At least eight debt-laden countries are in the pipeline to use debt-for-development swaps sponsored by the World Bank. These innovative transactions replace expensive debt with cheaper financing, generating fiscal savings that can be used for development projects.
Late last year, Côte d’Ivoire completed a debt-for-development swap that enabled it to buy back around €370m of its most expensive commercial debt maturing over the next five years.
Using a €240m ‘policy-based guarantee’ from the World Bank Group Guarantee Platform, Côte d’Ivoire was able to obtain a new, cheaper €400m 15 year commercial loan with a grace period. It also received a €286m credit from the International Development Association.
Anshula Kant, chief financial officer of the World Bank Group, told GlobalMarkets the lower interest rate and extended maturity had enabled Cote d’Ivoire to redeploy the savings towards development, specifically education.
The government gained access to about €330m over the next five years to support building over 30 new schools.
The investments are channelled through an ongoing World Bank education lending project, so there is a built-in spending and results monitoring mechanism. The Bank believes this gives the country a much better chance of fulfilling the conditions of the swap, because the World Bank is involved in both sides of the transaction.
Asked if other low and middle income countries could benefit from similar swaps, Kant said: “Eight or nine… that we consider are likely good candidates for this,” over the “short and medium term”.
Like finance ministers and NGOs, the Bank is worried by the mounting debt service payments many countries face. They are eating into revenue they could otherwise spend on development priorities like health and education — especially at a time when rich nations are cutting their overseas aid budgets.
Global hub
The countries expected to qualify for World Bank guarantees will be those in reasonably stable macroeconomic and fiscal situations but undergoing liquidity challenges — not economies in debt distress.
Some critics have attacked debt swaps, arguing they achieve neither real progress in making debt more manageable, nor important development gains. Governments often dislike to the high costs — both monetary and administrative — and object that outside interests can be given precedence over their own national development priorities, compromising their independence.
In a move that may counter those complaints, at July’s UN Finance for Development summit in Seville the World Bank and Spain launched a Global Hub for Debt Swaps for Development. It will offer technical support and financial assistance to countries considering debt swaps focused on food security and climate resilience.
The hope is that during a period of shrinking government budgets around the globe, this approach can give developing nations some essential financial leeway.