The Galapagos debt-for-nature swap highlights the importance of environmental conservation and sustainable economic growth
Sri Lanka unilaterally defaulted on its external debt in April 2022, exposing its long-standing economic and financial vulnerabilities and igniting a series of inter-related multiple economic crises—fiscal, debt, currency, inflation, and balance of payments—as well as a vast socio-political upheaval. The root cause of Sri Lanka’s economic crisis was a result of misuse of public funds by politicians on an unprecedented scale and large fiscal deficits, which were increasingly financed by unsustainable public debt, particularly foreign commercial borrowings. This carefully over time navigated Sri Lanka into a public debt crisis, international sovereign bond unsustainability, liquidity crisis, and a collapse in the exchange rate.
These were the catalysts for Sri Lanka’s decision to a unilateral default on its external debt. A substantial reduction and reprofiling of debt through restructuring of both domestic and foreign debt to ensure debt sustainability is essential coupled with a meaningful fiscal policy reform anchored by revenue increases and expenditure rationalisation to reduce fiscal deficits. Deep growth-enhancing structural reforms are necessary for medium-term rescue and recovery and long-term growth and stability of Sri Lanka.
Exit ramp
Like Sri Lanka, Ecuador in South America was searching for an exit ramp for its Sovereign Bond situation. Instead of using conventional brick-and-mortar restructuring methods, they came up with an innovative Debt for Nature swap, repurchasing $ 1.6 billion worth of Ecuador’s outstanding bonds at approximately 40 cents on the dollar. Debt for Nature Swap will save Ecuador $ 1.1 billion in debt service repayments over the next several years, with $ 450 million invested in conservation and sustainable activities. This goes on to show that there could be multiple ways to restructure a country’s sovereign bonds and this is a valuable lesson for Sri Lanka.
The Government of Ecuador (through the National Planning Secretariat, the Ministry of Economy and Finance, and the Ministry of the Environment, Water, and Ecological Transition), with the support of the Green Climate Fund, has announced the launch of the “Sovereign Green Bonds Framework of Ecuador”.
The document establishes guidelines, technical mechanisms, and instructions necessary to implement the core components of the Green Bond Framework. Projects funded by the issuance of these green bonds must meet eligibility criteria. Eligible projects include those focused on the development of renewable energy; sustainable agriculture, land use, and protected areas; sustainable and low-carbon transportation; and sustainable management of natural resources, among others. These programs and projects are expected to contribute to Ecuador’s transition towards sustainable development, based on low emissions and resilience to climate change.
Galapagos Debt for Nature swap
On 9 May 2023, Ecuador’s government successfully completed the Galapagos Debt for Nature swap, repurchasing $ 1.6 billion worth of Ecuador’s outstanding bonds at approximately 40 cents on the dollar. The operation will save Ecuador $ 1.1 billion in debt service repayments over the next 17 years, with $ 450 million invested in conservation and sustainable activities. Conservation investment will benefit the Galapagos National Park, the Galapagos Marine Reserve, and the new Hermandad Marine Reserve, which together total 198,000 square marine kilometres.
The Global Green Growth Institute (GGGI), with funding from the Latin American Development Bank (CAF), acted as a trusted advisory to the Ministry of Economy and Finance throughout the transaction by providing technical and financial advice. This was a significant milestone for Ecuador’s efforts to promote sustainable development and environmental conservation.
GGGI’s financial and technical advice included advice on the structure the debt swap transaction in compliance with Ecuador’s regulations and policies; design Ecuador’s Sovereign Green Bond Framework and secure its positive Second Party Opinion; coordination on the negotiation and formalisation of conservation commitments and the establishment of the Galapagos Life Fund; securing third-party credit enhancement by developing policies, regulations and frameworks required by third-party guarantors; and build the technical capacity of government officials from the Ministry of Environment and the Ministry of Finance and Economy on debt for nature swaps and other sustainable financial instruments key to the transaction under the framework of Ecuador.
The Galapagos debt-for-nature swap highlights the importance of environmental conservation and sustainable economic growth. The swap not only contributed to environmental conservation but also helped Ecuador save over a billion dollars in interest payments.
The Republic of Ecuador is now in the process of issuing its first Social Bond with the objective of diversifying its sources of funding for financing access to affordable and decent housing, thus reducing the housing deficit in the country. The proceeds from the bonds will be used to finance the public policy of affordable and decent housing through the provision of capital on appropriate terms for Social Interest Housing (or Vivienda de Interés Social, VIS) and Public Interest Housing (Vivienda de Interés Público, VIP).
(The writer is former currency strategist, commodity futures trader, and technical analyst.)
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Publish date : 2024-12-24 05:54:00
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