325. Memorandum From the Special Assistant for Mutual Security (Bell) to the Under Secretary of State for Economic Affairs (Dillon)0

SUBJECT

  • Saudi Arabian Military Credit—Proposed Moratorium Extension

In the attached memorandum, Mr. Rountree recommends that the moratorium on repayments against the FY 1957 Saudi Arabian military credit be extended for another year (Red Tab A).1 It is my view that such an extension is the only feasible course of action for the United States to take. This view is based on the following considerations:

1.
NEA informs us that the relationships of our Embassy, military people (including operations at Dhahran) and Aramco with the present administration within Saudi Arabia are thoroughly satisfactory. Given the current overall situation in that area it would appear unwise for the U.S. to refuse to cooperate in a matter of this obvious importance to the present regime.
2.
The second consideration is the evidence that Prince Faisel appears to be determined to establish and seriously adhere to a sound system of fiscal management, the total absence of such system in the past being the root of Saudi Arabia’s present financial difficulties. The budget announced in January is the first authentic budget in Saudi history. Although as yet we do not have a comprehensive analysis of the new budget, the information we do have in hand (Red Tab B)2 while indicating room for further improvement, supports the NEA view that Faisal is continuing to take actions to strengthen the austere trend he established last year with respect to Saudi finances. We understand that if the budget is successfully carried out it will balance at $325 million and would add $9 or $10 million to the small foreign exchange reserves created over the last six months, thereby further stabilizing Saudi currency which until recently has suffered serious fluctuations. The Saudi Arabian Government has a foreign debt incurred in the past of approximately $90,000,000, largely in New York banks and secured by claims against oil revenues accumulated but not paid. Faisal considers these as [Page 740]bona fide obligations of the Government on which he plans to pay interest in the coming year and to make provision in the next budget for payments against the principal amounts. There is, in addition, a Royal Family indebtedness estimated at at least $25,000,000. This has largely been incurred by the King and Faisal appears to be taking the position that the King must arrange payments out of his private resources. Under these circumstances I find it less difficult to concur in the course of action which NEA proposes.
3.
Also in connection with 2 above, it is worthwhile to note that, contrary to the judgment of this office at the time you approved the first moratorium in April 1958, the U.S. admonishment to Saudi Arabia to the effect that approval of new military credits if requested by Saudi Arabia could not be certain during the moratorium period has proven to be effective. The Saudis have not requested any major military sales either on a cash or credit basis beyond the $50 million credit line. They did request the transfer of a boat to be financed from the small unused balance (less than $1 million) of the original credit line but subsequent to your approval of the transaction as an exception, the Saudis pursuant to their austerity program chose not yet to consummate the transaction. We are informed by NEA that the Saudis have not made any major purchases from other sources during this period.
4.
The credit we are discussing was extended from FY 1957 MAP funds and repayments under it revert directly to the Treasury and are not eligible for reuse under the authority of Section 103(c) of the Act, which authority was not granted by Congress until 1958. This action would not therefore affect MAP availabilities.
5.
Finally, NE informs us that it has for some time anticipated requests either directly from the Saudi Arabian Government or through the IMF advisers for loan assistance in stabilizing the country’s financial situation. NEA believes that, from the political standpoint, some such assistance may be desirable but suggests that the proposed moratorium would, in effect, be a substantial form of assistance in lieu of other types of loans.

At the time the NEA memorandum at Red Tab A was written it was not clear that, in addition to another one-year moratorium, Faisal was also requesting a stretchout of the repayment period at the end of the moratorium beyond the terms of the original credit. These original terms require payments in equal monthly installments over three years. Under these terms the present unpaid balance is payable in twenty-six months after the moratorium period. The note handed Embassy Jidda, (a copy of which we now have in hand (Red Tab C)3 includes a formal [Page 741]request for a revision of terms to permit repayment over four years after the moratorium period, a revision which would have the effect of extending the three-year credit to a five-year credit payable over seven years by virtue of a two-year moratorium. We believe there is merit in the U.S taking a negative position with respect to this aspect of Faisal’s request.

You approved the first moratorium as a measure of relief to Saudi Arabia in lieu of its request for an extension of the repayment period. The U.S position would be, we believe, unduly loose and inconsistent if we now permit the extension of the repayment period, as well as the moratorium. There would seem to be advantages in insisting, at least for the time being, on adherence to the original terms of the credit, thereby encouraging a responsible attitude by Saudi Arabia toward this obligation. In addition, a revision of the original repayment terms beyond the moratorium proposed is a negotiating asset which may very well come in handy if it is determined that we need privileges at Dhahran Air Field beyond the current agreement which expires in 1961. With respect to the second aspect of Faisal’s request, therefore, we believe longer range objectives might be better served at less expense to the U.S. if we retain for possible later use the technique of lengthening the repayment period of this credit.

A cable has been prepared for your approval which grants a further moratorium on the Saudi credit discussed herein to permit monthly payments to be resumed in February 1960 with the original terms to apply thereafter. A memorandum to Defense formally recording the moratorium extension has also been prepared for your signature. Should you sign these documents as recommended below they would not be despatched until we have solicited and received the necessary concurrence of the National Advisory Council in this proposal. Both NEA and DOD have concurred in the course of action as recommended.

Recommendation:

That you (a) approve the cable at Blue Tab A,4 and (b) sign the memorandum to Defense at Red Tab D.5

  1. Source: Department of State, NEA/NE Files: Lot 61 D 472, Saudi Arabia, U.S. Military Assistance—1959. Secret. Drafted by Athol H. Ellis of W/MSC. Cleared in draft by Charles W. Adair, Jr., Director Office of International Finance and Development Affairs, and cleared with Parker T. Hart and Seymour Weiss of W/MSC.
  2. Dated January 19, not printed.
  3. Not further identified.
  4. The text of this note, January 8, not printed, is in despatch 141 from Jidda, January 19. (Department of State, Central Files, 886A. 10/1–1959)
  5. Dillon signed the draft cable, Blue Tab A, on February 20 and the Department of State transmitted it that day in telegram 772 to Jidda, not printed. (Ibid., 786A. 56/1–1959)
  6. Red Tab D was a memorandum from Dillon to Irwin, March 3, not printed. (Ibid., NEA Files: Lot 61 D 43, Dhahran)