Copyright Page
© 2022 International Monetary Fund
WP/22/162
IMF Working Paper
Strategy, Policy and Review Department
Debt-for-Climate Swaps: Analysis, Design, and Implementation
Prepared by Marcos Chamon, Erik Klok, Vimal Thakoor, and Jeromin Zettelmeyer
Authorized for distribution by Ceyla Pazarbasioglu
August 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper compares debt-for-climate swaps—partial debt relief operations conditional on debtor commitments to undertake climate-related investments—to alternative fiscal support instruments. Because some of the benefits of debt-climate swaps accrue to non-participating creditors, they are generally less efficient forms of support than conditional grants and/or broad debt restructuring (which could be linked to climate adaptation when the latter significantly reduces credit risk). This said, debt-climate swaps could be superior to conditional grants when they can be structured in a way that makes the climate commitment de facto senior to debt service; and they could be superior to comprehensive debt restructuring in narrow settings, when the latter is expected to produce large economic dislocations and the debt-climate swap is expected to materially reduce debt risks (and achieve debt sustainability). Furthermore, debt-climate swaps could be useful to expand fiscal space for climate investment when grants or more comprehensive debt relief are just not on the table. The paper explores policy actions that would benefit both debt-climate swaps and other forms of climate finance, including developing markets for debt instruments linked to climate performance.
RECOMMENDED CITATION: Chamon, Marcos, Erik Klok, Vimal Thakoor, and Jeromin Zettelmeyer. 2022. “Debt-for-Climate Swaps: Analysis, Design, and Implementation.” IMF Working Paper 2022/162, International Monetary Fund, Washington, DC.
| JEL Classification Numbers: | F35; Q01, Q28; Q53; Q57 |
| Keywords: | Debt-for-climate swaps; climate mitigation; climate adaptation; climate finance; fiscal space; debt; NDCs. |
| Authors’ E-Mail Address: | mchamon@imf.org erik.klok@minbuza.nl jthakoor@imf.org jzettelmeyer@imf.org |
| JEL Classification Numbers: | F35; Q01, Q28; Q53; Q57 |
| Keywords: | Debt-for-climate swaps; climate mitigation; climate adaptation; climate finance; fiscal space; debt; NDCs. |
| Authors’ E-Mail Address: | mchamon@imf.org erik.klok@minbuza.nl jthakoor@imf.org jzettelmeyer@imf.org |
Title Page
WORKING PAPERS
Debt-for-Climate Swaps: Analysis, Design, and Implementation
Prepared by Marcos Chamon, Erik Klok, Vimal Thakoor, and Jeromin Zettelmeyer1
Contents
Introduction
Debt-For-Climate Swaps: A Primer
When Do Debt-for-Climate Swaps Make Sense?
Debt-Climate Swaps Compared to Climate-Conditional Grants
Debt-Climate Swaps Compared to Comprehensive Debt Restructuring
Why Have Debt Swaps Remained a Niche Instrument?
Use of Funds: The Costs of Finding, Structuring, and Monitoring Projects
Supply of Funds: Debt Volume and Composition
Should Debt Swaps be Scaled Up, and if so, How?
Bundling Projects and Policy Reforms
Budgetary Expenditures Supporting Adaptation and/or Mitigation
Developing KPIs and Creating KPI-Linked Bond Markets
Using Carbon Credits to Incentivize Debt-Climate Swaps
Mobilizing Official Funding for Debt Swaps or Grants Linked to Climate Action
Conclusion
Annex I. Fiscal Transfers Associated with a Debt Swap
When Do Debt Swaps Expand the Fiscal Space of the Debtor?
Debt Swaps versus Conditional Grants
Would the Debtor be Better Off Keeping the Donor-Provided Cash Rather Buying Back Debt?
Donor-Conducted versus Debtor-Conducted Buybacks
References
BOXES
1. Recent Debt Swaps in Seychelles (2015) and Belize (2021)
2. Comparing Climate-Conditional Grants and Debt-Climate Swaps: An Example
FIGURES
Figure 1. Countries’ Fiscal Risk Categorization and Climate Vulnerability
Figure 2. Number of Countries with Above-Median Climate Risk, by Probability of Fiscal Crisis Risk
Figure 3. Illustrative Structure of a Tripartite Debt Swap
Figure 4. Sovereign Borrowing Space Measure for 64 Low-Income Countries
Figure 5. Distribution of Weighted-Average Bond Bid Prices for a Sample of PRGT and MAC Countries
Figure 1.1
Figure 1.2
Figure 1.3. External Public Debt of LICs by Creditor Composition
Figure 1.4. External Public Debt of MACs by Creditor Composition
TABLES
Annex 1.1 External Debt of Low-Income Countries by Creditor Type
Annex 1.2. External Debt of Market-Access Countries by Creditor Type
The authors are grateful to Shamshad Akhtar, Simon Black, Mark Bowman, Carter Brandon, Lee Buchheit, Edgar Buckley, Nadja Bohme, Peter Breuer, Kennedy Byron, Anderson Caputo Silva, Oya Celasun, Kay Chung, Chanda de Long, Dennis Essers, Marcello Estevão, Stephanie Fontana, Slav Gatchev, Kevin Gallagher, Mary Goodman, Sebastian Grund, Alejandro Guerson, Jaime Guajardo, Mitu Gulati, Klaus Hellwig, Saanya Jain, Florence Jaumotte, Emilia Jurzyk, Ken Kashiwase, Karin Kemper, Parinaz Khademi, Kristina Kostial, Peter Lindner, Mira Merhi, Annapurna Mitra, Mahmoud Mohieldin, Justin Mundy, Sean Nolan, Natalija Novta, Augustus Panton, Ugo Panizza, Sejal Patel, Ceyla Pazarbasioglu, Christian Peter, Romina Picolotti, Marcos Poplawski, James Roaf, Francisco Roch, Alok Sharma, Paul Steele, Fiona Stewart, Mariusz Sumlinski, Stijn Verhelst, Ignazio Visco, Ulrich Volz, Beatrice Weder di Mauro, Elisson Wright, Johannes Wiegand, Simon Zadek, and participants in a July 2021 Round table on Climate Finance and Debt Sustainability convened by the IMF Managing Director for discussions and comments on earlier drafts. Zhuo Chen and Dilek Sevinc provided first-rate research assistance.