Lecture 8
Government Borrowing, IMF and World Bank
1. Government budget constraint
G + rB/P = T + delta M / P + delta B / P
delta M = Change in M, delta B = Change in B
G and T are in real terms
2. Government debt (B)
B = Bd + Bf
Bd = domestic borrowing, Bf = foreign borrowing
3. Budget deficit (D)
- D = G + rB/P - T
- If D/Y ratio is too high, deficit may become unsustainable
4. Inflation
- Capital markets in LDCs not well developed
- No domestic borrowing
- Deficit financed by printing money
- High money growth leads to high inflation
5. IMF conditionality
- Condition for short-term loans
- Borrowers are usually countries with balance-of-payments difficulties
5.1 Reduce budget deficit
- Reduce government subsidies
- Sell off state-owned enterprises (privatization)
5.2 Reduce money growth
5.3 Devalue exchange rate
6. Problems with IMF conditions
7. Role of World Bank
- Financing of long-term projects (dams, power)
- Why private capital may not be forthcoming?
EC311 home