Sovereign Debt-for-Development Swaps: Debt Relief and Investment Mobilization

Abstract

Public external over-indebtedness represents a chronic obstacle to the development of low- and middle-income countries, where debt service consumes essential resources for health, education, and infrastructure. This article analyzes debt-for-development swaps as innovative debt relief instruments, distinguishing bilateral modalities—direct agreements between official creditors and debtors, as illustrated by the programs from Germany, the US, Spain, and France— from multilateral ones—complex structures involving third parties, evident in cases of Seychelles, Belize, Ecuador, and Côte d’Ivoire. Through case studies, we evaluate their contribution to the fiscal space, trade promotion, investment, and Sustainable Development Goals, recognizing benefits such as debt stock reduction and fund mobilization, alongside challenges like high transaction costs and lack of transparency. It concludes by proposing a greater role for international financial institutions to scale up the use of swaps.