215. Memorandum From the Executive Secretary of the Department of
State (Eliot) to the
President’s Assistant for National Security Affairs (Kissinger)1
2
Washington, January 25, 1972
Subject:
- Economic Aid Policy for Pakistan and India
At the SRG meeting of January 19 we were
asked for recommendations on our aid policy for Pakistan and India.
Joint State-AID recommendations are as
follows (addendum provides background and additional rationale):
PAKISTAN
Rice Export
Follow up as appropriate on our approval of Bhutto’s request for permission to export 300,000 tons
of low quality rice which is now surplus in West Pakistan as a result of
interruption of normal inter-wing trade. In this connection we have
already authorized Embassy Islamabad to offer to assist in meeting
foreign exchange costs of moving part of this surplus rice to
Bangladesh, providing Bhutto can
work out such an arrangement with Bangladesh authorities. (Bhutto has already publicly offered
rice to the East; we are suggesting that he follow up with an offer of
humanitarian assistance through the UN.)
PL–480
Conclude current negotiations for PL–480
agreement of 300,000 tons of wheat and 25,000 tons of edible oil, valued
at $27 million. This will help meet the immediate need for food and
budgetary help.
Debt Deferral
Adopt a forthcoming attitude at the February 22 meeting of
Aid-to-Pakistan Consortium with regard to
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the GOP request
for further debt deferral. Pakistan’s foreign debt position is sharply
deteriorating and relief is required urgently.
New Development Aid
Indicate to the GOP our readiness to act
in concert with the Aid-to-Pakistan Consortium in providing resumed
financial support for Pakistan’s development effort, as soon as an
outline of Pakistan’s revised development plan and strategy is
available. The IBRD tentatively
envisages a Consortium pledging session in July. However, Pakistan’s
financial situation is such that some FY
72 commodity lending may prove necessary for short-term financial
support short of preparation of a full development strategy.
INDIA
Aid Suspension
Hold in abeyance for the time being any decision with regard to the
suspension of $87 million of the FY 71
pipeline but review the suspension at frequent intervals as Indian
intentions become clearer.
PL–480
Conclude an agreement with the GOI if, in
spite of its initial negative reaction, it finally decides to pick up
our outstanding offer to substitute 50,000 tons of vegetable oil to
replace some of the wheat under last year’s PL–480 agreement, which we made in order to stabilize the
distressed US soybean oil market.
If this agreement is reached, consider, in light of US market conditions at the time, whether we
wish to proceed with the negotiation for a further 150,000 tons of
vegetable oil under a new PL–480
agreement which was pending at the outbreak of the Indo-Pakistan
war.
Leave in abeyance for the moment the question of 30,000 bales of cotton
which we agreed to permit the Indians to buy under a letter of credit
last October in anticipation of (but without formal commitment to) such
an amount in a new PL–480 agreement.
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Trade and Investment Programs
Give a go-ahead to USG agencies,
administering programs primarily for the benefit of US trade and investment (Export-Import Bank,
Overseas Private Investment Corporation, and Commodity Credit
Corporation). These agencies have held in abeyance programs of loans,
guarantees, and credits which US
commercial concerns are requesting in order to safeguard Americans’
interests and enhance the US firms’
competitive position in the Indian market. We think they should now be
instructed to apply normal commercial criteria to these programs.
New Development Aid
Consider the extension of new development aid to India at such time as a
new relationship with India is worked out.
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Attachment
Paper
Washington,
undated
ECONOMIC AID TO INDIA AND PAKISTAN
Background and Rationale
PAKISTAN
1. Pipeline Aid
The aid pipeline of undisbursed AID
funds for Pakistan is $56.7 million ($29.9 million in commodity aid
and $26.8 million in projects). Of this, $35.5 million was earmarked
or obligated for East Pakistan lending; $21.2 million for West
Pakistan.
2. PL–480
We have authorized our Mission in Islamabad to conclude a PL–480 Title I agreement for Pakistan of
wheat and edible oil valued at $27 million. This agreement, the
first for West Pakistan since before the fighting in East Pakistan
in March 1971, will help meet West Pakistan’s immediate need for
food and budgetary assistance. In concluding the agreement we have
also authorized a waiver of export limitation, permitting Pakistan
to seek export markets for its surplus rice, and we have informed
President Bhutto that if
arrangements could be made to move part of the rice to former East
Pakistan under the UN relief effort,
we would be prepared to assist in paying shipping costs of such
rice.
3. Consortium Debt
The World Bank has called a meeting of heads of delegations of the
Consortium on February 21, 1972, primarily to discuss Pakistan’s
foreign debt position which is onerous and worsening. Currently
Pakistan is committed to repay foreign loans amounting to over 25
percent of its earnings from exports as computed before the East
Wing broke away.
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It is unrealistic, financially and politically, to expect Pakistan to
resume its international debt payments in full on February 1 the
expiration date of the nine month unilateral moratorium. We should
press for recognition of this by Consortium members. In last fall’s
Consortium discussion, a $90 million annual debt deferral package
was considered and rejected (supported by the US). Pakistan is now seeking a higher level. However,
Pakistan is likely to recognize that any request for complete
deferral will not be accepted by the Consortium and may settle for
loss than the de facto annual rate of $120 million of the current
unilateral moratorium. We should help the World Bank lead the
Consortium members to an appropriate compromise. Alternatively,
since there is a trade-off between the amount of debt relief and the
duration of the debt relief timetable, we could seek agreement on a
short (2 or 3 month) full extension while the matter of longer term
debt rescheduling is being arranged.
4. New Development Aid
Mr. Peter Cargill, Chairman of
the IBRD Aid-to-Pakistan
Consortium, has just completed a short visit to Pakistan. He
outlined to GOP officials the
importance of prompt revision of Pakistan’s national development
plan and accompanying report. Bank President McNamara will visit Pakistan
beginning January 29 and his visit will serve to reinforce Bank
reviews on the need for forthright economic decisions by the GOP (including exchange reform) as a
prelude to resumption of development aid to Pakistan by Consortium
members. Cargill has suggested
to Pakistan that the Consortium could not meet on general aid until
Pakistan was able to present its revised development strategy and
FY 1973 budget. (This would not
be before July.) Pakistan hopes for earlier action on general aid.
We believe an earlier date is both possible and desirable.
We have suggested to GOP officials
that they consider asking for an earlier Consortium meeting (perhaps
as early as March) at which they would present a report of economic
decisions taken and would outline basic elements
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of the FY 1973 development strategy (as opposed to a detailed
budget which could not be presented for several months). If the
GOP agrees to make such a
presentation, we should urge the World Bank to call a meeting, and
should mobilize support among other nations.
At such a proposed meeting we should be prepared to announce a US commodity loan and should urge: (a)
others to do the same, including the World Bank, and (b) provision
of a standby credit by the IMF: The
magnitude of a US commodity loan
could be $50 million (this would compare with about $45 million
which would have been made available for West Pakistan imports under
the loan contemplated but not made in FY 1971Y.
INDIA
1. Pipeline Aid
$87.6 million in non-project aid that had not been finally committed
to suppliers and banks was suspended on December 6 and remains
suspended. Not covered by the suspension is $135 million of prior
years’ aid, consisting of about $105 million in non-project aid
already covered by irrevocable bank and suppliers’ commitments and
about $30 million in project aid.
2. Aid Suspension
Hold in abeyance for the time being any decision with regard to the
suspension of $87 million of the FY
71 pipeline but review the suspension at frequent intervals as
Indian intentions become clearer.
We must recognize, however, that a decision to continue the
suspension could carry certain costs to the US, including:
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[1 page not declassified]
soybean oil market, whether we should proceed with negotiations for
an additional sale of 150,000 tons under a new PL–480 agreement, which had been cleared
within the US Government and had been
discussed in general terms with the Indians before the outbreak of
hostilities on the subcontinent.
If we do decide it is in our interest to move this additional 150,000
tons of vegetable oil, we will also have to consider what
disposition to make of the 30,000 bales of cotton for which we
issued a reimbursable letter of credit to the Indians last October
in the anticipation that at least this amount of cotton would be
included in a new PL–480 agreement.
(The Indians have not purchased under this letter of credit and are
not likely to do so unless it appears we will include this cotton in
a new PL–480 agreement so that the
high US price could be compensated by
concessional terms.) Since we now have a tight cotton situation, it
would probably be in our interest to withdraw last October’s letter
of credit for the 30,000 bales. We should for the present, however,
hold a decision on this in abeyance as we may wish to include an
offer of cotton as inducement to the Indians to take the additional
vegetable oil.
4. Trade and Investment Programs
ExIm Bank, OPIC, and CCC have held their Indian programs in
abeyance since the outbreak of the war, while awaiting positive
political guidance from the Department of State. These programs are
designed for the short and long term benefit of US commercial interests, and we think it
would therefore be against our interest for them to be held up
further. Thus we recommend that such agencies be advised henceforth
to apply normal commercial criteria in regard to decisions about
their India programs. Specific examples of programs involved
are:
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Export-Import Bank—The Bank has recently
denied request backed by US
commercial interests operating in India, to extend the period of
validity of a line of credit for the importation of industrial raw
material and components from the United States.
Overseas Private Investment
Corporation—This agency wishes to go ahead with investment
guarantees for potential investors in India and to pursue its
programs of lending US-owned rupees,
both directly and indirectly (through Indian lending institutions)
to US firms operating in India in
order to give them some competitive advantage over other firms.
Commodity Credit Corporation—This agency
has applications from US exporters
for medium-term credit to finance commercial sales of wheat to
India. USDA would like to approve
these applications in order to ensure the US a reasonable share of the Indian commercial market
following India’s decision no longer to purchase wheat on
concessional terms (PL–480 Title I).
Indian imports are a major factor in the economical management of
our wheat surplus. CCC credits are
our mechanism for providing terms competitive with those offered by
India’s other major commercial suppliers of wheat (Australia and
Canada).
