Exploring all possible solutions – Debt for Nature Swaps

The Sri Lankan economy has come a long way from a disastrous debt situation. Having secured multiple creditor support, and with an IMF assurance in hand, the tides appear to have changed. Just yesterday, President Ranil Wickremesinghe claimed that his administration has a comprehensive reform plan with the goals of attaining debt sustainability, enhancing governance, extending social safety nets, and, fostering equitable economic growth. 

While this claim assures us that all possible issues are being addressed, it is also beneficial if all aspects of recovery are considered.

Debt-for-nature swaps (DFNS), in principle are deals that permit a bankrupt debtor nation, such as ours, to collaborate with a creditor nation or group, and trade the accumulated debt for the promise of supporting conservation efforts. In return for the debtor’s dedication to the conservation effort, the creditor agrees to forgive a part of the outstanding debt. Usually, this financing is done through a local conservation group or government body, which is employed to carry out the initiative.

DFNS was first discussed in the 1980s, a period when many developing nations were burdened with debt. These nations were compelled to put debt settlement ahead of other national priorities such as environmental preservation. This resulted in extensive deforestation, pollution, and habitat devastation. Bolivia arranged the world’s first DFNS in 1987, which saw the government pledging to reserve 3.7 million acres in three conservation zones nearby The Beni Biosphere Reserve in the Amazon Basin. 

These exchanges provided a solution to mitigate climate issues simply by incentivising bankrupt countries, more likely to be developing nations, to allocate funds towards conservation.

According to a publication by the think-tank, Centre for a Smart Future (CSF) under its ‘Natural Capital Forum’ this is beneficial given that developing nations are notably more susceptible to environmental issues. The study stated that 58 emerging nations around the globe have debt servicing obligations totaling almost $ 500 billion that are all due in the next four years alone. 

Therefore, these deals are gaining popularity as a means of lowering a country’s financial stresses, where applicable. Recently, Gabon announced a $ 700 million DFNS to finance marine conservation making it a contender for the largest value DFNS deal to ever be executed. 

Such exchanges have a number of significant advantages, in addition to the aforementioned financial and conservation related benefits. Debt reduction can be a vital move towards economic security and expansion for debtor countries. These countries can free up funds to spend on infrastructure, healthcare, and other priorities by lowering their debt loads. 

Another advantage is that they encourage international cooperation and teamwork, acknowledging the shared responsibility between nation states towards conservation. Creditor and indebted countries can forge closer ties and promote greater understanding helping local conservation groups and government organisations develop their capacities, enabling them to better control and safeguard natural resources in the long run.

DFNS do have some restrictions and difficulties despite their many advantages. Finding conservation initiatives that are both economically feasible and ecologically beneficial is one of the greatest obstacles. It can be challenging to make sure that money is allocated to initiatives that will significantly improve conservation results. Another issue is that some view such agreements as a form of neocolonialism, whereby creditor nations and groups use their financial clout to affect conservation laws in debtor countries. 

While this is a common criticism, and one that is not mutually exclusive to applying to extra-governmental support in the first place, the tangible results speak for themselves. 

For example, since 2015, Seychelles has improved the protection of its national waters from 0.04% to 30%, in accordance with its promise under a debt exchange. Therefore, all participants to a debt for nature exchange should view the arrangement as mutually advantageous collaboration rather than a one-sided transaction in order to prevent this impression.

DFNS continue to be a valuable instrument for supporting both debt relief and environmental preservation despite these obstacles, presenting a hopeful path forward that encourages cross-cultural collaboration, cooperation, and sustainability. As such it is a vital tool for governmental consideration in any debt sustainable debt restructure.