Foreign Relations of the United States, 1961–1963, Volume II, Vietnam, 1962

210. Telegram From the Embassy in Vietnam to the Department of State¹

Saigon, June 6, 1962—10 a.m.

1564. Task Force Viet Nam. Reference: Aidto 999, May 24.²

This message represents Task Forceʼs considered views on memorandum handed US reps by President Diem at Dalat (despatch 476)³ and a communication received May 28 from Secretary Thuan. The latter communication (pouched)⁴ provides additional data in support of GVN memorandum. In brief, it predicts a deficit in central government budget for CY 1962 of 4.8 billion piasters which attributed as follows: 1.7 billion to military budget; 3.17 billion to civil and paramilitary forces budget. Argument is made that deficit arises primarily because of failure to dispose of US economic aid and difficulties of importers to use such aid because of price factors resulting from limited world wide procurement requirements under USAID. Memorandum suggests a $25 million cash grant (presumption is that such a cash grant would have no limited procurement strings attached to it). Of this $25 million (to be disposed of within this calendar year) 5 million dollars would be spent for freight payments on foreign flag vessels, 12 million dollars for industrial machinery imports, and 8 million dollars for a variety of raw materials of which major item is fertilizer.

Two GVN written communications, plus several informal discussions, point to another serious negotiation with GVN on financial matters. We have given much thought to position we should take. Before describing effect of present economic and financial situation SVN on counter insurgency effort and making recommendations thereon, several factual errors in GVN memorandum of May 9 need correction:

1. GVNʼs balance of gold and dollar reserves as of March 31, 1962 was 164,450,000 dollars (figures given in GVNʼs memorandum failed to include about 20 million dollars in gold).

2. Average yield on US-financed imports is approximately 74 piasters per dollar rather than 82.

3. The contention that GVN has carried out all financial measures recommended in Staley-Thuc Report⁵ is exaggerated. While the 5/7 tax on foreign exchange (25 piasters per dollar) and revised scale of customs duties have been beneficial steps, there still remains much that can and should be done by GVN to increase its revenues. Revenues from taxes on real estate and income, for example, are up 16 per cent over last year, but should be considerably higher. (While rate of 60 piasters per dollar, plus customs duties, is not as high as it should be: we do not think time is right to press for another increase in foreign exchange taxes. While this should be long range objective, present business, political, and psychological conditions here make it inadvisable to press for it now.) GVN has this year, for first time, been confronted with necessity of major deficit financing. GVN estimates a deficit of approximately 4.8 billion piasters (on a total budget of 23.7) for this year. (Only earlier estimate was in the order of 3.5 billion piasters.)

Two issues are presented: (1) concerning the level of GVN foreign exchange holdings, and (2) the necessity to finance the piaster budget to wage a successful campaign on all fronts.

With regard to question of maintaining about $200 million level of foreign exchange reserves, GVNʼs position is that, in adopting Staley-Thuc Report, US and GVN both agreed that such level should be maintained by mutual measures. We have already explained to GVN that such factors as increase in list of US-financed imports (petroleum, sugar, cotton yarn—23 million dollars), dollar expenditures by US forces for military construction (15-20 million dollars), probable revival of GVN rice exports during second half of 1962 (5 million dollars) will reverse recent trend and probably restore GVNʼs reserves to region of 200 million dollars by mid-1963. This assumes that GVN will not repeat its unusually high drawings on foreign exchange reserves as during last half of 1961. GVN foreign exchange position is not, then, an acute economic or financial problem.

It is, however, a real psychological and political factor on GVN side.

With respect to piaster shortage, there will doubtless be a requirement for major deficit financing this year. Our original US-GVN calculations were that GVN budget of 23.4 billion piasters could be financed by: GVNʼs own revenues of 11 billion piasters; US imports amounting to 165 million dollars, including PL 480 (11 billion piasters); bank borrowing of 1.5 billion piasters. However, failure GVN economy to absorb more than approximately 135 million dollars US imports has resulted in shortfall govt income. Several factors are responsible for this situation, chief of which are sharp rise in prices resulting from monetary reform, on top of price increases resulting from limited world wide procurement policy, and insecurity in countryside.

We are not certain whether GVNʼs conclusions that removal of limited world wide procurement restrictions on aid dollars would in fact result in sales of an additional 25 million dollars of foreign exchange. It would be helpful if Washington could give exemptions on certain selected commodities this year to test GVN assumption. This, we think, could be done without creating a precedent for other countries, in light of SVNʼs emergency situation.

We recognize that in purely economic and financial terms, GVN can and probably should proceed to solve their piaster shortage through central bank financing of the budget deficit, which could probably be done without major price dislocations because of current slow-down in business activity and reduction in velocity of currency in circulation.

We not unaware of GVN proclivity to pass the buck to Uncle Sam, but we do not believe that standing pat in present situation will be conducive to winning the struggle here, despite the lack of an airtight economic rationale on GVN side. The US has made a very large investment of resources, manpower and prestige in this struggle. We need now a negotiating position from which to gain the largest possible contribution by the GVN from its own resources which will be both sound and timely and will keep up the momentum. If we do not come up with such a proposal, believe result will be either a slowdown or an effort to “sweat it out of the peasants” (e.g., failure to pay for labor, supplies, care for Montagnard population, civic action, etc.).

In addition to regularly budgeted items, there constantly arise in this fluid situation special requirements and special opportunities, requiring program changes or additional funds. For example, unforeseen requirements for strategic hamlets, “clear and hold” operations, relief and resettlement of many thousands of Montagnards who have flocked to government for protection, military civic action programs, etc., all present additional piaster requirements. They are tremendously important in counter-insurgency effort. US policy aims at speed-up in getting necessary supplies and incentives to Vietnamese peasants in order to enable them to defend themselves. We have sought a method to apply counterpart funds directly to rural rehabilitation projects. In the overall shortage of piasters for budgeted requirements, however, this has been difficult to achieve as it involves robbing Peter to pay Paul, although we have succeeded in getting one such agreement implemented.

Our considered recommendations for meeting current problem are as follows:

1. A waiver of limited worldwide procurement for industrial machinery. This is a category in which GVN claims that imports have fallen because of price factors stemming from limited worldwide procurement, particularly for small orders which are typical here. It is a fact that licensing activity for industrial machinery has dropped from an average annual rate of about 20 million dollars a year to an annual rate of 6 million during 1962. GVN estimates that an additional 12 million dollars of industrial machinery would be imported this year under conditions of unlimited worldwide US-financed procurement. While we are not certain that this would in fact result, we believe it desirable to test the GVNʼs assumption, and we believe this could be done without setting a precedent in view of the situation of active insurgency prevailing here.

2. Purchase from Viet Namʼs National Bank approximately 730 million piasters for US direct use (as agreed with GVN) for counterinsurgency operations where timely action is vital. This would produce a piaster fund enabling US to take direct action, where necessary, in order to apply prompt aid measures in US interests, and would, of course, additionally contribute 10 million dollars to GVNʼs foreign exchange reserves. These funds would be from allotments currently available to USOM in Saigon—i.e., this would not be additional aid to that already made availa61e by Washington. We consider this a justified extraordinary action for this year. En the first instance, when we formulated the current yearʼs budget, the full measure of the cost of the counterinsurgency effort was not foreseen; thus adequate provision was not made for screening out other items of expense. Secondly, the fall-off in demand for imports has served to blunt the anticipated increase in revenues deriving from import duties. If this proposal is approved, we will make a strong point of the fact that the GVN cannot count on this kind of action being repeated in future years.

3. In return, we would require an understanding from the GVN to finance from their own resources the remainder of the central government budgetary funds. We would urge measures to increase internal taxes, both assessments and collections, particularly on real estate and income. (The GVN record in this respect is improving—by increase of 16 per cent during this year—and we have reason to believe that the GVN intends to press forward in this field.) Deficit financing would obviously be the way to make up the difference, and we would require a firm undertaking from GVN to do so.

Request Washington reaction as soon as possible.

Nolting

1. Source: Department of State, Central Files, 811.0051K/6-662. Secret. Repeated to CINCPAC for Polad.
2. Aidto 999 reported that AID declined to deviate from the recommendations of the Staley-Thuc report of August 1961 on aid levels. (Ibid., 811.0051K/5-2462)
3. See footnote 5, Document 203.
4. Not found.
5. See the letter transmitting the report in Foreign Relations, 1961–1963, vol. I, Document 93.