Barbados Prime Minister Mia Amor Mottley spoke passionately before the United Nations General Assembly in September on growing debt many developing countries and its growing impact on their ability to prosper.
The average debt for weak and middle-income countryoutside China, reached 42% of their gross national income in 2020, compared to 26% in 2011. For countries in Latin America and the Caribbean, annual payments for servicing this debt alone represented on average 30% of their total exports.
At the same time, these countries face a “triple crisis from climate change, the pandemic and even now conflict which leads to the inflationary pressures which unfortunately lead people take the circumstances in hand“, Motley said.
Rising borrowing costs coupled with high inflation and slow economic growth have left developing countries like his a difficult position when it comes to climate change. High debt repayments mean countries have fewer resources to mitigate and adapt to climate change. Yet climate change increases their vulnerability, and this can increase their sovereign riskincreasing the cost of borrowing. Lower production capacity and tax base may lead to higher debt risks. It’s a vicious circle.
As a unique solution, countries and International organisations talk about “debt-for-climate swaps” to help solve both problems at the same time. UN Deputy Secretary General Amina Mohammed mentioned debt-for-climate swaps before 2022 United Nations Climate Change Conferencefrom November 6 to 18, as an option to refinance countries’ “crushing” debt.
How Debt Swaps Work
Debt-for-climate swaps allow countries to reduce their debts in exchange for a commitment to finance national climate projects with the financial resources freed up.
They were used since the late 1980s to preserve the environment and deal with the liquidity crisis in developing countries, including Bolivia, Costa Rica and Belize. These are commonly referred to as “debt-for-nature swaps”.
Belize, for example, was able to reduce its debt by committing to designate 30% of its marine areas as protected areas and to spend $4 million a year for the next two decades to marine conservation in a complex debt-for-nature swap.
Barter, organized in 2021 by Nature conservation, involves the US-based environmental group lending funds at a low interest rate to Belize to buy back $553 million in commercial debt at a steep 45% discount. The Nature Conservancy raised funds from investment bank Credit Swisse through the issuance of US government-backed “blue bonds”, which gave the bonds a solid investment grade credit rating.
Similarly, Costa Rica has made two debt-for-nature swaps with the United States. As part of the exchanges, Costa Rica agreed to allocate $53 million for conservation projects. It has already planted more than 60,000 trees and reverse its deforestation.
While debt-for-nature swaps have primarily been used for conservation, the same concept could be expanded to climate change mitigation and adaptation activities, such as the construction of solar farms or dykes. Some financial experts have suggested that debt-climate swaps could be structured in a way that also encourages private sector bondholders to swap the national debt they hold for carbon offsets.
Three keys to successful debt-climate swaps
I work with the Climate Policy Lab at the Fletcher School of Tufts University. Our experience with debt swaps offers lessons for the design and implementation of debt-for-climate swaps.
First, the complex governance structures of debt swaps have limited their use. In the past, transactions were generally small, generating only about $1 billion funding for the environment from 1987 to 2003. A terminology record template for future debt-for-climate swaps could reduce complexity and reduce the time and costs involved.
Second, debt-for-climate swaps should ease the debt burden enough to allow debtor countries to invest in climate change adaptation and mitigation projects. For example, the United States created debt-for-nature swaps with Indonesia in 2009 which have been criticized for not doing enough to help the Indonesian government achieve its conservation goals.
Another concern is known as ‘additionality’ – ensuring that trade leads to additional climate efforts, as opposed to covering efforts already planned Where already paid with international climate finance.
With widen the gaps Between the amount of adaptation aid that reaches countries and the amount they need, debt-for-climate swaps can be a significant source of finance. Climate Policy Initiative, a non-profit research group, recently estimated that about 90% adaptation needs of countries listed in their Nationally Determined Contributions climate change plans they submit to the UN – can only be met with the help of development banks or other countries.
Regions experimenting with debt swaps
Some regions are testing debt-climate swaps.
The Economic and Social Commission for West Africa has developed a Debt swap between climate objective and sustainable developmentin which he plays the role of intermediary between creditors and seven pilot countries. The initiative focuses on promoting sustainable development and climate goals, such as the development of more resilient agriculture.
Similarly, under the Caribbean Resilience Fund, the Economic Commission for Latin America and the Caribbean plans to launch a Debt swap for climate change adaptation. It aims to reduce the $527 million in debt in three pilot countries by issuing green bonds, similar to Belize’s debt swap. development banks play a crucial role securing new obligations and reducing credit risk.
Through carefully designed debt-for-climate swaps and the support of international institutions, development countries could increase their funding for desperately needed climate mitigation and adaptation actions and alleviate some of their heavy debt burden.
Quote: How Debt-Climate Swaps Can Help Solve Fiscal and Environmental Challenges of Low-Income Countries Simultaneously (2022, November 1) Retrieved November 1, 2022 from https://phys.org/news/2022-11-debt – for-climate-swaps-low-income-countries-fiscal.html
This document is subject to copyright. Except for fair use for purposes of private study or research, no part may be reproduced without written permission. The content is provided for information only.