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

222. Memorandum From Stephen Danzansky and Herman Cohen of the National Security Council Staff to the President’s Assistant for National Security Affairs (Carlucci)¹

Washington, June 19, 1987

SUBJECT

• Venice Follow-up on African Debt

The Venice Summit communique includes an agreement that Summit countries should seek ways to help relieve the debt problems of the poorest countries, primarily in Sub-Saharan Africa.² For countries undertaking adjustment efforts, Summit leaders agreed that their countries should:

○ Consider lowering interest rates on existing debt, and

○ Extend grace and repayment periods, especially in the Paris Club.

The communique also welcomes “the various proposals made in this area by some of us and also the proposal by the Managing Director of the IMF for a significant increase in the resources of the Structural Adjustment Facility over the three years from January 1, 1988.³ We urge a conclusion on discussions on these proposals within this year.”

It is important that we press ahead for early and significant progress on African debt. There has been some slippage among good-performing countries in the last few weeks. Zambia has abandoned efforts to reach agreement with the IMF and World Bank, and has turned away from market-oriented policies. The Ivory Coast, a free-market model for Africa, which has not been an aid recipient, has announced that it will no longer meet its debt obligations. In spite of following the right policies, both countries were facing a net resource outflow after the bills were paid. There are several other countries which will soon be in the same position. If the good performers abandon the fight, what can we expect of the others?

Paris Club reforms agreed to at Venice are well underway and will provide some limited relief. The main issue for follow-up is the expansion of the IMF’s Structural Adjustment Facility (SAF), which provides long-term concessional loans to poor countries that undertake economic reforms. About $3–3.5 billion will be available through the SAF between now and 1991. Michael Camdessus wants to triple the SAF, primarily because the IMF has about $8 billion in repayments coming due from Sub-Saharan Africa over that period. The repayments are a result of medium-term loans made by the IMF on hard terms during the late 1970’s and the early 1980’s—mostly at the insistence of the U.S. and other member countries.

There are three main ways that the SAF could be enlarged: 1) by pro rata subscriptions from IMF member countries, 2) by voluntary contributions, and 3) by sale of IMF-held gold. For all practical purposes, the U.S. cannot support Option 1 as long as so many existing international obligations (such as IDA replenishment) are unmet. Therefore, we must decide between telling Camdessus to pass the hat among surplus countries (Japan, Germany, Taiwan, Korea, etc.) and selling some IMF gold—or possibly a combination of these two approaches. Both options have drawbacks. The target of concluding discussions on these proposals “within this year” means that a U.S. position will be needed at the annual meetings of the IMF and World Bank during the last week of September. Allowing for summer vacation slippage, it would be well to press for interagency consideration now.

Bob Dean concurs.

RECOMMENDATION:

That you sign the attached memorandum to Secretaries Shultz and Baker and AID Administrator McPherson (Tab I)⁴ recommending that the interagency group on African debt (created at the February international economic policy breakfast)⁵ be asked to provide an options paper by the end of July.⁶

1. Source: Reagan Library, Stephen Farrar Files, Chronological File, Farrar Chron June 1987; NLR–177–6–25–5–7. No classification marking. Sent for action. Drafted by Farrar and Rosenberg. Farrar initialed for Danzansky. A stamped notation on the memorandum reads: “signed.”
2. For the text of the Economic Declaration, issued June 10 at the Venice Economic Summit, see Department of State Bulletin, August 1987, pp. 11–14. In addition to recognizing that the “problems of some of the poorest countries, primarily in Sub-Saharan Africa, are uniquely difficult and need special treatment,” the Declaration affirmed its support of the “growth-oriented case-by-case strategy” of the Baker plan for “major middle-income debtors.”
3. For discussion at the Venice Economic Summit of increasing the resources of the Structural Adjustment Facility, see Document 221 and footnote 2 thereto.
4. The signed memorandum is attached but not printed.
5. See Document 210.
6. Carlucci initialed the “Approve” option.