A new finance mechanism was launched by the United Nations on Wednesday, helping saving African governments US $11 billion in borrowing costs in the next five years, while promoting greener investments and sustainable development.
UN Economic Commission for Africa UNECA launched the LSF liquidity and sustainability facility at COP 26 at the global climate conference in Glasgow, Scotland.
International investors with portfolios with African government bonds can approach the LSF for short-term loans, known asRepos, using the bonds as a collateral, increasing investors' ability to turn those bonds into cash at short notice, known as liquidity.
It would make the bonds less risky and therefore more attractive to a wide range of investors. African governments would benefit from a higher demand and enhanced liquidity for their bonds, as well as cheaper financing costs.
The LSF said it could save African governments up to 11 billion dollars in borrowing costs over the next five years.
The existence of large repo markets for their government bonds has long helped creation of stable and additional funding sources, according to Egypt Finance Minister Mohamed Maait.
The LSF is trying to provide the same kind of supportive environment for African governments and private investors alike with the LSF. The LSF will raise money from institutions to fund the loans. The first transaction will be announced in the first quarter of next year, worth US $200 million, and will be funded by the African Export-Import Bank.
It expects to raise the equivalent of US $3 billion in the International Monetary Fund's unit of exchange, Special Drawing Rights, from developed countries and could hit US $30 billion overall, the LSF said.
David Escoffier, LSF board director, said that it will look to incentivize green bonds or bonds linked to sustainable development by offering better terms for its loans when they are backed by these instruments.
This will incentivise investors to buy them and, in turn, African governments to issue them, he added.