Developing countries in Africa will be able to save $11 billion in borrowing costs in the next five years by using a new UN finance mechanism while encouraging greener investments and sustainable development.
The U.N. Economic Commission for Africa (UNECA) this week launched the Liquidity and Sustainability Facility (LSF) as part of COP26, the global climate conference currently underway in Glasgow.
Interested international investors whose portfolios include African government bonds will be able to approach the LSF for short-term loans, known as repos, using the bonds as collateral, improving the ability of investors to turn those bonds into cash at short notice, known as liquidity.
Consequently, this would make the bonds less risky and more appealing to investors in general. As a result, African governments would benefit from increased demand for their bonds, as well as lower financing costs.
According to the LSF, African governments may be able to save $11 billion in borrowing costs over the next five years.
“Developed countries have long enjoyed the existence of large repo markets for their government bonds, facilitating the creation of stable and additional funding sources,” said Egypt Finance Minister Mohamed Maait. “With the LSF, our aim is to be able to provide the same sort of liquidity-supportive environment to African governments and private investors alike.”
The LSF will raise the money for the loans from institutions. The African Export-Import Bank is expected to fund its first transaction, worth $200 million, in the first quarter of next year.
After that, it expects to raise $3 billion in Special Drawing Rights, the IMF’s unit of exchange, from developed countries, and potentially $30 billion in total.
LSF will seek to incentivize green- or development-linked investments such as green bonds or bonds related to sustainable development by offering better terms on its loans backed by such instruments, says David Escoffier, board director of LSF.
He added that this would entice investors to purchase them and in turn, encourage African governments to issue them.
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