The Caribbean country plans to upgrade the resilience of water systems impacted by climate change by using funds freed up by a debt-for-climate swap.
Barbados’ recently completed debt-for-climate swap is the world’s first to focus mainly on climate resilience measures. It joins a slowly growing list of similar financial structures linked more broadly to climate and nature goals, which are backed by multilateral institutions.
The swap entails replacing part of Barbados’ national debt with cheaper debt, backed by multilateral institutions including the Inter-American Development Bank (IDB) and the European Investment Bank (EIB). Under the agreement, the country will spend the estimated $125m (€118m) in fiscal savings to be generated by the arrangement on water resource management projects to increase water and food security.
Improvements
Planned improvements include upgrading a sewage treatment plant into a modern water reclamation facility, which will produce water suitable for agricultural irrigation and recharging groundwater, as well as measures to reduce water losses and improve sewers, according to the institutions involved.
By cutting marine and groundwater pollution, the upgrades will help safeguard marine ecosystems such as reefs, and groundwater quality, as well as protecting public health. The boost to water supply will also help farmers to improve productivity in one the world’s most water-stressed countries, which relies on groundwater from aquifers for much of its supply and has to import much of its food.
“In the face of the climate crisis, this ground-breaking transaction serves as a model for vulnerable states, delivering rapid adaptation benefits for Barbados,” said Mia Mottley, the country’s prime minster. Motley was a high-profile champion for action on climate impacts at the recent COP29 conference in Baku.
Alexandra Almeida, EIB Global’s loan officer who led on the Barbados deal, told Impact Investor that its success demonstrated that multilateral development institutions and the private financial sector could work together to benefit vulnerable countries faced with few or no alternative financing options.
“We believe that what we were able to pull together in Barbados, combining the debt-for-climate conversion with climate resilience clauses, frontloading the savings from the conversion into an important infrastructure project, and adding sustainability targets linking to the financial cost of the new loan will be something that can also be adapted to other countries and situations in the future,” she said.
IDB President Ilan Goldfajn said the operation was “an important milestone in several dimensions”, being the first debt-for-climate operation focused on climate resilience, while also featuring pioneering financial innovation with “unprecedented” partnerships. He also said institutions now needed to look at how the model could be replicated elsewhere.
Under the financial structure, the provision of a sovereign sustainability-linked loan with a 3.25% coupon, lead arranged by CIBC Caribbean, enabled Barbados to buy back nearly $300m of its existing domestic bonds. The loan was backed by guarantees, comprising $150m each from the IDB and the EIB, the latter under the EU Global Gateway Initiative.
Upfront funding for the resilience project, totalling $110m, is being provided by the IDB and the Green Climate Fund (GCF). This includes a $40m grant from the GCF, a fund set up under the UN climate change process.
Sustainability targets
Under the terms of the loan, Barbados has undertaken to hit targets related to the volume and quality of reclaimed water generated by the upgraded plant. If it fails to meet them, the government will be subject to a financial penalty, which would be paid into the Barbados Environmental Sustainability Fund, a trust for environmental investments.
The loan is aligned with Barbados’ Climate Resilience Sovereign Sustainability-Linked Financing Framework. An assessment by research firm Sustainalytics concluded that this framework aligned with international best practices, describing the key performance indicator as “strong” and the sustainability performance target as “highly ambitious,” according to the institutions.
Debt-for-nature swaps and similar structures were first developed several decades ago but struggled to gain traction due to their complexity and risk profile. The climate emergency has given the structure a new lease of life, with several debt-for-nature and similar swaps emerging in the 2020s, mainly aimed at encouraging smaller countries to make sustainability-linked investments – often linked to maritime protection – in return for reducing their high debt burdens.
These include Belize’s debt-for-nature swap in 2021, where the debt restructuring provided funds for maritime environmental protection, and a debt swap to provide funds to Ecuador to protect the Galapagos Islands in 2023. Barbados itself agreed a debt swap in 2022, under which it made a $150m debt conversion to free up funds to help expand the Caribbean country’s marine protected areas from near-zero to around 30%. Barbados’ public debt has been falling but still stood at around 105% in September, according to the International Monetary Fund. The country is targeting a fall in its debt too GDP level to 60% by 2036.
