Debt for Nature Swaps in Africa: The Tail wagging the Dog?

Many low-income nations now have debt levels that are similar to those that existed before the Multilateral Debt Relief Initiative (MDRI) and the Heavily Indebted Poor Countries (HIPC) debt relief programs were implemented. Greater exposure to commercial creditors and the emergence of bilateral lenders like China are the main causes of the most recent increase in debt levels. While exposure to commercial creditors expanded considerably from 17% to 40% during the same period, the share of bilateral lenders in Africa's external debt decreased from over 50% in 2000 to just 27% in 2019. However, a recent string of shocks that have mostly occurred outside of its boundaries are eroding the continent's ability to offer its citizens critical services. Beginning with the global shocks of 2008, COVID-19, the Russia-Ukraine war, and, most importantly, the incidence of climate extremes. Collectively, these issues have put significant strain on the debt level.

The state of play in Africa

Africa is battling with mounting debt. In 2022, Africa's public debt reached USD 1.8 trillion, marking an 183% rise from 2010, or four times the growth in GDP in dollar terms. North African countries contribute for 40% of Africa's total debt. The risk of Africa's governmental debt being unsustainable increases as it grows. Africa is struggling to pay off its mounting debt. Africa's public debt reached USD 1.8 trillion in 2022, an 183% rise from 2010 and four times the growth of the continent's GDP in US dollars. North African nations make up 40% of the continent of Africa's total debt. The likelihood that Africa's national debt may become unsustainable rises along with it. Unfortunately, every dollar used to pay down Africa's debt decreases the likelihood that the continent will develop and address climate change. In fact, greater pressure to pay off massive debt will eventually result in less money available for natural resource management, widening the financial gap for the environment.

The Nature for debt swap: Another poverty Trap?

According to the AfDB, approximately USD 49 billion is now spent globally on biodiversity protection, with Africa accounting for only 6% of that total. This number illustrates that protected areas in Africa are underfunded, despite the fact that safeguarding Africa's wildlife is expected to cost only USD 1.2 billion per year. Reducing countries' debt burdens will not only help mobilize financing to close the climate and conservation funding gap, but it will also free up resources for public investment in vital areas such as education, health, and infrastructure. The need to support climate and environmental programs is so great that improper management may jeopardize development. Undoubtedly, strategies for attaining environmental and climate change outcomes via creative debt settlements have been gathering momentum quite quickly. This can be accomplished by refinancing through more advantageous, sustainability-focused agreements or by wiping off a portion of current debt commitments. The most often recommended solution is now presented: debt for nature swap. A debt swap is a situation in which a creditor (a developed or developing nation) forgives debt owing to them in return for the debtor's promise to put the remaining debt service payments toward a specific investment. ?Such an arrangement can be beneficial for both the debtor and the creditor, especially if the creditor has written off parts of the debt because they are not expecting full repayment by the debtor. ?

In essence, a DFN swap is an agreement to forgive a portion of a nation's sovereign debt in return for conservation pledges. They typically take the form of a conservation fund that is managed and funded locally, but they can also take the shape of high-level policy pledges. In order to reallocate some of the savings to conservation efforts, one or more philanthropic companies may purchase the current debt at a discount and restructure it as a multi-party arrangement. Alternatively, the debtor and creditor may agree on a bilateral basis. ?In this way, all parties stand to benefit from the transaction, including the original creditors in a multi-party swap, and the structure is versatile enough to be used in conjunction with other forms of climate- and nature-linked debt transactions. However, a debt for climate swap is appealing for countries with high levels of debt that face challenges servicing that debt, but the solution is not a one-size-fits-all.

Though these mechanisms also have the added benefit of helping African nations finance their wider development objectives, they have the ability to significantly reduce the funding gap for climate and nature. However, if the debt level of the continent rises and the impoverished are forced into other, less safe locations, this could be just another step down the bottom. The complicated topic of whether Africa should handle its climate worries through loans, ODA, or domestic resources is brought up by this. There are costs associated with each of these. Climate vulnerability rises as a result of inaction, while adopting a debt path encourages more unsustainable behavior.

Without a doubt, the conflation of ODA and climate finance Africa successfully closed one door to risk while opening another: debt sustainability. The IMF defines debt sustainability as a situation in which a borrower is projected to be able to continue servicing its loans without experiencing an unreasonably substantial future correction to the income-expenditure balance. Again, the issue arises: Is public debt truly sustainable? Whose sustainability does debt represent?

Fast forward

Various debt for nature swap models has been applied throughout Africa, with varying degrees of reported effectiveness. A continental restructuring plan would have varied significance and impacts for different nations in the region. Debt swaps can only be applied to long-term foreign debt, therefore there is no "one size fits all" solution to Africa's debt sustainability dilemma. Africa requires a regional debt for climate exchange program idea that is coordinated and unified. Africa is also capable of negotiating with donors such as the Paris Club, as a group of weaker nations. Africa can apply the lessons that South Africa's involvement in the Seychelles program taught it. The Seychelles is a successful example of an island state that recently negotiated an early payback program for US$30 million in loans with Paris Club members and South Africa, as part of a swap mechanism that included the country's commitment to marine conservation activities. Furthermore, a potential solution advocated in the Caribbean Islands is to establish a solid science-based regional debt exchange program that establishes defined targets and anticipates problems about the compliance and usefulness of released funds for projects. This must be supported by the engagement of well-known regional and national NGOs as partners in selecting initiatives, which will promote openness.

By launching a defined phased implementation and monitoring plan, as well as evaluating progress against predetermined metrics, the swap would be strengthened while also encouraging local buy-in, which is required for the project's sustainability. With local anchorage, the most vulnerable people are taking control of their potential to not only survive but also prosper by implementing realistic mitigation and adaptation strategies, transforming the intimidating issue of debt into an opportunity.

However, the scheme's viability is heavily dependent on the political continuity and will of national actors. This necessitates high-level political and whole-of-government backing from the debtor's government. In the event of a change in administration, there is a significant chance that the discussions will be abandoned or delayed. Without this, or there may be a lack of support for the activities' additional value. If the project is linked to the nation's other climate ambitions and NDC obligations, it has a good chance of succeeding. However, given the privileged class's political sway and the way that narratives about addressing climate change have been twisted, it is possible that this is just another honest day's work for powerful class and their army of carbon- and forest rent seekers.

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