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  • Charlie Hynes

Debt-For-Environment Swaps (DFES)

With the issue of climate change casting an increasingly foreboding shadow over the international community, those in and out of government systems are looking for ways to help address this seemingly insurmountable issue. Historically, the failures of climate centered policy can be attributed to large nations with substantial wealth reserves. So, with the recent introduction of ‘debt-for-environment swaps’ (DFES), environmental activists have rejoiced at the prospect of a method of environmental preservation that provides states with an easier avenue to part with fiscal capital.

The International Monetary Fund (IMF) published a working paper in August of 2022 detailing the benefits and faults of this method of support. Upon discovering a strong positive correlation between risk of fiscal crisis and climate vulnerability, the idea of DFES was birthed as a solution to both issues. The swap goes as follows: a creditor will reduce debt in exchange for the debtor’s policy or spending commitment. Historically, swaps such as this have been successful; in countries including Belize and Panama, the United States government diminished US bilateral debt in exchange for pro-climate commitments.

Unfortunately, swaps of this nature require a lot of coordination between both governments and third-party negotiators like the IMF or the Paris Group. Firstly, according to the IMF, countries must be qualified as ‘heavily indebted’. They must have also already exhausted more favorable debt relief options, and they must prove not only that they are capable of pursuing the sustainable programs they propose, but also that those programs will result in significant change. In the early 2000s, several governments met these qualifications which enabled them to pursue DFES, however few were successful. Both Georgia and the Kyrgyz Republic met these qualifications, yet their negotiations did not yield agreements.

There are a number of reasons that these negotiations fell through. Firstly, in both Georgia and the Kyrgyz Republic, ministers of the environment began the process of proposing and prepping for DFES without consulting all ministries of the government, which led to later conflict between domestic actors. This issue however, while apparently easily fixable, is deceptively complicated. In the highly indebted countries that qualify for a DFES program, domestic politics are often turbulent and complex. Different ministries and departments have different motivations, and corruption is far more likely to exist than in countries that do not have these characteristics.

Another large reason DFES failed in both Georgia and the Kyrgyz Republic is that the swap requires a lot of attention and resources to complete, but the Paris Club determined that in most cases the swap cannot forgive more than 15-25% of the debt. Considering most countries, including Georgia, required debt forgiveness from multiple countries (many of whom would not commit to debt forgiveness until later in the swap) the revenue the Georgian government would receive is not easily distributed along the timeline of the swap. Being unable to forecast accurately the amount of debt forgiveness provided given the variable amounts of prospective commitments from countries like the USA, the EU, Germany, Turkey, and Russia complicated all parties’ engagement in the process.

DFES, though a promising idea, remains far more complicated in practice than in theory- as is the case for most international policy making methods. However, the question remains: are these complications debilitating enough to invalidate this solution as viable? It seems that both the prospective payoff and reliability of both debtors and creditors are the two key factors in determining the success of a DFES. Debtors must prove both that their sustainability initiatives will be successful, and that their domestic institutions are coordinated enough to execute such a plan. Creditors, on the other hand, should commit wholly to the process, and commit to specific amounts of debt forgiveness overtime, while also allowing developing countries to prepare for large inflows of revenue to enter their domestic systems.

Image via Wikimedia Commons.

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