HT This Day: September 17, 1992 — India seeks $5 billion loan from IMF
According to IMF’s projections, the current account deficit of India in 1992-93 is expected to rise from US $ 3 billion in 1991-92 to US $ 6 billion as a result of casing of import restrictions
New Delhi: India has finally approached the international Monetary Fund (IMF) for a US $ 5 billion loan under a suitable mix of Extended Fund Facility (EFF) and Enhanced Structural Adjustment Facility (ESAF) over a three-year period beginning April 1993.
The Finance Minister, Dr Manmohan Singh, has cleared the draft Policy Framework Paper (PFP) for submission to the IMF and on the basis of this, effective negotiations will begin in October this year for converting the existing standby loan of US $ 2.2 billion into a fresh US $5 billion loan. The conversion process will be completed by March 31, 1993 and the new loan period will begin on April 1, 1993.
Out of the present standby loan of US $ 2.2 billion, it is estimated that $1.6 billion would be disbursed by the IMF within 1992-93 fiscal and this along with what was received by India in 1991-92, would amount to about $ 2 billion. So only a very small amount of the existing standby loan will be left to be disbursed after March 31, 1993 and that way the adjustment as a result of conversion of standby loan to EFF will be marginal.
The IMF has already told India that despite signs of strong recovery on the balance of payments front, the medium-term prospects are not optimistic due to the possibility of 50 per cent rise in import bill on crude oil and petroleum products in 1995 and India will need long-term balance of payments support from the international agencies, especially the IMF.
According to IMF’s projections, the current account deficit of India in 1992-93 is expected to rise from US $ 3 billion in 1991-92 to US $ 6 billion as a result of casing of import restrictions. Because the restoration of India’s access to commercial credit is likely to be a gradual process, the recovery of imports to normal levels will have to be achieved over a number of years, thus the projection is that during the mid-1990’s, there would be a temporary bunching of debt repayment obligations and over the next five years India will require an average of about US $ 5 billion each year to make scheduled payments on existing debt.
To finance the current account deficit projected for the next five years, India will need about US $ 10 billion in 1992-93 and about US $ 10 to 12 billion in each of the following four years. Despite the large repayments, the substantial inflow of official assistance required to support the current adjustment programme would raise India’s external debt from US $ 74 billion in 1991-92 to US $ 93 billion in 1996-97.
India is now entitled to get loans under ESAF and if the talks proceed according to India’s expectations, the mix will be US $ 1.4 to 1.5 billion under ESAF and the remaining US $ 3.5 billion under EFF. Under ESAF, the borrowing countries have to pay back loans over a 10-year period but have a five-and-a-half-year grace period before beginning payments. The interest rate of the ESAF loan is 0.5 per cent.
The PFP has to get full approval from the IMF and the World Bank and the paper contains quarterly benchmarks for all performances in key areas and the IMF is very strict on the fulfilment of the target. Twenty of the 72 eligible members currently use ESAF financing and almost $2300 million of the facility’s $3800 million in resources has been disbursed. The ESAF kitty is being enlarged and that is going to be of big help to India.
Under EFF, the three-year programme states policies and measures for the first 12 months in detail. Resources are provided in the form of extended arrangements that include performance criteria and drawings in instalments and repayments take place between four-and-a-half to 10 years. The interest rate is above 8 per cent.