Publication Date: October 2006
Publisher: Library of Congress. Congressional Research Service
Research Area: Economics; Environment
In the late 1980s, extensive foreign debt and degraded natural resources in developing nations led to the creation of debt-for-nature initiatives that reduced debt obligations, allowed for debt repayments in local currency as opposed to hard currency, and generated funds for the environment. These initiatives, called debt-for-nature swaps, typically involved restructuring, reducing, or buying a portion of a developing country's outstanding debt, with a percentage of proceeds (in local currency) being used to support conservation programs within the debtor country. Most early transactions involved debt owed to commercial banks and were administered by non-governmental conservation organizations and referred to as three-party swaps. Since 1987, three-party transactions have generated more than an estimated $117 million in local currency for conservation projects, as a result of the purchase of approximately $168 million in debt (face value) for $49 million. Other debt-for-nature initiatives involved official (public) debt and were administered by creditor governments directly with debtor governments (termed bilateral swaps).
In the early 1990s, the United States restructured, and in one case sold, debt equivalent to a face value of nearly $1 billion owed by Latin American countries; these transactions were authorized by Congress as part of the Enterprise for the Americas Initiative (EAI), which broadened the scope of debt swaps to include a number of social goals. Nearly $178 million in local currency for environmental, natural resource, health protection, and child development projects within debtor countries was generated from these swaps. The model for debt-for-nature initiatives, outlined in the EAI, was expanded in the Tropical Forest Conservation Act (TFCA) to include countries around the world with tropical forests. Under this program, debt can be restructured in eligible countries, and funds generated from the transactions are used to support programs to conserve tropical forests within the debtor country.
Since 1998, $82.6 million has been used under the TFCA to restructure loan agreements in eleven countries, and nearly $136.5 million in local currency will be generated in the next 12-26 years for tropical forest conservation projects. The TFCA was authorized for appropriations under P.L. 108-323 until FY2007. This law also authorized funding to conduct audits and evaluations of agreements in place and allow for the principal on debt agreements to be treated by the debt-for-nature transaction. (Currently interest on debts are treated in most agreements.)
Debt-for-nature transactions are generally viewed as a success by conservation organizations and debtor governments because of the funds generated for conservation efforts. The appeal of debt-for-nature transactions has been tempered in recent years, however, by higher debt prices on secondary markets and lower appropriations. As a result, fewer transactions have taken place. This report provides a description of debt-for-nature transactions and a summary of the Tropical Forest Conservation Act and will be updated as developments warrant.