413. Telegram From the Department of State to the Embassy in Iran1

1160. Deptel 1492, February 9;2 Embtels 1066, 984, 964, 951, 937 and 939;3 Embdes 440.4 Appreciate excellent analysis and comment [Page 957] Embtel 984 and line taken as reported despatch 440. Suggest you reply to Shah as outlined below:

Request for budgetary assistance made in spirit great frankness which appreciated. Our comment likewise in spirit frankness and sincere friendship.

Sure you understand USG most sympathetic problems of Iran and will do what it can to assist. Not necessary to list evidence past cooperation but most recent illustration is that of construction Qom airfield. Our hope and anticipation is to continue friendly help in coming years in variety of ways.

Believe you will permit me make certain comments as to underlying causes your budgetary situation and certain suggestions as to meeting problem in accordance spirit friendly cooperation which prevails between us. Experts indicate that Iran’s deficits are not likely to be of one or two year character but rather reflect longer range social and economic problems. This seems to mean further expansion of Iran’s national budget. Would hope that Iran would grapple with this expansion through resources available to it and by measures that will not result inflation. Seems clear that Iran itself has internal resources which can be used and capacity to borrow abroad from existing institutions such as World Bank.

Hope and believe you will understand following suggestions related to raising funds internally made in most friendly way.

Diversion of more oil revenues to general budget.
Acceleration of measures for reform tax collections.
Limited borrowing from Treasury with due regard for need to avoid inflation. It recognized this last step might make necessary some increase in permitted borrowing from Bank Melli. Officers in Embassy, USOM and international institutions have frequently discussed with Iranian officials means to avert inflationary effect of this procedure. In this connection it might be relevant to mention likely necessity for USG to raise its present debt ceiling of 275 billion dollars. You will see difficult position it puts Executive Branch USG in if point can be made that some of our debt increase is necessary because other countries are not taking similar action to extent their ability.

Another possibility might be found in measures to reduce budget requirements. Perhaps best of such measures would be transfer of certain projects for capital investment from general budget to Plan Organization. It recognized this might mean some relatively minor reshaping of program of Plan Organization itself. Your officials also no doubt continuously searching for ways to reduce existing expenditures under what might be called conditions of stringent need.

[Page 958]

Possible U.S. may be able participate in financing some development projects and you should make maximum use IBRD, Eximbank or other foreign credits. DLF financing may also be possible for projects which do not meet criteria of other institutions.

In all honesty should tell you that there are prospects of smaller amount of dollars for assistance next fiscal year than was case this year. You are aware I am sure that Executive Branch USG can only determine use of funds after Congress makes appropriations so that amount available is firm. Such determination will be made after most careful study. In light present understanding it only fair and right that you know it likely be most difficult or even impossible find funds for straight budget support for next fiscal years. Regret not in position make any promise but confident that continuing cooperation will be fruitful. You may be assured our deep interest and continuing help in ways open to us and within our means. This continuing help will include military end item deliveries, military construction, technical assistance and regional BP economic projects.

FYI. 1. Suggest you put above in proper form as talking piece and if you believe it useful leave copy with Shah.5

2. Question FY 1959 programs under study here. Possibility additional military soft goods being examined. We would like your further thoughts on this, on use PL 480 and on possible “readjustment” in defense support mentioned Embtel 984. DLF credits for specific projects might be available after Iran has exhausted possibility further credit facilities with IBRD and Eximbank for each project. Iranians should sound out Eximbank.

3. IBRD’s concern over inflationary aspect Treasury financing was clearly set forth in Knapp’s letter to Nasser June 6.6 You may wish consider this in further discussions.

4. We believe US Executive Branch would be endangering its foreign aid programs generally if it did not take account of strong private sentiment and legislative history here unfavorable to US providing further budgetary support to Iran.

5. We are deeply concerned over possible impetuous reaction from Shah to contents this cable. While there may be element of bluffing in Shah’s present attitudes, we do not want to appear to be calling his hand. We would deplore his taking action that he would later regret and consequently urge you to give most careful consideration to timing of this presentation. End FYI.

  1. Source: Department of State, Central Files, 888.10/11–1357. Confidential. Drafted by Mouser, Jones, Williams, and Kennedy; cleared with ICA, U/MSA, Defense, and Dillon; and approved by Rountree.
  2. In telegram 1492, February 9, the Department of State instructed the Embassy to impress upon the Shah that the U.S. Government believed that further budgetary aid for Iran could be avoided and that it was doubtful that such aid would be available from the United States. (Ibid., 888.10/1–3157)
  3. In telegram 1066, November 30, Chapin reported an audience with the Shah on November 30 in which the Shah immediately inquired of the status of his request for a loan to cover the projected budgetary deficit. (Ibid., 788.5–MSP/11–3057) Regarding telegram 984, see footnote 2, supra. Telegram 964, November 14, reported Minister Without Portfolio Taleghani’s call on Chapin to reiterate the Iranian request for a loan. (Ibid., 888.10/11–1457) Telegram 951, November 13, reported an informal conversation with Ebtehaj about budgetary support and the Plan Organization’s share of oil revenues. (Ibid., 888.10/11–1357) Regarding telegrams 937 and 929, see footnote 3, supra.
  4. Despatch 440, November 13, contained memoranda of discussion between Ebtehaj and Embassy officials concerning budgetary problems and a memorandum sent to Ebtehaj suggesting Iran raise the Iranian Treasury borrowing limit at the Bank Melli to alleviate the projected budgetary deficit. (Department of State, Central Files, 888.10/ 11–1357)
  5. See infra.
  6. Not found in Department of State files.