A New Way To Pay African Debt

Ecuador has more money for its Galapagos giant tortoises.

Climate finance is the reason.

Climate Finance

Countries borrow money by selling bonds to you and me, to countries, to businesses, to MDBs (Multilateral Development Banks like the IMF). For less affluent nations, the loans can be a huge burden. Not only do they have to pay back the principle when the bonds mature, but also, interest is a constant fiscal drain.

Now though, there might be a win/win solution. Around since the 1980s, the increasingly popular approach is the Debt-for-nature swap. The basic idea is that a country can get its debt reduced and guaranteed in exchange for climate friendly use of some of the funds.

This is how it works:

1. A country’s bondholders sell them at a discount. The discount reflects the country’s fiscal stress.
2. The buyers could be pension funds, insurance companies and other financial institutions.
3. Then, the borrowing nation replaces what the buyers in #2 bought with a new bond. Called a blue bond, it pays a lower interest rate. As a result, the borrower has less to pay back. (For Ecuador’s blue bonds, the interest rate plunged from 17% to 26% to 5.645%)
4. Because the new blue bond is guaranteed, its holder need not worry about a default.
5. Meanwhile, the borrower knows the minimum that it has to spend on conservation.

Below, you can see the basics in this Wikipedia graphic:

Since 2021, the value of Debt-for-nature swaps soared:

Our Bottom Line: African Debt

Debt will be a focus at this week’s meeting of the African Development Bank.

Below, our y-axis is the number of low and middle income countries while “low, medium and high” reflects their combined risk of fiscal and climate crisis. Because the African Development Bank tells us that 25 African countries are debt and climate threatened, I assume they are represented in this IMF graphic:

According to the BBC, this week, the African Development Bank will encourage more Debt-for-nature swaps.

My sources and more: Thanks to my BBC World Business Report podcast for introducing me to Debt-for-nature swaps. From there, Reuters, here, and here, and the WEF helped me figure out the swaps’ details. Then, Climate Change News.and Fast Company provided the step-by-step explanation. Finally, completing the picture, my African facts came from here and here.