climate risks.

The government should ensure that these investments address climate change by fully integrating climate risks at each stage of the public-investment cycle.

“It is also important to deliberately put in place fiscal buffers and other ways to pool risks at the national and regional levels, which can be called upon in the face of climate-related disasters such as floods and droughts.”

Green energy, agriculture

Namibia needs to scale up the use of renewable energy, which has a lower impact on the environment, the BoN said.

“Renewable energy minimises carbon pollution and has a much lower impact on our environment. The country will therefore need to increase the use of renewable energy.

“The green hydrogen project should be used to increase clean energy supply to the African and international regions.”

Namibia needs to improve agricultural resilience by installing irrigation systems, according to the central bank.

“Improved irrigation systems and broader access to drinking water, electricity, and finance would support higher economic growth and poverty reduction during prolonged dry spells and water shortages.

“These factors work hand in hand – electricity powers irrigation systems and deep tube-well pumps, and access to finance facilitates the building and maintenance of all three.”

There is a need for capacity building in the ministry of finance and public enterprises and the BoN through training of staff on climate change and its related impact on macroeconomic policy-making.

In addition, there is also a need for training to properly compile and analyse climatic data and embed the same in macroeconomic models and forecasting, the central bank said in conclusion. - Bank of Namibia