Compensatory financing, Managerial Economics

Assignment Help:

Compensatory Financing

Two other schemes for alleviating the effects of commodity trade instability have been operating for a number of years.  These are the IMF's Compensatory Financing Facility (CFF) started in 1963 and the EEC's STABEX scheme which was established by the Lome convention between the Community and forty-six African, Caribbean and compensating countries for shortfalls in export earnings which result from fluctuations in commodity markets.  No attempt is made to intervene in the markets to influence shortfall and the loans normally have to be repaid within a few years.  The IMF's CFF defines a shortfall as the gap between the current year's and forecasts for the subsequent years.  Initially drawings were limited to 25 per cent of the member's quota in the IMF, were not additional to ordinary drawings and required the member to co-operate with Fund in finding a solution to its balance - of- payments difficulties.  Partly because of these limitations and partly because the 1960s were a period of relative stability the CFF was little used.  Over the years the scheme was liberalized.  Major changes were made in1975 in the wake of the oil crisis. The limit on drawings was raised to 75 per cent of quota and could be additional to ordinary drawings.  The permitted that the amount of outstanding drawings in any twelve-month period was raised from 25 to 50 per cent of quota.  Because the calculation of the shortfall is necessarily delayed until after the end of the current year countries were   permitted to  draw on their ordinary quota in anticipation of a shortfall and then convert this to  a CFF drawing at anytime up to eighteen months later. Up to eighteen months later.  Shortfalls have to be for reasons outside the country's control and the member still has to co-operate with the IMF in finding a solution.  A rule which prevented a country from borrowing if its current exports were 5 per cent or more than the average of the two previous years was eliminated.  This proved crucial in the inflationary years of the 1970s.

After the 1975 reforms drawings shot up.  In the subsequent sixteen months drawings by forty-nine member countries reached SDR2.4 billion or twice the amount in the previous thirteen years.  By April 1980 the drawings by the non-oil Less Developed Countries (LDCs) had amounted to 4.6 billion SDRs and their net outstanding credits were 2.5 billion SDRs.

Nevertheless, it has been criticized for providing far too little assistance to the LDCs.  UNCTAD secretariat calculations show that drawings against the CFF by the LDCs have on average not exceeded 12.5 per cent of shortfalls. Even in 1976 - the year of maximum drawings -it was only 12.7per cent.

It may well be time for the CFF to meet a much larger proportion of export shortfalls, and most suggested reforms point that way, but several factors should be borne in mind.  First, the IMF assumes that most countries will use their own reserves, borrowing from other official sources and commercial sources as well as drawing upon the CFF.  Secondly, the 1976 drawings were in relation to the shortfalls of 1975 which was a quite exceptional year.   Primary commodities hit their peak in 1974 and their trough in 1975, recovering substantially in 1976 and 1977.  Many LDCs should have accumulated reserves from the preceding commodity boom in 1973/4 and the IMF had created several emergency funds to assist in this world crisis. For example the Oil Facility and the Trust Fund.  The NOLDCs did draw on these.

The CFF scheme is, in principle, a much easier system to operate than ICAs.  It is   much more comprehensive in that it covers all merchandise exports (and could easily include invisibles as well) and it is much less demanding of political necessity to obtain agreements. Or technical skill in forecasting future prices of individual commodities and designing optimal stocking policies than is the case for ICAs.  CFF-type schemes emerge in favourable light from simulation exercises and, in practice, the IMF scheme seems to have worked in the right directions even if the amounts of compensation have seemed small in relation to the recent problems of the LDCs.

Increases the LDCs' Fund quotas, the inclusion of invisibles, and calculation of shortfalls in real terms (allowing for changes in the prices  of imports) are all possible  reforms which could increase the value the CFF to LDCs.


Related Discussions:- Compensatory financing

Show normal profit equilibrium, Q. Show Normal profit equilibrium? Nor...

Q. Show Normal profit equilibrium? Normal Profits: With the condition of  MC = MR and MC cuts the MR from below, if E is the point of stable equilibrium, output of firm is OM

Stakeholders, The following represents the section headers you should consi...

The following represents the section headers you should consider for your reasoned document.   Each section should have (at least) two research citations to support your work :

Legal sanction - sources of monopoly, Legal Sanction: A monopoly as stated ...

Legal Sanction: A monopoly as stated above may be the result of a government sanction. The government of a country may legally permit a private monopoly or monopoly in the public s

Explain the demand analysis - managerial economics, Demand analysis Dem...

Demand analysis Demand analysis is undertaken to forecast demand, which is a fundamental constituent in managerial decision-making. Demand forecasting is of important because a

Price elasticity and marginal revenue, The most significant uses of the pri...

The most significant uses of the price elasticity of demand, used specifically in business decision-making. It refer to the relationship between price elasticity and the marginal c

The central bank, The Central Bank These are usually owned and operate...

The Central Bank These are usually owned and operated by governments and their functions are: i.      Government's banker :  Government's need to hold their funds in an ac

Volatility of the stock market, You have been provided with daily data star...

You have been provided with daily data starting in January 2009 on the main New Zealand stock market index, the NSX-50. Choose a suitable model for measuring volatility on the New

Determine marginal cost and hourly earnings, A firm hires two risk-neutral ...

A firm hires two risk-neutral workers to assemble bicycles and pays $20 for each assembly.Charlie's marginal cost of allocating effort (measured in dollars) to the production proce

Equilibrium income, Equilibrium Income In this model, aggregate desire...

Equilibrium Income In this model, aggregate desired expenditure has three components:  Consumption, Investment and Government Expenditure:

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd