Chapter

Introduction

Author(s):
International Monetary Fund
Published Date:
January 1980
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Considerable attention has been given to the problems arising from the instability of export earnings, especially those encountered by developing countries heavily dependent on the export of a few commodities with unstable prices. In order to reduce fluctuations in the export earnings of developing countries or, at least, to mitigate their adverse impact on the development process, three complementary approaches have been followed: export diversification; stabilization of commodity prices through international commodity agreements; and provision of compensatory financing assistance to countries experiencing export shortfalls.

For a number of countries now heavily dependent on one export commodity with highly fluctuating prices, the best solution in the long term is probably to diversify their commodity exports and to increase progressively their exports of manufactures. Export diversification, which normally occurs with economic development, is, however, a lengthy process and cannot be a solution in the short term.

Stabilization of commodity prices was the main objective of the Integrated Program for Commodities that was adopted at the Fourth Session of the United Nations Conference on Trade and Development (UNCTAD IV) in Nairobi in May 1976, but progress has been slow in implementing this program. After five years of negotiations, agreement on the establishment of a Common Fund for Commodities was reached on June 27, 1980. In spite of numerous meetings, international agreements could be successfully negotiated only for sugar in October 1977 and rubber in October 1979. Moreover, the four commodity agreements that have been in force for several years (for coffee, cocoa, tin, and sugar) have contributed only to a limited extent to the stabilization of the prices of these commodities.

Because of the practical difficulties encountered in the stabilization of world commodity prices, UNCTAD V in Manila gave more attention than did UNCTAD IV in Nairobi to compensatory financing schemes, which are easy to administer and can give immediate relief to primary exporting countries when their export earnings fall. In addition to the International Monetary Fund’s compensatory financing facility, two other schemes exist at present. One, administered by the Arab Monetary Fund, is intended to complement the Fund’s facility; it was established in 1978, but no drawing had been made under it by March 1980. The other, known as STABEX,1 is administered by the European Community. During the first five years of operations, approximately 400 million special drawing rights (SDRs) was transferred under STABEX; for the second five-year period ending in 1984, provision has been made for about SDR 560 million.

The Fund’s compensatory financing facility was established in 1963, but only 57 drawings, totaling SDR 1.2 billion, were made during its first 13 years. A turning point was the liberalization of the facility in December 1975, which occurred when commodity prices were at their trough because of the severe recession in 1975. From January 1976 through March 1980, there were 107 drawings totaling SDR 4.0 billion under the facility; these accounted for 31 per cent of the total credit extended by the Fund to all its members, and 45 per cent of the total if the United Kingdom is excluded, during this period (Table 1). The compensatory financing facility has, therefore, become a major facility for providing payments assistance to member countries, especially those heavily dependent on commodity exports.

Table 1.Use of Fund Credit, January 1976–March 19801(In billions of SDKs)
Group of Countries
Type of TransactionIndustrial2 and

oil exporting3
OtherAll Fund

Members
Credit tranches3.02.65.6
Extended Fund facility0.60.6
Supplementary financing facility0.40.4
Oil facility1.01.12.1
Compensatory financing facility4.04.0
Buffer stock financing facility0.10.1
Total credit4.048.812.8
Source: International Monetary Fund.

Excludes reserve tranche drawings of SDR 3.8 billion (of which SDR 3.3 billion by industrial countries) and Trust Fund loans of SDR 1.6 billion.

United States, Canada, Japan, Austria, Belgium, Denmark, France, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands, Norway, Sweden, and the United Kingdom (member countries classified as industrial in the International Monetary Fund’s International Financial Statistics (IFS) until March 1980).

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Credits to the United Kingdom alone were equivalent to SDR 3.9 billion.

Source: International Monetary Fund.

Excludes reserve tranche drawings of SDR 3.8 billion (of which SDR 3.3 billion by industrial countries) and Trust Fund loans of SDR 1.6 billion.

United States, Canada, Japan, Austria, Belgium, Denmark, France, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands, Norway, Sweden, and the United Kingdom (member countries classified as industrial in the International Monetary Fund’s International Financial Statistics (IFS) until March 1980).

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Credits to the United Kingdom alone were equivalent to SDR 3.9 billion.

The purpose of this pamphlet is to describe the objectives and modus operandi of the Fund’s compensatory financing facility. The first section summarizes the main features of the facility. The second section analyzes the nature of export earnings fluctuations. The third section explains how the facility operates. This presentation is complemented by four appendices. The first reproduces the compensatory financing decision adopted in August 1979 and lists purchases made under the facility until March 1980. The second illustrates the statistics required for a compensatory financing request. The third presents an algebraic analysis of export shortfalls. The fourth compares the main features of STABEX with those of the compensatory financing facility.

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