TAILIEUCHUNG - DEBT SUSTAINABILITY FRAMEWORK FOR LOW INCOME COUNTRIES : POLICY AND RESOURCE IMPLICATIONS - Part 5

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. | DEBT SUSTAINABILITY FRAMEWORK FOR LOW INCOME COUNTRIES POLICY AND RESOURCE IMPLICATIONS Paper submitted for the G-24 Technical Group Meeting Washington . September 27-28 2004 Part 5 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 possible. Instead the combination of IBRD loan and IDA credit terms offered to the country will be converted entirely to IDA credit terms1. Countries that are judged to be of medium debt risk will receive 50 percent of the IDA allocation as grants and the balance as credits. As in the case of high risk countries if the country concerned is a blend country the loan component will be offered on credit terms. Countries 1 Ibid footnote 3 page 10. that are judged to be low risk will receive the entire IDA allocation as credits. 3. This allocation system is simple to operate but has some shortcomings. Equity considerations .

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