In order to enter a rapidly expanding sector of the sustainable debt market, the African Development Bank Group is currently in talks to support a new debt-for-nature exchange.
“We’re looking at one transaction [and] still discussing the parameters,” said Hassatou Diop N’Sele, vice president for finance and chief financial officer at the AfDB, in an interview. She chose not to name the nation that had proposed the agreement, under which it would restructure its debt in return for dedicating part of the savings to environmental initiatives.
African countries have “a very good case” for using the financial arrangements, said N’Sele. “The continent faces multiple challenges, rising debt costs, a massive need for climate finance, and issues with regard to land degradation and biodiversity loss. With debt-for-nature swaps, there is the start of a solution,” she disclosed. ‘
In 2021, Belize completed the first debt exchange in the modern era with protection provided by the US International Development Finance Corporation. The Nature Conservancy, a charity, and the Inter-American Development Bank, the first multilateral to take on such a role, provided repayment guarantees for a Barbados contract. Since then, the IDB has supported the third and biggest deal in history in Ecuador.
“The ultimate goal will be to help the transaction achieve the desired extension of maturity and also a reduction of overall debt service,” N’Sele said.
The decision was made at a time when low-income nations are increasingly asking development banks and lenders from wealthy nations for assistance in addressing the triangular problems of climate change, financial distress, and rising poverty rates. At the climate finance meeting held last month, which was co-hosted by French President Emmanuel Macron and Barbados Prime Minister Mia Mottley, debt-for-nature swaps played a key role.
However, there are worries over the transactions' transaction costs as well as their actual effects on the economies and ecological systems of other nations.“It has to be at scale to make a real difference because there is a lot of work” in structuring such deals and they “can be costly,” N’Sele said.
The African Development Bank (AfDB), established in 1963 and headquartered in Abidjan, Ivory Coast, offers project financing to its member nations. While only Latin American governments have so far used debt-for-nature swaps with business creditors, African nations have shown interest. The first such agreement on the continent is anticipated to be finalized shortly by Gabon, while Gambia, Eswatini, and Kenya have also shown support.