Debt-To-Health Swaps: Financing health system resilience beyond the COVID-19 pandemic

On April 13, 2020, the International Monetary Fund (IMF) approved immediate debt relief to 25 of its member countries under the adapted Catastrophe Containment and Relief Trust (CCRT). The debt relief is one of several measures to alleviate the impacts of the COVID-19 pandemic and supports, especially vulnerable and indebted countries for an initial phase over the next six months. Indeed, the news provides the countries concerned with valuable fiscal space for manoeuvre to increase health- and emergency-related public expenditures.

Voices for far-reaching debt relief and debt cancellation will become louder in the coming weeks and months, given that 44% of least developed and several other low-income countries already faced debt distress or were at high risk of external debt distress before the COVID-19 outbreak. As the pandemic’s long-term trajectory is still unknown, and the economic knock-on effects are only just beginning, it is inevitable that debt servicing will become even more challenging and might cause a long-term debt crisis. If the international community wants to remain serious about global solidarity and sustainable development, additional moves on debt relief and cancellation should be considered.  

The challenge with debt relief for highly indebted developing countries is that it rarely results in increased public spending, let alone higher spending for the health sector. The reasons are manifold, including countries’ varied spending priorities and the related structural adjustment conditionalities that development finance institutions put in place for receiving support. Other factors include information asymmetry on debt servicing among different ministries and challenges for public sector health officials to advocate for an adequate spending share for the health sector.

Our work at IISD on public procurement and infrastructure finance also provides anecdotal evidence that relieved debt obligations are simply replaced with new ones. Moreover, we have seen that government agencies anticipate having to honour certain debt obligations, implying that no additional financial means will become available to increase public spending.

Debt Swaps: A viable option?

To make debt relief a more promising approach for advancing sustainable development objectives and, at present, to use it as a financing mechanism for achieving resilience of health care systems, would it be useful to tie debt relief to performance or conditionalities on public spending? In this vein, could debt-to-health swaps present a viable solution? 

Debt swaps combine the cancellation of debt obligations with a bilateral agreement between debtor and creditor governments. The latter waives all or part of the outstanding debt obligations and interest claims, and the debtor government agrees to use the earmarked funds for supporting pre-determined objectives and projects, such as in the health sector. Setting up and implementing debt swaps requires that the parties involved reach agreements on financing and legal matters, which are enshrined in “debt covenants.” These agreements would need to include the type and volume of debt to be waived, at what discount rate, and in which currency. Depending on the agreed objectives for reallocating the waived debt volumes, it will further be necessary to conduct feasibility studies for envisioned projects and initiatives in the health sector to be funded; define performance targets and monitoring mechanisms; enact measures to address corruption concerns; and not least, ensure sufficient amounts of debt relief to guarantee meaningful budgets over time.

The repurposing and allocation of earmarked debt volumes could either be implemented by the debtor government through setting up public trust funds or endowment funds in their country. This would help ensure long-term investment commitment for and ownership of financed projects. Such funds can then allocate loans or grants to projects and initiatives in the health sector according to defined objectives and performance criteria.

Alternatively, the creditor government may sell all or parts of the outstanding debt to an interested third-party organization with location-relevant expertise in the health sector. The acquiring party would then govern the funds and make allocation decisions. The party could also opt for providing complementary financial resources to allow for higher and longer-term funding volumes.

The Global Fund Example

The Debt2Health program of the Global Fund to Fight AIDS, Tuberculosis, and Malaria has applied a debt swap mechanism since 2007 jointly with several creditor governments. In so doing, it has successfully contributed to improving health systems and addressing the health impacts caused by HIV/AIDS, tuberculosis, and malaria in several countries, including Cameroon, the Democratic Republic of Congo, Côte d’Ivoire, Egypt, Ethiopia, Indonesia, and Pakistan.

The Debt2Health program was relaunched in 2018 after the financing mechanism was paused for several years due to a lack of engagement of new creditor governments. The debt swap mechanism first gained interest in the 1980s during discussions lead by the Paris Club on debt servicing issues and debt restructuring. Debt-for-development swaps and debt-for-nature swaps were designed to fund a variety of development projects and nature conservation projects in debtor countries, respectively.

In light of the COVID-19 pandemic and struggling health care systems in a range of emerging and developing countries, governments should consider debt swaps and partnerships like the Global Fund or other multilateral organizations and initiatives with subject matter and implementation expertise. Doing so could help make debt relief a meaningful funding mechanism for health system resilience. This will allow for a continuous contribution toward realizing sustainable development in many countries despite—or, more precisely, because of—the COVID-19 pandemic.