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

197. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Mulford) to the Deputy Secretary of the Treasury (Darman)¹

Washington, December 31, 1985

SUBJECT

• Interagency Agreement on the Trust Fund Proposal

Agreement has been reached among Treasury, State and AID staff on a revised formulation of the U.S. proposal for assisting the poorest countries with protracted balance of payments problems.² If approved by you and Deputy Secretary Whitehead, it will be used as the basis for the final round of consultations on the U.S. proposal, prior to IMF Board discussion of use of Trust Fund reflows on January 22.

The revised formulation builds on the basic elements of the proposal put forward in Seoul. It involves development by the Fund, Bank and recipient country of an overall “policy framework”. This framework would set medium-term economic policy goals and priorities and general financing targets, within which the Bank and Fund would then develop programs.

Eligibility would be limited to the poorest countries (below $550 GDP per capita) with protracted balance of payments problems and willing to undertake comprehensive economic programs. Funding sources would include Trust Fund reflows, World Bank resources (including IDA non-project lending, modest additional IBRD lending, and transfers of IBRD net income) and contributions by bilateral donors.

While the basic concepts and elements of our original formulation are retained, this new version addresses the key concerns raised in our consultations in Europe and Africa related to the specific modalities of Bank/Fund programming.

A number of countries are worried that our plan, rather than simply making Bank and Fund programs more consistent and supportive, would “blur” the distinctive missions of the Bank and Fund and/or lead to “ganging up” on recipients through cross-conditioning of performance by the two institutions. This formulation preserves the distinctness of the missions and programs of the two institutions by focusing joint action on the design, approval and review of an overall “policy framework”, rather than formal linkage of Bank and Fund financing programs. In so doing, this formulation would not change the fundamental roles or relationships between the institutions, or with their clients. Design and implementation of Fund and Bank programs under the framework would be left to the institutions, but each institution would take into account developments relating to the other’s program, albeit without any rigid links or cross-conditioning.

More difficult to address at this time are concerns over funding. Many countries believe that additional funding for the poorest countries, including funds to be matched with the Trust Fund reflows for the policy framework, should come primarily from a larger IDA VIII rather than bilateral funds. While we are confident that matching funds can be assembled (possibly as much as $1.3 billion of IDA VII and VIII resources, $500 million of IBRD net income, $250 million of IBRD lending and bilateral resources), it is impossible to better define the sources and levels of funding until the summer when the IDA VIII negotiations are advanced, and we can get a better fix on the availability of our own and others’ bilateral resources.³

We have expressed willingness to have part of IDA VIII dedicated to this program and have restated our willingness to seek bilateral funds if others do likewise. In addition, you should be aware that the Congress, in the Continuing Resolution, provided $75 million for the World Bank’s Special Facility for Sub-Saharan Africa for 1986. This action could be seen as improving our position with the Europeans who were unwilling to commit bilateral resources to the Trust Fund proposal on the grounds they had participated in the Special Facility and we had not. We do not believe that this Congressional action fundamentally alters our overall strategy or approach on the Trust Fund. However, we may be able to use our $75 million contribution to the Special Facility to raise anew the possibility of associating the uncommitted funds in the Special Facility with or obtaining additional bilateral funds for the Trust Fund proposal.

The funding issue cannot be resolved quickly, and it is inevitable that other questions and details will remain unresolved when the IMF Board takes up the Trust Fund in January. However, this reformulation addresses the major procedural concerns with the U.S. proposal raised by other governments. State and AID staff support it as a basis for further consultations and eventual agreement on coordinated IMF/World Bank programming.

Recommendation. That you approve the reformulated proposal for distribution at the Fund and Bank, and further consultations with the institutions and other governments.⁴

1. Source: National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Official Files of the Executive Secretariat, 1985, UD–11W, 56–88–79, Box 57, [no folder title]. No classification marking. Sent for action.
2. The December 20 revised proposal, entitled “An Approach to Assistance to Low Income Countries with Protracted Balance of Payments Problems,” is attached but not printed.
3. See Document 352.
4. Darman initialed the “Approve” option on January 2, 1986. In a February 12, 1986, memorandum to Baker, Mulford reported that “the modified U.S. proposal regarding the use of Trust Fund reflows received broad support from the IMF Executive Board at its meeting on Tuesday, February 11, 1986.” He continued: “The board discussion was an important step in the direction toward final acceptance of the U.S. approach.” (National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Correspondence Files, 1986, UD–13W, 56–89–13, Box 30, Memos to the Secretary, International Affairs, Jan–Feb ’86)