Debt-for-nature swap

Debt-for-nature swaps are financial transactions in which a portion of a developing nation's foreign debt is forgiven in exchange for local investments in environmental conservation measures.

The concept of debt-for-nature swaps was first conceived by Thomas Lovejoy of the World Wildlife Fund in 1984 as an opportunity to deal with the problems of developing-nation indebtedness and its consequent deleterious effect on the environment. In the wake of the Latin American debt crisis that resulted in steep reductions to the environmental conservation ability of highly indebted nations, Lovejoy suggested that ameliorating debt and promoting conservation could be done at the same time. Since the first swap occurred between Conservation International and Bolivia in 1987, many national governments and conservation organizations have engaged in debt-for-nature swaps. Most swaps occur in tropical countries, which contain many diverse species of flora and fauna. Also, countries that have engaged in debt-for-nature swaps typically have several threatened or endangered species, experience rapid deforestation, and have relatively stable, often democratic, political systems. Since 1987, debt-for-nature agreements have generated over US$1 billion for conservation in developing countries.

The financing mechanism for debt-for-nature swaps is an agreement among the funder(s), the national government of the debtor country, and the conservation organization(s) using the funds. The national government of the indebted country agrees to a payment schedule on the amount of the debt forgiven, usually paid through the nation’s central bank, in local currency or bonds. The process is shown in Figure 1. Participation in debt-for-nature swaps has been restricted primarily to countries where the risk of default on debt payments is high. In these circumstances, the funder can purchase the debt at well below its face value.

In a commercial debt-for-nature swap or three-party debt-for-nature swap, a non-governmental organization (NGO) acts as the funder/donor and purchases debt titles from commercial banks on the secondary market. Since the late 1980s, organizations such as Conservation International, The Nature Conservancy, and the World Wildlife Fund have participated in international debt-for-nature swaps. The NGO transfers the debt title to the debtor country, and in exchange the country agrees to either enact certain environmental policies or endow a government bond in the name of a conservation organization, with the aim of funding conservation programs.In total, recorded third-party debt-for-nature swaps have generated nearly US$140 million in conservation funding from 1987-2010 (see Table 1).

...
Wikipedia