The African Development Bank (AfDB) and Inter-American Development Bank (IDB) are actively seeking donors for Special Drawing Rights (SDRs), IMF reserve assets, aiming to amass $20 billion.
The goal is to transform these assets into a substantial $80 billion funding pool dedicated to climate financing.
This ambitious initiative is part of a broader endeavor among multilateral development banks to intensify their efforts in addressing climate change and poverty.
Leveraging SDRs for Impact
The AfDB and IDB intend to leverage each $1 of SDRs to generate $4 of new funding. This will be achieved through innovative financial instruments, such as hybrid capital bonds.
These bonds, pioneered by AfDB earlier this year, enable multilateral lenders to amplify the impact of their resources.
The IMF’s recent approval for using SDRs to acquire these bonds has further bolstered this strategy.
Global Outreach for Support
To secure the necessary SDRs, AfDB President Akin Adesina and IDB counterpart Ilan Goldfajn are embarking on a global tour.
They are engaging in discussions with potential donor countries, including Canada, the United States, Saudi Arabia, Korea, Kuwait, Qatar, and Brazil.
Encouragingly, these countries have expressed considerable interest in contributing to this cause.
Broadening the Donor Base
Furthermore, Japan has pledged its support as a prospective SDR donor. In Europe, France has indicated a willingness to provide some of its SDRs for a “liquidity guarantee,” ensuring donor repayment in case of financial difficulties.
With such widespread interest, Adesina and Goldfajn are optimistic about achieving their fundraising goals by the end of the year.
Diversifying Funding Streams
Beyond the SDR initiative, the AfDB has secured a $117 billion capital increase and seeks an additional $25 billion for its concessional lending arm, the African Development Fund.
The bank will allocate these resources to various projects, including credit guarantees that leverage its triple-A credit rating to reduce borrowing costs.
Additionally, governments will utilize the funds for debt-for-nature or climate swaps, reducing debt in exchange for safeguarding vital ecosystems.
Beyond Traditional Metrics
Recognizing the economic and ecological significance of Africa’s natural resources, Adesina emphasizes the need to reassess traditional valuation methods.
The AfDB aims to recalculate the continent’s GDP figures to incorporate the value of savannahs, rainforests, rivers, and oceans, estimated to be worth at least $6.8 trillion.
This shift in perspective could significantly enhance the debt metrics of countries like Congo and Gabon, which possess invaluable carbon sinks like the Congo Basin.
Innovative Financial Tools
The AfDB is also developing novel currency hedging tools to mitigate financial risks. A recent example is the $1 billion guarantee program established in South Africa in collaboration with the UK government.
Similarly, the IDB launched a comparable initiative in Brazil earlier this year for sustainability-focused projects.
Adesina strongly denounces resource-backed loans, where African countries pledge oil, gas, or metals as collateral for funding.
He criticizes this practice as “financial scavenging” that exploits the desperation of nations facing liquidity challenges. He calls for a shift away from such exploitative arrangements, emphasizing the importance of protecting Africa’s valuable resources and fostering sustainable development.