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

183. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Mulford) to Secretary of the Treasury Baker¹

Washington, August 1, 1985

SUBJECT

• Treasury proposal for Use of IMF Trust Fund Reflows in Conjunction with World Bank Financing

You may recall that in your Tokyo G–10 statement, you stated that the United States would be developing some ideas on the use of repayments to the IMF Trust Fund in the context of increased cooperation between the IMF and World Bank. This issue will be discussed at the Seoul Interim Committee meeting.²

Attached is a summary of the proposal which my staff have developed.³ It would involve an innovative program combining $2 to $2.7 billion in Trust Fund repayments with a roughly equivalent amount of World Bank resources to assist low income developing countries with protracted balance of payments problems.

The concept could provide the basis for a major U.S. initiative at the October annual meetings,⁴ but it will involve some difficult elements, with both economic and political implications, if it is to have a fair chance of succeeding:

(1) It will require an early—and firm—commitment on your part to support, both within the Cabinet and in Congress, an increased annual U.S. contribution to IDA VIII for FY ’88-90 of about $260 million above current levels. (This would imply annual U.S. contributions of $1010 million⁵ and a total IDA VIII of $12.1 billion. We would need to make sure that our other MDB requests aren’t adversely affected.) It also requires a decision to allocate about $500 million of net World Bank profits and increased IBRD lending of about $600 million to this use over the 6-year period.

(2) It would limit eligibility for use of the Trust Fund reflows to fewer countries than received assistance under the original Trust Fund in order to expand available resources for those most in need. Those which would be excluded could resist, in particular China and India.

(3) We would have to overcome significant legal and bureaucratic difficulties in both institutions.

(4) We would have to find a way of balancing the need to obtain an 85% majority vote for the proposal in the IMF with the need to assure effective conditionality on Trust Fund loans. This could prove to be a difficult trade-off.

If we are prepared to seek actively additional funding for the World Bank and to support a partial use of World Bank profits over the next few years, these difficulties may not be insurmountable. But they will require a high-level political commitment to address the basic structural adjustment and protracted balance of payments problems of countries which otherwise may be unable to meet significant repayment obligations to the IMF, the World Bank, and other creditors within the next few years. A comprehensive, coordinated approach by the IMF and World Bank is needed to help these countries meet their international obligations and to restore sustainable growth.

I am convinced that we have an outline for a meaningful program of Bank/Fund cooperation over the medium term which can help deal with the difficult economic problems of Sub-Saharan Africa as well as addressing the problems of prolonged use of IMF resources. However, this proposal does not purport to fully resolve the IMF repayments problem, since there is no guarantee that the new World Bank funds would be used solely to repay the IMF.

The key elements of our draft proposal are summarized in the attached paper. We would like to discuss them with you. If you agree with the approach, we would plan to discuss its general outlines with the management of both institutions and the G–5 (and possibly G–10) Directors at the Fund and Bank in order to help pave the way for broader support at the October meetings in Seoul.

1. Source: National Archives, RG 56, Records of the Office of the Secretary of the Treasury, Official Files of the Executive Secretariat, 1985, UD–11W, 56–88–79, Box 66, Memo to the Secretary, August ’85. Confidential.
2. See Document 190.
3. Attached but not printed is the undated paper entitled “Outline of Proposal for the Use of Trust Fund and World Bank Resources for the Poorest Countries.”
4. See Document 192.
5. As in the original.