Foreign Relations of the United States, 1977–1980, Volume XIX, South Asia

444. Memorandum From the Director of the Office of Management and Budget (McIntyre) and the Ambassador at Large and Coordinator for Economic Summit Affairs (Owen) to President Carter¹

Washington, June 6, 1980

SUBJECT

• Debt Rescheduling for Pakistan (U)

Secretary Muskie seeks your approval of a US offer, in concert with other western creditors, to reschedule $70–$100 million of Pakistan’s debts to US Government agencies that will fall due in FY 1981, subject to Pakistan’s agreement with the IMF on a stabilization program. His memorandum (Tab A)² asks you to agree to waive, on political and security grounds, our usual requirement that rescheduling be granted only as necessary to avert imminent default. (S)

Secretary Miller states that he will support the proposed exception to our debt rescheduling policy “provided that we obtain express Congressional concurrence for this approach and that we hold firm on the need for a meaningful IMF program.” (Tab B)³ (S)

Your decisions are needed to guide the US representative at the annual meeting of the Aid to Pakistan Consortium on June 12. (U)

Background

The agencies concerned have been reviewing these issues since last winter. They deferred making recommendations to you until the Congress clarified how your latitude to grant debt relief would be affected by the first budget resolution for FY 1981. (S)

State argues that unique political and budgetary factors require the United States to make an exception in this case to one of its two basic conditions for debt relief, i.e., that rescheduling is necessary to avert imminent default. State contends that the United States, having taken the lead internationally in promoting increased aid to Pakistan in response to Soviet aggression in Afghanistan and having subsequently been unable to provide increased US aid, cannot continue to be the lone holdout against debt relief among the major creditors without confirming Pakistani inferences of US political duplicity. Pakistan believes US resistance to rescheduling is blocking over $200 million in debt relief by the western “club” of creditors. Zbig supports State’s position in this respect.⁴ (S)

While noting State’s case that US participation in debt relief for Pakistan “could help slow the deterioration in US-Pakistan relations,” other agencies have raised these issues:

1. Inasmuch as many developing nations can contend that they face serious balance of payments problems next year, will the waiver of the “imminent default” test for Pakistan expose the United States to wholesale demands for debt relief with long-term budgetary consequences? (S)

Congressional advocates of this test will require assurances that a dangerous precedent is not being set. State and NSC staff believe that a precedent can be avoided on the basis of Pakistan’s unusual circumstances; OMB and Treasury are skeptical. OMB and Treasury believe that State’s case for an exception is, in fact, a better argument for politically determined new aid to Pakistan, via reprogramming of ESF money or a supplemental request, than it is for debt relief. IDCA thinks that if an exception must be made for political security reasons, it should be limited clearly to an FY 1981 international response to a security emergency. (S)

2. Will the Congress retaliate by cutting foreign aid, or by tightening restrictions on the President’s latitude to accord debt relief, or by making debt relief subject to restrictive provisions of the Foreign Assistance Act? (S)

Secretary Muskie believes that these concerns can be mitigated by careful Congressional consultation. State has consulted a dozen members of Congress, mostly Foreign Affairs and Foreign Relations Committee members, and reports that all favored the proposed debt rescheduling. More extensive consultation with Banking and Appropriations Committee members is required. In addition, any draft agreement must be submitted to four committees of Congress at least 30 days before it is to take effect. (S)

3. Where will the money come from? (U)

A rescheduling will increase net budget outlays by reducing scheduled receipts. Secretary Muskie is concerned that Congress might not provide the increase in budget ceilings necessary to accommodate the rescheduling, thereby forcing reductions in other programs, most likely in International Affairs. We would try to minimize this danger but cannot wholly preclude it. No agency advocates a supplemental request for additional ESF funds in view of the negligible probability of obtaining budget ceiling relief and additional appropriations. (S)

The US budgetary impact and timing of a Pakistan debt rescheduling are highly uncertain. All agencies agree, as do the other major creditor governments, that debt rescheduling must be conditioned on the debtor government’s executing an economic stabilization agreement with the IMF which makes it eligible for upper tranche IMF drawings. The Government of Pakistan has shown no appetite for the economic reforms that would be IMF conditions for such an agreement. Therefore, a multilateral rescheduling agreement is not foreseen in the near future and may never be consummated. (S)

4. Can our political objective and budgetary constraints be reconciled by deferring the application of US debt relief to FY 1982? (U)

This would require negotiating special treatment for the United States in the multilateral debt rescheduling group. State dismisses this option as “annoying” to both the Pakistanis and our allies. It also would weaken the justification of a policy exception for Pakistan based on an immediate security crisis. (S)

Options:

I. (Policy)

A. Waive the “imminent default” condition, subject to satisfactory Congressional consultations. (State, Brzezinski, and Owen)⁵

B. Alternatively, waive the “imminent default” condition, subject to express concurrence by the Congress. (Treasury favors; others oppose.)

C. Alternatively, reaffirm existing US policy, conditioning debt rescheduling on imminent default. Your adoption of this option would in present circumstances mean rejection of debt relief for Pakistan. (OMB)

1. Source: Carter Library, National Security Affairs, Staff Material, Office, Presidential Advisory Board, Box 85, Sensitive XX: 6/1–24/80. Secret. Sent for action.
2. Printed as Document 441.
3. Not attached.
4. See Document 445.
5. Carter checked the Approve option under Option A. At the bottom of the last page of the memorandum, Carter wrote: “a) This is very important. b) Congress has slashed foreign aid. This will substitute for some of it. c) Ed & Bill must do extensive consultation—without delay. J.” In a June 9 memorandum, Brzezinski informed Muskie, Miller, and McIntyre of Carter’s decision. (Carter Library, National Security Affairs, Staff Material, Office, Presidential Advisory Board, Box 85, Sensitive XX: 6/1–24/80)