China keeping financing terms secret is unacceptable

Mains Paper 1: Economy
Prelims level: China’s financing norms
Mains level: Important highlight of the China’s financing norms in the context of WTO regulations

Context

•  The threat is even greater when the secrecy is prompted by the less-than-lofty interests of a foreign government intent on getting its way.
•  A case in point is Chinese international development finance. China has become an important player in this area.
•  In principle, China’s massive savings, infrastructure know-how and willingness to lend could be great for developing countries.
•  Alas, Pakistan, Sri Lanka, South Africa, Ecuador and Venezuela have learned the hard way, Chinese development finance often delivers a corruption-filled sugar high to the economy, followed by a nasty financial (and sometimes political) hangover.

Secret financing terms became problem maker for other countries

•  As countries confront rising project costs and try to make sense of what happened, they find that the financial terms of their obligations have been contractually shrouded in secrecy.
•  The contracts impose constraints on the ability of borrowers to make the terms known to the government, let alone the public.
•  Many countries have made headway in shoring up their fiscal policies by adopting public-finance laws and budgeting practices to keep deficits under control. You would think this would be enough to keep a lid on debt accumulation.
•  After all, basic accounting implies that debt tomorrow is just debt today plus the deficit you run between today and tomorrow.
•  So, if you can control the deficit, you can control the growth of debt.

Comparison between government and non-government debt

•  An important way to distinguish between government and non-government debt is to determine whether the debt obligation is to be paid from future taxes or from the future cash flow generated by the project that is being funded with the loan.
•  But this distinction is often quite muddled, owing to guarantees, either explicit or implicit, that force the government to rescue the project ex post facto and repay the creditor fully or in part.
•  The outrageous version is based on the idea that this debt is not really debt, but just a pre-purchase of oil.
•  This claim is ridiculous, because debt is any obligation you take on today that you commit to repay with your future revenue.
•  Moreover, it is not just any old debt; it is debt collateralized by the future stream of exports, which makes it super-senior debt more senior than debt from entities with so-called preferred creditor status. Not counting it as debt is clearly outrageous.

Outcomes of the China’s Secret financing terms

•  China’s practice of keeping financing terms secret from the society that is ultimately responsible, and often from that society’s government, is beyond the pale.
•  Even the terms of renegotiation are secret, lest other borrowers use the outcomes as precedent.
•  A good argument reconciling secrecy in the context of public financial obligations with the public interest.
•  It is something that societies should not tolerate.
•  The fact that the terms of these massive obligations have not leaked to the public reflects how weak civil society and the press are in these countries.

Way forward

•  Credit rating agencies should demand to see the financing contracts.
•  If the agencies are rebuffed, the opacity of such practices should be reflected in their ratings.
•  The IMF and other multilateral creditors should condition loans on compliance with standards of transparency that would prevent this secrecy.
•  The Paris Club of major sovereign creditors should make the disclosure of the terms of Chinese or Russian loans a condition for debt restructuring.
•  Secrecy has a place in government, but not in international public-sector finance. It is a practice that needs to end before it does even more harm than it has already caused.

Prelims Questions:

Q.1) Consider the following statements about World Trade Organization (WTO):
1. It was established along with the United Nations in 1945.
2. It sets the rules for the global trading system and resolves disputes between its member nations.
3. It does not cover trade in services and others issues such as intellectual rights.

Which of the statements given above is/are correct?
(a) 1 and 3 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: B

Mains Questions:
Q.1) What do you mean by the term secrecy in government? What are its impacts on international public sector finance?