Cabo Verde – Portugal: How effective is the debt-for-nature deal?

By Pius Adeleye

Posted on Tuesday, 21 February 2023 16:03
Town of Mindelo, capital of Sao Vicente, Cape Verde Islands, Atlantic Ocean

The governments of Portugal and Cabo Verde have begun talks on a debt-for-nature deal that will restructure both the debt of the coastal West African country and its payment to the European creditor.

The island of Cabo Verde continues to face rising sea levels that has brought about biodiversity loss due to increasing ocean acidity, thereby threatening its economic growth and its environmental stability. It currently owes some $150m to the Portuguese state; and over $400m to its banks and other companies in Portugal.

However, Portugal’s Prime Minister Antonio Costa says the debt-for-nature deal will trade-off Cabo Verde’s debt for improved environmental conditions, greater investment in energy transition, and will help in the reduction of impact from climate change.

“This is a new seed that we sow in our future cooperation. Climate change is a challenge that takes place on a global scale and no country will be environmentally sustainable if all countries are not sustainable,” said Costa on Portugal’s RTP television.

Debt-for-nature is a financial swap deal in which part of a country’s foreign debt is pardoned in exchange for commitments to invest in climate and environmental reforms. The success of such a swap means there would be a relief or reduction in the public debt estimates of poor and developing countries who often have little resources to combat the impacts of climate change.

Globally, many countries have not recovered from the significant damage of Covid-19, and for many countries in the west Africa region, poor debt servicing and climate change remain a big challenge in the post-pandemic aftermath, including Cabo Verde.

Cabo Verde’s economic and environmental shortfalls

The West African island nation does not have a solid reputation when it comes to its economy. Data obtained from the Africa Development Bank (AFDB) shows that its public debt increased from 155% of GDP in 2020 to 156.7% in 2021. During the first pandemic year, there was a decline in the social conditions that pushed the poverty level to 31.6 % and unemployment moved from 11.3% to 14.5% in the same period.

“As of 2021, Cape Verde owed $2bn to external creditors. The government of Portugal is one of the country’s biggest creditors accounting for €140m [$149m] of its debt stock, but its share pales in comparison to that of Caixa Geral de Depósitos, a Portuguese state-owned banking corporation to which Cape Verde owes $427m,” Sarah Colenbrander, the director of ODI’s climate and sustainability programme, a global affairs think-tank based in UK, tells The Africa Report.

Will this deal affect Cabo Verde’s credit rating going forward? Will Portugal count this arrangement towards its international climate finance?

“The World Bank and Africa Development Bank are also major creditors, at $523m and $263m respectively. In 2021, Cabo Verde spent $81m servicing debts to these and other external creditors – around 8.6% of GDP,” she says.

The natural ecosystem and habitats of Cabo Verde, which are facing serious challenges, are the backbone of its tourism, agriculture, and other services that account for its financial growth. Deals like the debt-for-nature have been described by experts as an indirect attempt to solve the dilemma faced by global leaders on how and who should pay (financially) for actions taken to alleviate the impact of climate change.

“The debt-for-nature deal is linked to climate pledges since money is tied to the deal — and more deals could also reduce the debt burden of African countries. Although it is a $12m deal compared to the [over] $400m debt of Cabo Verde, [which means] it does not completely solve the debt issue, [..] it is still a positive development,” Paul Samson, an expert on global policy issues and president of the Centre for International Governance Innovation (CIGI), based in Canada, tells The Africa Report.

Transparency needed in deal

According to the initial debt repayment schedule, Cabo Verde had a $12m debt obligation until 2025, but it was to be restructured into the fund aid and ultimately, the entire debt repayments were to be redirected to this fund, allowing the island nation to invest in energy transition, ocean conservation as well as climate adaptation plans, said the Portuguese prime minister.

Despite the affirmations of Costa, it is not still clear whether the other debts, especially the $400m Portuguese bank and company loans owed by Cabo Verde, will be included in the swap deal. Analysts say more transparency in the fund aid is needed.

Is this a post-COP27 success?

Due to Cabo Verde’s geographical location, the island is exposed to climatic and environmental catastrophic events, especially disasters like tropical storms, landslides, volcanic eruptions, droughts, and floods. The impact of climate change has worsened the situation for an already vulnerable nation.

In September 2020, tens of thousands of Cape Verdeans were affected by floods costing them their homes and farmlands. The AFDB says in one of its reports that erratic rainfalls on the island leads to a yearly $2m loss and destruction of agriculture crops.

At COP27 last November, there were several calls by climate activists and representatives of vulnerable countries hit hard by climate disasters for talks on climate reparations, known as ‘Loss and Damage’: a compensation fund for climate damages caused by the industrial activities of the world’s rich economies.

Although a major headway was made for the fund at the conference, along with other climate alleviation schemes, concrete plans and action have yet to materialise. Since the Paris Agreement in 2015, wealthy countries continue to fall short of climate goals and climate financial and policy pledges, while turning a blind eye to the clamour for climate justice.

The new debt-for-climate deal is an important step, but not sufficient.

African countries contribute very little to global climate. Despite the ongoing social and environmental reforms in Cabo Verde, it could still lose between 0.1% and 0.27% of its per Capita GDP by 2030 and 2050 respectively, if the historic and neglected Paris Agreement is not met.

According to AFDB, the African continent loses about 15% of its GDP per capita every year, owing to the ravages of climate change. In the same report, the AFDB says up to $1.6trn will be needed between 2022 and 2030 to bridge the climate financing gap.

“Cabo Verde is just one of over 50 countries facing high levels of debt distress. Portugal’s willingness to explore innovative solutions is to be commended in the wake of COP27. Let us hope other major creditors now step up with an ambitious and joined-up response to the interconnected debt, climate and nature crises,” says Colenbrander.

“It’s dangerous,” says Daniel Nwagu, a Nigerian climate activist and advocate for sustainable smart agriculture. “If these countries continue to pay below the benchmark of the climate pledges, it will increase the time frame for the world to achieve the neutralisation of […] global warming.”

Impetus for debt-for-nature deal

In Africa, the novelty and the pursuit of the debt-for-nature deal is hugely credited to the Seychelles. After the 2008 (global) financial crisis pushed the country into serious debts that crippled its investment goals for a Blue Economy, it sought new options.

The archipelago of 115 islands in the Indian Ocean came up with an innovative approach that rescued its Blue Economy by converting its $21.6m of national debt to a debt-for-nature swap. Currently, these deals are gaining the interest of other African countries, such as Eswatini and Kenya.

Cabo Verde’s debt crisis is strongly linked to public-fund abuses. The archipelago suffers from a string of shocks and stresses: the impact of the pandemic, the fallout from the Russian-Ukraine war on food security, past droughts, and its dwindling tax revenues.

Over the years, the island nation’s borrowings have been channelled towards the sustenance of vital services and the maintenance of key systems and infrastructure that have been (majorly) affected by the impacts of climate change, experts tell The Africa Report.

According to a study of ODI, Portugal is one of the global emitters of carbon which have failed to meet its climate pledges. The study revealed that in 2020, Portugal paid a small percentage of its expected share.

  • The Portuguese government paid just $70m when it was supposed to pay about $688m to add up to the wealthy countries’ collective $100bn climate pledge and target.

It is not clear if Portugal will count the debt-for-nature swap deals as part of its long climate finance vows and experts are very concerned about the opaque nature of Portugal’s swap deal with Cabo Verde.

“The new debt-for-climate deal is an important step, but not sufficient. We also need more detail about the terms and conditions to assess the package. Will this deal affect Cabo Verde’s credit rating going forward? Will Portugal count this arrangement towards its international climate finance? Are other creditors such as Caixa Geral de Depósitos also happy to take a haircut?” says Colenbrander.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options