GSFA

Technical and Financial DISCOVER . LEARN . EMPOWER

Assistance by IMF 1
 Business
Environment
Course Outcome Will be covered in this
CO Title Level lecture
Number

CO1 Students will help the students understand Remember

and analyze various environmental factors
and their impact on business
CO2 Students will develop the perceptive of the Understand
different government policies and Acts that
influence business and the changes that are
taking shape in the recent years.
CO3 Students comprehend the impact of the Understand
global factors on the environment.

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 Contents
• Objective: To provide conceptual understanding of business environment.

• The following topics are covered in upcoming slides:

1. Introduction To Concept International Monetary Fund.

2. Objectives and Functions of International Monetary Fund.
3. Organisational Structure of IMF.

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 Technical and Financial
Assistance of IMF
• Technical Assistance: Technical assistance consists of expertise and
support provided by the IMF to its members in several broad areas:
the design and implementation of fiscal and monetary policy; institution-
building, the handling and accounting of transactions with the IMF; the
collection and retirement of statistical data and training of officials.

• Financial Assistance: The Fund provides financial assistance. It includes

credits and loans to member countries with balance of payments
problems to support policies of adjustment and reform. It makes its
financial resources available to member countries through a variety of
financial facilities. It also provides concessional assistance under its poverty
reduction and growth facility and debt relief initiatives. The IMF provides
financial assistance through the following: 4
 Financial assistance
Instruments
Borrowings: There are various borrowing instruments of IMF which help in lending money to
countries to resolve the disequilibrium in their BOP and these instruments are as follow
1) Stand-By Arrangements (SBAs):
• Stand-By Arrangements are one of the most common financial instruments used by the IMF.
• They provide short- to medium-term financial assistance to member countries facing balance of payments
problems.
• The assistance is often conditional, meaning the borrowing country must implement specific economic policies and
reforms.
• Repayments are required to be made within 3-5 years of each drawing.
• The rate of interest charged is generally high.

2) Extended Fund Facility (EFF):

• The Extended Fund Facility is designed for countries facing more serious and long-term balance of payments
problems.
• It provides financial assistance over a more extended period, often with a longer repayment schedule.
• Like SBAs, EFF arrangements come with conditions to address underlying economic issues
• Repayment provisions of EFF cover a period of 4-10 years.
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 3) The SAF (Structural
Adjustment Facility)
• The SAF (Structural Adjustment Facility) and ESAF (Enhanced Structural Adjustment Facility)
were programs set up by the International Monetary Fund (IMF) to help low-income countries
facing economic difficulties.
• 1. Structural Adjustment Facility (SAF):
• Purpose: The SAF was established in 1986 to provide financial assistance to low-income
countries struggling with balance of payments problems (when a country doesn't have enough
foreign currency to pay for imports or repay foreign debt).
• Conditions: Countries that received loans through SAF had to implement economic reforms, like
reducing government spending, improving tax collection, or changing trade policies, to make
their economies stronger and more stable.
• Loan Terms: The loans were offered on concessional terms, meaning they had very low interest
rates and could be paid back over a long period of time.
• SAF loans typically had a repayment period of 10 years. The SAF loans had very low
concessional interest rates, usually around 0.5%.
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4) Enhanced Structural Adjustment Facility (ESAF):
• Purpose: In 1987, the IMF created the ESAF to replace and improve upon the SAF. The
ESAF provided even more financial support to low-income countries. It was designed
to support long-term economic changes aimed at reducing poverty and promoting
economic growth.
• Enhanced Focus: ESAF required countries to take on stronger reforms, focusing on
improving their economies for the long run, like:
• Encouraging private businesses.
• Promoting exports.
• Restructuring inefficient government institutions.
• Longer Repayment and Low Interest: The loans were still on concessional terms with
longer repayment periods and very low interest rates, making it easier for countries to
manage their debts. SAF loans had a repayment period of 15 to 20 years. ESAF loans
also had concessional interest rates, generally around 0.5% to 1.0%.
• By 1999, ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF),
which put even more focus on poverty reduction while continuing to promote
economic stability and growth in low-income countries.
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5) Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL):

• The Flexible Credit Line and Precautionary and Liquidity Line are precautionary financial
instrument designed for countries with strong economic fundamentals.
• To qualify for the FCL, a country must meet stringent criteria, including a strong track
record of economic performance and sound policies.
• Countries with an FCL arrangement can access IMF resources without implementing
specific policy conditions, as long as their economic fundamentals remain strong.
• Countries with FCL arrangements can draw on the funds whenever needed, up to the
full amount of their arrangement, without undergoing additional conditionality or policy
conditions.
• The FCL and PLL is typically available for periods of one to two years, and countries can
draw on it as needed during this time.
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6) Rapid Financing Instrument (RFI):
• The Rapid Financing Instrument is used to provide emergency financial
assistance to member countries facing urgent balance of payments needs.
• It is typically granted without the need for a full-fledged economic program,
making it a quick-response tool.
7) Special Drawing Rights (SDRs):
• While SDRs are not a traditional lending instrument, they are an important
part of the IMF's financial architecture.
• SDRs are allocated to member countries based on their IMF quotas and can
be exchanged for freely usable currencies

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8) Policy Support Instrument (PSI):
• The Policy Support Instrument is a non-financial instrument that provides
policy advice by the IMF for countries with strong economic policies.
• It does not involve financial assistance but serves as a form of IMF
endorsement for a country's policies.
9) Post-Program Monitoring (PPM):
• After a country has successfully completed an IMF program, it may enter Post-
Program Monitoring.
• During this period, the IMF continues to monitor the country's economic and
financial developments.

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 SDR’s: Special Drawing Rights
• The Special Drawing Rights (SDRs) as an international reserve asset or reserve
money in the international monetary system was established in 1969 with the objective
of alleviating the problem of international liquidity.

• In 1967 Rio-de-Jenerio, an annual meeting of IMF took place, where it was decided
to create such an asset to be called as SDR.
• SDR’s are international units of accounts in which official account by IMF are kept.
They are used for international liquidity and are basically in the form of coupons.
• The holder of SDR can exchange the coupon for currencies required for making
international payments.

• The IMF would create SDR simply by opening an account in favour of member nation and
crediting it with a certain amount of SDR. the total volume credited has to be ratified
(confirmed) by the governing board and its allocation among members in proportion to
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their quotas.
• The IMF has two accounts of operation—the General Account and the Special Drawing
Account.
• The former account uses national currencies to conduct all business of the fund,
while the second account is transacted by the SDRs.
• The SDR is defined as a composite of five currencies known as ‘Basket of
Currencies’ consisting of presently—the US Dollar, European union’s Euro,
Japanese Yen, UK Pound Sterling and Chinese Renminbi.
• The SDRs are allocated to the member countries in proportion to their quota
subscriptions. Only the IMF members can participate in SDR facility. This basket of
currency is renewed every 5 years and currencies to be included are currencies of
those 5 countries which had largest export of goods and services. The interest
rates on SDR is determined weekly.

• SDRs being costless, often called paper gold, is just a book entry in the Special
Drawing Account of the IMF. Whenever such paper gold is allocated, it gets a
credit entry in the name of the participating countries in the said account. It
is to be noted that SDRs, once allocated to a member, are owned by it and operated by
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it to overcome BOP deficits.
 Advantages of IMF
 IMF can be seen as lender of last resort. When a country is seeing
an exodus of currency due to a balance of payments crisis, the IMF can
provide crucial loans to stabilise the economy and prevent a collapse
of confidence.
 Supporters argue that the IMF can also impose necessary reforms on
an economy. Reforms such as privatisation, fiscal responsibility,
control of Money supply, and attacking corruption. These policies may
cause short term pain, but, are essential for preventing future crisis
and long-term development.
 Provides an external assessment of the economy, which helps the
government to implement popular ideas.

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1) Economic Stability and Support:
• Financial Assistance: The IMF provides loans to countries facing balance of
payments problems or economic crises. This financial support helps stabilize
their economies and prevent crises from spreading to other countries.
2) Technical Assistance: The IMF offers expert advice and technical assistance
to help countries improve their economic policies and management. This
includes guidance on fiscal policy, monetary policy, and financial regulation.
3) Global Economic Surveillance:
• Monitoring: The IMF monitors the global economy and assesses the
economic policies of its member countries. This surveillance helps identify
potential risks and vulnerabilities early, allowing for timely interventions.
• Reports and Forecasts: The IMF publishes reports and economic forecasts
that provide valuable insights into global and national economic trends.
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4) Facilitating International Cooperation:
• Coordination: The IMF plays a role in fostering international cooperation on
economic issues. It helps coordinate policies among member countries to address
global economic challenges and promote stability.
• Dispute Resolution: The IMF provides a platform for member countries to discuss
and resolve economic disputes or concerns.
• 5) Enhancing Global Financial Stability:
• Currency Stability: The IMF helps maintain stable exchange rates and prevents
competitive devaluations that could destabilize the global economy.
• SDRs: Through Special Drawing Rights (SDRs), the IMF provides a global reserve
asset that can be used to supplement member countries' reserves and enhance
liquidity.
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6) Poverty Reduction and Development:
• Support for Low-Income Countries: The IMF has programs aimed at
supporting low-income countries, such as the Poverty Reduction and
Growth Trust (PRGT). These programs provide concessional loans and
support for development goals.
7) Promoting Sustainable Economic Growth:
The IMF encourages and supports structural reforms that promote
economic growth, such as improving governance, increasing efficiency,
and fostering investment.

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Criticism of IMF
• Social Impact and Inequality:
• Critics argue that IMF policies sometimes prioritize economic stability over social
considerations, potentially exacerbating income inequality and social unrest.
• Implementation of structural adjustment programs (SAPs) has been linked to reduced social
spending and negative impacts on education and healthcare systems.
• Democracy and Accountability:
• The decision-making process within the IMF has been criticized for lacking transparency
and being undemocratic. Some argue that major decisions are often influenced by a small
group of powerful economies, diminishing the voice of smaller and developing nations.
• Political Influence :
• The IMF has been accused of using its financial leverage to influence domestic policies in
member countries. This has led to concerns about the interference in national sovereignty.

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• Conditionality One of the most significant criticisms of the IMF relates to the conditions
attached to its financial assistance. Many argue that the IMF's policy conditions, often
referred to as "conditionality," are too stringent and can lead to the imposition of
austerity measures.
• Loss of Sovereignty: Countries may feel that IMF conditions undermine their
sovereignty by dictating economic policies and reforms. This can lead to a perception of
external interference in domestic affairs.
• Lack of Transparency: The IMF has been criticized for its decision-making processes and
the lack of transparency in how it sets policies and imposes conditions on member
countries.
• Dominance of Major Economies: The IMF’s decision-making structure is heavily
influenced by major economies, which can lead to concerns about the disproportionate
influence of wealthier countries over the policies and operations of the Fund.
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 Summary Of The Topic
• Global Environment has the direct impact on the business of the country,
hence as a businessman knowledge about the structure and working of
various global institutions is very important. IMF is one of the most important
organization as it regulates and supervises International trade closely.

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 Assessment Pattern
Sr. No. Type of Assessment Task Weightage of actual Frequency of Task Final Weightage in Internal Remarks
conduct Assessment
1. Assignment* 10 marks of each One Per Unit 10 marks As applicable to course
assignment types depicted above.

2. Time Bound Surprise 12 marks for each test One per Unit 4 marks As applicable to course
Test types depicted above.

3. Quiz 4 marks of each quiz 1 per Unit 4 marks As applicable to course

types depicted above.

4. Mid-Semester Test** 20 marks for one MST. 2 per semester 20 marks As applicable to course
types depicted above.

5. Presentation*** Non Graded: Engagement Task Only for Self Study MNG
Courses.
6. Homework NA One per lecture topic Non-Graded: Engagement Task As applicable to course
[ of 2 questions] types depicted above.

7. Discussion Forum NA One per Chapter Non Graded: Engagement Task As applicable to course
types depicted above.

8. Attendance and NA NA 2 marks

Engagement Score on BB

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 APPLICATION
• Application of Business Environment can be as follows:
1. Better understanding of International Organizations.
2. Better knowledge of IMF and its functions.
3. Helps in analyzing various financial assistance provided by IMF.

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 REFERENCES
• Reference Books:
• The above notes are extracted from the book by Aswathappa K., “Essential
of Business Environment”, Himalaya Publishers, link for same is [
https://www.amazon.in/Essentials-Business-Environment-K-Aswathappa/dp/935
2734815/ref=sr_1_3?dchild=1&keywords=business+environment+himalaya+
publication+book&qid=1592561125&s=books&sr=1-3
]

• F.Cherunilum, “Business Environment”, Himalaya Publishing House,

link for the same is: [
https://www.amazon.in/Business-Environment-Text-Cases/dp/9351429113/ref=
sr_1_1?dchild=1&keywords=business+environment+himalaya+publication+b
ook&qid=1592561125&s=books&sr=1-1
]

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 THANK YOU

For queries:
Email: [email protected]

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