Interest rate subsidies on international finance as a means of assisting low-income countries

Many of the conventional ways of using the international financial system as a mechanism for making resource transfers to developing countries require quite fundamental restructuring of that system. Furthermore the relevance of the most notorious plan - the SDR-aid link – has been reduced by the increase in the rate of interest on SDR net use and by the insignificant proportion of reserve growth accounted for by SDRs. The use of interest rate subsidies on IMF finance, in conjunction with reforms to Fund conditionality, offers one practical way of providing an albeit small amount of financial assistance to low income countries. Analysis suggests that such subsidies represent an attractive form of aid and may enhance international financial efficiency.