Posted: Wednesday, June 23, 2021. 10:51 am CST.
By Rubén Morales Iglesias: The Caribbean is faced with high public debt and low growth with eleven countries at or beyond the 60 percent threshold according to the Commonwealth Secretariat which yesterday held a webinar to discuss Debt for Climate swap (DFC).
The Commonwealth Secretariat said in an article entitled Debt-for-climate swaps in the Caribbean published on its website thecommonwealth.org that “the Government of Belize has requested the Commonwealth Secretariat to provide assistance to design and implement a ‘Debt for Climate/Nature Swap Mechanism’ for the country” and that “this webinar aims to enhance awareness and support capacity-building of stakeholders in the Government of Belize and the wider Caribbean region, focusing on the potential of debt-for-climate swaps as an option for managing rising debt levels while investing on climate action.”
Barbados, Belize, Jamaica, and Dominica are the highest debtor nations in the Caribbean and could benefit from Debt for Climate swaps according to the Commonwealth Secretariat.
The Commonwealth Secretariat said that financial organizations like the IMF and the World Bank say the COVID-19 pandemic has sent debt levels through the roof and debtor nations are finding it more difficult to meet their financial commitments. To help out, the Commonwealth “building on its long history of dedicated and sustained climate action and debt management support” has proposed the Commonwealth Multilateral Debt Swap for Climate Action.
A Debt for Climate swap, according to climatepolicyinitiative.org, is a “type of debt swap in which the debtor nation, instead of continuing to make external debt payments in a foreign currency, makes payments in local currency to finance climate projects domestically on agreed-upon terms.”
“Such swaps can be used to protect forests and other carbon sinks, boost clean and efficient energy, reduce short-lived climate pollutants and clean up air pollution,” says climatechangenews.com.
In effect, the Commonwealth is using Belize as an example for other countries to go the way of Debt for Climate swaps
“One example of its effectiveness is the Government of Belize’s “Debt-for-Nature Swap”. The country, according to World Bank estimates, has an annual average loss from wind-related events and floods of just under US$123 million, or seven percent of GDP. Further, there is a one percent probability in any year that a disaster will impose losses of more than 105 percent of GDP. In 2001 the debt for nature swap initiative helped the country reduce and reorient $9.7 million worth of debts to local conservation organisations,” said Delia Cox, Adviser, Debt Management, at the Commonwealth Secretariat in a blog entitled Averting a Dual Crisis with One Financial Instrument published by thecommonwealth.org.
“A marked, multi-faceted challenge requires a multi-faceted solution. Debt for climate and nature swap can help address this major obstacle,” said Dr Arjoon Suddhoo, Deputy Secretary-General, at the Commonwealth Secretariat at the opening of the webinar.
“These financial instruments cannot help address the public debt levels, while at the same time provide resources to help countries build resilience to climate change. The Commonwealth Secretariat and its Commonwealth Planet Finance Access Hub is supporting its member countries to enhance their access to climate finance,” Suddhoo added.
DFCs could provide Belize with savings of up to $280 million-plus interest said, Cox.
“Today, after droughts, the pandemic, and a recession, the country, according to a recent budget speech has an external public debt of approximately $2.8 billion with an average interest rate of 4.2 percent – compared to 2.7 percent for domestic debt. A debt for climate swap on 10 percent of its external debt could provide Belize with savings of approximately $280 million, plus interest, to finance a lasting green, post-pandemic recovery and fund climate resilience, disaster preparedness, and recovery initiatives,” said Cox.
But, with the Super Bond hovering over our heads, Cristopher Coye, Minister of State in the Ministry of Finance, Economic Development & Investment, doesn’t seem too convinced.
“The current price of Belize’s Super Bond is around $0.40 on the dollar. If a Debt for Climate Change Swap is achieved at that discounted price, that discount is not necessarily a benefit achieved by the swap itself. That was a market-determined discount on the basis of a market-based assessment of the repairability of such bond, given Belize’s expected economic situation over the remaining life of the bond,” Coye said.
“Since that is not necessarily a benefit achieved by the swap, then it follows that the absence of a Debt for Nature swap-based benefit does not provide a sufficient justification for the discount than to be paid by way of funding local climate or environmental projects.”
Coye asked if a Debt for Climate swap would be worth it.
“Will the swap enable the funding of those resource losses? For example, through supplementary grant funding. If not, is this swap worth the cost?
“While we are grateful to our partners for their efforts to assist us to confront the increasing challenges ahead, I want us to strengthen our position by fully informing ourselves on all the relevant factors, costs, and implications.”
Minister of Sustainable Development, Climate Change, & Disaster Risk Management Orlando Habet says DFCs are an option that must be looked at.
“It’s happening at the time when our countries are facing multiple challenges relating to the COVID-19 pandemic, challenges in resilient economic recovery and the incremental adverse effects of climate change,” said Habet.
“Many governments in our region have been negatively impacted with increased debt burden and have the challenge of investing resources towards climate action. Debt for Climate and Nature Swap is an option for our countries to explore the potential to address this issue,” Habet added.
The COVID-19 pandemic has exacerbated the “debt vulnerabilities of many low- and medium-income sovereigns” and debt levels “because government revenues have declined as a result of limited economic activity – while the timing and the quantum of debt servicing payments remain the same,” says climatepolicyinitiative.org.
Debtor countries, like Belize, are having a hard time servicing their debts to such an extent that reactivating economic growth or achieving their climate goals will be relegated to the backburner.
To make headway, many will depend on the debts being suspended, forgiven, or reoriented to Debt for Climate swaps.
To go with Debt for Climate swaps, Coye says Belize needs to have funded alternative plans.
“The tendency thus far is to focus on acquisition and management costs of these areas to be protected with minimal consideration given to the cost associated with human development opportunities that we forgo by putting these resources under protected status.
“That is a critical cost factor that we not only need to quantify, but if we proceed with a swap, we need to have developed and funded alternative plans,” Coye said.
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