The southern African island of Madagascar is pursuing a unique strategy to tackle its debt problem: in an environmentally friendly way. The first of its kind, it could set a precedent for other countries in the region.
Working closely with the World Wildlife Fund (WWF), the Malagasy Government has been able to buy back some of its foreign debts in local currency at huge discounts. Its outlay is then allocated to protecting the country's rich ecosystem.
These 'debt-for-nature' swaps were initiated in the mid-1980s when international environmental organisations were able to acquire discounted foreign liabilities of developing countries for conservation purposes.
Madagascar signed its first 'debt-for-nature' deal with the WWF in 1989 and has not looked back since. Analysts estimate that the scheme has enabled the country to redeem more than half of its $100m commercial bank debt.
"There is no loser in these deals," said Mr Jamie Resor, WWF's US-based debt-swap expert. "The debtor gets the debts off their books, Madagascar clears some of its debts and gets to strengthen natural resource management and the WWF gets to carry out its work."
The way the system works is that the WWF buys Malagasy debts on the secondary market at a discount and then 'sells' it to the Government at a higher discount. The money is then lodged into an interest bearing account which is used to fund programmes to preserve the island's rich biological diversity.
Secondary market prices for debts vary, depending on the likelihood of the debtor country honouring its obligations. Malagasy debt presently trades at a discount of approximately 50%. Therefore, one million dollars will, for instance, buy two million dollars worth of debt.
One of the beauties of the scheme is that the Government gets to redeem brand debt in local currency at a discount of around 60% of its original face value. This is definitely a boon for a country in the throes of economic crisis, buckling under debt service obligations and lacking much needed hard currency.
The scheme has won kudos from various governments, environmentalists and the World Bank, to name a few. Ms Christine Parniere, who works on the African desk at the Internationale Nederlanded Bank (INB) in Paris, said: "Madagascar has done a remarkable job. When the debt-swap programme started, Madagascar owed over $100m to commercial banks. They have now reduced this debt by at least half."
Although it is not a panacea for the country's debt...