Debt-for-Climate Swaps and Illicit Financial Flows: A Call for Caution in Designing Climate Finance Infrastructures

Ahead of COP28, there have been widespread calls for the adoption of 'debt-for nature' and 'debt-for-climate' swaps as an alternative climate finance system to address funding gaps in developing countries. Typically, these swaps involve a debtor country repurchasing its debt securities at substantial discounts or converting official bilateral debt into environmental assets, which enables more fiscal savings to be redirected toward conservation objectives. Unlike most climate finance instruments, these debt swaps avoid burdening countries in the Global South with additional unsustainable debt, thus allowing for a more effective response to the climate crisis without sacrificing spending on other development projects.

As stakeholders gather and discuss at the COP28 summit in Dubai, it is important for them to bear in mind that while debt-for-climate or ecological debt for fiscal debt swaps offers a promising approach to addressing debt and climate challenges simultaneously, they need to be implemented with careful attention to transparency, accountability, and integrity. Otherwise, it could become just another pathway to facilitate IFFs in Africa, which have the potential to undermine the fiscal benefits that should ordinarily result from these swaps.