CABINET COUNCIL ON ECONOMIC AFFAIRS MONDAY, JULY 19

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84T00109R000100050015-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: August 24, 2009
• Sequence Number: 15
• Publication Date: July 15, 1982
• Content Type: MEMO

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NSC review completed.
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.1 U U1 FJ f E11TIAL
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DATE: 7-15-82
NUMBER: 0 7 7 3 8 7 CA DUE BY:
SUBJECT: Cabinet Council on Economic Affairs
Monday, July 19, at 8:45 a.m.
ACTION FYI
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
OMB
UN
USTR
CEA
CEQ
OSTP
REMARKS:
ACTION
FYI
Baker G"
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Deaver ^
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2
Clark
Darman (For WH Staffing) fY
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Harper 0~
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Jenkins ^
L
Wheeler ^
0`
Kudlow ^
^ .
^
^
^
^
^
^
^
^
^
CCCT/Gunn ^
^
CCEA/Porter
CCFA/Boggs ^
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CCHR/Carleson ^
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CCLP/Uhlmann ^
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CCNRE/Boggs ^
^
The Cabinet Council on Economic Affairs will
July 19, in the Roosevelt Room.
The agenda and papers are
TREA has not reviewed.
Processed IAW CIA TREA
arrangement letter dtd 4/11/08.
meet on Monday,
RETURN TO: ^ Craig L. Fuller q/Becky Norton Dunlop
Assistant to the President Director, Office of
for Cabinet Affairs Cabinet Affairs
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THE WHITE HOUSE
WASHINGTON
0
CABINET AFFAIRS STAFFING M MORAN )UM
CONFIDENTIAL;.
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July 15, 1982
MEMORANDUM FOR THE CABINET COUNCIL ON ECONOMIC AFFAIRS
FROM: ROGER B. PORTER avid
SUBJECT: Agenda and Papers for the July 19 Meeting
The agenda and papers for the Monday, July 19 meeting of
the Cabinet Council on Economic Affairs are attached. The
meeting is scheduled for 8:45 a.m. in the Roosevelt Room.
The first agenda item is a report on the OECD Executive
Committee Special Session. Assistant Secretary of State Hor-
mats and Assistant Secretary of the Treasury Leland represen-
ted the U.S. and will report on the session.. No paper will
be circulated on this agenda item in advance of the meeting.
The second agenda item concerns Indian Borrowing from
the Asian Development Bank. India is seeking a $2.0 billion
lending program from the Bank financed from the Third General
Capital Increase now being negotiated by the Board of Directors.
A paper, prepared by the Department of the Treasury, on this
issue is attached.
The third agenda item is a report from the Working Group
on LDC Financial Problems, chaired by Assistant Secretaries
Leland and Hormats. The Working Group report includes a
paper on U.S. Policy on Multilateral Development Bank Parti-
cipation in Debt Rescheduling and a Status Report on Problem
Countries currently experiencing financial difficulties.
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July 19, 1982
8:45 a.m.
Roosevelt Room
1. Report on OECD Executive Committee Special Session (CM#275)
2. India Borrowing from the Asian Development Bank (CM#271)
3. Report of the Working Group on LDC Financial Problems
(CM#179)
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? ? CM # 271
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
JUL 121982
MEMORANDUM FOR: THE CABINET COUNCIL ON ECONOMIC AFFAIRS
From: Thomas Ledd llr
Acting Assis ant Secretary for
International Affairs
Subject: Indian Borrowing from the Asian Development
Bank (ADB)
India, currently a non-borrowing developing member coun-
try of the ADB, is seeking a $2.0 billion lending program from
the Bank. The lending program would be financed from the re-
sources of the Third General Capital Increase now being nego-
tiated by the Board of Directors. Prime Minister Indira Gandhi
may raise this issue in her meeting with President Reagan in
late July. Treasury believes we should continue present U.S.
policy in opposition to a borrowing program for India in the
ADB and that we should seek the President's concurrence in
this position.
The attached paper covers the current status of India's
request to borrow from the ADB. It outlines our concerns with
the Indian request as well as providing the pros and cons of
what we believe are the two available options: (1) confirmed
opposition to Indian borrowing or (2) limiting the size of
India's borrowing from the ADB.
Treasury recommends that we continue to oppose India's
borrowing from the ADB and will seek the Council's endorse-
ment of this position at the meeting on Friday, July 16.
Attachment
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Indian Borrowing from the Asian Development Bank
India is technically eligible to borrow from the Asian Development
Bank (ADB). However, at the time the ADB was established in 1966, its
resource base was so small (approximately $700 million in usable resources)
that the Bank's focus was toward small and medium sized borrowers. It was
decided that India with its huge resource requirement would be better
served through the World Bank Group (IBRD, IDA, IFC). By borrowing from
the ADB, India is attempting to lessen (1) the effect of China's entry
into the World Bank Group (which reduces India's share of total borrowing)
and (2) the impact of a smaller overall ILIA program.
Because of the nature of India's agreement not to borrow, it can re-
quest the establishment of a lending program without any formal Board of
Directors action. The issue arises only in the context of on-going General
Capital Increase (GCI) negotiations regarding the size of the capital
increase and possible country distribution of these resources. ADB Manage-
ment, which would prefer that India not borrow, has no legal or technical
basis on which to deny India's request. India's borrowing from the ADB
could be prevented only if a sufficient number of countries informed
Management of their opposition. Fran our soundings at the Board of
Directors at the ADB, it does not appear that we would receive developed
country support. The borrowing member countries who would be directly
affected by the entry of a large new borrower would prefer India not
borrow. It is doubtful, however, that they would align themselves pub-
licly against a fellow Third World Country.
India first expressed its desire to borrow both from the ADB and
the Asian Development Fund (the ADF provides concessional resources) in
January 1981. After initial rejection of its request by Bank Management,
the Indian Government sent a letter to the Bank saying it would seek to
borrow ordinary capital resources for the period of the new capital in-
crease starting in 1983, but would not seek ADF resources until 1986.
The United States supported Management's position that India should
not receive any ADB resources but our position was weakened because we had
not decided, at that time, whether we were going to participate in any
replenishment. The last formal exchange on this issue occurred in September
1981 when ex-ADB President Yoshida informed the Indian Government that the
traditional ordinary capital. borrowers, such as Philippines, Korea,
Indonesia and Thailand, had first claim to ADB resources. He implied that
India could have a portion of GCI resources over that which would permit a
fifteen percent growth in lending to the traditional borrowers. This
apparent softening of Management's position resulted from its perception
of a lack of continued member country opposition to India's request.
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U.S. Concerns
We are concerned about India's request for five reasons:
1. The character of the ADB, as an institution that serves small and
medium sized borrowers, would be fundamentally altered.
2. A lending program for India would be an incentive for China to join
the ADB, with the possibility that eventually almost half of the
ADB's resources would be channeled to these two countries.
3. Congress strongly opposes an expansion of MDB lending to India.
It is possible that the establishment of a lending program to
India could cause defeat, delay or reduction in GCI authorizing
legislation scheduled for next year.
4. If successful in gaining access to ADB resources, India will inten-
sify its lobbying for access to concessional Asian Development
Fund resources.
5. India already is the largest recipient of MDB resources, and is
likely to continue to be so in the future, despite its under-
utilized access to commercial credit.
Options
India expects to borrow from the ADB regardless of the size of the
GCI. Fran India's viewpoint, the larger the GCI the greater the amount of
resources that will be available to them.
The United States Government has to decide whether it wishes to oppose
or to limit Indian borrowing fran the ADB (by controlling the size of the
GCI). The pros and cons of each follows:
1) Oppose any Indian borrowing from ADB.
pro - This approach is most attractive to the Hill. Substantial
negative Congressional reaction is expected for any ADB
lending to India.
- The Bank would retain its regional character and would con-
tinue to serve small and medium sized borrowers.
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- It is less likely India will attempt to borrow from ADF in
1986.
-- China would be less interested in joining the ADB.
con - It may not be possible to rally sufficient support for our
position from other countries to prevent India's borrowing
from the ADB.
-- Opposition to India's borrowing will worsen already strained
bilateral relations.
2) Limit India's borrowing in the ADB by agreeing to a GCI that
allows a maximum growth in lends of fifteen percent during the
proposed GCI period.
pro
-- Management will have to make very hard choices as to which
countries receive less resources in order to accarurodate
India.
-- It avoids a direct bilateral confrontation with India while
at the same time sharply curtailing India's ability to borrow.
A GCI that permits fifteen percent growth in lending is con-
sistent with our position on the growth in lending in the
Inter-American Develcpment Bank GCI.
con - Negative Congressional reaction might lead to defeat, delay
or reduction in size of ADB GCI (and possibly ADF).authori-
zing legislation now scheduled for submission to Congress
in early 1983.
-- It becomes easier for India to borrow on conoessional re-
sources in 1986.
-- China may became interested in joining the ADB as a borrower.
Recannendation
That we oppose India's borrowing from the ADB. If the Council endorses
our proposal, we recommend (1) that we seek the President's concurrence for
this position and (2) that we begin to try to organize opposition to the
Indian request. Japanese support will be essential. If, however, they
are unwilling to support our position, we may have to fall back to Option 2,
limiting the size of India's borrowing from the ADB
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DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
JUL141982
MEMORANDUM FOR: THE CABINET COUNCIL ON ECONOMIC AFFAIRS
Subject: U.S. Policy On MDB Participation in Debt Rescheduling
Issue
Given the growth of multilateral development bank (MDB)
debt exposure, situations could arise where debt service owed
to the MDBs by a country seeking debt relief from its external
creditors represents a significant portion of the total debt
service falling due. For this reason, the CCEA Working Group
on LDC Financial Problems examined the question:
Should the United States seek to reverse the traditional
practice of excluding the MDBs from both official and
private multilateral debt rescheduling operations?
Background
Principal and interest payments by 98 countries to multi-
lateral organizations (including the MDBs) increased from $1.55
billion in 1975 to $4.42 billion in 1980 and, based on debt
owed as of the 1980, will reach $8.8 billion in 1985. (Over
two-thirds of the 1980 total is attributable to the World Bank.)
Despite this increase, debt service to multilateral organizations
as a percentage of total debt service on public or publicly guar-
anteed debt declined from 10.4 percent in 1975 to 8.2 percent in
1980. But, for a large number of countries the multilateral com-
ponent is more important than aggregate data would suggest. This
is the case particularly in low income countries -- although
in many of these the level of multilateral exposure is still
relatively small. There are also high concentrations in Central
America.
With one exception, debts owed to international organiza-
tions, including the MDBs, have been exempted from participa-
tion in multilateral debt renegotiations. A firm MDB policy
on arrearages has also minimized loan repayment problems under
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the threat to delay both loan disbursements and consideration
of new loans if there are serious payment delinquencies. The
fact that MDBs have been, in effect, treated as "preferred"
creditors has not been controversial among creditor governments,
in part because the financing arrangements supporting MDB opera-
tions are already based on an equitable cost-sharing basis and
the exclusion of the MDBs from participation in debt operations
has not been perceived as conveying any particular advantage
among the major creditor countries. Furthermore, MDB loans
have had longer maturities and lower interest rates than
bilateral loans. The non-participation of the MDBs has also
been considered to be in the mutual interest of creditors and
debtors since it: (1) facilitated MDB efforts to maintain pro-
grammed lending operations in the affected debtor country ---
concurrent with debtor country efforts to implement improved
policies; (2) avoided damaging the creditworthiness of the
MDBs in private capital markets; and (3) made it easier for
MDB donor governments to secure necessary public and legislative
support for MDB contributions and subscriptions.
Discussion
Arguments which have been raised for reversing U.S. policy
and favoring the inclusion of the MDBs in multilateral debt
renegotiations are that such inclusion would:
(a) be a logical extension of the "non-discrimination"
and "comparable treatment" concepts which we apply
to other creditor governments and private banks,
respectively;
(b) avoid a situation in which creditor governments
were in effect-"bailing out" the MDBs, and
(c) instill more market discipline into MDB operations
by encouraging more selectivity into the country
allocation of lending.
-- The pattern of MDB loan approvals in 1971-81 to
four recent recipients of multilateral debt relief
shows mixed results on the question of whether there
was any precipitous increase in MDB lending in the
years prior to debt renegotiation.
The principal arguments for maintaining U.S. policy and
continuing to exclude the MDBs from multilateral debt renegotia-
tions are that exclusion:
(a) does not convey any particular disadvantage among
creditors, who are also the major MDB shareholders;
-- other creditors have not expressed any significant
dissatisfaction with current practice and a U.S.
initiative to revise it would likely be highly
contentious.
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(b) avoids an adverse impact on MDB creditworthiness among
bondholders, although admittedly it is debatable to
what extent MDB participation in debt renegotiation
would affect MDB ability to borrow in capital markets.
-- The World Bank Treasurer considers the Bank's excel-
lent repayment record and the fact that it does not
participate in multilateral debt reschedulings to be
one of the two or three most important factors in
marketing World Bank securities. Recent Treasury
contacts with MDB underwriters in New York confirmed
this fact; with one underwriter going so far as to
say that World Bank participation in a multilateral
debt renegotiation would immediately reduce its
triple-A rating to a single-A rating, with consequent
negative implications on the Bank's access to and
cost of market financing.
(c) avoids the serious risk that MDB rescheduling would
increase Congressional criticism of the Administration's
decision not to seek appropriations for U.S. callable
capital subscriptions to the MDBs;
-- the fact that MDBs have a good repayment record is
perceived by MDB supporters on the Hill as a solid
indicator of the banks' overall attractiveness as
institutions to "put U.S. money."
(d) recognizes that MDB finance plays a somewhat different
development role with a longer term economic perspective
than either private sector finance or that portion of
bilateral finance geared to export promotion; and
(e) reflects the case that can be made that the continuation
of planned lending by the MDBs during a debt crisis
situation already constitutes an important component
of the multilateral effort to facilitate the debtor's
recovery.
-- Net transfers from multilateral organizations generally
do not appear to have been adversely affected to any
major extent by debt crisis situations and have tended
to remain high -- and in some recent cases, actually
recorded significant increases. Since debt renegotia-
tions are conditioned on the debtor country's commit-
ment to an IMF program, these MDB net transfers should
be taking place in an economic environment improved
from that which occasioned the debt crises.
This pattern of MDB net transfers contrasts markedly
with that of private creditors (suppliers credits/
financial markets) where declines or negative net
transfers frequently were recorded during a debt
crisis. While this is not surprising given the
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nature of and the commercial criteria underlying
the private debt, it does illustrate the dispro-
portionate burden that would be placed on the
MDBs vis-a-vis private creditors if the MDBs
were also required to participate more directly
in debt renegotiations at the same time they
were maintaining normal MDB lending and loan
implementation in a debt crisis situation.
MDB Co-Financing Arrangements
We have also examined the implications of MDB exclusion
from rescheduling for MDB co-financing arrangements with
commercial banks and other private lenders.
The objectives of U.S. emphasis on co-financing are threefold:
a. To maximize the impact of the technical
assistance, project skills and market-
oriented policy advice of the MDBs.
b. To reduce the MDBs' demands on the Federal
budget and U.S. capital markets.
c. To facilitate LDC access to international
capital markets.
To the extent that increased MDB private sector co-financing is
consistent with these objectives, we welcome and encourage such
activity. On the other hand, we would object to co-financing
programs that become competitive with private sector financial
institutions, or that encourage the MDBs to participate in low
risk, high financial rate of return projects where their presence
is not needed.
There has been significant growth over the past several years
in both total MDB co-financing and the private co-financing com-
ponent. Private sector participation in co-financed World Bank
operations totaled $1.8 billion in both FY 80 and FY 81, and in
FY 82 the level rose to over $3.2 billion. (The IDB has recorded
a cumulative total of $532 million in private co-financing; the
cumulative total in the ADB is $125 million.) The benefits to
commercial banks of participating through co-financing with the
MDBs include: MDB familiarity with LDC conditions and procedures,
controlled exposure, low cost access to MDB project expertise, and
the use of the MDBs as project appraiser and loan administrator.
Although private co-financing has increased, it still consti-
tutes a relatively small component of the operations of both the
MDBs and the commercial banks. In FY 82, only 16 of the World
Bank's 150 operations involved commercial co-financing, and
commercial co-financed loans represented only about 1.5 percent
of outstanding commercial bank loans to IBRD borrowing member
countries as of 12/31/81.
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Given current commercial bank concern about lending to
developing countries, the MDBs recognize that co-financing
will have to be made more attractive if the expansion of
private co-financing is to continue. In this context, there
have been suggestions that the "cross-default" clause be made
mandatory, also that new co-financing instruments and tech-
niques be devised.
The World Bank has now specifically proposed an experimental
"A/B" loan package in which a portion of the loan ("B loan") is
designed to commercial specifications (variable rates) with both
World Bank and commercial bank participation. This substantially
increases the risk that the Bank will be under pressure to partici-
pate in both loan accelerations and reschedulings. Indications
are that the Bank will strenuously reject these pressures, but
it admits that it will be breaking new ground and that it cannot
be foreseen how the parties involved might view a "B loan" in the
actual circumstances of a debt rescheduling.
Under the "cross-default" provisions currently included-in
World Bank co-financing arrangements, the Bank, at its option,
may decide to accelerate the repayment on the corresponding Bank
loan outstanding if the co-lenders have taken legal action to
accelerate their loan. The option is, however, entirely at the
Bank's discretion and, has not been exercised to date. To our
knowledge, there have not been any instances where the private
sector component of an MDB co-financed loan has been rescheduled.
The United States would have serious problems if World Bank
efforts to increase the attractiveness of. co-financing arrangements
sought to transfer the Bank's preferred creditor status (in resched-
uling operations) to the private component of co-financed loans.
However, any new co-financing procedures are far more likely to
make a component of MDB lending liable to rescheduling than they
are to attempt to exempt the corresponding component of commercial
bank lending.
World Bank consideration of procedures which would make the
Bank portion of co-financed loans liable to rescheduling would
have to weigh seriously the impact of such a move on the Bank's
overall credit standing in private markets. At the present time,
the Bank appears opposed to the idea of making the cross default
clause mandatory or to instituting what in effect would be "cross-
rescheduling" provisions. Even if the Bank were to agree to speci-
fic transactions where it would more effectively "share the risks
of lending" with its commercial co-financing partners, in A/B loans
or other schemes, it would undoubtedly ensure that the remainder
of its loan portfolio would remain exempt from rescheduling.
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In summary, current co-financing instruments and techniques
in no way conflict with U.S. debt rescheduling policy. However,
new Bank proposals will be monitored closely as they evolve with
a view to identifying situations where possible refinements or
clarifications in U.S. debt rescheduling policy may be necessary
or where the USG would want to oppose such proposals.
Recommendation
The Working Group concludes that no U.S. policy initiative
is needed at this time on the issue of MDB debt rescheduling and
supports the general practice of excluding the MDBs from multi-
lateral debt reschedulings. At the same time, the Working Group
recognizes that individual country situations could arise where
the United States would be justified -- after a "case by case"
analysis of MDB operations in a given country -- in encouraging
individual debtor countries to seek relief in some form from the
MDBs. In addition, MDB proposals on co-financing need to be
followed closely as they evolve.
The Working Group recommends that the Cabinet Council
endorse this position.
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DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
JUL 141982
SUBJECT: Status Report on Problem Countries
The Federal Reserve, State and Treasury are following
closely the financial difficulties currently being experienced
by a dozen-odd countries in which the United States has a special
interest. Recent developments in Mexico, Argentina, Sudan and
Zaire are of particular significance.
The Mexican economic situation remains precarious. While
the trade account is somewhat stronger and capital flight may be
abating, capital inflows are not sufficient to meet short-term
foreign exchange needs. The recent $2.5 billion "jumbo" loan
was poorly receive by the market. Banks are very reluctant to
increase their exposure. The GOM will not be able to float a
large syndicated loan for at least several months, if not longer.
The GOM will be forced to rely on rollovers of maturing credits
and "club deals" that bring in $50 to $100 million at a time.
July and August will be particularly difficult months. (C)
Adding to existing problems, on September 1 President Lopez
Portillo will deliver the annual State of the Union Address (his
last). Traditionally Bank of Mexico reserves are announced.
The President will want to announce a figure as large as the $3.9
billion announced for the end of May -- which he is very unlikely
to be able to do. A complicating factor is that pressure on the
peso usually picks up on the anniversary of previous devaluations,
i.e., August 31. (C)
Establishment of confidence in the willingness of the GOM
to implement strong corrective measures remains the key to over-
coming the continuing financial crisis. Only private capital
markets can provide the amount of financing the Mexicans require.
Now that the election is over, the GOM must announce convincing
implementing measures, e.g., more price increases for public
sector goods and services, further budget cuts, interest rates
high enough to remain positive in real terms and an accelerated
depreciation of the peso. The international banking community
already expects considerable tightening up in the stabilization
program. If this does not occur,-the foreign financing situation
could deteriorate rapidly. (C)
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i The Treasury and Federal Reserve swaps, even under circum-
stances appropriate to their use, are necessarily short-term and
limited in amount. President Lopez Portillo, who will remain in
office until December 1, remains opposed to recourse to the IMF.
However, borrowing from the Fund may become unavoidable both for
confidence and direct financing reasons. (C)
ARGENTINA
The new Argentine government of President Bignone appears to be
taking a mid-course between the austerity measures of his immediate
predecessors and the statist approach of Argentina's traditional
political parties, including the Peronists. The new Minister of
Economy, Jose Maria Dagnino Pastore, announced a series of major
economic policy changes during the first week of Ju y; cappe a
22% devaluation of the peso and a return to a dual exchange rate
system. A "commercial" rate will be pegged daily for trade transac-
tions. A "financial" rate for tourists, debt service and other
payments will reflect "the free play of market forces." The "finan-
cial" rate moved quickly to a discount of 35% from the official rate
on July 6. The government has also eliminated the requirement that
all external payments be approved by the Central Bank. This require-
ment had caused chronic delays in private debt service since the
measure was adopted on April 30. Foreign exchange purchases for
non-debt related payments -- including imports -- continue to be
tightly controlled. (LOU)
Argentina's liquid foreign exchange reserves -- now estimated
at $600-$800 million -- continue to erode. The Central Bank, however,
Halms to still have 1.1 billion in bilateral trade swaps available
within the region and $1.5-$2.0 billion in letters of exchange poten-
tially available for discount on foreign financial markets. These
are in addition to $1.3 billion in gold reserves. Argentina could
also use its nearly $640 million of SDR holdings and reserve
tranche in the IMF. (C)
U.S. banks (with the exception of some smaller, regional, insti-
tutions) continue to roll over maturing Argentine debts into new
short-term obligations. Argentine sources claim that as much as 90%
of maturing obligations are being rolled over; compared to only 75%
during the peak of hostilities in May. The GOA is currently attempt-
ing to negotiate several club deals in the $50-$150 million range
with U.S. banks and at least one new commercial bank credit line to
an Argentine bank (for $130 million) has been arranged. Hard currency
liquidity is nonetheless very tight, in part because of Venezuela's
failure to actually deposit $1 billion in foreign exchange holdings
in Argentine banks as promised in May. (C)
Argentine officials hope to restructure external debt in the
months ahead through a consolidation of short-term public sector
obligations into club loans led -By major U.S. banks. While the GOA
does not wish to seek an IMF standby due to internal political con-
siderations, a technical assistance mission has gone to Argentina
to evaluate the situation and suggest corrective economic measures.
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An IMF stand-by arrangement may still prove necessary to avoid an
unacceptably low level of reserves and mounting commercial arrear-
ages in the fourth quarter. (C)
In February, the IMF approved a one-year SDR 198 million
standby in support of a stabilization program covering CY 1982.
There was also a special pledging session in January (U.S. share
= $125 million) and a Paris Club debt rescheduling in March
(U.S. share $50 million). Since mid-May, the Government of
Sudan has been out of compliance with the IMF standby because of
failure to eliminate arrears relating to payments due under the
1979 Paris Club rescheduling. There is also an unresolved issue
with the IMF concerning Sudan's exchange rate policy. Accordingly,
the IMF has withheld release of SDR 35 million, which would have
been available at the end of June. (LOU)
The Government of Sudan missed an interest payment of about
$23 million due to commercial banks and under a "London Club"
debt-relief agreement concluded last December, it has informed
the banks that it will be unable to meet the September payment
as well. One of the leading U.S.- banks is threatening to declare
Sudan in default, although there is probably a large a ement o
u in t His t reat. (C)
The extremely precarious external financial position of
Sudan is not new. It was well understood at the time the IMF
arrangement was approved that Sudan would have a serious cash
flow problem throughout 1982. However, export earnings and
aid disbursements appear to be substantially lower than projected
at the beginning of the year, and the situation is now at a
critical stage. (LOU)
A recent review of the "Horn of Africa" by the NSC has
concluded, among other things, that the USG should strongly
encourage continued Sudanese economic reform and austerity mea-
sures. Specifically, the review recommends that an interagency
working group examine-options-for-meeting-Sudan's needs for
financial assistance including )de 5t relief. T is examination
could be undertaken within-the-CCEA's Working Group on LDC
Financial Problems, with State taking the lead. (C)
ZAIRE
Zaire is experiencing serious foreign exchange shortages
and accumulating arrears to private and official creditors as a
result of economic mismanagement. Depressed world prices for
copper and other commodities have contributed to Zaire's diffi-
culties. To maintain the flow of donor aid since mid-1981,
Mobutu has emphasized political relations (such as recognizing
Israel) rather than economic reforms. (LOU)
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Significant FMS arrearages have held up FY 1981 and FY 1982
military assistance in the form of Federal Financing Bank loans at
market-related interest rates (guaranteed by the Department of
Defense). An interruption of our military assistance programs
would presumably have an adverse impact on USG-GOZ political
relations. (LOU)
Relations with the IMF are at an all time low. The 3-year,
$1 billion extended arrangement was cancelled last month, just
one-year after it was approved, because the GOZ failed to meet
its September 1981 performance targets and was unwilling to
implement the policy reforms necessary to reestablish its eligi-
bility for Fund credit. (LOU)
Debt relief arrangements are in limbo. The GOZ has failed
to sign all but one of the .lateral agreements implementing the
July 1981 Paris Club agreement that set debt-relief terms for
1981 and 1982. This situation threatens the effectiveness of
the Paris Club approach to debt relief. Meanwhile, Zaire has
paid only part of the interest due in April 1982 to commercial
banks under a debt-relief agreement concluded in 1979. The
banks have taken the position that nonpayment is unacceptable.
(LOU)
From an economic/financial perspective, U.S. policy toward
Zaire should emphasize the necessity for Zaire to implement the
necessary economic adjustment measures and negotiate a new
standby arrangement with the IMF. (C)
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