Paraguay to follow Uruguay with World Bank sustainability loan
Uruguay will get rate cut on World Bank loan if it exceeds methane target
After Uruguay announced an innovative sustainability-linked loan from the World Bank, it took just two days for a second country to express interest in using the structure, an encouraging portent for the Bank’s hopes of a broad take-up among sovereign borrowers.
Uruguay and the World Bank said on Wednesday they had agreed terms on a loan whose interest rate will step down if the country hits certain climate targets — a first for a multilateral loan. It is still awaiting final sign-off by the Bank’s board, but will be about $350m.
If Uruguay reduces the intensity of methane emissions from its livestock sector further than promised in its Paris Agreement commitment, it could save up to $12.5m in interest payments.
The World Bank wants to encourage other countries to seek similar loans.
On Friday in Marrakech, Paraguay’s minister of economy Carlos Fernández Valdovinos told GlobalMarkets his country would also like to link multilateral loans to environmental targets, part of a broader push into sustainable finance likely to include a debut green bond as early as next year.
“As Paraguay’s productive structure is quite similar to Uruguay’s, and what is being measured [in Uruguay’s loan] is methane gas emissions from livestock, we also want to explore this,” said Fernández. “We want to look [at sustainable finance] in a way that has clear environmental targets, and that when those objectives are met the interest rate can be a bit lower.”
This is something Paraguay could do in bonds and multilateral loans, said the minister. In 2022, Uruguay became the first dollar bond issuer to include an interest step-down in a sustainability-linked bond. The SLB also includes an interest step-up if the government fails to meet sustainability targets, but the loan does not.
Uruguay already had targets in its framework with the World Bank that formed the basis of the new loan’s parameters.
The loan is a way of aligning these targets with financial incentives, part of the Bank’s plan to “incentivise countries to provide global public goods”.
The targets will be measured and verified ever year from 2028 until the loan maturity in 2038. Each year, the interest rate can go down or stay flat.
All the World Bank’s loans already have KPIs, but the lender must always be made whole — so replicating this product will depend on finding trust fund or bilateral financing to fund the interest rate reduction. In Uruguay’s case, the coupon reduction will be financed by a trust fund.