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Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer
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.
Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer

countries into three groups based on their risk of fiscal crisis in the next two years. In light of these links, debt-for-climate swaps have been proposed as an instrument that can help countries deal with both climate and debt problems at the same time . Picolotti and others (2020) call for the scaling-up of debt swaps as a means to support countries in building climate resilience and support their post-pandemic recovery. Steele and Patel (2020) argue for debt swaps benefiting spending programs rather than projects, that is, spending on climate resilience

Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer

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

Anna Belianska, Nadja Bohme, Kailhao Cai, Yoro Diallo, Saanya Jain, Mr. Giovanni Melina, Ms. Pritha Mitra, Mr. Marcos Poplawski Ribeiro, and Solo Zerbo

Challenges for Sub-Saharan Africa,” IMF Staff Climate Note 2022/009, International Monetary Fund, Washington, DC. ISBN: 979-8-40022-159-0 (Paper) 979-8-40022-166-8 (ePub) 979-8-40022-340-2 (PDF) JEL Classification Numbers: F34; F35; G22; H63; Q28; Q54; Q57 Keywords: Climate finance; sub-Saharan Africa; climate change; mitigation; adaptation; concessional finance; green bonds; blue bonds; sustainability bonds; debt for climate swaps; carbon credits; climate insurance; climate funds; forest conservation; green development Authors’ email

International Monetary Fund

countries risk defaulting on their Nationally Determined Contributions, current or enhanced. The road to walking the talk on the Paris target on finance starts with making sure these countries are the primary beneficiaries of any new issuance of Special Drawing Rights (SDRs) and that they secure a significant share of those proceeds for climate action. A second stepping stone is a comprehensive, all-hands-on-deck debt restructuring for the most affected countries to help them advance green solutions to their problems, through such instruments as debt-for-nature and debt-for-climate

Anna Belianska, Nadja Bohme, Kailhao Cai, Yoro Diallo, Saanya Jain, Mr. Giovanni Melina, Ms. Pritha Mitra, Mr. Marcos Poplawski Ribeiro, and Solo Zerbo
Sub-Saharan Africa (SSA) is the region in the world most vulnerable to climate change despite its cumulatively emitting the least amount of greenhouse gases. Substantial financing is urgently needed across the economy—for governments, businesses, and households—to support climate change adaptation and mitigation, which are critical for advancing resilient and green economic development as well as meeting commitments under the Paris Agreement. Given the immensity of SSA’s other development needs, this financing must be in addition to existing commitments on development finance. There are many potential ways to raise financing to meet adaptation and mitigation needs, spanning from domestic revenue mobilization to various forms of international private financing. Against this backdrop, S SA policymakers and stakeholders are exploring sources of financing for climate action that countries may not have used substantially in the past. This Staff Climate Note presents some basic information on opportunities and challenges associated with these financing instruments.
International Monetary Fund. Western Hemisphere Dept.

the detailed selective issues paper on the fiscal framework. Work is ongoing to recalibrate the fiscal strategy and strengthen the legislation surrounding fiscal responsibility, public financial management, and debt management. In particular, the suite of Acts will be amended to increase flexibility, enhance transparency, and improve operational efficiency. The authorities are also keen on exploring opportunities to monetize carbon credits, issue resilient debt, and leverage debt for climate swaps. They have reached out to staff to determine technical assistance

Anna Belianska, Nadja Bohme, Kailhao Cai, Yoro Diallo, Saanya Jain, Mr. Giovanni Melina, Ms. Pritha Mitra, Mr. Marcos Poplawski Ribeiro, and Solo Zerbo

swaps. This instrument restructures debt and applies the resulting savings towards spending exclusively focused on climate (for example, debt-for-climate swaps) or with a development component (for example, debt-for-development swaps). The restructuring can include conversion to local currency (reducing foreign exchange risks), a lower interest rate, an extended maturity, partial debt write-off, bond issuance or some combination of these ( Chamon and others 2022 , Steele and Patel 2020 ). Debt relief or cancellation. In these cases, the debt write-off is tied to

International Monetary Fund. Western Hemisphere Dept.

potential returns on such investment is warranted, particularly given its relatively high levels of capital stock. A second question is how climate change will impact different exporting sectors of the economy. This could include how commodity prices would respond to climate-related supply shocks. Third, is how the response to climate change will be financed. Models like the investment needs model assume debt financing, but drawing precautionary savings built up or financial innovations (e.g. debt for climate swaps), might unlock lower cost financing. Finally, the impact

International Monetary Fund. Western Hemisphere Dept.

in April 2022 on debt-for-climate swaps as an instrument for mobilizing or redirecting financing for climate-related objectives while keeping debt at sustainable levels. 1 Prepared by Azziza Trotter, Pauline Peters, Frode Lindseth, Stephen Mendes, Colin Owen, Martin Bowen, Marianna Endresz, Ralph Lewars, Robin Youll, Consuelo Soto-Crovetto, Patrick Blagrave, and Gregory Horman (all CARTAC). 2 The mission advised the ECCB to exercise caution in drawing conclusions from the QIS results at these institutions prior to ascertaining the reasons for