Decreased currency value, increased prices and increased imports… These three terms summarize the situation of many countries in the developing world, which have received successive economic blows over the past years, coinciding with the increasing frequency of climate disasters. All of those issues pushed them to continue knocking on the doors of creditors.
In 2022, the size of the public debt of Arab countries reached a new level of about $1.5 trillion. That is, nearly half of the regional gross domestic product. Middle-income countries - which include Egypt, Algeria, Tunisia, Morocco, Jordan, and Lebanon - bear approximately half of this debt.
Debt and climate change... vicious circle
The need of the region countries to recover the effects of natural disasters increased the challenges they face due to the inability to provide the necessary financial resources to finance climate action projects, while global warming threatens their economic potential. Hence, the idea of debt swaps is again at the forefront, which includes alleviating amounts of money owed by debtor countries in exchange for the implementation of projects that contribute to “Earth” protection.
Speaking to “Green in Arabic”, Dr. Salpi Djoundourian, Associate Professor of Economics and Associate Dean of the Adnan Al-Qassar College of Business at the Lebanese American University, indicates that the expected increase in the size of public debt for developing countries and emerging economies will represent about 15% of the gross domestic product by 2050 due to a set of climate policies; according to the financial monitoring report issued by the International Monetary Fund in 2023.
“Djoundourian” sees that such increase will be a challenge, especially for low and middle income Arab countries that already suffer increased debt and interest costs, in addition to its severe and increasing need to adapt to climate change. The resources they need are enormous, but their access to climate finance is limited.
Financing gap
The financing crisis that “Djoundourian” pointed out was also warned by the United Nations Economic and Social Commission for Western Asia (ESCWA), which indicated that the amount of funding that Arab countries need to fulfill their national plans to face climate change is not proportional to the amount of funding actually occurring, stressing that 11 Arab countries need $570 billion by 2030 to implement their national contribution plans.
The organization pointed out, in a previous report, the imbalance in the distribution of funding between Arab countries. Over the period between 2010 and 2020, 92% of the money flow went to only 6 countries: Egypt, Iraq, Jordan, Lebanon, Morocco, and Tunisia.
The economist continued that debt swap projects for climate action projects began to be proposed a long time ago as an alternative source that could benefit both parties: creditors and debtors.
If we look at the creditor parties, the amounts agreed upon to be swapped, which will be allocated to climate resilience projects, will increase climate financing pledges that will accelerate the implementation of the obligations of industrialized countries approved by the Paris Agreement, without adding an additional burden to their budgets, according to Djoundourian’s opinion.
The economist also pointed out another advantage that falls within these projects, which is their suitability for financing climate adaptation projects, which require long-term commitment. Because it is a predictable source, in addition to reducing the risks associated with dealing in foreign currency in favor of using the local currency.
The role of civil society
According to “Djoundourian”, there are two parties that can play an important role in these projects: The first is the international non-governmental environmental organizations and environmental protection groups that can play the role of mediator between the creditor party and the borrowing country. The second is private sector companies that can be attracted to these projects channel funds towards pollution reduction appropriations, or for social responsibility gains.
There are already examples of third-party intervention to facilitate such initiatives; For example, in 2015, TNC (The Nature Conservancy) agreed to purchase about $22 million in debt owed by the Seychelles, which is surrounded by Indian Ocean waters, in exchange for the latter's establishment of 13 new marine reserves where a number of activities, including fishing, were restricted.
At the Arab level, the United Nations Economic and Social Commission for Western Asia (ESCWA) launched the Debt for Climate Action Swap Initiative in 2020, with the aim of strengthening “Earth” protection efforts in the region. The initiative targeted middle-income countries in the Arab region that are committed to paying their debts and are not prone to defaulting on their outstanding payments, as well as providing civil society organizations with an opportunity to contribute to the development of barter programs.
The most significant gains for debtor countries are interest relief. The mechanism begins with the creditor's agreement to reduce interest payments, with the recipient country allocating a parallel amount in local currency to a dedicated account, while allowing donors joining the initiative to provide parallel funding, both within and outside the swap agreement, according to the organization's official website
The initiative's benefits are not limited to the environmental aspect. The number of vacancies will be created by the initiative between 2022 and 2028 in the countries of Egypt, Tunisia, Morocco and Jordan will exceed 540 thousand, according to the organization's preliminary estimates.
Displacement crisis
According to experts; focusing on promoting responses to the social and economic impacts to climate change for different groups, should be a key point during the negotiation of debt swaps.
Dr. Alaa Sarhan, Professor of Environmental Economics at the Egyptian University of Ain Shams and former World Bank Environmental Chief Economist in Washington, warned “Green in Arabic” that the inability to achieve climate justice would increase displacement rates from the South to the North. This poses a threat to the interests of developed countries with which debt swaps are being negotiated. Farmers, for example, face the risk of drought and fishing workers face the risk of declining production.
“Sarhan” sees that there’s a climate fund crisis reaching the developing countries. Most of which comes as loans, while the smallest portion includes: non-refundable grants and concessional funding amid international pressure to implement procedures to reduce greenhouse gases, and a local pressure to execute adaptation programs to protect their citizens besides the debts crisis.
The Professor of Environmental Economics noted that the idea of debt swaps was not a new one, but had begun in the world since the 1980s, and included the implementation of projects in various fields.
Climate Diplomacy
The way in which such negotiations should be pursued, from the point of view of the Professor of Environmental Economics, is "climate diplomacy", and to address creditor countries in the appropriate language. The wealthy Nordic countries say that economic crises have limited their ability to provide new financing, and we must therefore demand that they alleviate the debts already in place instead.
In his view, the issue of the compensation fund with climate justice and climate finance was an important triangle in dealing with the climate crisis, and he called for developed countries to address that the idea of debt swaps would ease the burden of compensation for losses and damages on them.
Professor of Environmental Economics described the issue of climate compensation as "thorny", because of the controversy over who should pay it. Are countries responsible for the greatest greenhouse gas emissions currently, or historically responsible countries? India, for example, occupies third place in the emission rate, but it has the world's largest population, and the size of its pollution relative to population is thus negligible.
Instead of considering who will be responsible for paying the climate bill, we should begin with debt relief and prioritize adaptation projects that receive less climate finance than mitigation projects, in his opinion.
“Sarhan” emphasizes the need for local solutions on a case-by-case basis, as each country has its own debt composition and capabilities that are different from those of other countries.
Climate crisis and deeper debts
Climate change poses a great risk to the Arab region. Development is negatively impacted by droughts, biodiversity loss, aridity, land degradation, rising temperatures, desertification, and natural disasters, which are all threats to water, energy, and food security. As a result, the costs of dealing with the climate change crisis are predicted to increase.
On this topic, Niranjan Sarangi, Senior Economic Affairs Officer of “ESCWA”, declared through his talk to “Green in Arabic” that the international public climate finance conducted is only 6% of the total estimated finance need to implement Nationally Determined Contributions (NDCs) priority actions in 11 Arab countries. The financing mostly comes in the form of debt, not grants.
He continued: The development of viable projects in this field is not an easy and affordable task for countries. Moreover, there are inconsistencies in the flow of finances in the region. The LDCs and conflict-affected countries that face specific difficulties have had a less successful access to financing.
A debt-swap mechanism for climate action
“Sarangi” pointed out to an initiative started by ESCWA three years ago which featured three main innovative features as follows: (a) debtor-driven national priorities are emphasized in the Nationally Determined Contributions and other development plans, (b) aiming for outcomes for climate change and SDGs by using a programmatic approach that includes a framework of Key Performance Indicators (KPIs), (c) to have a greater impact on fiscal space and development outcomes by increase swap amounts through the debt conversion process in the medium-term period. In addition, ESCWA is working with Jordan, Egypt, Tunisia, and other middle-income countries in the region to support their endeavors in establishing KPI-linked swap programs.
“Sarangi” addressed that a bigger assistance needs to be offered to countries in debt in order to find solutions other than debt swap. It is not always the miracle solution but it is one of the tools that can relief external debt repayments and boost fiscal space for flexible investments’ financing, as proposed by the ESCWA’s Climate/SDGs – Donor Nexus Initiative.
Regarding Climate/SDGs Debt Swaps and loss-and-damage compensations, “Sarangi” stated that the two mechanisms are significantly different in terms of structure, context, and applications. The first one is considered a prevention mechanism that can nurture adaptation to climate change; the second is a compensation one.
