Debt for Health Swaps : A source of additional finance for the health system?

Item

Title: Debt for
Health Swaps :
A source of
additional
finance for the
health system?
extracted text: WHO/ICO/MESD.3
Original: English
Distribution: Llmlttd

" Macroeconomics,
Health and
Development" Series

Number 3

Debt for
Health Swaps
A source of
additional
finance for the
health system?

Technical Paper

$
World Health Organization
Geneva, February 1992

J

CONTENTS
1.

The need for increased financing for health

5

2.

What are debt conversions.

5

3.

A stylized example of a debt-for-health conversion

7

4.

Will debt-for-health conversions increase financing for health?

8

5.

Will debt conversions solve the debt problem?

10

6.

Implementation
a. Identification of a donor
b. Identification of a recipient country
c. Selection of a suitable health project
d. Procurement of the debt
e. Creation of a local disbursement and monitoring structure

11
11
. 11
13
13
13

7.

The role of the WHO

14

1

ABSTRACT
At a time when restrictions on government spending put pressure on health sector
financing it is important to search for new potential sources of finance to maintain
and improve the provision of health care in developing countries. Debt-for-health
swaps may be one possibility.
Debt conversions, of which debt-for-health swaps is a particular example, are
increasingly used as part of debt management strategies of heavily indebted
countries. One potential advantage from the point of view of the debtor country
of such conversions is that they imply a transformation of the external debt of the
government into domestic debt, thereby resulting in less pressure to generate
foreign exchange for debt service.

A debt-for-health swap represents an opportunity for a foreign donor to increase
(relative to a straight gift) the local currency equivalent of a donation. This can
be achieved by first using foreign exchange to buy a country’s external debt at a
discount in the secondary market, and then donating this debt to the target country
in exchange for domestic funds. In the best of scenarios, the local currency
proceeds can be multiplied by a factor of two or three compared to a regular
donation of foreign exchange to the government.
Although debt swaps do have certain advantages, it must be recognized that there
arc certain constraints associated with them. One is that they do not generate any
foreign exchange for the recipient country, a fact that must be taken into account
in the design of the health project financed by the swap. Another constraint is that
the domestic macroeconomic situation of the recipient country may suffer as a
consequence of the increased domestic debt implied by the swap. It is important
to keep this in mind when countries are approached with proposals for debt swaps.
Debt-for-health swaps may present an opportunity to increase funding for the
health sector on a temporary basis. The WHO can play an important role in this
respect by providing technical services relating to the identification of suitable
health projects, by mobilizing additional funds from traditional or new donors,
and by serving as an intermediary in the debt conversion process. In fact, some
of these functions are already being accomplished. It should be emphasized,
however, that the window of opportunity to carry out debt-for-health swaps is
limited in time.

3

DEBT FOR HEALTH SWAPS
A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR?

1.

The need for increased financing for health
Limits on government spending, the related debt service burden, and for some
countries, the recent need to devote larger amounts of foreign exchange for energy
imports put the health sector at potential risk of having to cut back due to lack of
funding. This threat makes it important to search for new sources of finance in
order to maintain and improve the provision of health care.

The external debt of many developing countries may, paradoxically as it may
seem, constitute a conduit through which additional temporary funding for health
projects may be channeled. Recently considerable interest has been focused on the
possibility of exchanging some of a country’s external debt for increased health
expenditures in that country by means of so-called debt-for-health conversions
(or swaps). This report explains what exactly these swaps are, how they are
expected to work, what role they might play in financing health projects, and
which steps would have to be taken to implement them.

2.

What are debt conversions.
As a part of a strategy for dealing with the financing burden of their external debt,
a number of debtor countries have negotiated restructuring agreements with their
creditors. These agreements include such elements as changing the maturity of the
debt and the interest rate charged, allowing for a grace period for debt service
payments, and outright canceling of some portion of the debt. Debt conversion is
another example of debt restructuring.
The term debt conversions, or debt swaps, may refer to any of a number of
different methods for transforming the external debt of a country into new type
of liability, normally denominated in domestic currency rather than in foreign
exchange. Debt-for-equity, debt-for-development, debt-for-nature, and debt-forcharity swaps are all examples of such conversions that have actually been carried
out. To give a general understanding of what is involved consider two examples.

A debt-for-equity swap means that the foreign owner of the debt instrument trades
it in for a share of ownership in a domestic firm. This would typically come about
in two steps. The creditor would first convert the debt instrument into domestic
currency at the central bank. With that money, and with the approval of the
government, he would then buy shares in the domestic company. Three points are
important to keep in mind regarding these transactions. First, no foreign exchange
would be involved even though the original debt was denominated in, say, dollars.
Secondly, the foreign creditor now has a claim on the domestic private sector
rather than on the government.1 Third, the government has transformed its foreign
debt either into domestic debt or into an increase in the domestic money supply
depending on how the purchase of the original debt was financed.

1

Furthermore, the income generated by this claim is now dependent on the performance
of the domestic company and not directly on a stipulated interest rate as was the case with
the original debt

5

DEBT FOR HEALTH SWAPS

A debt-for-nature swap involves an exchange of foreign debt for a promise by the
government to finance a domestic environmental protection project. One way for
the government to do this is to issue domestic debt in exchange for the foreign
debt. The domestic debt is held by a special fund which is set up to administer the
environmental project.2*Note that the debt-for-nature swap has some similarities,
but also some important differences, with the debt-for-equity swap. The similarities
consist of the fact that no foreign exchange is involved in the transaction, and that
the government has exchanged foreign debt for domestic debt. The main
difference is that the foreign owner of the debt gets nothing in return except the
guarantee that the environmental project will be financed. In essence, the owner
of the foreign debt has made a donation to the country. This means that there is
little chance that commercial bank creditors themselves will want to enter into a
swap of this kind whereas they may for profitability reasons be interested in a
debt-for-equity conversion. Instead, debt-for-nature and related swaps are carried
out by other entities who have an interest in the particular project being financed
and who for this reason procure the commercial debt in the secondary market.
Debt-for-dcvelopment, debt-for-charity, and as we shall see, debt-for-health
swaps share the essential properties of the debt-for-nature swap. They rely on
donations from abroad, they generate domestic funds but no foreign exchange for
domestic projects, and they lead to an expansion of domestic debt by the
government. These features should be kept in mind when we evaluate the
advantages and disadvantages of debt-for-health swaps for channeling funds into
the health sector, and when we design a procedure for implementing such swaps.

In order to understand the motivations behind debt swaps, we must ask why a
commercial bank would be interested in exchanging debt it holds on a country for
equity in firms located there rather than investing in the country directly?
Similarly, why would a donor first use dollars to buy debt and then exchange this
debt for an environmental project rather than donate the dollars directly to the
country in exchange for local funds for the same project? The answer to these
questions is that a debt swap may generate more domestic currency and hence
more resources than a straightforward foreign investment or donation. Thus a
given amount of foreign exchange may allow the investor or donor to undertake
a larger project if it is done through a debt swap than if it is done directly.
The reason why a debt swap may be advantageous has do with the so called
secondary market for debt. (See the box on page 9) In this market, the value of the
debt formost highly-indebted developing countries is less than its face value. This
means that it is possible to buy $ 10 million, say, of debt for only $5 million if the
discount is 50%. If the central bank of the debtor country is willing to exchange
the full value of the debt for domestic currency in a swap operation, the foreign
investor or donor effectively gets $10 millions worth of domestic currency for
only $5 millions. For a donor interested in financing a health sector project, this
represents an opportunity to increase the local-currency resources with no extra
commitment of foreign exchange.

2

6

Depending on the nature of the debt, the fund may be able to sell it to local investors for
cash or it may have to hold it to maturity.

A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR ?

3.

A stylized example of a debt-for-health conversion
In order to illustrate how a potential debt-for-health swap might provide funds for
a health project consider the following illustrative example. Suppose a donor
wants to give $1 million for a rural clinic program in a developing country.3
Suppose that the exchange rate between the currency of that country (the Peso)
and the dollar is 10 Ps/$. A direct gift to the country’s health authorities would
make 10 million pesos available for the rural clinic program. Consider now the
alternative possibility of channeling the funds to the health project via a debt
swap, and suppose for the sake of this example that the secondary market price
of claims on this country is 25%, i.c 25 cents to the dollar. In this case, the donation
of $1 million will buy debt with a face value of $4 millions. If the central bank
of the developing country is still willing to exchange that debt at the official
exchange rate of 10 Pesos per dollar, the domestic currency value of the donation
will be 40 million pesos. The debt swap has thus generated a greater amount of
domestic currency for our rural clinic program than the straight donation.
The conclusion that the debt-for-health swap is necessarily a preferred way to
support health projects needs to be tempered somewhat by the following
considerations. First, the above illustrative calculations assumed that the central
bank of the recipient country was willing to exchange the face value of the donated
debt at the official exchange rate of 10 Ps/$. This need not be so. In fact, since the
authorities are not servicing the external debt fully, it would be surprising if they
were willing to exchange it at face value for domestic currency. This is equivalent
to giving 40 pesos per dollar for a donation of external debt but only 10 pesos per
dollar for a donation of foreign exchange. This may not be the intention of the
central bank, nor in its interest.4

A second cautionary remark is the domestic financing of the debt swap may have
inflationary consequences. Depending on the rate of inflation already present in
the economy any additional pressures may be difficult to accept by the authorities.
In addition, measures that may have to be adopted to counteract the inflationary
impact of the debt conversion may have adverse effects on that segment of the
population that was supposed to benefit from the swap in the first place.

3

Notice that the foreign exchange would have to be provided on a donor basis rather than
on a commercial basis as in the case of debt-for-cquity swaps. A commercial bank
holding claims on a country may be willing to exchange these for equity participation
in a debtor-country firm because it expects to earn higher returns on the equity. The same
bank would not be interested in a debt-for-health swap since it does not generate any
profits for the bank. Possible exceptions to this rule would occur if there were tax
advantages to the bank of agreeing to a debt-for-health donation or if it there werecertain
public relations reasons to enter into such swaps. In these cases the bank effectively
becomes a donor itself.

4

Note that countries have had damaging experiences with certain types of debt swaps for
this reason. In terms of our numerical example, domestic residents have at times had the
possibility to exchange 10 million pesos for SI million at the central bank, use the dollars
to buy debt in the secondary market for a face value of S4 million, and in adebt-for-equity
deal been able to exchange this debt for 40 millions pesos worth of domestic equity. This
so-called round-tripping has generated a healthy profit at the expenseof the central bank,
which has therefore become hesitant in agreeing to other types of swaps as well.

7

DEBT FOR HEALTH SWAPS

Thirdly, it should be recalled that a debt swap does not generate any foreign
exchange for the health project, only local funds. To the extent that the project
requires imported goods (vaccines, for example), the necessary foreign exchange
must come from other sources. The financial authorities in the country may not
be willing or able to provide that foreign exchange. In this case the projects
identified for debt-for-health swaps should have a predominantly domestic
currency content.
Finally it might be pointed out that the domestic-currency proceeds of the swap
would probably not be paid out directly to the authority or agency responsible for
overseeing the health project. Some other way of disbursing the funds would be
agreed on such as issuing government bonds to the agency or establishing a
special “social fund” from which the necessary funds for the health project could
be withdrawn as needed.

4.

Will debt-for-health conversions increase financing for
health?
In order to evaluate the desirability of debt-for-health swaps it is necessary to
make a judgement as to whether they are likely to increase funding for the health
sector. There are two aspects of this question relating to donor behavior and host
government behavior respectively.

How likely is it that debt-for-health swaps will generate additional funds from
donors? This is a question that is very difficult to answer. On the one hand it must
be realized that different types of aid to developing countries are substitutes. If
additional amounts are donated to health projects, it is likely that othersectors will
obtain less. Political forces which have ties with these sectors would then organize
to maintain the status quo. The outcome could then be a situation where no
additional aid in terms of foreign exchange will be allocated to the health area; aid
that was previously given in other forms will now simply be channelled through
debt-for-health swaps. However, even if this scenario comes about, the fact that
debt swaps generate larger amounts of domestic funds than other forms of aid
means that greater financial resources will nevertheless accrue to the health
sector.5
Even if traditional donors were not to increase their donations to a significant
extent, it is still possible that additional resources could be generated if new
donors could be brought in. They may be convinced to provide aid for health by
the opportunity offered by the swap facilities to see a substantial increase in

5

8

There is a scenario that is even less favorable for the health sector. This corresponds to
the case where foreign donors have a target for the amount of recipient-country funds
they are willing to give. In this case the debt swap possibility will obviously not provide
any extra resources.

A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR ?

The secondary market for developing country debt
This is a market where it is possible to buy and sell commercial bank claims on developing countries. A bank
which wants to reduce its exposure in a particular country can sell part or all of its claims to another investor.
In order to do so, the selling bank has to agree to a price lower than the face value of the debt. This price is
typically quoted as a percentage of the face value. For example, the table below indicates that the price of
Nigerian debt was 33% in July 1990 implying that commercial bank debt of this country with a face value
of $10 millions could have been bought for $3.3 millions.

Secondary market prices
(cents for $1)

March 1989

Jufy 1990

Ecuador

11

16

Poland

36

14

Morocco

42

45

Nigeria

21

33

What determines the prices shown in this
table? In very general terms they depend on
the expectations the creditors have concern
ing the debt service capabilities and intentions
of the debtor. For instance, the fact that Polish
debt was traded at 14% in July reflected the
judgement that only 14% of the contractual
debt service payments will ever be settled.
The fall in the price from 36% to 14% from
March 1989 to July 1990 indicates that market
participants have revised downwards the
chances of recuperating their outstanding
claims on Poland.

Secondary Market prices
Judgements about the debt service intentions of a
country obviously depend on its total amount of
for Developing Country debt
debt outstanding as wel I as its economic prospects. (15 heavily indebted countries. In % of face value)
The accompanying chart indicates that as the
indebtednessofdevelopingcountrieshas increased,
the average secondary market price has fallen
quite steadily. This dependence of the price on the
total amount of debt can sometimes lead to a
reluctance of private creditors to write off their
loans to certain countries who also have a substan
tial amount of official debt outstanding. For if
official creditors should forgive a significant por
tion of their claims, the value of the remaining debt
would increase. Forthisreason, commercial credi
tors would like to see official debt write-offs since
it would increase the likelihood thatthe remaining
debt could be serviced more fully.
It should be noted that the secondary market for
developing country debt only concerns the claims
held by commercial banks. So called Paris Club
debt (debt held by governments and official
institutions) is not traded on this market. The reason
is a reluctance on the part of these creditors to
admit that their claims are worth less than their face
value. This reluctance is more politically based
than grounded on economic sense.

9

DEBT FOR HEALTH SWAPS

recipient-currency resources for each dollar’s worth of aid. Additional donors
may also be brought in by the apparent possibility to contribute to the solution of
two problems simultaneously, namely both the debt and the health problem of the
recipient country.6
Suppose additional funds from foreign sources are indeed made available from
debt-for-hcalth swaps. Does this automatically mean that the health sector will
dispose of a larger total amount of resources? Not necessarily. The local
government may simply reduce domestic resources devoted to this sector. The
justification would be that the additional foreign funds have liberated scarce
budget resources for other urgent uses. Without wanting to take a view on whether
such actions would be likely or in the government’s interest, it must be recognized
that there exist forces that would push in this direction. Action should accordingly
be taken to reduce their chances of success to a minimum by putting conditions
on the debt swaps that attempt to bind the government to allocate a greater amount
of productive resources to the health sector.

It is extremely important to realize that debt-for-health swaps are likely to provide
additional funds only temporarily. One reason for this is that the amount of total
swappable debt is only finite. In addition, many other types of debt swaps arc
being considered by governments and donors. It follows that recipient governments
should not come to rely on these additional funds on an ongoing basis and as a
consequence reduce budget allocations. If they were to do this, the health sector
may be left worse off in the long run by accepting funds generated by debt swaps.

If governments can be induced to maintain their contributions to the health sector,
the temporary nature of the debt-for-health opportunity may be taken advantage
of to generate increased international support. By arguing that the debt swap is
only a fleeting occasion, it may be possible to convince donors to make a special
effort at this time. Perhaps the WHO could play a role of salesman in this context.

5.

Will debt conversions solve the debt problem?
In 1988 developing countries had an outstanding volume of long-term debt equal
to 980 billion dollars. Officially recorded debt conversions amounted to 7.9
billion dollars in the same year. Even if this figure does not include a certain
amount of informal debt conversions and therefore understates the total volume
of foreign debt extinguished by this method, it is clear that debt swaps do not yet
even come close to making a substantial dent in the overall debt problem. The
recent agreements between Costa Rica, Mexico, and the Philippines and their
respective creditors on debt reduction and restructuring suggests that the volume
of debt retired through conversions will increase in the near future. Furthermore,
as other countries are brought into negotiations one should expect that conversions
will become even more common. Compared to the total amount of outstanding
debt, however, they are likely to remain modest for the foreseeable future.

The qualifier ‘apparent’ is used in this sentence to indicate the possibility that the health
sector will not really be better off from the donation as a result of local government
behavior. On this possibility, sec the discussion below. When a donor gives S1 million,
all he can be sure of is that this is the additional amount of resources made available to
the recipient country. Since funds are fungible, he can not be sure what additional project
these funds have made possible.

10

A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR ?

If total debt conversions are small relative to the outstanding debt, it is obvious
that dcbt-for-health swaps should not be looked upon as a solution to the debt
problem of developing countries. The potential scale of such swaps is simply too
small. So while they have a potential for contributing significantly to the
financing of the health sector, debt-for-health swaps should not be judged on their
potential for resolving the larger problem of developing country indebtedness.

6.

Implementation
The implementation of a debt-for-health swap requires dealing with a number of
issues relating to the identification of a donor and a recipient country, the
elaboration of a suitable health project, the procurement of the debt, and the
establishment of a local procedure for disbursing the funds and monitoring the
project. Each of these issues will now be discussed in turn with the objective of
identifying the main constraints that need to be considered in each case.

a.

Identification of a donor

It has already been pointed out that debt-for-health swaps can not be considered
as a profit-generating undertaking. For this reason, the list of potential donors
includes primarily entities that have a basically charitable or political motivation
for their actions. Development agencies and charitable organizations are the
leading candidates. Businesses might be a possible source of donations if they
thought this would provide public relations benefits or if donations could be used
to reduce tax liabilities.7

Some countries’ debt is owned almost exclusively by governments and official
multilateral institutions.8 Since this type of debt is not traded on the secondary
market, it would be necessary that the corresponding creditor government (or
institution) be the donor in any swap agreement with such debtor countries.

b.

Identification of a recipient country

The first factor that must be taken into account in the choice of a country is the
size and type of its external debt. Unless the donor is a government which is
willing to participate directly in the swap, the recipient country must have a
certain amount of commercial debt outstanding. In order for the swap to be
advantageous for the donor, the debt must furthermore be traded at a substantial
discount in the secondary market.

A second important consideration is the macroeconomic situation in the recipient
country. As explained above, a debt swap reduces the external liabilities of the
debtor government, but it increases either its domestic debt or the domestic money
supply depending on how the swap is financed locally. The mechanism is as
follows. A swap of $ 1 million of external debt for 40 million pesos to be used in
a local health project implies that the government needs to acquire the local funds.

7

An early debt swap financed the Midland bank involving water sanitation and
reforestation projects in the Sudan seems to have been undertaken for these two reasons.

Madagascar and Viet Nam arc examples of such countries.

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DEBT FOR HEALTH SWAPS

It can borrow them from the public in which ease the domestic government debt
grows. A higher domestic debt implies greaterdebt service payments in the future
putting pressure on the government’s budget.

The alternative to acquiring the 40 million pesos by local borrowing is to resort
to the printing press, in other words to create more domestic money. The
consequences of such a policy would be increased demand, inflation, and balance
of payments difficulties.
From this discussion it follows that countries that already have precarious
budgetary situations, a potential or actual inflation problem, or a sizable external
deficit are not likely to be suitable candidates for a debt swap since their
macroeconomic problems could be aggravated by such an undertaking. Even if
the authorities themselves were tempted to reduce its foreign debt by means of a
swap, it is quite possible that the International Monetary Fund or the World Bank
would oppose it in order to limit the negative macroeconomic consequences.

One consideration may make the macroeconomic constraints just mentioned less
binding for debt-for-health swaps taken in isolation than for broader-based debt
conversions. This is the fact that the feasible size on health projects financed in
this way will be small relative to the economy as a whole. The budgetary or
inflationary consequences of such swaps may therefore be minor.’

Related to the potentially inflationary consequences of a debt swap is the
absorptive capacity of the country. If domestic resources required for the
expansion of the health sector are in short supply, then this sector cannot absorb
additional funds without putting pressure on costs. Little improvement in services
may under such circumstances be obtained.
A final consideration is that the recipient government must be favorably disposed
to the swap. The authorities may be reluctant for many reasons. They may feel that
they have other more urgent spending priorities than the health sector. They may
also have a different view on the debt service payments they will make than is
implicit in the secondary market discount on their debt. They may for instance
have little intention of paying anything even though a positive market price
suggests the contrary. They may also be hoping to obtain large debt reductions
through negotiations with their creditors and would therefore be unwilling to
enter into smaller swap deals which would indicate a willingness on their part to
make concessions in exchange for debt reductions. Furthermore, they may fear
that the debt-for-health swap will drive up the price of their debt in the secondary
market thereby making other conversions less attractive. Whatever the reasons for
reluctance on the part of the government in a potential recipient country, there is
little chance of discovering them without actually approaching the authorities
with a specific proposal.

’

12

This should not be taken to mean that these consequences can be ignored in the
identification of a country suitable for a swap operation mainly because a debt swap can
not be treated in isolation but must be incorporated into the country’s overall
macroeconomic strategy.

A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR ?

c.

Selection of a suitable health project

Several considerations must be kept in mind when a health project is chosen to
be financed by a debt swap. First it should be remembered that a swap will
generate no foreign exchange. Priority should thus be given to projects that
require mainly domestic resources. If some foreign exchange is needed, the donor
should be encouraged to provide part of his donation in the form of a debt swap,
and part in the form of foreign exchange. Otherwise it is likely that the whole
operation will fail because of the inability of the central bank to come up with the
foreign exchange resources.

A second consideration stems from the fact that the debt-for-health swaps
generate funds only on a temporary basis. This implies that only projects needing
temporary funds should be financed this way or that plans must be established
concerning their continued support after the funds obtained through the debt swap
are exhausted.
A final constraint on a project financed by a debt swap is the fact that 5 million
dollars is the minimum amount of debt that can be purchased on the secondary
market while keeping brokerage fees moderate.

d.

Procurement of the debt

Acquiring the debt of a country on the secondary market is best done through a
broker such a commercial bank or an accounting firm with experience in the
matter. The fees for such brokerage services are in the neighborhood of 0.5% of
the face value of the debt. It would be prudent also to involve the broker in other
aspects of the process, especially those dealing with negotiations with the
recipient government and with the establishment of a disbursement and monitoring
strategy for the health project. The total fee for a particular swap deal would then
include also the time involvement of the broker which will obviously vary with
the duties he is asked to undertake.

e.

Creation of a local disbursement and monitoring structure

The donor who provides the foreign exchange for a debt-for-health swap will
certainly want to have some guarantees that the local-currency proceeds from the
swap will actually be used for the project agreed on, and that other government
expenditures on the health sector will not be cut correspondingly. To some extent,
these guarantees will have to be based on trust in the government’s intentions as
determined in negotiations leading up to the swap agreement. They will also be
determined in part by the choice of project to be financed. But some additional
safeguards should be established. One would be to take the funds generated by the
swap out of the regular budget of the health ministry (which would presumably
be the intern ediary in the recipient country). This would imply appointing some
other organization to receive the funds and to disburse them according to the
requirement of the project. This organization would either receive the funds in the
form of an account with a domestic financial institution or in the form of
government bonds with maturities that correspond to the needs of the project.

13

DEBT FOR HEALTH SWAPS

7.

The role of the WHO
The WHO could assist in the realization of dcbt-for-hcalth swaps in a number of
ways from providing technical assistance in identifying appropriate health
projects to taking an active role in resource mobilization, negotiation with the
recipient country, and monitoring the progress of the financed project. Technical
assistance in the identification of important health projects as well as in their
execution is of course already provided on a regular basis by WHO staff. The
additional criteria imposed by the particular nature of debt swaps can readily be
incorporated in established selection procedures.
The WHO could seek to mobilize resources for debt-for-health swaps in several
ways. The simplest would be to encourage traditional donors to take advantage
of the special opportunities offered by the swap possibilities to increase their
pledges. Going outside traditional donors would require making it known that the
WHO will be able to act as a conduit of funds for health projects and actively
soliciting these funds. Finally one could imagine using WHO resources for the
purpose of financing swap operations.
The WHO could also act as an intermediary to facilitate debt-for-health swaps.
It could advise countries that are approached by donors and it could advise donors
which would like to finance swaps. The advisory role could also be extended to
the provision of disbursing and monitoring functions for the financed projects.
The intermediary role could furthermore include brokerage-type services related
the financial aspects of the swap operations although it should be noted that this
would require expertise currently not available in the organization.10 In addition,
it would be possible to conceive of WHO as a manager of a future Dcbt-For-Hcalth
Fund established by member countries to channel additional resources into the
health sector.

Recognizing the potential role it can play in facilitating debt-for-health swaps, the
WHO has already started some work in this area. Current activities are principally
those related to the promotion and advocacy of the swap mechanism among
creditors, debtors, and potential donors. In collaboration with the World Bank
and in consultation with the IMF the WHO is playing a limited intermediary role
by giving advice both to creditors and debtors, and by providing technical
assistance in the identification and formulation of projects suitable for debt for
health swaps.

To assist in policy and strategy development and to review WHO activities in this
area a working group on debt-for-health swaps has been established at WHO with
participation from the World Bank, WHO staff, and consultant macroeconomists
and financial analysts. This group has identified a number of debtor countries
which could benefit from this mechanism to finance existing health projects.

10 For this reason it is undoubtedly more cost effective to leave brokerage functions to
entities which already carry them out on a regular basis. Commercial banks and
accounting firms have already been identified as possibilities. The World Bank also has
recently set up a Financial Advisory Unit which is able to provide technical assistance
on the design of swap programs.

14

A SOURCE OF ADDITIONAL FINANCE FOR THE HEALTH SECTOR ?

Preliminary exploratory contacts with these countries are underway. These
countries were selected on the basis of the criteria discussed above including
country requests, the amount and type of outstanding debt, feasible and available
health projects, absorption capacity of the health sector, general economic
situation, and the potential availability of alternative financing schemes.

For a supplementary discussion of the issue of debt-for-health swaps,
see the document "Debt For Health Conversion, Analysis and Strategic
Planning Coordination", Pan American Health Organization, March
1990.

World Debt Tables 1989-90, External Debt of Developing Countries,
Volume 1, Analysis and Summary Tables, The World Bank and
International Capital Markets, Developments and Prospects,
International Monetary Fund, April 1990 contain data on the debt
situation of developing countries and discussions of the evolution of
debt management strategies.

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