The African Development Bank Group is in discussions to back a new debt-for-nature swap, marking its entry into a fast-growing corner of the sustainable debt market.
(Bloomberg) — The African Development Bank Group is in discussions to back a new debt-for-nature swap, marking its entry into a fast-growing corner of the sustainable debt market.
“We’re looking at one transaction [and] still discussing the parameters,” said Hassatou Diop N’Sele, vice president for finance and chief financial officer at the AfDB, in an interview. She declined to identify the country initiating the deal through which it would refinance its debt in exchange for allocating some of the savings to green projects.
AfDB, founded in 1963 and based in Abidjan, Ivory Coast, is a multilateral development bank providing project finance to member countries. While debt-for-nature swaps involving commercial creditors have so far been implemented only in Latin America, African countries have expressed interest. Gabon is expected to soon complete the first such deal on the continent, and Gambia, Eswatini and Kenya have also indicated their support.
African countries have “a very good case” for using the financial arrangements, said N’Sele. “The continent faces multiple challenges – rising debt costs, a massive need for climate finance, and issues with regard to land degradation and biodiversity loss. With debt-for-nature swaps, there is the start of a solution.”
Belize struck the first modern-day debt swap in 2021 with insurance from the US International Development Finance Corporation. A deal by Barbados received repayment guarantees from a nonprofit, The Nature Conservancy, and the Inter-American Development Bank, the first multilateral to play such a role. IDB has since guaranteed a third deal in Ecuador, the world’s largest so far.
AfDB is now willing to offer guarantees, N’Sele said. “The ultimate goal will be to help the transaction achieve the desired extension of maturity and also a reduction of overall debt service,” she said.
The move comes as low-income countries are increasingly calling on development banks and rich country lenders to help them tackle the concurrent challenges of climate change, debt distress and growing poverty rates. Debt-for-nature swaps featured prominently at last month’s climate finance summit co-hosted by French President Emmanuel Macron and Mia Mottley, prime minister of Barbados.
But there are concerns about the transaction costs associated with the deals and their real-world impact on countries’ ecosystems and finances. “It has to be at scale to make a real difference because there is a lot of work” in structuring such deals and they “can be costly,” N’Sele said.
She declined to comment on which investment bank may be structuring the deal that AfDB is backing. Debt-nature-swaps have so far been dominated by Credit Suisse Group AG, with Bank of America a more recent participant. “We would be willing to work with any actor, newcomer or not, in this space,” said N’Sele.
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