Chapter

Appendix II. Illustrative Case of a Request Under Compensatory Financing Facility

Author(s):
International Monetary Fund
Published Date:
January 1980
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The Executive Board considers requests for purchases under the compensatory financing facility on the basis of a staff report establishing the amount which can be drawn and explaining why the staff considers that the request meets the requirements specified in the decision. The statistical information contained in these reports is illustrated in Tables 17-21.

Table 17.Country X: Balance of Payments(In millions of SDRs)
Calendar Years
197719781979119802
A. Current account−31.9−100.2−125.9−112.0
Trade balance14.4−61.2−61.8−69.0
Exports171.1149.3166.0193.0
Imports−156.7−210.5−227.8−262.0
Services−68.1−74.9−106.8−95.0
Unrequited transfers21.835.942.752.0
B. Capital account74.077.087.8100.0
C. Overall balance (A + B)42.1−23.2−38.1−12.0
D. Financing−42.123.238.112.0
Accumulation of arrears3.24.0
Increase in Fund credit10.010.0
Reduction in net official reserves:
Increase in liabilities5.9
Reduction in assets42.114.124.12.0
Memorandum item:
Gross official international reserves72.258.134.032.0
(In weekly equivalent of imports)24.114.47.46.6

Provisional.

Projected.

Provisional.

Projected.

Table 18.Country X: Estimation of Export Shortfall, 1977–81(In millions of SDRs)
1980–81 Geometric Average
197719781979Estimated1Minimum2
Total exports150.9154.8145.7187.1177.5
Shortfall
Estimated18.4
Minimum315.0
Proposed purchase10.0

Based on projections shown in Table 19.

Minimum level of post-shortfall earnings required for a purchase of SDR 10 million. Because the shortfall years associated with the two consecutive purchases under the facility overlap by six months, the minimum shortfall justifying a purchase of SDR 10 million is the amount of the requested purchase plus half of the previous shortfall purchase (10 + 5 = 15).

Shortfall corresponding to geometric average of SDR 177.5 million.

Based on projections shown in Table 19.

Minimum level of post-shortfall earnings required for a purchase of SDR 10 million. Because the shortfall years associated with the two consecutive purchases under the facility overlap by six months, the minimum shortfall justifying a purchase of SDR 10 million is the amount of the requested purchase plus half of the previous shortfall purchase (10 + 5 = 15).

Shortfall corresponding to geometric average of SDR 177.5 million.

Table 19.Country X: Export Earnings and Shortfalls by Major Commodities, 1974–81
Shortfalls
19741975197619771978197919801981GeometricArithmetic
(Million SDRs)
Total exports72.495.2107.0150.9154.8145.7175.0200.018.419.6
Coffee31.638.553.776.189.981.093.4106.17.78.3
Tea15.820.522.840.826.727.830.234.23.84.1
Sugar2.612.811.516.012.914.621.925.63.03.6
Others22.423.419.018.025.322.329.534.12.93.5
(Annual rate of percentage change in earnings from previous year)
Total exports31.512.441.02.6−5.920.114.3
Coffee21.839.541.748.8−9.915.313.6
Tea29.711.278.9−34.64.18.613.2
Sugar392.3−10.239.1−19.413.250.016.9
Others4.5−18.85.6−24.9−11.932.315.6
Table 20.Country X: Value, Volume, and Unit Value Indices by Major Commodities, 1974–81(1979 = 100)
Value Share in

Total Exports

in 1979

(Per Cent)
Years Ending September 30Shortfall in Per Cent

of Level in Shortfall

Year
19741975197619771978197919801981
Value8540597110810510011813512.6
Coffee56394866941111001151319.5
Tea195774821479610010912313.6
Sugar101888791108810015017520.5
Volume7493817510010096109−4.7(excess)
Coffee87102826310010092109− 8.8(excess)
Tea678192104991001051154.4
Sugar13645689100100100100−2.3(excess)
Unit Value65678914510510012312418.3
Coffee45478015011110012512020.0
Tea859188141971001031078.6
Sugar1381361411248810015017523.4
Table 21.Country X: Coffee Balances, 1974–81
Years Ending September 30
19741975197619771978197919801981
Stocks at beginning of period (1)6.410.43.62.02.42.42.4
Production (2)34.428.026.024.834.835.634.838.8
Supply (1) + (2) = (3)40.838.429.624.836.838.037.241.2
Domestic consumption (4)4.44.44.84.04.45.66.06.0
Exports (5)26.030.424.818.830.030.028.832.8
Stocks at end of period (3) – (4) – (5) = (6)10.43.62.02.42.42.42.4

Country X derives most of its export earnings from three commodities: coffee, tea, and sugar. In February 1980 the authorities request a purchase of SDR 10 million under the facility on account of a shortfall experienced in the 12-month period ended September 30, 1979. The amount of the requested purchase is the maximum which the country can purchase under the facility, because it is the difference between the member’s quota in the Fund (SDR 20 million) and the amount outstanding under the facility (SDR 10 million) at the time of request.

Requirement of Need

Country X’s need is assessed on the basis of its balance of payments and reserve position, which are summarized in Table 17. The balance is based on actual data for calendar years 1977 and 1978, on provisional data for 1979, and on projections for 1980.

Country X’s overall balance shifted from a surplus of SDR 42 million in 1977 to deficits of SDR 23 million in 1978 and SDR 38 million in 1979. Although the 1979 deficit was financed partly by a previous purchase under the facility (SDR 10 million) and an accumulation of payments arrears (SDR 4 million), official reserves declined sharply (by SDR 24 million) in 1979. At the end of the year, gross official reserves were equivalent to only seven weeks of imports. The overall deficit is expected to be lower in 1980 than in 1979, but gross reserves are not expected to rise in 1980, even if the purchase of SDR 10 million under the facility is granted. On the basis of these developments (actual and expected), the proposed purchase is compatible with Country X’s balance of payments need. As the country has been cooperating with the Fund to find appropriate solutions to its balance of payments difficulties, the stricter test of cooperation is met.

Size of Shortfall

Country X’s export earnings declined by 5.9 per cent in the shortfall year40 after stagnating in the previous year, but a recovery is projected in the two post-shortfall years. On the basis of the projection made for the period October 1979 through September 1981, the amount of the shortfall is equivalent to SDR 18.4 million. Half of the SDR 10 million purchase under the facility made previously in connection with a shortfall year ended in March 1979 is considered as compensation for the shortfall experienced in the year ended September 1979, because the two shortfall years overlap by six months. Consequently, the minimum shortfall required for an SDR 10 million purchase is equal to SDR 15 million, which is lower than the estimated shortfall (SDR 18.4 million). The member may, therefore, purchase up to SDR 10 million, which raises its outstanding purchases under the facility to 100 per cent of its quota in the Fund. The shortfall is considered to be temporary in view of the expected recovery in 1980 and 1981.

Analysis by Commodities

More than 40 per cent of the shortfall is attributable to coffee which accounted for more than half of total export earnings in the shortfall year. Smaller shortfalls were also recorded for tea, sugar, and other exports (Table 19).

The shortfall is due entirely to a temporary price decline in the shortfall year, in particular, for coffee and sugar. The volume of exports in the shortfall year was higher than the trend value for coffee and sugar, but a little lower for tea (Table 20). Since Country X accounts for only a small share of world exports of coffee, tea, and sugar, the shortfall resulting from temporary price declines was clearly beyond the member’s control.

For coffee, which is the major export crop, projections are made for production, domestic consumption, and exports, and stocks are estimated at the beginning and end of each year (Table 21). As the level of stocks did not increase during the shortfall year, no adjustment needs to be made on account of stocks.

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