WASHINGTON, March 1 (UPI) -- Soon, some developing countries will be able to cash in their debt for healthcare -- and better financial health.
To finance the $50 billion-per-year gap between global health needs and global health aid, a flurry of inventive proposals have been put forth, including promises to buy future drugs and a tax on airline tickets.
But the Global Fund for AIDS, Tuberculosis and Malaria is resurrecting an old idea: letting countries cancel debt in exchange for undertaking specific development projects.
This year, Indonesia -- soon to be followed by Pakistan, Peru and Kenya -- will be the first country involved in the fund's new Debt2Health program in which tens of millions of dollars in debt will be negotiated in exchange for spending on fund-approved health projects.
Supporters of the plan say it will funnel much-needed funding into poor countries' health sectors. But others warn the potential of the project depends on how well it surmounts obstacles that have sunk debt-swaps in the past.
"It's win-win," Paul Zeitz, executive director of the Global AIDS Alliance, said Wednesday at the Brookings Institution.
Creditors reduce their risk, he said, and highly indebted countries with "an urgent, pressing health crisis" get additional resources to combat it, he said. In addition, participating countries often save money, because the exchange comes with a negotiated steep discount so that a $25 million health project could erase $50 million in debt.
In Indonesia, swap negotiations are under way with the German government under the auspices of the Global Fund. The Southeast Asian country, which spends 40 percent of its annual budget servicing its $34 billion debt burden, will exchange $180 million in debt for $90 million in health spending.
The remaining three pilot projects should be wrapped up by 2010, and the hope is to extend such arrangements to more highly indebted, high disease-burden countries after that, said Kingsley Chiedu Moghalu, head of global partnerships at the fund.
Arranging more of the agreements, however, may not be so easy.
At the peak of the Third World debt crisis in the 1980s, interested third parties purchased debt for pennies on the dollar, and then offered to erase it if the debtor country undertook any of a variety of projects. Several Central American countries, for example, eliminated large chunks of debt by protecting their rainforests.
But even during that time of copious debt, and the mutual desperation of debtor countries and lenders, less than $200 million was swapped.
Part of the reason is that political will is sometimes lacking in debtor countries, said Ngozi Okonjo-Iweala, a former Nigerian finance minister who participated in many swap negotiations.
When countries are not servicing their debt at all, "there is no real impact on the budget at all," she said, "and under the agreement, there is an immediate impact."
As a result, some politicians decide that "the debt is unserviceable, we're not doing anything, we're not swapping," she said.
There is also sometimes frustration with the limits put on how swapped funds can be spent, Okonjo-Iweala added, and creditors can also be tough negotiators that offer little or no discount on debt, she said.
But bilateral donors like Germany are warm and fuzzy compared to private lenders and export-import banks that hold 40 percent of the $2.5 trillion in developing-country debt, Zeitz said. Few deals of any kind have been brokered with such lenders, and none offers significant discounts.
"The time has come to bring them to the table," he said.
But some things have changed since the 1980s that might make negotiations more fruitful, said Homi Kharas, former chief economist of the East Asia and Pacific Region at the World Bank and visiting fellow at the Brookings Institution.
Countries are more financially solvent and have greater foreign-currency reserves than two decades ago, he said, which will give them stronger negotiating positions but also make them less likely to come to the table.
The best idea may be to offer debt-swapping as part of a menu of options to countries trying to improve their health infrastructure, Kharas added.
Despite the difficulties, Okonjo-Iweala said, it is worth it to pursue swapping as another way to increase health resources.
"Let's look at this and see what are the stumbling blocks in the way and try to take it from there."
