How Forgiving Debt Could Help Save the Earth
The question of debt and sustainable development has already been tackled in the 1980s with the introduction of debt-for-nature swaps. Now these agreements are regaining popularity.
Wildfires in the Amazon, bushfires in Australia, floods in Indonesia, record-low levels of the Arctic sea ice, record-high temperatures globally, forest fires in California, Lebanon, Siberia. Coronavirus.
These are only some of the catastrophes the world has witnessed in the past two years. With little time on our hands and huge changes to be made, climate change needs to be at the forefront of the conversation.
In 2019, developing nations owed $8 trillion in debts, mostly to wealthy, developed countries. The debt burden, further accelerated by Covid-19, poses an important threat to the sustainability of our world today.
Economies of developing nations often rely on natural resources, making them particularly vulnerable to the effects of climate change. In addition, much of the world’s biodiversity is found in developing countries. Unfortunately, these nations often find themselves unable to sustain their ecosystems due to limited wealth and high debt burdens. In 2019, developing nations owed $8 trillion in debts, mostly to wealthy, developed countries. The debt burden, further accelerated by Covid-19, poses an important threat to the sustainability of our world today. The question is: How can we bridge this gap between debts and environmental casualties?
The concept of debt-for-nature swaps allows developing countries to exchange their debt for a pledge to protect their natural resources. Accordingly, the benefactor(s) withdraws debt obligations owned by a developing country with the savings invested in preservation projects.
These agreements are usually done in two ways. Creditors can renounce, partially or totally, to the owned credit. Alternatively, they could sell it on the secondary market at a lower value, where it is typically bought back by conservation organisations. The funds are then assigned to local environmental trust funds and invested in conservation projects.
In a typical debt-for-nature swap, there are three main parties involved. The debtor country, the environmental group and the creditor. The latter usually involves banks or the government of a wealthy country. All three participants benefit from these deals.
The debtor country diminishes its debt burden while simultaneously increasing its environmental spending and saving hard currency. Moreover, such agreements often lead to the creation of jobs and can expand to financing social expenditures such as health or education.
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Environmental groups benefit by buying the debt on the secondary market, thus profiting from a discounted rate. Their participation in projects and negotiations also allows them to expand their network and portfolio.
The creditors’ benefits are three-way. Firstly, debt-for-nature swaps allow them to get rid of risky debts. Secondly, such agreements can improve the relationships between the parties involved. Finally, debt-for-nature swaps allow creditors to increase their environmental credentials, thus improving their reputation and Environmental, Social, and Corporate Governance (ESG) score.
A Solution From the Past, for the Future.
Debt-for-nature swaps have been found repetitively effective in the past. Agreements have been made in a range of developing countries with rich biodiversity, including Peru, Indonesia, Costa Rica, Ecuador, and the Philippines.
In 2015, the government of Seychelles has entered a debt-for-nature agreement with The Nature Conservancy – a U.S.-based NGO that had previously bought the debt from the Paris Club. The large ocean state is particularly vulnerable to climate change as its economy strongly relies on marine resources. Following a $27.3 million debt conversion deal, the Seychelle was able to expand its marine protection from 0.04% of its Exclusive Economic Zone to 30% in 2020.
Madagascar, a nation that was struggling to sustain its rich and unique biodiversity due to high levels of poverty and debt, signed a similar agreement with the French government in 2008. The debt-for-nature swap allocated roughly $20 million to preserve Madagascar’s rich biodiversity in an effort to “triple the size of the country’s protected areas,” with the funds managed through a conservation trust fund established by WWF.
With all parties benefiting from such agreements and with successful results in the past, this solution appears to be almost ideal. Almost.
Like all things, these agreements come with a few setbacks. For one, the nature of these deals implies long negotiations that may take up several years. The overall transaction costs may therefore ultimately turn out higher in certain cases, consequently increasing the debt burden.
Moreover, for the swap to be efficient, it must be implemented appropriately, which can be difficult in countries ruled by dishonest governments. The government of Madagascar played a critical role in the success of the debt-for-nature swap, continuously proving its willingness to dedicate funds to preserve scarce resources, regardless of economic circumstances. If dealing with corrupt governments or if the parties involved aren’t fully invested or transparent, such agreements may hold limited impact.
It should also be noted that debt-for-nature swaps typically involve only small amounts of debt relief, likewise limiting potential impact.
Could Debt-for-Nature Swaps Truly Help to Save the Earth?
Debt swaps present a compelling case of reducing developing countries’ debt burden while promoting sustainable development. They allow governments to tackle the urgent global crisis by allocating bigger portions of their budgets to protecting the environment, thus contributing to the climate finance missions set at the UN biodiversity conference and UN climate summit.
Although debt-for-nature swaps offer an interesting alternative to conventional debt agreements, they still have a long way to go before truly helping to save Earth, for manifesting meaningful global outcome would require deploying larger debt sums.
As part of pandemic economic rescue packages, governments have an opportunity to address simultaneously the crises of debt, climate and biodiversity destruction.
That said, debt-for-nature swaps can play an interesting and potentially substantial role in the future of climate change. “As part of pandemic economic rescue packages, governments have an opportunity to address simultaneously the crises of debt, climate and biodiversity destruction,” researchers from the London-based International Institute for Environment and Development (IIED) wrote in a report. Moreover, China, the largest owner of bilateral debt with developing nations, is set to host the next Convention on Biological Diversity summit. They could potentially consider debt-for-nature deals and promote other similar agreements.
Today, more than ever, debt-for-nature swaps may play a key role in saving the earth.
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com. — In the Featured Photo: Lake Brienz, Switzerland. Featured Photo Credit: Andreas Gücklhorn