Debt Swaps and Debt Conversion Development Bonds for Education

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ED-11/EFA/ME/5REV. Original : English

Debt Swaps and Debt Conversion Development Bonds

for Education

Final Report for UNESCO Advisory Panel of Experts on Debt Swaps

and Innovative Approaches to Education Financing

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Preface

This study was commissioned by UNESCO for the Advisory Panel of Experts on Debt Swaps and Innovative Approaches to Education Funding and funded by the Open Society Institute. The purpose of the study is to explore ways in which debt swaps can be combined with other financial instruments to leverage more funds for education and other development purposes. Background information was gathered by means of case studies of two recent debt swaps used to help fund investments in education, one carried out by Cameroon and France and the other by El Salvador and Spain. This was supplemented by interviews with a range of experts in the fields of education and finance, as well as a survey of relevant literature (see Appendix E for a list of the interviewees). The primary conclusion of the study is that using debt swaps to allow governments in developing countries to issue domestic bonds could help mobilize a significant and sustainable source of funding for education and other development purposes.

This report was prepared by two teams. David Stevens, Daniel Bond, Marianne Pellegrini, Garrett Wright and Casey Gheen of Affinity MacroFinance (AMF) were responsible for preparing Chapters 1, 3, 5 and 6, plus Appendices B through E. Chapter 2 and 4 and Appendix A were prepared by Danny Cassimon and Dennis Essers of the Institute of Development Policy and Management (IOB), University of Antwerp. The Panel guided the preparation of the report during meetings, audio conferences, and electronic communication. The teams received initial feedback and comments on the first draft of the report during the second meeting (19 & 20 May 2011) of the Advisory Panel of Experts on Debt Swaps and Innovative Approaches to Education Funding which was held at UNESCO in Paris.

Olav Seim and Lina Benete from the UNESCO’s Education for All Global Partnerships team provided overall coordination of the study.

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Members of UNESCO Advisory Panel of Experts on Debt Swaps and Innovative

Approaches to Education Financing

Ms Reem N. Bsaiso, Senior Educational Consultant (Ex-CEO of World Links Arab Region), Amman, Jordan

Mr Danny Cassimon, Professor, Institute of Development Policy and Management, University of Antwerp, Belgium

Mr Robert Filipp, Head of Innovative Financing, External Relations and Partnerships, Global Fund to Fight AIDS, Tuberculosis and Malaria, Geneva, Switzerland

Mr Daniel Filmus, National Senator, Buenos Aires, Argentina

Mr Michael Klingberg, Desk Officer, Federal Ministry for Economic Cooperation and Development (BMZ), Germany

Ms Akanksha A. Marphatia, ActionAid International, Acting Head of International Education, London, UK

Mr Hugh McLean, Education Director, Open Society Initiative, London, UK

Mr Mzobz Mboya, Advisor for Education, The New Partnership for Africa’s Development, South Africa

Mr Julien Meimon, Secretariat, Leading Group on Innovative Financing for Development, Ministry of Foreign and European Affairs, France

Mr Harry Patrinos, Lead Education Economist, World Bank, Washington, DC, USA

Ms Maria Vidales Picazo, Advisor, General Directorate for International Finance, Ministry of Economy and Finance, Spain

Ms Liesbet Steer, Research Fellow, Overseas Development Institute, London, United Kingdom Mr David C. Stevens, CEO, Affinity MacroFinance, New York, USA

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Abbreviation List

AECID Spanish Agency for International Development Cooperation AFD French Development Agency

AfDB African Development Bank AfDF African Development Fund ALSF African Legal Support Facility AMC Advanced Market Commitment BCR Central Reserve Bank of El Salvador BEAC Bank of Central Africa

BMZ German Ministry of Economic Cooperation and Development C2D Debt Reduction and Development Contract

CCS Consultative Committee for Allocation and Tracking of HIPC Resources CEMAC Economic Community of Central African States

CSO Civil Society Organization

DAF Spanish Development Assistance Fund DCA Debt Conversion Account

DCDB Debt Conversion Development Bond DMF Debt Management Facility

DSF Development Sustainability Index EAI Enterprise for the Americas Initiative ECA Export Credit Agency

EDPC Education Data and Policy Center EFA Education for All

EM Emerging Markets

ESS Education Sector Strategy FTI Fast Track Initiative

GAVI Global Alliance for Vaccines and Immunization GDP Gross Domestic Product

GER Gross Enrollment Ratio GNI Gross National Income

HIPC Heavily Indebted Poor Countries ICO Spanish Official Credit Institute

IDA International Development Association (World Bank) IFF International Financing Facility

IFFim International Financing Facility for Immunization LIC Low Income Countries

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MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative MINE Ministry of Education

NAA New Aid Approach

NGO Non-Governmental Organization ODA Overseas Development Assistance PTR Pupil-Teacher Ratio

PV Present Value

TFCA Tropical Forest Conservation Act XAF CFA Franc

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Executive Summary

Introduction

The World community continues to make progress toward achieving Education for All (EFA) goals, encapsulated by the second and third Millennium Development Goals (MDGs). Despite this progress, many countries are not on track to meet the MDGs for education. One of the key impediments for these countries is that there is insufficient funding for education. In an effort to address this problem UNESCO and other international organizations have been working to develop new sources of funding for education.

This study, commissioned by UNESCO for the Advisory Panel of Experts on Debt Swaps and Innovative Approaches to Education Funding, explores two topics: (1) how debt swaps have been used and can be used more effectively to provide funding for education and other development purposes and (2) ways in which debt swaps can be combined with other financial instruments to leverage more funds for education and other development purposes.

Part I - Debt Swaps for Education

Past Experience with Debt Swaps

The first focus of this study is a critical examination of the use of debt swaps.

Debt relief has a long and at times turbulent history. It goes back at least to the 1950s and has involved 85-plus developing countries (low and middle income) and their bilateral, multilateral and commercial creditors. Over time, debt relief policy and practice have undergone significant changes, as have the broader aid and development finance landscape of which debt relief is part. Moreover, different debt relief operations coexist today, with forms depending to a large extent on the nature of the debtor, the creditor and the specific types of debt involved.

One increasingly popular instrument of debt relief has been debt swaps, also referred to as “debt conversions.” In such transactions the creditor forgives debt on the condition that the debtor makes available some specified amount of local currency funding to be used for specific developmental purposes. The swap of debt in exchange for various debtor commitments has been actively practiced since the late 1980s. It is important to note that debt swaps have been seen not only as a means for reducing the indebtedness of developing countries, but also as a way to provide additional funding for developmental programs in these countries. It is primarily the latter that has led to a recent surge in debt swap initiatives in a wide range of sectors, including education.

Assessing how much debt is still available and eligible for swaps is a difficult task, mainly because of the lack of high-quality, detailed data on debt figures as well as variations in legal

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rules on debt relief among creditor and debtor countries. However, some rough estimates can be made.

The initiation of the Heavily Indebted Poor Countries (HIPC) Initiative in 1996 and its later enhancements resulted (or will result) in much of the debt of the 40 countries that qualified being forgiven. As a result, for these countries the debts that may still be available for swaps are to be found with non-Paris Club bilateral creditors and commercial banks who have not yet contributed to the HIPC Initiative. A rough estimate (based on end-2009 figures) is that there may be US$3.8 billion of non-Paris Club bilateral debt and an additional US$9.5 billion of debt within the commercial bank sphere available for swaps.

With respect to the small group of other, non-HIPC low income countries and the larger group of lower middle income countries, it is likely that only official bilateral debt would be available for swaps, as most countries would probably not accept relief on commercial debt for fear of losing financial market creditworthiness. Such strong assumptions leads to estimates that there may be US$15.4 billion for non-HIPC LICs and US$207.3 billion for lower middle income countries. The foregoing generalizations allow a very rough estimate of total debt that may be available for swaps. For the 96 countries classified by the World Bank as low income or lower middle income there may be as much as US$236 billion in debt available for swaps.

It is important to add that critical development needs remain unmet in upper middle income countries. Debt swaps could also be used to help these countries accelerate their progress towards the Millennium Development Goals.

Debt Swap Best Practices

It is perhaps enticing to see debt-for-development swaps as straightforward win-win constructions: debtors see their debt reduced and development spending increased, while creditors benefit from an increase in the value of remaining debt claims and increase their development credentials. The reality is however far more complex, as is now acknowledged by most stakeholders involved. For example, for debt swaps to be most beneficial to the recipient country they should create additional “fiscal space” for its government.1 This means that the local currency expenditures required of the recipient government by the swap should not be greater that the amount that would have been required to meet the original debt service payments on the debt.

Even if debt swaps adhere to the best practices, their impact on education financing will be limited if they continue to be executed on what is a piecemeal and strictly bilateral basis. ‘Upscaling’ is a necessary but difficult-to-achieve condition for significant improvement in debt swap results. The debts available for swap are being targeted by advocates of swaps from

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For excellent discussions of “fiscal space” and the issues surrounding the use of debt reduction to provide fiscal space to allow increased government spending for social programs see Heller & Shiller, “Issues in the Use of Debt Relief Savings in the Social Sectors,” (1999) and Heller, “The prospects of creating ‘fiscal space’ for the health sector,” (2006).

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various sectors—education, health, conservation, climate change and others. It would likely be more effective for debt-for-education supporters to work with these other interests in a common debt-for-development funding effort, with the sectoral allocation of the funds being dealt with at a second stage.

Conclusion

Experience has shown that when properly designed debt swaps can create “fiscal space” that allows recipient countries to provide additional funding for education and other development purposes. However, even if debt swaps adhere to the checklist and lessons learned, their impact on education financing (and a fortiori the debt situation of recipient countries) will be limited if one sticks to the typical piecemeal and strictly bilateral approach now observed. Upscaling is a necessary but difficult-to-achieve condition for debt swap performance improvement. The ‘available/eligible’ debt titles identified in this study are part of a ‘common pool’ in which advocates of swaps from various sectors are fishing -- among other, the health and conservation/climate change lobby. It is not very likely that debt-for-education supporters will have the longest fishing rod, nor is such competition among sectoral agencies desirable. A cooperative approach, whereby debt-for-education supporters team up with other interests in a common debt-for-development funding effort, would be more constructive. The sectoral allocation of funds, which should be worked out to conform to the development plans of debtor countries, can then be dealt with at a second stage.

One promising avenue for upscaling would be for individual bilateral creditors to unite in larger multi-creditor swap initiatives. It is certain that the heterogeneity of creditor policies on debt swaps remains a significant impediment to larger multi-creditor debt-for-development swaps. However, it should be possible to find at least some common ground from which a process of donor coordination could be initiated. With many non-Paris Club and commercial creditors already involved in debt relief operations and South-South cooperation becoming ever more important in today’s interconnected world, there may be untapped potential for involving them in large-scale debt swap initiatives.2 This would of course require greater transparency over their respective debt relief policies and attitudes towards debt-for-development swaps.

Role of UNESCO

UNESCO could become a focal organization on debt swaps, a facilitator assisting interested debtor countries in finding a group of creditors that are favorable towards debt-for-development swaps (debt-for-education swaps in particular) and willing to pool the resources generated by the relief given on their claims into one single fund. Such a fund would then be managed by (or at least in close cooperation with) the debtor country itself, with resources spent on its own development priorities. As such, debt swaps would take on a HIPC/MDRI-type

2_{Non-Paris Club and commercial creditors have accounted for 13% and 6% of debt relief respectively. (See UN,}

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of setup, avoiding many of the pitfalls of earlier first-generation swaps while at the same time creating enough critical mass to make a noticeable impact.

Part II - Debt Conversion Development Bonds

A New Source of Funding for Development

The second focus of this study was on identifying how other sources of new funding might be introduced through debt swaps. Various public and private sector sources of funds were examined, but it became clear that the domestic savings of developing countries themselves are potentially the most substantial and sustainable sources of additional funding for development. Perhaps most important are the assets held by pension fund and insurance companies, because these funds need to be invested on a long-term basis. There is more than US$3 trillion in assets being held by such institutional investors in the developing countries. And these assets are growing rapidly.

Such formalized domestic savings can be mobilized for social and economic development needs through the issuance of long-term local currency bonds. Most developing country governments are already issuing bonds within limits determined by their capacity to repay the debt. When carried out in accordance with best practices, debt swaps can increase the recipient government’s sustainable domestic borrowing capacity. This would not add to the fiscal burden of debtor governments since the funds for the future debt service payments would come from not having to make future payments on the converted foreign debt.

Debt Conversion Development Bonds

For this report the domestic bonds issued on the basis of savings achieved through debt conversions are called Debt Conversion Development Bonds (DCDBs). These bonds could be structured in the following way: one or more creditors agree to forgive specific debts in exchange for a commitment from the debtor country’s government to periodically place into a special account at their central bank or treasury the local currency saved from not having to make principal and interest payment on the debt. For this report the account is called the Debt Conversion Account (DCA).

The payments by the government into the DCA (the “counterpart funds”) would be in local currency (which would save the country from having to utilize its foreign exchange reserves) and would be made over time in accordance with the original debt service schedules of the converted debts.3

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The exchange rate used for the calculation of the local currency payments would be fixed—most likely to correspond to the exchange rate at the time of the debt conversion agreement with each creditor. (This is necessary to provide certainty as the amount of local currency going into the special account over time.)

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The government could then issue local currency bonds (DCDBs) which would be repaid from the stream of future payments going into the DCA. Depending on the amounts of debt swaps in each county, the time profile of the future stream of counterpart funds, and debt markets conditions, one or more DCDBs could be issued in each country, varying in size, tenor, interest rate and issuance date as appropriate.

Proceeds from the issuance of each DCDB would be deposited into the DCA. As development projects are approved and implemented, they would be funded by disbursements from the DCA. Such spending should be primarily for capital expenditures (such as infrastructure) and not operating expenditures.

The developing country governments would have full ownership of the DCA and they would be fully responsible for all payments on the DCDBs. These bonds would carry the “full faith and credit” commitment of the government, making them equivalent in priority of payment to other general obligation bonds of the government. While the counterpart payments and proceeds from the sale of DCDBs would pass through the DCA, this would be done primarily for monitoring purposes.

The primary purchasers of the DCDBs would likely be local institutional investors, banks and wealthy individuals. However, these bonds may also be attractive to foreign investors who are willing to invest in local currency securities. For example, they would be an attractive form of “Diaspora bond” or “social investment bond” given that they are used to finance specific social projects and the funds are monitored by donors and civil society organizations (CSOs).

Other Sources of Support for Domestic Bonds

Debt swaps are uniquely well suited as a means for backing domestic bonds, given the fact that once a debt is forgiven it creates a long term stream of savings for the recipient government. However, domestic bonds could be made possible by other means.

Just as with DCDBs, domestic bonds could be supported by donors who—instead of making a large one-time contribution—are prepared to commit to providing funding over a period of time. This might be particularly attractive to private sector donors who see the need for immediate and significant capital projects but who need to budget their support over a period of time.4

Domestic bonds can also be issued based upon the securitization of future streams of revenue such as college tuition payments, student loan payments, and student housing expenditures. Such bonds are usually based on the expectation that graduates will soon have the ability to pay for part of their advanced education (or that their parents can pay). Governments can use such

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This presents risks for the recipient government who would pledge their full faith and credit behind the repayment of the bonds based on the expectation that the future donor funding for debt service payments would be received.

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structured bonds as a way to fund capital expenditures for tertiary education, allowing them to increase budgetary spending for primary and secondary education. While the government is likely to have to provide their full faith and credit backing for the bonds, the fiscal space is created by the government capturing some of the student’s (or their parent’s) future earnings. There are a number of ways that domestic bonds can be made more attractive to investors. For example bonds based on the securitization of tuition payments can benefit from a partial credit guarantee provided by a development finance institution or a full financial guarantee offered by a monoline bond insurance company.

Conclusion

In some countries the “fiscal space” created from properly designed debt swaps can be used by the government to issue domestic bonds, thus mobilizing the country’s own formalized savings to fund development. Such domestic bond issuance based on debt swaps is warranted in those instances where spending a large amount today has potentially greater benefits that spending small amounts over a long period of time. This is most often true when the funds are used to fund essential infrastructure projects.

This paper has presented the idea of using debt swaps to support the issuance of domestic bonds. The proposed Debt Conversion Development Bonds could help fill the gap in funding needed to achieve the Millennium Development Goals for education. While DCDBs are not appropriate for all countries, there may be enough potential applications of this approach to warrant initiating a major campaign to promote their use. However, before launching such a campaign there is a need for additional research to:

 Identify bilateral official, multilateral and commercial debts held by developed countries that could be used for debt swaps.5

 Determine which creditors are likely to be willing and able to participate in a multilateral debt conversion effort to meet the MDGs.

 Determine the specific debts of each developing country that could be converted and the repayment terms for these debts.

 Calculate the potential amount of DCDBs that could be issued by each country.

 Evaluate the potential impediments to this proposal on the part of both creditor and debtor countries—and multilaterals and commercial banks.

 Evaluate the political and financial resources needed to successfully carry out this effort.

5_{Official bi-lateral debts held by members of the Paris Club may be the most easily mobilized for debt swaps.}

However, official bilateral debts held by creditor countries that are not members of the Paris Club, as well as debt held by commercial banks may, for some countries, be of significant amounts. In such cases an effort should be made to contact such creditors and explore the potential for using this debt for swaps. Mobilization of multilateral debt for debt swaps would, except in special situations, likely be very difficult.

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 Identify the best sponsors for this effort.

 Identify an organization to manage this effort.

Before launching a major campaign it would also be useful to test the concept with a pilot project. This would involve selecting an appropriate and willing country with clearly defined needs, finding one or more creditor countries willing to write off a portion of the country’s debt, and working with the recipient country to establish the framework for donor and civil society monitoring and to issue the bonds in the domestic capital market.6 This could be done rather quickly, as it does not require any major new multilateral agreements or administrative framework.

Role of UNESCO

UNESCO could play a lead role in promoting the Debt Conversion for Development Bonds as a way to dramatically increase funding to help meet the MDG goals for education by 2015. There could be several steps to this process.

First, it would be useful for UNESCO to lead an effort to present this new concept to two communities which currently have little direct overlap in their development work: those which are seeking to mobilize innovative sources of funding for development and those which are seeking to develop the domestic capital markets of developing countries.7 Both groups should be asked to critically examine the concept. If they agree that it has merit, both should be involved in refining it. UNESCO could carry out this effort by first disseminating a report (similar to the current report) to experts in both communities and seeking their comments. This evaluation process could be carried further by bringing together a group of these experts to discuss the concept and make recommendations on how it might best be implemented.

Second, UNESCO should seek funding and involve other partners to help to test the concept of DCDBs by arranging for a pilot study as described above. The initial phase of the pilot, which would involve the identification of an appropriate and willing country to issue DCDBs and exploring whether one or more countries would be willing to provide the necessary debt swaps, could be carried out at a small cost and relatively quickly. (While a pilot study could be carried out with just one participating creditor, it would be much more useful to engage multiple creditors. This would not only allow for greater funding, it would also help to test the process of creditor coordination and to see how the donor group functions at the country level.) Actual

6_{The Education for All – Fast Track Initiative could play an important role in this by helping to identify the unmet}

funding needs of countries relative to meeting education specific Millennium Development Goals. They could also assist in evaluating countries’ abilities to effectively use additional funding.

7_{Communication with the former group might be organized via the Leading Group for Innovative Financing}

(www.leadingroup.org). Included in the latter group would be the International Monetary Fund, the World Bank, the International Finance Corporation, regional multilateral development banks, and several development finance institutions and think tanks. Affinity MacroFinance, which is principally devoted to local currency bond financing in developing nations, would also be a logical participant in the latter group.

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implementation of a DCDB effort would be largely the responsibility and at the expense of the creditors and recipient country. Once DCDBs have been tested in a pilot project, UNESCO could arrange for an outside expert analysis of the effort which would be of great value in deciding whether to attempt to launch a major multi-country initiative.

If there is sufficient support for the concept of DCDBs as a new way to fund development programs, then UNESCO could proceed to mobilize a multi-creditor, multi-country effort to use DCDBs as a means to obtain a substantial increase in funding for development, and specifically for funding investments in education needed to meet the MDGs by the year 2015. To assist in this more ambitious effort UNESCO should seek support from other multilateral organizations, interested donor governments, developing country governments, civil society organizations and the private sector. UNESCO should also explore how “non-traditional” (emerging) donors, commercial creditors and South-South Cooperation partners could be involved.

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1. Introduction

The World community continues to make progress on achieving Education for All goals, encapsulated by the second and third Millennium Development Goals. According to the latest EFA Global Monitoring report, an additional 52 million children are enrolled in primary school. The number of children out of school in South and West Asia was cut in half, and in sub-Saharan Africa, enrollment ratios rose by one-third. Gender parity in primary enrollment has also improved. Despite this progress, the world is not on track to meet the MDGs for education. While there are a number of diverse reasons for this, insufficient funding is a key constraint for many countries.8 With this in mind, UNESCO as well as other international organizations have been working to develop new sources of funding for education.

In 2006, in line with the Resolution of the 33rd General Conference of UNESCO, the Director-General established the Working Group on Debt Swaps for Education which stimulated a debate and put the issue of debt swaps for education on the political agenda by exchanging information and experiences. In early 2010, the Leading Group on Innovative Financing for Development, an important platform for sharing information and promoting innovative financing mechanisms, established a Task Force on Innovative Financing for Education. The report of the Task Force was presented at the 2010 MDG Summit, proposing nine innovative financing mechanisms, including debt swaps for education, with a potential to raise funds for and the profile of, education. In order to explore further the potential of debt swaps for education, UNESCO established the Advisory Panel of Experts on Debt Swaps and Innovative Approaches to Education Financing in 2010.9 The Panel’s goal has been to examine how to advance knowledge on debt swaps and innovative financing for education for the benefit of EFA partners. A key deliverable of the Panel was this report focused, in particular, on the utilization of debt swaps and how they could be used in concert with other mechanisms to leverage more funding.

During the 1980s and 1990s, a period when many developing countries were facing severe problems due to being over-indebted to foreign creditors, debt swaps were viewed a means of making debt relief efforts more palatable to creditors. Rather than just writing off or extending the maturity of debt, creditors could get something in return for providing debt relief.10 Today one of the key motivations for arranging a debt swap is the desire on the part of one of the parties involved to provide domestic currency financing for a specific project or program that they view as a public good. This has led to a number of initiatives to use swaps to provide funding for education, health, environmental protection and similar purposes.11

8_{See UNESCO,}_{Education for All Global Monitoring Report 2010}_{, Chapter 2.} 9

The Advisory Panel consists of 14 experts with a balanced representation in the area of debt swaps and/or innovative financing for development or education (see Preface for the list of Panel’s members).

10_{For donor governments another attractive feature of debt swaps is that they are treated as a form of official}

development assistance (ODA), if they convey a grant element of at least 25% (calculated at a discount rate of 10%). See OECD Development Assistance Committee directives at

http://www.oecd.org/dataoecd/36/32/31723929.htm#32,33

11

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In 2007, The Global Fund to Fight AIDS, Tuberculosis & Malaria initiated a debt swap program of this type called Debt2Health that has drawn considerable attention. By the end of 2010, the Debt2Health program had concluded four swap agreements for approximately US$236 million12 in debt reduction, with the equivalent of half this amount in local currency to be spent on national health programs. The governments of Germany and Australia have participated from the creditor side, with Indonesia, Pakistan and Côte d’Ivoire being the recipient countries. While it is difficult to claim debt swaps as an innovative form of financing at this point, Debt2Health and similar efforts have sparked interest in doing something similar to promote education.

Over the past two decades a significant amount of the debt of developing countries has already been written off in efforts to help these countries achieve a more sustainable financial position and to allow them spend more of their on fiscal resources on development rather than on servicing their external debts. Thus the question often arises in discussions about the future of debt swaps—is there sufficient debt remaining that could be used for swaps? While an exact number is difficult to obtain, Professor Danny Cassimon and Dennis Essers of the University of Antwerp address this question in chapter 2. They estimate that there is a substantial amount of debt still available that could potentially be used for debt swaps. They caution, however, that the availability of this debt for swaps is constrained in various ways, most importantly by the established policies of creditor countries concerning their participation is swaps. In this chapter they also present lessons drawn from the swap experience so far and propose a checklist for designing debt swaps in ways that will maximize the developmental impacts for the recipient country.

In order to learn more about how debt swaps for education have been carried out in practice, two case studies of recent examples of such efforts were undertaken. The debt swaps that were examined were carried out by Spain and El Salvador (signed in 2005) and France and Cameroon in 2007-2011. These debt swaps for education programs are described in Chapter 3. Lessons drawn from the case studies are summarized at the end of this chapter.

Chapter 4 concludes the first section focused on debt swaps for education by outlining the potential of and limits to upscaling debt swap operations.

The second section of this paper starts with chapter 5. The focus of which is on ways to establish synergies between debt swaps and other innovative financial instruments. Most of the chapter is devoted to a proposal for combining debt swaps with the issuance of domestic bonds in ways that can mobilize the domestic savings of developing countries for education and other developmental purposes. The Debt Conversion Development Bond proposal is a form of “innovative financing” in the sense proposed by the Leading Group for Innovative Financing for

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Development:13

 It is linked to global public goods.

 It is complementary and additional to traditional official development assistance (ODA).

 It is more stable and predictable than traditional ODA.

The specific public goods are first, the achievement of the Millennium Development Goals and second, continuing financial support for economic and social development in developing countries.

The proposed DCDBs are complementary and additional to traditional ODA in that in most cases it will be the forgiveness of external debt by official donors that will make it possible for recipient countries to issue additional domestic bonds to finance their own development.

Finally, the funding made possible by DCDBs can provide more stable and predictable financing for development than traditional ODA in two respects. First, DCDBs use debt swaps to secure a pre-commitment of future financing extending over many years, thus providing a stable and predictable source of funding. Second, DCDBs can speed the development of domestic capital markets. Access via the domestic capital markets to the significant and rapidly growing pool of domestic savings that are being formalized by banks, pension funds, insurance companies and other institutional investors in developing should someday be one of the most important and stable sources of financing for their development.

The report concludes in Chapter 6 with suggestions on how these proposals on debt swaps for education and other development purposes might be put into practice.

13_{See Leading Group on Innovative Financing for Development website at www.leadinggroup.org and the}

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2. Overview of Debt Relief Policies, Debt Size and Lessons from debt

swaps for education

The current chapter consists of three main blocks. Section 2.1 provides a shorthand overview of international debt relief policy and practice throughout the years, with a focus on recent times. Next to a more general historical account it offers some insights into the debt swap policies of individual Paris Club and non-Paris Club bilateral creditors. Section 2.2 attempts to make a first, rough estimate of the amount of debt that could be available/eligible for swaps. In conclusion a review of the most important lessons learned from debt swaps conducted so far, in the education sector and elsewhere, is presented in Section 2.3, together with a preliminary ‘checklist’ to further improve upon debt swap performance.

2.1 Overview of debt relief policy and practice

Debt relief has a long and at times turbulent history. It goes back at least to the 1950s and has involved 85-plus developing countries (low- and middle-income) and their bilateral, multilateral and commercial creditors. Over time, of course, debt relief policy and practice have undergone significant changes, just as have the broader aid and development finance landscape of which debt relief is part. Debt relief could therefore be said to be a ‘chameleon’, changing colors in accordance with its environment. Moreover, different debt relief operations coexist today, with forms depending to a large extent on the nature of the debtor, the creditor and the specific types of debt involved.

A useful way of looking at international debt relief’s many guises is offered by Table 1 (see next page). As shown by this table and will be explained further on, the initiation of the Heavily Indebted Poor Countries (HIPC) Initiative in 1996 can be seen as constituting a pivotal moment in debt relief policy and practice. Accordingly, in the following subsections debt relief history will be treated as existing of three phases or ‘generations’ (which do partly overlap): the pre-HIPC era, the HIPC initiative (and its enhancement) in itself, and a variety of initiatives that go beyond HIPC. In view of the purpose of the current report we will focus on the third generation of debt relief, which includes recent debt swap initiatives, and restrict ourselves to the essentials as regards the former two phases. A fuller historical account of debt relief can be found in appendix (A) to this report.

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Table 1: A ‘generational’ overview of international debt relief initiatives (by type of creditor)

Bilateral (Paris Club) Bilateral (non-Paris Club) Multilateral Commercial

B e for e HI PC In itiati ve (1950s -199 6)

- common terms for LICs (Toronto, London, Naples), LMICs (Houston) and other countries (classic)

- debt swaps - parallel ODA relief

- ad hoc debt relief - exceptional debt relief

- London Club treatments - debt swaps - Brady deals - IDA-DRF buy-backs H IP C In itiati ve (1996 -...)

HIPCs non-HIPCs HIPCs non-HIPCs HIPCs non-HIPCs HIPCs non-HIPCs

- bringing debt down to debt sustainability thresholds through debt relief under Lyon (80%) and later Cologne (90%)

terms _{- common terms} - debt swaps - tailored debt relief through Evian approach - participation in bringing debt of HIPCs down to debt sustainability thresholds (varies per creditor) - ad hoc debt relief (including debt swaps) - bringing debt of HIPCs down to debt sustainability thresholds - exceptional debt relief - participation in bringing debt of HIPCs down to debt sustainability thresholds through London Club treatment, debt swaps, IDA-DRF buy-backs - London Club treatments - debt swaps - IDA-DRF buy-backs B e yo n d HI PC In itiat iv e (2006 -.. .) - providing 100% debt relief to post-completion point HIPCs - ad hoc debt relief (including debt swaps) - MDRI: providing 100% debt relief to post-completion point HIPCs (IDA/IMF/AfDF/ IADB)

Source: Authors’ own elaboration; Acronyms: LIC = low-income country, LMIC = lower middle-income country, ODA = Official Development Assistance, IDA-DRF = International Development Association Debt Reduction Facility, HIPC = Heavily Indebted Poor Country, MDRI = Multilateral Debt Relief Initiative, AfDF = African Development Fund, IADB= Inter-American Development Bank.

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Pre-HIPC debt relief: bilaterals leading the way

In the 50 years between the end of World War II and the introduction of the HIPC initiative, debt relief was very much dominated by traditional bilateral creditors. Through the Paris Club, an informal, voluntary forum set up in 1956, these creditors worked out debt problem solutions with their debtors. At first, debt restructurings were short-term and at market interest rates, aimed at recuperating as much as possible of outstanding claims. Only when debt burdens in most developing countries showed no sign of abating and in some even led to full-fledged debt crises, Paris Club creditors moved to a menu of options that would lower the present value of their non-concessional claims, either by means of debt stock reduction, debt service reduction or extensive debt service prolonging. Different debt treatment ‘terms’ followed each other in rapid succession, gradually increasing the concessionality embedded.14 From 1991, a debt swap clause also allowed Paris Club creditors to exchange ODA and part of non-ODA debt into debtor country commitments toward social, commercial or environmental investment, emulating earlier commercial creditor debt-for-equity and debt-for-nature swaps.15 Other pre-HIPC efforts are found mainly with commercial creditors. Most notably were the Brady deals that involved commercial creditors reducing their exposure to non-performing debt titles by swapping them for new, more concessional bonds.16

HIPC debt relief: a concerted effort

By the mid-1990s it was clear that the existing (Paris Club) mechanisms for debt relief would not suffice for a group of primarily low-income countries that continued to stagger under enormous burdens of external debt, a large part of which was owed to multilateral creditors. In an attempt to bring back to sustainable levels the debt of these countries, the World Bank and IMF launched the HIPC initiative in 1996. At completion point, HIPC-eligible countries would receive irrevocable debt relief from their bilateral (Paris Club and non-Paris Club), multilateral and commercial creditors in order to bring debt down to predetermined sustainability thresholds. Such a comprehensive approach marked a watershed in debt relief practice and policy. From 1996 onwards, debt relief would get on two distinct tracks: one for HIPCs, which would be broadened and deepened in the subsequent years, and one for non-HIPCs, which would largely be a continuation of pre-1996 practices (see Table 1).

In 1999 the original HIPC initiative was modified to incorporate some of the critiques voiced by civil society. Besides increased flexibility and broadened eligibility, the enhanced initiative introduced Poverty Reduction Strategy Paper (PRSP) conditionality, making the preparation and implementation of such a national development plan by debtor countries a necessary requirement for reaching HIPC completion point. This amendment made the link between debt relief and poverty alleviation more visible and explicit.

14

See appendix A and http://www.clubdeparis.org/sections/types-traitement/reechelonnement.

15_{See Cassimon et al. (2009) ‘What potential for debt-for-education swaps in financing Education for All?’ and}

references therein.

16

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Beyond-HIPC debt relief: ‘going the extra mile’ and the return of debt swaps

Almost all Paris Club creditors have chosen to ‘top up’ their commitments and deliver full 100% debt relief to their HIPC debtors. In 2006, the IMF, the International Development Association (IDA) and the African Development Fund (AfDF)17 followed suit by supplementing the HIPC initiative with the Multilateral Debt Relief Initiative (MDRI), which promised to forgive all remaining eligible debt owed to these three multilaterals for post-completion point HIPCs. From the outset the MDRI has been framed in terms of channeling additional resources to HIPCs in support of their progress towards the Millennium Development Goals (MDGs), more than as a debt sustainability mechanism (such as the HIPC initiative itself).

Importantly, the MDRI does not prescribe the participation in debt relief by bilateral creditors, commercial creditors and multilaterals other than the three mentioned, unlike the HIPC initiative where comprehensiveness was key.18 In 2007, the Inter-American Development Bank (IADB) launched a parallel initiative to cancel all debt owed to it by five Western Hemisphere post-completion point HIPCs. Meanwhile, debt relief to non-HIPCs has been granted only on an ad-hoc, case-by-case basis (much like before 1996) and, with the notable exception of (Paris Club) debt treatments of Iraq and Nigeria, through piecemeal operations.

One increasingly popular instrument to relieve the debt of (mostly) non-HIPCs and non-eligible debt titles of HIPCs 19 has been the debt swap or debt conversion. To be sure, the conversion of debt in exchange for various debtor commitments has been actively practiced throughout the long history of debt relief, even during the heydays of the HIPC initiative (when creditors had their hands full with HIPCs).20 However, it seems fair to say that recent years have seen a new surge in swap initiatives, and that in a wide range of sectors. The latest conversions include

debt-for-nature swaps enacted under the US Tropical Forest Conservation Act (see further) with Indonesia (2009), Brazil (2010) and Costa Rica (2010); debt-for-health swaps under the Debt2Health Scheme21 of the Global Fund to Fight AIDS, Tuberculosis and Malaria between Germany and Pakistan (2008), Germany and Cote d’Ivoire (2010) and between Australia and Indonesia (2010); and broader debt-for-human development swaps such as that between Spain

17_{The latter two organizations are the concessional lending arms of the World Bank and the African Development}

Bank, respectively.

18

This is, however, not to say that bilateral creditors do not contribute financially to the MDRI. Indeed, bilateral creditors compensate the IDA and AfDF for the costs these latter organizations incur in granting MDRI debt relief on their claims. This compensation takes place proportionally with the agreed bilateral burden shares in previous IDA and AfDF replenishing rounds. Bilaterals have also committed to mobilize additional resources to cover part of the costs of MDRI to the IMF, although most has been financed with funds generated by a revaluation of the IMF’s own gold reserves.

19

Ineligible debt titles are, for example, those credit arrangements that were concluded after the cut-off date for debt rescheduling (so-called ‘post-cut-off date debt’).

20_{Filmus and Serrani (2009) identify 128 debt swap for social investment agreements signed between 1998 and}

early-2008.

21

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and Ghana (2009). Proposals for even more debt swaps are seeing the light of day. One suggestion, for example, has been that of linking debt relief to climate change.22

In the remainder of this section we attempt to situate debt swaps in the broader (current) debt relief policy of a number of traditional Paris Club creditors and non-Paris Club bilaterals.

Traditional Paris Club creditors23

Spain has in recent years presented itself among Paris Club donors as the most outspoken

debt-for-development champion in general, and in the education sector more particularly. During the 2004 UN Summit for Action against Hunger and Poverty, Spanish Prime Minister José Luis Rodrígez Zapatero stated that Spain, beyond its HIPC commitments, envisaged being ‘actively involved in debt-for-social-development swap operations, especially in the area of primary education’.24 These policy goals were further consolidated end-2006 with the coming into force of Spanish Law No. 38 on External Debt Management.25 This legal text aims at linking external debt management with Spanish development policy and promotes principles of debtor ownership and sovereignty and (Spanish and local) civil society participation in the process of converting debt. Special mention is made of the need to target the poorest developing countries with the highest levels of external debt, preferably partner countries of Spain’s development policy. In practice, it can be seen that in the years prior to the new law, debt swaps were primarily conducted with Latin American countries, both HIPCs (topping up the 90% debt relief agreed upon in the Paris Club’s Cologne terms) and non-HIPCs (including middle-income countries).26 Spain adopted a differentiated debt swap policy, granting a discount of 60% on the counterpart payments due by debtor countries classified as HIPCs, on the one hand, and requesting full payments from non-HIPCs, on the other. Since the adoption of Law No. 38, however, Spain has redirected its policy stance on swapping debt towards topping up relief to

low-income HIPCs only, many of them from Sub-Saharan Africa.27

22_{See Development Finance International. (2009) ‘Debt relief to combat climate change’.} 23

One notable effort to synthesize the debt swap policy of Paris Club creditors is a recent book by Buckley (2011). This book contains separate chapters on US, Italian, German, French and Australian policy (and swap practice) as well as shorter sections on Switzerland, Spain and Norway. Some additional information on specific debt relief legislation in creditor countries can be found in Ruiz (2007) who critically examines and compares the relevant national laws/resolutions/declarations of Italy, Spain, Belgium, France and Norway.

24_{For a transcript of the full speech, see http://www.segib.org/upload/discursodelpresidentedelgobierno.pdf.} 25

See http://www.boe.es/boe/dias/2006/12/08/pdfs/A43049-43053.pdf. A translated, English version of Article 5 of this law (which deals with swaps) can be found in Filmus and Serrani (2009: 48).

26_{Navarro (2006) and Vera (2007) provide extensive overviews of these pre-2007 Spanish-Latin American swaps}

(with application in the education sector).

27

A full list of recently conducted and announced Spanish debt swap operations, together with specific program information can be found at

http://www.meh.es/es-ES/Areas%20Tematicas/Internacional/Financiacion%20internacional/Gestion%20Deuda%20Externa/Paginas/Progr amas%20de%20conversion.aspx.

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Italy was the first European creditor to establish its own legal framework linking debt relief explicitly to development and poverty reduction.28 Most instrumental has been its Law No. 209:

Measure to Reduce External Debt of Lower Income and Heavily Indebted Countries, a piece of legislation adopted in 2000 (with some amendments made since).29 This external debt law foresees, among other things, the possibility of debt conversions with non-HIPC IDA-only countries, other countries within the framework of a Paris Club decision and countries confronted with natural disasters or grave humanitarian crises, all conditional on debtor countries pursuing human development (and poverty reduction), respecting human rights and refraining from using war as a means of resolving disputes. In terms of targeting sectors with freed-up funds, priority is given to agriculture, health, education and infrastructure. Under Law No. 209, Italy signed a 10-year debt-for-development agreement with Kenya, a non-HIPC IDA-only country, with resources to be spent in the area of water and irrigation, health, education and vocational training and the upgrading of urban slums.30 As Ruiz (2007) points out however, the Italian government has in practice often chosen to target (non-IDA) middle-income countries with debt conversions. Recent exchanges with countries such as Pakistan, Peru, Macedonia, and, most notably, Egypt are testimony to this strategy.31

Germany’s debt swap policy is based on a federal budget act which authorizes the German

Ministry for Economic Cooperation and Development (BMZ) to exchange bilateral debt up to a certain maximum amount (which now stands at US$150 million annually).32 Considering criteria of indebtedness, political conditions, debtor countries’ track record in cooperation on debt management and their poverty reduction resource needs, the BMZ (together with the Ministry of Finance) proposes debt swaps to eligible countries on an ad-hoc basis.33 Funds released are to finance education, health, environmental protection, infrastructure or general poverty reduction. In contrast to most other bilateral creditors, Germany usually offers substantial discounts on the required counterpart payments (from 50 up to 80%). Whereas swaps were originally restricted to debt titles included in a Paris Club agreement, a legislative change in 2008 has made it possible to also swap debt that has not yet been rescheduled by the Paris Club, opening up the instrument to other debt titles and other, often middle-income, countries.34 Overall, recent years show a strong focus on non-HIPC lower-middle income countries, with swaps concluded with, among others, Jordan, Peru, Indonesia and Pakistan. Germany has been actively involved in the Global Fund’s tripartite Debt2Health initiative since its launch in 2007 and continues to support its workings.

28_{See Filmus and Serrani. (2009)}_{Development, education and financing: Analysis of debt swaps of social}

investment as an extra-budgetary education financing instrument.

29

The amended version of the law can be consulted at:

http://www.esteri.it/MAE/IT/Politica_Estera/Economia/Cooperaz_Econom/Debito_Estero/Legge_25_luglio_n_209 .htm.

30

See Buckley. (2011) Debt-for-development exchanges: History and new applications, Chapter 5.

31_{See Ginestro and Bottone. (2008) ‘Italian-Egyptian debt for development swap program’} 32

For a short summary of current German debt relief policy, see

http://www.bmz.de/en/what_we_do/issues/DebtRelief/instrumente/dept_swaps.html.

33_{Berensmann. (2007) ‘Debt swaps: An appropriate instrument for development policy? An example of German}

debt swaps’

34

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Among European bilateral creditors, France is, in some ways, the odd one out.35 It has developed its own mechanism for debt conversion, the so-called Debt Reduction and Development Contracts (C2D), a ‘donation-based refinancing system’ which was initiated in 2001 through memoranda issued by the French Ministries of Foreign Affairs and Economy.36 France uses the C2D scheme exclusively to fulfill its additional commitment of providing full 100% debt relief on the ODA debt of its HIPC debtors. Rather than cancelling ODA claims directly without further conditions once debtor countries reach their HIPC completion point (as, for example, Germany does), France demands that these countries continue to pay off these claims on each due date, but then transfers (i.e. refinances) the equivalent amount in euro into a counterpart fund held at the debtor’s central bank. From there resources are channeled to interventions in sectors that are considered priority in debtor countries’ PRSPs and MDG plans, with focus on areas of education, water and sanitation, health and the fight against AIDS, agriculture and food safety, infrastructure development, environmental protection and manufacturing sector development. Where possible, C2D support is (multi-)sector-based rather than project-based (as in most other debt swaps). Countries that have recently signed C2D debt swaps with France are, among other, Cameroon, Mauritania and Congo-Brazzaville.

The United States’ congressional initiatives on bilateral debt swaps have limited their

application solely to environmental conservation37: first, the 1990 Enterprise for the Americas Initiative (EAI) Act and later, from 1998 onwards, the Tropical Forest Conservation Act (TFCA).38 To be eligible for debt conversion under the TFCA, a debtor country must, logically, have sizeable tropical forests, have operational IMF and World Bank programs, show progress in the establishment of an open investment regime and, if applicable, have a satisfactory financing program with commercial creditors. Additional political criteria are that any TFCA beneficiary should have a democratically elected government, cooperate with US drug control policy, respect human rights and refrain from supporting terrorism. Only concessional loans extended under the Foreign Assistance Act or credits extended under the Agricultural Trade Development Assistance Act (also known as Food-for-Peace) can be converted. There is a strong but not exclusive focus on middle-income Latin American debtors under the TFCA. Swaps are often partially subsidized by international NGOs such as Conservation International or The Nature Conservancy.

Besides these five Paris Club creditors that are currently very active in swapping debt, there are a number of other Paris Club members that previously had debt swap programs of their own but now take a more passive stance. Switzerland, for example, was the first donor country to use debt-for-development swaps as an integral part of its development cooperation policy.39 The Swiss Debt Reduction Facility’s endowment fund of CHF500 million, set up in 1991, was

35_{See Buckley. (2011)}_{Debt-for-development exchanges: History and new applications}_{, Chapter 7.} 36

See http://www.diplomatie.gouv.fr/en/france-priorities_1/governance_6058/financial-governance_6397/the-c2ds-funding-instrument-under-the-apsfs_11332.html.

37_{See Buckley. (2011)}_{Debt-for-development exchanges: History and new applications}_{, Chapter 4} 38

See http://www.usaid.gov/our_work/environment/compliance/faa_v.html.

39

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eventually depleted in 2001. From then onwards, Switzerland decided to channel all remaining debt relief through the regular HIPC framework. In Belgium several debt-for-development swaps were conducted with buy-backs from Delcredere, the country’s leading export credit agency (ECA), during the 1990s.40 These (and other) smaller Paris Club creditors may be willing to reconsider debt swaps in the future, especially when presented as a concerted effort at the international creditor community level.

Non-Paris Club creditors

Reliable information on the debt relief policy of non-Paris Club creditors, some of them important debtor countries themselves (currently or in the past), is noticeably lacking. One reason is that there exist no multi-creditor fora for restructuring debt outside the Paris Club, which makes non-Paris Club debt relief more ad hoc and even more diffuse than Paris Club relief, even within the HIPC framework (in which all non-Paris Club creditors are in principle required to participate).41 Gueye et al. (2007) find that non-Paris Club creditors generally set far fewer conditions for executing debt restructuring agreements. Debt swaps, which typically involve targeted spending of freed-up resources and the creation of jointly managed counterpart funds may therefore not be the preferred option of many of these non-traditional creditors.

China, for example, has only very recently issued its first white paper on foreign aid activities.42

From this paper it appears that China has been extensively involved in debt relief, especially in Africa, with overall debt cancelled for 50 countries amounting to CNY25.6 billion (or about US$4 billion at current exchange rates) as of end-2009. Figures are however aggregated over years and individual countries. There is also no indication of whether and, if so, how much of these cancelled debts have been subject to swap-like deals.

All this should not detract from the fact that some non-Paris Club creditors have indeed executed debt conversions.43 The Czech Republic has conducted swaps for social investment in combination with buy-backs in order to fulfill its obligations under HIPC. Hungary has established clearing arrangements whereby debt is swapped for local debtor country goods (‘debt-for-exports’). Libya has engaged in debt-for-equity swaps, cancelling debt claims in exchange for equity stakes in local companies in the debtor country. In 2001 Guatemala even transferred a share of its debt claims on Nicaragua to Spain as a partial down payment of its own obligations toward Spain. One particular, oft-cited swap initiative is that between

Argentina and Senegal. In 1993, UNICEF’s Dutch Committee (with financial assistance from the

40

See Moye. (2001) ‘Overview of debt conversion’

41

Importantly, the Paris Club includes in all its agreements a clause that requires debtor countries to seek ‘comparable’ debt relief from all their non-Paris Club creditors. In practice, however, non-Paris Club bilateral participation in HIPC is very uneven, with some creditors delivering the full amount of the required relief and others nothing at all (see IDA and IMF, 2010).

42_{See http://www.scio.gov.cn/zxbd/wz/201104/t896900.htm.} 43

See Gueye et al. (2007) ‘Negotiating debt reduction in the HIPC initiative and beyond’; Moye. (2001) ‘Overview of debt conversion’

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ING bank) acquired US$24 million worth of bilateral and commercial debt owed by Senegal to Argentina from the latter’s government for US$6 million (a 75% discount). UNICEF cancelled these claims in return for Senegal’s promise to contribute the local currency (CFA franc) equivalent of US$11 million to UNICEF-administered projects for women and children in Senegal.

While being far from complete and exhaustive, the foregoing paragraphs demonstrate that the debt swap policy (and practice) of various bilateral creditors differs greatly, in terms of debtor countries and debt titles targeted as well as the specific purposes for which proceeds can be used. This heterogeneity can be observed even among the most prominent debt swap proponents within the Paris Club.

2.2 An analysis of debt available/eligible for swaps

Assessing how much debt is still available/eligible for swap purposes is a difficult if not impossible task, mainly because of the lack of high-quality, detailed data on debt figures as well as creditor and debtor countries’ legal rules on debt relief. As an entry point, we follow the report prepared by Development Finance International (2009) in looking at the latest available data on the external public and publicly guaranteed (PPG) debt structure of 96 countries: 40 HIPCs (post-, interim- as well as pre-; see Table A1 in appendix for a classification), 10 non-HIPC low-income countries (LICs), and 46 lower-middle income countries (LMICs).44 Detailed information by country is presented in appendix B.

Figures indicate that, overall, as of end-2009 these 96 low-income and lower-middle income had a combined outstanding PPG debt of around US$687.3 billion, of which US$415.6 billion (60%) was concessional and US$271.7 billion (40%) non-concessional. Total multilateral debt amounted to US$289 billion (or 42% of the total), of which US$173 billion was concessional. Total bilateral debt was US$266.5 billion (39% of all outstanding debt) with most of it, US$243 billion, concessional. Commercial debt stood at US$132 billion (19% of the total) for these 96 countries. Most commercial debt was bond and bank debt, namely US$72 billion and US$38.5 billion respectively. As is clear in appendix B, however, these aggregate figures mask huge disparities between country groupings (HIPCs, other LICs and LMICs) as well as within these groupings. Commercial debt titles constituted a much larger share of total outstanding PPG debt for LMICs (22.6%) that it did for HIPCs (9.2%) or other LICs (3.7%). The opposite is true for concessional multilateral debt, which is the most important category in relative terms for HIPCs (44.3%) and other LICs (61.2%) but certainly not so for LMICs (18.1%). Figure 1 represents these differences in debt structure graphically.

44

These 96 countries together represent all countries classified by the World Bank as low-income (LIC) or lower-middle income (LMIC) at the time of writing.

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Figure 1: structure of outstanding external debt per country grouping

Source: Authors’ calculations based on the World Bank Global Development Finance online database (2011); Note: for country classification and individual country data, see appendix B.

How do we now approximate total debt available for conversion?

For HIPCs, one should note that the majority share of the debt listed in appendix A2 is due to be cancelled (or has already been cancelled) upon these countries reaching completion point. Within the framework of the MDRI, all pre-cut off dated debt owed to the IDA, IMF, African Development Bank and the Inter-American Development Bank will be forgiven. This is the lion share of concessional multilateral debt. Similarly, most Paris Club bilateral creditors are also expected to go beyond their HIPC commitments and deliver 100% debt relief on ODA and non-ODA debt. Consequently, we believe that HIPC debt titles that remain available for swaps are primarily to be found with commercial creditors and non-Paris Club bilateral creditors that are not contributing to the HIPC Initiative and/or not willing to go beyond their HIPC commitments. To our knowledge no exact figures exist on how much of bilateral debt of HIPCs is owed to non-Paris Club creditors. The latest HIPC Status of Implementation report by the IDA and IMF (2010), however, indicates that non-Paris Club bilaterals account for 13% of total PV costs of the HIPC Initiative (for 40 HIPCs). If we simply extend this percentage to the nominal bilateral debt figures listed in appendix A2, we find that HIPCs owe roughly US$5.7 billion to non-Paris Club bilateral creditors. The IDA and IMF (2010) report further estimates that, at least with respect to the 30 current post-decision point HIPCs, Non-Paris Club creditors only deliver around 34-39% of their required assistance to the initiative. Using this percentage as a proxy for the contribution to all 40 HIPCs results in an estimated US$3.8 billion of non-Paris Club debt that will not be forgiven under the HIPC initiative and will thus, in principle, be available for swaps. Evaluating how much of commercial debt will be forgiven under HIPC is even harder, as information is very patchy. For reasons of simplicity we assume here that none of the commercial debt outstanding at end-2009 would be directly forgiven under the initiative, leaving us with approximately US$9.5 billion of commercial debt to swap.

Debt Swaps and Debt Conversion Development Bonds for Education