1. What is a Soft loan?
A soft loan is one that does not require to be repaid in cash. It can be repaid either wholly or partially by goods, services, or other non-monetary items.
2. What forms of soft loans are there?
The following are some common forms of soft loans:
(a) Barter or countertrade:
A form of credit or service in which goods of a certain kind, generally agricultural produce, are exchanged for goods of the same type but not necessarily of identical value.
(b) Labor services:
A loan is repayable with free labor from another country instead of cash payment. The work may be general or confined to national projects such as construction and economic development.
(c) Technical assistance:
A loan is repayable in the form of advice or guidance on agricultural, technological, or industrial matters provided by another country voluntarily.
(d) Production-sharing arrangements:
An arrangement whereby a foreign company is given the right to receive part of the production of oil, minerals, etc. found on either public or private land in return for its investment and expertise. Loans based on such arrangements may be repayable partly or wholly by the provision of extracted goods and/or services.
(e) Tax remissions:
A remission (that is, a temporary suspension or reduction) of taxes due to foreign companies involved in projects such as production-sharing arrangements.
3. What are the advantages of soft loans?
The main advantages are that they can promote economic development, particularly in developing countries that have little cash to spare for capital expenditure; and encourage the transfer of skills needed for industrialization. They thus contribute towards greater international trade which can be beneficial to both creditor and debtor nations. The use of barter and countertrade helps to overcome balance-of-payments difficulties by providing foreign currency for the debtor nation without its having to pay it in cash.
4. What are the disadvantages of soft loans?
The main drawback is that the creditor nation may lose control over the way in which the loan is used. A country wanting to borrow money may agree to repay by providing goods and services rather than cash as a result of pressure from creditors, who want to keep it as a customer. This can cause problems if there are no third parties with whom to trade or if the goods provided are not what was originally agreed. It also leads to difficulties if it is difficult for the creditor nation to monitor what the money is being used for, particularly in developing countries which may be less efficient at collecting taxes than developed ones.
5. When do countries make soft loans?
A soft loan is usually made by a creditor country to a developing or less-developed country that has balance-of-payments difficulties.
6. Give 3 examples of soft loans?
1) A direct form of help where one nation gives economic assistance in the form of equipment, materials, or services to another nation, thus allowing them to progress in a certain area.
2) Barter or countertrade: a form of credit or service in which goods of a certain kind, generally agricultural produce, are exchanged for goods of the same type but not necessarily of identical value.
3) Technical assistance: a loan repayable in the form of advice or guidance on agricultural, technological, or industrial matters provided by another country voluntarily.
7. Why do some countries give aid and others ask for help?
Aid is given when a country needs something or has a disaster and cannot pay for it itself. It is also given when one country wants to gain more friends, influence, etc. in the world; and less-developed countries generally ask for more aid in the form of loans because they cannot afford to pay it back. They often use this money to invest in areas such as health and education which would not be possible without outside help.
8. What are the different types of economic development according to DFI?
The main types of economic development are:
Economic growth through the production of goods using machinery, raw materials, and labor.
Economic growth through improved methods of farming, fruit growing, etc.; also by changing to more profitable activities such as cattle-rearing on ranches or poultry farming.
Increased investment in roads, railways, ports, airports, land improvement for agriculture and irrigation, power stations, etc.
Increased investment in health care facilities such as hospitals and clinics; improved housing conditions; educational opportunities for all members of society.