The mechanism of exchanging external debt for nature is an effective tool for Central Asian countries, which can reduce the debt burden and even provide opportunities to solve environmental problems, according to Kyrgyz environmentalists Eleonora Aliyazova, Kunduz Adylbekova and Zhamilya Suranaeva. An important condition for the successful implementation of such transactions is the correct consideration of the specific needs and contexts of the countries.
In Kyrgyzstan, the external debt ratio for 2024 reached about 38% of GDP , while in other Central Asian countries, external debt ratios average 25% of GDP. According to the United Nations Conference on Trade and Development (UNCTAD), a debt-to-GDP ratio of 60% is often used as the cutoff for developed countries, and 40% as the cutoff for developing and emerging economies.
Defaults can lead to devaluation of the region’s currencies. This, in turn, causes inflation and reduces the purchasing power of the population. For example, in 2001, Argentina defaulted on its foreign debt in the amount of more than US$132 billion, which was one of the largest defaults in the world.
At the same time, the region is experiencing the effects of climate change, which is worsening the already difficult socio-economic situation. The region is warming almost 2 times faster than the global average. Thus, if over the past decades the average global temperature has increased by about 0.2°C, then in Central Asia the average annual temperature has reached from 0.28°C to 0.42°C during similar periods. Glaciers in the region are melting rapidly – since the 1960s, glaciers have shrunk by more than 30% , and by 2050 they may decrease by another 50% . This threatens agriculture and food security, which can lead to large-scale socio-economic crises.
Countries facing debt distress are forced to resort to less sustainable practices, such as the extraction of fossil fuels (coal, oil and gas). This means that countries in the region with high levels of external debt are not prioritizing climate change mitigation spending.
One solution promoted by economists as a “win-win” is the Debt for Nature Swap (and its variations such as Debt for Climate Swap) . This financial model is a deal between a creditor and a debtor country, which involves writing off part of the country’s external debt in exchange for commitments to preserve the environment.
The Institute for Climate, Energy and Mobility describes two models for such deals as follows:
The effect of such a model is associated not only with a reduction in the debt burden of the debtor country and an improvement in the environmental situation, but also with the creation of opportunities for long-term sustainable development as a financial model.
Successful examples of debt swaps for environmental projects
Since the first swap between Bolivia and Conservation International in 1987, many debt-for-nature swaps have been conducted. Today, the method is used around the world, with the most successful example being Belize.
In 2021, Belize signed an agreement with The Nature Conservancy that reduced the country’s external debt by 10% of GDP . More importantly, it significantly improved the chances of preserving the marine environment of the longest coral reef in the Western Hemisphere.
A subsidiary of The Nature Conservancy provided financing for the purchase of $553 million in government debt at a discounted price . The deal was backed by $364 million in blue bonds with participation from Credit Suisse and insured by the U.S. International Development Finance Corporation (DFC), ensuring low interest rates and a long maturity.
In return, Belize pledged to invest $4 million annually in marine conservation until 2041 and to increase marine protected areas from 15.9% to 30% by 2026. A $23.5 million fund was created for sustainable financing.
This example shows that debt-for-nature swaps can be an effective tool for preserving natural sites if implemented correctly. An important condition for the successful implementation of these transactions is the correct configuration of the mechanisms, taking into account the specific needs and contexts of countries. This will ensure sustainable results in both the environmental and economic spheres.
Kyrgyzstan’s First Steps
Currently, there is no active interest in this financial instrument in Central Asia, but Kyrgyzstan, as one of the countries in the region, is actively promoting this agenda in dialogue with its creditors.
In the early 2000s, Kyrgyzstan signed an agreement to transfer part of its external debt to finance environmental projects, signing an agreement with the Paris Club of creditors. The funds released as a result of this agreement were directed to the preservation of biodiversity and sustainable land management. However, neither the Paris Club nor the Kyrgyz government have published reports on the projects implemented, which is an important criterion for such deals.
In recent years, this issue has again become the focus of attention in Kyrgyzstan. Kyrgyz President Sadyr Japarov has repeatedly announced an initiative to exchange the country’s external debt for the implementation of environmental projects; in January 2023, he proposed that international creditors write off part of the debt in exchange for joint implementation of a “green” initiative in Kyrgyzstan.
In September 2023, speaking at the 78th UN General Assembly Summit on Sustainable Development Goals, Japarov proposed establishing a special fund at the UN to finance climate change adaptation programs and exchange external debt for environmental projects aimed at preserving glaciers, biodiversity, and managing water resources.
Later, in November 2024, Turkey wrote off Kyrgyzstan’s foreign debt of $58.9 million in exchange for green economy projects. However, Kyrgyzstan likely met other conditions for Turkey’s debt write-off. Shortly thereafter, on December 31, 2024, it was revealed that the network of the Turkish Sebat Lyceum, founded by Fethullah Gülen (a Turkish Islamic preacher and founder of the Gülen or Hizmet movement, accused of attempting a coup in Turkey in 2016), was transferred to the Turkish state-owned Maarif Foundation.
Central Asia’s Potential for Debt-for-Nature Swap
Overall, to understand Central Asia’s potential for using this tool, it is worth looking at the debt structure and the main external creditor. Today, the main creditor of Central Asian countries is China, and it is Kyrgyzstan and Tajikistan that have record debt levels to this country.
This debt-for-nature swap instrument could be applicable and relevant to China, but as expert Nargiza Muratalieva notes in her article for the Carnegie Endowment, “Chinese experts acknowledge the originality of this model, but emphasize the need to refine ‘internationally agreed mechanisms and support systems’ for the successful implementation of this initiative.” Former vice president of the China Export-Import Bank Zhang Wencai (张文才) directly stated that “these proposals are currently unfeasible.”
Many regional experts believe that China is likely more interested in a debt-for-resources model that involves obtaining licenses to extract natural resources and/or export them.
How effective is the debt-for-nature swap instrument: risks and economic feasibility?
The debt-for-nature swap mechanism is initially a complex process, as it requires lengthy preparation and negotiations that can take years. If the amount of debt being written off is small, its impact on the country’s economy may be insignificant, as it will not lead to a noticeable reduction in the overall debt burden.
For example, in 2016, the Seychelles entered into a debt-for-nature swap agreement with The Nature Conservancy and private investors. As a result, the investors purchased 5% of the country’s government debt, worth $21 million. The debt was subsequently transferred to a trust fund that provided more favorable repayment terms, freeing up about $8 million for the government . However, all of the freed funds were used exclusively for marine conservation projects, which did not ease the country’s overall debt burden. In fact, this amount constituted less than 2% of Seychelles’ total external debt , making the economic impact of the deal extremely insignificant.
In addition, such a transaction requires significant costs for negotiations, administration and creation of a trust fund. In some cases, these costs may even exceed the economic benefit of the mechanism itself, which calls into question its effectiveness.
Like any other climate finance, this type of mechanism is a political instrument. Control over the finances remains with international institutions and creditor countries, which limits the economic sovereignty of debtor states.
There is also the issue of compliance. The state may not be prepared to agree to strict compliance conditions, which would put it in a position where it risks defaulting on the agreement or being forced to breach it due to circumstances beyond its control.
A small amount of debt is usually not enough to motivate a state to take on such risk. For example, in 1989, the World Wildlife Fund (WWF) conducted a $2.2 million debt swap with Zambia, buying the debt back at just 20% of its value. However, due to poor planning and the rapid devaluation of the Zambian kwacha, WWF was forced to spend the local funds raised from the swap in less than a year, significantly undermining the conservation program’s effectiveness.
Moreover, since effective accountability and monitoring mechanisms are often lacking, there is no guarantee that the debtor country will be able to fulfill the terms of the deal at all.
Moreover, if the debtor country did not have the resources to repay the original debt, the government is unlikely to have the resources to invest in the areas agreed upon in the swap. This could lead to a larger budget deficit, which may have to be financed by borrowing, thereby increasing the debt burden, or by diverting resources to other areas (health, education, infrastructure) through austerity measures.
Debt-for-nature swaps are not a long-term solution. To truly promote sustainable development, such mechanisms must be embedded in a broader strategic policy that takes into account not only environmental commitments but also the long-term economic strengthening of debtor countries. Otherwise, such initiatives risk becoming a temporary tool that fails to address the deeper problems of economic dependence and obstacles to sustainable development.
Conclusions and recommendations
Debt-for-nature swaps are an effective tool for Central Asian countries vulnerable to climate change, not only to alleviate the debt burden but also to address environmental issues. However, their effectiveness depends on several important conditions. For this mechanism to truly contribute to sustainable development, it must be part of a broader strategic policy that includes strengthening the economies of debtor countries. Otherwise, in the absence of a comprehensive approach, such initiatives may lead to the opposite effect – increasing debt dependence and economic instability, which will limit long-term development prospects.
Successful deals such as the Belize and Ecuador debt-for-green swaps demonstrate the long-term benefits of this mechanism. It improves the state of natural resources, creates jobs in green sectors of the economy, and reduces the debt burden.
However, despite their potential, such deals require complex preparation and lengthy negotiations, which limits their use, especially for countries with high levels of debt. The effectiveness of these agreements largely depends on the scale of the debt and the country’s ability to meet its obligations.
For Central Asian countries, there are a number of challenges associated with the use of the debt-for-nature swap mechanism:
Limited interest from the main creditor. China is the largest creditor of the countries in the region, but has not shown active interest in this model. Chinese experts acknowledge its originality, but emphasize the need to refine international mechanisms and support systems. For now, China is likely to continue to adhere to traditional debt management methods, such as extending repayment periods and investing in natural resource extraction, rather than supporting environmental initiatives.
Lack of transparency and institutional risks (corruption, reporting and monitoring). Lack of transparency in decision-making processes and weak control over the implementation of transactions can lead to corruption and abuse. There is also a risk that agreements will not be implemented due to political instability or economic difficulties, making such transactions unattractive.
Global trends towards reduced climate finance. Concerns are raised by key players such as the US withdrawing from the Paris Agreement, which could lead to a reduction in international funds allocated to models such as debt-for-nature swaps.
Neocolonialism. The mechanism may strengthen the economic dependence of debtor countries and limit their opportunities for independent development. This creates the risk of repeating neocolonial practices, in which environmental policy becomes an instrument of influence for more powerful states and organizations.
In light of these challenges, Central Asian countries need to develop a comprehensive strategy that includes:
- Development of environmental projects in combination with economic strengthening measures.
- Ensuring transparency of transactions and effective fiscal mechanisms for managing incoming funds.
- Strengthening international cooperation to adapt the debt-for-nature swap mechanism to regional conditions.
- Strengthening institutional resilience to ensure compliance with agreement terms.
- Development of additional financial instruments to support sustainable development and environmental safety.
Thus, in the short term, natural debt swaps can be a useful tool for Central Asian countries. However, for this mechanism to be successful and used in the long term, it needs to be integrated into a broader strategy for ensuring economic sustainability and environmental security in the region.
https://cabar.asia/ru/stanut-li-obmeny-dolga-na-prirodu-drajverom-zelenogo-razvitiya-tsentralnoj-azii