890F.51/10–1945

Memorandum by the Director of the Office of Financial and Development Policy ( Collado ) to the President of the Export-Import Bank of Washington ( Taylor )22

The time is fast approaching when some decision will have to be reached as to the method by which the United States Government is to provide the financial assistance which King Ibn Saud has requested to cover his budgetary deficit during the next few years. I think there is general agreement that the national interest in the American oil concessions in Saudi Arabia requires that such financial assistance be provided to the extent necessary to enable the King to maintain political and economic stability until oil royalties make the country self-sufficient. President Truman signified his agreement last May,23 and asked that the State, War, and Navy Departments formulate plans for provision of such assistance.

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At that time all concerned were impressed with the lack of precedent for financial assistance of this type by the United States Government to a foreign government. But, although the Export-Import Bank had not hitherto engaged in such operations, it was agreed that the Bank was not precluded by existing legislation from doing so, particularly since the budgetary deficit of the Saudi Government was roughly equivalent to its external trade deficit, so that loans by the Bank could be used for the most part to finance exports of American goods to Saudi Arabia.

However, those in the Department who had studied the situation closely felt constrained to point out that such loans might not be a sound banking risk. Petroleum experts agreed that the petroleum reserves in Arabia were perhaps the richest in the world, and that royalties would some day make the Government of Saudi Arabia very wealthy. But they pointed out that the market for Arabian oil would for some time to come be limited to European and Middle East countries whose currencies might not be freely convertible into dollars. Officials of the Arabian American Oil Company stated very frankly that their contract with Ibn Saud gave them the option of paying royalties in either sterling or dollars at the Company’s option, and that if their revenues from sale of oil were predominantly in sterling currencies not convertible into dollars, they would have to pay their royalties in such currencies. Thus no matter how large the King’s royalty revenues might become, they might not provide him a single dollar with which to pay interest and amortization on dollar loans made by the Export-Import Bank during the critical post-war years.

As we viewed the world trade outlook and the financial condition of sterling area and European countries last spring, the risk of such complications appeared so great that straight dollar loans to Saudi Arabia seemed to be outside the realm of sound banking practice. A great deal of time has been spent since then in concocting complex plans which would get around this problem.

Under one of these plans the War and Navy Departments would agree to buy with dollars a certain amount of Arabian oil each year, the dollar value of which the Oil Company would agree to pay in royalties to the Saudi Government, which in turn would promise to use them to service outstanding Ex-Im Bank loans. War and Navy representatives have indicated grave doubts that their Departments would actually commit themselves in advance to buy any given quantity of Arabian oil, in view of the probable objections of the American petroleum industry.

Another plan would avoid an intergovernmental loan entirely. The War and Navy Departments would pay royalties in advance to the Saudi Government on oil to be produced for their use at some indefinite future date. This involves setting aside an underground [Page 962] reserve for the War and Navy Departments, which would require legislation, create considerable technical oil production difficulties, might prove very costly in terms of interest on the public funds invested unless the oil was used fairly soon, and would not necessarily be any more acceptable to the domestic industry than an outright agreement to purchase oil.

I doubt very much that either of these plans or their several variants can be put into effect without bringing on a full dress Congressional debate on international petroleum policy. It occurs to me that we ought to re-examine the Saudi Arab financial problem in the light of the developments of the past few weeks, and see whether there is in fact anything so unique about it as to call for the desperate measures to which the planners have been resorting.

It seems clear to me that although Saudi Arabia was the first clear case to come to our attention, it is by no means the only one where inconvertibility of currencies would limit ability to service dollar loans. In fact the problem is practically world-wide, and few applicants for Export Bank loans outside Latin America would be any better risks than Saudi Arabia in a world of inconvertible currencies and scarce dollars. In such a world, Saudi Arabia would in fact be one of the better risks, because there is at least a fair chance that ten years from now, if not sooner, the United States will have to import Arabian oil to supplement domestic supplies.

Of course we all earnestly hope that we will not have to face a world of inconvertible currencies indefinitely. In my opinion there is good reason to believe that the present discussions with the British24 will bring us much closer to the establishment of free convertibility of currencies on current transactions, including the servicing of dollar loans.

I should like to suggest, therefore, that in considering a financial assistance program for Saudi Arabia, it is no longer appropriate to seek a specific guarantee that the Saudi Government will have dollar revenues sufficient to cover service on loans, so long as it is clear that that Government will have adequate overall foreign exchange revenues. Unless the petroleum experts are entirely wrong, I think there can be no question as to the adequacy of Saudi Arabia’s foreign exchange revenues for repayment of loans, over a reasonable period of time, beginning in about 1955.

The latest estimates in the Department indicate that the expenditures of the Saudi Government necessary to maintain political and economic stability will exceed revenues by about $11,000,000 in 1946, $7,000,000 in 1947, $5,000,000 in 1948, and $2,000,000 in 1949, or a total [Page 963] of $25,000,000 for the four-year period. By 1950 the budget should be in balance, and thereafter a surplus should appear. However, during the four succeeding years, the Saudi Government will have to purchase and return to the U.S. Treasury about $10,000,000 worth of silver bullion lend-leased during the war.

It is believed that by the year 1955 the Saudi Government could begin substantial amortization payments on its dollar obligations. In fact, if, as petroleum experts believe, production of Arabian oil has reached 100,000,000 bbls. per annum by 1955 (3% of estimated world production in that year), the Government of Saudi Arabia should have surplus revenues over and above total expenses equivalent to at least $3,000,000 per annum.

It is interesting to note also that this surplus might be entirely in the form of dollar exchange even if sterling were inconvertible, provided that only 30,000,000 barrels out of the 100,000,000 barrel production could be imported into the United States (such imports would be only 2% of total U.S. consumption). Under such circumstances, the oil company could hardly refuse the King’s request to pay the royalties on that amount of oil in dollars; such royalties would total nearly $7,000,000, of which the King would need no more than $4,000,000 for essential purchases in the United States, leaving $3,000,000 in dollar exchange for amortization of dollar debts.

My staff will provide further analysis along these lines shortly. At the moment I should like to call your attention to the fact that Colonel Eddy, American Minister to Saudi Arabia, will be in Washington for the next two weeks. I suggest we make every effort during that time to formulate a definite proposal which can be presented to King Ibn Saud before December 1 of this year, so that any negotiations which may be necessary over the terms or arrangements for supervision of expenditures can be completed before January 1, 1946.

  1. Drafted by Paul F. McGuire, Assistant Chief of the Division of Financial Affairs. Marginal notation by Richard H. Sanger of the Division of Near Eastern Affairs: “This plan of McGuire’s was presented to Taylor on Oct. 19 by Eddy, Henderson, Sanger and McGuire. It met with a favorable reception, and the Bank is working up a draft of an agreement.”
  2. See Mr. Grew’s memorandum of May 23 to President Truman, p. 900.
  3. On financial and trade subjects; for documentation, see vol. vi, pp. 1 ff.