Negative Effects of IMF and World Bank Loans for Low-Income Countries

-

 

Loans from international banks such as the International Monetary Fund (IMF) and the World Bank have long been financial support for low-income countries. The country is making money. While these loans are often seen as a way for businesses to contend, their impact should be carefully scrutinized. This article examines how the IMF and World Bank loans can negatively affect the economies of low-income countries.


Conditionality and Structural Adjustment Programs (SAPs) 

One of the disadvantages of the IMF and World Bank loans is the stringent conditionality and Structural Adjustment Programs (SAPs). These programs often require specific economic policies in beneficiary countries, such as austerity measures, deregulation and privatization.

While the purpose of these policies is to promote economic stability and growth, they can have a negative impact on low-income countries.

Austerity measures-the use of economic measures such as cuts in government spending and tax increases will reduce social spending, including spending on repairing diseases and education. This negatively affects the most vulnerable groups and increases income inequality.

Deregulation-this will lead to the protection of labor and the abolition of environmental regulation. This can affect the country's long-term development by leading to labor exploitation and environmental damage.

Privatization-Pressure to privatize SOEs may lead to the transfer of public assets to private entities, often in adverse conditions. This can create democratization, reduce access to essential services and limit governments' ability to invest in public infrastructure.


Debt Relief and Debt Relief

IMF and World Bank loans can cause low-income countries to become heavily indebted. High debt consumes a significant portion of the national budget for debt service, reducing the resources available for social and economic development.

Asset debt-Low-income countries can get caught up in the borrowing cycle to pay off their current debt, which can become permanently dependent on borrowed money. This can affect the economy in the long run and lead to poverty.

Interest rates and exchange rate risk-International financial institutions tend to apply higher interest rates on loans.

Currency volatility can increase the debt burden, making it difficult for countries to repay loans, leading to higher financial risks.


Going out of the Local Economy

IMF and World Bank loans can distort the local economy by diverting resources outside of the local economy. This can have a negative impact on local businesses, agriculture and small businesses.

Import dependency-Conditionality added to loans will support the liberalization of imports. As a result, low-income countries can experience significant disruptions to imports, weakening local economies and increasing economic inequality.

Unfair competition-Liberalization policies will expose the local economy to competition from higher market and foreign incentives, making it difficult for domestic companies to openly develop. This can hinder the development of the local economy and lead to financial dependency.


When the IMF and World Bank provide short-term assistance to low-income countries, it can have long-term effects on their economies. Bonds, debt, and the exclusion of local businesses are just some of the dangers these loans can have. International financial institutions should consider the potential negative effects of lending policies and work to promote sustainable and inclusive economic development in low-income countries.


More Sources of Information:

  • Marchesi, S., & Sirtori, E. (2011). Is two better than one? The effects of IMF and World Bank interaction on growth. The Review of International Organizations, 6, 287-306.
  • Kentikelenis, A., Gabor, D., Ortiz, I., Stubbs, T., McKee, M., & Stuckler, D. (2020). Softening the blow of the pandemic: will the International Monetary Fund and World Bank make things worse?. The Lancet Global Health, 8(6), e758-e759.

Comments

Post a Comment

Popular posts from this blog

Why Don’t Government Officials Ever Mix with Ordinary Kenyans?

-
The chasm between government officials and ordinary citizens has never been more apparent. Our leaders often seem removed from the daily challenges faced by millions of Kenyans, seemingly shielded in a bubble of privilege that prevents them from experiencing the realities of life in Kenya. This disconnection isn’t just a symbolic issue—it has profound implications on how policies are crafted and implemented, leading to decisions that feel foreign and irrelevant to the people. One striking example is the travel experience of government officials. While the average Kenyan endures long waits, crowded terminals, and substandard facilities at the airport, government officials are driven directly to and from planes, escorted to VIP lounges, and handled with special treatment that most Kenyans never see. These leaders are shielded from the realities of our airports—delayed flights, frustrating security checks, and a lack of essential services. In their separate world, they don’t encounter the...
Read more

The most important qualification for office is INTEGRITY

-
Image
  Fellow Kenyans, as we strive toward Vision 2030, I believe the most important qualification for anyone in public office is integrity. It’s not grades, tribe, money, or tailored suits that will push us forward; it’s the moral backbone to serve honestly, transparently, and responsibly. Without integrity, no amount of academic excellence, wealth, or charisma can create the genuine progress Kenya needs. We’ve seen the effects of placing the wrong priorities in leadership time and time again, with resources misused, promises broken, and an endless cycle of corruption that drains both the economy and our collective spirit. When I look at the state of our nation, it becomes clear that without integrity, the ideals of Vision 2030 are in jeopardy. Public office is a role of trust, where leaders are supposed to protect our resources and make decisions that benefit all Kenyans. But how often has this trust been betrayed? How often have leaders put their personal interests above the nation’s...
Read more

A Year of Mockery: Kenya’s Lost Mandate and the Rising Tide of Resistance

-
  A Year of Silence, Now Broken This very government had twelve months of uninterrupted grace. An entire revolution of the earth around the sun! They had time. They had resources. They had power. And most of all—they had the mandate of the people . And what did they do with it? They mocked us. With suits and speeches. With fake numbers. With promises they never intended to keep. And as the days passed, they mocked us not only with words—but with policies that emptied our pockets, raided our future, and left millions to suffer in silence. But the silence is over. A Grace Period Squandered When the new regime took office, Kenyans—tired of past betrayals—chose hope once more. Many gave them the benefit of doubt. After all, they spoke our language. They quoted scripture. They came from humble beginnings. They promised a hustler nation where everyone had a seat at the table. Twelve months later, the only people sitting at the table are the same ones who always have. And they’r...
Read more