Chapter 6


of the supply and demand functions, existing food deficits will be reduced and food security
improved.

3.2 Financial assistance

International financial assistance can help to enhance food security in two areas:

1. Trade finance for alleviating transitory food insecurity;

2. Lending operations to promote economic growth with equity, with special emphasis on
 approaches to reduce poverty and chronic food insecurity.

1) External finance to alleviate transitory food insecurity

External finance can help to alleviate transitory food insecurity, by ensuring the financial
capacity to import food in years when a country experiences poor harvests, faces high
international food prices, or suffers a massive reduction in foreign exchange earnings.

In 1981, the IMF established side by side with its Compensatory Financing Facility (CFF) a
cereal-import financing scheme with the purpose of providing financial assistance to
countries suffering from excess cereal-import cost (see Box 6.6). The purchase of food under
the scheme can be combined with other food imports. This offers the possibility of adjusting
food imports to changing volumes of food needed for stabilising food supplies. Credit
facilities to finance food imports are likely to be a more cost-effective form of stabilising
food supplies in comparison to the costs of building up and maintaining a buffer stock for the
same purpose. It should, however, be kept in mind that external finance of food imports,
although at favourable terms, contributes to increased foreign indebtedness and represents
basically a consumption credit that must be serviced with future export earnings. This applies
specifically to credits from the IMF that are, according to current practice, not the subject of
foreign debt release. This may be different if credits are obtained from bilateral official
donors.

Under the Lom6 Convention, the European Union has established a system for stabilisation
of export earnings (STABEX), providing financial aid on a grant basis to the ACP countries
(African, Caribbean and Pacific member countries of the Lomd Convention). If an ACP
member country suffers dramatic losses in export earnings, the STABEX facility can help to
maintain the capacity to pay for commercial food imports.


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