Several conservation groups feel that such deals could play a crucial role in meeting the climate finance requirement of developing nations
Ecuador and Barbados are reportedly exploring debt swapping deals to finance conservation and climate adaptation projects. Ecuador, in particular, is looking to tap into the debt-for-nature pool to free up money for conservation efforts in the Amazon rainforest, a Reuters report said citing a stock exchange filing.
According to the report, Amazon Conservation DAC, a special purpose vehicle, has offered to buy back four Republic of Ecuador bonds from debt holders. The debt-for-nature swap has been gaining traction globally as it allows countries to buy back more expensive debt and use the savings generated to fund conservation projects.
This comes in the aftermath of the recently-concluded 2024 Conference of the Parties (COP29) in Baku, Azerbaijan where negotiations around climate finance left developing and small island countries disappointed over the $300-billion deal agreed upon by the developing nations.
Several conservation groups feel that such debt-for-nature swaps could play a crucial role in meeting the climate finance requirement, which has been pegged at $1.3 trillion by the developing nations. Several member countries, including India, have expressed their dissatisfaction over the final quantum decided at COP29 saying it pales in comparison to the actual requirement of climate finding.
What Is Debt-for-nature Swap?
A debt-for-nature swap usually involves the buying of foreign debt, conversion of that debt into local currency and using the proceeds to fund conservation activities. The entire mechanism hinges on the willingness of commercial banks or governments to sell debt at a lower value than the original loan.
Take the example of the 1987 debt-for-swap exchange between Bolivia and Conservation International, considered to be the first of such deals in the world. Conservation International was able to acquire US$ 650,000 of Bolivian external debt at a discounted price of $100,000 under the agreement, as per the Food and Agriculture Organization (FAO). In exchange, the government of Bolivia agreed to provide maximum legal protection to the Beni Biosphere Reserve and to create three adjacent protected areas. The South American nation also agreed to provide $250,000 in local currency for management activities in the Beni Reserve.
Now, why would a lending institution agree to such a deal? The reason is that several of the developing countries are unable to pay the debt in full. Faced with uncertainties over future payments, commercial banks therefore consider selling debt at a discounted rate. Once the necessary approvals are acquired, the terms negotiated, the debt is acquired and presented to the central bank of the indebted country which cancels the debt and provides funds in local currency, either in the form of cash or bonds. The conservation projects are implemented over the life of the agreed programme.
Low and Mid Income Countries Under Financial Strain
According to a recent World Bank report, the total external debt stock of low- and middle-income countries hit at an all-time high of US$8.8 trillion in 2023, up 2.4 percent from the previous year, said the report. Noting that low- and middle-income countries paid a record US$1.4 trillion on foreign debt in 2023, the report highlights the crucial role played by multilateral creditors in terms of providing support to vulnerable countries amid shocks that have negatively affected their economies since 2019.
“In highly indebted poor countries, multilateral development banks are now acting as a lender of last resort, a role they were not designed to serve. That reflects a dysfunctional financing system: except for funds from the World Bank and other multilateral institutions, money is flowing out of poor economies when it should be flowing in,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President.
Given the financing scenario, alternate financing mechanisms such as debt-for-swap deals could prove to be helpful in achieving climate actions and conservation-related targets. Since the 1980s, 145 debt-for-nature swaps worldwide have written off US $3.7 billion from the face value of debt globally, as per a 2022 report by the African Development Bank. International conservation organisations or private foundations based in the Global North have initiated or brokered most debt-for-nature swaps, according to a Carbon Brief report.