African countries saddled with debt and ravaged by climate events have agreed to consider swapping debt to invest in climate action.
The Ethiopian capital of Addis Ababa is the site of the ongoing United Nations conference for finance and economic ministers who discussed a number of alternative green financing models that would allow a country’s debt to be reduced in exchange for commitments on green investments, reports The Hill.
One of the alternative models under discussion is called the “debt-for-climate swap.” This option is an economic tool that reduces a country’s debt in exchange for commitments on green investments.
The International Monetary Fund defines debt-for-climate swaps and debt-for-nature swaps as a way to free up fiscal resources so that governments can improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities.
Creditors provide debt relief in return for a government commitment to, say, decarbonize the economy, invest in climate-resilient infrastructure, or protect biodiverse forests or reefs.
The interest in debt-for-climate swaps comes as many African nations are battling with the effects of costly climate change-fueled events, reports CTV News Canada.
Events such as the ongoing drought in eastern Africa that has killed thousands and decimated livelihoods reliant on rain-fed agriculture and the aftermath of the devastating Cyclone Freddy in the south that’s left hundreds dead and thousands of others displaced are just two of a number of extreme weather events that have devastated many countries on the continent.
Egyptian finance minister Mohamed Maait said that his country is one of many that is now having to add heavy climate costs to budgets stretched thin by external debt — which takes up to 17 percent of countries’ spending in some cases
“What am asking every day and every hour is where do I get the money to protect our people from climate extremes,” Maait said, adding that borrowing was often the only option for some nations.
Yet “many countries simply cannot access international financial markets because of rising interest rates,” Hanan Morsy, the chief economist of the U.N. Economic Commission for Africa told the roundtable Monday evening.
Morsy added that private sector investments in climate finance are lower in Africa than in any other part of the world.
This tool was not the only type of funding under discussion. Bonds that would help increase private financial flows as well as “blended finance” models that would combine development funds and private capital as potential solutions for climate funding.
In 2022 the International Monetary Fund established a $50 billion climate loan pot to help low and middle-income nations access affordable and longer-term financing to respond to shocks associated with climate change. Rwanda became the first African nation to receive a loan of $319 million.
The World Bank also has a $50 billion pot but is sending around 5 percent of its funds to the ten most climate-vulnerable countries, according to a recent study by the Center for Global Development. Four of the ten nations identified — Mali, Niger, Sudan, and Liberia — were in Africa.
The ministers’ roundtable coincided with the Green Climate Fund board meeting, a group within the U.N. climate agency that financially supports nations to adapt to or curb climate change. On Monday the fund approved $580 million in new climate finance for developing nations.
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