The Centre has decided to prepay another $1 billion of costly forex loans soon. It will also announce a policy to discontinue aid from most bilateral donors.

Finance ministry officials said the prepayments would largely comprise of the World Bank currency pool loans taken at an average interest rate of just above 5 per cent.

They said the move would implement the promise made by Finance Minister Jaswant Singh in the Budget for 2003-04 to "proactively liquidate the relatively higher cost component" of the country's external debt portfolio.

The officials said with the retirement of these loans, the ministry would also announce a policy to formally break the country's dependence on bilateral external aid.

They said the ministry was already in touch with several of the donor agencies to ensure that the new stance of the Centre was appreciated. With the exception of multilateral agencies, the Centre would accept aid from only four countries, including Japan and the Netherlands, they said.

In 2002-03, the government prepaid Asian Development Bank and World Bank loans worth about $3 billion. It has set a tentative target of prepaying about $9 billion of foreign loans in 2003-04 by taking advantage of the comfortable level of reserves and substituting the loans with those raised from the domestic market, where interest rates were soft.

The finance ministry had gone in for an additional domestic borrowing of about Rs 14,000 crore (Rs 140 billion) to finance the debt buyback from the ADB and the World Bank. The officials said the sum to be raised from the market this time was being worked out.

Singh had said in the Budget the government would like the smaller aid partners to channel their aid to NGOs because it did not need them any more.