Disagreement about whether grants are preferable to loans is complicating efforts by rich countries to agree on debt relief for the world’s poorest countries.

Development experts say it is the size of the net flow of resources that matters, not whether assistance is in the form of concessional loans, grants or debt relief.

Bilaterally, governments tend to give grants, while multilateral lenders such as the World Bank offer a mix of loans and grants.

The World Bank view is that loans can go further than grants, since repayments can be lent out again to new borrowers. That argument falls apart, however, when countries do not repay their loans. The US argues that in far too many cases, most of them poor African borrowers, the bank is simply rolling over bad debt that cannot be repaid.

This is why the US required the International Development Association (IDA), the part of the World Bank which gives grants and interest-free loans to the world’s poorest countries, to set a fixed target for grants in its last round of financing.

As the US is unlikely, however, to raise its own contribution to the IDA, the Europeans, who will significantly boost their funding, are gaining the upper hand in the debate. In its next financing round, from 2005 to 2008, the IDA will allocate grants on the basis of an assessment of the sustainability of a country’s debt burden. The issue is resurfacing as Group of Seven industrialised nations try to hammer out a package of African debt relief, including World Bank loans, by this summer.

Other G7 members remain sceptical but the UK and US are pushing for 100 per cent debt relief for poor countries. Even they disagree on how this should be achieved.

The UK has offered to pay 10 per cent of the debt service for very poor countries. The US thinks that the World Bank should write off the debts of poor countries to the IDA.

Andrew Balls, Financial Times, February 16, 2005