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Monday, Jul 22, 2002

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Loans from multilateral agencies — Forex risk burden on States likely

Shaji Vikraman
Hema Ramakrishnan

NEW DELHI, July 21

THE going may get tough for States, which obtain loans from multilateral funding agencies, with a proposal now being mooted to shift the burden of meeting the foreign exchange risk on these loans to the States.

Simply put, States which are beneficiaries of sectoral loans from multi-lateral funding institutions such as the World Bank and the Asian Development Bank may well be required to meet the forex risk arising out of exchange rate fluctuations. Currently, the entire liability on this account is borne by the Centre.

An expert panel constituted by the Centre and chaired by Mr N.K. Singh Member, Planning Commission, has veered around to the view that the onus of meeting the forex risk should rest with States accessing funds from multilateral agencies.

Under the present dispensation, these loans are first routed to the Centre, which, in turn, on-lends them to States. The Centre routes 70 per cent of the amount as a loan and the balance 30 per cent as a grant.

Officials reckon that alternatives have to be found to contain the mounting debt servicing obligation of the Centre. "States, which access loans from multilateral institutions should at least fork out the forex risk on the grant component," said official sources.

Experts, however, maintain that such a proposal will not cut ice with States whose own financial position is precarious.

Currently, States, which intend accessing sectoral loans will have to route their proposals through a high-level committee constituted to monitor the States fiscal reform facility.

The panel, comprising representatives from the Finance Ministry, Planning Commission, Reserve Bank of India and State Government representatives, is essentially to be the "one-stop shop'' for clearing such proposals. This has been done to avoid the burden of the repayment of the loan from falling upon the Centre.

In fact, only last year the Finance Ministry shot down a proposal to allow State Governments to directly negotiate and access funds from multilateral agencies in view of their precarious financial position.

The total amount of World Bank loans sought by various States in 2001-02 and 2002-03 was $2.27 billion.

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