Debt-for-nature swap

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Debt-for-nature swaps are financial transactions in which a portion of a developing nation's foreign debt is forgiven in exchange for local investments in environmental conservation measures.

Contents

History

The debt-for-nature swaps concept was first given birth by Thomas Lovejoy of the World Wildlife Fund in 1987 as an opportunity to deal with the problems of developing-nation indebtedness and its consequent deleterious effect on the environment. [1] In the wake of the Latin American debt crisis that resulted in steep reductions to the environmental conservation ability of highly indebted nations, Lovejoy suggested that ameliorating debt and promoting conservation could be done at the same time. Since the first swap occurred between Conservation International and Bolivia in 1987, many national governments and conservation organizations have engaged in debt-for-nature swaps. Most swaps occur in tropical countries, which contain many diverse species of flora and fauna. [2] Also, countries that have engaged in debt-for-nature swaps typically have several threatened or endangered species, experience rapid deforestation, and have relatively stable, often democratic, political systems. [3] Since 1987, debt-for-nature agreements have generated over US$1 billion for conservation in developing countries. [4]

Process

The financing mechanism for debt-for-nature swaps is an agreement among the funder(s), the national government of the debtor country, and the conservation organization(s) using the funds. The national government of the indebted country agrees to a payment schedule on the amount of the debt forgiven, usually paid through the nation’s central bank, in local currency or ponds. The process is shown in Figure 1. Participation in debt-for-nature swaps has been restricted primarily to countries where the risk of default on debt payments is high. [5] In these circumstances, the funder can purchase the debt at well below its face value.

Figure 1: The general mechanics of a debt-for-nature swap. Debt-for-nature.png
Figure 1: The general mechanics of a debt-for-nature swap.

Types

In a commercial debt-for-nature swap or three-party debt-for-nature swap, a non-governmental organization (NGO) acts as the funder/donor and purchases debt titles from commercial banks on the secondary market. Since the late 1980s, organizations such as Conservation International, The Nature Conservancy, and the World Wildlife Fund have participated in international debt-for-nature swaps. The NGO transfers the debt title to the debtor country, and in exchange the country agrees to either enact certain environmental policies or endow a government bond in the name of a conservation organization, with the aim of funding conservation programs. In total, recorded third-party debt-for-nature swaps have generated nearly US$140 million in conservation funding from 1987-2010 (see Table 1). [4]

Bilateral debt-for-nature swaps take place between two governments. In a bilateral swap, a creditor country forgives a portion of the public bilateral debt of a debtor nation in exchange for environmental commitments from that country. [3] An example of a bilateral swap occurred when the U.S. Government, under the Enterprise for the Americas Initiative, forgave a portion of Jamaica's official debt obligations and allowed the payments on the balance to go into national funds that finance environmental conservation. These funds established the Environmental Foundation of Jamaica in 1993. Multilateral debt-for-nature swaps are similar to bilateral swaps but involve international transactions of more than two national governments. Recorded bilateral and multilateral debt-for-nature swaps have generated nearly US$900 million in total conservation funding from 1987-2010 (see Table 1). [4] A closely related form of debt swap is a debt-for-efficiency swap. [6]

Participation and yields

The following table shows the countries which have received funds from swaps and the total recorded funds generated by each kind of swap.

Table 1. Recorded DFNS Transactions by Country, Conservation Funds Generated, 1987-2010 (Millions US$) [4]
CountryThree-party Swap FundingNon-US Bilateral and Multilateral Swap FundingUS Bilateral Swap FundingTotal
Argentina$3.1$3.1
Bangladesh$8.5$8.5
Belize$9.0$9.0
Bolivia$3.1$9.6$21.8$34.5
Botswana$8.3$8.3
Brazil$2.2$2.2
Bulgaria$16.2$16.2
Cameroon$25.0$25.0
Chile$18.7$18.7
Colombia$12.0$51.6$63.6
Costa Rica$42.9$43.3$26.0$112.2
Dominican Republic$0.6$0.6
Ecuador$7.4$10.8$18.2
Egypt$29.6$29.6
El Salvador$6.0$55.2$61.2
Ghana$1.1$1.1
Guatemala$1.4$24.4$25.8
Guinea Bissau$0.4$0.4
Honduras$21.4$21.4
Indonesia$30.0$30.0
Jamaica$0.4$37.5$37.9
Jordan$45.5$45.5
Madagascar$30.9$14.8$45.8
Mexico$4.2$0.0$4.2
Nicaragua$2.7$2.7
Nigeria$0.1$0.1
Panama$20.9$20.9
Paraguay$7.4$7.4
Peru$12.2$52.7$58.4$123.3
Philippines$29.1$21.9$8.3$59.3
Poland$0.1$141.0$141.1
Syria$15.9$15.9
Tanzania$18.7$18.7
Tunisia$1.6$1.6
Uruguay$7.0$7.0
Vietnam$10.4$10.4
Zambia$2.5$2.5
Total by Swap Type$138.1$499.6$396.2$1,033.9

Funders

Nature Conservancy, Leonardo DiCaprio Foundation, Oak Foundation and Global Environment Facility have previously provided funds to pay to the debts. [7] [8]

Benefits

Debt for nature swaps have often been described as agreements in which all parties benefit and that there are no disadvantages. The benefits to the debtor country, creditor, and conservation organizations are outlined below.

For debtors

Through a debt-for-nature swap, a debtor country reduces its total outstanding external debt. The debtor country is able to buy back part of its debt in more favorable terms and pay for conservation initiatives rather than debt service. [9] This leads to higher international purchasing power for the debtor country. [10] Also, some argue that converting outstanding debts in USD to local currency debts lowers the long-term debt burden on developing countries. [4] [5] Additionally, debt-for-nature terms enable long-term planning and funding. [5]

If the country is interested in funding conservation, debt-for-nature swaps provide an additional source of funds for that purpose. In contrast to debt-for-equity swaps, debt-for-nature swaps do not compromise national sovereignty since no property exchange takes place. [9]

Environmental benefits to the debtor country include but are not limited to:

Investment in conservation also demonstrates economic returns. For example, Costa Rica has put debt-for-nature funds to good use in establishing and improving parks and preserves, and it has seen marked improvements in tourism, improved water quality, and increased energy output even in the short term. [9]

For creditors

Creditors see debt-for-nature swaps as a method to rid themselves of high-risk claims. By selling the debt claim, they can re-invest the proceeds from the sale in higher-performing ventures. Creditors faced with low-performance loans may also seek to limit their exposure, that is, to avoid further lending to debtor countries until their loans are serviced. [5]

For conservation organizations

Debt-for-nature agreements are a long-term source of funding for conservation initiatives, so both international organizations acting as donors and local organizations using funds are able to further their goals of conservation. The donor organizations also purchase the debt at a value below its face value and usually redeem it above its market value. In this way, swaps are thought to generate conservation funds at a discount. [5]

Decline

The decline in the number of debt-for-nature swaps in recent years likely results in part from the higher prices of commercial debt in secondary markets. [10] [12] In the late 1980s and early 1990s, conservation organizations could purchase relatively large debt obligations on the secondary market at highly discounted rates. During this period, conservation organizations and national governments negotiated swaps at a rate of approximately five agreements per year. Since 2000, the number of swap agreements has dropped to about two per year. [4] Additionally, other agreements for debt restructuring and cancellation, such as the Heavily Indebted Poor Countries (HIPC) initiative, lower a developing country’s debt obligation by much more than the relatively small contribution debt-for-nature swaps make. [4] Also, debt-for-nature swaps have undergone thorough critique by skeptics; these criticisms may have contributed to the decline of the debt-for-nature financing mechanism.

Criticism

Overstated financial benefits

Debt-for-nature swaps produce only minor debt reductions and generate far less funding than the face value of the debt purchased in the secondary market. [10] The amount of public debt relieved by debt-for-nature swaps, even in the countries that participate in swaps regularly, accounts for less than 1% of total external debt. [13] Also, if the indebted country does not engage in conservation in the absence of a debt-for-nature agreement, the swap may not provide the indebted country a social welfare improvement or any fiscal space in the national budget. [10] [14] The government of the indebted country is still responsible for payment of the debt, albeit to a conservation organization rather than to the creditor. Also, the funds produced through the agreement may replace other forms of aid, debt assistance, or conservation funding.

Misdirection of funds

Critics of debt-for-nature swaps argue that they do not generate funds where the needs are greatest. [13] Early in the history of debt-for-nature swaps, nearly three-quarters of the total funds generated went to Costa Rica, while other countries with needs equal to or exceeding those of Costa Rica did not receive any. [15] Brazil, for example, has had limited involvement in debt-for-nature swaps though it has experienced rapid deforestation. [4]

Environmental degradation and external debt

Research has shown that debt relief alone does not spur environmental conservation. Though debt shows a positive correlation with deforestation levels, most researchers believe that highly indebted countries lack political institutions and enforcement structures that would limit environmental degradation. [13] Heavily indebted countries may engage in high levels of deforestation due to shortsighted policies. [16] Some suggest that the solutions to environmental degradation are effective political institutions, democracy, property rights, and market structures, [13] and this development theory matches many of the principles of the Washington Consensus. Others suggest that primarily wealth creation and increased income have a positive impact on environmental conservation. [16] This approach considers an environmental Kuznets curve, by which environmental degradation increases, reaches a tipping point, then decreases as income or wealth increases.

Insufficient funding of environmental protection

Ultimately, the responsibility of conservation lies with the local non-governmental organization implementing the protection measures. Debt-for-nature swaps are only effective when the conservation organizations are respected by local residents, have a good financial management capacity, and have a good relationship with government and other non-governmental organizations. [9] [12]

Impacts on the poor

Debt for nature swaps are usually actioned by an indebted nation's elite, not the peasantry who may traditionally have owned or at least used the land in question. Land rights are often expressed in different ways and ownership takes many forms. Some early debt-for-nature swaps tended to overlook the people living on the land set aside for conservation. [17] Subsequent swaps have sought to include local residents, especially indigenous peoples, in the decision making process and the management of lands. [2] Although "seeking" to include does not mean that local residents have been included. Reports of recent debt swap cases in Madagascar, for instance, indicate local resentment towards conservation projects. [18]

Meddling in the internal affairs

It was feared that the however well-intentioned environmental protection programs could be perceived as middlesome and imperialistic. [19] The establishment of national parks in Africa has in some cases led to the impoverishment and displacement of local populations. [20] This kind of intervention was labeled as environmental or eco-colonialism. [19] [20]

See also

Related Research Articles

<span class="mw-page-title-main">Thomas Lovejoy</span> American ecologist (1941–2021)

Thomas Eugene Lovejoy III was an American ecologist who was President of the Amazon Biodiversity Center, a Senior Fellow at the United Nations Foundation and a university professor in the Environmental Science and Policy department at George Mason University. Lovejoy was the World Bank's chief biodiversity advisor and the lead specialist for environment for Latin America and the Caribbean as well as senior advisor to the president of the United Nations Foundation. In 2008, he also was the first Biodiversity Chair of the H. John Heinz III Center for Science, Economics and the Environment to 2013. Previously he served as president of the Heinz Center since May 2002. Lovejoy introduced the term biological diversity to the scientific community in 1980. He was a past chair of the Scientific Technical Advisory Panel (STAP) for the Global Environment Facility (GEF), the multibillion-dollar funding mechanism for developing countries in support of their obligations under international environmental conventions.

<span class="mw-page-title-main">Debt</span> Obligation to pay borrowed money

Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.

Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

<span class="mw-page-title-main">Credit derivative</span> Exotic financial option

In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.

<span class="mw-page-title-main">Heavily indebted poor countries</span> IMF and World Bank classification for special eligibility

The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank.

<span class="mw-page-title-main">Global Environment Facility</span> A multilateral environmental Foundation that protects the climate

The Global Environment Facility (GEF) is a multilateral environmental fund that provides grants and blended finance for projects related to biodiversity, climate change, international waters, land degradation, persistent organic pollutants (POPs), mercury, sustainable forest management, food security, and sustainable cities in developing countries. It is the largest source of multilateral funding for biodiversity globally, and distributes more than $1 billion a year on average to address inter-related environmental challenges.

A country's gross external debt is the liabilities that are owed to nonresidents by residents. The debtors can be governments, corporations or citizens. External debt may be denominated in domestic or foreign currency. It includes amounts owed to private commercial banks, foreign governments, or international financial institutions such as the International Monetary Fund (IMF) and the World Bank.

<span class="mw-page-title-main">Government debt</span> Total amount of debt owed to lenders by a government/state

A country's gross government debt is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt.

<span class="mw-page-title-main">Paris Club</span> International organization

Paris Club is a group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake reforms to stabilize and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment.

Hypothec, sometimes tacit hypothec, is a term used in civil law systems or mixed legal systems to refer to a registered non-possessory real security over real estate, but under some jurisdictions it may sometimes also denote security on other collaterals such as securities, intellectual property rights or corporeal movable property, either ships only as opposed to other movables covered by a different type of right (pledge) in the legal systems of some countries, or any movables in legal systems of other countries. Common law has two main equivalents to the term: mortgages and non-possessory liens.

Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding such distressed-debt creates significant risk due to the possibility that bankruptcy may render such securities worthless.

<span class="mw-page-title-main">Vulture fund</span> Fund that invests in distressed assets

A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to subsequently sell the debt for a larger amount than the purchasing price. Debtors include companies, countries, and individuals.

<span class="mw-page-title-main">Argentine debt restructuring</span> Process following Argentinas Great Depression

The Argentine debt restructuring is a process of debt restructuring by Argentina that began on January 14, 2005, and allowed it to resume payment on 76% of the US$82 billion in sovereign bonds that defaulted in 2001 at the depth of the worst economic crisis in the nation's history. A second debt restructuring in 2010 brought the percentage of bonds under some form of repayment to 93%, though ongoing disputes with holdouts remained. Bondholders who participated in the restructuring settled for repayments of around 30% of face value and deferred payment terms, and began to be paid punctually; the value of their nearly worthless bonds also began to rise. The remaining 7% of bondholders were later repaid 25% less then they were demanding, after centre-right and US-aligned leader Mauricio Macri came to power in 2015.

<span class="mw-page-title-main">Ecological debt</span> Environmental debt between Global North and South

Ecological debt refers to the accumulated debt seen by some campaigners as owed by the Global North to Global South countries, due to the net sum of historical environmental injustice, especially through resource exploitation, habitat degradation, and pollution by waste discharge. The concept was coined by Global Southerner non-governmental organizations in the 1990s and its definition has varied over the years, in several attempts of greater specification.

<span class="mw-page-title-main">Deforestation in Cambodia</span>

Deforestation in Cambodia has increased in recent years. Cambodia is one of the world's most forest endowed countries, that was not historically widely deforested. However, massive deforestation for economic development threatens its forests and ecosystems. As of 2015, the country has one of the highest rates of deforestation in the world.

A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments may either be accompanied by that government's formal declaration that it will not pay its debts (repudiation), or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments.

Conservation finance is the practice of raising and managing capital to support land, water, and resource conservation. Conservation financing options vary by source from public, private, and nonprofit funders; by type from loans, to grants, to tax incentives, to market mechanisms; and by scale ranging from federal to state, national to local.

Innovative financing refers to a range of non-traditional mechanisms to raise additional funds for development aid through "innovative" projects such as micro-contributions, taxes, public-private partnerships and market-based financial transactions.

In the context of sovereign debt crisis, private sector involvement (PSI) refers, broadly speaking, to the forced contribution of private sector creditors to a financial crisis resolution process, and, specifically, to the private sector incurring outright reductions ("haircuts") on the value of its debt holdings.

<span class="mw-page-title-main">Climate finance</span> Type of investment

Climate finance is "finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts". The term has been used in a narrow sense to refer to transfers of public resources from developed to developing countries, in light of their UN Climate Convention obligations to provide "new and additional financial resources", and in a wider sense to refer to all financial flows relating to climate change mitigation and adaptation.

References

  1. ↑ Visser, Dana R.; Mendoza, Guillermo A. (1994). "Debt-for-Nature Swaps in Latin America". Journal of Forestry. 92 (6): 13–6.
  2. 1 2 Reilly, William (2006). "Using International Finance to Further Conservation: The First 15 Years of Debt-for-Nature Swaps". In Jochnick, Chris; Preston, Fraser A. (eds.). Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis. Oxford University Press. pp. 197–214. ISBN   978-0-19-803752-1.
  3. 1 2 Deacon, Robert T; Murphy, Paul (1997). "The Structure of an Environmental Transaction: The Debt-for-Nature Swap". Land Economics. 73 (1): 1–24. doi:10.2307/3147074. JSTOR   3147074.
  4. 1 2 3 4 5 6 7 8 Sheikh, Pervaze A. (March 30, 2010). "Debt-for-Nature Initiatives and the Tropical Forest Conservation Act: Status and Implementation" (PDF). Congressional Research Service.
  5. 1 2 3 4 5 Greiner, Romy; Lankester, Allyson (2007). "Supporting on-farm biodiversity conservation through debt-for-conservation swaps: Concept and critique". Land Use Policy. 24 (2): 458–71. doi:10.1016/j.landusepol.2006.07.001.
  6. ↑ Cassimon, Danny; Prowse, Martin; Essers, Dennis (2013). "Financing the Clean Development Mechanism through Debt-for-Efficiency Swaps? Case Study Evidence from a Uruguayan Wind Farm Project". The European Journal of Development Research. 26 (1): 142–59. doi:10.1057/ejdr.2013.34. S2CID   53524876.
  7. ↑ "Debt for nature swaps".
  8. ↑ "LDF Supports First Ever Debt-for-Nature Swap in Seychelles".
  9. 1 2 3 4 Potier, Michael (1991). "Debt-for-nature swaps". Land Use Policy. 8 (3): 211–3. doi:10.1016/0264-8377(91)90034-G.
  10. 1 2 3 4 Cassimon, Danny; Prowse, Martin; Essers, Dennis (2011). "The pitfalls and potential of debt-for-nature swaps: A US-Indonesian case study". Global Environmental Change. 21 (1): 93–102. doi:10.1016/j.gloenvcha.2010.10.001.
  11. ↑ Shandra, John M; Restivo, Michael; Shircliff, Eric; London, Bruce (2011). "Do Commercial Debt-for-Nature Swaps Matter for Forests? A Cross-National Test of World Polity Theory". Sociological Forum. 26 (2): 381–410. doi:10.1111/j.1573-7861.2011.01245.x.
  12. 1 2 Resor, J.P. (1997). "Debt-for-nature swaps: a decade of experience and new directions for the future". Unasylva.
  13. 1 2 3 4 Didia, Dal (2016). "Debt-for-Nature Swaps, Market Imperfections, and Policy Failures as Determinants of Sustainable Development and Environmental Quality". Journal of Economic Issues. 35 (2): 477–86. doi:10.1080/00213624.2001.11506382. S2CID   156065544.
  14. ↑ Garvie, Devon A. (2002). "When are Debt for Nature Swaps Welfare—Improving?" (PDF). International Review of Economics and Business. 49 (2): 165–73.
  15. ↑ Kraemer, Moritz; Hartmann, Jörg (1993). "Policy Responses to Tropical Deforestation: Are Debt-for-Nature Swaps Appropriate?". The Journal of Environment & Development. 2 (2): 41–65. doi:10.1177/107049659300200203. S2CID   151041138.
  16. 1 2 Bhattarai, Madhusudan; Hammig, Michael (2001). "Institutions and the Environmental Kuznets Curve for Deforestation: A Crosscountry Analysis for Latin America, Africa and Asia". World Development. 29 (6): 995–1010. doi:10.1016/S0305-750X(01)00019-5.
  17. ↑ Choudry, Aziz (October 2003). "Conservation International: Privatizing Nature, Plundering Biodiversity". Seedling.
  18. ↑ Kaaristo, Maarja (29 July 2007). "The reluctant anthropologist". eurozine.com. Archived from the original on January 31, 2016.
  19. 1 2 Dillon, Nina M. (1991). "The Feasibility of Debt-For-Nature Swaps". North Carolina Journal of International Law and Commercial Regulation. 16: 127. Retrieved 28 August 2022.
  20. 1 2 Nelson, Robert H. (2003). "Environmental Colonialism: "Saving" Africa from Africans". The Independent Review. 8 (1): 65–86. ISSN   1086-1653. JSTOR   24562597.
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