WORLD TRADE
ORGANIZATIONG/AG/W/58
28 October 2002
(02-5929)
Committee on Agriculture Original:  English
PROPOSAL FOR FOLLOW-UP TO THE RECOMMENDATION OF THE
INTER-AGENCY PANEL ON EXAMINING THE FEASIBILITY OF THE
REVOLVING FUND OPERATING AS AN EX-ANTE FINANCING MECHANISM
Submission by Bangladesh, Cuba, Egypt, Jordan, Kenya and Sri Lanka
on behalf of the NFIDCs and LDC Group of the WTO
Background
The General Council examined the Report of the Inter-Agency Panel on Short-Term
Difficulties in Financing Normal Levels of Commercial Imports of Basic Foodstuffs ("the Panel") at
its 8 July and 30 July 2002 meetings.1   The establishment of the Inter-Agency Panel had been
approved by the fourth WTO Ministerial Conference at Doha in November 2001 following a
recommendation by the WTO Committee on Agriculture in the context of the implementation of the
Marrakesh Ministerial Decision on Measures Concerning the Possible Negative Effects of the ReformProgramme on Least-Developed and Net Food-Importing Developing Countries ("the Marrakesh
NFIDC Decision").
2
The terms of reference of the Panel, as agreed by the Committee on Agriculture and approved
by the General Council, included:
"1. To examine the terms and conditions of existing facilities of the international
financial institutions (namely: IMF and the World Bank) to which least-developed
and WTO net food-importing developing countries could have recourse in order to
address short-term difficulties in financing normal levels of commercial imports of
basic foodstuffs, principally cereals, rice, basic dairy products, pulses, vegetable oils
and sugar, during periods of rising world prices for such basic foodstuffs, including,as appropriate, other relevant sources of concessional financing …
"2. To examine the concept and feasibility of the proposal for the establishment
of a revolving fund in documents G/AG/W/49 and Add.1 and Corr.1…
"3. In the light of its review and examination under paragraphs (1) and (2) above
and having regard to the Marrakesh NFIDC Decision, to make such recommendationsfor the consideration of the WTO General Council as the Panel considers appropriate
regarding:  ways and means for improving access by least-developed and WTO net
food-importing developing countries to multilateral programmes and facilities to
                                                     
1 Inter-Agency Panel on Short-Term Difficulties in Financing Normal Levels of Commercial Imports of
Basic Foodstuffs, WTO document WT/GC/62-G/AG/13  (28 June 2002).
2 Decision of 14 November 2001 concerning Implementation-Related Issues and Concerns (see
WT/MIN(01)/17, dated 20 November 2001, paragraph 2.2).G/AG/W/58
Page 2
assist with short-term difficulties in financing normal levels of commercial imports of
basic foodstuffs."
The Panel's recommendations, concerning ways and means for improving access by LDCs
and NFIDCs to multilateral programmes and facilities to assist with short-term difficulties in
financing normal levels of commercial imports of basic foodstuffs, are summarized inparagraph 168(a) to (d) of the Panel Report.
3  Of these, 168 (a) (c) and (d) refer to explicit actions that
may be taken in the context of on-going activities by other institutions and the General Council is
already considering ways of following up on these issues.  The purpose of this paper is to put forward
to the General Council a concrete proposal for pursuing the Panel's recommendation contained in
paragraph 168(b), namely, to examine the feasibility  of the Revolving Fund operating as an ex-ante
financing mechanism.  In doing so, the proponents of  this proposal are mindful of the specific points
and questions raised by Members in the examination of the Panel Report and seek to take these intoaccount in this follow-up proposal.
Main issues raised as regards the functioning of the Revolving Fund
In examining the concept and feasibility of the proposal for the establishment of a revolving
fund, the Panel concluded that:
                                                     
3  "168.  In the light of our conclusions above and having regard to the Marrakesh NFIDC Decision,
we make the following recommendations concerning ways and means for improving access by LDCs and
NFIDCs to multilateral programmes and facilities to assist with short-term difficulties in financing normal levelsof commercial imports of basic foodstuffs:
(a) that in the context of the impending review of the CFF of the IMF, consideration be given by
member governments to
(i) extending the product coverage of the facility to cover all basic foodstuffs,
(ii) clarifying access in the context of an existing arrangement with the IMF,
(iii) providing a greater degree of automaticity without requiring an IMF-supported
programme,
(iv) reviewing the procedures and timeliness of disbursements, as well as encouraging
governments to come forward with purchase requests;
(b) that in the light of the limited potential usefulness of an ex-post revolving fund to support food
imports in times of need, the feasibility of an ex-ante financing mechanism aimed at foodimporters be explored;
(c) that the terms of reference of the Diagnostic Trade Integration Studies to be undertaken in the
context of the Integrated Framework include, as appropriate and if requested by thebeneficiary country, the items of
(i) food security implications of trade development strategies,
(ii) availability of, and access to, adequate financing, in particular by the private sector, to
support food imports;
(d) that strategies of commodity price risk management from the perspective of developing
country food importers be addressed by the Commodity Price Risk Management Group of the
World Bank."G/AG/W/58
Page 3
(a) Most government-owned food import agencies in developing countries have been disbanded
or exposed to competition from private sector importers.  A  revolving fund would therefore
need to have appropriate mechanisms to provid e financing to all importing enterprises (both
public and private) in the countries concerned to ensure that they can secure commercial
imports at reasonable borrowing cost during periods of rising world market prices for basicfoodstuffs.
(b) If funds from the revolving fund were to be made available ex-post, i.e. after importation, to
countries affected by excessive import payments, disbursements would allow them to
reconstitute their foreign exchange reserves that have been depleted through higher food
import bills.  In this respect, the revolving fund proposal has similar characteristics as the CFF
of the IMF.
However, given the prevalent system of food imports in developing countries, a fund that
would provide ex-post loans would have little or  no impact on the ability of private traders to
continue importing food.  Local traders who need to import more food need funds, or new
credit lines, at once.  The possibility, not certitude, that one or two years in the future, theirgovernments will receive a new loan is unlikely to influence the willingness of international
trading companies or banks to provide them affordable loans when needed.  Moreover,
governments are unlikely to authorize a new, dedicated credit line for food imports without
being certain that the disbursements under this credit line will be refinanced from an
international fund credit line.  In the view of the Panel, the proposed revolving fund, if it wereto operate as an ex-post-borrowing facility would be of limited value in reducing short-term
financing difficulties.  The proposed revolving fund would be of potentially greater value to
the countries concerned if it were to operate as an ex-ante borrowing facility.  While the Panel
considered some of the elements of such an ex-ante financing mechanism, it did not address
its operational modalities and cost implications in any detail.
(c) Import bills as a trigger for a revolving fund are problematic because they are partly
determined by government actions.  Some country-specific review of macroeconomic
management and sectoral policies might be required, if such a monitoring mechanism is not
already in place.  It may be necessary to consider adequate safeguards to ensure the viability
of such a revolving fund.  The practical arrangements for such a fund's operation would
therefore require certain preconditions for lending, with similar characteristics to those of theCFF of the IMF.
If the triggering mechanism were to be based on exogenous factors, such as increases in
world market prices and less favourable terms in financing food imports, no such
preconditions for lending are necessary;  and one positive effect would be that funds could bemade available faster.  However, if access to a revolving fund were based on such an
exogenous trigger as prices, some countries which do not need short-term financial assistance
might obtain access to such a fund.  The eventual negative impact of this would need to be
mitigated by setting the fund's lending terms in accordance to the rates normally available in
the market, that is, at a non-concessional rate.
(d) The viability of a revolving fund would require monitoring to avoid defaults.  Again,
appropriate conditionality would be necessary to reduce defaults.
(e) Demand for funds from a revolving fund may exceed available resources, particularly during
times of high world market prices for food.  Depending on the capitalization of the fund,
modalities would have to be established for rationing available resources.G/AG/W/58
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(f) The role of the government will be to guarantee the loans to importers, whether they are
public or private enterprises.  Mechanism would need to be in place at the national level to
make loans available to such enterprises.  In this connection, methods used in financial
markets on trade financing can guide the design of the operational mechanisms of the
Revolving Fund facility.
As regards these observations, the following may be noted.  First, the proponents of the
Revolving Fund proposal, as elaborated in documents G/AG/W/49 and Add.1 and Corr.1, did not
make any reference to an ex-post or ex-ante approach as regards its operational modalities.  The
concept of the Revolving Fund operating as an ex-post approach was the Panel's interpretation and not
an explicit modality suggested in the proponents' proposal.  Second, while the Panel limited its
consideration of the Revolving Fund to that of an ex-post mechanism, it recognized that an ex-ante
approach might be more promising as regards its effectiveness in assisting the countries concerned.
Third, most of the issues raised in the Panel's examination of the Revolving Fund proposal, as well as
by some Members during the review of the Panel Report by the General Council, apply equally to an
ex-ante and an ex-post approach and hence have to be dealt with irrespective of what approach is
pursued.  Finally, in view of the fact that the Panel's terms of reference did not prescribe any specificapproach in the consideration of the proponents' proposal, it is only fair to argue that the Panel did not
fully complete its work and consideration of the Revolving Fund as an ex-ante financing mechanism;
its most promising operational modality will have to be pursued.
Salient features characterising short-term diffi culties of LDCs and NFIDCs in financing food
imports
Before responding to the points made in the Panel Report and addressing some specific issues
related to the feasibility of the Revolving Fund operating as an ex-ante financing mechanism, it is
appropriate to recall also some pertinent observations and conclusions reached by the Panel as regardsthe particular food situation in the LDCs and NFIDCs.  The Panels noted, inter alia , that:
- The concerns of the LDCs and NFIDCs stem partly from their dependence on the
world market for a large share of their food consumption.  In the case of cereals,
NFIDCs imported 35 per cent of total consumption in 1998-2000.  For the LDCs the
dependence on cereal imports was 14 per cent compared to 11 per cent for the rest of
the developing countries.
- During the most recent period of high wo rld food prices (1995/96 to 1996/97), there
was a surge in the aggregate cereal import cost of LDCs and NFIDCs and a
significantly increased proportion of their imports was sourced commercially, as food
aid and concessional sales declined drastically.
- During the same period, the aggregate volumes of cereal imports were not maintained
by the LDCs.   Although the factors behind this were not analysed in the Panel
Report, the outcome may well be a downward adjustment in consumption, especially
by poor households in these countries.
- Some of the LDCs and NFIDCs in a weak financial position often face highly
unfavourable terms on world financial markets in financing of food imports (the
implicit interest rates can easily be in the 20 per cent range).
- The existing IMF Compensating Financing Facility (CFF) has been of limited use by
LDCs and NFIDCs, partly as a result of limitations in its product coverage,
conditionality and degree of concessionality for borrowing from it.G/AG/W/58
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- Price spikes on world markets for basic foodstuffs, as occurred in the past, are likely
to recur in the future.
It is also with these considerations in mind that the proponents of the Revolving Fund made
their earlier proposal for the creation of such a fund to assist LDCs and NFIDCs with short-term
difficulties in financing normal levels of commercial imports of basic foodstuffs, as envisaged under
the Marrakesh Decision.  In this connection, it is also to be noted that while the world market situation
in recent years has given a breathing space to LDCs and NFIDCs heavily dependent on the world
market for a substantial part of their food needs, past experience has taught us clearly that
complacency is often paid dearly.  It is now the time that action has to be taken to create an effective
instrument to deal with the next price spike.
Some initial considerations of a Revolving Fund operating as an ex-ante financing mechanism
The availability of finance for food imports from private sector sources and indeed, from
official export credit agencies is limited by ceilings which are expressed in US$ terms.  Thus, when
financing needs for the import of foodstuffs increase  strongly during a year relative to the previous
year, it is often difficult to find the needed new credit lines.  In such situations, importers may be
forced to reduce their import volumes, even if this  would lead to inadequate food supplies at the
national/local level and to large domestic/local price hikes.
Speed is of the essence in food import finance.  Many of the net food-importing countries
depend on the food imports to feed a large part of their population, and they need to maintain a timely
flow of certain import levels, as foregone food consumption implies hardship or even starvation.
When nominal world market prices increase, or the average import prices increase otherwise (e.g. due
to a reduction of food aid and concessional sales), importers with limited foreign exchange resources
and borrowing possibilities need access to supplementary finance at once.
A financing facility supported by a Revolving Fund could make it possible for importers to
contain the reduction of (or preferably maintain) the volume of food imports during such periods of
high world food prices and thus limit the downward adjustment in consumption and hardship of
domestic households many of which are already in a precarious nutritional situation.
Bearing in mind the issues raised in the Panel Report as well as during its consideration by the
General Council, such a financing facility should meet, among others, the following requirements:
- avoid tying up large resources unproductively
- recognise the predominant role of private sector in food imports and allow both
private and public entities to draw on the facility on an equitable basis
- have an external triggering mechanism under which funds would be released from the
Revolving Fund, which in addition would enable importers to obtain finance rapidly
when imports are effected
- have appropriate mechanisms in place to ensure reimbursement of funds borrowed
and reduce default risks
- allow for rationing of available resources in situations where excessive demands are
made on the facility and implications for the capitalization of the Revolving Fund and
need for a back-up arrangement
- avoid negative market distortions
- limit the secretarial costs of administering the facility.
With respect to the first requirement, the IMF' s experience clearly shows that it is possible to
create international contingency facilities that do not put an undue burden on member (donor)
countries, and that do not result in large idle resources.   The experiences and modalities of operationG/AG/W/58
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of such existing facilities in the IMF and elsewhere could be used in constructing the modalities of the
Revolving Fund facility.
Public entities should not be the main beneficiaries of the proposed new facility, except if
they have an import monopoly.  In all cases, the role of the government would be to guarantee theloans to importers, whether they are public or privat e.  Thus, strong rules ensuring that the private
sector has equitable or even preferential access to the financing facility would have to be written into
the agreement between the Revolving Fund facility a nd individual governments of eligible countries.
These agreements would also contain provisions for enforcing the agreed rules.   In addition, the
methods used by private sector financiers in their food financing activities can guide the design of the
operational mechanisms of the Revolving Fund facility , so that this requirement as well as several
other requirements mentioned above can be met.
External factors are, by definition, outside of the control of a country's government.  Thus, a
trigger mechanism that would set off the disbursements under the facility on the basis of external
factors such as world market prices does not require any checks on a country's policies, nor does it
require any policy conditionalities (at the most, one might want to list countries that are eligible toaccess the facility, and those that are not, e.g., because of past reimbursement record).  Disbursement
can therefore be fast.  Particular triggers need to be tailored for each country (e.g., a country that
imports mostly rice should have different triggers from a country that imports mostly wheat), but this
can be worked out on the basis of past import statistics, and reviewed every few years.
4
Reimbursement can be ensured in the same way that banks deal with credit risks in
commodity trade finance.  In this particular case, one could think of a three-step mechanism: the
importing agent  (private or public) is liable to reimburse the loan;  the local bank  (which can be a
subsidiary of an international bank) through which the importing agent obtains the loan, guarantees it
up to x%;  and the government  entity which administers the scheme in the country gives an
unconditional guarantee to reimburse the full loan, irrespective of whether the individual borrowers
have paid or not.  This would leave a residual "country risk", which, if one wishes, can be insured on
the private market for sovereign risk insuran ce (annual coverage for many net food-importing
developing countries is available at 1% or so) – the margin between the costs of funds and the rate
charged to importers (to avoid distortions) is large enough to cover such insurance costs.
Just like international banks usually do when providing credit for imports, the facility can
control the use of the funds by not disbursing them to the importing agents, but directly to the
international traders or export agencies from which they are buying.  Local banks should be
encouraged (and trained) to manage their credit risk vis-à-vis the importers, e.g., through the use of
collateral management techniques.  The latter will, in the long term, lead to larger credit lines and
greater flexibility of banks in reacting to the financing needs of importers, and one can thus expectthat after a number of years, in some countries fa ster than in others, the needs for the facility will
disappear.
If food prices increase dramatically and across the board, there may be a large call on the
facility's resources.  The facility could re-insure its risk, if it wants (the risk is basically a price risk,which can be covered quite easily on the international market for commodity risk management
                                                     
4 These "tailored" triggers ensure that not all countr ies start benefiting of the facility at the same time,
which reduces the risk of short-term effects on prices that could result if all countries were to come to the
market at the same time.  Note also that the facility does not act as a buffer stock supplying an unlimited amountof foodstuff to the market at a given price – rather, net food-importing developing countries are given the meansto maintain import levels even if world market conditions become more difficult for them (the world market
conditions themselves are only marginally affected).G/AG/W/58
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instruments).  But if it does not, a system of finance quota has to be established, and a formula
acceptable to all eligible countries needs to be elaborated.
Market distortions can be avoided by using the established marketing channels.  For example,
consider that trader X usually imports 10,000 tons of maize, under a credit line from internationaltrader Y.  Maize prices increase strongly, and Y informs X that under the existing credit line, he can
now only deliver 6,000 tonnes.  If the international facility has been triggered, X can then approach
(through a national coordinating office) the facility to request for a credit line for the remainder.  If
approved, the facility will either pay Y directly, or cover the credit risk of Y giving a larger credit line
to X.   In order to ensure that the financing faci lity complements rather than replaces existing credit
arrangements, the interest rate should be set at a level commensurate with what X is already paying
(given the costs of capital of the facility, this will generate considerable earnings to the facility, whichcan be used to cover secretariat costs and performance risks).
Finally, the administrative costs of a food import financing facility can be reduced by
adopting fairly straightforward triggering mechanisms  (reducing the review role of the secretariat),
and through cooperation with appropriate counterparts (which could, for example, supply the relevantdata).
In conclusion, all indications are that a Revo lving Fund facility for the financing of food
imports can be established in such a way that the risk of disruptions in imports due to import price
increases are largely avoided, and without any negative effects on the market or on the position ofprivate versus public sector importers.
The way forward
Further work on the Revolving Fund facility (or some form of a trust fund) for the benefit of
LDCs and NFIDCs could evolve along two lines: operational, and institutional and administrative.
The point of reference should be a decision of the General Council to explore "the feasibility of an ex-
ante financing mechanism aimed at food importers" as contained in paragraph 168(b) of the Panel
Report.  Future work would build on the analysis contained in the Panel Report.  To the extent
relevant, the design of the Revolving Fund facility would draw on the operational and institutional
experience of existing financing mechanisms, such as the IMF's Compensatory Financing Facility
(CFF).  The intent would be to avoid duplication of CFF conditionality, which the Panel Reportidentified as unacceptable to the proponents of the Revolving Fund facility.
With respect to operational features, as already discussed above, further consideration is
needed with respect to eligibility criteria and tr igger mechanisms.  For example, there would be a
need to identify the global and country-specific variables, including definition of the commodity
coverage, that would establish the basis for country access to Revolving Fund financing.  Additional
areas requiring exploration could include country-sp ecific ex post assessment of developments in food
imports compared to the assumptions used to trigger disbursements; interest rates and charges; normal
and accelerated repayment schedules; provisions for delayed repayments; and investment of financial
resources provided by donor countries not yet disbursed to eligible countries.
Institutional and operational considerations would need to be elaborated, based on the
assumption that the overall management and administ ration of the trust fund would be lodged within
an existing international agency, and the decision-making body of the said agency would oversee
operations of the Revolving Fund.  A small staff would be necessary to monitor economicdevelopments, prepare loan requests, monitor ex-post developments, and administer repayments and
financial investments. The intent of the proponents of the Revolving Fund is clearly to avoid the
creation of a new international agency.G/AG/W/58
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Finally, as regards the specific approach of ex ploring the feasibility of this Revolving Fund
ex-ante financing mechanism, it was agreed by the Committee on Agriculture that this proposal would
be discussed at its next formal meeting, and the appropriate decision be taken by the General Council
at its meeting in December 2002.
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