Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

317. Memorandum From the Director of the Bureau of the Budget (Schultze) to President Johnson¹

Washington, October 29, 1965.

SUBJECT

• Loan for the Government of Colombia

In the attached memorandum² the AID Administrator has requested your approval to sign a loan of $65 million for the Government of Colombia by November 1, or as soon thereafter as negotiations are completed.

This is the first such aid commitment submitted on an individual basis for your approval. We will shortly recommend to you procedures to provide for your review of the AID program at three critical points:

(a) The approval of a country program in the budget process;

(b) Approval of specific commitments ready for execution; and

(c) Regular reporting of progress on the country’s self-help efforts and actions taken by AID in this process.

AID has spent almost a year convincing the Colombians that we are serious about self help:

• • we have entered into no loan agreements with them so far this year,
• • we even withheld a payment last January of $10 million under the previously approved 1964 loan,
• • negotiating together with the IMF and the World Bank, AID now is getting written commitments from Colombia that promise some real progress.

Actions already taken

In fact, some of the toughest measures have already been executed. 1. In September, Colombia devalued its currency by a substantial percentage. The IMF, World Bank, and AID all think this devaluation will be successful in eliminating the biggest single drain on the Colombian economy, particularly in the private sector. All three agencies will be watching the results closely. 2. The Colombians have imposed a 20 percent surcharge on income tax, and 3. They have effectively more than doubled the export tax on coffee, to change a heavy government subsidy into a self-sustaining operation.

Commitments and controls on future action

The loan agreement won’t be simply for measures already taken. AID will only disburse the $65 million in quarterly segments, $20 million on signing and $15 million each in February, May, and August. And each release will be made only if a review of performance indicates that Colombia is making good progress in a number of important areas, including:

• —a flexible exchange rate policy and a liberalized trade policy
• —a non-inflationary fiscal, monetary, and wage policy
• —tax improvement measures which should help support a 10 percent increase in public investment
• —new program for agricultural development and reform
• —an expanded program of primary education financed at the local level.

The funds will be used to finance imports from the U.S. Secretary Fowler is satisfied with the provisions of the loan from a U.S. balance of payments point of view. Special conditions will be attached which have the effect of neutralizing the balance of payments impact in 1965.

Other contributors

In addition to AID, the World Bank and the IMF are contributing $130 million. Their commitments will also be tied to the same self-help efforts that the U.S. is insisting upon. The three agencies (AID, IMF, IBRD) have worked out a common approach and joint arrangements to make this work.

I recommend that you approve this loan request.³

Charles L. Schultze

1. Source: Johnson Library, National Security File, Memos to the President, McGeorge Bundy, Vol. 16. Confidential. Forwarded to the President as an attachment to a memorandum from Bundy, October 30, who commented: “Charlie Schultze’s memorandum seems to me first-rate and I fully concur with it.” (Ibid.)
2. Attached but not printed.
3. Before approving the loan the President asked for further comment from Oliver and Mann. Oliver replied: “A democratic, confident Colombia is of the greatest importance to our strategic and political national interests; and a new program, sound on development merits, is also the best guarantee we can supply that Colombia will achieve orderly, constitutional transfer of power in the 1966 elections.” (Telegram 630 from Bogotá, November 2; Johnson Library, National Security File, Memos to the President, Mc-George Bundy, Vol. 16) Mann wrote: “If we fail to come through in a timely way with our end of the bargain, the progress which has been made could begin to come unraveled because of political pressures in Colombia.” (Memorandum from Mann to the President, November 2; ibid.) Both reports were forwarded as enclosures to a memorandum from Bundy to the President, November 2. Johnson approved the loan “with reluctance, reservations and considerable misgivings—but with the understanding that it results in no loss in bal of pay this yr & that Oliver, Vaughn & Mann, Schultze, follow this day to day adm. & keep us informed.” (Memorandum from Bundy to the President, November 2; ibid.)