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

378. Information Memorandum From the Director of the Policy Planning Staff (Solomon) to Secretary of State Shultz¹

Washington, March 31, 1987

SUBJECT

• The Foreign Assistance Budget Crisis: Making The Most Of Even Less

Summary. Despite our strong campaign for the President’s FY 1988 foreign assistance requests, it appears almost inevitable that the crunch will get worse. We need to take a hard look at ways to make the most of our sharply reduced means. There are at least three options (which are not mutually exclusive): 1) reducing earmarks and other legislative restrictions; 2) changing the mix of our bilateral and MDB commitments; and 3) adopting new approaches for official debt restructuring. End Summary.

Despite yeoman efforts to secure Congressional support for our foreign assistance request, prospects for an adequately funded program are poor. It now appears we will have to absorb further cuts, on top of those of the last two years.

We must continue the campaign with Congress and the public for support. We must also keep the pressure on the surplus countries, principally Japan, to provide more assistance. But it is essential to begin working now on practical steps for coping with the inevitable shortfalls.

Ultimately, we may be forced to scale back our foreign commitments. But before we have to face those stark choices, we need to consider the options for covering existing commitments. We believe a review within State and AID needs to begin soon, focussing on at least the following issues.

Earmarks and Other Restrictions. The Administration’s proposed FY 1988 legislation includes provisions for eliminating outmoded restrictions on the use of Economic Support Funds and other appropriations. Other possibilities for making our assistance more effective include more competitive FMS pricing, setting up a revolving FMS fund, and lifting restrictions on IMET and equipment leasing. However, the overriding issue—earmarks—still has yet to be addressed.

In my memorandum to you of October 3, 1986² I proposed using the President’s authority to break earmarks in FY 1987. At a meeting on October 17, you indicated that you did not favor doing so in FY 1987, but agreed that we should begin working with Congress for more flexibility in FY 1988.

Preserving existing earmarks in the face of steep reductions in total availabilities will result in unacceptable cuts in non-earmarked programs and countries. Some may have to be zeroed out entirely. While more flexibility in allocating our foreign assistance would draw fire, many in Congress understand the problem and might support an initiative at least to reduce the earmarks by the same proportion that our whole Function 150 request is cut.

Congressman Obey raised this possibility with Under Secretary Derwinski at the HAC Foreign Operations Subcommittee overview hearing on March 19, and asked for the Administration’s position for the record. We need to consider this possibility now when it might be possible to work out a cooperative approach with the Congress. Otherwise, we could be forced to consider breaking earmarks for Egypt, Israel, and the base rights countries after they are written into the legislation at the levels we originally proposed. This would be much more confrontational.

Bilateral/Multilateral Mix. The MDBs are useful vehicles for U.S. assistance. They leverage scarce aid resources from other sources, and they are major sources of assistance for U.S. friends and allies. We rely heavily on the World Bank to design and oversee structural adjustment programs for important aid recipients. On the other hand, we are less sanguine about the effectiveness of the regional MDBs and their lending priorities.

In view of the stark budget outlook for FY 88, it might be useful to informally discuss the appropriate balance in our support for the World Bank/IDA, bilateral programs, and the regional MDBs with the relevant Congressional committees. As with the earmarks, the prospects for reaching an amicable accord with the Congress are better now than they will be later, when the legislative process is further advanced.

Official Debt Restructuring. FMS is not the only U.S. loan program which is causing debt-servicing problems for recipients of U.S. assistance. Some U.S. friends also must service sizeable debts as a result of past economic assistance loans. We need to explore possibilities for more flexible repayment arrangements, particularly for our friends facing cuts in current and future U.S. assistance.

For example, in the current budget environment Congress may be sympathetic toward allowing low-income countries with good economic reform records to service loans made under the Foreign Assistance Act by making payments into local currency development funds. Although this approach would provide only modest debt relief, it nevertheless offers a way of providing some additional help to hard-pressed friends without new budget outlays (although budgetary reflows into the 150 account would be correspondingly reduced). Bolivia, Pakistan, and several African countries, would benefit the most.

In sounding out Congress, we should take steps to make certain that its support does not come at the expense of undermining the President’s authority to carry out Paris Club reschedulings.

1. Source: Department of State, Executive Secretariat, S/P Records, Memoranda/Correspondence From the Director of the Policy Planning Staff to the Secretary and Other Seventh Floor Principals, Lot 89D149: S/P Chron—March 1987. Unclassified. Drafted by Marc Wall (S/P) and Russell Misheloff (S/P); reviewed by Lawrence Benedict (EB/IFD/ODF), Robert Glass (EB/IFD/OMA), Paul Daley (AF/EPS), Paul Balabanis (E), and Martin Dagata (AID); cleared by Richard Kauzlarich (S/P).
2. Not found.