Debt-for-nature swaps

Debt-for-nature swaps

Subject: Environment

Section: Climate Change

Context: 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”.

More on the News:

• 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 debt 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.
• 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.

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.

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.
• Multilateral development banks also see potential in green debt swaps.

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