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Through debt-for-climate swaps, debt payments are redirected in local currency to fund domestic climate projects, easing fiscal pressure without increasing debt. A country’s debt is reduced in exchange for investing the savings in climate projects.

Risks addressed

Applications

Range of sectors, including marine conservation and nature-based solutions.

Instruments and providers

• Bilateral swaps: Direct arrangements between debtor countries and official creditors.
• Tripartite swaps: Debt is reduced for creditors, financed by donors through an NGO/ SPV.

Debt sustainability

• Can ease near-term debt service by cancelling part of the debt or extending maturities.
• Can strengthen resilience, reduce future fiscal shocks, and lower sovereign risk.

Internal capacity requirements

Minimum	Advanced	Pathway
Track debt portfolios, assess fiscal impacts, disclose commitments, coordinate stakeholders.	Design transactions, negotiate across multiple creditor groups, develop financial structures, embed climate KPIs.	Leverage MDB and IMF programs -> Adopt climate budget tagging -> Partner with DFIs and NGOs -> Invest in training -> Pilot small-scale swaps

Regulatory capacity requirements

Minimum	Advanced	Pathway
Authorize debt restructuring, create SPVs or escrow funds, reallocate budgetary savings, enable public scrutiny.	Permit regional transactions, enable outcome-based instruments, align with international standards, recognize new asset class.	Amend debt management legislation, adopt sustainable finance taxonomies, standardize KPIs, leverage MDB/DFI advisory to review legal frameworks.

Pathways to adoption based on financial market readiness

• Shallow markets: Strengthen sovereign debt transparency; participate in IMF/World Bank Debt Sustainability Framework to create a credible basis for swaps.
• Emerging markets: Build creditor engagement platforms; hire advisory firms to manage negotiations and structure SPVs; develop domestic legislation for debt buybacks.
• Mature markets: Blend concessional finance with market-based instruments; align swaps with green bond frameworks and climate KPIs to appeal to ESG investors.

 Pricing considerations

• Key pricing drivers: Most cost-effective when sovereign bonds trade at a significant discount.
• Creditor type: Bilateral creditors may offer concessional terms if swaps align with policy priorities.

Average time to deploy

• 2-4 years: longer for commercial swaps.