LocationsTheme 9
A new wave of debt swaps
for climate or nature
More than 50 of the poorest developing countries are in danger of defaulting on their debt [121] and becoming effectively bankrupt, including 28 of the world’s top 50 [122] most climate-vulnerable countries. While they represent just 3% of the global economy, they account for over half of people living in extreme poverty. Debt swaps for climate or nature are not new, but a new wave of substantially larger deals might be part of the solution to debt distress and a way of directing additional resources to climate and conservation.
Signals
58 of the developing countries most vulnerable to climate change have almost $500 billion of debt servicing payments [123] due in the next four years. Several are calling publicly for more debt-for-nature swaps: 20 countries announced they were considering halting repayment [124] of $685 billion, ideally swapping debt for investment in climate projects, while the President of Ghana at COP 27 said, "I urge those who hold African debt to commit to debt for climate swap initiatives [125]." The Bridgetown Initiative [126] declared, “We cannot be good at rescuing banks but bad at saving countries.”
Belize’s debt for nature swap with The Nature Conservancy reduced the country’s external debt by 10% of GDP [127] and is helping to protect the longest coral reef in the western hemisphere. Other deals under evaluation include Gabon [128], Sri Lanka [129], Ecuador [130] and Cape Verde [131], while Lao PDR is working with UNDP to explore a potential debt-for-nature restructure [132].
Trends
Growing number of countries in debt distress
Climate shocks - more intense, more frequent
Developing countries assert themselves
Illustrative Signals
20 countries consider halting repayment of $685bn debt, swapping debt for investment in climate
Belize’s debt for nature swap with The Nature Conservancy reduced its external debt by 10% of GDP
Other deals under evaluation include Gabon, Sri Lanka, Ecuador, Cape Verde and Lao PDR
So what for development
Heavily-indebted countries vulnerable to climate change are caught in a vicious circle: debt servicing reduces fiscal space for investments to address climate change. Meanwhile, climate change degrades productive capacity and triggers natural disasters (and expensive reconstruction), making it even harder for countries to service their debt.
Debt swaps for climate and nature could be part of the answer, providing an incentive for creditors to participate in debt relief in exchange for environmental investments. That might bring in new money or new actors [133]. They “could even create additional revenue [134] for countries with valuable biodiversity by allowing them to charge others for protecting it and providing a global public good”. But there are still questions over the relative merits of debt swaps compared to alternative measures such as conditional grants and comprehensive debt restructuring. A recent IMF [135] report evaluated these options.
Debt swaps remain for the present a niche instrument in the market, but one with great potential. Going forward, they might not be limited to climate and nature, but could potentially expand to other SDG areas, as happened with the thematic bond market, which began with “green bonds” and then developed to include social and other sustainability targets.
If developing countries assert themselves increasingly forcefully on existential issues like debt and climate change, what would that mean for multilateral cooperation?
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