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Proposal to pre-pay over $600-m World Bank loans -- Govt bid to ease debt servicing burden

Shaji Vikraman

Harish Damodaran

NEW DELHI, April 23

THE Government's plan to pre-pay a portion of its past World Bank loans contracted at high rates is expected to lighten its future debt-serving burden, particularly towards 2003-04, when the $4.23-billion Resurgent India Bonds (RIB) are due for redemptio n.

The Finance Ministry has proposed to pre-pay over $600 millions worth of multi-currency World Bank loans contracted during the late 1980s at an average rate of above seven per cent.

Although the World Bank has rejected the Government's request to waive the one per cent penalty charge for pre-payment, the Finance Ministry, nevertheless, reckons that retiring some of the costly multi-lateral loans prior to maturity would confer annual savings of nearly $30 millions. The loans which the Government has chosen to pre-pay have a residual life of one to two years.

Depending on the market reaction to the initial $600-million tranche of pre-payment, the Government could consider going in for extinguishing more of such costly borrowings, officials said. Significantly, the Government only recently granted permission t o the Container Corporation of India to pre-pay the last two tranches of its loan contracted from the World Bank.

One of the options before the Government is to access the Samurai bond market in Japan, where interest rates are currently ruling at historic lows, to refinance some of the costlier World Bank loans.

The other _ more favoured _ option is to dip into the foreign exchange reserves for outright pre-payment of the loans.

Although the pre-payment route has not particularly pleased the World Bank _ which feels that retiring only costly loans tantamounts to ``cherry picking'' _ the Finance Ministry reckons that the strong reserves position, coupled with lower debt-servicin g levels, as of now, provides the ideal platform for undertaking such an exercise.

Pre-payment would also send out positive signals on the Government's external asset-liability management front, which may have a favourable impact on its sovereign rating.

India's foreign exchange reserves (exclusive of gold and SDRs) as on April 14 this year, stood at $35.36 billions _ an increase of $5.75 billions over the previous corresponding year. The current calendar year has itself witnessed a reserve accretion of $3.37 billions.

On the other hand, the country's external debt-servicing levels have declined sharply from a peak of $12.04 billions during 1995-96 to $10.73 billions in 1998-99 and an estimated $9.2 billions last year. These are expected to further fall to an average o f $8.5 billions in the coming few years, before the next ``hump'' of over $12.4 billions takes place during 2003-04, when the RIBs are due for redemption.

By pre-paying costly loans now when debt servicing levels are anyway low, the Government would be able to avoid a bunching of repayments in 2003-04, thereby smoothening the ``hump''.

The officials pointed out that while the World Bank loans were contracted at over seven per cent almost 15 years ago, the RIBs were raised at a more-or-less comparative average rate of 7.75 per cent, that too in a hostile post-nuclear blast environment.

Although a proposal was mooted earlier to pre-pay some of these World Bank loans _ on the lines of the pre-payment of IMF loans aggregating $1.5 billions in 1995-96 _ a prominent section within the Ministry thwarted the move.

As a result of pre-payment, the country's outstanding loans to the IMF have come down from $5.04 billions as of March 1994 to $133 millions in September 1999. Over the same period, the Government's outstanding non-concessional World Bank (IBRD) loans hav e come down only gradually, from $7.2 billions to $5.79 billions. This despite the country's interest-cum-repayment liabilities to the Bank far exceeding aggregate disbursements from it in recent years (see Table).

The fact that external reserves have risen sharply even in the face of negative net transfers on multilateral loans is a positive reflection on the Government's overall post-reform external sector management strategy, the officials noted.