- 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:
- to promote specific investment and policy action
- some debt relief.
- Acquisition of debt with some concession is the logic underlying the concept.
- 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.
- 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.
- 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