India may solve Venezuelan defaults
The Commerce Ministry has proposed a mechanism to address the issue of non-payment of dues by Venezuelan importers to Indian exporters. Sources in the government told that the ministry had recently written to the Venezuelan government to resolve the issue of payment defaults. However, Venezuela has not given its approval to the proposed payment mechanism. Talks on the issue will soon be held with the RBI.
Oil slip
Venezuela, an economy that relies on oil exports, has been severely hit by a drastic fall in oil prices. This has in turn resulted in the value of the Venezuelan currency plunging to record lows and a high demand for dollars. India’s goods exports to Venezuela in 2014-15 were $258 million (registering a 31 per cent year-on-year growth).
Owing to the crisis in Venezuela, India’s exports in FY16 (April-February) have touched only $125.5 million. India shipped mostly pharmaceutical products which amounted to $143.55 million in FY15 and $71.3 million in FY16. The sector is the worst affected due to the payment defaults.
Under the proposed payment mechanism when Indian importers pay for oil and other imports from Venezuela, a certain portion (say around 30 per cent) of the payment will be held by an Indian public sector bank, say SBI, in Venezuela.
Then through a vostro account that money will be kept in SBI’s Mumbai branch and converted to Indian rupees. (‘Vostro’ is an Italian term meaning ‘yours’, and vostro account refers to holding ‘your’ money or Venezuela’s money in this case.)
When India’s exports to Venezuela, the Venezuelan buyer (importer) will certify that they have received the goods and instruct the concerned Venezuelan bank to release the payment to the concerned Indian exporters. This instruction will be passed on to SBI-Venezuela and then to SBI-Mumbai. Finally, SBI-Mumbai will release the payment to Indian exporters by debiting from the vostro account.
The sources said due to the fear of losing the Venezuelan market to competitors from other countries including China, India’s exporters including from the pharmaceutical sector have decided to hold on for the moment despite the payment problems.
They said the discussions at the RBI-level would take into account a few concerns.
The trade balance is still hugely in Venezuela’s favour.
Though India’s goods imports from Venezuela in 2014-15 were worth $11.7 billion, most of this ($11.6 billion) were oil imports.
During FY16 (April-February), India’s imported goods worth $5.2 billion from Venezuela, but nearly all of it was oil imports. So if even 30 per cent of around $10 billion worth (annual) payment — for imports ($10 billion is the average of the five years leading up to FY15) from Venezuela — is kept annually in the vostro account, it will be a huge amount considering India’s annual exports to Venezuela have not even crossed $260 million so far.
Therefore, if Venezuela withdraws the remaining amount (after paying for India’s exports) in one go after a few years, it could have some impact on the Indian rupee, the sources said.
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