Chapter

Appendix III: Note on Arrangement on Guidelines for Officially Supported Export Credits

Author(s):
International Monetary Fund
Published Date:
January 1987
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Background

The Arrangement on Guidelines for Officially Supported Export Credits (the Consensus Arrangement) is adhered to by 22 members of the OECD Group on Export Credits and Credit Guarantees. The Arrangement has been in place since April 1978 and replaced a less elaborate understanding that had been in effect among a more limited number of OECD countries since early 1976. The Arrangement is intended to limit competitive subsidization of export financing and sets, inter alia, minimum allowable interest rates and maximum repayment terms for officially financed or subsidized export credits of two years and more.

The Arrangement allows some deviations (derogations) from normal practices. These deviations have to be notified to all members who can then “match” the deviations. The Arrangement also allows credits or grants that are wholly or partially (mixed credits) financed from public funds for development purposes. Under certain circumstances—indicated by the degree of concessionality—the conditions of these loans may be more favorable than the conditions of normal export credits. Sectoral understandings—nuclear power plants, aircraft, ships, and satellite communications stations—with special terms have been developed. Military equipment and agricultural commodities are excluded.

The Arrangement has been strengthened over the years, and several important modifications were introduced in 1983. Essentially, minimum allowable interest rates have been set more flexibly in the light of market conditions, and the use of mixed credits has been increasingly discouraged.

Terms and Conditions of Export Credits Before July 1987

Until July 1987 the basic guidelines of the Arrangement consisted of the following:

a. Minimum cash down payment of at least 15 percent of the value of the contract.

b. Maximum repayment terms of 8½ years. The term can be extended to 10 years for countries classified as relatively poor and for some intermediate countries.

c. Minimum interest rates for officially financed or subsidized export credits. (There are no minimum rates for “pure cover,” that is, unsubsidized officially guaranteed or insured credits.) A matrix of minimum rates is established for maturities of up to 5, up to 8½, and up to 10 years for three categories of countries. Category I is for relatively rich countries; Category II is for intermediate countries; and Category III is for relatively poor countries. Since October 1983 the minimum interest rates are revised twice a year if the weighted average of the long-term government bond yields for the five SDR currencies has moved by at least 50 basis points in either direction from the level of the previous adjustment. Table 4 provides the evolution of the structure of minimum interest rates in the recent past. In addition to this mechanism, if commercial rates of interest for the currency of a participant country fall below these minimums, then market-related “commercial interest reference rates” (CIRRs) serve as the minimum allowable interest rates. The CIRRs are adjusted monthly and are based, in most cases, on the monthly average government borrowing costs of five-year, fixed-rate funds, plus a margin of 100 basis points. The CIRR is increased by a premium of 20 basis points if the interest rate is fixed before the time of contract.

d. When aid funds are mixed with export credits, the interest rate and the repayment terms can be more favorable to the debtor country provided that the overall grant element of such mixed financing packages is at least 25 percent. For calculating the grant element, a uniform discount rate of 10 percent is used.

Table 4.Consensus Arrangement: Minimum Interest Rates(In percent)
RelativelyIntermediateRelatively
Rich CountriesCountriesPoor Countries
(Category I)(Category II)(Category III)
2-5 years
July 198413.3511.5510.70
January 198512.0010.709.85
January 198610.959.658.80
July 1986 19.558.257.40
5-8½ years
July 198413.6011.9010.70
January 198512.2511.209.85
January 198611.2010.158.80
July 1986 19.808.757.40
8’A-IO years
July 198411.90210.70
January 198511.2029.85
January 198610.1528.80
July 198618.7527.40
Source: The Export Credit Financing Systems in OECD Member Countries (Paris: Organization for Economic Cooperation and Development, 1987).

Changes Introduced from July 1987

The participants in the Arrangement agreed on March 17, 1987 to modify certain rules of operation. This recent agreement moves further in the direction of discouraging the use of mixed credits and of adapting the rules on minimum interest rates to market conditions. The maximum maturities for loans, however, were left unchanged. The main changes consisted of the following:

a. Matrix minimum interest rates for countries in Category I will be eliminated from July 1987. As a result, the minimum interest rate will be the CIRR of the currency in which the credit is given. Moreover, the margins in the calculation of matrix minimum interest rates for countries in Categories II and III will be increased by 0.3 percentage points. It is expected that this increase in matrix minimums will reduce subsidies on export credits.

b. The method of calculating the concessionality level for mixed credits has been changed by replacing the “grant element” using a uniform discount rate of 10 percent for all creditor countries with a system giving more weight to market interest rates in the various currencies.

c. The minimum concessionality level for mixed credits is to be increased from the present 25 percent of the credit to 30 percent in July 1987 and to 35 percent in July 1988. For the least developed countries, the minimum concessionality level was increased to 50 percent in July 1987.

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