Courtesy Adaderana

Sri Lanka is in talks for a debt-for-nature” swap deal of up to USD 1 billion in climate-focused finance, a kind of agreement discussed at the United Nations COP27 summit in Egypt, Reuters reported citing people familiar with the matter.

According to the news report, such agreements are part of efforts to address an intractable quandary facing world leaders as to who would pay the bill for the global fight against biodiversity loss and climate change.

Sri Lanka is among several other countries including Ecuador and Cape Verde exploring the possibility of striking debt-for-nature swap deals to ease the debt problems.

A debt-for-nature swap deal is a bilateral agreement, which involves purchasing foreign debt, converting that debt into local currency and using the proceeds to fund conservation activities. The key to the transaction lies in the willingness of commercial banks (or governments) to sell debt at less than the full value of the original loan.

Reuters reported that Ecuador – a serial defaulter and its sovereign bonds are again trading at distressed” levels, or a deep discount to their face value – is now n talks with banks and a nonprofit group in an attempt to teach a deal that would see about USD 800 million of its debt refinanced more cheaply, freeing up the savings conservation efforts.

At that level, it would be the biggest debt-for-nature swap struck to date, yet it could eventually be trumped by others, including Sri Lanka, which has been discussing a deal of up to $1 billion according to people familiar with those talks, the news agency said further.

Cape Verde, an archipelago nation off West Africa, is meanwhile close to a nature swap that could be worth up to USD 200 million, said Jean-Paul Adam, a former Seychelles government official who now works for the U.N. Economic Commission for Africa (UNECA), providing financing advice to governments.

Reuters stated that Ecuadorian, Sri Lankan and Cape Verde governments did not respond to requests for comment for this story, although Ecuadorian President Guillermo Lasso said in an local newspaper on Oct. 12 that its Galapagos swap deal could be wrapped up in four or five weeks.

The potential deals for Ecuador, Sri Lanka and Cape Verde, reported here in detail for the first time, point to a jump in interest for this form of financial alchemy, which was conceived decades ago but has remained something of a niche area until recently.

Only three of over 140 or so swaps struck over the past 35 years – the first in 1987 – had a value of more than a quarter of a billion dollars, according to global data published by the African Development Bank. The average size was $26.6 million.

The combined value of swap deals to date is $3.7 billion, according to the data. That’s a fraction of the $400 billion of emerging market sovereign debt analysts at Capital Economics recently estimated had fallen to distressed levels.

Advocates say that those current debt problems, combined with the growing political will and the recent successful swap deals in the Seychelles, Belize and Barbados, mean a swathe of other countries are now exploring the model.

-with inputs from Reuters