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Instruments
Debt for development swaps
Debt swaps have proven to be an important instrument of development policy. The principle is this: 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:
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The debtor government undertakes to invest the funds directly in development projects.
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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 partner 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, in consultation with the German government, for development projects in the fields of poverty reduction, education, environmental protection or HIV/AIDS.
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 2008, Germany had pledged debt swaps to 19 countries for a total of 1.36 billion euros.
Debts arising from Financial Cooperation amounting to some 737 million euros were waived once the partner countries concerned had fulfilled their commitments.
In September 2007, for the first time under a debt swap operation, the German government entered into a trilateral agreement, with the Global Fund to Fight AIDS, Tuberculosis and Malaria and the Indonesian government. Indonesia will pay 25 million euros into the Global Fund and the Global Fund will use this money to finance measures to fight HIV in Indonesia. In exchange, Germany is cancelling 50 million euros of debt arising from Financial Cooperation. The agreement is part of the Global Fund’s 'Debt2Health' Initiative. In April 2007, the Global Fund’s Board decided to go ahead with a two-year pilot phase of the Initiative for four countries: Indonesia, Kenya, Pakistan and Peru. Over the coming four years Germany will mobilise 200 million euros in total through the Debt2Health Initiative.
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