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

246. Memorandum From Stephen Farrar of the National Security Council Staff to the President’s Assistant for National Security Affairs (Powell)¹

Washington, September 30, 1988

SUBJECT

• Report on IMF/World Bank Annual Meetings

The IMF/World Bank annual meetings, held in Berlin this past week, were accurately described as the “world’s premier financial jamboree.” The thousands of official delegates appeared outnumbered by bankers and other financiers, creating a non-stop series of meetings and receptions. The Administration achieved its main objectives of avoiding departure from current policy on international debt and exchange rates. As expected, we were isolated in resisting calls to expand the resources of the IMF. Highlights of the meetings follow.

[Omitted here is discussion of G–7 economic cooperation.]

International Debt

All communiques issued during the meetings supported the current debt strategy. However, there was much talk of the need for a new approach.

— For debt of the poorest countries, especially Sub-Saharan Africa, creditor countries congratulated themselves for agreeing in the Paris Club the previous week on rules for implementing the debt relief scheme agreed to at the Toronto Economic Summit.² African debtor countries quickly observed that the Paris Club actions were not enough.

— On debt of middle-income countries, Japan announced that its Export-Import Bank will provide medium-term loans at concessional rates. These loans would be untied (to purchase of Japanese products) and would be provided in parallel with IMF programs. Japan also reiterated its proposal made at Toronto (opposed by the U.S.) to give the IMF a central role in debt restructurings. Japan’s proposals fell somewhat flat, perhaps because of the absence of Finance Minister Miyazawa.

— Mexico promoted a debt proposal that was a clear departure from the Baker Plan. It includes official guarantees of commercial lending.

In his address to the IMF, Secretary Brady attempted to put such debt proposals back in their box by asserting that “the United States regards with skepticism proposals that may appear to conform to the basic principles of the debt strategy, but which in practice will produce only an illusion of progress.”

Progress in the debt situations of several countries helped brighten the atmosphere of the meetings.

— Brazil and its commercial banks were commended for concluding agreement the previous week on a refinancing and new money package.

— Argentina and the World Bank announced agreement on $1.25 billion in new loans. This agreement was controversial because it was reached before Argentina had an IMF program in place. The IMF is concerned that it may have been undercut in its efforts to get Argentina to commit to meaningful economic reforms. The deal is a sign of the World Bank’s (and U.S.) anxiety about keeping Argentina’s finances from spinning out of control. However, almost no one believes that Argentina is prepared to undertake enough economic reforms to make a sustained difference.

— Peru showed signs of ending its status as a financial outlaw, which began three years ago when incoming President Garcia limited debt payments to 10% of export earnings. Finance Minister Salinas held a well-publicized “confidential” meeting with IMF Managing Director Camdessus, probably to search for ways for Peru to pay off its $562 million in arrears to the Fund and become eligible for new credits.

— Zaire pressed the U.S. (Allen Wallis) for support in persuading the IMF to relax conditions for entering into a Fund program. President Mobutu believes that President Reagan committed U.S. support in a March 1988 letter. My checks since my return have uncovered no such letter.

IMF Resources

The IMF is basically a revolving fund whose reserves are available for the temporary needs of its members. Its resources are now stretched because several member countries, including Sudan, Zambia, Peru and Liberia, are in arrears totalling almost $3 billion, about 10% of outstanding IMF credit. The IMF does not reschedule its debt, for fear that its role as a monetary institution would be jeopardized. Countries in serious arrears have no practical way of getting back on financial track since they cannot raise the cash to pay off arrears. This problem was discussed at Berlin, but no conclusions were reached. Over the next year, IMF rules will need to be changed to allow arrears to be refinanced as part of an IMF program.

As predicted, IMF Managing Director Camdessus continued his loud call for a doubling of IMF quotas—funds paid in by member countries. The U.S. firmly opposed any agreement now on a quota increase. Secretary Brady wisely wants to secure Congressional approval of the increase in World Bank resources contained in the FY 1989 budget. He argued that agreement on a quota increase should come after agreement on the IMF’s role in the 1990’s and resolution of the arrearage problem.

World Bank Resources

The U.S. is the only major country remaining to fulfill its commitment to pay into the Bank’s $75 billion Eighth General Capital Increase. Nevertheless, we were able to report that a major hurdle had been crossed. The week before the meetings, the House Banking Committee approved authorizing legislation.³ Appropriations prospects are also favorable.

Untied Lending to Soviet Bloc Countries

During his confirmation hearing, Secretary Brady promised to raise the issue with his G–7 counterparts. He did raise it, but no other country perceived a problem.

USG Representation

There was little interagency coordination at the meetings. Treasury, the lead agency, asserted nearly complete control in setting U.S. positions on draft communiques and in drafting U.S. statements. The exception was that Federal Reserve Board Chairman Greenspan worked directly with Secretary Brady at key points, especially in drafting the Secretary’s address to the IMF. The lack of coordination may have been visible to other delegations, as Treasury and State held separate sets of bilateral meetings. I heard many calls for more White House coordination of international economic issues.

1. Source: Reagan Library, Stephen Farrar Files, 1987–1988 International Economic Affairs Directorate Outline File, IEP Breakfasts 04/24/1987–11/18/1988; NLR–177–4–34–14–9. Confidential. Sent for information. Sent under an October 3 covering memorandum from Farrar to Negroponte, which provided the agenda for an IEP breakfast meeting scheduled for October 4. In the memorandum, Farrar explained that the communiqués of the IMF and World Bank meetings in Berlin “endorsed the U.S. position that any new techniques for managing the debt problem should be market-based, voluntary and should not shift risk from the private sector to the public sector. Treasury will want to reaffirm these principles.” Farrar recommended to Negroponte that “you endorse the Treasury approach. The international debt issue will be high on the agenda of the new Administration.” For a readout of the October 4 IEP breakfast meeting, see Document 247.
2. In telegram 324149 to all African diplomatic posts, October 4, the Department reported: “G–7 policymakers, meeting prior to the IMF/IBRD annual meetings in Berlin, agreed on a framework of comparability for implementing the Toronto Summit’s call for a differentiated approach to rescheduling the debts of low-income African reformers.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D880886–0818)
3. See footnote 3, Document 244.