Created: 9/17/1997

OCR scan of the original document, errors are possible


Intelligence Report

Office of Transnational Issue*


Austerity Programs: Limited Success Conslralnlng

Several high-profile arms deals in tke past year illustrate the limited ability ofMonetary Fund's austerity programs to constrainAlthough ihc purpose of ihc IMF is not to curb specific arms purchasesdefenseIMF

often encourages borrowers io direct scarce resources lo social projects rather than to ihc military. Some countries participating in IMF programs haveariety of methods in the last year lo fund arms buys:

Peru used revenues from the sale of state-owned firms and probably other off-budget funds to2 million contract forighters and air defense equipment.

The IMF, moreover. Is unlikely to exercise the oversight and political leverage necessary to deter most countries from carrying out their arms procurement plans.

Thi. lepra, wup^pwoUw,



Still Buying Arms

The International Monetary Fundprincipal task is toloans to countries facing large baiance-of-paytnentborrowers to commit to fiscal austerity programs, according toreports. These programs only establish macrocconomic targets forleave unplcmejitation to local policymakers.

^thc IMF usually encourages borrowers to cut their defense spending, particularly ex^ndituxes of hard currency for imports of military equipment. | |

Several IMF borrowers continue to purchaseeru bought an2 million wonh of aircraft and air defense equipment from Belarus in0 despite assuring international creditorAhat it would not buy advanced fighter aircraft.

Lima and the IMF agreedhree-year extended fundresident Fujimori approved ihe decision to buyBelarus

Peru has0 million on arms

so far inannual total could0 rnillioii. This would contradict Lima's April pledge to the IMF that it would spend0 million0 million on military purchases this year.

Prospects Dim for Enhanced IMF Hole in Curbing Arms ftirchasw

The IMF is unlikely to exercise the oversight and leverage necessary to deter most countries from carrying out their arms procurement plans.

If the IMF were to challenge major armsas on the grounds that they consume foreign exchange without bolstering the country's infrastructure or enhancing its ability to repay the Fund and othercountries probably would protest the move as violating their national sovereignry.

The IMF also lacks the political leverage necessary to dictate the spending priorities of relatively large countries such as Pakistan.

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