Bridging the Climate Finance Gap in Africa through Debt Swaps

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Many African economies are at the convergence of two crises, soaring debt burden and climate vulnerability. Over the past decade, public debt levels have risen sharply across the continent, and climate shocks, such as devastating floods and prolonged droughts, have exacerbated the vulnerable situation African economies face. The continent is home to some of the most climate-vulnerable countries in the world; however, many of these nations face unsustainable debt levels that limit their fiscal capacity for climate adaptation and resilience-building. 

Public debt levels in Africa have risen sharply over the past decade: by 2022, they reached US$ 1.8 trillion, a 183 percent increase from 2010. While this debt burden has serious economic implications, the precarity is further exacerbated by the particularly high levels of climate vulnerability that African nations face.

Despite these challenges, international support has receded in recent years. At a time when Africa urgently needs support from the international community, many countries have scaled back their aid commitments. Most notably, the United States, which accounted for 8 percent of all climate funding in 2024, has halted contributions to initiatives such as the US Agency for International Development (USAID), the International Green Fund and the Fund for Responding to Loss and Damage. In 2023, USAID provided US$3 billion in climate finance to developing countries; however, President Donald Trump’s administration now plans to suspend the organisation. The United Kingdom, which reduced its aid budget from 0.5 percent of Gross Domestic Product (GDP) to 0.3 percent, has also proposed aid cuts, as have Germany, France, and the Netherlands. African countries must explore alternative approaches to climate funding that do not worsen their debt burdens. One such strategy could be employing Debt-for-Climate swaps, which allow countries to reduce their debt obligations in exchange for committing to climate investments.

Africa’s Public Debt Crisis 

A well-designed swap can free up fiscal space by enhancing the debtor government’s repayment capacity and can help avoid socio-economic hardships associated with debt distress. Additionally, the agreement can help countries direct funds toward climate action without increasing debt burdens.

Public debt levels in Africa have risen sharply over the past decade: by 2022, they reached US$ 1.8 trillion, a 183 percent increase from 2010. While this debt burden has serious economic implications, the precarity is further exacerbated by the particularly high levels of climate vulnerability that African nations face. The continent is home to some of the world’s most climate-vulnerable countries, with many economies lacking the resilience to adapt. Climate-related events impose costs on governments for reconstruction and recovery, forcing them to increasingly borrow from international banks or donors. At the same time, a high level of debt reduces the capacity of governments to invest in climate-resilience projects because a high share of government spending is directed towards debt servicing. In Africa, the trend of growing debt servicing obligations has worsened over the years. In 2010, there were nine African countries where debt obligations comprised over 10 percent of total revenue; by 2022, the number had increased to over 20. 

Figure 1: African countries in debt distress and climate vulnerability

Source: International Monetary Fund and University of Notre Dame 

This situation is especially worrying for countries such as Chad, Niger and Guinea-Bissau which, as shown in Figure 1, have high levels of climate vulnerability and limited fiscal space to adapt or respond to these challenges. These countries will be hit hardest by the retreat of international support in climate aid and are likely to struggle to mobilise funds domestically for climate mitigation and adaptation. In such cases, innovative financing solutions such as Debt-for-Climate swaps can play a role in bridging the gap between debt servicing and climate adaptation. 

What are Debt-for-Climate Swaps? 

A Debt-for-Climate swap involves the lender reducing or restructuring a portion of a debtor country’s debt. In exchange, the debtor country commits to investing equivalent funds into climate-related projects. A well-designed swap can free up fiscal space by enhancing the debtor government’s repayment capacity and can help avoid socio-economic hardships associated with debt distress. Additionally, the agreement can help countries direct funds toward climate action without increasing debt burdens. While each agreement may differ, the general structure of a swap agreement can be represented by the figure given below. 

Figure 2: Debt-for-Climate swap structure 

Source: Climate Policy Initiative 

The first swap agreement was signed between US-based non-profit Conservation International and Bolivia in 1987. Under the agreement, Conservation International acquired US$ 650,000 of the Bolivian government’s debt for a discounted price. In return, the Bolivian government agreed to protect the Beni Biosphere Reserve and create three adjacent protected areas. Since 1987, several other countries have entered similar swap agreements. These include Costa Rica, the Philippines, Belize, Barbados and Seychelles - with a total of 140 swaps to date. Ecuador undertook the world’s largest debt swap in 2023, in an agreement that involved Credit Suisse buying US$ 1.6 billion of sovereign debt for US$ 644 million. In return, the government committed to spending US$ 118 million annually for 20 years on conservation in the Galápagos, including the protection of a marine reserve that serves as a migratory corridor for marine wildlife. The old debt will be replaced with a cheaper-to-service US$ 656 million "Galápagos Bond" maturing in 2041 and insured by the US International Development Finance Corporation (DFC).

To make these instruments work in the African context, a three-fold approach is essential. First, African-led multilateral institutions can consider playing a central role in underwriting and supporting the swap agreement. Second, channelling swap savings into green and sustainability-linked bonds can provide an impact-driven approach for climate priorities. Lastly, developing a standardised term sheet can streamline negotiations. 

However, while this instrument offers promise, it also comes with significant limitations. Debt-for-climate swaps have long gestation periods and involve complex and lengthy negotiations with multiple stakeholders, including debtors, creditors, multilateral institutions, local communities, and private sector actors. Negotiating a mutually acceptable agreement among diverse interests requires considerable time, resources and trust. In addition, tracking the impact of the swap on climate adaptation and mitigation can be costly due to the complex financial structures involved. Sometimes the funds from these swaps are managed in jurisdictions abroad that are known for having weak transparency rules. For example, the Galápagos Life Fund from Ecuador’s swap was incorporated in Delaware, a low-tax US jurisdiction, and did not disclose its project portfolio. Further, swap agreements can involve complex conditionalities, which often undermine their effectiveness. El Salvador, for instance, saved US$ $352 million on a US$ $1 billion debt but had to accept several strict conditions such as monetary penalties, interest rate adjustments and mandatory debt redemption in case of breaches. These conditionalities not only impose financial management costs on the debtor countries but also limit their autonomy in deciding how swap savings must be spent. These factors can limit the scalability and broader adoption of debt-for-climate swaps, especially in countries with low technical and institutional capacity. 

Making Debt-for-Climate Swaps Work for Africa

The following recommendations may be considered to make swap agreements viable and scalable in the African context: 

1. Leveraging the multilateral system to assist with swap agreements

Debt-for-climate swaps require strong underwriters who can guarantee the credibility of the swap. The multilateral development system is well-positioned to play this role because of its ability to mitigate operational and financial risks. Multilateral development banks (MDBs) can assist in the early stages of the swap agreement by helping countries build the necessary technical skills. While many African countries have made national commitments towards climate action, they often lack the expertise to formulate fundable projects. MDBs can provide technical assistance and data-driven advice to help countries develop projects that align with their goals. African-led institutions such as the African Development Bank, the African Union’s African Climate Policy Centre, and regional development banks can be leveraged to play a central role. Once the swap is completed,  the debtor country is expected to report on progress. To assist with transparency and accountability obligations, a green monitoring agency could be established to generate annual audits of the debtor countries. 

2. Blend swap savings into green and sustainability-linked bonds

Debt-for-climate swap savings can be channelled into green and sustainability-linked bonds, which many African countries already have experience using. Green bonds can be tied to measurable Key Performance Indicators (KPIs), while sustainability-linked bonds provide debtor countries more space to channel funds towards their priorities. Through this blended model, countries can enhance climate action while also incentivising accountability and growth. 

3. Create a template-based and stakeholder-driven negotiation model

Debt-for-Climate swaps agreements are complex and involve an array of stakeholders and issues that need to be considered, making them costly and time-consuming to negotiate and implement. For example, due to extensive multi-stakeholder negotiations, the Seychelles debt swap took four years to finalise. To facilitate the negotiation process, a debt-for-climate swap term sheet, similar to a term sheet for an investment deal, could serve as a template. The term sheet could take advantage of existing taxonomies and standards, such as the Climate Bonds Initiative (CBI) Climate Bonds Taxonomy, the European Union (EU) sustainable finance taxonomy, and the United Nations Framework Convention on Climate Change (UNFCCC) Reducing Emissions from Deforestation and Forest Degradation (REDD+) Safeguards.

Conclusion 

Given that many African countries find themselves in a precarious position of managing rising debt and climate vulnerability, Debt-for-Climate swaps offer a way to ease the burden. However, this instrument is accompanied by several challenges, such as long gestation periods, transparency issues and complex conditionalities, which can make it difficult for countries with institutional constraints to effectively carry them out.  To make these instruments work in the African context, a three-fold approach is essential. First, African-led multilateral institutions can consider playing a central role in underwriting and supporting the swap agreement. Second, channelling swap savings into green and sustainability-linked bonds can provide an impact-driven approach for climate priorities. Lastly, developing a standardised term sheet can streamline negotiations. With these reforms, Debt-for-Climate swaps could serve as a viable tool for African economies to bridge their climate financing gap. 

Anika Chhillar is a Research Assistant with the Centre for Economy and Growth at the Observer Research Foundation.

• Climate, Food and Environment
• Energy Security
• Climate Change
• Africa
• Adaptation and Resilience
• Climate Finance
• Climate Vulnerability
• Debt-for-Climate Swaps
• International Aid Retreat
• Multilateral Development Banks
• Public Debt Crisis
• Sustainability-linked Bonds

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