Using Local Currency Generated by U.S. Food Aid for Development Purposes

Published by the Government Accountability Office on 1990-04-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

‘$’   ,       .

      b GAO                   Testimony


          For Release         Using   Local   Currency
          on Delivery
          Expected at         Generated by U.S. Food Aid
          2:ilO p.m. EST      for Development  Purposes
          April   18, 1990

                              Statement of
                              Harold J. Johnson, Director
                              Foreign Economic Assistance   Issues
                              Before the Committee on Foreign Affairs
                              Subcommittee   on International Economic
                                Policy   and Trade
                              House of Representatives

                                                                      GAO Form 160 (12/87)
Mr.     Chairman         and Members of               the Subcommittee:

We are pleased              to be here           today            to discuss          issues      related      to local
currencies             generated       from U.S.             foreign         assistance           programs.           As you
requested,             we will     be providing                   information          on (1) whether               local
currencies             are used to achieve                   development              goals      in recipient
countries,             (2) who owns the               local         currencies           generated          under     titles
I and II         of     Public     Law 480,           and (3) how to improve                       accountability
for     these      local      currencies.


To summarize             our overall           findings,             let     me first          say that       both      AID
and recipient              countries         view       local        currencies           generated          through
Public       Law 480 and other                 programs             as valued          resources       in
furthering             development          efforts          of     these         countries.        Our reviews             of
how Public             Law 480,     title        I,     local        currencies           have been used in
numerous         countries         revealed           that         the currencies              generally       were
programmed             in support       of U.S.             development             objectives        for     those
countries.              In other       words,         AID     and host             governments        together
planned         for,     and intended           that         the     local         currencies       be used for
development.               However,         we also          found         that     monitoring        and oversight
of     the use of          local    currencies               has not         been sufficient                to ensure
that     the currencies             were,        in fact,            used for          the agreed           upon

The local             currencies             generated             from        title        I and title            II

government-to-government                                 food aid        belong           to the host            governments.
However,            the question               of who owns the local                             currency        does not
dictate          whether           it      is properly             and effectively                   used.         Instead,
there       are       two critical              elements            of     this         question          that     must be
addressed             irrespective              of ownership.                      First,         joint      AID/host          country
programming             decisions              on the use of U.S .-generated                                 local        currency
will      determine               whether       the        funds        will      be used for              appropriate
development             purposes.               And second,                there         must be adequate                   systems
of      financial            management and accountability                                     in place          to assure           that
the      funds        are     indeed         used for          agreed           upon purposes.                   The first,
(i.e.       joint       programming                 of     local        currency)              clearly       does not          depend
on ownership                 of    the      local        currency.              Nor does adequate                       financial
control          of    the        funds      necessarily                depend on ownership,                       although
some argue             that        more attention                  would        be paid           to accountability                   if
the United             States            retained         ownership.

While       we recognize                  the attractiveness                      of      this     accountability
argument,             we do not             support         making         these          local      currencies             U.S.
owned.           By continuing                 the present               practice              of host      country
ownership,             we see significant                      opportunities                     to increase             the   level
of developmental                        assistance          in the area of host                          country         financial
management capabilities.                                 We believe             that        AID can and should
strengthen             its        oversight          of     the use of                 local      currencies             in ways
that      will        help        to improve             the   financial                management capabilities                            of
the,host          governments.


Last     July     the AID missions                   around        the world              reported          that        there
were a total             of   250 local             currency            accounts          with        a total       balance             of
over     $1.2     billion.            Generally,            just         under      half         of     the local
currencies             are generated           through           food aid           programs.               Most of           the
rest     are generated               by Economic            Support          Fund (ESF) activities                            (both
cash grants             and the Commodity                Import           Program),              with     a small         amount
generated         by the Development                   Fund for             Africa.

Because         host     countries           vary     in their            development                 needs and
management capabilities,                       AID missions                 have a great                 deal      of
flexibility             in designing           and negotiating                    local          currency          uses with
host     governments,            as long        as the uses are consistent                                  with        the
intent        and purpose            of    the authorizing                  legislation.                  For example,
local     currencies           generated            under        title       I of     Public            Law 480 are                to
be used for             economic          development            purposes.                The projects              should
emphasize         directly           improving         the       lives       of     the poorest                 in the
countries.              Similarly,           50 percent            of     the     local          currencies             generated
under     ESF programs               must be used for                    development              purposes.              AID
guidance         states       that,        to achieve            this      goal,          currencies             can be used
to directly            support        host     country           or AID development                       projects            or
programs,         or to support               the development                    budget          of a particular
sector        or ministry.                In some cases,                 local     currency             use is
contingent         upon the host               country           making          policy          reforms,          such as

reducing           government           subsidies            or greater         privatization             of     their


Your recent             letter         to us raised             the question          of whether              Public         Law
480,     title        I-generated            local      currencies             are used in a way that
helps       achieve          development            goals       in recipient          countries.                To address
this     issue,        we considered                two related          questions.             First,          are     the
local       currencies            programmed           for     uses     that     support        the development
goals       for      individual          countries?                 And second,      do we have reasonable
assurance            that      those      local      currencies          are actually            used for              the
agreed       upon purposes?

Are These Funds Programmed For Development                                        Purposes?

Our reviews            generally            confirm          that     AID mission       officials               and the
recipient           government           jointly        program         and mutually            agree         on how
U.S.-generated                 local     currencies            are     to be used.          Both AID and the
host    countries             view      these       local      currencies         as valuable             in
furthering            development.                 The joint          programming       aspect           of     this
process           fosters        dialogue          and allows          AID to have input                 into      how the
host     country            allocates        its     scarce          development       resources.

TO determine                whether      local       currency          programming         supports
deve+lopment           goals,          evaluations            at the country           level       are necessary.

Over the last               few years        we have evaluated                  and reported             on how local
currencies            were programmed              relative          to development              goals         in several
countries.              In general,          we found         that      the currencies                were
programmed            for    purposes        consistent         with       development               goals.           There
were some exceptions,                    such as when the host                      government           and AID
could       not agree          on uses       for    the currencies,                 which       happened             in Kenya
and Egypt.

In 1988,        we reported            on the       integration            of      fiscal       years         1984-86
food aid        with        development          assistance            and Economic             Support         Fund
assistance            in four      African         countries--Madagascar,                       Ghana, Senegal,
and Kenya.1              Although        integration           of      the overall            food      aid     program
with       the other         assistance          programs       varied          by country,             we found             that
in Madagascar,               Ghana and Senegal,                title       I local           currencies             were
programmed            to support         AID's      major      development                objectives           for      those
countries.              For example,          in Madagascar,               AID'S          primary       objective             was
to assist         the government              to achieve             higher        rice      production,              and
title       I local         currencies       were programmed                  to    fund      rice      research
efforts.          In Ghana, where a major                      goal      was to achieve                 food         self-
sufficiency             by increasing            food   crop         production,             local     currencies
provided       credit         to small        farmers         to improve            production.                In
Senegal,        title        I local      currency        uses were             integrated            with      other
donor      efforts,          for   example,         to speed a commercial                      banking          debt

lFood Aid: Integration    With Economic                                Assistance            Programs in Four
Afri'i=an Countries  (GAO/NSIAD-88-96FS,                                February            25, 1988).
repayment          required              under       an agreement          between          the     International
Monetary          Fund and Senegal.

However,          Kenya provides                 an example            where host           government             officials
resisted          U.S.         efforts       to influence              how local          currencies              would     be
used.          AID and Kenyan officials                          were unable             to agree           on the use of
title         I local          currencies            for     fiscal     years      1984-86          until         1987.
Consequently              the local           currencies              were not used for                   economic
development              until        that     time.          AID officials              said      that      negotiations
with      Kenyan officials                   were difficult              because          the government
believed          that         the    food aid             program     served      important              U.S.     foreign
policy         and agricultural                  export         objectives,          that        local       currency
proceeds          belonged            to Kenya and were sovereign                           funds,          and that        other
donors        were willing                to provide            food    assistance           on a grant             basis
with      fewer        strings           attached.

We found          a similar              situation           in Egypt      involving             local       currencies
generated          under         a Commodity                Import     Program2,          where a large               portion
of      the    local      currencies             generated            in fiscal          years      1986-87         were not
programmed             until         1988.       AID officials             said     that         Egypt       prefers        to
finance         development               activities           with     project          dollars          rather       than
with      local        currencies            generated           from Commodity                 Import       Programs          or
Public         Law 480.              AID officials              have said         that      because          of    the nature
of      the U.S.         assistance           program           in Egypt,         they      have less             leverage

2Foreign Aid: Better                       Management of Commodity                        Import Programs Could
Improve Development                       Impact (GAO/NSIAD-88-209,                        September 26, 1988).
 than         in other       countries            to get      Egyptian          officials             to agree       with
 AID's        proposals           for     using     local      CUrrenCi@S.

We will          soon report             on our evaluation                  of how local              currencies            were
used in Tunisia                and Zaire            during         fiscal       year       1988.        We found          that
local         currencies          were programmed                  to support            development             goals         for
those         countries.            In Tunisia,              AID's     goals       were to promote                 economic
reform         and support              Tunisia's       structural              adjustment            program.            Title
I local          currencies             were programmed               to support            high      priority
Tunisian          government             rural      public         works       programs        that      provide          the
double         benefit       of     funding         rural      development               activities         and
providing          employment              to the rural              poor      adversely         effected          by
structural           adjustment             and a recent              drought.            In Zaire,         AID's         goals
included          increased             agricultural           productivity,                strengthening                the
primary         health       care        system,       and managing              population            growth       rates.
Title         I local      currencies             were programmed                to support            the local           costs
of dollar-funded                  AID development                  projects,        with       the majority               used
for     agriculture           and rural             development,             and health            projects         focusing
on child          survival          strategies          and family              planning        activities.

Local         Currencies          Used for          Budget         Support

You questioned               how Congress              can be assured               that       local      currencies
are being          used for             development          projects           rather       than being            absorbed
as general          budget          support.           We found         that      only       a small        percentage
of    title       I local         currency          was used for             non-development                budget

support.                 According         to data          provided             by AID missions,                    only        3.5
percent            of     local      currencies            generated              through               food aid      were used
for     public            sector         recurrent         costs          during          fiscal          year     1988.
However,            over         26 percent          of     local         currencies               generated          through           ESF
are used for                 public        sector         recurrent              costs.            Since      only         50 percent
of     the        local      currencies            generated              from      the Economic                  Support         Fund
must be used for                    development,               this        does not           appear          excessive.

As you know,                 the Administration's                         1990 food aid                   legislative
proposal            dated         March 1990 recommends that                               authority              be granted            so
that     "designated                uses of          local         currencies              are not           required            when
nonprogramming                    would     best        support           economic          growth           through
compliance                with     major         economic          restructuring."                        while      the use of
U.S.-generated                    local     currency           for        sector      or budgetary                   support           would
significantly                    complicate          assuring             proper      accountability                       for    such
funds,            our reviews             indicate         that          there     are occasions                   when such
uses,        if     legislatively                 authorized,              would      not          be inappropriate.

Can AID Be Reasonably                         Sure That Currencies                          Are Used for                   Agreed       Upon

According                to AID missions'                 fiscal          year     1991 annual                budget
submissions,                 in fiscal           year      1988,          84 percent               of     local      currencies
generated                from     food     aid     programs              worldwide          were spent               for     public
development                activities,             12 percent              for     private              sector       programs,           4
percent            for     budget         support         and other              purposes.               While      our reviews

of Public          Law 480 and other                        programs          that        generate          local      currencies
concluded          that          the     local       currency             was generally              being        programmed
appropriately,                  AID's       monitoring               was insufficient                     to provide
reasonable              assurance           that         the      funds      were actually                 used as
intended.               While       it     is     true      that         some AID missions                  have made
progress         in monitoring                    local        currency           use,      in general,              inadequate
accounting,              monitoring,               and reporting                  systems         have prevented              AID
from determining                   whether           withdrawals              and disbursements                      were made
for     the agreed              upon purposes.                     AID has also                 been unable           to
consistently              verify           that      required             local      currency             deposits         were
actually         made by the host                        country.

The issue          of     accountability                    for      local        currencies              is a contentious
one.       AID management and AID's                                 Inspector            General       disagree            on the
extent      to which              AID should               be held         accountable              for     local      currency
use.       AID management argues                            that,         although         it     must be satisfied
that     local      currencies                  are used for               appropriate             economic
development,              host         countries,              and not        AID,        ultimately           should        be
accountable              for      the proper               use of         the currencies               because         they       own
them.       AID officials                  maintain               that     increasing             demands for
accountability                  create          friction           with      the host           government           because
government          officials               view      the currencies                     as their          own.      On the
other      hand,         the      Inspector           General             contends         that      AID missions             must
maintain         full          financial           accountability                  for     the local           currencies
because      they         are      generated               from U.S.          assistance.                  Our work has

shown that                  improvements                 in local      currency        accountability              are


You asked                 us who owns the                  local     currencies         generated          from the
resale          of        title          I commodities             and those        generated          from the resale
of     title         II      donated          commodities.                Local     currencies           generated
through          title             I are owned by the host                        government.            Local     currencies
generated                 from title             II    government-to-government                    food aid         are also
owned by the host                          government.              We believe         that     because          the United
States          structures                 the assistance             as a grant            or a sale       on a
concessional                      loan     basis,        the United          States     manifests          its     intent
that       the       host          country        will      own the        local      currencies          generated         form
the assistance.                          There        are no disagreements                  between       AID and the
recipient                 countries           in this        regard.          However,         regardless          of who
owns the currencies,                           the host            country     and the United              States        decide
jointly          how they will                    be used.

The Senate                 proposed          amendment to the 1985 farm bill                              gives     the AID
Administrator                      the option            to determine             whether      local      currencies
generated             from a sale                 of commodities              are owned by the United
States          or the host                 country.           We do not           support      changing          the
ownership             of local              currencies             because     we believe          that     such a change
would          run counter                 to the general             development             strategy      of assisting
sovereign             countries              to manage their                 own resources             through      providing

technical          assistance              and helping             them build         the      financial
management institutions                          that     are necessary              for     all     aspects         of
government.              Furthermore,                 we do not          believe      that         taking        ownership
of     the    local      currency           is necessary                to resolve          the accountability
problem.           Also,      AID officials                  have said        that         changing         ownership
could        create      foreign         policy          problems,          since     recipient             governments
may see this             as infringing                  on their         national          sovereignty.

AID officials              also      told        us that          assuming      ownership            of     local
currencies            would        increase           accountability            requirements                and would
require        additional            resources            at      AID missions.              We did         not analyze
overall        mission        staffing             requirements,             but     some AID officials                     have
said       they    do not         have enough staff                     to provide          the oversight              of
local        currencies           that      they        are currently           required            to provide.

Finally,          U.S.     ownership             of     large      volumes     of     local         currencies            may
lead      to problems             similar          to those            experienced          in the        late      1960s
and early          197Os, when the United                          States     owned vast             quantities             of
local        currencies           in several             countries          (known as excess                 currency
countries).              The most notable                    of    these     was India.              At     the time,            the
United        States       had accumulated                   Indian       rupees      equal         to $687 million,
or about          9.6 percent,              of     India's         money supply.              Due to numerous
constraints,             the currencies                  were not being              spent         as fast        as they
were generated,               and the            fact     that         the United       States        controlled             such
a large        portion        of     the     Indian          money supply            became a major                 political
prob,lem.          Currently,            local          currency         generations,              expenditures,             or

year      end accumulations                 are near or exceed                  9 percent         of    the money
supply          in several         countries.            For example,            as of      the end of              1988,
local         currency       accumulations             in Costa          Rica    amounted         to 12 percent
of      the    country's          money supply.             If     these     currencies           were U.S.-
owned,         the United          States      would      control          12 percent        of Costa            Rica's
money supply.


The problem           as we see it             is one of maintaining                     proper        control        and
accountability              over      the local          currencies.             We believe            this    can be
accomplished             without       U.S.     ownership           of    the currency.                Although            the
currencies          are owned by the host                    government,             agreements           place
conditions          on the currency               use and AID is                responsible            for
reasonable          assurances          that      the currencies                are being         spent       for     their
intended          purpose.           AID recognizes              that     the    local      currencies              are
vulnerable          to fraud,          waste,      and abuse.               In its       December 1989 report
on compliance              with      the Federal          Managers'          Financial          Integrity            Act,
AID identified              inadequate          procedures              to track     host       country        owned
local         currencies          as a material           weakness.

A June 1989 AID survey                      identified           three      key weaknesses              in local
currency         monitoring.            Subsequently,              AID's        Office     of     Financial
Management proposed                   steps     to help          ensure      that     the currencies                 are
used for          the agreed          upon purposes.               First,        AID would         require           formal
and ptandard             financial          assessments           of host        country        agencies          using

local      currencies.               Second,       AID would            strengthen         host        country
reporting           requirements            and mission              verification          procedures             for
local     currencies               held    in special           accounts.            Finally,          AID would
require       audits         of     host    country        agencies         managing            the    local      currency
accounts       and receiving                funds.

We support           this      approach        because          we believe           the proper          focus          for
local     currency           accountability               should        be on assessing                and improving
the     financial           management systems                  of host       country       agencies.              The
proposed       steps         reiterate         the    internal           control        and financial
management responsibilities                          of    the host         country,        while        AID remains
responsible           for      providing         reasonable             assurance        that         the currencies
are used as intended.                      Also,      assessments             of host       country            financial
management systems                   and audits           of    local      currency        activities            could         be
funded      with      local         currencies        without           additional         strain        on existing
mission      resources.               We urge        AID management to adopt                          the Office          of
Financial          Management proposal                    as soon as possible.

Mr. Chairman,               this     concludes        my prepared             remarks.            We would         be
happy to respond                   to any questions                 you or the members may have.