Foreign Relations of the United States, 1952–1954, Africa and South Asia, Volume XI, Part 2

103 XMB/8–1153

Memorandum by N. H. Kirk of the Investment and Development Staff to the Chief of the Investment and Development Staff (Ross)

confidential

[Washington,] August 11, 1953.

Subject:

• Status of Eximbank Loan to Afghanistan

Problem: About a year ago the Afghan Government began talking about applying for an additional Eximbank loan for roads, power, and further development of the Helmand Valley. On January 12, 1953 the Embassy requested the Bank by letter to consider a line of credit for $20,000,000, the details of the additional projects to be worked out subsequently. The Bank thereupon sent Messrs. Gates and Kohler to Afghanistan to study the situation. In view of the situation at the Bank and the fact that the Afghans were firmly convinced that additional funds would be forthcoming the best the mission could do was make it clear to Afghan officials: (1) that the amount of financing which the Eximbank might undertake for further development in the Helmand was in real question, (2) that favorable action on road projects was doubtful, and (3) that there was no chance of further financing unless projects were submitted to the Bank in detail. Although General Edgerton has spoken discouragingly to Afghan Embassy officials recently about the possibility of a new loan, an Afghan mission is scheduled to leave Kabul about September 1st to enter into loan negotiations in Washington. In the meantime, the Afghans, with the assistance of Morrison-Knudsen Afghanistan, have been developing detailed projects to submit to the Bank.

Discussions with the Afghan mission could be greatly facilitated if the NAC could go on record at an early date concerning whether it has any objections to the Eximbank considering an Afghan application for a further development loan. For reasons given below it is essential that arrangements for financing further Helmand development be worked out early this fall as prolonged negotiations will have a deleterious effect upon the pace of actual development work and U.S.–Afghan relations no matter who finances it eventually.

Recommendation: It is recommended that the NAC be asked to consider this problem and indicate to the Eximbank that it has no objection to the Bank considering further development loans for the development of the Helmand Valley in Afghanistan.

Background

Financing the Investment Program: The Government of Afghanistan is committed to two heavy but, in the opinion of the Eximbank representatives, sound investment programs in the private and public sectors. The private investment program includes textile manufacturing, cement, and power development and the Government is committed to provide the Bank Milli (private) group about $6 million of foreign exchange annually over the next few years for these projects. Government investment plans are confined at this moment to a second stage development program for the Helmand Valley project, which may require from $9 to $11 million of foreign exchange over the next three years, and a road repair and construction program which might absorb $6 to $8 million over the same period. Thus Government foreign exchange expenditures for investment alone are planned at about $12 million annually while receipts fell from around $16 million in 1950 to around $11 million in 1952; Central Bank exchange reserves fell by $10 million in the same period (during this period the Helmand program was being financed out of the Eximbank credit). Efforts are being made to capture more exchange in the open market and curtail other expenditures but it seems apparent that the investment program must be cut back unless additional outside financing can be found.

The private group (Bank Milli) has long been critical of the Government’s investment program in the Helmand and in order to prevent a dangerous political schism from developing over this issue the Government is forced to assist private development by making exchange available at the official rate. Thus, curtailment of the private investment program would bring with it almost certain political risks.

Status of the Helmand Project: The curtailment of the Government investment program in the Helmand would entail even greater political risks for the U.S. as well as the Afghan Government. It has been estimated that some $45 million including the $21 million Eximbank credit has been invested in this project since 1946 and yet only the first stage of construction development (water storage) has been completed. The Arghandab dam, the Kajakai dam and the Boghra canal system are completed or will have been completed by fall. This has enabled the people already on land to extend their farms and bring additional water to their land but actual settlement of new land has hardly begun with only 235 families having been assigned land. The first tract of land being developed includes about 19,000 acres whereas there are some 900,000 acres potentially irrigable from the Arghandab and Kajakai Reservoirs. With the exhaustion of the 1950 Eximbank credit, the Afghans requested in January the following amounts in order that land development and settlement can continue to go forward:

• $1,000,000—Further engineering and soil and agricultural surveys
• $3,200,000—Marja, Nad-i-Ali and Shamalan water delivery, road and drainage systems
• $3,000,000—Arghandab diversion dam, main canals, water delivery, road and drainage systems
• $2, 100,000—Arghandab power plant

Until quite recently there was considerable danger that the Helmand Valley project would fail completely because of the inability of the Afghans to solve institutional and human problems. MKA was doing a fine job on construction but there was little progress on planning, organizational and social problems which a valley development authority must be prepared to solve. Stimulated by TCA the Afghan Government has created a Helmand Valley Authority which is beginning to assume responsibility and through which technical assistance can be made effective. Over the past few months, the role of MKA has changed from that of combined planner, engineer, constructor and advisor to that of a contractor in our more limited sense of the word. It still remains for the HVA, reinforced by the technical assistance agencies participating in the project, to take over functions heretofore assumed by MKA merely because of the existence of a vacuum.

Even if the HVA can assume its planning and operating responsibilities it will still have need of its contractor during the next stage of development which it is hoped can continue to be a transition period. Unless a firm source of funds for financing further MKA operations is found this fall, the company will probably be forced to close down a going organization of several thousand Afghans headed by experienced Americans with whom they have worked for years. The project could probably not recover from the loss of time and money which would result at this stage from disbanding the organization which now exists.

Political Importance of the Helmand Project: The Helmand Valley project is important to Afghanistan because it offers opportunities for greatly improving their marginal food production situation, achieving governmental administrative integration of this region with the rest of the country, for reducing present and prospective population losses to neighboring countries, and obtaining for this region economic parity with more prosperous sections of the country.

The project is important to the United States not only because of the capital investment which has been underwritten by this Government. The prestige of the U.S. in Afghanistan and the neighboring countries is involved in the success or failure of a project in which an American construction company, the Eximbank, the Department of State, and TCA have assumed responsibility. The failure of the project for any reason would be a severe blow to American prestige and American relations in this part of the world. It will be difficult enough to prevent failure from institutional and human inadequacies but the addition of new financial problems would probably assure failure.

Afghan Government officials have a very strong expectation that they will obtain more loan money for the Helmand Valley development from the U.S. Government. In the past year the Eximbank has sent two missions to Afghanistan because of this project. The U.S. Ambassador in Kabul has travelled the length of the valley and has made it clear that he considers the project a basic element of U.S. policy in the country. The very fact that, if the project failed, the present Afghan Government would be so severely embarrassed that it might fall, confirms the Afghan officials in their belief that further U.S. assistance will be forthcoming.

Alternative Sources of Financing: Afghan expectations and the danger of failure require the U.S. to consider what sources of further financing are available. From the standpoint of continuity of operations and the willingness of the GOA to borrow, the Eximbank would be the preferred source. Afghanistan is not a member of the IBRD and could probably not be admitted and negotiate a loan there fast enough to assure continuity of operations. Grant aid funds are a possibility although a somewhat incongruous possibility when the country is willing to borrow. The use of grant funds would require a considerably larger allotment of grant funds—$3–4 million annually for several years. This compares with the $700,000 programmed in fiscal 1953 and with about $1,500,000 tentatively allocated for fiscal 1954. The foreign minister recently complained bitterly over the inadequacy of TCA assistance to Afghanistan when compared to aid received by neighboring countries but there is a real question as to the country’s absorptive capacity for technical assistance.¹ There is also considerable feeling that the country should not undertake new capital investment projects until those already underway are closer to completion. The current investment programs can be financed out of Afghan resources and borrowing capacity so there are no financial reasons for putting our capital assistance on a grant basis. The Afghan desire for a larger grant program can probably be satisfied at less cost than would be entailed in putting the whole Helmand project on a grant basis.

Adjustment of Present Eximbank Loan Repayment Schedule: The present loan of $21,000,000 is repayable in 9 years commencing in 1956. Repayment on these terms in addition to new borrowing will result in a very heavy drain on the country’s foreign exchange position during years when the Government will be anxious to move into a new stage of development. Last spring the Eximbank indicated to the Afghan Government that it would be inclined to give sympathetic consideration to a request for some lengthening of term. If this were done in conjunction with a new loan the total annual payments would be increased over the present schedule and would make easier the continuation of the private investment program at a higher level than would otherwise be the case. Such action might help to lessen the disappointment of the Afghans if the Bank decides not to undertake new projects such as the road program.

1. A memorandum of the conversation held on July 25 between Foreign Minister Naim and William J. Hayes, Director of Technical Cooperation in Afghanistan, is enclosed with despatch Totec 11 from Kabul, July 28. Neither is printed. (889.00 TA/7–2853)