Debt for development swaps

A nurse takes the temperature of an one-year-old baby at Semenanyane clinic, in the mountainous district of Thaba-Tseka, eastern Lesotho.

Debt swaps have proven to be an important instrument of de­vel­op­ment policy. The principle is as follows: a partner country undertakes to provide funding for de­vel­op­ment projects within its own borders; in exchange, Germany grants debt relief for at least the equivalent amount.

There are two possible ways of transferring the released funds:

  1. The debtor government undertakes to invest the funds directly in de­vel­op­ment projects.

  2. The debtor government pays the funds into a trust account managed by an independent body. De­vel­op­ment projects are then financed with monies from that account.

Debt swaps enable donor countries to target and foster measures and processes in the co­op­er­a­tion countries that make good sense in de­vel­op­ment terms.

Germany’s contribution

Germany has been conducting debt swaps bilaterally since 1993. This means that Germany waives some of the debt arising from Financial Co­op­er­a­tion provided the beneficiary developing country uses the released funds for de­vel­op­ment projects.

The debt waiver was previously restricted to countries which were designated as low-income countries (LIC) or lower middle income countries (LMIC) according to the World Bank’s definition and which had been granted the ‘swap option’ by the Paris Club under a rescheduling agreement. Since 2008, it has been possible to extend debt swaps to Financial Co­op­er­a­tion debt which has not yet been rescheduled by the Paris Club. Debt swaps are, however, limited to countries with a particularly high level of external debt.

By the end of 2010, Germany had pledged debt swaps to 22 countries for a total of 1.5 billion euros.

Germany has thus far waived debts arising from Financial Co­op­er­a­tion amounting to some 929 million euros once the partner countries concerned had fulfilled their commitments. The swap projects agreed upon to date focus on the areas of general poverty reduction, education, environmental protection and combating HIV/AIDS.

Under the Debt2Health Initiative of the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM), additional funds from debt swap operations are to be generated and used for measures aimed at combating these illnesses. Germany was the first official partner to support this initiative, followed in 2009 by Australia.

In September 2007, for the first time under a debt swap operation, the German government entered into a trilateral agreement as part of the Debt2Health Initiative, with GFATM and the Indonesian government as partners. Under this agreement, Indonesia pays 25 million euros into the Global Fund which will use this money to finance measures to fight HIV in Indonesia. In exchange, Germany is cancelling 50 million euros of Indonesian debt arising from Financial Co­op­er­a­tion. Further Debt2Health debt swap operations were agreed in 2008 with Pakistan (40 million euros, of which 20 million euros is to be paid into the Global Fund) and in 2010 with Côte d’Ivoire (19 million euros, of which 9.5 million euros is to be paid into the Global Fund). All three debt swap operations are currently being implemented.

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