Loans And Foreign Aid - A dilemma attached with lower developed countries (LDCs)
Date Added: April 13, 2010 07:42:34 PM
Category: Business: Financial Services: Loans

Foreign aid is a dilemma associated with the fiscal situations of an economy. It is opted as a prerogative by the government when excess leakages are observed.  Foreign aid, assistance, loan, and grants are considered to be from same house. The international transfer of public and private funds in the form of loans or grants from donor countries to recipient countries is termed as foreign aid. It may also be economic, military, technical, and financial assistance given on an international and usually intergovernmental level.

Borrowing by the governments is an important instrument of fiscal policy in modern economies. The objective of raising funds through borrowing is to fill up the budget deficit or the gap between expenditure and tax revenues, although partially. Foreign Aid is aid given by governments and other agencies to support the economic, social and political development of developing countries. Aid can be rationalized on two grounds.

1.       First is the case of emergencies like wars and natural calamities; in these cases governments are compelled to raise loans to handle the situation immediately.

2.       Second is the case of accelerating the pace of development.


Debt refers to the stack of obligations owing to a nation that has accumulated overtime due to borrowing while foreign aid may be obligatory or not, depends upon the conditionalities put by the donors. Most of the developing and less developed countries (LDCs) rely on foreign aid for their development in growth. LDCs are in general characterized by population pressure, scarcity of productive resources or their ineffective utilization, technological backwardness, dependence on a few primary products, mass poverty and income inequalities, lawlessness and sectarian conflicts, corruption and political instability , ignorance and narrower outlook. With the exception of few countries, LDCs are generally caught in caught in a vicious circle of poverty. The rate of domestic saving is very low and the responsibility of accelerating development rests with only government. The government has to invest heavily in the basic infrastructure as well as in the social sector to provide general education and technical training, health facilities, sanitation, drinking water and housing. The LDCs being the exporter of raw materials and cheap products and importers of heavy machinery, finished goods are further widening the gap. Foreign currency exchange rates also multiply the amount of aid and adds the burden on the economy. To counter all these cases, countries are compelled to take foreign aid.


Aid may be given by individuals, private organisations, or governments. Standards delimiting exactly the kinds of transfers that count as aid vary. For example, aid figures may or may not include transfers for military use. Aid can be in the form of liquid funds and in the shape of developmental projects as well. For example, receiving food aid may enable a government to divert funds from its own food-support budget to its military budget. In that case the net effect of the aid is military although the aid money might actually be spent on food.In short, in this modern world foreign aid has become a fashion for LDCs to run their miserable economies.