Africa CDC eyes debt swaps to plug health financing gaps

In the wake of drastic foreign aid cuts, as many countries are burdened with high levels of debt, the African continent is strategizing ways to fill health gaps. There’s one area considered a largely untapped resource: Using debt swaps for health programming. The Africa Centres for Disease Control and Prevention, or Africa CDC, plans to focus heavily on matchmaking debtors and creditors to broker these deals. “We are talking about increasing innovative domestic resources, but also bringing some funding that we didn't explore in the past, like the debt swaps,” Dr. Jean Kaseya, director-general of Africa CDC, said. “It’s a major area of focus for Africa CDC for more sustainable financing.” And it’s in this spirit Kaseya recently appointed Christoph Benn as one of his special advisers, with a focus on guiding the agency on increasing the number of debt-for-health swaps. Kaseya said he made this appointment because Benn is a world-renowned expert on debt swaps. Benn is currently the director of global health diplomacy at the Joep Lange Institute in the Netherlands. He was formerly the director of external relations at The Global Fund to Fight AIDS, Tuberculosis and Malaria from 2003 to 2018 — where he set up a special mechanism for debt swaps called Debt2Health in 2007. Now, he’s working with Africa CDC to help create a conducive environment for countries to unlock debt swaps. Devex sat down with Benn to discuss how this is expected to play out. “[Kaseya] believed that this could be a good way for many African countries to address two big problems at the same time: You reduce the [debt] burden that many countries are suffering from, and you increase the domestic investments in health,” Benn said. Benn recently attended the African Union Summit in Addis Ababa, Ethiopia, where he spoke about debt swap agreements amid ministerial and presidential discussions on health financing. A recurring theme, he said, was that African countries spend more servicing debt to creditors than investing in their health systems. As a conservative estimate, debt swaps could free up hundreds of millions of dollars for health care across the continent, he said, but that figure might ultimately rise even higher. Making deals Debt-for-health swaps include a creditor country canceling a portion of debt owed by a national government, with the condition that the money freed up is invested domestically in health. The Global Fund is a leader in Debt2health swaps. It has executed 14 Debt2Health agreements involving three donors — Australia, Germany, and Spain — converting $470 million of bilateral debt into $330 million in health funding for 11 debtor countries. In these cases, health investments have been channeled through existing Global Fund grants and are subject to the fund’s performance, fiduciary, and reporting requirements. Some Debt2Health agreements include a discount, meaning the creditor cancels the full debt, while the debtor only has to invest part of that amount in health to qualify for the cancellation, a Global Fund spokesperson explained. Earlier transactions commonly reflected discounts of around 50%. But more recent Debt2Health agreements have been structured without a discount, they said. “Because we operate the largest multilateral grant platform for health in low- and middle-income countries — investing roughly US$4.5 billion–$5 billion annually across 120 countries, with about three-quarters directed to Africa — we can deploy swap proceeds rapidly and at low incremental cost, with operational expenses of around 6% of disbursed funds,” the spokesperson said. Funds from canceled debt could also go to governments or their partners to implement the health programming, without The Global Fund. But in this case, the parties typically set up a special fund. Germany has been a leading supporter of Debt2Health, striking agreements with Mongolia and Indonesia. As part of its new replenishment pledge through The Global Fund, it included €100 million (around $116 million) for debt swaps. Benn, who is German, said he’s worked for many years with creditor countries and has a good idea which countries might be willing to cancel debt. He added that Africa CDC’s “excellent relationships” with ministries of health and finance will be key, as ministers of finance are responsible for repaying debt. Finance ministers were involved in discussions around debt swaps at the AU summit, he said, adding that there was also a lot of interest. “If we find the respective creditor countries that are willing to cancel, we would not have any problem right now to identify an African country that would serve as the counterpart,” he said. “You get debt canceled, and you have more investment in your own health program. That's a pretty good deal.” Additionally, it’s easier for ministries of finance to swap debt as opposed to repaying debt in a foreign currency, in which they’re also paying interest. On the creditor side, Benn said there are varying degrees of experience with debt swaps. But when creditors cancel debt this way, it counts as official development assistance, or ODA. Donors are required to report to the Organisation for Economic Co-operation and Development’s Development Assistance Committee about their ODA spending, and while targets aren’t legally binding, there’s incentive for donor governments to appear generous, he said. “For some donor countries, it’s easier to cancel outstanding debt than to include new grant money into their budget,” he said. “The incentive is that it’s recognized as official development assistance, but you don't need to take that from your very limited grant budget. You can take it from money that has been lended to these countries, often years ago.” Minimizing roadblocks Benn said the AU summit discussions around debt swaps were a starting point. Next steps include identifying interested countries and creditors. That will be followed by country visits to facilitate agreements. Egypt has done debt swaps worth several hundred million — in a variety of sectors. Benn said it is the first candidate for debt swaps with China, and that could include the health sector. He also noted that Egypt is the only debtor country that has already signed a memorandum of understanding with China on debt swaps for development. Benn will be in Egypt with Africa CDC at the end of this month. One area countries have identified as challenging is relatively high transaction costs — time spent on negotiating the debt swap agreement by staff in national ministries of finance and health. “You need, probably, one and a half years to conclude the negotiations, because it’s also a somewhat complex financial transaction,” Benn said. For example, one of the last debt swaps The Global Fund negotiated took 18 months. But part of his work with Africa CDC is creating conditions to reduce transaction costs. That will include toolkits, templates, and capacity building around how these financial transactions work to help countries initiate that process and learn from each other’s experiences. “Not every country needs to start from scratch,” Benn said. “What the intention of our collaboration is to make the mechanism as easy as possible and kind of minimize the transaction costs.”