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
Meaning: It 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.
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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.
Countries most vulnerable to climate change struggle with resilience investment due to high debt, limiting their financial capacity.
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.
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Advantages:
Dual 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 fulfill their commitments (to support developing countries) through this attractive and transparent instrument.
Swap vs condition grants
- Swap: 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.
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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 organization, bought $22 million of its debt in exchange for promise to create 13 new marine protected areas.
Way ahead:
Countries 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.
How do Debt-for-Climate Swaps Help Small Island Countries?
- Small island developing states (SIDS) consider debt-for-climate swaps to tackle climate risks and financial challenges.
- This solution involves reducing external debt in exchange for policy commitments or spending by the debtor country.
- SIDS participating in these swaps can allocate freed-up fiscal resources to climate action and other developmental needs.
- The approach aids in decreasing external debt, promoting domestic investment in climate action for SIDS.
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