Debt-for-Development Swaps, a Restructuring Tool for Development

1. What are ‘Debt-for-Development Swaps’?

Debt-for-development swaps are agreements between a government and one or more of its creditors to replace existing sovereign debt with one or more liabilities that include a spending commitment towards a specific development goal. Therefore, debt-for-development swaps provide a mechanism for countries to reduce their debt burden by allocating resources toward objectives such as climate action, support to refugees, nutrition, education, nature conservation or other projects linked to development.

In contrast, debt-for-equity instruments, whereby the renegotiating of debt terms leads to the full or partial cancellation of the debt through the issuance of equity to the creditor, differ from debt-for-development swaps, which offer sovereigns an alternative path to achieve similar results. Needless to say, sovereigns cannot issue equity to creditors as they are not a corporation with shares.

This mechanism, debt-for-development swaps, involves a condition in the spending commitment towards the development goal tied to the renegotiation of the original debt. As a result, the sovereign debt is reduced if the ‘forgiven’ amount is allocated towards one of the agreed-upon development objectives.

When deciding the potential benefits of this type of arrangement for the debtor, an analysis of the sovereign financial and debt situation ought to be conducted. Countries with a high or moderate risk of default are the most suitable candidates, as the swaps can help smooth debt amortization profiles and serve as tools for managing liability, while simultaneously promoting high-impact development initiatives.

Conversely, countries with unsustainable debt levels or those already engaged in a debt restructuring process are typically not considered to be good candidates. In such cases, comprehensive debt reduction by its creditors and the implementation of a macroeconomic adjustment program are essential, making the swap less effective or even ineffective. Nevertheless, these swaps can sometimes be included in a debt restructuring process as a ‘top-up’ measure. Similarly, countries with low risk of debt distress are also unsuitable due to the inefficiency of the operation (ie, transactional costs are usually higher than the actual impact of the swap).  

A key factor in the effectiveness of these instruments is the implementation of a robust monitoring, verification and accountability structure. Reporting is required, not only on the general aspects of the swap but also on the specific targeted development goal.

2. Côte d’Ivoire: a Recent Case Study

In December 2024, Côte d’Ivoire announced an innovative debt-for-development swap targeting the education sector. This initiative is part of a broader financing package for Côte d’Ivoire, the Growth Development Policy Financing. Moreover, it is the first of its kind to be supported by the World Bank Group. The main reason behind this assistance lies in the possibility that the swap offers to simultaneously address two global challenges: (i) high indebtedness due to high interest rates, and (ii) the need to invest in development goals.

The support takes the form of a €500 million policy-based guarantee provided to Côte d’Ivoire through a guaranteed platform housed by the Multilateral Investment Guarantee Platform Agency (MIGA)[1]. Côte d’Ivoire will then use nearly half of the guarantee (€240 million) to secure a commercial loan with more favourable terms than the existing debt (lower interest rates, a longer maturity of 15 years, and a grace period of six years). With this loan, the country will buy back €400 million of its outstanding debt, which is the sovereign´s most expensive commercial debt maturing in the next five years (ie, a dual-tranche bond offering denominated in USD that was placed in January 2024, totalling $2.6 billion)[2]. The remainder of the policy-based guarantee will secure a Sustainability-Linked Loan to broaden its investor base.

Thanks to the swap operation, Côte d’Ivoire will free up close to €330 million in budgetary resources over the next five years, generating savings of €60 million in net present value terms. Of these debt service savings, €40 million will be allocated to supporting the education sector by building schools. The remaining €20 million will be used to increase the country’s fiscal space.

As mentioned above, monitoring, verification and accountability will serve as mechanisms for creditors' oversight and for the sovereign to enhance transparency. There is an existing World Bank-supported education program in Côte d’Ivoire within the framework of the World Bank Program for Results that monitors the outcomes and impact of the agreed-upon measures regarding the education sector. Since both programs focus on the education sector and are supported by the same institution—i., the World Bank—the supervision mechanism already in place and used for one will be extended to the other. This use of an already-existing system already placed in the country ranks this swap as innovative compared to others, which often incur significant costs by relying on expensive implementation structures, such as Special Purpose Vehicles (SPVs), trust funds or other mechanisms.

An example of progress under the umbrella of this goal is the recent inauguration of a new school building and facilities in Assoum 2, a village located in the municipality of Bouna (Zanzan District). This initiative has doubled students’ enrolment, proving clear evidence of the positive impact that this program is having on the country’s education sector.

3. Concluding Remarks

Emerging markets have historically faced significant challenges in securing reasonable financing terms from creditors, who often demand higher yields due to the riskiness of their investment (ie, higher volatility, changes in the political and economic environment, budget deficits, etc). This, in turn, results in expensive interest rates leaving these countries with limited or non-fiscal space to service their debt obligations. Eventually, such countries must choose one side of the coin, either prioritize debt repayment at the expense of social development or focus on social development, potentially triggering a debt moratorium.

Debt-for-development swaps provide an alternative for this dilemma by offering favourable terms when seeking financial resources from the international community. Sovereigns need to generate fiscal savings which can be reinvested to promote development and stimulate economic growth. The role of the World Bank, as a credible and supportive institution of this initiative, allows Côte d’Ivoire to have a flexible and favourable agreement with creditors, enhancing country ownership and contributing to growth.

Rodrigo Olivares-Caminal is a Professor and Chair of Banking and Finance Law at Queen Mary University of London.

Rosario Bustillo is an Associate at Kepler Karst Law Firm.

Candela Medrano-Marcos is a Legal Trainee at Kepler Karst Law Firm.

ENDNOTES:

[1] MIGA was established to unify and centralize the guarantee solutions offered by the World Bank. Prior to its creation, these guarantees were dispersed across the World Bank’s different institutions, each with its own distinct approval process and requirements.

[2] The dual tranche offering consisted of a $ 1.1 billion sustainable bond, with a 9-year maturity and a 7.625% interest rate (sustainable bonds); and a $ 1.5 billion conventional bond, with a 13-year maturity and an 8.25% interest rate (conventional bonds). The funds obtained were used for the repurchase and refinance of the country’s existing Eurobonds and international bank loans, as well as infrastructure projects. The repurchase of the bonds by the sovereign issuer is allowed if it is within the original terms and complies with the US Securities Act.