The World Bank is testing a number of innovative debt instruments in Latin America and the Caribbean as the region struggles to return to growth and faces daunting financing issues to address climate change.
The bank’s new Evolution Roadmap, presented earlier this year and under consultation for approval at the bank’s annual meeting in Marrakech, Morocco, includes a series of policies to help countries deal with debt and, when needed, recover from cataclysmic events.
“The Evolution Roadmap starts with the idea that we are going through a period of crisis on top of crisis, with a great deal of uncertainty and mounting concern,” Felipe Jaramillo, the World Bank’s vice president for Latin America and the Caribbean, told LatinFinance on the sidelines of the event. “There are new instruments to respond, among them novel ways to reduce debt.”
Jaramillo said that three of the bank’s new tools are being tested in the region with the support of partners such as the Inter-American Development Bank (IDB) and CAF.
The first instrument is debt-for-nature swaps, which have been spearheaded by the IDB and completed in three countries: Barbados, Belize and Ecuador.
Belize was first out of the gate, with a $553-million swap, followed by Barbados with $150 million and finally Ecuador, with a huge $1.6-billion deal last May.
The World Bank has since moved forward with a new instrument — a sustainability-linked loan to Uruguay that was presented on October 11 at the annual meeting. The facility allows Uruguay to get a step-down on interest payments based on reaching climate targets.
“It is the first time in history that the bank has made a loan that is linked to Paris Agreement indicators,” he said. “The goal is methane emissions that are going to be measured over the repayment period. If emissions go beyond the target, there will be a discount.”
A third tool is focused on the Caribbean and will apply to loans to small nations. It involves a pause in payments in the case of disaster. Jaramillo said the pause could be up to two years in the case of large-scale disasters.
“We recognize that this is only a first step. We are looking at ways to improve financing solutions for disasters in the Caribbean,” he said.
Hyginus “Gene” Leon, president of the Caribbean Development Bank, said the pause policy “is a very good idea and will benefit countries.” He cautions, however, that one size does not fit all and it is important to consider some flexibility, especially for countries that are hard hit or those that may experience back-to-back disasters.
He suggests the possibility of a two-plus-two option, which would add another two years depending on the country and scope of the disaster, and extending the tenure of loans.
The policy changes come against the backdrop of major disasters throughout the region — including severe drought in Argentina and Uruguay and flooding in Ecuador and Peru after a rare tropical cyclone this year — and a complicated growth scenario across the region.
The World Bank estimates growth for the region at 2% this year, increasing to 2.4% in 2024. Jaramillo said that pace of expansion is insufficient.
“The thing about these numbers is that they are very discouraging. Latin America and the Caribbean growing at 2% means it will have the slowest growth (of a region) and poverty, social tensions and exclusion will persist,” he said.