NAC Files, Lot 60 D 137
Memorandum by the NAC Staff Committee to the National Advisory Council
NAC Doc. No. 1081
[Here follows a table of contents. A revised summary of conclusions and recommendations initiated the paper (pages 1–3). The document proper was divided into five parts as follows: Part I, Outline of Proposed Foreign Assistance Programs, pages 1–7; Part II, Grant Assistance in Relation to the Levels of Gold and Dollar Reserves of Recipient Countries, pages 8–15; Part III, Counterpart Policy, pages 16–20; Part IV, Loans and Grants, pages 21 and 22; and Part V, Increase in Export-Import Bank Lending Authority, pages 23–27. The text of Parts I–III follows the table of contents.]
relation of loans and grants in foreign assistance programs
1. European Countries
For the past two years the Council has recommended that economic assistance to Europe should be on a grant basis. The fact that our assistance in the coming period must be viewed essentially as part of the military effort would suggest even more strongly that this policy should be continued for 1952.
2. Underdeveloped Countries
The problem of analyzing the relative roles of loans and grants in the proposed programs in the underdeveloped areas, especially in the [Page 1577] Middle East, South and Southeast Asia and Africa, is exceedingly difficult because of the predominantly political reasons for pushing forward programs of this magnitude at the present time. To some extent this political reason may justify a larger grant component in the total program than would otherwise be the case.
While the present program anticipates an appropriation request for only one year, it is to be regarded as an initial step in a longer-range program for the development of these areas. At present this long-range program has not been fully developed, and considerable time will have to be given to its planning and formulation, both in the recipient countries and in the U.S. Government. If the program were intended for a single year, it would be easier to decide the extent to which it can be financed on a loan basis and to what extent grants may be necessary. The prospective amounts would be more definite and the capacity of countries to repay could be more adequately judged in terms of their present balance-of-payments prospects. With a larger and less definite program extending over a number of years, the uncertainties in evaluating the relevant factors are multiplied considerably, so that it would not be prudent to determine, at this time, the relative roles of loans and grants for the entire program.
Some of the projects and programs for economic development which will be viewed by the recipient countries as of greatest importance for their economic development will be for projects and programs of the type which lend themselves to normal international lending operations by the established institutions, i.e., the Export-Import Bank and the International Bank. Where the projects are of this type and there is reasonable ability to service loans, they should be financed through the established agencies on the usual terms and conditions.
Certain other projects or programs which are of the predominantly technical assistance character,1 or programs for advancing health, education, or other objectives which do not result in an immediate increase in the prospective ability to service loans but which are regarded as essential for economic development, had best be treated on an outright grant basis. While it might be argued that the countries themselves should be willing, if they have the ability to service loans, to finance some of these programs on a loan basis, it is recognized that programs of this sort do not lend themselves to the normal type of banking operations as readily as do programs for transportation, public utilities, or industrial plants of the types which the banks have in time past financed. Where it is deemed desirable on political grounds to undertake such programs, it would be appropriate to finance them [Page 1578] on a grant basis. Moreover, certain related projects, while not of strictly technical assistance character in that they require larger proportions of materials, may be pushed at this time in terms of the general character of the program and as necessary adjuncts to the technical assistance or STEM programs. In such cases grant assistance might also be appropriate.
It is extremely difficult at any time to estimate the ability of foreign countries to service debt. While studies of the balance of payments may indicate what the present position of the country is, the projection of balance of payments for any considerable period is, at best, hazardous. Since the term of a loan is frequently 20 to 30 years, it is obviously impossible to predict with any degree of assurance what the debt servicing capacity of a country will be throughout the life of the loan. Practical judgment must be made in terms of the general prospects of the economy under consideration and the course of its internal financial and economic situation as well as its prospects of realizing foreign exchange through the sale of goods and services. At the present stage of world development with rapidly shifting trade patterns, changes in reserves and shifting prices, prediction becomes even more difficult. As the result of the defense effort, the balance-of-payments positions of some of the underdeveloped countries may improve considerably because of these materials, or possible increases in the prices of these materials. To what extent these improved payments positions are temporary can not, of course, be determined.
The Staff Committee has undertaken some preliminary studies of the debt-paying capacity of the recipients of grant aid under the proposed program and has based such studies principally on an appraisal of the current trade and payments situations of the countries concerned. These studies are incorporated in NAC Staff Document No. 4862 and may be of some use in indicating the appropriate policy to be followed, but it is recognized that they are based on the current situation which need not necessarily continue over a future period. It does appear, however, that for some of these countries there is a considerable capacity to service debt, while in others the immediate prospects are not very favorable. It would not appear desirable to adopt in this program a grant-loan ratio as was practically required under the legislation governing ERP. Where a loan is bankable, it should be treated as a loan by the usual public lending agencies. Where the type of project, or the situation of the country, indicates that a loan can not be serviced without an unreasonable burden and with reasonable prospects of repayment, assistance should be made on a grant basis.[Page 1579]
increase in lending authority of the export-import bank
In its meeting of December 14, 1950, the Staff Committee recommended the following action for the consideration of the Council:
- The NAC recommends an increase of $1.5 billion in the lending authority of the Export-Import Bank as an integral part of the legislative program for foreign financing proposed to be presented by the Administration to the next Congress.
The findings upon which the above recommendation was made were based upon information contained in NAC Document No. 1079, which follows. There is also attached a summary statement on the financial status of the Export-Import Bank and the International Bank as of November 30, 1950.
[Here follows text of NAC Doc. No. 1079, supra.]