Short Notes on Foreign Loan

The loans obtained from official and private sources of foreign countries are called foreign loans which are granted for a period of 5 years or more. They are of two types, viz., (a) Hard loan, i.e. loans repayable in foreign currency; and (b) Soft loan, i.e., loans repayable in Indian currency.

i. International Monetary Fund (IMF):

The IMF has been set up with basic objectives of helping those countries which suffer from actuate balance of payment problems.

In order to tackle the problem the IMF has the following objectives:

(i) To promote international monetary co-operation through the funds which provide machinery for consultation;

(ii) To promote the growth and development of international trade by maintaining high levels of employments;

(iii) To eliminate exchange restrictions;

(iv) To promote exchange stability;

(v) To make the sources of funds available only when countries have problems/ difficulties in balance of payment position;

(vi) Also to prevent dis-equilibriums in balance of payment position between member countries.

Thus, the IMF serves an important role as an International Institution.

IMF Loans:

In order to overcome from a critical balance of payments position, the IMF provides short-term financial assistance to its members. Practically, the members (countries) do not borrow from the fund but buy other members currencies and gold with their own currency.

ii. Special Drawing Rights (SDRs):

It is used to settle balance of payment deficit In other words, to operate the system more smoothly; member countries are required to accept some proportion of SDRs in payment for their debts.

iii. The International Finance Corporation (IFC):

This Corporation grants credit to the private firms for which no Government guarantee is needed. Its object is to promote economic development with private capital and manage­ment. It helps the underdeveloped countries only. The rate of interest which is charged by the Corporation is higher than that charged by the World Bank Normally, the loan is repayable within a period of 12 years in the same currency.

iv. The International Bank for Reconstruction and Development (IBRD):

The International Bank for Reconstruction and Development (called IBRD or the World Bank) was established in order to give long-term loans to its member countries for their industrial development.

Its objects are:

(i) To facilitate international investment of capital for productive purposes in underde­veloped countries;

(ii) To help reconstruction work in countries damaged by war;

(iii) To develop the resources and the productive capacity of the backward and underde­veloped countries;

(iv) To promote balanced growth of international trade.

However, the main functions of the World Bank set out in its Articles are as follows:

(i) It grants long-terms and medium-terms loans.

(ii) It also grants loans to Governments as well as to private borrowers connected with industrial concerns.

(iii) It also gives technical advice.

(iv) The Bank promotes foreign investments by guaranteeing loans by other organisations.

(v) It has also set up a number of subsidiary organisations for the finance.

The rate of interest, however, ranges from 3% to 6% p a depending on the period of time Tor which the loan is granted.

v. Foreign Direct Investment (FDI):

Under the circumstances investments/borrowings are given directly to the country concerned.

vi. The General Agreement on Tariffs and Trade (GATT):

After Second World War (1945) in order to promote peace and economic prosperity through co-operative basis the international community established a number of institutions. Among them, the most significant and successful organisation and agreement is the General Agreement on Tariffs and Trade or GATT. At present, it has almost 100 member countries and accounts for 85% of international trade.

Its fundamental principles are:

(i) Countries should work to lower trade barriers as far as possible;

(ii) All trade barriers must be applied on non-discriminatory basis;

(iii) If any country increases its tariff above the agreed level, it must compensate its partner countries for the loss so sustained; and

(iv) If any trade conflict arises, the same must be settled by arbitration and consultation;

Under the agreement, the representatives of the major industrial countries gather themselves in order to identify trade barriers and negotiate the principles for its removal. In 1995, however the GATT was renamed as “World Trade Organisation” or WTO It will have increased its power to enforce international trade agreement.

One interesting point is:

GATT considers that subsidies on both domestic and exports goods must either be eliminated or reduced. It promotes the interest of less developed countries and the eliminations of tariffs on commodities of particular interest to the member countries.

It also encountered problems with non-tariff barriers and to set up economic blocks making preferential agreement Non-tariff barriers include Government agencies purchasing only from home firms or legislation that prevents imports.