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Low-income countries with high levels of debt face a dilemma when considering new financing. Additional funding is needed to meet key development objectives, but too much new financing in the form of debt can exacerbate debt problems. Countries that borrow too much – even on concessional IDA terms – can quickly find themselves facing rapidly rising debt ratios that could threaten debt sustainability in the future. However, a policy that constrains new borrowing can undermine the country’s ability to achieve its development goals, especially if debt is contracted on concessional terms to finance activities with relatively high rates of return. New financing in the form of grants can ease this tension, but the total volume of grants available is constrained, so this option is limited.

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.