Countries that are most vulnerable to climate change—and the associated loss of natural biodiversity—are often those least able to afford investment to strengthen resilience because their budgets are burdened by debt. Such countries face a high risk of fiscal crisis, IMF staff research shows.
Debt-for-climate swaps and debt-for-nature swaps seek to free up fiscal resources so that governments can improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities. Creditors provide debt relief in return for a government commitment to, say, decarbonize the economy, invest in climate-resilient infrastructure, or protect biodiverse forests or reefs.
These instruments have existed in various forms for decades, and more countries are considering them following recent agreements in Barbados, Belize and Seychelles.
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