The trouble with debt swaps

So far, the vast majority of conversations about debt within climate negotiations have focused on debt swaps, which involve exchanging a portion of a country's debt obligations for investments or initiatives focused on climate action.

This practice has become increasingly common in recent years, with notable examples of debt swaps in Barbados, Belize, Ecuador and Cape Verde.

Last week at COP28, a new global task force was established to facilitate debt-for-nature swaps as a form of climate action.

Swaps that are well-designed can help to mobilise funds and resources for climate adaptation and environmental conservation projects in developing countries. But despite the hype, debt justice campaigners have also warned that they are not a silver bullet for the global debt crisis.

At their current scale, these deals very rarely have any significant impact on a country’s total debt. They are lengthy processes with high transaction costs, which often go to private organisations brought in to implement and oversee the swap.

But the biggest concern with debt swaps is their conditionality and the power they give creditors to determine how funds are used. Often, the terms of the agreement are not clear.

“What we are seeing, particularly in these debt-for-nature swaps that are happening recently, is a lack of transparency, which is very worrying because we don't know exactly what's going on. And, for instance, they say, ‘Yes, we will consider local communities and civil society participation.’ But we don't really know the details,” Fresnillo explained.

“If those conditions are not aligned with the country's priorities, it is a breach of the sovereignty in the country,” she said, adding that this entrenches existing unequal power dynamics between the Global North and South.

Towards debt justice

Instead, activists have called for wealthier nations, international institutions and private lenders to cancel the debt of developing nations struggling with the impacts of climate change, arguing that this is a form of climate justice.

To be ethical and efficient, debt cancellations must be unconditional, noted Fresnillo.

“You cancel the debt, and the country that doesn't have the resources to repay those debts in the first place, doesn't have to invest that money in anything in particular but its own needs.”

Fresnillo points to the Heavily Indebted Poor Countries (HIPC) Initiative launched by the IMF and World Bank in 1996 to illustrate the benefits of debt cancellation.

“That experience demonstrated that countries invested that money in education and health and social spending,” she said. 

In an open letter, more than 550 economists, climate experts and activists called for debt cancellation to be on the agenda at COP28, as did protesters at the summit, emphasising that climate finance in the form of Loss and Damage was not enough.

“The [Global] North cannot deceive us by saying ‘we are sending capital and assistance’ when there is a net $2 trillion of financial outflows from the South to the North,” said Lidy Nacpil of the Asian Peoples’ Movement on Debt and Development, in response to a question from The New Arab at a press conference.

“Whatever finance we are going to pour in for climate action, an even greater amount will flow out as debt service.”

“This needs to be complementary to loss and damage,” asserted Fresnillo, dismissing claims that debt cancellation is not economically viable for wealthier countries.

“The truth is that when they need the money for their own interests, like supporting Ukraine in the war against Russia, investing in military spending, or bailing out the banks, they find the money,” she said.

“It's just about priorities."

This article was originally published by The New Arab. Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.