The need to green monetary policies in the Arab region to encourage the transition to more ecologically sustainable economies was underlined by adviser to the management of the Arab Planning Institute, economist Moez Labidi.
In his recent brief brief entitled “Central Banks and Climate Change: Monetary Policies for Achieving Environmental Transition in the Arab Region,” Labidi considered that “the threats of climate change have not yet been given the place they deserve on central banks’ policy agenda, in the Arab region.”
“In the last few years, many central banks have become aware of the climate-related financial risks. Two factors explain
this trend reversal. On one side, financial stability cannot be achieved without greening the existing financial system. On the other side, price stability remains difficult to achieve given the new potential inflationary threats generated by a new age of energy price inflation, either because of the physical risks (climateflation) or from transition risks (greenflation and fossilflation), and without the fluidity of transmission channels that could be affected by financial climate-related risks,” the economist explained.
“Fossilflation is historically associated with inflation generated by geopolitical tensions (oil shocks of the 1970s, the Ukraine war in 2022, …). However, recently, the rise of climate change has left its mark. The fight against climate change marks fossil fuels more expensive especially when green technology is slow to meet the rise of global demand for renewable
energy and green products,” he said.
Greening monetary policy in Arab region is handicapped by persistent poor toolbox
“Greening monetary policy and prudential framework is not an easy task for central banks in the Arab region. Several conditions must be met in this regard: ‘green bonds’ issues, a dynamic secondary bond market, a resilient banking sector, a clear and credible ‘transition plan,’ a comfortable fiscal space, an economy that is not heavily dependent on fossil energy, availability of granular data, a well-equipped macroprudential toolbox, etc…All these conditions are not actually met by
the countries of the region,” according to the brief.
“The awareness of environmental problems has come a long way in the Arab region, but for central banks it is still in a rather embryonic state. Certain central banks have only joined the Network for Greening the Financial System (NGFS),” Labidi considered, adding that NGFS is a network composed of central banks and financial supervisors, that aims to “define, promote and contribute to the development of best practices to be implemented within and outside of the Membership of the NGFS and to conduct or commission analytical work on green finance” (NGFS, 2017).”
“Several Arab institutions have also joined NGFS, such as the Abu Dhabi Financial Services Regulatory Authority (2019) and the Financial Regulatory Authority of Egypt (2020). Other countries have been led to issue ‘green bonds’ only in their domestic markets such as Morocco (USD 356 million, in 2018) and Lebanon (USD 60 million, in 2018). However, until now, all these bond issues have not served to greening monetary policy, in so far as the central banks of these countries have
not used green quantitative easing or a new regulation favoring ‘green bonds’ during refinancing operations at the central bank window,” the brief reads.
//Courses of action
The economist estimates that “the Central banks in Arab region will have to review their traditional mandates
considering the increased climate-related risks. Only a combination of different monetary, prudential, and fiscal measures and incentives can make the difference between a successful environmental transition and a failed one.”
“The implementation of structural reforms remains crucial to improve fiscal space to make financing for the environmental
transition more accessible. The development of the local bond market in the Arab region could play a significant role in boosting ‘green’ bond issuance and support the greening of monetary and macroprudential policies.”
It is also essential to “improve the resilience of the banking sector to ensure the effectiveness of monetary policy. The banking sector remains the main channel for transmitting monetary policy in the Arab region and a major investment lever for greening monetary policy,” he indicated.
“Central banks should adopt the environmental footprint approach (carbon footprint and water scarcity footprint) to enhance the efficiency of the greening of monetary and macroprudential policies. Climate resilience remains the best guarantee of
energy security, food security and debt sustainability,” Labidi underlined.
