Poor nations seek to go green with debt swaps

Children play in the water at sunset in the port of Sal Rei, the main town of Cape Verde's Boa Vista island, July 15, 2010
explainer

Children play in the water at sunset in the port of Sal Rei, the main town of Cape Verde's Boa Vista island, July 15, 2010. REUTERS/David Lewis

What’s the context?

Debt-for-nature and climate swaps are difficult and costly to agree but offer one way to unlock the vital finance needed for more sustainable economies

  • Developing nations face debt, climate and nature pressures
  • Debt swaps can reduce amount owed, enable green investments
  • Global campaign, standards could boost environmental debt swaps

KUALA LUMPUR - With many developing nations facing a triple whammy of rising debt loads, climate change and nature loss, conservationists say the answer could lie with a financial instrument enabling them to tackle all three at once: "debt-for-environment swaps".

The world's poorest countries owe $62 billion in annual debt service, a year-on-year increase of 35%, the World Bank said in December, warning of a rising risk of defaults.

But even as debts burdens grow, there is now an urgent need for countries to invest more in climate and biodiversity protection to meet their international and national commitments.

In a bid to deal with these problems across the board, Portugal and Cape Verde sealed an agreement for a "debt-for-nature" swap last month, just days after Zambia said it too was looking at a similar proposal from green group WWF.

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Former Portuguese colony Cape Verde, an island nation off West Africa threatened by sea level rise and coastal erosion, owes about 140 million euros ($152 million) to Portugal and more than 400 million euros to banks and other entities.

The debt-for-nature swap negotiated with Portugal would see an initial 12 million euros of scheduled debt repayments put into an environmental and climate fund to help Cape Verde switch to cleaner energy supplies and tackle climate change.

Meanwhile, the debt-for-nature proposal for Zambia, which has vast national parks where some of Africa's most impressive wild animals live or migrate, aims to channel $750 million-$1 billion into conservation projects.

In 2021, a $553-million swap for Belize reduced its debt level by more than 10% of GDP and provided funds to protect the world's second-largest coral reef, while a 2015 deal with the Seychelles saw the government commit to protect 30% of its waters in exchange for $22 million of debt restructuring.

These types of debt swap are likely to increase in the coming years, analysts predict - with Ecuador and Sri Lanka also reportedly exploring similar deals.

Here are some facts about debt-for-environment swaps and the growing support for them among governments, conservationists and investors:

What are green debt swaps and how do they work?

Debt swaps are one way to change the terms of a country's borrowing - with bilateral government lenders, development finance institutions or private banks - either by giving states more time to repay loans or reducing interest rates and the amounts they must pay back.

With the agreement of creditors, debt swaps can help the world's low-income countries avoid default and enable them to redeploy part of their debt repayments to invest in measures to tackle climate change, nature protection, health or education.

For creditors, debt swaps can reduce their risk through additional guarantees and ensure that at least part of a loan is eventually repaid.

The first debt-for-nature swaps were agreed in the mid-1980s, mostly in Latin America, with rich nations the main creditors.

Another debt crisis in the late 1990s and early 2000s saw the Jubilee 2000 movement and Live 8 concerts - backed by religious and world leaders, and musicians like U2 frontman Bono - push for debt relief for poor countries in Africa and beyond.

During the last three decades, environmental debt swaps were rare and usually relatively small government-to-government agreements for $10 million-$20 million.

But in recent years there have been efforts to scale them up, although they can be administratively complex and expensive to arrange.

About 70-80% of countries' debts are now owed to private creditors, according to WWF - usually banks and asset managers.

In parts of Africa, a large chunk of the current debt pile is owed by mineral-rich countries to China's government, banks and other institutions, sometimes via its Belt and Road Initiative for infrastructure development.

The COVID-19 pandemic exacerbated high debt levels among many countries as they sought loans to soften the social and economic impacts of the health crisis.

More frequent and severe climate-driven disasters are also pushing countries into deeper debt distress, as seen with Pakistan's devastating floods last year and tropical storms that have hit island nations' economies hard.

Who is pushing debt-for-nature swaps and why?

Developing nations that are struggling to pay back creditors or defaulting on their debt - and thus cannot invest in greening their economies and protecting their rich biodiversity - are pushing for these swaps.

Egypt presented a swap with Germany as a model for others seeking to raise money for clean energy projects when it hosted the U.N. climate summit last November.

Multilateral development banks also see potential in green debt swaps.

But many backers, like WWF, do not regard them as a long-term solution to high indebtedness among the poorest countries because they often deal only with a small portion of overall debt and do not tackle current lending practices.

Nonetheless, green groups, such as The Nature Conservancy and the International Institute for Environment and Development (IIED), are helping arrange, monitor and sometimes finance them.

"If you can get a reduction on your debt and at the same time release funding for things you're not investing in because you don't have the money, it's a double whammy," said Esteban Brenes, conservation finance director at WWF in the United States.

What are the financial and political advantages?

The IIED estimates that about $100 billion could be raised through debt relief in developing countries, if 10% of overall sovereign debt were redeployed to climate and nature action.

Climate and the environment have not been a high political priority in many developing nations in the past, with the green agenda viewed as being pushed by the West, though this is now shifting, said Paul Steele, chief economist at the IIED in London.

But climate and nature debt swaps can foster useful discussions among finance, environment, agriculture and other ministries on what policies they can adopt to secure debt relief, he said.

"It allows this dialogue within government - which allows domestically, within developing countries, environment to be given a seat at the table," Steele said.

How can green debt swaps be encouraged?

A global framework or standard that sets the rules for green debt swaps would enable more creditors to join such initiatives and help increase the size of deals, said WWF's Brenes.

A public campaign, similar to the huge push to cut debt and poverty in the 1990s and 2000s, could also help, he added.

"With what's going on with climate, we don't have much time - maybe a window of 10 to 15 years," Brenes said.

The IIED's Steele said performance indicators are needed to track whether governments are meeting their green commitments in exchange for debt swaps.
Critics of the swaps, however, argue that poor nations should be given outright debt relief and allowed to invest the freed-up funds wherever they choose

(Reporting by Michael Taylor; Editing by Megan Rowling)


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