Developing Country Debt

A debt swap is a form of debt conversion in which external hard currency debt is traded for local currency or debt denominated in local currency. Debt-for-nature swaps support specific environmental projects, such as designation and management of protected areas, development of conservation management plans, training of park personnel, and environmental education activities. Development swaps support activities like microenterprise, education, training, health, agriculture, and other development activities. This report (1) discusses the number of developing countries that have participated in debt swaps, the extent to which these debt swaps have reduced total external debt, and the number of programs undertaken; (2) assesses the advantages and disadvantages of debt swaps and the efforts of the Agency for International Development to support private voluntary organizations that participate in such swaps; and (3) provides information on whether the World Bank implemented the Department of the Treasury's April 1988 recommendations on debt-for-nature swaps.

GAO found that: (1) between 1987 and 1990, 13 countries completed 26 debt swaps, retiring debts totalling $126 million; (2) PVO participation in debt swaps enhances developing countries' ability to raise funds and offers the prospect of providing additional funding for programs; (3) AID and Treasury officials reported that increases in the proportion of country debt have not caused a large increase in the price of the developing countries' debt on the secondary market; (4) debt swaps' advantages for debtor countries include the potential prospect of conserving foreign exchange resources through reduced debt service costs and environmental and development improvements; (5) debt swaps' disadvantages include inflationary impact, high debt prices, and the cost of servicing domestic bonds; (6) some economists believe that a debt swap makes sense only if a straight donation would not occur; and (7) the World Bank has not swapped any of its debt instruments, but has acted on four of the Treasury recommendations.