Exactly like people, nations can borrow money and just like us they also must pay back their debts along with relevant attention!
But why can’t all of the countries (nations) borrow money? Simply the exact same reason why individuals can’t – their particular expenses are greater than their income in many cases. To cross the space some countris try printing additional currency, raise debt and reduce expenditure. Often a country combines the three to tackle its financials. This is simply not good practise however.
There are roughly three ways that a country can borrow money; one is by providing bonds internally to its populace, two is taking a loan through international entities like the World Financial institution or the Asian Development Bank.. plus third is by undertaking financial loans from other countries.
Many governments issue Treasury Bonds and other Debt related Instruments which essentially means that the government will be borrowing on behalf of the country or from their citizens. While most of these bonds are issued to cover the expenses from the government in some cases they are issued which includes specific purpose like building infrastructure etc . Normally the bonds issued by governments are considered to be the most secure way to invest money and so the interest rate is also the lowest. These bonds are usually bought and sold in the open market and their particular yields also fluctuate or differ.
The 2nd source of borrowing for countries is most often from institutions like the International Monetary Fund or the Hard anodized cookware Development Bank as mentioned earlier. Right here, each country has to specify the actual purpose of the funds are going to be and the inspectors from these institutions then go to the country to appraise the task. For example if a particular country would like to borrow money for building a Dam they will approach the international fund. The fund will then send their own inspectors to appraise the task, see the viability and the benefits that will accrue to the people as a result of the project. They then determine the amount of the particular loan, tenure and the interest rate. Normally such loans are subsidized because they are for good causes.
This type of loan is not given out in a lump sum plus money is released at various stages of the project and the repayment also normally starts at the end of the speciified time period – say five years or so. This provision can be kept because the country is seeking the loan precisely because they are deprived of funds right away and the project getting undertaken is for the benefit of the people. Nevertheless this does not mean that interest does not accrue on that amount for that time period. Interest keeps on accruing which has to be paid later.
A 3rd way in which nations borrow money is by borrowing it from all other nations.
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Normally, this is also carried out with some specific purpose in mind and is reasonably well subsidized which means that the interest rates are lower than normal. Nations do this to develop strategic ties to nations generally to gain some form of economic or military advantage. For instance the united states may decide to lend to Pakistan to battle terrorism or India may lend to Bangladesh to tackle floods because it’s a neighbor. More than simply financial aid, when nations lend to each other it’s very often a signal of goodwill and political diplomacy. In political diplomacy there is always give and take and unlike the case of individuals, where if one borrows money one is expected to repay, here the beneficiary country can repay in other ways as well. While all this is never clearly mentioned the cases of many debts being written off after a period of time with no relationships getting strained is enough evidence to indicate that the lending country failed to really expect to get it back. Other favors can be given in global forums like the WTO for financial reasons or for military reasons by providing a country’s airspace and land for having a military bottom.
These are the three main ways in which countries borrow and lend money to one another or from their own citizens or international agencies. While in some cases they have to borrow to maintain their expenditures at other times it is to take care of some special needs like an emergency or some other project. You will notice that most of the above actions are quite similar to individuals and if you consider it long enough, you will find similarities even in your own life.