WB to lend for debt swapping

To provide loan at 5% interest rate to Andhra for replacing high-cost loans

Sharing the Andhra Pradesh government's concern over its growing interest burden, the World Bank has expressed its readiness to extend loans for debt swapping.

According to senior government officials, the multi-lateral lending agency will provide loan to the state for replacing the high-cost loans at 5 per cent interest rate, as is the case for all new loans, on back-to-back basis.

Andhra Pradesh has a total debt stock of Rs 75,000 crore (about $ 15 billion) and it spends about 36.5 per cent of its own revenues towards interest payments annually.

The state government officials have sought loan from the World Bank to replace the high-cost Power Bonds issued in the past at 13 per cent rate of interest amounting Rs 15,000 crore to which the bank officials responded positively, officials told Business Standard.

Besides asking for help to reduce the interest burden, state chief minister Y S Rajasekhara Reddy, during his meeting with the visiting World Bank president Paul D Wolfowitz had also sought fresh loan assistance of about Rs 16,000 crore for various projects in power, irrigation and other sectors. Some of the proposals have already been sent to the Government of India seeking loan from the World Bank.

According to officials, of all the proposals submitted by the state government, the World Bank itself is keen to fund $1,200 million HVDS (high voltage distribution system) project in energy sector.

The chief minister is also said to have requested the World Bank president to reduce interest rates on future loans. The state government wants to raise huge loans to fund its ambitious irrigation projects, which will further increase the interest burden on the state.

With regard to old external loans, the state government services 70 per cent of the loan component at 9 per cent rate of interest while 30 per cent comes as a grant from the Government of India.

The 12th Finance Commission has recommended for the back-to-back arrangement on all future external loans to states while reducing the role of Government of India as a mere guarantor. Hence, all new loans from the World Bank will come at between 4.5 per cent and 5 per cent rate of interest.

In the back-to-back arrangement, state governments will have to bear the risk of foreign exchange fluctuations.