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SWAps are not what you thought: Pooling resources for lending

Developing countries have to become octopi in managing business with multilateral financial institutions. Transaction costs grow when a country needs to borrow money from several institutions and manage individual accounts with each donor for a single development project. An alternative approach, recently approved as a tool by the IDB, will allow pooling of resources with donors and the government in the global harmonization effort underway to reduce transaction costs for borrowing countries and strengthen country ownership and leadership of development programs.

Numerous borrowers have requested this new sectorwide approach, or SWAp, a concept that might sound new within this context, but was first implemented by the British Department of International Development in 1990. Under a SWAp, development partners collaborate to support a government-led strategy and implementation program for a full sector through pooled funding, allowing greater flexibility and reducing duplication of efforts.

The IDB currently has three SWAps in its pipeline--a social protection program in Brazil and health programs in Honduras and Nicaragua.

The approach has challenges of its own. Donors, governments and stakeholders need to collaborate, which often requires long negotiations and careful consensus building.

According to Per Lundell, Senior Financial Management Adviser at the Swedish International Development Cooperation Agency (Sida) who participated at a seminar on the subject held at IDB headquarters, SWAps are more likely to achieve sustainable development and promote a more efficient dialogue between borrowers and donors. He also highlighted how SWAps can strengthen institutions by including capacity building elements in the process.

The bottom line, according to Svante Persson, coordinator for the Sida-IDB Partnership program at the Bank, is that bilateral donor agencies such as Sida have increased the use of SWAps, as demand for them has been growing steadily in recent years in low and middle-income countries in Latin America and the Caribbean.

“SWAps are changing the way donors are cooperating with partner countries as they move away from the project-based approach,” Lundell concluded.

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