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The Resignation of IMF Chief, and Western Dominance in IFIs

Christine Lagarde, IMF’s Managing Director, resigned this month after she was nominated to head the European Central Bank. She previously served as France’s finance minister during 2007-2011. This year, Lagarde’s exit from IMF is the second resignation of top officials of IFIs. Jim Yong Kim, World Bank’s president, had resigned to join private equity firm in January.

The resignation of Ms Lagarde, whose term was till July 2021, has reignited debates on her successor as the next IMF Managing Director. Though, the IFIs speak of inequality and democratic governance, when it comes to the appointment of their heads practice a protocol of appointing a European and US citizen as the head of IMF and World Bank respectively. This becomes possible due to their majority shares in the IMF and World Bank. They have used this privilege to exclude other countries from heading these organisations. There is a ‘Gentleman Agreement’ between the US and Europe, according to which Europe supports a the US candidate for World Bank, and US supports a European for the IMF chief.

Civil society organisations have been demanding an open merit-based and transparent process in the selection of the heads of Financial Institutions. However, these voices have fallen in deaf ears. This was evident in the case of the election of World Bank president which dumped the open merit based transparent in favor of US candidate and European support for the same.

The European countries have not yet reached on a consensus for the candidate. Media reports indicate that the likely candidates could be outgoing governor of Bank of England Mark Carney, former chancellor in the David Cameron government George Osborne, and former Dutch finance minister Jeroen Dijsselbloem. The name of Raghuram Rajan, former governor of Reserve Bank of India, has also been recently in the news as a possible candidate after British foreign affairs committee chairman Tim Tugendhat’s wrote a letter to foreign secretary Jeremy Hunt.

Seventy-five years after Bretton Woods Institutions were born, the realities of the world are different. The emergence of new financial institutions, particularly from the south like the AIIB and NDB, has challenged the once exclusive domain of Bretton Wood Institutions. The option before them is to reform/restructure not just in terms of their governance but also their neoliberal orientation, which suffered a jolt with the global financial crisis. A genuine start will be with the election of a new MD from the global south who is oriented towards the issues of poverty, inequality and climate change.

India Budget and Dollar-denominated Sovereign Bonds

The Finance Minister of India in her budget speech announced that the government would start raising a part of its gross borrowing from external markets and in foreign currencies. Though India’s sovereign debt is less than 5 per cent, there is a huge internal debt. Currently, most of the external debt is from concessional loans from IFIs or Bilateral institutions.

The announcement of raising finance through external borrowings got severely criticized by economists, including two former governors of the RBI. It is also being pointed out that India has never gone never gone never issued, even during the balance of payment crisis in 1990, Sovereign Bonds in the global market in external currencies. The external commercial bonds are dollar-denominated, and if the rupee depreciates due to external issues, there are high chances that we get into massive debts. Former RBI governors C. Rangarajan and Raghuram Rajan have viewed the plan with scepticism, with the latter saying that foreign currency debt has no real benefit and is fraught with risks.

Rathin Roy, a member of the Prime Minister’s Economic Advisory Council, has called for a discussion on the sovereign bonds. Citing examples of Brazil, Argentina, Turkey, Greece and Indonesia, he pointed out that any country that adopted this policy in the last 70 years paid dearly for it. Roy has raised concerns on the grounds of economic sovereignty and the macroeconomic consequences.

The increase in exposure to external borrowings will have a disastrous effect. India was insulated from the global crisis as it was not integrated with the global economy. These measures will decrease our advantages, and gradually with the lure of availability of more finance, there could be indiscriminate borrowing as we have seen within the country and subsequent NPAs. The pressure to pay back in dollars, which cannot be printed by the RBI will result in pressure for quick outputs often at the cost of local democracy.

State Partnership by World Bank – The Kerala Development Policy loan

Kerala became the first state to enter into a state partnership with World Bank based on their new Country Partnership Framework   2018-22. The partnership is for a development policy loan of USD 500 million (Rs 3500 crore).  The support will be for Resilient Kerala Initiative to enhance the state’s resilience against the impacts of natural disasters and climate change.

The loan is in context of rebuilding Kerala after the 2018 flood which destroyed property, infrastructure, and the lives and livelihoods of people. The loan is given under the development policy loan facility, which contains conditionalities with an impact on not just the project but the overall governance itself. According to a study conducted on the development policy operations of the world bank for the year 2017, it was found that there were about 503 conditions for 53 DPOs. The study also found World Bank’s strategic approaches and ideological preferences, including its private finance first approach reflected it in the loan conditions.

The loan conditions for the Resilient Kerala Initiative are given in the program document, which spells out prior actions and triggers for the program. The prior actions are pre-disbursement conditions, whereas the triggers are planned actions that will become the basis for establishing the prior actions for later operations.

In the loan, the prior actions, among others are introduction of a new flood cess, establishing a cross-sectoral State-level committee to draft a River Basin Conservation and Management Authority Act, establishing a River Basin Conservation and Management Authority, establishment of five agroecological zones, and the reorganization of the Agriculture Department along agroecological zones etc.

The Chief Minister of Kerala has said that some of the work with this loan will involve strengthening water supply and sanitation services and their resilience to disasters and impacts of climate change, reorganising network of core roads, and awarding performance-based contracts to insure roads against damage, establishing a committee to revise the master plans of cities, opening green corridors across the state, among others.

The loan conditionalities do not limit to these changes. They direct the government of Kerala on the share of the budget allocated for the core road network. Surprisingly, the conditionality is also about reduction in Non-Revenue water and recovery of O&M costs.

One does not know how cost recovery and reduction of non-revenue water, the arguments which World Bank has been pushing leading to water privatisation in many cities, have crept into this loan conditionality.

Furthermore, if one wonders why a communist  chief minister went to London Stock Exchange to ring its opening bell in the and why Kerala Infrastructure Investment Fund Board has become the first state-level firm in India to be listed on the London Stock Exchange. It is in line with the conditionality target agreed in the development policy loan to mobilise USD 500 million of public and private finance through cess, masala and Diaspora bonds to finance the recovery of resilience programs.

The Bond sale was challenged by the opposition in Kerala Assembly for the lack of transparency and clarity and for pushing the state into a debt trap. Congress legislator K S Sabarinathan, who moved an adjournment motion over the issue, said the interest rate of KIIFB’s masala bonds was 9.72 per cent, the highest of 44 such bonds listed at the LSE in the last two years. However, it can now be assumed   that the government has taken this step based on the World Bank condition.

Kerala has willfully given its policymaking to World Bank by accepting this development policy loan and what is ironic is that it is being done when the communist government is in power.

Other Loans by Financial Institutions

  1. The Asian Infrastructure Investment Bank (AIIB) will give a $100-million loan to L&T Infrastructure Finance Company for wind and solar infrastructure projects in India. This is the first time AIIB is extending a loan to a non-banking finance company.
  2. India signs a Loan Agreement of $328 Million with the World Bank for Improved Health Services in Andhra Pradesh.
  3. India signs a Loan Agreement worth US$ 400 Million with the World Bank to help Treat and Eliminate Tuberculosis from the country.
  4. India signs a Loan Agreement of US$ 250 Million with the World Bank to develop 766 kms of Rajasthan’s Roads and Highways.
  5. India signs Loan Agreement with the World Bank for USD 31.58 Million for Uttarakhand Public Financial Management Strengthening Project.
  6. World Bank approves $147 Million Loan to the Government of Jharkhand for the implementation of Jharkhand Municipal Development Project.
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