Innovative instruments for managing debt burdens

Different types of innovative debt instruments have been proposed, and some implemented on a small-scale or pilot basis. Their main aim is to either create room for additional investments in the SDGs or better manage shocks and risks.

The Addis Agenda specifically:

  • Encourages the study of new financial instruments for developing countries …noting experiences of debt-to-health and debt-to-nature swaps 


Latest developments

Debt swaps allow countries to use funds otherwise tied up in debt servicing for a social or environmental initiative. In debt-for-nature swaps, an international non-governmental organization (NGO) would purchase external debt and offer the debt for cancellation in exchange for a conservation commitment. Alternatively, debt would be exchanged for local currency that local conservation groups or government agencies would use to fund projects in the debtor country. In the Seychelles, a $15 million loan from the Nature Conservancy and $5 million worth of grants from various foundations was used to purchase $20 million worth of Seychelles debt held by European nations, which freed up $6 million for the Seychelles to use on marine conservation. Debt swaps have also been used for social objectives, such as the Debt-2Health initiative, facilitated by the Global Fund to Fight AIDS, Tuberculosis and Malaria, where creditors waive repayment of a portion of their loan to a country that, in return, invests an agreed amount in health. In the latest swap under this initiative, in 2017, Spain cancelled €36 million in outstanding debts owed by Cameroon, the Democratic Republic of the Congo and Ethiopia, in exchange for €15.5 million in investments in domestic health programmes supported by the Global Fund. More recently, ECLAC proposed a debt for climate swap where the Green Climate Fund would buy some of the external debt of participating countries and, instead of making debt-service payments, countries would make payments into a resilience fund, which would finance green investments.

State-contingent debt instruments contain a trigger mechanism that automatically defers debt-servicing payments that fall due during a crisis of specified type. A number of bonds with state-contingent clauses in their contracts have been issued, notably for countries in the Caribbean where the trigger is the advent of a hurricane of specified severity. To date, these bonds have not been introduced except by Governments restructuring their debt (Barbados being the most recent example). So far, the only significant lending with state-contingent clauses by an official creditor was by Agence Française de Dèveloppement, which provided countercyclical loans for project financing to Mali, Mozambique, Senegal and the United Republic of Tanzania between 2008 and 2016 for a total amount of €299 million, of which €215million were disbursed by end-2018.

Read more on innovative debt instruments here.