LETTER TO MR. ESKIN FROM ROBERT VASTINE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP82S00697R000400120010-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 27
• Document Creation Date: December 21, 2016
• Sequence Number: 10
• Content Type: LETTER

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DEPARTMENT C)F THE TREASURY
WASHINGTON, D.C. 20220
February 18, 1976
At an earlier meeting of the LOS deep
seabeds working group, Treasury wa.s, requested
to clarify the current United States policy
with regard. to compensatory finance and to
relate such policy to the ongoing efforts at
reaching agreement on an international regime
for the deep seabeds. In. accordance with
this request, I am sending the attached set
of papers.
The first paper attached sketches a
brief outline of the current U.S. policy
with respect to compensatory finance and a
draft U.S. position on this issue for use in
the context of the deep seabed negotiations.
The subsequent papers are designed to provide
a further explanation of compensatory
financing as an issue and U.S. initiatives
in this area, along with related current
developments, and to acquaint the reader
with the operations and services of the
international financial institutions, paying
specific attention to assistance rendered to
developing countries exhibiting substantial
economic dependence on primary commodities.
TREA has not reviewed.
Processed IAW CIA TREA
arrangement letter dtd 4/11 /08.
ON FILE TREASURY DEPARTMENT RELEASE
INSTRUCTIONS APPLY
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Should you need any additional
information, please do not hesitate to
contact me.
Sincerely yours,
Mr. Otho E. Eskin
Staff Director
Office of the Law of the Sea
Negotiations
Room 4321
Department of State
Washington, D.C. 20520
Attachments: U.S. Policy with Regard to Com-
pensatory Financing and Draft
U.S. Position Concerning
Compensation of LDC Land-
Based Producers in the Future
Regime of the Deep Seabed
IMF Press Release No. 75/65
Compensatory Financing
Compensatory Financing Schemes
Activities of International
Lending Development Institutions
(IDLI's)
IMF Extended Fund Facility
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U.S. POLICY WITH REGARD TO COMPENSATORY FINANCING AND
DRAFT U.S. POSITION CONCERNING COMPENSATION OF LDC LAND-
BASED PRODUCERS IN THE FUTURE REGIME FOR THE DEEP SEABED
As a result of the comprehensive review of U,,?S?
commodity ?poti,cundertaken izn J9L5 buy. the. EPB/NSC Ta.sk_
er .t_a s.hed.-for that purp..Q.se, it .was concluded,.:,:t : t.
compensator,y_.financing,of temporary export shortfalls Is
r`Sferble to comprehensive commodity,p i,cearrangements
as a means of dealing with the problems created for
d ve. oping countries by,excessive fluctuations in export
earnings.. This policy has consistently been reaffirmed
in recent statements at the highest levels.
The United States has strongly supported an expanded
multilateral compensatory financing program as reflected
in our proposal for a Development Security Facility in
the IMF. A major element of that proposal is reflected
_in the.pecember, 1975 decision by the IMF Directors to
substantially liberalize the existing IF Compensatory
Finance Facility. The other element of, theU.S, propo`s
al,
expansion of the scope of the proposed Trust Fund to
permit it to undertake.compeiisatory financing, remains
0,~1
the table but has not received much support. This pro-
posal, which would benefit only developing countries,
-would:
be permitted to make grants to the poorest
countries of compensatory drai~;ings from the
IMF in the event such countries are unable
to complete repayment within the IMF's
five-year repayment period; and
based on short falls in export earnings
from a select group of commodities,
provide additional compensatory financing
on concessional terms for poor countries
and on more extended maturities than are
available under the IMF for other LDCs.
Finally, in the continuing belief that the best way
for developing countries to reduce long-term dependence
on exports of primary products for foreign exchange
earnings is to diversify their economies through their
own efforts, the U.S. is currently seeking to expand the
authorized capital of the InterAmerican Development Bank
and the Asian Development Bank, and to become a member
I
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of the African Development Fund. All these measures will
result in a significant increase in the amount of loans
available for purposes of general economic development.
The above measures constitute the core of existing
U.S. policy with respect to compensatory financing and
the general strengthening of international financial
institutions concerned with economic development.
,U.S.should state that current compensatory financing
arrangements are responsive to the immediate concerns of
land-based producers of the minerals to be derived from
m nganese nodules and that further measures in this area
are not warranted. The U.S. should also emphasize the
importance of the various development lending institutions
as a source of the capital required in adjusting to any
economic dislocations brought about through deep seabed
mining and relate that the U.S. has undertaken extensive
initiatives in this regard since the last session of the
LOS Conference. In constructing their own lending
program, the IFI's work closely with the borrowing
countries to assist them in establishing economic and
financial policies conducive to development.
In cases where countries are dependent on a single
primary commodity, the development institutions make a
particular effort to advise and aid the country to
diversify into other areas. With respect to diversifi-
cation, it should be noted that the IMF's Extended Fund
Facility, which was established in September, 1974, is
prepared to make a commitment for up to three years to
provide resources to.members facing a financing need due
to payments difficulties in connection with programs to
correct structural maladjustments to their economies.
Drawings from these facilities have longer repayment
periods--four to eight years -- than regular credit
tranche drawings.
_...Any_.proposal in the context of the LOS Conference
which would affect U.S._ policies on the lending of inter
national financial institutions, _(;_ommodities, andf or
would involve a U.S. financial contribution over and._,
above the amount necessary to defray ISRA's initial
l i_strative expenses must be refe.rred_.back._,_tp
,.Waishington for consideration by the "appropriate
interagency forums.
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Washington, D.C. 2043
PRESS RELEASE NO. 75/65 FOR II'3 DIATE RELEASE
December 29, 1975
The International Monetary Fund has reviewed its policies in
connection with compensatory financing of export f:.actuaticns and has
decided to change the provisions of the facility so as to provide greater
access to members, particularly primary exporters, encountering balance
of payments difficulties caused by temporary export shortfalls.
Over the past few years, views have been expressed on ways of
increasing the usefulness of the compensatory financing facility to Fund
members. In its Press Communique of June 12, 1975 following its third
meeting, the Interim Committee of the Board of Governors on the International
Monetary System stated: "The Committee considered various proposals to
assist members in dealing with problems arising from sharp fluctuations
in the prices of primary products. In this connection, the Committee
requested the Executive Directors (of the Fund) to consider appropriate
modifications of the Fund's (facility) on the compensatory fira,ncing of
export fluctuations." This request was welcomed by the Joint Ministerial
Committee of the Boards of Governors of the Bank and the Fund on the
Transfer of :eal Resources to Developing Countries (the Development
Committee) in its Press Communique of June 13, 1975.
Under the new decision (attached), the Fund will be prepared to
authorize drawings up to 75 per cent of a member's quota (instead of
50 per cent under the 1966 Decision), provided that, except in disasters
or major emergencies, drawings outstanding will not be increased by a net
amount of more than 50 per cent (previously 25 per cent) of the member's
quota, in any 12-:aonth period. As previously, members can expect that their
requests for drawings will be met where the Fund is satisfied that the
shortfall is of a short-term character and is largely attributable to
circumstances beyond the member's control, and that the member will
cooperate with the Fund in an effort to find, where required, appropriate
solutions for its balance of payments difficulties. Requests for drawings
which would increase the drawings outstanding; under this decision beyond
50 per cent of the member's quota (previously 25 per cent) will be met
only if the Fund is satisfied that the .ember has been cooperating with
the Fund in an effort to find, where required, appropriate solutions for
its balance of payments difficulties.
The existence and amount of an export shortfall for the purpose of
any drawing under this decision shall be determined with respect to the
latest 12-month period preceding the drawing request for which the Fund
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has sufficient statistical data. However, in order to improve the time-
liness of assistance, the Fund may allow drawings with respect to a short-
fall period for which export data are estir:ated for a period of up to six
months. Moreover, the rules relating to reclassification or ordinary
drawings into compensatory drawings have been liberalized to allow such
reclassification to be made within 18 months from the date of the ordinary
drawing (instead of six months under the 1955 Decision).
The Fund will review the formula for computing the shortfall
(paragraph 5 of the attached Decision) not later than March 31, 1977, and
will review this decision as a whole when experience and developing circum-
stances make this desirable. The Fund will review the decision in any
event whenever drawings in any 12-month period exceed 1.5 billion special
drawing rights (SDKs) or outstanding drawings exceed SDR 3.0 billion.
Since the compensatory financing facility was introduced in 1963,
purchases have been made by 35 member countries. The amount of assistance
provided has totaled SDR 1,221 million, of which SDR 722 million remains
outstanding.
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INTERNATIONAL MONETARY FUND
Compensatory Financing of Exhort Fluctuations
Executive Board Decision - December 24, 1975
1. The financing of deficits arising out of export shortfalls,
notably those of primary exporting member countries, has always been
regarded as a legitimate reason for the use of Fund resources, which have
been drawn on frequently for this purpose. The Fund believes that such
financing helps these members to continue their efforts to adopt adequate
measures toward the solution of their financial problems and to avoid the
use of trade and exchange restrictions to deal with balance of payments
problems, and that this enables these members to pursue their programs
of economic development with greater effectiveness.
2. The Fund has reviewed its policies to determine how it could
more readily assist members, particularly primary exporters, encountering
payments difficulties produced by temporary export shortfalls, and has
decided that such members can continue to expect that their requests for
drawings will be met where the Fund is satisfied that
(a) the shortfall is of a short-term character and is largely
attributable to circumstances beyond the control of the
member; and
(b) the member will cooperate with the Fund in an effort to
find, where required, appropriate solutions for its balance
of payments difficulties.
3. Drawings outstanding under this decision may amount to 75 per
cent of the member's quota provided that (i) except in the case of short-
falls resulting from disasters or major emergencies, such drawings will
not be increased by a net amount of more than 50 per cent of the member's
quota in any 12-month period, and (ii) requests for drawings which would
increase the drawings outstanding under this decision beyond 50 percent
of the member's quota will be met only if the Fund is satisfied that
the member has been cooperating with the Fund in an effort to find,
where required, appropriate solutions for its balance of payments
difficulties.
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Attachment
11. The existence and amount of an export shortfall for the purpose
of any drawing under this decision shall be determined with respect to
the latest 12-month period preceding the drawing recuest for which the
Fund has sufficient statistical data, provided that the Fund may allow a
member to draw in respect of a shortfall for a 12-month period ending not
later than six months after the latest month for which the Fund has
sufficient statistical data.
5. In order to identify more clearly what are to be regarded as
export shortfalls of a short-term character, the Fund, in conjunction
with the member concerned, will seek to establish reasonable estimates
regarding the medium-term trend of the member's exports based partly on
statistical calculation and partly on appraisal of export prospects.
6. The shortfall for the purposes of this decision shall be the
amount by which the member's export earnings in the shortfall year are
less than the average of the member's export earnings for the five-year
period centered on the shortfall year. In computing the five-year average,
earnings in the two post-shortfall years will be deemed to be equal to
earnings in the two pre-shortfall years multiplied by the ratio of the
sum of earnings in the most recent three years to that in the three
preceding years. If the Fund considers that the result of the computa-
tions under the previous sentence is not reasonable, the Fund, in con-
junction with the member, will use an estimate based on a judgmental
forecast. When the Fund allows a member to draw under the proviso in
paragraph 1E above, the Fund may use such methods of estimating exports
during the period for which sufficient statistical data are not avail-
able as it considers reasonable.
7. Any member requesting a drawing under this decision will be
expected to represent that it will make a repurchase corrasnonding to
the drawing in accordance with the principles of Executive Board Decision
No. 102-(52/11), adopted February 1.3, 1952, as renewed by Executive Board
Decision No. 270-(53/95), adopted December 23, 1953. Approximately one
year and two years after a drawing by a member under this decision, the
Fund, after consultation with the member, may recormend to the member
that, in view of an improvement in its balance of payments and reserve
position, it should make a repurchase in respect of a part or all of the
outstanding drawing. The Fund will expect the member to repurchase in
accordance with the recommendation.
8. A member requesting a drawing under the proviso in paragraph 4
above will also be expected to represent that, if the amount drawn on the
basis of partially estimated data exceeds the amount that could have been
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drawn for the full 12-month period under paragraph 6 above, the member
will make a prompt repurchase in respect of the outstanding drawing, in
an amount equivalent to the excess.
9. Whenever the Fund's holdings of a member's currency resulting
from a drawing under this decision are reduced by the member's repurchase
or otherwise, the member's access to this facility, in accordance with
its terms, will be restored pro tanto.
10. When drawings are made under this decision, the Fund will so
indicate in an appropriate manner. Within 18 months from the date of
any drawing made under the Fund's tranche policies or under the Extended
Fund Facility, a member may request that all or part of the amount out-
standing be reclassified and treated, for all purposes of this decision,
as a drawing made under this decision. The Fund will agree to such a
request if at the time of the drawing under the tranche policies or the
Extended Fund Facility the member could have met the requirements for a
drawing of an equal amount under this decision.
11. In order to implement the Fund's policies in connection with
compensatory financing of export shortfalls, the Fund will be prepared
to waive the limit on the Fund's holdings of 200 per cent of quota,
where appropriate. In particular, the Fund will be prepared to waive
this limit (i) where a waiver is necessary to permit compensatory
drawings to be made under this decision or (ii) to the extent that
drawings in accordance with this decision are still outstanding.
Moreover, the Fund will apply its tranche policies to drawing
requests by a member as if the Fund's holdings of the member's currency
were less than its actual holdings of that currency by the amount of any
drawings outstanding under this decision.
-2. The Fund will review the formula in paragraph 6 not later than
March 31, 1977, and will review this decision as a whole when experience
and developing circumstances make this desirable. The Fund will review
this decision in any event whenever (i) drawings under this decision in
any 12-month period exceed SDR 1.5 billion or (ii) outstanding drawings
under this decision exceed SDR 3.0 billion.
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Attacnmentc
INTERNATIONAL MONETARY FUND
Stabilization of Prices of Primary Products
Executive Board Decision - December 24, 1975
Paragraph 2 of Executive Board Decision No. 2772-(6947), adopted
June 25, 1969, is amended to read:
2. In accordance with paragraph 1 above, the total of
purchases outstanding pursuant to paragraph 1 of this decision
shall not exceed 50 per cent of quota.
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 COMPENSATORY F I NANC I \G
ISSUE
1/76
J,DCs 1Ji11 exert pressure to create a compensatory
_ii11 )loin f:ici1 t;T atltSide the I; IF both at U;\CT.-:I) IV
and in the finance and raw. materials commissions in the
produccr - cons>.l c,x_, dialogue.
CURRENT STATUS
The U.S. proposed at the UNI Seventh Special Session the
creation of a D clopiient Security: Facility in the
1,141 as a more Co:apreaensivC and effective means of ;.:eetiag
LDC concerns about excessive expert" earning fluctuations than
would commodity price arrangements. A ]valor element
Of tale U. S. pro-)0 .n 1= has bce:1 achieved `.,'ith the Iiber-
CO1 1~:]1~: tOry f:.llancin ?aci1.1~.}'.
aliZ4.tioll of the PIPS
Our j:I- cpo. a l t"0 expand the "i rust Funs' to 1)c:r,:i t it to
" l s
ur.cdertae comr'ensat o r.y f i 11n r: c 1:g r c- .-: :, i n on the t a ble
althou}"l it has not Ieceive idcspre d support.
On December 24 , 1975, the 1..`F Executive Directors
rgreen to 1]heralize the Ji;i CO :'~ i?S? i01'}' rirl:iliCC I-ac1.11
by 1;1cre:1snlg countries' LOtr.l c t5T:T_14xT72 fXT...l+XT.,.2 II - ? 8X ,j,
.2 iT_I +XT_2) (l+ X,J;t-;;T ] 4-):,r_7 ~ -. R
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IMF CALCULATION OP COMPI:\'SAFL]i 511O1:TFA LLS
Under the old tcchni.cllnes, a con!pensebi e
export shortfall was c;Acul::ted as the difference
bet:wcen exports in the shortfall year