IMF History (1966-1971) Volume 2

Scope for Action by the Fund (Part II of a Staff Study)

International Monetary Fund
Published Date:
February 1996
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Chapter I Introduction

Part I of this study has described in some considerable detail the problems related to price instability and unfavorable price trends that face the producers of primary commodities. The difficulties which many of the primary producing countries, in particular those with a relatively low average per capita income, encounter as a result of these problems can be alleviated and overcome only through action in many fields. In part such action is related to the general climate in which world trade is conducted. This includes the maintenance of a sustainable rate of expansion in the industrial countries, and hence in a world demand for primary products; a world trade and payments system relatively free of restrictions and discrimination; and an adequate global level of international reserves. In another part the required action is related to the progress of development in general, and, more particularly, the diversification of the output of the developing countries away from products in actual or potential serious oversupply. Beyond these broad aspects, and the action in the field of domestic policy that individual countries might appropriately take, action will be needed more directly aimed at the supply and demand for individual primary products, their prices, and the foreign exchange obtained from their sale abroad.

The analysis in Part I, it may be recalled, suggests that commodity stabilization is likely to achieve its most important results where the stabilization of prices improves the long-term position of the commodity. This may occur if more stable prices add to long-term demand, or if they reduce long-term instability of supply. In certain cases, stabilization of commodity prices may also help to stabilize export earnings of producing countries, and may then sometimes achieve this latter objective to a lower cost in foreign exchange than action specifically directed to stabilizing export availabilities 1 through loans. Generally, however, it is not to be expected that comparable results in the stabilization of export availabilities are to be obtained from price stabilization as from action specifically directed to this objective, particularly where price instability reflects variations on the side of supply. Supply variations have been an important element in commodity instability in recent years, especially for agricultural products. In these instances, the price stabilization mechanism will have to provide for temporary limitation of export quantities (e.g., by quotas) in order to achieve satisfactory results in terms of the stabilization of export earnings.

The stabilization of commodity prices, in contrast to the stabilization of export availabilities through loans, involves both potential benefits and costs. These are costs in real terms that are distinct from transfers of income or purchasing power. These costs may arise in the form of excessive global investment in stocks; in loss of production or in additional inputs for a given volume of production; or in misallocation of resources in other ways, including misallocation as a result of misjudgment of the trend in prices and, consequently, misdirected and unsuccessful stabilization attempts. The need, in the case of price stabilization schemes, to weigh the expected gains from successful price stabilization against these costs often makes it difficult to reach an assessment of the value of any such scheme, not only in advance but also in retrospect.

The difficulty of making such assessments, as well as the varying balance of considerations for different participants, has been an important deterrent to the conclusion of international commodity agreements hitherto. No clear-cut basis exists for determining which particular commodity arrangements and which particular quantity and price objectives are in the general interest, or in the interest of less developed countries as a group. It is not possible, therefore, even assuming that a scheme is managed on the basis of a realistic appraisal of medium-term market prospects, to make a meaningful estimate of the aggregate financial resources “needed” for price stabilization. For any individual commodity, the amount of finance that might be absorbed by stabilization may vary widely in relation to different stabilization objectives and different market circumstances.

On these grounds, an important test for any particular stabilization scheme would always have to be willingness of participating countries that expect to derive benefits from the scheme to commit the necessary resources, whether drawing on their own reserves or on their general access to borrowed international financial resources.

The financial implications of commodity arrangements are most prominent in the case of international buffer stocks, though important financial implications also arise for other mechanisms. Even in relation to particular objectives for particular commodities, estimates of financing costs of buffer stocks may vary widely. One set of elements in this uncertainty comprises the market responses, in demand and supply, to the envisaged price adjustments. Another element is the choice among alternative means of financing and operating buffer stocks. Thus, the inclusion of some self-financing element, such as the levy on cocoa shipments envisaged in the draft cocoa agreement, will over time reduce or eliminate the need for outside financing of the cost of acquisition of stock. A device of this kind, together with a possible need for particularly large resources at the outset of the scheme when the durability of the arrangement is not yet secure in the eyes of traders, may mean that significantly larger resources are needed to establish a buffer stock than to maintain it over the years—always provided it is managed on balanced lines and does not lead to continuing accumulations of stock. Financial requirements may also be reduced by provision for lagged or partial payments on transactions undertaken directly with marketing authorities in producing countries.

The above factors have their influence on costs of stock acquisition. Carrying costs will depend on costs of storage and interest charges. These may vary widely in different circumstances; the level of the interest rate may turn the scale between a profit and a loss in the buffer stock operation. But these annual carrying costs are not normally amenable to the direct influence of the buffer stock agency. The cumulative level of these costs will, of course, be related to the period of storage. This will depend in part on the time path of fluctuations in the particular commodity market, and on policy decisions by the buffer stock management in relation to these market movements.

Beyond carrying costs and interest charges, the financial result of buffer stock operations will depend on trading profits or losses. These are in part determined by the “outside” influence of the course of market prices; but they can also be influenced by varying the margin between buffer stock buying and selling prices. A relatively wide margin will tend to increase trading profits, for any given volume of two-way transactions. However, insofar as this wide margin is achieved by setting the selling price at a high level, this may be at the expense of delaying disposal of stocks, and thereby adding to carrying costs; insofar as it is achieved by setting the purchase price at a low level, it will delay the buffer stock becoming effective in price support until prices have fallen correspondingly. In either case, the effectiveness of the buffer stock will be reduced as an instrument of price stabilization, though not necessarily as an instrument of earnings stabilization.

The Articles of Agreement 2 envisage a two-sided approach by the Fund to the problems in its field of action: through consultations with its members and through the provision of its resources to its members. In dealing with individual problems the Fund combines the two components of its approach in such measure as appears most effective. In accordance with this Fund approach, the discussion of the additional contributions that the Fund might make toward the solution of problems facing members in the field of primary production are presented below in two chapters, the first one dealing with the consultative aspects of possible Fund action and the second one dealing with new provisions for financing.

Chapter II Consultation with Members

Over the years the Fund has developed close relations and contacts with its members, both developed and developing countries. Initially, these contacts related in particular to the discharge of the direct responsibility of the Fund to approve exchange practices. But they have widened and grown in value, both to individual member countries and the Fund, through the annual visits by the Fund staff in connection with consultations under Article VIII and Article XIV. These visits, as they are now practiced, provide an opportunity for a broad review of all the policies bearing on member countries’ balance of payments, and thus of those developments affecting primary products entering international trade. More recently, consultations have sometimes included discussion of the circumstances which have led to use of the compensatory financing facility for fluctuations in export earnings. The discussion of the staff’s reports by the Fund’s Executive Board provides a regular forum for the expression of opinions and for the development of a common international view on the policies of members. In addition to these annual consultations there have been growing contacts in relation to the provision of Fund assistance—both financial and technical. Particularly in the context of the development of a stabilization program, there are extensive discussions on the member country’s policies, including policy bearing on commodity trade, at the critical time when the policies and measures are evolving rapidly. The basis therefore exists for Fund views on any aspect of commodity policy to be brought to the attention of member countries in ways which enable the authorities to take them into account as their own policies evolve.

Matters that bear on commodity policy have been particularly important in the Fund’s relations with primary producing countries, where commodity problems play a large role in the economy. In virtually every area of primary concern to the Fund—credit or fiscal policy, the balance of payments, exchange rates, and so on—problems frequently present themselves for which a solution must be based on an understanding of the issues involved in appropriate commodity policies. These have included the incentives or controls to be applied to producers, the incentives to be provided for the production and export of alternative products, and the degree of support to be provided through credit facilities or the budget for stock-building under national and international arrangements. More precisely, commodity policy issues have to be carefully considered in connection with each of the following policy decisions.

(1) Frequently, commodity conditions have been the single most important factor taken into account in determining exchange rate policy. The maintenance of an exchange rate which provides suitable incentives to exporters (and to producers who compete with imports) plays a vital role in limiting the difficulties which can arise from a weak commodity situation. The Fund has frequently assisted members when they have adjusted their exchange rates to more appropriate levels, and thereby has enabled them to achieve the most effective incentive for the diversification of export production away from weak commodities and for expansion of production of commodities in strong demand. It has been the experience of the Fund that without the market incentives provided by an appropriate exchange rate, diversification policy of a viable kind is critically inhibited.

The Fund has been given responsibilities in respect to exchange rates in order to ensure inter alia that this policy instrument is not used irresponsibly to further one member’s exports over those of another by competitive devaluation. This has not been a serious problem in the period of the Fund’s operation, but approval of member countries’ exchange rates remains an essential part of the Fund’s powers which is of particular relevance to commodity problems.

(2) In the related field of taxation and subsidies on particular commodities, policy decisions by individual member countries have at times taken the form of practices subject to approval by the Fund. In practice, the Fund’s advice and approval on these matters has been based on market judgments reflecting the basic demand and supply conditions of the commodities in question. It is important, as has been brought out in Part I of this study, that effective action be taken to reduce production of those commodities which are in serious oversupply. An example of the application of this principle in recent years is the staff’s recognition that coffee was in such a position. The Fund has, in many countries where this was appropriate, supported the domestic taxation of coffee production, which has had the effect of restraining production. Where possible, it has urged that this taxation be levied directly under the government’s tax powers, one reason being that this provides the greatest assurance of continuity in policy. However, there have been several countries in which it has not been feasible to use the tax system directly and where the Fund has approved exchange measures involving the imposition of substantial taxes through the exchange system.

(3) Stockpiling requires provision for finance and consequently has been the subject of review in many domestic financial or stabilization programs. Owing to the widespread incidence of commodity problems, many such programs have had to include provisions for the financing of stockpiling of primary products. The provisions have been based first upon a review of the merits of stockpiling, i.e., whether it is in the medium-term interest of the country as a whole on the basis of a realistic appraisal of market prospects. Where this was the case, the program provided for its financing through appropriate taxation or, if the overall financial circumstances permitted, through an extension of credit. In other cases, where the stock accumulation has appeared to be based on historic prices that were no longer realistic because of later developments, the Fund has advised adjustment of prices to more realistic levels.

(4) Developing countries exporting a commodity in a relatively weak market position have sometimes been faced by insistence by their trade partners on bilateral payments arrangements under which the developing country is forced to accept payments through bilateral account, usable only for purchases at prices that may be noncompetitive. The Fund has actively pressed for the elimination of such bilateral practices whenever practicable, in order to aid members to obtain convertible currency payment for their exports and to lessen the discrimination inherent in bilateralism.

With respect to other restrictions on exports, which may not fall as directly as those mentioned above within the Fund’s jurisdiction, the Fund provides a channel through which the developing members can describe, and bring to the attention of other members, the practices which they believe constitute unreasonable impediments to their efforts to increase their export earnings. This procedure can be helpful in directing attention to the need for reconsideration of such practices by other members.

In consultations with industrial countries, relatively less attention has been paid to the commodity problems of the type here reviewed, and this was appropriate from the point of view of the lesser importance of these commodities to the economies of these countries. At the same time, the primary product policies of industrial countries are among the important causes of the inadequate trend in the world prices and market capacity of a number of leading primary products. This occurs at a time when the share of primary production in total employment in most industrial countries has shrunk to a low percentage.

In present circumstances it seems appropriate to ask that the industrial countries test the policies they apply with respect to primary products against the Fund’s purposes and consider whether such policies “facilitate the expansion and balanced growth of international trade” (Article I (ii)). The Fund itself could pay additional attention to these matters, and periodically review the outlook for particular commodities and the policies of members with respect to them, with both producing and consuming countries. It would be hoped that this approach would increase the attention paid to commodity problems by the industrial members and focus their attention toward action to remove articifial disadvantages to the exports of the primary producing countries.

Chapter III Fund Assistance in Financing Stabilization Operations

Part I of this study has shown that the most appropriate approach toward stabilization depends to a large extent on certain market and physical characteristics of the individual commodities for which stabilization is sought. For purposes of discussion of the appropriateness of Fund financial assistance in particular relation to the objective of stabilization in the markets of primary products, a distinction is here being made among three methods of stabilization:

  • (1) The stabilization of “export availabilities.”

  • (2) Price stabilization by means of international buffer stocks.

  • (3) Other stabilization action, with special reference to stocking activities by individual producing countries.

As a general proposition it can be stated that insofar as the Fund provides assistance to its primary producing members in conjunction with commodity stabilization policies, it should do so in a manner most suitable to the particular commodities involved and on terms and conditions that are equitable among members.

In appraising the adequacy of special facilities, both the compensatory financing facility and the new facility outlined in the following sections of this chapter, it should be borne in mind that a member can also use, for the purposes which these facilities are intended to meet, its normal drawing potential in the Fund, subject of course to the degree of conditionality appropriate to the tranche of the quota in which any drawing would take place.

1. Stabilization of Export Availabilities

Under this approach international financial assistance is made available on a temporary basis to assist in evening out over time the amounts of exchange at the disposal of countries. This is achieved by making exchange available, in effect on a credit basis, in years when export proceeds are low compared with the medium-term trend, in the expectation of a reversal of the transaction in a reasonably short period, preferably at a time when export proceeds are high relative to the medium-term trend. A major technical advantage of this compensatory financing approach is the generality of its applicability. The approach can be used for all member countries and with respect to the proceeds from all exports. It applies without distinction to fluctuations in earnings whether these originate on the demand side or on the supply side of the market. It does not require any special arrangements in the commodity field. It does not stand in the way of specific arrangements for price stabilization wherever these are appropriate and feasible. Because of the limited number of commodities to which buffer stock may be appropriate and the difficulty of concluding agreements of this nature, it seems probable that compensatory financing will, for the foreseeable future, have to continue to play a major role in the financing of fluctuations in earnings.

A systematic scheme for stabilization of export availabilities has been introduced by means of the Fund’s facility for Compensatory Financing of Export Fluctuations. The Fund’s first decision on this facility was taken in 1963 and it was substantially broadened in 1966.1

Under this Decision the Fund stands ready to meet requests for drawings by members whose export proceeds over the latest 12-month period for which the Fund has statistical data have fallen short of the estimated medium-term trend of exports defined as a five-year moving average centered on the shortfall year. This estimate is arrived at partly by forecasting the export yield of individual commodities, and partly by means of statistical formulas derived from the exports of previous years. While compensatory drawings take place after the shortfall to which they relate, ordinary drawings made by members in anticipation of their entitlement can later be reclassified under the facility.

In order to qualify for compensatory financing, the member must be prepared to cooperate with the Fund in finding appropriate solutions for its balance of payments difficulties and the shortfall must be largely attributable to circumstances beyond the control of the member.

Amounts drawn under the facility are regarded as separate from and additional to a member’s normal drawing rights in the Fund. The policy conditions on which the Fund will consent to drawings under its ordinary facilities become increasingly strict the greater the amount of drawings already outstanding. In accordance with the separate status of the compensatory facility, however, drawings outstanding under that facility are disregarded by the Fund when considering the policy conditions to be applied to other drawing requests.

Subject to the limits discussed below, export shortfalls are compensated in full after due allowance for any part of them that may be deemed to have been compensated by previous ordinary or compensatory drawings. The use of the Fund’s resources in this way is, however, subject to certain quantitative limits in that compensatory drawings outstanding can normally not increase by more than 25 per cent of a member’s quota in any 12-month period, and the total amount outstanding cannot exceed 50 per cent of quota.

Compensatory drawings have to be repaid within an outer limit of three to five years, but the Fund recommends that in any year in which a member’s exports exceed the medium trend, earlier repayment from part of the excess should be made. Repayments of compensatory drawings restore the facility pro tanto.

Drawings under the compensatory facility have taken place as shown in the table. After a fairly substantial use of the facility in the first year of its existence, little use was made of it for a year or two owing to the relatively favorable export experience of primary producing countries during 1963 and 1964. Since its revision and extension in 1966, however, the facility has been much more intensively used, partly because primary producing countries have experienced more substantial export shortfalls and partly because of increasing familiarity with the facility, and appreciation of its advantages.

Transactions Under Decision on Compensatory Financing of Export Fluctuations
DrawingsRepurchases through May 31, 1969
(Million U.S. dollars)
1963 Decision
United Arab RepublicOct.196316.016.0
1966 Decision
Dominican RepublicDec.19666.6
New ZealandMay196729.229.2
Syrian Arab RepublicSept.19679.5
United Arab RepublicMar.196823.0
Grand Total377.75160.2

Reclassification of an ordinary drawing as a compensatory drawing under paragraph (9) of the Decision on Compensatory Financing of Export Fluctuations, as amended on September 20, 1966 [E.B. Decision No. 1477-(63/8), February 27, 1963, as amended by E.B. Decision No. 2192-(66/81), September 20, 1966; see above, p. 200].

Reclassification of an ordinary drawing as a compensatory drawing under paragraph (9) of the Decision on Compensatory Financing of Export Fluctuations, as amended on September 20, 1966 [E.B. Decision No. 1477-(63/8), February 27, 1963, as amended by E.B. Decision No. 2192-(66/81), September 20, 1966; see above, p. 200].

It may be concluded that the Fund’s compensatory financing facility has performed a useful function and would continue to perform this function even if there were a widened approach by the Fund toward facilitating stabilization in the primary commodity field.

As part of the 1963 Decision on Compensatory Financing, the Fund also made provision for increases in the quotas of primary producing countries to make them more adequate in the light of fluctuations in export proceeds and other relevant criteria.

2. Financing of Buffer Stocks

Certain general considerations will have to be kept in view in judging the usefulness of buffer stock operations and the role of Fund assistance in such arrangements. There will also be a need to approach arrangements on a commodity-by-commodity basis, in order to take into account the specific circumstances of each such commodity situation, as well as other policies and measures with which the buffer stock arrangement may be associated. The analysis in Part I suggests that where price instability is caused predominantly by shifts in demand rather than in supply and where flexible price policies based on a realistic appraisal of medium-term trends are pursued, international buffer stocks will normally tend to stabilize not only prices but also aggregate export earnings along with prices. Experience since 1950 suggests that most metals, together with some agricultural raw materials, fall potentially in this category. But additional criteria have to be applied to determine whether an international buffer stock is a suitable stabilizing mechanism for any given commodity. These include the effects on resource allocation, which may include costs as well as benefits. The effect on commercial stocks has to be considered in relation both to aggregate resource costs and specific financial costs. Insofar as the buffer stock imparts a greater degree of certainty to the market outlook, it may reduce or eliminate destabilizing movements in commercial stocks, and thereby have a catalytic stabilizing effect. Insofar, on the other hand, as it takes over some of the stabilizing functions earlier performed by commercial stocks, which in itself may or may not be desirable, a substantial and often rather indeterminate commitment may have to be added to the financial resources of the buffer stock.

While the earnings stabilization criterion for international buffer stocks appears to be potentially met for most metals, the economic suitability or practicality of the buffer stock device is, however, questionable for some of these on other grounds. These include the relative length of the price swings, which may result in high and perhaps uneconomic costs of buffer stocks, and the prevalence in the production of some metals of a relatively small number of large international corporations. Over the whole range of primary commodities, instances may arise where a better approach to earnings stabilization will be through national stock management or temporary supply restriction, possibly in combination with buffer stock arrangements. Such measures may not give rise to the need for full and direct compensation in foreign exchange. This applies, in particular where supply disturbances are dominant, and may also in certain cases be a more convenient way of dealing with the problems of commercial stocks. Provisions of this kind in association with a buffer stock scheme are included in the International Tin Agreement and also in the scheme currently under consideration for cocoa. Fund support of national action is discussed in Section (3) of this chapter.

If it were to be judged that many commodities could fall appropriately within the purview of buffer stock financing, this conclusion could effect the institutional arrangements for administering the financing as well as the techniques for raising the necessary funds. If, however, as is suggested above, the range of commodities for which buffer stocks are feasible on an economic basis is not very extensive, and the total costs not unduly large, and on the expectation that an appropriate part of the resources required would be obtained from sources other than international financial institutions, the funds to be provided internationally could be within the capacity of the Fund to handle without the necessity of establishing new institutional arrangements. It would also follow that separate resources would not need to be obtained by the Fund for this specific purpose.

If, however, the Fund were to assume this responsibility, it could do so only subject to certain limitations. Short of further amendment of the Articles, the financing would have to be (i) provided to members directly, (ii) available only to members which (taking into account their transactions with the buffer stock) had a balance of payments need to draw, (iii) temporary in duration within the Fund’s present or future understanding of that concept, (iv) “floating” only above the gold tranche as defined by the Proposed Amendment, if it were to “float” at all,2 and (v) available only as a conditional facility.3 It would, of course, be possible to eliminate by amendment any of these features of Fund financing of buffer stock operations. It should, however, be stressed that the provision of international funds for commodity stocking on a relatively modest scale, on a short-term repayment basis, to participating countries rather than to a commodity agency directly, and in the context of existing facilities of short-term borrowing, has certain economic merits irrespective of institutional considerations, in providing what may be thought to be necessary safeguards against unduly extensive and economically costly absorption of resources in this direction.

The following ideas are presented on the basis of the assumptions that have been outlined, including the one that there would not be resort to amendment.

A number of considerations argue in favor of a joint upper limit on the amount of resources provided for the compensatory financing facility and any assistance that the Fund might extend in connection with buffer stock financing. First, the number of commodities for which international buffer stocks, in their various possible forms, might be appropriate, and the number of countries that could be expected to benefit substantially if buffer stocks were introduced where appropriate, seems likely on the present assessment to be small, so that any special facility, to the extent that it is additional, would provide Fund resources to a relatively small group of countries. It seems equitable that this additional element be subject to a reasonable limitation. Secondly, the buffer stock approach and the compensatory financing approach toward stabilization have common features. Both are intended to deal with short-term instability in the economies of primary producing countries brought about by factors wholly or largely beyond their control. The former approach aims at averting the consequential disturbances in exports, the latter at offsetting them, so that where buffer stock operations deal successfully with the instability arising from demand fluctuations for a commodity that represents the bulk of any country’s exports, that country’s export proceeds will have been rendered more stable and hence its need for assistance of the compensatory financing type reduced. Of course, the two approaches also differ in important ways. Compensatory financing is directed specifically to stabilization of “export availabilities,” while buffer stock financing, through its stabilizing effect on prices for a commodity, may influence the long-term demand and supply and hence cumulative export earnings, though it may also have associated financial and real costs. It is recognized also that the two approaches are not full substitutes for each other: this is taken into account in the suggested provisions for operation.4

The remainder of this section discusses a number of issues that would arise if the Fund decided to extend assistance to members for buffer stock financing on the basis of a quantitative link to the existing compensatory financing facility. This discussion does not presuppose that problems of financing have been the main stumbling block in the conclusion of agreements for particular commodities. Nevertheless, some international agreements of a useful and otherwise practical character may not be negotiable without some possibility of financial assistance over and above what governments could contemplate providing from their own resources. In those circumstances assistance from an international institution can play an important role as a catalyst and may thus help individual countries to agree on action that is of collective benefit.

(1) The assistance in connection with buffer stock financing discussed here is intended essentially as a facility under which Fund resources are made available to members in their capacity as exporters of primary products. As recommended by unctad, the financial resources of a buffer stock should be provided in a form that is equitable for all parties concerned. When importing countries assume financial commitments in buffer stock arrangements, for example, as one of the possible means of ensuring equity and a balanced responsibility for operation of buffer stocks, the facility should be available to them as well. The sums involved for importing countries would probably rarely be such as to have a significant effect on the balance of payments of these countries, save possibly in the case of a developing country that was a large importer of a primary commodity. It would also be expected that an appropriate part of the resources required for a particular scheme would be met from sources other than international financial institutions.

(2) In the case of the financing of export shortfalls, the right of a country to make use of the compensatory financing facility, on the terms of that facility, is determined by the existence of a shortfall and the associated conditions referred to in the preceding section. With respect to assistance to members to enable them to finance buffer stocks, the primary justification for a drawing would lie in the fact that a member was required to make contributions for the financing of new purchases of stock or of operating expenditures as determined by an international commodity agreement, with respect to which certain associated conditions are described at (4) below, or for refinancing of short-term indebtedness incurred for such purposes. In addition, the member would also have to fulfill the condition described at (3) below. The member would, of course, have to have a balance of payments need to draw. By analogy with experience under the Compensatory Financing Decision, it might be expected that many members would not find it necessary to draw on the facility to make such payments to the international agency, either because they had no payments need or because the amount involved for them would be small, in particular where the commodity in question was a relatively minor export.

(3) A member that draws under the compensatory financing facility undertakes to cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties. The Fund would want to apply this condition to any buffer stock assistance as well.

(4) In addition, the Fund must be satisfied that the transactions which it is helping to finance are compatible with its purposes and with the short-term character of the facilities which it provides. This implies that the scheme in connection with which the facility is used should in its conception, governing provisions, and actual management be satisfactory from the point of view of certain criteria which are set forth in Annex A to this Report. These relate to such matters as observance of certain general principles of intergovernmental relations in commodity agreements, and as regards the appropriate operation of buffer stocks in relation to the temporary use of Fund resources and measures for long-term restriction of supply. It is desirable that these criteria should apply not only to the provisions of the commodity agreement on its initiation or renewal,5 but also to its actual operation. At the same time, the Fund’s commitment to help members finance buffer stock operations would have to be a reasonably firm one if it is to be of value as a basis for their commitments to a buffer stock agency and in framing the overall set of measures incorporated in a commodity agreement. This is an area of great difficulty and sensitivity. The preparation, negotiation, and management of commodity schemes would be the responsibility of governments and appropriate bodies established for these purposes, and not of the Fund; under the un procedures described in Annex A, these activities are subject to rules of publicity, and the operation of agreements to at least annual review. To the extent that the Fund was providing finance, or standing ready to do so, the exercise of the necessary safeguards would require it to be satisfied that the operation of the scheme was such that a member’s use of the Fund’s resources in connection with it would be temporary.

(5) The principle of the direct responsibility of members rather than of the Fund for the conduct of commodity operations of any buffer stock agency would be reinforced by the fact that any transactions would be conducted between the Fund and its members, and would be on the repayment terms applying to all Fund drawings. The Fund would not lend to a commodity agency as such. The main reason for this approach is the one just stated. As mentioned earlier, direct lending by the Fund to a commodity agency would require amendment of the Articles of Agreement.

(6) Parallelism with the Compensatory Financing Decision would suggest that assistance in the financing of buffer stocks would be “floating,” i.e., it would be separate from, and additional to, members’ general access to the Fund’s resources.6

(7) At present, members’ access to Fund resources under the Compensatory Financing Decision is limited to a maximum of 50 per cent of quota. It is suggested that a similar limit of 50 per cent of quota be applied to members’ access to the Fund’s resources for the purpose of buffer stock financing. The pattern of trade for some commodities for which buffer stocks have been proposed and appear economically feasible, and the possible terms of agreements relating to them, would suggest that the availability of Fund resources to this extent would be of substantial assistance even for countries for which the commodity in question was a large proportion of total exports. It is not suggested, however, that total purchases outstanding under the two facilities at any one time be allowed to the full extent of 100 per cent of quota. The close economic relationship between buffer stock operations and compensatory financing would make it reasonable that Fund assistance to members under these heads should be subjected to a somewhat lower common upper limit. Specifically, the total outstanding amount made available to a member for the compensation of export shortfalls under the compensatory financing decision and for the contribution to buffer stocks combined could appropriately be limited to 75 per cent of quota. The fact that a member is benefiting from the stabilizing influence of a buffer stock for its export product should to some extent reduce its need for compensatory financing, and it is thought that the joint limit suggested would meet any joint need to use the two facilities, though, of course, it is impossible to anticipate precisely a country’s possible total requirements in terms of both compensatory financing and its participation in one or more buffer stock arrangements. In any event, the proportion of purchases in terms of quotas that can appropriately be made under facilities of this nature cannot be determined on considerations of “need” alone. The Fund must strike a reasonable balance between the amount countries can draw under the Fund’s general policies and the amount available under special facilities and on special terms.

(8) Drawings outstanding under the compensatory financing facility need not be increased by more than 25 per cent of quota in any 12-month period except in the case of shortfalls resulting from disasters or major emergencies. To make an annual limit apply to drawings on the buffer stock facility might inflict hardship on countries requiring to use that facility, and perhaps place obstacles in the way of the adoption of a buffer stock scheme. It is, therefore, suggested that while the limitation on the annual increase in compensatory financing drawings outstanding should remain as at present, no such limit be placed on the increase in drawings outstanding under the buffer stock facility.

(9) In accordance with established policies regarding the temporary use of the Fund’s resources, the standard three- to five-year rule on repurchase would apply to drawings in support of buffer stocks. In addition, since these resources would be made available for the purpose of assisting buffer stock financing of a revolving character, a rule might be established that the member would repurchase from the Fund to the extent that the buffer stock distributed cash to its members. By benefiting from differences in timing in the stocking needs for different commodities, Fund assistance to buffer stock operations would be provided with the minimum possible drain on its resources.

(10) Repayment by a member would, of course, reopen pro tanto the facility as described at (7) above. However, it follows from (4) above that it would not be the intention that commodity stocking should be financed by reliance on long-term use of Fund resources.

3. Other Stabilization Action

National or international action for the temporary limitation of export supplies can in principle deal more effectively than international buffer stocks alone with the problem of earnings stabilization when supply is variable, since they are confined to obviating the depression of market prices by withholding excess offerings, while avoiding the overcompensation which will occur if the excess offerings are remunerated at full market prices as stocks taken up by an international agency. Where such commodity action in other forms is judged to be viable and consistent with Fund objectives, being based on a realistic appraisal of the medium-term trend, Fund support might be as appropriate as for the financing of stock purchases in foreign exchange by an international buffer stock.

The building up of stocks financed by national authorities or the withholding of supplies in observance of international quota commitments does not require an immediate foreign exchange outlay, but, depending on the extent to which payment is made to domestic producers and on what offsetting action is taken elsewhere in the economy, it may put additional strains on the domestic economy and hence on the balance of payments.

In contrast to the situation applying to international buffer stocks, which rest on the ability of members of a commodity scheme to make prompt payment to meet demands by the administration of the buffer stock, this form of supply management does not involve an immediate and precisely determinable use of foreign exchange. Fund support may be appropriate; but only analysis of the individual country situation can determine this. Some national stockpiling policies may be of great international interest and conducive to the balanced growth of international trade; others are likely to be disastrous both to the country investing in the stockpile and, in the slightly longer run, to other producers as well. The distinction cannot always readily be drawn; and it cannot be derived from some formal characteristic, e.g., whether the stockpiling is a commitment under an international commodity agreement. Moreover, the impact on the balance of payments of domestic stocking activities cannot be separated from the impact of other investment activities financed by the government. Indeed such stocking activities cannot be considered solely from the point of view of the price of the commodity and the income of its producers, but must also be appraised in the general context of a country’s policies of aggregate demand and economic stability. The problems posed here are, therefore, very closely connected with the general relations between the member and the Fund, both consultative and financial. Any assistance by the Fund in connection with national stocking activities (other than in relation to an export shortfall permitting a drawing under the Compensatory Financing Decision) should therefore be approached in the context of the Fund’s general tranche policies.

In appraising the fiscal and monetary impact of domestic accumulations of carryover stocks in the context of a member’s economic objectives and its possible use of the Fund’s resources, consideration would, as at present, be given to the appropriateness of members’ domestic credit arrangements. In addition, specific attention would be given in future to the appropriateness of such accumulations in the light, inter alia, of international commodity arrangements, general repercussions on the other main producing countries, and the interests of consuming and importing countries. Consideration would be given to the appropriate policies of the member relating to domestic credit and fiscal arrangements in this connection. Equally, in assessing the impact on the balance of payments of liquidations of stocks on external markets—and the domestic fiscal and monetary position of members—specific consideration would be given to any repercussions in international commodity markets.

Fund support of international supply management would obviously have to reflect certain general principles, in particular the need for the observance of the short-term character of the stabilization operation in conformity with the apparent medium-term trend. The integration of the Fund’s concern with members’ cooperation in acceptable international commodity policies into its general relationship with members could be both an important support for such policies and a means of guiding commodity arrangements in appropriate directions. In dealing with other questions, for example in relation to bilateral trade arrangements for particular commodities, the Fund might also, where appropriate, bear in mind the international commodity aspects of members’ policies.

In the context of this general approach to a country’s economy, the Fund could be prepared as in the past to grant members access to its resources, in accordance with its purposes, to meet payments problems arising from investment in stocks of primary products. The Fund would, in consultation with the member, determine in each case the amount it considered appropriate in the circumstances, which would be granted within the framework of the normal tranche policies.

4. Effects with Respect to Fund Liquidity

When, in 1966, the Fund decided to expand the compensatory financing facility, considerable attention was paid to the effects which this might have on Fund liquidity.7 The finding was that the expanded facility would involve maximum potential drawings of $1.3 billion, but that probably no more than about half of this amount would be realized, since countries with adequate reserves will often not use opportunities for compensatory drawings that are open to them and since any use made of the compensatory facility is likely to reduce to some extent requests for ordinary drawings.

Since these estimates were made, frequent use has been made of the compensatory financing facility, including use by at least one country with a very large quota. However, in nearly three years’ operation of the facility in its expanded form, the amount outstanding under the facility at no time exceeded $290 million as shown in the chart.

Drawings Outstanding Under the Decision on Compensatory Financing of Export Fluctuations

(In millions of U.S. dollars, end of month)

The suggestion made for possible Fund support in connection with international buffer stock operations would increase a member’s total access to floating facilities. It might also, on occasion, entail the use, for buffer stock purposes, of resources formerly available for compensatory financing that would otherwise have remained unused. On the other hand, the operation of international buffer stocks might mitigate the need for countries to ask for Fund assistance in connection with compensatory financing.

The nature of the problem does not permit, therefore, a quantitative estimate of the additional pressure on the Fund’s liquidity that might arise from the association of assistance to international buffer stocks into the compensatory financing facility. Much would depend on the extent to which it will in fact prove desirable and practicable to bring international buffer stock schemes into being, on the international climate in which any such buffer stocks would have to operate, and on the skill with which they would be managed. The joint limit suggested for a country’s access to the compensation of export shortfalls and the assistance to buffer stock operations combined is intended to ensure that the total of claims on the Fund’s liquidity under these headings would not become excessive.

Insofar as the Fund’s liquidity has been under a certain strain in recent years, Fund operations under the compensatory financing facility and, more generally, Fund operations with the primary producing countries have not been responsible to any major extent. Outstanding drawings of the less developed countries fluctuate little and show only a slowly rising trend in amount.

Chapter IV The Problem of Members’ Short-Term Indebtedness

Any consideration given by the Fund to measures to extend assistance to its members should also involve the aspect of the possible effects on these members’ short-term indebtedness. In its relationships with its members, the Fund is too often faced with this problem to ignore the risk that it might be further aggravated by increased drawings on the facilities of the Fund. Some consideration was already given to this question in connection with the extension of the compensatory financing facility in 1966; but the question arises more broadly in connection with all Fund transactions with countries with a basically weak international financial position.

It may be taken as a general proposition that, where the assumptions underlying the transaction prove to be correct, the member is fully justified in undertaking a short-term commitment to the Fund. For example, where a Fund drawing is based on a stabilization program, the member should without difficulty be able to repay the Fund once the program has taken hold. A compensatory drawing made to meet a shortfall in export proceeds that is established as a short-term shortfall should be readily reversible once exports have regained a satisfactory level. A buffer stock that has made purchases to deal with a situation of temporary disequilibrium between supply and demand should be able to unwind its position when supply and demand are again in better balance, and this should then permit repayment to the Fund by the exporting countries participating in the buffer stock arrangements.

There is thus a fundamental distinction between the difficulties that arise when short-term credit is resorted to for the finance of long-term needs and the kind of difficulties that may occasionally arise when short-term finance is being used to deal with difficulties which are ostensibly short term but which prove, even with flexible and realistic management of stabilization activities, not to be short term in character.

The answer to this problem goes well beyond the scope of this report, and should not be confined to considerations more directly relevant to the expanded assistance that the Fund might want to give to its members in dealing with commodity price fluctuation. Considered from a broad point of view, the indebtedness problem merges with that of the difficulties that primary producing countries have in attracting sufficient development capital. Problems arising in these circumstances are the concern of a number of international agencies, whose activities and programs of assistance are relevant to the Fund’s operations.

Financial assistance of a long-term character is clearly not a task for the Fund whose resources can be employed only on a revolving basis. But there is no doubt that it would be in the interest of both the Fund and its members if financial resources were available to assist members in dealing with commodity problems which required solutions of a long-term character. It is important to note in this connection that the Executive Directors of the World Bank Group have adopted a number of decisions on the feasible role of the Bank Group at this time in contributing to a solution of the commodity problem.

Annex A

Criteria for Fund Assistance to Members in Connection with International Buffer Stocks Criteria for appraisal of international buffer stock proposals are considered below under three categories relating respectively to (a) observance of certain general principles of intergovernmental relations as regards commodity agreements and international trade measures, (b) the temporary use of Fund resources and the appropriate operation of international buffer stocks, and (c) buffer stocks and price support measures.

General Principles of Intergovernmental Relations in Commodity Agreements

(1) Participation. Certain general principles and rules have been adopted by the United Nations Economic and Social Council regarding procedures to ensure equity in the conclusion and conduct of international commodity agreements. The Council has recommended that members of the United Nations should continue to accept these principles as a general guide to intergovernmental consultation or action with respect to commodity problems. It is suggested that adherence to these general principles as they relate to participation, voting, equitable treatment, and duration, should be a necessary condition for the provision of Fund assistance.1

General acceptance of the procedures dealing with the preparation, negotiation, and conduct of commodity agreements has been an important change by comparison with the interwar attempts to deal with difficult commodity situations mainly by producers alone. Most postwar agreements have been concluded initially under un auspices, they have been open to participation on the widest basis, and periodic reports on their operations have been submitted to un bodies. In practice, the preparation and stages of negotiation of some agreements, especially those renewing existing agreements, have been conducted under the auspices of commodity councils, gatt, and fao; the general procedures as laid down in the Havana Charter have been broadly observed in most negotiations, even where these have not been carried out under the aegis of the United Nations or unctad.

The question of the extent to which interested countries take advantage of the opportunities presented to them of participating in the operation and management of a commodity scheme is also of importance. The widest possible active participation would, of course, be desirable. However, a scheme may operate effectively and equitably without the participation of all countries with a substantial interest in the commodity. Evaluation of schemes from this point of view should therefore be on a case-by-case basis.

(2) Trade restrictions. The successful negotiation and operation of a commodity agreement including buffer stock operations may necessitate provisions requiring members, in certain defined circumstances, not to trade in the product with countries not members of the agreement. The possibility of consequential trade discrimination among Fund member countries, while not a matter falling within the Fund’s jurisdiction (unlike discrimination in payments arrangements) is nonetheless of concern to the Fund, having regard to its purposes. It could be expected that Fund member countries parties to a buffer stock agreement would seek to avoid any consequential discrimination in their trade with other Fund member countries. The procedures for consultation with members participating in buffer stock arrangements would afford an opportunity for discussion of any recourse to discriminatory trade practices in connection with the arrangements.

The Temporary Use of Fund Resources and the Appropriate Operation of International Buffer Stocks

It is proposed that drawings under the buffer stock financing facility should be temporary in character and subject to the repayment terms applicable to all Fund drawings including the standard three-to five-year rule on repurchases, with the addition of a special provision under which the member should repurchase from the Fund earlier to the extent that the buffer stock distributed cash to its members. Members that make use of the buffer stock financing facility will be expected to make the necessary provision, both inside the buffer stock agreement and in their own arrangements, to enable them to meet their repurchase commitments to the Fund.

Despite this partial separation of the member’s obligations to the Fund from any arrangements it may have with the buffer stock, the Fund is concerned that the operation of the scheme should be such as to ensure that the member’s use of Fund resources is no more than temporary. This fits well with the objective of the facility to foster the smoothing out of short-term price fluctuations round a medium-term trend. The following points are intended to meet these desiderata:

(3) Stability of export earnings. The relationship between price stabilization and the stability of a country’s earnings from a commodity should be an explicit consideration in the drafting of commodity schemes. As indicated in Part I of the staff study on Stabilization of Prices of Primary Products,2 the elasticity of demand might be such that price stabilization by a buffer stock agency could tend to destabilize rather than to stabilize export earnings in certain circumstances, namely, when price fluctuations are caused by supply fluctuations rather than by demand fluctuations.

From the Fund’s point of view, there would be serious reservations with regard to any scheme which appeared likely significantly to destabilize export proceeds for any considerable proportion of individual countries, and thus, inter alia, to increase rather than to reduce the use of Fund resources in the form of drawings under the Compensatory Financing Decision. In practice, even where supply fluctuations are important, a variety of techniques might be used to secure full or partial stabilization of export earnings in association with some degree of price stabilization. These include adjustment of the price range in response to overall supply variations, partial postponement of payment for stocks acquired in glut years, and temporary quota arrangements. The Fund would wish to consider the extent to which the possibilities offered by such techniques have been utilized in the arrangements.

The Fund recognizes that even arrangements for price stabilization that tended to increase earnings instability might have longer-term benefits in improving the trend in demand and the allocation of resources in producing countries or might otherwise reduce real costs. Nevertheless, having in mind the difficulties which buffer stocking with a destabilizing effect on earnings could create for the repayment of Fund drawings used in the financing of the stocks, it would seem appropriate for the Fund to confine its assistance to schemes which appear likely to increase (or at least not to reduce) the stability of export earnings for the generality of the developing countries concerned.

Even where price stabilization measures may be expected to reduce earnings fluctuations for the majority of participants, the earnings of some individual countries may be destabilized. Where there appear to be wide-ranging benefits from the scheme for participants taking one year with another, this should not preclude Fund assistance to the scheme.

(4) The stabilization of prices. The type of buffer stock scheme for which Fund financing would generally be suitable would be one that aimed at stabilizing prices round a medium-term trend, i.e., one in which stock accumulation and decumulation could be expected to balance out roughly in the medium term without resort to abrupt ad hoc variation of export quotas or ceiling prices undertaken regardless of the stability of export earnings.

In order to meet these desiderata it is necessary that the intervention price range should itself be flexible within the period of operation of the scheme. For example, it might be fixed for a maximum of one year ahead in time and changed in the light of revisions in anticipated demand and supply conditions. It is not feasible to lay down a specific formula for determining the medium-term trend value of the intervention range from year to year. However, once the scheme had been in operation for some time, the intervention range for any year might be set at a level which, if maintained, would be likely to result in a balance of stock accumulations and decumulations over a reasonable medium-term period centered on the year with respect to which the range was fixed, with some allowance for any stock accumulation prior to the period in question and for other relevant circumstances.

An important question concerns the width of the range between the upper and lower intervention points. A fairly wide range, though it permits a greater degree of price variation, has considerable advantages in reducing the probable amount of stock accumulation and thus the danger that the buffer stock will exhaust its financial resources, and in increasing the profitability of the operation of the buffer stock and thus facilitating the building up of reserve funds. On the other hand, a wide range could delay disposals at the upper intervention level and lengthen the cycle of stock transactions. It would thus be important to provide for flexibility in reversing the width as well as the level of the price range in the light of continual market appraisal.

In all matters having to do with the determination of intervention prices, it will clearly be important that careful preliminary studies be made employing the best available techniques for forecasting variations in demand and supply conditions affecting the commodity.

Procedures recommended under the un Resolutions to which reference was made earlier, envisaged the establishment of specialized study groups as a first preparatory stage in the conclusion of commodity agreements. Under unctad procedures extensive use has been made of preliminary consultations and exploratory meetings prior to the convening of formal commodity conferences for negotiation. Judgment by the Fund on specific commodity arrangements should be facilitated by such procedures.

(5) Supplementary techniques for medium-term stabilization. Most discussion of the role of buffer stocks envisages the use of supplementary measures such as quantitative controls on exports or national commitments on internal stock levels. As already indicated, such measures could play a useful role particularly in mitigating short-term fluctuations in exports and export earnings induced from the supply side, leaving the buffer stock to take the impact primarily of demand fluctuations; and effective provisions permitting the temporary application of quotas for this purpose might be indispensable to protect the financial resources of the buffer stock. Where such resources are very limited, it might be necessary to apply such measures even where the effect was to destabilize export earnings. Too much recourse to this device, however, might be an indication that other features of the arrangement—the price range or the amount of financing available to the buffer stock—were unsatisfactory.

(6) Financial arrangements. The various features of buffer stock schemes discussed at (3) to (5) above should all make it easier for the buffer stock so to arrange its transactions with countries participating in the scheme as to make it easier for the latter to repurchase from the Fund any amounts they may have drawn under the proposed facility. However, certain aspects of the facility and of the financing of the scheme are also important in this connection.

In the first place, not all types of payments from participants to the buffer stock authority would qualify for financing by the Fund. For example, buffer stock expenditures for the construction of storage facilities are clearly of a long-term character and not suitable for indirect financing by the Fund. Again, use of the facility would presumably be confined to reimbursement of members’ contributions for the financing of new purchases of stock or of operating expenditures or for refinancing of short-term indebtedness incurred for such purposes. Third, it is envisaged that in the event of the buffer stock distributing cash to its participants, these amounts would be used for repurchases of drawings on the proposed Fund facility. Any subsequent transfers of cash from Fund members to the buffer stock authority, provided it was for the acquisition of additional stocks and not for the refinancing of any temporary borrowing operation related to stocks previously financed through drawings on the Fund, would then give rise to a possibility of new drawings on the facility.

Moreover, it would be expected that an appropriate part of the initial and operating costs of buffer stocking would be met from sources other than international financial institutions. This could be achieved from the start by means of contributions by countries which would be unlikely to draw on the facility, or in appropriate cases by a restriction of drawings on the facility to some proportion less than 100 per cent of the amounts transferred from participants to the buffer stock authority. Lagged or phased systems of payment can also play an important part in appropriate market conditions in reducing initial foreign exchange costs; countries accepting lagged or phased payments would thus bear a proportion of the financial burden of the scheme. Such provisions might provide safeguards for the prudent operation of buffer stocks. Also the buffer stock might be expected to build up a reserve fund from non-Fund sources to minimize any danger that stocks might have to be sold at an inappropriate time merely to facilitate repurchases to the Fund. This could be achieved, for example, through the collection of a trade levy (which itself would of course not qualify for refinancing through the proposed facility), and by the accumulation of any operating profits earned by the buffer stock.

Buffer Stocks and Price Support Measures

(7) Long-term restriction of supply. Merely to provide, as has been suggested above, that the price and other provisions of commodity agreements involving buffer stocks should be such as to promote a balance between stock accumulation and decumulation in the medium term is not enough to ensure that prices will tend toward the level that would obtain in stable and liberalized trading conditions. Buffer stocking arrangements may be introduced as part of an agreement combining other and potentially restrictive elements such as export quotas, restrictions on output, or diversion of supplies into low value uses.

Provision for the possible application of temporary export quotas has been regarded above as a desirable function of such agreements in the interest both of price stabilization and of the short-term character of stock accumulation and decumulation. However, quotas can be, and frequently are, employed not temporarily but more or less continuously and for the purpose not merely of stabilizing the price of the commodity in question round a medium-term trend but also of maintaining prices in the medium and even in the long term above the level that would otherwise have obtained.

Articles 57 (c) and 63 (a) (in conjunction) of the Havana Charter provide that commodity control agreements (those involving trade or output control or regulating prices) should be designed to assure the availability of supplies adequate at all times for world demand at such prices as are fair to consumers and provide a reasonable return to producers, having regard to the desirability of securing long-term equilibrium between supply and demand.

This formulation would not appear to preclude agreements envisaging export quotas or restrictions on output that would be continuous throughout the lifetime of an agreement if these were required to prevent prices from being drawn down in the medium term to unreasonably low levels, as a result, e.g., of a past accumulation of national stocks, or overextension of production capacity, or other such cause. However, it would appear to preclude the use of such restrictions to maintain a price that would in all likelihood require the continuance of such controls in perpetuity.

In more recent years a concept has developed—largely in the context of the unctad, but reflected in the request by a number of Fund Governors with reference to which the Rio Resolution was passed—according to which commodity agreements should aim at prices that are “remunerative”3 to developing producing countries, even though this may involve a permanent real income transfer from consumers to producers.

In considering the relative merits of these not entirely compatible criteria of long-term price fixing, it should be taken into account:

(a) that if the agreement is negotiated in accordance with the principles laid down in (1) above and therefore includes provision for adequate participation of consuming countries, the latter may be deemed to have consented to any real income transfer involved in quantitative restrictions, concessional sales, etc.; and

(b) that if the provisions of the agreement relating to prices appear likely, despite the various controls proposed, to result sooner or later in a breakdown of the arrangement, the Fund, with its interest in stabilization, cannot afford to overlook this consideration in determining whether or not the buffer stock element in the agreement is worthy of Fund support.

It may be wise for the Fund not to decide in any general terms as between the different criteria of long-term price determination, but to judge on the merits of each case, whether “the expansion and balanced growth of international trade … and the development of the productive resources of all members” would be furthered by Fund assistance to such arrangements.

Part I, which is not reproduced here, was published in 1969 under the title The Problem of Stabilization of Prices of Primary Products: A Joint Staff Study (Part I).

The World Bank also published a Part II of this study in 1969, entitled Stabilization of Prices of Primary Products: Part II, Report of the Executive Directors of the International Bank for Reconstruction and Development with a List of Staff Papers and a Report by the Bank Staff.

E.B. Decision No. 2772-(69/47), June 25, 1969. The decision has been omitted here, as it appears in the section on Executive Board decisions in Part Three of this volume; see p. 201 above.

Defined as the proceeds from exports plus receipts from compensatory loans or drawings minus repayments of such loans or drawings.

On May 31, 1968 the Board of Governors approved proposed amendments to the Articles of Agreement, and these amendments are now before the Fund membership for acceptance. In this Report reference to the Articles of Agreement is to be read as reference to the Articles as they will stand after these amendments become effective.

Compensatory Financing of Export Fluctuations—Developments in the Fund’s Facility: A Second Report by the International Monetary Fund (Washington, 1966).

For an explanation of this point, see footnote 6 of this chapter.

For a suggestion as to what might be regarded as constituting an appropriate conditionality in this case, see numbered paragraphs (3) and (4) of this chapter.

See numbered paragraphs (7) and (8) of this chapter.

In practice, commodity agreements have been concluded and renewed for terms of not more than five years, as recommended under the un procedures mentioned in Annex A.

Any new facility could not, however, float into the gold tranche. This means that a member that drew under the facility at a time when it still had gold tranche drawing rights at its disposal would pro tanto lose such automatic drawing rights; in contrast, a member that makes a compensatory financing drawing in the same circumstances conserves its right to use its gold tranche drawing rights later.

Compensatory Financing of Export Fluctuations, pp. 27–28 [cited above in footnote 1, p. 235].

These general principles are those included in Articles 60 (1), 63 (b), and 65 (1) of the Havana Charter for the then proposed International Trade Organization. Article 60 (1) states:

The Members shall observe the following principles in the conclusion and operation of all types of inter-governmental commodity agreements:

  • (a) Such agreements shall be open to participation, initially by any Member on terms no less favourable than those accorded to any other country, and thereafter in accordance with such procedure and upon such terms as may be established in the agreement, subject to approval by the Organization.

  • (b) Non-Members may be invited by the Organization to participate in such agreements and the provisions of sub-paragraph (a) applying to Members shall also apply to any non-Member so invited.

  • (c) Under such agreements there shall be equitable treatment as between participating countries and non-participating Members, and the treatment accorded by participating countries to non-participating Members shall be no less favourable than that accorded to any non-participating non-Member, due consideration being given in each case to policies adopted by non-participants in relation to obligations assumed and advantages conferred under the agreement.

  • (d) Such agreements shall include provision for adequate participation of countries substantially interested in the importation or consumption of the commodity as well as those substantially interested in its exportation or production.

  • (e) Full publicity shall be given to any inter-governmental commodity agreement proposed or concluded, to the statements of considerations and objectives advanced by the proposing Members, to the nature and development of measures adopted to correct the underlying situation which gave rise to the agreement and, periodically, to the operation of the agreement.

The reference to Article 63 (b) is as follows:

The Members shall observe the following principles governing the conclusion and operation of commodity control agreements, in addition to those stated in Article 60:

  • (b) Under such agreements, participating countries which are mainly interested in imports of the commodity concerned shall, in decisions on substantive matters, have together a number of votes equal to that of those mainly interested in obtaining export markets for the commodity. Any participating country, which is interested in the commodity but which does not fall precisely under either of the above classes, shall have an appropriate voice within such classes.

Article 65 (1) states:

Commodity control agreements shall be concluded for a period of not more than five years. Any renewal of a commodity control agreement, including agreements referred to in paragraph 1 of Article 68, shall be for a period not exceeding five years. The provisions of such renewed agreements shall conform to the provisions of this Chapter.

See pp. 44–49 and 158. [The study is cited on p. 227 above.]

For a possible interpretation of this term, see Part I, The Problem of Stabilization of Prices of Primary Products, p. 117 [cited on p. 227 above].

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