Climate bank can fund a rebound from Covid crisis

A health worker collects a swab sample from a resident in Kibera, Nairobi on Sunday, October 18, 2020 to test for Covid-19.

Photo credit: Dennis Onsongo | Nation Media Group

What you need to know:

  • A climate bank, being public, would not have to earn high profits but can make investments of high social importance whose returns even out the costs.
  • The government can also set up an agency for the installation, financed by the bank.

The Covid-19 pandemic is hitting Kenya and the rest of the continent with a full-blown economic crisis. What do you do when economic activity is struggling to rebound after the lockdown, demand is depressed and foreign debt is skyrocketing?

Support from the international community will not be sufficient as the industrialised countries struggle with recession. But there are options for economic policy at the national level.

In our economies, the banking system is the source of finance and money. Money is created out of nothing once a loan is granted and it assumes purchasing power when it finances the production of goods.

Hence, any demand for money can be accommodated via credit issuance as money is not limited. Any expenditure can basically be financed by the banking system.

Nobody invests during a crisis despite money not being the bottleneck. The public sector should break the vicious cycle of economic contraction; proper investment plans can remove the financing restriction and help to achieve social and sustainable development goals.

Social importance

Take the case of a climate bank being set up. Being public, it would not have to earn high profits but can make investments of high social importance whose returns even out the costs.

For instance, the government can commit to strongly expanding the production of renewable energy and increase energy efficiency.

It can set up an agency for the installation, financed by the bank. Many jobs would be created while the energy system gradually becomes sustainable.

Employment creates income, which the employees spend in the economy. Additional demand stimulates further activities, which spill over to other sectors. As a result, the private sector will create more jobs.

Some argue that economic growth raises demand for imports, hence accumulation of foreign debt, which is not what Kenya needs now. But think about the fossil fuels it has to import. 

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