Gabon on August 15, 2023 announced a $500 million debt-for-nature swap. This becomes the second debt-for-nature swap transaction in Africa after a similar agreement in Seychelles.
Key points
- Debt-for-nature swaps allow heavily indebted developing countries to seek help from financial institutions in the developed world with paying off their debt if they agree to spend on conservation of natural resources.
- Debt swaps provide opportunities for raising capital in low-income countries to address environmental and other policy challenges and support green growth.
- There are also a range of risks and management issues that need to be addressed if debt swaps are to achieve their objectives.
- The rationale of debt swaps is that debt can be acquired at a discount. When creditors do not expect to recover the full nominal value of debts, they may be willing to accept less.
- In exchange for (partial) cancellation of the debt, the debtor government is prepared to mobilise the equivalent of the reduced amount in local currency for agreed purposes on agreed terms.
- Usually banks in developed countries buy the debts of such counties and replace them with new loans which mature later. These have lower interest rates.
- The notion of debt-for-nature swaps was first mooted in 1984 by Thomas Lovejoy, the former vice-president for science at the World Wildlife Fund-US, in response to the Latin American debt crisis.
- The first debt-for-nature swap was a third-party deal facilitated by Conservation International. Finalised in 1987, it involved foreign creditors agreeing forgive USD 650,000 of Bolivia’s debt in exchange for the country setting aside 1.5 million hectares in the Amazon Basin for conservation efforts.
- Gabon’s debt has been restructured under a Blue Bond in the world’s second-largest debt-for-nature swap.
- In May 2023, the world’s first and largest debt swap to conserve oceans was signed by Ecuador. The country had exchanged $1.6 billion denominated bonds for a new $656 million loan.
