Environment Benefits from Madagascar Foreign Debt

A debt for nature swap in Madagascar – where WWF buys a portion of the country’s external debt at a discount in return for the country allocating an equivalent amount in local currency to protect the environment – is yielding surprisingly good results. Mr. Paul Siegal, an expert on marine crustacea, has a diamond stud in one ear, a messianic gleam in his eyes, the fate of 450 species of frogs in his hands, and debt swap data at his fingertips.

If he looks the slightly eccentric Californian-educated lecturer he once was, the impression is shattered once he opens his mouth. Siegal talks like a hard-nosed Wall Street financier: of exchange rates and money markets, interest and inflation.

Like the animals he once studied, Mr. Siegal thrives by filling a unique niche. As technical expert for WWF – Worldwide Fund For Nature, he is responsible for the complex negotiations by which Madagascar’s national debt is turned to environmental use.

Under a scheme launched in 1989, WWF has been buying up Madagascan commercial debt, available at a discount on the secondary market. It then persuades the government to honour at least part of its obligations and uses the money to fund projects to protect Madagascar’s ecosystem.

It is an arrangement that benefits all concerned, including the 30 species of lemurs, eight types of baobabs, and 235 varieties of reptiles – not to mention the frogs – that make up the island’s uniquely rich flora and fauna.

The commercial banks are keen to off-load debts the crisis-hit government stopped servicing years ago. Madagascar, whose credit rating has at times fallen as low as F-triple minus, claws back some international credibility and gets to pay off a foreign debt in local currency. And WWF gets more money than it paid out to spend on a project.

“The banks get rid of a bad debt, the government gets investments in its own country and we get more than our initial outlay. You take a negative, and turn it into a positive. It seems like a free lunch,” says Mr. Siegal.

Over the last five years, Mr. Siegal has bought nearly US$5m in Madagascan commercial debt for slightly more than US$2.3m. The discount would have been greater if it were not for the relative scarcity of Malagasy commercial debt, a tiny fraction of the country’s US$5bn external debt.

“No one knows for sure, but rumour has it there is just US$50m-US$80m in commercial debt for Madagascar out there and at least half is supposed to be owned by a bank that doesn’t want to sell,” says Mr. Siegal. Hence the 50 per cent discount at which the debt trades surprisingly high for an African country with such a disastrous economic record.

The government at first repaid WWF the full value of the debt, pleased to be able to cancel part of its massive obligations in Malagasy francs. Recently, as the recession has begun to bite, it has been offering the WWF only 80 per cent of face value. But the margin remains good enough for WWF to stay in the game.

The money has gone into recruiting and training hundreds of government agents to patrol the huge island, persuading villagers to halt the bush-clearing that each year destroys 200,000 hectares of forest.

Apart from the threat the slash-and-burn technique brings for untold varieties of animals and plants, experts calculate that between five and 15 per cent of Madagascar’s Gross National Product is lost each year through the erosion of rice paddies and silting up of electrical turbines.

“The government realises that any agricultural society is underpinned by environmental factors,” says Siegal. “If they can’t halt the environmental decline, a country with an agricultural-based economy is dead in the water.”

Persuading a farmer to refrain from clearing land he needs for crops for the sake of some notional future benefit can be a thankless task. So WWF and the government have devised a quid pro quo arrangement.

Their agents agree to do something of immediate visible benefit to the community, such as provide funds for a school or bridge, in exchange for a promise that villagers will plant a forest or maintain woodland forest. The deal is sealed in the form of dina, traditional contract signed with the village elders.

“We have never had anyone cheat on a dina, they are always respected,” says Mr. Siegal. He recognises the project so far has merely touched the tip of the iceberg. But village by village, tiny project by project, WWF hopes to build up a national environmental awareness. The government seems to think the plan is working. It recently recognised Mr. Siegal and his boss with prestigious government awards.

Currently negotiating a couple of new debt swaps, Mr. Siegal has adapted smoothly to the world of boardroom meetings and executives in suits. The more he dabbles, the more analogies he finds with his old discipline.

“It’s all about resource allocation and what makes systems run. Biology and economics are really the same thing, you’re just changing currencies. I’m amazed how much of my education has been put to good use.”