Debt-for-climate swaps: Where ambition meets economic reality

Dr. Pepukaye Bardouille is Director of the Bridgetown Initiative and Special Advisor in the Prime Minister’s Office, Barbados; Dr. Rania Al-Mashat is Egypt’s Minister of Planning, Economic Development & International Cooperation, and previously held senior roles at the International Monetary Fund and the Central Bank of Egypt.

As COP30 approaches, countries face pressure to raise climate ambition, notably by updating their Nationally Determined Contributions (NDCs).

But ambition without means is just aspiration.

Many nations are grappling with shrinking aid, rising debt service costs, and worsening climate shocks.

Over 40% of people live in countries that spend more on debt than on health or education. This is a development emergency. Climate action isn’t a cost; it’s a catalyst for resilience and growth.

So NDCs must now focus on implementation: costed, bankable plans backed by suitable finance. And these investments must drive adaptation, job creation, and economic stability.

Achieving this shift depends on access to financial instruments that reflect the needs, fiscal constraints and structural realities of developing countries.

Debt-for-development swaps are one such instrument. Pioneered in the 1980s, these transactions began as bilateral agreements where a debtor country received partial debt relief in exchange for environmental or climate commitments.

Egypt, Barbados lead the way

Egypt has emerged as a leader in using bilateral debt swaps to advance its sustainable development agenda.

Through this approach, Egypt negotiates with creditors to direct savings from portions of its refinanced external debt into key investments. A specified amount of Egypt’s bilateral debt is written off, and it channels an equivalent amount - in Egyptian pounds - into domestic development projects.

Over the past two decades, Egypt has implemented debt swap programmes with Italy and Germany supporting rural development, infrastructure, education, food security, smart agriculture, and jobs.

Most recently, Egypt launched a pioneering debt swap programme with China; the first of its kind between China and any country.

Egypt’s approach has shown that by linking debt swaps to investment platforms, countries can accelerate progress on critical development priorities.

But bilateral loans are not the only type of swap transaction. With roughly 60% of external public debt in emerging and developing economies now owed to private creditors, commercial debt swaps are also important to consider.

Barbados has shown the potential of these conversions to support resilience.

In 2024, it refinanced $300 million through a locally issued loan backed by guarantees from the Inter-American Development Bank and the European Investment Bank.

The result? Over $125 million in savings, now being invested in wastewater treatment and climate-smart irrigation infrastructure.

Barbados’ $11.6 billion Investment Plan for building Prosperity and Resilience by 2035 provides a costed roadmap for achieving climate and development goals.

Much of this can be financed through de-risked private capital, but around 40% is expected to come from public budgets, including over $1 billion via debt-for-development swaps targeting commercial loans on the government balance sheet.

Scaling up through support

Since 2021, eight countries have executed debt conversions, refinancing $5.9 billion in loans and unlocking nearly $2 billion in savings.

Spain’s new Global Hub for Debt Swaps aims to scale access to swaps by offering technical assistance to help countries navigate legal and structural complexities.

But technical support alone isn’t enough. Credit enhancement is critical to reduce borrowing costs and unlock savings at scale.

Multilateral development banks (MDBs) are stepping up, but this support often counts against country borrowing envelopes, and MDBs can guarantee only part of the risk.

That is why the Bridgetown Initiative is advancing a new credit enhancement pool for commercial debt swaps - anchored by bilateral donors and designed to complement MDBs and mobilise additional risk-sharing.

This facility would bring scale, speed, and structure to a promising model, and directly respond to country demands.

Debt swaps aren’t a silver bullet, nor are they appropriate for every country.

But swaps can help improve a country’s overall debt profile by refinancing loans at a lower interest rate and also at longer tenors.

The resulting savings invested in development projects and climate action can enhance growth projections, further improving debt profiles.

Swaps can also help develop domestic capital markets, reducing foreign currency risk and macroeconomic vulnerability.

And for credit enhancement providers, their support translates directly into development impact – without adding to debt volumes – while crowding in more public and private capital.

As we approach COP30, climate ambition must be matched by realism. We cannot ask countries to do more while offering them less. By scaling up debt swaps and the tools that support them, we can turn aspiration into action - and build a more resilient, equitable, and sustainable future for all.