Debt Cancellation for Environmental Protection: A World First in the Galapagos

At $1.63 billion, Ecuador’s external commercial debt now represents more than 50% of its GDP. However, on Tuesday, May 9, 2023, the Ecuadorian government announced that it would reduce this debt by committing to environmental protection, the largest debt-for-nature swap in the world.

©tradingeconomics.com

In fact, the bank Credit Suisse will buy Ecuadorian bonds in the amount of 1.628 billion dollars. Carried out with the support of the Inter-American Development Bank (IDB) and the Development Finance Corporation (DFC) of the United States, the objective of the agreement is to reduce Ecuador’s debt by more than one billion dollars and to implement long-term ecological measures in the protected reserve of the Galapagos by the Ecuadorian authorities.

“The debt-for-nature swap is a historic step that marks a turning point in the country’s environmental and economic development,” said José Antonio Davalos, Ecuador’s Minister of the Environment. According to the government, “this financial mechanism demonstrates Ecuador’s firm commitment to a green transition towards a productive, inclusive and sustainable economy.”

What financial approach for this agreement?

As part of the deal, Credit Suisse announced in a note to the Luxembourg Stock Exchange that it will invest more than $644 million in the transaction. The payment schedules are already planned: the Ecuadorian bonds will be paid in cash by the Zurich-based bank every 5 years between 2030 and 2040, at a lower par value than the original one.

The IDB and CFD partners will aim to guarantee the transaction and insure it against the political risk that Ecuador may face.

The IDB is also present as a support to the policies of institutional strengthening of the environmental protection but also of the management of the public debt.

The president of the financial institution stated that: “Ecuador and the IDB are leading the way with this debt conversion for nature. Not only is this the largest operation of its kind, but it is also the first time that a multilateral institution has combined guarantees with political risk insurance to mobilize the resources of different actors for conservation.”

Good news for the protection of the Galapagos.

Thanks to this agreement, more than 450 million dollars will be dedicated to the conservation of the fauna and flora of the Galapagos Islands. Indeed, the Ecuadorian archipelago of the Pacific conceals a unique biodiversity in the world, as shown by the recent discovery of a virgin coral reef and full of life off the archipelago. Between giant turtles, blue-footed boobies, sea wolves and penguins, it is a huge but fragile ecosystem. Placed on the World Heritage List, many laws and agreements protect the islands, but much remains to be done.

One of the main projects related to this debt redemption is the creation of the Galapagos Life Fund (GLF) Board of Directors to finance the conservation activities of the islands over the next 18 and a half years. This will be composed of various public institutions and the resources will also be used for the preservation of the Galapagos Marine Reserve and the Hermandad, a protected area of over 198,000 square kilometers created in the archipelago in 2022.

The finance/environment exchange will help protect more than 2,500 marine species, such as sea turtles, whale sharks and hammerheads, which are endangered migratory species. This exchange will also allow for research and monitoring of ocean health, as well as building climate resilience and promoting sustainable fisheries.

Gustavo Manrique, Ecuador’s Minister of Foreign Affairs, said that “this marine reserve is special because of the participatory process that led to its creation. The government, the fishing sector, the academic sector and civil society in general have joined forces to increase and strengthen the conservation mechanisms of the extraordinary biodiversity of the Galapagos”.

He also added that “the conversion of the debt into kind is a recognition of all the work done. It is an example to the world of environmental protection and support for scientific research and production. This is true sustainable development”.

Financing biodiversity protection in Ecuador: contrasting political projects.

This announcement in favour of environmental protection is at least in contrast with the policy implemented by the government of President Guillermo Lasso. Indeed, crude oil is the first product exported in Ecuador, with more than 500 000 barrels per day. The current president’s objective is to double the production of barrels to 1 million per day, in addition to the opposition of indigenous populations and environmentalists. However, this is a considerable advance by the Ecuadorian government in terms of environmental protection.

Between 2007 and 2013, the Yasuní-ITT Initiative, a project of the government of Rafael Correa, was born. The initiative aimed at the financial involvement of the international community and Ecuadorian society in order to avoid the exploitation of a large oil deposit discovered in the Amazon in 1990, in the Yasuní National Park, one of the best preserved parks in the world. With a promise of participation of international governments up to 50% of the value of the potentially exploitable oil, the former president Correa had received only 100 million dollars by the end of 2011, barely 9% of the amount hoped for the first 4 years. Due to a lack of funds, the project ended in August 2013 and oil exploitation began.

Just like the current debt/environment swap for the Galapagos, this was an innovative financial/environmental swap implemented in Ecuador. As the country has an extraordinary biodiversity, the governments in Ecuador, as divergent as they may be, have understood the need to protect its environment and are pioneers in the methods to adopt.