UNCTAD-VII: EFFORTS BEING RENEWED TO BRING COMMON FUND INTO BEING.

Apr 10, 1987

UNCTAD-VII: EFFORTS BEING RENEWED TO BRING COMMON FUND INTO BEING.

GENEVA APRIL 7 (IFDA/CHAKRAVARTHI RAGHAVAN) -- The Secretary-General of UNCTAD, Kenneth Dadzie, is planning a round of further contacts with governments of third world countries and the socialist countries of Europe, which have not yet ratified the common fund agreement, to persuade them to do so and thus bring the agreement into force.

Indicating this in his address to African Trade Ministers at Addis Ababa in March, Dadzie had said: "This seems to be the best line of approach, since most of the developed market-economy countries have ratified the agreement and the United States of America has declared it will not do so".

The agreement, concluded in 1980, has so far been signed and ratified by 92 countries who account for 58.50 percent of the total directly contributed capital (DCC) of 470 million dollars.

For entry into force, the agreement requires two conditions to be met: ratification by at least 90 countries accounting for two-thirds of the DCC.

While the first has been met, the second has not.

Additional ratifications by countries who together account for another 8.3 percent of the DCC are needed to enable the agreement to enter into force.

In theory, the additional ratifications for 8.3 percent of capital could be obtained from among the G77 membership who have not so far ratified or otherwise acted on the agreement.

There are 51 countries, members of the G77, who together account for 15.72 percent of the DCC who have not ratified the agreement. Of these 18, for a total of 4.62 percent of the DCC, have signed the agreement but have not ratified, while the remaining have not acted at all.

The countries who have signed, but not ratified are: North Korea and Thailand (in Asia); Congo, Liberia, Madagascar, Morocco and Mozambique (in Africa); Barbados, Costa Rica, Cuba, Dominican Republic, El Salvador, Grenada, Guyana, Honduras, Peru, St. Lucia, and Surinam (in Latin America and Caribbean).

The other 33 who have taken no action at all are: Cote D'Ivoire, Libya, Mauritania, Mauritius, Seychelles and Swaziland (in Africa); Bahrein, Burma, Kampuchea, Fiji, Iran, Jordan, Laos, Lebanon, Maldives, Nauru, Oman, Qatar, Solomon Islands, Tonga, Vietnam, Cyprus and Malta (in Asia); Bahamas, Bolivia, Chile, Dominica, Panama, Paraguay, St. Vincent and Grenadines, Trinidad and Tobago and Uruguay (in Latin America).

In the OECD group, besides U.S. which has announced it will not ratify, Portugal and Turkey have signed but not ratified, while Iceland has not acted.

None of the nine socialist countries of Eastern Europe (Albania, Bulgaria, Czechoslovakia, GDR, Hungary, Poland and URSS), nor the nine falling in the category of "others" (Byelorussian SSR and Ukranian SSR, Holy See, Israel, Liechtenstein, Monaco, Mongolia, San Marino, and South Africa), have taken any action.

UNCTAD officials say that the additional 8.2 percent of the DCC criteria could be met if those third world countries, beneficiaries of the OPEC offer or the Norwegian offer to pay the contributions, ratify or accede to the agreement, and if the USSR as well as the Byelorussian and Ukrainian SSR could be persuaded to sign and ratify the agreement.

The three countries covered by the OPEC fund's offer to pay for the contributions of least developed countries are Burma, Maldives and Mauritania.

The Norwegian offer covers Costa Rica, El Salvador, Honduras, Madagascar, Mozambique and Swaziland.

Of the socialists, the Soviet Union has been allotted 2718 shares for a total value of 20.565.669 units of account (UA), which is equivalent to the SDRS, or about 27.18 million dollars. The Byelorussian and Ukranian SSR both have a minimum of 100 shares, each for one million dollars.

The total soviet commitment if it is to ratify the common fund and join it is about 29 million dollars.

However, not all of this is to be paid on ratification.

Of the total of 2718 shares allotted to the USSR, 2865 shares or 18.65 million are paid-in shares and the balance of 853 shares for 6.45 million are "payable" shares - a contingent liability to be called up in specified circumstances to meet the fund's own liabilities.

Under the scheme of the common fund agreement, on entry into force the USSR would have to pay 30 percent of the value of the paid-in shares in cash, and a year after another 20 percent.

The balance of 50 percent is to be deposited with the fund, in two instalments, in the form of irrevocable, non-negotiable and non-interest-bearing promissory notes. The first instalment is for then percent in promissory notes one year after the first cash payment of 30 percent, and the second instalment of and 40 percent the year after.

The ten percent of the value of paid-in shares in promissory notes can be cashed as and when decided by the executive board of the common fund, while the 40 percent can be cashed as and when decided by a two-thirds majority vote of the executive board, having due regard to the operational needs of the fund.

Given the current outlook for conclusion of international commodity agreements (ICAS) with price stabilization provisions and buffer-stock operations (who could associate themselves with the fund and seek to make use of its first account resources), for the foreseeable future the common fund is not expected to require encashment of the promissory notes for its operational needs.

Thus for the Soviet Union, the actual cash liability to ratify (and help the common fund coming into being) is only the cash contribution of 30 percent within sixty days of the entry into force of the agreement, and another 20 percent one year thereafter.

The common fund agreement has denominated payments in terms of "units of account", a basket of 26 convertible currencies (most OECD currencies, plus the Iranian and Saudi Arabian rials), and is in effect the IMF's special drawing rights.

The actual payments are to be made in any of the five usable currencies - deutsche mark, French franc, Japanese yen, pound sterling, or US dollar.

The agreement enables each member of the fund to exercise one of two options about payment in usable currencies.

In the first option, a member could pay in one of the usable currencies at the rate of conversion between that currency and the UA at the date of payment. This would in effect enable payments to be made in marks, francs, yen, pound sterling or US dollars, in terms of their value vis-à-vis the SDRS.

A second option is for a member, at the time of ratification, to select and specify the usable currency in which it would pay and this will be at the rate of conversion between that currency and the UA as at the date of the agreement (June 27, 1980).

On that date, the UA was worth 2.33306 Dutch marks, 5.42029 French francs, 287.452 Japanese yen, 0.563927 pound sterling, or 1.32162 US dollars.

Since then, in relation to the UA the mark and yen have appreciated, while the franc, sterling and the dollar have depreciated, and choice of any of these three would result in some savings to the country concerned.

If the Soviet Union were to choose to exercise its second option, and specify the French franc as its preferred usable currency, on the basis of exchange rates of April 7 it would save roughly 5.8 million dollars on the paid-in shares - 1.75 million on its first 30 percent cash contribution, 1.17 on the second cash contribution, and nearly three million on the promissory notes.

It chooses the pound sterling, it will save a total of 5.23 million dollars.

Both UNCTAD officials, and a number of third world delegations have been impressing on the Soviet delegates that by agreeing to ratify the common fund and help it to come into being, at the cost of a cash contribution of less then ten million dollars over two years, the political gains for the Soviet Union would be very much higher.

The Group of 77 is aware that the entry into force of the common fund agreement would not now have any major economic impact on the commodity sector, and particularly on efforts to stabilise prices, since this would depend on conclusion of ICAS.

However, they see the entry into force of the common fund agreement more in terms of its political and psychological impact - at a time when post-war multilateral cooperation has been brought to a halt, and the development consensus repudiated and even sought to be reversed by the U.S.

Also, entry of the agreement into force would enable some of the commodity development measures to be financed through the second account to be implemented, and this could have some medium to long-term benefits.

The agreement envisages that countries could earmark a portion of their DCC for the second account, for which a target of 70 million dollars has been set.

Besides this contribution for the DCC, the second account is intended to be financed by voluntary contributions. Of the target of 280 million dollars of voluntary contributions, 255.5 million dollars have already been pledged.

Some of the ICAS with development focus (jute and tropical timber) have formulated projects and these are awaiting finances for their execution. Development projects that could be financed by the common fund have been or are being formulated in respect of some other commodities which are the focus of study groups or other arrangements.

If the common fund becomes operational, some of these projects - for R and D measures, and for market promotion, etc. - could be financed.

If the fund becomes operational, it would get about 70 million dollars of cash contributions in the first year and another 46 million in the second year. A substantial portion of these are expected to be earmarked by members to the second account.

The balance left in the first account would be just enough to generate an income sufficient to finance the administrative budget of a very small secretariat, according to UNCTAD sources.

Thus the view that without ICAS and buffer-stocking operations, the common fund would merely be locking up unnecessary capital does not appear to be correct.

At the time when the fund was negotiated, the distribution of capital and of the voting rights among the countries of the G77, OECD group, socialists and China, was intended to secure a certain balance.

When the fund comes into force as a result of additional ratifications by the G77 members (for whom OPEC or Norway is paying), and the USSR (and Byelorussian and Ukranian SSRS), or 104 ratifications accounting for 66.86 percent of the total DCC, the votes of the various group would change.

But even then the voting structure would be close to what had been agreed upon at the time of the conclusion of the agreement: the group of 77 will have 46.5 percent of the votes, China 4.3 percent, OECD countries 42.2 percent, and socialist block seven percent.

The total cash contributions on entry into force would be 28.44 million dollars by G77 countries, 3.33 million by China, 31.20 million by the OECD countries and 6.20 by the socialists - again maintaining a balance between the G77 and China on the one hand and the OECD countries on the other.