Foreign Relations of the United States, 1958–1960, Near East Region; Iraq; Iran; Arabian Peninsula, Volume XII

259. Memorandum of Conversation⁰

Washington, December 9, 1958.

SUBJECT

• Iranian Budgetary Situation

PARTICIPANTS

• Eugene Black, IBRD
• J. Burke Knapp, IBRD
• Joseph Rucinski, IBRD
• Hector Prud’homme, IBRD
• Douglas Dillon, Under Secretary for Economic Affairs
• Donald D. Kennedy, Deputy Assistant Secretary for Economic Affairs, NEA
• John O. Bell, W/MSC
• Owen T. Jones, GTI

The meeting opened with Mr. Dillon denying Mr. Ebtehaj’s assertion in a recent message to Mr. Black¹ that Iran’s financial difficulties were a result of the United States military’s pressing upon the Shah armed forces in excess of Iran’s needs. Mr. Dillon referred to a communication received in Washington only last week in which Mr. Ebtehaj on behalf of the Shah made a strong plea for larger military forces and additional military aid,² recalled the many pleas of similar character made by the Iranians in recent years, and noted by way of example the different concepts that the Iranians and the United States have with regard to requirements for the defense of northeastern Iran. Iran is, however, under severe pressure from the Russians at the present time, Mr. Dillon said, pointing out briefly the origin and nature of these pressures, and is understandably concerned over its present position.

Mr. Black then turned to a brief review of the problems with which the IBRD is now faced in Iran. The Bank had been disposed originally to go along with a highway program totaling $72 million, of which $12 million was being put up by New York banks, largely because of the IBRD’s being identified with the project. Two things have now occurred which, taken together, make it very difficult for the Bank to proceed. First, it has become apparent that the Iranians are not going to balance their governmental budget, and second, there are reports that the Shah plans to divert further oil revenues to the general budget. The present Iranian Minister of Finance, Mr. Nasser, was very weak and was quite incapable of coping with the budgetary situation. The developmental and financial picture was further complicated by a number of capital projects involving the Government of Iran but being handled outside of the Plan Organization. In deciding what to do about the highway loan in such a situation, Mr. Black said it was very important for the IBRD to know what the United States Government had in mind for next year.

After Mr. Bell had briefly reviewed the Embassy’s latest estimate (Tehran 1054)³ of the budgetary situation, Mr. Dillon said that in our FY 1960 defense support estimates we had $20 million tentatively marked for Iran to help meet the additional costs growing out of commitments made following the Iraqi coup which would provide additional training and equipment for an Iranian effort to bring up to full strength existing forces supported by the United States. We might also consider making some additional defense support available to Iran out of the FY 1959 supplemental to meet such problems as the losses that Iran is suffering because of the cutoff of Russian imports of rice. In view of the importance of Iran to the United States and the uncertain character of our original estimates, Mr. Dillon did not foreclose the possibility of our defense support in FY 1960 exceeding the $20 million now planned. In any event, it was the consensus that we should probably inform the Iranians some time in January 1959 of our present intentions, subject to Congressional appropriations, with respect to FY 1960 assistance.

With regard to DLF, Mr. Dillon said that he had told Ebtehaj in New Delhi that we would be prepared to consider projects as they were submitted but as yet none had been received. Personally, Mr. Dillon thought possibly upwards to $40 million DLF during the coming fiscal year might be a reasonable expectation for Iran, but of course we could not speak in these terms to the Iranians and it would depend, in any event, upon the projects that were submitted. Iran, he thought, might reasonably expect to get some money out of the additional $225 million DLF capital authorized but not yet appropriated, as well as out of any further increase in DLF capital next year. In conclusion, Mr. Dillon shared Mr. Black’s concern over the Iranian budgetary situation. He suggested that the IBRD was probably in a better position to deal with this than the United States Government.

At the meeting’s end, Mr. Black was undecided on IBRD’s course of action. He said it was difficult to see how they could go ahead in the present situation and repeated again that they were not committed to do so. In any event, he said he assumed that he and Mr. Dillon were in agreement on three points: (1) that developmental projects generally should be taken out of the government and put into the Plan Organization, (2) that the present Minister of Finance should be replaced by a stronger man, and (3) that the Plan Organization share of oil revenue be fixed and no further departure be made from it. In concurring in these, Mr. Dillon emphasized again the importance of IBRD’s finding a way, if possible, to carry on with the highway loans.

0. Source: Department of State, Central Files, 888.10/12–958. Secret. Drafted by Owen Jones.
1. A summary of this oral message, from Ebtehaj to Black, is in a memorandum from S.P. Wheelock to Black, December 5. (Ibid., NEA/GTI Files: Lot 60 D 533, Iran Country Budget, 1958)
2. See footnote 1, Document 258.
3. Dated December 6. (Department of State, Central Files, 788.5–MSP/12–6558)