Debt-for-Water Swaps: A Sustainable Solution for Water Security and Economic Relief

Debt-for-water swaps are an innovative approach that helps indebted countries manage their debt while simultaneously investing in water-related projects. This mechanism aligns with sustainable development goals, enabling nations to address water scarcity and sanitation needs while managing fiscal pressures.

By Robert C. Brears, author of Financing Water Security and Green Growth (Oxford University Press)?

How Debt-for-Water Swaps Work?

In a debt-for-water swap, a portion of a country’s debt is forgiven or restructured in exchange for the commitment to fund local water projects. The creditor agrees to reduce or waive a portion of the debt, stipulating that the debtor nation allocates the funds to water-related initiatives, which would have gone toward debt repayments. This can include projects focused on improving water access, infrastructure development, watershed management, or water quality enhancement.?

Benefits of Debt-for-Water Swaps?

Debt-for-water swaps offer dual benefits by allowing countries to alleviate debt pressures while addressing pressing water challenges. By diverting funds to water initiatives, debtor countries can foster long-term economic and social gains through improved water access and resilience to climate impacts. The financial relief can also stabilize economies, creating opportunities for further investment in sustainable infrastructure and services supporting public health, agriculture, and urban development.?

Types of Projects Financed?

The funds redirected through debt-for-water swaps can be used for various projects. Typical projects include the construction of water treatment facilities, improved irrigation systems, watershed restoration, and the development of sustainable water management practices. Each project type addresses specific water challenges within the country, enabling tailored solutions that meet local needs and support national water policies. These projects are crucial in regions facing high water stress, where improving water infrastructure can have significant socio-economic impacts.?

Challenges and Considerations?

Implementing debt-for-water swaps requires careful planning and negotiation. Governments and financial institutions must ensure that projects are transparent and accountable, with defined objectives and measurable outcomes. Additionally, local governments must be able to manage and maintain water infrastructure to ensure the long-term success of these initiatives. Addressing these challenges involves close collaboration among stakeholders, including international financial institutions, non-governmental organizations, and local communities.

Case Study: El Salvador’s Landmark Debt-for-Water Swap – Conserving the Rio Lempa Watershed?

In October 2024, El Salvador finalized a $1 billion debt-for-water deal to protect the Rio Lempa watershed. With support from the U.S. International Development Finance Corporation (DFC), the Development Bank of Latin America and the Caribbean (CAF), and other partners, the government repurchased $1.031 billion of its bonds at a discount. This transaction generated $350 million in savings, with $200 million allocated directly to watershed conservation over 20 years and $150 million designated for an endowment, ensuring ongoing support.?

The Rio Lempa Conservation and Restoration Program will manage these funds to enhance water quality, biodiversity, and climate resilience across the watershed. Catholic Relief Services (CRS) and El Salvador’s Environmental Investment Fund (FIAES) will oversee program activities, which include issuing grants to NGOs focused on restoration projects. Given that the Rio Lempa supplies 68% of the nation’s water, this conservation effort is essential for supporting water security, agriculture, and industry. Oversight of the program will fall to a seven-member board that includes representatives from both government and non-governmental organizations, with the first grants scheduled for disbursement in 2025.?

Under the agreement, El Salvador also committed to long-term measures, such as establishing a zonal organization to oversee watershed conservation, implementing a National Integrated Water Resources Plan, and developing a monitoring system for water resources. Additional steps include protecting 75,000 hectares of aquifer recharge zones and setting up public feedback mechanisms for environmental law violations. These efforts aim to secure the sustainable management of the Rio Lempa watershed, which is vital to El Salvador’s water security and ecological health.?

The Take-Out

Debt-for-water swaps transform financial relief into sustainable water security, offering a dual solution for economic and environmental resilience.