Question

List and explain three (3) ways/channels in which countries finance their development using international financial markets. Explain how the choice of these channels can affect the development prospects of a country.

Answer 1

Three ways/ channels :

1. Stabilization loans : IMF provides stabilization loans to poor and low income countries at concessional rates to carry out developmental activities. This helps in gaining access to easy credit.

2. International markets provide access to commercial banks across the world that help governments and large corporations to borrow large loans for higher tenure.

3. Equity markets : Large companies and governments can issue stock and bonds on international bourses enabling them to raise larger sums of money and also provide cheaper credit.

The countries must choose the appropriate channel based on the cost of the fund, the economic conditions, the revenues and expenditures it will incur in the future since repaying the loan is in the foreign currency which depends on the exchange rate on the date of repayment. Also, when governments raise it must consider the trade relations it has with the country it intends to raise money from.