In 2021, the United Nations Economic Commission for Africa (UNECA) unveiled a groundbreaking initiative to address the dual challenges of liquidity constraints and sustainable development in Africa. The new Facility, aptly named the Liquidity and Sustainability Facility (LSF), is poised to revolutionize access to cheaper financing for African nations while promoting green development. The LSF was designed with the support of the United Nations Economic Commission for Africa and Afreximbank with the dual objective of supporting the liquidity of African Sovereigns Eurobonds and incentivizing SDG-related investments such as SDG and green bonds on the African continent.
The Liquidity and Sustainability Facility: A New Financial Instrument for a New Era
The Liquidity and Sustainability Facility is designed to lower borrowing costs for African governments and green projects by providing liquidity support and sustainability-linked incentives. In a region where the cost of capital is often prohibitively high, this initiative represents a critical intervention to foster economic growth and environmental stewardship.
The LSF will be supported by Citi, acting as structuring agent and providing expertise in setting up this facility, together with law firms White & Case LLP and Matheson and consultancy firm Eighteen East Capital.
Key Financial Details:
- Facility Size: The LSF aims to be initially capitalized at $1 billion, with a target to grow to $30 billion in the coming years. This sizable capitalization is expected to make a significant impact on the liquidity of African debt markets.
- Interest Rate Reduction: The facility is structured to lower the interest rates on sovereign bonds by providing liquidity at a discounted rate. The LSF will buy bonds at a lower yield, effectively reducing the borrowing costs for participating countries.
- Green Development Focus: The LSF has a strong emphasis on green projects. A significant portion of the facility’s resources will be allocated to projects that align with the Sustainable Development Goals (SDGs), particularly those aimed at mitigating climate change and fostering renewable energy.
The Liquidity and Sustainability Facility: Mechanism of Operation
The LSF will operate through a market-based mechanism where it purchases African sovereign bonds and green bonds, providing immediate liquidity to the issuing countries. By purchasing bonds at lower yields, the facility reduces the effective interest rate for African governments, making it cheaper for them to borrow. This mechanism is particularly beneficial for countries that struggle to access international capital markets at reasonable rates.
Bond Purchases and Market Impact:
- Sovereign Bonds: The facility will initially target bonds from African nations with a focus on those that demonstrate a commitment to sustainability and fiscal responsibility. The LSF’s purchases are expected to stabilize and even lower yields in African bond markets.
- Green Bonds: The LSF will also invest heavily in green bonds, providing much-needed capital for projects that promote environmental sustainability.
The Liquidity and Sustainability Facility: Sustainability and Liquidity – A Balanced Approach
The LSF’s innovative approach balances the need for immediate liquidity with long-term sustainability. By tying liquidity support to sustainability outcomes, the Facility incentivizes African nations to adopt greener policies and invest in sustainable infrastructure. This approach not only addresses short-term financial needs but also aligns with the broader global agenda of combating climate change.
Sustainability-Linked Incentives:
- Interest Rate Rebates: Countries that meet or exceed specific sustainability targets will be eligible for interest rate rebates, further lowering their borrowing costs.
- Technical Assistance: The LSF will also provide technical assistance to help countries design and implement green projects, ensuring that the funds are used effectively and efficiently.
The Liquidity and Sustainability Facility: Global Partnerships and Future Prospects
The LSF is backed by a coalition of global partners, including multilateral development banks, international financial institutions, and private sector investors. This broad support underscores the Facility’s credibility and the global commitment to Africa’s sustainable development.
Global Partner Contributions:
- Multilateral Development Banks: Institutions like the African Development Bank and the World Bank have pledged to support the LSF, both financially and through technical expertise.
- Private Sector Involvement: The Facility is also expected to attract private sector investment, particularly from impact investors who are interested in funding sustainable development in Africa.
Conclusion
The launch of the Liquidity and Sustainability Facility marks a significant milestone in Africa’s development journey. By providing cheaper loans and promoting green development, the LSF has the potential to transform the continent’s economic landscape, making it more resilient, sustainable, and inclusive. As the Facility grows and evolves, it will undoubtedly play a crucial role in shaping Africa’s future.
