Military Loans:

Repayment Problems Mount as Debt Increases

NSIAD-86-10: Published: Oct 30, 1985. Publicly Released: Dec 2, 1985.

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Joan M. McCabe
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Pursuant to a congressional request, GAO examined the repayment records of countries receiving loans under the U.S. foreign aid programs, to determine: (1) the status of the Guaranty Reserve Fund set up to back the loans; (2) how foreign governments repay the loans; and (3) how U.S. military aid shifted from mostly market rate loans to mostly outright grants and concessional interest rate loans.

GAO found that, of the three military aid programs, only the Foreign Military Sales (FMS) Financing Program requires payment for the aid received, with the exception of Egypt and Israel who have had their loan repayments waived or forgiven. The program provided credit through two types of loans: (1) direct, which are specifically appropriated for the procurement of defense articles; and (2) guaranteed, which are financed through the Federal Financing Bank and repayed through the Guaranty Reserve Fund to protect against foreign governments defaulting. Since 1975, guaranteed loans were the predominant type of financing; however, in 1985, all of the new FMS loans were direct, on-budget loans. Because of high interest rates, some foreign governments have found it increasingly difficult to repay these loans, which depletes the Guaranty Reserve Fund. The fiscal year (FY) 1985 FMS financing program will assist 14 foreign governments with debt repayment problems at concessional interest rates. However, GAO found that nine countries have been sanctioned over the past few years for defaulting on repayment of U.S. loans. Congress is concerned that agencies which provide foreign assistance have not developed and implemented plans to implement the intent of the legislation. GAO believes that: (1) if Congress continues to reject the Administration's proposal for permanent authorization and appropriation authority, the funds authorized for credits may be used to make payments due to defaults; and (2) future use of guaranteed loans would expand the government's contingent liability.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress is not considering any action to provide the authority which would trigger this recommendation. Therefore, this recommendation should not be continued as open.

    Matter: In the event the administration submits another budget proposal for permanent authorization and appropriation authority, Congress should consider such action only in conjunction with actions to rescind future guaranteed loan authority under the Arms Export Control Act.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The Administration's report to Congress complies with this recommendation. The Fund's cash needs will be met through FY 1987. Also, five alternative approaches are provided for reimbursing the Fund, all of which propose permanent authorization and appropriation budget authority. Since cash needs are deemed adequate, it is not necessary to reserve funds for potential defaults.

    Recommendation: The Secretary of State should: (1) reassess the Guaranty Reserve Fund's current cash needs and provide the results of this needs assessment to Congress in order that it may consider these needs along with the Administration's recommendations for reimbursing the fund, including any future proposal for permanent authority; and (2) reserve a portion of the funds authorized for loan credits, if justified by the needs assessment, to cover potential defaults and rescheduled debt.

    Agency Affected: Department of State


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