Journal Issue

Developments in Compensatory Financing of Export Fluctuations

International Monetary Fund. External Relations Dept.
Published Date:
December 1966
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IN FEBRUARY 1963, the International Monetary Fund established a new facility for compensatory financing of export fluctuations. Under this facility, which is designed particularly to benefit primary exporting countries, a member may obtain financial assistance from the Fund up to 25 per cent of its quota to compensate for temporary shortfalls in export receipts from the medium-term trend value of exports. This trend value is estimated partly on the basis of a statistical formula applied to current and past exports and partly from an assessment of the country’s export prospects.

The policies of members drawing under this facility do not have to meet the tests that the Fund applies in the case of ordinary drawings. (In accordance with the Fund’s “tranche policy,” these tests increase in stringency as drawings outstanding increase relative to the member’s quota.) However, members do have to satisfy the Fund that they are encountering payments difficulties, that the shortfall is of a short-term character and is largely attributable to circumstances beyond the member’s control, and that the member will cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties.

To date, this facility has been used by three countries: Brazil and the United Arab Republic in 1963 and the Sudan in 1965. The fact that compensatory drawings have not been requested more frequently during the last three years is the result of a number of special circumstances, particularly a generally favorable trend in prices of primary products over much of this period. It would seem likely, however, that the facility will be used more frequently in the future.

During the past year, the Fund has studied ways in which this facility could be made more useful to members and has, through a recent decision of its Executive Directors, made a number of changes in the facility to this end. The new decision and accompanying report was published on September 26. The principal features of the new policy are as follows:

First, whereas heretofore compensatory drawings outstanding could not normally exceed the amount equivalent to 25 per cent of a member’s quota, the facility has now been extended to permit outstanding compensatory drawings up to an amount equivalent to 50 per cent of a member’s quota, with the qualification that, except in the case of shortfalls resulting from disasters or major emergencies, outstanding drawings may not increase by more than 25 per cent of quota in any twelve-month period. Compensatory drawings in excess of 25 per cent of quota will be granted only when the Fund is satisfied that the member has been cooperating with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties.

Second, the compensatory facility will henceforth be separate from other drawing facilities of the Fund, in the sense that the amount of outstanding drawings under the compensatory facility will not affect members’ ability to draw from the Fund under the Fund’s policies regarding ordinary drawings in the various quota tranches. This means that the facility will be, so to speak, “floating.”

Third, a member may within six months of an ordinary drawing reclassify all or part of it as a compensatory drawing and thus restore to that extent its normal drawing rights for future contingencies, provided that, in the circumstances existing at the time of the request for reclassification, the member could make a compensatory drawing for that amount.

Fourth, consideration has been given to the repayment system appropriate in the case of compensatory drawings. It was decided to retain the present system under which members repay the Fund within an outside limit of three to five years. At the same time, in order to encourage members to reduce fluctuations in their export receipts, net of the amounts of transactions under the facility, the Fund decided to recommend that members repay in the years following a drawing under the facility an amount approximately equal to one half of any excess of exports over the medium-term trend value of their exports.

Fund and Bank Annual Meetings

The accounts in this issue of Finance and Development of the Fund and Bank Annual Meetings are greatly condensed, touching only upon a small portion of the speeches and activities.

More complete records of the Meetings are published by the Fund and the Bank in separate volumes entitled Summary Proceedings. These are available free on request from the Fund or the Bank, respectively.

Requests should be addressed to:

The Secretary

International Monetary Fund

19th and H Streets, N.W.

Washington, D.C. 20431, U.S.A.

The Secretary

International Bank for

Reconstruction and Development

1818 H Street, N.W.

Washington, D.C. 20433, U.S.A.

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