KAMPALA – More than 50 of the poorest developing countries are in danger of defaulting on their debt and becoming effectively bankrupt(World Bank, 2024), including 28 of the world’s top 50 most climate-vulnerable countries. While they represent just 3% of the global economy, they account for over half of people living in extreme poverty. Debt swaps for climate or nature are not new, but a new wave of substantially larger deals might be part of the solution to debt distress and a way of directing additionalresources to climate and conservation. 58 of the developing countries which are most vulnerable to climate change have almost $500 billion of debt servicing payments. Uganda’s public debt was 34.6 percent of GDP in 2018/2019 but surged to 50.6 percent in 2021/2022 and it has risen unprecedented levels, reaching UGX 96.1 trillion (USD 25.3 billion or 52 percent of GDP in 2024/2025 and this contradicts the IMF’s recommended threshold of 50 percent for low-income countries. If Uganda’s current public debt trends are not controlled, debt financing turbulences could emerge in 2025/2026 FY, this is because growing evidence suggests that Uganda may become caught up in a “public debt safety trap” where a favorable debt position, largely based on traditional debt sustainability metrics and the falsely signals that the country has more fiscal headroom to borrow, especially when debt is above the set national or international limits.
Natural damage in Uganda continues to occur due to human activity and increasingly severe climate change and to overcome this, an adequate and sustainable funding mechanism is needed. The Debt for Nature Swaps (DNS) mechanism involves exchanging debt for environmentally based project financingand the debt for nature swaps can provide benefits, namely eliminating part of the country’s debt while providing access to international financing and to increase its effectiveness, policy support can be provided, such as developing a road map for nature conservation, increasing the accuracy of calculating funding needs, encouraging collaboration and synergy between national and sub-national governments, strengthening cooperation with community organizations, and increasing community participation. Due to damage to forest ecosystems and land conversion, from 2002 to 2023 Uganda has lost 77.1 kha of humid primary forest, making up 7.2% of its total tree cover loss in the same time period and the total area of humid primary forest in Uganda decreased by 15% in this time period. The government has implemented various policies to overcome threats to nature conservation and climate financing and thisincludes, developing a National Climate Finance strategy and the Carbon Credit regulation framework , while Increasing the Nationally determined Contribution (NDC).
To ensure climate finance policy framework effectiveness, multi-party and multi-sectoral co- operation is needed particularly in the funding aspect and for both domestically and internationally. One such mechanism is a debt-for-nature swap or the exchange of state debt to finance nature-related programs. A debt-for-nature swap is an international funding mechanism for conservation or other nature conservation activities, where funds are sourced from debt relief provided by donor countries to borrowing countries, by exchanging debt payment obligations with the debtor’s commitment to finance conservation activities or projects (FAO-2024).This mechanism is commonly used by developing countries with high financial needs to address the impacts of climate change, conservation activities, and other nature conservation efforts. The examples of using this mechanism have been effective for Ecuador in 2023, which reduced part of its debt to finance the protection of rainforests in the Amazon and areas along the Pacific coast, the Indonesian, and the American governments which signed a debt exchange agreement to finance coral reef conservation in early July 2024.
To divert state debt through funding conservation activities, the creditor country needs a trustworthy third party namely a conservation institution or international nature activist willing to take over the management of the debt and negotiate with the creditor country. The debt-for-nature swap financial mechanism has a positive impact on reducing state debt as it serves as an alternative financing method for implementing nature conservation and mitigating and adapting to the impacts of climate change. However, its implementation is not without risks, some of these risks include potential financial losses as the value of the debt written off may be lower than the value of the natural assets to be protected, there is a risk of moral hazardwhere the ease of applying for debt may lead to it being cleared through the submission of nature conservation project activities, mis- appropriation of funds is another challenge in implementing this mechanism and this mechanism also requires negotiation between the donor country and the debtor and the negotiation process generally takes a considerable amount of time and can be expensive as it involves determining various rights and obligations that need to be fulfilled. Furthermore, proposed conditions may not always align with national policies or applicable laws and regulations and the management of funded projects also demands a high level of commitment from the debtor country including both the government and community organization partners. Additionally, risks can arise at the community level due to potential rejection of the projects that are to be implemented. To increase the effectiveness of this financing mechanism, the organizations should serve as government partners in the management of nature-based projects. Finally, the community and all stakeholders should be encouraged to participate actively in the projects and to carry out supervision, and this participation must ensure broader support and oversight while enhancing the effectiveness and transparency of the projects.
In conclusion, adequate and sustainable funding is needed to overcome Uganda’s natural conservation challenges and one potential source is the debt-for-nature swap mechanism, which converts debt into financing for nature-based activity projects. However, to increase the effectiveness of this funding mechanism, several supporting policies are necessary and this includes, building a roadmap for natural management, accurate calculation of funding needs, collaboration and synergy with local governments, strengthening cooperation with community organizations working in the natural sector, and encouraging active community participation. There is a need for Uganda to comprehensively calculate funding needs using databases from various ministries, institutions, and other organizations and providing a framework for long and medium-term funding requirements and this will assist the government in determining funding priorities. The synergy between national and sub-national governments should be encouraged and there must be continuous cooperation with various community organizations working in the natural sector. One of the prerequisites for applying for a debt-for-nature swap is cooperation between the government and communities through Climate Finance Public,Private Partnerships.
The author, Denis Tukahikaho PhD is the Ag. President, The Society for Environment and Climate Finance Professionals & Managing Partner at Climate Hub International.
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