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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.
When the world’s finance ministers and central bank governors assemble in Washington later this month. they would do well to focus on another looming debt crisis that could hit some of the poorest countries in the world, many of whom are also struggling with problems of conflict and fragility and none of which has the institutional capacity to cope with a major debt crisis without lasting damage to their already-challenged development prospects.