The global community has emphasized the importance of innovative financing solutions to address debt sustainability and support lower-income countries to manage their debt burden. GPE’s Debt2Ed innovative finance instrument can help them reduce their debts while mobilizing more funding for education.
In many lower-income countries, high levels of debt can divert resources away from critical development priorities, such as education, and can hinder progress toward achieving the Sustainable Development Goals (SDGs).
GPE’s Debt2Ed is an innovative financing instrument to transform repayments on national borrowing into investments in education while securing significant grant financing from the GPE through the Multiplier.
Effectively used, Debt2Ed will reduce the burden of public debt in GPE partner countries and enable more and better spending to get more children into school and learning.
Immense progress has been made in getting girls and boys into school. The COVID-19 pandemic set back or in some instances even reversed many of hard-won education investments and gains.
Falling government revenues, deepening poverty, reduced development aid, impact of climate change and mounting costs of paying off national debt crowd out critical investments in education.
Domestic budgets are the most significant and sustainable source of financing for education— but even before the pandemic, nearly 4 in 10 GPE partner countries spent the equivalent of half or more of their annual education budgets paying back sovereign loans.
The world’s most vulnerable economies need flexible, context-specific solutions to protect their education budgets, the engine of recovery, development and future growth.
Debt2Ed is linked to the GPE’s innovative finance facility – the GPE Multiplier. The Multiplier unlocks grant financing for a partner country’s education system when external partners mobilize new and additional financing.
Debt2Ed positions donors and partner countries to use debt treatments as the source of this additional funding in any of the countries eligible for GPE support.
A debt treatment is an agreement between the creditor and partner country (sometimes with a third party) to change the amount or repayment terms of a loan—in short, to provide debt relief.
Debt2Ed allows a triple win:
By agreeing to a debt treatment, donor and partner countries can immediately mobilize supplemental financing from the GPE Multiplier. Crucially, resources from the Multiplier can be disbursed when a debt treatment is agreed— potentially before the resources from the debt treatment itself are disbursed.
Côte d’Ivoire has been a GPE partner since 2010. It is the first partner country to leverage a debt swap using Debt2Ed.
Debt swaps are agreements between a creditor and a debtor where the existing debt is replaced with a new financial instrument or commitment. These arrangements often result in financial relief for the debtor and a redirection of cash flows towards specific goals, in this instance towards education programs in Côte d’Ivoire.
Given the spiraling debt environment across partner countries, debt swaps have gained increased attention in recent times, from both creditor and debtor countries.
The Debt2Ed agreement was facilitated by GPE in collaboration with France and Côte d’Ivoire, who had previously agreed to a debt swap transaction. This debt treatment results in increased fiscal space to invest in the country’s education system.
Côte d’Ivoire’s debt servicing to France will be transformed into new and additional financing to invest in priority actions and reforms to help get more children in school and learning. Côte d’Ivoire will continue servicing its debt to France as creditor, in accordance with the debt payment schedule negotiated bilaterally.
As soon as the repayment is made, France will transfer the equivalent amount to Côte d’Ivoire in the form of a grant, which will be deposited in a dedicated account in the country’s Central Bank. The GPE Multiplier enabled the country to leverage additional co-financing totaling $182 million for the education sector.
Different partner countries have different challenges. In some instances, partner countries may want to work with creditors and donors to lower the costs of repaying existing loans. Others have room to borrow but want to lower the cost of that borrowing to protect their fiscal health and invest more in education.
Recognizing the need for flexibility while embracing a pragmatic approach, Debt2Ed can apply to both debt swaps and loan buydowns.
In a debt swap, the creditor and partner country (the borrower, also called the debtor) agree to a debt treatment that reduces the debt service payments of an outstanding loan in exchange for a counterpart payment from the borrower to the education sector.
GPE works with the partner country and creditor to determine the best way to channel and monitor the payments to the education sector, which could be through the GPE Fund or through the partner’s systems.
In a loan buy-down, the creditor—or a third party—pays some or all of a loan’s interest and/or principal on behalf of the partner country.
Depending on the setting, the participants might make the buy-down conditional on ambitious, mutually agreed targets, for example achieving better results in access to schooling for marginalized children, or implementing critical reforms, like training more teaching staff.
Overall, Debt2Ed represents a visionary platform that not only addresses financial challenges but also promotes the achievement of partner countries education priorities and financing goals.
The potential of Debt2Ed to align financial incentives with SDG 4 makes it a valuable tool in the realm of education finance. This ensures that the financial relief provided through the debt treatments is used to achieve meaningful and sustainable outcomes in education.
Debt2Ed leads to improvements in a country's debt metrics by reducing its overall debt burden or restructuring its debt in a way that makes it more manageable. This can contribute to a country's fiscal stability and economic growth, potentially allowing more children to go to school and learn.
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