Looking into the Côte d’Ivoire Debt Swap
The World Bank Board recently approved a Budget Support Operation for Côte d’Ivoire that includes a policy-based guarantee (PBG) to secure a new long-term commercial loan under favorable conditions, which will finance the retirement of costly short-term debt. This liability management operation unlocks significant gains for Côte d’Ivoire - in net debt reduction, and importantly, given the country’s situation of illiquidity, in reduced debt service over the next few years.
Our analysis of the deal reveals that the gains generated by PBGs can go beyond the financial savings generated by sound liability management if they can also act as a signal of creditworthiness, managing to boost debtor countries’ standing in the capital market. We calculate, using a careful event study around the time of the Board decision, that the liability management operation, supported by the PBG, reduced the interest rate facing CI by over 30 basis points. This modest additional gain will further help Cote d'Ivoire in its ongoing efforts to refinance its outstanding debt on better terms in the future.
The paper finds that while the essential condition for PBGs to signal creditworthiness is the presence of an ambitious national stabilization and reform effort, the way they are structured needs to be improved in two ways to strengthen their effectiveness.
- First, their signaling value can be enhanced if they become more costly to the debtor countries, such as by accounting them at a larger share of their World Bank allocation than is currently the case.
- Second, World Bank capital can be leveraged further if their provisioning is reduced, in line with their smaller liquidity needs, compared to normal loans.
These findings encourage a new outlook on PBGs, urging stakeholders to acknowledge their potential wider macroeconomic effects, extending beyond merely financial benefits.
Does this operation signal a return of PBGs?
PBGs were issued by the World Bank in the past but have been discontinued in recent years due to downsides, such as incorrect pricing in the market. Our discussion suggests that they can play a very useful role in alleviating the current tight liquidity situation facing many developing countries, but only if they are further reformed to better meet current needs.