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Debt sustainability and financing terms in IDA14 : further considerations on issues and options (English)

This paper responds to the requests made at the third meeting of the IDA14 negotiations for more work on selected elements of the proposal, to make the primary grant eligibility criterion in IDA14 a country's risk of debt distress. At this meeting, Deputies stressed that while addressing the broad issue of debt sustainability, the new grant allocation system for IDA14 should, to the maximum extent, preserve the performance and incentive aspects of IDA'S performance-based allocation (PBA) system, as well as provide poor countries with an adequate volume of resource transfers, in order to accelerate progress towards the Millennium development Goals (MDGs). The paper takes as its starting point the joint Bank-Fund work on a debt sustainability framework, which provides the analytical foundation for the link between debt sustainability and grant eligibility. While the principles underpinning this work have been broadly endorsed, there is also a clear preference for lowering the policy-dependent debt and debt-service thresholds, to help lower the overall risk of actual debt distress situations. The paper is organized according to the same road-map as the previous papers, starting with issues related to eligibility criteria, followed by grant allocation issues, and lastly financing issues. Section II assesses the implications of the revised set of thresholds proposed by the staffs of the Bank and the Fund for IDA14 grant eligibility, and for the overall grant share. It also discusses other grant eligibility issues, including exceptional HIV/AIDS grants for IDA-only countries that would be ineligible for grants under a debt distress criterion; grants for regional projects; and, the "free rider" problem. Section III examines different options for reallocating the resources from the volume discount on grants associated under the proposed Modified Volume Approach. Section IV focuses on grant-financing issues, and discusses the workings of a "hard terms" window, proposed to be set up using the charges-related portion of the volume discount. Summary conclusions are presented in Section V, and suggested issues for discussion are outlined in Section VI. Updated external debt information and country rankings are presented in the tables in Annex 1. The implications of adopting five, rather than three, grant eligibility categories are examined in Annex 2.


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    Debt sustainability and financing terms in IDA14 : further considerations on issues and options

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Debt sustainability and financing terms in IDA14 : further considerations on issues and options (English). Washington, D.C. : World Bank Group.