Debt-for-Development Swaps: A Tool for Climate Action and Economic Resilience

Debt-for-development swaps ease debt burdens and create fiscal space for growth. These financial transactions restructure existing debt into new obligations with more favourable terms, such as lower interest rates or extended maturities. Debt-for-development swaps specifically channel funds into national priorities like climate action, education, and nature conservation without increasing debt distress. Barbados has been a global leader in this area, completing the world’s first debt-for-climate swap in November 2024, following its debt-for-nature swap in 2022. 

Debt swaps provide fiscal flexibility.  In the wake of the COVID-19 pandemic, rising debt service costs have constrained public investment, particularly in climate resilience. By reallocating resources from debt service to critical developmental projects, debt-for-development swaps offer a mechanism to address pressing challenges while supporting economic growth. These swaps not only improve fiscal sustainability but also align with governments’ long-term development goals.

Barbados has demonstrated leadership in leveraging debt-for-development swaps to advance climate resilience and economic sustainability. The 2024 debt-for-climate swap repurposed $592.7 million in domestic debt through a syndicated loan, reducing interest obligations without increasing the debt stock. Interest savings, estimated at $220 million over 10 years, will finance critical projects such as water resource management, agricultural irrigation, and aquifer recharge under the South Coast Water Reclamation Project (SCWR), co-funded by the IDB and Green Climate Fund. Building on the success of the 2022 debt-for-nature swap, which funded marine conservation and established a Marine Spatial Plan, Barbados continues to lead in adopting innovative financing mechanisms that address climate challenges while promoting sustainable economic growth.

The debt conversion reduced the Government’s interest burden and created space for climate adaptation projects. The 2024 debt-for-climate swap enabled the Government to replace more costly debt with lower-cost financing. The domestic banking sector provided a syndicated loan, fixed at 3.5 percent and totalling $592.7 million, to facilitate the early partial repayment of Series B, D, and E bonds, which carried higher interest rates of 3.75 percent, 4.25 percent (stepping up to 6 percent and 7.5 percent), and 8 percent, respectively. The retired bonds were equivalent to $595.7 million, making the transaction neutral to Barbados’ public debt stock. Guarantees for the loan were provided by the Inter-American Development Bank (IDB) and the European Investment Bank (EIB). Interest savings from the swap, estimated at $220 million over 10 years, will finance the Barbados Climate Resilience South Coast Water Reclamation Project. The SCWR will be co-funded by loans from the IDB ($80 million) and the Green Climate Fund (GCF) ($60 million), along with an $80 million grant from the GCF. The project includes constructing a water treatment plant and associated facilities to improve water management, ensure water quality for agricultural irrigation, and recharge aquifers, contributing to Barbados’ climate resilience goals.

Both Sustainability Performance Targets (SPT) and disaster clauses are included in the debt-for-climate swap. The loan includes sustainability-linked performance targets (SPT), requiring the Government to achieve specified water management goals by November 2030. If these targets are missed, financial penalties will be redirected to the Barbados Environmental Sustainability Fund. Additionally, the loan features natural disaster and pandemic clauses, allowing principal payments to be deferred for up to two years in the event of major shocks.