Officially, Botswana has made huge gains from engaging in a novel trade with the United States. In terms of this trade, which is called debt-for-nature (DFN) swaps, the US forgave a portion of Botswana’s foreign debt in exchange for the latter’s commitments to invest in biodiversity conservation and environmental policy measures.
“The US Government forgave USD 8.3 million of bilateral debt in exchange for Botswana’s commitment to facilitate grant financing for its tropical forests, funded partially through its savings from the swap,” says a report from the African Natural Resources Management and Investment Centre, an entity of the African Development Bank that advises member countries on natural resource management. “The US additionally contributed almost USD 7 million to the initiative to create a total of USD 10 million in conservation funding, meaning that a good portion of Botswana’s debt flow savings through the swap were reallocated for general budget spending.”
This deal was done through the Tropical Forest Conservation Act (TFCA) of 1998 which offered eligible countries (like Botswana) opportunities to reduce their official concessional debt owed to the U.S. government.
The ANRMIC has just released a report that considers whether transactions that are designed to exchange debt “forgiveness” for conservation action are effective at all. Its conclusion is that despite the hype, they are really not.
“Historical DFN swaps have had minimal fiscal impact on the countries involved. Since their debut in 1987, the total face value of debt treated globally through both two-party and multi-party swaps is only about USD 3.7 billion, of which only about USD 318 million were in Africa,” the report says.
It notes that the environmental allocation from a swap transaction is not always equal to the face value of treated debt.
“Moreover, while any reduction in principal may vary widely across different transactions, the maturity extension and interest reduction attainable through a multi-party swap should naturally provide greater budget flexibility to the sovereign even if the stock of debt remains largely unchanged. Finally, even in the case of a relatively small environmental allocation, the initial capitalization of local conservation funds, combined with policy commitments from the sovereign, should allow those funds to slowly grow over time, widening their ecological impact and gradually chipping away at the financing gap.”
There are two categories of lenders: bilateral and commercial. It so happened that the share of bilateral lenders in Africa’s external debt stock reduced from over 50 percent in 2000 to just 27 percent in 2019, as exposure to commercial creditors—banks and bondholders— increased dramatically from 17 percent to 40 percent in the same time period. In the case of commercial debt, any sort of renegotiation of the original bond or loan terms, even for the sake of biodiversity conservation, will have a negative impact on the country’s perceived credit worthiness, potentially leading to a ratings downgrade, increasing the cost of future borrowing.
“It can therefore be said that, while debt swaps work as a useful tool for countries already in default, those that have retained market access may wish to pursue alternative methods of financing climate and nature initiatives,” the reports says.
Developing nations find themselves in a difficult position because while there are benefits to protecting the integrity of ecological services and preserving natural capital for future and domestic use, “the costs of leaving land and resources undeveloped are too high.”
