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(Reuters) - Myanmar has cleared its arrears to the World Bank and Asian Development Bank and secured a huge debt write-off by creditor countries grouped in the Paris Club, clearing the way for aid donors to step up work to support the government's reforms.
Since taking office at the head of a quasi-civilian government in 2011, Myanmar President Thein Sein has freed political prisoners, unmuzzled the media and begun to reform the economy with a new foreign investment law and an exchange rate determined more by market forces.
In response, Western countries have eased sanctions imposed on the previous military regime.
International financial institutions have offered technical help but have been prevented from doing more by debt arrears accumulated under the military, which, under their rules, stopped them offering new loans.
However, on Monday, the Asian Development Bank (ADB) said the arrears owed to it had been cleared with the help of Japan, so it could resume operations in Myanmar. It offered a $512 million (324.8 million pounds) loan for social and economic projects.
The World Bank said Myanmar had also paid the money owed to it, again with the help of Japan, and it had responded with a $440 million credit.
The government said in a statement it had met creditors grouped in the Paris Club on January 25 and they had agreed to cancel half of the arrears Myanmar owed them in two stages, rescheduling the rest over 15 years, with seven years' grace.
On top of that, Norway had cancelled all the $534 million owed to it, while Japan was cancelling more than $3 billion, it said.
"These agreements result in total debt relief of around $6 billion, that is, more than 60 percent of total debt," the government said.
Finance Minister Win Shein said in the statement this marked "an era of new relationships in which Myanmar is committed to fully cooperate with all members of the Paris Club". He promised that resources freed up by the debt relief would be used for development projects and poverty reduction.
The Manila-based ADB said bridge financing provided to Myanmar by the Japan Bank for International Cooperation (JBIC) this month allowed the government to pay off arrears to the ADB of about $500 million.
The World Bank, in its statement from Washington dated January 27, said its new loan would be used in part to "help the government meet its foreign exchange needs", which included repaying a JBIC bridge loan used to clear arrears.
The World Bank arrears had been put at about $400 million.
Japan, whose government and companies have been particularly active in the former Burma since it opened up, had said it would help with the arrears.
The ADB, which reopened an office in Yangon, Myanmar's commercial capital, in April 2012, said the clearing of arrears allowed it to provide its first loan to the country in more than 30 years.
Thein Sein's government has had to start practically from scratch in developing a modern economy. Reflecting that, the ADB said it would focus on "the building blocks for stability and sustainability".
Among other things, it would look at improving public finances and developing the finance sector.
The loan would be used to "finalise arrears clearance and sustain government efforts to revamp the national budget process and modernise tax administration", the ADB said.
"In rural areas, where development has been hindered by lack of infrastructure, restrictions on land usage, poorly developed support services and limited access to financial services for farmers, ADB funding will help develop a strategy to make banking services more widely available," it said.
The World Bank said its credit would support reforms to strengthen macroeconomic stability and to improve public financial management and the investment climate.
It said that, over the past year, it had opened an office in Yangon and brought in technical experts to help the government develop a broad development programme.
The government outlined a detailed programme at a big aid donors' conference in the capital, Naypyitaw, on January 19-20.
The World Bank said it had already provided an $80 million grant for improvements to rural infrastructure, including schools, health clinics, roads and irrigation schemes in about 640 villages across Myanmar over six years.
The International Monetary Fund said on January 17 the government had asked for its help to pursue reforms and craft economic policies so that Myanmar could become part of the global economy.
Additional reporting by Martin Petty; Writing by Alan Raybould; Editing by Richard Borsuk, Paul Tait and Jeremy Laurence