How Do All The Different Nations Borrow Money

By: Bill Darken
Submitted: 2007-01-17 16:23:56
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Just like people, nations can borrow money and just like us they also must repay their debts along with relevant interest!

But why can't all of the countries (nations) borrow money? Simply the same reason why individuals can't - their expenses are greater than their income in many cases. To cross the gap some countris try printing extra currency, raise debt and cut expenditure. Often a country combines the three to tackle its financials. This is not good practise however.

There are roughly three ways that a country can borrow money; one is by issuing bonds internally to its population, two is taking a loan from international entities like the World Bank or the Asian Development Bank.. and third is by undertaking loans from other countries.

Many governments issue Treasury Bonds and other Debt related Instruments which essentially means that the government is borrowing on behalf of the country or from their citizens. While most of these bonds are issued to cover the expenses of the government in some cases they are issued with some specific purpose like building infrastructure etc. Normally the bonds issued by governments are considered to be the safest way to invest money and so the interest rate is also the lowest. These bonds are bought and sold in the open market and their yields also fluctuate or vary.

The 2nd source of borrowing for countries is most often from institutions like the International Monetary Fund or the Asian Development Bank as mentioned earlier. Here, each country has to specify what the purpose of the funds are going to be and the inspectors from these institutions then visit the country to appraise the project. For example if a particular country wants to borrow money for building a Dam they will approach the international fund. The fund will then send their inspectors to appraise the project, see the viability and the benefits that are going to accrue to the people as a result of the project. They then determine the amount of the loan, tenure and the interest rate. Normally such loans are subsidized as they are for good causes.

This type of loan is not given out in a lump sum and money is released at different stages of the project and the repayment also normally starts at the end of a speciified time period - say 5 years or so. This provision is kept because the country is seeking the loan precisely because they do not have funds right away and the project being undertaken is for the benefit of the people. However 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 other nations. 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 with other nations generally to gain some form of economic or military advantage. For instance the US may decide to lend to Pakistan to fight 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 stated the cases of many debts being written off after a period of time without relationships getting strained is enough evidence to indicate that the lending country did not really expect to get it back. Other favors can be given in international forums like the WTO for economic reasons or for military reasons by providing a country’s airspace and land for having a military base.

These are the three main ways in which nations borrow and lend money to each other 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 behavior is quite similar to individuals and if you think about it long enough, you will find similarities even in your own life.

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