Background Paper #3
By Mizan R. Khan
The global community already lives in a climate-changed world. Covid-19 and the consequent economic shocks have put additional strains on all countries – rich and poor. The low-income countries (LICs) are hit the hardest from these shocks and have the least amount of adaptive capacity. The increasing levels of debt for these countries have reached an unbearable phase, particularly after Covid-19. Adapting to the triple impacts on health, economy, and livelihoods is proving extremely difficult for the LICs. Though the G20 countries have initiated the Debt Service Suspension Initiative for these countries, it excludes more than 60% of their debts. The uptake has not been encouraging, as is evident from the responses of these countries.
But adaptation finance to address particularly the climate impacts, which in many ways are correlated with health effects, is immediate and urgent. During the last decade, the status of adaptation finance has not changed much – hovering below 20% of total climate finance, despite commitments by donors and agencies for a balanced allocation with mitigation. In this globally trying time of a liquidity crunch, where will the resources come from? It is unrealistic to expect new public finance from donors.
This opens a window to look for alternative sources of finance. The debt-for-adaptation swap (DAS) has the potential to respond to this need. It is argued here that with the appropriate design and implementation of such deals, the DAS can be a win-win option, both for the creditors and debtors. Past experiences with debt-for-nature swaps for more than three decades show that relatively little debt reduction has actually occurred in the recipient countries. Experiences in the Caribbean also show that an extremely long time is needed for negotiations alone.
Therefore, in order to make the DAS a viable and sustainable option, relatively large amounts of long-term bilateral debt need to be considered while focusing on the LICs with such debts. The investments will have better returns if they are applied to strengthening infrastructure related to health, capacity-building, and in coastal zones, and applied directly to productive sectors such as agriculture, water, forest, fishery, and decentralised renewable energy systems such as solar, wind, and others. These areas at the local community levels are likely to generate income, employment, and economic growth, andalso contribute to sustainable livelihoods, debt reduction, and debt sustainability.
However, the success of the deals will depend on compliance with many conditions on both sides, as laid out in this brief. The foremost among them being an understanding and commitment on both sides: Creditors must see their responsibility as a long-term programme of supporting adaptation in LICs with sincerity and an appreciation that there are genuine global benefits from strengthening their economic and social resilience. The debtor nations must own the scheme, supported by enabling policy-institutional frameworks, including the establishment of a transparent and accountable system of fiduciary management.
Finally, creditors need to be willing to provide capacity-building support to local and national institutions under a new paradigm of technical assistance, with local experts leading and foreign consultants facilitating. This process will leave sustainable capacity systems in recipient countries, which in most cases did not happen before.
Published by Heinrich Böll Foundation, Center for Sustainable Finance (SOAS, University of London), and Boston University Global Development Policy Center as Background Paper to the Debt Relief for Green and Inclusive Recovery Project.