Debt-for-Nature swaps: New way to slash Africa debt burden?

Portugal recently struck a deal to swap Cape Verde's debts for environmental investments in a fund established by the West African country. 

The agreement, known as a "debt-for-nature" swap, is fast expanding in other countries attempting to reduce debt while lessening the impact of climate change. 

Debt-for-nature swaps are financial transactions in which a portion of a developing country's foreign debt is forgiven in exchange for commitments to environmental investments.

Cape Verde, which owes 140 million euros (US$152 million) to Portugal and over 400 million euros (US$433 million) to Portuguese banks, is suffering from rising sea levels and biodiversity loss due to increasing ocean acidity.

However, courtesy of the new deal, the first 12 million euros (US$13 million) debt-repayment scheduled until  2025 will be put into the environment and climate fund. 

According to Antonio Costa, the Portuguese Prime Minister, the move seeks to solve the climate financing standoff between the wealthier nations and developing economies.

"No country will be sustainable if all countries are not sustainable," he noted in a recent visit to Cape Verde.

The newfound common ground between Cape Verde and Portugal comes at a time when the island nation is accelerating its fight against climate change.

"Cape Verde has shown climate leadership in words and actions," Antonio Guterres, the UN Secretary-General, noted in a recent visit.

It is expected that private sector debts owed by Cape Verde to Portuguese companies will, at least in part, be swapped in similar deals to accelerate mitigation and build resilience to climate change in the country.

The African Development Bank, in a 2022 report, urged African countries to explore debt-for-nature swaps.

According to the report, such plans "can allow a country greater flexibility in its future budgetary decisions, increasing its capacity to address environmental needs without the burden of additional debt restructurings."

A recent Reuters report confirms that Zambia is considering a debt-for-nature swap proposal from the World Wide Fund for Nature (WWF). If it goes through, it could help the country unhook, at least partially, from a $13 billion debt, currently under re-evaluation.

According to Zambian government debt data, the country accumulated $31.74 billion by the end of 2021, out of which $17.27 billion is external debt.

While the potential for the swap is not part of the current negotiations under the G20 debt restructuring framework, it could help cut down the country's debt and boost green projects.

Nigeria has also recently shown interest in lobbying for debt-for-nature swaps with its creditors.

On a US state visit, Yemi Osinbajo, Nigeria's Vice President, indicated "debt-for-climate swaps would guarantee a just and equitable energy transition for its population and Africans."

Gabon is currently engaging The Nature Conservancy, a US-based conservation group, seeking to restructure a $700 million Eurobond debt to fund marine conservation. The final decision on the negotiations is expected in 2023.

Elsewhere, Egypt, Madagascar, Cameroon, Tanzania, and Mozambique have benefitted from similar deals. 

But the ideal success story of debt-for-nature swaps can be seen in the Seychelles.

After defaulting on payment of $406m in 2008, The Nature Conservancy in 2015 announced a deal that saw US$29.6 million of Seychelles' national debt written off.

Seychelles has progressed from protecting 0.04% to more than 30% of its national waters, covering 410,000 square kilometres of the ocean after developing 13 new marine protected areas.

However, according to Richard Munang, the Deputy Director of UNEP Africa, some challenges could limit the reliance on debt-for-climate/nature swaps as a long-term solution for Africa.

"High transaction costs, the need to monitor conservation or climate projects, and the requirement that a debtor country makes a long-term financial commitment," Munang explained.

"Also coordination among existing creditors is a key hurdle to successfully swapping sufficient and large amounts of debt," he added.

Despite the potential challenges, he noted these deals present an opportunity for countries that cannot prioritise environmental actions due to financing constraints and where creditors see the value of possible ecological outcomes.