Debt and swaps for climate and nature: innovation for resilience? full transcript
Host [00:00:02] You are listening to the Make Change Happen podcast from IIED, the International Institute for Environment and Development.
In this episode, host Liz Carlile, and guests from Mali, Addis Ababa and the UK discuss the current opportunity for governments to address the crisis of debt, climate and biodiversity destruction though a new use of the system for debt swaps for climate and nature.
Liz Carlile [00:00:30] Hello and welcome to Make Change Happen, number eight. It’s great to have you with us all as listeners and many thanks to you for staying with us and giving us positive feedback. I’m your host today, Liz Carlile, and I’m director of Communications at IIED.
We have a great episode for you today, I think. We’ll be talking about debt swaps for climate and nature, a pretty controversial issue, but an idea that could really offer great gains for the wellbeing of our planet, and to help relieve the urgent pressure on developing country debt. So, I think we’ll cover kind of what they are, how they might work and what are some of the sort of opportunities and challenges.
And with me today, to talk about that, are three people. We have Yacouba Dème from Mali, and Yacouba is the country director from the Near East Foundation. And he has over 30 years’ experience in rural development and natural resource management as well as capacity building and training. So a very established person in thinking about how particular operationising, field-level approaches in mainstreaming can get into development planning at the local level. Welcome, Yacouba, we look forward to hearing from you.
Yacouba Dème [00:01:59] Thank you, hi.
Liz Carlile [00:02:02] We’re also joined by Jean-Paul Adam, who is the director for technology, climate change and natural resource management in the United Nations Economic Commission for Africa and Jean-Paul has lots of government experience. He calls himself a career diplomat, if you like, and has held ministerial posts in the government of the Republic of the Seychelles; minister for health, minister of finance and trade in the blue economy and has, importantly for this conversation, practical experience of debt swaps for nature and negotiating how they can come to life.
And last but definitely not least, my colleague Laura Kelly, who leads the sustainable markets group in IIED. And Laura has many years of senior level experience in policy engagement, dealing with topics around trade and development in the private sector. So, welcome to you, Jean-Paul and Laura.
Jean-Paul Adam [00:03:13] Thanks very much, it’s great to be here.
Laura Kelly [00:03:15] Yes, good to be here, Liz.
Liz Carlile [00:03:16] Great, and Laura, I’m going to start with you, I think. You know, we’re always looking for silver bullets, we’re looking for answers, so is this one? Is debt swaps for nature one of the answers? You know, how do they work? Can we tell our listeners what they are and how they might work?
Laura Kelly [00:03:36] Well hopefully they’re part of an answer, Liz, I don’t think they are a silver bullet because they’re potentially quite complex. But let me have a go at explaining in clear, simple language what we’re actually talking about.
So the idea of swapping debt for nature and climate is where a lender, be it a donor government or a private bank or an investor, agrees to reduce the repayment of a loan that they’ve made, in this case to a developing country, and there are a number of ways that that can be done. The debt can be converted into the local currency, which can then be used locally rather than having to buy foreign currency to repay the loan. Or the creditor can agree to a lower interest rate, so more money can be spent locally. Or, if they’re really generous, then the creditor can agree to write off the debt completely.
What we’re then suggesting is that those resources are used by the developing country governments who are the debtors, to invest in things that will help address climate change, that will help conserve nature. And they do it in ways that also create jobs, particularly now as we’re in sort of post-COVID-19, COVID times, but as we look to post-COVID economic recovery, we’re really going to need to get people, you know, into sort of sustainable and resilient jobs. So that’s the basic principle.
Liz Carlile [00:05:08]: The IMF or the International Monetary Fund and the World Bank have been meeting just now, haven’t they, to be thinking about, you know, the kind of post-COVID-19 recovery on the global economy, and I think just to remind our listeners, you know, the developing country debt at the moment, that the burden that countries are carrying are up to eight trillion US dollars. So there is an imperative now, isn’t there, to be looking at this?
Laura Kelly [00:05:37]: Yeah, it really is a sort of a very timely intervention and you know, it’s getting increasingly urgent. The bank and the fund have also estimated, along with the United Nations, that COVID could put up to half a billion people back below the poverty line. I mean, that’s wiping out sort of the last ten years of development for many people, so it really is quite serious.
I think the other thing that’s quite different about what we’re suggesting is that the money that is forgiven, if you like, the debt that is swapped, that that’s actually used by governments through their budgets. So, there’ve been initiatives in the past more at sort of a project level, but we’re talking about something that sort of happens at scale. So the money would be used by the government to set up sort of large scale sort of strategic projects, so that allows it to be more cost effective and to actually sort of get more resources into these kind of projects.
Liz Carlile [00:06:36] So that is a significant difference from the normal approach in delivery of aid, which is through projects. So those which tend to be smaller, shorter term, short lived, is that what you’re saying?
Laura Kelly [00:06:48] Yeah, and it also puts the control into the hands of local government and hopefully local communities, and I think we’ll hear more about that from Jean-Paul and Yacouba, because, you know, they’ve been involved in this kind of programmatic approach in climate and nature at the local and national levels.
Liz Carlile [00:07:09] Great, thanks Laura. So, Jean-Paul, I think you’ve had direct experience of some of this, would you like to tell us a bit about that?
Jean-Paul Adam [00:07:16] Yes, thanks very much, Liz, and, and I think this subject could not be more timely, as Laura has already pointed out, because generally countries around the world are facing a huge challenge to rebuild back better after COVID-19, and they don’t have the resources.
Now, Seychelles, the country where I was previously working as a government minister, and I was, I had the portfolio for finance at the point that Seychelles did its debt swap in 2015. And the Seychelles context at that time was that we had accumulated quite a large amount of debt over a period of time. We had a debt to GDP ratio of 175%. At that time, that was the highest in the world. That, that figure unfortunately now is quite common. There are a number of African countries with debt to GDP ratios of above 100%. Everyone heard the situation that Greece went through; there are a number of countries that are facing these huge debt challenges.
But when we faced it, there were many reasons why we ended up in that. Some of it was of course, some mistakes that were made, but it went back to the point where Seychelles could no longer borrow on concessional terms because of its GDP per capita rising to a level above that where it could borrow, borrow cheaply, and it had to go on the commercial market. And then when you had the financial crisis in 2008, that meant that Seychelles could actually not cater for its debt repayments.
We had a first phase of debt restructuring, which was around 2010, negotiated with the Paris Club of Creditors, where Seychelles got a 45% haircut. But then after that we, we were looking for ways as well which we could not only look for some, some way of reducing our debt portfolio, but how we could repurpose that debt into a climate resilience. And that’s where the conversation started with the Nature Conservancy, which is a US-based NGO but which operates globally, to help us in buying back another portion of our debt. That proved quite complicated because Seychelles had already had a first debt swap, a first debt restructuring, in 2010.
But nonetheless we managed to do a relatively small amount with a further 5% discount, and that debt was bought back using funds that were loaned by the Nature Conservancy, and also by philanthropists that assisted, so up to five million dollars. And through that, through those two funding mechanisms, Seychelles essentially bought back its debt earlier and then the debt was restructured into a trust fund established in Seychelles. And the formula was then that the Seychelles government continues to repay the debt, but rather than paying it to external creditors, it’s paying it locally into a local fund at a much more attractive interest rate. We went from an average interest rate of about 9% to 3%.
And those funds that are generated also then go into marine conservation, and in Seychelles they were linked to the creation of marine protected areas, covering 400,000 square kilometres. So it was a, a very interesting and successful operation.
Liz Carlile [00:10:21] This must have been pretty innovative, for the time?
Jean-Paul Adam [00:10:26] Yes, absolutely. As far as I’m aware it’s the only marine-based debt swap that has been done to date. There are debt swaps that have been done, for example in South America, around protecting forested areas and so on. But the Seychelles one is the first one around a marine protected area. And I think what was very interesting as well was that it has really engaged with community lead organisations, because the funds that are going to the trust fund, are then dispersed in the form of projects to support community lead projects that enhance the biodiversity value, or in some cases build climate resilience.
So among the projects, for example, that have been successfully implemented since then, include a voluntary closure of a fishery by the Praslin Fishermen’s Association, this is, Praslin is the second largest island, and the fishermen there agreed to a voluntary closure as part of managing the fish stocks there.
There was also a successful project around the monitoring of sooty terns which are very important in the ecosystem in terms of the food chain, relating to fish and relating to the ecosystem around the coastal areas and around coral islands. There’s also significant support, for example, for mangroves, looking at how we can reduce erosion in areas that were affected. So there’s been real impact on the ground, as well as the wider goal of having enhanced marine protected areas, in line with the goal of the Convention on Biodiversity, to achieve up to 30% of marine protected areas.
Liz Carlile [00:12:05] So, I think a really nice example there of what you said to the, the engagement at the local level, and we will hear from Yacouba a bit later in the programme of the sort of some of the key conditions for getting that right. But if we go back to the global level and this sense of a contributing to a global public good, I guess, this was, this was a very innovative programme.
Laura, what do you think these debt swaps will do for us, globally? You know, if we take that example of a sort of first attempt at really thinking this through for some key global environments that we’re very, very keen to hang on to? Where do you think this could go?
Laura Kelly [00:12:45] Well it’s really great to hear that example from Jean-Paul because, you know, we’ve been so focused in the last sort of year or so on the ocean. Blue Planet, the David Attenborough programme, and you know, it’s really good to see concrete examples of where resources are being really channelled to help deliver concrete outcomes.
But we also see the potential. You know, next year is gonna be a huge year for the climate and biodiversity. We’ve got the Conference of the Parties, COP26, in the UK, in Glasgow. We’ve got the biodiversity COP in Kunming in China, COVID-willing, hopefully those meetings will go ahead as planned.
Liz Carlile [00:13:28] Meetings are coming and going ten to the dozen, but we keep fingers crossed.
Laura Kelly [00:13:32] Exactly. We should been going to Glasgow this year, but we’re hopefully going next year. But with these international meetings, what we really want is them to, you know, promote concrete outcomes, things that actually make a difference for the climate and make a difference for nature. So, you know, we see a real potential on the climate side for these swaps to release more money for investment in climate adaptation resilience and mitigation. Much more than is sort of currently in things like the International Climate Fund or you know, sort of green funds that already exist. You know, there’s also the potential, as we’ve said, for sort of COVID recovery.
There’s also an interesting potential, the debt that we’re talking about is quite unusual compared to previous debt. Jean-Paul talked about the Seychelles experience. This time, quite a lot of it is owned by the private sector, and you know, this could be people’s pension funds and so on.
And of course you don’t want to, you know, lose that money but if it’s getting to the stage where the money can’t be repaid, then, if that, some of that money is then invested into things like climate and nature, you know, that could, could have big benefits and it would, you know, also demonstrate that many of these private investors’ banks who talk a lot of about inclusivity, sustainability – they talk about their sustainable development goals, they talk about their strategies – they’d actually be, you know, delivering concretely on those strategies by having some of these resources invested into these climate and nature swaps.
Liz Carlile [00:15:05] Thank you. So, Jean-Paul, you know, you’ve got a very interesting role in UN now. You know, what do you see as the potential that these swaps might offer, particularly for countries in Africa?
Jean-Paul Adam [00:15:19] Well, Africa’s facing a huge crisis at the moment. There’s of course the immediate threat of the COVID-19 pandemic, which Africa’s dealt with it very well in the context of being prepared for pandemics and having good contact tracing and so on and so forth. But it costs health systems a lot, it costs a lot in terms of managing the crisis. There’s the economic fallout, which is even more significant. And the climate impact, which was there even before the onset of COVID, is estimated to cost African countries between 3-5% of GDP, based on the current rate of warming.
Now, with increased warming, in some cases our projections show that some African countries in the Sahel will lose up minus 15% of GDP. So this is massive, it’s really a question of double benefit. Can you build climate resilience by investing money in key areas that help you fight climate change and in, in ocean-based economies it’s around, for example, rehabilitating mangrove areas? In areas that are affected by desertification, it’s about reforestation. So, can you repurpose funds that are already there in a sense as country’s debt? And restructure them a little bit along the lines of what Laura has suggested so that that is actually invested towards a boosting climate resilience? And based upon the projections of lost GDP, we can already consider boosting African countries’ economies by a significant amount every year, by doing these kind of activities.
Now, African countries have a problem at the moment in relation to their ability to mobilise finance. You have some, for example, the least developed countries, that do have access to some concessional finance. But the World Bank and the IMF have been very direct in saying that the funds that they have will not suffice to meet the global need based on the current situation and, you know, Laura mentioned that over half a billion people can go into poverty. We can reverse a lot of the goals that we’ve progressed on in terms of the Millennium Development Goals. And so we need to act on this urgently, and debt swaps is a way to bring money directly into areas that boost climate resilience and therefore create an immediate response to the COVID-19 pandemic and create nature-based solutions that improve livelihoods.
And we’ve been doing some things like this in Ethiopia, where we’re supporting, for example, tree replanting and that creates jobs for people involved in that tree replanting. And that tree replanting also supports water catchment areas, and protects water catchment areas. So I think there’s something that can be done on the level of debt, and that should be about development, it should be how you invest that money to improve people’s outcomes, to improve their livelihoods and their prospects.
Liz Carlile [00:18:09] So this feels, what I’m hearing you say, feels very much like a win-win, complex though it may be, and we are about to hear from Yacouba around sort of elements of that complexity, but if we can get this right, if we can get the right groups around the table, there seems to be lots of potential.
Jean-Paul Adam [00:19:25] It’s certainly is potentially win-win, I think, because there are a number of perhaps creditors who also recognise that it, as Laura has said, it’s better to have money that is secure than to have the risk of people not repaying.
Liz Carlile [00:18:39] Yeah, yeah. So it, just by turning something on its, on its end a bit, we can look at this differently.
Yacouba, I wanted to come to you for a question. I think the example that Jean-Paul gave us earlier, around the marine swaps in the Seychelles, really demonstrated the importance of rooting this kind of activity at community level, at ground level, at local level, in countries. And we know that to get the right engagement and the voices of the local level into decision making is critical. I know that you have worked extensively through the Devolved Climate Finance Alliance, and you’ve looked specifically at issues around transparency and accountability and the way that finance is released by debt relief. Can you tell us a little bit, how relevant this is and what we can learn from this to help with these debt swaps?
Yacouba Dème [00:19:39] Sure. In the context of Devolved Climate Fund, how you are saying, we have used the institutional architecture of Mali and Senegal to channel funds from the international level to the central level of the two countries. And from the central level to the region (cercles) and commune to the rural population of Mali, using the administrative framework of decentralisation.
So, if debt relief occurs and funding for climate and biodiversity investment programme becomes available, then it will be necessary to ensure that these funds are not confined to the central level of countries. But work in the sense that they reach the population that are most exposed to the further effects of climate change.
So, talking about transparency and accountability, the first thing citizens need to know is the nature and the extent of this debt, because in many cases this is kept secret. Second, they must be involved in the government’s investment decision-making process to ensure that the investment meets their priorities, ensure social inclusion, reach the most vulnerable, etc.
As part of a decentralised climate fund, or Devolved Climate Fund, we have set up a public fund to finance investment in goods, in public goods identified by communities and implemented by local authorities, municipalities. The aim was to fund community initiative after consultation with users on collective utility and a relevance to adaptation to climate fund. It is a means of establishing an effective dialogue between the producers, involving all components of the community, especially women and young people, as part of climate change adaptation process.
So, in conclusion, I would say, the decentralised management of climate fund by local authority and community requires reliable institutional and financial structures. If investment in debt are to ensure a resilience to climate change, local knowledge and perspective must be integrated into a formal planning process of local authority. But I have to say, that the integration of planning innovations into existing government planning systems takes time, and has to be done at the right pace to ensure ownership of all actors and polities.
Liz Carlile [00:22:35] But, but Yacouba, that sounds promising, I think, so although it’s complex, and although it takes time, it sounds like it is, it’s potentially possible, and is possible in a way that if we can learn how to do that well, we could take this to scale in other places.
Yacouba Dème [00:22:54] Yes!
Liz Carlile [00:22:55] Would you have a confidence about that?
Yacouba Dème [00:22:58] I’m absolutely confident. We, IIED started this kind of project in Kenya, that was years ago. It was in Isiolo. And then we did it in Mali and Senegal and we, from year 2015 up to year 2019, we had developing this. And now, myself, I’m working with the government of Mali, the Ministry of Decentralisation and Public Administration. We are working on a big proposal to extend it to the whole of Mali. We started with a pilot project that was in the three cercle in Mopti region, which is in Mali, and four departments in Senegal. So it is absolutely possible. And we have means, we have tools, we have a wide connect.
Liz Carlile [00:23:54] So this sounds great to hear. Jean-Paul, does some of the things that Yacouba was saying around, you know, how to connect at the different levels and how to ensure that all the different kind of community interests are represented. Did that match with your experience?
Jean-Paul Adam [00:24:13] Yes, I think it’s one of the biggest challenges because debt is, by nature it’s taken on by governments, at least in the context that we’re talking, sovereign debt. And the populations are often not necessarily understanding the link between debt and investment in public services, or in actions that improve resilience. So, in the context of Seychelles, the formula was the creation of a trust fund. And anyone can apply to that trust fund, they just have to put forward a project which meets the guidelines which are essentially going through projects which are contributing to climate resilience or improving rehabilitation of nature or biodiversity, so it’s very important that local people can feel connected in a way, and I think that was something that was very positive in the Seychelles.
But I think, going forward, one of the things that’s going to be very important in terms of replication of these kind of operations will be to make it simple for governments, because Seychelles had many years of negotiations to, to conclude what was in the finalisation, a relatively small amount of debt. And, promise of this is such that we could actually do much bigger operations and do them relatively quickly, and, the key is just to link them to the outcomes, is to be able to see where the money’s going to be invested. In many cases this can be done directly to, for example, community based organisations where they have a good track record. In other cases it can be through trust funds or in some cases it can be through government budgets. I think all of the above are options, if we can make debt swaps happen at scale, and they can potentially be beneficial for everyone.
Liz Carlile [00:25:55] So, as we’re coming towards the end of our discussion, Laura, do you, you know, is this the answer? It sounds too good to be true. What are we hearing about how people are feeling around this idea?
Laura Kelly [00:26:10] So, you know, there are people saying, if we go back ten, 15 years we had something called the Highly Indebted Poor Countries Initiative, HIPC, and that forgave an awful lot of countries’ debt. And here we are, 15 years later, back in this situation. What’s to prevent us, you know, ending up, in another 15 years, in this situation? You know, we’ve focused very much on the potential resources that could be used now for climate and biodiversity and recovery from COVID. But also, changing the way, the sort of, that debts are structured, that’s changed the way that lending happens, actually building in more of these sustainability criteria into loans, going forward, ‘cause as Jean-Paul and Yacouba have both said, you know, resources are needed to support countries to recover from COVID and to address the biodiversity and climate crises. So there is also something that these swaps could do to show us what we might be able to do in the bigger picture, in the longer term.
And it’s not just potentially developing country debt, it’s our own, you know, the money that we in the UK might need to recover from COVID or in other developed countries. Integrating sustainability criteria could be really important, going forward.
Liz Carlile [00:27:26] Thank you. So, to close, I, I would like to ask each of you, you know, this podcast is about making change happen and you know, we’re very keen to try and pinpoint where the next change needs to take place. So, Yacouba, in your mind, where do you think the biggest change needs to happen next to make more of this opportunity?
Yacouba Dème [00:27:55] Thank you. For me, a key first step is to make more accessible information available to parliament, local government, civil society, etc, on the possibility of, of these debt changes. As I was saying, usually it xxx.
The second thing is, there is a need to ensure with recipient countries, that there is an effective and transparent mechanism to channel funds through the grass roots, to be invested in activities that will develop a real resilience. So, that’s, if this can be, if these things can be done, then we can start something.
Liz Carlile [00:28:43] I’m really interested to hear your point about this, you know, transparency in information so that everybody is really understanding what the reality is and that that’s not kept hidden. That’s a really interesting point, I think.
So, Jean-Paul, where do you think the next change needs to be, if we’re going to make the most of this debt swap opportunity?
Jean-Paul Adam [00:29:08] Well, I think this is directly linked what we hope will be an outcome of the negotiations on the Conference of Parties linked to the Paris Agreement, and of course the next COP is in Glasgow. Because, we need to completely redefine the way we think about the response to climate change. We’ve tended to be quite reactive in relation to climate change; the science shows us clearly how that’s impacting countries. And in Africa, certainly, the impact is, is dramatic. And we need to have mechanisms that allow countries to invest themselves to create climate resilience.
And we must remember what, what is debt actually for? Debt is actually to build up your resilience, whether it be economic or environmental, to build up your capacity as a country to be able to deliver development to your population. So debt is about delivering development. And what is, what is very particular about this moment in time, the majority of African countries do not have access to enough resources. Where they do have access to resources, those resources are very expensive, at a very high rate of interest. And so they don’t have the space to actually be able to invest money in areas that, for example, create climate resilience.
At the same time, we have mechanisms to monitor, if we were to do debt swaps, we have already the principle of nationally determined contributions, where countries are voluntarily committed, for example, to invest in renewable energy. And in Africa you have the double benefit of building resilience but you’re also, resilience in terms of energy for example, and at the same time, connecting people that have not been connected to electricity before, and reducing carbon emissions, both continental wide in Africa and globally.
So, if we can look at debt swaps in Africa it’d be very easy to make a direct link between taking the proceeds of debt swaps and linking directly to, for example, nationally determined contributions of African countries. And we all know that the Green Climate Fund has not been able to fund the level of ambition that is needed in developing countries, and developing countries, in particular in Africa, don’t have access to the finances unless we bring in innovations such as this.
So I very much hope that the debt swaps will be as part of the results of the next COP, one of the outcomes that countries can turn to, and that we can all look at them and see them as transparent mechanisms that allow us to see where the money goes, and build climate resilience in Africa and globally.
Liz Carlile [00:31:39] Thank you for that. Laura, final point from you. Where should we see change?
Laura Kelly [00:31:45] What we need, I think, to make this happen, and as Jean-Paul has just said, to actually deliver something that could be really fundamentally important for addressing the climate crisis, is to get the right people together to talk about this. So obviously, there’s the debtor countries themselves, there’s the creditors, there’s the usual bilateral donors. There’s the IMF and the World Bank. There’s also China, who are a major creditor, and the private sector.
There are all of those actors who all have quite different interests, so you know, one of the things that we’re proposing is that a coalition under the auspices of the World Bank or the IMF come together to actually see how this could work in practice. And I think the key thing is, particularly China and the private sector, to engage with this. We, we’re hearing, you now, various commentaries about this idea of debt swaps from different actors. We really need to hear those comments translated or see those comments translated into, to concrete action, and people coming together to discuss how this might actually be turned into something.
Liz Carlile [00:32:55] So, I think a clear case for watch this space. And a very exciting one too.
So, it just remains for me to say thank you very much to our conversationalists today. So thank you, Yacouba Dème.
Yacouba Dème [00:33:09] Thank you.
Liz Carlile [00:33:10] Jean-Paul Adam.
Jean-Paul Adam [00:33:11] Thanks so much.
Liz Carlile [00:33:12] And Laura Kelly.
Laura Kelly [00:33:13] Thank you, Liz.
Liz Carlile [00:33:14] Thank you all.
So, for our listeners, if you’d like to know more, if you’d like to find out more, IIED has produced a report called Tackling the triple crisis: using debt swaps to address debt, climate and nature loss post-COVID-19. And that document has a lot of other references and reading material, so if you start there it would take you on an interesting journey.
The Make Change Happen page on the IIED website,
www.iied.org, can give you more information about our guests today and their Twitter handles. And you’re very welcome, please, to give us any feedback on the podcast’s Twitter account, which is @IIED_voices.
I really hope you’ve enjoyed this episode, and if you have, please do share with your networks. And we look forward to being in touch soon.
Host [00:34:37] You can listen to previous episodes of IIED Make Change Happen podcast on our website at www.IIED.org/podcast. The podcast is produced by our in-house communications team. For more information about IIED and our work, please visit our website at www.IIED.org.