314. Telegram From the Embassy in Pakistan to the Department of State1
11120. Paris for OECD. Subject: How Can We Break the Debt Rescheduling Impasse? Ref: (A) State 237737;2 (B) Islamabad 10061.3
1. We are under a drumfire of inquiry by GOP officials about when we are going to reschedule debt. We have told them in every way we know that they want debt rescheduling as a form of aid and that the U.S. does not extend its aid through debt rescheduling. It is a dialogue of the deaf. They are convinced of the justice of their case and view us as unreasonably and rigidly negative, especially since just about every other creditor country already is easing its terms on debt (UK, Sweden, Belgium, Netherlands) or has privately indicated it would reschedule if only the U.S. would (Germany, France, Italy). The Germans are actively lobbying for a generalized rescheduling. The only instructions we have are quite stiff (in effect, State 237737 advised the Pakistanis to “bite the bullet” and do it now since the longer they wait the stiffer the price they will have to pay) and quite stale (State 237737 was sent September 19). This leaves us in an uncomfortably negative and rigid posture, one from which it is impossible to be constructive.
2. As we have said before, we think the U.S. should be trying to negotiate needed reform so that resource transfers more effectively accomplish development. Just as you can’t beat something with nothing, neither can you negotiate effectively by saying “no”, even if you say it nicely. We understand the U.S. opposition to debt rescheduling [Page 735] under Pakistani circumstances and point out the reasons for it to the Pakistanis at every opportunity. We look for direct resource transfer instead in exchange for performance and this is the negotiation we and other creditors (including the IMF) should be engaged in. Even those who are most willing to reschedule or otherwise increase resource flow (including the Germans) agree this should be linked to reform.
3. We suggested a possible way out along these lines in our Islamabad 10061. Since the message has gone unanswered, we don’t know if this approach or some evolution of it holds any promise. If it doesn’t, we should like for someone else to suggest an approach that might get us out of our present impasse. (We assume all will agree this is desirable). With Pakistan’s own political situation precarious, with one of its neighbors close to revolution and with another harboring dubious intentions after its own revolution, this is not the time to be negative and uncompromising. We will pay a price for such a posture in many ways for a long time to come. It is the time to try to give Pakistan the cushion of external resources it sincerely feels it needs in return for (and as lever for) the sort of policy reform that will see that these external resources are well used.4
- Source: National Archives, RG 59, Central Foreign Policy File, D780469–0121. Confidential. Sent for information to Kabul, Karachi, Lahore, New Delhi, Paris, and Tehran.↩
- Telegram 237737 to Islamabad, September 19, transmitted the Department’s negative response to Pakistan’s August 16 note verbale, which requested U.S. support for Pakistan’s effort to reschedule its foreign debt. The Department stated: “It is our judgment that Pakistan’s balance of payments outlook is more optimistic than previously forecast by Pakistan and the World Bank, and that Pakistan’s situation should permit full servicing of debt in the year ahead.” (National Archives, RG 59, Central Foreign Policy File, D780383–0210)↩
- In telegram 10061 from Islamabad, October 16, the Embassy reported an October 15 discussion between U.S. officials and Pakistani Finance Secretary Aftab Ahmed Khan during which Khan was warned of U.S. concerns about recent Pakistani threats to default on its foreign debt in order to qualify for immediate debt rescheduling. Khan gave assurances that Pakistan would not unilaterally default. He added that in lieu of debt rescheduling, Pakistan “would welcome equivalent fast disbursing aid.” The Embassy recommended: “In the light of this, and if Aftab’s budget and money numbers are acceptable to the IMF, we think the U.S. should not stand in the way of a meeting to discuss Pakistan’s debt and economic situation.” (National Archives, RG 59, Central Foreign Policy File, D780427–0228)↩
- In telegram 292333 to Islamabad, November 17, the Department maintained the position that Pakistan’s balance of payments was manageable and did not require debt relief, adding: “We welcome Embassy’s effort to encourage GOP to resume discussions with the IMF. However, we do not wish to play the role of broker for either side or to pressure the IMF to accede to the GOP demands.” (National Archives, RG 59, Central Foreign Policy File, D780475–0398)↩