Iraq Debt Relief Remains High on U.S. Agenda, Says Official

U.S. Department of the Treasury
Office of Public Affairs
May 20, 2004

John B. Taylor
Under Secretary of the Treasury for International Affairs Testimony Before the House Appropriations

Subcommittee on Foreign Operations, Export Financing, and Related Programs

FY2005 Budget Request for Treasury International Programs

Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee, thank you for the opportunity to testify this morning on President Bush's FY2005 budget request for Treasury's international programs.

Treasury's international programs -- which include the multilateral development banks (MDBs), debt reduction, and technical assistance -- are critical instruments in promoting the Administration's international economic agenda. The MDBs promote global economic growth and poverty reduction, thereby helping to create stronger markets for U.S. goods and services. They also support specific U.S. foreign policy priorities, such as combating money laundering and terrorist financing, and rebuilding conflict-torn economies. Similarly, debt reduction can help poor countries remove debt overhang which inhibits growth and move to a sustainable level of debt. Our technical assistance helps countries institute the sound budget and financial systems needed for economic growth.

The FY2005 request for Treasury's international programs totals $1.71 billion. It includes $1.43 billion to fully fund our annual U.S. commitments to the MDBs, $58.7 million toward clearing a portion of U.S. arrears to these institutions, $200 million towards debt reduction, and $17.5 million for technical assistance.

The Economic Growth Agenda at the MDBs

The essential goal of the MDBs is to increase economic growth and thereby reduce poverty. The MDBs achieve this goal by providing financial assistance and policy advice. The productivity growth that spurs income growth depends on economic policy and governance frameworks in recipient countries.

The key elements of such policies were stated by President Bush in 2002 -- to govern justly, to promote economic freedom, and to invest in people.

The MDBs also support key U.S. foreign policy priorities, such as economic reconstruction in Iraq and Afghanistan, combating money laundering and terrorist financing and fighting HIV/AIDS, especially in Africa.

Upon assuming office, the Bush Administration made it clear that the MDBs' needed to reform in order to improve their effectiveness in promoting growth and reducing poverty. Implementing such reforms were one of the highest priorities of U.S. international economic policy.

The Bush Administration has linked its financial commitment to the MDBs to the implementation of such reforms. Significant progress has been made in two key reforms: implementing a rigorous measurable results management system and providing greater grant assistance.

I am pleased to report that all the institutions are currently in the process of establishing results management systems that set measurable results with timelines at the project, sector, country, and institution level. To provide a catalyst for this effort, the U.S. introduced an incentive contribution scheme as part of our contribution to the World Bank's International Development Association (IDA) last replenishment, IDA-13, pledging an additional $300 million that is conditioned on IDA meeting specific performance and outcome targets. IDA has achieved the initial targets set for last spring, and is working to accomplish its set of outcome objectives in the areas of private sector development, health and education for this spring. An outside independent evaluation will be undertaken this spring to verify whether the targets have been met.

I am also am pleased to report that we have increased the use of grants by the MDBs to improve outcomes and avoid unsustainable debt levels in the poorest countries. Grants programs are well established in IDA, the African Development Fund (AfDF) and the International Fund for Agricultural Development (IFAD), and the U.S. just concluded negotiating a new grant program in the Asian Development Fund (AsDF). Currently, the U.S. is seeking a significant expansion in the IDA and AfDF grant programs through the new replenishment negotiations this year. Grants have proven particularly useful in addressing the needs of those countries that have serious debt sustainability problems or are emerging from destructive conflicts, and for such critical needs as fighting the international HIV/AIDS epidemic. I recently went on a "grants" tour of Africa to assess how the new grants were working. In every country, I heard tremendous praise for the new grant programs. A particularly good grant program for education in Kenya incorporates an excellent measurable results framework.

To reinforce these reforms and strengthen the accountability of the MDBs, Treasury working closely with the Congress, has set out ambitious goals to increase the transparency of the MDBs' decision-making processes.

In particular, the United States has advocated greater availability of information on MDB projects, policies, Board meetings, fraud and corruption cases, and results indicators.

We have also asked that the MDBs make public the details of their internal systems for allocating assistance and establish a plan to conduct regular, independent audits of internal management controls.

The private sector plays a critical role in increasing growth and creating jobs in developing countries. For the last several years, the United States has urged greater emphasis on loan programs and technical assistance to small- and medium-sized enterprises (SMEs), along the lines of the IDA/International Finance Corporation (IFC) initiative to promote small business in Africa that was approved this past year. This year at the special Summit of the Americas, our Hemisphere's leaders committed to tripling the amount of bank loans available to small businesses in Latin America and the Caribbean. Because small business plays a critical role in generating jobs in most developing countries, we believe that more attention needs to be given to this critical sector by both multilateral and bilateral donors.

We are urging the MDBs to scale up their private sector development assistance, in the areas of policy advice, technical assistance and financial assistance. We have asked them to develop action plans to enact investment climate reforms. This will be a theme of the G-8 Sea Island Summit in June.

The U.S. is the largest cumulative donor to the multilateral development banks, and thus has significant influence in these institutions. Our participation in the MDBs mobilizes greater resources and generates greater impact than is available through bilateral programs alone. Our commitment to the MDBs reflects not only this resource-leveraging power, but also the enormity of the economic challenges facing developing and emerging-market countries around the world.

The FY2005 Request

There are four basic components of our FY2005 request: (1) annual funding for the MDBs, (2) arrears clearance for the MDBs, (3) debt relief, and (4) technical assistance.

(1) Annual Funding for the MDBs: $1.43 billion

The Administration's request of $1.43 billion for the MDBs includes the final regular payment of our proposed contributions to the current replenishments of IDA ($1.05 billion), the AfDF ($118 million), and the AsDF ($103 million). The request also includes the third of four payments ($107.5 million) under the current Global Environment Facility (GEF) replenishment. The $1.05 billion request for IDA includes $200 million for this year's portion of the results-based Incentive Contribution which is contingent on IDA's meeting certain performance goals. An outside independent audit, paid for by the World Bank, will review and verify the accomplishment of these goals before these additional funds are released.

(2) Arrears Clearance for the MDBs: $58.7 million

The $58.7 million request for arrears clearance is part of an effort to pay down U.S. arrears to the institutions, which totaled $472.7 million after passage of the FY2004 Appropriations Act. It is critical that the U.S. meet its international commitments, thus helping to ensure U.S. leadership and credibility on issues of vital importance to the United States.

(3) Debt Relief: $200 million

The $200 million request for debt relief includes: $75 million to complete the U.S. share of our Kananaskis Summit pledge of $150 million in additional contributions to the Heavily Indebted Poor Countries (HIPC) Trust Fund and $105 million will allow the United States to begin the process of 100 percent HIPC forgiveness on U.S. bilateral debt for the Democratic Republic of the Congo. The DRC has already qualified for HIPC treatment, and other creditors have already provided their share of debt reduction. The request also includes $20 million for debt relief under the Tropical Forest Conservation Act (TFCA) which provides debt relief to developing countries that commit to use the savings to protect their tropical forests.

Iraq's International Debt

Iraq is among the most highly indebted countries in the world with a debt to GDP ratio currently estimated at 484 percent (higher if war reparations are also included). Last September, the G-7 [Group of Seven countries United States, France, United Kingdom, Germany, Italy, Canada and Japan] Finance Ministers committed to resolving this issue by the end of 2004. We have made significant progress toward this goal.

Given the importance of addressing Iraq's debt overhang, the President asked the former Secretary of the Treasury and Secretary of State, James Baker, to serve as Special Presidential Envoy to work with the world's governments at the highest levels in seeking to reduce Iraq's debt burden. Since late last year, Secretary Baker has successfully secured commitments from leaders throughout Western Europe, Asia, and the Gulf States to provide at least substantial debt reduction for Iraq in 2004. Final agreement on the amount and terms of this reduction will be negotiated between Iraq and its creditors. The Administration looks forward to working constructively with Congress to support this initiative.

(4) Technical Assistance: $17.5 million

The request also includes $17.5 million for Treasury's technical assistance programs, which form an important part of our effort to support countries facing economic developments or financial security issues, and whose governments are committed to fundamental reforms. The FY2005 request will allow us to continue current programs in the Middle East, Africa, Asia, and Central and South America, as well as allow us to expand into new countries committed to sound economic reform policies. We expect to use $8.5 million of the appropriated funds on programs that focus on anti-terrorist initiatives, to be spent in coordination with other U.S. Government agencies.

-- Technical Assistance in Iraq and Afghanistan

Our Office of Technical Assistance (OTA) is actively engaged in post-conflict economic restructuring activities in Afghanistan and Iraq. In both countries, the focus of the work is on the creation of sound economic frameworks upon which future growth can be built. In Afghanistan, this has involved the initiation of a streamlined government budget process, an improvement of the payment system for government salaries, and the creation of a Debt Management Unit within the Ministry of Finance which manages outstanding debts and guarantees.

In Iraq, Treasury-led effort within the Coalition Provisional Authority
(CPA) has aided in the payment of Iraqi government workers and pensioners after the fall of Sadaam and the introduction of new currency. Our team also led the development of a central budget, a revitalization of its banking system, an introduction of sound management practices and transparency at the Central Bank and Ministry of Finance, the creation of a trade bank, and a strengthening of efforts aimed at combating financial crimes and terrorist financing. In addition, advice is being rendered on internal and external debt issues, including reconciling of Iraq's debt.

Authorization Requests

As part of the FY2005 budget, the Administration is seeking authorization for additional commitments to the HIPC Trust Fund in relation to President Bush's pledge at the G-7 Kananaskis Summit, for extension of authority for HIPC bilateral debt relief, and for re-authorization of the Tropical Forest Conservation Act (TFCA). I believe that it is critical that Congress pass authorization legislation for these programs, and I look forward to working with you and other Members of Congress to achieve this.

Conclusion

We will continue to work with the MDBs to make progress on implementing the strong reform agenda. I ask for your support as we strengthen these institutions in ways that increase their effectiveness in utilizing financing made possible by the taxpayers of the U.S. in serving vital U.S. economic and security interests around the world.

Our debt reduction and technical assistance programs also serve key U.S. reform and growth objectives in very important ways.

Although it is not part of the Treasury request, I cannot close without strongly urging your support for this year's Millennium Challenge Account
(MCA) request, a vital component of the President's international economic agenda. As you know, the Millennium Challenge Corporation's Board, on which Secretary Snow serves, recently announced the 16 countries eligible for MCA assistance, and we are moving forward aggressively with this program. We need your support to realize the President's vision for this groundbreaking initiative.

Thank you very much. I look forward to working with you on funding this request, and I would be happy to respond to your questions.

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(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)