Foreign Relations of the United States, 1977–1980, Volume IX, Arab-Israeli Dispute, August 1978–December 1980, Second, Revised Edition

200. Memorandum From the Director of the Office of Management and Budget (McIntyre) and the President’s Special Representative for Economic Summits (Owen) to President Carter¹

Washington, March 7, 1979

SUBJECT

• Financial Assistance to Israel and Egypt

We have discussed with you a number of times previously the implications of various levels of US assistance which might accompany a

Middle East settlement. While we would not presume to predict the focus of your ultimate negotiations, we do want to highlight for you several key elements which may be useful to you in the talks. (C)

First, prior year assistance levels tend to become unbreakable minimums or floors later. That argues in our view for defining any settlement aid as a special one-time package with no hint of continuation in subsequent years. (C)

Second, the US budgetary impact varies significantly with alternative forms (FMS credits versus Security Supporting Assistance) of aid, so that by moving to less “costly” forms, we can hold down our budget costs even as we look at higher dollar totals of aid. Along these same lines, our current FMS credit programs are basically off-budget, unsubsidized loans, except for Israel. For Israel, we have recently (and automatically) forgiven 50% of the FMS loans, thus making the program half grant and costing us 50 cents in outlays for each FMS dollar. (C)

Whatever the dollar level you contemplate in the settlement, these elements—special one-shot rather than ongoing package, more FMS than SSA, and making the FMS “regular” as opposed to “half grant”—would help to mitigate what will in any case be a major budget cost and serious threat to your present fiscal ceiling, as well as a significant threat to our other aid, particularly development aid. (C)

With these concerns in mind, we offer suggestions on three foreign assistance issues that may require your decision if a Middle East settlement is reached. (C)

I. Israel’s $3 billion request for extraordinary aid.

The Israeli request is for full US funding of the costs of (a) replicating in the Negev two Sinai airbases (estimated by DOD to cost about $1 billion, without all required infrastructure, if constructed in three years under US Corps of Engineers control with largely imported resources); (b) other Israeli military redeployments to new facilities (estimated by Israel to cost about $1.2 billion); and (c) military equipment additional to current procurement levels (estimated by Israel to cost about $750 million). (C)

We see two options:

Option 1. Full US financing of the airbases only ($1 billion), either on standard FMS long-term credit terms or—if a more liberal offer is required—on the unique terms (half grant, half long-term credit) now applicable to FMS credits to Israel. If this option is chosen, we would respond to the remainder of the Israeli request by a noncommittal offer to consider, as peace treaty implementation proceeds, requests for military or economic aid in the course of annual security assistance consultations. The commitment of $1 billion would result in budget outlays of $500 million about as follows: FY 79 $150 million; FY 80 $250 million; FY 81 $100 million; FY 81 $50 million. We would seek a one-time FY 79 appropriation for the entire funding of the three-year airbase construction program. (S)

Option 2. Increase the present $1.8 billion annual aid program by $500 million, to $2.3 billion, and indicate a willingness to continue at this level over the four years FY 79–82, so as to cover about $2 billion of the $3 billion special Israeli request. Under this option, outlays would rise by about $250 million in FY 79 and annually thereafter. We would request a supplemental appropriation of $500 million in FY 79 and amendment of your FY 80 foreign assistance budget request in the same amount, largely or wholly in the FMS account. (S)

Recommendation: We recommend Option 1 with standard FMS credit terms, because it:

—costs less and is hence more consistent with your overall fiscal policy (we are already getting complaints about rumored FY 79 supplementals from the Hill);

—minimizes the risk of locking us into a permanent higher level of aid (current aid levels already exceed Israel’s requirements);

—makes any aid over the cost of relocating the airfields dependent on actual Israeli expenditures and on clear evidence that additional economic aid is required;

—insulates the foreign assistance budget for other countries from offsetting Congressional cuts better than Option 2 because it is confined to the costs of a single event—airbase relocation—and because it does not involve annual aid requests for four years. (S)

In declining order of acceptability, we suggest two fall-backs:

a. Option 1 with the usual half-grant terms of FMS to Israel;

b. Option 2, with a hardening of the terms of at least the incremental aid to those of standard FMS credits. (S)

II. Egypt’s request for military aid.

You have a current proposal from Secretary Brown for military assistance to Egypt, involving annual arms sales of $500 million, with $200 million of this being on FMS credit terms. We have no basis for comment on these figures. We do suggest that you limit the time period of the commitment, so as to preserve latitude for tactical use of aid commitments as the peace process evolves and Middle East security requirements change. We would prefer two to three years, and would recommend not going beyond three years, at a maximum. (S)

III. Economic aid to Egypt and to regional development.

Sadat has frequently and publicly discussed a massive “Carter Plan” for Egypt and possibly other Middle Eastern countries; he may ask you to adopt this foundling. State and AID agree that a significant increase in US economic aid to Egypt cannot be justified on economic grounds; more aid would simply back up in the pipelines. If there is a political need to create a multi-donor Middle East Regional Development Program after the peace treaty, it should focus on Palestinian resettlement-employment, development of public services in the West Bank and/or Gaza, and private trade/investment in Egypt. If the political need exists, and if Sadat will agree to redefine his proposal in these directions, you might indicate that you would join him in proposing international consultations with other countries, including potential donors, on the modalities. Even if these consultations prosper, only a modest amount of planning money would be required in FY 80, unless creation of a West Bank/Gaza self-governing authority moves rapidly. (S)

1. Source: Carter Library, National Security Affairs, Staff Material, Middle East, Subject File, Box 50, Israel: 3–4/79. Secret. Sent for information.