Gearing debt swaps towards debt relief

Debt swaps are often dismissed for not focusing enough on debt relief. Yet the large scale – and widely endorsed – Heavily Indebted Poor Countries (HIPC) initiative, geared towards debt relief, was itself a form of debt swap. Sejal Patel explains how debt swaps can be structured so they align with the good practices showed by HIPC.

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Insight by 
Sejal Patel
Senior researcher in IIED's Shaping Sustainable Markets and Climate Change research groups
03 April 2024
A young woman wearing shorts, standing on a beach in the Seychelles. There is a boat behind her.

A marine research officer with the Seychelles National Parks Authority maps coral reefs (Photo: UN Women, via Flickr, CC BY-NC-ND 2.0 Deed)

An often-raised issue with debt swaps is that straight debt relief is preferrable, or that debt swaps do not focus enough on debt relief and debt sustainability.

It is true that debt relief can be more straightforward and provides the debtor country with breathing room on their fiscal space – that is, how flexible it can be on spending choices − and autonomy on their spending going forward. 

However, debt relief almost always comes with strings attached, always carrying terms and conditions in some form. 

For example, the Heavily Indebted Poor Countries (HIPC) initiative was designed to provide large-scale debt relief to low-income countries in response to the 1995-96 debt crisis. 

Before being considered for debt relief under HIPC, countries were required to demonstrate a track record of financial and economic policy reforms. 

Countries were also required to submit Poverty Reduction Strategy Papers (PRSPs). PRSPs were intended to support countries in meeting the Millennium Development Goals. They required countries to set out their plans to promote growth and reduce poverty through implementing specific economic, social and structural policies over a three-year period or longer. 

Investing in poverty reduction and growth is essential for building a strong economy, so these conditions are not necessarily negative or restrictive. Indeed, they can be productive, provided they have been developed and proposed by the debtor country on their terms, and reflect national and local development priorities. 


The approach taken by HIPC is therefore similar to debt for climate and nature swaps that also seek debt relief in exchange for requiring some growth-enhancing and poverty-reducing investments. 

In the case of debt for climate and nature swaps, ‘growth-enhancing and poverty-reducing’ extends to climate adaptation, mitigation and measures, and systems that support nature and biodiversity and its stewards and stewardship. Such responses help address crises that are undermining poverty reduction and economic stability. 

However, ‘debt swaps’ is an umbrella term and includes mechanisms of various forms. Many, particularly those designed in the past, have not enabled significant debt relief and have also restricted debtor country ownership in different ways. These have drawn heavy criticism.

This is not the case for all types of debt swap. IIED believes that by taking a programmatic approach to debt swaps – designing swaps to address the context as a whole rather than specific projects or activities, and by increasing the transparency of the terms on which they are negotiated – they can support debt relief more substantially, and improve debtor country ownership

Programmatic debt for climate and nature swaps

A programmatic approach can help strengthen national institutions and bring environment and finance ministries together to help secure long-term finance to boost investment in climate and nature. The components for this type of approach would:

  • Be based on key performance indicators, decided by the debtor country in accordance with national plans and commitments such as Nationally Determined Contributions (NDCs), National Biodiversity Strategies and Action Plans (NBSAPs) and national development strategies. These indicators should be developed through a broad and inclusive in-country consultation process, and tracked through transparent national verification systems that include independent verification mechanisms.
  • Work within national systems: decision making on funds should involve national and local government actors, whether that means funds are managed through the debtor government’s own budget systems, through a public-private vehicle such as a special purpose vehicle, or some other set-up that enables government ownership and focuses on strengthening national systems (rather than creating parallel systems). 

    This should be bolstered by accountability demonstrated through governance and fiduciary standards – for example, through a climate and nature budget tagging system. This enables more funds to be swapped, increases debtor country ownership, and helps bring accountability to national citizens as well as to the creditors.
  • Support freeing up resources for the public budget: on average, 26.3% from debt cancellations under HIPC went to poverty reduction. We argue that a similar proportion of a debt swap or cancellation should still be earmarked for investment in poverty reduction and promotion of growth (now also to include climate and nature activities). We estimate that through this approach, upwards of US$105 billion could be mobilised for climate and nature action.
  • Engage a comprehensive ‘all-creditors’ approach: Swap agreements should seek to engage with all creditors, public and private, on comparable terms, and create multi-party agreements to deliver debt relief at scale, lower transaction costs, and take a more comprehensive approach to addressing the debtor’s debt challenges.

Ensuring that swaps take a programmatic approach

There has been a recent wave of interest in debt for climate and nature swaps, particularly from debtor countries across Africa and Latin America. Recent transactions in Seychelles (2015), Belize (2021) and Ecuador (2023) have begun to show the potential of these instruments, but have not yet been able to fully engage a programmatic approach. 

In some cases, the sheer array of creditors, varied financing terms, and need for more complex financial structuring requires arrangements to manage that complexity, such as a government-private firm partnered special purpose vehicle. These types of arrangements can still support HIPC-style debt relief when undertaken with careful attention to ensuring country ownership.

Creditors are largely still in a ‘wait and see’ holding pattern, waiting for other creditors to ‘test’ this approach before they move. Stakeholders need to shift their focus from questioning ‘whether or not debt swaps are useful’ to ‘how to implement effective debt swaps’ – otherwise low-income countries will remain in protracted debt crises situations which require far greater resources to recover from than if international actors act earlier in providing support. 

Lack of buy-in also leaves debt swaps as piecemeal efforts that cannot leverage the benefits of broader stakeholder buy-in.

A way to scale up swaps is to formalise the instrument in the international architecture, much in the way that the Paris Club platform serves to formalise the G20’s bilateral debt relief provisions. 

This can help legitimise this type of mechanism, and improve transparency by building a central secretariat, standardised initial terms and clauses, and enabling a ‘mediator’ role in proceedings. This can help bring multiple creditors to the table around one transaction, helping to reduce transaction costs.

About the author

Sejal Patel ([email protected]) is a senior researcher in IIED's Shaping Sustainable Markets and Climate Change research groups

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