Egyptian Military Debt Forgiveness: Costs, Implications, and the Role of Congress

Transcription

1 Order Code IB90137 Egyptian Military Debt Forgiveness: Costs, Implications, and the Role of Congress Updated October 2, 1990 by Larry Q. Nowels Foreign Affairs and National Defense Division

2 CONTENTS SUMMARY ISSUE DEFINITION BACKGROUND AND ANALYSIS Overview of Egypt's Debt Origins and Problems with Egypt's FMS Debt Previous Proposals to Extend Egypt Official Debt Relief Key Issues for Congressional Consideration Costs and Budget Impact Associated with Forgiving Egypt's Military Debt Costs Specifically Related to Egypt Debt Forgiveness Broader Cost Implications Alternative Options for Helping Egypt Other Types of Relief Available Debt and Aid Initiatives Offered by Other Nations Egyptian Debt Forgiveness as a Precedent: What Will Other Countries Seek? Egyptian Debt Relief as Part of a Comprehensive U.S. Plan on Official Debt Relief LEGISLATION

3 SUMMARY Egyptian Military Debt Forgiveness: Costs, Implications, and the Role of Congress On Sept. 14, 1990, as part of the $1.9 billion "Operation Desert Shield" Supplemental Appropriation for 1990, President Bush asked Congress to cancel Egypt's $6.7 billion military debt in recognition of the Egypt's strong support of U.S. policy in the Gulf crisis, for its contribution to the international military force in the Gulf, and as a means by which the United States can assist Egypt in countering some of the severe economic hardships stemming from Iraq's invasion of Kuwait. At the present time, Egypt owes the U.S. Government about $12 billion. Of that amount, approximately 50% stems from U.S. military loans extended between 1979 and 1984 to help Egypt finance large weapons purchases under the Foreign Military Sales (FMS) program. Debt servicing for FMS credits represents between 50% and 75% of total Egyptian scheduled payments to the United States for the next 5 years. During the early- to mid-1980s, Egypt increasingly found it difficult to service its military debt to the United States, began to fall behind in scheduled payments, and asked the United States to consider some form of debt relief. Although the Administration did not originally support debt forgiveness for Egypt, the enormity of the military, political, and financial risks for Egypt brought on by the Persian Gulf crisis convinced President Bush that American policy on Egypt's FMS debt should change. While Members of Congress have registered a strong sense of appreciation for President Mubarak's bold actions, many are questioning the proposed military debt forgiveness. Their reservations are based on four general concerns: what are the costs and budgetary impact; what other options exist that might be more appropriate; what precedent will this action set for considering debt forgiveness for others; and whether the Administration should first establish a comprehensive plan to deal with global official debt problems within which Egypt would be included? There is wide disagreement over the financial cost to the United States and the effect on the Federal budget deficit that would result from forgiving Egypt's military debt. The Administration's position is that the proposal would have no impact on budget outlays for at least the next 5 years. Others note that Egypt has made at least partial debt servicing payments in recent years and reject the notion that forgiving Egypt's military debt would be "deficit neutral" or cost nothing. Some believe that forgiveness is not the appropriate response and suggest that the Administration consider a range of alternative options for assisting Egypt. A key concern raised by critics is the fear that if the United States forgives debt owed by Egypt, many countries holding U.S. military and other debt will demand the same concession. Granting these demands would result in substantial costs to the United States. A final issue raised is that there are a number of countries facing significant official debt difficulties and that the United States has not satisfactorily developed a comprehensive plan to address this broader problem. To cancel Egypt's military debt, according to these observers, would represent another piecemeal approach to a broader issue they believe is long overdue in receiving serious consideration.

4 ISSUE DEFINITION President Bush has asked Congress to forgive Egypt's $6.7 billion military debt owed to the United States. The White House characterizes this proposal as an extraordinary measure taken in recognition of the Egyptian government's strong support of U.S. policy in the Persian Gulf crisis, for its contribution to the multinational military force in the Gulf, and as a means by which the United States can immediately assist Egypt in countering some of the severe economic hardships stemming from Iraq's invasion of Kuwait. While Members of Congress have registered a strong sense of appreciation for President Mubarak's supportive actions, many are questioning the proposed military debt forgiveness. Their reservations are based on four general concerns: what are the costs and budgetary impact; what other options exist that might be more appropriate; what precedent will this action set for considering debt forgiveness for others; and should the Administration first establish a comprehensive plan to deal with global official debt problems within which Egypt would be included? BACKGROUND AND ANALYSIS Overview of Egypt's Debt At the present time, Egypt's total debt owed to the U.S. Government is about $12 billion. Of that amount (as of Dec. 31, 1989), slightly more than one-half stems from military loans extended by the United States between 1979 and 1984 to help Egypt finance large amounts of weapons purchased under the Foreign Military Sales (FMS) program. It is the FMS debt only that the President proposes to forgive. Egypt also owes the United States substantial amounts for loans associated with economic and food assistance programs, as well as relatively small sums for Commodity Credit Corporation and Export-Import Bank credits. (See Table 1, next page.) The terms for these various loans, however, are quite different. At the time that Egypt borrowed for military purposes, the United States extended FMS credits at near-market rates, and consequently, the military loans carry the hardest terms of debt owed by Egypt. Interest rates range between 10.7% and 13.7% on these 30- year FMS credits. Most economic and food assistance loans, on the other hand, are 40-year credits set at 3% interest rates. Debt servicing for FMS credits represents by far the largest portion between one-half and three-fourths of total Egyptian scheduled payments for the next 5 years. (Table 2, next page.) As Table 1 also indicates, of all foreign borrowers, Egypt holds the largest official debt owed the United States in terms of the total amount, as well as for military, economic, and food assistance credits. Placed in a broad context, Egypt's American debt obligations represent about 23% of its total $50 billion debt. Of the $50 billion total, Egypt owes by far the largest portion ~ $32 billion in long-term debt ~ to foreign governments, and much smaller amounts to multilateral development banks ($4.7 billion), private creditors with public guarantees ($5 billion), and private creditors without public guarantees ($1.1 billion). (Egypt also holds CRS-2

5 TABLE 1. Major Foreign Country Debtors to the United States Grovernment Principal Owed as of Dec. 31, 1989 (billions of dollars) Military* Economic Food Other** Total*** Ten Largest Debtors Egypt Israel Pakistan Poland India Turkey Indonesia Brazil Korea Greece Selected Other Debtors Bangladesh Philippines Morocco Jordan * - Excludes FMS loans refinanced under FMS debt reform. DOD guarantees 90% of such loans. ** - Includes Commodity Credit Corporation and the Export-Import Bank *** * Principal only; does not include arrearages. Source: Department of the Treasury. TABLE 2. Egyptian Debt Service Principal and Interest Projected as of Sept. 30, 1989 (billions of dollars) FY1990 FY1991 FY1992 Military Total Military Total Military Total FY1993 FY1994 Military Total Military Total Source: Department of the Treasury and Office of Management and Budget. CRS-3

6 about $7 billion in short-term debt.) Because of the large amount Egypt owes to foreign governments, debt relief initiatives put forward by the United States or others could have a particularly significant impact on Egypt's total debt and debt servicing requirements. The President's proposal would forgive only the military or FMS portion of Egypt's debt to the United States, which as of Sept. 4, 1990, stood at $6.72 billion - - $5.87 billion in principal and $0.85 billion in arrearages. Between now and 2015 when the final loan matures, Egypt is scheduled to pay $13.38 billion in principal, interest, and arrearage charges. This total is nearly evenly divided between principal and interest, and assumes that Egypt will make payments on time and not undergo future reschedulings or incur arrearage fees. Based on Egypt's past record of servicing its FMS debt, however, that assumption appears doubtful. Origins and Problems with Egypt's FMS Debt Following the signing of the Camp David Accords in 1979, Egypt began purchasing large amounts of military equipment from the United States financed with credits issued under the FMS program. These purchases were part of Egypt's effort to shift from Soviet-supplied to U.S.-supplied weapons. By 1981, the United States had extended to Egypt over $2 billion in FMS credits, all at near-market interest rates that were especially high at that time. Egyptian officials expressed concern that it would be very difficult for them to service this rapidly growing and expensive debt and sought more concessional forms of American military assistance. In 1982, the United States began to offer a portion of Egypt's military aid as grants, but still extended large amounts of FMS credits at market rates. Finally, in 1985, the United States began converting all military assistance for both Egypt and Israel to grants. (The United States generally began to transform the FMS program from one of loans to grants in the late 1980s. Today, nearly all U.S. military aid recipients receive grants.) During the early- to mid-1980s, Egypt increasingly found it difficult to service its military debt to the United States and began to fall behind in scheduled payments. In 1985, Egyptian arrearages began to threaten the country's continued eligibility for U.S. foreign assistance under the terms of the Brooke-Alexander amendment. This provision, initially sponsored by Senator Brooke and Representative Alexander and included in annual foreign aid appropriation acts since 1977, prohibits the transfer of any American assistance covered by that act if a country falls more than one year in arrears on debt repayment to the United States. (This amendment is currently included as Section 518 of P.L , Foreign Operations Appropriation Act, 1990.) In the past, Egypt would make payments at the last minute to avoid the Brooke- Alexander sanction. A 1987 Paris Club debt rescheduling offered some relief for Egypt, but within 2 years, Cairo was once again accumulating large "Brookesensitive" arrears on its FMS debt. In 1988 and 1989, Egypt paid $456 million in interest payments on its FMS debt, while building an arrearage of nearly $550 million. This year, when many American officials believed Egypt would finally succumb to the Brooke-Alexander restriction, Egypt paid $583 million and avoided a cut-off of American assistance. "Brooke-sensitive" FMS payments, however, grow to $720 million in FY1991 and to $756 million in FY1992. CRS-4

7 Previous Proposals to Extend Egypt Official Debt Relief Over the past decade, Egyptian officials continually have requested debt relief associated with the FMS loans. They have made a sharp distinction between their military debt and economic/food aid loans, viewing the military credits as falling within the context of the Camp David Accords and the associated risks undertaken by Egypt. Consequently, they regard the FMS debt as a "political" obligation, something that they never believed to be manageable financially and for which they should receive some special recognition. Others, including Members of Congress, have shared this concern for Egypt's growing official debt to the United States. Congress in 1979 expressed concern over the capacity of both Egypt and Israel to handle the additional debt that would come from the $3.7 billion FMS credits included in a security assistance authorization bill (P.L ) that followed Camp David. While not committing themselves to subsequent debt relief, lawmakers included in the law their sense that "it may become necessary to modify the terms of the loans...in future years." In 1983, the Senate Appropriations Committee directed that Egypt receive $200 million of its $750 million economic assistance as a cash transfer to address its growing debt problems. The final appropriations for that year, however, did not include the $200 million cash transfer earmark, and Egypt received only about $100 million in cash economic aid. Continuing alarm over growing debt burdens stemming from previous FMS credits led Congress in 1987 to initiate an FMS debt reform program in which countries that held FMS credits with interest rates above 10% could prepay the United States without penalty and refinance the loans in private markets at significantly reduced levels. Although a number of countries took advantage of this program, Egypt, because of its arrearage problem and because it could not commit sufficient collateral to back the private loans, was not able to participate. Despite repeated requests from the Egyptian government for debt relief and a widely held perception among analysts that Egypt's fragile economy could not sustain - in the long run -- the growing FMS debt obligation, the United States has not until recently considered debt forgiveness as an appropriate solution to Egypt's many economic problems. Through the terms of its aid program, the United States has pressed Egypt to undertake broad economic reform measures that American officials believed would eventually stabilize the Egyptian economy. The enormity of the military, political, and financial risks for Egypt brought on by the Persian Gulf crisis, however, convinced President Bush that American policy on Egypt's FMS debt should change. (For information concerning Egypt's economic and political situation, see CRS Report F, Egypt's New Foreign Policy Activism: Considerations for the United States.) Key Issues for Congressional Consideration On Sept. 14, 1990, as part of the $1.9 billion "Operation Desert Shield" Supplemental Appropriation for 1990, President Bush asked Congress to cancel Egypt's $6.7 billion FMS debt. In a series of sweeping but largely technical directives, Section 603 of the draft legislation first waives any existing provision of law that might legally block forgiving Egypt's debt. Section 620(r) of the Foreign CRS-5

8 Assistance Act of 1961, for example, prohibits the forgiveness of foreign aid loans, but would not apply due to the broad waiver. The draft language then instructs the Secretary of Defense to borrow from the Secretary of the Treasury sufficient amounts that permit the Defense Department to purchase Egyptian FMS loans currently held by the Treasury Department's Federal Financing Bank (FFB) (about $4.4 billion of the total). The language further directs the President to cancel all FMS debt amounts owed by Egypt to the Secretary of Defense, and finally cancels all Defense Department obligations owed to the Secretary of the Treasury associated with DOD's borrowings to purchase the Egyptian debt from the FFB. Rather than asking Congress to grant the President authority to forgive Egypt's debt in a more direct and simple manner, the Administration chose to seek permission through series of technical steps so that the FFB, the Bank through which most Federal agencies finance their guaranteed obligations, could maintain its financial integrity and would not hold Egypt's FMS loans at the time of cancellation. The proposal does not include a request for Congress to appropriate funds to cover the debt forgiveness. The President had hoped that Congress would consider the Egyptian debt question as part of the Operation Desert Shield supplemental, putting it on a potentially rapid legislative path. Congress incorporated the Operation Desert Shield supplemental as part of the temporary Continuing Appropriations (H.J.Res. 655) passed on September 30. On the issue of Egyptian debt forgiveness, however, Congress decided to substitute in place of the President's request a provision exempting Egypt from the Brooke-Alexander requirements until Dec. 31, This will allow Egypt to avoid a cutoff of U.S. assistance over the next 3 months because of debt arrearages, while permitting the Committee to study the overall scope and potential costs associated with the cancellation of Egypt's debt and related requests from other countries that might emerge. At this stage of the congressional term, it appears that the House-passed Foreign Operations Appropriations for FY1991 (H.R. 5114) that is pending in the Senate is the most probable legislative vehicle that would include the Egyptian debt relief initiative. In justifying the debt plan, Administration officials cite the extraordinary steps taken by President Mubarak in support of U.S. interests in the Gulf as well as the substantial economic costs Egypt will incur. The executive branch emphasizes in particular the critical role played by the Egyptian President in solidifying Arab opposition to Saddam Hussein and believes that his continued leadership in mobilizing Arab resistance is a key to U.S. policy concerns. They also praise President Mubarak for dispatching troops to the international force assembled in Saudi Arabia and for providing strategic cooperation in the American deployment of forces in the region. Since the debt cancellation proposal became public knowledge in early September, Members of Congress have expressed a number of reservations to the request. While commending strongly the actions of President Mubarak, some have questioned whether forgiving Egypt's debt is the correct American response. Congressional concerns largely have centered on four core issues and a set of related sub-issues: what are the costs and budgetary implications of forgiving Egypt's debt; are there alternative options for assisting Egypt; will the Egyptian case set a precedent that will lead to further and costly debt relief measures for other countries; and should the executive branch first develop a broad U.S. approach to official debt problems globally before proceeding with a plan for Egypt? CRS-6

9 Costs and Budget Impact Associated with Forgiving Egypt's Military Debt Costs Specifically Related to Egypt Debt Forgiveness. There has been wide disagreement and conflicting estimates over the financial cost to the United States and the effect on the Federal budget deficit that would result from forgiving Egypt's military debt. The Administration's position is that the proposal would have no impact on budget outlays for at least the next 5 years and that the recommendation should not be "scored" against current expenditures. Others note that Egypt has made at least partial debt servicing payments in recent years and reject the notion that forgiving Egypt's military debt would be "deficit neutral" or cost nothing. This matter was raised during final discussions between congressional and executive budget summit negotiators. Although OMB still argues that canceling Egypt's debt will not add to the deficit, the two sides at the negotiations agreed to establish a maximum level for "scoring" the Egyptian FMS debt forgiveness should Congress approve the initiative. As stated in the final budget agreement issued by OMB on September 30, Egyptian debt relief will increase outlays for the international affairs budget function by not more than $207 million in FY1991 and a total of $1.83 billion over 5 years. The Congressional Budget Office issued a slightly lower cost estimate of $150 million in FY1991 and $1.6 billion over 5 years. Regardless of the exact cost of the proposal (so long as it is less than what is specified in the budget summit accord), the budget agreement further provides that levels approved for the total international affairs budget in FY1991-FY1993 will not be affected by the Egyptian debt forgiveness initiative that amounts "scored" for the debt plan will be in addition to the ceiling set for the international affairs budget function. Thus, canceling Egypt's debt will not come at the expense of other international affairs programs. The Administration's earlier argument that the Egyptian military debt relief measure would not require appropriations or add to the Federal deficit revolved around the Office of Management and Budget's (OMB) assumption, determined in late 1989, that Egypt would not make any payments on its U.S. military debt in FY1990 through FY1994. OMB believed that Egypt, facing a near-crisis foreign exchange shortage, would participate in a series of Paris Club debt reschedulings over the next 7 to 10 years that would involve deferring any payment on its FMS debt during that period. Consequently, the OMB budget estimate submitted to Congress in January 1990 did not assume any military debt service payments by Egypt for FY1990 and beyond. Therefore, according to OMB, forgiving Egypt's debt, for which there was no payment expectation, would not alter the pending budget estimates for next year or change the outlay projections. Others argued, however, that there is a cost to the United States in forgiving the FMS debt. They note that between FY1985 and FY1989, Egypt made payments of nearly $1.2 billion on its military debt and that OMB assumptions for FY1990 on Egyptian debt service were wrong - that Egypt made a $583 million payment in March Furthermore, some critics point out that Egypt should be expected to at least service the "Brooke-sensitive" portion of its debt, an amount totalling $720 million in FY1991 and $756 million in FY1992. At least these levels, they believe, CRS-7

10 would be lost to the U.S. Treasury should the United States cancel Egypt's FMS debt. Regarding the prospect that Egypt might undergo multiple debt reschedulings, analysts point out that this simply defers the debt to a later point and that eventually Egypt will once again make payments; if forgiven today, the United States will also forgo those future receipts. Administration officials counter that Egypt's military debt is a "bad" debt that will never be repaid. While Paris Club action would forestall immediate debt service problems, Egypt probably would accumulate greater amounts of debt during the rescheduling process and be in a worse situation in the long term. Broader Cost Implications. Related to the matter of cost and budgetary impact of forgiving Egypt's military debt is the question of the extent to which debt relief for Egypt will lead to similar requests from other affected nations for some combination of additional debt relief and economic and military assistance. (See also section below on precedent-setting concerns and what other impacted countries are seeking.) There is concern within the Congress that action on the Egyptian debt issue will be the first of many steps taken to offset economic dislocation and political instability in nations supporting U.S. actions against Iraq. Israel, for example, is seeking a sizable increase in economic and military assistance, and U.S. officials indicate that they will agree to some compensation package for the Israelis. Many expect other requests to follow - not only from countries in the region, but from outof-area states that are making direct contributions to the multinational military force or that are facing severe economic repercussions because of a downturn in trade, foreign worker remittances, and higher oil prices. Outstanding principal on FMS debt for all countries currently stands at about $16 billion and for FY1991 OMB projects that the United States will receive $3.5 billion in payments on worldwide FMS loans. Because of limited U.S. foreign aid resources and the extreme pressures to restrain or reduce overall Federal spending, some Members are reluctant to proceed with the Egypt initiative without having a more comprehensive understanding of the potential total costs of aid- and debt-related programs that Congress might be asked to finance in the coming months. Such a broad estimate, which will be difficult to compile in the short term, may become a prerequisite for consideration by the appropriation committees that are responsible for managing worldwide foreign aid spending. Alternative Options for Helping Egypt There appears to be wide recognition that steps taken by President Mubarak since Iraq's invasion of Kuwait carry with them substantial political and military risks as well as economic costs. There also seems to be broad support for U.S. action that would offset to some extent those risks and costs. While expressing strong support for Egyptian actions, many - including Members of Congress - who do not believe that debt forgiveness is the appropriate response, suggest that the Administration consider a range of alternative options for assisting Egypt. These might include other forms of U.S. debt and economic relief and more specific compensation by American allies, Saudi Arabia, and the exiled Kuwaiti government. CRS-8

11 Other Types of Relief Available. Some have suggested that, short of outright debt forgiveness, there are a number of debt relief alternatives available to President Bush that would make a considerable contribution to the economic, military, and political problems facing Egypt. The United States, for example, could agree to a debt service moratorium for Egypt's military payments over the next few years. This would allow Egypt to avoid over $1.6 billion in scheduled FMS payments in FY1991 and FY1992. The United States might also restructure Egypt's military debt along the lines of the "Enterprise for the Americas Initiative" recently submitted to Congress by President Bush. (For details on the debt provisions contained in the Enterprise for the Americas Initiative, see CRS Issue Brief ) Another possible model would be to grant Egypt permission to repay a portion of its debt in local currency instead of dollars and to use these funds to support economic development programs in Egypt. The United States might also agree to reduce the interest rates associated with Egypt's military debt, a step that would decrease annual debt service payments. Interest rate reduction, however, might require Congress to appropriate funds necessary to "buy down" the higher terms, posing additional pressures on an already constrained budget. Congress could allow the President to waive the Brooke amendment so that Egyptian arrearage accumulations in excess of one year would not trigger a suspension of additional American economic and military assistance. (Congress adopted a temporary version of this option on September 30 when it approved a Brooke-Alexander waiver through Dec. 31, 1990.) Finally, the United States could provide a larger portion of its $815 million economic assistance as a cash transfer used by Egypt to help service its FMS debt payments. A point emphasized by a number of lawmakers is that by adopting one or a combination of these options, the United States would provide significant debt relief for Egypt without violating what they regard as a fundamental principle that borrowers, whether they are foreign governments or private American citizens, must ultimately pay their debts in one form or another. Administration officials state that they considered all possible alternatives, but came to the conclusion that military debt forgiveness was the most appropriate tool to address President Mubarak's economic and political difficulties. While other options might offer temporary relief, Egypt would continue to accumulate greater principal and interest obligations and perhaps jeopardize future security and economic stability. None of these proposals, in the minds of Administration officials, offers the full range and permanent benefits furnished by debt forgiveness. Moreover, executive branch spokesmen note that Egypt views its FMS obligations as a "political" debt linked to its decision to sign the Camp David Accords in 1979 and assume considerable risks seeking an accommodation with Israel. Consequently, cancellation of Egypt's military (but not other debt) would send an important message to President Mubarak regarding American resolve to back his bold actions over the past decade. Debt and Aid Initiatives Offered by Other Nations. Another alternative to American debt forgiveness suggested by some is for the United States to ask its allies, Saudi Arabia, and the exiled government of Kuwait either to provide the means for Egypt to service or retire its U.S. military debt, or to forgive repayment on their own loans owed by Egypt. Most agree that President Bush has been successful in encouraging U.S. partners to share a greater portion of the financial burden of the CRS-9

12 crisis, and some believe that an appropriate further contribution would be for these nations to extend the necessary foreign exchange so that Egypt could pay its military debt to the United States. Alternatively, an American decision to cancel Egypt's debt could be part of a coordinated effort by Japan, France, West Germany, and others to initiate similar debt forgiveness plans. (See also CRS Issue Brief 90131, Iraq/Kuwait Crisis: The International Response and Burdensharing Issues.) During early September, the United States received pledges totalling about $20 billion from allies and Gulf states for financial contributions to the crisis. American officials expect that about 50% will be programmed to offset U.S. costs in deploying over 150,000 troops while the other half will be channelled to the so-called "front line" states of Egypt, Turkey, and Jordan. There is no current estimate regarding how and in what form donor countries will allocate this assistance. On the debt side, the Egyptian government, as of 1988, owed about $32 billion to foreign governments approximately $5 billion to France ($1.9 billion for military purchases) and $2.5 billion each to Japan and West Germany. Like other options noted above, Administration officials say they considered seeking direct financial contributions from various countries to assist Egypt's FMS debt problem, but decided against it. They believe that a $6.7 billion Saudi or Kuwaiti contribution for Egyptian debt responsibilities would mean a $6.7 billion smaller contribution for other crisis-related needs. They also emphasize that President Bush feels strongly that the United States itself must make a significant gesture in recognition of actions taken by Egypt. These officials do say, however, that American cabinet officials recently dispatched to Tokyo and Europe pressed countries that hold Egyptian debt to consider some form of forgiveness initiative. Thus far, those efforts have been unsuccessful. Nevertheless, the Administration is hopeful that if the United States adopts a debt forgiveness plan, American officials can use this to leverage similar schemes from others in the months ahead. France has resisted, citing the fact that it makes no distinction between military and other economic or export loans. Japan, which has a longstanding policy not to forgive repayment of foreign aid loans, likewise has stated that it was not prepared to forgive Egyptian debt. Egyptian Debt Forgiveness as a Precedent: What Will Other Countries Seek? A key concern raised by critics is the fear that if the United States forgives debt owed by Egypt, many countries holding U.S. military debt will demand the same concession. Granting these demands would result in substantial costs to the United States. Unlike Egypt, many large foreign debtors maintain an excellent repayment record and OMB budget estimates continue to assume that the United States will collect these receipts. Consequently, U.S. forgiveness for additional countries would have a direct impact on the budget and add to the deficit. Aside from the debt consideration, some believe that the Egyptian case will open the way for many countries to insist that the United States provide some form of compensation in recognition for their contribution and/or problems stemming from the Persian Gulf crisis. CRS-10

13 The Administration argues strongly that within the context of military debt, the uniqueness of the Egyptian case will prevent it from becoming a precedent for others to gain debt relief. Spokesmen point to a number of factors that make Egypt's situation much different from those of other countries that hold large amounts of U.S. military debt: Egypt faces the most severe foreign exchange problem; Egypt is the only country in which economic conditions are such that multiple Paris Club debt reschedulings are likely; other nations, including Israel, Morocco, Pakistan, Jordan, and Turkey, have taken advantage of the U.S. FMS debt reform initiative that permits countries to prepay without penalty high interest rate FMS loans and refinance in commercial markets at reduced rates with 90% U.S. Government backing; and that the enormous political risks as well as economic shortfalls ~ estimated to be between $2 billion and $3 billion by U.S. sources and nearly $10 billion by Egyptian officials confronting President Mubarak warrant what is termed as an extraordinary American response. They contend that they are not trying to take advantage of the current crisis to gain support for debt forgiveness; that prior to the Gulf crisis, the Administration did not support this option. Only after Iraq's invasion, Egypt's firm response, and a greater concern over the political and military stability of President Mubarak's government did they begin to consider debt forgiveness. Countries frequently mentioned as likely to submit debt- or aid-related proposals include Israel, Turkey, Jordan, Greece, Pakistan, Morocco, and the Philippines. (See Table 1 for debt figures.) Israel reportedly has asked that the United States forgive its $4.6 billion official debt, provide an emergency $1 billion military assistance package, and increase annual military aid from $1.8 billion to $2.5 billion. Executive branch officials acknowledge that Israel will receive some additional assistance, but that the size and composition is unclear at the moment. They further note, however, that the Administration rejects the idea that debt forgiveness should be part of any assistance package for Israel. The Administration's assertion that Egypt represents a unique case of large military debtors is bolstered further by some other key differences among the holders of large FMS obligations. The majority of the total debt owed by Pakistan, Morocco, the Philippines, and Jordan, for example, is comprised of non-military loans. Thus, debt forgiveness applied strictly to FMS obligations might not be as important or desirable for these countries. Egypt's military debt also differs from Israel's military obligations in another key way. While Israel receives $1.2 billion in annual cash transfers each year from the United States (based on the principle stated in the FY1985 foreign aid appropriation (Section 534, P.L ) that economic aid should exceed Israel's total debt service requirements), Egypt receives only $115 million of its $815 million U.S. economic aid in the form of cash (that figure rose to $283 million in FY1990 following Iraq's invasion of Kuwait). Consequently, American cash transfers to Egypt only partially assist Cairo to service its U.S. military debt. What concerns a number of analysts, however, is that the debate regarding debt relief initiatives will broaden beyond simply military debt issues. Within a broader context of total U.S. Government debt, there are a number of countries that could make a compelling case, based on unique and special circumstances, for some debt accommodation. A number of countries, just as poor or poorer than Egypt, are confronting some of the same economic dislocations and loss of worker remittances that Egypt faces. Some, Bangladesh, for example, are also making military CRS-11

14 contributions to the international Persian Gulf force. For other countries, the United States has important foreign policy interests unrelated to the Gulf crisis in Poland or in the Philippines, for example ~ which are considered debt-distressed nations and where some form of debt relief might ease considerably economic difficulties they face. Consequently, many believe that it will be difficult to defend, particularly on economic grounds, the unique and non-precedent-setting nature of cancelling Egypt's military debt. Broader implications for American foreign policy interests and strong political pressures, they feel, will force additional, and in some cases costly, debt forgiveness plans once the United States approves debt cancellation for Egypt. Egyptian Debt Relief as Part of a Comprehensive U.S. Plan on Official Debt Another issue raised is that there are a number of countries facing significant official debt difficulties and that the United States has not satisfactorily developed a comprehensive plan to address this broader problem. To cancel Egypt's military debt, according to these observers, would represent another piecemeal approach to a matter they believe is long overdue in receiving serious consideration. Some Members cite Poland, in particular, as an example of a country that accumulated high levels of American debt under the previous communist regime; and that today the debt is largely worthless and represents a severe strain on the Polish economy. Some argue that Congress should not proceed with consideration of Egypt's debt before the Administration presents a clearer idea of what it plans for all problematic official debt. In recent years, the United States, at times at the urging of Congress, has given debt relief and forgiveness programs to selected groups of countries. At the 1988 Toronto Economic Summit, the United States endorsed official debt rescheduling for sub-saharan Africa from a menu of options agreed upon by the major economic powers. Later that year, Congress authorized the President to forgive economic aid debt owed by "relatively least developed countries" (Section 572 of the Foreign Operations Appropriations Act, 1989), conditioned on the presence of economic reform programs sanctioned by the World Bank or IMF. Subsequently, the United States signed agreements with 14 African countries that will result in the forgiveness of about $750 million in concessional debt. More recently, in September 1990, President Bush submitted to Congress a plan to restructure certain Latin American debt to the United States, permitting a reduction in principal and repayment in local currencies for some concessional debt and debt-for-equity and debt-for-nature swaps for selected official commercial loans. Congress is considering a number of other official debt relief proposals, including the forgiveness of debt related to concessional food assistance (P.L. 480) loans. None of these plans, however, approaches the issue in a comprehensive fashion as suggested by some critics of the Egyptian forgiveness initiative. LEGISLATION HJ.Res. 655 (Whitten) Continuing Appropriations, FY1991. Making continuing appropriations for FY1991 until Oct. 5, 1990, providing supplemental appropriations for Operation Desert Shield for FY1990, and for other purposes. Section 114 of the Act temporarily waives the application of the Brooke/Alexander amendment in the case of Egypt until CRS-12

15 Dec. 31, Introduced Sept. 30, 1990; passed House and Senate Sept. 30; signed into law Sept. 30. H.Con.Res. 373 (Dorgan) Expresses the sense of the Congress that the President should withdraw his proposal to forgive Egypt's military debt, and that, if not, the Congress should reject the President's recommendation. Introduced Sept. 19, 1990; referred to Committee on Foreign Affairs. S.Con.Res. 148 (Harkin) Expresses the sense of the Congress that the President should withdraw his proposal to forgive Egypt's military debt, and that, if not, the Congress should reject the President's recommendation. Introduced Sept. 28, 1990; referred to Committee on Foreign Relations. CRS-13