Linking Debt Relief and Sustainable Development: Lessons from Experience

The Covid-19 crisis has dealt a blow to developing-country economies, which were already facing rapidly rising debt burdens, calling into question their ability to scale-up climate investments. As the international community considers a menu of options to address the rising prospect of widespread debt distress and defaults in the developing world, it will be crucial that it weighs how such options can best contribute towards addressing the equally urgent climate crisis. Having that need in mind, the current paper examines the experience with debt-for-development swaps and major debt relief processes in order to draw some lessons that could help shape a debt-for-climate initiative (DCI). It concludes that, in order to significantly expand the fiscal space and create the incentives for investing in climate change adaptation and mitigation, a DCI would have to be a transaction capable of combining debt cancellation and swaps in creative ways. It also makes some recommendations to ensure the scheme reaps the benefits that swaps and debt relief have proven they can bring, while avoiding some of their identified shortcomings.

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