Editorial 1. Paris Club
Context: Paris Club likely to provide financial assurances to IMF on Sri Lanka debt: What is this grouping?
What is the Paris Club?
- The Paris Club is a group of mostly western creditor countries that grew from a 1956 meeting in which Argentina agreed to meet its public creditors in Paris. Their objective is to find sustainable debt-relief solutions for countries that are unable to repay their bilateral loans.
- It describes itself as a forum where official creditors meet to solve payment difficulties faced by debtor countries. All 22 are members of the group called Organisation for Economic Co-operation and Development (OECD).
- The members are: Australia, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, the United Kingdom and the United States.
How has Paris Club been involved in debt agreements?
- According to the information on its website, since its beginnings, the Paris Club has reached 478 agreements with 102 different debtor countries. Since 1956, the debt treated in the framework of Paris Club agreements amounts to $ 614 billion.
- It operates on the principles of consensus and solidarity. Any agreement reached with the debtor country will apply equally to all its Paris Club creditors.
- A debtor country that signs an agreement with its Paris Club creditors, should not then accept from its non-Paris Club commercial and bilateral creditors such terms of treatment of its debt that are less favourable to the debtor than those agreed with the Paris Club.
The role of the Paris Club over time
- The Paris group countries dominated bilateral lending in the last century, but their importance has receded over the last two decades or so with the emergence of China as the world’s biggest bilateral lender.
- In Sri Lanka’s case, for instance, China, Japan and India are the largest bilateral creditors. Sri Lanka’s debt to China is 52 per cent of its bilateral debt, 19.5 per cent to Japan, and 12 per cent to India. With Japan a member of the Paris Club, Sri Lanka needed assurances from China and India as well.
- The Paris Club had tried to get both countries on board a centralised effort, but Delhi launched its own bilateral negotiations with Colombo. Last month, during a visit to Colombo, External Affairs Minister S Jaishankar announced that India had written to the IMF providing the necessary financial assurances, adding that it hoped others would follow suit.
- The reported readiness by the Paris Club comes against this background. That still leaves China, whose Exim Bank offered a two-year moratorium on its loans soon after the Indian announcement.
- This has been deemed to be insufficient. Victoria Nuland, the US under-secretary of state who is touring Sri Lanka, said the Chinese offer was “not enough”. The IMF has not commented on the Chinese assurance, but described the Indian submission as a “good development”.
Editorial 2. A Time to Pause
Context: Signals from central banks across the world suggest the rate hike cycle is nearing its peak. RBI must tread cautiously
Central Banks in the past week.
- Over the course of this week, central banks across major developed economies have continued to raise interest rates in their fight against inflation.
- On Wednesday, the US Federal Reserve raised the benchmark interest rate by 25 basis points. On Thursday, the Bank of England increased interest rates by 50 basis points to a multi-year high of 4 per cent.
- Also on Thursday, the European Central Bank raised interest rates by 50 basis points.
- However, with data pointing towards a softening of prices, the commentary accompanying the policy announcements suggests that, globally, the monetary policy tightening cycle may be nearing its peak.
Clear Signals
- After hiking interest rates by 75 basis points in four consecutive meetings, the US Fed has in the last two meetings slowed the pace of its rate hikes. And inflation in the US has begun to trend lower — the consumer price index rose 6.5 per cent in December, down from the high of 9.1 per cent in June.
- This indicates that while the fight against inflation is not yet over, the terminal rate — at which central banks will stop hiking and take a pause — is approaching.
- In a similar vein, even as the European Central Bank said that it “intends” to raise interest rates by another 50 basis points at its March meeting, the outlook for inflation is improving. Headline inflation dipped to 8.5 per cent in January, down from 9.2 per cent in December.
- The Bank of England’s latest forecast also expects inflation to ease from 10.5 per cent in December to less than 4 per cent by the end of the year, dropping below the target of 2 per cent in 2024.
What should India do?
- Early next week, the monetary policy committee of the Reserve Bank of India will meet for the first time in this calendar year.
- Recent data released by the government shows that headline retail inflation has stayed below the upper threshold of the inflation targeting framework for two consecutive months.
- The Union budget has also stuck to the path of fiscal consolidation. The benchmark 10-year government bond yield has softened since its presentation, indicating that the markets are comfortable with the new fiscal’s sovereign borrowing programme.
- As monetary policy acts with a lag, a pause at this juncture would allow for the implications of the rate hikes carried out so far to be observed across the broader economy.
- While it is possible that the MPC may choose to opt for another rate hike, the growing dissent within the committee suggests that the rate hike cycle in India is also nearing its end.
Monetary Policy Committee: - Basics
- The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC.
- MPC is tasked with framing monetary policy using tools like the repo rate, reverse repo rate, bank rate, cash reserve ratio (CRR).
- It is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility