Sri Lanka is in talks for a “debt-for-nature” swap deal of up to US$1 billion in climate-focused finance, a kind of agreement discussed at the United Nations COP27 summit in Egypt, informed Finance Ministry sources revealed.
Such agreements are part of efforts to address an intractable quandary facing world leaders as to who would pay the bill for the global fight against biodiversity loss and climate change.
Debt restructurings tied to nature or climate-friendly outcomes present a multi-billion-dollar possibility, according to one of the world’s largest conservation organizations that’s been involved in three such deals.
There’s now a big push to get nature into sovereign debt markets,” said Simon Zadek, executive director at Nature Finance, which advises governments on debt-for-nature swaps and other types of climate-focused finance.
Sri Lanka is holding talks with banks and a nonprofit group in an attempt to reach a deal that would see about $1 billion of its debt refinanced more cheaply, freeing up the savings for conservation efforts, according to the three people with knowledge of the deal, who declined to be named as the discussions are confidential.
At that level, it would be the biggest debt-for-nature swap struck to date. for Sri Lanka, which has been discussing a deal of up to $1 billion according to people familiar with those talks.
“The opportunity for conservation here is huge.”Debt-for-nature or climate swaps are deals that typically allow a country to restructure its debt at a lower interest rate or longer maturity, with the proceeds being allocated to conservation or green projects, they added.
Since 2016, the Nature Conservancy has organized debt-for-nature swaps for the Seychelles, Belize and Barbados, which overall helped to convert more than $500 million of debt into $230 million of money for conservation.
The swaps are still a niche business, mainly because of high transaction costs, the need to monitor conservation or climate projects, and the requirement that a debtor country makes a long-term financial commitment.
There’s growing interest from the developing world. Gabon signaled its plans last month for a $700 million debt swap to fund marine conservation in what may be the biggest transaction yet.
While the instruments have been around for decades, their appeal has grown following the deals arranged by Nature Conservancy and the recent debt crises for developing nations caused by the Covid-19 pandemic, fallout from Russia’s war in Ukraine and rising interest rates.
Fifty-eight of the world’s developing countries most vulnerable to climate change collectively have almost half a trillion of debt servicing payments due in the next four years.
“This huge debt service payment could obstruct opportunities to invest in adaptation or the low-carbon transition,” said Sara Jane Ahmed, finance adviser to the Vulnerable Twenty Group, a coalition representing those 58 countries, in an interview. Debt swaps must scale, Ahmed added. “We’re just not in a situation where we can have austerity because we need to invest out of the pandemic and invest out of climate impacts.”
Countries that are especially vulnerable to climate change face a “triple whammy” from the need to spend more to improve resilience and reconstruction, while simultaneously facing higher borrowing costs, Kristina Kostial, deputy director of the strategy policy and review department at the International Monetary Fund, told the COP27 panel.
Climate or nature-related swaps might help break that cycle as they “offer developing countries, with little fiscal space, the opportunity to undertake urgently needed climate investments,” Kostial said. Carbon credits could feature as part of the swaps, she added.
