Achieving sustainable development and debt sustainability in developing countries: To what extent do debt-for-nature swaps matter?

This paper assesses the impact of debt-for-nature swaps on sustainable development in developing countries, using entropy balancing on a large sample of 127 countries from 1990 to 2020. The findings indicate that debt-for-nature swaps have a positive and statistically significant effect on sustainable development, operating through several key channels: public debt reduction, increased public investment, lower CO2 emissions, and improved human development. The additional results found in this paper show that if the treated countries had not benefited from debtfor-nature swaps, their sustainable development index would have decreased by 11%.At the same time, if untreated countries had benefited from debt-for-nature swaps, their Sustainable Development Index would have increased by around 2%. The analysis also reveals a non-linear relationship between the size of debt-for-nature swaps and the sustainable development index, with an optimal threshold estimated at 42% of the public debt level, beyond which diminishing returns are observed. These results suggest that debt-for-nature swaps can serve as an effective financing tool for sustainable development, provided that they are appropriately designed. From a policy perspective, expanding debt-for-nature swap programs requires broadening eligibility criteria, strengthening transparency and governance of environmental funds, and more systematically integrating climate objectives into multilateral debt relief mechanisms. Enhanced coordination between public and private creditors, as well as environmental organizations, is also crucial to ensure that debt-for-nature swaps support the ecological transition effectively in the most vulnerable countries.