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The food financial facility
Comment
The food financial facility
The IMF decision to initiate a food financing facility (FIT) represents the most important development in international food security for LDCs in many years. The facility will minimize the effects of foreign exchange availability restraints by financing member countries that experience unusual surges in cereal import bills, avoiding downward fluctuations in food consumption or inappropriate policy adjustments. Its credit system will operate on the same terms as the current IMF Compensatory Financing Facility on exports. The Fund is timely and has advantages over alternative food security schemes. No international agreements on grins reserves are required. It is complementary to but less political than food aid, which does not usually respond to production fluctuations in LDCs and decreases in volume as world prices rise. Moreover, clearly defined regulations enable the facility to respond immediately and reliably. The impact of the FFF will depend on a country’s internal food market intervention programmes.’ If an internal price stabilizatin policy is not pursued, consumption instability cannot be prevented, regardless of the amount of foreign exchange borrowing. Access to the FFF may benefit countries already committed to food consumption stabilization policies by assuring smooth investment flows, while its overall impact on cereal import levels may not be significant. However, a reliable international foreign exchange assistance scheme could encourage other countries to adopt the complementary policies for stabilizing cereal supplies. Concern about adverse effects are unsubstantiated. Since the facility’s assistance is based on unusual fluctuations in average cereal imports and not on the degree of self-sufficiency, the FFF should not promote longrun dependency on imports. Also, although the average level and variability of world food prices are likely to increase, the impact on world prices should be modest because additional imports by LDCs would be small in the context of the global market. Further, problems in accounting for FFF food aid flows should not occur if excess cereal imports cost is calculated against actual foreign exchange expenditure for commercial imports and cost of food aid is counted as zero. The IMF scheme could be improved by broadening the definition of food to include non-cereals such as vegetable oils and sugar, that are relevant to the poor’s diet and represent a significant proportion of LDC imports. Moreover, the Fund is likely to make adjustments in joint quota ceilings and revise country quotas, thereby further improving the food security capability of the FFF. The IMF has rejected a separate food facility.’ The approved FFF is integrated into the CFF for export earnings, treating cereal imports as negative exports and compensating countries only when a net export shortfall occurs. Providing quota limits are not too restricting, in years of extreme hardship when cereal prices are high, export revenues low, and ‘For an analysis of this and other aspects import needs above normal, contributions of the integrated and separate of the facility, see B. Huddleston, D.G. facility would be similar. But, do countries have a real balance of Johnson, S. Reutlinger and A. Valdk, for Food payments requirement when increased export revenues can offset excess ‘Financial Arrangements Security, IFPRI, Washington DC, 1981. cereal import costs? Even though an integrated approach will provide *A separate food facility would provide lower drawings in normal years than a separate facility, it can reduce food foreign exchange for cereal import bills exceeding recent average import values consumption instability with reasonable operation costs. but subject to a joint quota limit applicable to combined drawings from existing compensatory financing and the FFF in the same year.
Albetto Vald& IFPRI, Washington DC, USA
FOOD POLICY August 1981
The food financial facility
The IMF decision to initiate a food financing facility (FIT) represents the most important development in international food security for LDCs in many years. The facility will minimize the effects of foreign exchange availability restraints by financing member countries that experience unusual surges in cereal import bills, avoiding downward fluctuations in food consumption or inappropriate policy adjustments. Its credit system will operate on the same terms as the current IMF Compensatory Financing Facility on exports. The Fund is timely and has advantages over alternative food security schemes. No international agreements on grins reserves are required. It is complementary to but less political than food aid, which does not usually respond to production fluctuations in LDCs and decreases in volume as world prices rise. Moreover, clearly defined regulations enable the facility to respond immediately and reliably. The impact of the FFF will depend on a country’s internal food market intervention programmes.’ If an internal price stabilizatin policy is not pursued, consumption instability cannot be prevented, regardless of the amount of foreign exchange borrowing. Access to the FFF may benefit countries already committed to food consumption stabilization policies by assuring smooth investment flows, while its overall impact on cereal import levels may not be significant. However, a reliable international foreign exchange assistance scheme could encourage other countries to adopt the complementary policies for stabilizing cereal supplies. Concern about adverse effects are unsubstantiated. Since the facility’s assistance is based on unusual fluctuations in average cereal imports and not on the degree of self-sufficiency, the FFF should not promote longrun dependency on imports. Also, although the average level and variability of world food prices are likely to increase, the impact on world prices should be modest because additional imports by LDCs would be small in the context of the global market. Further, problems in accounting for FFF food aid flows should not occur if excess cereal imports cost is calculated against actual foreign exchange expenditure for commercial imports and cost of food aid is counted as zero. The IMF scheme could be improved by broadening the definition of food to include non-cereals such as vegetable oils and sugar, that are relevant to the poor’s diet and represent a significant proportion of LDC imports. Moreover, the Fund is likely to make adjustments in joint quota ceilings and revise country quotas, thereby further improving the food security capability of the FFF. The IMF has rejected a separate food facility.’ The approved FFF is integrated into the CFF for export earnings, treating cereal imports as negative exports and compensating countries only when a net export shortfall occurs. Providing quota limits are not too restricting, in years of extreme hardship when cereal prices are high, export revenues low, and ‘For an analysis of this and other aspects import needs above normal, contributions of the integrated and separate of the facility, see B. Huddleston, D.G. facility would be similar. But, do countries have a real balance of Johnson, S. Reutlinger and A. Valdk, for Food payments requirement when increased export revenues can offset excess ‘Financial Arrangements Security, IFPRI, Washington DC, 1981. cereal import costs? Even though an integrated approach will provide *A separate food facility would provide lower drawings in normal years than a separate facility, it can reduce food foreign exchange for cereal import bills exceeding recent average import values consumption instability with reasonable operation costs. but subject to a joint quota limit applicable to combined drawings from existing compensatory financing and the FFF in the same year.
Albetto Vald& IFPRI, Washington DC, USA
FOOD POLICY August 1981