Why is India concerned about lending programme of IMF, WB for poor nations?

Eleven nations have signed a note where they have argued against the Bank taking on the responsibility to lend more, thereby raising interest costs for the borrowers

More than the virtual meeting of the International Monetary Fund (IMF) and the World Bank with most of the G20 countries held last week to hammer out a new debt relief package for the poorest countries, more action is now expected backstage.

President of the World Bank David Malpass surprisingly announced last week he will quit by June 30. On Monday, the Financial Times ran a story saying developing nations including India have reasons to be unhappy with his departure. Eleven nations including India, China, Brazil, Saudi Arabia, and Russia have signed a note where they have argued against the Bank taking on the responsibility to lend more, thereby raising interest costs for the borrowers. The lending programme will be supported by the USA, which has seen this as necessary to expand its role in, especially Africa.

The meetings are the first in a series supposed to be held to find common grounds for debt relief for the countries in most distress.

On Monday, in a surprise move, India replaced its executive director at the World Bank, Rajesh Khullar before his term ended with Parameswaran Iyer, the CEO of NITI Aayog, who was just seven months into his job. Though the executive director does not have any direct administrative role at the Bank, Iyer, perceived as close to Prime Minister Narendra Modi, will sit on the Executive Board that will choose the successor to Malpass.

Last week, US Treasury Secretary Janet Yellen noted she expects the Executive Board to be “running a transparent, merit-based and swift nomination process for the next World Bank President”. The choice of words is “significant”, said an Indian government official, aware of the developments.

Traditionally, it is a USA-supported candidate who becomes the World Bank President. Malpass was supported by former US President Donald Trump. The IMF chief is similarly chosen as a candidate supported by the European Union.

USA is keen that using its AAA rating the World Bank should expand its purse to lend to counter climate change and the mounting debt burden. The offerings are supposed to help mostly African, Indian, and Pacific Ocean island countries. It also wants the IMF to follow a similar path.

But the eleven signatory countries have argued that if the Bank raises more debt from the international market, it will lose the coveted AAA rating. The high rating allows the Bank to keep the interest cost low on the loans it gives countries, for a huge raft of economic needs including both hard and soft infrastructure.

Yellen has said she looks forward to the World Bank “expanding our capacity to combat climate change, improve public health, and address conflict and fragility in the pursuit of ending poverty and advancing prosperity”.

India has reasons to be concerned about how the multilateral institutions place their money, as more nations in the subcontinent are falling into massive debt traps, needing IMF bailout.

A public finance economist explained that there is very little possibility that the commercial lenders to any of these countries will agree to a haircut. Sri Lanka defaulted on a commercial debt of $78 million in April last year and since then has found it increasingly difficult to raise money to service subsequent obligations. Pakistan is perilously close. “In these circumstances, the only access to forex by these countries is money from multilateral institutions”, the economist said.

Global debt is 247 per cent of world GDP, according to the IMF Global Debt Monitor released in December 2022. The choices for reducing this pile are not many.

India, for instance, has asked China to take a haircut on the debt it has extended to a large number of countries. If it does so that will be a big relief for Pakistan, Sri Lanka, and Bangladesh, all of whom have gorged on Chinese largesse.

The appeal is likely to be made through the Paris Club, an informal group of mostly western creditor nations. The members have of late begun to reach out to both China and India like in the case of Sri Lanka. Post the Covid pandemic, public debt has often surpassed other priorities including vaccine support and climate mitigation to become the biggest challenge for the multilateral institutions.

Early this year, S&P Global issued an estimate saying that the current round of interest rate rise by most central banks could cost global borrowers $8.6 trillion in extra debt servicing costs. “Rising interest rates and slowing economies are making the debt burden heavier. To mitigate the risk of a financial crisis, trade-offs between spending and saving may be needed”, the estimate noted.

On Monday again, in New Delhi, Commerce and Industry Minister Piyush Goyal met Citibank global CEO Jane Fraser to explore ways to make the bank take the plunge again in India, in a larger way. The bank has exited from its retail business in India in the past two years. Goyal issued a Tweet after the meeting saying they “deliberated on ways for the bank to align more closely with India’s banking sector needs with a focus on leveraging digital technology…” This could happen much earlier than the IMF and the World Bank finds out ways to lessen debt in the poorest countries.