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New Funding to Help Poor Countries Manage Debt

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DMFA new phase of a successful multi-donor trust fund is on track to launch April 3, 2014, with a minimum of $10 million.

The Debt Management Facility II (DMF II) program builds on previous success in debt-management advisory work and marks the beginning of a new partnership between the World Bank and the International Monetary Fund (IMF). The partnership will be dedicated to strengthening the capacity of low-income countries to manage their debt in a manner that is sustainable and encourages economic development.

The new pot of money will extend the work of the first DMF, a successful $22 million trust fund that the World Bank launched in November 2008. The initiative was born out of a recognition that low-income countries graduating from debt-relief programs, such as the Heavily Indebted Poor Countries (HIPC), might continue to struggle. There was a worry that they might fall into a vicious cycle of debt and assistance.
“Several countries had been provided debt relief by multilateral donors,” said Abha Prasad, a senior debt specialist at the World Bank who manages the trust fund. “The idea was: how to build capacity to manage debt effectively and avoid accumulation of unsustainable debt?”

The sovereign debt world can be complex, and the World Bank realized that low-income countries could improve their chances of staying on track with training on how to assess risks, better negotiate loan terms, and recognize the risks of borrowing from non-traditional creditors.

This acumen, in turn, could help the recipient countries spend their money in more productive ways: building infrastructure, providing access to clean water, and performing other functions essential to economic growth and poverty-reduction. Indeed, details that may seem mundane or insignificant at smaller level – an extra year in the maturity of a loan or a fraction of a percentage point lower on an interest rate – can, for a country, make the difference between providing electricity to a village or funding a school.

Source: World bank