Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

201. Memorandum From the Deputies Committee of the National Advisory Council for International Monetary and Financial Problems to the Council⁰

NAC Document 60–188

June 29, 1960.

SUBJECT

• Report of the NAC Deputies Committee

Introduction

The Chairman of the Council, in April, asked that a Special Committee of Deputies to the Council members be convened to discuss and make recommendations to the Council on several problems of NAC coordination of activities of U.S. lending agencies, in accordance with the Bretton Woods Agreement Act, as amended. The Deputies have held ten meetings and have reached a general consensus on the problems given in their terms of reference. These questions are:

(1) Coordination between Export-Import Bank and the Development Loan Fund

(2) The Role of the DLF in Latin America

(3) The “Dollar Option” Clause in DLF Lending Operations

(4) Dollar Repayments in DLF Loans

(5) Use of DLF Loans to finance Local Currency Expenditures

1. Coordination Between Export-Import Bank and DLF. The Deputies have considered a number of aspects of coordination between Export-Import Bank and the DLF. The majority of the Committee recommends approval of an action (or such other disposition as the Council agrees) as indicated in Appendix A.

2. Role of the DLF in Latin America. The Deputies have considered the relationship of the activities of the DLF and the Ex-Im Bank in Latin America and recommend to the Council the approval of an action (or such other disposition as the Council agrees) as indicated in Appendix B.¹

3. The “Dollar Option Clause” in DLF Lending. The Deputies held extended discussion of the proposal to make arrangements under DLF loans for a provision which would permit the DLF, under appropriate circumstances, to convert to dollars local currency receipts from payments of interest and amortization, or to use local currencies to finance exports to other areas in connection with DLF projects. This right was to be exercised if and when, in the future, the borrowing country’s situation had improved greatly through the discovery and exploitation of natural resources, improvement of production and trade, and other factors in its balance of payments which markedly increased its capacity to service loans in foreign exchange, or to finance some exports to other developing areas. Part of the problem was to specify the conditions under which the DLF might exercise the “dollar option”.

The Deputies concluded that it would be desirable for DLF to enter into “local currency use agreements”, supplemental to individual loan agreements, relating to the uses of local currencies received in payment of principal and interest on DLF loans. A draft model agreement has been submitted to the DLF Board and accepted by it.

4. Dollar Repayment in DLF Loans. The Deputies, after considering various aspects of the problem, concluded that the DLF should, in appropriate cases, make loans partially or totally repayable in dollars. It is their view that dollar repayment is not indicated for all cases of DLF loans, but that it may be required when a country has reasonable prospects for servicing dollar loans in the future, particularly where it does not receive loans at the present time from the Export-Import Bank or the International Bank. The Deputies, however, realized that it was difficult to set in advance the precise conditions under which partial dollar payment should be required or to determine in advance all of the circumstances which might be relevant. Accordingly, the paper in Appendix C² represents a general consensus of the majority of the Committee, expressed in the form of conclusions to a study paper but formal Council action is not recommended at this time.

5. DLF Loans for Local Currency Costs. The Deputies have concluded that the DLF might properly finance, with dollar loans, certain local currency expenditures in connection with loans whose foreign exchange costs are financed by the Export-Import Bank or the DLF, or, certain projects which involve primarily local expenditures but which will contribute importantly to the development of the borrowing country. Dollar financing of local currency expenditures may be necessary when local currencies cannot be supplied from non-inflationary sources by countries to which the extension of loans by the DLF would be in accordance with U.S. policies. Under some circumstances, particularly when the International Monetary Fund has agreed upon a stabilization program in the country, the financing of local currency expenditures from external resources may be required to avoid interference with the stabilization program and so adding to inflationary pressures in the country. The Deputies believe, however, that such local currency financing must be considered carefully and should take into account the willingness and ability of the country to devise and apply measures which would reduce its dependence upon foreign exchange sources for desirable investment in development projects. The general consensus of the Deputies (Appendix D)³ is expressed in the form of conclusions of the study made, but they do not recommend a formal Council action at this time in view of the difficulties in formulating a precise policy and specifying all of the necessary conditions appropriate to local currency financing.

Appendix A

COORDINATION BETWEEN EXIM AND DLF

The NAC recommends to Exim and DLF the following procedures as guidelines in their coordination activity.

(1) The division of borrowing countries into three groups as follows:

• Countries of primary interest to Exim (List A);
• Countries of primary interest to DLF (List B);
• Countries of joint interest (List C).
• Countries not listed will be treated on a case-by-case basis.

(2) To have applications from countries of primary interest to Exim directed to Exim, applications from countries of primary interest to DLF directed to DLF, and applications from countries of joint interest directed to U.S. Government Loaning Agencies—and Embassies in individual countries to be so informed. This would not preclude informal understanding in special cases between U.S. Government and applicant countries as to how particular projects or groups of projects were to be handled.

(3) To have the Exim-DLF Joint Committee recommend allocation of applications from countries of Joint Interest to each individual agency for consideration, processing, and action either individually, or on a Joint Loan basis as agreed by the Joint Committee.

(4) For Exim and DLF to prepare on a parallel basis, monthly reports to the NAC on all applications received and accepted, to show by countries, the amount, project, date received, and status of processing.

(5) For Exim to invite a senior official from the DLF staff to attend its Board Meeting when a project from a country of joint interest is under consideration, in order to complement the coordination achieved through the membership on the DLF Board of the President of Exim.

(6) To arrange, when made possible by common interest of two agencies, field trips to countries of joint interest on a joint participation basis, and to let it be known on such field trip that the joint team represents U.S. Government Loaning Agencies.

(7) To accept the principle that circumstances have arisen, and will probably arise in the future, where either in countries of primary DLF interest, or of Joint Interest, the interests of the U.S. Government may make it desirable that all or a portion of a DLF loan should be repayable in dollars. However, where such dollar repayment exists in a DLF loan, it is understood that, as a matter of U.S. Government internal policy, if problems of ability of the borrower to repay both DLF and Exim loans arise, then dollar repayments still owed to DLF will be subordinated to those due to Exim.

(8) To accept the above guidelines as flexible, with the necessary adaptation to be made for changing conditions, (including changing of country categories), as agreed by the Joint Committee, with any matters, or individual loans, where agreement is not reached, in the Joint Committee, to be referred to the NAC Deputies Committee, for review and recommendation for further action.

List A.

Countries of Primary Interest to Exim

All European countries except Greece, Spain, Turkey, and Yugoslavia.

Australia	Japan	New Zealand	Venezuela (?)
Canada	South Africa	Mexico (?)

List B.

Countries of Primary Interest to DLF

Burma	Korea	Vietnam
Cambodia	Laos	Jordan
China (Taiwan)	Nepal

List C.

Countries of Joint Exim-DLF Interest

All countries in Latin America except Mexico (?) and Venezuela (?)

Greece	Iran	Afghanistan	Philippines
Spain	Israel	Ceylon	Indonesia
Turkey	Lebanon	India	Guinea
Yugoslavia	U.A.R.	Pakistan	Liberia
		Thailand	Libya

0. Source: National Archives and Records Administration, RG 56, Records of the Department of the Treasury, NAC Documents. For National Advisory Council Use Only.
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