IMF projects for 2020 the worst crisis since the Great Depression in the 1930s with the global GDP set to fall by 3%, while the EU being among the hardest hit at a 5.2% GDP loss. Against falling public budget revenues, debt payments will increase due to local currency devaluation. Kazakhstan’s Tenge, for example, has already dropped by about 17% since the beginning of March against both the dollar and the euro, more than any other currency in the world; neighbouring Uzbekistan followed the suit by allowing its currency, Som, to devaluate twice in just three days in April . With majority of public debt being denominated in foreign currency, rising dept costs and weakening local currencies leave these countries with practically no fiscal space to increase expenditures without incurring even more debt. Many, however, will not be able to afford this move. Public-debt-to-GDP ratios are high across the region, especially in Armenia, Georgia, the Kyrgyz Republic and Tajikistan, where it stands at around 50%. Effective debt reliefs provisions are therefore urgently required to create much needed fiscal space and direct more resources into strengthening local economies.

All these countries meanwhile have a large untapped potential for cost-effective greenhouse gas emission reduction. Their energy intensities in the residential sector per household and per capita have been on the rise since the end of the 1990s, but still they do not exceed that of the EU-28. This is because in spite of lower levels of energy efficiency compared to the EU-27, these households still have lower living standards, such as smaller living (and thus heating) area per person, rarely air-conditioning, and fewer electrical amenities. The potential of energy savings and emission reduction is being realized at a much lower rate than needed to meet the Paris Agreement target. And, given the COVID-19 crisis and the necessity to address its consequences, this climate finance investment will likely to be underprioritized. The crisis could however not compromise but help to realize the potential.

“You never let a serious crisis go to waste!” - said Rimantas Zylius, the former Minister of Economy of Lithuania on the workshop dedicated to the analysis of European Structural and Investment Funds on 27 March, 2020. Having said that, he referred how the 2009 crisis helped Lithuania to establish a successful financial instrument and implement hundreds of energy efficiency building retrofits using the assistance of EU funds. While one can say Central Asia and Caucuses do not have access to such generous access to finance, we argue that there is a solution: the solution, which can deliver both real debt relief and real climate actions – a debt-for-climate swap.

Debt relief linked to environmental goals or debt-for-nature swaps is not a new story: after World War II the Paris Club comprised of major creditor countries initiated large-scale debt relief programs in the form of debt-for-equity swaps, and from 1991 onwards allowed debtors to convert their public debt into local payments for social or environmental projects. Since then, debt-for-nature swaps raised hundreds of million dollars for the environment. A good example among these is a dept swap scheme implemented by Seychelles and a club of public and private debtors which enables the country to cancel EUR 21.6 million in exchange for domestic investments in protection of its unique marine ecosystem. Their specific objective is to increase marine protected area from 1% to 30% of its territorial waters by 2020.

Debt-for-nature swaps carry multiple benefits to both debtor and creditor countries and therefore are often referred to as “win-win” solutions. While the benefits for the debtor are obvious, they are also numerous for the creditor. From a financial perspective, creditor’s remaining debt claims increase in value through such swaps and creditors can recover either full or at least part of their debt and thereby avoid the accumulation of arrears. Debt swaps are particularly beneficial in situation when the full repayment is highly unlikely, exactly as we are currently observing. In addition, creditor can register the instrument as part of its ODA commitments, which many of the developed countries will also find increasingly difficult to meet.

To be effective and deliver real climate outcomes, the swaps scheme should be credible. There are three key take-aways we can learn from experience of the successful debt-for-nature swaps:

- Credible operator, a financial institution with solid fund management expertise and also technical capacities to implement respective projects

- Credible M&V, a system which allows for systematic monitoring and reporting of the climate benefits, such as GHG emission reduction

- Credible project pipeline, project development assistance is absolutely essential to ensure robust supply of bankable projects which can deliver both climate and socio-economic benefits.

The COVID-19 impact is destructive for the economies, but addressing it could also bring new opportunities. Linking debt reliefs to climate actions is one of them and it must not be overlooked. We see lots of chances for these in particular in the EU neighbourhood, Caucuses, and Central Asia. The Minister of Environment of Armenia, Erik Grigoryan, negotiated a dept-for-climate swap, but now this is for the next government whether it will be finalized. Today, we team up with Erik Grigoryan to promote this innovative mechanism and help the environment in developing and transition economies. Contact Erik Grigoryan and us to discuss the design of climate swaps and ideas for collaboration.

Written by Marina Olshanskaya and Aleksandra Novikova