Credit: Jean-Marie Hullot, Creative Commons
After rising to become the world’s top bilateral creditor, China is facing a new challenge: a looming global debt crisis. Many of China’s most frequent borrowers now find themselves unable to repay their debts.
China has already shown itself as a willing partner in debt renegotiations. It has joined the G-20 Debt Service Suspension Initiative (DSSI) to ease this burden among 73 lower-income borrowers by allowing them to temporarily suspend their debt payments to participating bilateral lenders. The initiative is currently set to expire in June.
In fact, the DSSI-eligible countries facing the heaviest debt service are all repeat customers of China’s lending. Pakistan — the DSSI-eligible country with the greatest debt service burden — owes China $2.9 billion in debt service in 2021. Kenya and Angola — in second and third place — owe China $2.3 billion and $849 million in 2021, respectively. Laos owes China $442 million in 2021, a whopping 2 percent of its GDP.
With debt service burdens this high, China and other major creditors have come to realize that many of their debtor nations will never be able to repay these debts. To this end, the G20 has created a common framework, whereby DSSI countries can approach their creditors for outright debt forgiveness. Over 20 former finance ministers and central bank governors recently called for proposals that link global debt suspension and forgiveness efforts to environment and development outcomes. One way this could be achieved is by converting financial debt into environmental commitments through debt-for-nature or debt-for-climate swaps.
New research published in Science from our team at the Boston University Global Development Policy Center identifies countries that would be ideal candidates for such activity with China, based on their level of exposure to debt and climate change. Through such efforts, China could continue to pursue mutual policy goals with debtor countries, while also cementing its status as a global leader on climate.
What are Debt-for Nature and Debt-for-Climate Swaps?
Debt-for-nature swaps give debtor nations a mechanism to continue to pursue their longer-term sustainability goals despite short-term financing constraints. They typically involve converting debt repayment obligations into commitments to manage conservation projects, which benefit the world through climate change mitigation and biodiversity conservation.
Debt-for-climate swaps are a newer addition to this landscape, funding green energy and other climate savvy development plans. Most recently, the Seychelles implemented the world’s largest such swap, also the world’s first marine debt swap for dual nature and climate benefits, expanding marine protected areas to cover nearly one-third of the country’s seascape, in exchange for relief of $21.6 million in sovereign debt. An even newer innovation are ‘performance bonds’ linking finance with social and environmental outcomes.
Beyond the obvious benefit of creating an escape from this year’s debt crunch, swaps can also ensure that developing countries’ sustainability goals outlast the current crisis.
Our findings highlight countries with the heaviest debt exposure to China and also the greatest potential for biodiversity conservation and climate change mitigation, as reflected in the countries’ own Nationally Determined Contributions (NDCs) as part of the Paris Agreement.
Countries with high potential for biodiversity conservation may be interested in exploring debt-for-nature arrangements, while those with particularly ambitious NDCs may want to explore debt-for-climate schemes. Angola and Laos — mentioned above as particularly heavy borrowers from China — rank among the most attractive for both types of deals.
Other countries have advantages for one or the other. Those that are particularly vulnerable to the effects of climate change — like Senegal, Sudan, and Zimbabwe — may wish to explore debt-for-climate swaps to free up capital to reduce their high annual carbon emissions and build more climate-resilient economies. Smaller countries with high concentrations of threatened species — like Fiji and Togo — may prefer debt-for-nature swaps to have fiscal space to protect biodiversity.
Beyond the obvious benefit of creating an escape from this year’s debt crunch, swaps can also ensure that developing countries’ sustainability goals outlast the current crisis. Developing countries’ NDCs show an impressive determination toward greener development paths, but they are also financially ambitious. Debt swaps can help make the financing possible.
How Debt Swaps Can Help China
2021 is a momentous year for China’s sustainability policy, for two reasons. First, as China prepares to host the 2021 Conference of the Parties (COP) to the Convention on Biological Diversity, it would be well-served by a gesture to showcase its global leadership in conservation. China is also considering a global biodiversity fund as part of the COP, which could support swaps or credit enhancement while exhibiting China’s global environmental leadership.
Second, 2021 marks the 10-year anniversary of China’s Ecological Red Line (ERL) initiative to map and protect 2.4 million square kilometers — over one-fourth of the mainland area. The ERL constitutes one of the fastest conservation efforts the world has ever seen. Through it, China has developed enviable institutional capacity to map ecosystems, calculate the value of their ecological services, and plan for their sustainable uses. In climate change mitigation, China’s 2060 carbon neutrality pledge has also required tremendous institutional growth as the country rapidly boosts its renewable energy capacity. This is precisely the expertise that other developing nations need to pursue their own sustainability goals, pursuant to their own local priorities.
China is poised to lead by advancing proposals to incorporate nature and climate into global debt solutions at the G20. In the meantime, China can also lead by example in creating its own set of instruments to convert the looming debt crisis into opportunities for a green recovery from the Covid-19 crisis.1An online interactive tool allows readers to explore the possibilities themselves.
Rebecca Ray is a Senior Academic Researcher at the Boston University Global Development Policy Center. She holds a PhD in Economics from the University of Massachusetts-Amherst and an MA in International Development from the Elliott School of International Affairs at the George Washington University.
Blake Alexander Simmons is a Post-Doctoral Research Fellow at the Boston University Global Development Policy Center. He holds a PhD in Conservation Science from the University of Queensland and an MS in Biology from the University of Antwerp (Belgium).
