Debt swaps

'Debt for development swaps' are schemes whereby a poor country, instead of paying off a debt to a creditor, agrees to spend the money on a particular development or environmental project. Here we examine the strengths and weaknesses of such schemes.

Debt for development
'Debt for development swaps' started to be developed in the mid-1980s, in the form of 'debt for nature' swaps which attempted to tackle problems of debt and of environmental destruction in a unified way. The idea is that a poor country gets a debt cancelled, and agrees to channel some or all of the money it would have paid out on that debt towards a particular conservation or environmental project, often overseen by a local organisation. Around 30 debtor countries have had debt-for-nature swaps, often initiated by large international environmental organisations.

Since then, a number of other 'debt swaps' have been developed, including 'debt-for-health', 'debt-for-housing', etc. The Global Fund for HIV, AIDS, TB and malaria is currently developing a programme whereby donors can swap poor countries debts for investment in HIV and AIDS programmes.

Strengths and weaknesses
These swaps can reduce countries' debt burdens, whilst directing money to development or environmental projects. However, their overall impact on levels of debt and environmental management can be tiny compared to the costs in terms of time and effort on the part of the debtor government. Moreover, by their nature they involve privileging projects favoured by donors or non-governmental organisations over government priorities. Such swaps may be acceptable if they fit into the country’s overall debt management strategy, are used to fund a country's existing priority projects, and are planned and managed locally. however, they are certainly not a panacea to either debt problems or to development or environment problems.

The UK government does not engage in any debt-for-development or debt-for-nature swaps, stating that if they think a debt burden should be written off, they would prefer to cancel it outright and leave the country to decide how the released funds should be used.

Debt-for-equity
Debt-for-development or -nature swaps should be distinguished from 'debt-for-equity' swaps, which are a commercial tool used by companies to get a return on debts that they hold. For instance, a company might buy up a debt owed by a poor country to another country or company, and then offer to exchange that debt for a stake in a government-owned company or one which is being privatised.

Jubilee Debt Campaign argues that outside investors should simply write off poor countries' debts rather than using them as a means to leverage equity in enterprises.

The UK government will sell on debts to investors wanting to carry out debt-for-equity swaps, as long as the debtor country agrees to the swap.