WORL D TRAD E
ORGANIZA TIONWT/GC/62
G/AG /13
28 June 2002
(02-3644)
General Council
Committee on Agriculture
Marrakes h Minis terial D ecision on Me asures Concer ning th e Possi ble Neg ative
Effects of t he Refor m Progr amme o n Leas t-Devel oped a nd Net Food-Imp orting
Developin g Cou ntries
INTER-AGENCY PA NEL ON SHORT-TERM DIF FICULTIES IN
FINAN CING NORMAL LEVELS OF COMMERC IAL I MPORTS OF
BASIC FOODSTUFFS
Report of the Inter-Agency Panel
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TABLE OF CO NTENTS
I. INTRODUCTION 3
A. ESTABLISHMENT OF THE PANEL 3
B. TERMS OF REFERENCE 3
C. COMPOSITION OF THE PANEL 4
D. PROCEEDIN GS 4
II. ISSUES BEFORE THE PANEL 5
A. AVAILABILITY AND FINANCI NG COSTS OF EXTERNAL SUPPLIES OF BASIC FOODSTUFFS 5
1.Backgroun d 5
2.Price trends on the internation al markets for basic foodstuffs 5
3.Trends in the cost of cereal imports by LDCs and NFIDCs 11
4.Short-term difficulties in financing n ormal levels of commercial imports of basic foodstuffs 14
B. ACCESS TO SHORT -TERM MULTILATERAL FINAN CING FACILITIES 19
1.The Compensatory Fin ancin g Facility of the IMF 19
2.World Bank facilities 24
3.Other sources of concessional financing 25
C. PROPOSALS FO R THE ESTABLISHMENT OF A REVOLVING FUND 26
1.Main elements of revolving fund proposals 26
2.FAO contributions 28
3.Analysis of concept a nd feasibility of the revolvin g fun d propos al 30
D. OTHER OPTIONS 39
1.An ex-a nte food import financin g scheme 39
2.Commodity price risk management 40
3.Integrated Framew ork studies 40
III. CONCLUSIONS A ND RECOMMENDATIONS 41
IV. ANNEXES 45
1. Decision on Measures Concerning the Possible Neg ative Effects of the Reform Programme
on Least-Developed and Net Fo od-Im porting Developi ng C ountries 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 P anel 54
4. Submissions by the Fo od and Agriculture Organization of the United N ations (FAO) 86
5. Submissions by the Intern ational Monet ary Fund (IMF) 113
6. Submission by the International Grains Cou ncil (IGC ) 117
7. Submission by UN CTAD 120
8. Submission by the World B ank 131
9. Submission by the World F ood Pro gramme (WFP) 142
10. Submission by the Ara b Monetary Fu nd 146
11. Submission by the Asian Development B ank 147WT/GC/62
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I. INTRODUCTION
A. ESTABLISHMENT OF THE PANEL
1. The establishment of the Inter-Agenc y Panel on Short-Te rm Difficulties in Financing Normal
Levels of Comme rcial Imports of Basic Foodstuf fs ("the Panel") was approved by the fourth WTO
Ministerial Confer ence at Doha in Novembe r 2001 following a recommendation by the WTO
Commi ttee on Agriculture in the context of theimplementation of the Marrakesh Ministerial Decision
on Measures Concerning the Possible Negative Effects ofthe Refo rm Programme on Least-
Developed an d Net Food- Importing Developing Cou ntries ("the M arrakesh NFIDC Decision").1
2. The re commendation adopted by the Doha Ministerial Confe rence provides:
"that an inter-agenc y panel of financial and commodity experts beestablished, with
the requested participation of the World Bank, the IMF, the FAO, the Intern ational
Grains Council and the UNCTAD, to explore ways and mean s for improving access
by least-de veloped and WTO net food-importing developing countries to multilateral
progr ams andfacilities to assist with short-term difficulties in financing normal levels
of commer cial imports of basic foodstuffs, as well as the concept and fe asibility of the
propos al forthe 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 Gene ral Council for approval by not
later than 31 Dec ember 2001. The inter-a gency panel shall submit its
recommend ations to the Gener al Council by not later than 30 June 2 002." 2
B. TERMS OF R EFERENCE
3. The following detailed terms of reference of the Panel were subsequently agreed by the
Commi ttee on Agriculture and approved b y the Gene ral Council:
"1. To examine the terms and conditions of existing facilities of the international
financial institut ions (namely: IMF and the World Bank ) to which least-de velope d
and WTO net food-importing developing countries could have recourse in order to
addre ss short-te rm difficulties in financing normal levels of commercial imports of
basic foodstuf fs, principally cereals, rice, basic dairy products, pulses, vegetable oils
and sugar, during periods ofrising world price s for such basic foodstuf fs, including,
as appropriate, other relevant sources of concessional finan cing; this examination
shall take into account, inter alia, such submissions as may be submitted to the Panel
by least-de veloped and WTO net food-importing developing countries, donors and
the relevant international finan cial institu tions, by no later than e nd-Ma rch 20 02;"
"2. To examine the concept andfeasibility of the propos al for theestablishment
of a revolving fund in docume nts G/AG/W/49 and Add.1 and Corr.1, together with
any further elabor ation of those proposals as may be submitted to the Panel by the
sponso ring M embers concerned be fore the e nd of March 2 002;"
"3. In the light of its review and examination unde r paragraphs (1) and(2) abov e
and having regard to the Marrakesh NF IDC Decision, to make such recommendations
1Decision of 14Novem ber 2001 concer ning Impleme ntation-Relate d Issues and Concer ns (see
WT/MIN(01)/ 17, dated 2 0 Novem ber 2 001, para graph 2.2).2See G/AG/11, dated 28 September 2001,  Section B, pa ragrap h III(b).
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for the conside ration of the WTO Gene ral Council as the Panel considers appropriate
regarding: ways and mean s for improving access by least-de veloped and WTO net
food-importing developing countrie s to multi lateral progr ammes and facilities to
assist with short-term difficulties in financing normal levels of commer cial imports of
basic fo odstuf fs."
"4. In carrying out its task the Panel may consult with such bodies or institutions
as it consider s app ropriate;"
"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.4The Member s ofthe Panel were nominated by therespective heads
of the FAO, IMF, International Grains Coun cil, World Bank and UNCTAD, in respo nse to letters by
the WTO Director-G eneral inviting them to designate from their staff a financial or commodity expert
to participate in the work of the P anel on a personal a nd indepe ndent ba sis.
5. The Panel ha s the f ollowing composition:
Chairman: Mr. Yoichi Suzu ki of Ja pan
Member s: Mr. Mehmet Arda (UNCTAD)
Alternate :  Mr. Lamon Rutten
Mr. Ge rmain Denis ( IGC - I nternational Grains Co uncil)
Alternate :  Mr. Richard Woo dhams
Mr. Pa nos Kon andreas (FAO)
Mr. J ohn Nas h (World Bank )
Mr. Gr ant B. Taplin (I MF - Intern ational Moneta ry Fund )
D. PROCEEDINGS
6. The Panel r equested the M ember s involved to respon d to a numbe r ofwritten questions.5The
respo nses by four WTO Net Food-I mporting Developing Countries ("the NFIDCs") (Cuba, Egypt,
Jorda n and Tunisia) and six dono rs (Argentina, Australia, Canad a, Europea n Communities, Japan and
the United States) are attached.6The Chairman of the Panel invited the Membe rs involved to an
informal meeting on 28 May 2002 to provide a progress report. At an informal meeting on
3See G/AG/12 (dated 10 December 2001) and WT/G C/M/72 (dated 6 February 2002),
paragra phs 61-6 3.4See WT/GC/M/72 (d ated 6 Feb ruary 2002),parag raph 63.5The Members involve d comprise the donors, theleast-develope d countries ("the LDCs") and the
NFIDCs (Barbad os, Botswana, Côte d'Ivoire, Cuba, Dominica, Dominican Republic, Egypt, Honduras, Jamaica,
Jordan, Kenya, Mauritius, Morocco, Pakistan, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vince nt and the
Grenadines, Senegal, Sri La nka, T rinidad and T obag o, Tunisia and Venez uela).6See Annex 3.
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24 June 2 002, the Panel presented a draft report to the Mem bers involved, with a numbe r of Membe rs
making preliminary rema rks the reon.
II. ISSUES BEFORE THE PAN EL
A. AVAILABILITY AND FINANCING COSTS OF EXTERNAL SUPPLIE S OF BASIC FOODSTU FFS
1. Background
7. In the Marrakesh NFIDC Decision, the progressive implementation of the Urugua y Round
Agreements as a whole was seen as generating increasing opportunities for trade expansion and
economic growth to the benefit of all participants. Gener ally, improving the overall allocation of
resou rces either within or among individual sectors or betwee n countrie s is an integr al part ofthe
longer-te rm economic adjustment proce ss that canbe facilitated by the results of multila teral trade
negotiations. However, the impact and benefits from trade liberalisation may not neces sarily be
spread ev enly, eve n when the re are net gains to be reape d for economies as a whole.
8. The NFIDC Decision recogniz ed that during implementation of the Urugu ay Round
agricultural trade reform programme, some LDCs and NFIDCs may experienc e negative effects in
terms of the availability of adequate supplies of basic foodstuf fs onreason able terms and conditions,
including short-term difficulties in financing normal levels of comme rcial imports of basic foodstuf fs.
The particular concern was that some of the developing countrie s which were highly dependent on
supplies of subsidized food imported from the major industrialized countries might need tempor ary
assistance to make the necessary adjustments to expected highe r import price s for food, although
output from their f arming se ctors c ould be stimulated by highe r price s.7
9. Generally, world agricultural markets are influenc ed by many factors besides gove rnment
policies and trade agreements. For crop sector s, for example, weathe r conditions affecting either
export availabili ties or import requireme nts may significantly impact global supply and demand
balances and prices. Longer -term factors such as population growth, urbanisation, diet diversification
and economic conditions also influen ce the composition and level of import requirements. In the
context of the Marrakesh NFIDC De cision, we specifically address increased financing needs for food
imports arising from higher world market prices, increasin g food deficits or a shift from imports on
conce ssional terms o r food aid to commer cial food imports.
2. Price tr ends on the int erna tional markets for b asic fo odstu ffs
(a) Cereals
10. The entry into forceof the WTO Agre ement on Agriculture in January 1995 coincide d with
the beginning of a period of surging prices on the international mark ets for cereals. From the early
months of 1995 price s continued to strengthen and, in 1996, escalated to historically high levels.
Export price s peaked at aroun d mid-1996 after which world mark et prices declined quickly. Wheat
export prices peaked at US$ 258 per tonne in May 1996 (Figure 1below). Taking account of expo rt
subsidies they h ad be en as low as US$ 70 per tonn e in 1993.
7The conce rns ofthe LDCs andNFIDCs stem partly from their dependence on theworld market for a
large share o f their f oodconsum ption. In the case of cereals, NFIDCs impo rted 3 5 per cent o f total consum ption
in 1998-2000. For the LDCs the dependence on cereal impo rts was 14 per cent compared to 11 per cent forthe
rest of the de velopin g cou ntries.
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Figure 1 -  Expo rt prices for whe at and maize, 1990 -2002 (US$ pe r tonn e)
50100150200250
1990199119921993199419951996199719981999200020012002Wheat:USHardWinter
Maize:USYellowCornUS$/tonne
Note: Prices are export ( fob) prices be fore deductin g exp ort subsidies, if an y.
Source: International Grai ns Cou ncil.
11. The surge of world cereal prices was short-lived and followed by a sustained decline. By
mid-1998 price s ofwheat and maiz e had declined almost to the lowest levels since the 1970s.
Currently, export price s of wheat are around US$ 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-te rm declining trend since the mid-1970 s. 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.8
12. The 1995 -97 phase of surging grain prices was preceded by a numbe r of gove rnment actions,
which impacted longer-te rm market adjustments. In the United States, wheat stocks had accumulated
in the mid-1980s to levels which were consider ed to be unsustainable. One of themain objectives of
the 1985 United States farm legislation was to reduc e excessively high grain stocks in an effort to
reduc e budg etary expen ditures. Deficiency payments were tied to farmers ' participation in set-aside
progr ammes (acreage reduction programmes ). Expo rt subsidies were introd uced via the Expo rt
Enhanceme nt Progr am (EEP ) and the Targeted Expo rt Assistance Program (TEAP). In thefollowing
years, wheat stock s, in pa rticular public stocks, declined significa ntly.
8See also the contrib utions by the International Grains Council (Annex 6) and theWorld Bank
(Annex 8 ) which c ompleme nt this section.
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13. In the Europea n Communities, government (inter vention) stocks of wheat had increa sed
consider ably in the late 1980s and early 1990s. As part of the 1992 reform of the Common
Agricultural Policy, the Europe an Communities sought to reduce agricultural surpluses. The reforms
in the arable sector included compen satory payments for reductions of price suppo rts based on
historical acreage and yields, as well as compe nsation payme nts on mandato ry set-aside. Although
these r eforms did not modify the ex port restitution mechanism itself, after 1992/93 intervention stocks
of wheat also significantly declined in the Euro pean Communities.
14. In respon se to these policy chan ges and other factors, theaggregate are a harvested to wheat in
the five major exporting countrie s (United States, Europea n Communities, Canada, Austr alia 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' (forme r Soviet Union) aswell. As a result, world wheat production decreased from
590 million tonnes in 1990 to 530 million tonnes in 1995.
15. There was also a numbe r 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
purch ases. Ineffect, in early 1996, international wheat price s carried a risk premium, with prices
shooting up to extrao rdina ry levels. Wheat prices dropped quickly as from May 1996 when the
weather conditions improved in the United States and the markets receive d favourable crop reports
from othe r expo rters.
16. In the European Communities, export taxes on wheat and barley were introduce d in 1995 to
stabilize domestic prices. In practice, this measu re put additional pressu reson the overall availability
of sup plies on world mar kets.
17. With respe ct to the implementat ion of specific limitations on the use of expo rt subsidies
arising f rom the Urugu ay Round Ag reeme nt of Agriculture ,  we note the following:
/AB First, the implementat ion of WTO export subsidy reduction commitments was phase d 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-loade d, with the implicat ion that there
was additional scope forproviding export subsidies in the early years of the
implementat ion period.9Other things being equal, the phasing -in of export subsidy
reductions, in conjunction with the front-loading provisions, have reduced their possible
short-term p rice impact.
/AB Second, intern ational grains prices began to surge before the beginning of the
implementat ion period.  The implementation of exp ort subsidy reduction commitments by
major wheat expo rters began only in the second half of 1995. When these commitments
9The base level f or reductions is the ave rage level of ex port su bsidies in 198 6-90, but i n the subseq uent
years expo rt subsidy use for grains contin ued to increase in a numbe r ofcountries. To facilitate impleme ntation
of reductions from the higher export subsidy levels applied in theearly 1990s, the Urug uay Round participants
agreed on modalities allowing "front-loadin g" ofexport subsidy reductio n commitme nts. The modalities
regardin g front-loa ding allowed commitme nts to be higher than the base levels (1986-90) in the early years of
the implementation perio d, coupled with therequi rement that thereductions hadto be caught up tomeet the
agreed overall reduction by theend of the implementation perio d (21% for subsidized volumes and 36% for
budgetar y outlays on export subsidies for develope d countries from base perio d levels). Forexample, the
Schedules of Canada, the Euro pean Communities and the United States show that their respective export
subsidy reductio n commitments for wheat/wheat flour are front-loa ded insignificant amounts both in terms of
subsidized quantities and budg etary outlays.
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on cereals entered into force, they had already lost their mark et effect in terms of binding
constraints du e to the high world pric es prevailing at the time.
/AB Third, at the end o f the implementation period fo r dev eloped countries in 2000/01, despite
relatively low prices on the intern ational grain mark ets, there was only alimited use of
export subsidies. All exporter s concerned were well within their export subsidy
commitment levels for wheat/wheat flour andcoarsegrain s.10With the prevailing grain
prices and exchang e rates in 2000/01, the expo rt subsidy ceilings for grains could not
have had a significa nt negative impact, if any, on the terms of trade of LDCs and
NFIDCs.
18. In sum, there was a coinciden ce ofthe entry into force of the WTO commitments in
agriculture and surging world market price s for cereals in 1995 -97. The weight of the evide nce
available to us leads us to conclude that the surge wastrigger ed by anumbe r of short-term and long-
term factor s, which were only partly related to the Urugu ay Roun d 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 mark et prices have been low rather than when
world prices have been high. Since the use of export subsidies has been invers ely related to world
prices, they could not have been of significant value to countries experiencing difficulties in financing
food imports in ye ars of high p rices as experienced during 1 995-97 .
(b) Other basic foodstu ffs
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 andNFIDCs accounted, respectively, for some 39 per
cent and 35percent 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 (Figu re 2 below). In this
regard, the Panel notes that the compo sition of food imports of LDCs and NFIDCs differed
consider ably from other developing countries, where cereals and vegetable oils accou nt for 25 per
cent and 11 percent r espectively.  This is ess entially a reflection of their higher aver ageincome levels
and larg er proportions of highe r value foo d commodities and pr ocessed 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):
/AB First, there was a near coincidence of surging prices on the international mark ets forpalm
oil, sugar an d wheat in the ea rly 1990 s, with prices reaching a peak in the 1995 -96 period.
World market price s for palm oil shot up again in 1998, which was largely dueto the
occur rence of a severe drought in South-E ast Asia linked to the El Niño effe ct.
/AB Second, as the result of abunda nt supplies, international prices for palm oil and sugar, as
well as all food items combined, hav e fallen ba ck to their lowest levels f or a decade.
/AB Third, it appear s that in the period 1986-2001, the intern ational prices for sugar and palm
oil were substantially more volatile than world market prices for wheat or food in general.
This volatil ity of commodity markets unde rline the importance for net food-importers of
ensuring against ex cessive upside price risks a nd related import financing dif ficulties.
10See docume nt TN/AG/S/8, dated 9 April 2002.
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/AB Fourth, expo rt subsidy usage on vegetable oils and sugar has remained far below the
respective limi tations agreed in the Ur uguay Round andtherefore, other factors remaining
equal, could not ha ve ha d an adverse impact on food impo rt prices o f LDCs a nd NFIDCs.
Figure 2: Composition of food imports o f LDCs and NFIDCs, 19 98-20 00 av erage (pe r cen t)
LDCs
Cereals
39%
Dairyproducts
7%Vegetable oils
17%Fruitand 
vegetables
12%Meatand 
products
3%Sugar
9%Otherfoods
13%
NFIDCs
Cereals
35%
Dairyproducts
9%Vegetable oils
17%Fruitand 
vegetables
10%Meatand 
products
5%Sugar
8%Otherfoods
16%
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Otherdevelopingcountries
Cereals
25%
Dairyproducts
8%
Vegetable oils
11% Fruitand 
vegetables
14%Meatand 
products
11%Sugar
5%Otherfoods
26%
Source: FAO
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Figure 3 - International fo od price s, 1986 - 200 1 (198 6 = 100 )
050100150200250300
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 2001
Food Sugar Wheat Palm Oil
Notes: Food includes: cereals, oils, pr otein meals, meat, sugar, an d bananas
Wheat; U.S. number 1 HRW , fob Gulf of Mexic o
Palm Oil; Malaysia an d Indonesian, cif NW Europe
Sugar; I nternati onal Sugar Agreement price
Source: IMF
3. Trends in the cost of cereal imports by LDCs and NF IDCs
21. The rising co sts of food imports b y LDCs and NF IDCs is a c entral element of the rationale fo r
the establishment of a Rev olving Fund.  This is s et out in the NFIDC propo sals as follows:
"The main objective of the Agreement on Agriculture was to decrease thestructu ral surpluses
gener ated in the past by production and trade-disto rting policies in agriculture. It is,
therefo re, obvious that if this fundamental objective of the Agreement on Agriculture [AoA]
is succe ssful, the effect for the NFIDCs and LDCs will be an increase in the cost of their food
imports.
According to the data provide d by FAO (…), these two groups of countrie s are facing much
higher c ereal import bills than before.  T aking the two yea rs prior to 1995 as a ben chmark (i.e.
the average of the two mark eting years 1993/94 and 1994/95), the increase in the cereal
import bills in 1995/96 to 1996/97 amounted to 36.6 percent 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 chang ed only margin ally. More over, even after the
world prices returned to more normal levels since the 1997/98 mark eting year, thecereal
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import bills of these two groups of countries remained at a much highe r level than they were
prior to 1995.
In view of the abov e, the causality between policy reforms unde r the Uruguay Round and
higher f ood import bills for the LDCs a nd NFIDCs is cle ar."11
22. A number of dono r 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 andNFIDCs.12In their view, the 1995-199 7 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 enhan ced bythe Urugu ay
Round.
23. In this regard, on the basis of statistical data provided by FAO (Table 1 below) , we note the
following:
/AB First, there ha s been no clear u pward tr end in the ag gregate fo od import bills of LDCs and
NFIDCs since the b eginning of the WTO r eform pro cess in agriculture in 19 95.
/AB 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. ThePanel did not examine the reasons for this, including
whether this may have reflected improv ed dome stic cereal supply situations in some
LDCs in that period.
/AB Third, in the critical period of1995 -97, asignificantly increa sed propo rtion 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-pri ce 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.
/AB 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 gene rally depre ssed
levels) while food aid shipments increa sed.
/AB Fifth, price fluctuations unrelated to the WTO re form process on agriculture such as those
experien ced d uring 19 95-97 are likely to reocc ur.
11See G/AG/W/49 (dated 1 9 March 2001), page 1 (An nex 2 ).12See G/AG/11 (dated 2 8 September 2001), pages 8-1 4.
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Table 1 -  Cer eal import cos ts of LDCs and NFIDCs, 1 993/94 – 20 01/02
1993/941994/951995/961996/971997/981998/991999/002000/012001/02
estimate f'cast
Import bill (US $ mil lion)
LDCs 1365 2147 2495 2023 2468 2214 1773 1871 1882
NFIDCs 3567 4238 5806 5344 4941 4363 3828 4240 4007
LDCs & NFIDC s 4932 6384 8301 7367 7409 6576 5601 6110 5889
% change o ver 1 993/94-1994/9 5 -12.8 12.8 46.7 30.2 30.9 16.2 -1.0 8.0 4.1
Total volume imported (000 t onnes)
LDCs 1176 41406 81329 61177 21528 11692 71598 11526 41540 9
NFIDCs 2658 42678 32660 12852 53195 53343 73058 83288 63022 6
LDCs & NFIDC s 3834 84085 13989 74029 74723 65036 34656 94815 14563 5
% change o ver 1 993/94-1994/9 5 -3.2 3.2 0.8 1.8 19.3 27.2 17.6 21.6 15.2
Food aid ( 000tonnes)
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 29.2
NFIDCs 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 3.8
LDCs & NFIDC s 5800 5654 3958 3202 3493 4786 4912 4717 5654
% change o ver 1 993/94-1994/9 5 1.3 -1.3 -30.9 -44.1 -39.0 -16.4 -14.2 -17.6 -1.3
Comme rcial imports (0 00 to nnes)
LDCs 7794 9724 9983 9072 1241 81292 01184 21169 61090 4
NFIDCs 2475 42547 32595 62802 23132 43265 72981 53173 72907 6
LDCs & NFIDC s 3254 83519 73594 03709 54374 34557 74165 74343 33998 0
% change o ver 1 993/94-1994/9 5 -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 116.0 152.6 187.6 171.9 161.5 130.8 110.9 122.6 122.2
NFIDCs 134.2 158.2 218.3 187.4 154.6 130.5 125.1 128.9 132.6
LDCs & NFIDC s 128.6 156.3 208.1 182.8 156.8 130.6 120.3 126.9 129.0
% change o ver 1 993/94-1994/9 5 -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 ha rd winter 143 157 216 181 142 120 112 128 127
% change o ver 1 993/94-1994/9 5 -4.7 4.7 43.6 20.6 -5.4 -20.3 -25.3 -14.6 -15.6
Totals computed from un-roun ded data
1/ Based on per unit cost of total imports
2/ Average July-November
Source:  FAO
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4. Short- term difficulties in financing normal levels of commercial imports of basic
foods tuffs
24. The possibili ty that LDCs and NFIDCs may experienc e "short-te rm difficulties in financing
normal levels of commercial imports of basic foodstu ffs" as the consequ ence of the Uruguay Round
reform programme in agriculture, underlines both the Marrakesh NFIDC Decision andthe Panel' s
terms of reference. Since the concepts of "normal levels of commercial imports of basic foodstuf fs"
and "short-te rm difficulties in financing" are not defined, the Panel has invited the Member s involved
to submit their views. The Panel also asked Membe rs involved how they see the role of food aid for
attenuating short-term fina ncing dif ficulties of foo d imports.13
(a) Normal levels of comme rcial imports of b asic fo odstuf fs
25. Sever al donor countries referto the Usual Marketing Requir ement (UMR ) in the FAO
"Principles of Surplus Disposal andConsultative Obligations of Membe r Nations" to determine what
constitutes normal levels of commercial imports of basic foodstu ffs.14The UMR is based on an
average of total commercial imports of the commodity concer ned, usually in the preceding fiveyears,
taking into account the econ omic and balan ce-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 factor s such as population and/or income growth, and changes in consume r
preferences.
26. For their part, NFIDCs have propos ed a variety ofmethods to determine normal levels of
commercial imports of basic foodstuf fs.15Cuba suggests that defining "normal levels" would requir e
a country -by-countr y analysis, based on minimum consumption levels recommended by specialized
health institu tions in each countr y. Alternatively, the conc ept could be define d 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 releva nt period, and by any
food do nations re ceived.
27. Tunisia conside rs that normal levels of comme rcial imports should correspon d to a country's
import needs for agiven year. These needs would depend on available local production and on
increas es in dome stic 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
requireme nts fo r five b asic f oodstuf fs, in a ddition to strategic res erves of wheat and barley .
28. Egypt conside rs that normal levels of comme rcial imports of basic foodstuf fs could be
defined in terms of the import bill by a fo rmula: IB = (C x P – DP – A) x p, wher e IB is the import bill
of a basket of basic foodstuffs, C = per capita consumption, P = population, DP = dome stic
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 areusually seen in terms o f volumes rathe r than value s.
29. While the conce pt of the UMR is based on the notion of“normal levels of commercial
imports”, we note that its purpos e is entirely different from that envis aged 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 commer cial imports
by other exporting countries. Since theUMR is defined in terms of the average commercial imports
13See Panel questions 1 and 8, An nex 3.14See responses by Australia, Ca nada, the European Com munities and Japa n to q uestion 1 (Annex 3).15See responses by C uba, E gypt, Jordan and Tunisia to q uestion 1 (A nnex 3).
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over the past five years, this may result in levels, which are lower than the trend level of imports in
the current year if there is an upward trend. This is normally the case for the majority of net food-
importing developing countries.
30. More over, there are provisions in the "Principles of Surplus Dispo sal and Consultative
Obligations of Member Nations" for waiving UMRs or adjusting the five-ye arhistorical average
where the importing country concerned faces balan ce-of-payment difficulties, chang es of production
in relation to consumption of a commodity, where a case canbe made that the preceding fiveyears
were not representative, andother special factor s.16For these reasons theUMR may often bear little
direct relationship to the level of imports requir ed to meet domestic con sumption needs.
(b) Criteria to determine short-term difficulties in financing normal levels of commer cial imports
of ba sic food stuffs
31. The Panel notes that the spons ors of the revolving fund propos al appe ar to equate short-term
financing dif ficulties with surges in foo d import bills during times of high world mark et prices.
32. In the view of Egypt, for example, thetriggering mechanism for the Marrakesh NFIDC
Decision should be based on "the totality of effects and facto rs", that is on unex pected levels of food
import bills of LDCs and NFIDCs on an individual basis. Egypt consider s that a country effectively
experien ces short-term difficulties when the difference between theactual food import bill and the
five-ye ar moving aver age rea ches 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
Communit ies stress that increases in imports or in import bills above "normal" levels do not
neces sarily imply difficult ies in financing these imports. Import bills may incre ase due to economic
expansion, driven by gr owing demand a nd av ailabili ty of financial re sources to financ e imports.
33. Australia and Cana da raise the issue whethe r the revolving fund should be design ed to
addre ss financing difficulties that threaten food security, or whethe r 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 finan cing to pay
for imports of basic foodstuf fs. Similarly, Cuba defines short-term difficulties as a lack of financing
to ensur e food security. Japan consider s that short-term finan cing difficulties depen d on whether a
country can import the UMR throu gh commer cial trade, even when price s are rising or there is a
shortage of foreign cu rrency.
34. For Cana da, Cuba , the European Communities and Tunisia, short-term finan cing difficulties
are often linked to balanc e-of-payments problems. For its part, Jordan considers short-term
difficulties should be determined based onforeign exchange reserves as well as on an increase in
import bills above a three-year average byat least 25 per cent on a monthly basis. Some ofthe
possible causes for short-term finan cing difficulties identified by the Member s involved include
unexpe cted exchang e rate depreciation, incre ases in import prices, decreases in export prices, the
seaso nality of expo rt revenue s, debt service payments, unilateral measu res, structural market
transfo rmations, natur al disaster s, changes in international aid and financial suppo rt, wars, conflicts,
and political and/or financial cris es.
35. While we do not consider it necessary to seek to resolve the question of how to define short-
term difficulties in financing commer cial food imports, we note that most submissions from Member s
16For a more complete description of the establishment of UMRs, see FAO, Reporting proce dures and
consultative obligatio ns under the FAO principles of surplus disposal. Aguide for members of the FAO
Consultative S ubcommittee on Surplus Disposal, Rome 2 001, paras. 15-17 and Appe ndix H the reto.
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involved do not seem to suppo rt basing the definition of short-te rm finan cing difficulties solely on
exces s food import bills; some countries pointing out difficulties with this approach.
(c) Experienc es with res pect to sho rt-term finan cing difficulties
36. The Panel invited LDCs and NFIDCs to submit their experien ces with respect to short-term
financing dif ficulties of normal levels of comme rcial imports of basic foodstuf fs, to explain how these
were caused by the Uruguay Round reform programme in agriculture, and to describe how the
difficulties were addressed. Four countrie s, Cuba, Egypt, Jordan and Tunisia, have provided
information on their sho rt-term fina ncing dif ficulties.17
37. Cuba submits that importation of basic foodstuf fs should be a consistent and continuous
proce ss. Toensure that this is the case, a stable sourceof financing is require d to provide the
resou rces require d to cove r the cash-flow deficits of importers. Since Cuba 's economy is dependent
on commodities (including cane sugar, nickel an d tobacc o), fishe ry pr oducts and tourism, it is difficult
to recon cile the need for stable food imports througho ut the year with the season ality of its export
reven ues. Additional factors affecting Cuba' s ability to import foodstuffs includ e the lack of funding
from multilateral sources forfood supply programmes, the distance, which separates Cuba from its
supply mark ets and resulting high freight costs, and the trade emba rgo led by the United States. As a
result, Cuba has had to resolve its financing difficulties by negotiating with suppliers of basic
foodstuf fs, resorting to expo rt credit and credit insurance schemes offered by the official agen cies in
the supplier countries, obtaining costly trade credits, and allocating resou rces to the detriment of other
priorities. None ofthese 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 finan cial institut ions in order to obtain private financing to ensure a
minimu m level of essential food imports. The financ ed value of food imports during that period
increas ed 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 thegrowth in the value of food imports
financed through private and bank credits reached 36 per cent compar ed 1997. Beca use of the
urgen cy ofobtaining credits to import foodstuff s, 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
reduc ed or eliminated various forms of support previously granted to farme rs and exporters. In
respo nse, a transformation in cropping patterns occurred, away from subsidized towar ds 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.
Simul taneously, 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
treasu ry, Egypt adopted a series of compens atory measures, including the reduction of applied tariffs
on wheat and corn, the tempora ry re-institution of a rationing system for the poor, a substantial
reduction in nationally-held food stock s, a redu ction of imports of less essential items, and recou rse to
short-term commercial buye r credits available f rom a numb er of non -national financi al institu tions.
39. Jorda n states that during 1993 - 2000, the performance of its agricultural sector declined due
to climat ic factors. Especially the production of wheat and barley decreased significa ntly, and as a
conseq uenc e, imports ofbasic foodstuffs incre ased. An emergenc y relief programme was need ed to
assist the most affected farmers, herders and producers of treecrops. As a result of the Gulf crisis,
which led to the return of large numbe rs of expatriate worke rs and an incre ase in the size ofthe
population, and due to the high price s during the 1995 -96 period, the import bill of basic foodstuf fs
increas ed dramatically. The considera ble incre ase in debt servicing requir ements in the late 1980s
17See responses to question 2 and 3 (in the case of Jo rdan), Anne x 3.
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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 -
96 period led the competent autho rities to seek assistance to reinfo rce strategic inventorie s and normal
levels of imports o f basic foodstuffs inter alia through expo rt guarante e pro grammes and food aid.  To
addre ss its economic crisis, Jordan negotiated an arrangem ent with the IMF in 1989, and began
implement ing an econ omic ref orm pr ogramme.
40. Tunisia reports that while cereals normally accounted for an average of 34 per cent of
imports, this share rose to 46 pe r cent in 1995 and 54 pe r cent in 2001.  This wa s chiefly a result of the
increas e in the quantity of cereal imports in the wake of the decline in agricultural produ ction in 1994
and 1995, and the conside rable increase in the price of imports, particularly cereals (an incre aseof
27 per cent). In Tunisia, these imports were financed through foreign credit granted under mark et
conditions, which increa sed the balance -of-payments deficit and the debt burden. They have requir ed
a mobilization of financial resources to the detriment of a numbe r of development projects, in
particular those aimed at promoting the useof natural resources and impro ving competitiveness in the
agricultural se ctor.
41. The Panel notes that shifts in cropping patterns away from basic foodstuf fs toward s more
profitable crops should lead to anincre ase in the resources available, among other things, to finan ce
imports, at least in the long run. Howev er, it is evident that the four responding NFIDCs (Cuba,
Egypt, Jordan andTunisia) did encounte r 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. Theexperienc es described above show that the coping strategie s differed considera bly
from country to country, andthat access to the existing multilateral financing facilities has not formed
any significant pa rt of thes e strategie s, except in the context of Jordan's economic crisis.18
(d) Food aid
42. Food aid is one of the aspects addressed bythe Marrakesh NFIDC Decision in its own right.19
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.20
43. The Food Aid Conve ntion (FAC) provides a safety net in terms of food aid availabili ty. The
aggre gate annual commitments decrea sed 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 (whe at equivalent) and 
respectively. In the period 1986-20 01, annual shipments by the memb ersof the Convention
excee ded, 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 price s for cereals, as it provides assurances of minimum supplies of food aid
irresp ective of world food price and supply fluctuations. The Food Aid Conve ntion, 1999 also has
stronge r provisions to cover transpo rtation and other operation costs associated with food aid
transactions, especially when food aid is directed to LDCs and in emer gencie s. All food aid to LDCs
cover ed by memb ers' commitments under the FAC is to be provide d in the form of grants. Overall,
food aid provided in the form of grants under the current Conve ntion is to represent not less than
18See Jordan's response to question 3 (Anne x 3).19See paragra phs 3(i) a nd 3(ii) o f the Marra kesh NFIDC Decision (An nex 1 ).20See also the Panel's observations in this rega rd in parag raph 23 above .
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80 per cent of a membe r's contributions and, to the extent possible, membe rs are to seek progressively
to exceed this percentage. When allocating their food aid, FAC members undertak e to give priority to
the least-dev eloped 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 lowe r middle-
income countries and all other countries include d in the WTO list of net food-importing developing
countries at the time of ne gotiation of the Food Aid Convention 1999 .
45. In a contribution by the World Food Programme (WFP) to the Panel, WFP distinguishes
between two types offood aid: targeted food aid and programme food aid.21Targeted food aid
comprises both emerg ency food aid, design ed to relieve hunge r in disaste r situations, and project food
aid, which is distributed to identified beneficiary groups to support specific development and disaster
preve ntion activit ies. Programme food aid is usually supplied as a resource transfer forbalanc e-of-
payments or budgeta ry 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 finan cial transf ersare a much less costly way of dealing with balance-of -payments problems.
While virtually all targeted food aid is p rovided in the fo rm of grants, some p rogramme fo od aid is not
provided o n fully gr ant terms (i.e. o n con cessional terms).
46. Sever al Membe rs involved also distinguish between the impacts of targeted food aid and
progr amme food aid.22Most Membe rs involved recognize that targeted food aid is useful, especially
to addre ss emergency situations. Arge ntina, Canada , the Euro pean Communities, as well as the
World Bank, stress that long-term food aid is not a viable solution, and can be counte rproductive
becau se of effects on domestic markets. They point out that it tends to respond to the need to reduc e
surpluse s in dono r countries rather than responding to needs in recipient countries . Thus, it is
abundant during times of low price s, andscarce when prices arehigh, possibly even exacerbating
recipient countries ' short-term financing difficulties. The United States conside rs 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 addres s
situations of food insecurity. However, Cuba stresses that food aid is on the decline, and diminishes
especially during times of high price s, andis thus not sufficient to addressthe problems faced by
LDCs and NFIDCs.  Eg ypt indicates that ideally, food stock s held by major sup pliers sh ould be drawn
down in the form of food aid when LDCs and NFIDCs have the highest needs, but that in view of the
impracticabili ty and expense of maintaining such stocks, the revolving fund had been proposed
instead.  Tunisia indicates that ce rtain countries, including Tu nisia, are not eligible to receive f ood aid,
and pr opose s that eligibil ity criteria be reviewed.
48. Regarding the relationship between food aid and short-te rm difficulties in financing
commercial imports of basic foodstuf fs, Austr alia submits that unless short-term finan cing difficulties
coincide with a shortage of food, theneed for food aid does not arise. In its view, food aid addresses
chronic and sustained malnutrition or emerg ency food shortages, whereas the revolving fund propos al
deals with the impact of price or currency movements on food availability within a country for which
progr amme food aid, if available, could be of relevanc e. Australia indicates that food aid and the
revolving fund propos al thus address two different sets of problems, which may be experienc ed
separately or simultaneously. While countries might need finan cial assistanc e when faced with
financing difficulties, dumping developed -country food surpluse s into an economy under stressmight
harm ag ricultural development.
21See Annex 9.22See responses to question 8 (Anne x 3).
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49. The Panel notes that, to some extent, food aid effectively helps countrie s with limited
resou rces by reducing requirements to comme rcially finance needed food imports. The fundam ental
principles in effectively providing food aid include that it be given to countries with limited resour ces
to purcha se food commercially (thus minimizing displacement of commercial imports ofother
exporte rs),targeted to poor persons, and that it be provided in a way that does not interfe re with the
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 dome stic market, imports and finan cing need s.
(e) Export cr edits
50. In its responses to our question about how LDCs and NFIDCs manag ed to weather the
1995-97 price spike, Jordan submits that its strategy included efforts to seek bilateral assistan ce
through don ors' export c redit guar antee p rogrammes. 23
51. Since officially supported agricultural expo rt credits ("expo rt 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 increa sed from
US$11 billion in 1995 to US$18 billion in 1998; for bulk cereals, expo rt credits increa sed by
US$465 million or 22 per cent over thesame period24; but, the share of export credits accorded to
LDCs and NFIDCs remains ve ry low.25
B. ACCESS TO SHORT -TERM MULTILATERAL FINANCING FACILITIE S
52. The Panel'stermsofreferencerequireustoexamine the terms and conditions of existing
facilities of the IMF and the World Bank to which least-de veloped and WTO net food-importing
developing countries could have recourse in order to address short-te rm difficulties in financing
normal levels of commercial imports of basic foodstu ffs, principally cereals, rice, basic dairy
products, pulses, vegetable oils and sugar, during periods of rising world prices for such basic
foodstuf fs, including, as app ropriate, other relev ant sour ces of conce ssional fina ncing.
1. The Compensato ry Financing Facility of the I MF
(a) Operation
53. TheIMFprovide s finan cial assistance to its members throu gh a variety of facilities. The
principalfinancingfacilityintheeventoftemporarilyhigherfoodpricesistheCompensatory
Financing Facility (CFF), particularly its cereals element.26The CFF is a special facility that provides
financial assistan ce to countrie s that experience balanc e-of-payments difficulties arising from either a
shortfall in aggregate export receipts or an excess in cereal import costs. Compensato ry financing in
the event of a cereal import price rise is releas ed based on the following conditions: The exces s in
cereal import costs must be consider ed tempor ary and largely beyo nd the control of the country
conce rned. Unless the balance -of-payments position of the country concerned is satisfa ctory apart
from cereal import costs, access to the CFF is conside red in the context of a wider economic
23See Jordan's responses to q uestions 2 and 3 (Annex 3).24See OECD (20 00), A gricultural Outlo ok 2000-2005, p. 51.25See EC neg otiating pr oposal re gardin g export co mpetition of 18 September 2000 (G/AG/W/34, dated
11 June 199 8, paragraph 10). The ECnotes that its observatio n is based onan OECD survey using confidential
data.26For a concise history of the CFF since its creation in 1963, see contrib ution by the IMF (Anne x 5).
See also "Review of the Com pensatory and Contin gency Financing Facility (CCFF) andBuffer Stock Financing
Facility (BSFF) -- Preliminary Considerations", IMF, Decemb er 1999 at
www.imf.org//external/n p/ccffbsf f/review/index. htm.
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progr amme with the IMF.  The functioning of the CFF, as well as the criticisms raised by NFIDCs are
described below.27
(i) Temporar y excess in cer eal import cost beyo nd the co ntrol of the country c once rned
54. The excess in cereal import cost ("cereal import excess") is the difference by which thevalue
of ce real imports in the "exc ess year" exceeds the arithmetic averag e ofthe value ofcereal imports for
the five-y ear period centre d on the excess year. The calculation of the cereal import costs is thus
based on data onactual 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 thetwo
subseq uent years. The value of cereal imports exclud es food aid as well as anycereal imports which
are finance d with conces sional cr edit.
55. The eligibil ity criteria under the CFF requir e further that the cereal import exces s be
temporary, i.e.the price shock on the intern ational cereal market must be conside red to bereversible.
If the price shock were to be a permanent featur e, the Poverty Redu ction and Growth Facility (PRGF)
of the IMF would be the principal facility to assist low-income countries.28In the view of the Panel,
the experience in the past decades sugg ests that price increases on the international cereal markets
tend to be tempora ry, and the most recent price "shock", which began in 1995, was reversed within
less than two yea rs.
56. Price fluctuations on the world mark et for cereals are typically considered by the IMF to be
outside the control of gove rnments, unless the country conce rned is a dominant produce r of cereals.
The Panel notes that none ofthe LDCs or NFIDCs is a dominant produ cer of wheat, rice or coarse
grains. Also, for the purposes of the CFF, it is irrelev ant whether price increases for cereals onthe
world market a re du e to the Urugu ay Round reform p rogramme in agriculture or some other cau se.
57. The CFF is available for two catego ries of balanc e-of-payments problems. One catego ry
consists of countries that have satisfactor y balanc e-of-payments positions, except for the expo rt
shortfall or surge in cereal import costs. The second catego ry comp rises countries that have balance -
of-payments difficulties that extend beyond the expo rt shortf all or surge in cereal import costs.
Experienc e 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 alrea dy in place o r approved along with the req uest f or CFF su pport.
(ii) Export ear nings
58. Compensation for an excess in cereal import payments is triggere d only to the extent that the
import excess is not offset by a decline in other imports or an incre ase in receipts of merchan dise and
service s exports. Should it emerge that the cereal import excess was "overcompen sated", the IMF
require s prompt repurchase (repayment) of the loan.29This might include situations where, for
example, the ce real p rice hike wa s ove restimated or expo rt earning s wer e unde restimated.
(iii) Acces s limits
59. Purcha ses (loans ) under the cereal element are limited to the excess in cereal import cost of
the country c oncerned and the applicable access limit under the cereal element, whatever is lower. As
27The panel was min dful that a review o f the CFF was contemplated fo r the fi rst half of 2003.28The PRGF is the IMF's concessional lending instrument: terms are 10 years, with 5 ¼ years grace,
interest at 0.5 perce nt per annu m.29A prom pt repurchase was triggere d in the case of Algeria and Bulgaria, the two most recent cases of
countries havi ng ma de pu rchase un der the ce real element o f the CFF.
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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. Acces s limits are now
45 per cent of thecountr y's quota for either an export shortfall or acereal import excess, or 55per
cent of the q uota fo r the two fa ctors c ombined.
(iv) Disbursement and repayment
60. It may take two to three months between a request for a purchase unde r cereal element of the
CFF and disbu rsement of funds. Normally, two disbursements are made within six months. On the
other hand, a purchase unde r 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 anycase, repurchases (i.e.
repayme nt of the loan) are due 3¼ to 5 years after a purchase is made; the interest rate is currently
about 3.05 p er cent per year.
(b) Perceive d inadequ acies of the Compen satory Financing Fa cility
(i) General
61. The Panel observes that there has been very little use of the cereal element ofthe 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 increa sing international prices for cereals in 1995-97, only
Algeria and Bulgaria made a purchase unde r the cereal element.30As regards the reasons, the IMF
advises that su ch inf reque nt use wa s not due to a la ck of resources available und er the CFF.
62. We note that, in principle, all LDCs and listed NFIDCs have access to the resources of the
IMF, e xcept Cuba and Tu valu, since these countries are not cur rently member s of the IMF.
63. In the view of a numbe r ofNFIDCs, the CFF has certain inadequ acies for it to be a useful
resou rce in times of finan cing difficulties of imports o f basic food stuffs.Themain points raised relate
to its product cove rage, conditionality and lack of conce ssionality.
(ii) Product co verag e
64. Sever al of the NFIDCs have noted with conce rn that the CFF cove rs only cereals whereas the
product c overage envisag ed by the NF IDC Decision enc ompass es all basic foodstuffs .31
65. We note that there may be situations where there is a coincidenc e of tempo rary and reversible
price increases of various foodstuf fs, including grains, outside the control of governments resulting in
balance -of-payments difficulties or where intern ational cereal prices do not rise but price s for other
foodstuf fs do. There is thus a possibility that the limited product coverage of the CFF could be a
factor constr aining LDCs and NFIDCs experiencing short-term difficulties in financing normal levels
of commer cial food imports.
(iii) Conditional ity
66. For some, a perceive d shortcoming of the CFF is that it require s "conditionality". IMF loans
are usually provide d unde r an"arrangeme nt," which sets out the policies that a country intend s to
pursu e, which forms the basis ofaccessto the loan. Arrangeme nts are based on economic
30In the period of January 1993 to Septembe r 1999, the export shortfall element of the CFF was more
freque ntly used than its cereal element. Amongst the countries having drawn on the export shortfall element are
three NFIDCs (Dominican Repu blic, Jorda n and Pakistan) and one LD C (Rwa nda).31G/AG/11 (dated 2 8 September 2001),Annex 1.
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progr ammes formulated by countries in consultation with the IMF. Loans are then disbu rsed in
instalments as the programme is implemented. As a result of the November 2000 review of theCFF
referred to above, conditionality has been strengthened . Acce ss to the CFF will now be gene rally
available only in the context of a n arrangement.
67. We recall the relev ant provisions of the Marrakesh NFIDC Decision regarding access to the
resou rces to the international finan cial institu tions, which provide as follows:
"Ministers recognize that as a result of the Uruguay Round certain developing countries may
experien ce short-te rm difficulties in financing normal levels of commercial imports and that
these countries may beeligible to draw on the resources of international financial institut ions
under existing facilities, or such facilities as may be established, in the context of adjustment
progr ammes, in order to address such financing difficulties. In this regard Ministers take note
of paragraph 3 7 of the report of the Director -Gene ral to the CONTRACTING PARTIES to
GATT 1947 on his consultations with the Managing Director of the Intern ational Monetar y
Fund and the P resident of the World Bank (MTN.GNG/NG14/W/35)."32
We remark that the text of the Decision refers to "existing facilities, or such facilities as may be
established, in the context ofadjustment programmes". In our view, this provision reflects that access
to the resou rces ofthe IMF and World Bank is often conditioned by adjustment progr ammes designed
to rectify the und erlying eco nomic problems.
68. We note that in the majority of cases, it is expected that futur e purchases unde r the CFF
would be contingent on unde rtaking an economic programme under one of the following IMF
arrangements: Stand -by Arrangements, Extende d Arrangeme nts, or arrangements unde r the Poverty
Reduction and Growth Facility (PRGF). As Table 2 below show s, 6 of the 22 NFIDCs and 22 out of
49 LDCs currently have arrangements with the IMF. Sofar as count ries under arrangements are
conce rned, it is conceivable that, in the event of tempora ry cereal price increases on world markets,
access to the CFF would entail lit tle "extra" conditionali ty.
69. We f urther note that stand-alo ne access to the CFF is possible. In cases where the balan ce-of-
payments position is satisfacto ry, apart from the cereal import excess or expo rt shortf all, the IMF
allows acces s to the CFF without an arrangement involving conditionality. In addition, access to the
CFF, as to any othe r IMF facility, entails an asse ssment of the country 's capacity to repay the IMF.
32See the Marrakesh NFIDC Decision, parag raph 5 (An nex 1 ).
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Table 2 - LDCs and NFIDCs unde r arrangemen ts with the Interna tional Mone tary Fund (asof
end June 200 2)
Least-Developed Countries WTO Net Food-Importing Developing
Countries
Benin (PRGA) Côte d'I voire (P RGA)
Burkin a Faso (PRGA) Honduras (PRGA)
Cambo dia (PRGA) Kenya (PRGA)
Cape Verde (PRGA) Pakistan (PRGA)
Chad (P RGA) Peru (SBA)
Cong o, Democ ratic Rep ublic (PRGA) Sri Lanka (SBA)
Djibouti (PRGA)
Ethiopia (PRGA)
Guinea (PRGA)
Guinea-Bissau (PRGA)
Lao People's Democratic Re p. (PRGA)
Lesotho (PRGA)
Madagascar (PRGA)
Malawi (PRGA)
Mali (PRGA)
Mauritania (PRGA)
Mozambique (PRGA)
Niger (PRGA)
Sao Tomé an d Principe (P RGA)
Sierra Leone (PRGA)
Tanzania (PRGA)
Zambia (PRGA)
Key: SBA - Stand-by Arran gements
PRGA - Poverty Reductio n and Growth Ar rangeme nts
Source: Inter national Mo netary Fun d, International Financi alStatistics , April 200 2.
(iv) Lack of con cessionality
70. One of the modifications that proponents identified that might make access to the CFF more
attractive and consistent with the Marra kesh NFIDC Decision would be to make its resou rces
conce ssional in terms o f interest r ate and repayment period.33
71. The CFF is a non-concessional facility in the sense that purchases unde r it are subject to
charg es ("interest") on the use ofthe IMF's Gene ral Resou rces (GRA).34Currently, those charges are
33See G/AG/11 (dated 28 September 2001), parag raph 6 and G/AG/W/49/Add. 1 (dated 23 May 2001),
page 4 (Annex 2).
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3.05 percent per year. Still, the IMF generally recommend s against poor countries using GRA
resou rces. The issue, howeve r, of whether or not a finan cing facility is "concessional" depends on the
choice of benchmark s. A loan could be consider ed "concession al", for example, if it was provide d at
a rate of charge more favourable that the rate of charge governments may have to pay when
borrowing from c ommercial bank s.35
2. World Bank fa cilities
72. Most of the World Bank’s lending and non-len ding services areaimed at the root causeof
long-term foo d insecu rity: poverty.36Some investment projects are also aimed at improving trade and
distribution facilit ies, or improving a country ’s trade finan ce infrastructure, there by reducing
vulnerability to disruptions of imports. The World Bank has no facilities that are specifically
designed to help countries cope with price shock s, as is the CFF of the IMF. The World Bank does
have, however, several instruments to provide urgent assistanc e when acountr y is struc k by an
emergen cy that seriously dislocates its economy and calls for a quick respons e, as well as adjustment
loans which can provide balanc e-of-payments support for critically needed imports, including food.
Becaus e these facilities reduc e the vulne rability of developing and transition economies to food
shortage s, they a re releva nt to the deliberations of this Pan el.
73. One such type of World Bank instruments is the Import Rehabilitation Loan. This is a quick -
disbursing loan to provide support for the gove rnment budg et and balan ce-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 pop ulation. It is a species of adjustment loan, and
can include a n element of reform co nditionality.  For example, the Critical Import Rehabilitat ion Loan
was made to Bulgaria in 1997 to help finan ce primarily grain andoil imports when both domestic
production and normal import supply chann els were severely disrupted byinappr opriate economic
policy and political crisis, exace rbated by drought. The loan was conditional on the new Bulgarian
Government und ertaking a s eries of basic reforms in e conomic policy.
74. The World Bank also provide s several other types of adjustment loans, which disbur se to
finance general import expen ditures in times when balan ce-of -payment support is needed forany
reason, though in most cases the major reason for the need for special assistance to finance imports is
poor macroeconomic manag ement. Thes e loans arespecifically designed to suppo rt a well-defined
reform pro gramme a nd to help pa y for its transitional costs.
75. Other lending and non-lending instrume nts for emergenc y recovery assistanc e have as their
objective to restore assets and production levels in the disrupted economy. World Bank emergency
assistance may take the form of: immediate support in assessing the emerg ency's impact and
developing a reco very strategy; restru cturing of the World Bank's existing portf olio for the country, to
support recov eryactivities; redesign of projects not yet approved, to include recover y activities; and,
provision of an Eme rgenc y Recov eryCredit/Loan (ERC/ERL).
76. A very important benefit of a number of World Bank actions in respon se to a crisis (e.g.,
restru cturing the portfolio to increas e disbur sements in the near term) has not been the direct elements
financed , but the indirect element of providing foreign exchange. The foreign excha nge provided
enables countries to import food, medicine and other essentials, an ability, which may be reduced by
34The IMF uses "Comme rcial Interest Reference Rates" published by theOECD in calculating
concessionality for the purposes of the debt ceilin gs used in IMF-sup ported programs. These rates are based on
industrial countr y government de bt yields.35On the other hand, commercial banks may provide financing more expeditiously than the IMF unde r
the CFF.36See also contributio n by the W orld Bank (Annex 8).
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the loss of export earning s and need foremer gency imports that characterize drought period s or
international food pric e spike s.
77. Emergenc y Recov ery Loans may include quick -disbu rsing compo nents, but ERLs are mainly
to finance investments to rebuild physical assets and restor e economic and social activities after
emergen cies. ERL activities address resto ration 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 farme rs 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$2 00 million, combined with other fund
reallocations to total roughly US$350 million) was used to deal with multiple elements of the
respo nse to the drought, with one of its major contributions being to provide balan ce-of-pay ment
support that enabled the Gove rnment to do many things, including import food, that were not an
explicit part of the project. The World Bank made a special (US$1 0 million) grant to Somalia to
finance World Food Programme (WFP ) and UNICEF actions in the country that were specific ally
linked to the provision of food. The food was WFP 's, but the delivery was financ ed by the World
Bank.
78. In addition to emerge ncy assistanc e, the Worl d Bank may suppo rt free-standing investment
projects f or prevention and mitigation in countries prone to s pecific type s of disaster s.
3. Other sou rces of conc essional financing
79. Regional financial institut ions were contacted by the Panel to enquir e about any facilities that
addre ss short-te rm difficulties in financing normal levels of commercial food imports.37Two of these
institu tions, the Arab Monetary Fund andthe Asian Development Bank, provided information about
their financial fa cilities.38
(a) The Arab Monetary Fun d
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. Howeve r, the AMF 's facilities include the Compensatory
Loan, designed to assist eligible member countries in partly financing an unex pected balance -of-
payments deficit arising from either a shortfall of exports or an incre asein agricultural imports,
particularly cereals. Such a rise in imports must be attributable to rever sible exogen ous facto rs
beyond the control of the gove rnment in question.
81. Access unde r the Compen satory 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
repay able within three years in four equal half-yearly instalments, the first being due 18 months after
the date of the loan disbur sement.
82. The eligibil ity criteria require that the membe r countr y hasa balan ce-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 servic es. The request for the Comp ensator y Loan should bemade during the
shortfall year, or the following year. Eventually, a reque st canbe made during the year where the
authorities foresee an increase of imports resulting from a shock (or an export shortfall). The increase
37Letters were sent to the Arab Monetary Fund, the Asian Developme nt Bank, theAfrican
Development Bank, the Inter-American De velopme nt Ban k and the Islamic Develo pment Bank.38The information submitted by the Arab Monetar y Fund and by theAsian Developme nt Bank is
attached to this rep ort as Annexes 1 0 and 11, respectively.
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in imports of foodstuffs is calculated as the difference between the import cost in the shortf all year
and the a rithmetic average o f import co sts during the thr ee years centred on the short fall year .
83. So far, some 12 compen satory loans have been extended to eight AMF membe r countries, in
large pa rt to finance an inc rease in the value o f cereal imports or a s a result of d rought.
84. In addition, the Arab Trade Financing Progamme (AFTP ), anAMF sister -institution, is
specialized in the provision of credit aimed at finan cing inter-Ar ab imports and expo rts of virtually all
goods and commodities. ATFP charges conc ession al interest rates compa red to market rates for
similar transactions.
(b) The Asian Development Bank
85. The Asian Development Bank (ADB) provides variou s 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 ESTABLISHM ENT OF A REVOLVING FUND
86. The Panels ' terms of reference requir e us to examine the concept and feasibility of the
propos als for the establishment of a revolving fund that were submitted by a group of 17 NFIDCs
(Côte d'Ivoire, Cuba, Dominican Republic, Egypt, Hond uras, Jamaic a, Keny a, Mauritius, Morocco,
Pakistan, Peru , Sene gal, Sri Lank a, St. Lucia, Trinidad a nd Tob ago, Tu nisia and Ven ezuela) .39
1. Main elements o f revolving fund pro posals
87. The first propos al (G/AG/W/49) takes up three of the areas addressed by the Marrakesh
NFIDC Decision, namely food aid, technical and financi al assistanc e, as well as access to the
resou rces of the international financial institutions. In addition, it address es the issue ofestablishing
binding commitments and reviewing the implementation of these commitments. The secon d
submission (G/AG/W/49/Add.1) elaborate s on the concept of the revolving fund intended to address
the lack of suitably conditioned short-te rm financing.40
88. In their first propo sal, the sponsors envision the establishment of an inter-ag ency revolving
fund with two components. The first, variable compo nent of this fund would ensure that adequ ate
financing at concessional terms was made available to LDCs and NFIDCs during times of high world
market price s for basic foodstuffs. This component would be comprise d of existing and/or new
financing f acilities, as appro priate. Thepurpose of the second , fixed compone nt 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 infrastru cture. The elabo rated proposal
(G/AG/W/49/Add.1) drops the idea of a technical/financial assistance window for agricultural
projects. Instead, proponents call on donor s to set aside a greate r proportion of multilateral and
bilateral aid progr ammes for this purp ose.
89. However, in their respo nses to the Panel' s questions, Cuba and Tunisia suggest that part of the
resou rces of the revolving fund should be used to financ e capacity building. In their view, the
39G/AG/W/49 (dated 19 Marc h 2001) and Add.1 (dated 23 May 2001) and Add.1/C orr.1 (date d
27 June 2001) (Annex 2). In respo nse to questions by the Panel, the proposals were further elaborated by the
Cuba, Egypt and Tunisia (Anne x 3).Jorda n indicates that it supp orts the proposal (response to question 4,
Annex 3 ).40In the proposal, the re volvin g fund is also refer red to as the food fina ncing facility.
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revolving fund should addre ssthe long-term problems through projects aimed at increasing
productivity and ef ficiency in b asic fo od production in the countrie s in question.41
90. In the first propo sal, the creation of a finan cing facility is to be combined with a stockholding
scheme for cereals. According to this proposal, in years of plentiful supplies, produci ng countries
would commit to setting aside sufficient national food reserves, in accordance with the normal import
requireme nts as determined by FAO, in addition to volumes required for food aid, emergencies and
essential nutritional assistance projects. During times of high world market price s, these reserves
would be relea sed to LDCs and NFIDCs at reasonable prices, and thus, together with food aid, would
help them meet their normal import requir ements. The idea of physical stocks of food grains is not
taken up ag ain in the seco nd propos al.42
91. The main elements of the proposal fo r the e stablishment of a new short-term finan cing facility
for food imports (revolving fund ) are as follows.
(a) Capitalizat ion
92. The proposal estimates initial capital requirements forthe revolving fund of around
US$1.2 billion, based on an FAO study of the revolving fund.43The funds are proposed to be drawn
from multilateral financial organizations, the G-7 and other donors, as well as major developing
countries. Du ring yea rs when import bills are manag eable, the proposal indicates that dono rs could set
aside the resources, but not disbu rse them. Contributions to the revolving fund are to be inscribed in
WTO Membe rs' schedules as binding and legally enforceable commitments. Proponent s suggest that
the Membe rs concerned be require d to make regular annu al notifications in respe ct of these
commitments.
(b) Eligib ility and repayme nt terms
93. Access to the resources of the revolving fund is to be determined on a countr y-by-country
basis, after a fair assessment of requirements, in accordance with guidelines to be established. The
propon ents suggest that in periods of surges in import bills, each country's compen sation pack age
could be capped in order to maintain the revolving fund's long-term financial viability. The fund' s
resou rces would be repayable, which would reduce the initial capital required. Repa yments of
financial resources received by bene ficiaries would be unde r a medium-term scheme on terms more
favou rable than ma rket co nditions.
94. In its response to the Panel's questions, Egypt submits that eligibi lity should be based on
objective criteria, determined on a country -by-c ountry basis.44Tunisia conside rs that the revolving
fund should supplement existing facilities but on less restrictive terms of access.45Similarly, in
Cuba's view, such financing should not be subject to political or other conditionalities except forthose
related to the objectives o f the fu nd, ba sed o n the de finition of normal levels of commercial imports of
41See Cuba's respo nses to questions 5 an d 8,and Tunisia's response to q uestion 7 (Annex 3).42In 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. Howeve r, in view of the
impracticality and expense of maintainin g such stocks, the idea ofthe revolvin g fund had been proposed instead
(Annex 3).43"Towards Improving the Operational Effectiveness of theMarrakesh Decision on the Possible
Negative Effects of theReform Programme on Least-develope d and Net-Food Impo rting Devel oping
Countries"; prepared by the FAO Comm odities and Trade Division for the FAO Roundtable onSelected
Agricultural Tra de Policy Issues, Geneva, 21 Marc h 2001 (Annex 4). See also section C.2 below.44See Egypt's response to question 5 (An nex 3 ).45See Tunisia's responses to questions 4, 5 and 7 (An nex 3).
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basic foodstuf fs in individual countries. Cuba stresses the importanc e of providing for payments on
conce ssional terms with repa yment period s of mo re than 3 60 day s.46
(c) Administration of the revolving fund
95. The proposal recommend s that the administration and manageme nt of the revolving fund be
centralized in a "small burea ucracy", to be overseen by amanag ement board comprising
representatives of the WTO, FAO, IMF, World Bank, don or countries and be neficia ries.
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 mech anism for verifying the destination and use of the
resou rces.47In 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.48
2. FAO contributions
97. The FAO made two contributions to the Panel: one relating broadly to the implementation of
the Marrakesh NFIDC Decision as awhole, the other providing furthe r elabo ration of the conce pt of
the revolving fu nd.49
(a) Ex-ante v ersus ex-post bo rrowing
98. The FAO addresses the question whether borrowing from the revolving fund should be ex-
post, i.e. after the countr y 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 increase d 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 comme rcial terms knowing that
conce ssional finan ce would be forthcoming.
99. Regarding the ex-ante approach, the FAO identifies a numbe r of technical difficulties. A
commitment by the recipient countries would be require d to ensure that, to maintain normal
consumption levels, food is actually imported in amounts above those that would have been possible
in the absenc e ofthe revolving fund. This would require data on food consumption in the current
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
increas ed excessively, countrie s receiving a loan from the revolving fund could be expected to
undertak e measu res to protect the food s ecurity of the poo r, and to rep ort on how the loan was u sed.
46See Cuba's respo nses to questions 4 an d 7 (Annex 3).47See Cuba's and Egypt's responses to question 7 (An nex 3).48See Tunisia's responses to question 7 (Anne x 3).49The first FAO paper, titled "Towa rds Improvi ng the Operational effectiveness of theMarrakesh
Decision on the Possible Negative Effects of the Reform Progra mme on Least-Develope d and Net Food-
Importin g Develo ping Countries", was prepared by the FAO Comm odities and Trade Division for anFAO
Roun d Table on Selected Agric ultural Trade Policy Issues held in Geneva on 21 March 2001 . The second
paper, "Revolvi ng Fund for the Purpose of Impleme nting the WTO Marra kesh Decision Relating to the Least-
Developed and Net Food -Impo rting Developin g Countries", is based on an informal FAO consultation held in
Rome o n 17 September 2001.  See An nex 4 .
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(b) Definition of exces s food import bill
100. The FAO provide s calculations of the aggregate "excess food import bill" for the LDCs and
NFIDCs unde r various thres hold levels.50To define the excess food import bill, the FAO starts with a
five-ye ar moving average of the actual value of food imports to define thetrend. 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 exceed s the trend level by more than ten percent. The 1985-99 annu al average of
combined excess import bills for the LDCs and NFIDCs ranges from US$159 million for a thres hold
level of 35 p er cent to US$729 million for one o f 10 p er cent.51
(c) Capitalizat ion of the re volving fund
101. Based on thecalculation of the aggregate excess food import bill, the FAO analyses the
capital requirement for the revolving fund. The FAO assumes an interest rate of0.75 per cent per
year and a repayment period of two years; intere st earned by the"spar e" balance of the fund not
borrow ed in any given year is not taken into account. Unde r a scenario where the revolving fund was
established in 1984 with an initial endowment of US$600 million and a threshold level of25 per cent,
the resources of the fund would have been exhausted in 1992. Fresh injections would have been
require d for the revolving fund to continue operating. Depending on whethe r spikes in total exces s
import bills occur early or late during the life of the revolving fund, the capital requirements and the
need for injections va ries.
102. Since the food import bills of LDCs and NFIDCs exhibit an upward trend, the initial capital
requireme nts for the revolving fund need to be adjusted upwar ds if they are to suffice for future
periods. Assuming a ten year time horizo n for the revolving fund, an annual interest rate of 0.75 per
cent and athresh old 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 forcapital injections. In the view ofthe FAO, an open-en ded commitment to provide
additional capital on a stand-by basis is unlikely to be acceptable to contributors and the stand-by
component of therevolving fund would thereforeneed to be capped. Lending could be capped , either
propo rtionately, or including an element of special and differential treatment, so that borrowing by
NFIDCs is capp ed, but not that by LDCs.52
(d) Administration of the revolving fund
103. FAO considers that it would be inappropriate to establish a new institution to admin ister the
fund. Instead , an existing agency with experienc e, logistic infrastru cture 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 finan cial institu tion specialized in lending for
agricultural development, is identified as a possibility. In the view of the FAO, such arrangeme nt
could also help to strengthen the complementarity between short-term financing andthe long-term
technical and financial assistanc e for agricultural development identified in the Marr akesh NFIDC
Decision.
50The fo od im port bill as defi ned b y FAO includes com mercial fo od imp orts, exclu ding food aid.51These FAO estimates are for 19 NFIDCs and49 LDCs, and cover imports of cereals, dairy andmeat
products, vegetable oils and sugar.52For more details about these estimates and va rious scenarios, see FAO's technical note (Ann ex 4).
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3. Analysis of conc ept a nd fea sibility of the revolving fund p ropos al
104. In the light of its terms of reference, the Panel' s analy sis of the proposed revolving fund
addre sses only those portions of the proposals that conce rn short-te rm financing difficulties. First, the
report provides backgrou nd information regarding finan cing practices in the intern ational food trade.
Second, it examines the revolving fund as a conc eptfrom the point of view of its usefulnes s as a
solution to address finan cing difficulties of commercial food imports by LDCs and NFIDCs. Third, it
addre sses a number o f implementation issues.
(a) Backgro und
105. Over the past decade, most government-ow ned food import agencies have been disbande d;
some have been expo sed to competition and now function alongside private-se ctor trade rs (e.g.,
Egypt, Mauritius, Pakistan); and very few agencies have remained in a monopoly position (e.g., Cuba
and the Comoro s). In some countrie s, particularly in North Africa, trade has been privatised, but the
governme nt retains an “umbr ella” function over the imports of the key commodities (cereals, sugar,
vegetable oils), p roviding to some extent financing and subsidies, as well as imposing prices. Also, in
a few countries (e.g., Egypt, Myanmar, Sudan) the gove rnment has entered into counte rtrade (barter)
agreements unde r which food is imported a nd paid for in the c ountry ’s commodities.53
106. By and large, private traders are now responsible for importing food, and receive little
assistance from their gove rnments in obtaining the funds for importing. Most countries have freed
foreign exchange controls, hence hard currency is no longer centrally located, and importer s have to
procu re it by themselves. In the large majority of cases, the private tradersare locally owned; they
may be fairly large in local terms, but tend to have little track record since until a few years ago, the
governme nt arranged food imports, and have limited financial strength. They are generally
diversified, importing the whole r ange o f bulk food c ommodities, and often othe r products as well.
107. Given their limited financial capacity, local trade rs have a stron g preference for buyin g on
deferred payme nt terms, e.g., theseller provides thegood s, and agrees to be paid 60, 90 or 180 days
later. This allows them to import the foodstuff s, sell them on the local market, and use the proceeds
to reimburse the seller. Thelonger the payment terms, the better, particularly because this allows the
buyer to make large r-volume purchases, which can result in conside rable savings in transport costs.
The finan cing costs o f these deferred payment sale s are effectively hidden in the price o f the p roduct –
the seller will charge a price equal to the spot price of thecommodities, plus the interest charges, plus
a risk premium, plus a profit margin. Bank s have found that the implici t interest rates can easily be in
the 20 percent range, except when the seller can benefit from export credit insuranc e from his
governme nt.
108. It is very dif ficult for local tra ders to bor row money from banks with which to import food. A
number of developing-co untry governme nts have credit schemes, but funds tend to be scarce, and
food imports are rar ely in the list of priorities (funds often go to non-traditional exports ). Local bank s
gener ally require full guarantees, often in the form of real estate. As food trade tends to be a low-
margin busines s, few local trade rs have sufficient wealth to generate enough local bank finance to
keep bu siness going.  They are also not lar ge en ough to obtain international bank loans.
109. Developing country importe rs normally rely on their suppliers forfinan cing their imports.
Suppliers ca n arrange this in diffe rent ways:
53For example, the Malaysian government has initiated Bilateral Payme nt Arran gements to enable
poorer countries to bu y its palm oil.
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/AB First, the supplier can arrang e 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 importe r doe s not pay.
/AB Second, the supplier himself can bo rrow fr om a bank or use his own working capital to enable
sale on de ferred payme nt terms.
/AB Third, the supplier can obtain credit or credit insur ance from an official expo rt credit agency,
which provides cove r for 90 -95 p er cent of the risks of the credit.
/AB Fourth,  the loan c an be structur ed, u sing one o f a range ofpossibili ties.
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 pe riods, and only revised when there are specific conditions meriting its revision. Each
loan has arisk weighting, with country risk forming a large part of this. Banks generally target a
“risk- adjusted r ate of return” – the highe r the risk, the larg er the return should be .
111. In the second case, the credit will form part of the trading company ’s credit expo sure.
Trading comp anies operate very much like bank s (and have little choice in this, because they depend
so strongly onexter nal financ e), with credit ceilings for each country. Revising credit ceilings tends
to be slightly easier than in ban ks, but internal c redit committees are still very vigilant.
112. In the third case, officially suppo rted export credits and credit insura nce allows banks to
exempt loans from country ceiling restrictions. Export credits are quite important in international
food trade (see paragraph 51 abov e). Both the United States andthe Euro pean Communities have a
wide range of programmes, and a small numbe r of food-ex porting developing countries also have
progr ammes.54Typically, these programmes shift the credit risk from the exporte r to the expo rt
credit (insu rance) agenc y, with only 5-10 per cent of the risk still remaining with the exporte r. It is
often against such credits orcredit insuranc e that expo rters agree to sell on deferred payme nt terms.
These agencie s have specific budg ets for their operations, often mand ated by specific legislative
budget app rovals.
113. In these three cases, the transactions generate “trade paper” – the importe r acknowledge s
delivery, andpromise s to pay in, say, 90 days. This trade paper can be discounted on the second ary
market, that is, it is sold to investors. It canbe discounted with recourse – if the importe r does not
pay, the exporter has to pay the investor. It can also be discou nted without recou rse – the investor
takes the credit risk. The forfaiting market is the principal outlet for such without recou rse
discounting. The credit expo sures of the trading companies are often discounted in the forfaiting
market, which remov es the credit risks from the trade r’scountr y risk expos ure, 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 acountr y is offered, discounts
increas e fast, with the implication that the trading company has to build in a high price premium to
compensate forthis.
114. Increasingly, intern ational traders are resorting to the use of structuring techniques to enable
them to continue selling commodit ies to developing countrie s. One simple form is warehous e receipt
finance. The trader arranges for the commodities to be stored in an independ ently controlled
warehou se and the warehous e operato r issue s warehouse receipts, which are used as collateral for
financing. Once the international trade r has received theware house receipts, he lends to the local
trader a certain amount of the collateral value of the good s in warehous e and thefunds are reimburs ed
54For a list of export credit agencies, see WTO Secretariat back ground paper onExport Credits and
Related Facilities (G/AG/ NG/S/13, dated 26 June 2000, pp. 1 0-11).
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with the proceeds from the sale of the good s. The risk that the commodity is stolen from the
warehou se, or effectively expro priated by the gove rnment, canbe covered byinsura nce (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 nec essary for non-st ructur ed sales.
115. Apart from structur ed financ e, the other three sources ofimport financ e are all limited – the
credit ceilings arevery difficult to chang e. If the food import costs of acertain country increase
becau se of price incre ases, or larger needs for food imports on commer cial terms, it is quite likely,
other circumstances remaining equal, that the existing credit lines are insuf ficient. People still need
the food, of course, andthe mark et will find a new equilibrium. This would normally have one or
more of the following components:
/AB Local trade rs start rotating their capital and stock s faster by using the same credit line to
import, for example, twice as much food. Inste ad of reimbur sing in 90 days, they reimburs e
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
(transp ort takes mu ch time).
/AB 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 re flected in highe r price s paid for the food.
/AB Opportunistic trader s looking for high risk/high profit opportunities enter the mark et, selling
at a relatively high price (and in p ractice, o ften su b-stand ard commodities).
/AB Local trade rs start paying their bills late, using funds due for a credit on one commodity to
import another – which will ult imately lead to higher ris k premiums.
/AB International trad ers do more structur ed finance deals.
(b) Effectiveness o f ex-post availability of trade financ e
116. While the propon ents of the revolving fund have not clearly identified whethe r borrowing
from the revolving fund would take place before or after importation, we conside r the proposal to be
for an ex-post financing mech anism, 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 apre-determined threshold. (In contrast, an ex-ante mech anism would
provide financing at the time imports were e ffected, s ee 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 disburs ements under the CFF may be such that the
funds aremade available after the climax of the price increase. In such circumstanc es,countrie s may
experien ce short-te rm financing difficulties ex-ante but subsequent disburs ements 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 pr oposed revolving fund .
118. In light of the prevalent system of food imports (described above ), a fund that would provide
ex-po st 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
more food need funds, or new credit lines, at once. It is diffic ult to imagine how the possibili ty, not
certitude, that one ortwo years in the futur e, their governme nts will receive a new loan will influence
the willingness of intern ational trading companies or banks to provide them affordable loans when
needed . It is also difficult to imagine that a government would authoriz e a new, dedicated credit line
for food imports without being certain that the disburseme nts unde r this credit line will be refinanc ed
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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 exch ange
reserves, not to support food imports at the time of need , one may question why the "food trade
balance" is considere d in isolation – it would be more logical to consider the balanc e of payments as
a whole.
120. In respon se to the Panel's invitation to the LDCs and NFIDCs to describe their expe rience
with respect to short-term finan cing difficulties, in particular during the 1995-97 price hike on the
international cere al markets, the following has bee n submitted by Cuba, Eg ypt, Jord an and Tunisia:55
Cuba
"… During the 1995 -1996 increase in the price offoodstuff s, we had to negotiate intensively
with our usual supplier s and with the bank s 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 finan ced
through private and bank credits reached 36 per cent with respe ct to the same figures for
1997. Obviously, the urgenc y involved in obtaining these credits owing to the pressing need
to import foodstuff s regardless of the increase in mark et prices has meant that Cuba has had
to pay very high costs, well above the market level and even well abov e anyspread that
would be reasonable for Cuba forsuch finan cing – up to 18 per cent in interest, in annu al
terms, fo r 1997."
Egypt
"… In order to reduce the impact such a situation imposed on both the local populace and the
national treasur y, the Gove rnment of E gypt [GoE] adopted a series of compe nsatory measu res
such a s … a brief recourse to short-term commercial buye r credits available from a number of
non-national finan cial institu tions."
Jorda n
"…These imbalance s in Jordan's economy and the volatility of world prices of basic
foodstuf fs during the period 1995/1996 urged the competent authorities to seek assistance to
reinfo rce the strategic inventorie s and the normal levels of imports ofbasic foodstuffs,
through aid p rograms su ch as expo rt credit guarante e pro grams and food aid prog rams… ."
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
consider able increase in the price of imports, of cereals in particular (plus 27 per cent). These
imports are finance d through foreign credit granted unde r mark et conditions, which in fact
simply accentuate the b alance-of-paymentsdeficit and the de bt ratios."
55Cuba's an d Tunisia's responses to question 2, A nnex 3.
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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-te rm financing difficulties of the kind
described by Cub a, Egypt, J ordan and T unisia . This limita tion may not apply to an ex-ant e app roach.
(c) Trigger me chanism
122. A second conc eptual conc erns the trigger mechanism, which would be required for
disburseme nts from the proposed revolving fund. In this regard, the revolving fund proposals are
based on food import bills as a triggering facto r. Howeve r, in the FAO contribution, the triggering
would be bas ed on the lev el of a ctual food import bills above a certain threshold lev el.
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 exogen ous for LDCs and NFIDCs, the latter may be influe nced by factors within the control of
governme nts. Wenote that such factors may includ e inappr opriate micro - and macroeconomic
policies, but may also include policies related to the implementation of WTO commitments, and/or
those unde r 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 manag ement and sector al policies by
governme nts might be requir ed, if such amonitoring mechanism is not already in place. It may even
be necessary to conside r adequate safeguards to ensure the viability of such a revolving fund. The
practical arrangements for such a fund’s operation would theref ore requir e certain preconditions for
lending, with sim ilar chara cteristics to those o f the CFF of the IMF.
124. If the trigge ring mecha nism were to bebased on exogen ous facto rs, such as increases in
world market prices and less favourable terms in finan cing 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 trigge r price s,
some countrie s that do not need short-term finan cial assistanc e might gain access to the fund's
resou rces. 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-
conce ssional rate.
125. In respon se to our questions, Australia has expressed a concern that trigge r prices have the
potential of introducing unde sired e ffects into world mark ets.56In this rega rd, 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 ofUS$ 200 billion per year (excluding intra-Eur opea n
Communit ies trade. In addition, such a revolving fund would affect food imports only by the LDCs
and the NFIDCs a nd only in exceptional years; for the most part and in "normal" years trade would be
unaffected b y the ope ration of the revolving fund.
126. There area numbe r of other issues, which would need to be consider ed in relation to
implementat ionof the pro posed revolving fund.57
(d) Overdue obligations and risk of default
127. The proposal for the revolving fund as it currently stands does not address the issue of
overdu e obligations and the risk ofdefault on revolving fund loans.58During period s of high world
56See Australia's response to question 4, Annex 3.57In this conte xt, see also the IMF's Comme nts on FAO Draft Paper "Revolvi ng Fund for Net Food -
Importin g Develo ping Countries", Annex 5.
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market price s, the risk of defaults on revolving fund loans would be particularly high where high
prices cannot passed on to consumer s, making it difficult for importer s to recove r the full value of the
imported produ ct. A policy to protect the revolving fund, for example by imposing penalty interest
rates for overdue obligations, and cutting defaulting countries off from futur e access to the revolving
fund, would be required.
128. For this purpo se, price risk manag ement tools, such as future s and options, could be used to
reduc e the credit risk of importers with the additional benefit that this would make it possible for
importers to partially protect consumer s from world mark et price increases. Out-of-the -mone y call
options, for example, are relatively affordable. The May 2003 wheat future s contr act in Chicago
trades at US$29 per bush el.  A call option with a strike price of US$3 4 per bushel, which provides full
insuranc e against the risk that price s incre asebeyon d US$34 costs onedollar per bushel. This applies
to standard, exch ange -traded contr acts; tailor-made over-the-co unter contra cts would cost at most two
thirds of this. Howeve r, such risk manag ement tools can only address relatively short-term price
fluctuations.
129. In its responses to our questions, Canada noted that short repayment period s would incre ase
the likelihood of defaults, while a longer repayment period would imply a large r capitalization of the
fund, with the associated negative consequen ces, including the diversion of resources from other
development assistance.59Conver sely in the Panel' s view, a short repayme nt period might be
approp riate in view of the relatively short sh elf-life o f food.
130. It is unlikely that the risk of default could be eliminated completely, and depending onthe
rate of default, the capitalization and/or interest rates of the revolving fund would have to be higher.
To increa se the viability of the rev olving fund, conside ration would have to be given to making access
to the revolving fund non-automatic (i.e. introducing certain conditionality) and reducing the
conce ssional character of the facility. In this regar d, in its respo nse to questions from the Panel, the
Europe an Communities indicate that the conditions for access to the fund would need to guarantee
that disbursements from the fund were fully reimburs ed, andforesees that these conditions would not
differ from those attache d to the current multilateral financial facilities that address balance -of-
payments problems.60This would likely make the revolving fund unattractive to those countries who
find the current multilateral financing facilities inadequate precisely because of the attache d
conditionalit ies.
(e) Over-d rawing
131. A further issue for theimplementation 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
foodstuf fs, it is possible that food import bills for all or several LDCs and NFIDCs would increa se at
once. If in such a situation many countries request loans from the revolving fund, it is possible that
needs could exceed theresources 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 ove r several yea rs.
132. In its contributions to the Panel, the FAO considers two altern ative approaches for dealing
with peak years. Thefirst option is that donor s would inject new resources into the fund during peak
years. Dono rs would enter into a "stand-by arrangement" to provide additional funds in times of
need. These additional funds could be reimburs ed to the dono rs as the loans are repaid by NFIDC s
and LDCs, and possibly interest could be p aid on thes e extra resources.
58See Canada's respo nse to question 4 and the United States response to question 6 (Anne x 3).59See Canada's respo nse to question 4 (An nex 3) an d section (j) b elow.60See Europea n Commu nities' responses to question 6 (Anne x 3).
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133. The second option suggested by the FAO would be to cap total lending. This option is also
mentioned by proponents ofa revolving fund. They envis age that each country 's comp ensation
packag e could be capped in periods of surges in import bills, in order to avoid harming the revolving
fund' s long-te rm financial viability.61The FAO suggests capping loans in a proportionate mann er to
all borrower s seeking financial assistanc e, or introducing an element of special and differential
treatment so that lending to least-develop ed countries would not be capped. Howeve r, in order to
account for the possibility of a period of high prices persisting for more than one year, it would be
neces sary to make some estimate of such an eventuality at the time and leave some resources of the
fund for the second high-p rice year.62This would provide the basis for the necessary capping of
lending during the cu rrent yea r.
134. Even assuming that a price hike lasted for only one year, allocating the resou rces 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 excessimport bills, funds could only
be relea sed wh en 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 su ch su bmissions would have to be e stablished to avoid undu e delay s.63
(f) Data requireme nts
135. If the fund were to function as an ex-post borrowing facility, the beneficiary countrie s would
have to submit releva nt data to document their need for short-te rm financing. Depending on the
design of such a revolving fund, data requir ements would vary, but the type and source of data to be
used for requests and reporting would have to be well defined to avoid discr epancies in methods used
by different countries, limit ambigu ities as to acces s requirements, and reduc e possibilit ies 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 commer cial food imports. This would requir e collecting price and volume
data, normally from customs records. Where electronic database s can be used, this would likely not
be too burdensome , but wher e such facilities are not available, it might take several months until the
complete information can besubmitted. Thes e data would be difficult to verify, especially since
official statistics are often published with a delay of oneor 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. Disbu rsements 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 fu nd staf f had evaluated and v erified the requests.
(g) Impact on p rivate ope rators
136. In a ma rket enviro nment where many gov ernme nts in developing co untries have redu ced their
stake in the food trade or withdrawn entirely, the question of securing appropriate trade finan ce for
private ope rators is more critical.
137. If in a situation where a state-owned enterp rise has no exclusive import rights but government
allows parallel imports of foods by private operato rs, the revolving fund were to provide access to
61G/AG/W/49/Add.1 ( dated 2 3 May 2001), page 4 .62Given the ex-post nature oflendin g, by the time this evaluatio n was done some information on the
market conditions during thesecond year would be available (assuming that a price spike would not persist for
more than two years).63In this conte xt, see also section (f) below.
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conce ssional finan cing exclusively to the state-ow ned enterprise, there would be a risk for the
revolving fund to distort the conditions of competition. These distortions could affect the viability
both of provider s of commercial credit and private importers. Any finan cing scheme in a situation
where private food importers and a state-owne d enterprise coexist would need to avoid to adversely
affect the viability of the private secto r. How a conce ssional finan ce 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 co untries whe re all imports ar e carried out by the private secto r.
(h) Impact on f ood p roduction in LDCs and NF IDCs
138. In their respon ses to questions posed by the Panel, Austr alia and Canada raised some
conce rns that the revolving fund might lead to negative effects on dome stic food production in LDCs
and NFIDCs. Australia also pointed out that revolving-fu ndloans risk entre nching developing
country depend ence on developed countries fortheir food requirements. In its view, if the revolving
fund worked as a rebate for food purchases on the open mark ets, 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 s ector.64
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 conc ession al (as envisag ed in the
propos als), there could be a potential for a distortionary effect on dome stic production, assuming the
subsidy implicit in the conces sional loan was passed on to the dome stic market.65The revolving fund
could nevertheless be designed in such a way to avoid distortions, and in any casethe import volumes
financed by revolving fun d resources would be ma rginal.
(i) Accumulation of debt
140. In their respon ses to our questions, Austr alia and Canad a noted that loans from the revolving
fund may contribute to the unsu stainable debt burdens faced by many developing and least-dev eloped
countries.66The 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 extern al debt ceiling incorpor ated in an IMF-su pported programme. Performanc e criteria
relating to the amount and maturity structur e of foreign borrowing are typical feature s of IMF
arrangements. Their purpose is to limit external borrowing to amounts and terms consistent with
avoidance of future debt-s ervicing difficulties, to ensure a viable balance of payments position over
the medium term.67Depending 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
where this is not the case, revolving fund loans could increase a country 's debt servicing obligations
and thus co ntribute to a debt pr oblem in some ca ses.
64See Canada's and Australia's responses to question 4 (Anne x 3).65If  the im plicit subsidy was captured by the go vernme nt, there might be other problems with this type
of rent.66See Australia's and Canada's respo nses to question 4 (Anne x 3).67Performance criteria, usually b ased on selected econo mic and financial va riables, are used to monitor
progra m impleme ntation and achieveme nts. A criterion relative to official andofficially guara nteed debt is
freque ntly used. Unless a debt instrument is specifically exclu ded, it is considered tobe under the performa nce
criterion. Formedium - and long-term debt, the performance criterion is usually form ulated in terms of debts
contracted o r auth orized; for short-term debt, the limit is usually formulated in terms of net disbu rsements or net
changes in the stock of external debt. Concessional loansincluding a grant element of at least 35 per cent are
usually exclude d from the ceilin g; in some cases, the limit req uires a larger grant eleme nt.
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142. Convers ely, as Tunisia pointed out in its respon se, financing of food imports through credit at
market conditions also contributes to foreign debt.68To the extent that commercial credits are at less
favou rable c onditions, its impact on a countries ' debt situation may in fact b e more s evere.
(j) Relationship to long-term development as sistance
143. In its responses to the Panel' s questions, Cana da notes that the conce pt of the revolving fund
fails to establish a link between short-term financing needs and long-te rm development assistanc e.
Japan and the United States stress that more empha sis should be placed on increasing productivity in
the agricultural sector ofLDCs and NFIDCs, and on good gove rnance. The revolving fund could
result in a diver sion of aid resources away from longe r-term assistanc e that would contribute more to
sustained food security. Canada and the European Communities indicate that the resour ces 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 themost effective use of available resources. In addition, if the revolving fund
encou raged food purchases during times of high prices, this might result in an inapprop riate use of
governme nt funds .69
144. Convers ely, in its answer s to the Panel' s questions, Tunisia makes the point that in the
absen ce of short-term financial assistanc e for dealing with surges in import bills, governments may
have to divert resou rces away from developme nt projects. During the 1995/96 price hike, the
Tunisian Governme nt had to mobilize financial resources to the detriment of proje cts aimed at
promoting the use o f natur al res ources and improving comp etitiveness in the agricultural s ector.70
145. Although governments might need to use scarce resources to purchase food at high prices ,
where there is a need forfood, the Panel does not see why this would constitute an inapprop riate use
of government resources. We note that, from the dono rs' perspective, establishing a revolving fund
might involve diverting resour ces from longer-term developme nt projects, including activit ies
designed to enhance long-te rm food security. From the recipients' perspective, if short-term food
needs arenot 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
circumstance s ofthe countrie s con cerned a nd the de sign of a revolving fund .
(k) Governa nce and administration issues
146. In their respon ses to the Panel's questions, several donors raised concerns related to
govern ance and administration of the proposed revolving fund. They note that the revolving fund
would be costly to administer.71In the Panel's view, administering the revolving fund will inevitably
have a cost. Elabo rating the country -specific criteria for access to loans from the fund would require
a large, albeit one-o ff administrative effort, and dedicated staff would berequired to administrate the
fund.
147. Another point raised in donor s' responses is that the revolving fund might be subject to
pressure from dono rs in terms of which country is to benefit from the fund and tying finan cial
contributions to recipro cal purchases from the recipient countries (tied aid).72In the Panel's opinion,
existing mechanisms including bilateral aid areless transparent and provide more oppo rtunities for
68See Tunisia's replies to questions 2 an d 3 (A nnex 3).69See Japan's responses, para. 4and Australia's and the United States' responses, introd uction,
Europea n Commu nities and Cana da's responses to q uestion 4, Australia's responses, introductio n (An nex 3 ).70See Tunisia's response to question 2 (An nex 3 ).71See Australia's and the Euro pean Comm unities' responses to question 4, and the Unite d States
response to q uestion 6 (A nnex 3).72See Australia's, Argentina's and the Eu ropean Commu nities' responses to question 4 (Annex 3).
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pressure from dono rs than would be the case if a revolving fund were to be established in a
multilateral context.
148. In their propos als, the spons oring countries envisag e 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 beneficia ries. In its contributions to the Panel, the
FAO propose s IFAD a s a po ssible institution to administer the revolving fund since it has therequisite
logistics, staff and expe rienc e in managing funds. This idea was taken up by several of the
propon ents in the discus sions regarding the revolving fund proposal that were held in the regular
meetings of the Committee on Agriculture.73The Panel does not regard it as part of its task to express
a view on whether IFAD would be an appropriate organiz ation to administer a revolving fund of the
kind discuss ed in its repo rt.
D. OTHER OPTIONS
1. An ex-ant e food import financing scheme
149. In the light of our discus sions above, an ex-ante financing mech anism might be more
effective in meeting the objectives of the propo sals than would be an ex-po st financing scheme. This
section outlines some elements of such an ex-ante financing facility.74We note that any scheme with
a trigger mechanism based on factors within the control of governments would entail scrutiny of each
reque st fordisbur sement and henc e would probably be linked to some conditionali ty. There fore, a
trigger mech anism based on exogen ous factor s, for example, higher world mark et prices for food or
reduc ed av ailabili ty of food unde r con cessional terms, might be pr eferable.
150. Since world mark et prices forfood are available on a real-time basis, it would be possible to
establish, for each LDCs and NF IDC, a ba seline price index, a nd monitor the cha nges in these indices.
An increas e in the index of, for example 20 per cent, could then trigge r the availabili ty of new funds.
Data on conc ession al food imports and food aid are alsoavailable on a reasonably timely basis, and a
reduction of the volume offood available under such scheme s canin all likelihood be determined in
advanc e.
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 b y signals s uch a s describe d abov e. 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-throu gh for
the request for hard currency, with the loan then being used to pay the exporte r directly since this
avoids a whole s eries of risks, and no hard currency goe s to the co untry.
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 bevery
high. One important risk is related to price levels. Ifinternational prices have incre ased, the local
trader will have to incre ase local prices . This may be difficult, and moreove r, the government may
intervene to reduc e consumer prices (for example, by reducing applied tariffs). The local trader thus
runs a serious riskof making a loss onthe trans action – which greatly incre ases the risk of default on
the credit. Thus, it may be advisable to include, as one ofthe core functions of the international fund,
a price risk manag ement compon ent, which will make it possible to keep local food p rices stable.
73See for example the summa ry of the discussion in the regular meetin g ofthe Committee on
Agriculture o n 29 June 2 001, containe d in An nex 1 of G/AG/10, dated 6 July 2 001.74This section is based on ideas by panellist Lamon Rutte n (UNCTAD). See An nex 7 .
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153. Furthermor e, the entities administering the local credit lines (pres umably, local bank s) 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 f or thes e banks to fina nce fo od imports o n their own a ccount.
154. While the implementat ion of such a fund, if appropriately design ed, could have lowe r default
risk and fewe r administrative requir ements, it would be faced with similar difficulties as an ex-post
borrowing facility in terms of ove r-drawing and accumulation of debt.
2. Commodity price risk management
155. The International Task Forceon Commodity Price Risk Manageme nt (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 extend ed to consumers in food
importing countries as well. This insur ance scheme, while varied in its specific application by
country, is focus ed on adapting the commodity price risk mana gement tools commercially available
on international markets to provide a form of price insur ance to produ cers (and consume rs in the case
of insuring import p rices).
156. Price risk management instruments could be readily used by large purchasers of foodstuf fs,
either private sector commercial importers or government agents (food corporations or state-owned
enterpris es). They could also be used by governments to insulate safety nets from budgetary crises
cause d by food price increases. That is, a government agency, which knows that its expenditures will
increas e when food prices rise (either because it provide s food in-kind and must procure the higher -
priced food itself orbecause it must give higher income support to the poor) can purchase options that
would pay out when import price s increase beyond a certain level. This would then insure that it will
have the budgetar y resources it requires , without creating an unanticipated fiscal burden on the
governme nt. The price insur ance would protect them from short-term fluctuations in price, but not
against long-term downwa rd tre nds.
3. Integ rated Framework studies
157. The exp erienc e submitted by the fou r NFIDCs, which have respond ed to the Panels questions,
for the period of high world market prices in 1995 -97, suggest s 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-s pecific solutions are the diagno stic trade
integration studies to be undertaken in the context of the Integ rated Framework (IF ). The broad terms
of reference for integr ation studies focus on theconstraints that the LDC trade sectors face.75They
should be sufficiently flexible to cover the food security implicat ions of trade developme nt, and, the
availabili ty of, and access to, adequate financing, in particular by the private sector, to suppo rt food
imports. Diagnostic trade integration studies in LDCs are unde rtaken under the leade rship of the
World Bank with the supp ort of theIMF, ITC, UNCTAD, UNDP and WTO. The agreed terms of
reference by the IF "core" agencies may bene fit, in undertaking the studies, from drawing on the
expertise o f othe r age ncies.
159. Trade integ ration studies have been concluded for Camb odia, Madagascar and Mauritania, to
be followed by such studies in Burundi, Djibouti, Eritrea, Ethiopia, Guinea, Lesotho, Malawi, Mali,
Nepal, Seneg al and Yemen. It is envisag ed to further extend the country cove rage of trade integr ation
75See also document WT/IFSC/W/2 ( dated 1 5 Aug ust 200 1) by the IF Steering C ommittee.
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studies.  In this r espect, we note the following joint s tatement by the heads o f the ab ove agen cies:76
"We acknowledge reque sts from several non-LDC low-income economies to respond to their
trade development needs throug h the exten sion 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 institut ional framework
of the existing IF, to consider favourably these requests to provide support for mainstre aming
and fo r trad e-related technic al assistanc e, building on the IF mod el."
III. CONCLUSIONS AND REC OMMENDATIONS
160. In the context o f the M arrakesh NFIDC Decision, the Panel has addressed increased financing
needs forfood imports arising from highe r world market price s 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 upwa rd 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
foodstuf fs" are usually seen in te rms of volumes r ather 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 impro ved dome stic cereal supply situations in some LDCs in
that period.
(c) In the critical period of 1995 -97, a significa ntly increase d proportion ofthe combined
cereal import volumes of LDCs and NFIDCs was sourced commer cially, 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-pri ce period. This
illustrates the contribution that predictable levels of targeted food aid supplies in
times of rising world mark et prices for cereals can make to meeting the food need s 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 gene rally
depre ssed levels) while fo od aid shipments inc reased.
(e) There was a coincidenc e of the entry into force of the WTO commitments in
agriculture a nd su rging world mar ket price s for cereals in 1995 -97. The weight of the
evidence available to us lead s us to co nclude that the sur ge w as trigge red by a numbe r
of short-term and long-term factor s, which were only partly related to the Uruguay
Round reform programme in agricultur e. In particular, it cannot be excluded that
some re ductions in gr ain stocks may have been ma de in anticipation of exp ort subsidy
reduction commitments entering into for ce 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
76See docume nt WT/IFSC/1 ( dated 2 8 Februa ry 2002).
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to countries experien cing difficulties in financing food imports in yearsof high prices
as exp erienc ed du ring 1995-9 7.
(g) Price fluctuations unrelated to the WTO reform process on agriculture such as those
experien ced d uring 19 95-97 are likely to reocc ur.
(h) The four NFIDCs that have respon ded to our questions (Cub a, Egypt, Jordan and
Tunisia) encountere d real difficulties in financing normal levels of commercial food
imports, although they appear to have little relation with the Uruguay Round reform
progr amme in agriculture. Their experien cesshow that the coping strategies differed
consider ably from countr y to country, and that access to the existing multi lateral
financing facilities has not formed any significant part of these strategies, except in
the context of J ordan'seconomic crisis.
161. The Panel has examined the terms and conditions of existing facilities of the international
financial institut ions to which LDCs and NFIDCs could have recourse in order to address short-term
financing dif ficulties of commer cial food imports an d reached the f ollowing conclusions:
162. The existing multi lateral financing facilities assess the need for financing in the context of the
balance -of-payments situation of the countr y concerned. Insituations wher e private sector food
importers are experien cing finan cing difficulties, such difficulties may not be accompa nied by
balance -of-payments problems. In these circumstance s, balan ce-of -payments suppo rt will not
neces sarily solve the food financing problem when imports ar e nee ded.
163. We note that ac cess to the resources of the multilateral financial institut ions is not available to
Cuba and Tu valu since the se countries are not members of the IMF and the W orld Bank.
164. WithrespecttotheCFF, theprincipalfinancingfacilityoftheIMFintheeventoftemporarily
higherfoodprices,weconcludeasfollows:
(a) Access to the CFF involve s, in most instances, conditionality. Approximately 40 per
cent of the countries cove red 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 compen satory financing on
the basis oftheir existing IMF-supported programme, without having to accept
"additional" condi tionali ty. Stand-alone access to the CFF is possible without
entering into an arrangement involving conditionality if, apart from the cereal import
exces s, the balan ce-of-payments position of the cou ntry co ncerned is satisfacto ry.
(b) The interest rate of the CFF, currently 3.05 per cent per annum, is more favou rable
than that available from comme rcial bank s for most LDCs. Howeve r, the CFF
interest rate is highe r than that of the IMF's Poverty Reduction and Growth Facility,
under which the IMF expe cts most LDCs to borrow. Many LDCs have Poverty
Reduction and Growth Arrangements. Country programmes unde r the Pove rty
Reduction and Growth Facility are reviewed twice annually and could be adjusted to
respo nd to balanc e-of-payments dif ficulties related to a su rge in food import co sts.
165. The World Bank does not have facilities that are specially designe d to help countries cope
with short-term difficulties in financing food imports. Howev er, the World Bank provides loans to
countries that face emergency situations, aswell as adjustment loans that can provide balanc e-of-
payments support for critically needed imports, including food. Access to these facilities can imply
an element of conditionality.
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166. Among the regional financial institut ions, the Arab Monet aryFund (AMF) has advised the
Panel that Compensatory Loans are available to AMF membe r governments experiencing an
unexpe cted balanc e-of-payments deficit arising from an increase in agricultural imports. A
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 wide r than the IMF facility, the former might be an
alternative for A MF member countrie s.
167. We have examined the concept and feasibility of the proposal for the establishment of a
revolving fu nd.  I n this res pect, we c onclude as follows:
(a) Most gove rnment-own ed food import agen cies in developing countrie s have been
disbanded or exposed to competition from private sector importe rs. Arevolving fund
would therefo re need to have appropriate mecha nisms to provide financing to all
importing enterprises (both public and private ) in the countrie s concerned to ensure
that they can secure commer cial imports at reasonable borrowing cost during period s
of rising world ma rket price s for basic fo odstuf fs.
(b) If funds from the revolving fund were to be made available ex-po st, i.e. after
importation, to countries affected by excessive import payments, disbu rseme nts
would allow them to reconstitute their foreign exchange reserves that have been
depleted through higher food import bills.  In this re spect, the revolving fund propos al
has similar cha racte ristics as the CFF o f the I MF.
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 trade rs to continue importing food. Local trader s who need to import more
food need funds, or new credit lines, at once. The possibili ty, not certitude, that one
or two years in the future, their governments will receive a new loan is unlikely to
influence the willingness of intern ational trading companies or banks to provide them
affordable loans when neede d. Moreover, governme nts are unlikely to authorize a
new, dedicated credit line for food imports without being certain that the
disburseme nts unde r this credit line will be refinanc ed from an intern ational fund
credit line.  In the view ofthe Panel, the proposed revolving fund, if it were to operate
as an ex-post borrowing facility would be of limited value in reducing short-te rm
financing difficulties. The proposed revolving fund would be ofpotentially greater
value to the countries concerned if it were to operate as anex-ant e borrowing facility.
While the Panel considered some of the elements of such anex-ant e financing
mechanism, it did not addres s its operational modalit ies and cost implicat ions 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 secto ral policies might be requir ed, if such a monitoring mechanism
is not already in place. It may be necessaryto conside r adequate safeguards to ensure
the viabili ty of such a revolving fund. The practical arrangements for such a fund’s
operation would therefore require certain preconditions forlending, with similar
characteristics to those o f the CFF o f the I MF.
If the trigge ring mecha nism were to bebased on exogen ous facto rs, such as increases
in world market price s and less favou rable terms in financing food imports, no such
preco nditions for lending arenecessary; andone positive effect would be that funds
could be made available faster. Howe ver, if access to a revolving fund were based on
such an exog enou s trigger as prices, some countries which do not need short-te rm
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financial assistan ce 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 no rmally available in the market, that is, at a non -concessional rate.
(d) The viability of a revolving fund would require monitoring to avoid defaults. Again,
approp riate conditionality would be neces sary to red uce defaults.
(e) Demand for funds from a revolving fund may exce ed available resources, particularly
during times of high world ma rket pric es for food.  De pending o n the capitalization of
the fund, mod alities would have to be established forrationing available r esources.
(f) Drawings from a revolving fund might increas e some countries ' external debt,
possibly resulting in difficulties related to a country 's debt profile and the external
debt ceilings agre ed in the co ntext of an IMF arrangement.
168. In the light of our conclusion s abov e andhaving 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 no rmal levels of c ommercial imports of basic foodstu ffs:
(a) that in the context of the impending review of the CFF of the IMF, consider ation be
given by member gove rnments to
(i) extending the pro duct cov erage of the f acility to cover all basic fo odstuf fs,
(ii) clarifying ac cess in the context of an existing arra ngement with the IMF,
(iii) providing a greate r degree of automaticity without requiring an IMF-
supported programme,
(iv) reviewing the procedu resand timeliness of disbursements, as well as
encou raging gov ernme nts to come f orwa rd with purchas e requests;
(b) that in the light of the limited potential usefulness of an ex-po st revolving fund to
support food imports in times of need, the feasibili ty of an ex-ante financing
mechanism aimed at foo d importers be ex plored;
(c) that the terms of reference of the Diagnostic Trade Integr ation Studies to be
undertak en in the context ofthe Integ rated Framewor k include, as appropriate and if
reque sted by the b eneficiary c ountry, the items of
(i) food s ecurity impl ications of trade development str ategies,
(ii) availabili ty of, and access to, adequate financing, in particular by the private
sector, to s upport 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
Manag ement Group of the W orld Ban k.
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ANNEX  1
Decision on Mea sures Conce rning the Po ssible Negative E ffects ofthe R eform Pr ogramme on
Least -Developed and Net Fo od-Impor ting Developing Count ries
1. Ministers recognize that the progressive implementation of the results ofthe Urugua y Round
as a whole will generate increasing oppo rtunities for trade expansion and economic growth to the
benefit of all participants.
2. Ministers recognize that during the reform programme leading to greate r liberalization of
trade in agriculture least-d eveloped and net food-importing developing countries may expe rience
negative effects in terms of the availability of adequate supplies of basic foodstu ffs from extern al
sourc es onreasonable terms and conditions, including short-term difficulties in financing normal
levels of comme rcial imports of b asic fo odstuf fs.
3. Ministers accordingly agree to establish appropriate mechanisms to ensure that the
implementat ion 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-de veloped and net food-importing developing
countries.  To this e nd Ministers agr ee:
(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 negotiat ions in the
approp riate forum to establish a level of food aid commitments sufficient to meet the
legiti mate needs o f dev eloping countries during the reform programme;
(ii) to adopt guidelines to ensure that an increasing proportion of basic foodstu ffs is
provided to least- develop ed and net food-importing developing countries in fully
grant form and/or on appropriate concession al terms in line with Article IV of the
Food Aid Convention 1986;
(iii) to give full consider ation in the context of their aid programmes to requests forthe
provision of technical and financial assistance to least-developed and net food-
importing developing countries to improv e their agricultural produ ctivity and
infrastru cture.
4. Ministers further agreeto ensure that any agreement relating to agricultural expo rt credits
makes appropriate provision for differential treatment in favou r of least-de veloped and net food-
importing developing countries.
5. Ministers recognize that as a result of the Urugua y Round certain developing countries may
experien ce short-te rm difficulties in financing normal levels of commercial imports and that these
countries may be eligible to draw on the reso urces of international financial institutions under existing
facilities, or such facilities as may be established, in the context of adjustment programmes , in order
to addre ss such financing difficulties. In this regard Ministers take note of paragraph 37 of the report
of the Director -Gene ral to the CONTRACTING PARTIES to GATT 1947 on his consultations with
the Mana ging 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
Confer ence, and the follow-up to this Decision shall be monitored, as appro priate, by the Committee
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ANNEX  2
Proposal to Implement the Marrake sh Minist erial Decision
in favour o f LDCs and NFIDCs1
Submitted by Côte d'Ivoire, Cu ba, Dominican Republic, Egy pt, Hondura s,
Jamaica, Keny a, Mauritius, Mo rocco, Pakistan, P eru, Se negal, Sri Lanka, St. Lucia,
Trinidad and Tob ago, Tu nisia and Ven ezuela
We are grateful to the Vice-Ch airman of the WTO Committee on Agriculture for inviting
concr ete proposals by the NFIDCs and the LDCs on therelev ant points unde r paragraph 21 of the
Draft Ministerial Declar ation of 18 Octobe r 1999 related to the implementation of the Marrakesh
Ministerial Decision on Measures Concerning the Possible Negative Effects ofthe Refo rm Process on
Least-Developed and Net Food-Importing Developing Countries. We look forwa rd to the following
propos als being given immediate and favourable conside ration to allay the genuine concerns of the
NFIDCs and LDCs and effectively implement the relevant Ministerial Decision which is a legal
commitment of WTO Member s unde r Article 16 of the Agre ement on Agriculture. Weare confident
that the discussions in the Committee on Agriculture on this issue will lead to the submission of
positive suggestions to the Gene ral Coun cil for ado ption.
The main objective of the Agreement on Agriculture wasto decrease the structural surpluse s
gener ated in the past by production and trade-disto rting policies in agriculture. It is, therefore,
obvious that if this fundame ntal objective of the AoA is successful, the effect for the NFIDCs and
LDCs will be an incre ase in the cost of their food imports. The period since the UR came into being
provides a good example for examining the expe rience of NFIDCs and LDCs as regards their food
import bil ls.
According to the data provide d by FAO ( see T able I ), these two g roups of countries are facing
much higher cereal import bills than befor e. Taking the two yearsprior to 1995 as a benchma rk
(i.e. theaverage of the two marketing years 1993/94 and 1994/95) , the incre ase in the cereal import
bills in 1995/96 to 1996/97 amounted to 36.6 per cent forthe two group s of countries taken togethe r.
Nearly all of this incre ase (35.1 per cent) was dueto increa ses in the per unit cost of imported cereals,
as volumes chang ed only marginally. More over, even after the world prices returned to more normal
levels since the 1997/98 mark eting year, thecereal import bills of these two groups of countries
remained at a mu ch highe r level than they we re prior to 1995.
In view of the abov e, the causality between policy reforms unde r the Uruguay Round and
higher f ood import bills for the LDCs a nd NFIDCs is cle ar.
Propos als fo r Implementation
The Ministerial Decision includes thr ee mech anisms to respond to the difficulties faced by the
LDCs and NFIDCs: food aid, access to finan cing facilities, and technical and financi al assistanc e to
increas e agricultural productivity and infrastru cture. We have thefollowing propo sals in respect of
each o f thes e three me chanisms.
1G/AG/W/49, G/AG/W/49/Add.1 a nd G/AG/W/49/Ad d.1/C orr.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. Moreove r, thenew Food Aid Convention (FAC )
approv ed 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 ther efore, propose that:
(i) all food aid should b e fully in gra nt form;
(ii) donor countries should commit greater commodity volumes unde r the Food Aid
Convention;
(iii) the donor countries commit that the food aid volume s will increase in years of high
world market prices when such aid is most need ed. This can beachiev ed by
providing appropriate flexibility in the Convention, e.g. carryforward s from periods
of low prices and hence of low deman d for food aid and call forward s from next
year(s) contributions und er the FAC.
Access to Finan cing Facilities
The NFIDCs and LDCs need access to special financing facilities to main tain the normal
volume of food imports during times of high mark et price s without further jeopardizing their balance -
of-payments position. Experi ence has shown that the existing facilities under the Bretton Wood s
institu tions, due to the conditionalit ies attached andother technicalities, have not been used by the
countries in need ofsuch finan cing. Moreover, the requi red financing facility should have some
corresponding link with physical stocks of food grains. Wethere fore propos e that:
(i) FAO, in the light of its experien ce 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-a gency Revolving Fund should be set up with two components. The first,
and variable compon entof this Fund (to comprise existing and/or new finan cing
facilities as appro priate), 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 produ cing countries commit, in years of plentiful supplies aswe are witnessing
now, to put aside over and abov e volumes requir ed for food aid, emerg encies and
essential nutritional assistance projects, sufficient national food reserves in
accordance with the normal import requir ements of the NFIDCs and LDCs as
indicated by FAO;
(iv) these reserves should be released to the LDCs and NFIDCs at reasonable price s, in
times of high world market prices, to help them, together with available food aid,
meet their normal import requireme nts.
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Technical and Fina ncial Assistance
Further, we conside r it essential that technical and financial assistan ce be provided to the
NFIDCs and the LDCs to increase agricultural produ ctivity and infrastru cture. This will address
directly the very problem responsible for the heavy depend ence of LDCs and NFIDCs onthe world
market.  W e, there fore, propos e that:
(i) the secon d, and fixed component ofthe abov e-mentioned Revolving Fund should
provide technical and financial assistan ce to NFIDCs and LDCs for specific projects
linked to improving agricultural prod uctivity and related infr astru cture;
(ii) this technical and finan cial assistance to be provided to the NFIDCs and the LDCs
should be over and above the regula r bilateral and multilateral activit ies of dono rs in
this area.
Binding Commi tments and Effe ctive Monitoring
To ensure certainty and predictability in respect offood aid, finan cing, and technical and
financial assistan ce, it is recommend ed:
(i) all major developed exporting countries should put aside supplies, under national
food reserves, specifically earmark ed to be releas ed to the NFIDCs and LDCs under
reasonable p rices d uring y ears of high world pric es;
(ii) developed countries and intern ational development and financial institut ions (World
Bank IMF, UNDP) should contribute to the financing of the two compon ents ofthe
Revolving Fund which, in turn, should be managed by an inter-ag ency arrangement
with the full involvement of FAO;
(iii) the commitment of WTO Member s regarding volumes of food aid, volumes of
physical reserves, contributions to the two components of the Revolving Fund are
inscribed in their co untry s chedule s as binding and legally en forceable;
(iv) the WTO Membe rs should make regular annual notifications in respect of these
commitments to the Commi ttee on Agriculture of the W TO.
We are willing to enter into discussions with our trading partne rs in good faith and with a view to
reaching effective solutions. Depending on these discussions , we will be happy to provide further
technical elabor ation of the points made in this pro posal.
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Table I
CerealImportsofLDCsandNFIDCs(1993/94to1999/00)-InformationasofNovember15,1999
1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00
Importbill($million)
LDCs 1,375 2,195 2,272 1,871 2,357 1,996 na
NFIDCs 3,775 4,559 6,265 5,857 5,397 4,617 na
LDCs+NFIDCs 5,150 6,754 8,537 7,728 7,754 6,613 na
%changeover1993/94-94/95 -13.5 13.5 43.4 29.8 30.3 11.1 na
Totalvolumeimported(1000tons)
LDCs 11,167 13,310 12,273 10,753 14,390 15,380 13,108
NFIDCs 25,516 25,995 26,093 28,038 30,974 29,370 31,542
LDCs+NFIDCs 36,683 39,305 38,366 38,791 45,364 44,750 44,650
%changeover1993/94-94/95 -3.4 3.4 1.0 2.1 19.4 17.8 17.5
Foodaid(1000tons)
LDCs 3,932 4,326 3,305 2,553 2,669 3,157 na
%oftotalimports 35.2 32.5 26.9 23.7 18.5 20.5 na
NFIDCs 1,857 1,325 641 495 622 616 na
%oftotalimports 7.3 5.1 2.5 1.8 2.0 2.1 na
LDCs+NFIDCs 5,789 5,651 3,946 3,048 3,291 3,773 na
%oftotalimports 15.8 14.4 10.3 7.9 7.3 8.4 na
BenefitfromUSEEP($million)
LDCs 99 35 1 0 0 0 na
NFIDCs 355 88 21 0 0 0 na
LDCs+NFIDCs 454 123 22 0 0 0 na
%changeover1993/94-94/95 57.4 -57.4 -92.4 -100.0 -100.0 -100.0 na
Perunitimportcost($/ton)
LDCs 123.1 164.9 185.1 174.0 163.8 129.8 na
NFIDCs 147.9 175.4 240.1 208.9 174.2 157.2 na
LDCs+NFIDCs 140.4 171.8222.5 199.2 170.9 147.8 na
%changeover1993/94-94/95 -10.4 9.7 42.0 27.2 9.1 -5.7 na
Wheatexportprice
USno2hardwinter($/ton) 143 157 216 181 142 120 110
%changeover1993/94-94/95 -4.7 4.7 44.0 20.7 -5.3 -20.0 -26.7
1993/94-94/95 1995/96-96/97 1997/98-98/99
Averages(LDCs+NFIDCs)
Importbill($million) 5,952.0 8,132.5 7,183.5
Totalvolumeimported(1000tons) 37,993.9 38,578.5 45,057.0
Foodaid(1000tons) 5,719.8 3,496.8 3,532.0
BenefitfromUSEEP($million) 288.5 11.0 0.0
Perunitimportcost($/ton) 156.7 210.8 159.4
Wheatexportprice($/ton) 150.0 198.5 131.0
%changeover1993/94-94/95
Importbill 0.0 36.6 20.7
Totalvolumeimported 0.0 1.5 18.6
Foodaid 0.0 -38.9 -38.2
BenefitfromUSEEP 0.0 -96.2 -100.0
Perunitimportcost 0.0 34.6 1.8
Wheatexportprice 0.0 32.3 -12.7
Source:FAO.Figuresfor1998/99areprovisionalandfor1999/00areestimates
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Operationalizing the M arrak esh Decision:
A New Approach to Sh ort-T erm Financing Requiremen ts (G/AG/W/49/Add.1)
Introdu ction
The aim of this paper is to serve as abackground document for the Roundtable on
Operationalizing the Ministerial Decision on Measures Concerning the Possible Negative Effects of
the Reform Process onLeast-D eveloped Countries and Net Food-Im porting Developing Countries
(hereinafte r referred to as the Marrakesh De cision).
The Roundtable seeks to bring together all the parties concerned (LDCs, NFIDCs, donor
countries, the WTO, FAO, IMF and World Bank), in aneffort to discu ss the operationalization of part
of the propos als presented by a numb er of WTO Membe r states (docume nt 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/Wo rld Bank and the WTO Ministe rial in November 2001 for
implementat ion.
Sincere thanks is hereby extende d to Mr. Yoichi Suzuki, Minister Plenipotentiary at the
Mission of Japan to the WTO, whos e 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 Friedh eim, 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 theyears, kept the flame burning. To them we owe ourappreciation,
gratitude and thank s. May the Almighty bless our e fforts.
Why the D ecision? And Why the Round table?
There is little argument that agriculture is - and will remain for the foreseeable future - the
essential secto r 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 ofthese countries,
particularly as they depend - to a smaller orlarge r extent - on importing a sizeable proportion oftheir
populations' fo od requirements.
In or der forLDCs and NF IDCs to sign onto the Agr eement on Agriculture (AoA) in 1994, the
Decision was taken by Ministers attending the launch ofthe 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 foods tuffs from external sources on reasonable terms and
conditions'. Henc e, the Decision proposed three short-to-medium term response mechanisms (more
food aid in grant form, S&D treatment on expo rt credits, short-te rm credit facilities), as well as a
longer-te rm mechanism (technical & financial assistance to improv e agricultural produ ctivity and
infrastru cture ).
In view of the fact that the Decision has been a subject for little more than 'discus sion' and
'review ' for the last six ye ars,the Roundtable, the refore, aims to:
- Galvanise all conce rned states and parties into adopting a more practical and
pragmatic work programme aimed at moving from the 'discussion ' phase to the
'doing' o ne;  and
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- Study the propo sal presented herein to address the needs ofLDCs and NFIDCs in
their quest to satisfy their basic foodstuf f requireme nts from the world mark et; under
a mix of terms and conditions that may be conside red reasonable, with a view to
presenting a work able plan for implementation by the IV Ministerial Confe rence in
Doha.
In order to visualise the urgency and importanc e of the issue at hand, a few figure s would be
needed . Drawing on figures published by FAO, the WTO1 and other international sources, the
following facts stand o ut:
1. The combined popula tions of the 49 LDCs and 20 NFIDCs broke throug h the 1 billion mark
in 1998, re presenting ove r 22 p er cent of the combined population of all developing countries.
Meanwhile, undernourishment touche d around 38 per cent of LDC populations, and17 per
cent of thos e of NF IDCs.
2. Per capita income sofLDCs in 1997 were 17 percent of the average ofdeveloping
countries, while the p.c.i. for the NFIDCs in the same year stood at about 70 per cent of the
developing cou ntry av erage.
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 ofaround 3 per cent ($800 million) in the value of cereal
imports for thes e countries av er the figure s for 1999/2000.
4. Food aid deliveries to LDCs and NFIDCs fellfrom 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 the90-99 ten-ye araverage,
while that for NFIDCs was only around 63 per cent of said avera ge - compared to a 60per
cent rise in food aid deliverie s to 'other' countries during the same period. As to the
conces sionality of food aid, there remains at least one dono r country which does not yet
provide s uch aid o n a 100 percent-g rant-b asis.
5. The volume ofcommercial imports by LDCs and NFIDCs rosefrom 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
increas e of750,00 0 MTs forecast fo r 2000/01.
6. Although cereal import bills are now thankf ully lower than the peaks reached in 1995/96,
they still remain at a higher plateau than the p eriod p rior to 1994/95.
Scope and Magnitude of the pro blem
A recent FAO study2 conclud ed that the inadequ acy of physical supplies of basic foodstuff s
on world mark ets 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 thelanguag e used in formulating the Decision, the triggering mech anisms
for 'operationalising' the Decision should be based on the totality of effects and factors, i.e. on
unexpe cted levels of food import bills of LDCs and NFIDCs on an individual basis, rathe r than
1'Implementation of the Decision on Measu res…', docume nt no. G/AG/W/42/Rev. 3, WTO,
31 October 2 000; and 'Towards Impro ving the Operatio nal Effective ness of the Marra kesh Decision',
Discussion Paper no.2, FAO, R ome 2 001.2'Towards impr oving the Operatio nal Effective ness….', FAO, op. cit, pg. 4.
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limiting them to indiv idual factors that lead to the outcom e (e.g. rises in world mark et prices , declines
in food aid deliverie s, and so on ).
Based on these conclusions, thestudy went on to compute the magnitude of excess import
bills for the period 1 989-1998 b ased on 5 p er cent and 10 per cent alternative thresh olds. It concluded
that, for all food items and46 LDCs and 19 NFIDCs cove red by the Decision, the aggregate "excess"
food bill in the 'maximum' year (1995/96 ) over the mean of theperiod was $900 million (on the 5 per
cent rule) and $6 05 million (based on the 10 pe r cent rule)3.
Availabi lity of Financial resourc es
The Decision foresees the need of LDCs and NFIDCs to address both short-term finan cing
('to cover difficulties in financing normal levels of commercial imports') and a longer -term financial
need ('to improve their agricultural p roductivity and infr astructu re').
On the short-te rm fro nt, allusion has be en made to the availability of financial resou rces under
the IMF 's Compens atory Finan cial Facility (CFF). A recent evaluation unde rtaken by the IMF itself
points to the fact that 'there has been very little use of the CFF in recent years'4.Infact, 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 cover age to all basic food imports (rathe r than c ereals only).
2. Relaxation of its gene ral conditionalities and rules on eligibil ity.
3. Streamline eligibi lity requirements for b oth LDCs and NFIDCs.
4. 'Conce ssionalise' its r esources, both in terms o f repayment p eriods and intere st 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 addre ssed throug h the Marrakesh Decision) '5.
Meantime, the role and operations of the World Bank in the provision of short-term financing for
emergen cy food imports a re not cle ar.
The longer -term requirement for multilateral financial resources is theoretically available
through the World Bank 's contributions to the Consultative Group on Intern ational Agricultural
Resea rch (CGIAR), estimated at $ 50 million in 19986, and other World Bank projects in the field of
agriculture. No clear figures are available to quantify the long-term technical assistan ce and
capacity-building programme s for LDCs and NFIDCs, or a detailed evaluation of their effectivene ss
in raising produ ctivity and production – a key component o f the as sistance foreseen in the Decision.
To sum up, the financing require d to address the 'short-te rm difficulties' is practically
non-existent from any multilateral source on the terms - andunde r the conditions – foreseen in the
Decision; while the longer-term finan cing need ed to upgrade physic al and human resources in
agriculture a re partially available via the World Ban k.
3As shown in the FAO paper, the mean is the avera ge for 1989-98 of the total "excess" import bills
(i.e. the aggregate of all countries studied with import bills greater than 5per cent or greater than 10 percent
above trend). Negative deviations from trend were not taken into account, since such deviations do not
constitute a 'pro blem' to be addressed b y the Decision.4'The Fund's Compe nsatory Financial Facility – Recent Develo pments', IMF Speakin g points for the
Geneva Ro undta ble on Selected Ag ricultural Issues, Geneva Ma rch 2 1st, 2001 pg.2.5Ibid.6WTO doc ument G/AG/GEN/31 of 15 Decem ber 1 998, pg 23.
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The New Fund
This dearth of suitably conditioned short-term (<24 months matu rity) financial resources
leads us to believe in the need for a totally new appro ach for thefutur e, to be based on the philosoph y
and intent of the Decision. It is, in fact, neither inconceiva ble nor unreasonable to assume that the
1995/96 surges could happen repeatedly in the futur e. The idea is for the creation ofa special Food
Financing Facility (F3), solely designe d for the implementation of the Decision. The F3 could be
visualised as follows:
(a) In view if recent experien ce, its resource base is estimated at around $1,200 million7; to be
drawn from a 'consortium' ofmultila teral financial organisations, G-7 and other dono rs, and
major develope d expo rting Membe r states.
(b) The 'eligibili ty' of LDCs andNFIDCs to draw on the resou rces of the Fund would bedecided
on a country-b y-country basis andin accordance with agreed-upon guidelines, and after a fair
and factual computation/asses sment was made of its requirements. Levels of each country' s
compensation packag e could be capped in periods of surges in import bills, in order to avoid
harming the Fund 's long -term finan cial viabili ty.
(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
resou rces could be earmar ked by dono rs, but not disburs ed, with a view to the optimal
utilisation of such resources. Repayments of financial resources drawn -down by bene ficiaries
would be effected unde r a medium-term scheme on terms more favou rable than current open
market conditions.
(d) The responsibility for the administration and management of theFund would need to be
centralised in a small bureau cracy; said bureaucracy to be overseen by aManagement Board
comprising representations from the WTO, FAO, IMF, World Bank , dono r states as well as
the bene ficiaries.
This Fund would, obviously, not cove r the longe r-term requirem ents of LDCs and NFIDCs to
improve their basic infrastructur es and enhance agricultur al produ ctivity. In this respect, acall is
made out to all donor parties to earmark a greater proportion of any multi- and bi-lateral aid
progr ammes for such use. It was the vision of thesignatories to the Marrakesh Decision to 'wean '
recipients away from their food-aid 'depen dancy'. This can only be achieved through aserious,
conce rted and coop erative e ffort aimed at improving levels o f self -sufficienc y of LDCs and NFIDCs –
while mainta ining the gains achieve d in the agricultural reform process under the AoA, and spurring
these countries toward s greater engag ement in future reform processes under the current negotiations
under A rticle 20 of the AoA.
7This figure was calculated on 2years 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 Que stions Po sed by the Pan el
ARGENTINA
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Reply
Documents G/AG/W/49 and G/AG/W/49 /Add.1 clearly define the mecha nisms provid ed for
in the Marrakesh Ministerial Decision to address the diffic ulties which least-develop ed countries
(LDCs) and net food-importing developing countries (NFIDCs) may experien ce as a result of the
liberalization of trade in agriculture. This Decision is focused on the concept ofthe "availability of
adequate supplies of basic foodstuffs from exter nal 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 longe r-term respons e mechanisms , such as technical and financial
assistance to improve ag ricultural prod uctivity and infrastr ucture.
The second document sugge sts that the difficulties experienc ed by LDCs and NFIDCs with
regard to the long-te rm financing requir ed to improve their agricultural productivity and infrastructu re
would be partly resolved by the World Bank. Short-term financing requir ements would not, howeve r,
be met. Food aid therefore tends to decline when the need is greatest, that is to say, when
international prices are high, while finan cing from multi lateral sourc es is practically non-exi stent. It
was from this dearth of short -term financial resources that the propos al to set up a Revolving Fund,
with the aim of establishing a food financing facility in compliance with the Marrakesh Ministerial
Decision, was bo rn.
Argentina, as a developing country, agrees with the concer ns voice d in this document and
consider s it advisable for such an Inter-Age ncy Revolving Fund to be set up to assist LDCs and
NFIDCs with their food import bills, provided that transp arent methods are used to choo se suppliers,
thereby ensuring that imports come f rom open and c ompetitive markets.
We should also mention that, in our opinion, permanent food donation programmes do not
appea r to be aviable solution in the long term, in particular if they arediscr etionary and depend on
the donor countries ' need to offload their surplus es. Agric ultural sector development is a key element
as regards both food supply and thegeneration of foreign exchang e for the subsequent purchase of
products which cann ot be produce d or which are inefficiently produce d. This Fund must therefore be
established with a view to anticipating LDC and NFIDC food requirements and eliminating trade
barrie rs onagricultural products, such as tariffs and subsidies, in particular direct expo rt subsidies,
export credits, expo rt credit guara ntees and export credit insuran ce for agricultural products, all of
which are p articularly pe rnicious an d harmful to developing c ountry farme rs.
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Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
Reply
Revolving Fund guidelines relating to food aid recipient countries should restrict eligibil ity to
NFIDCs, with priority wi thin this group being given to LDCs.
Resour ces or funds for finan cing the purchase offoodstuff s by NFIDCs (with LDCs being
given priority) should be used subject to the commitment and on the firm condition that the food-
exporting cou ntries f rom which fo odstuf fs will be purch ased using r esources donated to the Revolving
Fund must be ch osen in a trans parent and fair mann er.
Q8. What are parties' views on the role of food aid toattenua te 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
requireme nts of one sector of the population of a resource-scarce economy ratherthan the conditions
in which such aid is g ranted.  Th ereis there fore a n eed f or 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 prese rving the humanitarian dimension of
food aid. That is to say, aid should be chann elled to needy populations, not those in possession of
resou rces.
The difference between dealing with temporary emerg ency situations and providing
permane nt assistanc e needs to be highlighted. The latter is not used for dealing with temporary
emergen cies, rather, to the contra ry, it constitutes an unfair tool for displacing comp etitors from
markets o r disposing o f subsidized su rpluse s.
We believe that the aid currently granted to address short-te rm difficulties is inadequ ate in
practical terms and untimely, since when food prices fall, aid levels increase, wher eas if price s rise,
aid levels decline, when it should really be the reverse. Aid should, at the very least, increa se when
prices p eak.
Faced with the reality of virtually non-e xistent and inade quate funding from multilateral
sourc es to alleviate these countries ' short-term difficulties, we concu r with the propo sal stemming
from document G/AG/W/49/Add.1 relating to the adoption of an entirely new approach for thefutur e,
based on the creation of a Revolving Fund , subject to the conditions mentioned in our replies to
questions Nos. 4 and 6 abov e.
We also feel that, when the p roposals mention the financing of imports on concessional terms,
some of these terms should bespecified, namely, inter alia, interest rates will be market-rel ated, but
will be preferential in that their terms will be better than those available from comme rcial banks and
the term of the credit will be equivalent to the shelf life of the product being finan ced by the
Revolving Fund. There must, however, be aguarantee that the source of funding is independ ent of
the origin of the goo ds.
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Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
In our opinion, there are enou gh well-develop ed international commodities markets and
exchan ges to minimize the risk of short-te rm commodity price volatility. In a number of cases,
commodity swaps have formed part of loan agreements, whereby the commodity price risk was
transf erred to other agents.
The World Bank is committed to using market-b ased instruments to reduce the effects of
price fluctuations onfarmers. To this end, it has set up a task force to explor e commodity risk
management to allow farme rs in developing countrie s, especially smallholders, to use options and
futures contra cts.
AUSTRALIA
Introdu ction
Australia is sympathetic to conce rns expressed by Developing Country (DC) and NFIDC
Member s regarding the effectiven ess of the "Decision on Measures Concerning the Possible Negative
Effects of the Reform Programme on Least-Dev eloped and Net Food-Im porting Developing
Countries" (the NFIDC Decision). Australia recognises that food security is a fundamental non-trade
conce rn, and supports the provision of food aid andtechnical assistance to reduce poverty, promote
rural development and agricultural productivity, and to improve access to food. To facilitate greater
food security for DC andNFIDC countrie s, Australia stron gly suppo rts revising and strengthening
existing WTO provisions un derthe NFIDC Decision.
Australia does not b elieve, howeve r, that establishing a n ew loan f acility to address s hort-term
financing difficulties for countries experien cing highe r than normal food import bills would be the
most effe ctive use of available resources. Australia believes that the efforts of the Inter -Agenc y Panel
would be more effectively directed towa rds focusing on how existing arrangements could be
reformulated to take better a ccou nt of de veloping cou ntry and NF IDC conc erns.
In Australia's view, global trade liberalisation in agriculture, and domestic agricultural reform
policies (in combination with sustainable agricultural and fisherie s development) arethe most
approp riate 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
measur es, export restrictions and taxes in conjunction with improvements in market access for
developing cou ntries.
Q1. In the view of the parties, what are the "normal levels of commercial imports ofbasic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y experie nces "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
Reply
Australia refers to the FAO's Cons ultative Subcommit tee on Surplus Dispo sal (CSSD)
definition of Usual Marketing Requir ement (UMR) in determining what constitutes a normal level of
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commercial imports of b asic fo odstuf fs.  Th e UMR works for all commodit ies where there is accepted
published information on commercial imports, that is, transa ctions excluding genuine food aid,
surplus disposal orconc ession al sales. The UMR is a moving five-ye ar average of commercial
imports published or otherwise obtainable from a reliable source. Statistics to calculate the level of
average commercial imports are sourced from variou s recognize d international bodies, such as in the
case of grains, the Intern ational Grains Council. Australia believes that the UMR forother
commodities can likewise be calculated on the basis o f accepted commercial import statistics.
In order to determine when acountr y is experiencing short-te rm financing difficulties, a
cleare r definition of what is a short-te rm finan cing difficulty is requir ed. In relation to the FAO
Technical Note1, the apparent definition of a short-term financing difficulty appea rs to bea 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 experien ce 'finan cing 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
eligibi lity criteria are established.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Reply
Australia is not convinced that a Revolving Fund would improve food security situation in
DCs and NFIDCs.
/AB While we see the value of such a Fund as assisting the objective ofensuring that all people, at
all times have a ccess to su fficient foo d, the cu rrent propo sal bas es the requir ement for food on
a decrease in imports of particular food produ cts. By this approach, such factors as reducing
wastage, increasing domestic produ ction or substituting between foods are ignored and could
even be discou raged. Forexample, such a system may encou rage continued imports of high
cost foods while discour aging production and consumption oflocally produ ced and cheaper
substitutes for the imported produ ct.
/AB It would also run counter to Au stralia's a pproach to f ood aid, which is to su pport tech nical and
capacity building to provide LDCs and NFIDCs with the capacity to increas e their own food
production and security, or to develop a produ ction base for other goods that will assist them
to sustainably financ e imports. Contributing to the financing of a loan facility to addres s
short-term financing difficulties, which eligible countries may experienc e in financing normal
levels of comme rcial imports of basic foodstuf fs, would not meet Austr alia's objective of
supporting technic al and capacity building but would risk entren ching dependence on
developed countries for continuing foo d requirements.
/AB The Fund could encourage countries to purchase food during times of high prices and would
require them to repay the loan back after a sho rt period of time. This would not neces sarily be
an appropriate use of government funds and could further increase developing country debt to
developed countries.
Additional ly, Australia believes that a Revolving Fund would likely be anexpe nsive
mechanism with substantial practical problems:
1FAO, Revolvin g Fund for the Purp ose of Implementin g the WTO Marrakesh Decision relating to the
Least-Developed an d Net Food -Imp orting De velopin g Co untries
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/AB Australia consider s that such a Fund would be costly to administer and would be subject to
pressure from dono r cou ntries ea ger for their monetary contribution to be us ed for purchase of
their commodities and putting pressu re on recipient countries to meet other criteria. This
would largely re flect the cur rent situation.
/AB As a Revolving Fund, the recipient countries have to pay back thefunds within a set period.
This would, in our view, putpressure on the recipient countries to meet a potentially onerous
repayme nt sched ule, with the risk that greate r indebtedne ss of DCs and NFIDCs could result.
More over, when prices rise there would be a concerted pull on funds to purchase ever-
diminishing stocks, putting the Fund und er even mo re pressure, or even causing it to collapse.
Australia would be conc erned if the loan facility took the form of providing a rebate to NFIDCs after
they have purchased their requirements on the open mark et.2In Austr alia's view, this proposal risks
acting as both a food consumption subsidy and as afood production tax in recipient countries. We
would be concerned that this may diminish the value of genuine reform unde rtaken in the agriculture
sector o f DCs an d NFIDCs.
/AB Australia is also concerned about the conc ept of a 'trigge r price ' in years where spikes in
commodity prices are experien ced, as suggested in the FAO' s technical note. In general
terms, we do not see a trigge r price as being practical. Trigg er prices have the potential to
introduce some unde sirable effects into world markets. Access to the Fund effectively creates
a consumption subsidy, and will increas e deman d 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
excee ded this very high trigge r price. The immediate effect of such an action would be to
furthe r drive up the price of thegood. This would add to the cost of the fund, and result in
greate r trans fers from NFIDCs to d eveloped country farmers.
Australia believes that the efforts of the Inter-Agency Panel would be more effectively
directed toward s focusing on how existing arrangements could be reformulated to take better account
of developing country and NFIDC conce rns, as per the Inter-Agen cy Panel's first Term of Reference.
Australia supports moves to encourage the World Bank, FAO, IFAD and other releva nt international
development organizations to enhance their provision oftechnic al and financial assistanc e to LDCs
and NFIDCs un der existing facilities and prog rammes.
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
Reply
It is premature to conside r such guidelines as no convincing argument has been put forward
on the need for a Rev olving Fund.
2As noted in FAO, Revolving Fund for the Purpose of Implementin g the WTO Marrakesh Decision
relating to the Least Develo ped a nd Net Food Importing Developin g Countries
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Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (questions to all partie s involved)?
Reply
Unless a country can demon strate that short-term financin g difficulties coincide with that
country' s shortage of food, the need forfood aid does not arise. A countr y'sshort-term finan cing
difficulties alone do not constitute a need for food aid. Such situations may call for financial
assistance , but the effective dumping of developed countries ' surpluse s in the guise of food aid into an
economy un der stress may c ause a collaps e or retardation in agricultural dev elopment.
Convers ely, ac cess to the Fund s hould not pr eclude the c ountry from eligibili ty for fo od aid.
The main differences between the Revolving Fund proposal and emergency food aid are that
emergen cy 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
availabili ty in a country, with the responsibility for funding largely falling on the gover nment using
the Fund. Clearly, a country can experience either of these events separately, orsimultaneously, and
food aid should only be used when the reduction in imports could result in chronic and sustained
malnutrit ion.  Any weakening o f thes e criteria would s ee the n eedy given pr eference over the starving,
which is not acceptable.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
Substantial price volatili ty in agricultural markets exists. Given the impact of climate
variability, weather events, disease and pests onagric ultural produ ction, significant produ ction
variation occurs in agricultural products, which can cause price volatility. This volati lity can be
accentuated by some agricultural policies and exchang e rate volatili ty. For these reasons, it is
important for importers and expo rters of agricultural products to expect price volatili ty and to plan for
it.
Hedging and other forward trading options represent mechanisms that both buyers and sellers
can use to manage their expo sure to commodity price movement risks. At present, the main mark ets
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 forwa rd markets for food products areusually limited to the current season,
so importers are only able to us e these ma rkets to manag e fluctuations within a marketing year.
These tools can work in two ways. Countries can pay a fee that gives them the right to
purch ase at a specific price , or they can enter into a contract to purchase at a specific price. In either
case, theeffect is that in years when price s are not high, the importer s are paying more than they
would, but they pay less than the world p rice in high pric e yea rs.
If futures ' markets are operating effectively, those attempting to hedge will on averag e 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 arewilling to sustain this loss to offset the impacts of adverse
price movements, such schem es can still be attractive.
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CANADA
Introdu ction
Canada recognizes the conce rns voiced by WTO Membe rs with the effectivenes s ofthe
Decision on Measu res Conc erning the Possible Negative Effects of the Reform Prog ramme on
Least-develop ed and Net Food-importing Developing Countries . Food insec urity is a multi-faceted
issue; it is a symptom of pove rty and a serious hindr ance to economic development. Long -term
solutions to food insec urity arise at both the international and national levels, for example, by
improving the delivery of development assistanc e, incre asing agricultural production and
productivity, and maintaining peace and s ecurity.
Canada believes that an important contribution that the WTO can make to address food
security conce rns is through agricultural trade reform. Reducing trade-distorting subsidies that
depre ss prices forfood 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 convinc ed that a new food financing facility for
countries that are experien cing higher than normal food import bills would be the best use of limited
resou rces. Existing facilities of international financial institutions would seem to be better place d to
respo nd to suc h sho rt-term dif ficulties.
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (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-ye ar average forspecific pro ducts a s an estimate of the "normal" level of food
imports of that produ ct. Howeve r, this method is necessarily an approximation becau se it does not
account for, inter alia, chang es in domestic production, population growth, or change s in the types of
differ ent foods that consumers choo se. Changes in the amount or value offood imported are not
neces sarily indicative of a cha nge in fo od security.
Furthermor e, increases in imports above "normal" levels do not necessarily indicate
difficulties in financing those imports. It would appea r that the situation foreseen in the Decision is
one wher e importer s, whether they be private sector traders or gove rnment bodies, are unable to
obtain financing in order to pay for imports of basic foodstuffs (often a balance -of-paym ents
problem).
Short-term difficulties in financing normal levels of comme rcial imports of basic foodstuf fs
could be caused by unexpecte d exchang e rate depreciation due, for example, to tempora ry declines in
export earnings or unusually large capital outflows. Such factors would typically be unexpected and
cause d by e xogen ous factors .
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Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Reply
Although Canada recog nizes the need to adequately address the food security conce rns of
NFIDCs and LDCs, we have a numbe r ofquestions about the concept andfeasibility of the Revolving
Fund.
The Decision clearly recognize s that developing countries may need to draw upon the
resou rces of International Financial Institutions to addres s 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-te rm process to create an enabling enviro nment forincre ased
domestic agricultural production. It is generally recogniz ed that there are important dome stic
constraints on agricultural productivity and production in some count ries, such as lack of favou rable
incentives, limited rural infrastru cture (e.g., transportation, storag e, communications) , weak
institu tions (e.g., commodity markets, enforceme nt of stand ards), and a lack of associated rural
industries (e.g., transportation and inspection service s, food processing industries, suppliers of
fertilizer and other inputs). Howeve r, the proposals for a Revolving Fund do not link short-term
financing an d long-term a gricultural dev elopment.
In fact, the Revolving Fund could discou rage agricultural produ ction in LDCs and NFIDCs
by reducing food prices exactly when supply should be incre asing. This initiative also has the
potential to divert aid resour ces from existing long-term development assistanc e that would ultimate ly
provide a greater d egree of foo d security.
We question the rationale for proposing this Revolving Fund within the context of the WTO
over othe r 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 mech anism or fund.
Progr ammes exist within both World Bank and the International Monetary Fund to address both the
short-term and long-te rm concerns raised in the Decision. Therefore, in the intere sts of policy
coher ence with other multi lateral efforts and in the absen ce of a clear rationale for a Revolving Fund,
it would better to use existing mechanisms.
Beyond the concept of the Revolving Fund , Canad a has a numb er 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 borrowe rs and
the possibility of difficulties with food import bills persisting beyond the short term.
However, alonger 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 burd en of borrower s).
• It is unclear if theRevolving Fund would be self-sustaining once initially capital ized. If there
were a default, would the Fund finan ce the loss out of intere st payments on other lending
operations? Or would the risk be borne by dono rs, 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 d ebt burd ens?
• If the lending terms set by the Fund were highly concession al it would not likely be a
sustainable institution. However, if they were not concession al, the Fund would be
competing against commercial lende rs and might not oper ate ef fectively.
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• Although the Revolving Fund is implici tly targeted towards alleviating the needs of the food
insecur e within beneficiary countries, loans made under the Fund would not necessarily
benefit those groups. Borrowe rs would need to demonstr ate that the loan was used to
increas e the f ood su pply fo r those affected p arts o f the pop ulation.
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
Reply
If the Rev olving Fund wer e established , Canad a expects that eligible borrowe rs would be able
to:
• demonstrate the n ature o f their sh ort-term financing diffi culties
• present a credible plan for using the loan to reme dy the short-term difficulties (including a
clear identification of the intended bene ficiaries within the bor rowing country )
• present a c redible timetable for r epayment, a nd
• demonstrate that sufficient resources had also been devoted to increa sing the long-term food
security of the countr y (e.g., by funding improv ements in rural infrastructu re or research to
increas e domestic ag ricultural prod uctivity).
Canada would expect a report from the recipient within a reasonable period of time and
before full repayment of the loan which would demon strate that the loan had been used to improve
food s ecurity.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
Reply
In most circumstan ces of critical food shortages, including those caused by the inability to
finance commercial imports, food aid is available. However, many countries find food aid
undesira ble as a solution because it depresses local prices and undermines long-term investment in
agricultural productivity. Food aid should beseen mainly as a very short-term, immediate reaction to
a food emerg ency situation, which could include an emergency caused by lack of financial means to
import food supplies. Appropriate investment in agricultural infrastructu re 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 eliminat ion of trade - and production-distorting agricultural
policies and by e nsuring cohe rence between trade and de velopment activities.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
While the expe rtise on this subject does not reside in the WTO, Canada suppo rts the
continued work of the World Bank with the International Task Force on Commodity Price Risk
Manag ement in piloting mechanisms for developing countries to manag e risks from commodity price
fluctuations.
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CUBA
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
Reply
The de finition of "normal levels of comme rcial imports of basic foodstuf fs" is a very complex
matter. It would practically requir e a country by country analy sis, since we need to establish the
levels which would guarantee the minimum consumption recommend ed by the specialized health
institu tions in each country . But the concept could also be defined by taking average imports of basic
foodstuf fs overa representative numbe r of years, remembe ring 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 do nations it has r eceived.
The appropriate criteria for determining short-te rm difficulties in financing normal levels of
commercial imports of foodstu ffs can also vary, and aregenerally associated with a lack of liquidity
which makes it difficult to guarantee thesupply of basic foodstuff s essential to ensuring food security
in a net food-importing developing country or a least-develop ed country (LDC ). Such difficulties
could be linked to imbalances in the balance -of-payments and the balanc e of trade due to the
seaso nality of expo rt revenue, indebtedne ss and debt service payments, financial speculation practised
by the econ omies of the develope d cou ntries, unilateral meas ures, variations in both import and expo rt
prices of goods, structural market trans formations, natural disaste rs, political crises, international
conflicts, wars, etc.
Q2. Please illustrate your countr y's expe rience with respect to short-term financing
difficulties of normal levels of commercial imports of basic foodstu ffs and explain how these
were caused by the Urugua y Round reform programme. How did your countr y addr ess any
such difficulties, in particular during the 1995/96 price increase, and why could they not be
address ed within the curren t framework o f assistanc e (question to NFIDCs/LDCs)?
Reply
The importation of basic food stuffs 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 resou rces needed to cover the cash flow deficits of
importers. For Cuba, whose economy rests on commodities (such as cane sugar, nickel and tobac co),
fishery products and tourism, reconciling the need for stable food imports throu ghout the year with
the seasonality of its resou rce-providing production is extremely complicated. Adde d to this is the
lack of funding from multilateral sources (World Bank, Inter-America n Development Bank,
International Monetary Fund, etc.) for food supply programmes, plus the distanc e which, in the
impossibil ity of acceding to its natur al market the United States separates Cuba from its supply
markets, resulting in exces sive freight costs not to mention the impossibil ity of buying on a market
with highly competi tive prices for the main food products needed by Cuba. This is a consequence of
the economic and trade embar go led by the Gov ernme nt of the United States ove r the pa st 40 ye ars.
As a result, Cuba hashad to deal with its financing difficulties by negotiating with suppliers
of basic foodstuffs, by resorting to expo rt granting credit and credit insuran ce schemes offered by the
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official agen cies in the supplier countries , by obtaining costly trade credits and by allocating liquidi ty
resou rces to the detriment of othe r priorities.
None of these altern atives provide the predictability to solve Cuba' s short-term difficulties in
financing the r equire d level of food imports, which can o nly be obtained at high cost.
During the 1995 -1996 increase in the price offoodstuffs , we had to negotiate intensively with
our usual suppliers and with the bank s 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 incre ased by approximately 26 per cent from one year to the
next, reflecting an additional cost of US$1 50 million. This growth trend continued, and in 1999, the
growth in the value offood imports financ ed through private and bank credits reached 36 per cent
with respect to the same figure s for 199 7.
Obviously, the urgency involved in obtaining these credits owing to the pressing need to
import foodstuf fs regardless of the increase in mark et prices has meant that Cuba hashad to pay very
high costs, well above the market level and even well above any spread that would be reason able for
Cuba fo r such finan cing – up to 18 percent in interest, in ann ual terms, for 1 997.
Q3. Please provide concr ete examples of efforts to seek assistance through existing
multilateral financing facilities and the response bythe agencie s conc erned (question to
NFIDCs/LDCs)?
Reply
Cuba does not have access to multi lateral financing facilit ies. Indeed, it is not a member of
the World Bank , the Inter-Americ an Development Bank or the Intern ational Moneta ry Fund owing to
the hostile policy of the Gover nment of the United States which limits the financing alternatives
available to our co untry and incre ases their co st.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Reply
We submitted to the Inter-Agenc y Panel document G/AG/11, Annex 2, containing a proposal
by variou s net food-importing developing countries and least-dev eloped countries concerning the
concept a nd feasibility of the propos ed Rev olving Fund.
We would also like to stress the importanc e of ensuring that the fund provides for payments
on soft terms with rep ayment pe riods o f more tha n 360 d ays and on a revolving basis.
More over, such finan cing should not be subje ct to political or other conditionalit ies, and a
revolving mech anism must be guarantee d to ensure that all of the recipients are able to benefit from
the scheme.
Q5. Is there any scope for addr essing different needs of NFIDCs and LDCs under the
proposed R evolving Fund (que stion to spons ors o f the Revolving Fund prop osal)?
Reply
Cuba sees this proposal as an attempt to address the different needs of the net food-importing
developing countries andthe least-d eveloped countries. It could be in that direction a first step, to be
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developed and improv ed with the views of the donors and of the other member countries of this group
and tried out in pra ctice.
Cuba also considers that this propo sal 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 r aised b efore.
Q7. Assuming the propo sed Revolving Fund were to be established, what should be
envisaged in terms ofrepo rting by recipient countrie s and monitoring (question to sponsor s of
the prop osed Re volving Fund)?
Reply
Transp arency should unqu estionably be one of the premises on which thefund is based. The
management of thefund should include a mech anism forverifying the destination and use of
resou rces. Howev er, 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 foodstuf fs and the determination of those levels forindividual countries or
groups of countries, is u nacceptable.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
Reply
In our view, this food aid is intended to deal with food insecurity emer gencies due to natural
disasters, w ars etc.
However, in today 's context, with food aid on the decline and the sha rp 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 cou ntries and the least-de veloped countries.
Conseque ntly, Cuba insists that this fund should provide additional solutions for the medium
and long term in the form of programmes aimed at increa sing productivity and efficiency in basic
food p roduction in the cou ntries in que stion.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
The price risk mana gement instruments can be beneficial, provided they are efficiently
managed, in that they help to guarantee price levels very close to the mark et 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 r equired import levels on f avou rable terms by pr oviding the possibility of fixing
more suitable mark et levels fo r postpon ed deliverie s.
Conseque ntly, we conside r that the development and promotion ofthese import risk
management instruments should be included among the technical assistan ce activit ies provided forby
the fund.
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EGYPT
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
In WTO documents G/AG/W/49, and Add.1 and Corr. 1, proponents of the Revolving Fund
adher ed to the interpr etation on the Marrakesh Decision whereby: "the triggering mechanisms for
'operationalising' the Decision sho uld be ba sed o n the totality of effe cts and facto rs, i.e. onunex pected
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, andso on)". Henc e, normal levels of commer cial imports of basic foodstu ffs can be
defined b y the following simple formula:
IB = (C x P – DP – A) x p
Wher e IB is the import bill of a basket of basic foodstuf fs,C = per capita consumption,
P = population,  DP = domestic pr oduction , A = food aid, p = p rice.
To be able to provide a fair and balan ced platform from which to calculate the eligibili ty of
NFIDCs/LDCs to draw from the proposed Fund, and in order to smooth -out short-term fluctuations, a
5-yea r moving av erage of import bills is a better tool for the pu rpose.
Figure 1 sh ows total food import bills of LDCs and NFIDC s over the past 35 years (1965-99) ,
along with the 5-year moving ave rage.
Fig. 1
0400080001200016000Actual
5-yearMA
It is noted from the abov e figur e that there has been asteady increase in food import bills
throughout the period, averaging just over 7percent perannum. The increase was particularly sharp
during 1972 -1984 (over 11 per cent per annum) and slowed down there after (to about 3 percent per
annum). The data alsoshow that there were three distinct occurr ences of "spikes" over the entire 35-
year period. The first, during the food crisis ofthe 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) a nd the third was in 19 95 and 1996 (a 20 percent ex cess).
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A country would be conside red to experience short-te rm difficulties in financing normal
levels of comme rcial imports when the difference between the "actual" and "5-year moving average"
reach the 10 p er cent level.
Q2. Please illustrate your countr y's expe rience with respect to short-term financing
difficulties of normal levels of commercial imports of basic foodstu ffs and explain how these
were caused by the Urugua y Round reform programme. How did your countr y addr ess any
such difficulties, in particular during the199 5/96 price increase, and why could they not be
address ed within the curren t framework o f assistanc e (question to NFIDCs/LDCs)?
As a part of the Uruguay Round package of reforms, and in order to conform to the
obligations taken on-bo ard st arting 1994, the Egyptian Gover nment (GoE) downscale d and/or phased-
out various forms of suppo rt previously granted to farme rs/exp orters under a variety of schemes. Asa
direct result, a subtle trans formation in the cropping pattern s occurred away from
"supported/sub sidised" crops towards the more "profitable" ones. A reduction was witnessed in the
areas allocated to – and by consequen ce the volume of production of - such basic items as sugarand
wheat; at the exact time when the world cer eal pric es sta rted upwa rds towar ds their peak in the 1996/7
seaso n. Meantime, a long-plann ed downtur n in the volumes of food aid granted to Egypt by some
donor countries kick ed-in, c omplicating matters furthe r.
In order to reduce the impact such a situation imposed on both the local populace and the
national treasur y, the GoE ado pted a s eries of compensato ry mea sures su ch as the reduction of applied
rates on imports of wheat and corn, the brief re-institut ion of a rationing system for the poor, a
substantial draw-d own fr om nationally-held food stocks, a reduction ofimports of less essential items,
and a brief recourse to short-term commer cial buyer credits available from a number of non-nation al
financial institut ions.
Q3. Please provide concr ete examples of efforts to seek assistance through existing
multilateral financing facilities and the response bythe agencie s conc erned (question to
NFIDCs/LDCs)?
To our knowledge, no recourse was made to IMF funds theoretically available for the
purpos e, as these came attach ed to a variety of conditionalit ies, which the GoE conside red difficult to
accept; particularly in view of the existen ce of the Ma rrak esh Decision .
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
The concept of the proposed Revolving Fund is based on two ideas: First, the Ministers '
recognition in the Marrakes h Decision of the need to establish appropriate mech anisms to ensure
implementat ion of the results of the UR on trade in agriculture while assuring the availabili ty of
adequate supplies o f basic f oods tuffs from e xternal sou rces on reasonable terms and conditions; and
second , the need to assure NFIDCs andLDCs that the Decision – taken in 1994 andnon-ope rational
to date – shall be made operational in one of its most essential aspects (i.e. short-term financial
support) beforeembar king on serious commitments in the second phase of agricultural liberalisation
currently under way. The feasibility of the abovementioned Fund can be measured against three
factor s: 1) the expected benefits to net-food expo rting develope d WTO membe rs from further
liberalisation of the international trade in agricultural produ cts, 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 b asket of ba sic food stuffs.WT/GC/62
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Q5. Is there any scope for addr essing different needs of NFIDCs and LDCs under the
proposed R evolving Fund (que stion to spons ors o f the Revolving Fund prop osal)?
It is Egypt's belief that no differentiation should be made between NFIDC's and LDC's under
the propo sed Fund; since the original Marrakesh Decision did not do so. In fact, the WTO
membership has been loath to furthe r sub-divide the membe rship into a variety of proposed sub-
categories (land -locked memb ers, small economies, small-island developing states, …etc). This was
most clearly seen during thepre-Doha preparatory process when discu ssing the draft TRIPS and
Public Health Declaration (adopted by the Minister s during the IV Ministerial Confe rence). Most
importantly, the "merits of eligib ility" of beneficiary memb er states should be based on objective
criteria and on a country -by-c ountry basis (paragraph (b) page 4 of document G/AG/W/49/Add.1
refers).
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
There is no doubt that there is a need to ensure transparency in both the proposed Fund's
operations/monitoring activities, and in the bene ficiaries' 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 manageme nt team with regular information (in the shape of formal and timely notifications,
similar to the those handled under the auspice s of theWTO' s Committee on Agriculture) on a numbe r
of va riables, su ch as:
/AB Production statistics on items o f basic foodstuffs.
/AB Statist ics on population grow th
/AB Figures on food aid, by item
/AB A timed series on the p er capita consumption of the basic food items.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
Food aid is an integr al part ofthe 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 figur es 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 opposit e of
what should be. In an ideal world, food stock s held by major suppliers could bedrawn -down in the
form of food aid when NFIDCs and LDCs have the highest need. But in view of the impracticality
and exp ense of maintaining such stocks, the idea o f the Fund wa s floated.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Commodity price risk manageme nt instruments (RMIs) can certainly be an effective means of
hedging against short-te rm price volatili ty. However, the effective use of these instrum ents
presu pposes a certain capacity and experienc e in handling such a fact beyond a large number of
NFIDCs and LDCs. Howev er, as per the formula in the answer to question 1 above, prices areonly
one factor affecting NFIDCs and LDCs . Production issues, for example, cannot be addressed by
RMIs.WT/GC/62
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EUROPEAN COMMUNIT IES
Introdu ction
The NFIDCs Decision was based on the assumption that international prices would rise as a
result of the disciplines undertak en in the Urug uay Roun d. Such a situation could have led to NFIDCs
and LDCs experien cing negative effects in terms of availabili ty of adequ ate supplies of basic
foodstuf fs. Howe ver, 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 anddemand. Conse quently one could argue that there have not
been a ny neg ative ef fects from the reform pr ogramme o f the like fo reseen in the NFIDCs De cision.
Nevertheles s the EC and its member States fully endo rsed the Decision taken by Ministers in
Doha to create an Inter-Agency Panel. The Panel is charged with examining ways andmeans 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 foodstuff s, and to examine
the conce pt and f easibility of a Revolving Fund.
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
"Normal levels of commer cial imports of basic foodstuffs" must somehow be linked to
average imports over a representative reference period, asforeseen in the practice ofthe FAO's
Consultative Subcommit tee on Surplus Dispo sal. These levels must beadjusted to take into account
external factors such as population and/or income chang es. It is howeve r important to note that
increas es in import bills do not neces sarily imply difficult ies in financing imports. Impo rt bills may
increas e in NFIDCs in pe riods o f eco nomic expan sion, drive n by e xpand ed dema nd and availability of
financial resources to finance imports. Import bills are not there fore appropriate indicators to measu re
difficulties to finance no rmal level of imports.
"Short-term difficulties in financing normal levels of commercial imports ofbasic foodstuffs"
are linked to increases in import price s, decreases of expo rt prices, financial crisis and/or currency
depre ciation. This is a typical case of balance -of-payments difficulties.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
The EC and its member States recognise s that there is a need to ensure facilities to LDCs and
NFIDCs to face short-term finan cing difficulties in order to ensure food security. Howeve r, it is not
neces sary to create a new initiat ive, becaus e facilities already exist to address these problems. The
IMF' s CFF is designed to address balan ce-of-payments problems related to the purchase ofbasic
foodstuf fs. The Fund regularly r eviews 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 supp ort related to Food security interventions
and to facilitate imports of food canbe included unde r bilateral dono r finan cial suppo rt. 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 upto roughly 20 per cent of its total allocation. The
WTO, on the other hand , is an institution that is neither prepared nor equipp ed to deal with financial
assistance , and cannot s ubstitute itself for the multilateral financial insti tutions.WT/GC/62
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The creation of aRevolving Fund could in fact be counte rproductive. Efforts in this area
should be geared to promoting a food security focus in the use of existing resources and mecha nisms.
In addition, the establishment of a Revolving Fund does not guarantee additional financial resou rces
but could res ult in additional inst itutional and bureau cratic bu rden.
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
In paragraph 5, the NFIDCs Decision states: "Ministers recognise that as a result of the
Uruguay Round certain developing countries may experienc e short-term difficulties in financing
normal levels of commercial imports and that these count ries 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 pro grammes, in orde r to add ress su ch fina ncing difficulties."
If a Revolving Fund were to be established, the EC and its member States would envisage
conditions on the eligibil ity and use ofthe resourcesthat ensure that the Fund were used appro priately
and not diverted to other uses. The recipient countries would need to prove their needs and the
conditions would need to guarante e that disburs ements from the Fund were fully reimburs ed. The EC
and its member States foresees conditions that would not differ from those that are attach ed to the
current multi lateral financial facilities to addres s balan ce-of -payments problems. In particular,
eligibi lity would need to differentiate between LDCs and the NFIDCs and apply different conditions
depending on the catego ry. Conditionali ties for loans should follow the same procedu resand rules
applied in this respe ct by other intern ational institu tions (WB, IFAD etc.) for the same catego ry of
countries.
Q8. What are parties' views on the role of food aid to attenua te short-term financing
difficulties of food imports (question to all parties involved )?
Resea rch shows that food aid programmes are neither efficient nor effective in this respe ct.
Financial transf ers to d eal with balance-o f-payments p roblems a re les s costly and more efficient.
The EC and its member States attaches a very high importanc e to food aid when it is used as
emergen cy food aid, and when it is provide d as a grant, and to the extent possible, throu gh local or
regional purchases. On theother hand, food aid driven by domestic supply conside rations and used as
surplus disposal is counterpr oductive. The EC gives food aid suppo rt through the WFP, NGOs etc.
under different finan cial instruments. Food aid is provided on a short-te rm basis for humanitarian
reasons, for relief, recovery linking to development, through the EC's huma nitarian office, ECHO.
The EC and its member States conside rs food aid to be necessary for humanitarian reasons in awide
range of situations: internal conflict, war situations, natural disaste rs, etc. and essential for groups
such as refugees, Internally Displaced Persons (IDP s), other victims and for certain specially
vulnerable g roups.  Sho rt- and medium-term foo d aid is well justified for these groups.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
The World Bank is working on promoting subsidised price riskmanageme nt instruments to
hedge against short-term price volatility. While the experien ce 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 develope d so farand believes that this facility could be very useful in certain
cases.
WT/GC/62
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JAPAN
Introduction
1. Since Japan is also anet food-importing country , Japan fully recog nises the necessity to
improve the effectiveness ofthe Marrakesh NFIDC Decision in terms of keeping food security and
preserving a nd de veloping ag riculture in eve ry co untry.  Ba sed on this position, Japan is willing to co-
operate and disc uss with other c oncerned countrie s.
2. In particular, Japan is ready for seriously envis aging how to contribute to the fund-rai sing
issue, as discus sed in the Panel, and positively coping with this problem within its possibil ities. Japan
finds it neces sary to review the present framework for the provision of funds , already undertak en by
some International Organisations, to identify deficiencies, if any, to hinde r 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 r espects bur densome fo r LDCs an d NFIDCs, a thorough analysis should be condu cted on
the caus ality between liberalisation, surplus decrease, price increase in the international mark et and its
repercussion on the import bill paid by LDCs and NFIDCs. Otherwise, an answ er 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, wi thout which a real solution would be impossible to find.
3. As for the conc ept and feasibili ty of a propos ed Revolving Fund , it would be highly
neces sary, without pre-fixed ideas on the necessity of creating such a fund, to get through the above -
mentioned review of thecurrent systems prior to any conc rete results. Japan would like to emphasis e
that all exist ing schemes should beexplor ed and that to increas e the numbe r of possible means would
not neces sarily ac hieve a better and mo re practical situation.
4. To solve difficulties, which had been raised in a series of discussions so far, in the long term,
more empha sis must be placed on the productivities in the LDC and NFIDCs' agricultural sector, as
indicated in the Decision itself and the addendum to the propos al by 16 countries
(G/AG/W/49/Add.1). According to its experience s on the ground , Japan stresses that not only
technical and financial assistanc e, but good manag ement by the recipient gove rnment 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 gene ral tenden cy 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 prefe rable to put aside reserves of food in case ofneed. From this
fundamental position, Japan is incorporating in its negotiating proposal the idea ofinternational food
stockholding, which will enable loan of f ood in the ca se of tempora ry shortag e.  During the n ew rou nd
negotiations Japan hopes to submit a more concrete versi on of this idea, on which furthe r discu ssion
should be e xtended.
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
(i) It is approp riate that the UMR (Usu al 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.WT/GC/62
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(ii) For the se cond q uestion, the ap propriate criteria would b e whether or not a country can get the
normal level of import (i.e., UMR) through comme rcial trade, even under such circum stances as the
increas e ofinternational price of the basic foodstuf fs and the shortage of foreign currencies caused by
economic c rises.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Prior to the creation of aproposed Revolving Fund, all other possibili ties should be explo red
for fund raising.  Thou gh recognising the importan ce of the food security problem widely experien ced
by LDCs and NFIDCs, Japan continues to have some scepticism on the necessity and utility of the
fund, a nd to sus pect that the pre sent fina ncial facilities can show its use fulnes s.
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (question
to donor s)?
Japan doesn 't commit itself to the creation of a Re volving Fund a s a premise.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
(i) For food security, a proper combination of domestic production, import and stock holding will
be required. Neverthele ss, the main priority should be placed on thestable domestic production. On
this understanding, Japan considers it crucial to give LDCs and NFIDCs necessary suppo rt for their
self-reliant effo rts in fa vour of the improv ement of p roductivities.
(ii) However, it is natural that prompt food aid be brought to countries suffering food crisis
deriving from negative factor s 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 dif ficulties of fo od imports.
(iii) Japan is proposing a new framework of intern ational food stock holding to tackle these short-
term difficulties of LDCs and NFIDCs.  This s ystem ena bles sup port fo r LDCs a nd NFIDCs in case of
emergen cies by using alre ady e xisting food stock in each country .
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
We think that it is necessa ry to review thoroughly the past experienc e of international
commodity agreements, which had the purpose of stabilising the price of primary products with
international buffe r stock, and which did not function as successfully as expected .WT/GC/62
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JORDAN
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
/AB The normal levels o f comme rcial imports of ba sic fo odstuf fs are as follows:
- Wh eat 600 ('000 tonnes ) + 15 0 (str ategic r eserves)
- Rice 180 ('000 tonnes )
- Suga r180 ('000 tonnes )
- Maiz e400 ('000 tonnes )
- Barley 600 ('000 tonnes ) + 10 0 (str ategic r eserves)
/AB In the early eighties, Jordan' s economic growth fell to such a low rate that the real per capita GDP
declined between 1981-1989( ). Furthermo re Jordan's foreign exchange reserves in terms of
months of imports coverage were falling steadily reaching a critical point in 1989, there fore the
approp riate criteria to determine short-term difficulties even in the present time depend s on the
foreign exch ange reserves aswell as on the average of the last three yearsdata of commer cial
imports of basic food stuffs during which the rise in prices would exceed the average normal value
of these imports by at least 25 p er cent incre ase on a monthly ba sis.
Q2. Please illustrate your countr y's expe rience with respect to short-term financing
difficulties of normal levels of commercial imports of basic foodstu ffs and explain how these
were caused by the Urugua y Round reform programme. How did your countr y addr ess any
such difficulties, in particular during the199 5/96 price increase, and why could they not be
address ed within the curren t framework o f assistanc e (question to NFIDCs/LDCs)?
Jorda n's expe rienc e with respe ct to short-term financing difficulties of normal levels of commercial
imports of basic foodstuffs.
/AB 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 rain fall in critical stages of the crop life, in addition to sever e frost wave s.
/AB Drought has severely affected the production of many agricultural crops for which production
levels for theyear 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 consequen ce the imports of basic foodstuf fs increased as shown in table (2). Preliminary
estimates of agricultural losses caused by the 1999/2000 drought episode s are summariz ed 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 24percent, range
land and f odde r 17 p er cent, field c rops 1 5 per cent and veg etables 7 p er cent. Thus an emergency
relief programme was needed to partially assist the most affected farme rs, herders and rain-fed
tree crop grower s to meet their minimum requirements and to start a new season under minimally
acceptable conditions.
/AB The considerable rise in the requireme nts of servicing extern al debts in the late eighties was a
major facto r in the economic crisis. Since then the volume of extern al debt and their burden onWT/GC/62
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the Kingdom's foreign currency reserves have constituted a structur al imbalance impeding the
economic development process. Despite the efforts exert ed by the GOJ in this respect which led
to positive results and improv ement in the external debt situation, the problem is still considered
a major imbalance that requires a long-te rm strategy to restrict its negative effects on the national
economy.
/AB These imbalanc es in Jordan' s economy and volatility of world prices of basic foodstuff s during
the period 1995/1996 urged the competent authorities to seek assistance to reinfo rce the strategic
inventories and thenormal levels of imports of basic foodstuffs, throug h aid programmes such as
export c redit guar antee p rogrammes an d foo d aid pr ogramme s as shown in tables (6,7) .
Q3. Please provide concr ete examples of efforts to seek assistance through existing
multilateral financing facilities and the response bythe agencie s conc erned (question to
NFIDCs/LDCs)?
After strong growth in the 1970 s andeven in the early eighties economic growth fell to such a low
rate that real per capita GDP declined between 1981-1 988. Jordan's foreign exchang e 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 Monetar y Fund for assistan ce in
restru cturing the economy. It began with a major devaluation of the dinar in 1989 (as shown in table
10) a ccompanied by trad e liberalization through tarif f reductions a nd removal of import ba rriers.
/AB Furthermor e, the negative effects of the Gulf Crisis on Jordan's economy with the return of more
than 400,000 as expatriate work ers and return ees, almost lead to doubling the numbe r of
population as shown in table (9). As a result the import bill of basic foodstuff has increased
dramatically coupled with the increas e in world prices of basic foodstuff (wheat, rice, sugar,
maize and ba rley) especially in the years 1995 -1997 as shown in table (5 ).
/AB More over, efforts were exert ed to seek assistance through multilateral and bilateral financing
facilities to finance the purchases of essential foodstuff during the boost of world price s in
1995/96, and those were introduc ed throu gh programmes such as Export Credit Guarantee
Progr ammes sponsored by theUSA, and through Food Aid Programmes granted by the USA,
Japan and Italy as illustrated in table (6,7).
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Jorda n's views con cerning the con cept and feasibility of the proposal o f the Revolving Fund
/AB Jorda n supp orts the conce pt of creating an Inter-Agency Revolving Fund to help the NFIDCs and
LDCs to acces s finan cing facilities in order to maintain the normal volume of basic food imports
during times of high market price s without jeopardizing their balan ce-of -payment. Therefore,
Jorda n supports the proposal submitted by a numbe r ofcountrie s in favour of NFIDCs and LDCs
which explains the technicalities of how this Inter-Agen cy Revolving Fund could manage those
financial facilities.WT/GC/62
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Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
In the short- and medium-term, external food aid plays an important role in meeting food
requireme nts related to emer gency situations, and essential nutritional assistance projects in many
NFIDCs and LDCs. It is recommended that dono rs of food aid shall ensur e that to the maximum
extent possible their levels of food aid are maintained during periods in which world mark et prices of
basic food stuffs have been increasing and that all food aid is provide d in fully grant form. In the
long-term, food needs in developing countrie s should bemet through increased domestic produ ction,
as well as through incre ased capacities to import on commercial terms which could be done throug h
technical assistanc e linked to improving the agricultural produ ctivity and related infrastructu re.
Stimu lating economic growth in developing countries should be a majo r driving force of the
multilateral trade re form p rocess.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Jorda n maintains strategic food reserves as a risk management tool in case of food shortage in the
local markets and/o r when world price s of such commodities are volatile. Besides, Jordan sometimes
concludes purchasing contra cts fo r basic food stuffs on the b asis o f futu re prices.TABLE (1)
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Values of total imports of basic f ood and feedstuff (JD million)
Wheat 42 66 47 62 65 52 99 113 73 50 33 52
Rice 14 23 15 16 19 13 29 30 32 25 34 29
Sugar 30 56 29 30 30 41 54 53 41 36 31 32
Maize 14 12 18 30 35 22 46 42 26 44 37 37
Barley 18 18 21 27 33 29 41 84 49 16 55 42
TABLE (2)
Quantities of tot al imports of basic food and feedstuff (thousand tons)
Wheat 295 687 580 603 669 508 739 666 574 499 391 642
Rice 57 105 56 76 81 62 99 84 105 87 111 99
Sugar 139 202 122 147 145 212 183 177 160 165 174 181
Maize 141 221 197 333 387 299 446 319 237 447 429 434
Barley 233 215 262 345 485 472 571 695 494 155 745 477
TABLE (3)
Total imports
(million JD)1230 1726 1711 2214 2453 2363 2591 3044 2909 2715 2636 2951
Total expo rts
(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 l ocal production (thousand tons)
Wheat 54 82 61 75 57 46 58 42 41 36 9 25
Barley 20 42 39 68 31 27 31 29 29 27 5 12
TABLE (5)
Average import
price (JD/ton)1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Wheat 142 97 82 103 98 102 134 169 128 100 84 81
Rice 247 222 273 208 239 210 292 351 303 286 306 291
Sugar 218 280 233 208 207 193 294 299 257 218 176 178
Maize 96 56 90 90 90 74 104 132 111 113 87 84
Barley 78 82 82 80 68 61 71 120 98 104 74 88
TABLE (6)
Food aid
(thousand tons)1996 1997 1998 1999 2000 2001March
2002Donor Country
Wheat - - - 150 350 202 - USA
Rice 2 5 - - - - 3 Italy
Maize 13 - 30 - - - - Japan
Barley 11 15 32 41 66 64 - Japan
TABLE (7)
Imports through
export credit
guarantee
programmes
(thousand tons)1996 1997 1998 1999 2000 2001 March
2002Country
Wheat 155 311 142 137 107 400 100USA Export Credit Guarantee Pro grammes
GSM 102
GSM 103
PL 48 0
TABLE (8)
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
External 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 19961997 -
2002
Exchange rate
$/JD3 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
Q1. In the view of the parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
Reply
Normal levels of comme rcial imports of basic foodstuf fs should correspond to the country 's
import needs f or agiven yea r.  These nee ds will depend on available local production and the increase
in domestic demand.
Conseque ntly, it should not be limited to the level of traditional imports calculated as an
average for the past ye ars.
As regards the appropriate criteria to determine whether a country expe rience s short-term
difficulties in financing normal levels of comme rcial imports of foodstu ffs, we would sugg est the
following:
- Food trade balanc e deficit;
- current balanc e-of-payments de ficit;
- insufficiency of intern ational aid and finan cial suppo rt, which only partially cover the
country' s needs in that ar ea.
Q2. Please illustrate your countr y's expe rience with respect to short-term financing
difficulties of normal levels of commercial imports of basic foodstu ffs and explain how these
were caused by the Urugua y Round reform programme. How did your countr y addr ess any
such difficulties, in particular during the 1995/96 price increase, and why could they not be
address ed within the curren t framework o f assistanc e (question to NFIDCs/LDCs)?
Reply
The data relating to the pattern of foreign trade reveals that cereals accou nted for an average
of 34 p er cent of imports.  T his sha re rose to 4 6 per cent in 199 5 and 5 4 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 considera ble
increas e in the price of imports, o f cereals in particular ( plus 27 per cent).
These imports are financ ed throug h foreign credit granted unde r market conditions, which in
fact simply acce ntuate the balanc e-of-payments de ficit and the debt r atios.
In any case, they have requir ed a mobilization of finan cial resou rces 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 a gricultural se ctor.
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Q3. Please provide concr ete examples of efforts to seek assistance through existing
multilateral financing facilities and the response bythe agencie s conc erned (question to
NFIDCs/LDCs)?
Reply
Efforts are made at the macro economic level in order to respe ct and control the foreign debt
ratios.
Existing facilit ies provided bythe international institut ions are conside red as one of several
sourc es of financing, but are generally subject to access conditionalit ies that are linked to the
implementat ion of structur al adjustment measur es.In othe r word s, they a re not easily acc essible.
As a result, since 1996 , food aid institutions such as WFP have classified Tunisia among the
non-eligible countries.
Tunisia has ther efore resorted e ach y ear, according to its needs, to foreign credit unde r market
conditions, or to sup plier's c redits g ranted e ssentially 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. Ultima tely, these requir ements or
conditionalit ies for access to sources of finan cing merely impose furthe r imper atives and constraints
on the country .
This is why, in Tunisia's view, these achiev ements must be strengthen ed, maintained and
supported by furthe r aid oriented towa rds n eeds in this area.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
Reply
The Fund is feasible to the extent that it is seen as an additional facility among others, and
offers the advantag e of being less restrictive in terms of access to its resources and enjoyment of its
service s.
Q5. Is there any scope for addr essing different needs of NFIDCs and LDCs under the
proposed R evolving Fund (que stion to spons ors o f the Revolving Fund prop osal)?
Reply
The scope for addressing these different needs will depend on the amount of resources place d
at the fund' s dispo sal, and in any case, this fund must not be asubstitute for existing mechanisms or
apply similar criteria.
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Q7. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of reporting by recipient count ries and monito ring (ques tion to sponso rs
of th e propo sed Revolving Fund) ?
Reply
As conce rnsreporting by recipient countries, what should berequired is the submission of a
report justifying the use of the fund 's resources.
Regarding the use of these resources, in conformity with the Marra kesh decision they must
provide for:
- Financing of commercial import needs for basic foodstuffs on more favou rable than
market conditions and subject to more flexible criteria;
- financing of requests for technical and financial assistance in order to help improve
productivity and infr astructu re in the agricultural secto r, and assistan ce to the net food
importing developing countries in developing their production potential for products
or se ctors wh ere the development o f such ca pacity is possible.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
Reply
Food aid can contribute e ffectively to attenuating these difficulties.
However, such aid is subject to certain rules and mech anisms which mean that certain net
importing countries, while suffering the effects of the agricultural secto r reform programme, are
excluded.
This was the case for Tunisia, where , as rev ealed in WTO document G/AG/W/42/Rev.4 dated
27 November 2001, "f ood aid deliverie s declined even mo re sharply d uring the p ast dec ade".
Aid as it is currently provided does not cover needs in terms offood products. This is why
the eligibi lity criteria need to be reviewed to enable all countries concerned to benefit from it on
conce ssional terms.
Q9. What are the views of parti es regarding commodity price risk managemen t instruments
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
In themselves, these instrume nts are useful. Howeve r, they do not alleviate the effects of the
reform programme on the net food-importing countrie s faced with a structural increase in prices and
even in fo od imports in conn ection with the further implementation of the pr ogramme.
More over, their use will require technical assistance, inter alia in training the human
resou rces co ncerned.
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UNITED STATES
Introdu ction
The United States wishes to thank the Inter-Ag ency Panel for the opportunity to provide
comments on the overall issue of the Marrakesh Agreement andin particular respond to the questions
posed b y the Panel.
The United States has studied the proposals G/AG/W/49 and G/AG/W/49/Add.1 and is
commit ted to working with other interested membe rs in addressing the food security concerns of Net
Food-Impo rting Developing Countries (NFIDCs) and Least-De veloped Countries (LDCs ). Food
security is one of the key issues in this round of negotiations as we move forward in the liberalization
proce ss.
The United States is committed to partnering with other countries and organizations to devise
action-oriented development strategie s that address rural pove rty and hunge r. The United States
provides suppo rt to developing countries for basic education in rural areas, impro vements on rural
infrastru cture, increased access to market information for farme rs, funding for agricultural research to
increas e productivity and trade capacity building to increase e xports.
However, we believe that the greatest improvements in food security can be achieved through
good governance at the national level. Many gove rnments still do not provide essential public goods,
such as civil peace, rule of law, trans port infrastru cture, clean water, electrical powe r, and public
research to gene rate new agricultural productivity. In addition, food security and income growth are
enhanc ed by the establishment of afair and market-o riented agricultural trading system that provides
substantial reductions in trade-distorting agricultural suppo rt and protections, resulting in correcting
and preventing restrictions and distortions in world agricultural mark ets. Food security can be
increas ed by capturing the potential gains from furthe r global trade liberalization and throug h
reductions in anti-ag ricultural biased domestic policies. Wenote that reducing tariff s and eliminating
domestic impediments to trade, which can be addressed through autonomous Government action,
could have the immediate effe ct of r educing d omestic food bills.
Under the Marrakesh Agreement, the Ministers recog nized that implementation of the
Uruguay Rou nd as a whole would ge nerate incre asing opportunities for trade expansio n and econ omic
growth to the benefit of all participants. The Ministers also recognized that least-dev elope d and net
food-importing developing countrie s may experien ce negative effects in terms of the availability of
adequate supplies of basic foodstuffs from exter nal sources on reasonable terms and conditions,
including short-term difficulties in financing normal levels of comme rcial imports of basic foodstuf fs.
To address these issues, the Ministers accordingly agreed to establish appropriate mech anisms to
ensur e that the implementation of the Uruguay Round did not adversely affect the availability of food
aid. Undertakings includ ed the reviewing food aid commitments, increasing food donations in grant
form, and giving full conside ration to requests for technic al and financial assistan ce. The Ministers
furthe r agreed to ensure that any agreement relating to agricultural export credits would make
approp riate pro visions fo r special and differential treatment in favou r of least-dev eloped and net food-
importing developing countries. In addition, these countrie s must be eligible to draw on the resources
of the international org anizations to add ress difficulties in short-term finan cing of food stuff s resulting
from the r eform pro gramme.
We will now provide our views relating to each of these commitments under the Marrakesh
Agreement, an d then f ollow wi th answers to the questions po sed b y the Pan el of exp erts.WT/GC/62
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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, theUnited 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 emer gencie s 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 infrastructu re activit ies, 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 conc essional terms, particularly to help vulne rable and needy
groups in middle-income countries. We believe concessio nal food aid acts as a bridge between grant
food aid and commer cial sales, helping countries transition to market economies. Like the food aid
provided in grant form, concessional programmes suppo rt bene ficial development activities aimed at
helping needy and vulne rable groups, improve the agricultural productivity of farmer s and related
infrastru cture in recipient countries and generally suppo rt economic development. Howeve r, such
commitments must reflect the U.S. Government budg et realities. The United States believes that the
respo nsibility for providing food aid must be shared by all nations with the ability, by providing food
or money thr ough g rants o r concessional sales .
Export Credit s
Regarding export credits, the Minister s agreed to ensure that any agreement relating to
agricultural expo rt credits would make appropriate provisions fordifferential treatment in favou r of
least-develop ed andnet 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 agreeon an acceptable packag e of disciplines gove rning expo rt 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 favou r of LDCs and
NFIDCs with regard s to disciplines on ex port c redits.
The United States believes that expo rt credit progr ammes present an oppo rtunity for some
countries to improve their food security by addressing short-term financing problems regarding the
import of basic foodstu ffs. Thes e programme s provide liquidity and purcha sing power to countries
that would otherwise be unable to purchase necessary food produ cts. The financial upheavals in Asia
and Latin America adversely affected food availability in countries facing short-te rm liquidity
problems. Howev er, the situation would have been wors e in some countries had they been unable to
use ex port c redit prog rammes to pu rchase their much needed food s upplies.
Intern ational Financial Institu tions
The United States defers to the experts representing the international institut ions to addre ss
conce rns 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 foodstu ffs.
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 mill ion to assist developing cou ntries comply with their commitments under the WTO Agreement
on Agriculture and the Agre ement on Sanitary and Phytosanitary Measures. The United States is andWT/GC/62
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will continue to be a source of capital, training and capacity building, and of economic partne rship
with the LDCs and NFIDCs.
Q1. In the view of the Parties, what are "normal levels of commercial imports of basic
foods tuffs"? What are appropriat e criteria todetermine whethe r a countr y expe rience s "sho rt-
term difficulties in financing normal levels of commercial imports of basic foodstu ffs" as
provided for in the Marr akesh NFIDC Decision and the Panel's terms of referenc e (question to
all parties involved)?
Reply
The United States believes that the Panel of experts in coordination with the experts of the
international financial institu tions can best answer this question. Howeve r, the United States retains
the right to review and c omment on any criteria dev eloped.
Q4. The Panel would appreciat e your views conc erning the conc ept and feasibility of the
proposed R evolving Fund (que stion to all parties involved) .
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 unconvince d
on the conc ept and feasibility of a new food financing facility at this t ime.
Q6. Assuming the propo sed Revolving Fund were to be established, what guidelines should
be envisaged in terms of eligibility and use of the resour ces by therecipient count ries (quest ion
to donor s)?
The United States has many concerns that would need to be addressed if such a fund was
created. For example:
/AB The facility's mechanics, e.g. how would we determine which countries could access
the fund, when and how the funds are allocated, which gove rnment ministry would
receive thefunds and how would funds be used (the proposing countrie s mentioned
capacity building activities and agricultural development, purchasing food was not
listed).
/AB The private sector manages almost all trade in food products. How would recipient
governme nts trans fer funds receive d from the facility to the private trade for food
purch ases?
/AB How would the fund be managed, what are the repayment terms, what if a country
defaults on the loa n?
/AB The proposed facility should not result in negative market distortions. Use of the
facility should not be automatic when a certain price thres hold is reached (othe rwise
this could result in a commodity stock sch eme which ha s its own set of problems ).
/AB Any trigger mech anism 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 r eceipts.
/AB In addition, there would n eed to be rules and c riteria established that would en sure the
fund does not undermine policy conditions attached to IMF finan cing and provisions
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for specific commitments on market and dome stic reforms and tariff reductions that
would help redu ce the food p rices in the recipient countr y.
Q8. What are parties' views on the role of food aid toattenua te short-term financing
difficulties of food imports (question to all parties involved )?
Reply
Food aid canplay an important role in helping LDCs and NFIDCs meet their food import
needs during times of short-te rm 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-te rm financing difficulties. Also, see thesection on
food aid a bove.
Q9. What are the views of parti es regarding commodity price risk managemen t instrum ents
for the purpo se of hedging ag ainst sh ort-term price v olatility (ques tion to all partie s involved)?
Reply
This Panel of inter-agency experts should conside r commodity price risk manag ement
instruments. However, commodity price risk manageme nt instruments address only one aspect of
volatil ity as it relates to food insecu rity: the price. Other sources of volatility include production and
the excha nge rate. In many instanc es, prices forvarious commodities are correlated, which may lead
to a net financial gain for the country. For example, increases in import prices for wheat, corn and
soybea ns may be offset by higher price s for oil, coffee, tea, cocoa, or other expo rts from the country.
Institutional capacity building and technical assistanc e would need to be provided to effectively
employ hedging mech anisms.  I n this matter, we note that gove rnment intervention in hedging is often
inefficient compa red to the private secto r. Additional information on these market instruments should
be pro vided to the member s for further conside ration.
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ANNEX  4
Submissions by the Food and Agricultur e Organization
of th e United Nations (FAO)
Towards improving the operational ef fectivenes s ofthe Ma rrakeshDecision on Mea sures Con cerning
the Possible Negative Effects of the Reform Progr amme on Lea st-Dev eloped and Net Food-Imp orting
Developing Countries1
I. BACKGR OUND
One of the subjects exten sively debated during the Urugua y Round (UR) negotiations was the
possible negative impact of agricultural trade liberalization on least developed and net food-impo rting
developing countries. This reflected a concern that the impact would be relatively greater on world
market price s of food commodities, which are imported in large and growing quantities by these
countries, than on tropical agricultural products, which are the main agricultural expo rts of these
countries. Other possible negative impacts were erosion oftrade preferences as tariffs are reduced
and the difficulties of LDCs and NFIDCs to increa se agricultural exports because ofsupply -side
constraints. Several studies have concluded that this group of countries could experienc e negative
effects on accou nt of these factors, at least during the reform process. Many of them are amon g the
poore st and most fo od-insec ure in the world.
These conce rns were recognized at the political level. Thus the Marrakesh Ministerial
Decision on Measu res Conc erning the Possible Negative Effects of the Reform Prog ramme 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 experien ce negative effects in terms of theavailability of
adequate supplies of basic foodstuffs from exter nal 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 foraction through four
respo nse me chanisms:
/AB Food aid;
/AB Short-term fina ncing of normal levels o f comme rcial imports;
/AB Favour able terms for agricultural exp ort credits;
/AB Technical and financial as sistance to improv e agricultural produ ctivity and infrastru cture s.2
1Paper prepared by the FAO Commo dities and Trade Division forthe FAO Round Table on Selected
Agricultural Tra de Policy Issues, Geneva, 21 Marc h 2001.2For the com plete text of the Decision , see Anne x I.
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There are currently 49 countries that are recog nized as LDCs and 19 asNFIDCs. All relevant
statistics clearly differ entiate these two groups from other developing countries with regardto food
security and the cap acity to import food.3
The implementation of the Decision has remained unsatisfa ctory and a matter of concern for
all, both donors and beneficiarie s, despite the political comm itment that has been stress ed from time
to time at major international confe rences, such as the World Food Summit, UNCTA D and the
Ministerial sessions of WTO. Many analysts feel that failure to implement fully the Decision , even in
a period such as 1995/96-19 96/97, when world food price s rose sharply and food import bills surged
(see B ox 1), points to some inhe rent, se rious p roblem with the very natu re of the Decision .
Box 1. Cereals Import Experience of LDCs and NFIDCs in 1995-19 98
World cereal prices increased sharply during 1995/96 and 1996/ 97 and there was an approximately 49perce nt
rise in the cereal import bill of LDCs and NFIDCs over theaverage 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 ai d shipments in this pe riod (to 9 percent of total cereal imports from roughly 15 percen t during 199 3/94) .
The shortfall consequently had tobe made upforby commercial imports at the higher world prices, which
were no longer subsidized. With the decline inworld market prices after 1997, cereal impo rt bills have also
fallen, thou gh less than p roportionately because of a rising volume of imports, contin ued low levels of food aid
and reduced export subsidization. Thus, it appears that cereal impo rt bills are now on a differe nt and highe r
plateau than before the Uru guay Round.
Source: "The Food Situation in the Least-Develope d 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
confiden ce and trust be develope d for continuing the reform process. The fulfilment of all
commitments, the Decision included, is one way forwar d. For all food-insecu re developing countries,
food security remains a top priority. The availabili ty of a contingent mech anism that can be trusted
during difficult times would both create a conducive environment for the negotiations and encourage
countries to liberalize f urther their foo d mark ets.
This pape r puts fo rward some ideas for facilitating implementation of the Decision . It define s
(in section 2) the nature of the "ne gative ef fects" alluded to in the Decision and provid es a roug h order
of magnitude ofthe "exce ss" food import costs for the countries concerned. Section 3 provide s
information on the three instruments envisaged in the Decision for assisting them in dealing with
short-term food import- related difficulties. Section 4 discus ses two propos als for implementing the
Decision .
II. NATURE AND MAGNITUDE OF THE FOO D PROBL EM 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 experie nce negative effects in terms of the
availabili ty of adequate supplies of basic foodstuf fs from external sources on reasona ble 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
3See The Food Situation in the Least Develope d and Net Food-Importing Develo ping Countries ,
Commo dities and Tra de Division, FAO, Rome , 1999.
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developing countries. The Decision accordingly prescribes action through thethree4respons e
mechanisms listed above (in Section 1 ).
But what are "reasonable terms andconditions" and when are they unreasonable ? Variou s
definitions are possible, but a simple interpr etation of "unre asonable" terms of access is if theterms
involve food import bills over a nd abo ve no rmal levels.
Triggering the respon se for a ssista nce
Triggers are essential in order to decide when and how to respond. The text of the Decision
provides some guidan ce in this respect. Specifically, it does not rest on a narrow interpr etation of the
negative effects arising from anysingle source of the problem, such as sharp rises in world market
prices o r sharp declines in fo od aid s hipments, but re fersin gen eral terms to the overall negative effect
of the r eform prog ramme as a whole.
These conside rations suggest that the triggers should not be based on the individual factors
that lead to the problem (e.g. higher world prices) but rathe r on the totality of the outcome itself, i.e.
the unexpe cted increase in the food import bill. There is the further implication that the triggers refer
to country- specific o utcomes, s uch a s exceptional increa sesin a pa rticular countr y's import bill. Thus,
what seems to have been envis aged is the need forassistan ce specifically to those countries suffering
negative effects in agiven year (usually a different group of countries in any one year like 1995/96,
when world ce real p rices spiked), rathe r than to all LDCs and NFIDCs simultaneously.
Quantifying unreas onable 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 demonstr ate the order of magnitude
involved, exce ss food import bills were computed on the b asis of a narrow definition, covering ce reals
only (Food I) and of a broader definition, which also includes most basic food items, namely
vegetable oils, dairy and meat p roducts and s ugar (Food II).
Two alternative thresholds were define d to measu re the excess import bill: i) 105 percent of
the trend level; and ii) 110 percent of the trend level.5The difference between actual import bills and
these threshold values is conside red to constitute an "exces sive" or "unreasonable" import cost, to use
the term of the Decision .6
In the calculations, the absolute value s of the excess food import bills so defined are summed
separately for 46 LDCs7, and the 19 NFIDCs andfor the two group s. The mean values shown in
Table 1 are the averages of these totals during the 10 years covered (1989 -1998 ). The maximum
4The fourth response mecha nism listed, namely the provision of technical and financial assistance to
the LDCs and NFIDCs to improve their agricultural productivity and infrastruct ure, addresses food problems of
a longer -term nature, in contrast to the other three mechanisms. By also includin g this instrument in the list, the
Decision rightly draws attention to the importance of addressing agricultural productivity and growth in these
countries.  Since this pape r con centrates on sh ort-term problems, this instrument is not c overe d in the a nalysis.5Trend levels were comp uted by fitting linear trend lines to annual impo rts durin g 1985-19 98. An
alternative and widel y used p roxy for tren d values is movi ng ave rages.6Thus, essentially, additional imports that are less than 5 per cent (or 10per cent) above thetrend level
are exclude d from the calculations. Imports below trend levels are also ignored as they are not relevant to the
Decision .7Data were not available for two other LDCs. The 49th countr y (Sene gal) was added to the United
Nations list after these calculations were made.
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value shown in the table is the largest annual total. For example, on the basis of the 10 per cent above
trend rule, the mean excess import bill of the LDCs was US$179 million for Food I and
US$224 million for Food I I. The corresponding maxima were US$421 and US$441 million, in 1992
and 1996, respectively. On the basis of the5 per cent rule, the mean s andmaxima were naturally
higher. For the entire sample of 65 countries, under the 10 per cent rule, the mean impo rt 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$5 02 million). At the
other extr eme, the ex cess for all 65 countrie s taken togethe r was lowe st in 1991 (US$84 million).
For such a large sample, the value of excess imports would obviously vary widely from
country to country, in a given year and also over time fora given country. What matters for a
compensation s cheme is that in any p articular ye ar only some c ountries face excess food import bills.8
Table 1. Food import bills of LDCs and NFIDCs in exc ess of 5 and 10 pe rcen t abov e the trend
(mill ion US$)
In excess of 5%
above trendIn excess of 10%
above trend
MeanMaximum
(year)MeanMaximum
(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
627466 ( 1992)
914 ( 1996)
1 252 (1996)
549 ( 1996)
978 ( 1996)
1 527 (1996)179
222
401
224
208
432421 ( 1992)
714 ( 1996)
998 ( 1996)
441 ( 1996)
647 ( 1995)
1 037 (1996)
Notes : Mean is the avera ge annual amount in 1989-1998 of imports in excess of the
threshold. Maximum is the largest annual value during the same perio d. Food II
comprises cereals, dairy and meat products, vegetable oils and sugar. The trend is for
1985 -1998.
Source : Computed from FAOSTAT data.
8Annex I I provides information on the food import capacity of the 65countries, in terms ofthe ratio of
food im ports to e xports o f goods an d services after de duction of debt service pa yments.
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III. THE THREE RESPONSE MECH ANISMS PROVIDED FOR IN TH E DECISION
In order to evaluate the altern ative propo sals discu ssed in the next section, it is important to
under stand how the three response mechanisms operate currently. This section provide s 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
legiti mate needs of developing countries during the reform programme. Seco nd, it calls for adopting
guidelines "to ensure that anincre asing proportion of basic foodstuffs is provided to LDCs and
NFIDCs in fully grant form and/or on appropriate concessional terms in line with Artic le IV of the
Food Aid Convention".
On the first point, the FAC 1999 determined 4,895, 000 tonne s of eligible products (in wheat
equivalent) (plus 130 million Euro in cash) as the minimum level. Actual levels of food aid have
gener ally excee ded this minimum.
On the secon d point, which is the more important one in the present context, the 1999 FAC
lists elig ible recipients under four categories as follows: (a) all LDCs; (b) 24 low-income countries (of
which 6 are NFIDCs); (c) 52lower middle-income countries (of which 9are 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 an d low-income countries (which includ e 6 NFIDCs) and sets out the
conditions under which countries and territories in the other two group s are eligible for food and
which include the remaining 13 NFIDCs.WT/GC/62
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Box 2. Eligible Recipients under the Food Aid Convention 1999
Article VII - Eligible Recipients
"(a) Food aid under this Conve ntion may be pro vided to the developin g countries and territories which arelisted
in Annex B, na mely:
(i) least-develope d cou ntries;
(ii) low-income c ountries;
(iii) lower middle-i ncome countries, and other countries include d in the WTO list of Net Food -
Importin g Develo ping Countries at the time of the negotiation of this Conventio n, when experie ncing
food emerge ncies or internation ally recognized financial crises leading to food shortage emergencies,
or when food aid o perations are targeted on vulnera ble gr oups.
(b) For pur poses of paragra ph (a) above, any changes made tothe DAC (Developme nt Assistance Committee of
the OECD) list of Develo ping Countries and Territories in Anne x B(a) to(c) shall also apply to thelist of
eligible recipients unde r this Co nventio n.
(c) When allocating their food aid, membe rs shall give priority to least developed countries and low-inc ome
countries."
Annex B – Eligible Recipients
"Eligible food aid recipie nts under Article VII ofthis Conventio n refer to Develo ping Countries and Territories
listed as aid recipients by the Develo pment Assistance Committee (DAC) of theOECD, effective as of
1 January 1997, and to countries inclu ded in the WTO list of Net Food-Im portin g Developi ng Countries,
effective as of 1 March 1999."
In accor dance with these p rovisions eligible r ecipients are:
(a) Least-develo ped co untries – all 48 co untries listed; *
(b) Low-i ncome c ountries – 24 countries listed, includi ng 6NFIDCs (Côte d’ Ivoire, Honduras, Kenya, Pakistan,
Senegal* and Sri Lanka);
(c) Lower middle-inc ome countries – 52 countries listed, includin g 9 NFIDCs (Botswana, Cuba, Dominican
Republic, Egypt, Jamaica, Morocc o, Peru , Tunisia an d Venezuela);
(d) Fou r other NFIDCs listed by WTO ( Barba dos, Mauritius, St. Lucia , Trinida d and Toba go).
____ ___________________
* As noted ab ove, Sene gal has since been added to the list of LDCs.
From the standpoint of the Decision , it may thus be seen that the Conve ntion did not treat all
LDCs and NFIDCs e qually in terms of p riority and c riteria fo r food aid allocation, and in c onsequen ce
a situation could arise where the needs of theremaining 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 ofcompen sation implici t in the Decision is related strictly to the
reform process andnot to conside rations such asinternational financial crises and feeding vulne rable
groups . It is consequently doubtful whether the FAC fully responds to the concerns reflected in the
Decision .
Compensator y financing fa cility
In paragraph 5of the Decision , Ministers recognized that "as a result of the Uruguay Round
certain developing countries may experienc e short-term difficulties in financing normal levels of
commercial imports and that these countries may be eligible to draw on the resources of intern ational
financial institut ions under e xisting facilities, or such facilities as may be established, in the context of
the adjustment progr ammes, in order to address such financing difficulties". The subsequent sentence
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refers to consultations by the GATT Director -Gene ral with the Managing Director of the IMF andthe
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 faron the other option stated above, i.e."such facilities as may be
established".  The main f eature s ofthe IMF ce reals facility are summa rized in Box 3.
Box 3. The IMF Compensatory Financing Facility
In 19 63 a Com pensatory Finan cing Facility ( CFF) was established in IMF to help co untries cope with tempora ry
exogen ous shocks affecting export earnings witho ut resorting to undue and unnecessary adjustments. Coverage
was expanded in 1981 toinclude excess cereal import costs. In 1998, this facility was integrated with a new
External Continge ncy Mecha nism (ECM) to create a new Com pensator y andContingenc y Financin g Facility
(CCFF).  T he ECM was, h owever, eliminate d in earl y 2000 an d the new facility again called CFF.
The purpose ofthe CFF is to ensure timel y assistance to members that are experienci ng balance of payme nts
(BoP) difficulties resulting from a temp orary decline inexport earni ngs (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 attributa ble to facto rs largely beyo nd the c ontrol ofthe auth orities.
Access limit s (the amount of compensation) unde r the CFF for excess cereal imports is determined by: i) a
member’ s BoP position; ii) past cooperatio n with IMF to resolve its BoP difficulties; and iii) willingness to
adopt adjustment policies that would meet the standar ds of uppertranche conditio nality. Depe nding on these
considerations, access limits can range from 10 per cent to55 percent of quota. Within these limits, access is
determined by the size o f the sho rtfall/excess and the mem ber’s capacity to re pay the l oan.
As originally concei ved, thekey features ofthe CFF were low conditionality and rapid processing of requests.
Access was not, however, inten ded to be automatic – the countr y's BoP position as a whole was recognized as
important an d not just that part deriving from the ex port sh ortfall or cereal imp ort excess.
The CFF facility has been relatively little used andits cereal comp onent even less. Of the total compensation of
SDR4.1 billion durin g 1993-1999, only 14 per cent related so to the cereal impo rts. Only four countries were
involved forcereals, fora total of six times in the seven years – Mold ova, South Africa, Alge ria andBulgaria.
None of them is either a LDC or aNFIDC. 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
progr ammes" and hence subject to conditionality. A recent review of the facility by the IMF staff
confirmed that f or most de veloping countrie s the eligibili ty criteria are dif ficult to meet:
"Indeed, recognition that it was rare in practice for a country to have an exog enou s
and tempora ry 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 ofaccesslimits 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 tempor ary expo rt 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. Thes e consider ations would sugge st that
"stand-alone" CFFs would be suitable only for circumstan ces – wher e there is no
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need for adjustment – which are, in pra ctical terms, unlikely to hold" (parag raph 15 of
the review9)."
Another factor is that the CFF is limited to cereals only, wher eas 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 interp retation as to whethe r shocks arenot only exog enous but
also of apurely tempora ry natur e (requiring no policy adjustments) or reflect more durable factors
(requiring an a djustment progr amme).10
The cereals import facility has neve r fitted well into IMF's various facilities, as its origin and
continuity were linked to humanitarian and food security conside rations. This too was recognized in
the repo rt cited above:
"The cereal import element was adde d in 1981 (to the original CFF), following the
increas ed volatility of food prices in the 1970s, initially for a fixed term of four years.
The Boar d 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 reconside red 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".11
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, andthe debate has focused on the two main
options discuss ed in the staff paper: i) elimination of the CFF; or ii) substantial amendments to the
facility, limiting it to cases where anarrangement 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 (ofall
facilities), on the unde rstanding that if it is decided to retain the CFF in the context of that review,
there is stron g sentiment for modifying and streamlining it along the lines the staff ha s propos ed."12
To sum up, the CFF could require consider able 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 ofthe BoP and other adjustment conditionality, in recognition that shocks
are exogen ous and tempor ary; iii) uniform eligibil ity criteria for all LDCs and NFIDCs, in line with
the Decision ; and iv) increasing the amount of financing on conc essional terms so asto make the
facility more attractive, e.g. clos er to the IMF Po verty Red uction and Growth Fa cility (PRGF).
9Review of the Compe nsatory and Contingency Financi ng Facility (CCFF ) and Buffer Stock
Financing Facility – Preliminary Considerations (Staff Review) , 9 Decem ber 1999, available on line at
http://www.imf.org/external/np /ccffbsff/review/index .htm.10The 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 comm odity prices are typically long-lasting, the duration of shocks inthe world market
prices of grains and other basic foods (e.g. sugar) is relatively short. More over, sharp increases in prices are
typically of m uch sh orter d uration t han shar p falls.11IMF (199 9), op. cit ., Box 2.12Summing Up by the Actin g Chairman – Review of Compe nsatory and Contingency Finan cing
Facility (CCFF) and Buffer Stock Financin g Facility – Preliminary Considerations. Executive Board Meeting
00/5, 14 Januar y 2000, also available at the website indicated i n note 9.
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Agricultural expor t credits
In theDecision Minister s agreed to "ensur e that any agreement relating to agricultural export
credits make s appropriate provision for differential treatment in favou r of LDCs and NFIDCs".
Negotiations on an Under standing on expo rt credits for agricultural products have been taking place
in OECD for some y ears, but no a greement has yet been reached.
A recent OECD study showed that agricultural export credits provided by memb er 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)13. Most
export credits were for basic foods (mainly cereals), followed by vegeta ble products (including
oilseeds and wheat flour ) and livestock products. Asregards recipients, the share in the total of
agricultural expo rt credits was very small forboth 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 donot necessarily target count ries facing liquidity constraints on their
purch ase o f food in world ma rkets, a s is often claimed for th eir justification.
Reverting to the Decision’s call for "differential treatment" in favour of LDCs and NFIDCs in
any ev entual agr eement, 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 expo rt 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 repre sents "assistan ce" in the true sense of the term, it is necess ary to ensure that LDCs and
NFIDCs enjoy a highe r rate of subsidy (a sort ofmost-fa voured-nation treatment, where by, for
example, a creditor country accords them the same terms as those granted to the most-fav oured
borrow er).
IV. IMPLEMENTING THE DECISION : TWO ALTERNATIVES
This section discus ses two possible alternative ways in which the Decision could be
implement. The first assume s implementation by donors/ag encies in a decentralized fashion as
currently but with some strengthening. The second envisage s the creation of a Special Food Secu rity
Facility.
Alternative 1 : Streng thening th e cur rent me chanisms
Each of the three short-term respon se mechanisms represents transfers from the donor to the
recipient country. They function either on a multilateral basis (aswhen they involve theIMF facility
or WFP - administered food aid) o r bilaterally (expo rt cre dits and f ood aid un der the FAC).  Ea ch ha s a
differ ent time frame for disbursement and eventual repayments, if requir ed, and different accounting
proce dures.
In order to relate the contributions under thevariou s 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 membe rs 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
emergen cy assistance ); expo rt 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 requir es some sort of monitoring mecha nism so that the releva nt WTO Committee is able to
take app ropriate a ction.
13An Analysis of Officially Supported Export Credits in Agriculture , Document
COM/AGR/TD/WP(2000) 91/Final, 2 000, OECD, Paris. Available o nline at http://www.oecd.o rg/agr .
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Box 4. A possible format for reporting on the implementation of the Decision
(all assistance expressed in terms of the g rant eq uivalent, in millions of US$)
Beneficiary
countryFood aid Financing facility Export c redit Total assistance Total needs
LDCs
Country 1
Country 2
........ .
........
NFIDCs
Countr y 1
Countr y 2
........ .
........
At the very least, all donor s would have to pledge annually their assistance for meeting
exceptional food import bills to some central secretariat, which would have the task of standar dizing
the data on a common reporting basis, expressed in compa rable 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 approa ch, there would be a good prospect of shortfalls in
assistance for exceptional food import requireme nts being identified early enou gh in the year for
donors to adjust their levels of assistan ce as appropriate. This format could also be useful to identify
areas whe re improveme nts may be requir ed, in the s ense of fully matching assistance to the need s.14
A strong reporting mech anism 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 resou rces, i.e. that the total made available would be adequ ate 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 "be st endea vour" c ommitment, as at present.
It is these weakness es in the decentr alized approach that have led several countries to prefer a
separate food security facility, with commi tments bound in WTO and adisbur sement system that
results in an e quitable sharing of the a ssistanc e for meeting exc eptional food import bills.
Alternative 2 : A spe cial WTO Food Securit y Facility
Under this alternative a Food Security Facility (FSF), unde r WTO auspice s, would be created
solely for the purpose of implementing the Decision . Although details would have to be worked out,
the FSF would oper ate bro adly as follows:
14Curre ntly, the WTO Committee on Agriculture monito rs the implementatio n ofthe Decision by
treating the instrume nts separately. Each relevant dono r and agenc y provides informatio n onits assistance
progra mmes, includi ng 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 i dentify a nd quantify country needs as stipulated by the
Decision or to ve rify if t he total level o f assistance provided was adequate or eve n excee ded the needs.
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A centralized implementation machinery
In contr ast to the current, decentr alized approach, the FSF would be a centralized machine ry
with its own resou rces, to be drawn upon asnecessary, and with an administrative machiner y for
implementat ion. In addition, unlike at pres ent, assistan ce commitments would be bound in WTO.
Financial requirements
The quantification of exce ss 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 requir ement would be US$3.6 billion ($6.0 billion). onor commitments
can be both in cash and in kind, (e.g. food aid), a s assistance is expressed on a grant-equivalent ba sis.
Eligib ility 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 bene ficiary.
In order to avoid a situation where excessive drawings in a single year could undermine the
viabili ty of the Facility itself, it would probably be necessary to set a cap to the level ofcompen sation
for each country. hat ceiling could be d etermined 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) thevalue of
food imports in the r eference period.
Control over the a vailable resou rces
Full control of available resources by the FSF itself is the key underlying feature of this
alternative. oweve r, that may not necessarily require that it hold all the resour ces 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 neces sary. This a rrangement es sentially require s 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 Commit tee on Agriculture, which is r espon sible for mo nitoring implementat ion.WT/GC/62
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Attachmen t I - Ma rrake sh Minist erial Decision on Mea sures Conce rning the Po ssible Nega tive
Effec ts of the Ref orm Prog ramme on Leas t-Developed and Ne t Food -Impor ting Developing
Countries
1. Ministers recognize that the progressive implementation of the results ofthe Urugua y Round
as a whole will generate increasing opportu nities for trade expansion and economic growth to the
benefit of all participants.
2. Ministers recognize that during the reform programme leading to greate r liberalization of
trade in agriculture least-Dev eloped and net food-importing developing countrie s may experien ce
negative effects in terms of the availability of adequate supplies of basic foodstu ffs from extern al
sourc es onreasonable terms and conditions, including short-term difficulties in financing normal
levels of comme rcial imports of b asic fo odstuf fs.
3. Ministers accordingly agree to establish appropriate mechanisms to ensure that the
implementat ion 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 en d Ministers agre e:
(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 negotiat ions in the
approp riate forum to establish a level of food aid commitments sufficient to meet the
legiti mate needs o f dev eloping countries during the reform programme;
(ii) to adopt guidelines to ensure that an increasing proportion of basic foodstu ffs is
provided to least- develop ed and net food-importing developing countries in fully
grant form and/or on appropriate concession al terms in line with Article IV of the
Food Aid Convention 1986;
(iii) to give full consider ation in the context of their aid programmes to requests forthe
provision of technical and financial assistance to least developed and net food-
importing developing countries to improv e their agricultural produ ctivity and
infrastru cture.
4. Ministers further agreeto ensure that any agreement relating to agricultural expo rt credits
makes appropriate provision for differential treatment in favou r of least developed and net food-
importing developing countries.
5. Ministers recognize that as a result of the Urugua y Round certain developing countries may
experien ce short-te rm difficulties in financing normal levels of commercial imports and that these
countries may be eligible to draw on the reso urces of international financial institutions under existing
facilities, or such facilities as may be established, in the context of adjustment programmes , in order
to addre ss such financing difficulties. In this regard Ministers take note of paragraph 37 of the report
of the Director -Gene ral to the CONTRACTING PARTIES to GATT 1947 on his consultations with
the Mana ging 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
Confer ence, and the follow-up to this Decision shall be monitored, as appro priate, by the Committee
on Agriculture.WT/GC/62
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Attachmen t II - An indicator of food import capacity of selec ted LDCs and NFIDCs
Food
importsXGS-Debt1Import capacity
indicatorCountry
(a) (b) (a)/(b)
US$ million %
LDCs2
1. Angola 235 3 401 6.9
2. Bangladesh 766 4 385 17.5
3. Benin 89 538 16.5
4. Burkin a Faso 60 260 23.2
5. Buru ndi 11 55 20.0
6. Cambo dia * 60 862 6.9
7. Cape Verde * 41 97 42.6
8. Central African
Republic16 159 10.3
9. Chad 19 192 9.7
10. Comor os * 20 44 45.5
11. Djibouti 44 193 22.7
12. Equatorial Guinea * 8 100 7.8
13. Gambia 55 179 30.9
14. Guinea 143 600 23.9
15. Guinea-Bissau 25 28 90.7
16. Haiti 262 262 100.1
17. Lao PDR * 21 408 5.1
18. Lesotho 65 196 32.9
19. Madagascar 62 673 9.2
20. Malawi 121 320 37.8
21. Maldives 24 364 6.7
22. Mali 56 431 13.1
23. Mauritania 150 353 42.4
24. Mozambique 153 355 43.1
25. Myanmar 156 1 308 11.9
26. Nepal * 53 1 038 5.1
27. Niger 61 264 23.2
28. Rwanda 60 81 73.7
29. Samoa * 20 71 28.4
30. Sierra Leone 75 103 72.3
31. Solomon Islands 15 205 7.3
32. Sudan * 176 588 29.9
33. Tanzania, United
Rep. o f165 1 019 16.2
34. Togo 46 461 9.9
35. Uganda 62 572 10.8
36. Vanuatu * 8 124 6.6
NFIDCs
1. Barbad os 47 1 134 4.1
2. Botswana 157 2 430 6.5
3. Côte d’ Ivoire 279 3 535 7.9
4. Cuba 459 n.a. -
5. Dominican Re public 319 6 193 5.1
1Exports o f goods an d services less debt service payme nts.2Reporte d for only 36 LDCs, fo r lack of data on services trade .
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Food
importsXGS-Debt1Import capacity
indicatorCountry
(a) (b) (a)/(b)
US$ million %
6. Egypt 2 546 11 58 9 22.0
7. Honduras 97 1 502 6.5
8. Jamaica 221 2 761 8.0
9. Kenya 340 2 209 15.4
10. Mauritius 173 2 296 7.5
11. Morocco 950 6 266 15.2
12. Pakistan 1 193 6 392 18.7
13. Peru 923 5 095 18.1
14. Senegal 3293 1 082 27.0
15. Sri Lanka 449 4 746 9.5
16. St. Lucia 36 339 10.7
17. Trinidad a nd To bago 137 2 447 5.6
18. Tunisia 564 6 756 8.3
19. Venezuela 785 16 59 0 4.7
Note : Data relate to the average for 199 5-1998 or thelatest four years available. An asterisk
(*) indicates that the count ry is not a Member of W TO.
Source : Food impo rts: FAOSTAT (Basic Food as defined i n the text, Fo od II);
Exports an d debt ser vice: IMF, Internatio nal Fin ancial St atistics .
3Since this annex was pre pared, Senegal has bee n adde d by the United Natio ns to the list of LDCs.
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Revolving Fund fo r the pu rpose ofimplementing the WTO Mar rakesh Decision relating to the Least-
Developed an d Net Food- Importing Developing Cou ntries1
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 experienc e in financing normal levels of commer cial imports of basic
foodstuf fs. It is argued that the provision of financing would not require justification other than
evidence that import bills were ex cessive .
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 cove rage, i.e. that food import
bills in excess of 125 percent of normal levels are consider ed excessive, an initial capital of
US$1 bill ion would suffice for"normal" years. In addition, extra resources ona stand -by basis would
be needed for spike years and these would amount to anothe r US$1 billion. However, these extra
injections into the RF would be paid back to the contributor s within two to three years from the time
of the exceptional borrowing. Henc e, 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
resou rces on loa n when s pikes oc cur.
Capping drawings from the RF – To insur e against the unlikely event that the total resourc es 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 contributor s 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 borrower s in a proportionate mann er. Another option would be to introduc e anelement of
special and dif ferential treatment so that bor rowing by NFIDCs is c apped but not that by LDCs.
Institutional location of the RF– It is envisaged that the RF would be managed by anexisting
financial institut ion with the requisite logistics, manpower and experienc e in managing funds . It
would also be desirable that it has experienc e in funding agricultural development programmes in the
prosp ective beneficiary countries. The International Fund forAgricultural Development (IFAD) is
one institution that meets these criteria.
I. BACKGR OUND
In a decision adopted by the WTO Gener al Council on 15 December 2000, the WTO
Commi ttee on Agriculture (CoA) was instructed to examine possible means of improving the
effectivenes s of the implementation of the Marrakesh Ministerial Decision on Measures Concerning
the Possible Negative Effects of the Reform Progr amme on Least-Dev eloped andNet Food-Imp orting
Developing Countries . In this context, a group of 16 developing country Membe rs of WTO submitted
on 25 April 2001 aproposal which calls for, inter alia, the establishment of an Inter-Agency
Revolving Fund (RF ) with two components2. Thes e were outlined as f ollows:
"The first, and variable component of the Fund (to compris e existing and/or new finan cing
facilities as appro priate), will be to ensure that adequate financing at concessional terms is
made available to the NFIDCs and LDCs in times of high world market price s". The second,
1Technical Note based on an info rmal FAO consultation hel d in Rome on 17 Septembe r 2001.2Proposal to Implement the Marrakesh Ministerial Decision in Favo ur of LDCs and NFIDCS,
G/AG/W/49, 19 Marc h 2001.
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fixed compon ent of the RF, should "provide technical and financial assistance to LDCs and
NFIDCs forspecific proje cts linked to improving agricultural productivity and related
infrastru cture … over andabov e the regular bilateral and multilateral activi ties of donor s in
this area".
FAO organized in September 2001 an informal meeting of expe rts from various international
organizations3to discuss the nature and modality of operation ofthe proposed RF. Section II
summarizes the views expressed byexpe rts at that meeting. Section III develops the possible nature
of the variable compone ntof the RF, including its resource base and the modalities of its operation.
The fixed component o f the RF pr oposal is not addres sed in this note.
II. SUMMARY OF THE FAO INFORMAL EXP ERT CONSULTATIO N OF
SEPTEMBER 2001
Discussions by theexperts during the Rome Consultation in September 2001, and earlier
consultations in Geneva in M arch 20014, identified sev eral issues involved in the ration alization of the
RF and its purpo se, how it could operate in practice andhow its resources could best be used. The
views expr essed are summari zed h ere.
The purpose of the RF would be to provide a loan facility to address short-term finan cing
difficulties eligible countries may expe rience in financing normal levels ofcommercial imports of
basic foodstuf fs. Loans from the Fund would be used to offset the extra costs of abnormal food
import bills. Two appro aches were considere d 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 respe ct to mobiliz ing resou rces to meet its food import
needs as well as c onditions that may be attached to d rawings from the RF.
Wher e 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 exchang e
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 beyo nd
a certain level. The very existen ce of the drawing right would be an assurance that governments
could secure conc essional finance for food imports beyo nd a certain level. Thus, countries facing
either a spike in import price s and/or a surg e in the volume of imports could confidently draw on their
scarce reserves or borrow on commercial terms knowing that conce ssional finan ce for the extra
imports would be fo rthcoming within a short time.
Under the ex ante approach some additional guarantee may be needed to ensure that
foodstuf fs areactually imported in amounts above what otherwise would have been possible to
maintain normal levels of consumption. This may present some difficulties. First, datab ases 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 foodstu ffs,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. Inother words,
much of the data on food consumption in the current year would consist of estimates of often doubtful
3See Annex 1 for list of participants.4At the FAO Roun d Table held in Gene va on21 March 2001. For example, see the FAO discussion
paper: "Towards Improving theOperational Effectiveness of the Marrakesh Decision on the Possible Negative
Effects of the Reform Programme on Least Developed a nd Net-Fo od Imp orting Developin g Countries ".
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value for determining whether the level of consumption was maintained by incre asing food imports,
which in turn led to exce ssive f ood import bills.
Second, it would be ne cessary to establish criteria on how the extra imports would be utilized.
Even if it is assumed that consumption forthe population as a whole is maintained, there may be
doubt as to whethe r consumption of the poor would actually be protected. It may quite possibly fall
while that of the better-of f member s ofsociety was maintained, but no such telling data are available
for all countrie s in the cur rent y ear.
In the absenc e 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 forthe poor are put in place and steps taken to mode rate domestic price
increas es by such means as drawing on reserve stock s and lowe ring import duties.
There is a variety of publicly funded social safety net programmes alrea dy in place in a large
number of developing countries (see Box 1). During period s of price spikes, one or more of these
progr ammes could provide the mechanism throu gh which the governme nt could interven e to protect
the consumption of the p oor.
Box 1. A typol ogy of government-funded social safety net interventions in developing countries that
support food security at the individual or household level
Targeting Food Income Nutrition
Targeted Emergenc y food aid Cash transfer
'safety nets'Weaning foods for low -income families
Food stamps for t he
poorUnemployme nt
benefits
School feedin g for
vulnerable groupsDisability grants Vitamins or mineral supplements for specifie d
groups
Supplementary
feeding for
vulnerable groupsPension for the
elderly
Untargeted General food price
subsidyUniversal child
benefitWater fluo ridization
Overvalued
exchange rate for
imported food
Self-targeted Food-fo r-wor k
projectsCash-work
projectsIodization of salt
Price subsidy on
'poor foods'
Besides demon strating ex postthat food import bills increas ed excessively during the
preceding year (or as soon asdata become available), countries receiving credit from the RF could be
expected to undertak e measu res to prote ct 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 eviden ce accumulated throu gh such reporting would not only contribute
to establishing the credibility of individual countries vis-à-vi s the fund and facilitate future borrowing,
but would also provide n eeded feedb ack to contributo rs supporting the RF.
Another issue addressed at the September Consultation was possible administrative
arrangements for theRF. The meeting agreed that it would not be approp riate to create a separate,
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new, institut ion to house the fund. Rathe r, there was consen sus that it should be operated by an
existing agency that has experien ce with managing funds and has the necessary logistic infrastructur e
and manpowe r. 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 conside red as one possibili ty, largely becau se it alread y operates a
Compensatory Financing Facility (CFF) that is available for excess import bills on cereals. How ever,
the Intern ational Fund for Agricultural Development (IFAD), which is a specialized international
financial institut ion for lending for agricultural development to low-income countries, was consider ed
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 longe r-term financing for
food and agriculture development (IFAD). Thes e twin-financing needs are not only stressed in the
propos al by the 16 WTO Memb ers, but also emph asized in the Marrakesh Decision . Also,
establishing the RF in IFAD would facilitate coordination and complementa rity with other Rome-
based organizations of the United Nations sy stem that deal with food and a gricultural issue s.
III. THE REQUISITE SIZE OF TH E REVO LVING FUND A ND ITS MODALITIES
Trends in food impor ts
Figure 1 sh ows total food import bills of LDCs and NFIDC s over the past 35 years (1965-99) ,
along with the five-yea r moving average. Two aspects of the trend should be taken into accou nt in
considering the features of the RF.
Figure 1. Annual and moving avera ge of food import bills of LDCs and NFIDCs, 196 5-99
First, there has been a steady increase in food import bills throughout the period, averaging
just over 7 per cent perannum. The increase was particularly sharp during 1972-198 4 (over 11 per
cent p.a. ) and slowed down thereafter (to about 3 per cent p.a.). Since the RF conce rns thefutur e, e.g.
2002-20 12, some upwar d adjustment would be required to take into accou nt this trend inasmuch as
the absolute level of excess imports would beincre asing. 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 pe rcentag e deviation in 1990.
Second, the data show that there were three distinct occur rences of "spikes" over the entire
35-ye ar period. The first, during the food crisis of the 1970s , lasted for three years(1973-75) , when
actual food imports were 42percent above the MA level. The second was in 1980 and1981 (31 per
cent abov e the MA level) and the third was in 1995 and 1996 (a20 percent excess). This "stochastic"0400080001200016000Actual
5-year MA
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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 ch ance of their o ccurring is small.
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 f or only two con secutive year s in the other two pe riods.
Definition of exc ess food import bills under various t hreshold levels
While assumptions can be made about future food impo rt 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 expe rience. In view of the mark ed shift in the trend of food imports in the early 1980s
(Figure 1), the analysis below is based onthe data for 1985-99 . As noted abov e, some adjustment to
the results would hav e to be mad e eve ntually to reflect the futu re pe riod.
The size of the RF depends on the mean level of excess food imports, their frequenc y
distribution and their sequen ce of occurrence. Thus, the starting point of the analysis is to define
exces s import bills .5
For any year t, the excess import bill for a given country is the actual level of imports minus
(1+/AC ) * MAt, whe re:
MAt is the moving avera ge value for year (t) calculated as the mean of actual import
bills for that year and the p revious four years (e.g. it is 1991-95 for the year 199 5);
/AC is a threshold level and the term (1+/AC ) * MAt measures the food import bill that is
not consider ed excessive and so is covered by the country ’s own resources. For
example, if /AC is 0.2, only imports more than 20 percent above theMAt level are
consider ed ex cessive.
The excess values calculated for individual countries aresummed up for all the LDCs and
NFIDCs conc erned to obtain the total excess billfor that year. Estimates of total excess bills are
shown in Figure 2 and in Table 1 for various value s of/AC , ranging f rom 0.10 to 0 .35.
5The nature of the problem addressed bythe Marra kesh Decision , as well as the central role of excess
food import bills, are discussed in anothe r paper in this volume (Towards Improving the Operational
Effectiveness of theMarrakesh Decision onMeasures Concerning the Possible Negative Effects of the Reform
Programme on Least-Developed andNet Fo od-imp orting Developin g Co untries ).
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Figure 2. Exce ss food import bills by thr eshold levels ( annual aver age 19 85 -99)
The 1985 -99 annual average level of the excess food import bill ranges from US$730 million
for a thres hold level of 10 percent to US$160 million for one of 35 percent.  Thu s, the thre shold level
is the key parameter determining the size of excess food import bills and consequently the size of the
RF.
Table 1. Exces s food import bills for various threshold levels a ssumed ( value in US$ mill ion)
Spike years Threshold level
(excess over
normal imp orts
- %)1985 -99
annual ave rage1995 119961985 -1999
average
(excludin g the
two spike
years)
10
15
20
25
30
35729
558
416
301
217
1592 338
1 903
1 482
1 119
835
6581 780
1 328
916
553
354 2
270 2524
395
296
219
161
122
1These are also the hig hest levels durin g the entire 1985-1999perio d.2Value in 19 92 (whic h was even lar ger tha n in 1 996).
Figure 3 shows the excess food import bills on the basis ofthe 25 per cent thresh old level.
They were lower than US$4 00 million during the first 10 years (except in 1992 when they were
slightly higher) followed by a spike in 1995 that also linge red into 1996, and were again below
US$400 mill ion in the last three yea rs.0200400600800
10% 15% 20% 25% 30% 35%
Thresho ld level(excess ofnormalimports)
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Figure 3. Exce ss food import bills in 1985-198 9 on th e basis o f a 25 per cent threshold level
(US$ mill ion)
The size of the R evolving Fund
Borrowing and repayment assumptions
The basic characteristic of theRF, which is essential to ensur e that the fund remains viable
over a sufficiently long period, is that it should be self-financing . Consequ ently, borrowing countries
must assume the obligation to repa y 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 b e cap ped.
Interest charged on theloan is assumed to be 0.75 per cent perannum. Alternatively,
differ ent concession al interest rates could be applicable to different eligible countries, depending, for
example, on their GNP per capita , or based on the World Bank'sIDA classification. Attachments 2
and 3 sh ow the va rious lending terms o f IMF a nd IFAD.
The repayment period is assumed to be two years. Thus, an amount borrowed in 2005 would
be re paid in full in 2007, together with the interest a ccrued.
At any year (t), the fund balance , i.e. the balanc e after disbu rsements (lending) and receipts
(repayment) would b e equ al to:
Balance (t) = Balanc e (t-1 ) – disbu rsements (t) + receipts (t)
Possible interest earnings on the “spare” balance are not taken into account. Conceiv ably,
part of the above balanc e of theRF can be invested to earn interest at commer cial rates, rather than
keeping the funds idle. Howev er, whethe r such intere st can be credited to the RF would depen d on
when contributors trans fer funds to it and how the lending and repayment operations are managed.
These are difficult matters to conside r a priori and thus this aspect (i.e. earnings from spare funds) is
not taken into account in the pr esent analysis.
Estimates based on experience of e xcess import bills in 1985-99
The size and the sequen ce of the excess food import bills depicted in Figure 3 provide the
main basis for estimating the size of the RF. Given thestocha stic nature of their distribution, it is
inevitable that the excess import bills, and hence the funding needs, would be characterized by several
years of "no rmal" or low levels of b orrowing and s ome yea rs of spikes.04008001200
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Figure 4 shows the hypothetical sequen ce of the fund balanc efor the period 1985-99
(computed as explained abov e), 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 exhau sted its resources and, in consequence, would have stopped
operating in 19936. Obviously, fresh injections would have been requir ed for the RF to continue
operating.
Figure 4. Hypoth etical fund balanc e in 1985 -99 with an initial capital of $60 0 mill ion
and 25 per cent threshold
-1200-60006001200
Figure 5 shows what would have happ ened ifsuch fresh injections had been made in order to
avoid fund s running out. This ca se assume s also that positive balanc es of the RF, as th ey ac cumulated,
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 mill ion in 1997 and $300 million in 1998.
Figure 5. Fund balance in 19 85-99 with fr esh inje ctions in spike y ears1
1With an assume d initial capita l and threshold as in Figure 4.
6The negative numbers shown in the figure for 1993 (US$66 million), 1995 (US$6 54 million) , 1996
(US$1 042 million) and 1997 (US$13 4 million) simply indicate the extent ofthe deficit with the assumed initial
capital.-1200-900-600-3000300600
RF witho utfreshinjection
RF with injection/pay backInjectionsPayback
RFstopsfunctioningin1993!
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It should be reiterated that under the "stand -by arrangeme nt", the initial capital of
US$600 million is the only contribution expected bycontributor s. In addition, it is assumed that
contributors would have been prepared to make available extra resources on a stand-by ba sis for spike
years. Howeve r, these extra injections would have had to be paid back. Henc e unde r this modality of
operation, the total net contribution to the RF would have been US$600 million plus the obligation (in
the form of "promisso ry notes" or in some similar form) to provide stand -by resou rces on loan when
spikes oc cur.
Alternative estimates, assuming other s equen cing
Spikes in the very early years of the RF. What would have been the consequences if the spike s such
as occurred in 1995 and 1996 had occurred earlier on, say in 1985 and 1986? Such a chang e in the
sequen ce 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-ba cks). 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$80 0 million in 1987 and US$20 0 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$6 00 million initial capital and US$1 100 million stand-by)
would not be af fected nor would the n ature o f the RF ch ange .
Spikes occurring in the middle of thesequenc e or other years in a random fashion. Neither thetotal
resou rces of the RF northe 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 seque nces of exces s food import
bills are gene rated thro ugh M onte 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 abov e (Figu re 1), the spike was not only sharp but also of
unpre cedented 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 somewh at larger initial RF
(because of an increase in the average annu al excess food import bill) but also forbigger injections
(over the three consecutive years), but that would not alter the nature of the RF. Moreover, the
injection imp licit in the th ird year is small as bor rowings du ring the fir st year are rep aid.
Adjusting the size of the RF for operations in the future
Estimates of the size of the RF discu ssed abov e were based on expe rience in 1985-99, but
food imports of the LDCs andNFIDCs have been trending upwar ds, 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 increa se.7In consequ ence, 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 tren ds of food import bills, covering a 10-yea r futur e period
(e.g. starting in 2002), imply that the initia l capital requirement forthe 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 ne cessary initial capita l endowment would amount to about US$1 billion.
As faras the stand-b y resources are concerned, it is difficult to speculate on thenature of
spikes in the future. What has been established from past data is that there is no trend in the severity
7The same perce ntage gap between the actual import bill from its movin g average (e.g. 3per cent) in
the year 2 007, for exam ple, would result in a m uch hi gher e xcess import bill tha n in, say 1993.
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of production shortfalls leading to ever-increasing price spikes8. There could be a repeat of the 1973-
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 aneventuality? Common
sense would suggest that extreme situations require extreme responses – a standa rd instrument is
unlikely to be effective for such situations. Moreover, as noted in Section II, an open-end ed
commitment is unlikely to be acceptable to contributor s 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 ormultiple years' duration). One capping option is to ration total
lending to all potential borrowers in a p roportionate manne r.  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 requir ed if a threshold level other than the 25per cent assumed
here were chosen. Figur e 2 provides a rough guide to the additional adjustments that would be
neces sary to the initial capital endowment.
With respe ct to the stand-by compone nt of the RF to cover spikes, it was pointed out above
that there is no way of determining the magnitude of such spike s in the future and that in any event
there are practical reasons why a cap would need to be set. Cons equently, it would also be necessary
to cap bor rowings from the RF s o that its long-term viability is assur ed.
8An analysis of a longer-time series going back tothe 1970s (1970-96) for cereals showed that: (i)
annual world market prices were fundamentally stable (trend- statio nary time-series process), in the sense that
temporar y shocks to the market do not leave permane nt effects and, after awhile, 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 anysystematic rising trend of intra-year (monthl y) price variability (Sarris, A. The
Evolving N ature of I nternational Price I nstability in Cereals Markets, ESCP No.4, Ro me: FAO, 199 8).
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Attachmen t 1 - Revolving Fund fo r the P urpos e of Implementing the WTO Mar rakesh
Decision: Inf ormal Expert Con sultation h eld in Rome on 17 Sept ember 200 1
List of Par ticipants
IMF
Grant B. Taplin
Special Repre sentative to the WTO
and Assistant Director, O ffice in Gen eva.
IFAD
Kwabena Of fei Dei
Assistant Controller, Accounting
Robert Cass ani
Coordinator, Re source Mobilization
Carol Upham
Progr amme Office r
Supplementary Fun ds
WFP
Robin Jacks on
Senior Policy Advisor
European Commission
André Libens
Principal Administrator (DG DEV)
FAO
Harmon Thomas
Chief, Commodity Policy and Projections Ser vice
Ramesh Sha rma
Senior Econ omist, Commodity Pol icy and Projections Se rvice
Panos Kona ndreas, S enior Liaison O fficer,
FAO Liaison Office in Genev a
Other Expe rts
Jim Greenfield
Commodit ies and Tr ade Exp ert,
Rome, Italy
Alberto Valdes
Consultant, Santiago, ChileWT/GC/62
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Page 111
Attachmen t 2 – Gen eral Terms o f IMF Financial Assistanc e
Repurchase terms
Facility or policy Charges Obligati on
schedule
(years)Expectatio n
schedule
(years)Instalments
Stand- by Arran gement Basic rate plus surcharge 13¼–5 2¼–4 Quarterly
Exten ded F und Facilit y Basic rate plus surcharge 14½–1 0 4½–7 Semiannual
Compensator y Financin g Facilit y Basic rate 3¼–5 2¼–4 Quarterly
Emergency Assistance Basic rate 3¼–5 Not app licable Quarterly
Supplemental Reserve Facility Basic rate plus 300-500
basis poi nts2–2½ 1–1½ Semiannual
Conti ngen t Credit Lines Basic rate plus 150-350
basis poi nts2–2½ 1–1½ Semiannual
Povert y Red uctio n and Growt h Facilit y 0.5 percent per ann um 5½–1 0 Not app licable Semiannual
Memorandum items:
Service charge 0.5 percent
Commitment charge 25 basis points oncommitted amou nts of up to 100 percent of quota, 10 basis
points thereafter
1 Surcharges are applied tothe combined credit outsta nding under the Stand-by Arrangement and Extended Fund Facility of
100(200)basis p oints on the amoun ts in e xcess of 2 00 (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 accou nt of changes in s hort-term i nterest rates in t he major internati onal money markets. The rate was about 4
percent in September 2 001.
Source : IMF (availab le on the I nternet at http://www.imf. org/e xternal/ np/tre/le nd/terms.h tm)
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Attachmen t 3 –  Len ding Terms and Conditions o f IFAD
Highly concessional terms
(applicable to c ountries with GNP per capita of US$1, 063or less)
/AB Free of interest
/AB Service charge of three-fo urths of one percent (0.75%) per annum
/AB Maturity perio d of40 years, inclu ding grace pe riod of 10 years.
Intermediate terms
(applicable to c ountries with GNP per capita of between US$1,0 64 an d US$1, 724)
/AB Interest per annum equivalent to 50% of varia ble refere nce interest rate (as determined annually by the
IFAD Executive Boa rd)
/AB Maturity perio d of20 years, inclu ding a grace pe riod of five years.
Ordinary terms
(applicable to c ountries with GNP per capita of US$1, 725or above )
/AB Interest rate per a nnum equivale nt to 1 00% of the varia ble refere nce interest rate (as dete rmined a nnually by
IFAD Executive Boa rd)
/AB Maturity perio d of15 to 18 years, inclu ding a grace period of three yea rs.
Note: For the purposes of implementing the HIPC Debt Initiative, the IFAD Exec utive Board may amend the
terms upon which an approved loan is provide d to a countr y. In determi ning thegrace period , the matu rity date
and the amount of each instalment forthe repayment of loans, the Exec utive Board shall take into account an
asses sment of a cou ntry’ s debt sustainability pro duced under the HIPC Debt Initiative.
Source: IFAD Lendin g Policies an d Criteria (available o n the Internet at
http://www.ifad.org/p ub/basic/lending/e/0 2polcri. pdf)
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ANNEX  5
Submissions by the In ternational Mon etary Fund ( IMF )
Compensatory Fina ncing Facility (CFF)
This note: (i) provide s a brief history of the CFF; (ii) outlines the main features of the CFF as
amended in November 2000; and (iii) provides consider ations as to why the CFF structure should
not be made mor e automatic than it is.
1. Brief histor y of the CFF
/AB The CFF was created in 1963, following a decade ofdeba te. A group of experts conven ed by
the United Nations had made the first sugge stions to this effect in 1953. The Fund 's initial
respo nse had been to stress the availability of its existing instruments, but it had grown
increasingly concerned about the vulne rability of primary producing countrie s. As originally
conceived , the key featu res of the CFF were low conditionality and rapid consider ation of
reque sts. Acce ss was not, howev er, intende d to be automatic—the country' s balan ce-of-pay ments
position as a whole was recognized to matter, not just that part deriving from the expo rt shortf all
or cereal import excess. The (cumulative) access limit was 25 per cent of quota. Access floated
with respect to access limits as would apply unde r other policies, but access did not "float" as
regards conditionality.1
/AB The CFF underwent succe ssive liberalizations in 1966, 1975, and 1979, in respon se variously
to low usage and to difficulties in commodity markets. The access limit was raised in stages,
eventually to 100 per cent ofquota. Two "tran ches" of access were identified, with more stringent
"cooperation" criteria for access beyond thelower tranche. These criteria, however, remaine d
loosely defined, as the Board emphasiz ed the need for flexibili ty and, in 1978, rejected a staff
propos al to adopt the standa rd of first credit tranche conditionality for access to the "uppe r
tranche" of the CFF. "Floating" with respect to first credit tranc he conditionality was introduced
in 1966 (sothat 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 revenu es and approval of a CFF request introduced in 1975, and the use ofestimated
data permitted in 1979, with an expectation of prompt repurchase if the estimates turned out to
overstate the compens able shortfall. The coverage of the facility was also expa nded, with tourism
and work ers' remittances included in 1979.
/AB The cereal import element was added in 1981 ,following the increa sed volatili ty of food prices
in the 1970s, initially for a fixed term of four years. TheBoar d had rejected this idea in 1978, out
of concern that it was inapprop riate forthe Fund to single out food imports as a balance -of-
payments problem, but reconside red 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".
/AB The long period of liberalization of the CFF was followed by the emergenc e ofcertain
concern s, and the conditions of the CFF were tightened in 1983-88. A sur ge in CFF lending in
1Access to the CFF did not thereby count towards access in calculating compliance with access limits
for use of the credit tranches, but it did reduce the amount of access that was available on first credit tranche
terms as regards con ditionality.
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the early 1980s had created discomfo rt in the Board with the difficulty of defining "coope ration",
and it had become apparent that it was rare in practice for a country to have a shortfall/excess in
the absen ce of an underlying balance -of-payments problem. In 1983, explicit standard s for
coope ration were set for the lower and upper tranch es ofCFF access, and these were furthe r
refined in 1988 to be come the stand ards currently in use.
/AB The contingen cy element was established in 1988 in response to twin concerns, each ofwhich
motivated a differ ent group of membe rs: that arrangements needed to be prote cted from adverse
shocks , and that ad verse shock s wer e best de alt with in t he context of arrangements. A proposal to
replace theCFF with a facility designed only to handle contingencies unde r arrangements had
been rejected by theBoar d in November 1987. By way of compromise, in a series of eleve n
meetings in Marc h 1988, the Boar d created the new contingenc y window while reducing virtually
all of the CFF access limits (with, for instance, the maximum financing forexpo rt shortfalls
reduc ed from 83 p er cent to 65 pe r cent of quota ).
/AB The two windows have since remained broadly unchang ed, with some technical modifications
in their 1990-92 reviews, including, in the 1992 review, the removal of CFF "floating" with
respect to first cr edit tranche conditionality. Access limits under each window were redu ced in per
cent of quota (to remain uncha nged on average in SDR terms) following the Eleventh Gener al
Review of Quotas in J anuary 199 9, pen ding the pre sent r eview.
2. Main fea tures of CFF a s amended in Novembe r 2000
During the 2000 Review of Fund facilities, a number of Directors were in favou r 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
inapprop riately. Following the amendments, the main featur es of the CFF a re cu rrently as f ollows:
/AB The purpose of the CFF is to help membe rs cope with tempora ry export shortfalls and high
cereal import costs that creat e an overall balance-o f-payments need. Commodity price shock s that
do not cre ate a tempor ary balanc e-of-payments ne ed would not qualify for compens ation.
/AB The CFF is a nonconc essional facility , with its rate of charge equal to that on stand-by
arrangements (SBAs). Howe ver,it carries certain advantag es for the borrowing member relative
to SBAs: access to CFF resources is su bject to sepa rate a ccess limits; and drawings unde r the CFF
are e xempt fr om sur charges on high levels o f access.
/AB The CFF operates under a single set of access limits : 45 per cent of quota for either anexpo rt
shortfalls or a cereal import exces s, or 55 per cent of quota for the two facto rs combined.
Regarding phasing, the duration of the facility is envisaged to be at least 6 months, with the
expectation that purch ases ofeven amounts will be made (unle ss there are good reasons for front-
or ba ck-loading ).
/AB Becaus e member s drawing unde r the CFF have usually had underlying balan ce-of -payments
problems that extend beyond thetempora ry shock, it is expe cted that a CFF will generally be
agreed in conjun ction with other Fund arrangements (SBAs, Extended Arrangements (EFF), or
arrangements under the Pove rty 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., abstr acting from the expo rt or cereal price shock )
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3. Should the CFF be more automa tic 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 conside r that there is scope for the Fund to offer an
unconditional facility that could be triggered automatically in the event of an expo rt shock or a
shock to key import prices . But there are good reasons why the Fund is probably not the appro priate
institu tion to provide compensato ry fina ncing with these cha racte ristics:
/AB The abov e argument pertains mainly to lower-income countries with no access to intern ational
capital markets (countries with access to private exter nal financing would be in a position to
smooth the impact temporary import pric e sho cks 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 noncon cessional nature. A PRGF arrangemen t or augmenta tion is
conce ssional, and would better support necessary longer -term structural adjustment such as trade
liberalization.
/AB As with its other facilities, the Fund requires adequa te safeguards forthe CFF to ensure that
resou rces are used for the achievem ent of exte rnal viability and not to perpetuate BOP difficulties.
In fact, in re-examining the experienc e with the CFF, the Board concluded that most of the
countries concerned need ed some domestic adjustment, which would have been more
approp riately suppo rted by a programme suppo rted by a stand -by, EFF, o r PRGF arr angement.
/AB The natur e of the unde rlying 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-alo ne CFF if
it has an otherwise satisfacto ry balan ce-of-payments situation. But if the shock is permanen t, as
is typically the case, the Fund 's task should be to help the membe r adjust to it (with the support of
an ar rangement), rather than to provide uncon ditional finance.WT/GC/62
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Comments on FAO Paper "Revolving Fund for the Purp oseof Implementing the WTO Ma rrakesh
Decision relating to the Least-Dev eloped a nd Net Food-Im porting
Developing Countries"
Executive Summary, second parag raph . This paragraph indicates that contributor s would be asked
to provide "extra resources on a stand -by basis" and that these resources would be paid back to
contributors. Howev er, the paper does not address whethe r intere st would be paid on these loan
resou rces an d, if so, the rate o f intere st on these loa n res ources.
Section I II.3.3 :
a. First para graph . The RF, asenvisag ed 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 sugge st it set out the overdue and provisioning
policies for accou nting purpos es and the financial policy such as burden-sharing or a similar
mechanism that would be use d to protect the RF from ov erdue obligations.
b. Fourth paragraph .The paper should specify the RF loan disbu rsement and repayment
schedule s, 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 parag raph . The paper could usefully specif y whether theRF 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 liabili ties of a Trust Fund or
Administered Account be strictly segregated from other activities of the institut ion managing the
RF. The paper should also describe accounting, reporting, andauditing policies. At a minimum,
financial statements prepared in accordance with International Accounting Standa rds should be
prepa red and s ubject to an exte rnal audit annu ally.
Additional consideration :
The RF's operations should incorporate guidelines on determining the creditworthiness ofborrowe rs,
in particular their capacity to repay the loans. This may require an overall assessment of a country 's
macroe conomic situation and pr ospects, in addition to the legal obligation for the gove rnment to rep ay
and the establishment of penalties fo r non payment.
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ANNEX  6
Submission by the In terna tional Grains Council (IGC)
World Grain Markets sinc e the mid-1990 s
In the mid-1990 s, the world grain mark et expe rience d a relatively short period of tight
supplies and high expo rt prices. Howeve r, production rebound ed 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 1970 s. Latterly, mark ets have staye d relatively depressed, with supplies
being adeq uate to meet the continued growth in commercial needs, and prices showing conside rable
stabili ty (see Ch art).
World wheat and coarse grain s 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 incre ases 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. Produ ction in the CIS and eastern Europ e was variable but there was major increase in
2001. In many developing countries, wheat production was relatively flat, but there was an overall
increas e in their output of co arse grains.
Although trend rises in grain yields have slowed down, growth continues even in countries
where they arealrea dy high, as new varieties come into use and more farme rs adopt improved
agricultural practices. Areas planted with grains in many major producing countries have declined,
although some land c ould no dou bt be br ought bac k into use und er adequ ate mark et incentives.
Overall growth of world grain consumption hasbeen 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 produ ction and trade, especially in the United States. The steep decline in use
in the CIS and Eastern Europe appe ars 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 Af rica.
World grain trade has increased by about 10 per cent since the mid-1990 s, with most of the
growth attributable to imports by developing countries. Some forme r major wheat importers, notably
China and Pakistan, have conside rably reduc ed their purchases, while imports by Iran, Brazil, North
Africa other than Egypt, and many least-dev eloped 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 expo rting countries in world grains exports has fallen in the last two
seaso ns, because of much largerexpo rts by countries in the Black Sea region, South Asia (for wheat)
and Brazil (for maiz e). Sales ofmaize by China have been variable, but very large in most recent
years.
Stocks in the five major expo rting countries remained large until the current season, when
they declined after their poor harvests. World grain stocks ros e steeply in the latter 1990s but, despite
very large invento ries in India, have recently been falling, mainly becaus e of a considera ble drop in
China's c arryove rs.
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Since 1998, world grain prices have stayed relatively low, fluctuating within a narrow band.
At those levels, prices do not provide satisfactory return s for many grain producers, who have turned
to their governments for sub stantial financial support to sup plement market r eturns.
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 countrie s' imports
of wheat an d coa rse grains hav e now r eached 150m. ton s, close to thr ee-qu arters o f the wo rld total.
After the short period of high world grain prices in the mid-19 90s, world produ ction
respo nded quickly to market signals. If the overall growth in world grains consumption and
production appears to have slowed down in recent years, the processof chang e in the global grain
economy h as acceler ated.
Trade in grains and products is flowing in new directions andin more processed forms in
respo nse to more open mark ets and to changing consume r requirements, wherequality factor s are
becoming a key factor in the market place. Trading has become more fluid and buying pattern s less
speculative, more geared to meeting immediate needs and inc reasingly using risk man agement tools.EXPORT PRICES (fob Gulf) OF US WHEAT AND MAIZE
July 1995 – March 20 02
6080100120140160180200220240260280300
1995 1996 1997 1998 1999 2000 2001
YEARUS$/ton
WHEAT: US HardWinter
MAIZE:US YellowCorn
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ANNEX  7
Submission by UNCTAD
Current p ractices in the financing o f international foo d trade , and implications for the structur e and
operational modalities of an intern ational "revolving fund" f or the financing o f food imports
Summary
Pursua nt to the Marrakesh Ministe rial Decision on Measures Concerning the Possible
Negative Effects of theRefo rm Programme on Least-De veloped and Net Food -Impo rting 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 elabor ates how such a fund canbe structure d so that it require s
no large new bureaucracy, is cost-eff ective, is efficient in enabling needy countries to obtain timely
finance forfood imports, and h elps to improve the intern ational trade in fo ods.
This note starts with a description of the current organization of food imports in developing
countries, a nd the fina ncing pr actices in international foo d trad e.  Food imports are overwhelmingly in
private hand s, and most gove rnments are not or little involved – not even in allocating foreign
exchan ge for imports, as the foreign exchange markets in most countries have been liberalized.
There fore, if a "revolving fund" is to enable sufficient imports during times of high world market
prices (or if a reduction in food imports at conc ession al conditions makes larger imports at
commercial terms ne cessary) it needs to reach the p rivate se ctor.
As is argued in the paper, the private sector is already constr ained in their access to financ e.
They normally need to buy on “deferred payment” terms, meaning that their foreign suppliers need to
accept the credit risks of developing countries’ traders. Thereare several ways (described in detail in
the pape r) in which the suppliers can mana ge this credit risk expo sure, but ultimately, they are
constrained through thetotal credit risk that the market can absorb – at a given cost, the market can
absor b only X dollars of credit risk for country Y. Therefore, the currently available private sector
facilities for finan cing developing country importe rs meet ab solute con straints, and cannot beadapted ,
except at great pain (large increases in country risk premiums and thus, import costs), to sudden
increas es in fina ncing ne eds.
Given these constraints imposed bymarket mechanisms, a special facility to deal with food
trade financing needs in times of crisis canbe useful. Howe ver, such a facility should aim to relieve
import needs when they arise, rather than reimbur sing gove rnments many month s after the problems
arise. To make finance available in time, the "revolving fund" can rely on objective trigger
mechanisms, based on world market food price s and annou nced reductions in conce ssion al exports to
countries. These factors are not influenced by the policies of the LDCs or NFIDCs which would
benefit from the fund’s suppo rt, and thus, no review of the food policies of prospective borrowe rs
would be req uired.
Furthermor e, the fund should rely on disbur sement modalities that ensure that, firstly, the
companies that actually import the food benefit of the finan cing and secondly, funds are actually used
for food imports and not diverted to other operations. Building on the existing modalit ies of food
trade and its financing make s this possible. Current contractual practices and the involvement of
banks at several stage s of the food trade financing chain give a good basis for a“revolving fund” to
provide tar geted fina nce.  On this b asis, on e can constru ct fund disbur sement mecha nisms that make it
virtually certain that funds will be used for food imports by experien ced local companies with a good
track r ecord.   How this can be don e is discu ssed in some detail in the pape r.
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It is also essential to ensure that funds are reimbur sed. International food trade is not without
its problems – contr act defaults or even frauds occur – andat a national level, it has often been
difficult for food trade finan ciers to recuperate their funds. By shifting part of the finan cing risks to
banks, the capacity of banks to identify potential problems and prevent them can be optimally used.
With sover eign guarantee s further backing national reimburseme nt obligations, serious payment
defaults c an be mad e unlikely.
As the propo sed mechanism builds on existing information and the market’s current
contractual habits and financin g mecha nisms, and it requi res no policy review proce ss,a "revolving
fund" of this nature is easy to administrate. It would thus requir e only a small secreta riat. The
"revolving fund" itself would not have to be paid-up; rathe r, donor countries can give "conditional
guara ntees" against which the fund could obtain finan cing when require d. The overall cost of
ensuring that eventual increa ses 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 counterpa rts to
improve food finan cing mechanisms, would create a better functioning of the food sector, and over
time, wi ll make itself superfl uous.
Context : the propo sal fo r the establishment of a "rev olving fund"
Following concerns that greate r liberalization of trade in agriculture may lead to negative
effects in terms of the availabili ty of adequ ate supplies of basic foodstuff s on reasonable terms and
conditions, the Marrakesh Ministerial Decision on Measures Conce rning the Possible Negative
Effects of the Reform Programme on Least-Dev eloped and Net Food-Im porting Countries was
adopted. As a mecha nism to cope with the possible short-term difficulties in financing normal levels
of commer cial imports of basic foodstuffs, 17 net food-importing countries made a proposal for the
establishment of a "revolving fund". This fund should ensure that adequ ate finan cing at conc ession al
terms is available to LDCs and NFIDCs during times of high world mark et prices.
This brief note explore s how such afund can function in the current context of international
food trade. It follows on an earlier FAO report on thesame issue, and has benefited from discus sions
in the WTO’s Interag ency Panel on Finan cing Normal Levels of Commer cial Imports of Basic
Foodstuff s. This note does not address the issue of the causality between the WTO reforms and
either the level of the prices of basic foodstuf fs, or the variability of these prices around their trend.
Rather, it recog nizes that while foodstu ff 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 finan cing normal levels of comme rcial imports of basic foodstuf fs are indeed likely to
occur . This note describes how a fund which, in a way, acts as an "insur ance" 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 "insuran ce premium" (the cost of the"revolving fund") is lost (although there are positive
side-e ffects).  But a s is arg ued h ere, the costs of awell-designed fund do not ne ed to be high.
Developing countr y food imports a re now mos tly in private hand s
Over the past decade, most government-ow ned food import agencies have been dissolved.
Some have been expos ed to competition and now function alongside private sector traders. Only in
very few net food-importing countries state enterprises have remained in a mono poly position in food
imports. Thus, the structure of food imports in developing countrie s is now dramatically differe nt
from that which prevailed in the early 1990s. By and large, private tradersare now respon sible for
importing food.
Wher e food imports take place within a private sector framewo rk, governments tend to take a
hands -off approach, leaving it to private traders and processors to procure foods on the international
market, and financ e its purch ase. In a handful ofcountries , private sector imports coincide with aWT/GC/62
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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, governme nts have helped set an enabling framework for food
imports.1Most countries have now freed exchang e contr ols, so hard currency is no longe r centrally
allocated, and importer s have to procure it by themselves. In the large majority of cases, the private
trader s are locally owned, although there have been a few large inter national traders which hav e set up
what amounts to barter operations in developing countries (bringing rice andother foodstuffs into the
country, and using the proce eds to buy commodities for expo rt). 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 gover nment arranged food imports), and a limited financial strength. They are generally
diversified, importing the whole r ange o f bulk food c ommodities, and often, othe r products as well.
Given their limited financial capacity, local trade rs have a stron g preference for buyin g on
deferred payme nt terms – e.g., the seller provide s the good s, 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 foodstuff s, sell them on the local market, and use the proceeds to reimburs e the seller.
The longer thepayment terms, thebetter, particularly because this allows the buyer to make large r-
volume purch ases which canlead to consider able saving s in transp ort 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 trade rs would be paying if they had theneed ed cash, plus the
interest charges that the intern ational 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 insuran ce from his governme nt (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 bank s generally require full guara ntees from prospective borrower s, often in the form of real
estate. As food trade tends to bea low-mar gin busines s, few local trade rs have sufficient wealth to
gener ate enou gh local bank finan ce to keep busine ss going. There are financing mechanisms to
overc ome this problem (in particular, warehou se receipt finance, which allows the bank to use the
food itself ascollateral for the financing), but most developing country banks are not familiar with
such mechanisms. The local trade rs are also not large enou gh to obtain international bank loans
(contra ry to the situation when state comp anies had a monop oly; these regularly tapped into the
international syndicated loan market, and even issued trade paper -comme rcial paper- for sale in the
international market. The remaining state enterp rises arestill able to do this, albeit within the
constraints o f countr y ceilings des cribed below).
Intern ational financing for developing countr y importer s
Developing country importe rs normally rely on their suppliers forfinan cing their imports.
The supplier s can provide for this in four w ays:
/AB 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 ca se the importe r doe s not reimbur se).
/AB They can borrow themselves from a bank (or use their own working capital) to enable
sale on de ferred payme nt terms.
1The best exam ple of this are the framework counte rtrade arrangeme nts into which the governments of
a few count ries (e.g., Egypt, Myanma r, Suda n) have entere d to enable local trade rs to payfood imports in local
currenc y or with local comm odities, and inparticular, the “Bilateral Payment Arrangements” promul gated by
Malaysia to enable po orer c ountries to buyits palm oil.
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/AB They can obtain credit or credit insuranc e from an official agency, which provide s cover
for 9 0-95% o f the risk s of the credit.
/AB They ca n use financial en gineering tec hniques 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 riskforms a large part of this), and banks gene rally target a "risk-adjusted rate of
return" – the highe r the risk, the larg er the return should be .
In the second case, the credit will form part of the trading company ’s credit expo sure.
International trading companies operate very much like banks (and have little choice in this, because
they depen d so strongly on external finance ), with credit ceilings foreach country. Revising credit
ceilings is slightly easier than in banks, but credit commit tees arestill very vigilant. The credit
exposu res that the trading compan y gets in this way are often discou nted in the forfaiting market
(which remov es them from the trader’s country riskexpo sure), and the costs of forfaiting arebuilt in,
from the be ginning, in the commodity’s price.
Official credits and credit insuranc e (which allows banks to exempt loans from countr y
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-e xporting developing countries (such as
Argentina and Malaysia ). Typically, these programmes shift the credit risk from the expo rter to the
export credit (insur ance) agency , with only 5-10% of the risk still remaining with the exporte r. It is
often against such credits orcredit insuranc e that expo rters agree to sell on deferred payme nt terms.
These agencie s have specific budg ets for their operations, often mandate d by specific parliamentary
budget approvals; most have been complaining in recent years that their budg ets had been cut to such
a deg ree that they h ave h ad to re duce their services.
In these three cases, the transactions gene rate "trade paper" (the importer ackn owledges
delivery, andpromise s to pay in, say, 90 days). If this trade paper receive s an "aval" (a type of
guara ntee) from areputable local bank, then it can be discounted on the seconda ry market, that is, it
can be sold to investors . It can be discounted with recou rse (meaning that if the importer does not
pay, the exporter has to pay the investor), which does not help the expo rter to reduce his own credit
risk expo sure but just provide s him with liquidi ty. It can also be discou nted without recour se – the
investor takes thecredit risk. The forfaiting market is the principal outlet for such without-rec ourse
discounting. The forfaiting market has only limited depth for each countr y, and when much paper
from a country is offered, discou nts incre ase fast (so the trader has to build in a high price premium to
compensate forthis).
Increasingly, traders are resorting to the use offinan cial engineering techniques to enable
them to continue selling commodit ies to developing countrie s. One simple form is warehous e receipt
finance, wherethe international trade r 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 trade r becomes also the importer, and the local trader becomes a mere
distribution agent. The risk that the commodity is stolen from the ware house , or effectively
exprop riated by the government, can be covered by insurance (including, for Southe rn African and
Eastern countries, b y a n ew Wo rld Bank f acility). Financial engineering adds costs, but it is often still
cheap er than building in the risk premiums that would be ne cessary for non -structured tr ade financing.
However, the possibilities to use financial enginee ring are limited by a lack of expertise in developing
countries (meaning that local bank s in general cannot supply the necessary supports ) andin certainWT/GC/62
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cases, inapp ropriate government policies (more in particular, inappropriate laws and regulations in
areas such as bank ruptcy rules o r the en forcement o f collateral).
What happ ens if there are sudden n ew food import need s?
The current food financing system is not very good for dealing with shocks. As canbe clear
from the discu ssion above, apart from structure d finan ce, the other three sources ofimport finance are
all limited – there are fixed ceilings that arevery difficult to chang e. So if food import needs of a
certain country increase (because of price incre ases, orlarge r needs for food imports on commer cial
terms), it is quite likely that, other circumstances remaining equal (and irrespective of the overall
balance of payment situation), existing credit lines areinsuf ficient. People still need the basic
foodstuf fs, of course, and the mark et will find a new equilibrium. This would normally have one or
more of the following components:
/AB Local trade rs 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 anothe r cargo). This does not have many negative consequence s, but
there are some limits to this, imposed by the logistics of international food trade
(transp ort takes mu ch time).
/AB International traders sell more on the assumption that they will place the resulting pape r
into the forfaiting market – which, given the limited depth of the forfaiting market for
most developing countrie s, will lead to higher discounts for the country ’s paper, which is
reflected in high er prices charged b y the trad er for the food.
/AB Opportunistic trader s –looking for high risk/high profit oppo rtunities- come in, selling at
a relatively high price (and in practice, with a serious risk ofdelivery of sub-stan dard
commodities or other co ntractual pr oblems).
/AB Local trade rs start paying their bills late, using funds due for a credit on one commodity
to import another. This will ultimate ly lead to higher risk premiums, andthus, highe r
food p rices.
/AB International trad ers do more structur ed finance deals.
For food consumer s, this "market solution" has as one consequen ce that the price s that they
would have to pay for their food are highe r than would have been necessary had financing costs not
increas ed. There are also likely to be short-term supply disruptions which, by themselves, can drive
up local prices .  Gove rnments which p rovide targ eted sup port to vulner able gr oups wo uld be squ eezed
between a d esire to co ntinue targeting their as sistance, a nd pressure to use their budget to help a larger
group o f consume rs.
While an overall balance of payment situation worsens thesituation for the food importe rs, a
better balance of payment situation does not do much to solve his financing problems. If there is no
surge in expo rt revenue at the same time that food import need s incre ase, it is likely that the local
currency will depre ciate (which would force trade rs to raise local prices, which in turn increases
trading risks), anda riskthat the gove rnment will intervene in the foreign excha nge market (this, in
turn, creates risks for foreign finan ciers and thus will lead to higher country risk premiums). If there
is a simultaneous surge in export revenu e and thus, the overall balanc e of payments does not
deteriorate, these problems are less likely. However, this does not mean that financing problems are
automatically resolved. Thos e 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.WT/GC/62
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Can an interna tional food financing facility be us eful?
Given the above, a new financing facility, in the form of a "revolving fund" forfood 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 intere st rate. Howe ver, given the prevalent system of food
imports, a fund that would provide ex-post loans, to help countries replenish the hard currency lost
through highe r food imports, would have little or no impact on the ability to keep food imports going
in times of increas ed food fina ncing ne eds.
Local trade rs who wish to import more food need funds, ornew 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 gover nment will get a new loan will influence the willingness of international trade rs or banks to
give them affordable loans now. It is even hard to imagine that the governme nt would authorize a
new, dedicated credit line for food imports without being absolutely certain that the disbur sements
under this c redit line wil l be refinan ced from a n international fund credit line – no Ministry of Finan ce
is likely to accept an arrangem ent of this kind. If there is the certitude that such refina ncing 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 asthe International Moneta ry Fund’s Comp ensato ry
Financing Facility (CFF) has not been set up to help solve this kind of financing problems, and
through its very natur e, cannot, irrespective of any chang es that onecould 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 excha nge reserves, not to support food imports at the time of need, then one can
question why the “ food tra de balan ce” is conside red in isolation – it would be more logical to conside r
the balance o f payments as a whole ( as inde ed, the I MF’s CFF doe s).
Can one design a scheme thatprovides funds when there is a need for incre ased food financing
instead o f after?
It is possible to design "trigger mechanisms" that are sufficiently immediate to enable the
disburseme nt of new food import credit lines at the moment that there is a need for such credit lines.
These trigge r mech anisms have the added advantag e that they are exter nal to the beneficiary
countries, and thus, the actions of the gove rnments of the beneficiar y countrie s need not to be
scrutinized; this makes the operations of the secretariat of the "revolving fund" easie r as no policy
review fun ction is nece ssary, and it can con sider ably spe ed up disb ursement.
Increased financing needs for food imports can result from three facto rs, two of which are out
of the local government’ s hands, and on the third of which it can have aninfluence through its
policies:
1. higher world ma rket price s for food
2. a shift fr om food imports on pr eferential terms/food aid, to commercial foo d imports
3. an incre ased food deficit, as a re sult of a dis aster, bad policies, o r other factors.
As has been noted by others, donors would have difficulty to accept compens ating a countr y
for the effects of its own poor policies. Thus, increased import needs because of factor 3 would be
compensated only after consid erable scrutiny, and except in the clear case of a non-man -made
disaster, financial disbur sements would belinked to seriou s conditionality. If the cause of the
increas ed ne eds is a disaster , then the intern ational community should respo nd with more foo d aid, not
with loans to enable commercial imports of basis foodstu ffs. One could thus argue that it is highly
preferable for an international fund to concentr ate on the increased financing needs that may result
from factors 1 and2. In practical terms, import statistics are also only available with many months of
delays; and then, may be an imperf ect reflection of the needs for extra import financing, as it may beWT/GC/62
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that in the absence of proper financing facilities, local importers were unable to make extra imports
despite large r local nee ds.
In contr ast, information on the first two fa ctors is a vailable with l ittle or no time delay. World
market price s for food are available on a real-time basis. Data on preferential food imports and food
aid are available on a reasonably timely basis (donor s tend to programme such schemes), and a
reduction of the volume offood available under such scheme s canin all likelihood be determined in
advanc e. These data are already gathere d by existing organizations (in particular, the FAO and the
International Grains Council), so it would not be necessary to constr uct an expensive new monitoring
system. Although it will require technical discu ssions, it should not be difficult to establish, for each
country, abaseline price index , and a baseline index for food imports at comme rcial terms. Thetwo
could then be combined into a "commercial food finan cing need index", for each country, and the
secretariat can monitor the chang es in these countr y indices. A, say, 20% increase in a country ’s
index could then trigge r the av ailabili ty of new fun ds.
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 finan cing
of food imports. The structur e is designed to enable finan cing of food imports when there is a need,
rather than to compens ate balan ce of payment losses after the fact. It builds on existing practices of
international trade and of intern ational finance. The kind of operations described below are perfectly
familiar to food buyers,bank s, andfood supplier s, and they would have little or no difficulty in
under standing the mech anisms and applying them. The structure of the facility also reflects the fact
that the major conce rn in finan ce is not so much to find clients intere sted in borrowing, but to secure
reimburseme nt, and it is assumed that a similar conce rn applies to donor countries that make funds
available or provide loan guarantees. Thus, the structure describe d below contains strong measures to
reduc e the risk of loan default.
One possibility for the structu ring of an international finan cing facility is the creation of
earma rked financing windows in the intere sted LDCs and NFIDCs. These windows would remain
dormant as long as certain ag reed trigger s are not breached, but become active once there is a need for
new financ e for food imports. A small secretariat would be charged with monitoring trigger signals.
The secreta riat should also elaborate, with interested governments, what should be the trigge r levels,
and what should be the link between available food import credit and the levels reached by the trigge r
factor s, on the b asis o f clear criteria established by the inter national community.
Secretariat of
international
facilityNational windo w
(e.g., with Cen tral
Bank)
Local 
bankLocal 
bank
Local
traderLocal
traderLocal 
traderDonor
countries1.The set-upofthefund
Provisionof loan guar antees, up 
to Xamount, and conditional on 
certa in «trigger » cond itions 
being m et.Creation of nat ional «window s» 
insuitable local organizat ions, and 
agreements on fi nancing and 
reimburse ment m odalities.
Agreementonlending 
modali ties and 
distributionof
risks.
Infor mationon 
lendi ngcondit ions 
andmodalities.
WT/GC/62
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To ensure that, if there is a need for new food finan cing, funds will be available, the
international community can provide conditional guarante es rather than finan ce – in other word s,
there is no need to have a large amount of mone y in a non-utilized account. At the national level, the
governme nt would have to agreethat any sums borrowed under the facility will be reimbursed – it
needs to give a sovereign guarantee. If food impo rts area state monop oly, the gove rnment could
decide that the food parastatal or its parent Ministry administrates the fund. Iffood imports are
largely in private sector hands, then the actual lending to traders should be through local bank s. 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 bank s can then
inform local trade rs.
The secreta riat 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 bank s with which it will work in the future to distribute the actual funds. These
reputable suppliers donot need to be just the major weste rn trading houses – with the assistanc e of
banks, one can find many more potential suppliers, across the world. But it is neces sary to establish a
list of some kind, as fraud is not uncommon in international food trade, and one needs to avoid that
funds arepaid ove r to a c ompany that then mak es no delivery o f 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 aclear
sequen ce of events to enable traders to obtain the funds necessary to import food. As is indicated in
the following chart, the sequenc e ofevents would start with the international secreta riat advising a
country that trigger s 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 gove rnment, 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, conta ct 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-com e-
first served basis. Anothe r possibility is to auction off access rights among the local traders,for
example on the basis ofthe interest rate they are willing to offer (this would indeed increase the costs
for trader, but would generate a pro fit for the "national window" which could be used, for example, to
target food assistan ce to vulne rable groups ). If ona first-come -first-se rved basis, the local trader
would enter into an import contra ct with a reputable fo reign supplier (the list of which should be ma de
available). With a copy of the contr act, he now approach es 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
reque st, and if it is comfo rtable with the credit risk of the local trade r 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 require d payme nt for the food imports unde r the contra ct. This whole
proce ss could be do ne in a matter o f a few day s.WT/GC/62
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Secret ariat of
intern ational 
facilityNationalwindow
(e.g.,with Central
Bank)Foreign
supplier
Local
bankLocal
bank
Local
traderLocal 
traderLocal 
traderDonor 
countries2.  D isbursementunder the fund
1.Indication th at the 
availabilityof X amoun tof 
finance has been triggered
2.Information that the special 
finan cing w indow is now open
3. Informa tion that the
window is now open5. 
Finance 
request6.If
appro ved, 
finance 
request8.Trigg er of
guara ntees7. If approved , finance req uest4.Contract10. Export 9.Payment
There are variou s ways in which the "revolving fund" can obtain the needed finan ce. It could
reque st donor countrie s to provide funds in place of some of their guarantees . Or it could borrow
from banks against the gove rnment guarante es (these give a AAA credit rating, which enables the
facility to borrow money c heaply ).  In certain conditions, it could raise the funds at even lowe r cost on
the capital market.  The re are also variou s ways in which the for eign supplier can bepaid. The easiest
and less risky approach is probably to work throug h reputable bank s, which guarantee that once they
make the payment, the food will indeed be s hipped in ac cordance with the contract. Many banks have
the skills and expe rience to do this (in effect, it can be as simple as the opening of a letter of credit),
and it would probably not be wo rthwhile to build up such sp ecific ex pertise in the sec retariat.
Once the payme nt has been made, or theforeign supplier feels secure that it will be made,
shipment of the foods will be arrange d, in such a way that the supplier will be paid the remaining 5,
10 or 20% which the importe r is supp osed to pay directly. It is virtually impossible that the funds are
diverted to other u ses.
After an agreed time, the local trade r (importer ) has to reimbur se the loan, in local currency.
If hedoes so in time, the local bank reimburs es 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 mana ged at the level of the national
window). The national window, in turn, reimbu rsesthe "revolving fund" for the payme nt made to the
international supplier of the foodstuffs; and the "revolving fund" could in turn reimbur se the ultimate
provider s ofthe finan ce.  Th e dono r guarante es can then b ecome d ormant ag ain.
WT/GC/62
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Secretari at of 
internat ional
facilityNationalwindow
(e.g., w ith Cent ral 
Bank )
Local
bank
Local
traderDonor 
countries3.Reim bursement under the fund, 
assum ing no defaul t
1. Reim bursement in 
local currency2. Re imbursem ent in 
local curre ncy3. Re imbursem ent in 
hard currency
4. Guarantees 
expire
The fund should be set up in such a way that it strongly reduces therisk of default. The best
way to do this is to create stakeholde rs in a proper reimburseme nt 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. Soif
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 trade rs or
for the food busines s could be too easily exhausted. But it has to be high enou gh to ensure that the
bank takes active meas ures to ensure reimbur sement. One of the activit ies of the secretariat should be
that it arranges training and advice to local bank s so that they feel comfortable with such a role in
provide financing to food importers. At the national level, the governme nt would provide asovereign
guara ntee, so even ifthere is a local loan default, the international facility should be reimburs ed. If
the sovereign defaults, the dono rs’ guarante es would be called upon; presuma bly, this can be handled
in the same way that multila teral financier s now deal with sovereign defaults by their member
countries. A final element one could conside r is the useof one of the various instruments that are
now available to deal with price risk; this could help to reduce credit risk. If international price s have
increas ed, the local trader will have to incre ase local price s. This may be difficult, and moreover, the
governme nt may intervene to reduce consume r prices (e.g., by reducing import taxes ). The local
trader thus runs a serious risk of making a loss on the transaction – which greatly increas es the risk of
default on the credit. A price risk mana gement component can help local trade rs to keep prices low,
to the benefit of c onsume rs and simultaneously, making d efault less likely.
WT/GC/62
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Secret ariat of 
internat ional
facilityNational window
(e.g., w ith C entral
Bank)
Local
bank
Local
traderDonor 
countries4.Reim bursem ent unde r the fund, in 
case of paym ent defa ults
1. No reimbursement. 2. Re imbursement of, 
say20%ifloan va lue3.Full reim bursement i n 
hard curre ncy?
4. Guarantees 
expire?
It should be noted that gover nments can have some leeway in deciding on the pricing ofthe
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 intere st 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 lowe r
interest charge. The difference can be used in several ways, e.g., to set up amechanism to deal with
credit risk, o r to sub sidize food distribution to vulnerable gr oups.
A fund as sketch ed 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
greate r competition among suppliers, and to lower prices . The normal flow of food trade is not
disturbed or distorted. Disbur sement is easy, with proce dures that require little time or
documentation. Strong safeguards are built in to ensure loan reimburseme nt. As the secreta riat can
be very small and donors would provide conditional guara ntees, not funds , the burden on dono rs’
funds would be minimal – so should there be no mark et shock s in the years to come , no funds will
have been wasted . Finally, a fund like this makes itself super fluou s after one or two decades, as the
secretariat’s activities to create sufficient capacity among local bank s to manag e the proper
distribution of loans will ultimately lead to these banks being able to give such loans on their own
behalf.
In con clusion, if an extern al shock occu rs which for ces LDCs and NFIDCs to find much more
finance to import sufficient foodstuf fs, as required to maintain normal levels of consumption, then the
"revolving fund" will help them solve the problem. If no such shock occu rs, thesecretariat’s
operations, over theyears, will still contribute greatly to strengthening the LDCs ’ and NFIDCs’
systems for food imports andfinan cing, which will reduce transaction costs and lead to better prices
for consume rs. Either way, gove rnments need to decide whethe r the costs of thesystem, even if they
are low, a re justified by the e xpected benefits.
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ANNEX  8
Submission by the Wo rld Bank
Respons e to the Prop osal of the Least-Developed and Net Food -Impo rting Countries1
General comments and summar y
The World Bank is seriously committed to assisting the net food-importing developing
countries and the least-d evelope d countrie s to meet their food security objectives, to capture the
benefits from their participation in the WTO, and to mitigate any adver se impacts from agricultural
trade liberalization. The Bank also supports the pro-active stance of the net food-importing
developing countries and the least-d eveloped countries in these discu ssions to examine possible
means of improving the effectiveness of the implementation of the Marrakesh Ministerial Decision on
"Measu res Concerning the Possible Negative Effects of the Reform Programme on Least-Developed
and Net Food- Importing Developing Cou ntries".
The Proposal to Implement the Marrakesh Ministerial Decision in Favou r ofLDCs and NFIDC s
submitted by Côte d'Ivoir e, Cuba, Dominican Republic, Egypt, Hondur as, Jamaica, Kenya, Mauritius,
Moro cco, 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, amon gst 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 counte r-cyclical subsidy mechanism
whereby food and financial aid are automatically triggered by commodity price increases due to
agricultural trade liberalization agree d under the Uruguay Round (UR). In addition, increa ses in
overall levels of financial an d technical a ssistance are pro posed.
In gen eral, the p otential effects of liberalization on the lea st-develop ed andnet food importing
countries are quite complex, differing significantly among membe rs of this group ofcountrie s, and
deserves careful conside ration. They depend upon sever al things, including the extent to which
countries undertak e to liberalize their own policies; whether the countries are importe rs of particular
products; and the structure of trade policies in the affected countries. While the global and country -
specific benefits of liberalization gene rally outweigh the costs2, it is possible that particular types of
liberalization will have a negative impact on some economic groups in some countries. Tothe extent
that agricultural trade liberalization raises the average world prices of certain products, or increases
their volatil ity, there wil l be a negative impact on the purchasers of those products in all countries. Of
cours e, the converse is true ofproducers of those commodities, who will benefit from a price rise. In
countries that rely heavily on imports ofthose commodities, the negative impact on purchasers will
outweigh the benefits f or dome stic produ cers.
Sever al conside rations suggest, howev er, that the propo sed instrume nt is not the best way to address
possible problems associated with increasing world price s of commodities that result from
liberalization. Liberalization to date has been quite limited, and futur e liberalization is likely to be
implemented gradually, with the implication that any effects will be felt only over a numbe r of years.
Other instruments - existing ones, perhaps with relatively minor modifications, as well as some more
1Backg round Paper prepa red byWorld Bank staff in the Rural Devel opment Department with
contributio ns from Developme nt Econ omics Grou p andRegio nal Units. The paper does not reflect the position
of the W orld Bank Board of Exec utive Directors or the co untries they represent.2A general theme emergi ng from theevaluations of the Urugua y Round conducted by theWorld Bank
(Martin and Winters 1996), is that the gains from countries' own liberalization typically outweighe d those from
increases in their market access op portu nities.
WT/GC/62
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modest new ones - can be used to more effectively addre ssshort-term difficulties in financing normal
levels of comme rcial imports should they arise, and to insur e against price risks andemer gency food
crises. For example, price risk management instruments are widely available, which give both private
and public sector importer s the ability to insure themselves against short-term precipitous incre ases 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 auspice s of the Integ rated Framework studies that are now being conducte d for the Least-
Developed Countrie s, or unde r some kind of separate fa cility.
Plan of the pape r
This response first examines the question of whethe r, to what extent, and over what time
horizon trade liberalization has raised, or is likely to raise, prices of food imports. It then discu sses
potential measures to mitigate adver se effects, first looking at existing progr ammes and then at
measur es that could beused in the futur e. The focus here is on adverse effects on food security,
which we take as the majo r concern unde rlying the proposal. Since the World Bank has been asked
by the Panel to describe its instruments that have some bearing on the deliber ations concerning the
propos al, the paper discusses in some detail Bank instruments that are intend ed to ameliorate the
negative effects of any shocks that may undermine food security in developing count ries. 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 alrea dy done in the FAO's submission. Since the IMF is to submit
information on the Compens atory Finan ce Fa cility, th is paper also doe s not discus s this mechanism.
Real and potential effects o f trade liber alization on world grain prices
The Proposal to Implement the Marrakesh Ministerial Decision in Favou r ofLDCs and
NFIDCs argues that NFIDCs and LDCs are facing much higher cereal import prices following the
Uruguay Round Agreement on Agriculture, and that these highe r price s are due to the Agre ement.
The argument is based on the compariso n of cereal import prices during 1993-94 with 1995-96 and
attributing the change to the Agre ement.
1. Cereal import price s for NFIDCs and LDCs have not risen significantly during the
1990s.
Cereal prices were low during 1993-9 4 and high during 1995 -96 as the following graph
shows. Thus, compa rison ofcereal import costs focusing on these years will lead to the conclusion in
the Propos al. However , price s have declined since 1996 and average import prices are now below the
levels of 1993-94 for the Least-Develope d Countries and slightly above for theLow-Inc ome Food
Deficit Countries.WT/GC/62
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significant steps in sensitive areas such as agriculture would be phased in over an even longe r period.
Other structur al supply anddemand shifter s are also at work, the net impact of which is difficult to
predict. But judging from the experience of the last decades, it would appea r likely that these will
operate on balan ce to dep ress pric e.  In addition, to the extent that trade ba rriers hav e been reduc ed (or
will be reduc ed in the future), this implies reduced world price variability and theref ore better ability
to plan and to hedg e again st price hikes .
5. Resear ch sugg ests that multilateral trade liberalization produ ces benefit s tonet food-
importing countries that in some ca ses o ffset the costs from higher food pric es.
Two World Bank studies examined the impacts of Urugua y Round liberalization on least-
developed and net food-importing countries (Ande rson 1998; Ingco 1997). Since the least-dev eloped
countries were not require d to liberalize their own policies, these studies focused on the impacts of
Round-induc ed changes in extern al prices on these countrie s. Both of these studies divided the
impacts of changes in world price s into two components—terms of trade effects, and distortion
impacts. The terms of trade impa cts of liberalization are well known, and have frequently feature d 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 the se earlier studies focused on the least-d evelope d and net food -importing countries.
The terms of trade impacts resulting from changes in world price s are relatively
straightforwa rd. They are the impacts of changes in world price s on the costs of net food imports, or
the benefits obtained from net expo rts. For a net importer, an increase in price s will raise costs, with
the size of the additional cost depen ding upon the level of imports. For a net expo rter, anincre ase 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 thenature of an entire array
of policy distortions in the economy. They arise from the impact of changes in world price s on the
extent to which countries undertak e activities that are worth less (ormore ) than their true costs. If,for
example, a country has anexpo rt tax on a particular commodity, the resulting depressed domestic
prices will lead produc ers to produce less ofthe good than is socially optimal, and consume rs to
consume mo re than is s ocially optimal. Both increas es in pr oduction and reductions in cons umption 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 mar ket, lead to suc h a n et gain. An incre ase in the import bill
(caused, for example, by an increase in import prices ) will cause an exch ange rate depreciation, which
will have the same kind of effect in the market for this export, tending to offset the adverse terms of
trade e ffect for the countr y from the higher import prices.
A key finding ofthe two studies is that the distortion impacts, which have typically been
ignored in the past, can be extremely important in the least-develope d and net food-importing
countries. Th e Ing co study u ses more up-to-d ate and detailed estimates of tra de 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 numbe r of cases, including Bangladesh, Egypt, and Tanzania, the
distortion effects operated in the oppo site direction to the terms of trade impacts, and conve rted an
appar ent negative impact of the URAA into a substantially larger gain (See Ingco 1997, p16,
Scena rio II). The distortion impacts are extremely complex, howeve r, and sometimes worke d against
the country. In India, for exam ple, the distortion impacts were negative, prima rily becaus e the world
prices of some its taxed commodities, such as riceand cotton, were estimated to fall. These price
declines reduce d India 's output of these commodities, which was already too low because of the use
of export restrictions. On the other hand, in Keny a and Zimbabwe, the distortion effects greatly
reinfo rced an initial gain from the chan ged terms of trade.WT/GC/62
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Overall, the results of these initial studies sugge st that the policy-related impacts were far
from unifo rm, but generally incre ased the gains from the Urugua y Round package to most low-
income and net food-impo rting countries. Howev er, 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 price s of theliberalization packag e. These studies were unde rtaken using a
relatively simple numerical model3designed so that it could be applied to countrie s wher e data
availabili ty is limited. These models would allow the evaluation of the impacts on least-dev eloped
countries o f diff erent world price chang es resulting fr om future liberalization propos als.
The overall conclusion from the above points (1)- (5) taken together is that anysubsta ntial
increas e in international agricultural prices that could potentially result from the international
agreements: (a)has not occurred yet; (b) is probably a numb er of yearsaway, and (c) could well be
offset by other econ omic factor s at work in the mean time. Furthermo re, any losse s to net food-
importing countries would not be unifo rm across countrie s, andmay be partially or completely offset
in individual countries by other g ains f rom the ove rall agr eement.
Measu res to ameliorate the impact of  sh ocks that threaten food s ecurity
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-sufficienc y. Food insecurity of a population arises only when
two conditions are met simultaneously—domestically produ ced food is not accessible and impo rts are
not available in a timely way to fill the gap. This is apparently also the perspective ofthe RF
propos al, which is intended to insur e countrie s' access to financing for imports. There is a degree of
inconsistency with the technical assistan ce comp onent of the proposal, howe ver,which is add ressed to
increasing domestic prod uction.
Seen in this light, long-term structural food insecurity exists primarily because of a deman d-
side problem -lack of purchasing power by the poor - and must be addressed by raising income s.
Nonetheless, it is true that a structural supply shift which resulted in an incre ase in the average price
of food would incre ase thelong-term inciden ce of food insec urity by causing more of the poor to be
unable to purchase an adequ ate supply of food or to do soonly at the cost of diverting so much of
their income into food that they have inadeq uate income remaining to meet their other basic needs.
Such a structural supply shift could also incre ase food insecurity by increa sing the budg etary
requireme nt of any gove rnment orprivately-f unde d safety net programmes that provide food to the
needy.
More transitory food insecurity commonly arises becaus e 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 (deman d side), as well as
productive c apacity and commercial ch annels for delivering fo od (supply side ).
1. World Bank Facilities for Helping with Shor t-Term Price Shock s and Emerg ency Food
Shortag es
Most of the World Bank's lending and non-len ding services areaimed at the root cause of
long-term food insecu rity - poverty. Some investment projects are also aimed at improving trade and
distribution facilit ies, or improving a country 's trade finan ce infrastructure, there by reducing
vulnerability to disruptions of imports. The World Bank has no facilities that are specific ally designed
to help countries cope with price shock s, as is the IMF's Compe nsator y Finance Facility. The Bank
does have, however, several instruments to provide urgent assistanc e when a country is struc k by an
emergen cy that se riously dislocates its eco nomy and calls fo r a quick respons e.
3The mo del ru ns within the widely availa ble EXCEL sprea dsheet.
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One such type of Bank instrument is the Impo rt Rehabilitation Loan. This is a quick-
disbursing loan to provide support for the gove rnment budg et and balan ce-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 pop ulation. It is a species of adjustment loan, and
can include a n element of reform co nditionality.  For example, the Critical Import Rehabilitat ion Loan
was made to Bulgaria in 1997 to help finan ce primarily grain andoil imports when both domestic
production and normal import supply chann els were severely disrupted bypoor economic policy and
political crisis, exacerbated by drought. The loan was conditional on the new governme nt's
undertaking a series o f basic reforms in e conomic policy.
The World Bank also provide s several other types of adjustment loans, which disbur se to
finance general import expen ditures in times when balan ce-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 mac roeconomic manag ement.  Thes e loans are spe cifically designed to support a well-
defined reform pr ogramme and to help p ay fo r its transitional costs.
Other lending and non-lending instrume nts for emergenc y recovery assistanc e have as their
objective to restore assets and production levels in the disrupted economy. Bank emergency assistance
may take the fo rm of:
/AB immediate support in asse ssing the eme rgency's impact and d eveloping r ecov ery strategy;
/AB restru cturing of the Bank's existing portf olio for the country, to suppo rt recovery
activit ies;
/AB redesign of p rojects not y et appro ved, to include recovery activities;  and
/AB provision of an eme rgency recovery credit/loan (ERC/ERL).
A very important benefit of a number of Bank actions in respon se to a crisis (e.g.,
restru cturing the portfolio to increas e disbur sements in the near term) has not been the direct elements
financed , but the indirect element of providing foreign exchange, which enable s countrie s to import
food, medicine and othe r essentials, which may be reduc ed by the loss of export earnings and need for
emergen cy imports, which c haracterize drought period s or intern ational food p rice spike s.
ERLs may include quick -disbur sing compon ents, but ERLs are mainly to financ e investments
to rebuild physical assets and restore economic and social activit ies after emerg encies. ERL activities
addre ss restor ation of a ssets a nd pr oduction, r ather than relief.
The Bank c onside rs the following criteria in deciding whether to p rovide a n ERL:
/AB Impact on e conomic priorities and investment prog rammes.
/AB Freque ncy: For recurring events, such as annual flooding, a regular investment loan is
more app ropriate.
/AB Urgency: For a slow- onset disaster such as a drought, the more thoro ugh preparation of a
regular investment project may b e preferable.
/AB Prospe cts fo r reducing h azards from similar natural disaster s in the futur e.
/AB Expected e conomic ben efits.
ERLs do not attempt to addres s long-term economic, sectoral, or institutional problems, and
do not include conditionality linked to macro-eco nomic policies. They include only conditions
directly related to the emerg ency recovery activities and to prepa redness/mitigation in the event the
disaster recurs.
ERLs often come after the event, but are usually used to finan ce transpo rt, seeds, fertilizer,
etc. which facilitate the capacity of the country or affected farme rs 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 Afric a. The ERC for Zimbabwe, as aWT/GC/62
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part of the Bank's respon se to the 1992 drought was large ($200 million, combined with other funds
reallocations to total roughly $350 million) and was used to deal with multiple elements of the
respo nse to the drought. Probably the major contribution of the Bank's total financing for that
operation, howe ver,was that it provided balan ce-of-payment suppo rt (at least indirectly) that enabled
governme nt 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 financ e 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 financ ed by the Bank.
In addition to emerge ncy assistanc e, the Bank may supp ort freestanding investment projects
for prevention and mitigation in countries prone to specific types of disaster s. Such operations could
assist in (a)developing a national strategy, (b) establishing an adequ ate institut ional and regulatory
framewo rk, (c) carrying out studies of vulne rability and risk assessment, (d) reinfo rcing vulne rable
structure s and adjusting building and zoning c odes, and (e) acq uiring haz ard-reduction technology.
2. Commodity Price Risk Managemen t Measur es
A wide range of instruments are now available comme rcially to protect against price
movements in the short term. Options can be used by economic agents with large expo sure 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
purch asers of foodstuf fs, either private sector commercial importers or government agents (food
corpo rations orstate-owne d enterprise s). They could also be used by governments to insulate safety
nets fr om budgeta ry 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
procu re the higher-priced food itself or because it must give higher income suppo rt to the poor) can
purch ase options that would pay out when import prices increase beyond a certain level. This would
then insure that it will have the budg etary resources it requir es, without creating anunanticipated
fiscal bur den on the gove rnment. The price insurance would protect them from short-term fluctuations
in price, but not against long -term downwar d trend s.
The International Task Forceon Commodity Price Risk Manageme nt (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 extend ed to consumer s in
food importing countries as well. This insur ance scheme, while varied in its specific application by
country, is focus ed on adapting the commodity price risk mana gement tools available on intern ational
markets to provide a form ofprice insur ance to producers (and consume rs in the case of insuring
import prices). The Bank has also developed instruments to suppo rt the development of crop yield
insuranc e, and has one o perational pilot project in Moro cco,with others unde r preparation.
3. Commodity swaps
Commodity swaps is a produ ct the IBRD began offering in 1999 to help clients address
commodity price risk. IBRD countries whose debt-se rvicing capacity is heavily expo sed to specific
commodities may benefit from financial terms that link the debt-se rvicing co sts 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 majo r challenge for many developing countries, but most
commodity-depende nt countries have inadequate access to risk-he dging instruments. To address this
need, in 1999 the IBRD began offering commodity swaps on a pilot basis to borrowe rs with a
demonstrated need to reduce exposure to commodity price chang es. 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. Hedg es couldWT/GC/62
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be structu red to reduc e commodity price-r elated risks for both produ cers and consumer s of energy,
mineral and ag ricultural prod ucts.
4. Food aid and subsidized cr edit
While food aid has served a valuable function in cases of disaste rs when normal supply
channels aredisrupted, it has in many cases had undesira ble and unintended consequenc es. In
gener al, 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
surpluse s in developed countries depress world price s and create pressure to dispo se of the excess
stocks throu gh food aid. While an incre ase in supply will lower the market price even if it is sold at
"market prices", this effect of distorting the mark et is often magnified by the fact that in the event, the
distribution is free or actual sales prices are far below local price s. This tends to depress prices for
local produc ers, lowering their incomes , reducing incentives forproduction, and thereby incre asing
the country 's future reliance onfood imports. In addition, the price reductions created by food aid
distort season al (inter-h arvest) price movements and discourage the development of private storage
facilities. Finally, food aid is in many cases distributed throu gh governmental channels, thereby
undermining private sector development in mark eting infrastr ucture. 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 forfood imports (including
export credit from the exporting countries): the subsidized imports depress farmers' prices and
discoura ge production; if not done on a purely comme rcial basis, it can be timed poorly (e.g., in
confo rmity with the requireme nts of the expo rt credit agency, not the demands in the importing
country) and thereby distort seasonal price movements; and it is often channeled through gove rnment
agents, und ermining private s ector ma rket de velopment.
More over, both food donations and conce ssional credit programmes obscure the real value of
the grant element involved and run counte r to the principle of trans parency. If a grant is justified, the
grant sho uld be transparent and not disguised through anunknown gra nt element embedded in in-kind
food aid o r sub sidized intere st rates.
5. Food vouche rs
One alternative to addressfood security concerns that would not entail sever al of the
shortcomings of direct food aid is to establish a system to distribute food vouchers to the needy when
food prices increase. These vouch erscould beredeemed through normal commer cial import and
distribution channels and so would not undermine private secto r development. They would also
operate to inc rease dema nd, not sup ply, so they would not distort domestic prices for either produc ers
or consumer s. The difficulty in this is that it requires a system for identifying target recipients and
distributing the vouchers to them.
6. The Propos ed Revolving Fund
We do not propo se to analyze the RF propos al in depth, since this is ably done in the FAO's
submission, circulated to the Panel on 19 February. It is, howev er, worthwhile to note the following
points.
/AB Food insecu rity is an individual, not a national, phenomen on. It is unclear what would be
the rationale for providing assistanc e to the LDCs and NFIDCs, when many poor
consume rs in other countries would be hit equally as hard or harder byfood price
increas es. It is also not clear what kind of mechanisms could be designed to ensure thatWT/GC/62
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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 begiven in the
form o f foo d vouc hers.
/AB If it would involve subsidizing food imports - e.g., throu gh subsidized credit - the
revolving fund would have the same shortcomings enume rated in the discu ssion of food
aid and sub sidized c redit.
/AB Establishing sensible criteria for access to the fund - both long-te rm and year-to-yea r -
would be difficult. First, conside r long-te rm eligibil ity. As noted above, because of the
complicated effects, it is not clear which, even among the net food importing countries ,
would be net loser s from an agreement liberalizing trade. Export revenu es 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 consumer s in countrie s not classified as NFIDCs should be exclud ed from
assistance . Seco nd, trigge rs for year-to-ye ar access would need to be carefully defined
and complex. Automatically granting access based on anincrease in import bill for food
would reward poor economic policy. (Food subsidies and macroeconomic
mismanagement, together orseparately, could trigger a sharp increase in food imports).
Thus, ac cess would nee d to involve some kind o f policy r eview, which is one of the major
complaints with the operation of the CFF. Access trigge rs 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 expo rt
receipts.
/AB If the fund were to include asecond 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 compo nent is to enhan ce food security, it should be focused onpove rty-
reducing activities, given that long-term structural food insecurity is a demand-sid e issue.
Focusing development assistan ce on importable food crops could unde rmine the suppo rt
available for other forms of income -generating activit ies in rural areas (export crops and
off-farm activities) and in urban areas, as well as for improveme nts in trade and storage
infrastru cture which in the e nd co uld have a highe r impact in reducing food ins ecurity.
Conclusion
Given that any significant incre ases in price s that would result from a multilateral trade
agreement areyears in the future, and may not materialize at all, it would seem prematur e to
contemplate the establishment of a revolving f und at the p resent time. Establishing such a fund would
require rathe r complex rules governing access, and could have negative effects onagricultural
produc ers and development of the private sector storage anddistribution sectors. To the extent that
any compe nsation is required to mitigate advers e effects on food security, it would be prefe rable to
channel this directly to those who are adversely affected —poor consumers —pe rhaps throug h a
system of food vouche rs.Although this would require an infrastru cture 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 forthis. Experien ce with similar programmes of food
stamps or other income suppo rt 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 progr ammes in countries which may be v ulnera ble.
Food security problems can arise for a numbe r 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 implicat ions of trade for food vulne rability may dimin ish their conce rns and, more importantly,WT/GC/62
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identify actual vulnerabilities - unrelated to trade - that should be addressed. This kind of study could
be carried out under the auspic es of the Integrated Framewo rk studies that are now being conducted
for the L east-Dev eloped Cou ntries, o r unde r some kind of separate facility.WT/GC/62
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ANNEX  9
Submission by the Wo rld Food Prog ramme (WFP )
Implementation of the Decision on Meas ures con cerning the Pos sible Negative Effe cts of the Ref orm
Progr amme on Lea st-Develope d and N et Food-Imp orting Developing Countries
How Food Aid Complements Commercial Imports
in Response to Exte rnal Shoc ks
Introdu ction
This note examines h ow food aid can complement commercial imports in respons e to exter nal
shocks in poor countries. It first defines the diffe rent 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 discu ssion is not limited to
shocks that may be r elated to the negative c onsequenc es of the trade reform process on poor countries '
food security. Lastly, the paper reviews both commer cial imports and emergency food aid as
respo nses to shoc ks affecting food security.
Financial tools and access to multilateral conces sional credit schemes areimportant and
neces sary elements to secure adequate commercial imports for the poorest countries. Howev er, 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 poores t countries
during the r eform pro cess.
Background
In 1994, as part ofthe outcome of the Urug uay Roun d negotiations on agriculture, there was
an agreement to establish appropriate mecha nisms to ensure that the availabili ty of food was not
adver sely a ffected by the results of the trad e agreements.
The decision s pecifically identified three areas of interve ntion:
/AB establishing appro priate levels o f food aid;
/AB ensuring that basic foodstuff s are provided to poor countries in full grant form and /or on
approp riate terms; and
/AB supporting technic al and financial assistanc e to improve agricultural productivity and
infrastru cture o f the lea st developed and n et food importing de veloping countrie s.
These three areas of intervention should be viewed as a means of implementing a
compreh ensive a pproach to e nsuring food security during the reform pr ocess.
As part of theimplementation of the Marrakesh Decision an Inter-Ag ency Panel was set up to
look at financing normal levels of commercial imports of basic foodstu ffs for countrie s experiencing
short-term difficulties. The Inter-Ag ency Panel was established on the recommendation of the WTO
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Agricultural Commit tee and endo rsed by the Doha Ministerial. This note is submitted at the request
of the Chairman of the Inter-Agenc y Panel.
Types of food aid
There aretwo types of food aid – targeted food aid and programme food aid. It is critical to
under stand the different modalities as the objectives and henc e outcome differs dramatically
depending on which modality is used. Theuse of the term food aid in this paper refers exclusively to
targeted f ood aid.
Targeted food aid comprises both emer gency and project food aid. It is targeted to identified
population groups who are experien cing difficulties in meeting their consumption needs, either in
development settings or in eme rgencies.
Programme food aid is usually supplied as a resource trans fer for balan ce-of -payments or
budgetary suppo rt objectives. It is not targeted to specific beneficiary groups but is sold on the open
market of the recipient count ry. Food commodities provided as programme food aid are boug ht by
those who ca n afford to buy them, an d do not reach the poo rest an d most in need. Researchshows that
progr amme food aid is neither effective norefficient and that finan cial transf ers to deal with balance-
of-payments pr oblems a re much les s costly.
Food secu rity and external shock s
Developing countries, particularly LDCs, are vulnera ble to the adverseconseque nces of a
range of unpredictable and unanticipated shocks. These shock s affect both the price and availability
of food and have direct consequenc es on both gove rnments' ability to import adequate amou nts of
food a nd peo ple's ability to purchase and p roduc e adequate food for thems elves a nd their f amilies.
Shocks such as deterioration in countries ' external terms of trade, hyperinflation, andbalanc e-
of-payments crises can dramatically increas e food insecu rity. Seve re climate variation, crop failure
and civil conflict can also have negative impacts on both gove rnments' and populations' abilities to
ensur e adequate food supplies.
Food security is measu red at both the national level and the household level. At the national
level it fundamentally reflects whethe r a country can produce and/or import enoug h food to feed its
population. The severity of food insecurity at the national level highligh ts countries that are facing
grave difficulties in meeting their total food need s. This may mean countrie s cannot import adequate
food supplies due to balance -of-payme nts constraints or that food imports constitute an exceptional
burden on external payme nts. For many countries, concessional terms for food imports may be a
viable solution for a ssisting them in meeting their food nee ds at the n ational level.
Adequate food security at the national level is a necessary, but not sufficient condition to
ensur e food security at the household level. National food security is a gross measure anddoes not
taken into account variations in domestic production, marketing infrastru cture and/or household
income facto rs. 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 powe r, or
be unable to produc e their food requireme nts. In many countries, it is small, localised shocks that tip
vulnerable h ouseh olds ove r the ed ge into long-term pov erty.
A sudden and/or precipitous drop in the ability to purchas e or grow enough food most often
leads to hous eholds divesting both human and physical assets. Some coping strategies are apositive
means of overcoming food shortage s, 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 environme nt. Examples of negative coping strategies
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are: severe reduction in food consumption, selling productive assets, reducing expen ditures on basic
service s such as health and e ducation, over-e xploitation of marginal lands, and abno rmal migration.
Negative coping strategie s cancontribute to a long-term decline in food consumption and to
chronic food insecurity. For very vulne rable households , shocks, even small ones, have the potential
to turn short-te rm food security problems into a downwa rd spiral, diminishing household resiliency
and trapping p eople in long-te rm pove rty.
Although food insec urity is most visible at the individual or household level, policy make rs
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 longe r period. There are,
however, a few instruments which can direct public transf ers to food insecure households. Targeted
food aid is on e of th ese instrume nts.
Combining commercial imports and fo od aid to r espond to sh ocks
When poor countries experience extern al shock s affecting food availability they can mobilise
basic foodstuf fs by: 1) using in-country stocks, 2) purchasing comme rcial imports at market rates or
on conc essional terms , and/or 3) requesting humanitarian food aid from the international community.
Often in-country food security stocks arenot at adeq uate levels to smooth food availabili ty
fluctuations. Thus, national policy makers aregenerally 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 require d amounts of food
imports during a crisis. Even when commercial imports are made available on very favou rable terms ,
governme nts and donors prefer to use grant mechanisms rathe r than measures that accumulate debt
given the debt c risis that curr ently cripples s o many LDCs.
Commercial imports and food aid fulfill differ ent roles in addressing food security problems.
Commercial imports are put on domestic markets to stabilise fluctuations in both price and
availabili ty of basic foodstuf fs.They can also be used to maintain political confidence and ensure
political stabili ty during a crisis. But comme rcial imports are not likely to be targeted toward s the
poore st, most food insecure populations. Instea d, gover nments prefer to use grant food aid for
"social"  programmes ta rgeted to the po orest group s.
Food aid is targeted to those populations experiencing severe food insecu rity and as such is
complementary to commercial food imports distributed through dome stic 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 pattern s oreconomic opportunities can spell disaster in terms of their capacity to meet their
food n eeds.
Food aid's basic objective is to compensate for the fact that commercial food distribution does
not ensur e adequate food access for all. Becaus e income elasticities of deman d fall sharply as one
appro aches and moves beyond thepove rty line, additionality is highest when food aid reaches the
poore st househ olds. Food aid in this case is not import substituting, as governments are unable to
import enough basic foodstuff s to meet the needs of the poorest household s. Better targeting of poor
countries, such as LDCs with food aid and better targeting within countries increa sesthe positive
impact that food aid can h ave o n foo d security.WT/GC/62
G/AG /13
Page 145
In a crisis, it is important that food aid and comme rcial 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 dome stic agricultural production. If there is too little
food aid those populations who are unable to access mark et distribution systems will be left out.
More over, both food imports andfood aid should be linked to national food security scheme s in order
to make sur e that imports are coordinated with all other food s ecurity measur es.
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 expe nsive should be encou raged. Howeve r,
the food security of the poorest populations must also be taken into conside ration. Targeted food aid
channeled to populations who are constrained by lack offood, 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 ens ure that po or ho usehold s can me et their cons umption needs.WT/GC/62
G/AG /13
Page 146
ANNEX  10
Submission by the Arab M onetary Fund
I am writing in respon se to your inquiry as per your letter of 8 March 2002 concerning the
financing o f commer cial 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 balanc e-of-payment deficits
rather tha n targetting a sp ecific element oc casioning suc h deficits. Moreove r, AMF 's facilities include
one known as the Compen satory L oan: the Compen satory Loan is designed to help membe r countries
finance an un expected and u nforeseen o verall balance-of -payments d eficit resulting from a shortfall in
export earnings of goods and service s and/o r an increase of agricultural imports, in particular, cereal
imports, attributable to reversible e xogen ous factor s bey ond the c ontrol of the authorities.
Access unde r the comp ensato ry loan for export shortf all and/or an increase in the value of
agricultural imports is limited to 50 per cent of the membe r's paid-up subscription in the Fund's
capital. The loan is subject to a 4.75 per cent interest charge and is repay able within three years in
four equal half-yearly instalments, the first being due 18 months from the date of the loan
disburseme nt.
The eligibil ity criteria require that the membe r hasa balan ce-of -payments need, identified by
overall balanc e-of-payments deficit and a level of foreign reserves below six months of imports of
goods and service s. Further more, the export shortfall and/or the increase of agricultural imports
should result from factors outside the control of the authorities conce rned. Impo rtant as well, the
reque st forthe loan should be made during the shortfall year, or the following year. Eventually, a
reque st can be made during the year where the autho rities foresee an exports shortfall or an increase
of imports re sulting from a s hock.
The expo rt shortfall (incre ase in imports of foodstuf f) is calculated as thedifference between
export earnings in the shortf all year and the arithmetic average of expo rt earning s during thethree
years centr ed on the shortfall year.
So far, some 12 compen satory loans have been extended to eight membe r countrie s, in large
part to financ e an inc rease in the value of cereal imports or a result of dro ught.
In parallel, AMF's sister-institution, the Arab Trade Financing Programme (ATFP) is
specialized in the provision of credit aimed at finan cing inter-Ar ab imports and expo rts of virtually all
goods and commodities. ATFP charges interest rates which are on the whole quite advantag eous in
relation to those pre vailing in the markets fo r similar types of trans actions.WT/GC/62
G/AG /13
Page 147
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 "measu res concerning the possible negative effects of the reform
progr amme on least- develop ed and net foo d-importing developing countries".
We understan d that greater liberalization in agriculture in least-develop ed and net food-
importing countries may experien ce negative effects in terms of the availability of adequate supplies
of basic foodstuffs from exter nal sources on reasonable terms and conditions. In fact, in the ADB
region, ther e are several least-de veloped and n et food -importing developing cou ntries.
While we, ADB, provide various loans to developing membe r countries, ADB does not have
particular multilateral financing facilities available to its borrowing members in the event offinan cing
difficulties of commer cial food imports.
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