A Trickle to a Stream: Can Debt-for-Development Swaps become an asset class?
Commercial debt swaps have emerged as a strategic tool for governments seeking to manage and optimize their debt portfolios while advancing development objectives.
Known as Debt-for-Development Swaps (D4D), these arrangements involve converting existing, often costly or short-term debt into more sustainable, long-term instruments. A concessional credit support mechanism, such as a guarantee or insurance from a development partner enable the price difference. The borrowing government then allocates part of the savings to a development program. Essentially, a development partner helps the country refinance its debt at a lower cost, and in return, the government commits to using the saved fiscal space for SDG-related initiatives.
While not a miracle solution, D4D transactions have gained significant interest from policymakers, global institutions, and civil society, especially after major deals in 2021 and 2022.
2024 marked a turning point: D4D deals increased from five to nine, while debt refinancing reached $6.8 billion, generating $2.1 billion for development and climate goals.
Despite these figures, swaps remain complex and need simplification. Questions about their maturity as an asset class persist. This note reviews recent deals, showing progress but highlighting ongoing challenges, particularly regarding transparency about financial savings, which are often unclear or misleading.
A Call for Transparent Savings Calculations
A central recommendation of the paper is to adopt standardised and transparent methodologies for calculating savings in D4D Swaps. These savings determine the fiscal space freed by the refinancing and the amount pledged for development programs, effectively shaping future national budgets. Yet, stakeholders currently use inconsistent methods, making results difficult to compare and potentially overstating benefits. The note calls for a clear and harmonised approach, notably through Net Present Value (NPV)-based assessments, to ensure that all stakeholders (governments, donors, and civil society) can accurately assess the fiscal impact and value of each deal.