DEBT-FOR-CLIMATE SWAPS

  • In the past decade, debt-for-climate swaps have grown relatively popular among low- and middle-income countries.
  • Debt-for-climate swaps allow countries to reduce their debt obligations in exchange for a commitment to finance domestic climate projects with the freed-up financial resources.
  • It was introduced as a debt restructuring device that aims to combat climate change by ensuring that debt-ridden countries do not incur additional debt while addressing climate change locally.

The idea of debt swaps:

Debt swaps possess dual objectives:

  1. to promote specific investment and policy action
  2. some debt relief.
  3. Acquisition of debt with some concession is the logic underlying the concept.
  4. For instance, a debt-for-climate swap is an agreement between the creditor and a debtor by which the former forgoes a portion of the latter’s foreign debt, or provides it debt relief, in return for a commitment by the government to invest in a specific environmental project.
  • A new agreement would be worked out with a multilateral or bilateral partner to replace the terms of the initial loan agreement.
  • It would direct the remaining debt on mutually agreed terms towards “green or blue” domestic investments.
  • Green investments focus on projects or areas committed to preserving the environment.
  • Blue investments focus on sustainable use of ocean resources.

Why these swaps are attractive?

  • The signatories to the Paris Agreement and the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions, have a commitment to provide financial assistance to developing countries to build clean, climate-resilient futures.
  • Debt-for-climate swaps are one way to fulfil their commitments.

Transparency:

  • Debt-for-climate swaps are attractive instruments due to their transparency.
  • The concessional capital is assured to be directed to climate projects with third-party guarantors overseeing the escrow fund.
  • Transparency is key for assurance of commitment.

Investments in island countries:

  • Debt-for-climate swaps offer an innovative way to make climate investments in climate-vulnerable island developing economies while creating the much-needed fiscal space.
  • At the same time, debt-for-climate swaps support climate investment by committing a country to swing their spending from debt service to an agreed public investment.

Conclusion

  • The main problem with principal financial instruments is that they disturb the already strained economy in exchange for assistance.
  • However, debt-for-climate swap creates the much-needed fiscal space without causing policy disruptions.
  • Swaps are mainly advantageous for small developing countries.
  • However, the scaling up of the debt swap is still much lower than grants as creditors do not see their gain in this deal.
  • Debt swaps can only be successful if the creditors are not rigid on returning the debt’s whole value.
  • Rich countries have a responsibility to support poorer nations.
  • This demands the dispensation of debt to poorer countries in the Global South due to the Global North’s climate debt from disproportionately higher emissions.

SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB

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