Foreign Relations of the United States, 1951, The Near East and Africa, Volume V

884A.10/10–2151: Telegram

The Ambassador in Israel (Davis) to the Department of State ¹

secret
priority

Tel Aviv, October 21, 1951—11 p. m.

371. While serious deterioration morale of population generally is not yet apparent, overtone of doubt and anxiety marked in official circles. Food situation still deteriorating while power and transportation facilities continue to be inadequate with no immed promise improvement in face growing population.

Continued reductions in rations and continued failure to distribute established rations has led to partial breakdown of commodity and wage controls. The consequent significant and growing volume of black-market transactions in controlled commodities and fon exchange, together with scarcity of goods generally has resulted in growing inflationary pressures marked by sharp open-market price rises and sharp declines in value of Israel pound in relation to gold sovereigns and dollars.

Because of acute fon exchange shortages and particularly because of lack working balances, govt has been unable to come to grips with these problems. While world-wide shortage critical materials for power irrigation and transportation has contributed to present situation, the most immed problem and the one in which assistance is most urgently needed is getting fon exchange for food and essential commodity imports in amts sufficient to reestab ration distributions and commodity controls.

Israel Treasury has provided fol detail of govt financial position (millions of dollars):

1. Fon exchange obligations maturing Oct–31 Dec 1951 for fol: Import credits 32.8; settlement of swings in bilateral trade agreements 2.0; defense imports credit settlement 9.0; POL 1.2; total 45.0.

2. Anticipated earnings: proceeds of exports and invisibles 11.0; remittances (UPA) and transfers (bond sales) 15.0; total 26.0; uncovered balance of obligations 10.0.

Discussion of amt of minimum requirements for maintaining import pipeline over next three months as well as estimates of Israel capacity to obtain renewal of credit facilities to finance such requirements were inconclusive. Estimated requirements figure cld be held to between $25 and 30 million which was assumed to be manageable thru credit renewals provided fall maturities are met. Govt also felt confident of ability to extend maturity of at least $4 million of obligations.

Cash balances of treas are nil in sterling and under $100,000 in dollars. It was categorically stated no additional balances now due Treas from UJA, UPA or bond sales account.

This poses particular problem in that requirement is for immed funds to fill gap in settlement of due obligations, all of which cover shipments already recd. In effect Israel Govt has been operating without working dollar balances since March 1950 and from Jan 1951 without any exchange. It has been obliged to finance entire import on instable structure of short-term bankers credits and acceptances at considerable cost. Present situation, amounting to an overbought position, threatens so to jeopardize credit standing as to endanger imminent collapse of financing structure. This eventuality wld obviously greatly increase cost to US of sustaining economy.

While we were informed that above summary represents total of maturing short-term liabilities and prospective assets, Horowitz’ conversations in London will, if successful, bring additional relief. Shld UK Treas advance pound 3 million requested for settling sterling POL position, approx. pound 1 million wld be additional margin. (We assume UK will not grant Israel Govt’s request for 20 million pound development loan in near future.) This we consider, shld not be deducted from assistance contemplated by US, but shld serve either to give essential increase in flexibility to present position or to meet costs packing citrus crop.

Kaplan request (Embtel 370, Oct 19)² for immed assistance is given validity by above figures. Requirement thus becomes emergency finance to honor obligations maturing in last quarter calendar 1951 for whole range of imports. Gap US might fill now cld be programmed from essential “austerity” imports. This wld not only prevent collapse presently over-extended external credit structure but appears appropriate use Section 205 MSA funds by insuring supply of essentials for maintenance immigrant well being as well as stability whole economy. Israel Govt officials listed austerity program until Jan 1 as fols in million dollars (tho not necessarily from dollar sources): foodstuffs and animal feed 19.9; seeds, fertilizer, agric shares 2.554; industrial raw materials 2.9; truck spares .7; non-sterling POL 3.3; chemicals, pharmaceuticals .3; rough diamonds 1.7; total 30.452. Detailed breakdowns of foregoing have been given.

Dept for Fryer TCA and Gardiner NEA from Bayne and Parker.

In view practical absence working balances and assuming Washington agreement of gap-filling emergency proposal which we recommend, assistance will require time-saving procedure to be effective. In working level discussions we have agreed with Israel reps to suggest fol procedure to TCA/W for 15 million emergency allocation, reserving right to revise procedure for balance of funds available. We emphasized any disbursement by US wld be subject to bilateral agreement or letter of intent which wld provide for performance guaranties; we did not specify latter in our conversations with Israel Govt officials. Procedure discussed which Israel Govt also cabling, is in five steps:

1. Estab of joint US–IG acct in Bank Leumi for 15 million.

2. Acct at disposal of IG Treasury against counter-signature of appropriate TCA mission official.

3. Funds to be used only for refinance of existing short term credit facilities for programmed commodities or for new purchase under program.

4. IG will provide within 10 days bankers confirmation that ltr of credit was opened for programmed transaction as represented.

5. Joint account wld be reimbursed as first charge on free IG funds in any case of misrepresentation or short fall by supplier, etc.

Above procedure has advantage of not requiring provision of cash by IG which has none and of using normal business channels. It has, however, disadvantage of postponing maturities for essential items which may not be met ultimately from IG fon exchange receipts. This might prejudice flexibility whole program, and restrict it to a maintenance of essential supply. This we do not consider desirable. We have throughout discussions distinguished between section 205 funds and section 203 funds to allow program leeway for Mission’s future operations. In any event, earliest arrival of Mission Chief and comptroller wld appear necessary.

We have had only limited discussions of counterpart except to point out that US wld require it. It appears likely from obvious inflationary conditions caused by heavy internal defense and capital expenditures that 95 percent counterpart wld be best used for debt retirement or other appropriate deflationary measure.

Govt presentation has so far failed to satisfy us that we are seeing complete picture. Particularly mil component of total annual fon exchange requirements has been withheld altho promises that this will be given, continue. We have reasonable grounds for assumption that present crisis arises from undeterminately high level mil expenditure over past few months which exhausted available resources for even food imports, and thereby disrupted both import scheduling and refinancing program. Furthermore, data furnished on total fon exchange payments and receipts fail to account fully for known receipts.

For example fin exchange receipts for Jan–Aug period this year show only $40.5 million transferred to Israel Treasury from combined UJA receipts and bond sale proceeds. Latter alone stated to be $60 million thru Sept. This discrepancy may be explained by direct procurement for refugees not scheduled thru Israel Govt accts, mil disbursements, or direct payment on long term obligations. However, we cannot now certify that we have complete picture or particularly, that their statement of exhaustion all balances is correct.

Our considered recommendation therefore is that at least $15 million be made immed available to Israel Treasury to meet matching obligations and thereby preserve credit structure. Additional reservations concerning longer range over-all fon exchange expenditures and earnings require more rigorous examination and analysis prior to finalization program for balance aid funds. We are increasingly convinced that mission must extend responsibility to review of entire import program including at least access to mil requirements schedules. In our discussions here we have met several high level officials who, informally, urged such outside control as essential.

Emb will continue lines of inquiry established this week. Cooperation of Israel reps while less than satisfactory, is improving and there is reason to expect will increase particularly as they become accustomed to closer work in relationship in Israel with US reps.

Emb concurs completely in above.³

Davis

1. Repeated for information to London.
2. Supra.

3. In telegram 301 to Tel Aviv, October 26, not printed, the Department stated that it was actively working on the recommendations of this telegram and would advise as soon as possible with a definite decision on the request for emergency aid (884A.10/10–2151).

   Telegram 427 from Tel Aviv, November 2, not printed, stated that subsequent discussions with Israeli officials had not altered the recommendations set forth in telegram 371 with respect to the need for approximately $15 million in emergency assistance (884A.10/11–251).