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Can debt swaps be a game-changer for poor nations to go green?

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Can debt swaps be a game-changer for poor nations to go green?

Context- With many developing nations facing a triple whammy of rising debt loads, climate change and nature loss, conservationists say the answer could lie with a financial instrument enabling them to tackle all three at once: “debt-for-environment swaps”.

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

But even as debt burdens grow, there is now an urgent need for countries to invest more in climate and biodiversity protection to meet their international and national commitments.

(Source- Mint)

What are green debt swaps and how do they work?

  • Debt swaps are one way to change the terms of a country’s borrowing – with bilateral government lenders, development finance institutions or private banks – either by giving states more time to repay loans or reducing interest rates and the amounts they must pay back.
  • With the agreement of creditors, debt swaps can help the world’s low-income countries avoid default and enable them 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 their risk through additional guarantees and ensure that at least part of a loan is eventually repaid. The first debt-for-nature swaps were agreed in the mid-1980s, mostly in Latin America, with rich nations the main creditors.
  • Another debt crisis in the late 1990s and early 2000s saw the Jubilee 2000 movement and Live 8 concerts – backed by religious and world leaders, and musicians like U2 frontman Bono – push for debt relief for poor countries in Africa and beyond.
  • During the last three decades, environmental debt swaps were rare and usually relatively small government-to-government agreements for $10 million-$20 million. But in recent years there have been efforts to scale them up, although they can be administratively complex and expensive to arrange.
  • About 70-80% of countries’ debts are now owed to private creditors, according to WWF – usually banks and asset managers.
  • 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.
  • The COVID-19 pandemic exacerbated high debt levels among many countries as they sought loans to soften the social and economic impacts of the health crisis.
  • More frequent and severe climate-driven disasters are also pushing countries into deeper debt distress, as seen with Pakistan’s devastating floods last year and tropical storms that have hit island nations’ economies hard.

Who is pushing debt-for-nature swaps and why?

  • Developing nations that are struggling to pay back creditors or defaulting on their debt – and thus cannot invest in greening their economies and protecting their rich biodiversity – are pushing for these swaps.
  • Egypt 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 last November.
  • Multilateral development banks also see potential in green debt swaps.
  • But many backers, like WWF, do not regard them as a long-term solution to high indebtedness among the poorest countries because they often deal only with a small portion of overall debt and do not tackle current lending practices.

What are the financial and political advantages?

The 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 nature action.

How can green debt swaps be encouraged?

  • 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, said WWF’s Brenes.
  • A public campaign, similar to the huge push to cut debt and poverty in the 1990s and 2000s, could also help, he added.
  • 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.

Conclusion- Debt swaps can prove to be a pertinent instrument in helping countries go green.

Source- Indian Express

NEWS- Can debt swaps be a game-changer for poor nations to go green?

Syllabus- GS-2; GS-3; International Relation; Economy

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