EVALUATION OF THE EFFECT OF INTERNATIONAL MONETARY FUND (IMF) LOAN POLICY ON DEVELOPING ECONOMY
(A CASE STUDY OF NIGERIA)
ABSTRACT
This research work sought to evaluate the effect of IMF loan policy on developing economy with Nigeria as a case study. The statement of problem in this research work is the dysfunctional relationship between lenders and borrowers in international finance. The main objective of the study is to evaluate the effect of international monetary fund (IMF) loan policy on developing economy. The sources of data used are primary and secondary sources. The study revealed that the developed nations are using the fund to control the economy of the developing nations. Recommendations such as the establishment of a framework for dealing with international debt crisis and avoiding such crisis in the future were made.
CHAPTER
ONE
1.0
INTRODUCTION
Loans
from the International Monetary Fund (IMF) largely come with policy change
conditions attached – conditions that the IMF has played a significant role in
developing. Criticisms of the excessive burden and politically sensitive nature
of these conditions led to significant reviews at the IMF and the introduction
of some conditionality-free facilities, although these are limited in scope.
The IMF claims to have limited its conditions to critical reforms agreed by
recipient governments. However, the worrying findings of this research suggest
that the IMF is going backwards – increasing the number of structural
conditions that mandate policy changes per loan, and remaining heavily engaged
in highly sensitive and political policy areas.
1.1 BACKGROUND OF THE STUDY
The
International Monetary Fund (IMF) was conceived and nurtured at Bretton Woods
Conference (USA) in 1944 by representatives of forty-four (44) countries. These
countries include among others, United States of
America, Japan,
Canada, Britain and few
Latin American countries. The conference was called to discuss the
international trade and payment problems that were causing monetary upheaval
and inducing many countries to adopt protective and restrictive trade practices.
The conference was also called to reconstruct and restructure many European
economies, which have been ravaged by the Second World War.
Reconstruction
and restructuring a war-ravaged economy is extremely an expensive task. The
countries involved obviously could not foot the bill of such huge expenditure
without foreign assistance. The united
states of America was ready to protect these
European economies from communist temptation thus, quickly devised what came to
be known as the Marshal plan, which essentially brought in resources to finance
the reconstruction and restructuring programmes of the war ravaged Western
European countries. The United
States of America also considered it
necessary to establish a strong and lasting trading relationship and to
strengthen the relation and interest of alt the Western European countries.
Therefore,
to facilitate and promote such international trade, it was considered very
important to set up an international organization with adequate resources and
control to facilitate the payment and provide short-term balance of payment
facilities for countries suffering from balance of payment deficit caused by
temporary and non-structural economic dislocations. This conception gave birth
to international monetary fund as an institution suitable for this purpose.
When
the IMF was established in 1944 (World Bank Report 1996), most of the
developing countries were under colonial rule and their economies were simply
under imperial control with nothing but simple agricultural products and raw
materials which were regarded as products of imperial countries. The IMF was
therefore essentially set up to address short-term balance of payment deficit
of western industrial countries. The articles establishing IMP stipulated that
as developing countries are becoming independence they could join the IMF since
they might also experience short-term balance of payment crises for which they
could seek and perhaps get assistance.
1.2
STATEMENT OF THE PROBLEM
The
rise of IMF lending and crisis mediation since the early 1980s reflects, in
large part, the development of dysfunctional relationship between lenders and
borrowers in international finance. Referring the relationship requires that
moral hazard be reduced and that crises prevention and management be more
effective. The IMFs new initiatives to deal with crises, however are likely to
be ineffective. An approval based on greater reliance on two-party negotiation
holds more promise in stabilizing the international financial system than current
approach, in which the IMF too often becomes a burdensome third party.
1.3 OBJECTIVES OF STUDY
It
is obvious that economic problems of developing nations have consistently
defied solutions. This research work will focus attention on the evaluation of
the international monetary fund (IMF) loan policy on developing economy. To
achieve this, the following objectives will be pursued.
i.
To assess the various
IMF loan policies
ii.
To examine the impact
of IMF loan policies on developing nations
iii.
To analyze the challenges
faced by developing nation in accessing and paying back IMF loans.
iv.
To appraise
recommendation to be adopted by IMF and developing nation to reduce the adverse
effect of the various loan policies.
1.4
RESEARCH QUESTIONS
To
achieve the objectives of this study the researcher tries to find out solution
to the following research questions.
i.
What are the IMF loan
policies?
ii.
Has the IMF loan
policies any adverse effects on the economy of developing nations?
iii.
Has the implementation
of IMF loan any adverse effect on the economy of developing nations?
iv.
What is the variation
of the IMF loan policy from developed nations and the developing ones?
v.
What is your assessment
of the impact of IMF loan policies on developing nations?
1.5 RESEARCH HYPOTHESIS
H0:
IMF loan policy has negatively impacted on the economy of developing nations
H1:
IMF loan policy has positively impacted on the economy of developing nations
1.6 SIGNIFICANCE OF THE STUDY
This
project work will be of immense benefit in the following ways:
i.
Revamping the ailing
economy of developing nations.
ii.
The appropriate reform
of the IMF loan policies.
iii.
The study will also be
useful to those other countries wanting to borrow from the fund or seeking
other economic measures to revive their ailing economies.
1.7 SCOPE OF THE STUDY / LIMITATION
This
study covers the evaluation of IMF loan policies on developing nations. This is
a wide area to cover, but as a result of limited time and resources the
researcher deem it fit to reduce the scope of the study to Nigeria alone since the condition of Nigeria economy
and the impact of IMF loan policies is the same with other developing nations
of the world
In
carrying out this work the researcher encountered some problems. Apparently the
researches carried out in developing countries like Nigeria are usually inhibited by
inadequate data, this serve as one of t the major limiting factors. Lack of sufficient funds and the uncooperative
1.8
DEFINITION
OF TERMS
The following terms are frequently used in this work.
It is therefore necessary to offer definition for them with short explanation.
IMF: International Monetary Fund
Balance of
Payment: It is defined as the
statistical record of all economic transaction that take during a specific
period of time between the country resident and the rest of the world.
Bretton
World Agreement of 1944: this
articles of agreement adopted by the international monetary conference of 44
nations which met at Bretton Woods, New Hamspire, USA.
Capital
Flight: Illegal transfer of a country’s
foreign exchange earning into foreign personal account.
Debt services
used to ration: this is ratio
of debt to exhort of goods and services used to assess the ability to use
export to service external debt.
Development: This is a multifaceted concept. It measures changes
in the standard of living of people over time.
Economic
Development: This is one
aspect of development. It provides answers to such questions as: What has
happen to poverty? What has happen to the gap between the have and the have not.
Extended Fund Facility:
This is a fund that supports medium term programmes through extended
arrangement that generally run for three years (four years in exceptional
cases) and are aimed at overcoming balance of payment difficulties stemming.
Loan:
A business transaction between two entities whereby one party (the lender)
agrees to rent fund to the second party (the borrower). The fund may be rented
with or without a fee. This fee is called interest or discount.
Long-term debts: Are
liabilities that become due more than one year after the signal of the agreement?
Usually these are formal legal agreements demanding periodic payments of
interest until the maturity date at which the principal amount is repaid.
Monetary Policy: That
part of economic policy which regulates the level of money or liquidity in
order to achieve some desired policy objective such as control of inflation, an
improvement in the balance of payment position, high level of employment and
growth in the economy.
Monetary Reserve:
A member’s monetary reserves are its net official holding of gold of
convertible currencies of other members and he currencies of such non-member as
the fund may specified.
Structural Adjustment
Facility (SAF): Facility established by IMF to
provide financial assistance on concessional terms to low income earning
countries with balance of payment problem.
Structural Adjustment
Programme (SAP): an economic measure
aimed at revamping the economy. It is based on a policy of privatization and
commercialization of public utilities, removal of subsidies, liberalization and
self-reliance
Special Drawing Rights
(SDR): This is an international reserve asset
which is the official unit of account of the IMF which has also increasingly
serve as a substitute for gold in international
payments. The special drawing account was set up in 1969.
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