Debt For Nature Swaps Becoming Increasingly Popular for Developing Nations

• Debt-for-nature swaps are becoming a more widely used tool to help indebted countries raise money for conservation or climate-related projects. Countries like the Bahamas, and El Salvador have become the latest sovereigns added to the list of this exchange.
• Under a swap, a country buys back more expensive debt and replaces it with cheaper debt, usually with the help of a development bank. The savings are then used for environmental projects that restore mangroves, protect oceans, or help adapt to the impacts of climate change.
• Notably, Barbados completed a US$150Mn debt conversion in September 2022, freeing up US$50Mn of long-term financing for marine conservation with the government promising to protect up to 30% of seas covered by its territorial and sovereign rights. The deal was funded by a 15-year dual currency blue loan arranged by Credit Suisse and CIBC First Caribbean.
• In 2021, Belize also committed to spend US$4Mn a year and fund a US$23Mn marine conservation trust to protect the world's second-largest coral reef by buying back and retiring a US$533Mn bond. Backed by nonprofit, The Nature Conservancy, the U.S. International Development Finance Corporation and Credit Suisse, the deal provided about $200Mn in debt relief to the Central American country.
• More recently, the Bahamas unlocked more than US$120Mn in November 2024 to fund the conservation and management of its oceans and mangroves with a US$300Mn debt swap financed by Standard Chartered and backed by the private sector.
• El Salvador also freed up US$352Mn in October 2024 to fund the conservation of the Rio Lempa, the country's main river and its watershed. At the time, the deal was the largest funding commitment a country had made for conservation as part of a debt-for-nature swap. The deal was financed by a US$1Bn loan from JP Morgan with US$1Bn political risk insurance cover from DFC, the United States development finance institution, and a US$200Mn standby letter of credit from CAF, the Development Bank of Latin America and the Caribbean, likely lowering the cost of the lending.
• Overall, debt-for-nature swaps act as vital tools for promoting environmental conservation and sustainable development. By alleviating the financial burdens of indebted countries while simultaneously funding crucial conservation efforts, these mechanisms foster a good relationship between economic stability and ecological protection. Ultimately, these swaps…help to combat climate change, while supporting sovereigns and reducing government debt, highlighting the interconnectedness of financial health and environmental sustainability.

(Sources: Reuters)