Win-Win-Win
The idea of the debt swaps is that everyone wins: The foreign lenders get bad debt off their books, Costa Rica reduces its external debt, and the donors magnify their impact by boosting our efforts for forest conservation and reforestation with additional funding.
The theory proved successful: Debt-for-nature swaps have become one of Costa Rica’s most important tools for improving conservation to this day.
Transformative Results and Lasting Impact
After an initial wave of commercial debt-for-nature swaps, our efforts caught the interest of the Netherlands and Sweden. What helped a lot to gain momentum was the international attention Costa Rica received when president Oscar Arías was awarded the Nobel Prize for Peace.
I proposed the debt-swap to the Dutch government, who quickly approved a $5 million program focused entirely on forestry. The outcomes were remarkable: The Dutch purchased debt at 14-17% of its face value, nearly doubling the original amount through short-term bonds provided by Costa Rica’s Central Bank. This financial strategy funneled significant resources into the Forestry Development Fund (FDF), which I co-managed with the Dutch Ambassador, and laid the groundwork for what would become the Payment for Ecosystem Services (PES) program.
The Swedish debt-swap focused on the Guanacaste National Park project. Debt bought pro-bono by Salomon Brothers from the US was executed through the National Parks Foundation. Donations and grants totaling nearly $12 million were used to buy debt with a face value of $75 million. The Central Bank returned more than $35 million in local currency bonds with short maturation periods. This tripled the value of donor contributions while reducing the government’s foreign debt significantly.
I later proposed expanding this program to bilateral or government-to-government debt, an idea that was taken up by the United States and became the basis of the Tropical Forestry Conservation Act. So far, Costa Rica has traded over $65 million under this program. One notable example is the second swap between the United States and Costa Rica, which was consolidated in 2010 and has been active since then.
Over the years, the swaps have significantly contributed to increasing Costa Rica’s forest cover from less than 30% to over 55% of the land area.
Global Impact and Inspiration
Debt-for-nature swaps have not only provided financial relief for Costa Rica, but also catalyzed a sustainable path for forest management, inspiring other countries to adopt similar strategies for conservation and environmental protection.
Recently, debt-swaps are receiving renewed attention to tackle the critical problems of climate change. For example, both Brazil and Colombia have proposed bilateral debt swaps to protect the Amazon and address the challenges of climate change in that region.
