2023-06-12 07:57:04
• Cancel part of the sovereign debt
• Against resource conservation commitments
• A mechanism that has drawbacks
Lhe Annual Meetings of the African Development Bank (AfDB) ended at the end of May 2023, in Sharm el-Sheikh. On the menu of the exchanges, the mobilization of private financing to fight once morest climate change. One of the proposals for achieving this objective was put forward there. These are debt-nature swaps. An idea developed in the report on the African Economic Outlook 2023, published by the AfDB. What is it regarding ? In their efforts to reverse environmental degradation, African countries find themselves hampered by competing needs and limited budgets. The high levels of poverty and hunger, as well as the numerous armed conflicts on the continent have made it extremely difficult to implement the ambitious 2030 sustainable development agenda in the region. Not to mention that Covid-19 has worsened the sovereign debt situation of many countries on the continent. Increased needs for health and social spending have further squeezed national budgets, affecting not only spending on conservation, but also the ability to service public debt. According to the debt sustainability analysis carried out by the World Bank (WB) and the International Monetary Fund (IMF), 24 countries in Africa are either in a situation of global debt distress or exposed to a high risk of global debt distress.
This increased pressure to service this debt will inevitably translate into a reduction in funds that might have been invested in natural resource management and, ultimately, a growing financing gap for nature. Reducing countries’ debt burdens will not only help free up funds to close the climate and conservation finance gap, but also free up resources for public investment in key areas such as education, health and infrastructure.
Hence the solution which consists of debt-climate/nature exchanges (DFN). “A debt-for-nature swap is a type of financial transaction in which a portion of a developing country’s sovereign debt is canceled in exchange for the country’s commitment to conserve its natural resources,” explains the Economic Outlook report. from the AfDB. They are an effective means of transferring wealth to low- and middle-income countries to enable them to finance their national conservation efforts. The basic structure of a DFN swap is the cancellation of a portion of a country’s sovereign debt for conservation commitments. These usually result in the creation of a locally funded and managed conservation fund, but may also involve high-level political commitments. This debt forgiveness can result from a bilateral agreement between the debtor and the creditor, or from a multi-party agreement in which the existing debt is repurchased at a discount by one or more philanthropic entities and a part of the savings realized is reallocated to the efforts conservation.
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The limits of the solution
LDebt swaps are an excellent method of transforming expensive and budget-constraining debt into meaningful environmental action. The first and most obvious is the need to find an existing creditor who is willing to pay for these results. Commercial creditors may be less inclined to consent to financial loss to a foreign custodial fund.
Then, at least in the case of commercial debt, any form of renegotiation of the initial terms of the bond or the loan, even for the purpose of biodiversity conservation, will naturally have a negative impact on the assessment of the solvency of the country, which might lead to a downgrading of its rating and therefore an increase in the cost of future borrowings. It can therefore be argued that, while debt swaps are a useful instrument for countries already in default, countries that have retained market access may wish to explore other methods of financing debt initiatives. climate and nature.
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The outlook remains positive and stable for the continent
Lhe outlook remains positive and stable, with an expected rebound to 4% in 2023 and further consolidation to 4.3% in 2024. According to the African Development Bank (AfDB), projections show that 18 African countries will experience growth rates above 5% in 2023, and their number should increase to 22 in 2024.
“This continued resilience will be underpinned by expected improvements in global economic conditions, fueled by the reopening of China and a downward adjustment in interest rates as the effects of monetary policy tightening on inflation begin to wear off. bear fruit”, continue the experts.
Africa’s growth forecast for 2023–2024 will be stronger than that of Europe and the global average, but lower than that of Asia (4.3%), which should benefit from the rebound in China. The April 2023 edition of the International Monetary Fund’s World Economic Outlook projects global growth to decline from 3.4% in 2022 to 2.8% in 2023.
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