- Barbados completes a $293m debt-for-climate swap, generating $125m in savings to improve water and food security through a modern water reclamation facility.
- Prime Minister Mia Mottley hails the deal as a pioneering model for vulnerable island states, backed by the IDB and EIB with $300m in guarantees.
- Debt-for-nature swaps are gaining momentum. They offer financial relief and environmental benefits, and global organisations are promoting them as tools for climate adaptation.
Barbados has secured a $293 million debt-for-climate swap to strengthen its water and food security. CIBC Caribbean led the transaction, with $300 million in guarantees and $150 million each from the Inter-American Development Bank (IDB) and the European Investment Bank (EIB) under the EU’s Global Gateway Initiative.
The government refinanced its debt in three segments. Most of the debt was refinanced at an 8% interest rate without a discount. Smaller portions received lower rates of 3.75% and 4.25% but came with a higher discount to face value. This restructuring generated $125 million in savings, which the country will channel into upgrading the South Coast Water Reclamation Facility.
Prime Minister Mia Mottley described the deal as a “ground-breaking model” for vulnerable island nations. “With upfront funding, we will build a facility that strengthens water management, food security, and resilience,” she stated. The savings will fund the transformation of the South Coast sewage plant into a modern water reclamation facility.
According to the EIB, Barbados designed the loan as a Sovereign Sustainability-Linked Loan (SSL), the first focused on water security. The SSL sets specific sustainability targets tied to the volume of water the new facility will produce. The government will pay a financial penalty if it fails to meet these targets, which will go into the Barbados Environmental Sustainability Fund.
Despite being surrounded by the ocean, Barbados faces severe water shortages, which limits food production and forces the country to rely heavily on imports. The revamped facility will address these challenges by producing water suitable for agricultural irrigation and groundwater recharge.
Debt-for-nature swaps have gained traction in emerging markets. They offer countries a way to manage refinancing costs amid rising global interest rates. International organisations like the World Economic Forum (WEF) and the IMF actively promote these mechanisms. The WEF estimates that debt-for-nature swaps could unlock $100 billion globally to restore ecosystems and help countries adapt to climate change.
Ecuador recently completed a similar deal involving blue bonds to protect the Galapagos Islands. This transaction reduced Ecuador’s debt by $1 billion and provided long-term financial stability, with the new bonds maturing in 2041.
Due to guarantees from multilateral banks, institutional investors benefit from lower risks in these deals. However, they must accept lower returns. The growing interest in such swaps reflects their potential to align financial goals with environmental commitments, benefiting both countries and investors.
Barbados has demonstrated how innovative financial tools can support climate action while maintaining fiscal responsibility. This debt swap places the island at the forefront of sustainable finance and serves as a model for other nations facing similar economic and environmental challenges.
By tackling its climate vulnerabilities through this deal, Barbados sets an example for other island nations seeking to balance economic stability with environmental sustainability.