Summing Up by the Acting Chairman, Review of the CCFF and BSFF, January 14, 2000


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Review of Fund Facilities— Preliminary Considerations
March 2, 2000

Summing Up by the Acting Chairman of the IMF's Executive Board
Review of Fund Facilities -- Preliminary Considerations
Executive Board Meeting 00/27
March 16, 2000



Review of the Compensatory and Contingency Financing Facility (CCFF) and Buffer Stock Financing Facility (BSFF)--Preliminary Considerations

Prepared by the Policy Development and Review Department in consultation with other departments
December 9, 1999


Contents
I. Introduction
II. The Compensatory Element of the CCFF
  1. Operation of the Compensatory Element
  2. Experience with the Compensatory Element
  3. The Rationale for Compensatory Financing
  4. Options
III. The Contingency Element of the CCFF
IV. The BSFF
V. Issues for Discussion

Text Tables
1. Access Limits and Cooperation Requirements for Compensatory Financing
2. Categorization of Requests for CFF financing January 1989- September 1999
3. Summary of Access Limits Under CFF
4. Use of ECMs, 1988-1999
5. Use of BSFF, 1969-1999

Text Boxes
1. Main Features of the Compensatory Financing Element of the CCFF
2. Brief History of the CCFF
3. Possible Mechanics of an amended CFF
4. The Functioning of ECMs
5. The Buffer Stock Financing Facility

Annex
1. Recent Experience with the CCFF

Annex Tables
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1. Compensatory Financing Purchases, January 1993-September 1999
2. Compensatory Financing: Experience with the Early Drawing Procedure, 1976-1999
3. Compensatory Financing: Purchases Occurring More Than Seven Months After the End of the Shortfall Year
4. Early Drawings Under CCFF: January 1993-September 1999

  • This paper discusses the case for substantial amendments to the compensatory element (CFF) of the CCFF. Such a change would reflect both changes in the world economy and difficulties in implementation. The CFF would be available only in the context of arrangements, except in cases where a member's balance of payments position is satisfactory apart from temporary export shortfalls and/or cereal import excesses, and access limits under the CFF would be simplified.


  • The paper proposes the elimination of the contingency element (ECM) of the CCFF. This reflects its very rare use, the complex rules governing the ECM (which remain despite previous efforts at simplification) and the fact that the objectives of the ECM can be (and have been) largely replicated through the use of adjustors to performance criteria and/or augmentation.


  • The paper also proposes the elimination of the BSFF, in view of low utilization and the small and declining interest in buffer stocks worldwide.

I. Introduction

1.    The Compensatory Financing Facility (CFF) was established in 1963 to help countries cope with temporary exogenous shocks affecting export earnings without resorting to undue and unnecessary adjustment. Once eligibility has been established and access determined (based on the size of the shock and an assessment of the member's past and future cooperation with the Fund), a purchase is made available with no further conditions attached. Coverage was expanded in 1979 to include shortfalls in receipts from tourism and workers' remittances, and again in 1981 to include excess cereal import costs.

2.    The Compensatory and Contingency Financing Facility (CCFF) was created in 1988 with the integration of the CFF and the new external contingency mechanism (ECM).1 An ECM is a mechanism attached to a Fund arrangement that provides additional resources in the event certain critical external variables (e.g., export prices or foreign interest rates) depart from the assumptions of the program. Whereas the CFF was intended to address deviations in specific current account variables from past trends, the ECM was designed to address deviations of a broader number of current account variables from program assumptions.

3.    The CFF itself underwent further modifications around the turn of the decade, and refinements were made to the ECM in the first few years of its existence. The modalities and access limits for the CFF were comprehensively revised in 1988. The coverage of the export element of the CFF was further expanded in 1990 to include all services and income (except investment income).2 The ECM was modified in 1990 and 1992, mostly in an effort to simplify its operations and to increase its usefulness to members.

4.    The Buffer Stock Financing Facility (BSFF) was established in 1969 to provide financial assistance to members with a temporary balance of payments need arising from contributions to buffer stocks established under approved international commodity agreements. No member has used the BSFF since 1984, and all commodity agreements for which BSFF eligibility has been approved have expired. The only existing agreement that could become eligible for BSFF support is the 1995 International Natural Rubber Agreement (which entered into force in 1997), but that agreement has not been approved for eligibility by the Board3

5.    This paper provides a brief overview of the experience with the CCFF and BSFF and explores different options for the two facilities.4 It concludes that there is a case for eliminating the ECM and the BSFF, reflecting the fact that these facilities are no longer used and the same objectives can be better achieved by using other existing facilities. The paper also argues that, reflecting both changes in the world economy and difficulties in implementation, there is a case for elimination or at least substantial modification of certain features of the CFF.

6.    On previous occasions when the CCFF and BSFF have been discussed, Directors have expressed concern in a number of areas. During the last CCFF review (in January 1993), Directors were troubled by the element of judgment involved in assessing the degree of cooperation with the Fund, which determines access to compensatory financing (a concern that has resurfaced regularly since). Many Directors also emphasized the desirability of simplifying the facility, and most endorsed the view that more experience should be gained before deciding whether a substantial modification of the facility would be appropriate. During the Executive Board meeting to approve BSFF eligibility for the 1987 International Rubber Agreement, some Directors questioned the wisdom of retaining the facility when only one commodity agreement was eligible, and questioned the principle of market intervention embedded in commodity agreements.5

7.    This paper deals with the CFF, ECM, and BSFF in turn (Sections II-IV), issues for discussion are summarized in Section V.

Table of Contents

II. THE COMPENSATORY ELEMENT OF THE CCFF

A. Operation of the Compensatory Element

8.    The compensatory element of the CCFF (the CFF) is designed to provide compensation to member countries experiencing shortfalls in export earnings and/or excesses in cereal import costs (Box 1). The eligibility criteria require that the shortfall/excess be temporary and stem from factors beyond the authorities' control, and that the member have a balance of payments need. In addition, where the member is experiencing balance of payments difficulties beyond the effects of the temporary shortfall/excess, the member is expected to cooperate with the Fund in an effort to address them. The export shortfall (cereal import excess) is calculated as the amount by which a member's export earnings (cereal import costs) for a 12-month period are below (above) their medium-term trend.6,7 Various other provisions of the facility ensure that requests for compensatory financing are met in a timely fashion, in particular that a request cannot be made later than six months after the end of the shortfall year, and, in cases where the authorities foresee a shock, that the calculation for the shortfall year may include up to 12 months of estimated data.

Box 1. Main Features of the Compensatory Financing Element of the CCFF

The main purpose of compensatory financing is to ensure timely financial assistance to members that are experiencing balance of payments difficulties resulting from a temporary decline (rise) in export earnings (cereal import costs).

Eligibility requirements

  • The export shortfall and/or excess cereal import cost must be considered temporary, i.e., a deviation from trend that is expected to be reversed.

  • The shortfall/excess must be attributable to factors largely beyond the control of the authorities. Although this is often a matter of judgement, fluctuations in world prices are typically considered beyond the control of the member, except when the member is a dominant producer. By contrast, a decline in export volume due to imposition of trade or quota restrictions imposed by a member on its own exports would be regarded as within the control of that member.

  • As with all use of Fund resources, a member has to have a balance of payments need. Such a need is identified by the member's overall balance of payments position, its reserve position, or developments in its reserves.
  • In addition, where the member has balance of payments difficulties beyond the effects of the shortfall/excess, the member is expected to cooperate with the Fund in an effort to address its balance of payments difficulties.

Coverage

  • Under the export element, compensation can be given for a shortfall in total merchandise export earnings (and not for any subset of any export components). Receipts from services (excluding investment income) may be considered if reliable statistics are available.

  • Coverage of the cereal element is limited to imports of cereal only (excluding any concessionally financed cereal imports). However, an excess in cereal import cost may be compensated only to the extent that it is not offset by an excess of export earnings.

Calculations

  • An export shortfall is calculated as the amount by which export earnings in the shortfall year are below the medium-term trend value, defined as the geometric average of export earnings during the five years centered on the shortfall year.

  • An excess in cereal import cost is the difference between cereal import payments in the excess year and the arithmetic average cost of cereal imports for the five years centered on the excess year.

  • In order to ensure timely financing, the shortfall/excess year can end no earlier than six months (seven months in case of a technical difficulty not within the member's control) before the Board meeting to consider the request.

  • While the shortfall/excess year can be the latest 12-month period for which actual data are available, it is also possible to use estimated data for part or all of the shortfall year under the "early drawing procedure". However, no estimated data can be used for any part of the two pre-shortfall years, and likewise projections for the two post-shortfall years cannot include any actual data.
  • When nine or more months of estimated data are used for the shortfall year, the amount of compensation is provided in two tranches, the first of which is 65 percent of the total compensable amount.
Access limits, cooperation, and capacity to repay

Access limits under the CCFF for export shortfalls and cereal import excesses are determined by: (i) a member's balance of payments position, (ii) past cooperation with the Fund to resolve its balance of payments difficulties, and (iii) willingness to adopt adjustment policies that would meet the standards of upper credit tranche conditionality. Depending on these considerations, access limits can range from 10 percent to 55 percent of quota (Table 1). Within these limits, access is determined by the size of the shortfall/excess, and the member's capacity to repay the Fund.


9.    In order to minimize risks associated with the lack of phasing in CFF purchases, a complex system of access limits and sublimits has been developed.8 The limits are related to a member's balance of payments position, track record of cooperation with the Fund, and whether or not there is an economic program that would meet the standards of an upper credit tranche arrangement (Table 1). Maximum access is available if the export shortfall or cereal import excess is the only cause of the balance of payments difficulty and the member is judged to have no need for adjustment. In such a case, the member is eligible for access of up to 55 percent of quota.9 In cases where there are balance of payments difficulties beyond those related to the shortfall/excess, access limits are lower. Depending on both the member's record of past cooperation and the expectation of future cooperation (the latter related in part to the existence of a program meeting the standards of upper credit tranche conditionality), access limits range from 10 percent to 45 percent of quota. In addition, actual access may be set below the applicable access limits where warranted by a member's capacity to repay the Fund.10

Table 1. Access Limits and Cooperation Requirements for Compensatory Financing
Balance of Payments Position, Apart from Export Shortfall and
Cereal Import Excess, is Satisfactory

Paragraphs 12(c) and 31(d) 1

 

Export Shortfall

Cereal Import Excess

Joint Access

Access Limit In percent of quota

45

45

55

Balance of Payments Difficulties Extend Beyond Export Shortfall and
Cereal Import Excess

Cooperation Not Unsatisfactory: Paragraphs 12(a) and 31(b)

Past Cooperation Unsatisfactory: Paragraphs 12(b) and 31(c)

First Case:

If the Fund is satisfied that the member will cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments.

First Case:

If the Fund is satisfied the member has taken action that gives reasonable assurance that corrective policies will be adopted.

Access Limit:
In percent of quota

Export Shortfall

Cereal Import Excess

Joint Access

20

10

30

Access Limit:
In percent of quota

Export Shortfall

Cereal
Import Excess

Joint Access

10

10

20

Second Case:

(a) If the member has a Fund arrangement, in support of a program that meets the criteria for the use of the Fund's general resources in the upper credit tranches, under which performance is broadly satisfactory; or (b) if the Fund approves such an arrangement at the time of the request; or (c) if the member's current and prospective policies meet such criteria.

Second Case:

(a) If the member has Fund arrangement, in support of a program that meets the criteria for the use of the Fund's general resources in the upper credit tranche, under which performance is broadly satisfactory; or (b) if the Fund approves such an arrangement at the time of the request; or (c) if the member's current and prospective policies meet such criteria.

Access Limit:
In percent of quota

Export Shortfall

Cereal Import Excess

Joint Access

352

252

45

Access Limit:
In percent of quota

Export Shortfall

Cereal
Import Excess

Joint Access

20

10

30

 

 

 

 

Third Case:

(a) If the member has a Fund arrangement, in support of a program that meets the criteria for the use of the Fund's general resources in the upper credit tranches, under which a review is completed at the time of the request, or (b) if the member's policies in the recent past, as well as its current and prospective policies, continue to meet such criteria.

 

 

 

Access Limit:
In percent of quota

Export Shortfall

Cereal
Import Excess

Joint Access

352

252

45

Source: Stand-By Operations Division, PDR.
1/ Paragraphs of the CCFF Decision.
2/ Includes optional tranche equivalent to 15 percent of quota.

 

Table of Contents

B. Experience with the Compensatory Element

10.    This section provides a brief summary of experience since the CFF was extensively modified in 1988, by way of background to the discussion of some fundamental issues in the next section. The Annex provides tables on purchases under the CFF and a short summary of experience since the modifications to the CFF introduced at the time of the last review in 1993.

11.    Since 1989, 28 members (or about 16 percent of the Fund's average membership over the period) have made 45 purchases under the CFF (amounting to SDR 8.4 billion).11 After declining steadily during the 1980s, there was a sharp jump in use of the facility in 1991 (when the oil element was temporarily activated in the context of the Gulf War and there were 18 requests). In 1992 use of the facility fell back, and between 1995-1998 there was only one request a year. In 1999, thus far, requests have picked up slightly to five.

12.    About three quarters of the countries that made purchases (20 out of 28) were middle-income, and a similar proportion of the purchases (32 out of 45) were made in conjunction with upper credit tranche stand-by or extended arrangements (either pre-existing or concurrently approved).12 Of the thirteen purchases that were not made in immediate association with upper credit tranche arrangements, only seven were complete "stand-alone"13; the other six were either associated with arrangements in the first credit tranche, under the Structural Adjustment Facility or under the Enhanced Structural Adjustment Facility, or preceded the approval of an upper credit tranche arrangement by only a few weeks (Table 2). Most cases concerned members whose record of cooperation was deemed to be satisfactory; there were only five cases in which past cooperation was judged not to be satisfactory'in four of these five cases, upper credit tranche stand-by arrangements were put in place at the time of the CFF request. In no case was the shortfall/excess deemed to be the member's only balance of payments difficulty.



Table of Contents

Table 2. Categorizations of Requests for CCFF Financing: January 1989 - September 1999
Previous Record of Cooperation Satisfactory

Export Shortfall
Paragraph 12(a)(i): 20 percent of quota 2
No upper credit tranche arrangement; Fund is satisfied that member will cooperate.

Algeria (1999, no arrangement) 3
Algeria (1989, first credit tranche SBA approved at the same time)
Former Yugoslav Republic of Macedonia (1999 no arrangement) 3
Ghana (1993, no arrangement)
Israel (1992, no arrangement)
South Africa (1993, no arrangement, statement of policies; also purchased under 31(b)(i) due to a cereal element.

 

 


Cereal Excess
Paragraph 31(b)(i): 10 percent of quota 2
No upper credit tranche arrangement; Fund is satisfied that member will cooperate.
Moldova (1993, no arrangement; cereal element purchase only)

Oil Excess (expired 12/91)
Paragraph 44(c)(i)
No upper credit tranche arrangement; Fund is satisfied that member will cooperate.
Bulgaria (1991; SBA requested at the same time and approved shortly after)
India (1991, first purchase; first credit tranche
SBA approved at the same time
India (1991, second purchase; statement of policy)
Pakistan (1991; third-year SAF approved)
Romania (1991; first purchase; SBA requested at the same time, and approved shortly after)

 

 

 

Export Shortfall
Paragraph 12(a)(ii): 35 percent of quota 2
Upper credit tranche arngement in place: existing or approved

 
Algeria (1994; SBA approved)
Algeria (1996, existing EA)
Azerbaijan (1999; ESAF approved) 3
Barbados (1992; SBA approved)
Cote d'Ivoire (1990; existing SBA)
Dominican Republic (1993; SBA approved)
Honduras (1992; existing SBA)
Jordan (1989; existing SBA)
Jordan (1989; SBA approved)
Mexico (1989; EA approved)
Pakistan (1999; existing ESAF)
Papua New Guinea (1990; SBA approved)
Russia (1998; EA Augmentation)


Cereal Excess
Paragraph 31(b )(ii): 35 percent of quota 1
Upper credit tranche arrangement in place; existing or approved
Bulgaria (1997; SBA approved)

Oil Excess (expired 12/91)
New Paragraph 44(c)(ii)
Upper credit tranche arrangement in place: existing or approved
Czechoslovakia (1991, first purchase; SBA approved)
Czechoslovakia (1991, second; existing SBA)
Czechoslovakia (1992, existing SBA)
Hungary (1991, existing SBA)
Hungary (1992, existing SBA)
India (1991, first purchase; existing SBA)
Jamaica (1991, first purchase, existing SBA)
Jamaica (1991, second purchase, approved SBA)
Panama (1992; SBA approved)
Philippines (1991; SBA approved)
Poland (1991; SBA approved)
Romania (1991, second purchase; SBA approved)
Romania (1992, existing SBA)

Previous Record of Cooperation Not Satisfactory

Export Shortfall
Paragraph 12(b)(i): 10 percent of quota 2
No upper credit tranche arrangement. Fund is satisfied that member will cooperate.
Rwanda (1995, no arrangement)
(purchase approved on a lapse-of-time basis)

Export Shortfall
Paragraph 12(b)(ii): 20 percent of quota 2
Upper credit tranche arrangement in place: existing or approved

Gabon (phased drawing)
(1994; SBA approved, phased)
Jordan (1999, EA approved) 3

Oil Excess (expired 12/91)
Paragraph 44(d) (ii)
Upper credit tranche arrangement in place: existing or approved
Costa Rica (1991; SBA approved)
Dominican Republic (1991; SBA approved)

Source: Stand--By Operations Division, PDR.
1SBA = stand-by arrangement; EA = extended arrangement; ESAF = Enhanced Structural Adjustment Arrangement
2Refers to actual quota limits under the Eleventh General Review.
3Purchase under the new quota limits of the Eleventh General Review.

 

Table of Contents

13.    In a number of cases, the staff has recommended and the Board has agreed, that a member should not draw the entire amount of additional resources that might be available to it under the CFF--at least not all at once. Access was set below the applicable access limit on capacity to repay grounds (Algeria 1994); access under existing concurrent arrangements was rephased in light of the purchase under the CFF (Azerbaijan 1999, Pakistan 1999); and an existing extended arrangement was augmented in lieu of a purchase under the CFF (Ukraine 1999).

C. The Rationale for Compensatory Financing

14.    The case for low- or relatively low-conditionality financing of temporary exogenous balance of payments shocks through the CFF rests on three premises: (i) the appropriate response to the temporary shock consists of timely financing rather than adjustment (otherwise, higher conditionality—with phasing of resources—would be appropriate); (ii) members have little or no access to alternative sources of financing (otherwise, they could turn to these, instead of being forced into excessive and unnecessary adjustment); and (iii) other Fund facilities are not suited for this purpose. Doubts about these premises have been raised since before the CFF's establishment (see Box 2), but the Board has thus far considered that the balance of arguments favored retaining the CFF. Developments over the last decade, however, and in particular the evolving nature of the membership and of the global economy, argue for a revisiting of this balance. The following paragraphs discuss each of these premises in turn.

15.    First, there are several reasons why the appropriate response to a CFF-type shock may not consist entirely of financing.

i.    In practice it is difficult to distinguish between temporary and permanent shocks, and even those that could be clearly considered temporary may be less common than was supposed in the past. While fluctuations in the prices of primary commodities were a major concern in the 1950s and the ensuing decades, at least since the 1980s secular trends in these prices have seemed to become more important, and evidence has accumulated that commodity price shocks typically do not reverse quickly.14 This suggests that the proper response to a commodity price shock should involve adjustment as well as financing. This in turn suggests that the appropriate context of the associated CFF-like financing would be an arrangement under which the required adjustment could be monitored and purchases subject to related conditionality, rather than in the form of an outright purchase outside the context of an arrangement and without the application of conditionality linked to the adjustment program.

Box 2. Brief History of the CCFF

  • The CFF was created in 1963, following a decade of debate. A group of experts convened by the United Nations had made the first suggestions to this effect in 1953. The Fund's initial response had been to stress the availability of its existing instruments, but it had grown increasingly concerned about the vulnerability of primary producing countries. As originally conceived, the key features of the CFF were low conditionality and rapid consideration of requests. Access was not, however, intended to be automatic--the country's balance of payments position as a whole was recognized to matter and not just that part deriving from the export shortfall or cereal import excess. The (cumulative) access limit was 25 percent of quota. Access floated with respect to access limits as would apply under other policies, but access did not "float" as regards conditionality. 1

  • The CFF underwent successive liberalizations in 1966, 1975, and 1979, in response variously to low usage and to difficulties in commodity markets. The access limit was raised in stages, eventually to 100 percent of quota. Two "tranches" of access were identified, with more stringent "cooperation" criteria for access beyond the lower tranche. These criteria, however, remained loosely defined, as the Board emphasized the need for flexibility and, in 1978, rejected a staff proposal to adopt the standard of first credit tranche conditionality for access to the "upper tranche" of the CFF. "Floating" with respect to First Credit Tranche conditionality was introduced in 1966 (so that. access to the CFF did not affect the conditionality of the first credit tranche). Timeliness was another focus, with various technical modifications to cut the lag between a drop in export revenues and approval of a CFF request introduced in 1975, and the use of estimated data permitted in 1979, with an expectation of prompt repurchase if the estimates turned out to overstate the compensable shortfall. The coverage of the facility was also expanded, with tourism and workers' remittances included in 1979.

  • The cereal import element was added in 1981, following the increased volatility of food prices in the 1970s, initially for a fixed term of four years. The Board had rejected this idea in 1978, out of concern that it was inappropriate for the Fund to single out food imports as a balance of payments problem, but reconsidered upon receipt of requests from the World Food Council and the Food and Agriculture Organization, and giving weight to the "human considerations associated with this issue" (EBM/80/117). The cereal element has since been routinely extended.

  • The long period of liberalization of the CFF was followed by the emergence of certain concerns, and the conditions of the CFF were tightened in 1983-88. A surge in CFF lending in the early 1980s had created discomfort in the Board with the difficulty of defining "cooperation", and it had become apparent that it was rare in practice for a country to have a shortfall/excess in the absence of an underlying balance of payments problem. In 1983, explicit standards for cooperation were set for the lower and upper tranches of CFF access, and these were further refined in 1988 to become the standards currently in use.

  • The contingency element was established in 1988 in response to twin concerns, each of which motivated a different group of members: that arrangements needed to be protected from adverse shocks, and that adverse shocks were best dealt with in the context of arrangements. A proposal to replace the CFF with a facility designed only to handle contingencies under arrangements had been rejected by the Board in November 1987. By way of compromise, in a series of eleven meetings in March 1988, the Board created the new contingency window (a "hydra-headed facility of mind-numbing and self-defeating complexity", see Silent Revolution:The International Monetary Fund, 1979-1989, J.M.Boughton, forthcoming), while reducing virtually all of the CFF access limits (with, for instance, the maximum financing for export shortfalls reduced from 83 percent to 65 percent of quota).

  • The two windows have since remained broadly unchanged, with some technical modifications in their 1990-92 reviews, including, in the 1992 review, the removal of CFF "floating" with respect to First Credit Tranche conditionality. Access limits under each window were reduced in percent of quota (to remain unchanged on average in SDR terms) following the Eleventh General Review of Quotas in January 1999, pending the present review.

1Access to the CFF did not thereby count towards access in calculating compliance with access limits for use of the credit tranches, but it did reduce the amount of access that was available on first credit tranche terms as regards conditionality.

ii.    Experience suggests that few countries have "ideal" policies. Even in cases where good policies are being implemented, some policy response might still be required in the presence of exogenous shocks that are identifiable and transitory. This is particularly so over the medium term, to ensure that the CFF resources are repaid. In the absence of adjustment (or a positive balance of payments shock), further balance of payments problems may arise when it is time for the member to make repurchases. This problem has been of concern to the staff and the Board since the discussions that led up to the creation of the CFF.15 Indeed, recognition that it was rare in practice for a country to have an exogenous and temporary export shortfall without also having a more persistent balance of payments problem was the main reason why CFF conditionality was tightened in the 1980s and why the complex system of access limits under the facility evolved. It is notable in this respect that no country has been judged under the CFF to have a balance of payments problem limited exclusively to the effect of a temporary export or cereal import shock since the early 1980s, and that the great majority of purchases under the CFF have taken place in conjunction with arrangements. These considerations would suggest that "stand-alone" CFFs would be suitable only for circumstances —where there is no need for adjustment—which are, in practical terms, unlikely to hold.

iii.    There may be a problem of adverse selection. Availability of relatively unconditional upfront disbursements of CFF resources may bias use of the CFF—on a"stand-alone"basis—toward countries that are not prepared to pursue necessary adjustment programs.

16.    Second, a growing number of members have access to international capital markets during normal times. A stylized classification of potential users of Fund resources might now involve two groups: middle-income members with access to capital markets, and low income members with limited access. It is perhaps the latter group that has the most potential need for compensatory financing (both because they have little access to private sources of finance, and because they may be more exposed to exogenous current account shocks). Yet the terms that apply to the CFF may not be appropriate for these members, and indeed it is, by and large, middle-income member countries that have been using the CFF in its current form. Members with access to capital markets may opt to use CFF resources simply because the costs are lower than market financing, and in such cases financing under the CFF would substitute for market financing for at least part of the shock.

17.    Third, alternative means to satisfy the need for compensatory financing exist within the collection of Fund facilities. As was recognized in the runup to the creation of the CFF, stand-by arrangements (and augmentations thereof) are available for any kind of balance of payments problem; these offer the advantage not only that conditionality can be applied (see above), but also that the phasing of purchases can be matched to the evolution of the balance of payments need over time. And in the (likely rare) instances where adjustment and conditionality are not deemed necessary, resources can still be provided in the form of the first credit tranche (if available), emergency assistance (under the relevant conditions), or outright purchases. Two developments in the last decade or so have added further weight to the view that compensatory financing could be provided just as (or more) effectively by other means:

i.    Many of the low-income countries that have suffered droughts or commodity price shocks that have generated export shortfalls or cereal import excesses have, since the creation of the ESAF in 1987, had ESAF arrangements in support of adjustment and reform programs either in place or close to approval at the time of the shock. As part of the assessment of overall balance of payments need, financing for such shocks could thereby be provided on more appropriate terms to such countries through the ESAF.

ii.    The Fund can now respond rapidly to requests for arrangements, reflecting in part, the development of emergency procedures.16 This aspect of early motivations for a CFF—namely, the desire for an instrument that would allow the Fund to respond quickly to current account shocks—may have become less relevant.

18.    Of the above three considerations (the need for adjustment and conditionality, the availability of alternative finance, and the existence of other Fund facilities), it is the first that has proved the most troubling, as was recognized during previous efforts to reform the CFF. While the procedure of linking access to the quality of past cooperation and the strength of members' policies may help secure an appropriate ex ante policy stance, it does not, absent follow-up conditionality, provide much assurance that envisaged policies will be implemented. Moreover, Directors have, over various cases, often expressed discomfort with having to make these difficult judgements about cooperation and strength of policies, especially when such judgements must be made outside the context of an arrangement (which would otherwise provide a yardstick regarding the strength of policies and a basis for continuing conditionality). Difficult judgements of this nature must also be made by the staff in bringing requests for access to the CFF to the Executive Board and in recommending approval. For"stand-alone"requests, too much may depend on the staff's judgement on whether the member will, or will not, carry out envisaged policies. This in turn makes it difficult to ensure equality of treatment for the membership. When CFF financing is being supplied in the context of an arrangement, the member can to some extent be given the benefit of the doubt, since the application of conditionality should help ensure follow-through. Even when CFF financing is provided in the context of an arrangement, however, there can be problems if the purchase under the CFF is large in relation to access under the arrangement, since this may distort the pattern of access during the arrangement and effectively weaken its conditionality. These considerations raise questions about (i) the suitability of "stand-alone" access to the CFF, in particular, and (ii) the lack of phasing of purchases under the CFF generally.

D. Options

19.    The above discussion points to significant problems with the present construction of the CFF. Shortfalls and excesses have typically been experienced against the background of wider balance of payments problems and adjustment needs. The relatively low conditionality associated with the facility creates risks, and attempts to mitigate these risks have made the facility complex and difficult to understand and administer. The kind of shocks for which the CFF was designed may not be as reversible and temporary as was once assumed. The availability of concessional resources in the Fund appears to have reduced the interest in the CFF of those for whom it was perhaps most potentially relevant. And with wider access to capital markets, the provision of financing under the CFF may have begun to serve primarily to substitute for recourse to alternative sources of finance, rather than forestalling excessive adjustment.

20.    In view of the above, one option would be to simply eliminate the CFF and seek to provide equivalent financing, as needed and where appropriate, under stand-by, extended or ESAF/PRGF arrangements (either upon approval or through their augmentation). However, although this would have the advantage of ensuring that compensatory financing was provided only in conjunction with adjustment programs, elimination of the CFF would create a number of practical problems. First, it would mean that, overall, limits on potential access to Fund resources would be effectively reduced, as CFF access "floats" as regards the limits on access under other facilities and policies. While it would be possible to raise the access limits under the credit tranches (CT) and the Extended Fund Facility (EFF) to levels currently implied by the combined CT/EFF and CFF access limits, this would risk bringing with it an unintended upward drift in access across the board. Second, in cases where an extended arrangement is in place, substituting access to the CFF with augmentation of the EFF would result in a significant lengthening of the repurchase period, which would seem inappropriate since there would be no reason to suppose that external shocks should generally be of longer duration for members with EFFs than for members with stand-by arrangements.17 Third, elimination of the CFF would also remove an objective criterion for calculating compensable export shortfalls and cereal import excesses. While the methodology is not without scope for improvement, it does help remove an unnecessary element of arbitrariness in judging access.

21.    Another option would to retain the CFF, but limit "stand-alone" access to the CFF to those cases in which the member's balance of payments position, apart from the temporary export shortfall and/or cereal import excess, is satisfactory.18 In all other cases, access to the CFF would be provided only in the context of arrangements.19 This would have the virtue of associating access to the CFF for all members whose balance of payments problems extend beyond those of the temporary export shortfall and/or cereal import excess with the conditionality attached to the resources of the underlying arrangement, while avoiding the problems that would otherwise result from elimination of the CFF. The link to the conditionality of the underlying arrangement could also be strengthened by introducing provision for the phasing of purchases under the CFF, making them subject to performance criteria under the arrangement (Box 3). Confinement of access to the CFF to arrangements for these cases would also create an opportunity to greatly simplify the system of access limits. Much of the complexity of these limits derives from the efforts to discriminate between differing degrees of cooperation in determining eligibility under the CFF. If the CFF were available only in the context of an arrangement for these cases, there would be no need to make independent judgments about the member's past and future cooperation, since this standard would be set by the arrangement and the policy commitments under it. This would permit the six sets of limits currently specified under the CFF to be collapsed into only two sets. Based on the current limits under the CFF: (i) "stand-alone" cases would continue to be subject to the maximum limits that already apply for these cases, i.e., 45 percent of quota for export shortfalls, 45 percent of quota for cereal import excesses and a joint limit of 55 percent of quota; and (ii) all other cases would be in the context of arrangements and would be subject to a single set (rather than five sets) of limits of 35 percent of quota for export shortfalls, 25 percent of quota for cereal import excesses, and a joint limit of 45 percent of quota. Table A illustrates these changes in access limits. There does not, however, seem to be a clear reason why there should be two different sets of access limits for "stand-alone" CFF access and for CFF access in the context of arrangements, since financing under both situations is aimed at the same problem (an export shortfall and/or cereal import excess). Accordingly, and in the spirit of simplification called for in Fund facilities, it is for consideration whether to adopt a single set of access limits for both cases of, say, 45 percent of quota for export shortfalls, 45 percent for cereal import excesses and a joint limit of 55 percent of quota.

Box 3. Possible Mechanics of an amended CFF
  • Eligibility would be determined as it is currently. The new CFF would cover exogenous and temporary export shortfalls and cereal import excesses. The method of calculation for the shortfall/excess would remain unchanged.

  • Access to the CFF would be subject to a simplified, possibly even a single, set of limits and would "float" with respect to the access limits applicable to the credit tranches and extended arrangements. Repurchase periods would be the same as for the credit tranches, as at present.

  • "Stand-alone" access to the CFF would be available only for members whose balance of payments position is satisfactory apart from the temporary export shortfall or cereal import excess.

  • Except in cases warranting "stand-alone" access to the CFF, access to the CFF would be only available in the context of an arrangement, and:

    (a) CFF purchases would be phased according to the related balance of payments need and in alignment with the conditionality of the underlying arrangement. There would normally be at least two purchases.

    (b) CFF purchases would be made in parallel with purchases under the arrangement. CFF purchases would be subject to program performance criteria and/or completion of a review just like purchases under the arrangement. If purchases under the program were interrupted, CFF purchases would be also.

  • ESAF-eligible countries would be eligible for the new CFF but in light of the rate of charge would normally not be expected to request CFF resources. Countries with ESAF arrangements in place could have access to the CFF, but would normally be expected to seek an augmentation of the ESAF arrangement in lieu of access to the CFF.

 

Table 3. Summary of Access Limits under CFF
(In percent of quota)

  Existing Limits
 

Illustrative Future Limits CFF


  Export
Shortfall
Cereal
Import
Excess
Joint
Request
Expor
Shortfall
Cereal
Import
Excess
Joint
Request

I. No Other BOP Problems1 45 45 55 45  

45  

55  
II. Other BOP Problems 1       352 252 452
   A. Satisfactory Past Cooperation

      i. No Fund arrangement but
           cooperat ion expected

20 10 30
      ii. Upper credit tranche arrangement
           in effect3
35 25 45
   B. Unsatisfactory Past Cooperation      
      i. No Fund arrangement but
           cooperat ion expected
10 10 20
      ii. Upper credit tranche arrangement
           in effect3
         a. No review completed yet 20 10 30
         b. A review has been completed 35 25 45

1 Besides the export shortfall and/or the cereal import excess.
2Provided only in conjunction with Fund supported programs.
3These limits also apply in cases where an arrangement is approved at the same time as the CCFF request or if the member's current and prospective policies would otherwise meet the standard of an upper credit tranche arrangement.

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22.    If it were decided to continue with the CFF, either as confined to arrangements--as is proposed--or as it is now, there remain a few technical issues that merit re-examination. These issues could be taken up in a short follow-up paper.

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III. THE CONTINGENCY ELEMENT OF THE CCFF

23.    The purpose of the ECM is to provide members pursuing policies supported by Fund arrangements with an ex ante commitment of Fund financial support in the event of an exogenous current account shock. While compensatory financing was intended to address deviations in certain current account variables from past trends, contingency financing under the ECM was designed to address deviations from a program's baseline assumptions for such variables. ECMs are intended to provide for a combination of adjustment and financing in the face of unexpected developments in prespecified current account variables that are beyond the control of the authorities (Box 4).

24.    The ECM has been used very rarely and not at all in the last six years. Since its inception in 1988, ECMs have been attached to only 11 Fund-supported arrangements. Eight of these cases were arrangements approved during 1991 and 1992. In only one case has a drawing under the ECM ever been made (Bulgaria in 1992, for SDR 57 million). The last case of an arrangement including an ECM was Hungary in 1992, and the mechanism was not triggered (Table B).

25.    The complexity and rigidity of the operations governing the contingency element have made it difficult to understand and to use effectively. While the notion of pre-specifying the response to contingent developments is appealing, the special role played by key variables in determining the baseline forecast has made discussions with the authorities more complicated . Furthermore, the symmetry provisions imbedded in ECMs constrain the authorities to accumulate reserves in the event of better than expected current account outcomes, reducing the overall attractiveness of the mechanism.

26.    The rare use of ECMs also reflects the availability of other mechanisms to achieve the same objectives, in particular via the use of (i) program adjusters to prevent interruptions to purchases from unexpected changes to program parameters, (ii) program augmentations to increase Fund support if appropriate, and (iii) access to the CFF.20 In addition, the establishment of emergency procedures and the demonstrated capability of the Fund to respond rapidly has meant that members are assured that Fund financial support can be in place relatively quickly when needed.

Box 4. The External Contingency Mechanism (ECM)


  • The ECM was added to the CFF in August 1988 to provide a blend of adjustment and contingency financing in the face of unexpected developments in pre-specified current account variables that are beyond the control of the authorities. ECMs are approved in conjunction with Fund arrangements. Financing provided by this mechanism covers a portion of the loss in foreign exchange earnings stemming from unfavorable deviations in these variables from the baseline path. In the event of a positive external shock, the symmetry provisions allow either additional build up of international reserves or a reduction in the access under the associated arrangement (this option is specified in the particular arrangement).
Access limits
  • Access through the ECM is limited to no more than 50 percent of the access under the arrangement, provided that the contingency financing does not exceed 35 percent of quota , inclusive of the optional tranche (i.e., the additional access made available under the CCFF when a Fund arrangement is in place). A sublimit of 15 percent of quota applies to contingency financing related to interest rate deviations. Access "floats" with respect to the annual and cumulative access limits.
Features of the mechanism
  • Coverage. ECMs are intended to cover unanticipated changes in the balance of payments on current account owing to deviations from programmed values in exogenous components of key external variables, such as export earnings, import prices and interest rates. Other current account items (such as tourists receipts and workers' remittances) could also be covered if they are of particular importance.

  • Projections. Assumptions regarding the relevant exogenous variables (such as import and export prices) need to be agreed with the authorities as well as balance of payments projections against which contingent deviations in covered variables are to be calculated.

  • Contingent deviations. The aggregate size of the contingent deviation is calculated as the net sum of deviations from baseline values for individual variables.

  • Threshold. Contingent financing is triggered (and performance criteria adjusted) after the aggregate size of the contingent deviation exceeds a minimum level. This threshold is decided on a case by case basis.

  • Financing proportion. Performance criteria are adjusted and the potential availability of contingency financing is triggered by a fraction (between zero and one) of the calculated cumulative net sum of deviations in covered variables (above the threshold).

  • Caps. Maximum adjustments are established to performance criteria.
Avoidance of double compensation
  • In calculating purchases, care is taken to avoid double compensation between the compensatory and contingency financing elements of the facility by deducting the amounts compensated under one component from the amounts to be compensated under the other.

 
 

Table 4. Use of ECMs, 1988-99
   Previous Reviews
    Current Review
  
  1988-90  1991-92    1993-99 Total

Number of arrang. with ECMs

3  8   0 11
Number of purchases 0   1   0   1

Amounts (In millions of SDR)

0  57   0 57

 

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27.    Previous attempts to simplify ECMs have failed to elicit interest on the part of members. The CCFF reviews of 1990 and 1992 sought to streamline the rules governing the contingency element. While further such attempts could be considered, the staff does not believe that another exercise of this type would represent an efficient use of staff or Board resources. As noted, the main objective of contingency financing can be achieved with a combination of program adjusters and augmentations as well as, perhaps, with continued use of a (modified) CFF.

28.    In this light, the staff recommends elimination of the contingency element of the CCFF.

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IV. THE BSFF

29.    The BSFF has been dormant for the last 15 years.21 All of the 39 purchases made during its 30-year existence (amounting to SDR 0.56 billion) took place in the first 15 years of the facility (i.e., between 1969 and 1984). Since the last BSFF review was completed in June 1983, there have been five purchases for a total of SDR 102 million (by Brazil, Dominican Republic, Cote d'Ivoire, Thailand, and Zimbabwe, mostly to cover contributions under the 1977 International Sugar Agreement); all of these purchases were made within eight months of the 1983 review (Table C).

 
Box 5. The Buffer Stock Financing Facility


  • The Buffer Stock Financing Facility (BSFF) was established in 1969 to provide assistance to members in connection with their contributions to international buffer stocks of primary products, operating in the context of approved international commodity agreements (ICAs). The BSFF was the Fund's contribution to the international community's efforts to stabilize commodity prices, which were seen at the time as excessively volatile, with damaging consequences for the stability of export earnings of developing countries heavily dependent on commodity exports. The BSFF provides support in the context of those ICAs whose objective is the stabilization of international prices through market intervention by buffer stocks, and that satisfy certain participation requirements adopted by the United Nations Economic and Social Council, in particular that they are open to participation of both consuming and producing countries, and that they do not maintain artificially high prices through long-term restrictions of supply.

  • A member country may only request assistance under the BSFF to finance contributions to a buffer stock that the Executive Board has previously considered to be consistent with the BSFF principles. Since the establishment of the BSFF, the Fund has stood ready to provide assistance under the 1972 International Cocoa Agreement; the fourth, fifth, and sixth International Tin Agreements; the 1977 International Sugar Agreement; and the 1979 and 1987 International Natural Rubber Agreements.

  • All eligible commodity agreements have expired. The last to expire was the 1987 International Natural Rubber Agreement in December 1993. Currently there are no agreements under which drawings under the BSFF can be made. The only existing international commodity agreement that could become eligible for BSFF support is the 1995 International Rubber Agreement, which entered into force in February 1997. The Fund has recently been requested to consider whether this agreement is suitable for BSFF support.

  • A member may request a purchase under the BSFF to finance a balance of payments need arising from a compulsory contribution to an approved buffer stock, up to 25 percent of quota. This limit was initially set at 50 percent of quota, but since then it has been gradually reduced. The resources are provided under the condition that the member undertakes to cooperate with the Fund to find appropriate solutions for its balance of payments difficulties.

  • The BSFF has been used by 18 member countries for total drawings of SDR 558 million. Of this amount, purchases of SDR 225 million were made under the three Tin agreements, SDR 202 million under the Sugar Agreement, and SDR 132 million under the 1979 Natural Rubber Agreement. No purchases were made under the 1972 International Cocoa Agreement or the 1987 International Natural Rubber Agreement. The last purchase under the BSFF took place in January 1984, under the Sugar Agreement.
 

30.    There are currently no commodity agreements for which BSFF eligibility has been approved, and only one (the 1995 International Rubber Agreement) for which eligibility could potentially be approved. The latter includes only a limited number of member countries, and two of the three largest producers have officially announced their decision to leave the supporting commodity organization.

31.    Buffer stocks have proved to be ineffective in stabilizing prices. At the time of the creation of the facility, buffer stocks were perceived to be a way of reducing price volatility and ameliorating the detrimental effect of depressed commodity prices. However, the experience has been that attempts to stabilize commodity prices by means of buffer stock arrangements have met with little success, and that the modest price stabilization achieved in practice has typically been outweighed by the interest and carrying costs of the buffer stock.

32.    Moreover, difficulties in covering small contributions to buffer stocks--leading to a balance of payments "need" for use of Fund resources--could be an indication of more serious balance of payments problems. In those cases where a problem exists, the financing needs of the member country would be better addressed through a Fund-supported program under the regular facilities.

Table 5. Use of BSFF, 1969-99
  Previous Reviews

 

Current Review

 

1969-76 1977-82   1983-841  1985-99 Total

Number of Purchases 14   20       5 0   39
Number of Countries   5   14       5 0   18
Amounts (In millions of SDR) 30 427   102 0 559

1All purchases took place between June 1983 and January 1984.
 

Table of Contents

33.    In view of the above considerations, the staff recommends the elimination of the BSFF.

V. ISSUES FOR DISCUSSION

34.    The Board may wish to focus on the following issues:

  (i)   whether the BSFF should be eliminated;

 (ii)   whether the contingency element of the CCFF should be eliminated; and

(iii)    whether the compensatory element of the CCFF should be either:

(a)    eliminated or,

(b)    limited to cases where a stand-by arrangement, extended arrangement or ESAF is in place, subject to substantially simplified access limits, and phased (except where the member's balance of payments position is satisfactory apart from the temporary export shortfall or cereal import excess, in which case "stand-alone" access would remain available).

35.    Draft decisions will be prepared as appropriate in light of the discussion of this paper.


Annex 1. Recent Experiences with CCFF, January 1993 - September 1999

During the period since the last review of the CCFF in 1993:

  • Sixteen purchases totaling SDR 4.1 billion were made by thirteen developing countries under the CFF (Table 1).

  • No purchases were made under the contingency element, nor did any Fund arrangement have a contingency mechanism (ECM) attached.

  • Of the total purchases, SDR 3.6 billion was purchased under the export element (SDR 2.2 billion by Russia) and the remaining SDR 568 million under the cereal import element.

  • Purchasing countries represented Africa (four countries), Eastern Europe (five countries), Middle East (three countries), and Western Hemisphere (one country).

  • Compensatory purchases during the review period covered 52 percent of calculated shortfalls/excesses (39 percent excluding Russia); this was significantly below the compensation ratio of 65 percent during 1990-92. Purchases for five of the sixteen requests were equal to the entire calculated shortfall/excess; ten purchases were constrained by access limits or test of cooperation, and in one case (Algeria, 1994), access was reduced on capacity to repay considerations.

  • To facilitate prompt access to compensatory financing, the CCFF decision permits the use of estimated data for part or all of the shortfall/excess year under the early drawing procedures. Since 1993, three quarters of compensatory drawings have been based on early drawing procedures (Table 2). To reduce the risk of overcompensation (and of prompt repurchase), the compensatory element was modified in 1993, requiring phasing of purchases whenever nine months or more of estimated data are used. Under this rule, the first purchase is limited to 65 percent of the amount that could have been purchased without phasing, and once six months of actual data becomes available, the second purchase may be requested. In the review period, only one purchase was made as the first drawing under the phased drawing procedure.

  • The six-month rule, which requires that a request for compensatory financing be considered by the Board no later than six months from the end of the shortfall/excess year, was observed in all but one case during the review period (Table 3). In this one case, the staff paper requesting the purchase was circulated to the Board within six months, and the Board approval was granted in the seventh month.

  • Under the CFF, once the actual data for the shortfall/excess year becomes available, final calculation is made and in the event of overcompensation, it is expected that a prompt repurchase be made and that the Board should be informed. Since 1993, three cases gave rise to expectation of prompt repurchases, and all these cases, the repurchase expectations were met within the prescribed 30-day period (Table 4).



1This paper uses the old term "CFF" for the compensatory element of the CCFF, and the term "ECM" for the contingency element.
2Also in 1990, a temporary oil import element was introduced to compensate for increases in fuel import costs during the Gulf War; it was discontinued at end-1991.
3The Fund has been asked by the International Natural Rubber Organization to make a determination regarding the eligibility of this agreement for BSFF support. A response will be prepared once the present review has been completed by the Board.
4The last review of the CCFF was conducted in January 1993 (EBS/92/201 and Supplement 1). The last review of the BSFF took place in the context of the review of the cereal import element of the CFF in June 1983 (SM/83/131).
5Executive Board meeting of April 4, 1990 (EBM/90/53), which approved the eligibility of the 1987 International Rubber Agreement (SM/90/40).
6An excess in cereal import costs may be compensated only to the extent that it is not offset by an excess in export earnings.
7For exports, the medium-term trend is determined by the five-year geometric average centered on the shortfall year. For cereal imports it is the arithmetic five-year average centered on the excess year. Export trends are calculated using geometric averages because the nominal value of exports is believed to follow a geometric curve more closely than an arithmetic curve (see Compensatory Financing Facility, L.M.Goreux, IMF Pamphlet No. 34, 1980). An arithmetic average is used for cereal imports (in place of geometric), on the other hand, because cereal imports in any one year may sometimes be zero (which would result in a spurious geometric average of zero, irrespective of positive import values in other years).
8Purchases are phased only if nine or more months of estimated data are used for the shortfall year, in which case compensation is provided in two tranches, the first of which is 65 percent of the total compensable amount.
9Access limits were reduced, in relation to quota, when the Eleventh Review of Quotas entered into effect in early 1999, in such a way as to keep average access in SDR terms unchanged.
10The CFF "floats" relative to the credit tranches as regards access, but not as regards conditionality. That is, access to the CFF does not count toward the access limits in the credit tranches but it counts toward use of the first credit tranche for purposes of conditionality. This means that, while a member using the CFF would still have access to the first credit tranche, resources under it would become subject to phasing.
11Although the modifications to the CFF entered into force in 1988, purchases under the new guidelines did not begin until early 1989. Over the entire 36-year period since the introduction of the original CFF in 1963, 106 countries have made 343 drawings under the CFF for SDR 25.3 billion.
12Two drawings were made in conjunction with a combined extended/ESAF arrangement.
13India (1991); Israel (1992); Moldova (1993); Ghana (1993); South Africa (1993); Rwanda (1995); and Algeria (1999).
14See, for instance, Cashin, Paul, Hong Liang and John C. McDermott, 1999, "How Persistent are Shocks to World Commodity Prices" (IMF Working Paper WP/99/80), who find that for the majority of individual commodities it typically takes more than five years for one half of the initial price shock to reverse.
15See, for instance, "Fund Policies and Procedures in Relation to Compensatory Financing of Commodity Fluctuations" (reproduced in IMF Staff Papers, VIII (1960-61), pages 1-76). This report, the first on the possibility of a compensatory facility, emphasized that there could not be automatic access to the Fund's resources in the event of an export shortfall because the country's balance of payments situation as a whole had to be taken into account.
16"Emergency Financing Mechanism—Summing Up by the Chairman", EBM/95/85, September 12, 1995.
17The relatively long repurchase maturities of the EFF were intended for balance of payments problems of a more protracted nature.
18This case is currently provided for under paragraphs 12(c) and 31(d) of the CCFF decision. The Operational Guidelines (SM/93/147) elaborate that this case "would typically be an economy with a strong external position, adversely affected by exogenous and quickly reversible shocks like a temporary decline in world prices or a drought. The shortfall is considered to be self-correcting and no fundamental change in economic policy would be warranted."
19Eligible arrangements would include stand-by arrangements, extended arrangements and ESAF/PRGF arrangements
20The coverage and flexibility of the ECM is only slightly broader than the CFF. The CFF covers aggregate exports and imports of cereals, whereas there is scope under the ECM to break both imports and exports into subcomponents as well as include (up to a sub-limit) interest payments. The CFF relates compensation to deviations from trend, while the ECM works off deviations from agreed baseline assumptions.
21The modalities of the BSFF are described in Box 5.
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