Postponing the Inevitable: Can Monetary Policy Promote Environmental Sustainability in Southern Africa?

Abstract

ABSTRACT:Globally, stakeholders are desperate in search of appropriate monetary policy for promoting environmental sustainability and countering the threat of climate events. They have attempted to identify some mechanisms such as climate lending system, sound financial development, and interest rate to adjust pollution to tackle climate-related risk. These advocates of the monetary environment nexus proposed three key strategies. First, banks should lower rates to financing climate-related lending criteria. Second, consider lower financing rates for firms that embrace carbon footprints. Third, central banks (CBs) must reconsider financing condition-based threshold of lending and climate risk disclosure. To heighten the debate, the central banks are advised to favour green policies, even if there is a need to compromise stability and productivity to realise the objectives. However, the question of whether it is appropriate to include climate mandates as part of the central bank operational mandate remains controversial. This is because the CBs, climatologists and scientists are divided in opinion with regards to using monetary policy to promote environmental sustainability without creating distortion in the system. More so, the persistent questions include how fast and at what cost can a monetary policy promote environmental sustainability. The extent of the aftermath, which is associated with the failure of monetary authorities in encouraging sustainability and the complications arising during economic activities in Africa, remains unknown. In addition to physical risk, bubble assets, slow farm productivity, prolonged growth, and other factors remain a concern. Although climate change is widely believed to impact only agriculture and energy, the banking sector is insecure due to the risk of imminent financial crises. This study investigates whether a monetary policy can promote climate financing in the Southern African Development Community (SADC). The SADC is selected as the candidate of inquiry because it has been identified as a potential hotspot of climate events. The empirical evidence is based on Westerlund cointegration that accounts for cross-sectional dependency and the Panel Vector Autoregressive/ Panel Vector Error Correction methodology. The findings indicate that a long-lasting relationship exists among the factors; however, the monetary policy induces sustainability with a feedback effect on the economy. Therefore, the mandates of CBs differ and handling financial stability as well as climate-related concerns may cause distortions that go beyond existing monetary instruments.