Is it time to revive debt-for-health swaps?

The UN and development agencies have expressed alarm at the devastation the COVID-19 pandemic could wreck in Africa and other developing countries worldwide. The World Food Programme has warned that the COVID-19 pandemic could push an additional 420 million people into extreme poverty – mostly in Africa – seriously derailing efforts to reach the Sustainable Development Goals (SDGs). Experts warn that weak public healthcare systems could quickly become overwhelmed. The UN Economic Commission for Africa (UNECA) estimates that Africa will need an additional US$44 billion in emergency healthcare financing to deal with the pandemic. An active containment and mitigation strategy will save lives, but will require a 32% increase in health spending, says UNECA.

Governments in Africa don’t have the financial tools at their disposal to deal with the pandemic. Health (and other SDG) financing gaps were already high before the crisis struck. Low-income African countries are seeing demand for their exports collapse while the option of borrowing vastly more money to invest in health systems doesn’t exist. In developed countries, states can borrow at historically low interest rates; for indebted low-income countries, rates are punitively high and rising. Debt risks were already high prior to the pandemic with debt levels at an historic peak, and over 40% of low-income countries already at high-risk of – or already in – debt distress, according to the IMF.

The UN has warned that without aggressive policy action, the COVID-19 pandemic could turn into a protracted debt crisis for many developing countries. This could set back development by a decade or more. The G20 has responded with partial debt service suspensions for some low-income countries and small island developing states.  But this will not be sufficient to avoid widespread debt defaults. These initiatives exclude multilateral and commercial debts and do not extend to many severely indebted middle-income countries. Gordon Brown, Former UK Prime Minister has called for US$ 80 billion in debt relief for 76 developing countries; instead the crisis has led to increases in borrowing.

What more can be done? Debt-for-health swaps could provide an additional way in which more resources for healthcare systems could be made available while also reduce high debt burdens.

Debt-for-health swaps have been implemented on a limited basis in the past, mostly by the Global Fund and a handful of bilateral creditors, including Australia, Germany and Spain. They largely fell out of favour due to high transaction costs and concerns that initiatives failed to strengthen the public health systems of partner countries. They were also largely superseded by a focus on debt-for-nature swaps where more successes have been registered and new models tested, including a US$22 million marine conservation debt-for-nature finance swap in the Seychelles in 2018 brokered by the Nature Conservancy, which also leveraged impact investors for the first time.

New rounds would need to take on board the lessons learned from previous experiences and seek to engage commercial creditors and impact investors, but could have some advantages in increasing much-needed investments in health while also reducing debt at this critical time. Converting foreign currency debt obligations to local currency payment obligations can also ease debtor countries’ vulnerabilities to exchange rate fluctuations. They could also provide an avenue for increasing Official Development Assistance (ODA) at a time when aid is under pressure.

To improve efficiency and reduce transaction costs, debt swaps should be designed as large-scale and comprehensive operations involving multiple creditors, with spending earmarked to broad country-established public health priorities that reinforce rather than undermine national implementation systems. Debtor countries must have sovereignty over health spending priorities. Debt-for-health swaps must not be tied to the purchase of any goods or services from participating bilateral creditors. Efforts must be made to reduce negotiation times.

With debt swaps, the devil is very much in the detail, but if implemented well could be part of a broader suite of financing responses to this terrible crisis. The UN has called for innovative financing alternatives to be considered in the fight against COVID-19. A new generation of well-designed debt-for-health swaps may be able to play a role.