Fiscal stress from high and increasing debt is draining a large share of many countries’ revenues to cover debt servicing, instead of financing the Sustainable Development Goals and climate-resilient projects. While debt servicing is a major public spending burden for many Arab countries, limited fiscal space puts the region at risk of being unable to recover from the COVID-19 pandemic. Scaling up official development assistance or climate finance pledges in the immediate and near terms may pose a challenge for donor countries, especially given the adverse economic consequences of the pandemic and the constraints affecting bilateral cooperation. Climate/SDGs debt swaps provide a unique opportunity for creditors and donors to show solidarity in assisting developing countries to recover better from the pandemic, and strengthen development cooperation to accelerate the achievement of the SDGs and the Paris Agreement.
The Financing for the Development in the Era of COVID-19 and Beyond Initiative set out various options for consideration by Heads of States and Governments, including the use of debt swaps to assist countries facing high debt burdens. Moreover, the 2015 Addis Ababa Action Agenda on Financing for Development encourages highly-indebted developing countries to use debt-to-nature swaps.
ESCWA launched the Climate/SDGs Debt Swap Mechanism (Debt Swap/Donor Nexus Initiative) to support member States in their struggle with climate finance, high debt burdens, and fiscal pressures that have been exacerbated by the adverse impact of the pandemic.
The Initiative converts national debt-serving payments on foreign debt into domestic investment for implementing climate-resilient projects through collaborative arrangements between debtors, creditors and donors. For debtor countries, it provides relief from the payment of interest on external debt, while increasing sustainable public investment in climate-resilient projects that advance the SDGs and the Paris Agreement. For creditors, the amount of the debt swap allocated for climate-resilient projects increases the official development assistance disbursement/climate finance pledges that accelerate the implementation of the SDGs and the Paris Agreement, without adding extra burdens on their budgets.
ESCWA launched the Debt Swap/Donor Nexus Initiative in December 2020 at a high-level conference that brought together ministers, senior officials and technical experts from selected member States. It held in March 2021 the first advisory committee meeting on operationalizing the Climate/SDGs Debt Swap Mechanism and published the Climate/SDGs Debt Swap Mechanism report.