What are Green Debt Swaps and How Do They Work?

Context

Recently, conservationists said that the problem of rising debt loads, climate change, and natural loss especially by developing countries, could be solved with a financial tool called "debt-for-environment swaps," which would allow developing countries to address all three issues at once. 

Probable Question

Can debt swaps be a game-changer for developing nations to go green? Comment (150 words, 10 marks)

About Green Debt Swaps

• Debt swaps are one way to change the terms of a country’s borrowing, with bilateral government lenders, development finance institutions, or private banks.
• The first debt-for-nature swaps were agreed upon in the mid-1980s, mostly in Latin America, with rich nations as the main creditors.
• During the last three decades, environmental debt swaps were rare and usually relatively small government-to-government agreements for $10 million-$20 million. 
• In recent years there have been efforts to scale them up, although they can be administratively complex and expensive to arrange.
• Working: It is done either by giving states more time to repay loans or by reducing interest rates and the amounts they must pay back.
• Causes to push developing nations for swaps: Such nations struggle to pay back creditors or default on their debt and thus cannot invest in greening their economies and protecting their rich biodiversity.
• Promoting swaps: Green groups, such as The Nature Conservancy and the International Institute for Environment and Development (IIED), are helping arrange, monitor, and sometimes finance them

Need of Green Debt swaps

Warning of a rising risk of defaults: The world’s poorest countries owe $62 billion in annual debt service, a year-on-year increase of 35%, as per the World Bank.

• Rising Private creditors: About 70-80% of countries’ debts are now owed to private creditors, according to the World Wide Fund for Nature (WWF), usually banks and asset managers.
• China’s debt trap: In parts of Africa, a large chunk of the current debt pile is owed by mineral-rich countries to China’s government, banks, and other institutions, sometimes via its Belt and Road Initiative for infrastructure development.
• Debt rises in the COVID-19 pandemic: It exacerbated high debt levels among many countries as they sought loans to soften the social and economic impacts of the health crisis.
• Severe climate-driven disasters: This is also pushing countries into deeper debt distress, as seen with Pakistan’s devastating floods, the recent case of Earthquakes in Turkey, and  tropical storms that have hit island nations’ economies hard.

Significance of Green Debt Swaps

For the world’s low-income countries

• With the agreement of creditors, debt swaps can help the world’s low-income countries avoid default.
• It enables the world’s low-income countries to redeploy part of their debt repayments to invest in measures to tackle climate change, nature protection, health, or education.

For creditors

• Debt swaps can reduce risk through additional guarantees and ensure that at least part of a loan is eventually repaid. 

For financial and political advantages

• The International Institute for Environment and Development (IIED) estimates that about $100 billion could be raised through debt relief in developing countries if 10% of overall sovereign debt were redeployed to climate and natural action.
• Climate and nature debt swaps can foster useful discussions among finance, environment, agriculture, and other ministries on what policies they can adopt to secure debt relief.
• Green debt swaps enable this governmental debate as well, allowing for the domestic inclusion of the environment in developing nations.

Promoting green debt swaps

• A global framework or standard that sets the rules for green debt swaps would enable more creditors to join such initiatives and help increase the size of deals.
• A public campaign could also help in promoting green debt swaps.
• Critics of the swaps, however, argue that poor nations should be given outright debt relief and allowed to invest the freed-up funds wherever they choose.

Usage of Green debts swaps Globally

• In a bid to deal with these problems across the board, Portugal and Cape Verde, an island nation off West Africa, sealed an agreement for a “debt-for-nature” swap.
• Zambia, which has vast national parks where some of Africa’s most impressive wild animals live or migrate, aims to channel $750 million-$1 billion into conservation projects. The nation is too looking at a similar proposal from green group WWF. 
• In 2021, a $553-million swap for Belize, a nation on the eastern coast of Central America reduced its debt level by more than 10% of GDP and provided funds to protect the world’s second-largest coral reef.
• A 2015 deal with Seychelles, a country in East Africa, saw the government commit to protecting 30% of its waters in exchange for $22 million of debt restructuring.
• Ecuador and Sri Lanka are also reportedly exploring similar deals.
• Egypt also presented a swap with Germany as a model for others seeking to raise money for clean energy projects when it hosted the U.N. climate summit in 2022.

Way Forwards

• There is now an urgent need for countries to invest more in climate and biodiversity protection to meet their international and national commitments.
• There is also a need for performance indicators to track whether governments are meeting their green commitments in exchange for debt swaps.

News Source: The Indian Express

https://indianexpress.com/article/explained/explained-climate/debt-for-nature-swaps-poor-nations-green-8447422/

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