A recent stress test involving five African banking systems has unveiled that certain lenders in the region might face collapse if the degradation of natural environments significantly diminishes the profitability of agriculture and forestry enterprises they finance. The study, which incorporated the central banks of Zambia, Ghana, Rwanda, Morocco, and Mauritius, indicated that businesses within specific sectors could experience profit reductions of up to 50% over the next two decades due to unchecked deforestation and the decline of essential pollinators like bees.
Oswald Mungule, a senior analyst at the Bank of Zambia, who contributed to the study, highlighted the continent’s reliance on nature, warning that a lack of coordinated response to climate risks could precipitate systemic risks and contagion effects within Africa’s financial sector.
The findings precede the U.N.’s COP16 biodiversity conference in Colombia this October, where global leaders are expected to face increasing pressure to curb the destruction of critical ecosystems. The new stress test, an expansion of an initial analysis conducted in 2022, is the first since the global biodiversity deal at COP15 in Toronto to evaluate the economic destabilisation potential of biodiversity loss.
According to the World Economic Forum, nearly two-thirds of Africa’s economic output is either highly or moderately dependent on the natural environment. The stress tests, orchestrated by the African Natural Capital Alliance (ANCA) alongside British development agency FSD Africa and consulting firm McKinsey, revealed that the agriculture, mining, and food sectors face the most severe challenges.
In the absence of remedial action over the next 25 years, Ghana’s agriculture firms and Zambia’s mining firms could witness profit declines of 50% and 32% respectively, triggering adverse feedback loops for banks. Dorothy Maseke, head of ANCA and FSD Africa Nature Lead, noted that cumulative expected credit losses across the five nations could surge by up to 21% by 2050 if no nature-positive measures are enacted, painting a dire scenario.
A significant issue underscored by Zambian central bank official Mungule is the risk of food shortages, which historically escalate both inflation and interest rates. Zambia’s recent severe drought has led to a spike in food prices, constituting over 50% of the country’s CPI basket. Amidst a national debt crisis nearing resolution, nearly 14% of loans extended to agriculture and forestry firms by Zambian commercial banks are now classified as “non-performing,” with expectations of this figure rising.
Although agriculture contributes less than 4% to Zambia’s GDP per IMF data, the mining sector, which could see over a 30% profit decline, holds a more substantial 17.5% share. In response, Zambia’s central bank is advocating for a reduction in loans to mining firms in favour of those engaging in greener, more nature-friendly activities. The bank also aims to perform regular climate-stress tests on the banking system and seeks to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Maseke disclosed that ANCA has established memorandums of understanding with four African nations, including Zambia, to assist with policymaking, with aspirations to support eight countries by year-end. The stress test results, which did not disclose individual bank specifics, evaluated three scenarios: one with no additional action on nature and climate risks; a second with stringent government regulations but sluggish corporate response; and a third with coordinated actions from both governments and companies. If companies manage to mitigate their environmental impact and adjust prices to reflect incurred costs, the adverse effect on profits could be reduced by 27% to 78%.
This comprehensive analysis underscores the urgent need for concerted efforts to address biodiversity loss and its economic ramifications, particularly within Africa’s vital agricultural and mining sectors.