Unrealistic Use of Loans To Support Foreign Military Sales

Testimony was given concerning a GAO report which described the ability of countries to pay for their military imports, the implications of foreign military sales financing on the Federal budget, and the solvency of the Foreign Military Sales Guaranty Reserve Fund. To finance foreign military sales, the United States has shifted, for the most part, from an on-budget grant and low-interest direct loan program to an off-budget high-interest loan program. GAO stated that this shift was not entirely realistic because: (1) off-budget loans do not show the total expenditure for foreign military assistance and require the United States to charge the recipient a high interest rate; (2) some countries cannot afford the high interest charges associated with these loans; (3) the Guaranty Reserve Fund used to guarantee these off-budget loans is undercapitalized in relation to the risks undertaken so that a future Congress may need to make appropriations to fund a program authorized by a prior Congress; and (4) loans only delay rather than resolve the question of how to fund military imports for less developed countries. Furthermore, this program often causes undue burden on the recipient countries economic and financial capability to repay the loan. GAO found that debt-troubled countries have been required to divert scarce foreign exchange from development to servicing their military debt. Guarantees for Federal Financing Bank foreign military loans require no new budget authority or annual appropriations for the Guaranty Reserve Fund. GAO believes that the Federal Financing Bank should not engage in transactions of this sort if its activities are not fully reflected in the budget. GAO believes that the debt servicing prospects of several large borrowers are sufficiently uncertain to call into question the adequacy of the Guaranty Reserve Fund. If corrective actions are not taken now to provide increased funding for contingencies, other actions may be needed.