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Debt-for-climate swaps

GS Paper 3

Syllabus: Environment, Conservation

 

Source: DTE

 

Context: In the past decade, debt-for-climate swaps have grown relatively popular among low- and middle-income countries.

Debt-for-climate/debt-for-nature swaps
MeaningIt is a debt restructuring device between the creditor and a debtor by which the former forgoes a portion of the latter’s foreign debt/provides its debt relief, in return for a commitment to invest in specific environmental mitigation and adaptation projects.
Who will be benefitted?Low and middle-income countries, small island developing states (SIDS).

 

 

Example – Caribbean SIDS: The COVID-19 pandemic resulted in a 73% drop in international tourist arrivals in 2020, and has aggravated the region’s debt crisis.

NeedThese countries are most vulnerable to climate change and are least able to afford the investment to strengthen resilience due to their debt burden.

 

 

The signatories to the Paris Agreement and the Glasgow Financial Alliance for Net Zero (GFANZ) have a commitment to provide financial assistance to developing countries to build clean, climate-resilient futures.

AdvantagesDual objectives: to promote specific investment and policy action (that aims to combat climate change) on the one hand and some debt relief on the other.

 

 

Seeks to free up fiscal resources → Governments can improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities.

 

 

Developed countries can fulfil their commitments (to support developing countries) through this attractive and transparent instrument.

Swap vs condition grantsSwap: Offer debt relief above what is needed to finance the climate investments (net debt relief), leading to a higher fiscal transfer and the creation of fiscal space.
Conditional grants: Cover the cost of an investment and require economic dislocation → diversion of resources from planned development programmes.
Successful implementation

(Seychelles)

In 2017, this small African country announced the successful conclusion of negotiations for a debt-for-adaptation swap under a tripartite model.

 

 

The Nature Conservancy (TNC), a US-based environmental organisation, bought $22 million of its debt in exchange for a promise to create 13 new marine protected areas.

Way aheadCountries like Sri Lanka [ranked as highly vulnerable to climate change catastrophes and also reeling under the sovereign debt crisis] can seek the help of these instruments.

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