DEBT SUSTAINABILITY FRAMEWORK FOR LOW INCOME COUNTRIES:
POLICY AND RESOURCE IMPLICATIONS Paper submitted for the G-24 Technical Group Meeting
(Washington, D.C. September 27-28 2004)

Part 6

Nihal Kappagoda, Research Associate, The North-South Institute
Nancy C. Alexander, Director, Citizen’s Network on Essential Services Allocation of Grants

1. The starting point for the allocation of grants is the system in place for
allocating IDA funds based on the PBA system that was described in the
previous section. This ensures the link with policy performance that has
increasingly been the basis on which IDA funds have been allocated in
successive replenishments. Thereafter, the country groupings based on
debt distress are used to allocate grant funds within the IDA country
allocations that have been determined.

2. Countries that are judged to be high risk, based on the DSAs using
current and projected debt levels that take account of exogenous shocks
to the extent possible, will receive the entire IDA allocation as grant
funds. The use of current indicators if only these are available assumes
that the debt indicators remain static during the replenishment period.
In the event that the country concerned is already a blend country,
maintaining the principle that prevailed during IDA 13 that grant funds
will be available for IDA only countries, a grant allocation will not be
Financing of Grants

4. Grant financing during IDA 14 will compromise the future viability of
IDA as credit reflows are financing an increasing share of the total
commitment authority of IDA. A measure of the problem is illustrated
2

by the fact that if 20 percent of the allocations from IDA 14 onwards are
in the form of grants, without additional grant financing by donors it
will reduce the commitment authority by about 7 percent in 20 years
and nearly 20 percent in 40 years
3
. It is not clear why this should be a
concern as a 7 percent reduction appears marginal in a time period that
is beyond that set for the achievement of the MDGs. It is more
important to increase grant funding as quickly as possible to countries,
particularly those in sub-Saharan Africa, to achieve the MDGs by 2015.
If these funds are provided on credit terms instead of grants there is the
prospect of an excessive build up of debt.

5. The World Bank proposes a combination of mechanisms such as
replacing foregone reflows of credit principal through additional donor
financing, reducing the concessionality of IDA credits, and imposing
upfront charges on grant recipients. Additional grant financing by
donors is made up of two parts. The first is the upfront payment by
donors of the foregone service and commitment charges that reflect the
cost of doing business to IDA. The second is the undertaking by donors
to replace foregone principal reflows over the repayment period of up to

Bank also concludes that there may be a small group of 10 better off
countries, mostly in Asia, for whom a reduction of the maturity period
by 5 years could be considered. This approach of hardening IDA terms