IMF History (1966-1971) Volume 1

Chapter 15: Financing Buffer Stocks

International Monetary Fund
Published Date:
February 1996
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Buffer Stock Financing was the Fund’s answer to the demands of the developing countries in 1967 and 1968 that the Fund and the World Bank pay greater heed to the problem of stabilization of prices of primary products. For two decades developing countries had been calling attention to the adverse consequences for their export earnings of the extreme fluctuations in world commodity prices, although they had never specifically asked the two Bretton Woods institutions to help find a solution. However, in the circumstances prevailing internationally in 1967—a renewed onset of falling commodity prices in the midst of intensive consideration by the industrial countries of how to change existing international monetary arrangements to aid their own external payments problems—the developing countries considered the time ripe to request, at a minimum, a special study of the problem of primary product prices. After nearly two years of study and discussion, in June 1969 the Fund introduced a facility for financing buffer stocks.


The reversal in world prices of raw materials from the beginning of 1966 to the latter part of 1967 was swift and sharp. In the early months of 1966, output in industrial countries had been rising more rapidly than at any time since 1964 and raw material prices had risen steeply. But, in the second half of 1966 and the first half of 1967, a slowing down of world industrial growth precipitated very large declines in the prices of nearly all raw materials and primary products. The prices of wool, rubber, tin, coffee, sisal, and lead dropped markedly. For the first time since 1963 the maintenance of tin prices above the floor established by the International Tin Agreement required intervention through the international buffer stock. In contrast, when more normal growth in the output of industrial countries had been maintained, as from mid-1964 through 1965, raw material prices had been more or less stable.

In 1967 most primary producing countries began to experience rather severe balance of payments pressures. The most adversely affected were the African countries. These countries were already suffering from a number of difficulties that reduced their exports in 1966–67: the outbreak of civil war in Nigeria, the closing of the Suez Canal because of hostilities in the Middle East, the unilateral declaration of independence by Rhodesia, and the poor agricultural harvests in several northern African countries. Moreover, the African countries exported mainly to Europe, and the slower growth of output in industrial Europe in 1966–67 compounded their export difficulties. Hence, the export earnings of Cameroon, Ethiopia, Kenya, Nigeria, Rhodesia, Senegal, Sierra Leone, Tanzania, Uganda, Zambia, and other African countries declined appreciably.

Because of the tremendous attention that had been given for some years, and was still being given, at the behest of the industrial countries, to the possibility of creating a new reserve asset to meet their possible needs for greater liquidity, it was to be expected that the Fund’s developing members would take the occasion to request a review of their special needs. Not only had there been the deterioration in their foreign exchange earnings just described, but—what was more serious for most developing countries—the Decade of Development, as the United Nations had christened the 1960s, had not come close to being the era of economic advance originally hoped for.

The monetary and financial leaders of developing countries consequently intensified their efforts to bring attention to their common financial problems and to press their concerns in unison, not only in the Fund but in other forums. The Unctad, which had held a world conference in Geneva in 1964, was planning a second conference for February–March 1968 in New Delhi. Analogous to the Group of Ten of the industrial countries, the leaders of developing countries were beginning to assemble from time to time as the Group of Seventy-Seven.

These were among the facts to which Mr. Schweitzer directed the attention of the Governors at the Annual Meeting in Rio de Janeiro in September 1967.1 Noting the severe impact that the deceleration of activity in the industrial world during 1966–67 had had on primary producing countries, he stressed the untimeliness of any setback for the less developed of these countries. The real gross national product of many less developed countries, he said, had grown more slowly from 1960 to 1965 than in the previous five years and, on a per capita basis, had risen only slightly or had even declined. Now, he feared, this situation had worsened.

African Members Press for Special Study

These circumstances prompted the Governors for France and for 14 African members within the franc zone—Cameroon, the Central African Republic, the People’s Republic of the Congo, Ivory Coast, Dahomey, Gabon, Upper Volta, Madagascar, Mali, Mauritania, Niger, Senegal, Chad, and Togo2—to assemble in Dakar, Senegal, the week before the 1967 Annual Meeting and to agree to submit to the Governors of the Fund and the Bank a resolution concerning the stabilization of primary product prices. The interest shown in this subject by the Governors for these African members had been foreshadowed at the Annual Meeting the year before in the remarks of Mr. Mohamed Salem Ould M’Khaitirat (Mauritania). Speaking on behalf of the 7 countries of the West African Monetary Union (umoa)—Dahomey, Ivory Coast, Upper Volta, Togo, Niger, Mauritania, and Senegal—he suggested that international aid take the form of stabilization of commodity prices.3

During the 1967 Annual Meeting, while for virtually all the Governors the most important topic was the proposed outline for establishment of the SDR facility, Mr. Debré (France) and the Governors of the Fund for several African members addressed themselves vigorously to the problem of prices of primary products. Mr. Debré wanted priority to be given “to an international organization of the market for certain raw materials and certain products, notably tropical products”4

Mr. Alexandre Banza (Central African Republic), giving the views of the five countries making up the Central African Customs and Economic Union (udeac)—Cameroon, the Central African Republic, the People’s Republic of the Congo, Gabon, and Chad—talked about the particular plight of the producers of coffee, cocoa, cotton, bananas, and oilseeds.5 Mr. Courmo Barcourgné (Niger), the Governor to speak this year for the 7 countries making up the West African Monetary Union, urged a study of the stabilization of commodity prices.6

Warmly seconding a resolution by the Board of Governors concerning prices of primary products was Mr. Tan (Malaysia). The commodity price problem became graphic as he cited price and quantity statistics for his country’s main export, natural rubber. Between 1960 and 1966 the unit value of Malaysia’s natural rubber exports had fallen from an average of 35 U.S. cents a pound to 21 U.S. cents a pound, and in 1967 the price fell further, to 15 U.S. cents a pound, the lowest in 18 years. As a result of falling commodity prices Malaysia had, since 1960, incurred a foreign exchange loss of the order of US$1,807 million, an amount equivalent to 6¾ times the total official net loans and grants that Malaysia had received during the six years 1961 through 1966.7

This much interest in some action on primary product prices was sufficient. On September 29, 1967, the same day on which they adopted the resolution approving the Outline for the SDR facility and calling for changes in the rules and practices of the Fund, the Board of Governors of the Fund adopted a resolution concerning primary product prices.8 This resolution requested the staff of the Fund, together with the staff of the World Bank, to prepare a study of the problem of the stabilization of prices of primary products at remunerative levels and of possible solutions and their feasibility. The study was to be submitted to the Executive Directors, who were asked to transmit it to the Board of Governors with their comments, if possible by the time of the next Annual Meeting in 1968. A similar resolution was adopted by the Boards of Governors of the World Bank Group.

Many of the supporters of the resolution seemed to believe that, since the Fund and the World Bank had the financial wherewithal to support any plan that might be devised for the solution of the problem of primary product prices, there was a real distinction between a study of the problem by these Bretton Woods institutions and the studies by other groups.

Mr. Schweitzer welcomed the invitation to the Fund to study the stabilization of commodity prices. But he emphasized that a great deal of work in this area had been done and was currently being done in other international bodies, such as the Unctad and the Food and Agriculture Organization (fao), and reminded the Governors that “there is no easy road toward fully satisfactory solutions of the problems related to the instability of commodity prices.”9

Report by Staff

After the staffs of the Fund and the World Bank had exchanged views on the procedure to be followed in the preparation of this study, the Fund staff advised the Executive Directors that the study could best be divided into two parts. The first would cover the general commodity problem, including an evaluation of possible solutions to the instability of commodity prices, and would be worked on jointly by the staffs of both institutions. The second would discuss the role that the Fund or the World Bank might have in solving commodity problems, and would necessarily be prepared separately by each institution. In line with the desire of several of the Governors that the commodity study should involve a major effort—possibly comparable to that of the work on international liquidity—and in order to ease coordination with the World Bank, an interdepartmental staff group was designated to oversee the Fund’s part of the study.

The Executive Directors, especially the Executive Directors elected by developing members, supported by the French Executive Director, expressed keen interest in the progress of the staff’s work. For example, when the Directors gave their informal reactions to the 1967 Annual Meeting, shortly after they returned to Washington, Mr. Plescoff (France) underscored the necessity for a Fund-Bank study of commodity problems. The French authorities, he said, attached great importance to the resolution and believed that precise proposals should be presented to the Governors at the 1968 Annual Meeting. Early in 1968, when the Unctad adopted a resolution stressing the importance of the Fund-Bank study, Mr. Plescoff requested that the text of the Unctad resolution be distributed to the Executive Directors.10 In July 1968 he was to tie together the commodity price question and the basic purposes of the Fund and of the World Bank, pointing out that the Brazilian delegation had circulated a proposal on the stabilization of prices of primary products at Bretton Woods at the time these organizations had been established.

Because of the intense interest of the Executive Directors, a provisional outline of Part I, prepared by a joint Fund-Bank working party, was sent to the Executive Board in April 1968 and discussed by the Board at two meetings on May 15, 1968. Mr. Yaméogo (Upper Volta), who had been elected by the African members that had initiated the Governors’ resolution, commented favorably on the breadth and thoroughness of the study. He stressed that there were two major facets to the study of commodity prices. The first was the short-term instability of prices and earnings and how the consequences of such instability could be limited. The second was the long-term trend in the level of earnings of primary producing members. The first was in essence a problem of balance of payments adjustment while the second was basically a problem of economic development. He was pleased to note that the staff study recognized the distinction. Mr. Yaméogo, as well as Messrs. Diz (Argentina), Faber (Guinea), González del Valle (Guatemala), Kafka (Brazil), Madan (India), and Nikoi (Ghana), made a number of specific suggestions for the study. They urged especially that practical specific proposals be forthcoming, noting that the Fund had had some experience along these lines as a result of the compensatory financing facility.

In July 1968 preliminary texts of both Part I, the analytical part prepared jointly with the World Bank staff, and Part II, Scope for Action by the Fund, were sent to the Executive Board.

Part I of the study, later published, took into account both the short-term and long-term situations in commodity markets.11 It analyzed the trends in commodity trade, as well as the fluctuations of primary product prices, and it considered the measures that might be taken to reduce price fluctuations. In preparing the report, the staffs of the World Bank and the Fund drew widely on the work of the fao, the Contracting Parties to the gatt, and the Unctad, as well as of specialist commodity organizations, although the high priority given to completion of the study in time for presentation to the 1968 Annual Meeting necessarily limited consultation with these and other organizations.

This part of the report made several observations which formed the underpinnings for the policy action recommended in Part II. Among the observations were the following:

One, developing countries were still heavily dependent on a narrow range of primary products for most of their exports. Furthermore, the exports of most developing countries continued to be concentrated on a few commodities.

Two, world commodity markets had shown two major unfavorable characteristics. Their absorptive capacity had grown only slowly: technological developments, changes in consumer spending patterns, and protection given by industrial countries to their own primary products had all worked in the direction of slowing the growth of outlets for primary product exports. Commodity markets had also been subject to wide price fluctuations. The degree of price instability since the early 1950s appeared to be lower than in earlier decades, but it had remained substantial.

Three, a technique of price stabilization which was widely discussed but not much used was an international buffer stocking arrangement. This device was used in the International Tin Agreement, and was being envisaged in the cocoa agreement that had been under negotiation for several years. The objective of buffer stock operations was to keep the price of the commodity between certain agreed limits by a procedure in which the buffer stock agent bought the commodity when the price dropped below a floor and sold the commodity when the price rose above a pre-set ceiling. The staff’s analysis showed that, when the objective of buffer stock operations was limited to smoothing fluctuations around a medium-term price trend, and when this trend was correctly identified, the quantities which the buffer stock agent had to buy or sell for stabilizing the price of the commodity canceled out within a reasonably short time. In other words, the quantities bought when prices were low equaled the quantities sold when prices were high.

Four, the international buffer stock device did not work equally well for all commodities. Much depended on the causes of the price instability of the given commodity. When the price instability resulted from shifts in demand as against shifts in supply, buffer stock operations tended to stabilize both product prices and export earnings. However, when price instability resulted from shifts in supply, buffer stock operations were not necessarily successful in stabilizing export earnings. These considerations, plus others, such as the perishability of some commodities, meant that the range of commodities for which buffer stock operations were appropriate might not be large. In determining the desirability of price stabilization through stocking operations, the benefits to producing and consuming countries had to be weighed against the costs of the stabilizing arrangement. These costs varied from commodity to commodity, depending on the size of the required stocks, the costs of storage, the rate of interest, and the duration of the stocking period.

Five, the level and trend of the export earnings of developing countries could be improved in a number of other ways, for instance, restrictions on primary products by importing countries could be removed and the output and exports of developing countries could be diversified over the long term.

The staff also examined, in Part II, the contribution that the Fund might make to the specific problems of countries producing primary products, over and above the functions the Fund performed in facilitating world trade generally. In two important fields of action for the Fund—consultations with members and the provision of financial resources—the staff offered recommendations.

Noting that the Fund’s annual consultations under Articles VIII and XIV had broadened to include virtually all policies bearing on members’ balance of payments positions, the staff suggested that consultations could include more intensive discussions of commodity problems. In consultations with developing members, the effects on production and export of primary commodities of such factors as exchange rate policies, taxation and subsidization, bilateral trading arrangements, and restrictions by other countries could all be more fully considered. In consultations with developed members, where less attention had been paid to commodity problems, the Fund could ask that officials direct their attention to the disadvantages to primary product producers, especially those with low incomes, of the policies being applied by developed countries to favor their own primary products.

Another part of the staff’s suggestion was that the Fund periodically review with both producing and consuming members the outlook for particular commodities and their policies with respect to these commodities. These discussions, thought the staff, would encourage industrial members to remove government-sanctioned impediments to imports from primary producing members.

The staff believed further that the Fund’s compensatory financing facility should be retained even if the Fund widened its policies, or introduced new ones, relating to primary products. The compensatory financing facility dealt with the problem of fluctuations in export earnings after the problem arose. But there was another problem, namely, that of trying to prevent fluctuations in export earnings.

Therefore, in addition to the compensatory financing facility, there was merit in the Fund’s providing buffer stock financing, especially as there had been a gap in this field. The two schemes would be complementary. Admittedly, problems of financing international buffer stocks had not necessarily been the main stumbling block in the formation of commodity agreements among countries. The costs and benefits of price stabilization were not easily ascertainable, and the interests of one country might conflict with those of another. Hence, agreement among countries was often difficult. Nonetheless, outside financing, as from the Fund, might help countries to work out and conclude appropriate agreements.

Such financing by the Fund should be on a modest scale, on a short-term repayment basis, in methods that were integrated with the Fund’s existing policies on the use of its resources. The standard three-to-five-year rule on repurchase could apply to drawings for buffer stock financing, since stock transactions in any sound scheme could be expected roughly to balance out in the medium term. The close relationship between buffer stock financing for price stabilization and compensatory drawings for export shortfalls also made it reasonable that any assistance by the Fund to buffer stock financing should have a joint upper limit with compensatory financing drawings.

Views of Executive Directors and Governors

When the Executive Board began consideration of the staff’s study on July 31, 1968, Mr. Southard, the Acting Chairman, noted that, as the Board had agreed, a representative of the staff of the World Bank was present and a representative of the Fund’s staff had attended discussions of the Bank’s Executive Board. Most members of the Executive Board commended the analysis, which contained new ideas on this often-studied topic. Mr. Rajaobelina (Malagasy Republic), however, expressed disappointment at the proposals for action. These consisted of (1) indirect assistance by the Fund to buffer stocks by allowing members to draw to finance contributions to stocks and (2) drawings to mitigate the effects of domestic stockbuilding. He hoped the Fund would be more liberal. Mr. Stone (Australia), reflecting the view of the Australian authorities that the crux of the commodity problem was that industrial countries protected their own agriculture, differed with the staff’s reasoning. He contended that any solution to the problem of primary product prices should reduce, rather than increase, restraints on world trade. A vital criterion for any adequate solution, he suggested, was its effect on global real income. This criterion might require that any necessary restructuring of production or of demand occur in the economies of the industrialized countries rather than, as was usually assumed, in those of the developing countries. It was ironic, Mr. Stone continued, that restructuring of output should take place in the developing countries in order to correct supply gluts that had resulted largely from the failure of developed countries to undertake such restructuring themselves. The irony became more acute when one considered that the developed countries, compared with the developing ones, enjoyed considerably greater mobility of resources, much higher levels of technical skills, and a much greater availability of capital, all of which would make the task of restructuring easier for them.

Mr. Diz, in a detailed paper of his own, contended that the staff report had not provided a satisfactory empirical basis for action in the commodity field. The relationship between variations in the prices of different commodities and variations in the export earnings of developing countries was a complex, multi-faceted one that needed further analysis if the Fund and the World Bank were to come up with useful recommendations.

Some Executive Directors favored the staff’s idea that the Fund finance international buffer stocks. Mr. Lieftinck (Netherlands), for example, generally agreed with the staff’s suggestions. Mr. Plescoff, on the other hand, like Mr. Rajaobelina, did not want the Fund restricted to the solutions available under its existing Articles. Similarly, Mr. Nikoi and Mr. Madan preferred broader solutions. Mr. Kafka, emphasizing that any proposals that might be devised only went a short way to solving the problems arising out of the instability of commodity prices, wanted to explore just how much might be done within the existing Articles before thought turned to possible amendments. For instance, might not rules on repurchase be altered? Might there not be a second compensatory tranche under the compensatory financing facility? Might not the formula for determining the extent of export shortfalls under that facility be re-examined? Mr. Dale (United States) raised a number of questions concerning the results of a buffer stock financing facility in the Fund and the ways in which the buffer stock arrangements that countries set up would be formulated and administered so that countries might qualify for assistance from the Fund. Several Executive Directors also noted the need for the Fund’s action to be coordinated with the responsibilities and policies of the World Bank.

Because of the diversity of their views, and because the 1968 Annual Meeting was only weeks away, the Executive Directors, after considerable debate about procedures and after coordination with the Executive Directors of the World Bank, decided in September 1968 to transmit to the Board of Governors only Part I of the study and to inform the Governors that Part II had been begun and would be sent later. They attached a draft resolution for the Governors to consider to the effect that Part II should be completed not later than the 1969 Annual Meeting.

At the 1968 Annual Meeting, several Governors, including Mr. Ismail bin Mohamed Ali (Malaysia), Mr. François-Xavier Ortoli (France), and Mr. R. D. Muldoon (New Zealand), indicated their disappointment at the results thus far achieved.12 Then the Board of Governors considered and passed a second resolution on the stabilization of prices of primary products. This resolution urged that “specific financial measures” and other solutions to the commodity problem be considered, and that Part II of the study be completed not later than June 30, 1969.13

Intensified Study

Beginning in October 1968 and continuing for the next eight to nine months, the attention of the Executive Directors to the primary product price problem became a full-blown effort. The statistical material which had formed the empirical basis of Part I of the staff study was circulated to the Executive Board. A representative from the staff of the Fund regularly attended the meetings of an Executive Director–staff seminar on stabilization of prices of primary products that was inaugurated by the World Bank and was to go on for many months. In February and March 1969 the Fund staff prepared two further papers. The first spelled out criteria that the Fund could apply to international buffer stock proposals in order to determine whether or not they were worthy of Fund financial support. The second examined the possible effects of buffer stock financing on the liquidity of the Fund.

Developing countries continued to be very interested in the study. In January 1969 Mr. Prebisch, Secretary-General of the Unctad, wrote to Mr. Schweitzer drawing attention to the proposals concerning buffer stocks contained in the report of the Unctad Committee on Commodities, which had concluded its meetings in Geneva the previous November. Mr. Prebisch stressed that the proposals had been unanimously agreed by the members of the Unctad Committee, who attached great importance to the resources for financing buffer stocks that could be made available by international financial institutions.

At the Fourth Conference of Governors of the Central Banks in Southeast Asia, held in Bali, Indonesia, in February 1969, the Governors of the central banks of the Khmer Republic, Ceylon, Indonesia, Laos, Malaysia, Thailand, and South Viet-Nam, the Deputy Governor of the Central Bank of the Philippines, a representative of the Nepal Rastra Bank, and the Permanent Secretary of the Ministry of Finance, Singapore, adopted a joint position on the problems of stabilization of the prices of primary commodities. A report embodying this position was later transmitted to the Managing Director by Mr. Kharmawan (Indonesia). They advocated further liberalization of the Fund’s compensatory financing facility and the introduction of a separate facility for financing buffer stocks. With regard to the latter, those Governors present at the Conference considered, inter alia, that the maximum period of three to five years for repayment of buffer stock assistance, as proposed by the staff, might not coincide with the price cycles of certain commodities. For such situations they thought it would be desirable to have available a refinancing facility, this refinancing to be done by both the Fund and the World Bank.

In mid-March 1969, the Executive Board began a paragraph-by-paragraph consideration of the staff’s policy paper of the previous year in order to guide the staff in a redraft. In the midst of these discussions Mr. de Maulde (France) circulated a memorandum giving the views of the French authorities on the action the Fund and the World Bank could initiate in the field of stabilization of prices of primary products. These institutions could (1) help to solve the financing problems associated with the initial and operating stages of commodity agreements; (2) play a key role in the investment programs needed to diversify the output and exports of primary producing countries; and (3) adapt their traditional lending policies so that countries would have a strong incentive to reach and abide by international stabilization agreements.

The first form of assistance was the Fund’s domain, while the second and third were matters for the World Bank Group. Any responsibilities that might devolve upon the Fund and the World Bank in connection with this minimum program would not require additional funding for these institutions nor more than a slight broadening of their existing activities.

The French authorities thus concluded that the Fund staff’s proposals represented “a positive approach” to what the Fund could do. A consensus of the Executive Directors on a buffer stock financing arrangement seemed to be emerging.

A Decision Reached

The staff redraft of Part II of the study, Scope for Action by the Fund, completed in May 1969, reflected these views. Therefore, when this report came before the Board, most of the Executive Directors appointed or elected by industrial members—Messrs. Dale (United States), Johnstone (Canada), Lieftinck (Netherlands), Maude (United Kingdom), Palamenghi-Crispi (Italy), Plescoff (France), Schleiminger (Federal Republic of Germany), and van Campenhout (Belgium)—were in general accord with it. Several of the Executive Directors elected by developing members—Messrs. Kafka, Kharmawan, and Yaméogo in particular—regretted that the Board could not support more liberal action by the Fund in the commodity price field, but they went along with proposals that were acceptable to the other Executive Directors.

During the Executive Board’s discussion much attention centered on the question of what limits should apply to drawings under the proposed buffer stock facility and on the question of how high should be the joint limits placed on buffer stock drawings and drawings under the existing compensatory financing facility. After consideration of a revised version of the staff report, the Executive Board, on June 25, 1969, adopted a decision to assist members in financing contributions to international buffer stocks, and on July 9 their report to the Board of Governors was made public.14

Elements of the Decision

The Executive Directors’ report on buffer stock financing took the form first of having the Executive Directors state that they generally agreed with the suggestions for Fund policy that was set out in Part II of the staff’s study. Then, there was a Board decision on buffer stock financing which contained a complex of features, fixing the terms and conditions of drawings. To help finance its contribution to an international buffer stock, a member might draw from the Fund amounts up to 50 per cent of its quota, without any limit—such as existed in the compensatory financing facility—on the amount that might be drawn in any 12-month period. However, drawings outstanding for the purpose of buffer stock financing and for compensatory financing of export fluctuations together might at no time exceed a common upper limit of 75 per cent of quota. To the extent that such drawings raised the Fund’s holdings of a member’s currency above 200 per cent of quota, the Fund was prepared to waive this limit on purchases. Buffer stock drawings were also conditional in the sense that a member drawing under the facility had to have a balance of payments need and had to agree to cooperate with the Fund to find solutions to its balance of payments difficulties.

Other features of the buffer stock financing facility were similar to, though not identical with, those of the compensatory financing facility. Drawings were to be additional to access to the Fund’s regular resources: they were to be ignored in computing the amounts that members were normally able to draw under the Fund’s usual tranche policies, and, more importantly, in determining the conditions to be applicable. An exception was that a member drawing under the buffer stock facility at a time when it still had gold tranche drawing rights at its disposal pro tanto lost such drawing rights, an exception that later was to require separate examination and decision of the legal question whether the Fund could challenge a member’s representation of need when the purchase for buffer stock financing was also a gold tranche purchase. In August 1971 the Board decided that the Fund would not challenge a member’s representation of need for a buffer stock drawing if the purchase was within the gold tranche.15

The standard three-to-five-year rule on repurchases applied to drawings for buffer stock financing. In addition, since drawings under this facility were in support of buffer stock operations of a revolving character, the decision established a rule requiring a member to repurchase from the Fund at an earlier date than the usual three to five years to the extent that the buffer stock agent distributed cash to its members.

Further criteria were set down to enable the Fund to judge the suitability of buffer stock arrangements for assistance. The Fund had to be satisfied that the arrangements were economically sound and that the transactions it was helping to finance were compatible with the Fund’s purposes and with the requirement that the use of its resources be temporary. Certain general principles of intergovernmental relations laid down by the United Nations were, for example, expected to be observed in the conclusion and conduct of the international commodity agreements involving the buffer stock arrangements. The agreements had to take explicit account also of the effects of price stabilization objectives on the stabilization of export earnings: the Fund would have serious reservations about any scheme that appeared likely to destabilize export earnings for any number of members.

The nature of the price objectives of a stockholding scheme were also considered crucial. Schemes suitable for Fund financing were those aiming at the stabilization of prices around a medium-term trend, so that stock transactions could be expected roughly to balance out over a medium-term period. The Fund further regarded as an important test of any stabilization scheme the willingness of participating governments to commit some of their own resources to the scheme. Thus an appropriate part of the initial and operating costs of the buffer stock arrangement was to be met from resources other than those of the international financial institutions.

Paragraph 6 of the decision further stated that the Fund, in its consultations with members, would pay increased attention to their policies in the commodity field. The implementation of this paragraph is discussed in the last section of this chapter.

Some Disappointments

When the 1969 Annual Meeting took place the following September, several Governors from developing members—Mr. Qizilbash (Pakistan), Mr. Ahmad (Malaysia), and Mr. Wardhana (Indonesia)—expressed regrets that the outcome of the Fund-Bank exercise on the stabilization of primary product prices had been limited.16 Other Governors, including Mr. Giscard d’Estaing (France) and Mr. E. H. K. Mudenda (Zambia), had indicated satisfaction with the Fund’s buffer stock financing decision.17 Mr. Henri Konan Bédié (Ivory Coast), considering the solution temporary, made detailed suggestions for longer-run solutions.18

While the Fund’s scheme was less criticized as time went on, the number of general comments on the need to stabilize commodity prices increased. At the 1970 Annual Meeting in Copenhagen, several Governors, especially for member countries in Africa, continued to voice concern that the problem of the stabilization of primary product prices had not been adequately dealt with. Mr. Hédi Nouira (Tunisia), who was Chairman of the 1970 meeting, so remarked in his opening address.19 Similarly, Mr. Abdoulaye Lamana (Chad), speaking on behalf of Cameroon, the Central African Republic, the People’s Republic of the Congo, and Gabon, said that the problem remained serious.20 Mr. Muldoon (New Zealand) once again stressed that the primary product problem was a basic one.21 And Mr. Tan was already suggesting a liberalization of the Fund’s new facility.22

By the time of the 1971 Annual Meeting, however, the transformation of the international monetary scene brought about by the suspension of official dollar convertibility on August 15, 1971, and the crisis implications for both industrial and primary producing members, dominated the Governors’ remarks, and for the time being the primary product problem was submerged.

The Decision Implemented

In October and November 1970 the Fund examined the first use proposed for the new buffer stock financing facility.

The Fourth International Tin Agreement, negotiated in April–May 1970, was to enter into force on July 1, 1971, on expiry of the Third Agreement. Like the previous Agreements, the Fourth Agreement provided for the operation of an international buffer stock of tin to which participating countries were expected to make contributions.

The staff prepared a report that examined (1) current conditions in the world tin market, (2) the operations of the first three International Tin Agreements, which had been in force since 1956, (3) the details of the Fourth Agreement, and (4) the suitability of the Tin Agreement for the Fund’s assistance under its new buffer stock facility. On November 25, 1970, after several discussions of the question, the Executive Board took a decision to the effect that members could use the Fund’s buffer stock financing facility in connection with the financing of the contributions that they were required to make to the international tin buffer stock to be established under the Fourth International Tin Agreement.23 The Fund would expect that each participant in the Tin Agreement would meet from sources other than the Fund not less than one third of its share of the initial contribution of the cash equivalent of 7,500 tons of tin. This amount, that is, the amount to be furnished from sources other than the Fund, would correspond to one eighth of the total of compulsory producer contributions envisaged over the life of the scheme. The staff was to keep the Executive Board informed on the operation of the buffer stock and other developments in connection with the Fourth International Tin Agreement by reports to be made at least once a year, and the Fund might make such review of this decision as was appropriate in the light of these reports.

In June 1971, shortly before it was expected that requests for the use of the Fund’s resources would be made under this decision, another problem arose. Some tin remained in the buffer stock at the conclusion of the old Agreement. Members wanted to receive credit for these past tin contributions as part of their new contributions and to draw equivalent amounts under the Fund’s new buffer stock facility. The Executive Board decided in favor of this arrangement. Their decision was that any initial contribution that a member might make in kind (that is, in the form of tin metal) would be regarded as equivalent to contributions in cash and would be valued at the floor price ruling when the Agreement entered into force.24 Messrs. Lieftinck, Schleiminger, and van Campenhout, believing that access to the buffer stock facility was being unduly widened, abstained from the decision. They were concerned that contributions in the form of tin metal, especially past contributions, did not directly affect a member’s foreign exchange reserve position and hence did not meet the test of balance of payments need that was to govern drawings for buffer stock contributions.

The Fourth International Tin Agreement entered into force provisionally on July 1, 1971, and on July 1–5, at its first session under the Agreement, the International Tin Council determined the initial stock contributions to be made by the participating producing countries.

The new facility was used shortly thereafter by three members that were major tin exporters. On July 16, 1971, the Fund agreed to purchases by Bolivia and Indonesia of $2,974,000 and $1,887,000, respectively, under the terms of the buffer stock facility; and on August 6 the Fund agreed to a purchase of $7,293,240 by Malaysia under the facility.25 Since Malaysia’s request for a drawing under the buffer stock facility also involved a gold tranche purchase, the drawing had been held up pending the decision, referred to above, as to whether a member’s claim that it had a balance of payments need could be challenged under these circumstances. At the end of October 1971 Bolivia and Indonesia again requested purchases under the facility of $1,545,000 and $980,000, respectively, and these requests were granted.

Consultations to Include Commodities

In August 1970 the staff suggested a way to implement that part of the buffer stock decision relating to the taking up of commodity problems as part of the Fund’s regular annual consultations. Here, the principal question for the Fund was the degree to which it should become involved in commodity problems that arose from restrictions or other trade practices by one member that adversely affected the commodity exports of another member.

The question was a thorny one. In the first place, as a general policy the Fund had not pursued questions relating to its members’ trade practices and trade restrictions, as distinct from their restrictions on foreign exchange and payments. Matters pertaining to trade had been the prerogative of the gatt.26 Yet the primary producing countries had become intensively concerned about the agricultural restrictions of the industrial countries and the resultant limitations on their access to the industrial countries’ markets.

A number of developments in the late 1960s had brought about these concerns. Primary producing countries had been asked to limit their exports of meat and cotton textiles voluntarily. More stringent regulation of imports of meat had been introduced in European markets. Some primary producing countries had been having marketing difficulties as a consequence of preferences extended by the eec countries to developing countries associated with the eec. In addition, industrial countries were becoming increasingly self-sufficient in many materials, as a result both of the increasing importance of synthetic products and of the rapid growth of their own production of natural products, especially of agricultural goods sheltered by protective barriers and subsidies.

Questions concerning restrictions on commodity trade and of agricultural protection in industrial countries had come under active consideration by various international organizations. The fao and the Unctad, for instance, had been scrutinizing these questions. That the study of primary products by the Fund and the World Bank ought to be concerned with the agricultural protectionist policies of the industrial countries, even more than with buffer stock arrangements, had been the thrust of the remarks at the Annual Meetings by the Governors for Australia and New Zealand. Mr. Muldoon (New Zealand) had spoken on this point at some length at the Annual Meetings both in 1968 and in 1969. Similarly, Mr. Leslie H. E. Bury (Australia), at the 1969 Annual Meeting, stressed that the urgent need was for the industrial countries to reduce their protection and to adopt more liberal trading policies toward the importation of raw materials and foodstuffs.27

Against this background, the staff did not make specific suggestions, and awaited guidance from the Executive Directors as to how far they wished to extend their concern with commodity problems. It was the staff’s view that the Fund’s entrance into the field of restrictions on commodities should be a cautious and experimental one. Reasoning that the Fund had a special interest in those commodity trade practices that might cause use of the Fund’s compensatory financing facility or that might affect the operations of buffer stock schemes where the Fund might be asked to commit resources, the staff suggested that the Fund’s efforts, at least at the outset, be addressed to those commodity trade practices that were closely associated with balance of payments difficulties in primary producing members.

During consultation discussions the staff could encourage primary producing members to make known the specific situations that were aggravating their balance of payments difficulties. The issues selected for follow-up would be those that appeared to the Fund significantly to affect the payments situations or domestic equilibrium of members. The consultations with industrial members would not get into reviews of domestic agricultural policies but would, nonetheless, yield important information on commodity practices, including members’ reasons for the specific policies criticized by primary producing members and the intent of the industrial members to ameliorate any adverse effects on other members. The effective contribution of the Fund would be to encourage members to give fuller consideration to the international implications of specific national actions and policies in the commodity field. Because of the newness of this consultation activity, the staff proposed to make progress reports to the Executive Directors from time to time.

In October 1970, after a very long session on this topic, the Executive Board endorsed the proposed procedure. Mr. de Maulde, Mr. Tom de Vries (Netherlands, Alternate to Mr. Lieftinck), Mr. Palamenghi-Crispi, and Mr. van Campenhout abstained.

Thus, after 1965, the Fund’s interest in the problems of primary commodities was stepped up appreciably. There was the enlarged access to its financial resources through the compensatory financing and buffer stock arrangements described in this chapter and the preceding one. In addition, as a further explicit recognition that what affects primary commodities impinges directly on members’ balances of payments, the Fund greatly expanded its collaboration with specialized groups working on commodity problems.

To help to deal with the Fund’s widening tasks in the commodity field, a Commodities Division in the Research Department was established in 1969.

As an illustration of the Fund’s growing work in commodities, it may be noted that during the single fiscal year 1970/71 staff representatives attended the Seventeenth Session of the International Coffee Council in London, the Twenty-Ninth Plenary Meeting of the International Cotton Advisory Committee in Washington, and meetings of several bodies of the fao—such as the Committee on Commodity Problems (ccp), the Consultative Committee on Tea, the Study Group on Rice, and the Consultative Committee of the ccp Study Group on Jute, Kenaf, and Allied Fibres. Staff representatives also went to the UN Wheat Conference, held to negotiate a new International Wheat Agreement to replace the International Grains Arrangement of 1967, which was due to expire on June 30, 1971; to the meetings of the Unctad Committee on Commodities, a permanent subcommittee of the Unctad set up a few years before; to the Unctad consultations on a draft International Cocoa Agreement; and to meetings of the International Tin Council’s Interim Committee concerning the transition to the Fourth International Tin Agreement.

At the request of the International Coffee Organization, the Fund also entered into an informal arrangement to provide it with information on exchange rates in connection with payments by participants into the Organization’s Diversification Fund.28

Opening Address by the Managing Director, Summary Proceedings, 1967, pp. 19–20.

These countries are listed in the same order in which they were listed in the Governors’ resolution, that is, in the alphabetical order of their French names; see Vol. II below, p. 227.

Statement by the Governor of the Fund for Mauritania, Summary Proceedings, 1966, p. 165.

Statement by the Governor of the World Bank for France, Summary Proceedings, 1967, p. 72.

Statement by the Governor of the Fund for the Central African Republic, Summary Proceedings, 1967, pp. 101–102.

Statement by the Governor of the Fund for Niger, Summary Proceedings, 1967, p. 144.

Statement by the Governor of the Fund and the World Bank for Malaysia, Summary Proceedings, 1967, pp. 42–43.

Resolution No. 22-9; Vol. II below, p. 227.

Concluding Remarks by the Managing Director, Summary Proceedings, 1967, p. 242.

UN document TD/11/RES/19, March 28, 1968.

The Problem of Stabilization of Prices of Primary Products: A Joint Staff Study (Part I), International Bank for Reconstruction and Development and International Monetary Fund (Washington, 1969).

Statements by the Alternate Governor of the Fund for Malaysia, the Governor of the World Bank for France, and the Governor of the Fund for New Zealand, Summary Proceedings, 1968, pp. 39–40, 75–77, and 148–49.

Resolution No. 23-13; Vol. II below, p. 228.

E.B. Decision No. 2772-(69/47), June 25, 1969. The Executive Directors’ report, their decision, and Part II of the staff’s study are reproduced in Vol. II below, pp. 201 and 227–50.

E.B. Decision No. 3386-(71/83), August 6, 1971; Vol. II below, p. 203.

Statements by the Governors of the World Bank for Pakistan, Malaysia, and Indonesia, Summary Proceedings, 1969, pp. 23, 46, and 84.

Statements by the Governor of the World Bank for France and the Governor of the Fund and the World Bank for Zambia, Summary Proceedings, 1969, pp. 61 and 151.

Statement by the Governor of the Fund for Ivory Coast, Summary Proceedings, 1969, pp. 190–94.

Opening Address by the Chairman of the Boards of Governors, Summary Proceedings, 1970, p. 12.

Statement by the Governor of the Fund for Chad, Summary Proceedings, 1970, pp. 28–29.

Statement by the Governor of the Fund for New Zealand, Summary Proceedings, 1970, p. 52.

Statement by the Governor of the World Bank for Malaysia, Summary Proceedings, 1970, p. 62.

E.B. Decision No. 3179-(70/102), November 25, 1970; Vol. II below, pp. 201–202.

E.B. Decision No. 3351-(71/51), June 21, 1971; Vol. II below, p. 202.

Amounts in respect of drawings are expressed here in dollars, although they may have been made in other currencies; see footnote 5 in Chap. 14 above.

For a discussion of the distinction between the areas of jurisdiction of the gatt and the Fund, see History, 1945–65, Vol. II, Chap. 16, and also pp. 235–40.

Statements by the Governor of the Fund for New Zealand and the Governor of the Fund and the World Bank for Australia, Summary Proceedings, 1968, pp. 147–49; Summary Proceedings, 1969, pp. 87–88 and 148.

That these trends would continue was evidenced by the fact that in 1972 and 1973, staff representatives were to participate in international discussions of still other commodities. But the most important event in the Fund’s activities regarding commodities in these two years was the agreement by the Fund, on April 30, 1973, after the International Cocoa Agreement was signed, to permit the use of its buffer stock facility for cocoa.

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