Africa looks to debt-for-climate swaps to finance action

African leaders are looking at debt-for-climate swaps to reduce untenable international debt levels by agreeing to climate action and commitments, a strategy that could prove a win-win for both the continent’s hardest-hit nations as well as an entire planet that relies on the forests of Gabon and the biodiversity of Madagascar.

The strategy of “debt swap” for climate intervention came to the forefront during the Conference of African Ministers of Finance, Planning and Economic Development in Addis Ababa. It’s a model that’s been adopted in the Indian Ocean nation of Seychelles, where 30% of its ecologically important territory is to be placed under marine protection as part of an innovative 2018 debt-swap deal.

The week-long conference, organized by the United Nations Economic Commission for Africa (UNECA) through Tuesday, focused on challenges faced by Africans as they deal with floods, drought, food insecurity and related climate impacts that disproportionately affect their nations.

At the same time, African leaders are trying to advance their economies while carrying the weight of crushing debt loads, even as they continue to recover from the impacts of the COVID-19 pandemic. Hanan Morsy of UNECA reminded participants that in the 10 poorest nations—nations as diverse as Burundi, South Sudan and Malawi—between 60% and 82% of people live in poverty.

“Coming out of the low levels of income and wealth is now being made more challenging by climate change as seen in the recent flooding in Madagascar, Malawi, and Mozambique,” said Albert Muchanga, the commissioner for Trade and Industry of the African Union Commission. “We must add to this, the looming debt crisis which could undermine all the growth achievements of the past 23 years.”

In 2022, the government debt-to-GDP ratio in Africa was 64.5%, said UNECA. Some experts put that as high as 70% or more, including the authors of a 2021 report that explores the benefits of debt-for-climate swaps.

“There is potential to address these crises through ‘general purpose’ debt financing linked to climate and nature key performance indicators (KPIs),” said the report authors. “For severely indebted African countries this could be through debt-for-climate and nature conversion or swaps.”

It’s one way to relieve the economic pressure on at least 22 African nations facing debt crises, including Sahel nations that kept the climate swaps on the agenda during a recent meeting in Niamey, Niger. The swaps are a solution that have been implemented elsewhere, including Belize, Barbados and now Ecuador, and they may make it possible for the poorest nations to invest in climate resilience and adaptation.

“Countries struggling to keep up with debt payments will not be able to invest in the Sustainable Development Goals and climate action for years,” warned Achim Steiner of the United Nations Development Program during last month’s Sciences Po forum. “Further, capital markets will lock developing economies out of new finance they need to move forward.”

As with Steiner, the African leaders stressed the need for debt-for-nature and debt-for-climate swaps, but that requires cooperation from China and other creditors, including the G20, International Monetary Fund (IMF), World Bank and African Development Bank.

“For swaps to really have an impact, the number and size of transactions must be scaled up significantly,” says the IMF. “This means addressing barriers to scale and improving the financial terms under which swaps are conducted.”