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ADB loans likely to cost more for India

R C Murthy in Manila, the Philippines

India will encounter a less-favourable Asian Development Bank from now on and will have to brace itself to receive resources that would be more expensive than at present.

The situation is bound to be so unless the next government resolves the nuclear tangle and the missile development issue.

On the eve of the crucial annual meeting of the financial institution, the Japanese government and all the Japanese nationals holding key positions at the ADB are tightening the screw on India.

A proposal of the new ADB chief, Tadao Chino, is to raise for India and China the cost of market interest-bearing resources from ADB's window called Ordinary Capital Resources.

The two Asian giants have closed ranks on the issue and are fighting, behind the scenes, the interest hike plan. India and China feel the ADB ought not to make interest hike a means of resource mobilisation for lending to small nations in the region.

The other avenues the ADB is exploring are:

• Recycling loan repayments.
• Extension of soft-loan window called Asian Development Fund, which gives loans to poorer nations at a reduced rate of less than three per cent.

Chino has kicked off the resource mobilisation campaign by asking donor countries to start discussions on the new facility ADF VIII, which succeeds ADF VII next year.

The projected amount of ADF VIII is in the range of $ 7-8 billion. The exact size will depend on the willingness of donor countries to fund and their own budgetary situation.

Japan is willing to fund but is constrained by its own domestic problems of reflating its economy and large sums needed to bail out its troubled banking system, which is plagued by large non-performing assets.

Western countries are afflicted with aid-fatigue and are preoccupied with problems in their backyard, the latest being Nato-run bombing of Yugoslavia. The US is focusing on troubled Brazil and Mexico, whose economies are in doldrums.

ADF VII was a $ 6.3 billion fund at the outset but shrunk to $ 4.7 billion because of fall in Japanese yen value over the past couple of years.

A substantial portion of $ 6.3 billion was yen-denominated, the contribution having come from Japan in its currency.

The resource crunch virtually dashed India's hopes, harboured at one stage, to access ADF as it has been doing with the International Development Association, the World Bank's soft-loan subsidiary.

Even market interest-bearing loans are difficult to come by from the ADB in view of the not-so-favourable attitude of Japanese nationals holding key positions at the ADB.

An initiative at the ADB to offer a financial sector reform loan for recasting the non-banking financial companies, was nipped in the bud by an ADB official, who happened to be a Japanese.

In February, when the issue of a loan to India came up before the World Bank board, the Japanese government along with the US abstained. Prior to that, the two had cast negative votes. Whether or not Japan will emulate that example at the ADB is to be seen over the next few days.

With a caretaker government in New Delhi, the Indian delegation is led by Finance Secretary Vijay Kelkar. But he cannot step into the realm of politics. The next government will have to tackle the problem in case Japan persists with negative vote at the ADB.

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