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WORLD TRADE

ORGANIZATIONWT/GC/62G/AG/1328 June 2002(02-3644)

General Council Committee on Agriculture

Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing

Developing Countries

INTER-AGENCY PANEL ON SHORT-TERM DIFFICULTIES IN FINANCING NORMAL LEVELS OF COMMERCIAL IMPORTS OF

BASIC FOODSTUFFS

Report of the Inter-Agency Panel

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TABLE OF CONTENTS

I. INTRODUCTION 3

A. ESTABLISHMENT OF THE PANEL 3B. TERMS OF REFERENCE 3C. COMPOSITION OF THE PANEL 4D. PROCEEDINGS 4

II. ISSUES BEFORE THE PANEL 5

A. AVAILABILITY AND FINANCING COSTS OF EXTERNAL SUPPLIES OF BASIC FOODSTUFFS 51. Background 52. Price trends on the international markets for basic foodstuffs 53. Trends in the cost of cereal imports by LDCs and NFIDCs 114. Short-term difficulties in financing normal levels of commercial imports of basic foodstuffs 14

B. ACCESS TO SHORT-TERM MULTILATERAL FINANCING FACILITIES 191. The Compensatory Financing Facility of the IMF 192. World Bank facilities 243. Other sources of concessional financing 25

C. PROPOSALS FOR THE ESTABLISHMENT OF A REVOLVING FUND 261. Main elements of revolving fund proposals 262. FAO contributions 283. Analysis of concept and feasibility of the revolving fund proposal 30

D. OTHER OPTIONS 391. An ex-ante food import financing scheme 392. Commodity price risk management 403. Integrated Framework studies 40

III. CONCLUSIONS AND RECOMMENDATIONS 41

IV. ANNEXES 45

1. Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries 45

2. Proposals to Implement the Marrakesh Ministerial Decision in favour of LDCs and NFIDCs (G/AG/W/49, G/AG/W/49/Add.1 and G/AG/W/49/Add.1/Corr.1) 46

3. Replies by the Members involved to Questions Posed by the Panel 54

4. Submissions by the Food and Agriculture Organization of the United Nations (FAO) 86

5. Submissions by the International Monetary Fund (IMF) 113

6. Submission by the International Grains Council (IGC) 117

7. Submission by UNCTAD 120

8. Submission by the World Bank 131

9. Submission by the World Food Programme (WFP) 142

10. Submission by the Arab Monetary Fund 146

11. Submission by the Asian Development Bank 147

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I. INTRODUCTION

A. ESTABLISHMENT OF THE PANEL

1. The establishment of the Inter-Agency Panel on Short-Term Difficulties in Financing Normal Levels of Commercial Imports of Basic Foodstuffs ("the Panel") was approved by the fourth WTO Ministerial Conference at Doha in November 2001 following a recommendation by the WTO Committee on Agriculture in the context of the implementation of the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries ("the Marrakesh NFIDC Decision").1

2. The recommendation adopted by the Doha Ministerial Conference provides:

"that an inter-agency panel of financial and commodity experts be established, with the requested participation of the World Bank, the IMF, the FAO, the International Grains Council and the UNCTAD, to explore ways and means for improving access by least-developed and WTO net food-importing developing countries to multilateral programs and facilities to assist with short-term difficulties in financing normal levels of commercial imports of basic foodstuffs, as well as the concept and feasibility of the proposal for the establishment of a revolving fund in G/AG/W/49 and Add.1 and Corr.1. The detailed terms of reference, drawing on the Marrakesh NFIDC Decision, should be submitted by the Vice-Chairman of the WTO Committee on Agriculture, following consultations with Members, to the General Council for approval by not later than 31 December 2001. The inter-agency panel shall submit its recommendations to the General Council by not later than 30 June 2002." 2

B. TERMS OF REFERENCE

3. The following detailed terms of reference of the Panel were subsequently agreed by the Committee on Agriculture and approved by the General Council:

"1. To examine the terms and conditions of existing facilities of the international financial institutions (namely: IMF and the World Bank) to which least-developed and WTO net food-importing developing countries could have recourse in order to address short-term difficulties in financing normal levels of commercial imports of basic foodstuffs, principally cereals, rice, basic dairy products, pulses, vegetable oils and sugar, during periods of rising world prices for such basic foodstuffs, including, as appropriate, other relevant sources of concessional financing; this examination shall take into account, inter alia, such submissions as may be submitted to the Panel by least-developed and WTO net food-importing developing countries, donors and the relevant international financial institutions, by no later than end-March 2002;"

"2. To examine the concept and feasibility of the proposal for the establishment of a revolving fund in documents G/AG/W/49 and Add.1 and Corr.1, together with any further elaboration of those proposals as may be submitted to the Panel by the sponsoring Members concerned before the end of March 2002;"

"3. In the light of its review and examination under paragraphs (1) and (2) above and having regard to the Marrakesh NFIDC Decision, to make such recommendations for the consideration of the WTO General Council as the Panel considers appropriate 1 Decision of 14 November 2001 concerning Implementation-Related Issues and Concerns (see

WT/MIN(01)/17, dated 20 November 2001, paragraph 2.2).2 See G/AG/11, dated 28 September 2001, Section B, paragraph III(b).

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regarding: ways and means for improving access by least-developed and WTO net food-importing developing countries to multilateral programmes and facilities to assist with short-term difficulties in financing normal levels of commercial imports of basic foodstuffs."

"4. In carrying out its task the Panel may consult with such bodies or institutions as it considers appropriate;"

"5. The Panel shall submit its report and recommendations to the WTO General Council by no later than 30 June 2002."3

C. COMPOSITION OF THE PANEL

4. The Chairman of the Panel was nominated by the WTO Committee on Agriculture and taken note of by the General Council.4 The Members of the Panel were nominated by the respective heads of the FAO, IMF, International Grains Council, World Bank and UNCTAD, in response to letters by the WTO Director-General inviting them to designate from their staff a financial or commodity expert to participate in the work of the Panel on a personal and independent basis.

5. The Panel has the following composition:

Chairman: Mr. Yoichi Suzuki of Japan

Members: Mr. Mehmet Arda (UNCTAD)

Alternate: Mr. Lamon Rutten

Mr. Germain Denis (IGC - International Grains Council)

Alternate: Mr. Richard Woodhams

Mr. Panos Konandreas (FAO)

Mr. John Nash (World Bank)

Mr. Grant B. Taplin (IMF - International Monetary Fund)

D. PROCEEDINGS

6. The Panel requested the Members involved to respond to a number of written questions.5 The responses by four WTO Net Food-Importing Developing Countries ("the NFIDCs") (Cuba, Egypt, Jordan and Tunisia) and six donors (Argentina, Australia, Canada, European Communities, Japan and the United States) are attached.6 The Chairman of the Panel invited the Members involved to an informal meeting on 28 May 2002 to provide a progress report. At an informal meeting on

3 See G/AG/12 (dated 10 December 2001) and WT/GC/M/72 (dated 6 February 2002), paragraphs 61-63.

4 See WT/GC/M/72 (dated 6 February 2002), paragraph 63.5 The Members involved comprise the donors, the least-developed countries ("the LDCs") and the

NFIDCs (Barbados, Botswana, Côte d'Ivoire, Cuba, Dominica, Dominican Republic, Egypt, Honduras, Jamaica, Jordan, Kenya, Mauritius, Morocco, Pakistan, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Senegal, Sri Lanka, Trinidad and Tobago, Tunisia and Venezuela).

6 See Annex 3.

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24 June 2002, the Panel presented a draft report to the Members involved, with a number of Members making preliminary remarks thereon.

II. ISSUES BEFORE THE PANEL

A. AVAILABILITY AND FINANCING COSTS OF EXTERNAL SUPPLIES OF BASIC FOODSTUFFS

1. Background

7. In the Marrakesh NFIDC Decision, the progressive implementation of the Uruguay Round Agreements as a whole was seen as generating increasing opportunities for trade expansion and economic growth to the benefit of all participants. Generally, improving the overall allocation of resources either within or among individual sectors or between countries is an integral part of the longer-term economic adjustment process that can be facilitated by the results of multilateral trade negotiations. However, the impact and benefits from trade liberalisation may not necessarily be spread evenly, even when there are net gains to be reaped for economies as a whole.

8. The NFIDC Decision recognized that during implementation of the Uruguay Round agricultural trade reform programme, some LDCs and NFIDCs may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs. The particular concern was that some of the developing countries which were highly dependent on supplies of subsidized food imported from the major industrialized countries might need temporary assistance to make the necessary adjustments to expected higher import prices for food, although output from their farming sectors could be stimulated by higher prices. 1

9. Generally, world agricultural markets are influenced by many factors besides government policies and trade agreements. For crop sectors, for example, weather conditions affecting either export availabilities or import requirements may significantly impact global supply and demand balances and prices. Longer-term factors such as population growth, urbanisation, diet diversification and economic conditions also influence the composition and level of import requirements. In the context of the Marrakesh NFIDC Decision, we specifically address increased financing needs for food imports arising from higher world market prices, increasing food deficits or a shift from imports on concessional terms or food aid to commercial food imports.

2. Price trends on the international markets for basic foodstuffs

(a) Cereals

10. The entry into force of the WTO Agreement on Agriculture in January 1995 coincided with the beginning of a period of surging prices on the international markets for cereals. From the early months of 1995 prices continued to strengthen and, in 1996, escalated to historically high levels. Export prices peaked at around mid-1996 after which world market prices declined quickly. Wheat export prices peaked at US$ 258 per tonne in May 1996 (Figure 1 below). Taking account of export subsidies they had been as low as US$ 70 per tonne in 1993.

Figure 1 - Export prices for wheat and maize, 1990-2002 (US$ per tonne)

1 The concerns of the LDCs and NFIDCs stem partly from their dependence on the world market for a large share of their food consumption. In the case of cereals, NFIDCs imported 35 per cent of total consumption in 1998-2000. For the LDCs the dependence on cereal imports was 14 per cent compared to 11 per cent for the rest of the developing countries.

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50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Wheat: US Hard Winter

Maize: US Yellow Corn

US$/tonne

Note: Prices are export (fob) prices before deducting export subsidies, if any.

Source: International Grains Council.

11. The surge of world cereal prices was short-lived and followed by a sustained decline. By mid-1998 prices of wheat and maize had declined almost to the lowest levels since the 1970s. Currently, export prices of wheat are around US$ 125-130 per tonne (US Hard Red Winter) and US$ 90-95 per tonne for maize (US Yellow Corn). We note that in real terms international prices for cereals have shown a long-term declining trend since the mid-1970s. Cereal prices at their peak in 1996 were not nearly as high as during the "world food crisis" in the 1970s when adjusted for inflation. 2

12. The 1995-97 phase of surging grain prices was preceded by a number of government actions, which impacted longer-term market adjustments. In the United States, wheat stocks had accumulated in the mid-1980s to levels which were considered to be unsustainable. One of the main objectives of the 1985 United States farm legislation was to reduce excessively high grain stocks in an effort to reduce budgetary expenditures. Deficiency payments were tied to farmers' participation in set-aside programmes (acreage reduction programmes). Export subsidies were introduced via the Export Enhancement Program (EEP) and the Targeted Export Assistance Program (TEAP). In the following years, wheat stocks, in particular public stocks, declined significantly.

2 See also the contributions by the International Grains Council (Annex 6) and the World Bank (Annex 8) which complement this section.

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13. In the European Communities, government (intervention) stocks of wheat had increased considerably in the late 1980s and early 1990s. As part of the 1992 reform of the Common Agricultural Policy, the European Communities sought to reduce agricultural surpluses. The reforms in the arable sector included compensatory payments for reductions of price supports based on historical acreage and yields, as well as compensation payments on mandatory set-aside. Although these reforms did not modify the export restitution mechanism itself, after 1992/93 intervention stocks of wheat also significantly declined in the European Communities.

14. In response to these policy changes and other factors, the aggregate area harvested to wheat in the five major exporting countries (United States, European Communities, Canada, Australia and Argentina, which account for a combined world market share of approximately 90 per cent) declined by 13 per cent between 1990 and 1994. Assuming average yields, this decline accounted for approximately 25 million tonnes of wheat. Concurrently, there was a steep fall in the output of CIS countries' (former Soviet Union) as well. As a result, world wheat production decreased from 590 million tonnes in 1990 to 530 million tonnes in 1995.

15. There was also a number of short-term factors at play that fuelled the 1995-97 surge in grain prices, such as the severe drought affecting United States winter wheat and China's substantial wheat purchases. In effect, in early 1996, international wheat prices carried a risk premium, with prices shooting up to extraordinary levels. Wheat prices dropped quickly as from May 1996 when the weather conditions improved in the United States and the markets received favourable crop reports from other exporters.

16. In the European Communities, export taxes on wheat and barley were introduced in 1995 to stabilize domestic prices. In practice, this measure put additional pressures on the overall availability of supplies on world markets.

17. With respect to the implementation of specific limitations on the use of export subsidies arising from the Uruguay Round Agreement of Agriculture, we note the following:

First, the implementation of WTO export subsidy reduction commitments was phased in over a period of six years for developed countries, starting in 1995. Implementation of these commitments by developing countries is still underway, ending in 2004/05. In addition, a number of the commitments were front-loaded, with the implication that there was additional scope for providing export subsidies in the early years of the implementation period.3 Other things being equal, the phasing-in of export subsidy reductions, in conjunction with the front-loading provisions, have reduced their possible short-term price impact.

Second, international grains prices began to surge before the beginning of the implementation period. The implementation of export subsidy reduction commitments by major wheat exporters began only in the second half of 1995. When these commitments

3 The base level for reductions is the average level of export subsidies in 1986-90, but in the subsequent years export subsidy use for grains continued to increase in a number of countries. To facilitate implementation of reductions from the higher export subsidy levels applied in the early 1990s, the Uruguay Round participants agreed on modalities allowing "front-loading" of export subsidy reduction commitments. The modalities regarding front-loading allowed commitments to be higher than the base levels (1986-90) in the early years of the implementation period, coupled with the requirement that the reductions had to be caught up to meet the agreed overall reduction by the end of the implementation period (21% for subsidized volumes and 36% for budgetary outlays on export subsidies for developed countries from base period levels). For example, the Schedules of Canada, the European Communities and the United States show that their respective export subsidy reduction commitments for wheat/wheat flour are front-loaded in significant amounts both in terms of subsidized quantities and budgetary outlays.

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on cereals entered into force, they had already lost their market effect in terms of binding constraints due to the high world prices prevailing at the time.

Third, at the end of the implementation period for developed countries in 2000/01, despite relatively low prices on the international grain markets, there was only a limited use of export subsidies. All exporters concerned were well within their export subsidy commitment levels for wheat/wheat flour and coarse grains.4 With the prevailing grain prices and exchange rates in 2000/01, the export subsidy ceilings for grains could not have had a significant negative impact, if any, on the terms of trade of LDCs and NFIDCs.

18. In sum, there was a coincidence of the entry into force of the WTO commitments in agriculture and surging world market prices for cereals in 1995-97. The weight of the evidence available to us leads us to conclude that the surge was triggered by a number of short-term and long-term factors, which were only partly related to the Uruguay Round reform programme in agriculture. In particular, it cannot be excluded that some reductions in grain stocks may have been made in anticipation of export subsidy reduction commitments entering into force in 1995. We also note that export subsidies have been used in periods when world market prices have been low rather than when world prices have been high. Since the use of export subsidies has been inversely related to world prices, they could not have been of significant value to countries experiencing difficulties in financing food imports in years of high prices as experienced during 1995-97.

(b) Other basic foodstuffs

19. The scope of the Marrakesh NFIDC Decision comprises other basic food items, such as dairy products, pulses, vegetable oils and sugar, which are specifically listed in the Panel's terms of reference. Although cereals represented the main share of the aggregate food import values of the LDCs and NFIDCs (cereal imports in LDCs and NFIDCs accounted, respectively, for some 39 per cent and 35 per cent of their total food imports in 1998-2000 according to FAO data), vegetable oils and oilseeds accounted for about 17 per cent for both groups of countries (Figure 2 below). In this regard, the Panel notes that the composition of food imports of LDCs and NFIDCs differed considerably from other developing countries, where cereals and vegetable oils account for 25 per cent and 11 per cent respectively. This is essentially a reflection of their higher average income levels and larger proportions of higher value food commodities and processed products.

20. With regard to price trends of vegetable oils (palm oil) and sugar in the import basket of LDCs and NFIDCs, we note the following (Figure 3 below):

First, there was a near coincidence of surging prices on the international markets for palm oil, sugar and wheat in the early 1990s, with prices reaching a peak in the 1995-96 period. World market prices for palm oil shot up again in 1998, which was largely due to the occurrence of a severe drought in South-East Asia linked to the El Niño effect.

Second, as the result of abundant supplies, international prices for palm oil and sugar, as well as all food items combined, have fallen back to their lowest levels for a decade.

Third, it appears that in the period 1986-2001, the international prices for sugar and palm oil were substantially more volatile than world market prices for wheat or food in general. This volatility of commodity markets underline the importance for net food-importers of ensuring against excessive upside price risks and related import financing difficulties.

4 See document TN/AG/S/8, dated 9 April 2002.

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Fourth, export subsidy usage on vegetable oils and sugar has remained far below the respective limitations agreed in the Uruguay Round and therefore, other factors remaining equal, could not have had an adverse impact on food import prices of LDCs and NFIDCs.

Figure 2: Composition of food imports of LDCs and NFIDCs, 1998-2000 average (per cent)

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Source: FAO

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Figure 3 - International food prices, 1986- 2001 (1986 = 100)

Notes: Food includes: cereals, oils, protein meals, meat, sugar, and bananasWheat; U.S. number 1 HRW, fob Gulf of MexicoPalm Oil; Malaysia and Indonesian, cif NW EuropeSugar; International Sugar Agreement price

Source: IMF

3. Trends in the cost of cereal imports by LDCs and NFIDCs

21. The rising costs of food imports by LDCs and NFIDCs is a central element of the rationale for the establishment of a Revolving Fund. This is set out in the NFIDC proposals as follows:

"The main objective of the Agreement on Agriculture was to decrease the structural surpluses generated in the past by production and trade-distorting policies in agriculture. It is, therefore, obvious that if this fundamental objective of the Agreement on Agriculture [AoA] is successful, the effect for the NFIDCs and LDCs will be an increase in the cost of their food imports.

According to the data provided by FAO (…), these two groups of countries are facing much higher cereal import bills than before. Taking the two years prior to 1995 as a benchmark (i.e. the average of the two marketing years 1993/94 and 1994/95), the increase in the cereal import bills in 1995/96 to 1996/97 amounted to 36.6 per cent for the two groups of countries taken together. Nearly all of this increase (35.1 per cent) was due to increases in the per unit cost of imported cereals, as volumes changed only marginally. Moreover, even after the world prices returned to more normal levels since the 1997/98 marketing year, the cereal

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import bills of these two groups of countries remained at a much higher level than they were prior to 1995.

In view of the above, the causality between policy reforms under the Uruguay Round and higher food import bills for the LDCs and NFIDCs is clear."5

22. A number of donor countries have objected to the revolving fund proposal being premised on the establishment of a causality link between the Uruguay Round reform programme in agriculture and negative effects experienced by LDCs and NFIDCs.6 In their view, the 1995-1997 price spike may have been an isolated occurrence and the fact that markets returned quickly to lower levels reveals a resilience in the world food system which may in fact have been enhanced by the Uruguay Round.

23. In this regard, on the basis of statistical data provided by FAO (Table 1 below), we note the following:

First, there has been no clear upward trend in the aggregate food import bills of LDCs and NFIDCs since the beginning of the WTO reform process in agriculture in 1995.

Second, in the period during which prices for cereals were escalating (1995/96 to 1996/97), there was a surge in the aggregate cereal import cost of LDCs and NFIDCs. During this period, the aggregate volumes of cereal imports was maintained by the NFIDCs, but not by the LDCs. The Panel did not examine the reasons for this, including whether this may have reflected improved domestic cereal supply situations in some LDCs in that period.

Third, in the critical period of 1995-97, a significantly increased proportion of the combined cereal import volumes of LDCs and NFIDCs was sourced commercially, while the volume of food aid shipments was lower. Even after the critical years, commercial cereal imports have remained at higher levels than before the high-price period. This illustrates the contribution that predictable levels of targeted food aid in times of rising world market prices for cereals can make to meeting the food needs of LDCs and NFIDCs.

Fourth, the cereal import bills for LDCs and NFIDCs have somewhat "normalised" since 1998/99, as prices on world cereal markets have stabilised (albeit at generally depressed levels) while food aid shipments increased.

Fifth, price fluctuations unrelated to the WTO reform process on agriculture such as those experienced during 1995-97 are likely to reoccur.

5 See G/AG/W/49 (dated 19 March 2001), page 1 (Annex 2).6 See G/AG/11 (dated 28 September 2001), pages 8-14.

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Table 1 - Cereal import costs of LDCs and NFIDCs, 1993/94 – 2001/02

1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02estimate f'cast

Import bill (US $ million)LDCs 1365 2147 2495 2023 2468 2214 1773 1871 1882NFIDCs 3567 4238 5806 5344 4941 4363 3828 4240 4007LDCs & NFIDCs 4932 6384 8301 7367 7409 6576 5601 6110 5889% change over 1993/94-1994/95 -12.8 12.8 46.7 30.2 30.9 16.2 -1.0 8.0 4.1

Total volume imported (000 tonnes) LDCs 11764 14068 13296 11772 15281 16927 15981 15264 15409NFIDCs 26584 26783 26601 28525 31955 33437 30588 32886 30226LDCs & NFIDCs 38348 40851 39897 40297 47236 50363 46569 48151 45635% change over 1993/94-1994/95 -3.2 3.2 0.8 1.8 19.3 27.2 17.6 21.6 15.2

Food aid (000 tonnes)LDCs 3970 4344 3313 2699 2863 4006 4139 3568 4505% of total imports 33.7 30.9 24.9 22.9 18.7 23.7 25.9 23.4 29.2NFIDCs 1830 1310 645 503 631 780 773 1149 1149% of total imports 6.9 4.9 2.4 1.8 2.0 2.3 2.5 3.5 3.8LDCs & NFIDCs 5800 5654 3958 3202 3493 4786 4912 4717 5654% change over 1993/94-1994/95 1.3 -1.3 -30.9 -44.1 -39.0 -16.4 -14.2 -17.6 -1.3

Commercial imports (000 tonnes)LDCs 7794 9724 9983 9072 12418 12920 11842 11696 10904NFIDCs 24754 25473 25956 28022 31324 32657 29815 31737 29076LDCs & NFIDCs 32548 35197 35940 37095 43743 45577 41657 43433 39980% change over 1993/94-1994/95 -3.9 3.9 6.1 9.5 29.1 34.6 23.0 28.2 18.0

Per unit import cost (US $/tonne) 1/

LDCs 116.0 152.6 187.6 171.9 161.5 130.8 110.9 122.6 122.2NFIDCs 134.2 158.2 218.3 187.4 154.6 130.5 125.1 128.9 132.6LDCs & NFIDCs 128.6 156.3 208.1 182.8 156.8 130.6 120.3 126.9 129.0% change over 1993/94-1994/95 -9.7 9.7 46.1 28.3 10.1 -8.3 -15.6 -10.9 -9.4

Wheat export price (US $/tonne)US no.2 hard winter 143 157 216 181 142 120 112 128 127% change over 1993/94-1994/95 -4.7 4.7 43.6 20.6 -5.4 -20.3 -25.3 -14.6 -15.6

Totals computed from un-rounded data1/ Based on per unit cost of total imports 2/ Average July-NovemberSource: FAO

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4. Short-term difficulties in financing normal levels of commercial imports of basic foodstuffs

24. The possibility that LDCs and NFIDCs may experience "short-term difficulties in financing normal levels of commercial imports of basic foodstuffs" as the consequence of the Uruguay Round reform programme in agriculture, underlines both the Marrakesh NFIDC Decision and the Panel's terms of reference. Since the concepts of "normal levels of commercial imports of basic foodstuffs" and "short-term difficulties in financing" are not defined, the Panel has invited the Members involved to submit their views. The Panel also asked Members involved how they see the role of food aid for attenuating short-term financing difficulties of food imports.7

(a) Normal levels of commercial imports of basic foodstuffs

25. Several donor countries refer to the Usual Marketing Requirement (UMR) in the FAO "Principles of Surplus Disposal and Consultative Obligations of Member Nations" to determine what constitutes normal levels of commercial imports of basic foodstuffs.8 The UMR is based on an average of total commercial imports of the commodity concerned, usually in the preceding five years, taking into account the economic and balance-of-payments position of the importing country. In Australia's view, the UMR could be calculated for different commodities on the basis of accepted commercial import statistics. For Canada and the European Communities, however, this method would exclude factors such as population and/or income growth, and changes in consumer preferences.

26. For their part, NFIDCs have proposed a variety of methods to determine normal levels of commercial imports of basic foodstuffs.9 Cuba suggests that defining "normal levels" would require a country-by-country analysis, based on minimum consumption levels recommended by specialized health institutions in each country. Alternatively, the concept could be defined by taking average imports of basic foodstuffs over a representative number of years, although this average could be influenced by the purchasing power of the country in question during the relevant period, and by any food donations received.

27. Tunisia considers that normal levels of commercial imports should correspond to a country's import needs for a given year. These needs would depend on available local production and on increases in domestic demand. For Tunisia "normal levels" should not be limited to traditional imports calculated as an average for past years. Similarly, Jordan identified some specific volume requirements for five basic foodstuffs, in addition to strategic reserves of wheat and barley.

28. Egypt considers that normal levels of commercial imports of basic foodstuffs could be defined in terms of the import bill by a formula: IB = (C x P – DP – A) x p, where IB is the import bill of a basket of basic foodstuffs, C = per capita consumption, P = population, DP = domestic production, A = food aid and p = price. Egypt considers that a five-year moving average of import bills could be used to smooth out short-term fluctuations. In the Panel's view, normal levels of commercial food imports are usually seen in terms of volumes rather than values.

29. While the concept of the UMR is based on the notion of “normal levels of commercial imports”, we note that its purpose is entirely different from that envisaged under the Marrakesh NFIDC Decision. The UMR represents a commitment by a country receiving food aid to import an amount of the same commodity commercially to allay fears of displacement of commercial imports by other exporting countries. Since the UMR is defined in terms of the average commercial imports over the past five years, this may result in levels, which are lower than the trend level of imports in the current

7 See Panel questions 1 and 8, Annex 3.8 See responses by Australia, Canada, the European Communities and Japan to question 1 (Annex 3).9 See responses by Cuba, Egypt, Jordan and Tunisia to question 1 (Annex 3).

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year if there is an upward trend. This is normally the case for the majority of net food-importing developing countries.

30. Moreover, there are provisions in the "Principles of Surplus Disposal and Consultative Obligations of Member Nations" for waiving UMRs or adjusting the five-year historical average where the importing country concerned faces balance-of-payment difficulties, changes of production in relation to consumption of a commodity, where a case can be made that the preceding five years were not representative, and other special factors.10 For these reasons the UMR may often bear little direct relationship to the level of imports required to meet domestic consumption needs.

(b) Criteria to determine short-term difficulties in financing normal levels of commercial imports of basic foodstuffs

31. The Panel notes that the sponsors of the revolving fund proposal appear to equate short-term financing difficulties with surges in food import bills during times of high world market prices.

32. In the view of Egypt, for example, the triggering mechanism for the Marrakesh NFIDC Decision should be based on "the totality of effects and factors", that is on unexpected levels of food import bills of LDCs and NFIDCs on an individual basis. Egypt considers that a country effectively experiences short-term difficulties when the difference between the actual food import bill and the five-year moving average reaches 10 per cent. However, several countries have questioned the use of import bills to determine the existence of short-term financing difficulties. Canada and the European Communities stress that increases in imports or in import bills above "normal" levels do not necessarily imply difficulties in financing these imports. Import bills may increase due to economic expansion, driven by growing demand and availability of financial resources to finance imports.

33. Australia and Canada raise the issue whether the revolving fund should be designed to address financing difficulties that threaten food security, or whether it should offset the negative impact of price or currency spikes. According to Canada, the situation foreseen in the Marrakesh NFIDC Decision is one where private or government importers are unable to obtain financing to pay for imports of basic foodstuffs. Similarly, Cuba defines short-term difficulties as a lack of financing to ensure food security. Japan considers that short-term financing difficulties depend on whether a country can import the UMR through commercial trade, even when prices are rising or there is a shortage of foreign currency.

34. For Canada, Cuba, the European Communities and Tunisia, short-term financing difficulties are often linked to balance-of-payments problems. For its part, Jordan considers short-term difficulties should be determined based on foreign exchange reserves as well as on an increase in import bills above a three-year average by at least 25 per cent on a monthly basis. Some of the possible causes for short-term financing difficulties identified by the Members involved include unexpected exchange rate depreciation, increases in import prices, decreases in export prices, the seasonality of export revenues, debt service payments, unilateral measures, structural market transformations, natural disasters, changes in international aid and financial support, wars, conflicts, and political and/or financial crises.

35. While we do not consider it necessary to seek to resolve the question of how to define short-term difficulties in financing commercial food imports, we note that most submissions from Members involved do not seem to support basing the definition of short-term financing difficulties solely on excess food import bills; some countries pointing out difficulties with this approach.

10For a more complete description of the establishment of UMRs, see FAO, Reporting procedures and consultative obligations under the FAO principles of surplus disposal. A guide for members of the FAO Consultative Subcommittee on Surplus Disposal, Rome 2001, paras. 15-17 and Appendix H thereto.

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(c) Experiences with respect to short-term financing difficulties

36. The Panel invited LDCs and NFIDCs to submit their experiences with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs, to explain how these were caused by the Uruguay Round reform programme in agriculture, and to describe how the difficulties were addressed. Four countries, Cuba, Egypt, Jordan and Tunisia, have provided information on their short-term financing difficulties.11

37. Cuba submits that importation of basic foodstuffs should be a consistent and continuous process. To ensure that this is the case, a stable source of financing is required to provide the resources required to cover the cash-flow deficits of importers. Since Cuba's economy is dependent on commodities (including cane sugar, nickel and tobacco), fishery products and tourism, it is difficult to reconcile the need for stable food imports throughout the year with the seasonality of its export revenues. Additional factors affecting Cuba's ability to import foodstuffs include the lack of funding from multilateral sources for food supply programmes, the distance, which separates Cuba from its supply markets and resulting high freight costs, and the trade embargo led by the United States. As a result, Cuba has had to resolve its financing difficulties by negotiating with suppliers of basic foodstuffs, resorting to export credit and credit insurance schemes offered by the official agencies in the supplier countries, obtaining costly trade credits, and allocating resources to the detriment of other priorities. None of these alternatives provide the predictability needed to solve Cuba's short-term difficulties. During the 1995/96 increase in food prices, Cuba had to negotiate intensely with its usual suppliers and with banks and financial institutions in order to obtain private financing to ensure a minimum level of essential food imports. The financed value of food imports during that period increased by approximately 26 per cent from one year to the next, with an additional cost of US$ 150 million. This increasing trend continued, and in 1999 the growth in the value of food imports financed through private and bank credits reached 36 per cent compared 1997. Because of the urgency of obtaining credits to import foodstuffs, Cuba has had to pay charges well above market levels - up to 18 per cent in interest in 1997.

38. Egypt indicates that as part of the reforms related to the results of the Uruguay Round, it reduced or eliminated various forms of support previously granted to farmers and exporters. In response, a transformation in cropping patterns occurred, away from subsidized towards more profitable crops. The volume of production of basic items such as sugar and wheat decreased at the time when world cereal prices started increasing towards their peak in the 1996/1997 season. Simultaneously, a long-planned reduction in the volumes of food aid granted to Egypt became effective. In order to reduce the impact of the situation on the local population and on the national treasury, Egypt adopted a series of compensatory measures, including the reduction of applied tariffs on wheat and corn, the temporary re-institution of a rationing system for the poor, a substantial reduction in nationally-held food stocks, a reduction of imports of less essential items, and recourse to short-term commercial buyer credits available from a number of non-national financial institutions.

39. Jordan states that during 1993 - 2000, the performance of its agricultural sector declined due to climatic factors. Especially the production of wheat and barley decreased significantly, and as a consequence, imports of basic foodstuffs increased. An emergency relief programme was needed to assist the most affected farmers, herders and producers of tree crops. As a result of the Gulf crisis, which led to the return of large numbers of expatriate workers and an increase in the size of the population, and due to the high prices during the 1995-96 period, the import bill of basic foodstuffs increased dramatically. The considerable increase in debt servicing requirements in the late 1980s was a major factor contributing to Jordan's economic crisis, and debt volumes and their impact on foreign reserves constitute an imbalance impeding the economic development process. These imbalances in Jordan's economy and the volatility of world prices of basic foodstuffs during the 1995-

11 See responses to question 2 and 3 (in the case of Jordan), Annex 3.

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96 period led the competent authorities to seek assistance to reinforce strategic inventories and normal levels of imports of basic foodstuffs inter alia through export guarantee programmes and food aid. To address its economic crisis, Jordan negotiated an arrangement with the IMF in 1989, and began implementing an economic reform programme.

40. Tunisia reports that while cereals normally accounted for an average of 34 per cent of imports, this share rose to 46 per cent in 1995 and 54 per cent in 2001. This was chiefly a result of the increase in the quantity of cereal imports in the wake of the decline in agricultural production in 1994 and 1995, and the considerable increase in the price of imports, particularly cereals (an increase of 27 per cent). In Tunisia, these imports were financed through foreign credit granted under market conditions, which increased the balance-of-payments deficit and the debt burden. They have required a mobilization of financial resources to the detriment of a number of development projects, in particular those aimed at promoting the use of natural resources and improving competitiveness in the agricultural sector.

41. The Panel notes that shifts in cropping patterns away from basic foodstuffs towards more profitable crops should lead to an increase in the resources available, among other things, to finance imports, at least in the long run. However, it is evident that the four responding NFIDCs (Cuba, Egypt, Jordan and Tunisia) did encounter real difficulties in financing normal levels of commercial food imports, although they appear to have little relation with the Uruguay Round reform programme in agriculture. The experiences described above show that the coping strategies differed considerably from country to country, and that access to the existing multilateral financing facilities has not formed any significant part of these strategies, except in the context of Jordan's economic crisis.12

(d) Food aid

42. Food aid is one of the aspects addressed by the Marrakesh NFIDC Decision in its own right. 13 For the purposes of its report, we have examined food aid only to the extent that it relates to short-term difficulties in financing normal levels of commercial food imports.14

43. The Food Aid Convention (FAC) provides a safety net in terms of food aid availability. The aggregate annual commitments decreased from a total of 7.517 million tonnes under the Food Aid Convention, 1986 to 5.35 million tonnes (wheat equivalent) under the Food Aid Convention, 1995. Under the new Food Aid Convention 1999, the minimum annual volume and value commitments of FAC members amount to a total of 4.895 million tonnes (wheat equivalent) and €130 million, respectively. In the period 1986-2001, annual shipments by the members of the Convention exceeded, often significantly, their combined commitments, except in 1994/95 when there was a shortfall.

44. The fact that these commitments are expressed mainly in volume terms is significant in times of high world market prices for cereals, as it provides assurances of minimum supplies of food aid irrespective of world food price and supply fluctuations. The Food Aid Convention, 1999 also has stronger provisions to cover transportation and other operation costs associated with food aid transactions, especially when food aid is directed to LDCs and in emergencies. All food aid to LDCs covered by members' commitments under the FAC is to be provided in the form of grants. Overall, food aid provided in the form of grants under the current Convention is to represent not less than 80 per cent of a member's contributions and, to the extent possible, members are to seek progressively to exceed this percentage. When allocating their food aid, FAC members undertake to give priority to the least-developed countries and low-income countries, many of which are on the present WTO list of net food-importing developing countries. Other eligible food aid recipients include lower middle-

12 See Jordan's response to question 3 (Annex 3).13 See paragraphs 3(i) and 3(ii) of the Marrakesh NFIDC Decision (Annex 1).14 See also the Panel's observations in this regard in paragraph 23 above.

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income countries and all other countries included in the WTO list of net food-importing developing countries at the time of negotiation of the Food Aid Convention 1999.

45. In a contribution by the World Food Programme (WFP) to the Panel, WFP distinguishes between two types of food aid: targeted food aid and programme food aid.15 Targeted food aid comprises both emergency food aid, designed to relieve hunger in disaster situations, and project food aid, which is distributed to identified beneficiary groups to support specific development and disaster prevention activities. Programme food aid is usually supplied as a resource transfer for balance-of-payments or budgetary support objectives. It is not targeted to specific beneficiary groups but is sold to those who can afford it. According to WFP, programme food aid is neither effective nor efficient, and financial transfers are a much less costly way of dealing with balance-of-payments problems. While virtually all targeted food aid is provided in the form of grants, some programme food aid is not provided on fully grant terms (i.e. on concessional terms).

46. Several Members involved also distinguish between the impacts of targeted food aid and programme food aid.16 Most Members involved recognize that targeted food aid is useful, especially to address emergency situations. Argentina, Canada, the European Communities, as well as the World Bank, stress that long-term food aid is not a viable solution, and can be counterproductive because of effects on domestic markets. They point out that it tends to respond to the need to reduce surpluses in donor countries rather than responding to needs in recipient countries. Thus, it is abundant during times of low prices, and scarce when prices are high, possibly even exacerbating recipient countries' short-term financing difficulties. The United States considers that concessional food aid can act as a bridge between grant food aid and commercial sales, helping countries transition to market economies.

47. Cuba, Egypt, Jordan and Tunisia note that food aid can be an effective tool to address situations of food insecurity. However, Cuba stresses that food aid is on the decline, and diminishes especially during times of high prices, and is thus not sufficient to address the problems faced by LDCs and NFIDCs. Egypt indicates that ideally, food stocks held by major suppliers should be drawn down in the form of food aid when LDCs and NFIDCs have the highest needs, but that in view of the impracticability and expense of maintaining such stocks, the revolving fund had been proposed instead. Tunisia indicates that certain countries, including Tunisia, are not eligible to receive food aid, and proposes that eligibility criteria be reviewed.

48. Regarding the relationship between food aid and short-term difficulties in financing commercial imports of basic foodstuffs, Australia submits that unless short-term financing difficulties coincide with a shortage of food, the need for food aid does not arise. In its view, food aid addresses chronic and sustained malnutrition or emergency food shortages, whereas the revolving fund proposal deals with the impact of price or currency movements on food availability within a country for which programme food aid, if available, could be of relevance. Australia indicates that food aid and the revolving fund proposal thus address two different sets of problems, which may be experienced separately or simultaneously. While countries might need financial assistance when faced with financing difficulties, dumping developed-country food surpluses into an economy under stress might harm agricultural development.

49. The Panel notes that, to some extent, food aid effectively helps countries with limited resources by reducing requirements to commercially finance needed food imports. The fundamental principles in effectively providing food aid include that it be given to countries with limited resources to purchase food commercially (thus minimizing displacement of commercial imports of other exporters), targeted to poor persons, and that it be provided in a way that does not interfere with the

15 See Annex 9.16 See responses to question 8 (Annex 3).

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well functioning of domestic markets. To the extent that targeted food aid leads to additional consumption (by people who could not afford food otherwise), it will have no, or at most minimal, effect on a country's domestic market, imports and financing needs.

(e) Export credits

50. In its responses to our question about how LDCs and NFIDCs managed to weather the 1995-97 price spike, Jordan submits that its strategy included efforts to seek bilateral assistance through donors' export credit guarantee programmes. 17

51. Since officially supported agricultural export credits ("export credits") as such were not within the purview of the Panel's terms of reference, the Panel simply notes the following on the basis of OECD Secretariat reports: the total export credits for agricultural products increased from US$11 billion in 1995 to US$18 billion in 1998; for bulk cereals, export credits increased by US$465 million or 22 per cent over the same period18; but, the share of export credits accorded to LDCs and NFIDCs remains very low.19

B. ACCESS TO SHORT-TERM MULTILATERAL FINANCING FACILITIES

52. The Panel's terms of reference require us to examine the terms and conditions of existing facilities of the IMF and the World Bank to which least-developed and WTO net food-importing developing countries could have recourse in order to address short-term difficulties in financing normal levels of commercial imports of basic foodstuffs, principally cereals, rice, basic dairy products, pulses, vegetable oils and sugar, during periods of rising world prices for such basic foodstuffs, including, as appropriate, other relevant sources of concessional financing.

1. The Compensatory Financing Facility of the IMF

(a) Operation

53. The IMF provides financial assistance to its members through a variety of facilities. The principal financing facility in the event of temporarily higher food prices is the Compensatory Financing Facility (CFF), particularly its cereals element.20 The CFF is a special facility that provides financial assistance to countries that experience balance-of-payments difficulties arising from either a shortfall in aggregate export receipts or an excess in cereal import costs. Compensatory financing in the event of a cereal import price rise is released based on the following conditions: The excess in cereal import costs must be considered temporary and largely beyond the control of the country concerned. Unless the balance-of-payments position of the country concerned is satisfactory apart from cereal import costs, access to the CFF is considered in the context of a wider economic programme with the IMF. The functioning of the CFF, as well as the criticisms raised by NFIDCs are described below.21

17 See Jordan's responses to questions 2 and 3 (Annex 3).18 See OECD (2000), Agricultural Outlook 2000-2005, p. 51.19 See EC negotiating proposal regarding export competition of 18 September 2000 (G/AG/W/34, dated

11 June 1998, paragraph 10). The EC notes that its observation is based on an OECD survey using confidential data.

20 For a concise history of the CFF since its creation in 1963, see contribution by the IMF (Annex 5). See also "Review of the Compensatory and Contingency Financing Facility (CCFF) and Buffer Stock Financing Facility (BSFF) -- Preliminary Considerations", IMF, December 1999 at www.imf.org//external/np/ccffbsff/review/index.htm.

21 The panel was mindful that a review of the CFF was contemplated for the first half of 2003.

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(i) Temporary excess in cereal import cost beyond the control of the country concerned

54. The excess in cereal import cost ("cereal import excess") is the difference by which the value of cereal imports in the "excess year" exceeds the arithmetic average of the value of cereal imports for the five-year period centred on the excess year. The calculation of the cereal import costs is thus based on data on actual imports for the two years prior to the current excess year; an estimate of the value of the cereal imports of the current year, and a projection of cereal import costs for the two subsequent years. The value of cereal imports excludes food aid as well as any cereal imports which are financed with concessional credit.

55. The eligibility criteria under the CFF require further that the cereal import excess be temporary, i.e. the price shock on the international cereal market must be considered to be reversible. If the price shock were to be a permanent feature, the Poverty Reduction and Growth Facility (PRGF) of the IMF would be the principal facility to assist low-income countries.22 In the view of the Panel, the experience in the past decades suggests that price increases on the international cereal markets tend to be temporary, and the most recent price "shock", which began in 1995, was reversed within less than two years.

56. Price fluctuations on the world market for cereals are typically considered by the IMF to be outside the control of governments, unless the country concerned is a dominant producer of cereals. The Panel notes that none of the LDCs or NFIDCs is a dominant producer of wheat, rice or coarse grains. Also, for the purposes of the CFF, it is irrelevant whether price increases for cereals on the world market are due to the Uruguay Round reform programme in agriculture or some other cause.

57. The CFF is available for two categories of balance-of-payments problems. One category consists of countries that have satisfactory balance-of-payments positions, except for the export shortfall or surge in cereal import costs. The second category comprises countries that have balance-of-payments difficulties that extend beyond the export shortfall or surge in cereal import costs. Experience has shown that most drawings under the CFF are likely to fall into this second category. In this case, access to the CFF would be in the context of an IMF-supported economic programme (arrangement), either already in place or approved along with the request for CFF support.

(ii) Export earnings

58. Compensation for an excess in cereal import payments is triggered only to the extent that the import excess is not offset by a decline in other imports or an increase in receipts of merchandise and services exports. Should it emerge that the cereal import excess was "overcompensated", the IMF requires prompt repurchase (repayment) of the loan.23 This might include situations where, for example, the cereal price hike was overestimated or export earnings were underestimated.

(iii) Access limits

59. Purchases (loans) under the cereal element are limited to the excess in cereal import cost of the country concerned and the applicable access limit under the cereal element, whatever is lower. As the result of the modifications of the CFF that were approved by the IMF's Executive Board in November 2000, the complex system of access limits has been simplified. Access limits are now 45 per cent of the country's quota for either an export shortfall or a cereal import excess, or 55 per cent of the quota for the two factors combined.

22 The PRGF is the IMF's concessional lending instrument: terms are 10 years, with 5 ¼ years grace, interest at 0.5 percent per annum.

23 A prompt repurchase was triggered in the case of Algeria and Bulgaria, the two most recent cases of countries having made purchase under the cereal element of the CFF.

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(iv) Disbursement and repayment

60. It may take two to three months between a request for a purchase under cereal element of the CFF and disbursement of funds. Normally, two disbursements are made within six months. On the other hand, a purchase under the CFF can also be made in anticipation of a projected excess in cereal import costs. There is the expectation of repayment of 2 ¼ - 4 years, but in any case, repurchases (i.e. repayment of the loan) are due 3¼ to 5 years after a purchase is made; the interest rate is currently about 3.05 per cent per year.

(b) Perceived inadequacies of the Compensatory Financing Facility

(i) General

61. The Panel observes that there has been very little use of the cereal element of the CFF in recent years. In the period from January 1993 to September 1999, there were six purchases by four countries (Algeria, Bulgaria, Moldova and South Africa). None of these countries is an LDC or an NFIDC. During the phase of rapidly increasing international prices for cereals in 1995-97, only Algeria and Bulgaria made a purchase under the cereal element.24 As regards the reasons, the IMF advises that such infrequent use was not due to a lack of resources available under the CFF.

62. We note that, in principle, all LDCs and listed NFIDCs have access to the resources of the IMF, except Cuba and Tuvalu, since these countries are not currently members of the IMF.

63. In the view of a number of NFIDCs, the CFF has certain inadequacies for it to be a useful resource in times of financing difficulties of imports of basic foodstuffs. The main points raised relate to its product coverage, conditionality and lack of concessionality.

(ii) Product coverage

64. Several of the NFIDCs have noted with concern that the CFF covers only cereals whereas the product coverage envisaged by the NFIDC Decision encompasses all basic foodstuffs.25

65. We note that there may be situations where there is a coincidence of temporary and reversible price increases of various foodstuffs, including grains, outside the control of governments resulting in balance-of-payments difficulties or where international cereal prices do not rise but prices for other foodstuffs do. There is thus a possibility that the limited product coverage of the CFF could be a factor constraining LDCs and NFIDCs experiencing short-term difficulties in financing normal levels of commercial food imports.

(iii) Conditionality

66. For some, a perceived shortcoming of the CFF is that it requires "conditionality". IMF loans are usually provided under an "arrangement," which sets out the policies that a country intends to pursue, which forms the basis of access to the loan. Arrangements are based on economic programmes formulated by countries in consultation with the IMF. Loans are then disbursed in instalments as the programme is implemented. As a result of the November 2000 review of the CFF referred to above, conditionality has been strengthened. Access to the CFF will now be generally available only in the context of an arrangement.

24 In the period of January 1993 to September 1999, the export shortfall element of the CFF was more frequently used than its cereal element. Amongst the countries having drawn on the export shortfall element are three NFIDCs (Dominican Republic, Jordan and Pakistan) and one LDC (Rwanda).

25 G/AG/11 (dated 28 September 2001), Annex 1.

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67. We recall the relevant provisions of the Marrakesh NFIDC Decision regarding access to the resources to the international financial institutions, which provide as follows:

"Ministers recognize that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties. In this regard Ministers take note of paragraph 37 of the report of the Director-General to the CONTRACTING PARTIES to GATT 1947 on his consultations with the Managing Director of the International Monetary Fund and the President of the World Bank (MTN.GNG/NG14/W/35)."26

We remark that the text of the Decision refers to "existing facilities, or such facilities as may be established, in the context of adjustment programmes". In our view, this provision reflects that access to the resources of the IMF and World Bank is often conditioned by adjustment programmes designed to rectify the underlying economic problems.

68. We note that in the majority of cases, it is expected that future purchases under the CFF would be contingent on undertaking an economic programme under one of the following IMF arrangements: Stand-by Arrangements, Extended Arrangements, or arrangements under the Poverty Reduction and Growth Facility (PRGF). As Table 2 below shows, 6 of the 22 NFIDCs and 22 out of 49 LDCs currently have arrangements with the IMF. So far as countries under arrangements are concerned, it is conceivable that, in the event of temporary cereal price increases on world markets, access to the CFF would entail little "extra" conditionality.

69. We further note that stand-alone access to the CFF is possible. In cases where the balance-of-payments position is satisfactory, apart from the cereal import excess or export shortfall, the IMF allows access to the CFF without an arrangement involving conditionality. In addition, access to the CFF, as to any other IMF facility, entails an assessment of the country's capacity to repay the IMF.

26 See the Marrakesh NFIDC Decision, paragraph 5 (Annex 1).

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Table 2 - LDCs and NFIDCs under arrangements with the International Monetary Fund (as of end June 2002)

Least-Developed Countries WTO Net Food-Importing Developing Countries

Benin (PRGA) Côte d'Ivoire (PRGA)

Burkina Faso (PRGA) Honduras (PRGA)

Cambodia (PRGA) Kenya (PRGA)

Cape Verde (PRGA) Pakistan (PRGA)

Chad (PRGA) Peru (SBA)

Congo, Democratic Republic (PRGA) Sri Lanka (SBA)

Djibouti (PRGA)

Ethiopia (PRGA)

Guinea (PRGA)

Guinea-Bissau (PRGA)

Lao People's Democratic Rep. (PRGA)

Lesotho (PRGA)

Madagascar (PRGA)

Malawi (PRGA)

Mali (PRGA)

Mauritania (PRGA)

Mozambique (PRGA)

Niger (PRGA)

Sao Tomé and Principe (PRGA)

Sierra Leone (PRGA)

Tanzania (PRGA)

Zambia (PRGA)

Key: SBA - Stand-by ArrangementsPRGA - Poverty Reduction and Growth Arrangements

Source: International Monetary Fund, International Financial Statistics, April 2002.

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(iv) Lack of concessionality

70. One of the modifications that proponents identified that might make access to the CFF more attractive and consistent with the Marrakesh NFIDC Decision would be to make its resources concessional in terms of interest rate and repayment period.27

71. The CFF is a non-concessional facility in the sense that purchases under it are subject to charges ("interest") on the use of the IMF's General Resources (GRA).28 Currently, those charges are 3.05 percent per year. Still, the IMF generally recommends against poor countries using GRA resources. The issue, however, of whether or not a financing facility is "concessional" depends on the choice of benchmarks. A loan could be considered "concessional", for example, if it was provided at a rate of charge more favourable that the rate of charge governments may have to pay when borrowing from commercial banks.29

2. World Bank facilities

72. Most of the World Bank’s lending and non-lending services are aimed at the root cause of long-term food insecurity: poverty.30 Some investment projects are also aimed at improving trade and distribution facilities, or improving a country’s trade finance infrastructure, thereby reducing vulnerability to disruptions of imports. The World Bank has no facilities that are specifically designed to help countries cope with price shocks, as is the CFF of the IMF. The World Bank does have, however, several instruments to provide urgent assistance when a country is struck by an emergency that seriously dislocates its economy and calls for a quick response, as well as adjustment loans which can provide balance-of-payments support for critically needed imports, including food. Because these facilities reduce the vulnerability of developing and transition economies to food shortages, they are relevant to the deliberations of this Panel.

73. One such type of World Bank instruments is the Import Rehabilitation Loan. This is a quick-disbursing loan to provide support for the government budget and balance-of-payments in periods of crisis. It is specifically targeted at imports that are vital to the functioning of the economy and preservation of a minimal level of well-being of the population. It is a species of adjustment loan, and can include an element of reform conditionality. For example, the Critical Import Rehabilitation Loan was made to Bulgaria in 1997 to help finance primarily grain and oil imports when both domestic production and normal import supply channels were severely disrupted by inappropriate economic policy and political crisis, exacerbated by drought. The loan was conditional on the new Bulgarian Government undertaking a series of basic reforms in economic policy.

74. The World Bank also provides several other types of adjustment loans, which disburse to finance general import expenditures in times when balance-of-payment support is needed for any reason, though in most cases the major reason for the need for special assistance to finance imports is poor macroeconomic management. These loans are specifically designed to support a well-defined reform programme and to help pay for its transitional costs.

75. Other lending and non-lending instruments for emergency recovery assistance have as their objective to restore assets and production levels in the disrupted economy. World Bank emergency

27 See G/AG/11 (dated 28 September 2001), paragraph 6 and G/AG/W/49/Add.1 (dated 23 May 2001), page 4 (Annex 2).

28 The IMF uses "Commercial Interest Reference Rates" published by the OECD in calculating concessionality for the purposes of the debt ceilings used in IMF-supported programs. These rates are based on industrial country government debt yields.

29 On the other hand, commercial banks may provide financing more expeditiously than the IMF under the CFF.

30 See also contribution by the World Bank (Annex 8).

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assistance may take the form of: immediate support in assessing the emergency's impact and developing a recovery strategy; restructuring of the World Bank's existing portfolio for the country, to support recovery activities; redesign of projects not yet approved, to include recovery activities; and, provision of an Emergency Recovery Credit/Loan (ERC/ERL).

76. A very important benefit of a number of World Bank actions in response to a crisis (e.g., restructuring the portfolio to increase disbursements in the near term) has not been the direct elements financed, but the indirect element of providing foreign exchange. The foreign exchange provided enables countries to import food, medicine and other essentials, an ability, which may be reduced by the loss of export earnings and need for emergency imports that characterize drought periods or international food price spikes.

77. Emergency Recovery Loans may include quick-disbursing components, but ERLs are mainly to finance investments to rebuild physical assets and restore economic and social activities after emergencies. ERL activities address restoration of assets and production, rather than relief. They are usually used to finance transport, seeds, fertilizer, etc. which facilitate the capacity of the country or affected farmers to prepare for the following year's crop. As one example, the ERC for Zimbabwe, as a part of the Bank's response to the 1992 drought (US$200 million, combined with other fund reallocations to total roughly US$350 million) was used to deal with multiple elements of the response to the drought, with one of its major contributions being to provide balance-of-payment support that enabled the Government to do many things, including import food, that were not an explicit part of the project. The World Bank made a special (US$10 million) grant to Somalia to finance World Food Programme (WFP) and UNICEF actions in the country that were specifically linked to the provision of food. The food was WFP's, but the delivery was financed by the World Bank.

78. In addition to emergency assistance, the World Bank may support free-standing investment projects for prevention and mitigation in countries prone to specific types of disasters.

3. Other sources of concessional financing

79. Regional financial institutions were contacted by the Panel to enquire about any facilities that address short-term difficulties in financing normal levels of commercial food imports. 31 Two of these institutions, the Arab Monetary Fund and the Asian Development Bank, provided information about their financial facilities.32

(a) The Arab Monetary Fund

80. The Arab Monetary Fund (AMF) provides lending facilities to its member countries that are intended to contribute to the financing of overall balance-of-payments deficits rather than targeting a specific element occasioning such deficits. However, the AMF's facilities include the Compensatory Loan, designed to assist eligible member countries in partly financing an unexpected balance-of-payments deficit arising from either a shortfall of exports or an increase in agricultural imports, particularly cereals. Such a rise in imports must be attributable to reversible exogenous factors beyond the control of the government in question.

81. Access under the Compensatory Loan is limited to 50 per cent of the member country's paid-up subscription in the AMF's capital. The loan is subject to a 4.75 per cent interest charge and is

31 Letters were sent to the Arab Monetary Fund, the Asian Development Bank, the African Development Bank, the Inter-American Development Bank and the Islamic Development Bank.

32 The information submitted by the Arab Monetary Fund and by the Asian Development Bank is attached to this report as Annexes 10 and 11, respectively.

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repayable within three years in four equal half-yearly instalments, the first being due 18 months after the date of the loan disbursement.

82. The eligibility criteria require that the member country has a balance-of-payments need, identified by an overall balance-of-payments deficit and a level of foreign reserves below six months of imports of goods and services. The request for the Compensatory Loan should be made during the shortfall year, or the following year. Eventually, a request can be made during the year where the authorities foresee an increase of imports resulting from a shock (or an export shortfall). The increase in imports of foodstuffs is calculated as the difference between the import cost in the shortfall year and the arithmetic average of import costs during the three years centred on the shortfall year.

83. So far, some 12 compensatory loans have been extended to eight AMF member countries, in large part to finance an increase in the value of cereal imports or as a result of drought.

84. In addition, the Arab Trade Financing Progamme (AFTP), an AMF sister-institution, is specialized in the provision of credit aimed at financing inter-Arab imports and exports of virtually all goods and commodities. ATFP charges concessional interest rates compared to market rates for similar transactions.

(b) The Asian Development Bank

85. The Asian Development Bank (ADB) provides various loans to developing member countries, but does not have a special financing facilities for the event of financing difficulties of commercial food imports.

C. PROPOSALS FOR THE ESTABLISHMENT OF A REVOLVING FUND

86. The Panels' terms of reference require us to examine the concept and feasibility of the proposals for the establishment of a revolving fund that were submitted by a group of 17 NFIDCs (Côte d'Ivoire, Cuba, Dominican Republic, Egypt, Honduras, Jamaica, Kenya, Mauritius, Morocco, Pakistan, Peru, Senegal, Sri Lanka, St. Lucia, Trinidad and Tobago, Tunisia and Venezuela).33

1. Main elements of revolving fund proposals

87. The first proposal (G/AG/W/49) takes up three of the areas addressed by the Marrakesh NFIDC Decision, namely food aid, technical and financial assistance, as well as access to the resources of the international financial institutions. In addition, it addresses the issue of establishing binding commitments and reviewing the implementation of these commitments. The second submission (G/AG/W/49/Add.1) elaborates on the concept of the revolving fund intended to address the lack of suitably conditioned short-term financing.34

88. In their first proposal, the sponsors envision the establishment of an inter-agency revolving fund with two components. The first, variable component of this fund would ensure that adequate financing at concessional terms was made available to LDCs and NFIDCs during times of high world market prices for basic foodstuffs. This component would be comprised of existing and/or new financing facilities, as appropriate. The purpose of the second, fixed component of the revolving fund would be to provide technical and financial assistance to LDCs and NFIDCs for specific projects linked to improving agricultural productivity and related infrastructure. The elaborated proposal

33 G/AG/W/49 (dated 19 March 2001) and Add.1 (dated 23 May 2001) and Add.1/Corr.1 (dated 27 June 2001) (Annex 2). In response to questions by the Panel, the proposals were further elaborated by the Cuba, Egypt and Tunisia (Annex 3). Jordan indicates that it supports the proposal (response to question 4, Annex 3).

34 In the proposal, the revolving fund is also referred to as the food financing facility.

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(G/AG/W/49/Add.1) drops the idea of a technical/financial assistance window for agricultural projects. Instead, proponents call on donors to set aside a greater proportion of multilateral and bilateral aid programmes for this purpose.

89. However, in their responses to the Panel's questions, Cuba and Tunisia suggest that part of the resources of the revolving fund should be used to finance capacity building. In their view, the revolving fund should address the long-term problems through projects aimed at increasing productivity and efficiency in basic food production in the countries in question.35

90. In the first proposal, the creation of a financing facility is to be combined with a stockholding scheme for cereals. According to this proposal, in years of plentiful supplies, producing countries would commit to setting aside sufficient national food reserves, in accordance with the normal import requirements as determined by FAO, in addition to volumes required for food aid, emergencies and essential nutritional assistance projects. During times of high world market prices, these reserves would be released to LDCs and NFIDCs at reasonable prices, and thus, together with food aid, would help them meet their normal import requirements. The idea of physical stocks of food grains is not taken up again in the second proposal.36

91. The main elements of the proposal for the establishment of a new short-term financing facility for food imports (revolving fund) are as follows.

(a) Capitalization

92. The proposal estimates initial capital requirements for the revolving fund of around US$1.2 billion, based on an FAO study of the revolving fund.37 The funds are proposed to be drawn from multilateral financial organizations, the G-7 and other donors, as well as major developing countries. During years when import bills are manageable, the proposal indicates that donors could set aside the resources, but not disburse them. Contributions to the revolving fund are to be inscribed in WTO Members' schedules as binding and legally enforceable commitments. Proponents suggest that the Members concerned be required to make regular annual notifications in respect of these commitments.

(b) Eligibility and repayment terms

93. Access to the resources of the revolving fund is to be determined on a country-by-country basis, after a fair assessment of requirements, in accordance with guidelines to be established. The proponents suggest that in periods of surges in import bills, each country's compensation package could be capped in order to maintain the revolving fund's long-term financial viability. The fund's resources would be repayable, which would reduce the initial capital required. Repayments of financial resources received by beneficiaries would be under a medium-term scheme on terms more favourable than market conditions.

35 See Cuba's responses to questions 5 and 8, and Tunisia's response to question 7 (Annex 3).36 In its response to question 8, Egypt indicates that ideally, food stocks held by major suppliers could

be drawn down in the form of food aid when NFIDCs and LDCs have a need. However, in view of the impracticality and expense of maintaining such stocks, the idea of the revolving fund had been proposed instead (Annex 3).

37 "Towards Improving the Operational Effectiveness of the Marrakesh Decision on the Possible Negative Effects of the Reform Programme on Least-developed and Net-Food Importing Developing Countries"; prepared by the FAO Commodities and Trade Division for the FAO Roundtable on Selected Agricultural Trade Policy Issues, Geneva, 21 March 2001 (Annex 4). See also section C.2 below.

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94. In its response to the Panel's questions, Egypt submits that eligibility should be based on objective criteria, determined on a country-by-country basis.38 Tunisia considers that the revolving fund should supplement existing facilities but on less restrictive terms of access.39 Similarly, in Cuba's view, such financing should not be subject to political or other conditionalities except for those related to the objectives of the fund, based on the definition of normal levels of commercial imports of basic foodstuffs in individual countries. Cuba stresses the importance of providing for payments on concessional terms with repayment periods of more than 360 days.40

(c) Administration of the revolving fund

95. The proposal recommends that the administration and management of the revolving fund be centralized in a "small bureaucracy", to be overseen by a management board comprising representatives of the WTO, FAO, IMF, World Bank, donor countries and beneficiaries.

96. Cuba and Egypt indicate in their responses to the Panel's questions that the fund should be managed in a transparent way, including a mechanism for verifying the destination and use of the resources.41 In Egypt's view, to be eligible to draw from the fund, recipient countries should provide regular information on variables such as production of basic foodstuffs, population growth, food aid, and per capita consumption of basic food items. Tunisia suggests that recipient countries be required to submit a report justifying the use of the fund's resources.42

2. FAO contributions

97. The FAO made two contributions to the Panel: one relating broadly to the implementation of the Marrakesh NFIDC Decision as a whole, the other providing further elaboration of the concept of the revolving fund.43

(a) Ex-ante versus ex-post borrowing

98. The FAO addresses the question whether borrowing from the revolving fund should be ex-post, i.e. after the country has imported the food using its own resources, or ex-ante, i.e. at the time the country imports the needed supplies. If borrowing takes place ex-post, the fact that a country's actual food import bill increased beyond a certain level could be used as the main condition for triggering access to the revolving fund's resources. When facing a surge in import bills, countries could thus draw on their foreign currency reserves or borrow on commercial terms knowing that concessional finance would be forthcoming.

99. Regarding the ex-ante approach, the FAO identifies a number of technical difficulties. A commitment by the recipient countries would be required to ensure that, to maintain normal consumption levels, food is actually imported in amounts above those that would have been possible in the absence of the revolving fund. This would require data on food consumption in the current

38 See Egypt's response to question 5 (Annex 3).39 See Tunisia's responses to questions 4, 5 and 7 (Annex 3).40 See Cuba's responses to questions 4 and 7 (Annex 3).41 See Cuba's and Egypt's responses to question 7 (Annex 3).42 See Tunisia's responses to question 7 (Annex 3).43 The first FAO paper, titled "Towards Improving the Operational effectiveness of the Marrakesh

Decision on the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries", was prepared by the FAO Commodities and Trade Division for an FAO Round Table on Selected Agricultural Trade Policy Issues held in Geneva on 21 March 2001. The second paper, "Revolving Fund for the Purpose of Implementing the WTO Marrakesh Decision Relating to the Least-Developed and Net Food-Importing Developing Countries", is based on an informal FAO consultation held in Rome on 17 September 2001. See Annex 4.

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year, which are not easily available, especially for non-cereals. In the view of the FAO, it would also be necessary to establish criteria for the utilisation of the additional imports, especially to protect the consumption of the poor. Besides demonstrating at a later stage that the food import bill had increased excessively, countries receiving a loan from the revolving fund could be expected to undertake measures to protect the food security of the poor, and to report on how the loan was used.

(b) Definition of excess food import bill

100. The FAO provides calculations of the aggregate "excess food import bill" for the LDCs and NFIDCs under various threshold levels.44 To define the excess food import bill, the FAO starts with a five-year moving average of the actual value of food imports to define the trend. The excess import bill is the amount by which the value of food imports in any year exceeds the trend value plus a certain threshold level. For example, if the threshold is set at 10 per cent, the excess import bill is the amount that exceeds the trend level by more than ten per cent. The 1985-99 annual average of combined excess import bills for the LDCs and NFIDCs ranges from US$159 million for a threshold level of 35 per cent to US$729 million for one of 10 per cent.45

(c) Capitalization of the revolving fund

101. Based on the calculation of the aggregate excess food import bill, the FAO analyses the capital requirement for the revolving fund. The FAO assumes an interest rate of 0.75 per cent per year and a repayment period of two years; interest earned by the "spare" balance of the fund not borrowed in any given year is not taken into account. Under a scenario where the revolving fund was established in 1984 with an initial endowment of US$600 million and a threshold level of 25 per cent, the resources of the fund would have been exhausted in 1992. Fresh injections would have been required for the revolving fund to continue operating. Depending on whether spikes in total excess import bills occur early or late during the life of the revolving fund, the capital requirements and the need for injections varies.

102. Since the food import bills of LDCs and NFIDCs exhibit an upward trend, the initial capital requirements for the revolving fund need to be adjusted upwards if they are to suffice for future periods. Assuming a ten year time horizon for the revolving fund, an annual interest rate of 0.75 per cent and a threshold level of 25 per cent, the initial capital requirement for the period 2002-12 would amount to about US$1 billion. It is difficult to predict the nature of future spikes in import bills, and thus the need for capital injections. In the view of the FAO, an open-ended commitment to provide additional capital on a stand-by basis is unlikely to be acceptable to contributors and the stand-by component of the revolving fund would therefore need to be capped. Lending could be capped, either proportionately, or including an element of special and differential treatment, so that borrowing by NFIDCs is capped, but not that by LDCs.46

44 The food import bill as defined by FAO includes commercial food imports, excluding food aid.45 These FAO estimates are for 19 NFIDCs and 49 LDCs, and cover imports of cereals, dairy and meat

products, vegetable oils and sugar.46 For more details about these estimates and various scenarios, see FAO's technical note (Annex 4).

(d) Administration of the revolving fund

103. FAO considers that it would be inappropriate to establish a new institution to administer the fund. Instead, an existing agency with experience, logistic infrastructure and human resources should operate the fund to ensure that it is well managed and to keep costs to a minimum. The International Fund for Agricultural Development (IFAD), a financial institution specialized in lending for agricultural development, is identified as a possibility. In the view of the FAO, such arrangement could also help to strengthen the complementarity between short-term financing and the long-term technical and financial assistance for agricultural development identified in the Marrakesh NFIDC Decision.

3. Analysis of concept and feasibility of the revolving fund proposal

104. In the light of its terms of reference, the Panel's analysis of the proposed revolving fund addresses only those portions of the proposals that concern short-term financing difficulties. First, the report provides background information regarding financing practices in the international food trade. Second, it examines the revolving fund as a concept from the point of view of its usefulness as a solution to address financing difficulties of commercial food imports by LDCs and NFIDCs. Third, it addresses a number of implementation issues.

(a) Background

105. Over the past decade, most government-owned food import agencies have been disbanded; some have been exposed to competition and now function alongside private-sector traders (e.g., Egypt, Mauritius, Pakistan); and very few agencies have remained in a monopoly position (e.g., Cuba and the Comoros). In some countries, particularly in North Africa, trade has been privatised, but the government retains an “umbrella” function over the imports of the key commodities (cereals, sugar, vegetable oils), providing to some extent financing and subsidies, as well as imposing prices. Also, in a few countries (e.g., Egypt, Myanmar, Sudan) the government has entered into countertrade (barter) agreements under which food is imported and paid for in the country’s commodities.47

106. By and large, private traders are now responsible for importing food, and receive little assistance from their governments in obtaining the funds for importing. Most countries have freed foreign exchange controls, hence hard currency is no longer centrally located, and importers have to procure it by themselves. In the large majority of cases, the private traders are locally owned; they may be fairly large in local terms, but tend to have little track record since until a few years ago, the government arranged food imports, and have limited financial strength. They are generally diversified, importing the whole range of bulk food commodities, and often other products as well.

107. Given their limited financial capacity, local traders have a strong preference for buying on deferred payment terms, e.g., the seller provides the goods, and agrees to be paid 60, 90 or 180 days later. This allows them to import the foodstuffs, sell them on the local market, and use the proceeds to reimburse the seller. The longer the payment terms, the better, particularly because this allows the buyer to make larger-volume purchases, which can result in considerable savings in transport costs. The financing costs of these deferred payment sales are effectively hidden in the price of the product – the seller will charge a price equal to the spot price of the commodities, plus the interest charges, plus a risk premium, plus a profit margin. Banks have found that the implicit interest rates can easily be in the 20 per cent range, except when the seller can benefit from export credit insurance from his government.

108. It is very difficult for local traders to borrow money from banks with which to import food. A number of developing-country governments have credit schemes, but funds tend to be scarce, and food imports are rarely in the list of priorities (funds often go to non-traditional exports). Local banks generally require full guarantees, often in the form of real estate. As food trade tends to be a low-

47For example, the Malaysian government has initiated Bilateral Payment Arrangements to enable poorer countries to buy its palm oil.

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margin business, few local traders have sufficient wealth to generate enough local bank finance to keep business going. They are also not large enough to obtain international bank loans.

109. Developing country importers normally rely on their suppliers for financing their imports. Suppliers can arrange this in different ways:

First, the supplier can arrange for an international bank loan to be set up alongside the food trade, which may involve a certain amount of risk sharing between the supplier and the bank, in case the importer does not pay.

Second, the supplier himself can borrow from a bank or use his own working capital to enable sale on deferred payment terms.

Third, the supplier can obtain credit or credit insurance from an official export credit agency, which provides cover for 90-95 per cent of the risks of the credit.

Fourth, the loan can be structured, using one of a range of possibilities.

110. In the first case, the credit will form part of a bank’s country exposure. Banks have credit lines for each country with a specific ceiling; and often, separate ceilings for each industry within the country. Once the credit line is exhausted, it is normally very difficult for a loan officer to obtain permission from the Bank's credit committee to provide new credit. Credit ceilings are normally set for fairly long periods, and only revised when there are specific conditions meriting its revision. Each loan has a risk weighting, with country risk forming a large part of this. Banks generally target a “risk-adjusted rate of return” – the higher the risk, the larger the return should be.

111. In the second case, the credit will form part of the trading company’s credit exposure. Trading companies operate very much like banks (and have little choice in this, because they depend so strongly on external finance), with credit ceilings for each country. Revising credit ceilings tends to be slightly easier than in banks, but internal credit committees are still very vigilant.

112. In the third case, officially supported export credits and credit insurance allows banks to exempt loans from country ceiling restrictions. Export credits are quite important in international food trade (see paragraph 51 above). Both the United States and the European Communities have a wide range of programmes, and a small number of food-exporting developing countries also have programmes. 48 Typically, these programmes shift the credit risk from the exporter to the export credit (insurance) agency, with only 5-10 per cent of the risk still remaining with the exporter. It is often against such credits or credit insurance that exporters agree to sell on deferred payment terms. These agencies have specific budgets for their operations, often mandated by specific legislative budget approvals.

113. In these three cases, the transactions generate “trade paper” – the importer acknowledges delivery, and promises to pay in, say, 90 days. This trade paper can be discounted on the secondary market, that is, it is sold to investors. It can be discounted with recourse – if the importer does not pay, the exporter has to pay the investor. It can also be discounted without recourse – the investor takes the credit risk. The forfaiting market is the principal outlet for such without recourse discounting. The credit exposures of the trading companies are often discounted in the forfaiting market, which removes the credit risks from the trader’s country risk exposure, and the costs of forfaiting are built in, from the beginning, in the commodity’s price. The forfaiting market has only limited depth for each country, and when a lot of trade paper from a country is offered, discounts increase fast, with the implication that the trading company has to build in a high price premium to compensate for this.

48 For a list of export credit agencies, see WTO Secretariat background paper on Export Credits and Related Facilities (G/AG/NG/S/13, dated 26 June 2000, pp. 10-11).

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114. Increasingly, international traders are resorting to the use of structuring techniques to enable them to continue selling commodities to developing countries. One simple form is warehouse receipt finance. The trader arranges for the commodities to be stored in an independently controlled warehouse and the warehouse operator issues warehouse receipts, which are used as collateral for financing. Once the international trader has received the warehouse receipts, he lends to the local trader a certain amount of the collateral value of the goods in warehouse and the funds are reimbursed with the proceeds from the sale of the goods. The risk that the commodity is stolen from the warehouse, or effectively expropriated by the government, can be covered by insurance (including, for Southern African and Eastern countries, by a new World Bank facility, the Trade Financing Facility). Structuring adds costs, but it is often still cheaper than building in the risk premiums that would be necessary for non-structured sales.

115. Apart from structured finance, the other three sources of import finance are all limited – the credit ceilings are very difficult to change. If the food import costs of a certain country increase because of price increases, or larger needs for food imports on commercial terms, it is quite likely, other circumstances remaining equal, that the existing credit lines are insufficient. People still need the food, of course, and the market will find a new equilibrium. This would normally have one or more of the following components:

Local traders start rotating their capital and stocks faster by using the same credit line to import, for example, twice as much food. Instead of reimbursing in 90 days, they reimburse in 45, and purchase another cargo. While this does not have many negative consequences, there are some limits to this practice, imposed by the logistics of international food trade (transport takes much time).

International traders sell more on the assumption that they will place the resulting trade paper into the forfaiting market – which, as noted, will lead to higher discounts for the country’s paper, which is reflected in higher prices paid for the food.

Opportunistic traders looking for high risk/high profit opportunities enter the market, selling at a relatively high price (and in practice, often sub-standard commodities).

Local traders start paying their bills late, using funds due for a credit on one commodity to import another – which will ultimately lead to higher risk premiums.

International traders do more structured finance deals.

(b) Effectiveness of ex-post availability of trade finance

116. While the proponents of the revolving fund have not clearly identified whether borrowing from the revolving fund would take place before or after importation, we consider the proposal to be for an ex-post financing mechanism, as it would effectively provide funds after the physical importation of food and when it has been established that the food import bill of the country seeking assistance was in excess of a pre-determined threshold. (In contrast, an ex-ante mechanism would provide financing at the time imports were effected, see section D.1 below).

117. As a result of an ex-post scheme, there would be a time-lag between the actual excess in food import expenditures and borrowing from the revolving fund. In this aspect, the revolving fund idea is similar to the CFF of the IMF. The timing of disbursements under the CFF may be such that the funds are made available after the climax of the price increase. In such circumstances, countries may experience short-term financing difficulties ex-ante but subsequent disbursements under the CFF would allow them to reconstitute their foreign exchange reserves that have been depleted. It appears that, in principle, the same would apply to the proposed revolving fund.

118. In light of the prevalent system of food imports (described above), a fund that would provide ex-post loans, to help countries replenish the hard currency lost through higher food imports, would have a limited impact on their ability to continue importing food. Local traders who need to import

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more food need funds, or new credit lines, at once. It is difficult to imagine how the possibility, not certitude, that one or two years in the future, their governments will receive a new loan will influence the willingness of international trading companies or banks to provide them affordable loans when needed. It is also difficult to imagine that a government would authorize a new, dedicated credit line for food imports without being certain that the disbursements under this credit line will be refinanced from an international fund credit line. If there is certitude that such refinancing will be possible, then the question is why it should take one or two years. It should be possible to make funds available at once.

119. If the logic of the ex-post payments is purely to replenish the country’s foreign exchange reserves, not to support food imports at the time of need, one may question why the "food trade balance" is considered in isolation – it would be more logical to consider the balance of payments as a whole.

120. In response to the Panel's invitation to the LDCs and NFIDCs to describe their experience with respect to short-term financing difficulties, in particular during the 1995-97 price hike on the international cereal markets, the following has been submitted by Cuba, Egypt, Jordan and Tunisia:49

Cuba

"… During the 1995-1996 increase in the price of foodstuffs, we had to negotiate intensively with our usual suppliers and with the banks and financial institutions in order to obtain private financing that would guarantee the minimum level of food imports essential to the country. Thus, the financed value of food imports during that period increased by approximately 26 per cent from one year to the next, reflecting an additional cost of US$150 million. This growth trend continued, and in 1999, the growth in the value of food imports financed through private and bank credits reached 36 per cent with respect to the same figures for 1997. Obviously, the urgency involved in obtaining these credits owing to the pressing need to import foodstuffs regardless of the increase in market prices has meant that Cuba has had to pay very high costs, well above the market level and even well above any spread that would be reasonable for Cuba for such financing – up to 18 per cent in interest, in annual terms, for 1997."

Egypt

"… In order to reduce the impact such a situation imposed on both the local populace and the national treasury, the Government of Egypt [GoE] adopted a series of compensatory measures such as … a brief recourse to short-term commercial buyer credits available from a number of non-national financial institutions."

Jordan

"…These imbalances in Jordan's economy and the volatility of world prices of basic foodstuffs during the period 1995/1996 urged the competent authorities to seek assistance to reinforce the strategic inventories and the normal levels of imports of basic foodstuffs, through aid programs such as export credit guarantee programs and food aid programs…."

Tunisia

"… This switch in the trade pattern is chiefly a result of the increase in the quantity of cereal imports in the wake of the decline in agricultural production in 1994 and 1995 and the

49 Cuba's and Tunisia's responses to question 2, Annex 3.

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considerable increase in the price of imports, of cereals in particular (plus 27 per cent). These imports are financed through foreign credit granted under market conditions, which in fact simply accentuate the balance-of-payments deficit and the debt ratios."

121. If the proposed revolving fund is to operate as an ex-post borrowing facility, it would obviously be of limited value in reducing the ex-ante short-term financing difficulties of the kind described by Cuba, Egypt, Jordan and Tunisia. This limitation may not apply to an ex-ante approach.

(c) Trigger mechanism

122. A second conceptual concerns the trigger mechanism, which would be required for disbursements from the proposed revolving fund. In this regard, the revolving fund proposals are based on food import bills as a triggering factor. However, in the FAO contribution, the triggering would be based on the level of actual food import bills above a certain threshold level.

123. Alternatively, triggering could be determined by the components of the food import bills, i.e., whether increased import bills are due to increases in world market prices and/or less favourable terms in financing food imports, or increases in quantities of commercial imports. While the first two are exogenous for LDCs and NFIDCs, the latter may be influenced by factors within the control of governments. We note that such factors may include inappropriate micro- and macroeconomic policies, but may also include policies related to the implementation of WTO commitments, and/or those under structural adjustment programmes. In order to ensure an equitable operation of a revolving fund if import quantities or the overall import bill were to be used as a triggering mechanism, some country-specific review of macroeconomic management and sectoral policies by governments might be required, if such a monitoring mechanism is not already in place. It may even be necessary to consider adequate safeguards to ensure the viability of such a revolving fund. The practical arrangements for such a fund’s operation would therefore require certain preconditions for lending, with similar characteristics to those of the CFF of the IMF.

124. If the triggering mechanism were to be based on exogenous factors, such as increases in world market prices and less favourable terms in financing food imports, no such preconditions for lending are necessary; and one positive effect would be that funds could be made available more quickly. However, if access to a revolving fund were based solely on the basis of trigger prices, some countries that do not need short-term financial assistance might gain access to the fund's resources. The eventual negative impact of this would need to be mitigated by setting the fund’s lending terms in accordance to the rates normally available in the market, that is, at a non-concessional rate.

125. In response to our questions, Australia has expressed a concern that trigger prices have the potential of introducing undesired effects into world markets.50 In this regard, the Panel considers that a revolving fund in the magnitude of US$ 1 to 1.2 billion is likely to have limited market effects, given world imports of food in the order of US$ 200 billion per year (excluding intra-European Communities trade. In addition, such a revolving fund would affect food imports only by the LDCs and the NFIDCs and only in exceptional years; for the most part and in "normal" years trade would be unaffected by the operation of the revolving fund.

126. There are a number of other issues, which would need to be considered in relation to implementation of the proposed revolving fund. 51

50 See Australia's response to question 4, Annex 3. 51 In this context, see also the IMF's Comments on FAO Draft Paper "Revolving Fund for Net Food-

Importing Developing Countries", Annex 5.

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(d) Overdue obligations and risk of default

127. The proposal for the revolving fund as it currently stands does not address the issue of overdue obligations and the risk of default on revolving fund loans.52 During periods of high world market prices, the risk of defaults on revolving fund loans would be particularly high where high prices cannot passed on to consumers, making it difficult for importers to recover the full value of the imported product. A policy to protect the revolving fund, for example by imposing penalty interest rates for overdue obligations, and cutting defaulting countries off from future access to the revolving fund, would be required.

128. For this purpose, price risk management tools, such as futures and options, could be used to reduce the credit risk of importers with the additional benefit that this would make it possible for importers to partially protect consumers from world market price increases. Out-of-the-money call options, for example, are relatively affordable. The May 2003 wheat futures contract in Chicago trades at US$29 per bushel. A call option with a strike price of US$34 per bushel, which provides full insurance against the risk that prices increase beyond US$34 costs one dollar per bushel. This applies to standard, exchange-traded contracts; tailor-made over-the-counter contracts would cost at most two thirds of this. However, such risk management tools can only address relatively short-term price fluctuations.

129. In its responses to our questions, Canada noted that short repayment periods would increase the likelihood of defaults, while a longer repayment period would imply a larger capitalization of the fund, with the associated negative consequences, including the diversion of resources from other development assistance.53 Conversely in the Panel's view, a short repayment period might be appropriate in view of the relatively short shelf-life of food.

130. It is unlikely that the risk of default could be eliminated completely, and depending on the rate of default, the capitalization and/or interest rates of the revolving fund would have to be higher. To increase the viability of the revolving fund, consideration would have to be given to making access to the revolving fund non-automatic (i.e. introducing certain conditionality) and reducing the concessional character of the facility. In this regard, in its response to questions from the Panel, the European Communities indicate that the conditions for access to the fund would need to guarantee that disbursements from the fund were fully reimbursed, and foresees that these conditions would not differ from those attached to the current multilateral financial facilities that address balance-of-payments problems.54 This would likely make the revolving fund unattractive to those countries who find the current multilateral financing facilities inadequate precisely because of the attached conditionalities.

(e) Over-drawing

131. A further issue for the implementation of a revolving fund is related to the modalities for allocating the available funds in peak years. During periods of high world market prices for basic foodstuffs, it is possible that food import bills for all or several LDCs and NFIDCs would increase at once. If in such a situation many countries request loans from the revolving fund, it is possible that needs could exceed the resources available in the fund. This situation would become increasingly likely if the period of high prices persisted for two or more years, leading to a high demand for the fund's resources over several years.

132. In its contributions to the Panel, the FAO considers two alternative approaches for dealing with peak years. The first option is that donors would inject new resources into the fund during peak

52 See Canada's response to question 4 and the United States response to question 6 (Annex 3).53 See Canada's response to question 4 (Annex 3) and section (j) below.54 See European Communities' responses to question 6 (Annex 3).

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years. Donors would enter into a "stand-by arrangement" to provide additional funds in times of need. These additional funds could be reimbursed to the donors as the loans are repaid by NFIDCs and LDCs, and possibly interest could be paid on these extra resources.

133. The second option suggested by the FAO would be to cap total lending. This option is also mentioned by proponents of a revolving fund. They envisage that each country's compensation package could be capped in periods of surges in import bills, in order to avoid harming the revolving fund's long-term financial viability.55 The FAO suggests capping loans in a proportionate manner to all borrowers seeking financial assistance, or introducing an element of special and differential treatment so that lending to least-developed countries would not be capped. However, in order to account for the possibility of a period of high prices persisting for more than one year, it would be necessary to make some estimate of such an eventuality at the time and leave some resources of the fund for the second high-price year.56 This would provide the basis for the necessary capping of lending during the current year.

134. Even assuming that a price hike lasted for only one year, allocating the resources among all interested countries would require access criteria to determine each country's entitlement. If borrowing from the revolving fund took place ex-post based on excess import bills, funds could only be released when all eligible countries had indicated their intention to draw on the revolving fund, and submitted the information required to document their excess import bill. Only after this information was received and verified could the amount available for each country be calculated. Some cut-off point for such submissions would have to be established to avoid undue delays.57

(f) Data requirements

135. If the fund were to function as an ex-post borrowing facility, the beneficiary countries would have to submit relevant data to document their need for short-term financing. Depending on the design of such a revolving fund, data requirements would vary, but the type and source of data to be used for requests and reporting would have to be well defined to avoid discrepancies in methods used by different countries, limit ambiguities as to access requirements, and reduce possibilities for data manipulation. For example, if the revolving fund provided loans ex-post where import bills had risen above a certain threshold in a given year, countries would have to submit requests including data with respect to the value of commercial food imports. This would require collecting price and volume data, normally from customs records. Where electronic databases can be used, this would likely not be too burdensome, but where such facilities are not available, it might take several months until the complete information can be submitted. These data would be difficult to verify, especially since official statistics are often published with a delay of one or more years, and normally use average prices to calculate import values. Although not impossible, we point out that this would require administrative efforts from potential recipient countries and from the staff of the revolving fund, and would lead to delays. Disbursements from the revolving fund could not begin until data had become available in eligible LDCs and NFIDCs, countries had submitted the relevant information, and the revolving fund staff had evaluated and verified the requests.

(g) Impact on private operators

136. In a market environment where many governments in developing countries have reduced their stake in the food trade or withdrawn entirely, the question of securing appropriate trade finance for private operators is more critical.

55 G/AG/W/49/Add.1 (dated 23 May 2001), page 4.56 Given the ex-post nature of lending, by the time this evaluation was done some information on the

market conditions during the second year would be available (assuming that a price spike would not persist for more than two years).

57 In this context, see also section (f) below.

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137. If in a situation where a state-owned enterprise has no exclusive import rights but government allows parallel imports of foods by private operators, the revolving fund were to provide access to concessional financing exclusively to the state-owned enterprise, there would be a risk for the revolving fund to distort the conditions of competition. These distortions could affect the viability both of providers of commercial credit and private importers. Any financing scheme in a situation where private food importers and a state-owned enterprise coexist would need to avoid to adversely affect the viability of the private sector. How a concessional finance facility could operate in such a way is not clear to the Panel, nor is it clear how access to the revolving fund could be equitably apportioned in countries where all imports are carried out by the private sector.

(h) Impact on food production in LDCs and NFIDCs

138. In their responses to questions posed by the Panel, Australia and Canada raised some concerns that the revolving fund might lead to negative effects on domestic food production in LDCs and NFIDCs. Australia also pointed out that revolving-fund loans risk entrenching developing country dependence on developed countries for their food requirements. In its view, if the revolving fund worked as a rebate for food purchases on the open markets, it could act both as a consumption subsidy and a production tax in recipient countries, and thus diminish the value of genuine reform in the agriculture sector.58

139. In the Panel's view, the impact of the revolving fund on domestic food production would depend on the lending conditions. If lending conditions were concessional (as envisaged in the proposals), there could be a potential for a distortionary effect on domestic production, assuming the subsidy implicit in the concessional loan was passed on to the domestic market.59 The revolving fund could nevertheless be designed in such a way to avoid distortions, and in any case the import volumes financed by revolving fund resources would be marginal.

(i) Accumulation of debt

140. In their responses to our questions, Australia and Canada noted that loans from the revolving fund may contribute to the unsustainable debt burdens faced by many developing and least-developed countries.60 The Panel accepts that giving long-term credit for the importation of goods that are for immediate consumption might in effect result in repayment difficulties, especially for countries that already face debt-servicing problems.

141. In addition, potential lending under the proposed revolving fund might not be consistent with a country's external debt ceiling incorporated in an IMF-supported programme. Performance criteria relating to the amount and maturity structure of foreign borrowing are typical features of IMF arrangements. Their purpose is to limit external borrowing to amounts and terms consistent with avoidance of future debt-servicing difficulties, to ensure a viable balance of payments position over the medium term.61 Depending on the design of the revolving fund, it is possible that it could lead to complications with external debt ceilings if the country has an arrangement with the IMF. Even

58 See Canada's and Australia's responses to question 4 (Annex 3).59 If the implicit subsidy was captured by the government, there might be other problems with this type

of rent.60 See Australia's and Canada's responses to question 4 (Annex 3).61 Performance criteria, usually based on selected economic and financial variables, are used to monitor

program implementation and achievements. A criterion relative to official and officially guaranteed debt is frequently used. Unless a debt instrument is specifically excluded, it is considered to be under the performance criterion. For medium- and long-term debt, the performance criterion is usually formulated in terms of debts contracted or authorized; for short-term debt, the limit is usually formulated in terms of net disbursements or net changes in the stock of external debt. Concessional loans including a grant element of at least 35 per cent are usually excluded from the ceiling; in some cases, the limit requires a larger grant element.

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where this is not the case, revolving fund loans could increase a country's debt servicing obligations and thus contribute to a debt problem in some cases.

142. Conversely, as Tunisia pointed out in its response, financing of food imports through credit at market conditions also contributes to foreign debt.62 To the extent that commercial credits are at less favourable conditions, its impact on a countries' debt situation may in fact be more severe.

(j) Relationship to long-term development assistance

143. In its responses to the Panel's questions, Canada notes that the concept of the revolving fund fails to establish a link between short-term financing needs and long-term development assistance. Japan and the United States stress that more emphasis should be placed on increasing productivity in the agricultural sector of LDCs and NFIDCs, and on good governance. The revolving fund could result in a diversion of aid resources away from longer-term assistance that would contribute more to sustained food security. Canada and the European Communities indicate that the resources that donors contribute to the revolving fund would not necessarily be resources additional to those available for other development assistance activities. In Australia's view, establishing the revolving fund would not be the most effective use of available resources. In addition, if the revolving fund encouraged food purchases during times of high prices, this might result in an inappropriate use of government funds.63

144. Conversely, in its answers to the Panel's questions, Tunisia makes the point that in the absence of short-term financial assistance for dealing with surges in import bills, governments may have to divert resources away from development projects. During the 1995/96 price hike, the Tunisian Government had to mobilize financial resources to the detriment of projects aimed at promoting the use of natural resources and improving competitiveness in the agricultural sector.64

145. Although governments might need to use scarce resources to purchase food at high prices, where there is a need for food, the Panel does not see why this would constitute an inappropriate use of government resources. We note that, from the donors' perspective, establishing a revolving fund might involve diverting resources from longer-term development projects, including activities designed to enhance long-term food security. From the recipients' perspective, if short-term food needs are not met, long-term development may be compromised since human development and economic development are in fact two sides of the same coin. Much would depend on the specific circumstances of the countries concerned and the design of a revolving fund.

(k) Governance and administration issues

146. In their responses to the Panel's questions, several donors raised concerns related to governance and administration of the proposed revolving fund. They note that the revolving fund would be costly to administer.65 In the Panel's view, administering the revolving fund will inevitably have a cost. Elaborating the country-specific criteria for access to loans from the fund would require a large, albeit one-off administrative effort, and dedicated staff would be required to administrate the fund.

147. Another point raised in donors' responses is that the revolving fund might be subject to pressure from donors in terms of which country is to benefit from the fund and tying financial

62 ? See Tunisia's replies to questions 2 and 3 (Annex 3).63See Japan's responses, para. 4 and Australia's and the United States' responses, introduction, European

Communities and Canada's responses to question 4, Australia's responses, introduction (Annex 3).64 See Tunisia's response to question 2 (Annex 3).65 See Australia's and the European Communities' responses to question 4, and the United States

response to question 6 (Annex 3).

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contributions to reciprocal purchases from the recipient countries (tied aid).66 In the Panel's opinion, existing mechanisms including bilateral aid are less transparent and provide more opportunities for pressure from donors than would be the case if a revolving fund were to be established in a multilateral context.

148. In their proposals, the sponsoring countries envisage that the revolving fund would be administered by a small staff overseen by a management board comprising representatives from the international organizations, donor countries and beneficiaries. In its contributions to the Panel, the FAO proposes IFAD as a possible institution to administer the revolving fund since it has the requisite logistics, staff and experience in managing funds. This idea was taken up by several of the proponents in the discussions regarding the revolving fund proposal that were held in the regular meetings of the Committee on Agriculture.67 The Panel does not regard it as part of its task to express a view on whether IFAD would be an appropriate organization to administer a revolving fund of the kind discussed in its report.

D. OTHER OPTIONS

1. An ex-ante food import financing scheme

149. In the light of our discussions above, an ex-ante financing mechanism might be more effective in meeting the objectives of the proposals than would be an ex-post financing scheme. This section outlines some elements of such an ex-ante financing facility.68 We note that any scheme with a trigger mechanism based on factors within the control of governments would entail scrutiny of each request for disbursement and hence would probably be linked to some conditionality. Therefore, a trigger mechanism based on exogenous factors, for example, higher world market prices for food or reduced availability of food under concessional terms, might be preferable.

150. Since world market prices for food are available on a real-time basis, it would be possible to establish, for each LDCs and NFIDC, a baseline price index, and monitor the changes in these indices. An increase in the index of, for example 20 per cent, could then trigger the availability of new funds. Data on concessional food imports and food aid are also available on a reasonably timely basis, and a reduction of the volume of food available under such schemes can in all likelihood be determined in advance.

151. An ex-ante scheme to facilitate food imports could consist of an international fund which could be used to back up country-level credit lines. The availability of country credit lines could be triggered by signals such as described above. This could be structured in many different ways: from a financing perspective, the ideal model would be for the local credit line to act as a pass-through for the request for hard currency, with the loan then being used to pay the exporter directly since this avoids a whole series of risks, and no hard currency goes to the country.

152. The local credit line operator would then collect the local currency payments. There are many risks that would need to be covered. Default rates in poorly constructed schemes can be very high. One important risk is related to price levels. If international prices have increased, the local trader will have to increase local prices. This may be difficult, and moreover, the government may intervene to reduce consumer prices (for example, by reducing applied tariffs). The local trader thus runs a serious risk of making a loss on the transaction – which greatly increases the risk of default on the credit. Thus, it may be advisable to include, as one of the core functions of the international fund, a price risk management component, which will make it possible to keep local food prices stable.

66 See Australia's, Argentina's and the European Communities' responses to question 4 (Annex 3).67 See for example the summary of the discussion in the regular meeting of the Committee on

Agriculture on 29 June 2001, contained in Annex 1 of G/AG/10, dated 6 July 2001.68 This section is based on ideas by panellist Lamon Rutten (UNCTAD). See Annex 7.

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153. Furthermore, the entities administering the local credit lines (presumably, local banks) need the skills to operate them, thus requiring some training in how to finance food imports. Such training would, at the same time, make it easier for these banks to finance food imports on their own account.

154. While the implementation of such a fund, if appropriately designed, could have lower default risk and fewer administrative requirements, it would be faced with similar difficulties as an ex-post borrowing facility in terms of over-drawing and accumulation of debt.

2. Commodity price risk management

155. The International Task Force on Commodity Price Risk Management (ITF), with its secretariat in the World Bank, is currently piloting mechanisms to provide commodity price insurance to smallholder farms in developing countries. This could possibly be extended to consumers in food importing countries as well. This insurance scheme, while varied in its specific application by country, is focused on adapting the commodity price risk management tools commercially available on international markets to provide a form of price insurance to producers (and consumers in the case of insuring import prices).

156. Price risk management instruments could be readily used by large purchasers of foodstuffs, either private sector commercial importers or government agents (food corporations or state-owned enterprises). They could also be used by governments to insulate safety nets from budgetary crises caused by food price increases. That is, a government agency, which knows that its expenditures will increase when food prices rise (either because it provides food in-kind and must procure the higher-priced food itself or because it must give higher income support to the poor) can purchase options that would pay out when import prices increase beyond a certain level. This would then insure that it will have the budgetary resources it requires, without creating an unanticipated fiscal burden on the government. The price insurance would protect them from short-term fluctuations in price, but not against long-term downward trends.

3. Integrated Framework studies

157. The experience submitted by the four NFIDCs, which have responded to the Panels questions, for the period of high world market prices in 1995-97, suggests that the strategies to cope with food import financing difficulties are likely to be country-specific. Since most LDCs are net-importers of food, the constraints faced by their import sectors merit close attention in devising a trade development strategy.

158. A possible mechanism for identifying country-specific solutions are the diagnostic trade integration studies to be undertaken in the context of the Integrated Framework (IF). The broad terms of reference for integration studies focus on the constraints that the LDC trade sectors face. 69 They should be sufficiently flexible to cover the food security implications of trade development, and, the availability of, and access to, adequate financing, in particular by the private sector, to support food imports. Diagnostic trade integration studies in LDCs are undertaken under the leadership of the World Bank with the support of the IMF, ITC, UNCTAD, UNDP and WTO. The agreed terms of reference by the IF "core" agencies may benefit, in undertaking the studies, from drawing on the expertise of other agencies.

159. Trade integration studies have been concluded for Cambodia, Madagascar and Mauritania, to be followed by such studies in Burundi, Djibouti, Eritrea, Ethiopia, Guinea, Lesotho, Malawi, Mali, Nepal, Senegal and Yemen. It is envisaged to further extend the country coverage of trade integration studies. In this respect, we note the following joint statement by the heads of the above agencies: 70

69 See also document WT/IFSC/W/2 (dated 15 August 2001) by the IF Steering Committee.70 See document WT/IFSC/1 (dated 28 February 2002).

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"We acknowledge requests from several non-LDC low-income economies to respond to their trade development needs through the extension of the benefits of the IF. We encourage those agencies and donors in a position to do so, without diverting resources from the IF nor distracting from the priority accorded to LDCs, and acting outside the institutional framework of the existing IF, to consider favourably these requests to provide support for mainstreaming and for trade-related technical assistance, building on the IF model."

III. CONCLUSIONS AND RECOMMENDATIONS

160. In the context of the Marrakesh NFIDC Decision, the Panel has addressed increased financing needs for food imports arising from higher world market prices for food, increasing food deficits or a shift from food imports on concessional terms or food aid to commercial food imports. It has reached the following conclusions:

(a) There has been no clear upward trend in the aggregate food import bills of LDCs and NFIDCs since the beginning of the WTO reform process in agriculture in 1995. In this connection, we note that "normal levels of commercial imports of basic foodstuffs" are usually seen in terms of volumes rather than values.

(b) However, in the period of escalating world market prices for cereals (1995-97), there was a surge in the aggregate cereal import cost of LDCs and NFIDCs. During this period, the aggregate volumes of cereal imports was maintained by the NFIDCs, but not by the LDCs. The Panel did not examine the reasons for this, including whether this may have reflected improved domestic cereal supply situations in some LDCs in that period.

(c) In the critical period of 1995-97, a significantly increased proportion of the combined cereal import volumes of LDCs and NFIDCs was sourced commercially, while the volume of food aid shipments was lower. Even after the critical years, commercial cereal imports have remained at higher levels than before the high-price period. This illustrates the contribution that predictable levels of targeted food aid supplies in times of rising world market prices for cereals can make to meeting the food needs of LDCs and NFIDCs.

(d) The cereal import bills for LDCs and NFIDCs have somewhat "normalised" since 1998/99, as prices on world cereal markets have stabilised (albeit at generally depressed levels) while food aid shipments increased.

(e) There was a coincidence of the entry into force of the WTO commitments in agriculture and surging world market prices for cereals in 1995-97. The weight of the evidence available to us leads us to conclude that the surge was triggered by a number of short-term and long-term factors, which were only partly related to the Uruguay Round reform programme in agriculture. In particular, it cannot be excluded that some reductions in grain stocks may have been made in anticipation of export subsidy reduction commitments entering into force in 1995.

(f) Export subsidies have been used in periods when world market prices have been low rather than when world prices have been high. Since the use of export subsidies has been inversely related to world prices, they could not have been of significant value to countries experiencing difficulties in financing food imports in years of high prices as experienced during 1995-97.

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(g) Price fluctuations unrelated to the WTO reform process on agriculture such as those experienced during 1995-97 are likely to reoccur.

(h) The four NFIDCs that have responded to our questions (Cuba, Egypt, Jordan and Tunisia) encountered real difficulties in financing normal levels of commercial food imports, although they appear to have little relation with the Uruguay Round reform programme in agriculture. Their experiences show that the coping strategies differed considerably from country to country, and that access to the existing multilateral financing facilities has not formed any significant part of these strategies, except in the context of Jordan's economic crisis.

161. The Panel has examined the terms and conditions of existing facilities of the international financial institutions to which LDCs and NFIDCs could have recourse in order to address short-term financing difficulties of commercial food imports and reached the following conclusions:

162. The existing multilateral financing facilities assess the need for financing in the context of the balance-of-payments situation of the country concerned. In situations where private sector food importers are experiencing financing difficulties, such difficulties may not be accompanied by balance-of-payments problems. In these circumstances, balance-of-payments support will not necessarily solve the food financing problem when imports are needed.

163. We note that access to the resources of the multilateral financial institutions is not available to Cuba and Tuvalu since these countries are not members of the IMF and the World Bank.

164. With respect to the CFF, the principal financing facility of the IMF in the event of temporarily higher food prices, we conclude as follows:

(a) Access to the CFF involves, in most instances, conditionality. Approximately 40 per cent of the countries covered by the Marrakesh NFIDC Decision currently have arrangements with the IMF. Since these countries have accepted certain conditionality, it is possible that they could have access to compensatory financing on the basis of their existing IMF-supported programme, without having to accept "additional" conditionality. Stand-alone access to the CFF is possible without entering into an arrangement involving conditionality if, apart from the cereal import excess, the balance-of-payments position of the country concerned is satisfactory.

(b) The interest rate of the CFF, currently 3.05 per cent per annum, is more favourable than that available from commercial banks for most LDCs. However, the CFF interest rate is higher than that of the IMF's Poverty Reduction and Growth Facility, under which the IMF expects most LDCs to borrow. Many LDCs have Poverty Reduction and Growth Arrangements. Country programmes under the Poverty Reduction and Growth Facility are reviewed twice annually and could be adjusted to respond to balance-of-payments difficulties related to a surge in food import costs.

165. The World Bank does not have facilities that are specially designed to help countries cope with short-term difficulties in financing food imports. However, the World Bank provides loans to countries that face emergency situations, as well as adjustment loans that can provide balance-of-payments support for critically needed imports, including food. Access to these facilities can imply an element of conditionality.

166. Among the regional financial institutions, the Arab Monetary Fund (AMF) has advised the Panel that Compensatory Loans are available to AMF member governments experiencing an unexpected balance-of-payments deficit arising from an increase in agricultural imports. A

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Compensatory Loan is provided on similar terms and conditions to the CFF of the IMF. Since the product coverage of AMF facility appears to be wider than the IMF facility, the former might be an alternative for AMF member countries.

167. We have examined the concept and feasibility of the proposal for the establishment of a revolving fund. In this respect, we conclude as follows:

(a) Most government-owned food import agencies in developing countries have been disbanded or exposed to competition from private sector importers. A revolving fund would therefore need to have appropriate mechanisms to provide financing to all importing enterprises (both public and private) in the countries concerned to ensure that they can secure commercial imports at reasonable borrowing cost during periods of rising world market prices for basic foodstuffs.

(b) If funds from the revolving fund were to be made available ex-post, i.e. after importation, to countries affected by excessive import payments, disbursements would allow them to reconstitute their foreign exchange reserves that have been depleted through higher food import bills. In this respect, the revolving fund proposal has similar characteristics as the CFF of the IMF.

However, given the prevalent system of food imports in developing countries, a fund that would provide ex-post loans would have little or no impact on the ability of private traders to continue importing food. Local traders who need to import more food need funds, or new credit lines, at once. The possibility, not certitude, that one or two years in the future, their governments will receive a new loan is unlikely to influence the willingness of international trading companies or banks to provide them affordable loans when needed. Moreover, governments are unlikely to authorize a new, dedicated credit line for food imports without being certain that the disbursements under this credit line will be refinanced from an international fund credit line. In the view of the Panel, the proposed revolving fund, if it were to operate as an ex-post borrowing facility would be of limited value in reducing short-term financing difficulties. The proposed revolving fund would be of potentially greater value to the countries concerned if it were to operate as an ex-ante borrowing facility. While the Panel considered some of the elements of such an ex-ante financing mechanism, it did not address its operational modalities and cost implications in any detail.

(c) Import bills as a trigger for a revolving fund are problematic because they are partly determined by government actions. Some country-specific review of macroeconomic management and sectoral policies might be required, if such a monitoring mechanism is not already in place. It may be necessary to consider adequate safeguards to ensure the viability of such a revolving fund. The practical arrangements for such a fund’s operation would therefore require certain preconditions for lending, with similar characteristics to those of the CFF of the IMF.

If the triggering mechanism were to be based on exogenous factors, such as increases in world market prices and less favourable terms in financing food imports, no such preconditions for lending are necessary; and one positive effect would be that funds could be made available faster. However, if access to a revolving fund were based on such an exogenous trigger as prices, some countries which do not need short-term financial assistance might obtain access to such a fund. The eventual negative impact of this would need to be mitigated by setting the fund’s lending terms in accordance to the rates normally available in the market, that is, at a non-concessional rate.

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(d) The viability of a revolving fund would require monitoring to avoid defaults. Again, appropriate conditionality would be necessary to reduce defaults.

(e) Demand for funds from a revolving fund may exceed available resources, particularly during times of high world market prices for food. Depending on the capitalization of the fund, modalities would have to be established for rationing available resources.

(f) Drawings from a revolving fund might increase some countries' external debt, possibly resulting in difficulties related to a country's debt profile and the external debt ceilings agreed in the context of an IMF arrangement.

168. In the light of our conclusions above and having regard to the Marrakesh NFIDC Decision, we make the following recommendations concerning ways and means for improving access by LDCs and NFIDCs to multilateral programmes and facilities to assist with short-term difficulties in financing normal levels of commercial imports of basic foodstuffs:

(a) that in the context of the impending review of the CFF of the IMF, consideration be given by member governments to

(i) extending the product coverage of the facility to cover all basic foodstuffs,

(ii) clarifying access in the context of an existing arrangement with the IMF,

(iii) providing a greater degree of automaticity without requiring an IMF-supported programme,

(iv) reviewing the procedures and timeliness of disbursements, as well as encouraging governments to come forward with purchase requests;

(b) that in the light of the limited potential usefulness of an ex-post revolving fund to support food imports in times of need, the feasibility of an ex-ante financing mechanism aimed at food importers be explored;

(c) that the terms of reference of the Diagnostic Trade Integration Studies to be undertaken in the context of the Integrated Framework include, as appropriate and if requested by the beneficiary country, the items of

(i) food security implications of trade development strategies,

(ii) availability of, and access to, adequate financing, in particular by the private sector, to support food imports;

(d) that strategies of commodity price risk management from the perspective of developing country food importers be addressed by the Commodity Price Risk Management Group of the World Bank.

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ANNEX 1

Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries

1. Ministers recognize that the progressive implementation of the results of the Uruguay Round as a whole will generate increasing opportunities for trade expansion and economic growth to the benefit of all participants.

2. Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least-developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.

3. Ministers accordingly agree to establish appropriate mechanisms to ensure that the implementation of the results of the Uruguay Round on trade in agriculture does not adversely affect the availability of food aid at a level which is sufficient to continue to provide assistance in meeting the food needs of developing countries, especially least-developed and net food-importing developing countries. To this end Ministers agree:

(i) to review the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention 1986 and to initiate negotiations in the appropriate forum to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme;

(ii) to adopt guidelines to ensure that an increasing proportion of basic foodstuffs is provided to least-developed and net food-importing developing countries in fully grant form and/or on appropriate concessional terms in line with Article IV of the Food Aid Convention 1986;

(iii) to give full consideration in the context of their aid programmes to requests for the provision of technical and financial assistance to least-developed and net food-importing developing countries to improve their agricultural productivity and infrastructure.

4. Ministers further agree to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of least-developed and net food-importing developing countries.

5. Ministers recognize that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties. In this regard Ministers take note of paragraph 37 of the report of the Director-General to the CONTRACTING PARTIES to GATT 1947 on his consultations with the Managing Director of the International Monetary Fund and the President of the World Bank (MTN.GNG/NG14/W/35).

6. The provisions of this Decision will be subject to regular review by the Ministerial Conference, and the follow-up to this Decision shall be monitored, as appropriate, by the Committee on Agriculture.

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ANNEX 2

Proposal to Implement the Marrakesh Ministerial Decision in favour of LDCs and NFIDCs1

Submitted by Côte d'Ivoire, Cuba, Dominican Republic, Egypt, Honduras, Jamaica, Kenya, Mauritius, Morocco, Pakistan, Peru, Senegal, Sri Lanka, St. Lucia,

Trinidad and Tobago, Tunisia and Venezuela

We are grateful to the Vice-Chairman of the WTO Committee on Agriculture for inviting concrete proposals by the NFIDCs and the LDCs on the relevant points under paragraph 21 of the Draft Ministerial Declaration of 18 October 1999 related to the implementation of the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Process on Least-Developed and Net Food-Importing Developing Countries. We look forward to the following proposals being given immediate and favourable consideration to allay the genuine concerns of the NFIDCs and LDCs and effectively implement the relevant Ministerial Decision which is a legal commitment of WTO Members under Article 16 of the Agreement on Agriculture. We are confident that the discussions in the Committee on Agriculture on this issue will lead to the submission of positive suggestions to the General Council for adoption.

The main objective of the Agreement on Agriculture was to decrease the structural surpluses generated in the past by production and trade-distorting policies in agriculture. It is, therefore, obvious that if this fundamental objective of the AoA is successful, the effect for the NFIDCs and LDCs will be an increase in the cost of their food imports. The period since the UR came into being provides a good example for examining the experience of NFIDCs and LDCs as regards their food import bills.

According to the data provided by FAO (see Table I), these two groups of countries are facing much higher cereal import bills than before. Taking the two years prior to 1995 as a benchmark (i.e. the average of the two marketing years 1993/94 and 1994/95), the increase in the cereal import bills in 1995/96 to 1996/97 amounted to 36.6 per cent for the two groups of countries taken together. Nearly all of this increase (35.1 per cent) was due to increases in the per unit cost of imported cereals, as volumes changed only marginally. Moreover, even after the world prices returned to more normal levels since the 1997/98 marketing year, the cereal import bills of these two groups of countries remained at a much higher level than they were prior to 1995.

In view of the above, the causality between policy reforms under the Uruguay Round and higher food import bills for the LDCs and NFIDCs is clear.

Proposals for Implementation

The Ministerial Decision includes three mechanisms to respond to the difficulties faced by the LDCs and NFIDCs: food aid, access to financing facilities, and technical and financial assistance to increase agricultural productivity and infrastructure. We have the following proposals in respect of each of these three mechanisms.

1 G/AG/W/49, G/AG/W/49/Add.1 and G/AG/W/49/Add.1/Corr.1.

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Food Aid

Unfortunately, it has been observed that food aid is lower when world market prices are high and hence more food aid is needed, and vice versa. Moreover, the new Food Aid Convention (FAC) approved in June 1999 has lesser volume of commodity commitments (4.895 million tonnes, in wheat equivalent) than under the previous 1995 FAC (5.35 million tonnes, in wheat equivalent) and 1986 FAC (7.5 million tonnes).

We therefore, propose that:

(i) all food aid should be fully in grant form;

(ii) donor countries should commit greater commodity volumes under the Food Aid Convention;

(iii) the donor countries commit that the food aid volumes will increase in years of high world market prices when such aid is most needed. This can be achieved by providing appropriate flexibility in the Convention, e.g. carry forwards from periods of low prices and hence of low demand for food aid and call forwards from next year(s) contributions under the FAC.

Access to Financing Facilities

The NFIDCs and LDCs need access to special financing facilities to maintain the normal volume of food imports during times of high market prices without further jeopardizing their balance-of-payments position. Experience has shown that the existing facilities under the Bretton Woods institutions, due to the conditionalities attached and other technicalities, have not been used by the countries in need of such financing. Moreover, the required financing facility should have some corresponding link with physical stocks of food grains. We therefore propose that:

(i) FAO, in the light of its experience and work in this area, should be asked to provide estimates of the volumes of normal annual food imports that are needed by individual NFIDCs and the LDCs to maintain consumption levels, and assess the assistance needed to import these quantities;

(ii) an inter-agency Revolving Fund should be set up with two components. The first, and variable component of this Fund (to comprise existing and/or new financing facilities as appropriate), will be to ensure that adequate financing at concessional terms is made available to the NFIDCs and LDCs in times of high world market prices;

(iii) the producing countries commit, in years of plentiful supplies as we are witnessing now, to put aside over and above volumes required for food aid, emergencies and essential nutritional assistance projects, sufficient national food reserves in accordance with the normal import requirements of the NFIDCs and LDCs as indicated by FAO;

(iv) these reserves should be released to the LDCs and NFIDCs at reasonable prices, in times of high world market prices, to help them, together with available food aid, meet their normal import requirements.

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Technical and Financial Assistance

Further, we consider it essential that technical and financial assistance be provided to the NFIDCs and the LDCs to increase agricultural productivity and infrastructure. This will address directly the very problem responsible for the heavy dependence of LDCs and NFIDCs on the world market. We, therefore, propose that:

(i) the second, and fixed component of the above-mentioned Revolving Fund should provide technical and financial assistance to NFIDCs and LDCs for specific projects linked to improving agricultural productivity and related infrastructure;

(ii) this technical and financial assistance to be provided to the NFIDCs and the LDCs should be over and above the regular bilateral and multilateral activities of donors in this area.

Binding Commitments and Effective Monitoring

To ensure certainty and predictability in respect of food aid, financing, and technical and financial assistance, it is recommended:

(i) all major developed exporting countries should put aside supplies, under national food reserves, specifically earmarked to be released to the NFIDCs and LDCs under reasonable prices during years of high world prices;

(ii) developed countries and international development and financial institutions (World Bank IMF, UNDP) should contribute to the financing of the two components of the Revolving Fund which, in turn, should be managed by an inter-agency arrangement with the full involvement of FAO;

(iii) the commitment of WTO Members regarding volumes of food aid, volumes of physical reserves, contributions to the two components of the Revolving Fund are inscribed in their country schedules as binding and legally enforceable;

(iv) the WTO Members should make regular annual notifications in respect of these commitments to the Committee on Agriculture of the WTO.

We are willing to enter into discussions with our trading partners in good faith and with a view to reaching effective solutions. Depending on these discussions, we will be happy to provide further technical elaboration of the points made in this proposal.

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Table I

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Operationalizing the Marrakesh Decision: A New Approach to Short-Term Financing Requirements (G/AG/W/49/Add.1)

Introduction

The aim of this paper is to serve as a background document for the Roundtable on Operationalizing the Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Process on Least-Developed Countries and Net Food-Importing Developing Countries (hereinafter referred to as the Marrakesh Decision).

The Roundtable seeks to bring together all the parties concerned (LDCs, NFIDCs, donor countries, the WTO, FAO, IMF and World Bank), in an effort to discuss the operationalization of part of the proposals presented by a number of WTO Member states (document G/AG/W/49), namely to create a new fund whose purpose is to provide the 'safety net' promised by the Marrakesh Decision, under terms and conditions compatible with the latter. It is hoped that the Roundtable would produce an agreement on forging forward with ideas for financing LDC/NFIDCs, to be presented at both the autumn session of the IMF/World Bank and the WTO Ministerial in November 2001 for implementation.

Sincere thanks is hereby extended to Mr. Yoichi Suzuki, Minister Plenipotentiary at the Mission of Japan to the WTO, whose untiring efforts as Vice-Chair of the Committee on Agriculture at the WTO were instrumental in revitalising a subject long-thought dead and organising the Roundtable. Special gratitude also goes to Frank Wolter and Thomas Friedheim, Director and Counsellor respectively of the Agriculture Division and their staff, for their help and cooperation with the current effort. Last, but most definitely not least, to all the men and women of the delegations of Member states who have, over the years, kept the flame burning. To them we owe our appreciation, gratitude and thanks. May the Almighty bless our efforts.

Why the Decision? And Why the Roundtable?

There is little argument that agriculture is - and will remain for the foreseeable future - the essential sector for the majority of LDCs and NFIDCs, whose impact spills over from the economic into the social and political arenas. Food security is also a major policy objective of these countries, particularly as they depend - to a smaller or larger extent - on importing a sizeable proportion of their populations' food requirements.

In order for LDCs and NFIDCs to sign onto the Agreement on Agriculture (AoA) in 1994, the Decision was taken by Ministers attending the launch of the WTO, with the express aim of providing a 'soft landing' for those Member states whose economies were most liable to be affected from the liberalisation of agriculture under the AoA. Particularly, the Decision focused on the concept of 'availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions'. Hence, the Decision proposed three short-to-medium term response mechanisms (more food aid in grant form, S&D treatment on export credits, short-term credit facilities), as well as a longer-term mechanism (technical & financial assistance to improve agricultural productivity and infrastructure).

In view of the fact that the Decision has been a subject for little more than 'discussion' and 'review' for the last six years, the Roundtable, therefore, aims to:

- Galvanise all concerned states and parties into adopting a more practical and pragmatic work programme aimed at moving from the 'discussion' phase to the 'doing' one; and

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- Study the proposal presented herein to address the needs of LDCs and NFIDCs in their quest to satisfy their basic foodstuff requirements from the world market; under a mix of terms and conditions that may be considered reasonable, with a view to presenting a workable plan for implementation by the IV Ministerial Conference in Doha.

In order to visualise the urgency and importance of the issue at hand, a few figures would be needed. Drawing on figures published by FAO, the WTO2 and other international sources, the following facts stand out:

1. The combined populations of the 49 LDCs and 20 NFIDCs broke through the 1 billion mark in 1998, representing over 22 per cent of the combined population of all developing countries. Meanwhile, undernourishment touched around 38 per cent of LDC populations, and 17 per cent of those of NFIDCs.

2. Per capita incomes of LDCs in 1997 were 17 per cent of the average of developing countries, while the p.c.i. for the NFIDCs in the same year stood at about 70 per cent of the developing country average.

3. The combined cereals import bills for LDCs and NFIDCs rose by over 10 per cent from 1993-95 to 1998/99, with a peak rise of 42.6 per cent in 1995/96. It is forecast that the year 2000/01 will see a further rise of around 3 per cent ($800 million) in the value of cereal imports for these countries aver the figures for 1999/2000.

4. Food aid deliveries to LDCs and NFIDCs fell from 5.65 million MTs in 94/95 to an estimated 4.59 million MTs in 99/00; a drop of around 19 per cent. It is notable that the volume of food aid to LDCs in 1999 represented 99 per cent of the 90-99 ten-year average, while that for NFIDCs was only around 63 per cent of said average - compared to a 60 per cent rise in food aid deliveries to 'other' countries during the same period. As to the concessionality of food aid, there remains at least one donor country which does not yet provide such aid on a 100 per cent-grant-basis.

5. The volume of commercial imports by LDCs and NFIDCs rose from 35.2 million MTs in 94/95 to an estimated 42.9 million MTs in 99/00 (a rise of over 21 per cent), with a further increase of 750,000 MTs forecast for 2000/01.

6. Although cereal import bills are now thankfully lower than the peaks reached in 1995/96, they still remain at a higher plateau than the period prior to 1994/95.

Scope and Magnitude of the problem

A recent FAO study3 concluded that the inadequacy of physical supplies of basic foodstuffs on world markets are not currently an issue for reflection, and that the real problem lies in the conditions of access facing LDCs and NFIDCs in obtaining their food requirements. The study also concluded that, in view of the language used in formulating the Decision, the triggering mechanisms for 'operationalising' the Decision should be based on the totality of effects and factors, i.e. on unexpected levels of food import bills of LDCs and NFIDCs on an individual basis, rather than

2 'Implementation of the Decision on Measures…', document no. G/AG/W/42/Rev.3, WTO, 31 October 2000; and 'Towards Improving the Operational Effectiveness of the Marrakesh Decision', Discussion Paper no.2, FAO, Rome 2001.

3 'Towards improving the Operational Effectiveness….', FAO, op. cit, pg. 4.

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limiting them to individual factors that lead to the outcome (e.g. rises in world market prices, declines in food aid deliveries, and so on).

Based on these conclusions, the study went on to compute the magnitude of excess import bills for the period 1989-1998 based on 5 per cent and 10 per cent alternative thresholds. It concluded that, for all food items and 46 LDCs and 19 NFIDCs covered by the Decision, the aggregate "excess" food bill in the 'maximum' year (1995/96) over the mean of the period was $900 million (on the 5 per cent rule) and $605 million (based on the 10 per cent rule)4.

Availability of Financial resources

The Decision foresees the need of LDCs and NFIDCs to address both short-term financing ('to cover difficulties in financing normal levels of commercial imports') and a longer-term financial need ('to improve their agricultural productivity and infrastructure').

On the short-term front, allusion has been made to the availability of financial resources under the IMF's Compensatory Financial Facility (CFF). A recent evaluation undertaken by the IMF itself points to the fact that 'there has been very little use of the CFF in recent years' 5. In fact, reliable evaluative studies has come to the conclusion that, to make the CFF compatible with the terms of the Decision, the CFF would need 4 adjustments:

1. Extend its coverage to all basic food imports (rather than cereals only).

2. Relaxation of its general conditionalities and rules on eligibility.

3. Streamline eligibility requirements for both LDCs and NFIDCs.

4. 'Concessionalise' its resources, both in terms of repayment periods and interest levels.

It is to be noted that the same study concludes that 'the CFF is not the most suitable instrument for addressing the problem .. (sic. to be addressed through the Marrakesh Decision)'6. Meantime, the role and operations of the World Bank in the provision of short-term financing for emergency food imports are not clear.

The longer-term requirement for multilateral financial resources is theoretically available through the World Bank's contributions to the Consultative Group on International Agricultural Research (CGIAR), estimated at $ 50 million in 19987, and other World Bank projects in the field of agriculture. No clear figures are available to quantify the long-term technical assistance and capacity-building programmes for LDCs and NFIDCs, or a detailed evaluation of their effectiveness in raising productivity and production – a key component of the assistance foreseen in the Decision.

To sum up, the financing required to address the 'short-term difficulties' is practically non-existent from any multilateral source on the terms - and under the conditions – foreseen in the Decision; while the longer-term financing needed to upgrade physical and human resources in agriculture are partially available via the World Bank.The New Fund

4 As shown in the FAO paper, the mean is the average for 1989-98 of the total "excess" import bills (i.e. the aggregate of all countries studied with import bills greater than 5 per cent or greater than 10 per cent above trend). Negative deviations from trend were not taken into account, since such deviations do not constitute a 'problem' to be addressed by the Decision.

5 'The Fund's Compensatory Financial Facility – Recent Developments', IMF Speaking points for the Geneva Roundtable on Selected Agricultural Issues, Geneva March 21st, 2001 pg.2.

6 Ibid.7 WTO document G/AG/GEN/31 of 15 December 1998, pg 23.

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This dearth of suitably conditioned short-term (<24 months maturity) financial resources leads us to believe in the need for a totally new approach for the future, to be based on the philosophy and intent of the Decision. It is, in fact, neither inconceivable nor unreasonable to assume that the 1995/96 surges could happen repeatedly in the future. The idea is for the creation of a special Food Financing Facility (F3), solely designed for the implementation of the Decision. The F3 could be visualised as follows:

(a) In view if recent experience, its resource base is estimated at around $1,200 million 8; to be drawn from a 'consortium' of multilateral financial organisations, G-7 and other donors, and major developed exporting Member states.

(b) The 'eligibility' of LDCs and NFIDCs to draw on the resources of the Fund would be decided on a country-by-country basis and in accordance with agreed-upon guidelines, and after a fair and factual computation/assessment was made of its requirements. Levels of each country's compensation package could be capped in periods of surges in import bills, in order to avoid harming the Fund's long-term financial viability.

(c) The resources available to the Fund could be 'recycled' or repayable, so as not to unduly inflate the capital of said Fund. In fact, in the years when import bills are amenable, the resources could be earmarked by donors, but not disbursed, with a view to the optimal utilisation of such resources. Repayments of financial resources drawn-down by beneficiaries would be effected under a medium-term scheme on terms more favourable than current open market conditions.

(d) The responsibility for the administration and management of the Fund would need to be centralised in a small bureaucracy; said bureaucracy to be overseen by a Management Board comprising representations from the WTO, FAO, IMF, World Bank, donor states as well as the beneficiaries.

This Fund would, obviously, not cover the longer-term requirements of LDCs and NFIDCs to improve their basic infrastructures and enhance agricultural productivity. In this respect, a call is made out to all donor parties to earmark a greater proportion of any multi- and bi-lateral aid programmes for such use. It was the vision of the signatories to the Marrakesh Decision to 'wean' recipients away from their food-aid 'dependancy'. This can only be achieved through a serious, concerted and cooperative effort aimed at improving levels of self-sufficiency of LDCs and NFIDCs – while maintaining the gains achieved in the agricultural reform process under the AoA, and spurring these countries towards greater engagement in future reform processes under the current negotiations under Article 20 of the AoA.

8 This figure was calculated on 2 years worth of credit facilities at the lower end level of $600 million, as per the FAO study.

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ANNEX 3

Replies by the Members involved to Questions Posed by the Panel

ARGENTINA

Q4. The Panel would appreciate your views concerning the concept and feasibility of the proposed Revolving Fund (question to all parties involved).

Reply

Documents G/AG/W/49 and G/AG/W/49/Add.1 clearly define the mechanisms provided for in the Marrakesh Ministerial Decision to address the difficulties which least-developed countries (LDCs) and net food-importing developing countries (NFIDCs) may experience as a result of the liberalization of trade in agriculture. This Decision is focused on the concept of the "availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions" by way of short- to medium-term response mechanisms, such as food aid in fully grant form and access to financing facilities, and longer-term response mechanisms, such as technical and financial assistance to improve agricultural productivity and infrastructure.

The second document suggests that the difficulties experienced by LDCs and NFIDCs with regard to the long-term financing required to improve their agricultural productivity and infrastructure would be partly resolved by the World Bank. Short-term financing requirements would not, however, be met. Food aid therefore tends to decline when the need is greatest, that is to say, when international prices are high, while financing from multilateral sources is practically non-existent. It was from this dearth of short-term financial resources that the proposal to set up a Revolving Fund, with the aim of establishing a food financing facility in compliance with the Marrakesh Ministerial Decision, was born.

Argentina, as a developing country, agrees with the concerns voiced in this document and considers it advisable for such an Inter-Agency Revolving Fund to be set up to assist LDCs and NFIDCs with their food import bills, provided that transparent methods are used to choose suppliers, thereby ensuring that imports come from open and competitive markets.

We should also mention that, in our opinion, permanent food donation programmes do not appear to be a viable solution in the long term, in particular if they are discretionary and depend on the donor countries' need to offload their surpluses. Agricultural sector development is a key element as regards both food supply and the generation of foreign exchange for the subsequent purchase of products which cannot be produced or which are inefficiently produced. This Fund must therefore be established with a view to anticipating LDC and NFIDC food requirements and eliminating trade barriers on agricultural products, such as tariffs and subsidies, in particular direct export subsidies, export credits, export credit guarantees and export credit insurance for agricultural products, all of which are particularly pernicious and harmful to developing country farmers.

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Q6. Assuming the proposed Revolving Fund were to be established, what guidelines should be envisaged in terms of eligibility and use of the resources by the recipient countries (question to donors)?

Reply

Revolving Fund guidelines relating to food aid recipient countries should restrict eligibility to NFIDCs, with priority within this group being given to LDCs.

Resources or funds for financing the purchase of foodstuffs by NFIDCs (with LDCs being given priority) should be used subject to the commitment and on the firm condition that the food-exporting countries from which foodstuffs will be purchased using resources donated to the Revolving Fund must be chosen in a transparent and fair manner.

Q8. What are parties' views on the role of food aid to attenuate short-term financing difficulties of food imports (question to all parties involved)?

Reply

The term "food aid" tends to evoke direct grants of food intended to meet the food requirements of one sector of the population of a resource-scarce economy rather than the conditions in which such aid is granted. There is therefore a need for transparent rules and stricter monitoring to be established for this kind of aid, in order to ensure that WTO export subsidy reduction commitments are not circumvented, while at the same time preserving the humanitarian dimension of food aid. That is to say, aid should be channelled to needy populations, not those in possession of resources.

The difference between dealing with temporary emergency situations and providing permanent assistance needs to be highlighted. The latter is not used for dealing with temporary emergencies, rather, to the contrary, it constitutes an unfair tool for displacing competitors from markets or disposing of subsidized surpluses.

We believe that the aid currently granted to address short-term difficulties is inadequate in practical terms and untimely, since when food prices fall, aid levels increase, whereas if prices rise, aid levels decline, when it should really be the reverse. Aid should, at the very least, increase when prices peak.

Faced with the reality of virtually non-existent and inadequate funding from multilateral sources to alleviate these countries' short-term difficulties, we concur with the proposal stemming from document G/AG/W/49/Add.1 relating to the adoption of an entirely new approach for the future, based on the creation of a Revolving Fund, subject to the conditions mentioned in our replies to questions Nos. 4 and 6 above.

We also feel that, when the proposals mention the financing of imports on concessional terms, some of these terms should be specified, namely, inter alia, interest rates will be market-related, but will be preferential in that their terms will be better than those available from commercial banks and the term of the credit will be equivalent to the shelf life of the product being financed by the Revolving Fund. There must, however, be a guarantee that the source of funding is independent of the origin of the goods.

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Q9. What are the views of parties regarding commodity price risk management instruments for the purpose of hedging against short-term price volatility (question to all parties involved)?

Reply

In our opinion, there are enough well-developed international commodities markets and exchanges to minimize the risk of short-term commodity price volatility. In a number of cases, commodity swaps have formed part of loan agreements, whereby the commodity price risk was transferred to other agents.

The World Bank is committed to using market-based instruments to reduce the effects of price fluctuations on farmers. To this end, it has set up a task force to explore commodity risk management to allow farmers in developing countries, especially smallholders, to use options and futures contracts.

AUSTRALIA

Introduction

Australia is sympathetic to concerns expressed by Developing Country (DC) and NFIDC Members regarding the effectiveness of the "Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries" (the NFIDC Decision). Australia recognises that food security is a fundamental non-trade concern, and supports the provision of food aid and technical assistance to reduce poverty, promote rural development and agricultural productivity, and to improve access to food. To facilitate greater food security for DC and NFIDC countries, Australia strongly supports revising and strengthening existing WTO provisions under the NFIDC Decision.

Australia does not believe, however, that establishing a new loan facility to address short-term financing difficulties for countries experiencing higher than normal food import bills would be the most effective use of available resources. Australia believes that the efforts of the Inter-Agency Panel would be more effectively directed towards focusing on how existing arrangements could be reformulated to take better account of developing country and NFIDC concerns.

In Australia's view, global trade liberalisation in agriculture, and domestic agricultural reform policies (in combination with sustainable agricultural and fisheries development) are the most appropriate way of improving the food security situation of DC and NFIDC countries. The priorities for agriculture reform are: achieving disciplines on food aid, export subsidies, domestic support measures, export restrictions and taxes in conjunction with improvements in market access for developing countries.

Q1. In the view of the parties, what are the "normal levels of commercial imports of basic foodstuffs"? What are appropriate criteria to determine whether a country experiences "short-term difficulties in financing normal levels of commercial imports of basic foodstuffs" as provided for in the Marrakesh NFIDC Decision and the Panel's terms of reference (question to all parties involved)?

Reply

Australia refers to the FAO's Consultative Subcommittee on Surplus Disposal (CSSD) definition of Usual Marketing Requirement (UMR) in determining what constitutes a normal level of

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commercial imports of basic foodstuffs. The UMR works for all commodities where there is accepted published information on commercial imports, that is, transactions excluding genuine food aid, surplus disposal or concessional sales. The UMR is a moving five-year average of commercial imports published or otherwise obtainable from a reliable source. Statistics to calculate the level of average commercial imports are sourced from various recognized international bodies, such as in the case of grains, the International Grains Council. Australia believes that the UMR for other commodities can likewise be calculated on the basis of accepted commercial import statistics.

In order to determine when a country is experiencing short-term financing difficulties, a clearer definition of what is a short-term financing difficulty is required. In relation to the FAO Technical Note9, the apparent definition of a short-term financing difficulty appears to be a sudden surge in import prices and/or currency depreciation, resulting in a fall in people's ability to purchase food in a food-importing country. Is the Fund designed to only cater for food-importing countries which experience 'financing difficulties' that threaten people's food security, or is it to offset the negative impacts of price or currency spikes? Such clarification should be established before eligibility criteria are established.


Reply

Australia is not convinced that a Revolving Fund would improve food security situation in DCs and NFIDCs.

While we see the value of such a Fund as assisting the objective of ensuring that all people, at all times have access to sufficient food, the current proposal bases the requirement for food on a decrease in imports of particular food products. By this approach, such factors as reducing wastage, increasing domestic production or substituting between foods are ignored and could even be discouraged. For example, such a system may encourage continued imports of high cost foods while discouraging production and consumption of locally produced and cheaper substitutes for the imported product.

It would also run counter to Australia's approach to food aid, which is to support technical and capacity building to provide LDCs and NFIDCs with the capacity to increase their own food production and security, or to develop a production base for other goods that will assist them to sustainably finance imports. Contributing to the financing of a loan facility to address short-term financing difficulties, which eligible countries may experience in financing normal levels of commercial imports of basic foodstuffs, would not meet Australia's objective of supporting technical and capacity building but would risk entrenching dependence on developed countries for continuing food requirements.

The Fund could encourage countries to purchase food during times of high prices and would require them to repay the loan back after a short period of time. This would not necessarily be an appropriate use of government funds and could further increase developing country debt to developed countries.

Additionally, Australia believes that a Revolving Fund would likely be an expensive mechanism with substantial practical problems:

9 FAO, Revolving Fund for the Purpose of Implementing the WTO Marrakesh Decision relating to the Least-Developed and Net Food-Importing Developing Countries

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Australia considers that such a Fund would be costly to administer and would be subject to pressure from donor countries eager for their monetary contribution to be used for purchase of their commodities and putting pressure on recipient countries to meet other criteria. This would largely reflect the current situation.

As a Revolving Fund, the recipient countries have to pay back the funds within a set period. This would, in our view, put pressure on the recipient countries to meet a potentially onerous repayment schedule, with the risk that greater indebtedness of DCs and NFIDCs could result. Moreover, when prices rise there would be a concerted pull on funds to purchase ever-diminishing stocks, putting the Fund under even more pressure, or even causing it to collapse.

Australia would be concerned if the loan facility took the form of providing a rebate to NFIDCs after they have purchased their requirements on the open market.10 In Australia's view, this proposal risks acting as both a food consumption subsidy and as a food production tax in recipient countries. We would be concerned that this may diminish the value of genuine reform undertaken in the agriculture sector of DCs and NFIDCs.

Australia is also concerned about the concept of a 'trigger price' in years where spikes in commodity prices are experienced, as suggested in the FAO's technical note. In general terms, we do not see a trigger price as being practical. Trigger prices have the potential to introduce some undesirable effects into world markets. Access to the Fund effectively creates a consumption subsidy, and will increase demand for that good. If a single price trigger was put in place for a product, countries would only have access to the Fund if the world price exceeded this very high trigger price. The immediate effect of such an action would be to further drive up the price of the good. This would add to the cost of the fund, and result in greater transfers from NFIDCs to developed country farmers.

Australia believes that the efforts of the Inter-Agency Panel would be more effectively directed towards focusing on how existing arrangements could be reformulated to take better account of developing country and NFIDC concerns, as per the Inter-Agency Panel's first Term of Reference. Australia supports moves to encourage the World Bank, FAO, IFAD and other relevant international development organizations to enhance their provision of technical and financial assistance to LDCs and NFIDCs under existing facilities and programmes.


Reply

It is premature to consider such guidelines as no convincing argument has been put forward on the need for a Revolving Fund.

10 As noted in FAO, Revolving Fund for the Purpose of Implementing the WTO Marrakesh Decision relating to the Least Developed and Net Food Importing Developing Countries

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Q8. What are parties' views on the role of food aid to attenuate short-term financing difficulties of food imports (questions to all parties involved)?

Reply

Unless a country can demonstrate that short-term financing difficulties coincide with that country's shortage of food, the need for food aid does not arise. A country's short-term financing difficulties alone do not constitute a need for food aid. Such situations may call for financial assistance, but the effective dumping of developed countries' surpluses in the guise of food aid into an economy under stress may cause a collapse or retardation in agricultural development.

Conversely, access to the Fund should not preclude the country from eligibility for food aid.

The main differences between the Revolving Fund proposal and emergency food aid are that emergency food aid is targeted to offset chronic and sustained malnutrition and is funded by donors, where the Revolving Fund could alleviate the impact of price or currency movements on food availability in a country, with the responsibility for funding largely falling on the government using the Fund. Clearly, a country can experience either of these events separately, or simultaneously, and food aid should only be used when the reduction in imports could result in chronic and sustained malnutrition. Any weakening of these criteria would see the needy given preference over the starving, which is not acceptable.


Reply

Substantial price volatility in agricultural markets exists. Given the impact of climate variability, weather events, disease and pests on agricultural production, significant production variation occurs in agricultural products, which can cause price volatility. This volatility can be accentuated by some agricultural policies and exchange rate volatility. For these reasons, it is important for importers and exporters of agricultural products to expect price volatility and to plan for it.

Hedging and other forward trading options represent mechanisms that both buyers and sellers can use to manage their exposure to commodity price movement risks. At present, the main markets for these tools are in developed countries, and are denominated mainly in US dollars, Yen and Euro. For this reason, there is little scope for importers to use these tools to hedge against currency movements.

In addition, these forward markets for food products are usually limited to the current season, so importers are only able to use these markets to manage fluctuations within a marketing year.

These tools can work in two ways. Countries can pay a fee that gives them the right to purchase at a specific price, or they can enter into a contract to purchase at a specific price. In either case, the effect is that in years when prices are not high, the importers are paying more than they would, but they pay less than the world price in high price years.

If futures' markets are operating effectively, those attempting to hedge will on average pay more than if they did not hedge. In addition, the more people attempting to hedge should result in this financial loss increasing. If countries are willing to sustain this loss to offset the impacts of adverse price movements, such schemes can still be attractive.

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CANADA

Introduction

Canada recognizes the concerns voiced by WTO Members with the effectiveness of the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-developed and Net Food-importing Developing Countries. Food insecurity is a multi-faceted issue; it is a symptom of poverty and a serious hindrance to economic development. Long-term solutions to food insecurity arise at both the international and national levels, for example, by improving the delivery of development assistance, increasing agricultural production and productivity, and maintaining peace and security.

Canada believes that an important contribution that the WTO can make to address food security concerns is through agricultural trade reform. Reducing trade-distorting subsidies that depress prices for food producers, and reduce incentives for productive investment in agriculture sectors in developing countries would make a significant contribution to improving the food security situation of many developing countries. We are not convinced that a new food financing facility for countries that are experiencing higher than normal food import bills would be the best use of limited resources. Existing facilities of international financial institutions would seem to be better placed to respond to such short-term difficulties.

Q1. In the view of the parties, what are "normal levels of commercial imports of basic foodstuffs"? What are appropriate criteria to determine whether a country experiences "short-term difficulties in financing normal levels of commercial imports of basic foodstuffs" as provided for in the Marrakesh NFIDC Decision and the Panel's terms of reference (question to all parties involved)?

Reply

In the context of food aid, Canada has adopted the FAO's Principles of Surplus Disposal which use a simple five-year average for specific products as an estimate of the "normal" level of food imports of that product. However, this method is necessarily an approximation because it does not account for, inter alia, changes in domestic production, population growth, or changes in the types of different foods that consumers choose. Changes in the amount or value of food imported are not necessarily indicative of a change in food security.

Furthermore, increases in imports above "normal" levels do not necessarily indicate difficulties in financing those imports. It would appear that the situation foreseen in the Decision is one where importers, whether they be private sector traders or government bodies, are unable to obtain financing in order to pay for imports of basic foodstuffs (often a balance-of-payments problem).

Short-term difficulties in financing normal levels of commercial imports of basic foodstuffs could be caused by unexpected exchange rate depreciation due, for example, to temporary declines in export earnings or unusually large capital outflows. Such factors would typically be unexpected and caused by exogenous factors.

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Reply

Although Canada recognizes the need to adequately address the food security concerns of NFIDCs and LDCs, we have a number of questions about the concept and feasibility of the Revolving Fund.

The Decision clearly recognizes that developing countries may need to draw upon the resources of International Financial Institutions to address short-term difficulties in financing food imports in the context of adjustment programmes. This is a recognition that improving food security in many countries is part of a long-term process to create an enabling environment for increased domestic agricultural production. It is generally recognized that there are important domestic constraints on agricultural productivity and production in some countries, such as lack of favourable incentives, limited rural infrastructure (e.g., transportation, storage, communications), weak institutions (e.g., commodity markets, enforcement of standards), and a lack of associated rural industries (e.g., transportation and inspection services, food processing industries, suppliers of fertilizer and other inputs). However, the proposals for a Revolving Fund do not link short-term financing and long-term agricultural development.

In fact, the Revolving Fund could discourage agricultural production in LDCs and NFIDCs by reducing food prices exactly when supply should be increasing. This initiative also has the potential to divert aid resources from existing long-term development assistance that would ultimately provide a greater degree of food security.

We question the rationale for proposing this Revolving Fund within the context of the WTO over other organizations.

Canada's view is that, at a time when international debt reduction is a key development priority, there would need to be strong and sound reasons to establish a new mechanism or fund. Programmes exist within both World Bank and the International Monetary Fund to address both the short-term and long-term concerns raised in the Decision. Therefore, in the interests of policy coherence with other multilateral efforts and in the absence of a clear rationale for a Revolving Fund, it would better to use existing mechanisms.

Beyond the concept of the Revolving Fund, Canada has a number of concerns about how it would operate.

• The proposal defines a relatively short repayment period which, in practice, would make default on such loans more likely given the existing debt situation of potential borrowers and the possibility of difficulties with food import bills persisting beyond the short term. However, a longer repayment period would imply a larger capitalization of the Fund and the negative effects associated with this (e.g., diverting funds from other uses and increasing the debt burden of borrowers).

• It is unclear if the Revolving Fund would be self-sustaining once initially capitalized. If there were a default, would the Fund finance the loss out of interest payments on other lending operations? Or would the risk be borne by donors, who would be expected to bail out and re-capitalize the Fund (in the process possibly reallocating money from other development priorities)? How would the Fund ensure that it does not lead to net additions to potentially unsustainable debt burdens?

• If the lending terms set by the Fund were highly concessional it would not likely be a sustainable institution. However, if they were not concessional, the Fund would be competing against commercial lenders and might not operate effectively.

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• Although the Revolving Fund is implicitly targeted towards alleviating the needs of the food insecure within beneficiary countries, loans made under the Fund would not necessarily benefit those groups. Borrowers would need to demonstrate that the loan was used to increase the food supply for those affected parts of the population.


Reply

If the Revolving Fund were established, Canada expects that eligible borrowers would be able to:

• demonstrate the nature of their short-term financing difficulties• present a credible plan for using the loan to remedy the short-term difficulties (including a

clear identification of the intended beneficiaries within the borrowing country)• present a credible timetable for repayment, and• demonstrate that sufficient resources had also been devoted to increasing the long-term food

security of the country (e.g., by funding improvements in rural infrastructure or research to increase domestic agricultural productivity).

Canada would expect a report from the recipient within a reasonable period of time and before full repayment of the loan which would demonstrate that the loan had been used to improve food security.


Reply

In most circumstances of critical food shortages, including those caused by the inability to finance commercial imports, food aid is available. However, many countries find food aid undesirable as a solution because it depresses local prices and undermines long-term investment in agricultural productivity. Food aid should be seen mainly as a very short-term, immediate reaction to a food emergency situation, which could include an emergency caused by lack of financial means to import food supplies. Appropriate investment in agricultural infrastructure and productivity is a major determinant of food security in the long term. WTO Members can best contribute to that end by agreeing on significant reductions or elimination of trade- and production-distorting agricultural policies and by ensuring coherence between trade and development activities.


Reply

While the expertise on this subject does not reside in the WTO, Canada supports the continued work of the World Bank with the International Task Force on Commodity Price Risk Management in piloting mechanisms for developing countries to manage risks from commodity price fluctuations.

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CUBA


Reply

The definition of "normal levels of commercial imports of basic foodstuffs" is a very complex matter. It would practically require a country by country analysis, since we need to establish the levels which would guarantee the minimum consumption recommended by the specialized health institutions in each country. But the concept could also be defined by taking average imports of basic foodstuffs over a representative number of years, remembering that this average could, in its turn, be influenced by the purchasing power of the country in question during the period under analysis and the food donations it has received.

The appropriate criteria for determining short-term difficulties in financing normal levels of commercial imports of foodstuffs can also vary, and are generally associated with a lack of liquidity which makes it difficult to guarantee the supply of basic foodstuffs essential to ensuring food security in a net food-importing developing country or a least-developed country (LDC). Such difficulties could be linked to imbalances in the balance-of-payments and the balance of trade due to the seasonality of export revenue, indebtedness and debt service payments, financial speculation practised by the economies of the developed countries, unilateral measures, variations in both import and export prices of goods, structural market transformations, natural disasters, political crises, international conflicts, wars, etc.

Q2. Please illustrate your country's experience with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs and explain how these were caused by the Uruguay Round reform programme. How did your country address any such difficulties, in particular during the 1995/96 price increase, and why could they not be addressed within the current framework of assistance (question to NFIDCs/LDCs)?

Reply

The importation of basic foodstuffs should be a consistent and continuous process. To ensure that this is the case, it is essential that there be a stable source of financing, or if not, that alternative financing be found to guarantee the minimum resources needed to cover the cash flow deficits of importers. For Cuba, whose economy rests on commodities (such as cane sugar, nickel and tobacco), fishery products and tourism, reconciling the need for stable food imports throughout the year with the seasonality of its resource-providing production is extremely complicated. Added to this is the lack of funding from multilateral sources (World Bank, Inter-American Development Bank, International Monetary Fund, etc.) for food supply programmes, plus the distance which, in the impossibility of acceding to its natural market the United States separates Cuba from its supply markets, resulting in excessive freight costs not to mention the impossibility of buying on a market with highly competitive prices for the main food products needed by Cuba. This is a consequence of the economic and trade embargo led by the Government of the United States over the past 40 years.

As a result, Cuba has had to deal with its financing difficulties by negotiating with suppliers of basic foodstuffs, by resorting to export granting credit and credit insurance schemes offered by the official agencies in the supplier countries, by obtaining costly trade credits and by allocating liquidity resources to the detriment of other priorities.

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None of these alternatives provide the predictability to solve Cuba's short-term difficulties in financing the required level of food imports, which can only be obtained at high cost.

During the 1995-1996 increase in the price of foodstuffs, we had to negotiate intensively with our usual suppliers and with the banks and financial institutions in order to obtain private financing that would guarantee the minimum level of food imports essential to the country. Thus, the financed value of food imports during that period increased by approximately 26 per cent from one year to the next, reflecting an additional cost of US$150 million. This growth trend continued, and in 1999, the growth in the value of food imports financed through private and bank credits reached 36 per cent with respect to the same figures for 1997.

Obviously, the urgency involved in obtaining these credits owing to the pressing need to import foodstuffs regardless of the increase in market prices has meant that Cuba has had to pay very high costs, well above the market level and even well above any spread that would be reasonable for Cuba for such financing – up to 18 per cent in interest, in annual terms, for 1997.

Q3. Please provide concrete examples of efforts to seek assistance through existing multilateral financing facilities and the response by the agencies concerned (question to NFIDCs/LDCs)?

Reply

Cuba does not have access to multilateral financing facilities. Indeed, it is not a member of the World Bank, the Inter-American Development Bank or the International Monetary Fund owing to the hostile policy of the Government of the United States which limits the financing alternatives available to our country and increases their cost.


Reply

We submitted to the Inter-Agency Panel document G/AG/11, Annex 2, containing a proposal by various net food-importing developing countries and least-developed countries concerning the concept and feasibility of the proposed Revolving Fund.

We would also like to stress the importance of ensuring that the fund provides for payments on soft terms with repayment periods of more than 360 days and on a revolving basis.

Moreover, such financing should not be subject to political or other conditionalities, and a revolving mechanism must be guaranteed to ensure that all of the recipients are able to benefit from the scheme.

Q5. Is there any scope for addressing different needs of NFIDCs and LDCs under the proposed Revolving Fund (question to sponsors of the Revolving Fund proposal)?

Reply

Cuba sees this proposal as an attempt to address the different needs of the net food-importing developing countries and the least-developed countries. It could be in that direction a first step, to be developed and improved with the views of the donors and of the other member countries of this group and tried out in practice.

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Cuba also considers that this proposal should include the utilization of part of the fund to finance capacity building and any aspects reflecting other concerns of this group of countries that had not been raised before.

Q7. Assuming the proposed Revolving Fund were to be established, what should be envisaged in terms of reporting by recipient countries and monitoring (question to sponsors of the proposed Revolving Fund)?

Reply

Transparency should unquestionably be one of the premises on which the fund is based. The management of the fund should include a mechanism for verifying the destination and use of resources. However, any political or other conditions for access to such financing other than those dictated by the principles governing the granting of funds, based on the definition of normal levels of commercial import of foodstuffs and the determination of those levels for individual countries or groups of countries, is unacceptable.


Reply

In our view, this food aid is intended to deal with food insecurity emergencies due to natural disasters, wars etc.

However, in today's context, with food aid on the decline and the sharp decrease due to rise in the prices of the principle foodstuffs, this option is no longer sufficient to tackle the problems of the net food-importing developing countries and the least-developed countries.

Consequently, Cuba insists that this fund should provide additional solutions for the medium and long term in the form of programmes aimed at increasing productivity and efficiency in basic food production in the countries in question.


Reply

The price risk management instruments can be beneficial, provided they are efficiently managed, in that they help to guarantee price levels very close to the market price and limit the risk of price variations at the time of delivery. They can result in significant cost savings while at the same time guaranteeing the required import levels on favourable terms by providing the possibility of fixing more suitable market levels for postponed deliveries.

Consequently, we consider that the development and promotion of these import risk management instruments should be included among the technical assistance activities provided for by the fund.

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EGYPT


In WTO documents G/AG/W/49, and Add.1 and Corr. 1, proponents of the Revolving Fund adhered to the interpretation on the Marrakesh Decision whereby: "the triggering mechanisms for 'operationalising' the Decision should be based on the totality of effects and factors, i.e. on unexpected levels of food import bills of LDCs and NFIDCs on an individual basis, rather than limiting them to individual factors that lead to the outcome (e.g. rises in world market prices, declines in food aid deliveries, and so on)". Hence, normal levels of commercial imports of basic foodstuffs can be defined by the following simple formula:

IB = (C x P – DP – A) x p

Where IB is the import bill of a basket of basic foodstuffs, C = per capita consumption, P = population, DP = domestic production , A = food aid, p = price.

To be able to provide a fair and balanced platform from which to calculate the eligibility of NFIDCs/LDCs to draw from the proposed Fund, and in order to smooth-out short-term fluctuations, a 5-year moving average of import bills is a better tool for the purpose.

Figure 1 shows total food import bills of LDCs and NFIDCs over the past 35 years (1965-99), along with the 5-year moving average.

Fig. 1

0

4000

8000

12000

16000

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

US$

mill

ion

Actual5-year MA

It is noted from the above figure that there has been a steady increase in food import bills throughout the period, averaging just over 7 per cent per annum. The increase was particularly sharp during 1972-1984 (over 11 per cent per annum) and slowed down thereafter (to about 3 per cent per annum). The data also show that there were three distinct occurrences of "spikes" over the entire 35-year period. The first, during the food crisis of the 1970s, lasted for three years (1973-75) when actual food imports were 42 per cent above the MA level. The second was in 1980 and 1981 (31 per cent above the MA level) and the third was in 1995 and 1996 (a 20 per cent excess).

A country would be considered to experience short-term difficulties in financing normal levels of commercial imports when the difference between the "actual" and "5-year moving average"

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reach the 10 per cent level.

Q2. Please illustrate your country's experience with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs and explain how these were caused by the Uruguay Round reform programme. How did your country address any such difficulties, in particular during the1995/96 price increase, and why could they not be addressed within the current framework of assistance (question to NFIDCs/LDCs)?

As a part of the Uruguay Round package of reforms, and in order to conform to the obligations taken on-board starting 1994, the Egyptian Government (GoE) downscaled and/or phased-out various forms of support previously granted to farmers/exporters under a variety of schemes. As a direct result, a subtle transformation in the cropping patterns occurred away from "supported/subsidised" crops towards the more "profitable" ones. A reduction was witnessed in the areas allocated to – and by consequence the volume of production of - such basic items as sugar and wheat; at the exact time when the world cereal prices started upwards towards their peak in the 1996/7 season. Meantime, a long-planned downturn in the volumes of food aid granted to Egypt by some donor countries kicked-in, complicating matters further.

In order to reduce the impact such a situation imposed on both the local populace and the national treasury, the GoE adopted a series of compensatory measures such as the reduction of applied rates on imports of wheat and corn, the brief re-institution of a rationing system for the poor, a substantial draw-down from nationally-held food stocks, a reduction of imports of less essential items, and a brief recourse to short-term commercial buyer credits available from a number of non-national financial institutions.


To our knowledge, no recourse was made to IMF funds theoretically available for the purpose, as these came attached to a variety of conditionalities, which the GoE considered difficult to accept; particularly in view of the existence of the Marrakesh Decision.


The concept of the proposed Revolving Fund is based on two ideas: First, the Ministers' recognition in the Marrakesh Decision of the need to establish appropriate mechanisms to ensure implementation of the results of the UR on trade in agriculture while assuring the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions; and second, the need to assure NFIDCs and LDCs that the Decision – taken in 1994 and non-operational to date – shall be made operational in one of its most essential aspects (i.e. short-term financial support) before embarking on serious commitments in the second phase of agricultural liberalisation currently under way. The feasibility of the abovementioned Fund can be measured against three factors: 1) the expected benefits to net-food exporting developed WTO members from further liberalisation of the international trade in agricultural products, 2) the potential disruption by NFIDCs and LDCs of such liberalisation if no soft landing is provided, and 3) if measured against the total volume of world trade in a basket of basic foodstuffs.

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It is Egypt's belief that no differentiation should be made between NFIDC's and LDC's under the proposed Fund; since the original Marrakesh Decision did not do so. In fact, the WTO membership has been loath to further sub-divide the membership into a variety of proposed sub-categories (land-locked members, small economies, small-island developing states, …etc). This was most clearly seen during the pre-Doha preparatory process when discussing the draft TRIPS and Public Health Declaration (adopted by the Ministers during the IV Ministerial Conference). Most importantly, the "merits of eligibility" of beneficiary member states should be based on objective criteria and on a country-by-country basis (paragraph (b) page 4 of document G/AG/W/49/Add.1 refers).


There is no doubt that there is a need to ensure transparency in both the proposed Fund's operations/monitoring activities, and in the beneficiaries' system of reporting to the Fund.

Recipient countries, in order to be eligible to use the Fund, would be expected to provide the Fund's management team with regular information (in the shape of formal and timely notifications, similar to the those handled under the auspices of the WTO's Committee on Agriculture) on a number of variables, such as:

Production statistics on items of basic foodstuffs. Statistics on population growth Figures on food aid, by item A timed series on the per capita consumption of the basic food items.


Food aid is an integral part of the equation established in 1 above. Therefore, there can be no doubt that food aid is a possible useful tool in attenuating short-term financing difficulties. However, and as figures published by a number of IGOs seem to indicate, food aid was – and still is – being used as a means of surplus production elimination. That is to say, the volumes of food aid seemed larger when production was peaking (and prices slumping), and vice versa; the exact opposite of what should be. In an ideal world, food stocks held by major suppliers could be drawn-down in the form of food aid when NFIDCs and LDCs have the highest need. But in view of the impracticality and expense of maintaining such stocks, the idea of the Fund was floated.


Commodity price risk management instruments (RMIs) can certainly be an effective means of hedging against short-term price volatility. However, the effective use of these instruments presupposes a certain capacity and experience in handling such a fact beyond a large number of NFIDCs and LDCs. However, as per the formula in the answer to question 1 above, prices are only one factor affecting NFIDCs and LDCs. Production issues, for example, cannot be addressed by RMIs.

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EUROPEAN COMMUNITIES

Introduction

The NFIDCs Decision was based on the assumption that international prices would rise as a result of the disciplines undertaken in the Uruguay Round. Such a situation could have led to NFIDCs and LDCs experiencing negative effects in terms of availability of adequate supplies of basic foodstuffs. However, since the conclusion of the Uruguay Round there have not been increases in international prices that can be attributed to the implementation of commitments. Prices have evolved driven essentially by trends in supply and demand. Consequently one could argue that there have not been any negative effects from the reform programme of the like foreseen in the NFIDCs Decision.

Nevertheless the EC and its member States fully endorsed the Decision taken by Ministers in Doha to create an Inter-Agency Panel. The Panel is charged with examining ways and means to improve access by LDCs and NFIDCs to multilateral programmes and facilities to assist with short term difficulties in financing normal levels of commercial imports of basic foodstuffs, and to examine the concept and feasibility of a Revolving Fund.


"Normal levels of commercial imports of basic foodstuffs" must somehow be linked to average imports over a representative reference period, as foreseen in the practice of the FAO's Consultative Subcommittee on Surplus Disposal. These levels must be adjusted to take into account external factors such as population and/or income changes. It is however important to note that increases in import bills do not necessarily imply difficulties in financing imports. Import bills may increase in NFIDCs in periods of economic expansion, driven by expanded demand and availability of financial resources to finance imports. Import bills are not therefore appropriate indicators to measure difficulties to finance normal level of imports.

"Short-term difficulties in financing normal levels of commercial imports of basic foodstuffs" are linked to increases in import prices, decreases of export prices, financial crisis and/or currency depreciation. This is a typical case of balance-of-payments difficulties.


The EC and its member States recognises that there is a need to ensure facilities to LDCs and NFIDCs to face short-term financing difficulties in order to ensure food security. However, it is not necessary to create a new initiative, because facilities already exist to address these problems. The IMF's CFF is designed to address balance-of-payments problems related to the purchase of basic foodstuffs. The Fund regularly reviews its existing financial facilities and their modalities and is ready to adjust them as necessary. Other facilities available from the IMF and the World Bank also address these problems in the longer term. In addition, budget support related to Food security interventions and to facilitate imports of food can be included under bilateral donor financial support. For example, the EU, under its Food Security / Food Aid Budget Line which totals about 500 M Euro per year, provides budget support to priority countries for up to roughly 20 per cent of its total allocation. The WTO, on the other hand, is an institution that is neither prepared nor equipped to deal with financial assistance, and cannot substitute itself for the multilateral financial institutions.

The creation of a Revolving Fund could in fact be counterproductive. Efforts in this area should be geared to promoting a food security focus in the use of existing resources and mechanisms.

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In addition, the establishment of a Revolving Fund does not guarantee additional financial resources but could result in additional institutional and bureaucratic burden.


In paragraph 5, the NFIDCs Decision states: "Ministers recognise that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties."

If a Revolving Fund were to be established, the EC and its member States would envisage conditions on the eligibility and use of the resources that ensure that the Fund were used appropriately and not diverted to other uses. The recipient countries would need to prove their needs and the conditions would need to guarantee that disbursements from the Fund were fully reimbursed. The EC and its member States foresees conditions that would not differ from those that are attached to the current multilateral financial facilities to address balance-of-payments problems. In particular, eligibility would need to differentiate between LDCs and the NFIDCs and apply different conditions depending on the category. Conditionalities for loans should follow the same procedures and rules applied in this respect by other international institutions (WB, IFAD etc.) for the same category of countries.


Research shows that food aid programmes are neither efficient nor effective in this respect. Financial transfers to deal with balance-of-payments problems are less costly and more efficient.

The EC and its member States attaches a very high importance to food aid when it is used as emergency food aid, and when it is provided as a grant, and to the extent possible, through local or regional purchases. On the other hand, food aid driven by domestic supply considerations and used as surplus disposal is counterproductive. The EC gives food aid support through the WFP, NGOs etc. under different financial instruments. Food aid is provided on a short-term basis for humanitarian reasons, for relief, recovery linking to development, through the EC's humanitarian office, ECHO. The EC and its member States considers food aid to be necessary for humanitarian reasons in a wide range of situations: internal conflict, war situations, natural disasters, etc. and essential for groups such as refugees, Internally Displaced Persons (IDPs), other victims and for certain specially vulnerable groups. Short- and medium-term food aid is well justified for these groups.


The World Bank is working on promoting subsidised price risk management instruments to hedge against short-term price volatility. While the experience gained so far on these instruments for developing countries in respect of basic foodstuffs is still not sufficient, the EC and its member States supports the efforts developed so far and believes that this facility could be very useful in certain cases.

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JAPAN

Introduction

1. Since Japan is also a net food-importing country, Japan fully recognises the necessity to improve the effectiveness of the Marrakesh NFIDC Decision in terms of keeping food security and preserving and developing agriculture in every country. Based on this position, Japan is willing to co-operate and discuss with other concerned countries.

2. In particular, Japan is ready for seriously envisaging how to contribute to the fund-raising issue, as discussed in the Panel, and positively coping with this problem within its possibilities. Japan finds it necessary to review the present framework for the provision of funds, already undertaken by some International Organisations, to identify deficiencies, if any, to hinder the usage of these funds and to clarify ways of improvement. And also, though Japan doesn't deny the fact that liberalisation was in some respects burdensome for LDCs and NFIDCs, a thorough analysis should be conducted on the causality between liberalisation, surplus decrease, price increase in the international market and its repercussion on the import bill paid by LDCs and NFIDCs. Otherwise, an answer from the wrong basis would mislead us. This is why we are attaching a great importance to the tasks of the Panel on this matter, without which a real solution would be impossible to find.

3. As for the concept and feasibility of a proposed Revolving Fund, it would be highly necessary, without pre-fixed ideas on the necessity of creating such a fund, to get through the above-mentioned review of the current systems prior to any concrete results. Japan would like to emphasise that all existing schemes should be explored and that to increase the number of possible means would not necessarily achieve a better and more practical situation.

4. To solve difficulties, which had been raised in a series of discussions so far, in the long term, more emphasis must be placed on the productivities in the LDC and NFIDCs' agricultural sector, as indicated in the Decision itself and the addendum to the proposal by 16 countries (G/AG/W/49/Add.1). According to its experiences on the ground, Japan stresses that not only technical and financial assistance, but good management by the recipient government are of significance to the long-term development in this sector. In this vein, it is our duty to establish trade rules on the agricultural sector, which would not prevent the domestic agriculture from sufficiently developing.

5. We find a following general tendency on food aid; little aid when price is high and aid is eagerly waited for, and vice versa, because this aid is based mainly on commercial interests. To complement this default, it will be preferable to put aside reserves of food in case of need. From this fundamental position, Japan is incorporating in its negotiating proposal the idea of international food stockholding, which will enable loan of food in the case of temporary shortage. During the new round negotiations Japan hopes to submit a more concrete version of this idea, on which further discussion should be extended.


(i) It is appropriate that the UMR (Usual Marketing Requirement), fixed, when implementing food aid, on FAO principle of surplus disposal, be regarded as the normal levels of commercial imports of basic foodstuffs.

(ii) For the second question, the appropriate criteria would be whether or not a country can get the normal level of import (i.e., UMR) through commercial trade, even under such circumstances as the

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increase of international price of the basic foodstuffs and the shortage of foreign currencies caused by economic crises.


Prior to the creation of a proposed Revolving Fund, all other possibilities should be explored for fund raising. Though recognising the importance of the food security problem widely experienced by LDCs and NFIDCs, Japan continues to have some scepticism on the necessity and utility of the fund, and to suspect that the present financial facilities can show its usefulness.


Japan doesn't commit itself to the creation of a Revolving Fund as a premise.


(i) For food security, a proper combination of domestic production, import and stockholding will be required. Nevertheless, the main priority should be placed on the stable domestic production. On this understanding, Japan considers it crucial to give LDCs and NFIDCs necessary support for their self-reliant efforts in favour of the improvement of productivities.

(ii) However, it is natural that prompt food aid be brought to countries suffering food crisis deriving from negative factors such as natural disaster or conflict, which would block domestic production, import or stockholding. And also, it is a practical solution from a purely economic view to attenuate short-term financing difficulties of food imports.

(iii) Japan is proposing a new framework of international food stockholding to tackle these short-term difficulties of LDCs and NFIDCs. This system enables support for LDCs and NFIDCs in case of emergencies by using already existing food stock in each country.


We think that it is necessary to review thoroughly the past experience of international commodity agreements, which had the purpose of stabilising the price of primary products with international buffer stock, and which did not function as successfully as expected.

JORDAN


The normal levels of commercial imports of basic foodstuffs are as follows:

- Wheat 600 ('000 tonnes) + 150 (strategic reserves)- Rice 180 ('000 tonnes)- Sugar 180 ('000 tonnes)- Maize 400 ('000 tonnes)- Barley 600 ('000 tonnes) + 100 (strategic reserves)

In the early eighties, Jordan's economic growth fell to such a low rate that the real per capita GDP declined between 1981-1989( ). Furthermore Jordan's foreign exchange reserves in terms of months of imports coverage were falling steadily reaching a critical point in 1989, therefore the appropriate criteria to determine short-term difficulties even in the present time depends on the foreign exchange reserves as well as on the average of the last three years data of commercial imports of basic foodstuffs during which the rise in prices would exceed the average normal value of these imports by at least 25 per cent increase on a monthly basis.

Q2. Please illustrate your country's experience with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs and explain how these were caused by the Uruguay Round reform programme. How did your country address any such difficulties, in particular during the1995/96 price increase, and why could they not be addressed within the current framework of assistance (question to NFIDCs/LDCs)?

Jordan's experience with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs.

The performance of the agricultural sector in Jordan during the years 1993-2000 reveals a decline in the agricultural activity in comparison with the previous years. The decline was attributable largely to climatic factors, such as the abstention of rain during the rainy season and the scarcity of rainfall in critical stages of the crop life, in addition to severe frost waves.

Drought has severely affected the production of many agricultural crops for which production levels for the year 1999/2000 were far below average in comparison with the previous years (1993-1998). As shown in table (4) the production of wheat and barley declined dramatically; as a consequence the imports of basic foodstuffs increased as shown in table (2). Preliminary estimates of agricultural losses caused by the 1999/2000 drought episodes are summarized in value equivalent in US dollars of direct losses amounting to at least 160 million. For olives and fruit trees losses represent 37 per cent of the total, followed by livestock losses 24 per cent, range land and fodder 17 per cent, field crops 15 per cent and vegetables 7 per cent. Thus an emergency relief programme was needed to partially assist the most affected farmers, herders and rain-fed tree crop growers to meet their minimum requirements and to start a new season under minimally acceptable conditions.

The considerable rise in the requirements of servicing external debts in the late eighties was a major factor in the economic crisis. Since then the volume of external debt and their burden on the Kingdom's foreign currency reserves have constituted a structural imbalance impeding the economic development process. Despite the efforts exerted by the GOJ in this respect which led

to positive results and improvement in the external debt situation, the problem is still considered a major imbalance that requires a long-term strategy to restrict its negative effects on the national economy.

These imbalances in Jordan's economy and volatility of world prices of basic foodstuffs during the period 1995/1996 urged the competent authorities to seek assistance to reinforce the strategic inventories and the normal levels of imports of basic foodstuffs, through aid programmes such as export credit guarantee programmes and food aid programmes as shown in tables (6,7).


After strong growth in the 1970s and even in the early eighties economic growth fell to such a low rate that real per capita GDP declined between 1981-1988. Jordan's foreign exchange reserves in terms of months of imports coverage were falling steadily reaching a critical point in 1989 when only a few days worth of imports could be paid for with reserves. At the same time the government total debt as a share of GDP nearly doubled between 1980 and 1988. The critical condition of Jordan's economy in 1989 led to negotiation with the International Monetary Fund for assistance in restructuring the economy. It began with a major devaluation of the dinar in 1989 (as shown in table 10) accompanied by trade liberalization through tariff reductions and removal of import barriers.

Furthermore, the negative effects of the Gulf Crisis on Jordan's economy with the return of more than 400,000 as expatriate workers and returnees, almost lead to doubling the number of population as shown in table (9). As a result the import bill of basic foodstuff has increased dramatically coupled with the increase in world prices of basic foodstuff (wheat, rice, sugar, maize and barley) especially in the years 1995-1997 as shown in table (5).

Moreover, efforts were exerted to seek assistance through multilateral and bilateral financing facilities to finance the purchases of essential foodstuff during the boost of world prices in 1995/96, and those were introduced through programmes such as Export Credit Guarantee Programmes sponsored by the USA, and through Food Aid Programmes granted by the USA, Japan and Italy as illustrated in table (6,7).


Jordan's views concerning the concept and feasibility of the proposal of the Revolving Fund

Jordan supports the concept of creating an Inter-Agency Revolving Fund to help the NFIDCs and LDCs to access financing facilities in order to maintain the normal volume of basic food imports during times of high market prices without jeopardizing their balance-of-payment. Therefore, Jordan supports the proposal submitted by a number of countries in favour of NFIDCs and LDCs which explains the technicalities of how this Inter-Agency Revolving Fund could manage those financial facilities.


In the short- and medium-term, external food aid plays an important role in meeting food requirements related to emergency situations, and essential nutritional assistance projects in many NFIDCs and LDCs. It is recommended that donors of food aid shall ensure that to the maximum extent possible their levels of food aid are maintained during periods in which world market prices of basic food stuffs have been increasing and that all food aid is provided in fully grant form. In the long-term, food needs in developing countries should be met through increased domestic production, as well as through increased capacities to import on commercial terms which could be done through technical assistance linked to improving the agricultural productivity and related infrastructure. Stimulating economic growth in developing countries should be a major driving force of the multilateral trade reform process.


Jordan maintains strategic food reserves as a risk management tool in case of food shortage in the local markets and/or when world prices of such commodities are volatile. Besides, Jordan sometimes concludes purchasing contracts for basic foodstuffs on the basis of future prices.

TABLE (1)

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Values of total imports of basic food and feedstuff (JD million)

Wheat 42 66 47 62 65 52 99 113 73 50 33 52Rice 14 23 15 16 19 13 29 30 32 25 34 29Sugar 30 56 29 30 30 41 54 53 41 36 31 32Maize 14 12 18 30 35 22 46 42 26 44 37 37Barley 18 18 21 27 33 29 41 84 49 16 55 42

TABLE (2)

Quantities of total imports of basic food and feedstuff (thousand tons)


TABLE (3)

Total imports (million JD) 1230 1726 1711 2214 2453 2363 2591 3044 2909 2715 2636 2951

Total exports (million JD) 534 612 599 633 691 794 1005 1040 1067 1046 1051 1081

Trade deficit -696 -1114 -1112 -1581 -1762 -1569 -1586 -2004 -1842 -1669 -1585 -1870

TABLE (4)

Total local production (thousand tons)

Wheat 54 82 61 75 57 46 58 42 41 36 9 25Barley 20 42 39 68 31 27 31 29 29 27 5 12

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TABLE (5)

Average import price (JD/ton) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000


TABLE (6)

Food aid(thousand tons) 1996 1997 1998 1999 2000 2001 March

2002 Donor Country

Wheat - - - 150 350 202 - USARice 2 5 - - - - 3 ItalyMaize 13 - 30 - - - - JapanBarley 11 15 32 41 66 64 - Japan

TABLE (7)

Imports through export credit guarantee programmes (thousand tons)

1996 1997 1998 1999 2000 2001 March 2002

Country

Wheat 155 311 142 137 107 400 100

USA Export Credit Guarantee ProgrammesGSM 102GSM 103

PL 480

TABLE (8)

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000External debt (million JD) 4836 5457 5059 4578 4230 4339 4466 4723 4581 5010 5186 4795

TABLE (9)

Total population (thousands) 2694 3468 4444 4756 5039

TABLE (10)

Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997-2002

Exchange rate $/JD 3 2.7 1.7 1.5 1.5 1.5 1.42 1.42 1.41 1.41 1.41

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TUNISIA


Reply

Normal levels of commercial imports of basic foodstuffs should correspond to the country's import needs for a given year. These needs will depend on available local production and the increase in domestic demand.

Consequently, it should not be limited to the level of traditional imports calculated as an average for the past years.

As regards the appropriate criteria to determine whether a country experiences short-term difficulties in financing normal levels of commercial imports of foodstuffs, we would suggest the following:

- Food trade balance deficit;

- current balance-of-payments deficit;

- insufficiency of international aid and financial support, which only partially cover the country's needs in that area.

Q2. Please illustrate your country's experience with respect to short-term financing difficulties of normal levels of commercial imports of basic foodstuffs and explain how these were caused by the Uruguay Round reform programme. How did your country address any such difficulties, in particular during the 1995/96 price increase, and why could they not be addressed within the current framework of assistance (question to NFIDCs/LDCs)?

Reply

The data relating to the pattern of foreign trade reveals that cereals accounted for an average of 34 per cent of imports. This share rose to 46 per cent in 1995 and 54 per cent in 2001.

This switch in the trade pattern is chiefly a result of the increase in the quantity of cereal imports in the wake of the decline in agricultural production in 1994 and 1995 and the considerable increase in the price of imports, of cereals in particular (plus 27 per cent).

These imports are financed through foreign credit granted under market conditions, which in fact simply accentuate the balance-of-payments deficit and the debt ratios.

In any case, they have required a mobilization of financial resources to the detriment of a number of development projects, in particular those aimed at promoting the use of natural resources and improving competitiveness in the agricultural sector.

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Reply

Efforts are made at the macroeconomic level in order to respect and control the foreign debt ratios.

Existing facilities provided by the international institutions are considered as one of several sources of financing, but are generally subject to access conditionalities that are linked to the implementation of structural adjustment measures. In other words, they are not easily accessible.

As a result, since 1996, food aid institutions such as WFP have classified Tunisia among the non-eligible countries.

Tunisia has therefore resorted each year, according to its needs, to foreign credit under market conditions, or to supplier's credits granted essentially by the United States.

The reform programme in the agricultural sector and its effects should avoid penalizing the developing economies in general, and in particular those among them that have been able, by their own means, to achieve positive economic and social results. Ultimately, these requirements or conditionalities for access to sources of financing merely impose further imperatives and constraints on the country.

This is why, in Tunisia's view, these achievements must be strengthened, maintained and supported by further aid oriented towards needs in this area.


Reply

The Fund is feasible to the extent that it is seen as an additional facility among others, and offers the advantage of being less restrictive in terms of access to its resources and enjoyment of its services.


Reply

The scope for addressing these different needs will depend on the amount of resources placed at the fund's disposal, and in any case, this fund must not be a substitute for existing mechanisms or apply similar criteria.

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Q7. Assuming the proposed Revolving Fund were to be established, what guidelines should be envisaged in terms of reporting by recipient countries and monitoring (question to sponsors of the proposed Revolving Fund)?

Reply

As concerns reporting by recipient countries, what should be required is the submission of a report justifying the use of the fund's resources.

Regarding the use of these resources, in conformity with the Marrakesh decision they must provide for:

- Financing of commercial import needs for basic foodstuffs on more favourable than market conditions and subject to more flexible criteria;

- financing of requests for technical and financial assistance in order to help improve productivity and infrastructure in the agricultural sector, and assistance to the net food importing developing countries in developing their production potential for products or sectors where the development of such capacity is possible.


Reply

Food aid can contribute effectively to attenuating these difficulties.

However, such aid is subject to certain rules and mechanisms which mean that certain net importing countries, while suffering the effects of the agricultural sector reform programme, are excluded.

This was the case for Tunisia, where, as revealed in WTO document G/AG/W/42/Rev.4 dated 27 November 2001, "food aid deliveries declined even more sharply during the past decade".

Aid as it is currently provided does not cover needs in terms of food products. This is why the eligibility criteria need to be reviewed to enable all countries concerned to benefit from it on concessional terms.


Reply

In themselves, these instruments are useful. However, they do not alleviate the effects of the reform programme on the net food-importing countries faced with a structural increase in prices and even in food imports in connection with the further implementation of the programme.

Moreover, their use will require technical assistance, inter alia in training the human resources concerned.

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UNITED STATES

Introduction

The United States wishes to thank the Inter-Agency Panel for the opportunity to provide comments on the overall issue of the Marrakesh Agreement and in particular respond to the questions posed by the Panel.

The United States has studied the proposals G/AG/W/49 and G/AG/W/49/Add.1 and is committed to working with other interested members in addressing the food security concerns of Net Food-Importing Developing Countries (NFIDCs) and Least-Developed Countries (LDCs). Food security is one of the key issues in this round of negotiations as we move forward in the liberalization process.

The United States is committed to partnering with other countries and organizations to devise action-oriented development strategies that address rural poverty and hunger. The United States provides support to developing countries for basic education in rural areas, improvements on rural infrastructure, increased access to market information for farmers, funding for agricultural research to increase productivity and trade capacity building to increase exports.

However, we believe that the greatest improvements in food security can be achieved through good governance at the national level. Many governments still do not provide essential public goods, such as civil peace, rule of law, transport infrastructure, clean water, electrical power, and public research to generate new agricultural productivity. In addition, food security and income growth are enhanced by the establishment of a fair and market-oriented agricultural trading system that provides substantial reductions in trade-distorting agricultural support and protections, resulting in correcting and preventing restrictions and distortions in world agricultural markets. Food security can be increased by capturing the potential gains from further global trade liberalization and through reductions in anti-agricultural biased domestic policies. We note that reducing tariffs and eliminating domestic impediments to trade, which can be addressed through autonomous Government action, could have the immediate effect of reducing domestic food bills.

Under the Marrakesh Agreement, the Ministers recognized that implementation of the Uruguay Round as a whole would generate increasing opportunities for trade expansion and economic growth to the benefit of all participants. The Ministers also recognized that least-developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs. To address these issues, the Ministers accordingly agreed to establish appropriate mechanisms to ensure that the implementation of the Uruguay Round did not adversely affect the availability of food aid. Undertakings included the reviewing food aid commitments, increasing food donations in grant form, and giving full consideration to requests for technical and financial assistance. The Ministers further agreed to ensure that any agreement relating to agricultural export credits would make appropriate provisions for special and differential treatment in favour of least-developed and net food-importing developing countries. In addition, these countries must be eligible to draw on the resources of the international organizations to address difficulties in short-term financing of food stuffs resulting from the reform programme.

We will now provide our views relating to each of these commitments under the Marrakesh Agreement, and then follow with answers to the questions posed by the Panel of experts.

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Food Aid

The United States is the largest donor of food aid, annually providing over half the world's food aid and over half the World Food Programme's budget. In FY 2001, the United States provided over $700 million in food aid to LDCs and NFIDCs. Over 90 per cent of U.S. food aid donations are made on fully grant terms. Grant food aid is instrumental in alleviating hunger in emergencies or in situations where the country may not have the resources to purchase food. In some cases, grant food aid is monetized and used to fund agricultural development and infrastructure activities, which help the country increase its agricultural productivity and rural economy. We believe that there is also a need for food aid to be provided on concessional terms, particularly to help vulnerable and needy groups in middle-income countries. We believe concessional food aid acts as a bridge between grant food aid and commercial sales, helping countries transition to market economies. Like the food aid provided in grant form, concessional programmes support beneficial development activities aimed at helping needy and vulnerable groups, improve the agricultural productivity of farmers and related infrastructure in recipient countries and generally support economic development. However, such commitments must reflect the U.S. Government budget realities. The United States believes that the responsibility for providing food aid must be shared by all nations with the ability, by providing food or money through grants or concessional sales.

Export Credits

Regarding export credits, the Ministers agreed to ensure that any agreement relating to agricultural export credits would make appropriate provisions for differential treatment in favour of least-developed and net food-importing developing countries. Plurilateral negotiations on agricultural export credits have been taking place in the OECD since 1994. Although the Chair's proposal included an additional three months of tenor (repayment period) for LDCs and NFIDCs, the participants were unable to agree on an acceptable package of disciplines governing export credits, credit guarantees and insurance programmes. As a result, the negotiations are stalled. However, as in the OECD, the United States will support special and differential treatment in favour of LDCs and NFIDCs with regards to disciplines on export credits.

The United States believes that export credit programmes present an opportunity for some countries to improve their food security by addressing short-term financing problems regarding the import of basic foodstuffs. These programmes provide liquidity and purchasing power to countries that would otherwise be unable to purchase necessary food products. The financial upheavals in Asia and Latin America adversely affected food availability in countries facing short-term liquidity problems. However, the situation would have been worse in some countries had they been unable to use export credit programmes to purchase their much needed food supplies.

International Financial Institutions

The United States defers to the experts representing the international institutions to address concerns regarding the ways and means for improving access by LDCs and NFIDCs to the multilateral programmes and facilities that would assist with short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.

Technical and Financial Assistance

The United States provided over $90 million in FY 1999 to FY 2001 to developing countries for agricultural development activities. During this same period, the United States provided nearly $30 million to assist developing countries comply with their commitments under the WTO Agreement on Agriculture and the Agreement on Sanitary and Phytosanitary Measures. The United States is and

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will continue to be a source of capital, training and capacity building, and of economic partnership with the LDCs and NFIDCs.

Q1. In the view of the Parties, what are "normal levels of commercial imports of basic foodstuffs"? What are appropriate criteria to determine whether a country experiences "short-term difficulties in financing normal levels of commercial imports of basic foodstuffs" as provided for in the Marrakesh NFIDC Decision and the Panel's terms of reference (question to all parties involved)?

Reply

The United States believes that the Panel of experts in coordination with the experts of the international financial institutions can best answer this question. However, the United States retains the right to review and comment on any criteria developed.


Reply

The United States helps NFIDCs and LDCs improve their food security and continues to support efforts aimed at improving food security. However, the United States remains unconvinced on the concept and feasibility of a new food financing facility at this time.


The United States has many concerns that would need to be addressed if such a fund was created. For example:

The facility's mechanics, e.g. how would we determine which countries could access the fund, when and how the funds are allocated, which government ministry would receive the funds and how would funds be used (the proposing countries mentioned capacity building activities and agricultural development, purchasing food was not listed).

The private sector manages almost all trade in food products. How would recipient governments transfer funds received from the facility to the private trade for food purchases?

How would the fund be managed, what are the repayment terms, what if a country defaults on the loan?

The proposed facility should not result in negative market distortions. Use of the facility should not be automatic when a certain price threshold is reached (otherwise this could result in a commodity stock scheme which has its own set of problems).

Any trigger mechanism should be reviewed in the context of the overall financing needs of the countries in question, not food alone. For example, it would not make sense to give help to a NFIDC or a LDC when their food import bills are rising, if at the same time their export receipts are rising even more, for example, because of oil export receipts.

In addition, there would need to be rules and criteria established that would ensure the fund does not undermine policy conditions attached to IMF financing and provisions for specific commitments on market and domestic reforms and tariff reductions that would help reduce the food prices in the recipient country.

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Reply

Food aid can play an important role in helping LDCs and NFIDCs meet their food import needs during times of short-term financing difficulties. The U.S. share of food aid allocated to countries facing emergency situations has grown through time. We note that such emergency situations often leave the country facing short-term financing difficulties. Also, see the section on food aid above.


Reply

This Panel of inter-agency experts should consider commodity price risk management instruments. However, commodity price risk management instruments address only one aspect of volatility as it relates to food insecurity: the price. Other sources of volatility include production and the exchange rate. In many instances, prices for various commodities are correlated, which may lead to a net financial gain for the country. For example, increases in import prices for wheat, corn and soybeans may be offset by higher prices for oil, coffee, tea, cocoa, or other exports from the country. Institutional capacity building and technical assistance would need to be provided to effectively employ hedging mechanisms. In this matter, we note that government intervention in hedging is often inefficient compared to the private sector. Additional information on these market instruments should be provided to the members for further consideration.

ANNEX 4

Submissions by the Food and Agriculture Organization of the United Nations (FAO)

Towards improving the operational effectiveness of the Marrakesh Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing

Developing Countries11

I. BACKGROUND

One of the subjects extensively debated during the Uruguay Round (UR) negotiations was the possible negative impact of agricultural trade liberalization on least developed and net food-importing developing countries. This reflected a concern that the impact would be relatively greater on world market prices of food commodities, which are imported in large and growing quantities by these countries, than on tropical agricultural products, which are the main agricultural exports of these countries. Other possible negative impacts were erosion of trade preferences as tariffs are reduced and the difficulties of LDCs and NFIDCs to increase agricultural exports because of supply-side constraints. Several studies have concluded that this group of countries could experience negative effects on account of these factors, at least during the reform process. Many of them are among the poorest and most food-insecure in the world.

These concerns were recognized at the political level. Thus the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries (henceforth referred to as the Decision) states that:

"Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least developed countries and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs."

To deal with the possible negative effects, the Decision provided for action through four response mechanisms:

Food aid; Short-term financing of normal levels of commercial imports; Favourable terms for agricultural export credits; Technical and financial assistance to improve agricultural productivity and infrastructures. 12

11 Paper prepared by the FAO Commodities and Trade Division for the FAO Round Table on Selected Agricultural Trade Policy Issues, Geneva, 21 March 2001.

12 For the complete text of the Decision, see Annex I.

There are currently 49 countries that are recognized as LDCs and 19 as NFIDCs. All relevant statistics clearly differentiate these two groups from other developing countries with regard to food security and the capacity to import food. 13

The implementation of the Decision has remained unsatisfactory and a matter of concern for all, both donors and beneficiaries, despite the political commitment that has been stressed from time to time at major international conferences, such as the World Food Summit, UNCTAD and the Ministerial sessions of WTO. Many analysts feel that failure to implement fully the Decision, even in a period such as 1995/96-1996/97, when world food prices rose sharply and food import bills surged (see Box 1), points to some inherent, serious problem with the very nature of the Decision.

Box 1. Cereals Import Experience of LDCs and NFIDCs in 1995-1998

World cereal prices increased sharply during 1995/96 and 1996/97 and there was an approximately 49 percent rise in the cereal import bill of LDCs and NFIDCs over the average of the previous two years. While most of the increase in the import bill was accounted for by higher import unit values, there was also a sharp decline in food aid shipments in this period (to 9 percent of total cereal imports from roughly 15 percent during 1993/94). The shortfall consequently had to be made up for by commercial imports at the higher world prices, which were no longer subsidized. With the decline in world market prices after 1997, cereal import bills have also fallen, though less than proportionately because of a rising volume of imports, continued low levels of food aid and reduced export subsidization. Thus, it appears that cereal import bills are now on a different and higher plateau than before the Uruguay Round.

Source: "The Food Situation in the Least-Developed and Net Food-Importing Developing Countries", Commodities and Trade Division, FAO, Rome, 1999.

In the context of the new agricultural trade negotiations, it is essential that a climate of confidence and trust be developed for continuing the reform process. The fulfilment of all commitments, the Decision included, is one way forward. For all food-insecure developing countries, food security remains a top priority. The availability of a contingent mechanism that can be trusted during difficult times would both create a conducive environment for the negotiations and encourage countries to liberalize further their food markets.

This paper puts forward some ideas for facilitating implementation of the Decision. It defines (in section 2) the nature of the "negative effects" alluded to in the Decision and provides a rough order of magnitude of the "excess" food import costs for the countries concerned. Section 3 provides information on the three instruments envisaged in the Decision for assisting them in dealing with short-term food import-related difficulties. Section 4 discusses two proposals for implementing the Decision.

II. NATURE AND MAGNITUDE OF THE FOOD PROBLEM ADDRESSED BY THE DECISION

Defining "negative effects"

The Decision defines the nature of the food problem in a general manner, stating that during the reform programme LDCs and NFIDCs "may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions". The issue is thus clearly that of access to food in world markets "on reasonable terms and conditions", which is indeed a widely recognized problem for many net food-importing

13 See The Food Situation in the Least Developed and Net Food-Importing Developing Countries , Commodities and Trade Division, FAO, Rome, 1999.

developing countries. The Decision accordingly prescribes action through the three14 response mechanisms listed above (in Section 1).

But what are "reasonable terms and conditions" and when are they unreasonable? Various definitions are possible, but a simple interpretation of "unreasonable" terms of access is if the terms involve food import bills over and above normal levels.

Triggering the response for assistance

Triggers are essential in order to decide when and how to respond. The text of the Decision provides some guidance in this respect. Specifically, it does not rest on a narrow interpretation of the negative effects arising from any single source of the problem, such as sharp rises in world market prices or sharp declines in food aid shipments, but refers in general terms to the overall negative effect of the reform programme as a whole.

These considerations suggest that the triggers should not be based on the individual factors that lead to the problem (e.g. higher world prices) but rather on the totality of the outcome itself, i.e. the unexpected increase in the food import bill. There is the further implication that the triggers refer to country-specific outcomes, such as exceptional increases in a particular country's import bill. Thus, what seems to have been envisaged is the need for assistance specifically to those countries suffering negative effects in a given year (usually a different group of countries in any one year like 1995/96, when world cereal prices spiked), rather than to all LDCs and NFIDCs simultaneously.

Quantifying unreasonable or excess food import bills

Although cereals represent a high proportion of total food imports for most net food-importing developing countries, other foods, particularly vegetable oils, meat and dairy products, and sugar, are also important in the diet of poor people and constitute a significant share of the total food import bill. For the purpose of the present analysis, in order to demonstrate the order of magnitude involved, excess food import bills were computed on the basis of a narrow definition, covering cereals only (Food I) and of a broader definition, which also includes most basic food items, namely vegetable oils, dairy and meat products and sugar (Food II).

Two alternative thresholds were defined to measure the excess import bill: i) 105 percent of the trend level; and ii) 110 percent of the trend level.15 The difference between actual import bills and these threshold values is considered to constitute an "excessive" or "unreasonable" import cost, to use the term of the Decision.16

In the calculations, the absolute values of the excess food import bills so defined are summed separately for 46 LDCs17, and the 19 NFIDCs and for the two groups. The mean values shown in Table 1 are the averages of these totals during the 10 years covered (1989-1998). The maximum value shown in the table is the largest annual total. For example, on the basis of the 10 per cent above

14 The fourth response mechanism listed, namely the provision of technical and financial assistance to the LDCs and NFIDCs to improve their agricultural productivity and infrastructure, addresses food problems of a longer-term nature, in contrast to the other three mechanisms. By also including this instrument in the list, the Decision rightly draws attention to the importance of addressing agricultural productivity and growth in these countries. Since this paper concentrates on short-term problems, this instrument is not covered in the analysis.

15 Trend levels were computed by fitting linear trend lines to annual imports during 1985-1998. An alternative and widely used proxy for trend values is moving averages.

16 Thus, essentially, additional imports that are less than 5 per cent (or 10 per cent) above the trend level are excluded from the calculations. Imports below trend levels are also ignored as they are not relevant to the Decision.

17 Data were not available for two other LDCs. The 49th country (Senegal) was added to the United Nations list after these calculations were made.

trend rule, the mean excess import bill of the LDCs was US$179 million for Food I and US$224 million for Food II. The corresponding maxima were US$421 and US$441 million, in 1992 and 1996, respectively. On the basis of the 5 per cent rule, the means and maxima were naturally higher. For the entire sample of 65 countries, under the 10 per cent rule, the mean import bill was US$401 million for Food I and US$432 million for Food II. The maximum level reached was just over one billion dollars. In only three out of the 10 years did the excess import bill exceed US$500 million – in 1995 (US$984 million), 1996 (US$1 037 million) and 1998 (US$502 million). At the other extreme, the excess for all 65 countries taken together was lowest in 1991 (US$84 million).

For such a large sample, the value of excess imports would obviously vary widely from country to country, in a given year and also over time for a given country. What matters for a compensation scheme is that in any particular year only some countries face excess food import bills.18

Table 1. Food import bills of LDCs and NFIDCs in excess of 5 and 10 percent above the trend (million US$)

In excess of 5% above trend

In excess of 10% above trend

Mean Maximum (year) Mean Maximum

(year)

Food I (cereals only) LDCs (46)

NFIDCs (19)Total (65)

Food II (cereals and most other basic foods)

LDCs (46)NFIDCs (19)Total (65)

216 300 515

290 336 627

466 (1992) 914 (1996)

1 252 (1996)

549 (1996) 978 (1996)

1 527 (1996)

179 222 401

224 208 432

421 (1992) 714 (1996) 998 (1996)

441 (1996) 647 (1995)

1 037 (1996)

Notes: Mean is the average annual amount in 1989-1998 of imports in excess of the threshold. Maximum is the largest annual value during the same period. Food II comprises cereals, dairy and meat products, vegetable oils and sugar. The trend is for 1985-1998.

Source: Computed from FAOSTAT data.

18 Annex II provides information on the food import capacity of the 65 countries, in terms of the ratio of food imports to exports of goods and services after deduction of debt service payments.

III. THE THREE RESPONSE MECHANISMS PROVIDED FOR IN THE DECISION

In order to evaluate the alternative proposals discussed in the next section, it is important to understand how the three response mechanisms operate currently. This section provides relevant information.

Food aid

The Decision provides for action at two levels. First, Ministers shall review the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention (FAC) 1986 and initiate negotiations to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme. Second, it calls for adopting guidelines "to ensure that an increasing proportion of basic foodstuffs is provided to LDCs and NFIDCs in fully grant form and/or on appropriate concessional terms in line with Article IV of the Food Aid Convention".

On the first point, the FAC 1999 determined 4,895,000 tonnes of eligible products (in wheat equivalent) (plus 130 million Euro in cash) as the minimum level. Actual levels of food aid have generally exceeded this minimum.

On the second point, which is the more important one in the present context, the 1999 FAC lists eligible recipients under four categories as follows: (a) all LDCs; (b) 24 low-income countries (of which 6 are NFIDCs); (c) 52 lower middle-income countries (of which 9 are NFIDCs); and (d) 4 NFIDCs not included in (b) or (c) – see Box 2.

Article VII of the Convention states that priority in food aid allocations shall be given to categories (a) and (b), i.e. LDCs and low-income countries (which include 6 NFIDCs) and sets out the conditions under which countries and territories in the other two groups are eligible for food and which include the remaining 13 NFIDCs.

Box 2. Eligible Recipients under the Food Aid Convention 1999

Article VII - Eligible Recipients"(a) Food aid under this Convention may be provided to the developing countries and territories which are listed in Annex B, namely:

(i) least-developed countries;(ii) low-income countries;(iii) lower middle-income countries, and other countries included in the WTO list of Net Food-Importing Developing Countries at the time of the negotiation of this Convention, when experiencing food emergencies or internationally recognized financial crises leading to food shortage emergencies, or when food aid operations are targeted on vulnerable groups.

(b) For purposes of paragraph (a) above, any changes made to the DAC (Development Assistance Committee of the OECD) list of Developing Countries and Territories in Annex B (a) to (c) shall also apply to the list of eligible recipients under this Convention.

(c) When allocating their food aid, members shall give priority to least developed countries and low-income countries."

Annex B – Eligible Recipients"Eligible food aid recipients under Article VII of this Convention refer to Developing Countries and Territories listed as aid recipients by the Development Assistance Committee (DAC) of the OECD, effective as of 1 January 1997, and to countries included in the WTO list of Net Food-Importing Developing Countries, effective as of 1 March 1999."

In accordance with these provisions eligible recipients are:

(a) Least-developed countries – all 48 countries listed; *

(b) Low-income countries – 24 countries listed, including 6 NFIDCs (Côte d’Ivoire, Honduras, Kenya, Pakistan, Senegal* and Sri Lanka); (c) Lower middle-income countries – 52 countries listed, including 9 NFIDCs (Botswana, Cuba, Dominican Republic, Egypt, Jamaica, Morocco, Peru, Tunisia and Venezuela); (d) Four other NFIDCs listed by WTO (Barbados, Mauritius, St. Lucia, Trinidad and Tobago).

_______________________* As noted above, Senegal has since been added to the list of LDCs.

From the standpoint of the Decision, it may thus be seen that the Convention did not treat all LDCs and NFIDCs equally in terms of priority and criteria for food aid allocation, and in consequence a situation could arise where the needs of the remaining 13 NFIDCs are not fully taken into account. Also, the allocation criteria applicable to groups (c) and (d) do not fully conform with those of the Decision; in particular the principle of compensation implicit in the Decision is related strictly to the reform process and not to considerations such as international financial crises and feeding vulnerable groups. It is consequently doubtful whether the FAC fully responds to the concerns reflected in the Decision.

Compensatory financing facility

In paragraph 5 of the Decision, Ministers recognized that "as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of the adjustment programmes, in order to address such financing difficulties". The subsequent sentence refers to consultations by the GATT Director-General with the Managing Director of the IMF and the

President of the World Bank. Attention has consequently focused on the existing facilities of the two Bretton Woods institutions, and in particular on the cereal financing facility of IMF. Very little debate has taken place so far on the other option stated above, i.e. "such facilities as may be established". The main features of the IMF cereals facility are summarized in Box 3.

Box 3. The IMF Compensatory Financing Facility

In 1963 a Compensatory Financing Facility (CFF) was established in IMF to help countries cope with temporary exogenous shocks affecting export earnings without resorting to undue and unnecessary adjustments. Coverage was expanded in 1981 to include excess cereal import costs. In 1998, this facility was integrated with a new External Contingency Mechanism (ECM) to create a new Compensatory and Contingency Financing Facility (CCFF). The ECM was, however, eliminated in early 2000 and the new facility again called CFF.

The purpose of the CFF is to ensure timely assistance to members that are experiencing balance of payments (BoP) difficulties resulting from a temporary decline in export earnings (or rise in cereal import costs). 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, and must be attributable to factors largely beyond the control of the authorities.

Access limits (the amount of compensation) under the CFF for excess cereal imports is determined by: i) a member’s BoP position; ii) past cooperation with IMF to resolve its BoP difficulties; and iii) willingness to adopt adjustment policies that would meet the standards of upper tranche conditionality. Depending on these considerations, access limits can range from 10 per cent to 55 per cent of quota. Within these limits, access is determined by the size of the shortfall/excess and the member’s capacity to repay the loan.

As originally conceived, the key features of the CFF were low conditionality and rapid processing of requests. Access was not, however, intended to be automatic – the country's BoP position as a whole was recognized as important and not just that part deriving from the export shortfall or cereal import excess.

The CFF facility has been relatively little used and its cereal component even less. Of the total compensation of SDR4.1 billion during 1993-1999, only 14 per cent related so to the cereal imports. Only four countries were involved for cereals, for a total of six times in the seven years – Moldova, South Africa, Algeria and Bulgaria. None of them is either a LDC or a NFIDC. None utilized the facility in 1995, a year of cereal price spikes, and only Algeria borrowed in 1996.

_____________________Source: The IMF Staff Review cited in note 9 of this paper.

The reasons why the CFF has been little used have a bearing on the implementation of the Decision. One key factor appears to be that drawings must be made "in the context of the adjustment programmes" and hence subject to conditionality. A recent review of the facility by the IMF staff confirmed that for most developing countries the eligibility criteria are difficult to meet:

"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 BoP 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 BoP 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 other 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" (paragraph 15 of the review19)."

Another factor is that the CFF is limited to cereals only, whereas the Decision covers all basic foods. Also, the CFF explicitly links excess cereal imports to export earnings - compensation is possible only to the extent that the excess in cereal imports is not offset by an excess of export earnings. There are also problems of interpretation as to whether shocks are not only exogenous but also of a purely temporary nature (requiring no policy adjustments) or reflect more durable factors (requiring an adjustment programme).20

The cereals import facility has never fitted well into IMF's various facilities, as its origin and continuity were linked to humanitarian and food security considerations. This too was recognized in the report cited above:

"The cereal import element was added in 1981 (to the original CFF), 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 BoP problem, but reconsidered it upon receipt of requests from the World Food Council and the FAO, and giving weight to the human considerations associated with this issue. The cereal element has since been routinely extended".21

Given these difficulties, the future of the CFF also seems to remain uncertain. A subsequent review of the facility by the IMF Executive Board summarized the situation as follows: "No Director has argued for retention of the CFF as it stands now, and the debate has focused on the two main options discussed in the staff paper: i) elimination of the CFF; or ii) substantial amendments to the facility, limiting it to cases where an arrangement is in place or no other BoP problem is present". The conclusion reached was that "we leave the CFF for now, pending the broader review (of all facilities), on the understanding that if it is decided to retain the CFF in the context of that review, there is strong sentiment for modifying and streamlining it along the lines the staff has proposed."22

To sum up, the CFF could require considerable modification if it were to be used in the spirit of the Decision. At the very least, that would involve: i) extending the coverage from cereals to all basic foods; ii) relaxation of the BoP and other adjustment conditionality, in recognition that shocks are exogenous and temporary; iii) uniform eligibility criteria for all LDCs and NFIDCs, in line with the Decision; and iv) increasing the amount of financing on concessional terms so as to make the facility more attractive, e.g. closer to the IMF Poverty Reduction and Growth Facility (PRGF).

19 Review of the Compensatory and Contingency Financing Facility (CCFF) and Buffer Stock Financing Facility – Preliminary Considerations (Staff Review), 9 December 1999, available on line at http://www.imf.org/external/np/ccffbsff/review/index.htm.

20 The distinction between short-lived and long-lived shocks is important in this context. The scope for commodity stabilization in the latter case is limited. Notwithstanding the empirical findings in several recent studies that shocks to commodity prices are typically long-lasting, the duration of shocks in the world market prices of grains and other basic foods (e.g. sugar) is relatively short. Moreover, sharp increases in prices are typically of much shorter duration than sharp falls.

21 IMF (1999), op. cit., Box 2.22 Summing Up by the Acting Chairman – Review of Compensatory and Contingency Financing

Facility (CCFF) and Buffer Stock Financing Facility – Preliminary Considerations. Executive Board Meeting 00/5, 14 January 2000, also available at the website indicated in note 9.

http://www.imf.org/external/np/ccffbsff/review/index.htm

Agricultural export credits

In the Decision Ministers agreed to "ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of LDCs and NFIDCs". Negotiations on an Understanding on export credits for agricultural products have been taking place in OECD for some years, but no agreement has yet been reached.

A recent OECD study showed that agricultural export credits provided by member countries have increased markedly in recent years, from US$5.5 billion in 1995 to US$7.9 billion in 1998, though the subsidy element involved was generally small (about US$300 million in 1998) 23. Most export credits were for basic foods (mainly cereals), followed by vegetable products (including oilseeds and wheat flour) and livestock products. As regards recipients, the share in the total of agricultural export credits was very small for both LDCs and NFIDCs (0.2 per cent and 9 per cent, respectively). One implication of all this - also stressed in the study - is that current agricultural export credit programmes do not necessarily target countries facing liquidity constraints on their purchase of food in world markets, as is often claimed for their justification.

Reverting to the Decision’s call for "differential treatment" in favour of LDCs and NFIDCs in any eventual agreement, two points may be noted in particular. First, special attention may need to be given to the shares of LDCs and NFIDCs in total agricultural export credits, which are currently very small. Second, since it is the subsidy element of the credit, and not necessarily the volume of credit itself, that represents "assistance" in the true sense of the term, it is necessary to ensure that LDCs and NFIDCs enjoy a higher rate of subsidy (a sort of most-favoured-nation treatment, whereby, for example, a creditor country accords them the same terms as those granted to the most-favoured borrower).

IV. IMPLEMENTING THE DECISION: TWO ALTERNATIVES

This section discusses two possible alternative ways in which the Decision could be implement. The first assumes implementation by donors/agencies in a decentralized fashion as currently but with some strengthening. The second envisages the creation of a Special Food Security Facility.

Alternative 1: Strengthening the current mechanisms

Each of the three short-term response mechanisms represents transfers from the donor to the recipient country. They function either on a multilateral basis (as when they involve the IMF facility or WFP- administered food aid) or bilaterally (export credits and food aid under the FAC). Each has a different time frame for disbursement and eventual repayments, if required, and different accounting procedures.

In order to relate the contributions under the various programmes to the needs of recipients under the Decision, some centralized accounting and reporting would be required, since each source of assistance has its own objectives to meet in addition to those stemming from the Decision: IMF facilities are for IMF members facing particular BoP difficulties; food aid is given not only to cope with exceptional import bills but also for a variety of other reasons (e.g. for nutrition programmes and emergency assistance); export credits are given for different commodities, on different terms and for varying reasons. To keep track of all these different forms of assistance and how they relate to the Decision requires some sort of monitoring mechanism so that the relevant WTO Committee is able to take appropriate action.

23 An Analysis of Officially Supported Export Credits in Agriculture, Document COM/AGR/TD/WP(2000)91/Final, 2000, OECD, Paris. Available online at http://www.oecd.org/agr.

Box 4. A possible format for reporting on the implementation of the Decision(all assistance expressed in terms of the grant equivalent, in millions of US$)

Beneficiary country

Food aid Financing facility Export credit Total assistance Total needs

LDCs Country 1 Country 2 ......... ........ NFIDCsCountry 1Country 2 ......... ........

At the very least, all donors would have to pledge annually their assistance for meeting exceptional food import bills to some central secretariat, which would have the task of standardizing the data on a common reporting basis, expressed in comparable units of value (e.g. the grant element) compiled by donor and recipient and assessed against the estimated excess food import bill. This secretariat would report regularly to the WTO Committee on Agriculture. Box 4 illustrates a format for reporting this information. With this approach, there would be a good prospect of shortfalls in assistance for exceptional food import requirements being identified early enough in the year for donors to adjust their levels of assistance as appropriate. This format could also be useful to identify areas where improvements may be required, in the sense of fully matching assistance to the needs.24

A strong reporting mechanism of this kind should gradually lead to improvements as the gaps in assistance are identified and implementation difficulties noted. Yet, there is no guarantee about the predictability of resources, i.e. that the total made available would be adequate and timely to meet the needs arising under the Decision. Moreover, it is unlikely to lead to binding commitments in WTO and would involve only a "best endeavour" commitment, as at present.

It is these weaknesses in the decentralized approach that have led several countries to prefer a separate food security facility, with commitments bound in WTO and a disbursement system that results in an equitable sharing of the assistance for meeting exceptional food import bills.

Alternative 2: A special WTO Food Security Facility

Under this alternative a Food Security Facility (FSF), under WTO auspices, would be created solely for the purpose of implementing the Decision. Although details would have to be worked out, the FSF would operate broadly as follows:

24 Currently, the WTO Committee on Agriculture monitors the implementation of the Decision by treating the instruments separately. Each relevant donor and agency provides information on its assistance programmes, including the amount of assistance to the LDCs and NFIDCs. This information is then compiled by the WTO Secretariat, but no attempt is made either to identify and quantify country needs as stipulated by the Decision or to verify if the total level of assistance provided was adequate or even exceeded the needs.

A centralized implementation machinery

In contrast to the current, decentralized approach, the FSF would be a centralized machinery with its own resources, to be drawn upon as necessary, and with an administrative machinery for implementation. In addition, unlike at present, assistance commitments would be bound in WTO.

Financial requirements

The quantification of excess food import bills in Section 2 provides a basis for calculating the rough order of magnitude of the resources required for the Facility. The mean annual level of compensation was estimated to be roughly US$600 million. Assuming that the reform process lasts for six (ten) years, the total requirement would be US$3.6 billion ($6.0 billion). onor commitments can be both in cash and in kind, (e.g. food aid), as assistance is expressed on a grant-equivalent basis.

Eligibility and level of compensation

The Facility would first have to verify that a country is eligible to make drawings up to its ceiling entitlement for a particular year, to which end it would have to compute the excess import bill for each beneficiary.

In order to avoid a situation where excessive drawings in a single year could undermine the viability of the Facility itself, it would probably be necessary to set a cap to the level of compensation for each country. hat ceiling could be determined by, for example, a) the quantity of food imports in a reference period and the increase in current world prices over some threshold level, or b) the value of food imports in the reference period.

Control over the available resources

Full control of available resources by the FSF itself is the key underlying feature of this alternative. owever, that may not necessarily require that it hold all the resources itself. They may be held by other bodies, as in Alternative 1, but in that case they would have to be committed for use by the Facility as necessary. This arrangement essentially requires that commitments are bound in WTO.

Reporting

Since the sole objective of the Fund is to implement the Decision, it would report directly to the Committee on Agriculture, which is responsible for monitoring implementation.

Attachment I - Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing

Countries

1. Ministers recognize that the progressive implementation of the results of the Uruguay Round as a whole will generate increasing opportunities for trade expansion and economic growth to the benefit of all participants.

2. Ministers recognize that during the reform programme leading to greater liberalization of trade in agriculture least-Developed and net food-importing developing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions, including short-term difficulties in financing normal levels of commercial imports of basic foodstuffs.

3. Ministers accordingly agree to establish appropriate mechanisms to ensure that the implementation of the results of the Uruguay Round on trade in agriculture does not adversely affect the availability of food aid at a level which is sufficient to continue to provide assistance in meeting the food needs of developing countries, especially least developed and net food-importing developing countries. To this end Ministers agree:

(i) to review the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention 1986 and to initiate negotiations in the appropriate forum to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme;

(ii) to adopt guidelines to ensure that an increasing proportion of basic foodstuffs is provided to least-developed and net food-importing developing countries in fully grant form and/or on appropriate concessional terms in line with Article IV of the Food Aid Convention 1986;

(iii) to give full consideration in the context of their aid programmes to requests for the provision of technical and financial assistance to least developed and net food-importing developing countries to improve their agricultural productivity and infrastructure.

4. Ministers further agree to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of least developed and net food-importing developing countries.

5. Ministers recognize that as a result of the Uruguay Round certain developing countries may experience short-term difficulties in financing normal levels of commercial imports and that these countries may be eligible to draw on the resources of international financial institutions under existing facilities, or such facilities as may be established, in the context of adjustment programmes, in order to address such financing difficulties. In this regard Ministers take note of paragraph 37 of the report of the Director-General to the CONTRACTING PARTIES to GATT 1947 on his consultations with the Managing Director of the International Monetary Fund and the President of the World Bank (MTN.GNG/NG14/W/35).

6. The provisions of this Decision will be subject to regular review by the Ministerial Conference, and the follow-up to this Decision shall be monitored, as appropriate, by the Committee on Agriculture.

Attachment II - An indicator of food import capacity of selected LDCs and NFIDCs

Country Food imports

XGS-Debt25 Import capacity indicator

(a) (b) (a)/(b)US$ million %

LDCs26

1. Angola 235 3 401 6.92. Bangladesh 766 4 385 17.53. Benin 89 538 16.54. Burkina Faso 60 260 23.25. Burundi 11 55 20.06. Cambodia * 60 862 6.97. Cape Verde * 41 97 42.68. Central African

Republic16 159 10.3

9. Chad 19 192 9.710. Comoros * 20 44 45.511. Djibouti 44 193 22.712. Equatorial Guinea* 8 100 7.813. Gambia 55 179 30.914. Guinea 143 600 23.915. Guinea-Bissau 25 28 90.716. Haiti 262 262 100.117. Lao PDR * 21 408 5.118. Lesotho 65 196 32.919. Madagascar 62 673 9.220. Malawi 121 320 37.821. Maldives 24 364 6.722. Mali 56 431 13.123. Mauritania 150 353 42.424. Mozambique 153 355 43.125. Myanmar 156 1 308 11.926. Nepal * 53 1 038 5.127. Niger 61 264 23.228. Rwanda 60 81 73.729. Samoa * 20 71 28.430. Sierra Leone 75 103 72.331. Solomon Islands 15 205 7.332. Sudan * 176 588 29.933. Tanzania, United

Rep. of165 1 019 16.2

34. Togo 46 461 9.935. Uganda 62 572 10.836. Vanuatu * 8 124 6.6

NFIDCs1. Barbados 47 1 134 4.12. Botswana 157 2 430 6.53. Côte d’Ivoire 279 3 535 7.94. Cuba 459 n.a. -5. Dominican Republic 319 6 193 5.16. Egypt 2 546 11 589 22.07. Honduras 97 1 502 6.5

25 Exports of goods and services less debt service payments.26 Reported for only 36 LDCs, for lack of data on services trade.

Country Food imports

XGS-Debt Import capacity indicator

(a) (b) (a)/(b)US$ million %

8. Jamaica 221 2 761 8.09. Kenya 340 2 209 15.410. Mauritius 173 2 296 7.511. Morocco 950 6 266 15.212. Pakistan 1 193 6 392 18.713. Peru 923 5 095 18.114. Senegal 27 293 1 082 27.015. Sri Lanka 449 4 746 9.516. St. Lucia 36 339 10.717. Trinidad and Tobago 137 2 447 5.618. Tunisia 564 6 756 8.319. Venezuela 785 16 590 4.7

Note: Data relate to the average for 1995-1998 or the latest four years available. An asterisk (*) indicates that the country is not a Member of WTO.

Source: Food imports: FAOSTAT (Basic Food as defined in the text, Food II); Exports and debt service: IMF, International Financial Statistics.

27 Since this annex was prepared, Senegal has been added by the United Nations to the list of LDCs.

Revolving Fund for the purpose of implementing the WTO Marrakesh Decision relating to the Least-Developed and Net Food-Importing Developing Countries28

Executive Summary

Purpose of the Revolving Fund (RF) – The RF would provide a loan facility to address the short-term financing difficulties that least developed countries (LDCs) and net food-importing developing countries (NFIDCs) may experience in financing normal levels of commercial imports of basic foodstuffs. It is argued that the provision of financing would not require justification other than evidence that import bills were excessive.

Size of the RF – The key parameter that determines the size of the RF is the threshold level selected to define excess food import bills. Under the assumption of a 25 per cent coverage, i.e. that food import bills in excess of 125 percent of normal levels are considered excessive, an initial capital of US$1 billion would suffice for "normal" years. In addition, extra resources on a stand-by basis would be needed for spike years and these would amount to another US$1 billion. However, these extra injections into the RF would be paid back to the contributors within two to three years from the time of the exceptional borrowing. Hence, the total net contribution to the RF is US$1 billion plus the obligation (in the form of "promissory notes" or in some other similar form) to provide stand-by resources on loan when spikes occur.

Capping drawings from the RF – To insure against the unlikely event that the total resources of the RF (including funds on call) are insufficient to cover loan applications in an exceptional spike year, loans would have to be capped. Thus, the maximum callable obligation of contributors would always remain fixed, i.e. would not exceed US$1 billion during a spike period (which could be of one or multiple years' duration). One capping option is to ration total lending - at the time of the spike - to all potential borrowers in a proportionate manner. Another option would be to introduce an element of special and differential treatment so that borrowing by NFIDCs is capped but not that by LDCs.

Institutional location of the RF – It is envisaged that the RF would be managed by an existing financial institution with the requisite logistics, manpower and experience in managing funds. It would also be desirable that it has experience in funding agricultural development programmes in the prospective beneficiary countries. The International Fund for Agricultural Development (IFAD) is one institution that meets these criteria.

I. BACKGROUND

In a decision adopted by the WTO General Council on 15 December 2000, the WTO Committee on Agriculture (CoA) was instructed to examine possible means of improving the effectiveness of the implementation of the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries. In this context, a group of 16 developing country Members of WTO submitted on 25 April 2001 a proposal which calls for, inter alia, the establishment of an Inter-Agency Revolving Fund (RF) with two components1. These were outlined as follows:

"The first, and variable component of the Fund (to comprise existing and/or new financing facilities as appropriate), will be to ensure that adequate financing at concessional terms is made available to the NFIDCs and LDCs in times of high world market prices". The second, fixed component of the RF, should "provide technical and financial assistance to LDCs and

28 Technical Note based on an informal FAO consultation held in Rome on 17 September 2001.1 Proposal to Implement the Marrakesh Ministerial Decision in Favour of LDCs and NFIDCS,

G/AG/W/49, 19 March 2001.

NFIDCs for specific projects linked to improving agricultural productivity and related infrastructure… over and above the regular bilateral and multilateral activities of donors in this area".

FAO organized in September 2001 an informal meeting of experts from various international organizations2 to discuss the nature and modality of operation of the proposed RF. Section II summarizes the views expressed by experts at that meeting. Section III develops the possible nature of the variable component of the RF, including its resource base and the modalities of its operation. The fixed component of the RF proposal is not addressed in this note.

II. SUMMARY OF THE FAO INFORMAL EXPERT CONSULTATION OF SEPTEMBER 2001

Discussions by the experts during the Rome Consultation in September 2001, and earlier consultations in Geneva in March 20011, identified several issues involved in the rationalization of the RF and its purpose, how it could operate in practice and how its resources could best be used. The views expressed are summarized here.

The purpose of the RF would be to provide a loan facility to address short-term financing difficulties eligible countries may experience in financing normal levels of commercial imports of basic foodstuffs. Loans from the Fund would be used to offset the extra costs of abnormal food import bills. Two approaches were considered in borrowing from the RF: ex post, i.e. borrowing takes place after the imports have been effected from a country’s own resources; and ex ante, i.e. borrowing takes place at the time the country imports the needed supplies. Both have implications for the attitude and ability of the country with respect to mobilizing resources to meet its food import needs as well as conditions that may be attached to drawings from the RF.

Where borrowing takes place ex post, in the year following the surge in the import bill, the condition for activating the drawing on the RF would have been met if the extra foreign exchange outlay had already been made to secure the extra food imports. This is the main condition for using the RF's resources and one that is by definition met – i.e. the actual food import bill increased beyond a certain level. The very existence of the drawing right would be an assurance that governments could secure concessional finance for food imports beyond a certain level. Thus, countries facing either a spike in import prices and/or a surge in the volume of imports could confidently draw on their scarce reserves or borrow on commercial terms knowing that concessional finance for the extra imports would be forthcoming within a short time.

Under the ex ante approach some additional guarantee may be needed to ensure that foodstuffs are actually imported in amounts above what otherwise would have been possible to maintain normal levels of consumption. This may present some difficulties. First, databases for assessing the level of food consumption in the current year are rarely sufficiently up-to-date or adequate. Only cereal consumption levels for all countries are monitored by FAO’s Global Information and Early Warning System (GIEWS), with regular up-datings. For other foodstuffs, data only become available after a lapse of a year or so. Moreover, estimates of food consumption depend not only on data for production and trade, which are reasonably reliable, but also on stock movements and utilization levels of feed, seed and other inputs, which are harder to measure. In other words, much of the data on food consumption in the current year would consist of estimates of often doubtful value for determining whether the level of consumption was maintained by increasing food imports, which in turn led to excessive food import bills.

2 See Annex 1 for list of participants.1 At the FAO Round Table held in Geneva on 21 March 2001. For example, see the FAO discussion

paper: "Towards Improving the Operational Effectiveness of the Marrakesh Decision on the Possible Negative Effects of the Reform Programme on Least Developed and Net-Food Importing Developing Countries".

Second, it would be necessary to establish criteria on how the extra imports would be utilized. Even if it is assumed that consumption for the population as a whole is maintained, there may be doubt as to whether consumption of the poor would actually be protected. It may quite possibly fall while that of the better-off members of society was maintained, but no such telling data are available for all countries in the current year.

In the absence of reliable up-to-date data to monitor current consumption, especially of the weaker segments of the population, the best possible indicator of the efforts made by governments is whether food safety nets for the poor are put in place and steps taken to moderate domestic price increases by such means as drawing on reserve stocks and lowering import duties.

There is a variety of publicly funded social safety net programmes already in place in a large number of developing countries (see Box 1). During periods of price spikes, one or more of these programmes could provide the mechanism through which the government could intervene to protect the consumption of the poor.

Box 1. A typology of government-funded social safety net interventions in developing countries that support food security at the individual or household level

Targeting Food Income NutritionTargeted Emergency food aid Cash transfer

'safety nets'Weaning foods for low-income families

Food stamps for the poor

Unemployment benefits

School feeding for vulnerable groups

Disability grants Vitamins or mineral supplements for specified groups

Supplementary feeding for vulnerable groups

Pension for the elderly

Untargeted General food price subsidy

Universal child benefit

Water fluoridization

Overvalued exchange rate for imported food

Self-targeted Food-for-work projects

Cash-work projects

Iodization of salt

Price subsidy on 'poor foods'

Besides demonstrating ex post that food import bills increased excessively during the preceding year (or as soon as data become available), countries receiving credit from the RF could be expected to undertake measures to protect the food consumption of the poor and food insecure as an objective of the loan agreement. Recipient countries could be expected to report back to the RF as to how the loan was used – e.g. to replenish food reserve stocks or repay loans used to finance food safety net programmes. The evidence accumulated through such reporting would not only contribute to establishing the credibility of individual countries vis-à-vis the fund and facilitate future borrowing, but would also provide needed feedback to contributors supporting the RF.

Another issue addressed at the September Consultation was possible administrative arrangements for the RF. The meeting agreed that it would not be appropriate to create a separate, new, institution to house the fund. Rather, there was consensus that it should be operated by an existing agency that has experience with managing funds and has the necessary logistic infrastructure and manpower. That would not only ensure that the resources were well managed but also that administrative costs would be kept to a minimum.

The IMF was considered as one possibility, largely because it already operates a Compensatory Financing Facility (CFF) that is available for excess import bills on cereals. However, the International Fund for Agricultural Development (IFAD), which is a specialized international financial institution for lending for agricultural development to low-income countries, was considered as a more promising possibility. Having the RF located in IFAD could be expected to strengthen the complementarity between a short-term financing instrument (the RF) and longer-term financing for food and agriculture development (IFAD). These twin-financing needs are not only stressed in the proposal by the 16 WTO Members, but also emphasized in the Marrakesh Decision. Also, establishing the RF in IFAD would facilitate coordination and complementarity with other Rome-based organizations of the United Nations system that deal with food and agricultural issues.

III. THE REQUISITE SIZE OF THE REVOLVING FUND AND ITS MODALITIES

Trends in food imports

Figure 1 shows total food import bills of LDCs and NFIDCs over the past 35 years (1965-99), along with the five-year moving average. Two aspects of the trend should be taken into account in considering the features of the RF.

Figure 1. Annual and moving average of food import bills of LDCs and NFIDCs, 1965-99

First, there has been a steady increase in food import bills throughout the period, averaging just over 7 per cent per annum. The increase was particularly sharp during 1972-1984 (over 11 per cent p.a.) and slowed down thereafter (to about 3 per cent p.a.). Since the RF concerns the future, e.g. 2002-2012, some upward adjustment would be required to take into account this trend inasmuch as the absolute level of excess imports would be increasing. Thus, for example, a percentage deviation from the moving average level in, say, 2005 would give a much higher excess import bill than the same percentage deviation in 1990.

Second, the data show that there were three distinct occurrences of "spikes" over the entire 35-year period. The first, during the food crisis of the 1970s, lasted for three years (1973-75), when actual food imports were 42 percent above the MA level. The second was in 1980 and 1981 (31 per cent above the MA level) and the third was in 1995 and 1996 (a 20 percent excess). This "stochastic" pattern of food imports has implications for the design of the RF: in the sense that the distribution of "excess food import bills" is not normal but positively skewed, i.e. there are some extreme values (spikes) but the chance of their occurring is small.

0

4000

8000

12000

16000

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

US$

mill

ion

Actual5-year MA

Also important for the operation of the RF is the number of "consecutive" spikes. During 1965-99, only once did food import bills remain high for three consecutive years (1973-75), whereas the spike lasted for only two consecutive years in the other two periods.

Definition of excess food import bills under various threshold levels

While assumptions can be made about future food import bills and their pattern over the first 10 years over which the RF may be expected to operate, much of the analysis necessarily has to be based on past experience. In view of the marked shift in the trend of food imports in the early 1980s (Figure 1), the analysis below is based on the data for 1985-99. As noted above, some adjustment to the results would have to be made eventually to reflect the future period.

The size of the RF depends on the mean level of excess food imports, their frequency distribution and their sequence of occurrence. Thus, the starting point of the analysis is to define excess import bills .1

For any year t, the excess import bill for a given country is the actual level of imports minus (1+) * MAt, where:

MAt is the moving average value for year (t) calculated as the mean of actual import bills for that year and the previous four years (e.g. it is 1991-95 for the year 1995);

is a threshold level and the term (1+) * MAt measures the food import bill that is not considered excessive and so is covered by the country’s own resources. For example, if is 0.2, only imports more than 20 percent above the MAt level are considered excessive.

The excess values calculated for individual countries are summed up for all the LDCs and NFIDCs concerned to obtain the total excess bill for that year. Estimates of total excess bills are shown in Figure 2 and in Table 1 for various values of , ranging from 0.10 to 0.35.

1 The nature of the problem addressed by the Marrakesh Decision, as well as the central role of excess food import bills, are discussed in another paper in this volume (Towards Improving the Operational Effectiveness of the Marrakesh Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-importing Developing Countries).

Figure 2. Excess food import bills by threshold levels (annual average 1985 -99)

The 1985-99 annual average level of the excess food import bill ranges from US$730 million for a threshold level of 10 per cent to US$160 million for one of 35 per cent. Thus, the threshold level is the key parameter determining the size of excess food import bills and consequently the size of the RF.

Table 1. Excess food import bills for various threshold levels assumed (value in US$ million)

Threshold level (excess over

normal imports - %)

1985-99annual average

Spike years 1985-1999 average

(excluding the two spike

years)1995 1 1996

101520253035

729558416301217159

2 3381 9031 4821 119

835658

1 7801 328

916553

354 2

270 2

524395296219161122

1 These are also the highest levels during the entire 1985-1999 period.2 Value in 1992 (which was even larger than in 1996).

Figure 3 shows the excess food import bills on the basis of the 25 per cent threshold level. They were lower than US$400 million during the first 10 years (except in 1992 when they were slightly higher) followed by a spike in 1995 that also lingered into 1996, and were again below US$400 million in the last three years.

0

200

400

600

800

10% 15% 20% 25% 30% 35% Threshold level (excess of normal imports)

US$

mill

ion

Figure 3. Excess food import bills in 1985-1989 on the basis of a 25 per cent threshold level (US$ million)

The size of the Revolving Fund

Borrowing and repayment assumptions

The basic characteristic of the RF, which is essential to ensure that the fund remains viable over a sufficiently long period, is that it should be self-financing. Consequently, borrowing countries must assume the obligation to repay their loans.

Under normal conditions, the amount borrowed is assumed to cover 100 per cent of a country's excess import bill. However, in periods of inadequate resources in the RF, the level of borrowing would be capped.

Interest charged on the loan is assumed to be 0.75 per cent per annum. Alternatively, different concessional interest rates could be applicable to different eligible countries, depending, for example, on their GNP per capita, or based on the World Bank's IDA classification. Attachments 2 and 3 show the various lending terms of IMF and IFAD.

The repayment period is assumed to be two years. Thus, an amount borrowed in 2005 would be repaid in full in 2007, together with the interest accrued.

At any year (t), the fund balance, i.e. the balance after disbursements (lending) and receipts (repayment) would be equal to:

Balance (t) = Balance (t-1) – disbursements (t) + receipts (t)

Possible interest earnings on the “spare” balance are not taken into account. Conceivably, part of the above balance of the RF can be invested to earn interest at commercial rates, rather than keeping the funds idle. However, whether such interest can be credited to the RF would depend on when contributors transfer funds to it and how the lending and repayment operations are managed. These are difficult matters to consider a priori and thus this aspect (i.e. earnings from spare funds) is not taken into account in the present analysis.

Estimates based on experience of excess import bills in 1985-99

The size and the sequence of the excess food import bills depicted in Figure 3 provide the main basis for estimating the size of the RF. Given the stochastic nature of their distribution, it is inevitable that the excess import bills, and hence the funding needs, would be characterized by several years of "normal" or low levels of borrowing and some years of spikes.

0

400

800

1200

1985

1987

1989

1991

1993

1995

1997

1999

US$

mill

ion

Figure 4 shows the hypothetical sequence of the fund balance for the period 1985-99 (computed as explained above), on the assumption that the RF had been established in 1984, with an initial endowment of US$600 million. On this basis, the fund would have covered the needs until 1992, after which it would have exhausted its resources and, in consequence, would have stopped operating in 19932. Obviously, fresh injections would have been required for the RF to continue operating.

Figure 4. Hypothetical fund balance in 1985-99 with an initial capital of $600 million and 25 per cent threshold

-1200

-600

0

600

1200

1985

1986

1988

1990

1992

1994

1996

1998

US$

mill

ion

Figure 5 shows what would have happened if such fresh injections had been made in order to avoid funds running out. This case assumes also that positive balances of the RF, as they accumulated, were drawn on to pay back the contributors of such extra injections. Under this "stand-by arrangement", three fresh injections would have been necessary: $100 million in 1993, $600 million in 1995 and $400 million in 1996. Contributors would have been paid back this total of $1,100 million in two instalments - $800 million in 1997 and $300 million in 1998.

Figure 5. Fund balance in 1985-99 with fresh injections in spike years1

1 With an assumed initial capital and threshold as in Figure 4.

It should be reiterated that under the "stand-by arrangement", the initial capital of US$600 million is the only contribution expected by contributors. In addition, it is assumed that contributors would have been prepared to make available extra resources on a stand-by basis for spike years. However, these extra injections would have had to be paid back. Hence under this modality of

2 The negative numbers shown in the figure for 1993 (US$66 million), 1995 (US$654 million), 1996 (US$1 042 million) and 1997 (US$134 million) simply indicate the extent of the deficit with the assumed initial capital.

-1200

-900

-600

-300

0

300

600

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

US$

mill

ion

RF without fresh injection

RF with injection/pay back

Injections

Pay back

RF stops functioning in 1993!

operation, the total net contribution to the RF would have been US$600 million plus the obligation (in the form of "promissory notes" or in some similar form) to provide stand-by resources on loan when spikes occur.

Alternative estimates, assuming other sequencing

Spikes in the very early years of the RF. What would have been the consequences if the spikes such as occurred in 1995 and 1996 had occurred earlier on, say in 1985 and 1986? Such a change in the sequence of shortfalls would not have altered the mean level of the RF, but would have had implications for the timing of fresh injections (and pay-backs). On this hypothesis, fresh injections of US$600 million would have been required in 1985 and US$500 million in 1986. As the borrowings in 1985 would have been repaid in 1987, the RF would quickly have accumulated a large balance, making it possible to repay US$800 million in 1987 and US$200 million in 1988. The remaining US$100 million could have been re-paid only in 1991 in order to keep the RF operating. Thus, basically, the total size of the RF (US$600 million initial capital and US$1 100 million stand-by) would not be affected nor would the nature of the RF change.

Spikes occurring in the middle of the sequence or other years in a random fashion. Neither the total resources of the RF nor the nature of its operation would need to change if the spikes were to occur in the middle of the sequence. This conclusion also holds when the sequences of excess food import bills are generated through Monte Carlo random sampling.

Spikes that last for three consecutive years (as in 1973-75). The food crisis of 1973-75 was the worst for the past four decades. As seen above (Figure 1), the spike was not only sharp but also of unprecedented duration. What would be the consequences for the RF if such a situation were to recur? Simulations show that there would be a need not only for a somewhat larger initial RF (because of an increase in the average annual excess food import bill) but also for bigger injections (over the three consecutive years), but that would not alter the nature of the RF. Moreover, the injection implicit in the third year is small as borrowings during the first year are repaid.

Adjusting the size of the RF for operations in the future

Estimates of the size of the RF discussed above were based on experience in 1985-99, but food imports of the LDCs and NFIDCs have been trending upwards, as was noted above. There is an upward trend in excess food import bills since these are measured relative to a moving average – which rises as actual bills increase.3 In consequence, some upward adjustment would be required for the size for the estimated initial capital (calculated for the period 1985-99) so as to adequately cover future excess food import bills. Projected trends of food import bills, covering a 10-year future period (e.g. starting in 2002), imply that the initial capital requirement for the 1985-99 period would have to be scaled up by a factor of about 1.6. Thus, if the RF were to be set up with a time horizon of 10 years, the necessary initial capital endowment would amount to about US$1 billion.

As far as the stand-by resources are concerned, it is difficult to speculate on the nature of spikes in the future. What has been established from past data is that there is no trend in the severity of production shortfalls leading to ever-increasing price spikes4. There could be a repeat of the 1973-

3 The same percentage gap between the actual import bill from its moving average (e.g. 3 per cent) in the year 2007, for example, would result in a much higher excess import bill than in, say 1993.

4 An analysis of a longer-time series going back to the 1970s (1970-96) for cereals showed that: (i) annual world market prices were fundamentally stable (trend- stationary time-series process), in the sense that temporary shocks to the market do not leave permanent effects and, after a while, the market returns to the previous situation; (ii) there was no evidence of an increasing trend in inter-year price variability; and (iii) also, there was no evidence of any systematic rising trend of intra-year (monthly) price variability (Sarris, A. The Evolving Nature of International Price Instability in Cereals Markets, ESCP No.4, Rome: FAO, 1998).

75 situation or things could get worse, although the probability of that happening should be small. In any event, would it be justified to provide sufficient funds to cover such an eventuality? Common sense would suggest that extreme situations require extreme responses – a standard instrument is unlikely to be effective for such situations. Moreover, as noted in Section II, an open-ended commitment is unlikely to be acceptable to contributors and therefore the stand-by component of the RF would need to be capped; an amount of US$1 billion was suggested. Thus, the maximum callable obligation of contributors should remain fixed, i.e. would not exceed US$1 billion during a spike period (which could be of one or multiple years' duration). One capping option is to ration total lending to all potential borrowers in a proportionate manner. Another option would be to introduce an element of special and differential treatment so that borrowing by NFIDCs is capped but not that by LDCs.

Adjustment would also be required if a threshold level other than the 25 per cent assumed here were chosen. Figure 2 provides a rough guide to the additional adjustments that would be necessary to the initial capital endowment.

With respect to the stand-by component of the RF to cover spikes, it was pointed out above that there is no way of determining the magnitude of such spikes in the future and that in any event there are practical reasons why a cap would need to be set. Consequently, it would also be necessary to cap borrowings from the RF so that its long-term viability is assured.

Attachment 1 - Revolving Fund for the Purpose of Implementing the WTO Marrakesh Decision: Informal Expert Consultation held in Rome on 17 September 2001

List of Participants

IMFGrant B. TaplinSpecial Representative to the WTO and Assistant Director, Office in Geneva.

IFADKwabena Offei DeiAssistant Controller, Accounting

Robert CassaniCoordinator, Resource Mobilization

Carol UphamProgramme OfficerSupplementary Funds

WFPRobin JacksonSenior Policy Advisor

European CommissionAndré LibensPrincipal Administrator (DG DEV)

FAOHarmon ThomasChief, Commodity Policy and Projections Service

Ramesh SharmaSenior Economist, Commodity Policy and Projections Service Panos Konandreas, Senior Liaison Officer, FAO Liaison Office in Geneva

Other ExpertsJim GreenfieldCommodities and Trade Expert,Rome, Italy

Alberto ValdesConsultant, Santiago, Chile

Attachment 2 – General Terms of IMF Financial Assistance

Repurchase termsFacility or policy Charges Obligation

schedule (years)

Expectation schedule(years)

Instalments

Stand-by Arrangement Basic rate plus surcharge 1 3¼–5 2¼–4 Quarterly

Extended Fund Facility Basic rate plus surcharge 1 4½–10 4½–7 Semiannual

Compensatory Financing Facility Basic rate 3¼–5 2¼–4 Quarterly

Emergency Assistance Basic rate 3¼–5 Not applicable Quarterly

Supplemental Reserve Facility Basic rate plus 300-500 basis points

2–2½ 1–1½ Semiannual

Contingent Credit Lines Basic rate plus 150-350 basis points

2–2 ½ 1–1½ Semiannual

Poverty Reduction and Growth Facility 0.5 percent per annum 5½–10 Not applicable Semiannual

Memorandum items:Service charge 0.5 percent

Commitment charge 25 basis points on committed amounts of up to 100 percent of quota, 10 basis points thereafter

1 Surcharges are applied to the combined credit outstanding under the Stand-by Arrangement and Extended Fund Facility of 100 (200) basis points on the amounts in excess of 200 (300) percent of quota.

Note: IMF's market-related interest rate, known as the "rate of charge", is based on the SDR interest rate which is revised weekly to take account of changes in short-term interest rates in the major international money markets. The rate was about 4 percent in September 2001.

Source: IMF (available on the Internet at http://www.imf.org/external/np/tre/lend/terms.htm)

http://www.imf.org/external/np/tre/lend/terms.htm

Attachment 3 – Lending Terms and Conditions of IFAD

Highly concessional terms(applicable to countries with GNP per capita of US$1,063 or less) Free of interest Service charge of three-fourths of one percent (0.75%) per annum Maturity period of 40 years, including grace period of 10 years.

Intermediate terms(applicable to countries with GNP per capita of between US$1,064 and US$1,724) Interest per annum equivalent to 50% of variable reference interest rate (as determined annually by the

IFAD Executive Board) Maturity period of 20 years, including a grace period of five years.

Ordinary terms(applicable to countries with GNP per capita of US$1,725 or above) Interest rate per annum equivalent to 100% of the variable reference interest rate (as determined annually by

IFAD Executive Board) Maturity period of 15 to 18 years, including a grace period of three years.

Note: For the purposes of implementing the HIPC Debt Initiative, the IFAD Executive Board may amend the terms upon which an approved loan is provided to a country. In determining the grace period, the maturity date and the amount of each instalment for the repayment of loans, the Executive Board shall take into account an assessment of a country’s debt sustainability produced under the HIPC Debt Initiative.

Source: IFAD Lending Policies and Criteria (available on the Internet at http://www.ifad.org/pub/basic/lending/e/02polcri.pdf)

http://www.ifad.org/pub/basic/lending/e/02polcri.pdf

ANNEX 5

Submissions by the International Monetary Fund (IMF)

Compensatory Financing Facility (CFF)

This note: (i) provides a brief history of the CFF; (ii) outlines the main features of the CFF as amended in November 2000; and (iii) provides considerations as to why the CFF structure should not be made more automatic than it is.

1. Brief history of the CFF

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, not just that part deriving from the export shortfall or cereal import excess. The (cumulative) access limit was 25 per cent of quota. Access floated with respect to access limits as would apply under other policies, but access did not "float" as regards conditionality.5

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 per cent 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".

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",

5 Access 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.

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 while reducing virtually all of the CFF access limits (with, for instance, the maximum financing for export shortfalls reduced from 83 per cent to 65 per cent 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 per cent of quota (to remain unchanged on average in SDR terms) following the Eleventh General Review of Quotas in January 1999, pending the present review.

2. Main features of CFF as amended in November 2000

During the 2000 Review of Fund facilities, a number of Directors were in favour of abolishing the CFF, as its function could be served by other facilities. In the end, however, the Board decided to retain it, albeit in a substantially streamlined fashion, so as to ensure that it is not used inappropriately. Following the amendments, the main features of the CFF are currently as follows:

The purpose of the CFF is to help members cope with temporary export shortfalls and high cereal import costs that create an overall balance-of-payments need. Commodity price shocks that do not create a temporary balance-of-payments need would not qualify for compensation.

The CFF is a nonconcessional facility, with its rate of charge equal to that on stand-by arrangements (SBAs). However, it carries certain advantages for the borrowing member relative to SBAs: access to CFF resources is subject to separate access limits; and drawings under the CFF are exempt from surcharges on high levels of access.

The CFF operates under a single set of access limits: 45 per cent of quota for either an export shortfalls or a cereal import excess, or 55 per cent of quota for the two factors combined. Regarding phasing, the duration of the facility is envisaged to be at least 6 months, with the expectation that purchases of even amounts will be made (unless there are good reasons for front- or back-loading).

Because members drawing under the CFF have usually had underlying balance-of-payments problems that extend beyond the temporary shock, it is expected that a CFF will generally be agreed in conjunction with other Fund arrangements (SBAs, Extended Arrangements (EFF), or arrangements under the Poverty Reduction and Growth Facility (PRGF)) and based on their conditionality. However, a stand-alone CFF is possible if it is determined that the member's balance-of-payments is otherwise (i.e., abstracting from the export or cereal price shock) satisfactory.

3. Should the CFF be more automatic and have lower conditionality?

A common criticism of the CFF is that it is not easily accessible and that it comes with too much conditionality attached. Some consider that there is scope for the Fund to offer an unconditional facility that could be triggered automatically in the event of an export shock or a shock to key import prices. But there are good reasons why the Fund is probably not the appropriate institution to provide compensatory financing with these characteristics:

The above argument pertains mainly to lower-income countries with no access to international capital markets (countries with access to private external financing would be in a position to smooth the impact temporary import price shocks for which the CFF was designed). But for lower income countries, recourse to the CFF to support trade liberalization is not the most attractive option, given the CFF's nonconcessional nature. A PRGF arrangement or augmentation is concessional, and would better support necessary longer-term structural adjustment such as trade liberalization.

As with its other facilities, the Fund requires adequate safeguards for the CFF to ensure that resources are used for the achievement of external viability and not to perpetuate BOP difficulties. In fact, in re-examining the experience with the CFF, the Board concluded that most of the countries concerned needed some domestic adjustment, which would have been more appropriately supported by a programme supported by a stand-by, EFF, or PRGF arrangement.

The nature of the underlying import price shock is also important. If the price shock associated with trade liberalization is temporary, then the country could be eligible for a stand-alone CFF if it has an otherwise satisfactory balance-of-payments situation. But if the shock is permanent, as is typically the case, the Fund's task should be to help the member adjust to it (with the support of an arrangement), rather than to provide unconditional finance.

Comments on FAO Paper "Revolving Fund for the Purpose of Implementing the WTO Marrakesh Decision relating to the Least-Developed and Net Food-Importing

Developing Countries"

Executive Summary, second paragraph. This paragraph indicates that contributors would be asked to provide "extra resources on a stand-by basis" and that these resources would be paid back to contributors. However, the paper does not address whether interest would be paid on these loan resources and, if so, the rate of interest on these loan resources.

Section III.3.3:

a. First paragraph. The RF, as envisaged in the draft, would be self-financing and "borrowing countries must assume the obligation to repay their loans". The paper does not address the possibility of overdue obligations. We would suggest it set out the overdue and provisioning policies for accounting purposes and the financial policy such as burden-sharing or a similar mechanism that would be used to protect the RF from overdue obligations.

b. Fourth paragraph. The paper should specify the RF loan disbursement and repayment schedules, e.g., in one lump sum, or installments, the currency or currencies that would be used for disbursements and repayments, and the timing for interest payments, e.g., quarterly, semi-annually, or annually.

c. Fifth paragraph. The paper could usefully specify whether the RF would be administered as a Trust or Administered Account, who would administer it, and the amount, if any, of administration fees. We would recommend that the assets and liabilities of a Trust Fund or Administered Account be strictly segregated from other activities of the institution managing the RF. The paper should also describe accounting, reporting, and auditing policies. At a minimum, financial statements prepared in accordance with International Accounting Standards should be prepared and subject to an external audit annually.

Additional consideration:

The RF's operations should incorporate guidelines on determining the creditworthiness of borrowers, in particular their capacity to repay the loans. This may require an overall assessment of a country's macroeconomic situation and prospects, in addition to the legal obligation for the government to repay and the establishment of penalties for nonpayment.

ANNEX 6

Submission by the International Grains Council (IGC)

World Grain Markets since the mid-1990s

In the mid-1990s, the world grain market experienced a relatively short period of tight supplies and high export prices. However, production rebounded rapidly, especially in the main exporting countries, and stocks were rebuilt. By mid-1998, prices of wheat and of maize had fallen to nearly their lowest since the 1970s. Latterly, markets have stayed relatively depressed, with supplies being adequate to meet the continued growth in commercial needs, and prices showing considerable stability (see Chart).

World wheat and coarse grains production reached a record in 1996, but has since remained a little lower. Output in the main exporters was sustained at a high level, as yield increases offset area reductions, but their crops fell in 2001 after bad weather in several key producing areas. In China, there was also a significant fall in output, in part driven by new policies to deter production of lower-quality grain. Production in the CIS and eastern Europe was variable but there was major increase in 2001. In many developing countries, wheat production was relatively flat, but there was an overall increase in their output of coarse grains.

Although trend rises in grain yields have slowed down, growth continues even in countries where they are already high, as new varieties come into use and more farmers adopt improved agricultural practices. Areas planted with grains in many major producing countries have declined, although some land could no doubt be brought back into use under adequate market incentives.

Overall growth of world grain consumption has been slowing down since the early 1990s. However, feed use of grains continues to expand at a moderate rate in major exporting countries reflecting growing meat production and trade, especially in the United States. The steep decline in use in the CIS and Eastern Europe appears to have bottomed-out, but consumption of wheat in China has levelled-off. Food and feed use of grain continues to increase in many developing countries in Asia, Latin America and North Africa.

World grain trade has increased by about 10 per cent since the mid-1990s, with most of the growth attributable to imports by developing countries. Some former major wheat importers, notably China and Pakistan, have considerably reduced their purchases, while imports by Iran, Brazil, North Africa other than Egypt, and many least-developed countries are higher. Coarse grains imports by Mexico, North Africa and Near East Asia have grown, principally to supply their expanding livestock industries.

The share of the major exporting countries in world grains exports has fallen in the last two seasons, because of much larger exports by countries in the Black Sea region, South Asia (for wheat) and Brazil (for maize). Sales of maize by China have been variable, but very large in most recent years.

Stocks in the five major exporting countries remained large until the current season, when they declined after their poor harvests. World grain stocks rose steeply in the latter 1990s but, despite very large inventories in India, have recently been falling, mainly because of a considerable drop in China's carryovers.

Since 1998, world grain prices have stayed relatively low, fluctuating within a narrow band. At those levels, prices do not provide satisfactory returns for many grain producers, who have turned to their governments for substantial financial support to supplement market returns.

In sum, the food and animal feed needs of many middle and lower-income developing countries are now the main dynamic factor in international grain trade. Developing countries' imports of wheat and coarse grains have now reached 150m. tons, close to three-quarters of the world total.

After the short period of high world grain prices in the mid-1990s, world production responded quickly to market signals. If the overall growth in world grains consumption and production appears to have slowed down in recent years, the process of change in the global grain economy has accelerated.

Trade in grains and products is flowing in new directions and in more processed forms in response to more open markets and to changing consumer requirements, where quality factors are becoming a key factor in the market place. Trading has become more fluid and buying patterns less speculative, more geared to meeting immediate needs and increasingly using risk management tools.

EXPORT PRICES (fob Gulf) OF US WHEAT AND MAIZEJuly 1995 – March 2002

60

80

100

120

140

160

180

200

220

240

260

280

300

1995 1996 1997 1998 1999 2000 2001

YEAR

US$/ton

WHEAT: US Hard Winter

MAIZE: US Yellow Corn

WT/GC/62G/AG/13

ANNEX 7

Submission by UNCTAD

Current practices in the financing of international food trade, and implications for the structure and operational modalities of an international "revolving fund" for the financing of food imports

Summary

Pursuant to the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Countries, 17 net food-importing countries made a proposal for the establishment of a revolving fund to ensure that adequate financing at concessional terms is available to LDCs and NFIDCs during times of high world market prices. This brief note elaborates how such a fund can be structured so that it requires no large new bureaucracy, is cost-effective, is efficient in enabling needy countries to obtain timely finance for food imports, and helps to improve the international trade in foods.

This note starts with a description of the current organization of food imports in developing countries, and the financing practices in international food trade. Food imports are overwhelmingly in private hands, and most governments are not or little involved – not even in allocating foreign exchange for imports, as the foreign exchange markets in most countries have been liberalized. Therefore, if a "revolving fund" is to enable sufficient imports during times of high world market prices (or if a reduction in food imports at concessional conditions makes larger imports at commercial terms necessary) it needs to reach the private sector.

As is argued in the paper, the private sector is already constrained in their access to finance. They normally need to buy on “deferred payment” terms, meaning that their foreign suppliers need to accept the credit risks of developing countries’ traders. There are several ways (described in detail in the paper) in which the suppliers can manage this credit risk exposure, but ultimately, they are constrained through the total credit risk that the market can absorb – at a given cost, the market can absorb only X dollars of credit risk for country Y. Therefore, the currently available private sector facilities for financing developing country importers meet absolute constraints, and cannot be adapted, except at great pain (large increases in country risk premiums and thus, import costs), to sudden increases in financing needs.

Given these constraints imposed by market mechanisms, a special facility to deal with food trade financing needs in times of crisis can be useful. However, such a facility should aim to relieve import needs when they arise, rather than reimbursing governments many months after the problems arise. To make finance available in time, the "revolving fund" can rely on objective trigger mechanisms, based on world market food prices and announced reductions in concessional exports to countries. These factors are not influenced by the policies of the LDCs or NFIDCs which would benefit from the fund’s support, and thus, no review of the food policies of prospective borrowers would be required.

Furthermore, the fund should rely on disbursement modalities that ensure that, firstly, the companies that actually import the food benefit of the financing and secondly, funds are actually used for food imports and not diverted to other operations. Building on the existing modalities of food trade and its financing makes this possible. Current contractual practices and the involvement of banks at several stages of the food trade financing chain give a good basis for a “revolving fund” to provide targeted finance. On this basis, one can construct fund disbursement mechanisms that make it virtually certain that funds will be used for food imports by experienced local companies with a good track record. How this can be done is discussed in some detail in the paper.

WT/GC/62G/AG/13

It is also essential to ensure that funds are reimbursed. International food trade is not without its problems – contract defaults or even frauds occur – and at a national level, it has often been difficult for food trade financiers to recuperate their funds. By shifting part of the financing risks to banks, the capacity of banks to identify potential problems and prevent them can be optimally used. With sovereign guarantees further backing national reimbursement obligations, serious payment defaults can be made unlikely.

As the proposed mechanism builds on existing information and the market’s current contractual habits and financing mechanisms, and it requires no policy review process, a "revolving fund" of this nature is easy to administrate. It would thus require only a small secretariat. The "revolving fund" itself would not have to be paid-up; rather, donor countries can give "conditional guarantees" against which the fund could obtain financing when required. The overall cost of ensuring that eventual increases in food import bills resulting from the implementation of the WTO agreement will not endanger the food security of LDCs and NFIDCs is thus low. Moreover, it is a temporary cost: the secretariat of the "revolving fund", by working with national counterparts to improve food financing mechanisms, would create a better functioning of the food sector, and over time, will make itself superfluous.

Context: the proposal for the establishment of a "revolving fund"

Following concerns that greater liberalization of trade in agriculture may lead to negative effects in terms of the availability of adequate supplies of basic foodstuffs on reasonable terms and conditions, the Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Countries was adopted. As a mechanism to cope with the possible short-term difficulties in financing normal levels of commercial imports of basic foodstuffs, 17 net food-importing countries made a proposal for the establishment of a "revolving fund". This fund should ensure that adequate financing at concessional terms is available to LDCs and NFIDCs during times of high world market prices.

This brief note explores how such a fund can function in the current context of international food trade. It follows on an earlier FAO report on the same issue, and has benefited from discussions in the WTO’s Interagency Panel on Financing Normal Levels of Commercial Imports of Basic Foodstuffs. This note does not address the issue of the causality between the WTO reforms and either the level of the prices of basic foodstuffs, or the variability of these prices around their trend. Rather, it recognizes that while foodstuff prices at the moment are lower than several years ago, there always is a risk that they can increase sharply in a relatively short period; and if this happens, then problems in financing normal levels of commercial imports of basic foodstuffs are indeed likely to occur. This note describes how a fund which, in a way, acts as an "insurance" against this risk can be set up. Like all other forms of insurance, if the event against which one took out coverage does not occur, the "insurance premium" (the cost of the "revolving fund") is lost (although there are positive side-effects). But as is argued here, the costs of a well-designed fund do not need to be high.

Developing country food imports are now mostly in private hands

Over the past decade, most government-owned food import agencies have been dissolved. Some have been exposed to competition and now function alongside private sector traders. Only in very few net food-importing countries state enterprises have remained in a monopoly position in food imports. Thus, the structure of food imports in developing countries is now dramatically different from that which prevailed in the early 1990s. By and large, private traders are now responsible for importing food.

Where food imports take place within a private sector framework, governments tend to take a hands-off approach, leaving it to private traders and processors to procure foods on the international market, and finance its purchase. In a handful of countries, private sector imports coincide with a

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more hands-on role of the government in financing imports, setting local prices, etc.; and for some commodities in some countries, governments have helped set an enabling framework for food imports.6 Most countries have now freed exchange controls, so hard currency is no longer centrally allocated, and importers have to procure it by themselves. In the large majority of cases, the private traders are locally owned, although there have been a few large international traders which have set up what amounts to barter operations in developing countries (bringing rice and other foodstuffs into the country, and using the proceeds to buy commodities for export). The local, private traders may be large in local terms, but tend to have little track record (because of the fact that until a few years ago, the government arranged food imports), and a limited financial strength. They are generally diversified, importing the whole range of bulk food commodities, and often, other products as well.

Given their limited financial capacity, local traders have a strong preference for buying on deferred payment terms – e.g., the seller provides the goods, and agrees to be paid 60, 90 or 180 days later (the seller will normally discount these payment flows – more on this below). This allows them to import the foodstuffs, sell them on the local market, and use the proceeds to reimburse the seller. The longer the payment terms, the better, particularly because this allows the buyer to make larger-volume purchases which can lead to considerable savings in transport costs. The financing costs of these deferred payment sales are effectively hidden in the price of the product – the seller will charge a price equal to the price which the traders would be paying if they had the needed cash, plus the interest charges that the international trader is faced with, plus a risk premium, plus a profit margin. Banks that have looked into this have found that the implicit interest rates can easily be in the 20% range, except when the seller can benefit of credit insurance from his government (more on this below).

It is very difficult for local traders to borrow money from banks with which to import food. While developing country governments often have credit schemes, funds tend to be scarce, and food imports are rarely in the list of priorities (instead, credits are targeted at non-traditional exports). Local banks generally require full guarantees from prospective borrowers, often in the form of real estate. As food trade tends to be a low-margin business, few local traders have sufficient wealth to generate enough local bank finance to keep business going. There are financing mechanisms to overcome this problem (in particular, warehouse receipt finance, which allows the bank to use the food itself as collateral for the financing), but most developing country banks are not familiar with such mechanisms. The local traders are also not large enough to obtain international bank loans (contrary to the situation when state companies had a monopoly; these regularly tapped into the international syndicated loan market, and even issued trade paper -commercial paper- for sale in the international market. The remaining state enterprises are still able to do this, albeit within the constraints of country ceilings described below).

International financing for developing country importers

Developing country importers normally rely on their suppliers for financing their imports. The suppliers can provide for this in four ways:

They can arrange for an international bank loan to be put up alongside the food transaction (which may involve a certain amount of risk sharing between the supplier and the bank, in case the importer does not reimburse).

They can borrow themselves from a bank (or use their own working capital) to enable sale on deferred payment terms.

6 The best example of this are the framework countertrade arrangements into which the governments of a few countries (e.g., Egypt, Myanmar, Sudan) have entered to enable local traders to pay food imports in local currency or with local commodities, and in particular, the “Bilateral Payment Arrangements” promulgated by Malaysia to enable poorer countries to buy its palm oil.

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They can obtain credit or credit insurance from an official agency, which provides cover for 90-95% of the risks of the credit.

They can use financial engineering techniques to mitigate country and credit risks.

In the first case, the credit will form part of a bank’s country exposure. Banks have credit lines for each country with a specific ceiling; and often, separate ceilings for each industry within the country. Once the credit line is exhausted, it is very difficult for a loan officer to get permission from the credit committee to provide new credit. Credit ceilings are normally set for fairly long periods, and only revised when there are specific conditions meriting its revision. Each loan has a risk weighting (country risk forms a large part of this), and banks generally target a "risk-adjusted rate of return" – the higher the risk, the larger the return should be.

In the second case, the credit will form part of the trading company’s credit exposure. International trading companies operate very much like banks (and have little choice in this, because they depend so strongly on external finance), with credit ceilings for each country. Revising credit ceilings is slightly easier than in banks, but credit committees are still very vigilant. The credit exposures that the trading company gets in this way are often discounted in the forfaiting market (which removes them from the trader’s country risk exposure), and the costs of forfaiting are built in, from the beginning, in the commodity’s price.

Official credits and credit insurance (which allows banks to exempt loans from country ceiling restrictions) are very important in international food trade. Both the USA and EC have a wide range of programmes, as do a small number of food-exporting developing countries (such as Argentina and Malaysia). Typically, these programmes shift the credit risk from the exporter to the export credit (insurance) agency, with only 5-10% of the risk still remaining with the exporter. It is often against such credits or credit insurance that exporters agree to sell on deferred payment terms. These agencies have specific budgets for their operations, often mandated by specific parliamentary budget approvals; most have been complaining in recent years that their budgets had been cut to such a degree that they have had to reduce their services.

In these three cases, the transactions generate "trade paper" (the importer acknowledges delivery, and promises to pay in, say, 90 days). If this trade paper receives an "aval" (a type of guarantee) from a reputable local bank, then it can be discounted on the secondary market, that is, it can be sold to investors. It can be discounted with recourse (meaning that if the importer does not pay, the exporter has to pay the investor), which does not help the exporter to reduce his own credit risk exposure but just provides him with liquidity. It can also be discounted without recourse – the investor takes the credit risk. The forfaiting market is the principal outlet for such without-recourse discounting. The forfaiting market has only limited depth for each country, and when much paper from a country is offered, discounts increase fast (so the trader has to build in a high price premium to compensate for this).

Increasingly, traders are resorting to the use of financial engineering techniques to enable them to continue selling commodities to developing countries. One simple form is warehouse receipt finance, where the international trader will take control over the logistics chain, handle the commodities while they move down the commodity chain, and only distribute the commodity from a distribution point (warehouse) inside the country in small quantities, often against cash payment. In fact, the international trader becomes also the importer, and the local trader becomes a mere distribution agent. The risk that the commodity is stolen from the warehouse, or effectively expropriated by the government, can be covered by insurance (including, for Southern African and Eastern countries, by a new World Bank facility). Financial engineering adds costs, but it is often still cheaper than building in the risk premiums that would be necessary for non-structured trade financing. However, the possibilities to use financial engineering are limited by a lack of expertise in developing countries (meaning that local banks in general cannot supply the necessary supports) and in certain

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cases, inappropriate government policies (more in particular, inappropriate laws and regulations in areas such as bankruptcy rules or the enforcement of collateral).

What happens if there are sudden new food import needs?

The current food financing system is not very good for dealing with shocks. As can be clear from the discussion above, apart from structured finance, the other three sources of import finance are all limited – there are fixed ceilings that are very difficult to change. So if food import needs of a certain country increase (because of price increases, or larger needs for food imports on commercial terms), it is quite likely that, other circumstances remaining equal (and irrespective of the overall balance of payment situation), existing credit lines are insufficient. People still need the basic foodstuffs, of course, and the market will find a new equilibrium. This would normally have one or more of the following components:

Local traders start rotating their capital and their stocks faster – using the same credit line to import, say, twice as much food (instead of reimbursing over 90 days, they reimburse in 45 days, and buy another cargo). This does not have many negative consequences, but there are some limits to this, imposed by the logistics of international food trade (transport takes much time).

International traders sell more on the assumption that they will place the resulting paper into the forfaiting market – which, given the limited depth of the forfaiting market for most developing countries, will lead to higher discounts for the country’s paper, which is reflected in higher prices charged by the trader for the food.

Opportunistic traders –looking for high risk/high profit opportunities- come in, selling at a relatively high price (and in practice, with a serious risk of delivery of sub-standard commodities or other contractual problems).

Local traders start paying their bills late, using funds due for a credit on one commodity to import another. This will ultimately lead to higher risk premiums, and thus, higher food prices.

International traders do more structured finance deals.

For food consumers, this "market solution" has as one consequence that the prices that they would have to pay for their food are higher than would have been necessary had financing costs not increased. There are also likely to be short-term supply disruptions which, by themselves, can drive up local prices. Governments which provide targeted support to vulnerable groups would be squeezed between a desire to continue targeting their assistance, and pressure to use their budget to help a larger group of consumers.

While an overall balance of payment situation worsens the situation for the food importers, a better balance of payment situation does not do much to solve his financing problems. If there is no surge in export revenue at the same time that food import needs increase, it is likely that the local currency will depreciate (which would force traders to raise local prices, which in turn increases trading risks), and a risk that the government will intervene in the foreign exchange market (this, in turn, creates risks for foreign financiers and thus will lead to higher country risk premiums). If there is a simultaneous surge in export revenue and thus, the overall balance of payments does not deteriorate, these problems are less likely. However, this does not mean that financing problems are automatically resolved. Those benefiting from higher export proceeds are unlikely to be the same companies that need to procure new financing for their food imports, and the latter would still be faced with the financing ceilings as described above.

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Can an international food financing facility be useful?

Given the above, a new financing facility, in the form of a "revolving fund" for food imports to help countries deal with import shocks, would be very useful. It would help the continuing flow of imports of basic foodstuffs at a reasonable interest rate. However, given the prevalent system of food imports, a fund that would provide ex-post loans, to help countries replenish the hard currency lost through higher food imports, would have little or no impact on the ability to keep food imports going in times of increased food financing needs.

Local traders who wish to import more food need funds, or new credit lines, at once. It is very hard to imagine how the possibility (not certitude) that six months, orone-two years in the future, their government will get a new loan will influence the willingness of international traders or banks to give them affordable loans now. It is even hard to imagine that the government would authorize a new, dedicated credit line for food imports without being absolutely certain that the disbursements under this credit line will be refinanced from an international fund credit line – no Ministry of Finance is likely to accept an arrangement of this kind. If there is the certitude that such refinancing will be possible, then the question is why it should take one-two years… it should be possible to make funds available at once. An ex-post scheme such as the International Monetary Fund’s Compensatory Financing Facility (CFF) has not been set up to help solve this kind of financing problems, and through its very nature, cannot, irrespective of any changes that one could suggest with respect to its conditionality.

It could also be noted that, if the logic of the ex-post payments is purely to replenish the country’s foreign exchange reserves, not to support food imports at the time of need, then one can question why the “food trade balance” is considered in isolation – it would be more logical to consider the balance of payments as a whole (as indeed, the IMF’s CFF does).

Can one design a scheme that provides funds when there is a need for increased food financing instead of after?

It is possible to design "trigger mechanisms" that are sufficiently immediate to enable the disbursement of new food import credit lines at the moment that there is a need for such credit lines. These trigger mechanisms have the added advantage that they are external to the beneficiary countries, and thus, the actions of the governments of the beneficiary countries need not to be scrutinized; this makes the operations of the secretariat of the "revolving fund" easier as no policy review function is necessary, and it can considerably speed up disbursement.

Increased financing needs for food imports can result from three factors, two of which are out of the local government’s hands, and on the third of which it can have an influence through its policies:

1. higher world market prices for food2. a shift from food imports on preferential terms/food aid, to commercial food imports3. an increased food deficit, as a result of a disaster, bad policies, or other factors.

As has been noted by others, donors would have difficulty to accept compensating a country for the effects of its own poor policies. Thus, increased import needs because of factor 3 would be compensated only after considerable scrutiny, and except in the clear case of a non-man-made disaster, financial disbursements would be linked to serious conditionality. If the cause of the increased needs is a disaster, then the international community should respond with more food aid, not with loans to enable commercial imports of basis foodstuffs. One could thus argue that it is highly preferable for an international fund to concentrate on the increased financing needs that may result from factors 1 and 2. In practical terms, import statistics are also only available with many months of delays; and then, may be an imperfect reflection of the needs for extra import financing, as it may be

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that in the absence of proper financing facilities, local importers were unable to make extra imports despite larger local needs.

In contrast, information on the first two factors is available with little or no time delay. World market prices for food are available on a real-time basis. Data on preferential food imports and food aid are available on a reasonably timely basis (donors tend to programme such schemes), and a reduction of the volume of food available under such schemes can in all likelihood be determined in advance. These data are already gathered by existing organizations (in particular, the FAO and the International Grains Council), so it would not be necessary to construct an expensive new monitoring system. Although it will require technical discussions, it should not be difficult to establish, for each country, a baseline price index, and a baseline index for food imports at commercial terms. The two could then be combined into a "commercial food financing need index", for each country, and the secretariat can monitor the changes in these country indices. A, say, 20% increase in a country’s index could then trigger the availability of new funds.

How can a market-friendly "revolving fund" facility for financing food imports be structured?

The following sets out one possibility to structure a "revolving fund" facility for the financing of food imports. The structure is designed to enable financing of food imports when there is a need, rather than to compensate balance of payment losses after the fact. It builds on existing practices of international trade and of international finance. The kind of operations described below are perfectly familiar to food buyers, banks, and food suppliers, and they would have little or no difficulty in understanding the mechanisms and applying them. The structure of the facility also reflects the fact that the major concern in finance is not so much to find clients interested in borrowing, but to secure reimbursement, and it is assumed that a similar concern applies to donor countries that make funds available or provide loan guarantees. Thus, the structure described below contains strong measures to reduce the risk of loan default.

One possibility for the structuring of an international financing facility is the creation of earmarked financing windows in the interested LDCs and NFIDCs. These windows would remain dormant as long as certain agreed triggers are not breached, but become active once there is a need for new finance for food imports. A small secretariat would be charged with monitoring trigger signals. The secretariat should also elaborate, with interested governments, what should be the trigger levels, and what should be the link between available food import credit and the levels reached by the trigger factors, on the basis of clear criteria established by the international community.

Secretariat of international

facility

National window(e.g., with Central

Bank)

Local bank

Local bank

Local trader

Local trader

Local trader

Donor countries

1. The set-up of the fund

Provision of loan guarantees, up to X amount, and conditional on

certain « trigger » conditions being met.

Creation of national « windows » in suitable local organizations, and

agreements on financing and reimbursement modalities.

Agreement on lending modalities and distribution ofrisks.

Information on lending conditions

and modalities.

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To ensure that, if there is a need for new food financing, funds will be available, the international community can provide conditional guarantees rather than finance – in other words, there is no need to have a large amount of money in a non-utilized account. At the national level, the government would have to agree that any sums borrowed under the facility will be reimbursed – it needs to give a sovereign guarantee. If food imports are a state monopoly, the government could decide that the food parastatal or its parent Ministry administrates the fund. If food imports are largely in private sector hands, then the actual lending to traders should be through local banks. It would then make most sense to locate the national window with the Central Bank, which in turn works with interested local banks to familiarize them with the new window. Local banks can then inform local traders.

The secretariat of the international facility should also establish a list of reputable international food suppliers, which it could do itself, but which more efficiently could be done through international banks with which it will work in the future to distribute the actual funds. These reputable suppliers do not need to be just the major western trading houses – with the assistance of banks, one can find many more potential suppliers, across the world. But it is necessary to establish a list of some kind, as fraud is not uncommon in international food trade, and one needs to avoid that funds are paid over to a company that then makes no delivery of food.

As long as the automatic triggers that the international community has agreed on are not breached, the revolving fund remains dormant. When they are breached, there can be a clear sequence of events to enable traders to obtain the funds necessary to import food. As is indicated in the following chart, the sequence of events would start with the international secretariat advising a country that triggers have been breached, and that now, a credit line of a certain amount is available for food imports, and will remain available for a limited number of months.

The local government, if it feels there is indeed a need for more financing for food imports, can then notify the local banks who have agreed to be part of the scheme that the window is now open. These banks, in turn, contact their clients. There are then a number of ways for traders to access the fund. The chart shows how it could look like if access to the window is on a first-come-first served basis. Another possibility is to auction off access rights among the local traders, for example on the basis of the interest rate they are willing to offer (this would indeed increase the costs for trader, but would generate a profit for the "national window" which could be used, for example, to target food assistance to vulnerable groups). If on a first-come-first-served basis, the local trader would enter into an import contract with a reputable foreign supplier (the list of which should be made available). With a copy of the contract, he now approaches his bank with the request to have the transaction financed – for 80, 90, 95%, details are to be elaborated. The local bank would look at the request, and if it is comfortable with the credit risk of the local trader or with the risk mitigation mechanisms that he proposes (or agrees to), the bank will forward the request to the national window. The national window will normally send this request on to the international facility, which should then automatically make the required payment for the food imports under the contract. This whole process could be done in a matter of a few days.

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facility


Bank)

Foreign supplier

Local bank

Local bank

Local trader

Local trader

Local trader

Donor countries

2. Disbursement under the fund

1. Indication that the availability of X amount of finance has been triggered

2. Information that the special financing window is now open

3. Information that the window is now open

5. Finance request

6. If approved, finance request

8. Trigger of guarantees

7. If approved, finance request4. Contract

10. Export 9. Payment

There are various ways in which the "revolving fund" can obtain the needed finance. It could request donor countries to provide funds in place of some of their guarantees. Or it could borrow from banks against the government guarantees (these give a AAA credit rating, which enables the facility to borrow money cheaply). In certain conditions, it could raise the funds at even lower cost on the capital market. There are also various ways in which the foreign supplier can be paid. The easiest and less risky approach is probably to work through reputable banks, which guarantee that once they make the payment, the food will indeed be shipped in accordance with the contract. Many banks have the skills and experience to do this (in effect, it can be as simple as the opening of a letter of credit), and it would probably not be worthwhile to build up such specific expertise in the secretariat.

Once the payment has been made, or the foreign supplier feels secure that it will be made, shipment of the foods will be arranged, in such a way that the supplier will be paid the remaining 5, 10 or 20% which the importer is supposed to pay directly. It is virtually impossible that the funds are diverted to other uses.

After an agreed time, the local trader (importer) has to reimburse the loan, in local currency. If he does so in time, the local bank reimburses the national window. Both payments are in local currency (in theory, loans could be denominated in hard currency, but this would expose the local trader and local bank to risks that can much more easily be managed at the level of the national window). The national window, in turn, reimburses the "revolving fund" for the payment made to the international supplier of the foodstuffs; and the "revolving fund" could in turn reimburse the ultimate providers of the finance. The donor guarantees can then become dormant again.

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facility


Bank)

Local bank

Local trader

Donor countries

3. Reimbursement under the fund, assuming no default

1. Reimbursement in local currency

2. Reimbursement in local currency

3. Reimbursement in hard currency

4. Guarantees expire

The fund should be set up in such a way that it strongly reduces the risk of default. The best way to do this is to create stakeholders in a proper reimbursement process. One element in this is that the local banks which actually interact with local importers have to take a part of the credit risk. So if the importer defaults, the bank would still be obliged to reimburse, say, 20% of the loan amount. One cannot make this percentage too high, because then, the local bank’s credit lines for certain traders or for the food business could be too easily exhausted. But it has to be high enough to ensure that the bank takes active measures to ensure reimbursement. One of the activities of the secretariat should be that it arranges training and advice to local banks so that they feel comfortable with such a role in provide financing to food importers. At the national level, the government would provide a sovereign guarantee, so even if there is a local loan default, the international facility should be reimbursed. If the sovereign defaults, the donors’ guarantees would be called upon; presumably, this can be handled in the same way that multilateral financiers now deal with sovereign defaults by their member countries. A final element one could consider is the use of one of the various instruments that are now available to deal with price risk; this could help to reduce credit risk. If international prices have increased, the local trader will have to increase local prices. This may be difficult, and moreover, the government may intervene to reduce consumer prices (e.g., by reducing import taxes). The local trader thus runs a serious risk of making a loss on the transaction – which greatly increases the risk of default on the credit. A price risk management component can help local traders to keep prices low, to the benefit of consumers and simultaneously, making default less likely.

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facility


Bank)

Local bank

Local trader

Donor countries

4. Reimbursement under the fund, in case of payment defaults

1. No reimbursement.

2. Reimbursement of, say 20% if loan value

3. Full reimbursement in hard currency?

4. Guarantees expire?

It should be noted that governments can have some leeway in deciding on the pricing of the food under this scheme. It would be advisable if the scheme is set up in such a way that traders who benefit from it pay the same interest rates that they would pay in the absence of a crisis situation (interest rate subsidies tend to lead to distortions). The national window would pay a much lower interest charge. The difference can be used in several ways, e.g., to set up a mechanism to deal with credit risk, or to subsidize food distribution to vulnerable groups.

A fund as sketched above has several advantages. Extra food imports can take place within weeks of an observed need for new financing for food imports. The use of funds is strictly controlled – diversion of funds is virtually impossible. Risks for food suppliers are minimal, which will lead to greater competition among suppliers, and to lower prices. The normal flow of food trade is not disturbed or distorted. Disbursement is easy, with procedures that require little time or documentation. Strong safeguards are built in to ensure loan reimbursement. As the secretariat can be very small and donors would provide conditional guarantees, not funds, the burden on donors’ funds would be minimal – so should there be no market shocks in the years to come, no funds will have been wasted. Finally, a fund like this makes itself superfluous after one or two decades, as the secretariat’s activities to create sufficient capacity among local banks to manage the proper distribution of loans will ultimately lead to these banks being able to give such loans on their own behalf.

In conclusion, if an external shock occurs which forces LDCs and NFIDCs to find much more finance to import sufficient foodstuffs, as required to maintain normal levels of consumption, then the "revolving fund" will help them solve the problem. If no such shock occurs, the secretariat’s operations, over the years, will still contribute greatly to strengthening the LDCs’ and NFIDCs’ systems for food imports and financing, which will reduce transaction costs and lead to better prices for consumers. Either way, governments need to decide whether the costs of the system, even if they are low, are justified by the expected benefits.

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ANNEX 8

Submission by the World Bank

Response to the Proposal of the Least-Developed and Net Food-Importing Countries7

General comments and summary

The World Bank is seriously committed to assisting the net food-importing developing countries and the least-developed countries to meet their food security objectives, to capture the benefits from their participation in the WTO, and to mitigate any adverse impacts from agricultural trade liberalization. The Bank also supports the pro-active stance of the net food-importing developing countries and the least-developed countries in these discussions to examine possible means of improving the effectiveness of the implementation of the Marrakesh Ministerial Decision on "Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries".

The Proposal to Implement the Marrakesh Ministerial Decision in Favour of LDCs and NFIDCs submitted by Côte d'Ivoire, Cuba, Dominican Republic, Egypt, Honduras, Jamaica, Kenya, Mauritius, Morocco, Pakistan, Peru, Senegal, Sri Lanka, St. Lucia, Trinidad and Tobago, Tunisia and Venezuela (G/AG/W/49, G/AG/W/49/Add.1 and G/AG/W/49/Add.1/Corr.1) calls, amongst other things, for the establishment of a Revolving Fund to address the short-term difficulties in financing normal levels of commercial imports. In particular, the Proposal requests a counter-cyclical subsidy mechanism whereby food and financial aid are automatically triggered by commodity price increases due to agricultural trade liberalization agreed under the Uruguay Round (UR). In addition, increases in overall levels of financial and technical assistance are proposed.

In general, the potential effects of liberalization on the least-developed and net food importing countries are quite complex, differing significantly among members of this group of countries, and deserves careful consideration. They depend upon several things, including the extent to which countries undertake to liberalize their own policies; whether the countries are importers of particular products; and the structure of trade policies in the affected countries. While the global and country-specific benefits of liberalization generally outweigh the costs8, it is possible that particular types of liberalization will have a negative impact on some economic groups in some countries. To the extent that agricultural trade liberalization raises the average world prices of certain products, or increases their volatility, there will be a negative impact on the purchasers of those products in all countries. Of course, the converse is true of producers of those commodities, who will benefit from a price rise. In countries that rely heavily on imports of those commodities, the negative impact on purchasers will outweigh the benefits for domestic producers.

Several considerations suggest, however, that the proposed instrument is not the best way to address possible problems associated with increasing world prices of commodities that result from liberalization. Liberalization to date has been quite limited, and future liberalization is likely to be implemented gradually, with the implication that any effects will be felt only over a number of years. Other instruments - existing ones, perhaps with relatively minor modifications, as well as some more modest new ones - can be used to more effectively address short-term difficulties in financing normal

7 Background Paper prepared by World Bank staff in the Rural Development Department with contributions from Development Economics Group and Regional Units. The paper does not reflect the position of the World Bank Board of Executive Directors or the countries they represent.

8 A general theme emerging from the evaluations of the Uruguay Round conducted by the World Bank (Martin and Winters 1996), is that the gains from countries' own liberalization typically outweighed those from increases in their market access opportunities.

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levels of commercial imports should they arise, and to insure against price risks and emergency food crises. For example, price risk management instruments are widely available, which give both private and public sector importers the ability to insure themselves against short-term precipitous increases in prices of specific commodity imports. Achievement of food security objectives is best pursued in the medium- to long-term through more development assistance to increase incomes of those at risk, and by other measures that could be identified through a study to identify actual vulnerabilities – most of which are unrelated to trade - that should be addressed. This kind of study could be carried out under the auspices of the Integrated Framework studies that are now being conducted for the Least-Developed Countries, or under some kind of separate facility.

Plan of the paper

This response first examines the question of whether, to what extent, and over what time horizon trade liberalization has raised, or is likely to raise, prices of food imports. It then discusses potential measures to mitigate adverse effects, first looking at existing programmes and then at measures that could be used in the future. The focus here is on adverse effects on food security, which we take as the major concern underlying the proposal. Since the World Bank has been asked by the Panel to describe its instruments that have some bearing on the deliberations concerning the proposal, the paper discusses in some detail Bank instruments that are intended to ameliorate the negative effects of any shocks that may undermine food security in developing countries. The paper makes a few brief points regarding the Revolving Fund proposal itself, but does not analyze this on a technical level, since this is already done in the FAO's submission. Since the IMF is to submit information on the Compensatory Finance Facility, this paper also does not discuss this mechanism.

Real and potential effects of trade liberalization on world grain prices

The Proposal to Implement the Marrakesh Ministerial Decision in Favour of LDCs and NFIDCs argues that NFIDCs and LDCs are facing much higher cereal import prices following the Uruguay Round Agreement on Agriculture, and that these higher prices are due to the Agreement. The argument is based on the comparison of cereal import prices during 1993-94 with 1995-96 and attributing the change to the Agreement.

1. Cereal import prices for NFIDCs and LDCs have not risen significantly during the 1990s.

Cereal prices were low during 1993-94 and high during 1995-96 as the following graph shows. Thus, comparison of cereal import costs focusing on these years will lead to the conclusion in the Proposal. However, prices have declined since 1996 and average import prices are now below the levels of 1993-94 for the Least-Developed Countries and slightly above for the Low-Income Food Deficit Countries.

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2. The evidence does not support the argument that cereal prices rose during 1995-96 because of the Uruguay Round Agreement on Agriculture (URAA).

Cereal prices rose in 1995 and 1996 primarily because of low world grain stocks which followed from a 3.2 per cent decline in world production in 1995/96 (see figure). Cereal stock relative to use fell to an unusually low level at the end of the 1995/96 marketing year because of a poor US harvest (13.4 per cent compared to an average of 18.8 per cent in the previous five years). High fertilizer prices and strong economic growth during that period contributed to the sharp price increases. Stock levels recovered in 1996 and continued to increase though 1998, driving world cereal prices lower. The URAA was not directly related to the price increases during 1995 and 1996, nor the price declines since. The fact that the grain import bills in some countries continue to be higher despite the price declines is another indicator that trade liberalization is not the cause.

It is, of course, possible that the URAA increased food prices relative to what they would have been in its absence, even though they fell relative to past levels. That is, it may be true that without the URAA, prices would have fallen further than they in fact did. This is plausible, but even by this standard of comparison, price "increases" attributable to the URAA are estimated to be quite small. Goldin and van der Mensbrugghe (1996, p169) estimated that enough liberalization was achieved in wheat, for example, to raise estimated world wheat prices by only 3.8 per cent. By contrast, they estimated that the prices of coarse grains and sugar would rise by only around 2 per cent, and dairy products by a little over 1 per cent. For a number of other agricultural commodities, including rice and cotton, they estimated that there was so little overall liberalization that prices would actually fall relative to the prices of manufactures exports.

One reason for this limited impact on food prices is that the URAA did not achieve a great deal of agricultural liberalization. While it achieved an enormous amount in terms of establishing rules, the liberalization that it achieved was much less than the target cuts in protection included in the agreement. This situation arose because of the choice of base years where protection rates were high, the use of "dirty tariffication" in developed countries, the widespread use of ceiling bindings in

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Low-Income Food Deficit 175.3 229.5 30.9 193.0 10.1Least Developed Countrs 224.9 252.1 12.1 203.0 -9.7

Developing Countries 180.6 229.7 27.1 181.3 0.3

Trade Weighted Cereal Price FOB 137.1 184.4 34.5 125.7 -8.3

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developing countries, and the options for least-developed countries to avoid liberalizing their own policies.

3. Real cereal prices have shown a strong secular declining trend.

Primarily because of the tremendous increase in productivity and yields in the past decades, the long run prices of cereals (at least wheat, maize and rice) have shown a downward trend. Real prices of cereals are near the lowest levels in decades as the second graph shows.

4. Prices are unlikely to increase in the near term.

The failure of the URAA to achieve substantial liberalization implies that much is left to be done, so a successful Doha round could potentially achieve a great deal of liberalization. However, even if this were to raise world agricultural prices - and there is little analytical evidence that this effect would be significant - the impact is likely to be felt only gradually and in the medium term. The round itself is scheduled to be concluded over several years, and it appears likely that any

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significant steps in sensitive areas such as agriculture would be phased in over an even longer period. Other structural supply and demand shifters are also at work, the net impact of which is difficult to predict. But judging from the experience of the last decades, it would appear likely that these will operate on balance to depress price. In addition, to the extent that trade barriers have been reduced (or will be reduced in the future), this implies reduced world price variability and therefore better ability to plan and to hedge against price hikes.

5. Research suggests that multilateral trade liberalization produces benefits to net food- importing countries that in some cases offset the costs from higher food prices.

Two World Bank studies examined the impacts of Uruguay Round liberalization on least- developed and net food-importing countries (Anderson 1998; Ingco 1997). Since the least-developed countries were not required to liberalize their own policies, these studies focused on the impacts of Round-induced changes in external prices on these countries. Both of these studies divided the impacts of changes in world prices into two components—terms of trade effects, and distortion impacts. The terms of trade impacts of liberalization are well known, and have frequently featured in policy discussions, but the distortion impacts have only received attention in a small number of studies, such as Anderson and Tyers (1993), Tyers and Falvey (1989), and Alston and Martin (1995). None of these earlier studies focused on the least-developed and net food-importing countries.

The terms of trade impacts resulting from changes in world prices are relatively straightforward. They are the impacts of changes in world prices on the costs of net food imports, or the benefits obtained from net exports. For a net importer, an increase in prices will raise costs, with the size of the additional cost depending upon the level of imports. For a net exporter, an increase in prices will increase returns, with the magnitude of the benefits depending upon the level of net exports.

The distortion impacts are more complex because they depend on the nature of an entire array of policy distortions in the economy. They arise from the impact of changes in world prices on the extent to which countries undertake activities that are worth less (or more) than their true costs. If, for example, a country has an export tax on a particular commodity, the resulting depressed domestic prices will lead producers to produce less of the good than is socially optimal, and consumers to consume more than is socially optimal. Both increases in production and reductions in consumption of such a good will make the country better off. A rise in the world price of this export good will, assuming it is passed on to the domestic market, lead to such a net gain. An increase in the import bill (caused, for example, by an increase in import prices) will cause an exchange rate depreciation, which will have the same kind of effect in the market for this export, tending to offset the adverse terms of trade effect for the country from the higher import prices.

A key finding of the two studies is that the distortion impacts, which have typically been ignored in the past, can be extremely important in the least-developed and net food-importing countries. The Ingco study uses more up-to-date and detailed estimates of trade distortions, and covers a wider range of low-income and net food-importing countries, making its results of more general interest for this submission. In a number of cases, including Bangladesh, Egypt, and Tanzania, the distortion effects operated in the opposite direction to the terms of trade impacts, and converted an apparent negative impact of the URAA into a substantially larger gain (See Ingco 1997, p16, Scenario II). The distortion impacts are extremely complex, however, and sometimes worked against the country. In India, for example, the distortion impacts were negative, primarily because the world prices of some its taxed commodities, such as rice and cotton, were estimated to fall. These price declines reduced India's output of these commodities, which was already too low because of the use of export restrictions. On the other hand, in Kenya and Zimbabwe, the distortion effects greatly reinforced an initial gain from the changed terms of trade.

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Overall, the results of these initial studies suggest that the policy-related impacts were far from uniform, but generally increased the gains from the Uruguay Round package to most low-income and net food-importing countries. However, the impacts in any future liberalization will clearly depend upon the specific nature of the agricultural policies used in the country, and on the impacts on world prices of the liberalization package. These studies were undertaken using a relatively simple numerical model9 designed so that it could be applied to countries where data availability is limited. These models would allow the evaluation of the impacts on least-developed countries of different world price changes resulting from future liberalization proposals.

The overall conclusion from the above points (1)- (5) taken together is that any substantial increase in international agricultural prices that could potentially result from the international agreements: (a) has not occurred yet; (b) is probably a number of years away, and (c) could well be offset by other economic factors at work in the mean time. Furthermore, any losses to net food- importing countries would not be uniform across countries, and may be partially or completely offset in individual countries by other gains from the overall agreement.

Measures to ameliorate the impact of shocks that threaten food security

In assessing the effects of measures that might be taken to mitigate these effects, the premise maintained in this paper is that food security is not equivalent, or even necessarily closely correlated, to a country's food production and self-sufficiency. Food insecurity of a population arises only when two conditions are met simultaneously—domestically produced food is not accessible and imports are not available in a timely way to fill the gap. This is apparently also the perspective of the RF proposal, which is intended to insure countries' access to financing for imports. There is a degree of inconsistency with the technical assistance component of the proposal, however, which is addressed to increasing domestic production.

Seen in this light, long-term structural food insecurity exists primarily because of a demand-side problem - lack of purchasing power by the poor - and must be addressed by raising incomes. Nonetheless, it is true that a structural supply shift which resulted in an increase in the average price of food would increase the long-term incidence of food insecurity by causing more of the poor to be unable to purchase an adequate supply of food or to do so only at the cost of diverting so much of their income into food that they have inadequate income remaining to meet their other basic needs. Such a structural supply shift could also increase food insecurity by increasing the budgetary requirement of any government or privately-funded safety net programmes that provide food to the needy.

More transitory food insecurity commonly arises because of shocks on either the demand or supply side, or both. Wars, political disturbances, economic crises, or natural disasters may temporarily disrupt the income-earning capacity of the population (demand side), as well as productive capacity and commercial channels for delivering food (supply side).

1. World Bank Facilities for Helping with Short-Term Price Shocks and Emergency Food Shortages

Most of the World Bank's lending and non-lending services are aimed at the root cause of long-term food insecurity - poverty. Some investment projects are also aimed at improving trade and distribution facilities, or improving a country's trade finance infrastructure, thereby reducing vulnerability to disruptions of imports. The World Bank has no facilities that are specifically designed to help countries cope with price shocks, as is the IMF's Compensatory Finance Facility. The Bank does have, however, several instruments to provide urgent assistance when a country is struck by an emergency that seriously dislocates its economy and calls for a quick response.

9 The model runs within the widely available EXCEL spreadsheet.

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One such type of Bank instrument is the Import Rehabilitation Loan. This is a quick-disbursing loan to provide support for the government budget and balance-of-payments in periods of crisis. It is specifically targeted at imports that are vital to the functioning of the economy and preservation of a minimal level of well-being of the population. It is a species of adjustment loan, and can include an element of reform conditionality. For example, the Critical Import Rehabilitation Loan was made to Bulgaria in 1997 to help finance primarily grain and oil imports when both domestic production and normal import supply channels were severely disrupted by poor economic policy and political crisis, exacerbated by drought. The loan was conditional on the new government's undertaking a series of basic reforms in economic policy.

The World Bank also provides several other types of adjustment loans, which disburse to finance general import expenditures in times when balance-of-payment support is needed for whatever reason, though in most cases the major reason for the need for special assistance to finance imports is poor macroeconomic management. These loans are specifically designed to support a well-defined reform programme and to help pay for its transitional costs.

Other lending and non-lending instruments for emergency recovery assistance have as their objective to restore assets and production levels in the disrupted economy. Bank emergency assistance may take the form of:

immediate support in assessing the emergency's impact and developing recovery strategy; restructuring of the Bank's existing portfolio for the country, to support recovery

activities; redesign of projects not yet approved, to include recovery activities; and provision of an emergency recovery credit/loan (ERC/ERL).

A very important benefit of a number of Bank actions in response to a crisis (e.g., restructuring the portfolio to increase disbursements in the near term) has not been the direct elements financed, but the indirect element of providing foreign exchange, which enables countries to import food, medicine and other essentials, which may be reduced by the loss of export earnings and need for emergency imports, which characterize drought periods or international food price spikes.

ERLs may include quick-disbursing components, but ERLs are mainly to finance investments to rebuild physical assets and restore economic and social activities after emergencies. ERL activities address restoration of assets and production, rather than relief.

The Bank considers the following criteria in deciding whether to provide an ERL: Impact on economic priorities and investment programmes. Frequency: For recurring events, such as annual flooding, a regular investment loan is

more appropriate. Urgency: For a slow-onset disaster such as a drought, the more thorough preparation of a

regular investment project may be preferable. Prospects for reducing hazards from similar natural disasters in the future. Expected economic benefits.

ERLs do not attempt to address long-term economic, sectoral, or institutional problems, and do not include conditionality linked to macro-economic policies. They include only conditions directly related to the emergency recovery activities and to preparedness/mitigation in the event the disaster recurs.

ERLs often come after the event, but are usually used to finance transport, seeds, fertilizer, etc. which facilitate the capacity of the country or affected farmers to prepare for the following year's crop. Such loans or credits have been used in Ethiopia, Kenya, Somalia and Sudan. They were used during the 1974 and 1985 droughts in the Sahel and Horn of Africa. The ERC for Zimbabwe, as a part of the Bank's response to the 1992 drought was large ($200 million, combined with other funds

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reallocations to total roughly $350 million) and was used to deal with multiple elements of the response to the drought. Probably the major contribution of the Bank's total financing for that operation, however, was that it provided balance-of-payment support (at least indirectly) that enabled government to do many things, including import food, that were not an explicit part of the project. The Bank made a special ($10 million) grant to Somalia to finance WFP and UNICEF actions in the country that were specifically linked to the provision of food. The food was WFP's but the delivery was financed by the Bank.

In addition to emergency assistance, the Bank may support freestanding investment projects for prevention and mitigation in countries prone to specific types of disasters. Such operations could assist in (a) developing a national strategy, (b) establishing an adequate institutional and regulatory framework, (c) carrying out studies of vulnerability and risk assessment, (d) reinforcing vulnerable structures and adjusting building and zoning codes, and (e) acquiring hazard-reduction technology.

2. Commodity Price Risk Management Measures

A wide range of instruments are now available commercially to protect against price movements in the short term. Options can be used by economic agents with large exposure to risk from price movements either to lock in a specific price, or to insure that price will not be greater than a specified level or not be lower than a specified level. These could be readily used by large purchasers of foodstuffs, either private sector commercial importers or government agents (food corporations or state-owned enterprises). They could also be used by governments to insulate safety nets from budgetary crises from food price increases. That is, a government agency which knows that its expenditures will increase when food prices rise (either because it provides food in-kind and must procure the higher-priced food itself or because it must give higher income support to the poor) can purchase options that would pay out when import prices increase beyond a certain level. This would then insure that it will have the budgetary resources it requires, without creating an unanticipated fiscal burden on the government. The price insurance would protect them from short-term fluctuations in price, but not against long-term downward trends.

The International Task Force on Commodity Price Risk Management (ITF), with its secretariat in the World Bank, is currently piloting mechanisms to provide commodity price insurance to smallholder farms in developing countries and this could possibly be extended to consumers in food importing countries as well. This insurance scheme, while varied in its specific application by country, is focused on adapting the commodity price risk management tools available on international markets to provide a form of price insurance to producers (and consumers in the case of insuring import prices). The Bank has also developed instruments to support the development of crop yield insurance, and has one operational pilot project in Morocco, with others under preparation.

3. Commodity swaps

Commodity swaps is a product the IBRD began offering in 1999 to help clients address commodity price risk. IBRD countries whose debt-servicing capacity is heavily exposed to specific commodities may benefit from financial terms that link the debt-servicing costs of their IBRD loans to movements in the price of a specific commodity or basket of commodities. Managing the risks associated with commodity prices is a major challenge for many developing countries, but most commodity-dependent countries have inadequate access to risk-hedging instruments. To address this need, in 1999 the IBRD began offering commodity swaps on a pilot basis to borrowers with a demonstrated need to reduce exposure to commodity price changes. Commodity swaps are individually negotiated transactions to exchange two sets of cash flows at certain dates in the future, where one set of cash flows is linked to the market price of a commodity or index and the other is a pre-agreed fixed cash flow or a cash flow based on a floating or fixed rate of interest. Hedges could be structured to reduce commodity price-related risks for both producers and consumers of energy, mineral and agricultural products.

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4. Food aid and subsidized credit

While food aid has served a valuable function in cases of disasters when normal supply channels are disrupted, it has in many cases had undesirable and unintended consequences. In general, food aid provides significant quantities that have a potentially large impact on the local market price. The aid has also often been given at times when it is least needed - that is, when large surpluses in developed countries depress world prices and create pressure to dispose of the excess stocks through food aid. While an increase in supply will lower the market price even if it is sold at "market prices", this effect of distorting the market is often magnified by the fact that in the event, the distribution is free or actual sales prices are far below local prices. This tends to depress prices for local producers, lowering their incomes, reducing incentives for production, and thereby increasing the country's future reliance on food imports. In addition, the price reductions created by food aid distort seasonal (inter-harvest) price movements and discourage the development of private storage facilities. Finally, food aid is in many cases distributed through governmental channels, thereby undermining private sector development in marketing infrastructure. While such adverse effects may on specific occasions be acceptable costs to pay for mitigating or avoiding famine, these should be evaluated on a case-by-case basis.

Many of these same shortcomings are true of subsidized credit for food imports (including export credit from the exporting countries): the subsidized imports depress farmers' prices and discourage production; if not done on a purely commercial basis, it can be timed poorly (e.g., in conformity with the requirements of the export credit agency, not the demands in the importing country) and thereby distort seasonal price movements; and it is often channeled through government agents, undermining private sector market development.

Moreover, both food donations and concessional credit programmes obscure the real value of the grant element involved and run counter to the principle of transparency. If a grant is justified, the grant should be transparent and not disguised through an unknown grant element embedded in in-kind food aid or subsidized interest rates.

5. Food vouchers

One alternative to address food security concerns that would not entail several of the shortcomings of direct food aid is to establish a system to distribute food vouchers to the needy when food prices increase. These vouchers could be redeemed through normal commercial import and distribution channels and so would not undermine private sector development. They would also operate to increase demand, not supply, so they would not distort domestic prices for either producers or consumers. The difficulty in this is that it requires a system for identifying target recipients and distributing the vouchers to them.

6. The Proposed Revolving Fund

We do not propose to analyze the RF proposal in depth, since this is ably done in the FAO's submission, circulated to the Panel on 19 February. It is, however, worthwhile to note the following points.

Food insecurity is an individual, not a national, phenomenon. It is unclear what would be the rationale for providing assistance to the LDCs and NFIDCs, when many poor consumers in other countries would be hit equally as hard or harder by food price increases. It is also not clear what kind of mechanisms could be designed to ensure that any aid to the LDCs and NFIDCs reached the appropriate population of poor consumers. If it were possible to design mechanisms to target them, then the aid could be given in the form of food vouchers.

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If it would involve subsidizing food imports - e.g., through subsidized credit - the revolving fund would have the same shortcomings enumerated in the discussion of food aid and subsidized credit.

Establishing sensible criteria for access to the fund - both long-term and year-to-year - would be difficult. First, consider long-term eligibility. As noted above, because of the complicated effects, it is not clear which, even among the net food importing countries, would be net losers from an agreement liberalizing trade. Export revenues in many of these countries would be increased by the better market access resulting from an agreement, and prices of their other imports might decline. It is also not clear on what basis poor consumers in countries not classified as NFIDCs should be excluded from assistance. Second, triggers for year-to-year access would need to be carefully defined and complex. Automatically granting access based on an increase in import bill for food would reward poor economic policy. (Food subsidies and macroeconomic mismanagement, together or separately, could trigger a sharp increase in food imports). Thus, access would need to involve some kind of policy review, which is one of the major complaints with the operation of the CFF. Access triggers would also have to take into account the overall financing needs of the countries in question, not food alone. It would not make sense to give help to countries when their food import bills are rising, if at the same time their export receipts are rising even more, e.g. on account of oil export receipts.

If the fund were to include a second and fixed component of Technical and Financial Assistance, this should not be focused specifically on the production of food crops. If the objective of the component is to enhance food security, it should be focused on poverty-reducing activities, given that long-term structural food insecurity is a demand-side issue. Focusing development assistance on importable food crops could undermine the support available for other forms of income-generating activities in rural areas (export crops and off-farm activities) and in urban areas, as well as for improvements in trade and storage infrastructure which in the end could have a higher impact in reducing food insecurity.

Conclusion

Given that any significant increases in prices that would result from a multilateral trade agreement are years in the future, and may not materialize at all, it would seem premature to contemplate the establishment of a revolving fund at the present time. Establishing such a fund would require rather complex rules governing access, and could have negative effects on agricultural producers and development of the private sector storage and distribution sectors. To the extent that any compensation is required to mitigate adverse effects on food security, it would be preferable to channel this directly to those who are adversely affected—poor consumers—perhaps through a system of food vouchers. Although this would require an infrastructure for identification of the target group and for voucher distribution and redemption, many countries already have at least some existing mechanisms that could be adapted for this. Experience with similar programmes of food stamps or other income support mechanisms is accumulating as more countries begin to use them as part of their safety net programmes. Since there is significant lead time before any price increases would be felt, there is some time to install such programmes in countries which may be vulnerable.

Food security problems can arise for a number of reasons - natural disasters, wars, and economic shocks. Most of these in all likelihood will be much more important determinants of a country's food security than will global trade agreements. For countries that are concerned, a study of the implications of trade for food vulnerability may diminish their concerns and, more importantly, identify actual vulnerabilities - unrelated to trade - that should be addressed. This kind of study could be carried out under the auspices of the Integrated Framework studies that are now being conducted for the Least-Developed Countries, or under some kind of separate facility.

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ANNEX 9

Submission by the World Food Programme (WFP)

Implementation of the Decision on Measures concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries

How Food Aid Complements Commercial Importsin Response to External Shocks

Introduction

This note examines how food aid can complement commercial imports in response to external shocks in poor countries. It first defines the different types of food aid. Then it looks at how external shocks can affect food security in Least-Developed Countries (LDCs) and Net Food-Importing Developing Countries (NFIDCs) at both the macro and micro level. The discussion is not limited to shocks that may be related to the negative consequences of the trade reform process on poor countries' food security. Lastly, the paper reviews both commercial imports and emergency food aid as responses to shocks affecting food security.

Financial tools and access to multilateral concessional credit schemes are important and necessary elements to secure adequate commercial imports for the poorest countries. However, non-commercial channels, such as targeted food aid, are essential to complement commercial imports so that the poorest populations are reached. This dual approach is in keeping with the spirit of the Marrakesh Decision, which seeks to protect and support the food security of the poorest countries during the reform process.

Background

In 1994, as part of the outcome of the Uruguay Round negotiations on agriculture, there was an agreement to establish appropriate mechanisms to ensure that the availability of food was not adversely affected by the results of the trade agreements.

The decision specifically identified three areas of intervention:

establishing appropriate levels of food aid;

ensuring that basic foodstuffs are provided to poor countries in full grant form and /or on appropriate terms; and

supporting technical and financial assistance to improve agricultural productivity and infrastructure of the least developed and net food importing developing countries.

These three areas of intervention should be viewed as a means of implementing a comprehensive approach to ensuring food security during the reform process.

As part of the implementation of the Marrakesh Decision an Inter-Agency Panel was set up to look at financing normal levels of commercial imports of basic foodstuffs for countries experiencing short-term difficulties. The Inter-Agency Panel was established on the recommendation of the WTO Agricultural Committee and endorsed by the Doha Ministerial. This note is submitted at the request of the Chairman of the Inter-Agency Panel.

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Types of food aid

There are two types of food aid – targeted food aid and programme food aid. It is critical to understand the different modalities as the objectives and hence outcome differs dramatically depending on which modality is used. The use of the term food aid in this paper refers exclusively to targeted food aid.

Targeted food aid comprises both emergency and project food aid. It is targeted to identified population groups who are experiencing difficulties in meeting their consumption needs, either in development settings or in emergencies.

Programme food aid is usually supplied as a resource transfer for balance-of-payments or budgetary support objectives. It is not targeted to specific beneficiary groups but is sold on the open market of the recipient country. Food commodities provided as programme food aid are bought by those who can afford to buy them, and do not reach the poorest and most in need. Research shows that programme food aid is neither effective nor efficient and that financial transfers to deal with balance-of-payments problems are much less costly.

Food security and external shocks

Developing countries, particularly LDCs, are vulnerable to the adverse consequences of a range of unpredictable and unanticipated shocks. These shocks affect both the price and availability of food and have direct consequences on both governments' ability to import adequate amounts of food and people's ability to purchase and produce adequate food for themselves and their families.

Shocks such as deterioration in countries' external terms of trade, hyperinflation, and balance-of-payments crises can dramatically increase food insecurity. Severe climate variation, crop failure and civil conflict can also have negative impacts on both governments' and populations' abilities to ensure adequate food supplies.

Food security is measured at both the national level and the household level. At the national level it fundamentally reflects whether a country can produce and/or import enough food to feed its population. The severity of food insecurity at the national level highlights countries that are facing grave difficulties in meeting their total food needs. This may mean countries cannot import adequate food supplies due to balance-of-payments constraints or that food imports constitute an exceptional burden on external payments. For many countries, concessional terms for food imports may be a viable solution for assisting them in meeting their food needs at the national level.

Adequate food security at the national level is a necessary, but not sufficient condition to ensure food security at the household level. National food security is a gross measure and does not taken into account variations in domestic production, marketing infrastructure and/or household income factors. A country may have an adequate overall food supply, and at the same time discrete populations within the country may be excluded from markets, have inadequate purchasing power, or be unable to produce their food requirements. In many countries, it is small, localised shocks that tip vulnerable households over the edge into long-term poverty.

A sudden and/or precipitous drop in the ability to purchase or grow enough food most often leads to households divesting both human and physical assets. Some coping strategies are a positive means of overcoming food shortages, for example off-farm employment when it is available. However, for many poor people coping strategies are negative - that is, they have a long-term detrimental effect either on individuals or their environment. Examples of negative coping strategies are: severe reduction in food consumption, selling productive assets, reducing expenditures on basic services such as health and education, over-exploitation of marginal lands, and abnormal migration.

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Negative coping strategies can contribute to a long-term decline in food consumption and to chronic food insecurity. For very vulnerable households, shocks, even small ones, have the potential to turn short-term food security problems into a downward spiral, diminishing household resiliency and trapping people in long-term poverty.

Although food insecurity is most visible at the individual or household level, policy makers typically have few policy options which directly affect household level food security in the short-run. Most policy instruments operate at more aggregate levels and over a longer period. There are, however, a few instruments which can direct public transfers to food insecure households. Targeted food aid is one of these instruments.

Combining commercial imports and food aid to respond to shocks

When poor countries experience external shocks affecting food availability they can mobilise basic foodstuffs by: 1) using in-country stocks, 2) purchasing commercial imports at market rates or on concessional terms, and/or 3) requesting humanitarian food aid from the international community. Often in-country food security stocks are not at adequate levels to smooth food availability fluctuations. Thus, national policy makers are generally faced with two options: food aid and commercial imports.

LDCs and NFIDCs experiencing external shocks affecting food security will often use both commercial imports and food aid to respond to the gap in food availability. Poor countries most often are unable to adequately mobilise sufficient resources to purchase the required amounts of food imports during a crisis. Even when commercial imports are made available on very favourable terms, governments and donors prefer to use grant mechanisms rather than measures that accumulate debt given the debt crisis that currently cripples so many LDCs.

Commercial imports and food aid fulfill different roles in addressing food security problems. Commercial imports are put on domestic markets to stabilise fluctuations in both price and availability of basic foodstuffs. They can also be used to maintain political confidence and ensure political stability during a crisis. But commercial imports are not likely to be targeted towards the poorest, most food insecure populations. Instead, governments prefer to use grant food aid for "social" programmes targeted to the poorest groups.

Food aid is targeted to those populations experiencing severe food insecurity and as such is complementary to commercial food imports distributed through domestic markets. Unfortunately, significant segments of LDC and LIFDC populations live either outside the physical range of affordable commercial food distribution (remote rural and migrating groups) or outside its economic range (populations lacking income to purchase food). For these populations, the slightest change in weather patterns or economic opportunities can spell disaster in terms of their capacity to meet their food needs.

Food aid's basic objective is to compensate for the fact that commercial food distribution does not ensure adequate food access for all. Because income elasticities of demand fall sharply as one approaches and moves beyond the poverty line, additionality is highest when food aid reaches the poorest households. Food aid in this case is not import substituting, as governments are unable to import enough basic foodstuffs to meet the needs of the poorest households. Better targeting of poor countries, such as LDCs with food aid and better targeting within countries increases the positive impact that food aid can have on food security.

In a crisis, it is important that food aid and commercial imports are coordinated so that the balance of food sources in a country can be maintained. If there is too much food aid then it may disrupt markets and have a negative impact on domestic agricultural production. If there is too little

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food aid those populations who are unable to access market distribution systems will be left out. Moreover, both food imports and food aid should be linked to national food security schemes in order to make sure that imports are coordinated with all other food security measures.

Conclusion

When an external shock hits a very poor country, the government usually is constrained in terms of the level of imports is it able to fund. Efforts to ease this situation through the use of financial mechanisms that make commercial imports less expensive should be encouraged. However, the food security of the poorest populations must also be taken into consideration. Targeted food aid channeled to populations who are constrained by lack of food, can both save lives and support livelihoods. Targeted food aid should be used in combination with other mechanisms such as commercial imports in order to ensure that poor households can meet their consumption needs.

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ANNEX 10

Submission by the Arab Monetary Fund

I am writing in response to your inquiry as per your letter of 8 March 2002 concerning the financing of commercial imports of basic foodstuffs.

You may wish to know that the lending facilities which the Arab Monetary Fund offers to its member countries are intended to contribute to the financing of overall balance-of-payment deficits rather than targetting a specific element occasioning such deficits. Moreover, AMF's facilities include one known as the Compensatory Loan: the Compensatory Loan is designed to help member countries finance an unexpected and unforeseen overall balance-of-payments deficit resulting from a shortfall in export earnings of goods and services and/or an increase of agricultural imports, in particular, cereal imports, attributable to reversible exogenous factors beyond the control of the authorities.

Access under the compensatory loan for export shortfall and/or an increase in the value of agricultural imports is limited to 50 per cent of the member's paid-up subscription in the Fund's capital. The loan is subject to a 4.75 per cent interest charge and is repayable within three years in four equal half-yearly instalments, the first being due 18 months from the date of the loan disbursement.

The eligibility criteria require that the member has a balance-of-payments need, identified by overall balance-of-payments deficit and a level of foreign reserves below six months of imports of goods and services. Furthermore, the export shortfall and/or the increase of agricultural imports should result from factors outside the control of the authorities concerned. Important as well, the request for the loan should be made during the shortfall year, or the following year. Eventually, a request can be made during the year where the authorities foresee an exports shortfall or an increase of imports resulting from a shock.

The export shortfall (increase in imports of foodstuff) is calculated as the difference between export earnings in the shortfall year and the arithmetic average of export earnings during the three years centred on the shortfall year.

So far, some 12 compensatory loans have been extended to eight member countries, in large part to finance an increase in the value of cereal imports or a result of drought.

In parallel, AMF's sister-institution, the Arab Trade Financing Programme (ATFP) is specialized in the provision of credit aimed at financing inter-Arab imports and exports of virtually all goods and commodities. ATFP charges interest rates which are on the whole quite advantageous in relation to those prevailing in the markets for similar types of transactions.

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ANNEX 11

Submission by the Asian Development Bank

I refer to your letter to the President of 8 March 2000, which requests the Asian Development Bank to provide information on "measures concerning the possible negative effects of the reform programme on least-developed and net food-importing developing countries".

We understand that greater liberalization in agriculture in least-developed and net food-importing countries may experience negative effects in terms of the availability of adequate supplies of basic foodstuffs from external sources on reasonable terms and conditions. In fact, in the ADB region, there are several least-developed and net food-importing developing countries.

While we, ADB, provide various loans to developing member countries, ADB does not have particular multilateral financing facilities available to its borrowing members in the event of financing difficulties of commercial food imports.

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