Debt-for-nature swap

Debt-for-nature swaps are financial transactions in which a portion of a developing nation's foreign debt is forgiven in exchange for local investments in environmental conservation measures.

The debt-for-nature swaps concept was first given birth by Thomas Lovejoy of the World Wildlife Fund in 1987 as an opportunity to deal with the problems of developing-nation indebtedness and its consequent deleterious effect on the environment.

[2] Also, countries that have engaged in debt-for-nature swaps typically have several threatened or endangered species, experience rapid deforestation, and have relatively stable, often democratic, political systems.

[4] The financing mechanism for debt-for-nature swaps is an agreement among the funder(s), the national government of the debtor country, and the conservation organization(s) using the funds.

Participation in debt-for-nature swaps has been restricted primarily to countries where the risk of default on debt payments is high.

[3] An example of a bilateral swap occurred when the U.S. Government, under the Enterprise for the Americas Initiative, forgave a portion of Jamaica's official debt obligations and allowed the payments on the balance to go into national funds that finance environmental conservation.

Recorded bilateral and multilateral debt-for-nature swaps have generated nearly US$900 million in total conservation funding from 1987-2010 (see Table 1).

[5] The decline in the number of debt-for-nature swaps in recent years likely results in part from the higher prices of commercial debt in secondary markets.

[10][12] In the late 1980s and early 1990s, conservation organizations could purchase relatively large debt obligations on the secondary market at highly discounted rates.

During this period, conservation organizations and national governments negotiated swaps at a rate of approximately five agreements per year.

Though debt shows a positive correlation with deforestation levels, most researchers believe that highly indebted countries lack political institutions and enforcement structures that would limit environmental degradation.

[16] Some suggest that the solutions to environmental degradation are effective political institutions, democracy, property rights, and market structures,[13] and this development theory matches many of the principles of the Washington Consensus.

[9][12] Debt for nature swaps are usually actioned by an indebted nation's elite, not the peasantry who may traditionally have owned or at least used the land in question.

[17] Subsequent swaps have sought to include local residents, especially indigenous peoples, in the decision making process and the management of lands.