The Manila Times

Debt-for-nature swaps an intriguing opportunity for PH

ARECENT development that combines sovereign debt relief with investment in climate resiliency may offer significant benefits to the Philippines and provide solutions to the twin concerns of managing the country’s growing external debt and financing climate adaptation and mitigation objectives. At the moment, there seem to be few downsides to the concept, and the Philippines seems well-positioned to make a strong pitch to potential benefactors, so it should be carefully studied by the government.

A debt-for-nature swap is a financial arrangement that essentially erases a portion of a country’s external debt in exchange for the government investing an agreed-upon amount in conservation or climate resiliency programs. The deals can be rather complex, but the most common form used so far is a multilateral arrangement where one or more third-party organizations or institutions purchase part of a country’s external debt from the original owner, usually at a discount, and then forge a new deal with the debtor country, where the debt will be written off once the debtor country invests a certain amount of its budget in relevant projects. The debt-for-nature swap can also be a bilateral government-to-government deal.

The idea is not that new, having first been proposed by the economist Thomas Lovejoy, then with the World Wildlife Fund, back in 1984 in response to the Latin American debt crisis. Between 1987 and 2003, according to data from the African Development Bank, about $1 billion in debt-for-nature swaps were created, but for about the past 20 years, not much more has been done. However, given serious debt crises in several countries at the same time that financing the world’s climate response has become a critical objective, the concept has found new life in the past year. A debt-for-nature deal for Ecuador worth $1.6 billion earlier this month became the biggest such deal to date, and there are ongoing negotiations to forge a similar deal for financially crippled Sri Lanka. Other countries where deals are likely within the next few months include Bangladesh and Pakistan.

Advantages

The advantages for a debtor country are obvious. Part of its repayment of external debt (usually in US dollars) is immediately suspended, without harming its credit status. The amount it has to invest in domestic funds is usually less than what it would repay because of discounting, and it can spread that spending out in a more manageable way. And of course, needed conservation and climate resiliency projects can be created, so the country gains added value from its spending. For creditor countries, the advantage is that their commitments to climate financing under the 2015 Paris Agreement can be met without any additional spending on their part.

Until now, debt-for-nature swaps have been considered primarily a debt relief tool, but it is the latter advantage to creditor nations that make them attractive to the Philippines. As has been often reported, roughly 72 percent of the Philippines’ commitment to reducing its emissions by 75 percent by 2030 is conditional, and can only be met with external assistance. That assistance has been slow in coming — as it has been for the rest of the world as well — and so a debt-for-nature swap offers an easy solution. And although the Philippines’ external debt has increased substantially over the past couple of years due to the pandemic, causing some worries here, the country is in comparatively sound shape and presents less risk from a creditor’s point of view. As confirmation of that, debt watcher Fitch Ratings just this week upgraded its outlook for the Philippines from “negative” to “stable,” citing the government’s good fiscal management in recovering from the pandemic downturn.

All of that put together would amount to a strong pitch to potential benefactors to create a debt-for-nature swap for the Philippines. The concerned agencies — the Department of Finance, the Department of Management and Budget, and the National Economic Development Authority — should study the idea and prepare a proposal. Even a small debt-for-nature swap would be beneficial, and since the Philippines is not as institutionally handicapped as other countries mentioned above, it could serve as a good test case for improving and expanding the concept.

Opinion

en-ph

2023-05-25T07:00:00.0000000Z

2023-05-25T07:00:00.0000000Z

https://manilatimes.pressreader.com/article/281603834835097

The Manila Times