NAC files, lot 60 D 1371

The Assistant Director of the Export-Import Bank (Arey) to the Secretary of the National Advisory Council on International Monetary and Financial Problems (Glendinning)2

Dear Mr. Glendinning: The Royal Government of Afghanistan has applied to the Export-Import Bank for a credit of approximately $36 million to assist in financing the purchase in the United States of equipment, materials, and services required to continue its development program in the Helmand River Valley, and for certain other purposes. This program is designed primarily to continue the work begun in 1946 which the Export-Import Bank assisted in financing through a $21 million credit authorized in 1949.

The program authorized in 1949 called for the construction of two major dams to obtain control of the Helmand and Arghandab River waters and construction of a major canal system in what is known as Boghra—Marja—Shamalan area. The work has been completed except for minor clean-up but has not resulted as yet in significant increases in acreage under cultivation and crop production. The first task was one of providing the basic capital works which must be followed by construction of a substantial amount of irrigation facilities and land development in order to obtain the full benefits of the original investment. This fact was recognized at the time the original credit was made, as was the possibility of further financing. It was hoped that the Government of Afghanistan would be able to carry out some of the required irrigation and land development work without external assistance and simultaneously with the basic construction program. This has not been the case for a variety of reasons, most of them not entirely unexpected. The work accomplished with the first loan of the Export-Import Bank has been successful to the extent of gaining control of basic water resources in a major section of Afghanistan, but a further investment in connection with this water potential is required if the possibilities of the development are to be realized.

In the course of the study of this loan program over the past year the American Ambassador to Afghanistan, the Chief of Mission of the FOA in Kabul, and representatives of the State Department have emphasized repeatedly to the Bank their views as to both the economic and political importance of going ahead with this job. These views have been set forth in both oral and written form and might best be summed up by saying that, in their opinion, unless further substantial credits from the Bank are forthcoming the United States position and objectives [Page 1473] in Afghanistan will be seriously, and perhaps critically, jeopardized on political as well as economic grounds.

During the construction period under the first loan the Staff of the Bank made three extensive field trips to Afghanistan in which the problem of the next logical step in the Helmand Valley development was carefully studied. On the basis of these trips and a detailed study of the Afghan loan application, the Staff has advised the Executive Committee of the Bank that a minimum and necessary next step for a three-year construction and agricultural development program would require financial assistance from this Bank to the extent of approximately $18.5 million. Approximately $16.2 million would be spent on the Helmand development and the remaining $2.3 million on a high priority road maintenance program. Total cost of the program contemplated would amount to approximately $27.5 million in dollar equivalents. Thus, the Government of Afghanistan would be undertaking an obligation to furnish the equivalent of some $9 million to cover necessary rupee, afghani, and off-shore dollar requirements of the construction program. This latter appears to present no problem.

Careful study of the current Afghan financial and economic situation and prospects indicates that the Government can undertake an additional dollar debt burden of this magnitude only if the terms of the original $21 million loan are re-negotiated on a more liberal basis and the terms of new financing are set accordingly. Based upon the limited information available in 1949, the original loan was established to carry a six-year grace period and nine years to repay, which, in the light of more recent practice on programs of this character, now seems excessively conservative. The current Afghan foreign exchange situation is difficult and prospects are that it will remain tight for the next four or five years in consequence of commitments already undertaken for a private industrial development in the North and of inadequate management of the Afghan karakul industry. Looking beyond 195960 there would seem to be every reason to expect improvement.

It is proposed, therefore, that the terms of the new credit provide for repayment in 36 semiannual installments commencing October 20, 1958 under a level payment arrangement so that the total of each semiannual combined interest and principal payment thereafter is approximately constant; with disbursements under the credit to be evidenced by promissory notes bearing interest at the rate of 4½ percent per annum, payable semiannually; and with the line of credit to be available for disbursement until December 31, 1957.

In addition, it is proposed that the Bank give assurances to the Government of Afghanistan that it is prepared on completion of disbursements under the existing credit to refund all obligations which have been issued to the Bank under that credit by accepting new notes bearing interest at the present rate of 3½ percent per annum, payable [Page 1474] semiannually, and repayable in 36 semiannual installments commencing on October 20, 1958 under a level payment arrangement, so that the total of each semiannual combined interest and principal payment thereafter is approximately constant.

The Export-Import Bank requests the National Advisory Council to advise the Bank whether the Council perceives any objection to the Bank’s considering the proposed credit and revision of terms in the old credit.3

Very truly yours,

Hawthorne Arey
  1. Master file of the documents of the National Advisory Council on International Monetary and Financial Problems for the years 1945–1958, as maintained by the Bureau of Economic Affairs of the Department of State.
  2. This letter is filed as NAC Document No. 1615.
  3. In NAC Action No. 694, Apr. 26, the Council stated that it offered no objection to either of the proposals outlined above. (NAC files, lot 60 D 137; NAC Document No. 88) The Export-Import Bank authorized the new credit on Apr. 29 and authorized refunding of the previous loan either on that date or shortly thereafter. (Export-Import Bank, Eighteenth Semiannual Report to Congress: January—June, 1954 (Washington, Government Printing Office), p. 44)