Insecurity, food financing and the IMF

Insecurity, food financing and the IMF

This article considers the desirabil- ity and feasibility of an intematknal food financing facility along lhe lines of existing lending facilities administered by ths IMF and under the IMPS auspices. A prominent proposalistheextenthoflhe Compensatory Financing Facility. Ths authors extunine this proposal inthecontextofthenatuteand magnitude of food insscurity in developing countries. The authors conclude that the establishment of afoodfacilitywlthintheIMFisboth desirable and feasible, but that, as sugges&d by FAO, it should be ~from~-pensatory Financing Facility.

The authors are in the Department of Economics, University of Manchester, Manchester Ml3 9PL, UK (Tel: Of% 273 7121).

Our work on food security has beneffted at all stages from discussions wfth the staff in the Commodff and Trade Division of FAO. We are also grateful to FAO for making available data tapes on which some calculations referred to are based. David Colman, Phil Leeson, Hans Singer, Chris Stevens and partfcipants in Ths knchester University Development Economics Semi- nar provided valuable comments on an earlier version of this artfcfe.

‘Most recently in The Brandt Commission Report which argues that, ‘....compassion. solidarity and self-interest all tail for the urgent abolition of hunger’ (p 90), and recommends the adoptfon by the international community of an emergency focd programme (Brandt Commission, No&- South: A Programme for Survival, Pan Books, London, 1980).

Christopher Green and Colin Kirkpatrick

Food insecurity in developing nations has been widely discussed in recent years. ’ As a result of widespread crop failures in 1974, agricultural prices rose to record levels and international grain stocks fell to the equivalent of less than one month’s consumption. This resulted in widespread mal- nutrition and starvation in many parts of the Third World, and demon- strated the vulnerability of low-income economies to a shortfall in food supplies. While the crisis atmosphere of the 1973-75 period has receded, many less developing countries continue to face immense problems in ensuring an adequate level of regular food supplies.

The need for additional measures to strengthen food security, and in particular, to assist the low income food deficit countries in meeting their current food import requirements and emergency needs is generally acknowledged to be a common responsibility of the international community. The 1974 World Food Conference adopted the International Undertaking on World Food Security, which was subsequently endorsed by 75 governments and the EEC. However, progress in implementing the main elements of the International Undertaking has been slow. Negotia- tions on a new International Grain Agreement which would include provisions for reserve stocks and provide financial assistance to LDCs in building up their domestic food reserves have failed so far to achieve an agreement. Donor country commitments to the Food-Aid Convention have been increased from 4.6 million to 7.6 million tons, but remain below the 10 million ton target set by the 1974 Conference. The intema- tional emergency food reserve operated by the World Food Programme stands at only 0.3 million tons.

The limited progress in international discussions on the creation of adequate emergency food reserves has led to a search for other means of achieving greater food security in the LDCs. As a result, there has been increasing interest in the proposal to establish an international food financing facility which would make concessionary funds available to meet LDCs’ variable commercial food import needs. By focusing on finance rather than food stocks per Se, this proposal would, at least in the short-run, obviate the immediate difficulty in reaching international agreement on the coordination of world food stocks. Following a request made by FAO and by the World Food Council, the International Monetary Fund (IMF) discussed at its September 1980 meetings the proposals for a food financing facility and it was referred to the Fund’s Executive Board for ‘prompt’ consideration and evaluation.2

0398-9192/81/030135-12$82.98 0 1981 IPC Business Press 135

insecurity, fmdfimcing and the ZMF

*For further details on these diissions, see IMF Survey, Annual Meetings Issue, 13 October 1980. TAO, Agricidiu~ Commodi& Prv@tis 19X5-1985, Rome, 1979. 4Although for some recent papers on sbort- term insecudty see A. Valdb, ad, f%& Security for ~ve~~~g Countries, West- view Press, E3oulder, CO, 1980. 5Full details of thesa calculations are given in C.J. Green and C.H. Kirkpatrick, The Magnitude and Sources of Food Insecu@ in Developing Countries, Manchestef University Economics Department Discus- sion Papar No 18.1980. “See Green and Kirkpatrick, op ck, Ref 5, for an expk%nation of ths assumptions Unix @iii estimate.

In this article we consider the des~ab~~ and feasibility of establishing an international food financing facility along the same lines as the existing facilities administered by the &IF, particularly that for compensatory finance.

The food insecurity problem has two principal dimensions: long-term and short-term. The longer-term aspects of the problem are relatively well documented and are particularly refIected in the increasing gap between the consumption needs and production capacities of the developing countries. Imports of cereals by the LDCs increased from 52 million tons in 1972 to over 70 million tons in 1978, and projections of production and demand indicate a doubling of LDCs’ cereal import requirements by 1990.3 Rather less attention has been given to the short-term, cyclical aspects of food insecurity.* It is clear, however, that irrespective of the long-run trend in per capita food consumption, variability in per capita

consumption is per se a significant cause of food insecurity and its attend- ant consequences.

Short-run insecurity in food supplies has two main sauces: domestic food production and foreign exchange availability. Faced with a production shortfall or an increase in food import costs, a low-income economy that is already subject to a foreign exchange constraint can only avoid a shortfall in ~ns~ption by drawing on food reserves, increasing food aid inflows, or reducing non-food imports. Given the inadequacy of food reserves in most LDCs, the limited availability of international emergency stocks of food aid and the need to maintain imports essential to the economy’s development, the up&&expectation must be that the majori- ty of low-income economies will be forced to respond to a short-term threat to food supplies by allowing damaging downward adjus~en~ in ~nsumption levels.

This point of view is broadly confirmed by an examination of the experience of a sample of twenty-six low income economies during the mid-1960s to mid-197Os, which is summarixed in Table 1. All these countries were subject to a relatively severe foreign exchange constraint at the end of the observation period, with foreign exchange holdings providing less than l2 weeks import coverage in fifteen countries and under six months coverage in all but three of the sample (Column 2). To show the variability in consumption experienced by the sample countries, we computed the probability that actual food consumption per capita would fall more than 2.5% below trend.5 Column 3 shows that 11 of the 26 countries experienced a shortfall in ~ns~ption per head of at least 2.5% one year in every three, and 23 countries experienced a shortfall one year in four.

These estimates of consumption instability may understate the seriousness of the problem of food insecurity for several reasons. Fit, the shortfall is unlikely to be evenly distributed. The combined effect of an unevenly distributed shortfall on the already uneven consumption pattern in most developing countries will be felt most severely by the poorer sections of the population. Under plausible assumptions about the distribution of food, an average shortfall in consumption per head of 2.5% could translate itself into a shortfall of 10% for as much as 30% of the adult ~p~ation.6 A second important question to the estimates of resumption variability is that they provide no indication of the nutri-

136 FOOD POLICY August 1981

Insecurity, foodfinancing and the IMF

Source: Columns (I), (2) and (4). World Develop- ment Report, Work! Bank, Washingtun DC, 1330; Column (3) C.J. Green and C.H. Kirkpatkk, The Magnitude and Sources of Food lnsecudty in Developing Coufltfiies, Manchester Univemity Economics Department Dbcuasion P’aper No 18, 1960.

‘Furthermore, in some cases the trend in consumption per capita has actually been downwards. Thus the short-term fluctuations, which are the main focus of this paper, have been superimposed on a steadily deteriorating standard of life. *This argument is discussed in more detail in C.J. Green, Insulating Countries Against Fluctuations in Domestic Production and Exports: An Analysis of Compensatory Financing Schemes, Manchester Univers- ity Economics Department Discussicn Paper No 16,1666. See also A. Siamwalla and A. Valdes, ‘Food insecurity in developing countries’, Food policy, Vol 5, No 1, November 1 !XKI, pp 258-272.

Afghantstan

z”“” Central African Empire Chad Ethiopia Haiti India Indonesia Kenya Madagascar

kzrwi Mauritania Nepal Niger Pakistan

=- Scmalii Sri Lanka Sudan TarlZak TOSO uppervulta Zaire

190

2EiE 250 130 110 230

ii? 270 240 140 110 270 110 160 190 130 190 110 200 290 190 300 130 130

7.8 29.6 2.2 15.6 0.8 29.5 1.7 34.6 0.9 41.7 4.6 25.8 1.4 29.6 9.0 33.0 2.7 41.7 3.9 26.6 1.7 13.6 3.4 36.3 0.3 33.7 1.5 37.4 8.1 31.9 3.5 39.0 2.0 39.0 5.4 32.6 1.7 35.2 5.9 32.6 4.5 25.5 0.3 37.0 4.2 22.7 1.6 31.2 2.2 32.3 0.9 42.9

mirhm f-w-

WV (4)

110 76 96 99 74 75 93 91 105 88 115 90

tional adequacy of the consumption levels around which the fluctuations occur. Column 4 shows that in all but four of the sample countries, average daily calorie supply per capita in 1977 was below the minimum requirements. ’

Thus, while the food financing facility proposed is concerned primarily with the problem of short-run fluctuations in consumption levels, it needs to be emphasized that any downward fluctuation in consumption per capita, however small, will have serious implications, given the mal- distribution and nutritional inadequacies of existing consumption levels.

The food financing facility proposal

We have argued above that the low income economies’ Limited reserves of foodstuffs and foreign exchange have forced them to respond to temporary shortfalls in food production or import purchasing capacity by allowing consumption levels to deteriorate. The purpose of a food financing facility (FFF) would be to make concessionary finance available to the poorer LDCs to enable them to finance unanticipated increases in their requirements for commercial food imports, thus avoiding the need for harmful adjustments in consumption.

To see that a facility of this nature could be an effective substitute for the establishment of stockpiles of food in individual countries, it is sufficient to observe that from the point of view of economic theory, the short-term food insecurity problem can be regarded as a problemof the imperfection of international capital markets8 If international capital markets were perfect, countries which encountered above-average food import costs, owing to a domestic production shortfall or rise in world prices, could simply borrow in the world market to finance these costs and repay the loans when costs fell back to below-average levels.

FOOD POLICY August 1981 137


In practice, international loans are rarely, if ever, made by private banks for the sole purpose of smoothing out fluctuations in consumption. Moreover, it is doubtful whether low income food-deficit LDCs, who would probably be regarded as high-risk borrowers, would be able to afford the likely interest charges on such loans. Absence of adequate lending facilities implies that individual LDCs can only take precautions against food shortages by stockpiling on their own account. In fact, most food-deficit LDCs with foreign exchange constraints never have the funds to acquire adequate grain reserves. Moreover, it would be ineffi- cient to stockpile food on a bunk-by~un~ basis as it would forgo the obvious cost advantages of pooling food reserves.

The establishment of an FIT in the IMF can be seen as a simple way of unblocking these inevitable imperfections in world capital markets. In the framework of the IMF, the facility could operate without regard for the riskiness of individual countries and could, in principle, make more finance available on more favourable terms than private banks. Whether these improvements in terms would be sufficient to enable individual countries to alleviate significantly their food insecurity problem would depend largely on the precise way in which a facility were established. In this respect, two main proposals have been put forward. The first would be to extend the coverage of The Compensatory Financing Facility (CFF) to include imports of foodstuffs - most probably confined to cereals. The second would be to establish a separate FFF with a different, although as yet unspecified, set of rules from the CFF. We will consider each of these options in turn.

The Compensatory Financing Facility and food

The CFF was established by the IMF in 1963. In general terms, the purpose of the facility is to provide balance of payments support to countries which experience fluctuations in receipts from exports caused by circumstances beyond their control. A country which suffers a shortfall in export receipts, caused for example by a poor harvest or a slump in the world price of its main commodity export, is entitled to borrow from the IMF under the CFF. The facility has been progressively broadened and liberalized since its inception, the most recent liberalization coming

9For further details, see in particular L. Goreux, ‘Compensatory financing for fluc-

into effect in August 1979. ‘I& m&n features of the CFF as it is presentl;

tuations in the cost of cereal imports’, in constituted may be summarized as follows:9 Valdbs, op tit, Ref 4; L. Goreaux, &mph- satory Financing Facility, IMF Pamphlet Series, No 34, Washington DC, 1900; IMF Survey, 5 January 1976,20 August 1979, and September 1979 Supplement. For a theoretical analysis of the CFF in the context of the food sacurily question, see Green, op c&, Fief 8. Thus if export eaminqs were to evolve as follows (in .$m): 1976 (actual): 83; 1979 (a&&): 91; 19&o (estimate): 80; 1981 (forecast):110;1Q82(forecast):121,thetrendis eaualtc$95.7m=5~83.91.80.110.121and th& shorifall in 1980 is $15.7m = $95.7m - $80m. The country would then be permitted to draw the smaller of 100% of its quota snd f 15.7m under the CFF provided that it did not have any comDensatorv drawinas already out&&ding.. “Decision No 6224~(791135) reprinted in IMF Survey, 20 August 1979.

The export shortfall is defined as the amount by which a country’s export earnings in the shortfall year are less than the geometric average of the country’s export earnings for the five-year period centred on the shortfall year. lo Although the facility is confined chiefly to receipts from merchandise exports, receipts from travel and workers’ remittances may at the individual country’s option be included in the calculation. A country which experiences Q sho~a~L is entitled to draw the lesser of the shortfall amount and 100% of its quota. Of this amount, however, only 50% of quota is automatically available, the remaining 50% being condi- tional on the IMF being ‘satisfied that the member has been cooperating with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties’. ” Drawings under the CFF are generally repayable within 5 years and carry the same charge as normal credit tranche drawings from the IMF. While countries are encouraged to repay before the five years has elapsed if

FOOD POLICY August 1981

W4F Survey, 20 August 1979. Wntil December 1975, the export earnings for the two years after the shortfall year could not be projected by more than 10% above the earnings of the two years bsfore the shortfall year. The 1975 liberalization allowed export earnings of the two post- shortfall years to be projected on the es- sumption that the eamings would grow at the average rate of the preceding six years inkling the shortfail year. - *dAccardina to estimates made in UNCTAD (?979), the” proporW of total drawings to total shortfatfs during the period 1Q63-75 wasonly ll%.~~~~la~~~~ UNGTAD’s e&mates of the shortfalls, using the IMF fomtula. It should be noted that these estimates are based on actual export data. Insofar as the sharp increases in com- mod&y prices in the 1970s were not fully anticipated, such estimates will tend to over- state both the trend value of exports and hence the shortfall that could ‘reasonably’ be forecast in advance. Cleariy, the August 1979 increase in the maximum funds available under the CFF to 190% of quota can be expected to increase the percentage of estimated shortfalfs covered by drawings (UNCTAD, ~~~~ Financing: issum and Pfopc3sais for fm#er Action, TWZ29Bupp 1, Geneva, 1979. ‘WF SWVey, 1 September 1980, p 273. s’6ACcMdingto the IiUF Sunny, 5. January 1976. over the ten vears 1966-75. Use of Fund’ Resources through the CFF amount- ed to 9% of Use of Fund Resources through the normal credit tranche policies. 17Supposa export earnings and food import costs evolved as follows (in $ m):

Food Nei fwQ& ~~~ total

1978 33 20 63 1979 IQ80

z 24 67 25 55

1981 110 35 75 1982 121 41 w)

As explained in Ref 10, the export shortfall is $15.7m; whereas the shortfall of exports net of food imports computed in the same way is: V63.67.55.75.80-55 = 67.4-55 = $12.4m. Obviously, if food imports were above trend in 1S80,the net sho&fail would exceed $?5.7m. YGee, in particutar, Goreux. op cif. Ref 9. X9Goreux’s study covers a sample of only 46 countries, or less than half the IMF membership. However, the sampfe dii include certain ‘key’ countries such as India. Moraover, a further 26 IMF members are industrial countries or oil-exporters for whom the scheme would not be relevant. West writers have assumed that any form of food facility will be confined to cereals, a term which includes wheat, rice and feed- grains. In moat countries, the share of human consumption in total cereal consumption, and the share of cereals in total ~ntinu~~ on page 140

Insecurity, f~ud~nu~cing and the IMF

export revenues should recover sharply, in practice few countries exercise this option.

By the end of March 1980, drawings on the facility totalling 5.3 million Special Drawing Rights (SDR) had been made, corresponding to over 150 separate purchases: of these, SDR 4.0 billion had been drawn since an important liberalization in 1975.‘2 The average amount drawn per transaction was SDR 22.8 million up to 1975, and SDR 38.6 million in the period since then, an increase of 69%. The IMF staff have estimated that a large part (around three-quarters) of the increase in the eligibility of counties for compensatory finance since 1975 could be attributed to the change in the method of computing the shortfall, involving the elimina- tion of certain limits on the forecast amount of exports to be used in the calculations. I3

The expansion in the availability and use of the CFF needs to be kept in context. First, actual drawings from the CFF have fallen short of the estimated shortfalls. The reason why many LDCs have failed to draw against CFF an amount which fully covers the estimated shortfall in their export earnings is the quota-related limit placed on such drawings. I4 The severity of this limit can be gauged by noting that for a sample of 74 countries, the total funds available for ~rn~nsato~ finance have never exceeded 10% of total exports in any year since the inception of the facility. Is Moreover, apart from a few selected years in which there were large changes in commodity prices (notably 1976), compensatory finance has made a relatively small contribution to the IMF’s total effort for balance of payments support. l(r

The extension of the CFF to meet food insecurity requirements is primarily a technical matter. Food imports are subject to fluctuations owing to circumstances beyond a country’s control such as changes in the weather and their consequent impact on production, and changes in world food prices. Hence, it seems natural to consider extending the compensator financing calculations to include imports of foodstuffs. Under this proposal the trend and shortfall would be computed by considering export earnings net of food import costs. Thus if food import costs rose while export earnings remained on trend, a country would be eligible to borrow from this modified CFF to help finance these increased (above trend) food imports. On the other hand, reduced food imports might offset an export shortfall and reduce a country’s eligibility to borrow,” or, above trend export earnings could offset above trend import costs.

Prima facie, this proposal would appear to assist food security needs, although its effectiveness would obviously depend in part on the volume of funds available to individual countries under the IMF’s quota rules, More detailed arguments in favour of this proposal have been presented elsewhere. I8

Apart from the technical simplicity involved in extending CFF to include imports of foodstuffs, one of the main arguments in favour of the scheme is that the ‘cost’ to the international community, in terms of the provision of funds, would be rather small. Goreux has carried out an exercise to determine the amount of funds which would have been required during the period 1963-75 under variousdifferent compensatory financing arrangements. IQ His results show that a separate scheme providing compensatory finance for cereal import? independently of other IMF facilities and in accordance with the 1978 r&es would have generated

hsecurity, food financing and the ZMF

Continued hm page 139 food consumption (measured in terms of caloria intake) are high. In addition, actual worfd trade in foodstuffs consists predominantly of cereals which therefore play the major role in meeting countries’ marginal food requirements. In the rest of this a&b3 we referto ‘food’ and ‘mea&$ kiteMange- aMY. *IAt the time Goreaux’s paper was written, the CFF did not cover receipts from services. Thus, his calculations also show the effact of extendim the scheme from

shortfalls totailing SDR 3.1 billion. On the other-hand, the extension of compensatory finance to cover imports of cereals within the existing arrangements, though under 1978 rules, would actually have marginally reduced the total shortfalls to SDR 24.8 billion, from the SDR 24.9 billion generated by the conventional scheme exclusive of cereals.*l The difference between these two hypothetical schemes arises from the offsetting nature of the shortfall calculation when cereal imports are included. A positive correlation between exports and cereal imports will lead to smaller sho~falls when exports and cereal imports are combined than when they are considered separately. Thus, Goreux’s results imply that the extension of the CFF to cover imports of cereals would most likely not require the IMF to commit additional resources for lending purposes.

However, we are not convinced by this argument. First, the main calculation on which it is based relates solely to the total amount of the shortfalls. As indicated above, a country’s actual access to compensatory finance is equal to either the shortfall or the size of its quota, whichever is the lesser, and in practice, shortfalls have frequently exceeded quota limits. Consequently, the sum of the shortfalls sets an upper limit to the amount which could be requested by shortfall countries under existing IMF rules and it is not necessarily a good indicator of the amounts which would actually be drawn. If the inclusion of cereal imports in the CFF is to have an effective impact on food insecurity, it is quite possible that additional funds may be required in excess of those implied by individual country quotas in the IMF.

Second, Goreux’s estimate of the shortfalls under a separate ‘cereals- only’ scheme of SDR 3.1 billion is equivalent to only about SDR 260 million per annum. These figures may be compared with the global increase in IMF quotas of SDR 19.6 billion to a total of SDR 58.6 billion, which took effect in late 1980 under the Seventh General Review.” In this respect, therefore, the additional ‘cost’ of a cereals-only scheme appears to be rather small.

More seriously, however, we do not find the amount of additional resources which the IMF would need to commit for lending purposes to be a useful way of expressing the ‘costs’ of a lending facility. In this sense, the cost to the IMF (or perhaps the international community) is precisely the same as the benefit received by food-shortfall countries. Thus a ‘low-cost’ scheme is also a ‘low-benefit’ scheme. An effective

merchandise exP0rts to em* Of es food-security scheme would require the channelling of additional and services. Deducting food aid receipts from total imports, and basing the shortfalls resources to food-shortfall countries, not merely a diversion of some of on net commercial imports dii not signifi- the funds already available to them from the IMF away f?om their current cantfy alter the results, lowering the short- fallfromSDR24.8billiontoSDR24.6billion.

employment_ 23

%UF Survey, September 1979. In add&ion Thus, the main argument in favour of a direct extension of the Cl% to to the general increase in qwtas, the hoard include imports of foodstuffs appears to be simplicity of ~plementation. of Govemors appnwed a new ailocation of SDRs amounting to SDR 12 billion in 1979-

This point encompasses the related advantage that compensatory finance

81. is already well-understood by member countries in the IMF and there 130ne way in which the CFF might be modi- would, therefore, be no learning period involved in implementing a fied to Pm- addiinai resources would further extension. While considerations of simplicity should not be be to include a ‘secor~I window’ whii woukl allow members to receive addii underated, there are a number of serious arguments against the extension assistance for an increase in their ceraal of compensatory finance and in favour of a separate ‘food facility’. import costs, subjeot to the proviso that tha drawings under the ‘first’ and ‘second’ windows together oould not exceed the net shortfall calculated by offseQing the Combined food and compensatory finance! facility

iwxease i” wea’ impolt e with any increase in export earnings tn the same Consideration of two fundamental aspects of the relation between food

m* security and compensatory finance leads us to believe that solution of the

140 FOOOPOUCY August 1981


food problem through compensatory finance will involve different requirements from those which the existing CFF is intended to meet. These considerations imply that the food security problem should be tackled by the establishment of an altogether separate food financing facility (although within the IMF) to assist countries with food deficits.

Z4Estimates, for a sample of 49 such countries,ofthesupplygapbetweentheactuai imports of cereals and the level needed to maintain~eaverage,ortrend,levf+lofccn- sumption per capita, show that in 28 out of 49 countries, the vofume of cereal imports would have had to have been at least 25% larger to achieve the target consum levels (B Huddleston and C.H Kiricpa~ ‘A finan& food facility’, mkeo, &tot& 1979, pp 12-13).

Objectives of compensatory financing for foodstuffs

There is a fundamental difference between the main objectives of compensatory financing for foodstuffs and those of the existing compensatory financing scheme. The CFF is directed mainly at stabilizing foreign exchange receipts, whereas the main purpose of compensatory finance for foodstuffs is the stabilization of domestic food consumption against fluctuations both in domestic food production and in world food prices. In other words, a food facility would seek to stabilize a domestic policy target (consumption) by operating indirectly through the balance of payments accounts. However, variations in domestic food production and world food prices will, in general, induce adjustments in the domestic economy which will not be reflected in a straightforward way in the international accounts. To put it another way,the observed value of imports in a particular country will not, in general, contain direct information, either about production and consumption in that country, or about the volume of imports needed to make up a food deficit. In particular, actual imports will embody the effects of possibly undesirable and damaging internal adjustments which a country may have made in response to a disturbance in world food prices or domestic food production, as well as to other disturbances such as in exports.

Consider as an example a country which experiences a shortfall in food production. The country may choose to sustain domestic consumption by increasing food imports at the expense of non-food imports which are required to sustain the development effort. Although ex post consumption statistics indicate that the country has experienced little food insecurity, in effect such a country can be regarded as purchasing current security at the expense of future living standards, a result that is hardly desirable.

Conversely, the country may choose to sustain a reasonable balance of payments position by permitting shortfalls in the production of food to be reflected entirely in consumption. In this case, cereal imports will appear relatively stable and hence ex post import statistics will show that the country has little need for compensatory financing for food imports per se, whereas the reverse may be true. Moreover, this appears to have been the experience in many poor countries during the 1965-77 period, with cereal imports falling far short of the amount required to maintain consumption per capita leve1s.24

The point is that the consumption-production problem cannot be analysed separately from the balance of payments problem. A shortfall in domestic production, for example, will necessitate certain kinds of adjustment elsewhere in the economy. The difficulty in designing a food facility is that of correctly interpreting the information provided by such ex post data, which embody to some degree the effects of various adjustments already made by farmers, consumers and importers in the economy. The example above highlights the necessity for an effective food facility to take into account more information than that provided by the observed value of food imports as indicated by the rules of the CFF. A food facility based solely on the excess value of food imports will almost


Insecurity, foodfinancing and the ZMF

certainly understate the seriousness of the problem in a particular country and will thus provide at best only a partial alleviation of food insecurity.

Endogeneity of the food import bill

A second major objection to the extension of compensatory financing to cover imports of foodstuffs and in favour of establishing a separate scheme, stems from what could be called the ‘endogeneity’ of the food import bill. Compensatory financing takes as its main assumption that export fluctuations are largely outside the control of an individual country. In extending the CFF to foodstuff imports, the IMF would in effect be making the same assumption about such imports.

Over the five-year period within which the trend and shortfall are computed, it is probably reasonable to suppose that exports are outside the control of an individual country - particularly if, as is generally the case, that country’s main export goods constitute a relatively small part of total world trade in such products. For imports, however, such an assumption is much less plausible. According to theory, the primary deter- minants of total imports are domestic demand and relative prices. The former is influenced almost wholly by domestic economic developments, while the latter is probably influenced both by domestic factors and by trends in the world economy.

The role of domestic demand is relatively complex. If a country is to stabilize domestic food consumption effectively, then imports should increase to offset production shortfalls. However, in a year in which the harvest fails, the farm sector will produce a smaller marketable surplus and the consequent fall in farm incomes will reduce demand for the products of other sectors of the economy. This will tend to generate the familiar multiplier effect which, when combined with the effect on food prices of the smaller marketed surplus, will lead to a cut in non-farm incomes. Therefore, unless the government takes measures to stabilize farm and non-farm incomes, there is no guarantee that the economy will generate the purchasing power necessary to ensure that the extra imports required will, in fact, be ordered.

In practice, in many developing countries food imports are controlled primarily by the central government or public purchasing agency and not directly by the private sector. But even if such an agency ensures that the necessary imports are forthcoming in years of production shortfall, there remains the problem of aggregate demand or domestic purchasing power. This can also be seen as a distribution problem. If the necessary food is available but consumers (and even farmers) lack the cash to purchase it, then the government must either provide the cash or operate a direct internal food distribution programme. The latter is more likely to be needed in predominantly rural areas.

An equally important aspect of food insecurity is that most of the affected countries also face a severe foreign exchange constraint. In practice this means that in many years the level of imports, including foodstuffs, is determined directly by the severity of this foreign exchange constraint rather than by considerations of domestic demand and relative

25The most direct attempt to appraise this prices. There is some evidence of a direct link in developing countries

evidence is probably that of Hemphill. His between foreign exchange receipts and imports; fluctuations in the value resutts are suggestive rather than conch- of total imports, even in the short-run correspond largely with move- sive (W.L. He&$hill, The Effect of Foreign _ - _ Exchange Receipts on Imports of Less

ments in foreign exchange availability.25

Developed Countries, IMF Staff Papers, A foreign exchange constraint means that a shortfall in export revenues 1974). uncompensated by external assistance will induce a more intensive


Insecurity, food financing and the ZM F

rationing of import licences and a fall in imports. Insofar as import licences are allocated according to forecasts of foreign exchange revenues, the correspondence between export and import fluctuations may be rather close. This means that for many countries an export shortfall can be the direct cause of a fall in imports.

This argument has important implications for the proposal to merge food imports into the existing CFF. A country which experienced an export shortfall should be eligible for compensatory finance. Indeed, if such a country had a severe foreign exchange constraint, then its need for compensatory finance would be particularly acute. However, if the export shortfall causes a fall in imports, including foodstuffs,26 then the shortfall of exports less food imports will clearly be smaller than the shortfall of exports alone. With the merging of food imports into the CFF, a country in this position would be entitled to draw less than under the existing CFF whereas it clearly ought to be entitled to draw at least as much as before if the food facility is to meet its objectives.

Another way in which the endogeneity of imports can mean that shortfall data will provide a misleading picture of a country’s need for assistance arises through the influence of price changes on the volume of food imports. To some extent, in providing compensatory finance for exports, it is irrelevant whether the shortfall is attributable to a slump in the volume or price of exports; the purpose of the compensation is to restore the command over real resources on international markets which would have been provided by the trend value of exports.

In the case of imports, however, suppose that a country which imports a certain volume of food on average is faced with an increase in the world price. ” If the country is unable to cut back on non-food imports and faces a binding foreign exchange constraint then, even if the conventional price elasticity of demand for foodstuffs is zero, the foreign exchange constraint will force some reduction in the volume of food import~,~~ accompanied by a moderate rise in total spending on imports. In such a case, compensatory financing based on net export values will understate the need for assistance because the rise in the value of food imports will be less than needed to purchase the full volume of food imports required to maintain consumption levels. Hence, a modified CFF will fail to provide adequate compensation in such cases. Indeed, a simultaneous rise in export and import prices, accompanied by a fall in the volume of food imports could, under IMF rules applied to exports net of food imports, lead to the calculation of an excess rather than a shortfall. Such a perverse

Z60bviously there may be some changes in result is unacceptable and it suggests that there is a clear need to base any

the commodii oornposition of imports. food fi nancing scheme on the volume of food imports required rather

*‘A predominant view has been that fluctua- than the value actually purchased. tions in the food import bill of most LDCs could be attributed mainly to variations in the quantii purchased and not fluctuations

summary

in world prices. See, in particular, A. Vald& It is possible that an ill-designed FFF would fail to stabilize food con- and p. Konandreas* ‘Assessiw food in- sumption because it is extremely difficult to ensure that actual food security based on national aggregates in developing oountries’ in Valdk, op tit, Ref imports are exactly equal to the difference between actual production and 4.Thisviewhas, however,beench&rged target consumption levels. While these problems are common to any by Green and Kirkpatrick op tit, Ref 5, who argue that the data have been misintetpret-

m, th ey would be particularly evident in a compensatory financing

ed, and they show that. proportionately, arrangement based on the fluctuations in export receipts, net of food variations in prices have been as important import costs. Under such an arrangement there might be occasions on as variations in quantities for many low income food defkit countries.

which shortfall data would provide a wholly misleading picture of a

280r possibly a fall in quality - muoh harder country’s need for assistance and, as a consequence, the arrangement to measure though equally damaging. would fail in its goal of stabilizing food consumption levels.


Inseczuity, f~d~nunc~g and the IMF

Charactmistics of a food financing facility

It is our view that merging food imports into the CFF would not be a satisfactory method of initiating an EEF. Equally, a separate facility in which eligibility for compensation was based solely on fluctuations in food import expenditure would suffer from most of the same fundamental weaknesses as the ‘modified’ CFF proposal. The endogenous nature of imports means that the behaviour of food import expenditures will tend to understate the true size of the food insecurity problem, either because domestic production shortfalls have been partly absorbed in a decline in cons~ption levels, or because an exogenous increase in import prices will cause domestic demand for food to fall. If the objective of an FFF is to prevent adverse consumption effects, then the facility must be able to identify the underlying behaviour that induces the changes in food import expenditure.

Therefore, the main argument in favour of a separate food facility is that, since such a scheme is concerned only with foodstuffs, it would be possible to pursue the consumption stabilization objective directly by appropriate modification of the eligibility criteria to take into account information about production, consumption and import prices. By focusing more directly on the goal of consumption stabilization, a separate scheme would enable an afflicted country to pursue its food security objective without constantly having to make unacceptable trade-offs between immediate food security needs and the longer-term objectives of its economic development progrme. An FFF would aim to permit a country to stabilize food consumption levels by making it possible for the monetary authorities to finance unanticipated increases in the food import bill necessitated by the consumption stabilization objective.

It is not our aim in this article to develop a blueprint for an FEE. In practice, many of the details of such a facility would depend on the feasibility of providing relatively objective criteria for determining a country’s eligibility to draw on the facility. These criteria would, in turn, be subject to various political constraints concerning their acceptability to IMF member countries.

However, having made clear our objection to ~mbining a food facility with compensatory finance, it is possible to indicate broadly some of the desirable characteristics of such a facility while recognizing that in practice some of these characteristics will be difficult to realize. The elements of a food facility can be illustrated through the concept of ‘food security imports’, defined as the difference between the target consumption level of foodstuffs and actual domestic production.2g Food insecurity arises when the actual volume of imports is less than the volume of food security imports. In principle, a food facility should seek to provide funds to permit a country to make up the difference between actual food imports and food security imports by commercial food purchases on the open market. In practice, such an objective will not be attainable. First, many developing countries are increasingly dependent on food imports to meet their consumption needs and the gap between actual and food security imports is growing over time. Evidently, a food facility involving self-financing loans cannot fund such longer-term import dependence. Second, and more pragmatically, it is unrealistic to expect that an IMF

‘This WncePt 1s dl=@ in &ail 1” S. Reutlinger, ‘Food insecurity: magnitude

facility would not be subject to some limits of utilization by individual

and remedies’, World Development, Vol6, countries. Indeed, such limits are desirable to avoid the risk that any one 1978, pp 797-611. country could pre-empt all the available funds.



Subject to these limitations, however, a food facility should be able to make finance available to a country when the world price of cereals, for example, rises (even though domestic production is at the normal level), when there is a domestic production shortfall (and world cereal prices are at their normal level) or more likely, when there is a combination of crop failures and increasing import prices. By basing eligibility on direct monitoring of changes in production and world prices rather than on food import expenditure, a food facility is more likely to achieve stabilization of the target variable - consumption. In addition, the facility would need a procedure for establishing that production shortfalls were the result of factors beyond the country’s control, rather than the result of deliberate cutbacks in production or of under-reporting.

A distinctive aspect of a food facility would be that its objective should be to prevent, rather than compensate for, shortfalls in domestic food consumption. As far as possible, user countries should be able to procure imports in anticipation of a consumption decline. Evidently there are limits to this possibility, particularly in countries where a second, short harvest may be critical in determining whether a country experiences a food shortage in any given year.3o Nonetheless, a food facility should obviously not introduce additional delays into the process of obtaining additional food supplies. Thus, the facility should operate so that countries could know with a high degree of certainty that funds would be available to finance unanticipated food imports. This could be achieved by adapting the existing practice of the CFF which allows export shortfalls to be compensated up to six months ahead of the shortfall data becoming available. 3’

However effective the forecasting procedures, exceptional food import needs in particular countries will continue to arise with relatively little advance warning and the immediacy of the need for additional food imports suggests that full assurance of support can only be guaranteed if drawings on the facility have a high degree of automaticity with minimum conditionality attached, ie similar in form to existing arrangements for gold tranche drawings which are fully automatic. Without quick and advance access to the resources of the facility, the countries which would be the primary users would be unlikely to find it suited to their needs.

Furthermore, it is worth emphasizing that the timeliness of the financial support is a crucial factor in eliminating many of the difficulties of designing a scheme which are associated with the endogeneity of the import bill. A foreign exchange constraint may cause a country to cutback imports in response to an anticipated export shortfall, particularly if it is not certain that any external assistance will be forthcoming. If countries are assured of assistance in advance, they can plan to avoid such undesirable cutbacks in response to export shortfalls or increases in world food prices.

The issue of the timeliness of a facility’s assistance leads directly to a further question, namely the limits to be placed on a country’s access to the facility’s resources. As mentioned above, a cut-off in the amount of funds available to individual countries is probably necessary to avoid the risk that a few countries may pre-empt most of the available lending resources. However, relating the cut-off directly to a country’s quota in the IMF, while undoubtedly most convenient, may penalize small, relatively closed economies. The reason for this is that the IMF quota calculations place a relatively important weight on a country’s trade and

its variability.32 While there is probably a direct link between the volume

“V/e are grateful to David Colman for clari- fying this point. “‘Goreux shows that total world-wide export shortfalls can be accurately forecast using a time trend and business cycle indicator (L. Goreux, Compensatory kncing: The Cvclicai pattern of Exert Shottfalls. IMF Siaff Pa&s, 1977. gut, see Finge; and Derosa on the acuracy of judgemental forecasts (J.M. Finger and D.A. Derosa, ‘The Compensatoty Finance Facility and export instabilii’, Journal of World Trade Law, Vol 14, No 1, January/February, 1980). 3*IMF Survey, 5 June 1978.



of a country’s trade and the amount of foreign exchange reserves it requires, the link between trade and food insecurity is much more tenu- ous because of the importance of domestic production as a source of insecurity. Hence, it may be appropriate to consider an alternative solution to the problem of choosing a cut-off, perhaps by the development of separate ‘food quotas’.

Finally, there is the question of the precise terms on which food facility funds should be made available. Since the purpose of the facility is to ensure adequate consumption standards, countries with more than adequate consumption levels - established in terms of a threshold level of income or consumption per capita - would presumably not quality for use of the facility. Consequently, the food facility would be used exclu- sively by low-income developing countries whose ability to repay would be severely constrained. There would seem, therefore, to be a case in favour of a degree of concessionality being included in the terms of repayment, either in respect of the charges or the length of the repayment period or perhaps both.

Concluding comments

A food facility along the lines discussed in this paper would appear to be well within the scope of the IMF’s objectives which include inter alia ‘[giving] confidence to members by making the Fund’s resources tempo- rarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or internationalpros- perity’. 33 Nevertheless, such a facility would include a number of novel features - novel, that is, in relation to current IMF practice. It would require timely collection of additional data on food consumption, production, imports and aid flows; it would need to be based on more complex conditions than food import values alone; to ensure timeliness it would have to have a high degree of automaticity with a much greater emphasis on establishing a country’s precise eligibility ex post after the drawing had been made;34 and finally it may require the development of an alternative set of ‘food quotas’ on which to base the limits of access to the facility by individual countries.

Nonetheless, the practical difficulties of operating a food facility along these lines should not be exaggerated. The IMF and other international agencies have considerable expertise and experience in the collection and analysis of the relevant data and they are certainly accustomed to monitoring individual country developments. Furthermore, the alternative of merging cereal imports into the CFF runs the risk of failing to provide assistance either in the form or in sufficient quantities to be of significant value in reducing food insecurity. In this respect it suffers from the

331MF Articles of Agreement, Article I(v) weakness of appearing to satisfy the form of tackling food insecurity while (emphasis added). ~4~cess drawings could be repaid prompt-

failing to deal with the substance of the problem. Such an outcome would

ly as is required under the existing CFF not be in the interests of either the industrial economies or the food needy scheme. developing countries.


Insecurity, food financing and the IMF

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