Eli5 if IMF gives loan to a country, why they ask to impose tax on it’s people. What they want to achieve and how they come to know that the very country has achieved all the targets like tax collection, etc etc

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Eli5 if IMF gives loan to a country, why they ask to impose tax on it’s people. What they want to achieve and how they come to know that the very country has achieved all the targets like tax collection, etc etc

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Anonymous 0 Comments

The lenders want to get rich, not just give away free money, so they have to get the money paid back. If the country doesn’t give the money back they can just take over the country and seize assets, like an invasion.

Anonymous 0 Comments

If the IMF lends a nation money, they’re in big troubles and have already shown that they can’t handle tax money properly. So, the IMF agrees to lend a steady stream of money but only IF the one borrowing agrees to structural changes. Usually, the tax hikes are accompanied with the obligation to build =infrastructure or provide a basic economic safety net, altough that part is often ignored.

Nations who don’t want to accept that level of control can simply look elsewhere for their next loan if they don’t like it.

Anonymous 0 Comments

The natural incentives of borrowers and lenders are fundamentally opposed. If you get a loan, you would obviously rather keep the money for yourself. If I give you a loan, my biggest priority is that you will pay it back. We have opposite goals. Imagine if you were getting a loan for a house and, instead of paying that money directly to the seller, the bank put the money in your account trusting you to write a check to the seller. It is pretty easy to imagine that someone somewhere would abuse that trust, maybe take a detour to a casino, maybe they buy some bitcoin, whatever. In any case lending cannot function well if the economy does not have a good enforcement mechanism. If you made the casino detour in the U.S. you would be guilty of bank fraud, punishable by up to 30 years in prison.

The thing is, when the IMF makes loans, there is not a strong system of international law to prosecute and enforce claims like this. They would be relying on the courts of the country that just took the loan to side against itself, which is not much to rely on at all! Instead, the IMF sets conditions for its loans. They do not give out the whole loan at once, but instead define benchmarks that the country must meet before it gets the next chunk of cash. This helps ensure that the loan is used prudently and most importantly, gives the global investor community confidence. Eventually the country will be able to sell bonds to normal investors, which means the financial system is healthy.