Debt-for-Climate Swaps: Analysis, Design, and Implementation (IMF)

In light of the links between climate vulnerability and fiscal risks, debt-for-climate swaps, which is a practice of reducing partial debt in exchange for engaging in climate-related investments, is proposed as an omnipotent climate finance instrument. One recent working paper from International Monetary Fund (IMF) compared debt-for-climate swaps and other fiscal instruments, and discussed the possible policy supports. Debt-for-climate swaps can in some cases have more benefits than conditional grants or comprehensive debt restructuring, and even expand other investment potentials for climate mitigation and adaptation. However, it should be underlined that such benefits exist in the narrow context of high debt distress and/or promising climate investment commitments. Overall, the paper finds that they are generally less efficient forms of support than conditional grants and/or broad debt restructuring.