Chapter

Compensatory Financing: First Report

Author(s):
International Monetary Fund
Published Date:
February 1996
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In March 1959 the UN Commission on International Commodity Trade agreed to consider at its next session, in May 1960, international measures designed to compensate for fluctuations in export receipts, and invited the Fund to inform the Commission about its policies in this respect. A report by the Fund in response to this invitation was followed by further discussions, during which a number of alternative plans were examined.

In May 1962 the Commission considered comments by a technical working group set up to report on these plans, and invited the Fund to consider whether it could not play a larger part in financing fluctuations in export receipts. A draft response to this invitation, prepared by the staff, was reviewed by the Board in November and December 1962, and a revised version of it in February 1963. The latter was approved with slight amendments on February 27, and was sent to the Commission. It is reproduced below.

Compensatory Financing of Export Fluctuations

(February 1963)

A Report by the International Monetary Fund on Compensatory Financing of the Fluctuations in Exports of Primary Exporting Countries

INTRODUCTION

The United Nations Commission on International Commodity Trade, at its tenth session held in Rome in May 1962, “invited the International Monetary Fund, in the light of the discussion during the tenth session, and after consideration of the questions involved, to present, as soon as possible, a report as to whether and in what way the Fund might play an increased part in the compensatory financing of export fluctuations of primary exporting countries, and to keep the Technical Working Group currently informed of the progress of its deliberations on the subject.” 1

The present report by the International Monetary Fund is presented in fulfillment of the invitation extended by the Commission.

I. PREVIOUS CONSIDERATION OF THE PROBLEM BY THE FUND

In 1960, in response to an earlier request by the Commission on International Commodity Trade, the Fund prepared a study explaining its policies and procedures bearing on the compensatory financing of fluctuations in foreign exchange receipts from the export of primary commodities.2 The main points in this study may be briefly summarized as follows:

(1) The provision of foreign exchange to Fund members to assist in the compensation of short-term fluctuations in the balance of payments constitutes a legitimate use of Fund resources.3 Among such fluctuations are some that arise primarily from variations in export prices and proceeds. However, in order that balance of payments deficits from this cause should be suitable for financing by the Fund, the member’s policies must be such as to enable it, with the financial assistance it obtains from the Fund, to overcome its difficulties within a reasonably short period of time.

(2) It would be neither practicable nor desirable to make the amount of such assistance dependent on any automatic formula, or to provide any separate form of Fund assistance to deal with export fluctuations alone. The reasons for this are (a) that judgment is required to determine the extent to which export fluctuations require, and are suitable for, compensatory financing in the light of the balance of payments as a whole, and the extent to which any compensation required should be provided by international transfers rather than by national reserve movements, and (b) that, if the Fund should give too much of its assistance automatically, its ability to influence countries toward the adoption of appropriate policies would be seriously impaired. Requests for drawings for all purposes in accordance with the Articles of Agreement are, however, treated liberally if they are within the gold tranche or the first credit tranche.

(3) Fund quotas (at the end of 1959) were considered adequate to provide for its primary exporting members a supplement to liquidity which, in the majority of cases, should be sufficient, in conjunction with their own resources, to enable them to deal with payments problems created by short-term fluctuations in exports or in receipts from abroad of the order experienced since World War II, provided they did their best to keep their income and costs adjusted to the longer-run changes in their external purchasing power.

(4) There appeared (as of the same date) to be no reason why a shortage of Fund resources should be a factor limiting the amount of assistance that the Fund would otherwise consider it desirable to extend to its members.

(5) Consequently, it was concluded that “members of the Fund that are taking appropriate steps to preserve internal financial stability and to maintain their balance of payments in equilibrium, taking good years with bad, and that are otherwise making satisfactory progress toward the fulfillment of the Fund’s purposes can anticipate with confidence that financing will be available from the Fund which, in conjunction with a reasonable use of their own reserves, should be sufficient to enable them to overcome temporary payments difficulties arising from export fluctuations.” 4

II. SUGGESTIONS FOR INCREASED USE OF FUND RESOURCES FOR COMPENSATORY FINANCING

Since the study summarized above was submitted to the United Nations in April 1960, the subject of compensatory financing has been actively considered within the framework of the United Nations (UN) and of the Organization of American States (OAS), in particular by the UN Committee of Experts which reported in January 1961,5 and by the OAS Group of Experts which reported in April 1962.6

In general, the international bodies in which the matter has been discussed have displayed understanding toward the Fund’s policies on compensatory financing, as outlined above (including the restricted scope given to automatism in Fund transactions), and appreciation for the assistance which the Fund has been able to give under its present rules to primary exporting countries having export difficulties. However, certain suggestions have been made for changes in policy that would permit an enhancement of the Fund’s role in compensatory financing. Moreover, it has been argued that, even if the Fund should make a reasonable degree of progress in the direction indicated, enough uncertainty would remain in the minds of governments as to their ability to draw on the Fund to justify the consideration of other possible international measures of compensatory financing. The suggestion has therefore been made that some new financial institution separate from, though possibly affiliated with, the Fund is needed to provide compensatory financing for export fluctuations, in amounts or of a kind or with a degree of automatism that is either not practicable or not desirable for the Fund. In pursuance of this line of thought, the above mentioned UN Committee of Experts worked out schemes for a Development Insurance Fund, which have subsequently been elaborated by the UN Secretariat, whereas the scheme of the OAS Expert Group is on a loan basis.

The following are the principal suggestions made by the UN and OAS Experts regarding the policies and practices of the Fund in the use of its own resources.

1. Qualitative criteria for the use of Fund resources

The UN Commission on International Commodity Trade, at its session of May 1961, “considered that it would be desirable if the Fund would study the question whether the present criteria for the use of its resources are fully adapted to circumstances in which payments difficulties arise mainly from fluctuations in primary product markets.” 7

2. Stand-bys or near stand-bys for compensatory financing

According to the Report of the UN Committee of Experts, “through the increased use of stand-by arrangements or consultative procedures, the Fund should aim to clarify with interested members the conditions which would assure that the full use of quota without waiver (Fund holding of 200 per cent of a member’s currency) or even more will be readily granted if it appears justifiable according to forecasts of commodity markets and other relevant considerations.” 8

3. Extension of gold-tranche criterion to later tranches

The Report of the UN Committee of Experts suggests that “in so far as drawings on the Fund are automatic, a country whose export proceeds fall has reliable access to a source of compensatory financing. At present only 25 per cent of a member country’s quota comes close to being automatically available. Any significant increase in this percentage which the Fund could institute would be a valuable step toward providing compensatory financing to meet the needs of primary producing countries when threatened with the adverse impact of a decline in export proceeds.” 9

4. Automatic compensatory drawing rights in first credit tranche

In Appendix II of the Report of the UN Committee of Experts, one of the Experts suggested that “to offset fluctuations in the export proceeds of primary producing countries, compensatory drawings and repayments should be determined automatically by a formula. The fluctuations should be measured as a deviation from a trend which can be estimated on the basis of a moving average of three preceding years. A shortfall in export proceeds in any year should entitle the country to draw from the Fund automatically up to, say, an amount which causes the Fund’s holdings of the country’s currency to equal 125 per cent of its quota…. Subsequently, when export proceeds are above the trend, the excess earnings should be used automatically to repay the earlier drawings.” 10 From the context it appears that this Expert had in mind full compensation of shortfalls as defined, up to the 125 per cent point, and subsequent repayment of the whole of any excess of export proceeds over trend.

5. Automatic compensatory drawing rights additional to normal facilities

At the Special Meeting of the Organization of American States at Punta del Este in August 1961, Chile proposed that Fund members affected by declines in prices of important export commodities should be enabled to draw from the Fund in amounts determined by the magnitude of the price decline in question relative to the average price in the three preceding years and by the volume of exports affected. Drawings under these special arrangements would be repaid when prices rose above the average in the three preceding years. The ability of members to make ordinary drawings would not be affected by the amounts outstanding under these special arrangements.11

******

The proposals advanced, whether for new compensatory financing institutions or for changes in the policies and practices of the Fund, are evidence that the assistance provided by the Fund under present policies is considered either insufficiently automatic in character or inadequate in amount to deal with the payments problems that arise from fluctuations in exports of primary exporting countries. The question of automatism of Fund operations is discussed in Section III; that of the quantitative adequacy of members’ access to the Fund, in Section IV. These sections lead to the Conclusions (set out in Section V of this report) which deal with Fund action.

III. AUTOMATISM AND THE USE OF FUND RESOURCES

The type of automatism envisaged in the various proposals that have been put forward—automatism of the “export compensatory”‘ rather than of the “all purpose” type—has two principal features:

(1) A mathematical formula would be used to determine whether, and to what extent, exports in a particular year are to be considered so abnormally low as to require compensation, or so abnormally high as to permit the repayment of compensation received previously. No judgment would be made by the lending agency, in the light of any other information that might be available, as to whether, in a particular situation, the formula yields a reasonable estimate of normal exports.

(2) The lending agency, whether the Fund or a new agency, would make credit available to a country without question whenever the formula pointed to a statistical justification on export grounds alone. No regard would be paid to the over-all balance of payments need for such credit, to the likelihood that the country would be able, in the light of the policies it was pursuing, to repay the credits that were being granted or, in some proposals, to the amount that the country has already borrowed. The country itself could, of course, refuse to take up credits to which it was entitled or could repay credits before maturity.

With regard to the first point, the proposals now under consideration have assumed, virtually without question, that when exports are below the average for, say, the three preceding years they can safely be assumed to be abnormally low so that compensation would be appropriate. Statistical experiments, covering the postwar period, recently made for a large number of primary exporting countries, suggest, however, that this is by no means generally the case. The fact that exports in any given year have been lower (or higher) than they were in preceding years is very often an indication of a downward (or upward) trend which may well persist for some years to come. Export proceeds that seem low in relation to those of preceding years may well appear in retrospect as rather favorable. It follows from this that automatic formulae based on past and current export data can, at best, yield only rather unsatisfactory estimates of the true trend of exports. In the absence of foreknowledge of future exports, the least inaccurate estimate of the normal level in any given year is likely to be one that attributes a great weight to the exports of the year itself. Even when this is done, however, the extent to which it is possible to adjust export proceeds by adding or subtracting compensatory receipts or repayments so as to bring them closer to their true norm or to reduce their instability is limited.12

While great uncertainty must always attach to any attempt to estimate the medium-term trend or norm of exports, it is reasonable to assume that a better estimate could be made by the exercise of judgment based on an analysis of the causal factors at work than by any mathematical formula, however skillfully contrived, which is based on the mere statistical magnitude of current and previous exports.

In regard to the second aspect of automatism—the granting of credit irrespective of the general balance of payments situation or of the policies of the country receiving assistance—it may be useful to set out existing Fund policies and their rationale.

Under present Fund policies “members are given the overwhelming benefit of the doubt in relation to requests for transactions within the ‘gold tranche,’ that is, for drawings which do not increase the Fund’s holdings of the currency beyond an amount equal to the member’s quota. The Fund’s attitude to requests for transactions within the ‘first credit tranche’—that is, transactions which bring the Fund’s holdings of a member’s currency above 100 per cent but not above 125 per cent of its quota—is a liberal one, provided that the member itself is making reasonable efforts to solve its problems. Requests for transactions beyond these limits require substantial justification. They are likely to be favorably received when the drawings or stand-by arrangements are intended to support a sound program aimed at establishing or maintaining the enduring stability of the member’s currency at a realistic rate of exchange.” 13

In the higher tranches, the Fund has therefore wished to be satisfied that a sound set of policies is being followed. The Fund may have reached this conclusion before the question of a drawing arose—e.g., if it has a stand-by arrangement with the country in question. If such policies are being followed, no change in them would be needed to meet payments difficulties that are due solely to temporary situations in foreign markets, or to such factors as a temporary fluctuation in crops. The mere fact of a falling off in exports would not be taken as an indication that a corrective program was necessary or that the corrective program already envisaged should be intensified. On the other hand, a need for corrective policies might arise either because the decline in exports appeared to foreshadow a lasting weakening of the country’s balance of payments or because (though the export decline itself might be purely temporary and self correcting) the country’s monetary and financial policies were such as to provoke, sooner or later, balance of payments difficulties even under satisfactory export conditions. Recognition by the Fund of the need for corrective policies in either of the two circumstances outlined above does not mean that the Fund has seized the occasion of a member country’s financial plight to press for immediate adoption of the full range of what might be construed as “ideal” policies; for example, the elimination of all payments restrictions, the adoption of full currency convertibility at an effective par value, the abolition of all multiple rates, etc. Reference to the policies followed in regard to these matters by the many countries that are using the Fund in the second or higher credit tranches or that have stand-by arrangements permitting such use would dispel at once the notion of such an approach by the Fund. In accordance, however, with the purposes set out in Article I of the Fund’s Articles of Agreement, Fund assistance, at least beyond the gold tranche, is not made available to any country that makes no effort to move toward the elimination of those aspects of its exchange and monetary policies that are detrimental to the interests of the member itself or those of other members.

The general case against providing compensatory credit without inquiry into general balance of payments need or into the policies of the country concerned has been argued at length in “Fund Policies and Procedures in Relation to the Compensatory Financing of Commodity Fluctuations,” 14 and these arguments have not, in general, been challenged. As suggested by the UN Committee of Experts, a country exposed to export fluctuations might feel more secure if it had access to resources on which it could draw without having to satisfy any international organization or lending government as to the type of domestic or international economic policy it was pursuing. Moreover, it is possible that the availability of international credit on an automatic basis at times when exports are low, and the necessity of repaying such credit at times when exports are high, would have some effect in inducing countries to attempt to keep their domestic expenditures and imports on an even keel, on the basis of reasonable expectations as to the medium-term trend of their exports and other receipts. These potential advantages, however, have to be weighed against the disadvantages of automatic credit geared to a single element in the balance of payments. In this connection it may be appropriate to mention two considerations in particular:

(1) Even a statistically accurate determination that exports in a particular year are below normal implies nothing at all as to the cause of the shortfall. The cause may be a decline in world demand or a crop failure brought about by a natural calamity. But the reason may also lie in domestic inflation, leading to increasingly overvalued exchange rates, government purchases for stockpile at prices above those prevailing in world markets, or other national policies. When declines in exports occur, a most careful consideration of their possible causes is needed in order to determine whether some of them may not be open to remedial action by the country itself, so as to prevent export declines in the future if similar circumstances recur.

Thus, while it is desirable that countries have access to financial means to compensate for fluctuations in exports, it is not particularly desirable, and may be against the genuine interest of the country concerned, that this finance should be provided automatically and without an exploration of the causes of the decline in exports and the measures that might be taken to improve exports in the future.

In this connection, it should be pointed out that the benefits which a country derives from reaching an understanding with the Fund as to the policies appropriate to its situation may extend beyond the financial assistance obtained from the Fund itself. In such circumstances, agreement with the Fund is likely to strengthen opinion abroad and at home regarding the country’s creditworthiness, and thus to facilitate the attraction of capital from other sources, official as well as private.

(2) The total amount of short-term credit made available to a country by one agency or under one arrangement cannot be totally divorced from the amount made available on similar terms by another agency or under another arrangement by the same agency. It would be shortsighted to think that a country would be fully justified in borrowing a relatively large amount on short term to compensate for an export shortfall while totally disregarding the amount that it had already borrowed on short term for other purposes. Prudent countries would themselves see to it that their total indebtedness did not exceed what they could reasonably expect to repay, and this would take into account all indebtedness of a similar character. It would seem to be dubious wisdom to set up the terms of lending of an international agency in such a manner as to put governments under internal pressure to borrow sums that they themselves might consider beyond the bounds of prudence. If there are sensible limitations on total short-term borrowing, these limitations should be taken into account not only by the borrowing country itself but also in the policies of the international agency extending the credit.

IV. QUANTITATIVE ADEQUACY OF DRAWING FACILITIES IN THE FUND

The UN Committee of Experts responsible for producing International Compensation for Fluctuations in Commodity Trade calculated that 14 out of 46 primary producing countries experienced, over the years 1953–59, cumulative shortfalls of exports, when compared with average annual exports over the three preceding years, of such magnitude that to compensate them fully would have compelled them, after using up 125 per cent of their Fund quotas, to dip into their own reserves to an extent exceeding 30 per cent of reserves at the end of 1959.15

The Experts did not offer an opinion as to whether these facilities, had they been available on an automatic basis, would have been adequate to meet, to a reasonable extent, the need for compensatory financing of export fluctuations. However, they pointed out that if only the 25 per cent of quota constituting the gold tranche had been made available by the Fund to meet the cumulative export shortfalls, 20 of the countries concerned would have had to draw down their reserves by more than 30 per cent to achieve full compensation. These near-automatic facilities, they implied, were insufficient; and even if a reasonable degree of progress were made by the Fund in extending the automatism of drawings in many cases, the uncertainty of drawings would, they considered, offer a serious handicap to the object of continuity in development expenditure.

In a UN Secretariat Study,16 it was calculated

  • (a) that for the average primary exporting member of the Fund the average shortfall in export earnings (compared with the mean of the previous three years’ exports) over the period 1953–60 was approximately equal to half of its (1961) quota; and that in only half of the countries would drawings of up to 50 per cent of quota have sufficed to offset the average annual shortfall for years in which shortfalls occurred; 17 and

  • (b) that if each primary exporting member had sought to compensate 100 per cent of its export shortfalls by drawing on the Fund and had used 60 per cent of export excesses for repayment, subject to a limit of cumulative net drawings of 50 per cent of quota, primary exporting members could have compensated in this way about one third of their total shortfalls.18

The authors of the study made it clear that their calculations were not intended to reflect on, or measure, the adequacy of the Fund as a means of assisting member countries, since usually reserves and other sources of credit could also be drawn upon and since Fund drawings are not limited to 50 per cent of quota.

The question of the quantitative adequacy of drawing facilities in the Fund to meet the needs for compensatory financing of export fluctuations is a difficult one, and no answer can be made to it without the help of many arbitrary suppositions. In arriving at these suppositions the following considerations are relevant:

(1) In the first place, as is generally recognized, Fund facilities are intended to be used in conjunction with national reserves and other sources of finance.

(2) Again, account has to be taken of the fact that all these forms of international liquidity are required to meet payments deficits arising not only from export shortfalls but also from fluctuations in other items in the balance of payments, notably fluctuations in imports. These fluctuations in other items are, indeed, rather more important than export shortfalls in the causation of payments deficits. Moreover, reserves cannot safely be run down to zero even to meet the severest drains. On the other hand, the various possible causes of deficit are unlikely to exercise their maximum effect simultaneously.

(3) In seeking to measure the probable need for compensatory financing of export shortfalls, it is impracticable to measure such shortfalls from a five-year moving average centered on the middle year (as was done in “Fund Policies and Procedures in Relation to the Compensatory Financing of Commodity Fluctuations”), and misleading to measure them from a moving average of the preceding three years (as was done by the UN Experts and Secretariat and by the OAS Experts). As has been pointed out elsewhere,19 the five-year moving average centered on the current year, while it may be considered an “ideal” norm from which to measure export deviations, is not usable in practice since foreknowledge of the exports of future years is necessarily lacking. It would seem desirable, however, that the “practical” norm from which export deviations are measured should be close to this “ideal” norm insofar as the latter can be predicted on the basis of existing knowledge. Such a prediction is perhaps best made by the exercise of judgment in the light of all relevant information. If, however, the practical norm is defined by an automatic formula involving the exports of current and previous years, statistical calculations show that the formula, if it is not to diverge unnecessarily from the ideal norm, must give considerable weight to the current year’s exports. Moreover, as was argued in “Fund Policies and Procedures in Relation to the Compensatory Financing of Commodity Fluctuations,” the compensation of fluctuations should, in principle, be partial only. This implies that a target level of export availabilities 20 that is somewhat closer to actual exports than is the ideal norm be chosen. The result will be to increase still further the weight that should be given to the current year’s exports in the calculation of the practical norm, or alternatively—what amounts to the same thing—deviations of actual exports from the practical norm should themselves be compensated only in part.

In Table 1 it is assumed that drawings on the Fund or drafts on national reserves will be made to cover two thirds of the shortfalls of actual exports with respect to a practical export norm defined as an average of exports in the present and two preceding years, with weights of 50 per cent given to the present year and 25 per cent to each of the two preceding years. It is assumed that two thirds of export surpluses with respect to this norm are used to repay drawings or reconstitute reserves. In order to ensure that countries with a downward long-term trend in exports do not indefinitely increase their claims on compensatory financing, it is assumed that drawings are repaid, or drafts on reserves are made good, in the fourth and fifth years of the drawing. In column 1 of the table, the maximum net cumulative requirements for compensatory financing over the period 1951–61 on these assumptions 21 are shown for low-income primary exporting members of the Fund.

Columns 2, 3, and 4 present three alternative measurements of the means presently available to meet the requirements set forth in column 1. Column 2 shows one third of each country’s potential external liquidity, defined as its unused potential drawing facilities with the Fund (through the fourth credit tranche) plus its gross reserves of gold and convertible currency, as of mid-1962. The assumption underlying this column is that one third of external liquidity is approximately what can be used to meet export fluctuations, the remainder being required for basic reserves and for other types of payments deficits insofar as these coincide with export shortfalls. Column 3 shows one half of the excess of each country’s potential external liquidity, as of mid-1962, over a presumed minimum reserve equal to the value of one month’s imports at the 1961 rate. Column 4 gives each member country’s Fund quota as of mid-1962. The assumption underlying column 4 is that each member would be in a position to use up to one half of its quota for the purpose of financing export fluctuations and would match this amount by an equal use of its own reserves, so that the combined use of reserves and Fund resources would amount to 100 per cent of quota.

The problem of the adequacy of Fund resources (in conjunction with national reserves) in meeting needs for the compensatory financing of export fluctuations is approached differently in columns 2 and 3 on the one hand, and in column 4 on the other. A comparison of column 1 with column 2 or 3 affords a measure of the extent to which member countries might have been able to meet export fluctuations of a defined magnitude on the basis of their external liquidity as of a given moment of time (viz., mid-1962). A comparison of column 1 with column 4 affords a measure of the extent to which member countries could meet such fluctuations on the basis of their normal drawing power in the Fund, starting from a position in which drawings for the purpose of export compensation are zero and assuming that the member will have adequate independent reserves to use pari passu with drawings on the Fund. In all cases, the need for financing is measured in relation to the experience of a particular decade (1951–61) and on the basis of specific assumptions regarding the degree of compensation. The comparisons of column 1 with columns 2 and 3 would seem the more relevant when considering the need for adding to the resources available to countries for compensatory financing. The comparison with column 4 is the more relevant when considering the adequacy of the Fund quotas of individual members.

Table 1.Adequacy of External Liquidity to Finance Fluctuations in Exports of Some Fund Members(In millions of U.S. dollars)
MemberMaximum

Financial

Requirements

Indicated by

1951-61

Experience1

(1)
Assumed Limits of Finance Available
One third

of external

liquidity2

(2)
One half

of excess

external

liquidity3

(3)
Fund

quota4

(4)
One half

of Fund

quota4

(5)
Excesses or Deficiencies (-) in Available Financing
Column 2

minus

column 1

(6)
Column 3

minus

column 1

(7)
Column 4

minus

column 1

(8)
Column 5

minus

column 1

(9)
Argentina192.3101.391.2280.0140.0–91.0–101.187.7–52.3
Bolivia18.89.110.422.511.2–9.7–8.43.7–7.6
Brazil130.8206.6249.2280.0140.075.8118.4149.29.2
Burma20.556.575.730.015.036.055.29.5–5.5
Ceylon25.842.649.045.022.516.823.219.2–3.3
Chile54.835.028.0100.050.0–19.8–26.845.2–4.8
Colombia79.566.776.8100.050.0–12.8–2.720.5–29.5
Costa Rica5.810.010.615.07.54.24.89.21.7
Cyprus4.522.929.611.25.618.425.16.71.1
Dominican Republic8.311.914.515.07.53.66.26.7–0.8
Ecuador5.813.815.915.07.58.010.19.21.7
El Salvador7.815.418.611.25.67.610.83.4–2.2
Ethiopia4.729.640.613.256.6524.935.98.51.9
Ghana21.875.496.835.017.553.675.013.2–4.3
Greece12.3116.7145.360.030.0104.4133.047.717.7
Guatemala5.722.528.215.07.516.822.59.31.8
Haiti7.35.36.611.25.6–2.0–0.73.9–1.7
Honduras7.07.98.811.25.60.91.84.2–1.4
India148.0305.6368.2600.0300.0157.6220.2452.0152.0
Indonesia135.089.9101.8165.082.5–45.1–33.230.0–52.5
Iran289.796.4119.670.035.0–193.3–170.1–219.7–254.7
Iraq54.756.067.115.07.51.312.4–39.7–47.2
Jordan2.720.826.48.054.0518.123.75.31.3
Korea8.172.596.218.89.464.488.110.71.3
Lebanon3.364.181.86.83.460.878.53.50.1
Libya1.736.348.211.035.5534.646.59.33.8
Malaya246.0290.1404.832.5516.2544.1158.8–213.5–229.8
Mexico60.2185.6231.1180.090.0125.4170.9119.829.8
Morocco2.881.2103.252.526.278.4100.449.723.4
Nicaragua3.412.916.211.25.69.512.87.82.2
Nigeria15.880.094.150.025.064.278.334.29.2
Pakistan143.0142.1186.4150.075.0–0.943.47.0–68.0
Panama1.810.39.40.50.28.57.6–1.3–1.6
Paraguay4.05.05.911.25.61.01.97.21.6
Peru11.042.243.832.5516.2531.232.821.55.2
Philippines15.246.740.175.037.531.524.959.822.3
Saudi Arabia4.2114.3158.955.027.5110.1154.750.823.3
Sudan32.863.986.115.07.531.153.3–17.8–25.3
Syrian Arab Republic28.29.26.715.07.5–19.0–21.5–13.2–20.7
Thailand24.8175.7243.445.022.5150.9218.620.2–2.3
Tunisia18.830.336.618.359.2511.517.8–0.5–9.6
Turkey51.385.9107.686.043.034.656.334.7–8.3
United Arab Republic77.877.989.390.045.00.111.512.2–32.8
Uruguay60.382.8115.630.015.022.555.3–30.3–45.3
Venezuela0229.5295.9150.075.0229.5295.9150.075.0
Viet-Nam34.760.480.018.559.2525.745.3–16.2–25.5
Yugoslavia9.036.316.6120.060.027.37.6111.051.0
Total2,101.83,453.14,276.83,203.31,601.41,351.32,175.01,101.5–500.4

As described on page 451.

A country’s external liquidity is defined as its gross gold and convertible foreign exchange reserves plus its total tranche position with the Fund. Figures given are for mid-1962. A country’s total tranche position with the Fund is the amount that it could still draw, as of a given date, if its justification were sufficient, without increasing the Fund’s holdings of its currency above 200 per cent of its quota.

Excess external liquidity (as of mid-1962) is defined as external liquidity (described in footnote 2) less average monthly imports (for 1961).

Quotas given are for mid-1962.

Quotas to be increased by annual installments, as follows: Ethiopia to $15 million by September 1963; Jordan to $11.25 million by July 1964; Libya to $15 million by September 1963; Malaya to $37.5 million by October 1963; Peru to $37.5 million by September 1963; Tunisia to $22.5 million by May 1964; and Viet-Nam to $22.5 million by November 1963.

As described on page 451.

A country’s external liquidity is defined as its gross gold and convertible foreign exchange reserves plus its total tranche position with the Fund. Figures given are for mid-1962. A country’s total tranche position with the Fund is the amount that it could still draw, as of a given date, if its justification were sufficient, without increasing the Fund’s holdings of its currency above 200 per cent of its quota.

Excess external liquidity (as of mid-1962) is defined as external liquidity (described in footnote 2) less average monthly imports (for 1961).

Quotas given are for mid-1962.

Quotas to be increased by annual installments, as follows: Ethiopia to $15 million by September 1963; Jordan to $11.25 million by July 1964; Libya to $15 million by September 1963; Malaya to $37.5 million by October 1963; Peru to $37.5 million by September 1963; Tunisia to $22.5 million by May 1964; and Viet-Nam to $22.5 million by November 1963.

It might be argued that parts of the reserves of some countries are virtually unusable, in that they are pledged against certain liabilities, or for other reasons. To some extent this factor is taken into account in the concept of minimum reserves underlying the calculations in columns 2 and 3. However, since no allowance has been made for this factor in column 4, column 5 has been added to show the extent to which the compensatory financing of export fluctuations would be limited if countries’ use of external liquidity for this purpose were to be limited to 50 per cent of Fund quotas—a rather extreme assumption in most cases.

The differences between the alternative measures of the means available for compensatory financing of export fluctuations shown in columns 2, 3, 4, and 5, and the computed requirements for such financing shown in column 1, are set forth in columns 6, 7, 8, and 9, respectively. It is noteworthy that the incidence of “minus” signs in columns 6 and 7 is almost identical. One third of external liquidity as of mid-1962 would have been inadequate to cover maximum compensatory requirements of only 9 countries out of 47. One half of the excess of such liquidity over one month’s imports would have been similarly inadequate in 8 of the same 9 countries. A limitation of financing to 100 per cent of quota as shown in column 8 would again have restricted export compensation in only 9 countries. Since these groups partially overlap, 16 member countries would have been limited by one or the other criterion. The more stringent limitation of financing to 50 per cent of quota, illustrated in columns 5 and 9, would result in “minus” signs in 9 countries in addition to those referred to above. In view of the necessarily somewhat arbitrary nature of the criteria employed in these calculations, and their uniform application to all countries regardless of special circumstances, the results for individual countries should not be taken too seriously. The calculations do, however, yield a general impression of the magnitude of the problem.

In a few countries with declining medium-term trends over the 1951–61 period, limitation of the finance available for automatic compensation over that period would probably have exercised a beneficial effect through limiting the need for repayment at times when exports were low in relation to trend.

V. CONCLUSIONS: FUND ACTION IN CONNECTION WITH EXPORT FLUCTUATIONS

(1) The financing of deficits arising out of export shortfalls, notably those of primary exporting member countries, has always been regarded as a legitimate reason for the use of Fund resources, which have been drawn on frequently for this purpose. The Fund believes that such financing helps these members to continue their efforts to adopt adequate measures toward the solution of their financial problems and to avoid the use of trade and exchange restrictions to deal with balance of payments problems, and that this enables these members to pursue their programs of economic development with greater effectiveness.

(2) The Fund noted in its 1962 Annual Report that trends in prices of basic commodities in the past few years have adversely affected the export earnings of many Fund members, which has increased the strain on their reserves. In view of this and in order to ensure the maximum effectiveness for its support to members—in particular, primary exporting members—that are faced with fluctuations in export proceeds, the Fund is taking the action set forth below.

A. Quotas

(3) The quotas of many primary exporting countries, taken in conjunction with a reasonable use of their own reserves, are at present adequate for dealing with export fluctuations such as have occurred during the past decade. In those instances, however, where adjustment of the quotas of certain primary exporting countries, and in particular of countries with relatively small quotas, would be appropriate to make them more adequate in the light of fluctuations in export proceeds and other relevant criteria, the Fund is willing to give sympathetic consideration to requests for such adjustment.

B. Drawing policies

(4) Under the present policies and practices on the use of Fund resources, any member is given the overwhelming benefit of the doubt in relation to requests for transactions within the gold tranche, and the Fund’s attitude to requests for transactions within the first credit tranche is a liberal one provided the member itself is making reasonable efforts to solve its problems. In the higher credit tranches too, where a member’s policies are consistent with Fund policies and practices on the use of Fund resources in these tranches, the Fund gives assistance, on a substantial scale, toward meeting temporary payments deficits, including deficits arising out of export shortfalls. The policies and practices of the Fund on drawings and stand-by arrangements have been developed in order to help members to meet more effectively their temporary balance of payments difficulties and to enable them, where necessary, to pursue policies aimed at restoring external and internal equilibrium. Fund assistance in accordance with these policies and practices has made an effective contribution to the solution of the difficulties of these members and the achievement of equilibrium. It has often led, moreover, to the provision of further resources from public and private sources for meeting immediate and longer-term needs. In the application of its policies and practices governing the use of its resources, the Fund’s attitude has been a flexible one, and account has been taken of special difficulties facing members.

(5) The Fund has reviewed its policies to determine how it could more readily assist members, particularly primary exporters, encountering payments difficulties produced by temporary export shortfalls, and has decided that such members can expect that their requests for drawings will be met where the Fund is satisfied that

  • (a) the shortfall is of a short-term character and is largely attributable to circumstances beyond the control of the member; and

  • (b) the member will cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties.

The amount of drawings outstanding under this decision will not normally exceed 25 per cent of the member’s quota, and the drawings will be subject to the Fund’s established policies and practices on repurchase. When drawings are made under this decision, the Fund will so indicate in an appropriate manner.

(6) In order to implement the Fund’s policies in connection with compensatory financing of export shortfalls, the Fund will be prepared to waive the limit on Fund holdings of 200 per cent of quota, where appropriate. In particular, the Fund will be prepared to waive this limit (i) where a waiver is necessary to permit compensatory drawings to be made under paragraphs (4) and (5) above, or (ii) to the extent that drawings in accordance with paragraph (5) are still outstanding.

Whenever the Fund’s holdings of a member’s currency resulting from an outstanding compensatory drawing under paragraph (5) are reduced, by the member’s repurchase or otherwise, this will restore pro tanto the member’s facility to make a further compensatory drawing under that paragraph, should the need arise.

(7) In order to identify more clearly what are to be regarded as export shortfalls of a short-term character, the Fund, in conjunction with the member concerned, will seek to establish reasonable estimates regarding the medium-term trend of the member’s exports on the basis of appropriate statistical data in conjunction with qualitative information about its export prospects.

(8) The provision of credit to deal with the balance of payments effects of export fluctuations provides immediate relief for a country’s short-term difficulties. In many cases, however, it will also be necessary to introduce measures of a policy character in order to attain a satisfactory and lasting solution to a country’s balance of payments problems. Members generally have actively cooperated with the Fund to find and adopt the measures necessary to this end. Beyond immediate balance of payments difficulties, the primary exporting countries are, in many instances, facing unfavorable long-term export trends, and all are trying to meet the challenge of achieving more rapid and sustained development through a strengthening and broadening of their economies. The last mentioned problem will require action in many fields and over many years by both the primary exporting countries and the industrial countries, separately and in concert, including readier access to the markets of the developed countries for the products of the developing countries and an appropriate and sustained flow of technical and financial assistance to the developing countries. The Fund considers that its activities can provide valuable assistance in helping to establish a climate within which longer-term measures can be more effectively pursued.

Annex: Net Fund Drawings1 of Some Fund Members,2 1947-62
Cumulative,

1947-57
19581959196019611962Cumulative,3

1947-62
Available

Under

Stand-by

Arrangement,

End 1962
Argentina75.072.548.531.0–9.0218.050.0
Bolivia6.52.02.4–1.5–2.01.38.56.5
Brazil75.037.6–20.247.740.0–17.5162.5
Burma15.0–3.0–4.0–4.0–4.0
Ceylon11.211.222.5
Chile31.110.6–12.459.3–12.776.0
Colombia25.05.0–15.0–15.065.07.572.5
Costa Rica7.5–4.13.411.6
Dominican Republic9.09.0
Ecuador5.0–5.014.0–2.211.92.0
El Salvador5.55.7–3.2–8.011.2
Ghana14.214.2
Guatemala5.05.0
Haiti1.02.51.9–1.3–1.31.94.85.0
Honduras3.8–3.83.81.21.21.37.53.8
India200.0–72.5122.525.0275.175.0
Indonesia55.0–9.0–18.533.721.282.5
Iran25.3–8.4–11.945.0–12.0–37.9
Mexico45.0–45.0
Nicaragua3.8–1.9–1.94.54.5
Pakistan12.512.5
Paraguay5.50.8–1.50.1–1.6–1.81.55.0
Peru10.0–10.030.0
Philippines15.0–6.23.3–2.925.434.640.4
Sudan5.01.2–0.4–2.9–2.9
Syrian Arab Republic15.0–0.73.417.7
Turkey21.517.0–3.0–3.010.55.548.5
United Arab Republic30.0–2.725.2–2.757.4107.25.0
Uruguay15.015.015.0
Yugoslavia22.967.5–7.582.9
Total593.591.31.984.6479.646.71,297.8260.5
Source: International Monetary Fund, International Financial Statistics.

Minus sign indicates net repayment.

Countries in Table 1 which have drawn on the Fund.

Totals may not equal sums of annual data because of rounding.

Source: International Monetary Fund, International Financial Statistics.

Minus sign indicates net repayment.

Countries in Table 1 which have drawn on the Fund.

Totals may not equal sums of annual data because of rounding.

United Nations, Commission on International Commodity Trade, Report on the Tenth Session (E/CN.13/55, May 31, 1962), p. 41.

“Fund Policies and Procedures in Relation to the Compensatory Financing of Commodity Fluctuations,” Staff Papers, Vol. VIII (1960–61), pp. 1–76.

Since the presentation of this study in April I960, Fund transactions with primary exporting countries have greatly increased. Outstanding drawings by low-income primary exporters have nearly doubled over the last 3 years. For details see Annex Table (p. 457).

Ibid., p. 4.

United Nations, International Compensation for Fluctuations in Commodity Trade (Report by a Committee of Experts, E/CN.13/40, New York, 1961).

Organization of American States, Final Report of the Group of Experts on the Stabilization of Export Receipts (Washington, D.C., 1962).

United Nations, Commission on International Commodity Trade, Report of the Ninth Session (E/CN. 13/42, May 1961), p. 21.

UN Committee of Experts, op. ext., p. 29.

Ibid., p. 28.

Ibid., p. 81.

Pan American Union, Inter-American Economic and Social Council, Special Meeting at the Ministerial Level, Punta del Este, Minutes and Documents (Washington, D.C, 1962): Draft Resolution by the Delegation of Chile, pp. 550 ff. (in Spanish).

See J. Marcus Fleming, Rudolf Rhomberg, and Lorette Boissonneault, “Export Norms and Their Role in Compensatory Financing,” Part I, Staff Papers, Vol. X (1963), pp. 98–124.

International Monetary Fund, Annual Report, 1962, p. 31.

Staff Papers, Vol. VIII (1960–61), pp. 1–76.

UN Committee of Experts, op. ext., pp. 25–29.

Consideration of Compensatory Financial Measures to Offset Flunctuations in the Export Income of Primary Producing Countries: Stabilization of Export Proceeds Through a Development Insurance Fund (E/CN.13/43, January 1962).

Ibid., pp. 46–48 (Table 10) and p. 49.

Ibid., p. 54.

Fleming, Rhomberg, and Boissonneault, op. cit.

That is, export proceeds adjusted for compensatory receipts and payments.

The assumptions are the same as those underlying Scheme 24 in Table 5 in the study by Fleming, Rhomberg, and Boissonneault, op. cit.—a scheme which yields export availabilities considerably closer to target and considerably smoother over time than those of Scheme 1 (the OAS Scheme) in that table.

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