Taking action on debt in Germany’s development cooperation
Commitment to debt sustainability
Germany participates in key pillars of the international debt architecture such as the Paris Club and the G20 Common Framework for Debt Treatments, and has been a significant contributor to key initiatives such as HIPC (Heavily Indebted Poor Countries), MDRI (Multilateral Debt Relief Initiative) and DSSI (Debt Service Suspension Initiative).
Preventing debt crises
With a view to preventing debt crises, Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) is supporting: the Debt Management Facility (DMF) by the World Bank and IMF, the debt management software “DMFAS” (French: SYGADE) by UN Trade and Development, the IMF’s capacity building in Africa and the Middle East, the African Legal Support Facility (AfDB), and GIZ technical assistance projects on debt management in Viet Nam and Zambia.
In terms of piloting finance instruments, Germany’s development bank KfW has teamed up with the West African Development Bank BOAD in offering Shock-Resilient Loans (SRLs), i. e. loans which are backed up by a third-party insurance agency. Unlike Climate Resilient Debt Clauses (CRDCs), with SRLs debt service is not paused in the event of a shock, but taken over by the insurer.
Germany’s development cooperation emphasises good governance, domestic resource mobilisation, transparent and effective taxation, and leveraging private capital. This helps with creating the fiscal space necessary to keep debt sustainable and invest in sustainable development.
In the bigger picture, Germany’s contributions to Multilateral Development Banks and to financing mechanisms such as, for example, the Loss and Damage Fund, are conducive to preventing debt crises, as they help mitigate the impact of external shocks on developing countries’ budgets.
Germany’s bilateral debt swaps
Since the 1990s, bilateral debt swaps have been a part of Germany’s financial development cooperation. Through these swaps, debt from bilateral financial cooperation loans provided by Germany’s KfW development bank is converted into investments with development impact.
Recent debt swaps have involved promoting renewable energy in Egypt or Kenya, promoting public health through Debt-2-Health Swaps in Mongolia and Indonesia, and partnering with the Global Fund to Fight AIDS, Tuberculosis and Malaria (Global Fund).
Turning debt into investments, these swaps provide debtor countries with additional development finance. These investments typically benefit bilateral or multilateral development projects.
Examples: a debt-for-climate swap with Kenya, a swap focused on food security with Egypt, or a debt-for-health swap with Indonesia, implemented via the Global Fund.
How Germany’s bilateral debt swaps work
Bilateral swaps are carefully prepared using a case-by-case approach and are subject to parliamentary approval in Germany. The respective debtor country’s government, the German Federal Ministry for Economic Cooperation and Development (BMZ) and the German development bank KfW are involved in tailoring each debt swap to the specific needs and circumstances.
When agreeing on a bilateral debt swap:
- both countries agree on the specific amount of outstanding debt to be swapped;
- the debtor mobilises the equivalent of the debt in local currency funds to be used for jointly selected development projects aligning with the debtor country’s development strategy;
- upon successful implementation, Germany waives the previously agreed amount of debt.