By Marc Jones
LONDON (Reuters) -Barbados is set to become the first nation to use a new standardised debt swap facility aimed at helping multiple countries use money for development projects instead of high-interest loan payments, finance officials have told Reuters.
Dubbed a “debt-for-resilience” facility, the multi-billion dollar set-up is backed by four major development banks and is expected to see two or three more countries in the Caribbean region, where it is focused, sign up by year-end.
Barbados is on course later this year to be the test case for what is expected to be the facility’s formal launch at the U.N. COP30 climate summit in Brazil in November, its Finance Minister Ryan Straughn said.
“Barbados will focus initially on a debt-for-social swap to create fiscal space to renew investment in our social sector,” Straughn said, without providing details on the projects the government would target.
Straughn said a number of other Caribbean countries – which he did not name – had also agreed in principle to undertake swaps of their own as well.
Under the programme, the countries would buy back pockets of their most costly government bonds from the open market. They then cancel them and issue new ones with a significantly lower interest rate thanks to the development banks’ credit guarantees that effectively reduce the risk for bond buyers.
Debt swaps have become increasingly popular in recent years as a way for developing countries to replace expensive government debt with cheaper bonds, and use the savings on projects such as environmental conservation, schools or infrastructure.
But the new debt-for-resilience mechanism is a leap forward as it largely standardises many of the legal and transactional complexities that have meant some recent swaps have taken years to execute and produced relatively modest debt savings.
Barbados will have to say what it will spend the money on beforehand, but the resilience tag gives it wide scope on what the projects can be.
BLUEPRINT FOR OTHER REGIONS
The four multilateral development banks involved are the Inter-American Development Bank, the World Bank, CAF and the Caribbean Development Bank.
Well over a dozen countries in and around the Caribbean will be eligible to use the facility, although their national debt has to be judged as broadly sustainable in order to do so.
Avinash Persaud, special adviser at the Inter-American Development Bank, estimated the initial wave of swaps under the facility was likely to add up to a combined $2-$3 billion of debt in the coming years.
Projects that could be funded can range from “physical, financial, fiscal and social”, Persaud said, giving governments options such as school, health or financial system improvements to more robust energy grids or sea or border defences.
The hope is that it will also become a blueprint for countries in the Amazon basin and in other parts of the world.
“Resilience is a key foundation for growth and development,” Persaud said, adding individual swap sizes will depend on the countries and projects involved, but also pointing to debt-for-nature swaps in Ecuador and El Salvador that had topped the $1 billion mark.
IDB officials are due to visit Barbados this month to scope out projects for the inaugural swap.
It is set to be bigger than a near $300 million swap in December to fund a new sewage treatment plant, both in terms of size and the amount of debt it cuts – that last swap saved $125 million in interest payments – but officials are yet to put an exact number on it.
White Oak Advisory managing director Sebastian Espinosa, who has been working with the multilateral lenders and CARICOM – a grouping of 15 Caribbean states and five associate members – on the facility, said the overall focus on resilience was key.
“It now comes down to what countries see as most important to them,” said Espinosa, who also advises Barbados. And “importantly it shows that debt swaps can be scaled up on both the sovereign and credit enhancement provider ends”.
(Reporting by Marc Jones;Editing by Alison Williams)
Comments