Implementing debt-for-nature swaps (DFNS) can play a “unique role” in providing funds to establish marine protected areas (MPAs), as shown by successful experiences in Seychelles and Belize, a study has found.

In their analysis, published in the journal Humanities and Social Sciences Communications, researchers from Wuhan University in China investigated the case studies of the two island countries, both with weak debt sustainability, which used DFNSs to implement their marine protection activities.

“The MPA has been recognised as one of the most effective and important tools for conserving marine habitat and biodiversity, and managing fisheries,” authors Xiaoyi Jiang and Hao Cao said.

“The debt-for-nature swap has played a positive role in establishing MPAs in Seychelles and Belize by providing stable financial support for MPAs and improving the debt sustainability of debtor countries to some extent.”

Debt-for-nature swaps are a process by which a country’s external debt is partially cancelled in exchange for the debtor government’s commitment to pay for environmental projects in their local currency on terms agreed upon with creditors.

The mechanism has been implemented for environmental preservation in the past couple of decades, primarily in tropical rainforest protection projects in South America and Southeast Asia, and it is being advocated by many developing countries. As nature loss has climbed the international agenda, there has been a significant increase in such arrangements – and the attention they get – in the past two-three years.

During this year’s World Economic Forum (WEF) meeting in Davos, Switzerland, Colombian President Gustavo Petro reiterated the concept of debt-for-nature swaps to mobilise resources and protect the rainforest.

BELIZE AND SEYCHELLES

Since establishing MPAs requires various financing measures, DFNSs can assist countries lacking funds to develop marine protected areas with sustainable financial support, the study underlined.

In order for a debtor country to obtain funding for marine conservation via DFNS, it must make specific commitments and manage all DFNS transactions through trust funds established under their national laws. These trusts provide a source of income which can be invested in marine conservation efforts.

In 2020, Seychelles, a nation of 115 islands in the Western Indian Ocean, managed to increase the area in its territorial waters covered by MPAs to 30% from 1% and designed “half of these new MPAs as ‘no-take’ zone” through the Seychelles Conservation and Climate Adaptation Trust (SeyCCAT).

Under the debt swap in Belize, the US Development Finance Corporation provides insurance de-risking Belize’s outstanding debt, restructured into ‘blue bonds’ with lower interest rates, to make the debt more attractive to investors.  In exchange, Belize commits to allocating $4.2 million per year for marine conservation until 2041 and expanding its Biodiversity Protection Zones from 15.9% of ocean area to 30% by 2026.

The county combined a DFNS with its environmental protection strategy, such as the Blue Loan Agreement, to obtain a considerable amount of financing.

TOWARDS GLOBAL ACTION

“Given the practices in Seychelles and Belize, the focus of the next step in developing the DFNS is ensuring its satisfactory performance as a kind of blended finance that relieves debt, and provides funds for environmental protection actions,” researchers said.

The study stressed that such swaps must be accompanied by a number of best practices to achieve its potential in safeguarding marine ecosystems:

• Transparency must be strengthened, also through the public disclosure of information
• Debtor countries must introduce a special legislation on DFNS to provide a legal basis for the domestic implementation of environmental protection pledges
• Countries must benefit from the long-term support and assistance from the international financial institutions and NGOs

Despite the study’s positive conclusions, researchers warned that further observation is needed to make sure that DFNSs can support MPA financing on a wider scale, given that DFNS has so far covered only four countries –Belize, Seychelles, Barbados, and Ecuador.

Last year, Ecuador and Credit Suisse negotiated the world’s biggest DFNS arrangement to date. Under the deal, Ecuador will buy back over $1.6 billion of its debt with a $656-mln loan that will be paid for through the new Galapagos Marine Bond. It is expected to generate $323 mln for island marine conservation projects by 2041.

By Giada Ferraglioni – giada@carbon-pulse.com

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