WASHINGTON, Jan 15: The World Bank is set to dramatically increase the amount of aid it issues in grants to its poorest borrowers, the lender said on Friday, amid US pressure and concerns over countries' debt burdens.

The United States - the bank's largest shareholder - has urged replacing loans with grants to help impoverished countries break a gnawing "debt cycle" of paying down loans and needing to borrow more funds.

World Bank Vice President Geoffrey Lamb told a forum on Thursday that major donors were close to an agreement on boosting grants to 30 per cent of the bank's poor country aid from a current 19 per cent.

The World Bank said the proposal would increase the grant allocation of its International Development Association, or IDA, that provides aid to 81 developing countries including 39 in Africa. IDA commitments totaled $7 billion in 2003.

The change would be effective on July 1. The bank as an institution has come to the judgment that it is very important to ensure debt sustainability in low income countries, Sona Varma, senior economist in the World Bank debt department, said in an interview on Friday.

We have realized that debt reduction is not sufficient and we need to do more. If countries are showing a high risk of debt distress then it makes sense to provide them funding on grant terms, she said.

While both non-governmental organizations and the United States have pressed for a major shift toward grants, some bank insiders fear it could bleed the institution's finances.

The World Bank's view is that the use of grants should be anchored in the assessment of countries' debt sustainability while preserving IDA's financial strength over time, World Bank spokesman David Theis said, responding to a question about the financial impact of shifting to grants.

The proposed increase in grant aid, if approved, is not expected to drain funds available for lending. Donors, who gather every three years to replenish the IDA funds, agreed at a December meeting in Greece to boost overall funding to IDA by 30 per cent.

From that pot, we worked out that these grants are something that we can provide, Varma said. She suggested more funds would be needed if the share of grants to loans were to rise significantly in the future.

In addition to increasing the share of grants in IDA, the World Bank said it was also possible that some countries could receive all of their funding in grants. There is currently a 40 per cent cap on how much countries can receive in grants instead of loans, which have a very low interest rate. Negotiations over changes to IDA's grant allocation are expected to conclude in late February. -Reuters