An account of debt-for-development exchanges in the Philippines provides a good demonstration of the evolution of the technique itself, evolving from a commercially driven transaction to one focussed on development projects and proposed by creditor countries. The Philippine experience sheds light on both the strengths and weaknesses of the debt-exchange technique and illuminates the opportunities and potential pitfalls in applying debt-for-development exchanges in the future. This chapter uncovers the manner in which debt-for-development exchanges can help developing countries overcome their dependence on external debt and harness their own resources for their developmental ends.

DEBT-FOR-DEVELOPMENT EXCHANGE FOR RURAL BANK REHABILITATION

In 1990 a World Bank team packaging a US$100 million agricultural loan identified a shortfall of capital in more than 800 rural banks in the Philippines that totalled about US$50million. It was estimated that the Philippine Deposit Insurance Corporation had a risk exposure of up to US$250 million of insured deposits in those banks. These banks also owed the Central Bank of the Philippines about US$75 million, which brought the total potential loss for the government to US$335 million should the banks fail. However, at the same time, they saw an opportunity because other banks had capital of about US$75 million in excess of the prescribed levels. Hence, the system had more than enough resources collectively to solve its problem. To effectively manage the funds from the World Bank loan, a merger of the rural banking system was identified as necessary.