Could Debt-for-Nature Swap be the Answer to Pakistan’s Indebtedness?

Sustainability is a key focus of global investors, and demand for green bonds and other sustainable finance products is on the rise. Swapping debt to protect the climate helps maintain fiscal sustainability, promote a green recovery and foster long-term economic growth.

Debt swaps can modify procedures, strategies, and structures to support green growth, going past merely acting as finance tool for particular industries. Such programs allow national debt to be channeled toward meeting environmental pledges and significantly advancing the Paris Agreement goals. Debt swapping is a contemporary strategy that entails buying the debt of developing nations and demanding that they commit to safeguarding biodiversity and irreplaceable ecosystems in exchange.

According to a Sustainable Development Policy Institute study published in September 2022, around 30 economies have adopted debt-for-climate swaps primarily in Latin America and the Caribbean. Some $2.6 billion in debt swap accords were reworked globally from 1987 and 2015, of which $1.2 billion was spent in traditional projects. Additionally, 29 countries benefited from debt swaps during the pandemic.

Blue and Green Bonds

A blue bond is a newer type of a sustainability bond issued to fund investments in healthy oceans, while green financing covers climate change mitigation projects that reduce greenhouse gas emissions.

The United Nations has put the market value of marine and coastal resources and industries at an estimated $3 trillion per year. Global green bond issuances topped half a trillion dollars in 2021, according to Climate Bonds Initiative, a UK-based green debt tracker. Asian Development Bank said in a December 2021 report that green bonds issued by China tallied more than $22 billion in the first half of 2021, with close to 100 transactions, following by the Republic of Korea and Japan. The total value of Association of Southeast Asian Nations-labeled green, social, and sustainability bonds reached $16.4 billion as of September 2021.

Nations that are highly indebted can be provided swaps by creditors to stabilize their economies. Indebted countries would then be bound to commit to reforms and policies that align with the Paris Agreement and 2030 sustainable development goals. For example, goal number 14 focuses on “Life Below Water.”

Scope for Pakistan

Pakistan’s external debt totaled $126.9 billion in September 2022, compared with $130.2 billion in the previous quarter, CEIC Data showed, while IMF predicted the metric to soar by 2025. Its Data-Mapper, however, forecasts Pakistan’s general gross debt improving to 63.7% of GDP from 77.8%.

According to the Global Climate Risk Index 2021, Pakistan was the eighth most susceptible nation in the world owing to climate change. Federal Minister for Planning, Development and Special Initiatives Ahsan Iqbal recently said that the total estimated cost of the devastating floods is about $46.4 billion.

In order to achieve a greener resurgence, Pakistan in 2021 was reportedly eyeing new debt-to-nature swap deals worth $1 billion till 2023. Pakistan owed around $11.54 billion in Paris Club debt, including $1.42 billion to Germany and $403 million to Canada.

The Water and Power Development Authority launched Pakistan’s first-ever green bond worth $500 million in May 2021, but there is a long way to go. Swaps of debt for development could free up funds for spending in many crucial areas, such as health and education. It would also give Pakistan budgetary room due to debt cancelation and by raising the possibility of issuing new bonds for development in local capital markets.

Pakistan can follow the footsteps of Cambodia, India, and Seychelles, all of which utilized innovative finance products. Cambodia utilized social bonds to help unemployed people and train them, while India invested in girls’ schooling in Rajasthan by issuing development impact bonds. Seychelles converted $21.6 million of national debt through the world’s first blue economy debt for nature swap and issued the world’s first sovereign blue bond.

When an economy is unable to pay back its obligations, debt relief or typical swaps may trigger, but Pakistan needs to think out of the box to utilize debt-for-nature swaps amid rising debt concerns. Pakistan must develop a strong and transparent implementation framework to ensure progress toward agreed-upon targets. For that, coordination across federal and provisional levels would be needed. In addition, Pakistan needs to be at the forefront on climate change issues, raising its profile globally. All of this sounds like a big ask, but perhaps is the need of the hour.

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