JOHANNESBURG, Nov. 3 (Reuters) – The United Nations on Wednesday launched a new financing mechanism aimed at saving African governments $ 11 billion in borrowing costs over the next five years, while promoting greener investments and sustainable development.
The United Nations Economic Commission for Africa (UNECA) launched the Liquidity and Sustainability Facility (LSF) at COP26, the ongoing global climate conference in Glasgow, Scotland.
International investors with portfolios containing African government bonds will be able to contact the LSF for short-term loans, called pensions, using the bonds as collateral, thus improving the ability of investors to turn these bonds into cash in the short term, called cash.
This would make bonds less risky and therefore more attractive to a wider range of investors. African governments would then benefit from increased demand and increased liquidity for their bonds, as well as lower financing costs.
The LSF said it could potentially save African governments up to $ 11 billion in borrowing costs over the next five years.
“Developed countries have long benefited from the existence of large repo markets for their government bonds, facilitating the creation of stable and additional sources of finance,” said Egyptian Finance Minister Mohamed Maait.
“With the LSF, our goal is to be able to provide the same kind of liquidity-friendly environment to African governments and private investors.”
The LSF will collect funds from institutions to finance the loans. For example, its first transaction is expected to be announced in the first quarter of next year, valued at $ 200 million and financed by the African Import-Export Bank.
After that, he plans to raise the equivalent of $ 3 billion in the International Monetary Fund’s unit of exchange, Special Drawing Rights, from developed countries, and could reach $ 30 billion in total, said the LSF.
It will seek to encourage green or development-related investments such as green bonds or bonds related to sustainable development by offering better conditions for its loans when they are backed by this type of instrument, said David Escoffier, director of the LSF board of directors.
This will inspire investors to buy them and, in turn, African governments to issue them, he added.
Reporting by Emma Rumney; Editing by David Gregorio
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