IFAD has taken a significant step in its efforts to enable the world’s poorest people to escape poverty by eliminating loans and introducing a grant-only scheme for poor countries unable to sustain debt.

The debt sustainability framework is part of a unified effort by the world’s biggest multilateral financial institutions to ensure that essential financial assistance does not cause undue financial hardship for those countries most in need.

"It's a major move, not just for IFAD, but for everyone in the world of foreign aid and development," said Lennart Båge, IFAD's President. "It represents a permanent change in the way we do business."

“It is also a very concrete example of harmonization at work," he added.

Debt sustainability is part of a broad debt management approach to ensure borrowing countries can manage their debt. It not only frees very poor countries from the burden of interest payments, it also allows them to take money that would have had to go to interest payments and use it for other essential services, such as clean water, health and education.

IFAD has adopted the International Development Association's debt sustainability model. Poor countries with low debt sustainability ("red light" countries) now receive assistance on 100 per cent grant terms; poor countries with medium debt sustainability ("yellow light" countries) receive assistance on 50-50 grant/loan terms; poor countries with high debt sustainability ("green light" countries) receive assistance on 100 per cent loan terms. The ratings have been determined using the country debt sustainability analyses of the World Bank and International Monetary Fund. Previously, poor countries received aid mainly in the form of highly concessional loans.

"This should enable us to be more responsive and responsible as financiers," said Båge."

IFAD's member states have agreed to compensate IFAD for the value of principal repayments that are being lost as a result of the shift from loans to grants for some countries. The objective is for the new approach to have zero financial impact on IFAD.

Over the past 20 years, multilateral financial institutions have learned that high levels of external debt can severely hamper the poverty-fighting efforts of poor countries. The debt sustainability framework is the logical extension of the Debt Initiative for Heavily Indebted Poor Countries, which was launched by the World Bank and the International Monetary Fund in 1996 to make sure no poor country was saddled with an unmanageable debt burden. Since then, about US$35 billion of debt from 30 countries, mainly in Africa, has been forgiven.

The Debt Initiative for Heavily Indebted Poor Countries addressed existing debt. The aim of the debt sustainability framework is to look to the future and prevent the development of a lend-forgive cycle, while ensuring the poorest nations still receive the funds necessary to increase the pace of poverty reduction.