Debt Swapping Furthers Conservation Cause in Forests of Ecuador, Costa Rica and Bolivia

Latin America’s huge foreign debt, a crushing burden in every country, has brought a Midas-like windfall for nature conservation in three small nations seeking to protect their tropical rain forests.

Ecuador, Costa Rica and Bolivia have swapped tiny portions of their debts for foreign investment in environmental projects, most of them aimed at saving the region’s jungle areas.

In each case, the hard cash donated from abroad has had an impact far out of proportion to the initial investment, thanks to the multiplier effect of such swaps.

The concept has some built-in dangers for the debtor countries, principally the risk of fueling inflation and jeopardizing broader debt renegotiations, so the programs are unlikely to reach a major scale. Still, they are already funding some substantial environmental projects.

Ecuador, which has signed swaps worth $10 million in debt, and Costa Rica, at $11 million, are by far the biggest nature dealers. Bolivia’s program is far smaller, at $650,000, but it has funded a major expansion of the Beni Biosphere Reserve, an important flood plain for the Amazon basin. The swaps involve a minuscule fraction of Latin America’s $400-billion-plus total debt.

In February, 1988, Costa Rica arranged donations from a range of international environmental groups for an initial $547,000 to buy $3.3 million in debt, reflecting the market’s discount value of the debt. Further programs have followed, and more are planned. The interest from the bonds purchased with the funds is being used to protect Costa Rica’s natural parks, which include tracts of Central American rain forest.

Ecuador’s Nature Foundation, an influential non-governmental organization, has coordinated the effort here. The first swap, involving the purchase of $1 million of debt, took place in March, 1988, and a second package worth $9 million more was completed this year, with “investments” by the World Wildlife Fund and Nature Conservancy.

Cash donations of well under $2 million bought the whole $10 million worth of debt because of the discount offered by banks eager to unload unpaid debt. The bonds purchased pay interest twice a year, and with Ecuadorean rates at 36% annually, the return will be substantial.

The income next year will fund programs including a ecological data bank; protection of national parks, including the Galapagos Islands, Amazonian areas and endangered cloud forests on the slopes of the Andes, and training and education programs.

“This covers our needs for protected areas for the next eight to 10 years,” said Gonzalo Oviedo, who handles debt swaps for the Nature Foundation. “But in my opinion, at least for the foundation, the debt-swap chapter is already practically closed.”

Oviedo said the government is concerned about the inflationary impact of such swaps because they increase the amount of local currency in circulation. The dollars never actually reach Ecuador; foreign donors pay foreign banks that hold the debt, and the Ecuadorean government then issues matching bonds in local currency--a form of printing money.

Another risk is political: By accepting the notion of such swaps, the government may prejudice its ability to renegotiate its foreign debt on favorable terms. Oviedo said that swapping debt is an acknowledgment that it should be paid in the first place.

Furthermore, to pay their debts, poor nations often are forced to adopt export-oriented policies that produce severe environmental damage, Oviedo argued. Deforestation, for example, can result from logging, agriculture and oil exploration fueled by the need to generate export earnings, he said.

“The Nature Foundation believes it is absurd to pay the debt,” Oviedo said. “I believe that in a few years, there will not even be any point in negotiating on the debt, and swaps will become meaningless. But in the meantime, we might as well seek ways to generate resources for nature conservation.”