Compensatory Finance Options for tackling the commodity price problem

The document examines the history and failure of compensatory finance schemes designed to smooth revenue flows for commodity-dependent developing countries. It analyzes the IMF's CFF and the EU's STABEX, concluding that both were undermined by donor conditionality and a tendency to operate pro-cyclically. While UNCTAD continues to propose innovative, automatic, and self-financing models, the author argues that these tools have fallen out of political fashion, replaced by direct budget support and market-based intelligence.

• The IMF's Compensatory Financing Facility (CFF), established in 1963, was designed as a counter-cyclical financial stabilizer for governments and central banks to address short-term export shortfalls without interfering in commodity markets. However, after 1983, the CFF became conditional on the adoption of balance-of-payments remedies, which caused disbursement delays and rendered the mechanism pro-cyclical, leading developing countries to abandon it in the 1990s.
• The EU's STABEX scheme, operating from 1975 for ACP states, functioned as a grant-based aid allocation mechanism triggered by shortfalls in agricultural export earnings. While it provided rapid aid disbursement, it often failed to support producers directly, instead subsidizing inefficient national commodity boards or allowing governments to fund budget deficits without diversifying their economies.
• Compensatory finance mechanisms were often used by industrialized nations as political tools rather than purely economic stabilizers. STABEX, for instance, served as 'soft power' to counter commodity cartels and as a political deflector to avoid the creation of a UN-led Common Fund for commodity regulation.
• The World Bank has noted that commodity earnings instability is a primary reason why many Highly Indebted Poor Country (HIPC) clients fail to meet their debt relief targets. In response, the Bank has explored market-based alternatives, such as a pilot international commodity price insurance mechanism with price floor and ceiling guarantees.
• UNCTAD has proposed a modernized compensatory finance scheme characterized by automatic payouts, ease of access, no conditionality, and direct pass-through mechanisms to producers. A refined version aims to be entirely self-financed through loans rather than grants and to cover both export earnings and food import stresses.
• The author concludes that there is currently little political will to revive compensatory finance, as donors now prefer direct budget support, trade facilitation, and the use of modern communications (such as cell phones) to provide market intelligence to farmers.

APA

Hewitt, A. (2007). Compensatory Finance Options for tackling the commodity price problem. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/compensatory_finance.pdf

Chicago

Hewitt, Adrian. Compensatory Finance Options for tackling the commodity price problem. International Institute for Sustainable Development, 2007. https://www.iisd.org/system/files/publications/compensatory_finance.pdf.

Wikipedia

{{cite report |last1=Hewitt |first1=Adrian |title=Compensatory Finance Options for tackling the commodity price problem |publisher=International Institute for Sustainable Development |date=November 2007 |url=https://www.iisd.org/system/files/publications/compensatory_finance.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{hewitt2007compensatory, author = {Hewitt, Adrian}, title = {{Compensatory Finance Options for tackling the commodity price problem}}, institution = {International Institute for Sustainable Development}, year = {2007}, month = nov, url = {https://www.iisd.org/system/files/publications/compensatory_finance.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }