Nature’s option for indebted economies

By Nachilala Nkombo

What does Africa Month 2021 mean for 1.2 billion Africans looking for a better future amid the global health pandemic?

While the death toll from COVID-19 is the lowest on the continent compared to other parts of the world, Africa must prepare for the worst in terms of the economic and social impacts of the pandemic.

African economies are expected to be in deep recession as they rely heavily on external financial flows from economies that have been hit hardest by COVID-19. Most of the financial inflows come from tourism and the raw materials it exports to Europe and Asia.

Prior to COVID-19, African policymakers grappled with two significant challenges: growing poverty and growing national debt. These have not disappeared.

According to the World Bank, Africa is the only continent in the world that is experiencing an increase in the number of people living in poverty. The absolute number of people living below the poverty line is estimated to have risen to 433 million Africans in 2018, from 284 million in 1990.

And with COVID-19, we expect the number of people living below poverty to increase exponentially.

When it comes to its total debt burden, the continent’s total debt stock stood at over 67% of its GDP in 2020.

For those who care about natural capital, we know that high debt and high poverty represent a bleak future for nature and we need to stop this.

Despite the resources and people of Africa having created fortunes for a number of successful multinationals and a few individuals from inside and outside Africa.

Poverty and national debts are increasing exponentially. If not well managed, these realities will contribute to the economic recovery of the African economy during and after COVID-19.

For the fallen hero of African independence, high poverty and high national debt is not the freedom he died for.

Zambia is the poster child for African countries struggling to meet debt service obligations. Zambia’s public external debt position as of December 31, 2020 had increased 9% to $ 12.74 billion, from $ 11.65 billion as of December 31, 2019.

A total of US $ 639.68 million was paid to creditors, compared to US $ 1,091 million in 2019, a decrease of 41.4%. The significant reduction in external debt service is explained by the Debt Service Suspension Initiative (DSSI) of the G20 / Paris Club May-December 2020.

The Zambian government has also pledged the IMF for extended credit support, but negotiations have been protracted and some analysts don’t believe they will be concluded anytime soon. Likewise, discussions on the suspension of debt service with holders of euro bonds yielded no results, as the Zambian government chose not to make the semi-annual repayments of the bonds.

Angola and the Republic of Congo have similar debt levels.

As debt pressure levels continue to rise, innovative financial mechanisms are needed to protect a range of African countries from deteriorating economic, health and environmental conditions.

Reversing these exponentially growing high poverty rates will be difficult with a huge debt burden, but not impossible to solve. In addition to the proposals made by the G20 countries to renegotiate debts, the G20 countries owe the world whose repayments have been made difficult by the economic crisis induced by COVID-19.

Africa can however capitalize on its natural resources by considering debt settlement instruments that help restore nature and simultaneously green recovery and green job creation.

One approach that can achieve these goals is the use of debt-for-nature swaps.

A debt-for-nature swap is a transaction whereby a country has its debt bought, renegotiated or canceled by its creditors (totally or partially) with specific conditions, for example, that the savings made on the debt service are invested in environmental conservation activities (Mathias, et al, 2018).

Hence, the country is freed from strict debt service payment on one side and invests in conservation and environmental protection measures on the other side.

The concept was started in 1967 by James Goff of the Experimental Conservation Agency, in association with the Bidborough Badgers, as an opportunity to address the debt problems of developing countries and their deleterious effects on the environment (Visser & Mendoza , 1994). Lovejoy (1984) suggested that improving debt and promoting conservation could be a win-win situation for the country and for nature.

Countries that have benefited from debt-for-nature swaps typically have several threatened or endangered species, experience rapid deforestation, and have relatively stable, often democratic, political systems.

Since 1987, debt-for-nature agreements have generated over US $ 1 billion for conservation in developing countries (Sheikh, 2010).

Zambia’s failure to agree with its creditors on a debt service suspension program represents an opportunity for a debt-for-nature swap that it has experienced.

Drawing lessons from the past and from similarly structured transactions, the government of Zambia in 1993 established a debt conversion program which enabled an orderly conversion of external debt owed to its creditors purchased by many NGOs to restore the debt. nature.

In this program, funded by the World Bank debt buyback and facilitated by the Debt-for-Development Coalition, NGOs bought Zambian debt at 11%. They received a 16.5% dollar denominated note (WWF report, 2003).

Although it is seen as an innovative financial option to relieve over-indebtedness and achieve environmental and development results; debt-for-nature swaps are, however, recognized worldwide. International observers have raised concerns about the perceived ineffectiveness of debt-for-nature swaps relative to other financial mechanisms and the potential risks that debt relief agreements pose to a country’s sovereignty. development (Didia, 2016).

However, failure to conclude such deals can only lead heavily indebted countries not only to default, but also to continue massive environmental degradation as they try to find ways out. a vicious debt trap.

Unnatural debt swaps can only really work when the country is at a high risk of default, mainly because the debt is bought at a discount.

With Zambia’s credit rating low and with a history of default, now is a good time to consider issuing against nature debt swaps. These would address the important challenges of attracting more private investment with long-term conservation goals and helping to relieve the country from debt distress worsened by the impact of COVID-19.

Beyond the debt challenge, the COVID-19 pandemic has once again highlighted the weaknesses that characterize most African economies in need of urgent transformation.

These include the high vulnerability of Africa’s nature due to high levels of poverty and dynamic growth; high import bills for food and manufactured goods which could have been produced locally and which have a huge global carbon footprint; exports of raw materials such as copper, cocoa and crude oil; and insufficient financial and trade links between African economies.

Nachilala Nkombo is the CEO of the World Wide Fund for Nature (WWF) in Zambia

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