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

245. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Mulford) to Acting Secretary of the Treasury McPherson¹

Washington, September 12, 1988

SUBJECT

• Paris Club-Poorest: Eligibility

Action Forcing Event

You may be approached by State to reconsider Secretary Baker’s decision to limit the Paris Club framework of options for the poorest countries to Sub-Saharan Africa only. Bolivia already has postponed negotiations for a new rescheduling while Club discussions on the framework and on eligibility continue. I expect this issue to be raised in my G–7 Deputies meetings this week and in the Paris Club next week.²

Background

You will recall that Secretary Baker reaffirmed in early July that the Paris Club options should be limited to countries in Sub-Saharan Africa. The Secretary said specifically that Bolivia should not be included.

Secretary Baker was concerned mainly about possible contagion effects. He reasoned (I believe) that if the special treatment were extended to countries outside Sub-Saharan Africa, it would immediately become a global debt relief mechanism. For example, if Bolivia received such treatment, other Latin debtors would only have to ask creditors to stretch the income criterion, rather than breaching both an income and a geographic test.

There is a general Paris Club consensus that eligibility should be limited to IDA-only recipients (per capita income of $550 or less) with a debt service ratio of 30% or more and a Fund/Bank adjustment program in place. While there had been a sense that the differentiated approach would be limited to Sub-Saharan Africa, that question was reopened during the July Paris Club meeting.³ The IMF, joined by some smaller creditors, insisted that there should be no geographic limits. In addition, the Japanese have told us since that they would like to see Bangladesh (which does not meet the debt burden criterion) and Burma included in the eligible set.

Other Considerations

Income Level: Despite its obvious poverty and current IDA-only borrowing from the World Bank group, Bolivia has the highest per capita income ($570) of countries in this group. It currently is receiving IDA-only funds only because of a lack of creditworthiness.

Applying the Paris Club options to non-African Bolivia would make it difficult to argue that “blend-country” Pakistan should not receive such treatment when its per capita income ($350) is less than Senegal ($510) or even Liberia ($440). [Nigeria ($370) will pose a separate problem, despite its current lack of IDA or SAF-eligibility.]

Amount of Relief Required: Bolivia’s financial situation is qualitatively better than most Sub-Saharan African countries. The working assumptions of its ESAF program are for rescheduling of debt service due only on so-called non-previously rescheduled debt. The IMF projects a debt service “hump” for Bolivia in the early 1990s and a potential financing gap after conventional reschedulings, but those would appear to be manageable through a rescheduling of part of the previously rescheduled debt at that time.

State Department View: State wants Bolivia to be eligible for the options approach and John Whitehead may seek your concurrence.

Conclusion: We will be under pressure during Paris Club discussions the week of September 19 to enlarge the set of countries eligible for special treatment under the Paris Club options approach. Bolivia may also press us on this issue and has postponed its Paris Club negotiations pending further debate.

Providing such treatment to Bolivia, however, will cause difficulties in excluding other non-African countries—most notably Pakistan.⁴ The framework was proposed with Sub-Saharan Africa in mind.

Recommendation: That you be prepared for State’s request. That you reconfirm Secretary Baker’s decision to limit the Paris Club options approach to countries in Sub-Saharan Africa only and that Bolivia not be eligible.⁵

1. Source: National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 44, Classified Memos to the Secretary, August ’88. Limited Official Use. Sent for action. A stamped notation at the top of the memorandum reads, “Noted MPM.” All brackets are in the original.
2. The week of September 19.
3. In an August 4 memorandum to Baker, Mulford provided an update on the July 26 Paris Club meeting, during which the question of geographic eligibility was reopened. Mulford also reported that the Paris Club “did not conclude a package of options for the poorest, most heavily indebted countries,” as the United States had expected it would. (National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Congressional Correspondence, 1988, UD–10, 56–10–1, Box 44, Classified Memos to the Secretary, August ’88) In telegram 278573 to Tokyo, August 25, the Department reported on the status of the Paris Club discussions of the Toronto Summit debt relief proposals. (Department of State, Bureau of Economic Affairs, Office of Economical and Agricultural Affairs Files, Official Economic Summit Files, 1975–1991, Lot 93D490: Toronto Summit)
4. McPherson underlined “most notably Pakistan.”
5. McPherson initialed the “Approve” option.