790D.5 MSP/10–2354: Telegram

The Chargé in Pakistan ( Emmerson ) to the Department of State

secret

563. Pass FOA, Defense. Reference: Deptel circular 198, October 15.1 Following is State message with which FOA and MAAG in general agreement.

1.
Statistical data justifying major increase United States aid program Pakistan included material supplied by Embassy to Heinz mission2 and will not be repeated here. Since August structure of problem not changed, though economic deterioration and political unrest have become more acute.
2.
Re justification of aid to Pakistan, Embassy believes that Pakistan has already contributed significantly to realization of United States policy objectives Middle East and Southeast Asia, and has potential [Page 1872] for making substantial further contribution. Turkey–Pakistan agreement continues appear most likely nucleus for creation effective organization Middle East defense, and attraction it exerts on Iraq and Iran seems increasing. Pakistan’s association with SEATO gives appearance more genuine Asiatic character this arrangement, and has potential effect on Ceylon and Burma. Economic and military developments this country following its firm alignment with United States bound exert significant influence on wavering neutralist states of Middle East and Southeast Asia, and substantial progress here, added to that achieved in Turkey, would convince many doubters that collaboration with United States pays off. Finally, Pakistan has considerable military potential and will to develop it. Given requisite assistance, country could make real contribution to security of Middle East, and possibly of Southeast Asia as well.
3.
Embassy understands that basic objective United States aid programs Pakistan is development of economy ultimately capable, without United States assistance, of supporting stable government and of sustaining agreed level of military effort. Available data and analyses so far made, however, do not permit long-range forecast of Pakistan’s economic development, measurement of potential rate of growth, and accurate assessment of investment required realize this potential consequently, Embassy unable evaluate proposed program in relation this objective. We consider development requisite data and completion necessary analyses indispensable for proper conduct expanded United States programs Pakistan, but it is task beyond present personnel resources Embassy.
4.
Embassy compelled to consider proposed aid program in more restricted framework, employing following criteria: (a) effect of proposed program on political and economic stability Pakistan during fiscal year 1956; (b) possible added requirements of military assistance program which in terms of end-item deliveries may be substantially stepped up in next fiscal year, but which should not involve significant increases in manpower; (c) capacity of Pakistan’s economy to absorb investment.
5.
On basis Embassy’s estimate of Pakistan’s balance payments position fiscal year 1956 and best judgment of economic and political prospects, total of $50 million aid in commodities and direct forces support plus surplus agricultural commodities at fiscal year 1955 level give fair prospects of stable situation. Given continuation present foreign exchange earnings, and proposed increase United States development assistance which should produce some incidental savings foreign exchange, proposed figure should permit some easing in supply of consumer goods, and thus ease pressures on government. However, view of present political uncertainty in Pakistan, no assurance that this or any other level of aid in itself will provide stable regime in months [Page 1873] ahead. Can be said with assurance that without aid of general magnitude proposed, prospects of stability materially reduced.
6.
Embassy’s present view that division proposed paragraph 3—B reference telegram, id est, $40 million commodities, $50 million projects, and $10 million direct forces support, preferable. From point view balance payments problem, no significant difference alternatives A and B. However, proposal which would permit direct contribution to military budget seems Embassy to offer definite advantages; (a) it would have desirable psychological effect on Pakistanis who have been very unhappy about level of military aid. The Finance Minister who has far greater financial sophistication than most of his colleagues, likes to think that military program will bring its own set of benefits, separate from benefits of “economic aid”; (b) might make it unnecessary to divert counterpart generated by commodity or development aid from development projects to military uses and obviate protracted bureaucratic clashes within GOP; (c) it would enable us to exert more direct influence on military budget as whole. Although present Embassy view that approximately $10 million direct forces support could probably be effectively used, and that this amount will prove sufficient to cover increased cost generated by military program in fiscal year 1956, must be emphasized this scarcely better than “hunch”. At time this message drafted, military planning targets for 1956 under review in Washington, and no information available rescheduling deliveries this year or next. We have assumed “token” deliveries this year, and considerable step-up next, but no increase in force level. In event program more substantial than anticipated, may prove necessary to supplement dollar allocation for direct forces support with some counterpart funds generated by commodity or development aid.
7.
Comments on proposed level project assistance necessarily speculative, since no assessment effectiveness present projects in various sectors presently available, and since certain sectors of Pakistan’s economy, such as transport and communications, which might be important areas of investment under revised concept United States objectives Pakistan have not as yet been studied. However, Embassy concurs in view that $50 million probably reasonable planning level. Ability deal effectively with program this magnitude assumes following: (a) Effective domestic financial policies to mobilize capital supplemented by adequate rupee counterpart; (b) rapid and effective development of additional projects, particularly in areas which would make useful contribution to defense potential, id est, transport, communications, POL distribution facilities, ordnance production, etc.; (c) effective coordination of plans for provision of dollar and rupee components such projects; (d) marked stepping up in recruitment of United States technical and contract personnel, and for long range, [Page 1874] substantial increase in technical training of Pakistanis. Although Embassy considers that significant amount investment in sectors which are not immediately productive of returns may be justified by long-range economic considerations, or by defense considerations, or both, Embassy strongly endorses objective 5—A2 reftel of avoiding diffusion effort, and concentrating priority activities. In this connection, suggest desirability thorough assessment present FOA program determining areas in which greatest results produced, and ability expand activities these areas.
8.
Re loan basis defense support funds, Embassy believes following considerations relevant Pakistan: (a) Extreme tightness Pakistan’s budget, and limited local currency available investment purposes. Generation some counterpart will probably be necessary permit effective utilization expanded dollar projects; (b) probability that significant part any expanded investment program will be in areas which though important to defense and long-range economic progress do not promise any immediate direct financial return, exempli gratia, transport, communications, etc.; (c) possible need for local currency contribution to Pakistan’s defense budget to permit realization military objectives. For these reasons, Embassy considers substantial portion of defense support aid should be in form grants. Some portion might be loan, provided such loan to be serviced in rupees. Repayment in dollars of course impossible for foreseeable future.
9.
Despatch setting forth USOM detailed program recommendations forwarded FOA air pouch October 23.3
Emmerson
  1. Not printed.
  2. Telegram 83 to Ankara, July 21, announced that Foreign Operations Administrator Stassen was sending a team, led by H. J. Heinz II, President of the H. J. Heinz Co., to investigate the economic situation in Pakistan and recommend a course of action to improve it. (890D.00/7–2154) The Heinz Mission recommended that the united States extend $75.6 million in emergency commodity aid to Pakistan. (Memorandum by Byroade to the Acting Secretary, Oct. 20, 1954: 790D.5 MSP/10–2054)
  3. Not printed.