Why in news? 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”.

Highlights:

• 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.
• 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.

The need for the debt swaps:

• 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.
• 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.

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.

How does the debt swap help?

• 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.

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

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.
• 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.
• “It allows this dialogue within government – which allows domestically, within developing countries, environment to be given a seat at the table.

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.
• Performance indicators are needed to track whether governments are meeting their green commitments in exchange for debt swaps.