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Central Bank of Eswatini

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Central Bank of Eswatini

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Central Banking in the Era of Climate Change

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9 November 2023

Presented by

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Ms Felicia Dlamini-Kunene

Deputy Governor

Eswatini

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PRESENTATION OUTLINE

Two Sub-themes

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  • Macroeconomic and Financial Impact of Climate Change in the COMESA Region, The Role of Central Banks

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  • Green Financing in COMESA: Opportunities and Alternatives

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PRESENTATION OUTLINE

Bank of International Settlements(2021)

Will Fall Disproportionately on Developing Economies with ;

Limited Mitigation Strategies

Limited Coping Strategies �

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Effects of Climate Change

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PRESENTATION OUTLINE

2015 Paris Agreement

Strengthening Global Responses to Climate Change

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  • Limit Global Warming
  • Transition to a low or net zero greenhouse gas emissions by 2025

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PRESENTATION OUTLINE

Bank Climate Change Risks

  • Size

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  • Complexity

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  • Business Model

Banks Exposed Regardless of

Banks Physical Exposure Risks

Unchartered Waters

  • Directly – balance sheet of households and climate sensitive sectors

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  • Indirectly – effects on wider economy and financial system
  • Limitations of risk-based approaches

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  • Embracing deep uncertainty

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PRESENTATION OUTLINE

A New Financial Crisis

“Green Swan” financial crisis affecting the financial health of the banking and insurance sectors

Accumulation of atmospheric CO2 can lead to irreversible impacts

Climate rescuer of last resort

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PRESENTATION OUTLINE

Growing Social Pressures on Central Banks

Severity of climate-related risks and the role of central banks during the 2007-08 Global financial crisis

Central banks could substitute for most of government interventions

Central banks Engage in “green quantitative easing” to “solve” complex socioeconomic problems related to low-carbon transition

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Changing Central Bank functional roles, alternating between

  • Price stability
  • Financial stability
  • Support of the State’s financing in times of crisis

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Requires investment in;

  • Knowledge
  • Technical expertise
  • Communication

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OUTLINE

Demand Side Shocks

Private(Households) or Public(Government) Consumption

Investment

International Trade

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OUTLINE

Supply Side Shocks

Potential Supply of Labour

Physical capital

Investment and Technology

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Climate Change Shocks to Affect Monetary policy Through;

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Monetary Policy and Climate Change

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Supply-Side

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Demand-Side

Affecting Price Stability Mandate

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  • Food prices tend to increase in the short-term following natural disasters and weather extremes
  • Supply shocks reduce economies’ productive capacity

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Climate Related Shocks on Inflation

  • Long-standing impacts on agricultural yields leading to frequent resource shortages, loss in work hours due to excessive heat waves and flooding
    • Reduced stock of physical and human capital
    • Reduced output

impacts of climate change on inflation are unclear because climate supply and demand shocks may pull inflation and output in opposite directions and generate a trade-off for central banks between stabilizing inflation and stabilizing output fluctuations

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PRESENTATION OUTLINE

Channels which Climate Change can Affect Financial Stability

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  • Arise from the interaction of climate-related hazards with vulnerability of exposure to human and natural systems

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  • Associated with uncertain financial impacts resulting from rapid low-carbon transition, including policy changes, reputational impacts, technological breakthroughs or limitations, and shifts in market preferences and social norms

Physical

Transitional

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PRESENTATION OUTLINE

Mitigation and Adaptation measures

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  • Renewable Energy Solutions

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    • Increased investment dampens impact of climate change in society and broader economy
    • Private sector including banks needs to explore these opportunities

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  • Well-coordinated and ambitious climate policies

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PRESENTATION OUTLINE

Network of Greening the Financial System

  • Platform to;
    • share information
    • share experiences
    • train officials on the effects of climate change

Bank of England (BOE) using NGFS scenarios in conducting analysis that quantitatively assesses the impact of climate change in the financial system and also considering how to “green” the Corporate Bond Purchase Scheme (CBPS)

A monetary policy measure

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PRESENTATION OUTLINE

COMESA Central banks

Support the development of green bonds

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Use traditional monetary policy tools

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Intensify discussions on sustainable finance and green financing taxonomy

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Issue sustainable banking guidelines to promote sustainable banking practices

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CENTRAL BANKS MUST

Macro-prudential Tools

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PRESENTATION OUTLINE

Efforts to Reduce Global Warming

Reduction of Fossil Fuel

Reforestation and afforestation

Protection of Wetlands

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Thank you.