Nigeria Advised to Take Advantage of Debt-for-Climate Swaps to Exit Financial Woes

Michael Olugbode in Abuja

Nigeria has been advised to take advantage of the Debt-for-Climate Swaps financing mechanism to exit its present financial woes as over $3.7 billion could be generated annually for the next six years by embracing the system.

Speaking at a report dissemination event in Abuja, with theme: “Towards Reconciling Economic and Debt Management Policies with Gender and Climate Objectives in Nigeria,” the Chief Economist at the Development Bank of Nigeria, Plc, Prof. Joseph Nnanna, lamented that Nigeria had found itself at a crossroads, grappling with the twin challenges of climate change and a mounting debt profile.

nanna while stating that Nigeria was not alone in this quagmire, stressed that: ‘Our country, Nigeria like many others, is witnessing the devastating impacts of climate change – rising temperatures, sea-level rise, and extreme weather events.
“The shrinking Lake Chad is a stark reminder of the threats to our food and water security, as well as our broader socio-economic development. Yet, limited financing options due to our debt crisis have left us at a crossroads. Despite financial limitations, urgent action is needed to combat climate change.’

He lamented that: “Our public debt has been increasing at an alarming rate, and the COVID-19 pandemic has exacerbated our debt sustainability risks. To ensure economic growth and stability, we must reduce our reliance on fossil fuels and develop green-oriented industries.

“So, what’s the solution? Debt-for-climate swaps offer a promising way forward as noted in the research conducted. This innovative financing mechanism involves exchanging debt service payments for commitments to invest in climate change mitigation and adaptation programmes of which by redirecting resources towards climate initiatives, Nigeria can effectively tackle climate change while alleviating its debt burden.”

He added that: “Research indicates that Nigeria’s vulnerability to climate change and debt distress make this approach compelling. We find ourselves in a unique position where we can use debt swaps to free up significant resources – over $3.7 billion, to be exact – annually for the next six years. If the entire eligible debt is successfully swapped, it would generate an average of nearly $300 million annually over the next six years.”

He noted that: “These funds can be channeled towards achieving our Nationally Determined Contributions (NDC) and promoting green ventures, such as sustainable public transportation of which the country’s Nationally Determined Contributions (NDC) submitted in 2021 estimates a financing requirement of $177 billion from 2021 to 2030 to be able to meet the conditional target of cutting current emissions by 50 per cent before 2030.”
He explained that: “The concept of debt swaps is not new, but its application in the context of climate and development is quite innovative. Through strategic debt-for-development swaps, Nigeria can unlock additional resources of up to US$11 billion.

“These funds, currently tied up in debt obligations, can be redirected towards climate-smart projects and sustainable development initiatives. We can invest in renewable energy projects, improve our infrastructure to withstand the impacts of climate change, and support local communities in adapting to a changing environment.”

He added that carbon pricing remained one of the most effective policy instruments to facilitate low carbon transition and raise revenue for general fiscal purposes, particularly climate-smart investment, but however decried that despite its potential, Nigeria has no explicit carbon tax policy for greenhouse gas reduction.

He said to facilitate carbon tax policy for Nigeria, there was the need determined the optimal carbon pricing policy for Nigeria by identifying the scope of taxation, determining the regulation point, and ascertaining the optimal tax rate that would result in specific emissions abatement level and generate substantial revenue.
He stressed that: “By implementing a phased carbon tax policy, Nigeria stands to reduce its carbon emissions by up to 2.4 million tonnes annually, and increase revenue estimated at NGN4.3 trillion for investment in infrastructure, education, healthcare, and other sectors essential for our nation’s growth and development.”

In his welcome address, the Executive Director of Centre for the Study of the Economies of Africa (CSEA), Dr. Chukwuka Onyekwena, that the event was borne out of several months of dedicated research, noting that it was hosted by CSEA in collaboration with Brookings Africa Growth Initiative, and funded by the International Development Research Centre (IDRC).

He said the rate at which debt was rising in Nigeria, was a worrying trend, saying it had constrained the country’s ability to generate sufficient growth, cope with crises, and invest for development.

He noted that: “In 2023, Nigeria’s debt reached $108.3 billion, which is a 123 per cent increase since 2012, with the COVID-19 pandemic as well as the Russia-Ukraine war as the key drivers of the rapid rise.

“Increasing amounts of public revenue is allocated for debt servicing purposes. In 2022, 96 per cent of the federal government’s revenue was allocated towards the federal government’s interest payments. In the 2023 national budget, the budget share for debt servicing is 75 per cent, way higher than budget share of for infrastructure at 11 per cent, and health and education at three per cent and two per cent respectively.”

He explained that: “Based on the foregoing, CSA and Brookings AGI carried out a three-fold research project aimed at offering fundamental fiscal policy options for growing out of debt in Nigeria.

“The studies engender the profound link between economic policies, environmental goals, gender equality, and societal well-being. As we disseminate these findings today, we acknowledge the transformative power of knowledge, the necessity of collaboration, and the responsibility that lies upon us to translate research into action.”