Unless I am totally misunderstanding how the process works, this is no way like free prospects or free money. The Orioles have the ability to spend up to 5 M or whatever is left, but it is real money. It was not given to them, and they decided to put it in their pocket. It is their money that they are spending. Again, if they do not think the kid is worth 5 million or he is not accepting what they are willing to spend, than giving him the whole thing if you think he is not worth it, is bad business.
He is not a free prospect.
I'm saying that "what the player is worth" is far less of a concern than it usually is in this scenario. If it were the beginning of the period and you thought he was only worth $400k then you wouldn't give him $2M just because, because there are other things to spend that money on. But if it's the end of the period and you think he's worth $400k, then you should gie him $2M if that's what it takes to sign him, because it's the end of the period and there is nothing else to spend that money on.
The choice of what to do with this money is not a zero sum game. It's not "spend it on international free agent(s) or spend it on something else". They can spend it on both the international FAs and that something else, because they have plenty of money available and we are talking about the smallest possible of expenses when it comes to running an MLB franchise. The idea that the team will be unable to do some other thing that needs to be done (pick your favorite thing amongst any of a dozen small expenses) because they spent a couple million on a 16 y/o Dominican or a 22 y/o Cuban is completely outrageous. It's frugality with no benefit.
Siginng Sanchez for $2M would not be "spending just to spend", even if they think he's only worth $500k. Signing him for $4M when they know $2M would get it done would be spending the extra money just to spend it. But spending $2M to get him if any less of an offer means he goes to TB or Oakland or KC or wherever, is just being smart, even if as compared to other imaginary International FAs that don't exist, he is only worth a fraction of that $2M. He's worth it overall, not just because the market is artificailly limited and he'd be worth every penny and more if he were a true free agent, but because there is nothing else to do with that money. He's got a far better chance of helping the Orioles than the nothing does.