Reaching an early consensus on strengthening multilateral development banks (MDBs) and launching an alternative model for intercontinental infrastructure development through the proposed India-Middle East-Europe Corridor (IMEC) are two key takeaways from the Group of 20 (G20) meeting in New Delhi.
Together, the two initiatives could address some of the causes behind the global debt crisis and potentially create a framework to bail out debt-ridden countries. Both would bring significant strategic benefits to India vis-à-vis China.
MDB reforms are part of the Delhi Declaration. The panel submitted its first report in June. The final report is expected to be released before the chairman’s trip to Brazil next month.
Rio de Janeiro’s task is to shape it. However, some reforms – such as relaxing capital adequacy standards – may take effect sooner. This will pave the way for more funds to be released to emerging economies. India is keen on taking an early decision in this regard.
According to existing estimates, nearly 60% of low-income countries are either in debt distress or at high risk. A December 2019 World Bank report (“Global Debt Tide”) called it the “largest, fastest and most widespread” debt surge in 50 years.
The infrastructure boom in emerging economies over the past two decades, a lack of safe financing options and China’s debt-trap diplomacy are the main contributors to this mess.
Debt accumulation
If developed properly, infrastructure brings huge indirect benefits to the economy. However, it takes a long time to gest and has low direct returns, making it unsuitable for conventional private financing.
Low-cost financing from multilateral development banks played a leading role in the reconstruction of war-torn Europe and helped build infrastructure in the early stages of development in countries such as India.
As the pace and scale of infrastructure construction increases, financing from multilateral development banks fails to meet the requirements. Mature debt markets help developed countries attract investment from pension funds and narrow the gap.
Developing countries have yet to take full advantage of such tools. This was the main reason behind the surge in bad debts and liquidity crisis in India in the early part of the last decade. As a large economy, India is addressing these issues by introducing Infrastructure Investment Trusts (InvITs) and reviving development financing. However, smaller economies with weak financial infrastructure, such as Bangladesh, have declined due to easy Chinese finance.
China has provided unprecedented amounts of loans to smaller economies under its multinational Belt and Road Initiative. Countries borrowed beyond their means.
The infrastructure developed as a result is often prohibitively expensive, or is a white elephant – as is the case with Kenya’s railways.
When countries are in debt trouble, Beijing demands that a piece of land in the Maldives or Sri Lanka be pledged as collateral for a loan and be used for strategic purposes.
China cannot be blamed alone for this mess. They start an unholy rivalry and others join in. Reform of the multilateral development banks could solve part of the problem by channeling new funds to developing countries.
However, IMEC’s collaborative finance model could show the world a way out of China’s neo-colonialism and potentially create bigger and better trade links than the Belt and Road Initiative promises.
India, Iran and Russia have created the International North-South Transport Corridor (INSTC) through a cooperative model where participating countries pool resources.
IMEC is a bigger proposition. In addition to rail and shipping options, IMEC will provide power and energy (natural gas and hydrogen) pipeline connection options.
India, Saudi Arabia, the European Union, India, the United Arab Emirates, France, Germany, Italy and the United States signed a memorandum of understanding during the G20 summit to create the corridor.
The likelihood of success is high as IMEC relies on India’s thriving bilateral relations with Saudi Arabia, the UAE with Saudi Arabia, and the UAE and Israel to complete the project. Just like it successfully brought Russia and the United States to a consensus at the G20, India may also help IMEC establish ties with INSTC. It would facilitate trade over a vast area between the Caspian Sea and the Mediterranean Sea.
Most importantly, IMEC will provide debt-ridden Africa with new connectivity options without much additional cost and ensure better utilization of built assets.
Money is no longer so easy to make
Infrastructure investment is non-negotiable. While this will drive up demand for funds, there are certain constraints on the supply side.
Economic problems in China and Europe and a sharp rise in global defense spending are direct consequences of geopolitical tensions; will limit the flow of funds to poorer countries.
Clearly, the days of easy money are over. This requires smart spending and lending. Reforms of the G20 and multilateral development banks may solve some of the problems. The remaining problems must be alleviated by pooling resources.
The author is an independent columnist and researcher
