Building an early consensus on strengthening multilateral development banks (MDB) and launching an alternative model for inter-continental infrastructure creation through the proposed India-Middle East–Europe Corridor (IMEC), are the two major takeaways of the G20 session in New Delhi.
Together, the two initiatives may address partly the reasons behind the worldwide debt crisis and may create a framework to bail out debt-ridden nations. Both will bring major strategic benefits to India vis-à-vis China.
MDB reform is part of the Delhi Declaration. The expert group submitted the first report in June. The final report is expected next month before the presidency goes to Brazil.
It would be the task of Rio de Janeiro to give it shape. However, part of the reforms — like relaxing the capital adequacy norm — may come into effect sooner. It would pave the way to release more funds to the emerging economies. India is keen for an early decision in this regard.
According to available estimates, nearly 60 per cent of low-income countries are either in debt distress or at high risk. A December 2019 World Bank report (‘Global wave of debts’) put it as the “largest, fastest, and most broad-based” debt surge in five decades.
The infrastructure rush in emerging economies over the last two decades, inadequate safe financing options and China’s debt-trap diplomacy are major reasons behind this mess.
If rightly developed, infrastructure brings tremendous indirect benefits to the economy. However, the long gestation and low direct returns make it unsuitable for regular private finance.
Low-cost MDB finance played a lead role in the reconstruction of the war-ravaged Europe and helped infrastructure building in countries like India in the early phase of development.
As the pace and size of infrastructure building increased, MDB finance fell short of the requirement. The matured debt market helped the developed world to attract investment from pension funds and mitigate the gap.
Such instruments are not adequately available in the developing world. This was the prime reason behind the bad debt surge and liquidity crisis in India, early in the last decade. As a large economy, India is resolving those issues by introducing infrastructure investment trusts (InvIT) and reviving development finance. However, smaller economies (like Bangladesh) with weak financial infrastructure fell for easy Chinese finance.
China offered an unprecedented amount of loans to smaller economies under the transnational Belt and Road Initiative (BRI). Countries borrowed way beyond their means.
The infrastructure thus developed is often inexplicably costly or white elephants — like the railroad to nowhere in Kenya.
When nations became debt-strapped, Beijing demanded a piece of the Maldives or Sri Lanka, mortgaged against loans, for strategic use.
China cannot be blamed alone for the mess. They initiated an unholy competition and, others joined in. The MDB reforms can address part of the problem by channelling fresh finance to the developing world.
However, it is the collaborative finance model of IMEC which may show the world an escape route from China’s neo-colonialism and may set up bigger and better trade links than promised by BRI.
India, Iran and Russia have already created the International North-South Transport Corridor (INSTC) through the collaborative model, where participating countries pooled resources.
IMEC is a bigger proposition. Apart from rail and shipping options, IMEC would also offer electricity and energy (gas and hydrogen) pipeline connectivity options.
India, Saudi Arabia, European Union, India, the UAE, France, Germany, Italy and the US have entered an MoU, on the sidelines of the G20 summit, to create the corridor.
The possibility for success is high as IMEC banks on India’s thriving bilateral relations with Saudi Arabia, UAE have healthy bilateral relations with Saudi Arabia, UAE and Israel to get the project through. Like its success in bringing Russia and the US to a consensus at G20, India may also help IMEC connect with INSTC. It would help trade in the vast region between the Caspian and the Mediterranean seas.
Most critically, IMEC would open new connectivity options to debt-ridden Africa without much extra cost and ensure better utilisation of assets already built.
No more easy money
Investment in infrastructure is non-negotiable. While that would push the demand for funds upwards, there are definite constraints on the supply side.
The economic problems in China and Europe and the dramatic rise in defence expenditure worldwide as a direct fall out of the geopolitical tension; would limit the fund flow to poorer nations.
Clearly, the days of easy money are over. That calls for both judicious spending and lending. G20 and MDB reforms may solve part of the problem. The rest has to be mitigated through pooled resources.
The writer is an independent columnist and researcher