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

227. Memorandum From Stephen Danzansky of the National Security Council Staff to the President’s Assistant for National Security Affairs (Carlucci)¹

Washington, September 21, 1987

SUBJECT

• Phone Call to Jim Baker on IMF Annual Meeting

Purpose of Call

To convey the importance you attach to finding a way to enlarge the IMF’s Structural Adjustment Fund (SAF) and to offer your help in searching for ways the U.S. might participate.

Background

The SAF is a $3 billion fund created in 1985 to provide long-term concessional loans to poor countries undertaking policy reforms. Its resources come from repayment of loans made under the IMF Trust Fund, created in the early 1970’s from sales of IMF gold. The SAF is a key element of the Baker Plan.

The problem with the SAF is that it is too small: Sub-Saharan African countries alone owe the IMF some $6 billion over the next three years in repayment for standby arrangements agreed to in the early 1980’s. While that repayment burden cannot be carried, it also cannot be rescheduled—because of tradition due to the IMF’s monetary character.

This spring, IMF Managing Director Camdessus proposed tripling the SAF, in effect to provide refinancing for the $6 billion in loans coming due to the IMF. Camdessus ignored Jim Baker’s advice not to launch a public campaign since the U.S. cannot participate now. The SAF expansion was endorsed in principle at the Venice Summit, though the U.S. took the position that surplus countries (Japan, Germany, etc.) should provide the funding.

Baker is attempting to contain pressure for an expanded SAF until Congress has provided funding for IDA–8, half of which is planned for Africa. Nevertheless, the U.S. will be urged to participate at the upcoming IMF annual meeting. Some countries (Italy, U.K.) are prepared to sell some of the IMF’s $50 billion in gold if necessary to finance the SAF. Baker—and perhaps Camdessus—oppose gold sales. Baker fears that gold sales would undermine the strength of the IMF as a monetary institution and would undermine Congressional support of the IMF.

Discussion

We believe that an expanded SAF is critical to resolving Sub- Saharan Africa’s debt problem. Without a resolution, there is little prospect for progress in the area, including progress on the President’s Initiative to End Hunger in Africa.² Also, the Africans themselves are planning an OAU Summit meeting on debt in December.³

The U.S. ought to be prepared to consider hard choices in seeking ways to expand the SAF. One possible way is to provide new funding—perhaps as little as $50–60 million per year for six years, according to an informal Treasury staff estimate. Another possible way is to collateralize the IMF’s gold, using it as security against future loan default. Neither of these choices is easy.

How the U.S. plays the issue at next week’s IMF meeting is a question of tone as well as substance. The U.S. should appear willing to consider the options further.

State staff support collateralizing gold, though Secretary Shultz has not taken a position. For your information at Tab II is a letter to you from John Sewell, President of the Overseas Development Council, supporting the gold sales option.⁴

Hank Cohen concurs.

RECOMMENDATION

That you use the talking points at Tab I⁵ to call Jim Baker.⁶

1. Source: Reagan Library, Stephen Farrar Files, Chronological File, Farrar Chron September 1987; NLR–177–6–35–5–6. No classification marking. Sent for action. Prepared by Farrar. A stamped notation in the top right-hand corner of the memorandum reads: “Natl Sec Advisor has seen.” Carlucci wrote at the top of the memorandum: “Thru this mtg—then revisit.”
2. For information on the President’s initiative to end hunger, see Foreign Relations, 1981–1988, vol. XLI, Global Issues II, Document 259.
3. Telegram 5029 from Addis Ababa, December 1, transmitted the text of the Final Declaration of the OAU Summit on African Debt. The Declaration called for numerous proposals, including the conversion of past official bilateral loans to grants, a reduction of real interest rates on existing loans, 50-year repayment and 10-year grace period on new loans, and a suspension of debt repayment for 10 years from 1988. (Department of State, Central Foreign Policy File, Electronic Telegrams, D870983–0610)
4. Tab II, Sewell’s September 11 letter to Carlucci, is attached but not printed.
5. Tab I, a set of undated talking points entitled “Phone Call to Secretary Baker: IMF Annual Meeting: Expanding the Structural Adjustment Fund,” is attached but not printed.
6. Carlucci did not indicate his approval or disapproval of the recommendation.