Interview with Oussama Kaissi Chief Executive  Officer of ICIEC

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Interview with Oussama Kaissi Chief Executive  Officer of ICIEC

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العدد 503- تشرين الأول/أكتوبر 2022

Special Edition of the Union of Arab Banks (UAB) Magazine

On the Occasion of the 2022 Annual Meetings of the International Monetary Fund

(IMF) and the World Bank Group (WBG)

* UAB Magazine: The global economy is currently facing several headwinds and uncertainties, including the lingering impact of the pandemic, the Ukraine conflict, the resultant rises in food and energy prices, the cost of living crisis and the economic shocks of high inflation, subdued GDP. What is your outlook for the global economy ahead?

– The volatility in the global geopolitical and economic uncertainties is matched by the differing opinions on the responses by governments and international multilateral in mitigating these uncertainties.

The only metric on which there seems to be a consensus is that with increasing prices continuing to squeeze living standards worldwide, tackling inflation must be the priority for policymakers. But the tighter monetary Policy will have real economic costs. However, any delay will only exacerbate them.

The IMF’s World Economic Outlook Update in July 2022 paints a gloomy and more uncertain immediate-to-medium future. What was a tentative recovery in 2021, boosted by a rebound in GDP growth, quickly dissipated due to the increasingly grim global developments and economic shocks that followed in 2022 on the back of a world economy already weakened by the ongoing COVID-19 pandemic.

These include global output contracting in Q2 2022 owing to worse-than-anticipated economic downturns in Russia and China reflecting COVID-19 outbreaks and lockdowns; lower than expected US consumer spending; higher-than-expected inflation worldwide led by the US, EU, and OECD countries such as Türkiye where inflation is set to rise to 72.1% triggering tighter financial conditions; and further negative spillovers from the war in Ukraine.

The IMF forecast GDP growth to slow from 6.1% last year to 3.2% percent in 2022, 0.4 percentage points lower than in the April 2022 World Economic Outlook. Global inflation has been revised due to rising food and energy prices and lingering supply-demand imbalances and is expected to reach 6.6% in advanced economies and 9.5% in emerging and developing economies this year. In 2023, says the Fund, «disinflationary monetary policy is expected to bite, with global output growing by just 2.9%».

The downside risks going forward depend on the trajectory of the Ukraine War and dealing with the resultant energy crisis, especially in Europe, where huge increases in the wholesale price of gas have led to energy poverty disproportionately affecting the lower-paid society. In developing countries, tighter global financial conditions are already inducing debt distress in several economies; and geopolitical fragmentation could impede international trade and cooperation.

Against such a global macroeconomic background, policy implementation of concomitant pressing issues such as mitigating climate change by a transition to clean and green energy governed by the net-zero targets and timelines set by the Paris Climate Agreement and subsequent COPs, and achieving the targets set by the UN SDGs agenda by 2030 are being delayed. Governments are reverting to form by re-commissioning or extending the use of coal-fired power stations, nuclear plants and turning to increasing fossil fuel extraction and fracking to reduce their dependency on Russian gas and oil imports, if only for the short-to-medium term.

The consensus is that increasing prices continue to squeeze living standards worldwide, so taming inflation must be policymakers’ priority. Tighter monetary Policy will inevitably have real economic costs, but delays will only exacerbate them.

The reality is that no one knows how the world’s geopolitical, macroeconomic, and financial risks will play out over the next few years. The talk now is of Post-Covid Industry’ Normalization’ as opposed to ‘Recovery’ and dealing with ESG and Digital Transformation strategies and opportunities, leaving US-China Industry Tensions on the sideline despite the recent spat between Beijing and Washington over Taiwan.

According to Fitch, the high inflation environment, subsequent cost of living crisis, and rising interest rate environment in many markets have had knock-on effects on other trends. While we have seen a waning economic impact from COVID-19, the Russia-Ukraine crisis has prevented full economic normalization globally, impacting growth across several industries. In some sectors, ESG and sustainability trends have taken a backseat as focus shifts to cost reduction and food security, and the price of the green transition has increased due to high commodity prices.

The one certainty is that the current economic shocks will contribute to significant global macroeconomic volatility, which could be with us for a few years. Moody’s projects higher social and political risks over the next 18 months, which «will fuel inflation and weigh on the balance of payments and government finances of net food and oil importers.» The Middle East and Africa are among the most susceptible to these risks.

* The MENA economies are subject to the same challenges as most other countries. Despite the current high oil prices and anticipated rebound in GDP growth, what are your expectations for the economic and financial prospects of the MENA and GCC countries in 2022 and beyond?

– In 2021, the MENA region, according to IMF, saw a better-than-expected recovery, due to strong domestic demand, with real GDP growth revised up to 5.8%. However, inflation also surged and remained elevated. This had reduced countries’ monetary policy space when fiscal Policy was already constrained with higher post-pandemic public debt.

As 2022 began, the Omicron variant swept through the region, with most countries seeing temporary spikes in COVID-19. In February, a new shock reverberated through the global financial and commodities markets, worsening growth and inflation prospects and adding to already-high levels of uncertainty.

The MENA region’s oil-importing countries are also exposed through commodity prices and global financial channels, as well as their reliance on wheat, corn flour, barley, sunflower oil and fertilizer imports. This includes Egypt, Lebanon, Yemen, Somalia, Libya, and Tunisia, amongst other countries.

The IMF projects real GDP growth in the MENA region at 5% in 2022, with the caveat that downside risks that may dominate the outlook include a prolonged war with further sanctions on Russia. This raises food insecurity concerns and the risk of social unrest; tighter-than-expected global financial conditions could trigger capital outflows, persistent inflation, and a more pronounced slowdown in China.

Policy priorities in the near term include adjusting monetary Policy based on country circumstances to control inflation and avoid derailing the recovery; exchange rates should be allowed to adjust, with interventions used only to prevent market disruptions; structural reforms assumed even more essential to prevent scarring from the pandemic and war and ensure a private sector-led inclusive recovery; increasing the tax base; promoting the private sector and reducing bureaucracy to foster growth and inclusion; tackling rising global food and energy prices is vital, and adjusting to climate change through adaptation.

On fiscal Policy, oil exporters should rebuild buffers, while in emerging market and middle-income countries where fiscal space is limited, growth-friendly fiscal consolidation prioritizing health, social spending, and investment will be critical.

The Arab Monetary Fund, similarly, projects the growth rate of Arab economies to average at 5.4% in 2022, compared to 3.5% in 2021, driven by many the relative improvement in global demand; the growth of the oil and gas sectors, and the rise in prices and revenues; and the continued adoption by MENA Governments of economic and fiscal stimulus packages to support current economic recovery.

However, the AMF expects the pace of GDP growth for the Member States to decline in 2023 to 4.0%, in line with the decline in the global economic growth rate, the expected decline in commodity prices, and the impact of the gradual withdrawal from expansionary fiscal and monetary policies that support has propped up demand.

One primary concern, however, is the danger of sovereign debt distress and default. More significant constraints on fiscal policies have already led to more outstanding sovereign indebtedness in some countries, which in turn may lead to more significant debt distress leading to default risk. Of the 25 most vulnerable countries to default risk in 2022, 10 are from the OIC/MENA Region. Tunisia and Egypt are ranked 3rd and 5th in Bloomberg’s Sovereign Debt Vulnerability Ranking.

In the MENA region, Bahrain’s Government Debt to GDP ratio is forecast at 116.5% for 2022, followed by Egypt at 94.0%, Tunisia at 87.3%, and Morocco at 71.1%, respectively. The potential cost to the economy in the cost of debt servicing is an increased Interest Expense to GDP Ratio in 2022 of 4.5% for Bahrain, 8.2% for Egypt, 3.0% for Tunisia, and 2.4% for Morocco.

The other impacts on high default risk are the cost of Government bonds and Sukuk and its implications for Government bond Yields and 5-Year Credit Default Swap Spreads.

Similarly, one way to increase revenues in MENA countries, for instance, is to increase the tax base through more efficient tax collection. According to the IMF, tax revenue as a share of GDP remains relatively low in MENA states despite progress towards broadening tax bases in many countries. This is against the immediate pressure faced by governments to increase spending to protect the poor from the rise in food and fuel prices and the cost-of-living crisis, to improve health systems delivery and education, to build resilience to future socio-economic shocks, and meet the UN SDGs.

A recent IMF paper shows that the average difference between actual and potential tax collection is 14% of GDP (excluding oil and gas). Some of the most significant revenue gaps are found in the MENA region’s low-income countries – often reflecting the effects of governance fragility and conflict.

The impact on various sectors of the economy is implicit. Market volatility, inflation and interest rates are key concerns. Moody’s recent survey of GCC Asset Managers showed that capital market volatility is their biggest challenge. Higher inflation, which erodes asset values and increases payroll costs, and rising interest rates, which push up borrowing costs and weigh on bond prices, are significant concerns.

u Infrastructure spending is the need of the moment. Infrastructure to create jobs and attract investment; to effect climate mitigation, adaptation, and finance; to facilitate better ease of doing business and better movement of goods, services, and economically active populations; and to alleviate poverty and inequality by improving the general wellbeing and lives and livelihoods of citizens. How important is supporting and facilitating infrastructure projects in OIC and MENA countries, especially through FDI flows?

– According to the UN and IMF, the world needs up to US$90 trillion worth of infrastructure investment by 2030, and US$5-7 trillion is required annually to meet the SDGs by 2030 – but there is a persistent financing gap of at US$2.5 trillion each year.

Infrastructure deficit is a universal phenomenon irrespective of economic status or governance systems. Fitch Solutions estimated the Global Infrastructure Project Pipeline in 2021 at US$12 trillion, of which Asia accounted for US$5 trillion, North America and Western Europe for US$2.6 trillion, the MENA Region for US$1.6 trillion, Latin America for US$970bn, Sub-Saharan Africa for US$890bn, and Central and Eastern Europe for US$793bn – primarily in rail, renewable energy, social infrastructure, construction and utilities. The contrasts remain stark. Infrastructure, for instance, is one of the primary beneficiaries of the EU’s €1.8 trillion’ Recovery Plan for Europe’.

To Gilles Lengaigne, Head of Origination at Generali Global Infrastructure, it is not only a question of investment per se but the direction of investment into social impact. He maintains that as essential long-term assets with regular cash flows, investors have always valued infrastructure for its resilient, countercyclical features. However, being essential is no longer enough – to be truly future-proof, infrastructure assets must be both necessary and sustainable to meet the needs of rapidly transforming societies and remain viable, primarily through mitigating climate risk and pursuing digitization and decarbonization.

The ultimate aim is to make infrastructure ‘bankable’ inclusive of acceptable risk and target social impact to a larger cohort of investors, whether through PPPs. In this respect, the US$1 billion Infra Initiative launched this year by The Arab Petroleum Investments Corporation (APICORP) and the Islamic Development Bank (IsDB) is very pertinent. Infra Initiative, a private sector-focused infrastructure financing initiative, aims to finance strategic utility projects that contribute to human and sustainable economic development in the Member States of the two multilaterals and their respective national development strategies.

Investment promotion into and between OIC member states is a core mandate of ICIEC. The transformative role of ICIEC in promoting trade and investment into and between its 48 member states is backed by the fact that since inception, we have disbursed a cumulative amount in access of US$90 billion. Of this, US$71 billion represents support for trade, while US$19 billion for foreign direct investments. Of the total support provided by ICIEC in 2021, Outward Investment from member states accounted for US$731 million and inward investment into member states for US$2,241 million, as components of our Business Insured for the year.

OECD estimates for Q1 2022 show global Foreign Direct Investment (FDI) flows continue on their upward trajectory, increasing by 28% compared to Q4 2021, to US$535 billion. Global FDI flows reached their highest quarterly level in the past five years. FDI flows to developing economies in 2021 increased by 30% to US$837 billion, the highest level ever recorded. The increase was mainly the result of solid growth performance in Asia, a partial recovery in Latin America and the Caribbean, and an upswing in Africa. The share of developing countries in global flows remained just above 50%.

UNCTAD figures show that FDI flows to Africa reached US$83 billion in 2021 – a record level – from US$39 billion in 2020, accounting for 5.2% of global FDI. Flows to North Africa fell by 5% to US$9.3 billion. Egypt saw its FDI drop by 12% as significant investments in exploration and production agreements in extractive industries were not repeated. Despite the decline, the country was the second largest host of FDI on the continent.

The GCC states’ pledge to invest some US$22 billion in various sectors may boost FDI in the near future. Announced greenfield projects in Egypt more than tripled to US$5.6 billion. Nevertheless, the competition for FDI flows is intense, especially in today’s global socio-economic uncertainties.

* One of the core components of ICIEC’s mandate is to promote and facilitate the Islamic finance industry. Which is now firmly a part of the mainstream global financial system, albeit a growing niche sector. What are the prospects for the industry going forward?

– The Islamic finance industry has shown remarkable resilience in the wake of global uncertainties over the last three years, especially in its response to the COVID-19 pandemic and its growth trajectory. This trend is especially encouraging in the two largest Islamic finance markets – Malaysia and Saudi Arabia. The importance of the Islamic banking industry to the economy cannot be overstated. In Malaysia, for instance, the industry contribution to the national GDP in 2021 totalled 1.23%.

The growth dynamics suggest an upward trajectory over the next few years. S&P Global projects the industry to reach assets under management of over US$3.6 trillion by 2025. Refinitiv, in its Islamic Finance Development Report 2021, reports a steady increase in total assets under management (AUM) from US$2,964bn in 2019 to US$3,374bn in 2020 to reach a projected US$4,940bn in 2025.

Moody’s Investors Service, in September 2022, stressed that growth in the major Islamic finance markets – the GCC states, Malaysia and Indonesia – is rising on the back of a surge in key exports like hydrocarbons and palm oil, as well as easing pandemic restrictions. The caveat is that inflation in these countries will also remain moderate because of government subsidies and policy rate hikes.

The economic rebound will keep the asset quality, including the non-performing financing ratios of Islamic banks, stable while pushing profitability to pre-pandemic levels. Islamic banks can therefore maintain ample capital and liquidity buffers, enabling them to capitalize on the growing demand for Shariah-compliant financial services.

In Malaysia, according to Bank Negara Malaysia (the central bank), Islamic financing in 2021 totalled US$198.88 billion – up from US$183.36 billion in 2020. Total Islamic deposits and investment accounts in 2021 amounted to US$217.34 billion – up from US$199.62 billion the year before. This trajectory continued in the first four months of 2022 when the total banking system assets of Islamic banking assets reached 30.42% compared with 30.66% at the end of December 2021. Total Islamic banking AUM at the end of April 2022 reached US$219.56 billion – up on US$214.48 billion at the end of 2021.

The growth dynamics of the industry continued on its upward trajectory in 2021. Islamic financing accounted for 42.5% of total loans and financing of the banking system; Islamic banking deposits and investment accounts constituted 39.8% of total deposits and investment accounts.   The annual growth rate of Islamic financing at 8.2% in 2021 paled that of the 2.1% growth of conventional financing. Similarly, Islamic deposits and investment accounts grew by 8.9% compared with 4.9% in conventional deposits and investment accounts.

A similar trend was witnessed in the Malaysian Islamic Capital Market (ICM). According to the Securities Commission Malaysia (SC), the size of the ICM increased by 2.3% to US$520 billion at the end of 2021 from US$510 billion at the end of 2020. This comprised a total market capitalization of Shariah-compliant securities of US$270 billion and a total Sukuk outstanding amounting to US$250 billion. The ICM continued to dominate, accounting for 65.4% of the total size of the overall Malaysian capital market.

In Saudi Arabia, Islamic banking AUM is well on its way to breaking the $1 trillion barrier. According to the Saudi Central Bank (SAMA), Islamic AUM reached over US$565 billion in Q12021.

In a recent survey by Moody’s, GCC fund managers stressed that they expect continued strong demand for Shariah-compliant investments but foresee more moderate growth in investments that meet ESG criteria.

The other developments are the continued support from Islamic financial institutions for post-pandemic economic recovery and normalization, embracing and expanding the industry’s fintech and digitization footprint, especially through the proliferation of Islamic digital banks, and greater involvement and uptake in SDG, ESG, SRI, Sustainability and Green finance.

* Sukuk is now an established fund-raising instrument that the G20 is championing as an ideal way to finance much-needed infrastructure, including Green, food security, clean energy and health projects. Sovereigns issue Sukuk to finance budget gaps and to add depth to their capital markets. Banks are issuing Sukuk for refinancing and other balance sheet purposes. How do you see the prospects for the Sukuk market?

– The resilience of Sukuk as a funding instrument cannot be underestimated. As a fixed-income debt instrument, it is subject to the same market and economic vagaries as bonds and other securities.

For instance, the issuance of US dollar-denominated Sukuk in Emerging Markets (EMs) has been less affected than bonds amid the volatilities in 1Q 2022. According to Fitch Ratings, its Sukuk Index outperformed an EM bonds index in the same quarter, largely due to the higher weight of oil exporters in the Sukuk index.

Similarly, according to Refinitiv, global Sukuk issuance held its own in FH 2022, raising US$100.9 billion, only marginally lower than the US$104.2 billion in FH 2021. A new Sukuk issuance record was set in 2021 for the fifth consecutive year, reaching a total of US$196.5 billion – up 8.2% from US$181.6 billion in 2020.

Moody’s Investor Service also concurs that Sukuk’s appeal and acceptance as an investment tool are growing, as shown by the high demand for recent issuances. Order books have become normal to exceed the offered amount by three or four times, particularly for creditworthy borrowers. Furthermore, demand for Sukuk increasingly comes from international actors in markets less exposed to Islamic finance.

Predicting Sukuk market dynamics is not an exact science. It depends on assumptions which often are subjective and beholden to Policy, market, and global changes and events. No amount of modelling can mitigate these metrics. The consensus seems to be that issuances are slightly down in FH 2022 compared with FH 2021 and that SH 2022 issuances will moderate.

While Refinitiv, for instance, projects global Sukuk issuance to reach US$185 billion at the end of 2022, Moody’s predicts that it will fall to between US$160 billion and US$170 billion in 2022, from its estimate of US$181 billion in 2021.

The reasons given are that high oil prices have reduced the funding needs of major Sukuk-issuing sovereigns, and higher interest rates deter issuance by corporates and financial institutions. This may be true, but only up to a point. The disruptions caused by the lingering pandemic, the fallout from the Ukraine conflict on fuel and food prices, and the impact of rising inflation and debt distress will be with us for a few years. Commodities prices and output remain volatile. All countries are affected by cost-of-living crises. As such, demand for increased government funding will remain before it evens out.

According to the International Energy Agency (IEA), total OECD production of crude oil, NGL and refinery feedstocks increased by 2.5% in June 2022 compared to June 2021; gross refinery output of total products grew by 4.2% on a year-on-year basis; net deliveries of total products grew in June 2022 by 0.9% compared to June 2021; oil stock levels on national territory decreased by 5 968 kt in June 2022 compared to the closing stock levels in May 2022 and closed at 476 million metric tons.

As such, Saudi Arabia’s Sovereign Sukuk Issuance Programme is also aimed at a diversified public debt fundraising strategy and developing the Saudi Sukuk and Islamic Capital Market. The Ministry of Finance is also encouraging banks and corporates to issue Sukuk as a cheaper fund-raising tool instead of more expensive bank finance.

The actual aggregate volume of sovereign domestic Sukuk issued by the National Debt Management Centre in the first seven months of 2022 reached SAR85.9 billion (US$22.9 billion). I am confident that the Sukuk market will sustain its momentum as new issuers enter the market; new structures such as SOFR-linked Sukuk, Green Sukuk, Infrastructure Sukuk, and Social Sukuk proliferate.

The real challenge is for the OIC Member States to adopt the requisite legal and regulatory frameworks for Sukuk issuance to give issuers and investors the certainty and confidence to utilize this unique instrument. The other challenge is to deepen the secondary market to release much-needed liquidity.

According to Refinitiv, the value of Sukuk outstanding reached US$726.8 billion in FH 2022, up 4.4% from the end of 2021. The secondary Sukuk market is highly concentrated within the three largest jurisdictions – Malaysia, Saudi Arabia, and Indonesia – accounting for 80% of the value of Sukuk outstanding in FG 2022.

* Issuance of Green Sukuk compared with Green bonds is minuscule, albeit there has been some momentum gathering in the last few years. Would you like to see greater involvement of Green finance and Sukuk, given the considerable demand for climate, infrastructure and development finance from issuers and investors? How is ICIEC contributing to this?

– Green finance has become a core component of economic, financial, and social development and inclusion. Regulators are rushing to adopt Green Finance Taxonomies and are rewriting the playbook for political, market and societal demands that companies report their environmental and social impact.

The ethos of Islamic finance, in general, is consistent with the objectives of the SDG Agenda, Climate Action, ESG, poverty alleviation, gender empowerment and equality, and food security to promote the wellbeing of citizens.

Not surprisingly, we have seen a proliferation of Green, Social and Sustainable Bonds issuance. In 2021, a record US$1 trillion of such bonds were issued globally, according to the European Commission. The European Union expects this figure to rise by 50% in 2022, albeit it remains about 10% of the total global debt capital market.

In contrast, according to Fitch Ratings, total Green and Sustainable Sukuk reached US$15bn in 2021, led by the sovereign, multilaterals, and corporate issuers in Indonesia, Malaysia, and the GCC states, Türkiye and Pakistan. Sukuk remains the preferred format for ESG-linked debt in core Islamic finance markets.

Insurers are Green Economy enablers because they are risk absorbers and could play a key role in developing a more sustainable global economy. ICIEC’s green finance credentials are implicit, especially in promoting a clean and just energy transition in the Member States through supporting renewable energy projects, waste management, desalination, and clean water provision, often involving private sector investment and bank investment financing.

Sukuk is an ideal instrument to raise capital for the pressing socio-economic development needs of our Member States. They are still recovering from the aftermath of the pandemic and are now required to contend with the fallout of the Ukraine conflict and the resultant global economic shocks, which have also put extra pressure on the revenue and debt burden of developing countries.

As Fitch stresses, a long-term investment focus means insurers are well placed to channel investment into infrastructure projects, notably renewable energy. Insurers can design products to reduce risks inherent in infrastructure projects and increase their attraction to investors. The ability to help channel investment into sustainable projects is a sizeable growth opportunity for the insurance sector.

As a multilateral investment insurer, ICIEC has also developed a Sukuk Insurance Policy, a credit enhancement and third-party guarantee instrument aimed initially at promoting unrated sovereign domestic issuances by the Member States rated below investment grade. We are rolling out the Policy, whose launch was delayed by the uncertainties of the pandemic, Ukraine disruptions, and global economic conditions.

The upscaling of Green Sukuk is vital. Those countries that have issued Green Sukuk have done so under individual Green Bond & Green Sukuk Frameworks and Taxonomies. These vary from one jurisdiction to another. Take, for instance, the use of proceeds for «eligible Green Projects.» These are largely monitored by third parties giving «opinions» instead of certifying that the projects are indeed ‘Green’ according to accepted international standards. At best, the Green Sukuk ecosystem is fragmented.

Green bonds are a growing category of fixed-income securities, and Green Sukuk could widen the appeal of Sukuk beyond its traditional markets in Asia, the Middle East, and West Africa, including ethical investors in Western markets and beyond. However, Green Sukuk issuance has still a long way to go to catch up with Green Bond issuance, although an encouraging sign for the future is that the maturities on Green Sukuk issuances are increasing to between 10-25 years and that investor demand from both Islamic and international investors including Offshore US accounts, UK, EU, and the Far East is consistently robust.

Moody’s projects Green Sukuk issuance will accelerate as governments promote sustainable policy agendas and demand for sustainable investments encourages new issuers to consider Green Sukuk as an alternative financing tool.

* We are edging towards COP 27 in Sharm El-Sheikh in Egypt in November this year. Given the uncertainties and volatility in the global geopolitical and macroeconomic conditions, has Climate Action lost its urgency as many countries, including the ICIEC Member States, reset their policy options to mitigate the impact of these uncertainties? What are your expectations for the latest Conference of Parties (COPs)?

It is true that against a current global macroeconomic background, policy implementation of mitigating climate change by the transition to clean and green energy governed by net zero targets and timelines set by the 2015 Paris Climate Agreement and subsequent COPs and achieving the UN SDG agenda targets by 2030, are being delayed. Governments are re-commissioning or extending the use of coal-fired power stations, nuclear plants and increasing fossil fuel extraction and fracking to reduce dependency on Russian gas and oil imports, if only for the short-to-medium term.

In the UK, for instance, in early September 2022, the new Conservative Government unveiled an Energy Plan that freezes the energy price cap to £2,500 annually till 2024, which had been due to rise to £3,549 for a typical household from October. It has also introduced an energy plan which caps the wholesale price for gas for six months for businesses, especially in the hospitality and services sectors. The UK government plans to finance the energy price cap through government borrowing, which analysts stress could cost up to £170bn to taxpayers. Prime Minister Liz Truss has also torn up the Conservative Government’s climate action playbook by issuing new oil and gas exploration licences for the North Sea, lifting the ban on fracking for shale gas, and looking to negotiate lower-priced long-term contracts with renewable and nuclear power companies.

Climate action for the OIC Member States is a complex issue. Member States of the OIC face particular climate threats due to declining agricultural productivity, weather volatility, and receding water levels and quality. These threats make the Member States most vulnerable because they depend on high climate-sensitive natural resources. The Member States’ low adaptation capacities due to technological and financial impediments are added to that.

Many OIC countries are primary commodities producers and processors, including oil, gas, coal, agri-products etc. Just transitioning to clean energy will be a complicated process. As such, the transition has to be well thought out and pragmatic, balancing the demands of climate change with those of economic development and resource mobilization.

As we move towards COP27 in November, it is no surprise that the global narrative is resetting towards this trajectory, notwithstanding the entrenched impacts of a receding COVID-19 pandemic, the changing Ukraine conflict, and dealing with the global shocks of rising inflation, food, and fuel prices and a cost-of-living crisis.

In September, Egypt hosted the Egypt-International Cooperation Forum in Sharm El-Sheikh

ahead of COP27 under the theme of moving from pledges to implementation. Ministers from MENA and African countries renewed their call for a sharp increase in climate financing while simultaneously pushing back against any abrupt and arbitrary move away from fossil fuels, especially coal, oil and gas, on which many of the countries as primary producers are dependent.

Egypt, an oil and gas producer, is highly vulnerable to climate change. It has positioned itself as a champion for African interests in the wake of COP27. According to the African Union, the continent is faced with an annual climate financing gap of about US$108 billion. This is exacerbated by climate finance being biased against climate-vulnerable countries, which goes against the demand that «let the polluters pay.»

Climate change impacts all sectors, including food insecurity. According to the IMF, Sub-Saharan Africa and some MENA states are the world’s most food insecure regions. Africa benefited from less than 5.5% of global climate financing despite having a low carbon footprint and suffering disproportionately from climate change.

The role of gas in the transition to cleaner energy is a crucial point of contention at COP27. For some countries, natural gas is fundamental to their economy and development. To others, climate change is a threat to their very survival.

Take the mitigation ambition of the COP process in line with the 1.5°C goals of the Paris Agreement. COP made some progress in keeping this ambition alive, yet funding for the root causes of climate change is still exponentially more significant than funding for the response to climate change. At least US$1.6 trillion was spent on fossil fuel subsidies over the five years since the adoption of the Paris Agreement in 2015. The challenge is to get the balance right and not to do things abruptly. Vulnerable countries that are the least polluters cannot be expected to pay the price for the heavy polluters – past and present.

According to the IMF, global climate finance currently totals about US$630 billion annually, with debt being the primary funding source for investments. This puts an extra burden on debt distress. It’s disheartening that we are still far from the goal to mobilize US$100bn annually by 2020 towards climate finance, as promised by the rich countries. It seems that promises are made only to be broken.

In July, the IMF published a detailed note on mobilizing domestic and foreign private sector capital in developing economies to support climate projects by overcoming existing constraints. Estimates of global investments needed to achieve the Paris Agreement’s temperature and adaptation goals range from US$3 to US$6 trillion annually until 2050. The variation is because of the large data gaps in tracking climate finance data and underdeveloped disclosure.

* What are the Climate Action priorities for the OIC and Arab Countries? Are Member States taking climate action seriously enough and what are the resource and Policy implementation gaps that need to be closed?

– Climate change is a global phenomenon. Its effects impact all countries. The OIC, including the MENA states, have diverse economies and resources and capacities to mitigate and adapt to climate change.

Therefore, their ability to deal with the devastating consequences of climate change – prevention, mitigation, and adaptation – varies from country to country. The consensus among international agencies is that least developed countries (LDCs) are disproportionately worst affected, with severe consequences on already scarce resources and a resort to debt financing, thus increasing the debt burden of some countries to unsustainable levels.

Despite such constraints and global uncertainties, OIC Member States has risen to the challenges of climate action with urgency in cooperation with multilaterals such as the IsDB Group and ICIEC. Governments cannot achieve effective climate action, especially in LDCs. Partnerships with multilaterals to deploy innovative de-risking solutions are critical to creating bankable projects in high-risk markets. Multi-stakeholder collaboration is vital to unlocking institutional investor assets.

Sovereign Wealth Funds, Pension Funds, Social Security Organisations and private sector investors have an enormous responsibility to ensure that capital flows towards economic returns and social impact. This presents opportunities that climate change presents to the industries and risks – a role investors can play in enabling the OIC continent to transition to more resilient and sustainable economies and prepare for climate-driven events and catastrophes.

These institutions have significant roles to play in helping reach net-zero emissions and by influencing other investors to align towards investing for impact in social, climate and environmentally friendly projects, in line with a greater role for Public-Private Partnerships (PPPs) to fill capacity constraints and mobilize investment funding.

Bank Negara Malaysia and the Securities Commission Malaysia, the banking and capital market regulators, for instance, have set up a permanent Joint Committee on Climate Change and launched the Climate Change and Principle-based Taxonomy (CCPT) aimed at creating greater awareness and strengthening the response of financial institutions to climate risk, the latest meeting of the Committee in September revealed that this has led to an increased demand for practical tools and urgency to address key gaps needed to support the transition.

It would be difficult to find a government with no Climate Action or Sustainable Development Strategy in place. Or, for that matter, a dedicated Minister in Charge of Climate Change and the Environment.

Various countries have adopted country-specific Climate Action Plans, but the challenge remains whether they have the capacity and resources to implement them impactfully. Hence the importance of multi-stakeholder collaboration.

Egypt, one of the largest carbon gas emitters in Africa and one of the most vulnerable to climate change, has launched several such initiatives underpinned by the provisions of the Egypt Vision 2030, one of the most comprehensive frameworks for sustainable development anywhere. They include the National Climate Change Strategy 2050, complemented by the Integrated Sustainable Energy Strategy 2035, which identifies a set of targeted indicators to be reached by 2030 – 20% of Egypt’s power generation based on renewables by 2022, 42% by 2035.

Egypt has the opportunity to become a world leader in renewable energy. According to the World Energy Employment report, clean energy industries now employ more people globally than fossil fuels. The report finds that the number of energy jobs worldwide has recovered from disruptions due to COVID-19, increasing to above its pre-pandemic level of more than 65 million people. The growth has been driven by hiring in clean energy sectors, while the oil and gas sector saw some of the most significant declines in employment at the start of the pandemic and has yet to recover fully, even with a spur of recent projects for new liquified natural gas (LNG) projects.

Egypt has set up a New and Renewable Energy Authority (NREA), which has a strategic role in implementing the Government’s renewable energy plans. The country’s total installed capacity of renewables amounts to 3.7 gigawatts (GW), including 2.8 GW of hydropower and around 0.9 GW of solar and wind power.

Egypt is making strides in combating climate change by shifting towards a green and sustainable economy and preserving environmental and natural resources while ensuring that the fundamental principles of «Inclusive Growth» and «Leaving No One, and No Place Behind» are put in place. This approach includes advancing public-private partnerships; leveraging Green Finance such as the recent debut US$750m Green Bond and the pending maiden sovereign Sukuk; increasing inward FDI flows in sectors such as renewable energy; promoting innovative financing, including blended finance, de-risking tools, private sector funds – to enhance climate action.

* ICIEC, as the only Islamic multilateral credit and investment insurer, is in a pivotal position to contribute meaningfully to improving the climate action, mitigation, and adaptation agendas, policies, and shortcomings of its Member States. Can you expand on the operations and activities that ICIEC supported in this field

– As a signatory to the Principles for Responsible Insurance and the fact that it is the only Shariah-compliant multilateral insurer, sustainable investment is firmly embedded in ICIEC’s due diligence process through linking all new Business and other queries with SDG and climate action indicators.

ICIEC and peer multilaterals contribute to the international climate finance ecosystem. It is committed to further boosting its green and sustainable finance operations. It has proposed the establishment of a Climate Action Finance Trust Fund with institutional partners, peer multilaterals and ECAs in member states and beyond, which would offer a discount on the insurance premiums needed for the financing of Climate Action projects in member states that are not investment grade.

ICIEC actively targets real impact and change in all its financing, insurance policies it underwrites and projects it supports and acts as a catalyst for private sector capital mobilization towards achieving the SDGs.

Cumulatively, ICIEC has insured more than US$ 83bn in trade and investment and US$2.2 bn in support of FDI at the end of 2021. Its activities were directed to specific sectors – US$31.7bn to energy, US$25bn to manufacturing, US$5.3bn to infrastructure, US$2bn to healthcare, and US$1.4bn to agriculture. The IsDB Group’s current renewable energy financing totals about US$3.4 billion, and ICIEC, has provided US$470 million in insurance for renewable energy projects in member states.

The investment and development impacts and delivery demonstrate and contribute to the Policy and socio-economic resilience required for post-pandemic economic recovery and rebuilding. This is done through ICIEC’s unique Shariah-compliant de-risking solutions, including the Non-Honouring of Sovereign Financial Obligations (NHSFO) Policy, Foreign Investment Insurance Policy (FIIP) to cover Equity Investment, and Reinsurance. This is achieved through forging Partnerships for Change in line with SDG 17 and ICIEC’s Theory of Change strategy, thus harnessing international best practices and technologies.

In Türkiye, ICIEC provided US$80m Reinsurance to Eksport Kredit Fonden (EKF), the leading Danish ECA, to support the construction of four wind farm projects with an aggregate electricity generation capacity of 316 MW. EKF is one of the most experienced ECAs supporting wind energy projects.

In the UAE, ICIEC provided a 17-year US$32.5 million NHSFO cover for a financing facility from Sumitomo Mitsui Banking Corporation Europe (SMBCE) for the construction of a Waste-to-Energy project in Sharjah, which on completion will result in an estimated net reduction of 460,000 CO2 emissions per year and reduction of waste disposed to landfills.

In Egypt, ICIEC provided a similar 3-year US$56 million NHSFO facility to cover SMBC’s participation in the US$3 billion Syndicated Green Term Facility arranged by Emirates NBD Capital and First Abu Dhabi Bank for the Egyptian Ministry of Finance to finance several eligible green projects in the water and sanitation areas. Egypt is highly vulnerable to the impacts of climate change. Climate adaptation projects aiming to increase resilience and adaptive capacities are vital to the country.

In the second transaction in Egypt, ICIEC provided a 7-year US$68 million FIIP to cover

Breach of Contract and PRI to UAE-based Alcazar Energy for its equity investment in the Benban Solar Complex in Aswan, comprising the building of four 50MW solar power plants.

ICIEC has a long relationship with Egypt, including Elsewedy Electric, Egypt’s largest integrated energy company. As of 2022, Elsewedy has some 50 active insured buyers under ICIEC’s insurance policy in Africa, Europe, and Asia, with an exposure of US$50 million. ICIEC is positioned to play a key role in private sector engagement through the credit enhancement its policies provide to financial institutions and the access it has to its Member Country national and sub-national bodies, who are the custodians of the relevant Climate Action projects and transactions.

* Do you see any constraints that may impede climate action policies, access to finance and de-risking tools, and broader regional and international cooperation?

– Climate Action – finance, mitigation, and adaptation, is hampered by a cornucopia of structural constraints, apart from the usual lack of resources, policy deficits, lack of technical expertise and the market vagaries of decarbonization, carbon pricing, and carbon capture.

A recent Forum organized by OMFIF, the UK-based independent central banking think tank, identified several constraints, including «unnecessary bureaucracy», excessive risk aversion; lack of harmonization of disclosure standards for sustainable finance; proliferation of worldwide fragmented green taxonomies for guiding sustainable investments; and the need to achieve an appropriate framework for public and private investors and financial institutions to channel private investments into the vast opportunities for sustainable and green finance.

Worldwide regulatory agencies need to harmonize disclosure standards for sustainable finance to reduce unnecessary bureaucracy and maximize capital flows into investments countering climate change. There are several definitions of ESG, sustainable investments, and impact investment. Similarly, the proliferation of worldwide taxonomy schemes for guiding sustainable investments is causing confusion and inefficiency. What is required is a regulatory system that is diverse enough to handle the complexity of sustainable finance initiatives and the multiplicity of organizations promoting them, yet sufficiently simple to improve transparency and enforceability.

According to the Forum consensus, the danger is that a failure to harmonize Climate Action regimes and green taxonomies may lead to competition between jurisdictions and some investors migrating to regions such as the US and Asia, where opportunities for scaled-up investment may deem to be greater.

The Egyptian Government rightly aspires that COP27 will be an important milestone in this decisive decade for climate action through undertaking an urgent, ambitious, impactful, and transformative agenda guided by a holistic approach to sustainable development based upon the principle of equity and informed by science.

COP27 must focus on a stronger implementation of policies, transformation of commitments into actions, and translating the pledges of the summits into solutions in the field. Climate action can be a golden thread that leads to sustainable development based on a balance between mitigation, adaptation, and means of implementation, thus facilitating an effective just, and equitable transition. To realize this, we have to harmonize policies, standards, taxonomies, and constraints that may impede progress towards effective climate adaptation delivery