This paper argues that the debate is not over, and given the tool’s track record to date, it is clear that debt swaps are an additional financial tool to help achieve the SDGs and enhance debt sustainability. In a particularly challenging funding environment for Low- and Middle-Income countries (LMICs), debt swaps have unlocked additional resources on a scale rarely seen. To date, nine debt swaps have been implemented in seven countries, mainly in the Americas, releasing nearly $1.7Bn in nominal financing over time and reducing debt stocks and debt service by billions of US dollars. When used in the right circumstances and well-structured around specific objectives, debt swaps can make a significant additional impact.
The distinctive structure of these flows and the legal obligations behind them warrant careful consideration to harness their unique potential for advancing development outcomes. The author proposes a set of three guiding principles to ensure that the potential of swap resources is optimized:
- Define a long-term vision of what can be achieved through swap resources through consultations, both at the design and operational stages.
- Target expenditures that particularly benefit from long-term financing, such as maintenance, vaccine campaigns or climate-resilient infrastructure.
- Establish mechanisms to ensure additionality with government spending as the swap is operationalized.