Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

187. Memorandum From the Under Secretary of State for Economic Affairs (Wallis) to Secretary of State Shultz¹

Washington, September 10, 1985

SUBJECT

• Treasury Proposal for Special African Facility

I believe your realistic choices are starker than the attached memorandum would suggest. The option favored by AF and EB proposes in part seeking a supplemental appropriation for a direct contribution to the proposed facility. Knowing your concern about the federal budget deficit and the constraints we are likely to face in FY-86 and FY-87, you should consider what we would do in the likely event that additional resources are unavailable.

The primary objective of the Treasury proposal is to find a way to deal with the inability of poor LDC’s (especially in Africa) to meet their IMF repayment obligations in coming years. Of lesser concern to them, but central to us, is the impact which prolonged debt and adjustment problems are having in strategically-important countries. While the proposal would help Treasury “bail out” the IMF by giving it a way to recycle its money and that of other donors, it would also unblock significant amounts of bilateral and multilateral assistance that these countries otherwise stand to lose. It would not increase the overall amount of financing available, but it would permit targetting it in a way that more nearly meets our goals (and would also increase Africa’s share).

To make this work, we would need: (a) to convince the Congress to approve either the AEPRP transfer or new appropriations; and (b) to get the support of 85 percent of the IMF membership. The attached memo suggests some of the Congressional problems; another one is the Kemp/Kasten concern about IMF conditionality.² A Congressional relations strategy designed to overcome such problems would have to focus on the additional resources which this initiative would make available to low-income countries, primarily in Africa—the flip side of which is that these additional resources come primarily at the expense of India and China.

A commitment of U.S. resources would greatly increase our negotiating leverage to obtain the required 85 percent majority in the IMF Executive Board. “Parallel use” of the AEPRP funds without new appropriations for a direct U.S. contribution would not be credible, for reasons pointed out in the attached memo. Thus, realistically the alternative to Treasury’s proposal is to see the IMF Trust Fund repayments allocated to all IDA-eligible countries with little or no conditionality. We could still take our best shot at targetting the funds more effectively, but with little hope of success.

Allen Wallis³

Attachment

Action Memorandum From the Assistant Secretary of State for African Affairs (Crocker) and the Assistant Secretary of State for Economic and Business Affairs (McMinn) to Secretary of State Shultz⁴

Washington, undated

SUBJECT

• Treasury Proposal for Special African Facility

ISSUE FOR DECISION

Dave Mulford came over to see Chet Crocker on Friday, September 6, to make another try on the Treasury proposal (Tab A) for a U.S. initiative to establish a joint IMF/World Bank Facility for Comprehensive Economic Reform.⁵ Treasury seeks both our support for the concept and agreement to allocate our bilateral African Economic Policy Reform Program (AEPRP) funds to the new facility. Mulford would like a speedy response since discussion of the IMF Trust Fund is scheduled for later this week and our initiative could be discussed there and at the Bank/Fund meeting in Seoul in October.⁶

ESSENTIAL FACTORS

Trust Fund reflows over the next five years may reach $2.7 billion. In the absence of a decision to the contrary, they are likely to be allocated to a mixed bag of countries, with virtually no conditionality or relationship to financial need. Treasury proposes to establish a new Fund/Bank facility which would utilize Trust Fund reflows supplemented by Bank funds ($1.8 billion) and additional bilateral contributions ($1.1–1.3 billion) for a total of $5–6 billion. (The total is somewhat exaggerated since it involves considerable resources which would have come available to these countries in any case.) These funds would be lent at highly concessional rates to low per capita income countries which have protracted balance of payments problems and have shown a willingness to undertake comprehensive economic policy reforms. The criteria have been crafted so as to exclude China and India but cover roughly 50 mostly but not exclusively African countries (see hypothetical country list attached to Treasury paper).⁷ Treasury has discussed the facility with the Chinese and was told that China was unlikely to oppose so long as the facility is structurally non-discriminatory (i.e., would not exclude any country which met the criteria in the future); Treasury assumes that India would find it difficult to oppose special assistance for the poorest countries.

Treasury believes that our ability to secure international support for this proposal will depend heavily on a U.S. bilateral contribution. Given the difficulties of securing Congressional approval of any new funds, particularly for a multilateral institution, Treasury proposes we allot our AEPRP funds for the next four years ($425 million) to the facility.

The Treasury proposal is a response to your initiative with Jim Baker and the work of the Whitehead group. The concept deserves our strong support. It is sound economically and politically, linking policy reform and a special effort to secure resources for the poorest countries. It would produce practical Bank/Fund cooperation on policy reform which has proven to be an elusive U.S. policy goal for years.

We agree with Treasury that a U.S. bilateral contribution is needed. However, direct contribution of AEPRP funds raises domestic difficulties. Direct transfer of funds to the facility would require legislation and, while House Democrats favor such an approach, the Administration has, in the past, opposed it. We don’t know whether the Senate would go along. It would also in effect take a bilateral initiative of the Reagan Administration and turn it over to a multilateral agency which lists Vietnam, Kampuchea, and Afghanistan among potential non-African recipients.

An alternative approach would be to announce our intention to use our AEPRP funds in close parallel with the facility, much as is being done now by several major countries with the Bank’s African facility. This would not require legislation and would retain our bilateral flexibility to choose among recipients. By itself, however, such an announcement is not likely to carry much weight, as we have already said we would work with the Bank’s African facility in using AEPRP funds. Thus we probably need some real money which the U.S. could pledge to request from Congress in the FY–86 supplemental or the FY–87 request.

Treasury has asked that knowledge of this proposal be very restricted until we decide whether we want to go ahead with it.⁸ If we do so decide, we should give some thought as to how to obtain maximum possible international recognition of the importance of the initiative, including possibly involving the President personally.

RECOMMENDATIONS

That you concur in Treasury’s proposal, including transfer of AEPRP funds to the international facility.

Alternatively, that you concur in the basic thrust of Treasury’s proposal but instruct us to work out a modification for parallel use of AEPRP funds and an initiative with the Congress in the FY–86 supplemental or FY–87 regular direct contribution to the facility (AF and EB favor—EB believes the new money is vital; without it EB favors the first option).

Alternatively, that you concur in the basic thrust of the Treasury’s proposal but instruct us to work out a modification limited to the parallel use of AEPRP’s funds.

Alternatively, that you wish to discuss the Treasury proposal further with us.⁹

1. Source: Department of State, Files of the Under Secretary of State for Economic Affairs, W. Allen Wallis, Chrons; Memo to the Secretary/Staff and Departmental/Other Agencies; Memos to the Files; White House Correspondence, 1987–1987, Lot 89D378: Chron—September 1–15, 1985. Secret; Sensitive.
2. See footnote 2, Document 180.
3. Wallis initialed “AW” above his typed signature.
4. Secret; Sensitive. Drafted by Peter Lande (AF/EPS); cleared EB/IFD and AF. Sent through Whitehead, who did not initial the memorandum. McKinley initialed the memorandum on September 9.
5. Tab A is attached but not printed. See footnote 3, Document 183.
6. See Document 192.
7. The undated “Joint IMF/World Bank Facility Hypothetical List of Countries” is attached but not printed.
8. Regarding White House frustration over not knowing of the development of this proposal, see Document 191. Documentation is also scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVII, Trade; Monetary Policy; Industrialized Country Cooperation, 1985–1988.
9. Shultz did not indicate his approval or disapproval of any of the recommendations.