Large-scale debt swaps can help fight debt, climate change and nature loss together

by Paul Steele, Chief Economist, International Institute for Environment and Development— Sep 14, 2020

In the maelstrom of COVID-19, unsustainable debt, climate change and catastrophic biodiversity loss threaten a sustained and sustainable recovery from the impacts of the pandemic. The International Institute for Environment and Development (IIED) has released a new report on a new form of debt swaps that could provide developing countries with an opportunity for a green post-COVID-19 recovery that would also help reduce poverty.

A global pandemic in the midst of a triple crisis

Developing country debt reached over US$8 trillion in 2019. On average developing countries spent over 10 percent of their government revenues on debt repayments in 2018, and for several least developed and middle-income countries the amount rose to 20 percent. Money that is crucial for addressing the climate and biodiversity emergencies that are bearing down on already struggling countries, as well as for providing for improved education, infrastructure, and health.

In “Tackling the triple crisis: using debt swaps to address debt, climate and nature loss post-COVID-19” IIED shows that using large-scale debt swaps as part of post-COVID recovery measures would help address the pressures from crippling debt and the climate and biodiversity crises. COVID-19’s economic fallout means less of the finance needed to address poverty and the impact of climate change and biodiversity loss will be available, pushing millions more women, children, and men into poverty.

Poor Countries and Climate FinanceBy exchanging an existing debt contract for one that writes off debt or reduces the debt’s original value by, for example, having repayments made in the debtor country’s currency or charging lower interest rates, a developing country’s overall external debt could be reduced.

The money saved would be used to invest in poverty-reducing climate resilience programs, climate emissions mitigation, or biodiversity protection initiatives.

To date, debt swaps have been limited to a few small-scale projects in which the money has been managed in trust funds by international NGOs. IIED’s “Tackling the triple crisis” shows that by creditors channeling the money direct to developing country governments’ budgets specifically for financing such action as reforestation or researching or planting climate resilient crops, debt swaps can be used on a large scale.

It also means more money will be available for these issues than under earlier project-based versions and be more cost effective. By having the money channeled through governments’ financial systems, it increases their accountability to their citizens and commitment to the environmental programs.

Large-scale debt swaps for climate and nature will also benefit public and private lenders as debt will be invested productively to increase sustainable economic growth and so reduce the need for further debt write-offs. They will also help creditors to meet their pledges to improve environmental and social standards.

Such debt for climate and nature swaps will also help achieve the key objectives of increased biodiversity and climate finance set by next year’s UN biodiversity conference being held in China and the UN climate summit in the United Kingdom.

The report calls on the international community to work with debtors to establish a technical working group, under guidance of an international body such as the World Bank. The working group’s purpose would be to develop a comprehensive and coordinated climate and nature program swaps initiative over the next three years to address the crisis of debt, climate change and biodiversity loss.

See ‘Tackling the triple crisis: using debt swaps to address debt, climate and nature loss post- COVID-19‘ by Paul Steele, IIED chief economist, and Sejal Patel, IIED climate change researcher. The report includes a comprehensive list of the developing countries that will benefit most from this type of debt relief.

The International Institute for Environment and Development held a webinar on this topic on Sept. 9. A recording of the webinar is available here.

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