Question

What are the pros and cons of conditional lending by the the International Monetary Fund?

Are the costs and benefits different in the short-run versus the long-run?

Answer 1

First of all we have to understand the term 'Conditional Lending' . When IMF sactions loads to any country on the basis of certain condtions it is called conditional lending. IMF looks for the economics condtion of the country , its budget deficit, borowing, repaying capacity,etc. Accordingly IMF decides on what conditionas loans will be sanctions. For example in 1991 Indian Economy was in huge finicial crises . There were huge borrowings , budget deficit was so high and inflation rate was of two dogits. Under certain circumstances IMF sanctioned 7 billon dollors loans through sanctions or conditions.

There are certain pros and cons of conditional lendings.

PROS

1. It provides immdiate releif to the meber country. Country would be able to solve its finacial crises up to certain extent.

2. If country is having budget deficit then this problem can be sorted out through IMF loans.

3.This loan can be used by the country for technical advanement and research which will help the country in the long run.

4. If country is having some old debt those can be repay with this loans.

5. It will increase money supply inthe market which will increase borrowing capacity of people and AD can increase.

CONS

1. Loans are always a liabilty for a country therefore they should be wisely used if they are not used properly it will lead to more trouble for a country.

2. If the loans are used for some non developmental purposes than they will create more finacial burden on the economy.

3. IMF condtions may include removel of susidies but its a goverment objectives to provide benifits to the certain segments of the socity. It will contradict the government obejectives.

4. If loand are not able to reduce to budget deficit then the purpose of taking laons will not be solved.

Cost and Benifit Analysis in the short run

1. If loans interest rates are lesser than the gain then they are more benificires in the short run. Problem of short term lending by domestic producers and be sorted out.On the contarary if heigher interest rates are charged by th IMF it will reduce the benifits.

2. In the long run IMF lendings are mmore helpful and cost will be less then the benifits. It will help to build infrastructure , promote innovations in the country, domestic producers will be more motivated therefore long terms bennifits are more.

But is all this discussion it is important to note that all the loans whhich are conditional basis must be properly used . It should not be used for non developmental purposes and remopveal or ommision of subsidies to the certain sections of the socity is must.