Debt Swapping Takes Hold in Africa

DEBT swapping - the trend in Latin American debt relief for several years - is coming into vogue in Africa. Debt conversion - the system used by Latin American nations to retire about $14 billion in foreign arrears - is a new concept in Africa. So far, only Zambia and Nigeria have tried it. But other African governments are considering following suit.

``Debt conversions are definitely a wave of the future in Zambia,'' says Bank of Zambia governor P.X. Nkhoma. Since 1985, Zambia has converted more than $50 million of its $6 billion debt, and in the process has expanded nontraditional exports such as cotton.

``It is a way to bring foreign investors back to Africa and to stimulate exports,'' says Mr. Nkhoma, explaining Zambia's program to officials from 11 African countries at a recent workshop on debt conversion here. The two most common types of debt swap are debt for equity (ownership of property or shares in a local company), and debt for local currency, which allows businessmen in a debtor country to purchase the nation's debt at a discount, convert it into local currency, and reinvest it locally.

Nigeria has swapped $95 million of its $27 billion in foreign debt since it began conversions three months ago. The swap has resulted in foreign investments in its agriculture, mining, and tourism.

While not a cure-all for Africa's $224 billion in foreign debt, conversions ``can be one of the many weapons in a country's debt management arsenal,'' says Edward S. Ayensu, senior adviser at the African Development Bank (ADB).

But swaps won't likely become as popular in Africa as they have been in Latin America - at least not for a while. Three-quarters of Africa's debt is ``official'' - money owed to governments and public institutions. So far, only debts owed to private commercial banks have been eligible for swapping. Officials in creditor countries are discussing whether to allow official debt to be converted.

``In the meantime,'' said Warren Weinstein, an administrator for the US Agency for International Development, ``it is important for African countries to move ahead with debt conversions to show that they can work here.'' USAID recently allowed its grants to private organizations to be used to convert debt into local currency when it is used to support development projects.

Once the administrative barriers are removed, the biggest debt swap potential in Africa will probably be for nature and development.

``Debt-for-nature conversion schemes are of particular attraction to African countries where environmental degradation and pressure on available land have become increasingly serious,'' ADB president Rabacar N'Djaye says. Latin American countries and the Philippines have traded debt to international environmental groups and used the local currency for domestic conservation.

Besides enabling the government to retire some of its debt and reduce interest payments, says E.A. Ajayi, an adviser to the governor of the Nigerian Central Bank, debt swaps have stimulated foreign investment, boosted exports, created jobs, and expanded the government's tax-revenue base.

But there are pitfalls. Debt swaps can cause inflation, enable foreigners to gain control of the domestic economy, and lead to ``round-tripping,'' Mr. Ajayi says. Round-tripping results when the debt purchaser uses the local currency he receives to buy foreign exchange on the black market instead of investing locally.