Question

For each of the following situations, explain which of the policy issues discussed in this chapter relates to the stance the institution has taken.

a. The World Bank offers to make a loan to a company in an impoverished nation at a lower interest rate than the company had been about to agree to pay to borrow the same amount from a group of private banks.

b. The World Bank makes a loan to a company in a developing nation that has not yet received formal approval to operate there, even though the government approval process typically takes $15$months.

c. The IMF extends a loan to a developing nation's government, with no preconditions, to enable the government to make already overdue payments on a loan it had previously received from the World Bank.

Short answer

(a) The World Bank has interfered with the operation of private credit markets by extending the company a lower credit rate, despite the fact that the company had already qualified for alternate funding at market interest rates.

(b) Because the company lacks permission to operate in the country, the World Bank has committed funds to dead capital.

(c) The moral hazard issue in this situation stems from the fact that the International Monetary Fund (IMF) has removed the recipient government's incentive.

Step-by-step solution

Introduction.

The International Monetary Fund (IMF) is an international organization with a variety of objectives. Reduce global poverty, promote international trade, and promote financial stability and economic growth are among these goals.

Reason for pay to borrow the same amount from a group of private banks (part a).

The World Bank has interfered with the function of private credit markets by extending a lower credit rate to the company, despite the fact that the company had already qualified for alternate funding at a market interest rate. This also provides an incentive for the company to borrow at market rates for less efficient investments.

Reason for the World Bank makes a loan to a company in a developing nation (part b). 

The World Bank has committed funds to dead capital because the company does not have permission to operate in the country. Furthermore, the opportunity cost applies because the alternative opportunities for a return on investment are now locked up in dead capital.

Cause of the IMF extends a loan to a developing nation's government, with no preconditions (part c).

The country is robbing Peter to pay Paul in this case. The moral hazard issue in this situation stems from the fact that the International Monetary Fund (IMF) has removed the recipient government's incentive to implement reforms that will allow it to repay this and future loans.