The pitfalls and potential of debt-for-nature swaps : a US-Indonesian case study

Abstract

The vital role of forests in limiting the likelihood of dangerous climate change has precipitated renewed interest in debt-for-nature swaps. This article uses evidence on past debt-for-nature swaps and similar debt mechanisms to assess the recent second wave of debt swaps. It outlines five typical shortcomings of this form of financial transaction: that they often fail to deliver additional resources to the debtor country; often fail to deliver more resources for conservation/climate purposes; often have a negligible effect on overall debt burdens, and, as such, do not generate more ‘indirect’ benefits; and are often in conflict with the new aid delivery paradigm’s emphasis on alignment with government policy and systems. Our analysis is applied to a recent debt-for-nature swap initiative between the United States and Indonesia. We show that this case, which we consider as a litmus test for current swap practice, performs unevenly across the five shortcomings identified. On the one hand, the swap does not create additional resources for the Government of Indonesia, is too insignificant to create indirect (positive) economic effects, and appears at odds with the new aid delivery paradigm’s insistence on system alignment. On the other hand, the swap does not reduce Government of Indonesia resources, and is very much in line with current national policy. The extent to which the resources provided by the swap are additional to other donor support and reserved domestic budget lines for conservation goals is unclear. Whilst a second generation of debt-for-nature swaps should clearly be avoided, there is a need to debate broader ways of linking debt service repayments to forest conservation.