Israel: U.S. foreign assistance.

SUMMARY

Israel is not economically self-sufficient, and relies on foreign assistance and borrowing to maintain its economy. Since 1985, the United States has provided $3 billion in grants annually to Israel. Since 1976, Israel has been the largest annual recipient of U.S. foreign assistance, and is the largest cumulative recipient since World War II. In addition to U.S. assistance, it is estimated that Israel receives about $1 billion annually through philanthropy, an equal amount through short- and long-term commercial loans, and around $1 billion in Israel Bonds proceeds.

Israeli Prime Minister Netanyahu told a joint session of Congress on July 10, 1996, that Israel would reduce its need for U.S. aid over the next four years. In January 1998, Finance Minister Neeman proposed eliminating the $1.2 billion economic aid and increasing the $1.8 billion in military aid by $60 million per year during a 10-year period beginning in the year 2000. The FY1999, 2000, 2001, 2002, and 2003 appropriations bills included cuts of $120 million in economic aid and an increases of $60 million in military aid for each year.

U.S. aid to Israel has some unique aspects, such as loans with repayment waived, or a pledge to provide Israel with economic assistance equal to the amount Israel owes the United States for previous loans. Israel also receives special benefits that may not be available to other countries, such as the use of U.S. military assistance for research and development in the United States, the use of U.S. military assistance for military purchases in Israel, or receiving all its assistance in the first 30 days of the fiscal year rather than in 3 or 4 installments as other countries do.

In addition to the foreign assistance, the United States has provided Israel with $625 million to develop and deploy the Arrow antimissile missile (an ongoing project), $1.3 billion to develop theLavi aircraft (cancelled), $200 million to develop the Merkava tank (operative), $130 million to develop the high energy laser anti-missile system (ongoing), and other military projects. In FY2000 the United States provided Israel an additional $1.2 billion to fund theWye agreement, and in FY2002 the United States provided an additional $200 million in anti-terror assistance.

For FY2004, the Administration requested $480 million in economic, $2.16 billion in military, and $50 million in migration resettlement assistance.

[For more information, see CRS Issue Brief IB82008, Israel-United States Relations.]

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MOST RECENT DEVELOPMENTS

Globes, the Israeli economic journal, reported in its August 21, 2003, issue that the United States and Israel signed an agreement on terms for the loan guarantees that stipulates that the United States can deduct an amount from the loan guarantee equal to the amount Israel spends in the occupied territories. A similar provision appeared in the 1993 loan guarantees (Title VI, P.L. 102-391) and in the FY2003 supplemental appropriations law (P.L. 108-11, April 16, 2003). The press reported on August 5, 2003, that Administration officials were considering reducing the amount of loan guarantees available for Israel because Israel was building a wall in the West Bank. The funds in P.L. 108-11 are in addition to funds for Israel in P.L. 108-7, the omnibus appropriations law signed on February 20, 2003, that included $2.1 billion in military grants, $600 million in economic grants, and $60 million in refugee assistance for Israel for FY2003.

BACKGROUND AND ANALYSIS

Since 1976, Israel has been the largest annual recipient of U.S. aid and is the largest recipient of cumulative U.S. assistance sinceWorld War II. (1) From 1949 through 1965, U.S. aid to Israel averaged about $63 million per year, over 95% of which was economic development assistance and food aid. Amodest military loan program began in 1959. From 1966 through 1970, average aid per year increased to about $102 million, but military loans increased to about 47% of the total. From 1971 to the present, U.S. aid to Israel has averaged over $2 billion per year, two-thirds of which has been military assistance. Congress first designated a specific amount of aid for Israel (an "earmark") in 1971. Also in 1971, economic assistance changed from specific programs, such as agricultural development, to the Commodity Import Program (CIP) for purchase of U.S. goods. CIP ended in 1979, replaced by largely unconditional direct transfers for budgetary support. The 1974 emergency aid for Israel, following the 1973 war, included the first military grant aid. Economic aid became all grant cash transfer in 1981, military aid became all grant in 1985.

Beginning in the mid-1970s, Israel could no longer meet its balance of payments and government deficits with imported capital (gifts from overseas Jews, West German reparations, U.S. aid) and began to rely more on borrowed capital. Growing debt servicing costs, mounting government social services expenditures, perennial high defense spending levels, and a stagnant domestic economy combined with worldwide inflation and declining foreign markets for Israeli goods pushed the Israeli economy into a near crisis situation. The "unity" government of 1984, cut government subsidies, froze wages and prices, raised taxes, and took other measures to restore the economy. Major economic indicators improved through the next decade, but the economy began to falter again in the 1990s and remains stagnant.

Current U.S.-Israel Aid Issues

Wye Agreement Supplemental Aid

In late 1998, Israel requested $1.2 billion in additional U.S. aid to fund moving troops and military installations out of the occupied territories as called for in the October 23, 1998 Wye agreement. Following the Knesset (parliament) vote in December to hold new elections in May 1999, Israel put the peace process and the withdrawals on hold. In February 1999, the Administration requested $600 million in military aid for Israel for FY1999, and $300 million in military aid for each fiscal year 2000 and 2001, to implement the Wye Agreement despite the fact that Israel was not completing the called for withdrawals. The President vetoed H.R. 2606, the FY2000 foreign operations appropriations bill, in part because it did not include the Wye funding. On November 29, 1999, the President signed the consolidated appropriations bill, H.R. 3194 (P.L. 106-113), which included, in Division B, passage of H.R. 3422, the foreign operations appropriations bill. Title VI of H.R. 3422, introduced in the House on November 17, 1999, included the $1.2 billion Wye funding for Israel.

According to a State Department report presented to Congress in late October 1999, the Wye funding was intended to be used as follows (in millions of dollars):

 
Israel Defense Force Redeployment 
  Relocate IDF Training Areas:      90 
  Relocate One Armored Division:    95 
  Relocate Brigade Training Area:   15 
                        Subtotal:   200 
 
Counter Terror 
  Light Surveillance Aircraft:              50 
  Explosive Detection and Identification:   85 
  Armored …