How climate change undermined SA’s economic and financial stability on way to junk status
The International Panel on Climate Change says challenges are to increase as temperatures rise at twice the global average
As governments worldwide rebuild their economies in the wake of the Covid-19 pandemic there is also a need to strengthen resilience to climate change. This is particularly true in Southern Africa, which has been hit with repeated climatic shocks in recent years, adversely affecting macroeconomic resilience and financial stability. These challenges are expected to increase — according to the International Panel on Climate Change, temperatures in Southern Africa are rising at twice the global average.
Though the SA government’s 2012 national climate change response paper noted the increasing frequency and severity of climate shocks, the country remains exposed to them. In March 2020 Moody’s ratings agency downgraded SA’s credit rating to junk status, owing partially to the country’s exposure to “frequent climate change-related shocks such as droughts, which undermine the agricultural sector's performance and weigh on growth”. This was evidenced by the challenges facing the state-owned Land and Agricultural Development Bank, where there was a sharp increase in nonperforming loans. This ratio was 19.5% at the end of September 2020 — substantially higher than the 9.6% of 2019.
Responding to the drought required the government to bail out Land Bank and finance the country’s drought response, putting further pressure on an already strained fiscus. In March 2020 government declared a national state of disaster for drought for the second time in three years after multiple provincial states of disaster had already been declared. In the 2020 budget statement a provision of R500m was made “for disaster management to respond to the impact of recent floods and ongoing drought”.
In addition, in last month’s budget Land Bank became the only state-owned enterprise to receive a bailout. The National Treasury allocated R7bn to recapitalise the bank after it defaulted in 2020.
Cyclones are also increasing in frequency. The first category 5 tropical cyclone in the South Indian Ocean occurred in 1994, and 12 have been recorded between 1990 and 2015.
In 2019 Cyclone Idai tore through Malawi, Mozambique and Zimbabwe, costing the agriculture sector in Malawi — one of the poorest countries in the world — about 5% of its GDP. An assessment by the World Bank in Mozambique showed that the cyclone increased poverty, raised inflation and decreased economic growth. The poverty rate rose from about 64% to 79% in affected areas and played a big role in the decline in real GDP growth from 4.7% to 2.4% (after two decades of GDP growth averaging 8%).
Substantial financial resources were required to address the human impact of the cyclone — 1.7-million Mozambicans, nearly half of them children, required humanitarian support. But Mozambique was not in a financial position to do so — total external debt amounted to $14.78bn in 2019, having increased almost 30% in two years. The debt-to-GDP ratio was an astounding 113%.
Delaying the response to climatic shock can be costly. Research by the World Bank shows that failing to meet the consumption needs of those suffering from drought can cost lower income countries 3.9% of GDP in the long term.
While Southern African countries cannot control the severity or frequency of climatic shocks, they can strengthen climate adaptation and mitigation. Adaptation, or adopting measures to reduce the adverse effects of climate change, is inherently local. Mitigation, or reducing emissions, is a global challenge.
Climate adaptation is essential for Southern Africa given the importance of the agriculture sector. This requires using drought-tolerant seeds, developing and deploying larger irrigation systems, and strengthening access to seasonal weather forecasts. Climate adaptation also requires strengthening the resilience of the freshwater supply by increasing capacity to capture and store surface and groundwater resources or, in coastal countries, investing in desalination plants.
Strengthening the capacity of health care systems to respond to climatic shock is also important. After Cyclones Idai and Kenneth more than 3,000 children were diagnosed with life-threatening severe acute malnutrition. Research by Emanuela Galasso and Adam Wagstaff estimated the cost of childhood stunting to be 9%-10% of GDP per capita for countries in Africa and Asia.
For countries reliant on hydropower, diversification is critical to strengthening the resilience of the energy sector. Most domestically produced energy that enters Eswatini’s national grid comes from hydropower, which made it a critical vulnerability during the 2015/2016 El Nino drought. Likewise, the 2019 drought in Zambia and Zimbabwe — the worst in 40 years — turned off the lights for millions who were reliant on hydroelectric power from Kariba Dam. Countries need to diversify their energy sources — by developing geothermal, solar and biogas production — to increase the sector’s resilience.
Strengthening the supply of critical food supply chains is also an urgent adaptation measure. In 2019 alone Lesotho declared a national disaster due to a drought that left a quarter of its population with severe food insecurity; the drought in Zambia and Zimbabwe brought millions to the brink of famine; and Botswana declared 2018/2019 a drought year and distributed relief food packages.
Finally, improving early warning and disaster management systems is critical. Cyclone Idai caused more than 1,200 deaths and severe flooding in Madagascar, Malawi, Mozambique and Zimbabwe, and adversely affected another 3-million lives directly.
Climate mitigation is also critical to ensure Southern Africa plays its part in the just transition. With nearly 90% of SA’s energy coming from coal-fired power stations, the damage is far-reaching given that many countries in the region purchase energy from SA. Secunda, Sasol’s coal-to fuels and chemicals plant in SA, is the world’s biggest emitter of greenhouse gases from a single site.
The reliance on coal can have many adverse effects, particularly on food security. A study by the Bureau for Food and Agricultural Policy found that at the current rate of coal mining about 12% of the country’s total high potential arable land will be permanently damaged, with a further 14% being subjected to coal prospecting applications. If coal mining continues to grow about 240,000ha of land could be lost, translating to 1.2-million tonnes of maize, ultimately enough to make SA a permanent maize importer. This will affect the whole region given its reliance on SA for maize.
Pigouvian taxes — taxes on any market activity that generates negative externalities — are an excellent mechanism to both encourage mitigation and finance adaptation. They correct the market failure due to agents not paying the full cost of the actions they impose on others. A carbon tax enables the government to tax the negative environmental impacts while raising substantial revenue to finance adaptation. It also benefits the short-term balance of payments, while encouraging long-term green investments to ensure Southern Africa is not left behind in the clean energy transition.
Given the increasing frequency and severity of climatic shocks in the region the urgency to develop a proactive adaptive and mitigative agenda is critical. Reactively responding to climatic shocks is not an option given declining fiscal positions within the region. By the end of 2019 Lesotho, Malawi, Mozambique, Zambia and Zimbabwe all faced debt distress.
• Baskaran, a development economist who holds a PhD from the University of Cambridge, is a senior research fellow at the University of Cape Town’s Development Policy Research Unit.
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