• Gabon has launched Africa’s first debt-for-nature swap, with plans of buying up at least $450M of its government debt and converting it into an eco-friendly blue bond.
• Africa needs to cut more ‘debt-for nature-swap’ deals to not only alleviate the heavy indebtedness but also to help in mitigating the climate change crisis by stepping up conservation efforts.
• ‘Debt-for-nature -swap’ deals will steer the growth of green and blue investments in Africa.

The debt-for-nature swaps concept has emerged as a viable solution to address Africa’s ‘poly-crisis’ marked by debt distress, climate change, and biodiversity loss. In light of this, Gabon recently launched an initiative termed Africa’s first debt-for-nature swap.

The Central African nation intends to buy up at least $450 million of its government debt and convert it into an eco-friendly blue bond. This is with a tender offer for its sovereign dollar-denominated bonds maturing in 2025 and 2031, prompting the Eurobonds to rise as much as 2.2 cents on the dollar.

Gabon’s debt-for-nature swap plan

Over and above, several other nature-rich African countries that are debt-saddled are similarly considering cutting debt-for-nature deals following the footsteps of Gabon. According to Bloomberg, the market for debt-for-nature swaps is poised to exceed $800 Billion, sparking competition between financiers as demand for green investments increases.

The debt-for-nature swaps have recently garnered popularity among conservation finance. This comes in after Ecuador secured the world’s largest debt-for-nature swap on record in May 2023, amounting to $1.6B of its commercial debt. This allows the country to convert the debt into a $656 million loan issued as a bond by the global investment bank Credit Suisse, to be paid over the course of 18 years.

To boot, this frees up $18 million annually for the next two decades for the conservation of the Galápagos Islands, one of the most biodiverse marine regions in the world. The country’s move was driven by the need to protect the archipelago’s unique flora and fauna, ranked among the world’s most precious ecosystems, which includes endangered species that can be found nowhere else on earth.

According to Reuters, with perspective to a regulatory filing, by Gabon on the London Stock Exchange, the country stated that it had “launched invitations to tender for purchase by the Republic for cash, of its 2025 and 2031 Notes.”

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Buyback bonds

Consequently, this prompted the three Eurobonds that it referred to rise as much as 2.2 cents on the dollar. The February 2031 maturity rose 2.203 cents to 83.702 cents and November 2031 maturity jumped 2.129 cents to 83.573 cents, compared to the Gabonese government’s offer to buy back the bonds for 85 cents per $1 of the bond.

Furthermore, the 2025 maturity rose 1.194 cents to 95.4 cents, below the offer price of 96.75 cents. Additionally, in view of the industry sources to the News Agency, the US International Development Finance Corporation (DFC), will provide political risk insurance this year, as it has in similar recent deals in Ecuador and Belize.

Read Also: Harnessing Blue Bonds Potential for Africa

So what exactly are debt-for-nature swaps?

Debt -the for-Nature swap is a financial mechanism or economic tool, which allows a country’s debt burden to be reduced in exchange for commitments on green investments. It’s a transaction in which a portion of a developing nation’s foreign debt is forgiven in exchange for local investments in environmental conservation measures.

According to the International Monetary Fund (IMF), creditors extend debt relief to developing countries, and in exchange they commit to initiatives, such as decarbonizing the economy, investing in climate-resilient infrastructure, or safeguarding biodiverse ecosystems like forests and reefs. The primary goal is to channel the saved resources from debt relief toward environmental conservation efforts.

The swaps free up fiscal resources for governments to improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities. The swaps can be pertinently integral for countries that are most vulnerable to climate change, and often unable to afford investment to strengthen climate change-related resilience.

This concept traces its roots to the late “father of biodiversity” Thomas Lovejoy, who deemed it a win-win situation for countries, financiers, and conservationists in the 1980s during the debt crisis. This ensured that financing supports environmental preservation without compromising economic development.

Also Read: Ocean conservation can revamp Africa’s blue economy

Why Africa needs more debt-for-nature Swaps

The two most prominent reasons why African countries need to cut more of these deals are first, the vulnerability of the continent to the climate change crisis. Yet, it produces the most negligible global emissions at a paltry 4 percent of greenhouse gas emissions (GHG). The continent is no stranger to climate-induced natural disasters such as drought, famine, floods; cyclones, landslides, earthquakes, volcanic eruptions, wildfires, and locust infestation. The aftermath of these disasters is costly and has retrogressed development and further aggravated indebtedness, as they take up loans to mitigate the effects.

In addition, many countries are debt-laden due to the ‘perfect storm’ of challenges that have left no country unscathed; from high inflation, currency depreciation, and food insecurity among many problems. These debts can be swapped to increase investments in climate action. Therefore it’s a viable green financing model. According to the IMF, Debt-for-climate swaps and debt-for-nature swaps seek to free up fiscal resources so governments can improve resilience, without triggering a fiscal crisis or sacrificing spending on other development priorities.

For instance, the lesson from Ecuador’s success should be a benchmark, as the deal freed up substantial financial resources to support conservation efforts. Besides, Gabon’s debt-for-nature swap has the potential to massively boost the nation’s environmental resilience, while fostering a more sustainable future. By freeing up fiscal resources through debt relief, the government can now deepen conservation. Many African countries can trade off bad debts against habitat preservation.

Next Read: Climate financing: Africa’s green bonds uptake on a roll

Africa’s dire debt crisis

The surge in debt accumulation by African nations has become alarming. the Covid-19 pandemic significantly instigated Africa’s indebtedness with the Russian invasion of Ukraine further exacerbating the crisis. Consequently, the IMF has identified many African countries as debt-distressed or at high default risk. How can Africa at the risk of default restructure its debts? As a means to navigate the sustainable debt market?

Many African countries have defaulted on their sovereign loans instigating an uphill task to formulate debt restructuring programs. Many nations if not all have resulted from IMF bailout programs such as Egypt, Ghana, Kenya, Uganda, Zambia, Namibia, DRC, Lesotho, Rwanda, Morocco, Angola, Cameroon, Burundi, Eswatini, South Africa, Benin, Liberia, Gambia, Tunisia, Tanzania, Somalia, Seychelles, Sierra Leone, Togo, Nigeria, Mozambique, Niger, Sudan, Senegal, Guinea Bissau, Djibouti, Ethiopia, Mali, Mauritania, Cote d’Ivoire, Madagascar, C.A.R, Chad, Burkina Faso, Malawi, and Comoros.

Consequently, many nations seek to reduce their public debts to bolster fiscal stability, in exchange for allocating some of the savings to green and blue projects. Therefore, aiding in alleviating economic stagnation and spurring growth and development, and achieving climate commitments. For instance, Gabon will receive an eco-friendly blue bond for at least $450 million of its government debt. The blue bonds are an innovative financial instrument that aligns with sustainable development objectives, rendering them practical tools for conservation projects.

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AfDB assists countries to strike debt- for nature deals

The African Development Bank (AfDB) is venturing into this new lucrative market. In its report titled, “Debt-for-Nature-Swaps: Feasibility and Policy Significance in Africa’s Natural Resources Sector,” published in the last quarter of 2022, the Bank stipulated its Debt Action Plan and Sustainable Borrowing Policy. Furthermore, the report laid out specific interventions on debt management and sustainability in African countries, reducing the risks of debt crisis and distress. The Bank recommends that Africa “look towards” debt-for-nature or climate swaps to “mobilize conservation and biodiversity finance, for nature-positive projects on a case-by-case basis,” as tailored solutions remain crucial for optimal results.

Read: Africa’s Carbon Credits Market Poised to Drive Economic Growth in 2023

The chief objective is to mobilize finance for African countries while advancing climate and nature goals to support Africa’s “nature-positive development agenda.” Hence, this will impact debt sustainability, climate resilience, and biodiversity conservation” for people and the planet. The flagship publication highlighted policy options for sustainable financing, focusing on debt-for-climate or nature swaps; transactions designed to exchange debt forgiveness for conservation action. Moreover, the report was set to address “the triple threat of unsustainable debt, climate risk, and degradation of nature” through the African Union’s (AU) Green Recovery Action Plan 2021-2027. The report underscored opportunities and innovations for mobilizing external finance, into indebted countries at concessional rates, including private-sector financing.

Read: Gabon’s carbon credit sale: the silver bullet for economic revival?

Gabon globally setting the pace in Conservation

Gabon remains a significant global conservation leader, in terms of ocean conservation and the overall environment. Gabon’s Coastal waters and marine Exclusive Economic Zones are home to some endangered species. For instance, the country hosts the highest density of the world’s largest population of leatherback turtles nesting sites. To boot, the Coast is crucial in seasonal breeding and calving ground for humpback whales; it boasts 5 IUCN red-listed whale and dolphin species and over 25 species of sharks and rays.

Given that the country borders the Atlantic Ocean, its coastline of 550 miles is a touristic site, home to unique species of flora and fauna such as the olive ridley turtles, the largest congregations in the Atlantic lay their eggs on the sandy beaches, while hippos play on untouched beaches and African dwarf crocodiles inhabit the country’s watery caves and wooded streams.

The country protects up to 30 percent of its terrestrial, freshwater, and marine habitats. Experts note that Gabon’s network of Marine Protected Areas (MPAs) provides a blueprint for many other countries to adopt.

Furthermore, Gabon’s rainforest forests are part of the Congo Basin, renowned as the ‘lungs of Africa.’ They are home to unique wildlife including 60 per cent of the world’s remaining forest elephants.

The forest clearings are home to the world’s remaining western lowland gorillas and chimpanzees, together with African forest buffalo and over 700 species of birds. Through the debt-for-nature-swap initiative, the country projects to secure a sustainable financial stream, which will bolster the conservation of vulnerable ecosystems.

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