890F.51/4–2246: Telegram

The Acting Secretary of State to the Chargé in Saudi Arabia (Sands)

114. Legs 110, Apr 22.16 Saudi Minister called at Dept Apr 24 to ascertain possibility modification certain provisions draft loan agreement. He was told that any modifications would have to be passed upon by Bank’s Board of Directors, and that Dept could not speak for Bank. However, it was informal opinion of Dept financial officers present that:

Article VII was never intended to preclude uncontrolled expenditure of oil royalties in excess of amounts due Bank in any given year. Par 2 Art VII meant only that SAG must not pledge oil royalties as security for loans from third parties without Bank’s approval.
It was not impossible that some satisfactory arrangement for handling interest payments could be worked out.
If loan for consumers’ goods small and limited to purchase one or two commodities, Bank’s supervisory activities under Article III would be minimum. For example, if agreement limited to financing 40,000 tons wheat and 300 trucks, entire loan contract could be reworded and be very simple. However, Bank would probably not be prepared to modify supervisory provisions on capital goods and technical services for development projects. Such provisions standard for development projects all countries. Bank loans money for only such development work as it believes sound and useful.
Minister informed that developments since draft agreement approved by Bank in January made it doubtful Bank would now offer loan for general financial assistance in amount originally offered. Oil royalties of at least $12,000,000 now appeared assured for year 1946, against $6,000,000 estimate used in estimating $11,000,000 deficit on which original offer based. Instead of estimated deficits for years 1947 and after, surpluses appeared probable due to greatly increased royalty probabilities. Depts original estimates upon which [Page 744] it based its recommendations to Bank which Bank accepted were considered to provide liberally for SAG essential requirements, and unless SAG could provide proof of larger essential requirements, Dept would probably not now be able recommend more than $5,000,000 loan for year 1946, particularly in view greatly increased demands on limited Bank resources for war-devastated countries. Although no budgetary assistance now appeared necessary after 1946, needs could be reexamined from time to time. Offer of $5,000,000 for development purposes would probably still stand, however.
Also explained that to avoid competition with new World Bank, Eximbank might not now be able to offer interest as low as 8 per cent, although Dept hopeful original interest offer could be maintained if loan concluded in near future.
In summary, Minister given to understand that Dept and Bank would probably give favorable consideration to request for loan of about $5,000,000 for procurement one or two major SAG requirements during 1946 such as wheat or trucks. Entirely new agreement might be drafted, terms of which might be much simpler than those of draft agreement. Bank might be willing to consider special arrangements for handling interest. Shorter repayment period such as 5 years would probably be welcomed if SAG desired, and would simplify interest problem. Portions of original agreement relating to $5,000,000 line of credit for development might be used for separate agreement, with royalty pledge provisions modified, supervisory provisions unchanged, special interest arrangements to be attempted. Interest basis might have to be higher than 3 per cent, but of course no higher than applicable to other countries under similar circumstances. All information subject to confirmation by Bank. Minister should discuss any definite proposals SAG might have directly with Bank officials.
You may inform MinFinance also Aramco.

  1. Not printed; it reported that commercial banks were unwilling to make a loan to the Saudi Arabian Government and mentioned the possibility that the Government might wish to reopen discussions with the Export-Import Bank on conditions for a loan (890F.51/4–2246).