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Unlocking potential: green finance in the Middle
East, North Africa and Central Asia

Keynote Speech at Governor's Luncheon, organised by the International
Monetary Fund's Middle East and Central Asia Department

17.04.2024 I Washington D.C. I Sabine Mauderer

Check against delivery.

1 Climate change - not a distant threat
2 Time's up for fossil fuels
3 Green finance in emerging market and developing economies
4 The NGFS Blended Finance Handbook
4.1 Barriers to blended finance
4.2 Policy recommendations

5 Concluding remarks

1 Climate change - not a distant threat

Good afternoon everyone.

I am delighted to kick off your discussions on how to make financial sectors more
resilient to climate-related risks and how to scale up climate finance. They come at
the right time.

Countries in the Middle East, North Africa and Central Asia are particularly vulnera-
ble to the impact of climate change. Not tomorrow but today. We are in the midst
of a climate emergency.

For example, the devastating floods that hit Pakistan in 2022 affected 33 million
people and drove up food inflation. The Asian Development Bank estimated the
costs for rehabilitation of land and reconstruction of infrastructure to be at least
US$16.3 billion.[1]

Elsewhere in the region, water scarcity is a big problem, for instance in Egypt. Only
about 3% of the country's surface is arable land, i.e. land on which crops can be
grown, mostly along the Nile. Heat waves, water stress and salinated soil already put
pressure on Egypt's agriculture.[2] Climate change will further exacerbate these
existing vulnerabilities with implications for food prices and food security.

Climate change will have significant effects on food prices all over the world accord-
ing to a recent study by the European Central Bank (ECB) and the Potsdam Institute
for Climate Impact Research (PIK). Globally, food inflation could increase by

3.2 percentage points per year by 2035. Headline inflation could rise by

1.18 percentage points annually.

The study underlines the greater vulnerability of many countries in the Middle East,
North Africa and Central Asia where the effects might exceed the global averages.
The study also suggests that, as temperatures continue to rise, these inflationary
effects are likely to worsen. [3]

This means for central banks and supervisors it is high time to be prepared for the
huge economic impact of climate change and the associated upward pressure on
prices, and to raise awareness among governments about the massive economic
impact.

2 Time's up for fossil fuels

Given that climate change is here, and here to stay, responses ought to be two-
pronged. First, adaptation, i.e. responding to what is already happening. Second,
mitigation, i.e. accelerating global decarbonisation and fast-tracking the green
transition.

In other words: we need to prevent the worst while addressing the bad that is
already happening.

I know that we ought to be realistic and pragmatic. The world economy is still very
dependent on fossil fuels and will continue to be for some time. Take oil, for
instance. According to a recent analysis by the International Energy Agency (IEA),
global oil demand is growing more slowly, after a strong post-pandemic rebound. [4]

The IEA expects global oil demand to peak by the end of this decade. However, the

IEA also acknowledges that in many cases it is still difficult to find alternatives to oil.

It also states that under current policies, oil demand could remain near current levels
for some time.[5]

But the trend is clear: many regions across the world are weaning their economies
off fossil fuels. The IEA also projects that global demand for natural gas will peak by
2030.[6] For instance, last year, natural gas consumption in Europe fell by 7% and
reached its lowest levels since 1995.[7] At the same time, global investment in clean
energy has been outpacing investment in fossil fuels. According to the IEA "for every
US$1 US spent on fossil fuels, US$1.7 is now spent on clean energy". In 2019 this
ratio was 1 to 1.[8]

These global developments will have a particularly pronounced effect in the Middle
East, North Africa and Central Asia, where the emissions intensity of economic activ-
ities is higher than in other emerging market and developing economies.[9] This
makes companies and financial institutions - especially those exposed to carbon-
heavy activities - vulnerable to transition risks. In light of these global trends and
developments, it is essential to plan for a post-fossil fuel future.

3 Green finance in emerging market and developing economies

We need to scale up climate finance significantly, both for mitigation as well as for
adaptation. Climate adaptation measures, such as developing heat-tolerant crops or
making public infrastructure "climate-proof", are an essential pillar of addressing the
climate crisis. At the same time, decarbonisation efforts will also require large-scale
investment, for example, to develop low-carbon technologies.

The climate-related financing needs for mitigation and adaptation in the Middle
East, North Africa and Central Asia are substantial, at least US$1 trillion by 2030 to
achieve the Nationally Determined Contributions (NDCs), according to the IMF.
[10] Comparing the financing needs with the actual supply of green finance across
the region shows a large financing gap. This is where the region's financial sectors
must play a major role.

Attracting substantive amounts of private capital will be essential to plug the financ-
ing gap. Blending public and private capital can be one viable option to mobilise
green finance. Unfortunately, emerging market and developing economies especially
tend to struggle to get private investors on board.

In a challenging global macroeconomic and geopolitical environment, investors
appear to prefer investing in advanced economies that often offer more attractive
risk profiles.

This is especially true after central banks in advanced economies increased interest
rates to bring down inflation. Many emerging market and developing economies
have started to cut rates. By contrast, central bank rates in many advanced econo-
mies, for example in the United States and the euro area, have plateaued. This has
further reduced the interest rate differentials between emerging market and devel-
oping economies, on the one hand, and advanced economies, on the other. At the
same time, overall, political risk in emerging market and developing economies has
increased.

All in all, investments in emerging market and developing economies have become
less attractive in recent years. That means emerging market and developing econo-
mies need to improve their risk-return profiles to attract investors.

4 The NGFS Blended Finance Handbook

In this context, let me showcase some of the work carried out by the global
Network of Central Banks and Supervisors for Greening the Financial System - the
NGFS. Some of you are members of this network, which aims to support the transi-
tion of the financial system towards sustainability.

4.1 Barriers to blended finance

At COP28 in Dubai, the NGFS published a handbook that identifies key barriers to
blended finance in emerging market and developing economies.[11] Let me give you
a few examples.

First, structural issues, such as gaps in the legal and institutional frameworks of the
countries concerned. This often translates into issues for private investors. For
instance, country ratings falling below the often required investment-grade thresh-
olds or foreign exchange hedging becoming too expensive.

Second, limited investment opportunities and a lack of viable climate projects.
Typically, such projects are small in scale, require longer timelines and therefore have
high due diligence costs. This makes them unattractive to international private
investors.

Third, data gaps: investors need to be able to effectively price in climate-related
risks. A lack of robust frameworks, standards and taxonomies makes this very
difficult.

4.2 Policy recommendations

The NGFS handbook also provides several policy recommendations to address these
barriers. To name just a few:

First, put in place policies that make emerging market and developing economies
more attractive for investors. This includes, for example, climate policies such as
carbon pricing, which can be very effective in shifting capital flows into climate
investments.

Second, policymakers should promote ways to better manage and diversify risks and
strengthen the catalytic role of multilateral development banks to attract private
capital. For example, diversifying risk through risk pooling and tranching, could help
attract different sources of private capital.

Third, investors need decision-useful information and planning certainty. Credit
rating agencies and ESG data providers can play an important role here. It is essen-
tial that they align their practices and products with blended finance realities in
emerging market and developing economies.

Implementing these recommendations and resolving the obstacles to green finance
in emerging market and developing economies will require the collaboration of mul-
tiple stakeholders. Policymakers, multilateral development banks and private finan-
cial institutions all need to get on board.

In this context, let me highlight the role of the large sovereign wealth funds that
some countries of the region have. Thanks to their long-term investment horizons
and their large size, they are uniquely placed to act as catalysts for green finance
and to crowd in private capital. Some sovereign wealth funds are already involved in
climate mitigation projects in the region. But overall, this involvement is still quite
low.[12] According to the IMF, reasons for that include many of the obstacles I men-
tioned earlier, such as a lack of standards and data quality, a perceived lack of invest-
ment opportunities and low returns as well as uncertainty around government green
finance policies. Drawing on the recommendations and the experience from the
demonstrative projects that the NGFS handbook compiles could prove a good start-
ing point to tackle these challenges.

5 Concluding remarks

The Middle East, North Africa and Central Asia face a host of climate-related risks.
These risks range from damage due to extreme weather events to sizeable transition
risks due to the reliance on fossil fuels and the exposure to carbon-intensive
activities.

Addressing these risks makes multitasking necessary. Countries will have to adapt to
climate change, while also mitigating it to prevent further damage and losses.

Climate adaptation and mitigation require substantial investments that cannot come

from the public sector alone. This offers great potential for the financial sectors in

the region to play a prominent role in financing these dual efforts. To fully unlock

this potential, work is needed on a range of barriers to investment that persist.
Pooling its expertise from all regions of the world, the NGFS can do its bit to help
make this happen, together.

Footnotes:

. Asian Development Bank (2022): By the numbers: Climate change in Central

Asia.

. Asian Development Bank (2022): By the numbers: Climate change in Central

Asia.

. Carnegie Endowment for International Peace (2023): Climate change in Egypt:

Opportunities and obstacles.

. Kotz et al. (2024): Global warming and heat extremes to enhance inflationary

pressures, Communications Earth & Environment, Vol. 5 (116).

. International Energy Agency (2024): Oil demand growing at a slower pace as

post-Covid rebound runs its course.

. International Energy Agency (2024): Oil demand growing at a slower pace as

post-Covid rebound runs its course.

7. International Energy Agency (2023): World Energy Outlook 2023.

. International Energy Agency (2024): Gas Market Report Q1 2024.

9. International Energy Agency (2023): World Energy Investment 2023.

. International Monetary Fund (2024): Preparing financial sectors for a green

uture: Managing risks and securing sustainable finance.

. International Monetary Fund (2024): Preparing financial sectors for a green

uture: Managing risks and securing sustainable finance.

. International Monetary Fund (2024): Preparing financial sectors for a green

uture: Managing risks and securing sustainable finance.

. Network for Greening the Financial System (2024): Scaling up blended finance

or climate mitigation and adaptation in emerging market and developing
economies.

. Network for Greening the Financial System (2024): Scaling up blended finance

or climate mitigation and adaptation in emerging market and developing
economies.

. International Monetary Fund (2024): Preparing financial sectors for a green

uture: Managing risks and securing sustainable finance.