Foreign Relations of the United States, 1958–1960, Arab-Israeli Dispute; United Arab Republic; North Africa, Volume XIII

238. Memorandum From the Assistant Secretary of State for Near Eastern and South Asian Affairs (Rountree) to the Acting Secretary of State¹

Washington, April 29, 1959.

SUBJECT

• US Attitude with Respect to UAR Application for IBRD Loan for Suez Canal Improvement

Discussion:

Following the signature of the French and British financial agreements with the UAR regulating certain of the problems which arose from the Suez crisis, the question of a possible IBRD loan to the UAR for improvement and development of the Suez Canal is again arising. In March 1959, President Black reported to the British, French and US representatives on the IBRD Board that the Bank is considering the possibility of a loan which might amount to $100 million, with a maturity of some 20 years, to finance the deepening and widening of the Suez Canal. This would cover what is known as first and second stage work, namely deepening from 35 to 37 feet and subsequently deepening from 37 to 40 feet (draft of vessels). A so-called third stage, which might mean a dual Canal, a pipeline or a substantial widening, is not under consideration at this stage. Mr. Black commented that, from a project point of view, such a loan would be quite simple and sound, as the earnings of the Suez Canal Authority are some 40 million Egyptian pounds ($112 million) annually, entirely in foreign exchange, while expenses amount to approximately half this amount and are largely in local currency. On March 10, Mr. Black touched briefly on this proposal at a meeting of the full IBRD Board at which time, according to the US representative, he appeared to receive the Board’s general approval. A small IBRD team was accordingly sent to Cairo on April 20 to undertake a preliminary evaluation of the UAR economic situation and prospects with a view to possible loan operation.

Meanwhile, UAR Minister of Economics Kaissouni informed Embassy Cairo on April 7 that a formal application for a Bank loan for Canal improvement had just been submitted to the IBRD (Embassy Cairo’s G–387 attached, Tab A).² Kaissouni stated that the UAR wished as a first step to obtain partial IBRD financing for existing Canal improvement contracts (which involve three US firms). He expressed gratification at the assurances of US support for sound UAR loan applications to the IBRD which had previously been received from Ambassador Hare (Deptel 2961 attached, Tab B).

The British have now raised with us the question of the attitude which our representatives at the IBRD should adopt with respect to a possible loan to the UAR for Canal development (Deptel 3101 to Cairo attached, Tab C). The UK proposes to instruct its representative to indicate that the British are agreeable to a possible loan on a basis outlined by President Black (see above). However, they suggest that the following conditions be incorporated in any loan agreement with the UAR: (a) there should be no excessive increase in Canal tolls; (b) there should be no international discrimination with respect to shipping; and (c) there should be no arbitrary closure of the Canal. We have been asked to comment on this British suggestion and to indicate whether we would support it at the IBRD.

We are uncertain whether President Black would be prepared, as the British have suggested, to attach conditions of such a manifest political character to an IBRD loan agreement with the UAR. It is our preliminary view that, while all three conditions suggested by the British are desirable aims, existing international instruments go part way to meet the problem. We also question whether the Bank could exercise leverage in this matter since the assured annual income from the Canal is such that financing might be forthcoming from other sources. Furthermore, it might be unwise for the Bank, in an effort to obtain more formal guarantees, to link the question of Canal financing directly to that of a UAR assurance regarding discrimination with respect to shipping, since this would immediately raise the Israel transit question.

You will recall in this connection that the operation of the Suez Canal has been the subject not only of the UN Security Council resolution of October 15, 1956, which incorporated six principles for settling the Canal question (attached Tab E), but also of the unilateral Egyptian declarations of March 18 and April 24, 1957 setting forth basic principles relating to the Suez Canal and arrangements for its operation (Egyptian Declaration of April 24 is attached, Tab D). While the Egyptian Foreign Minister accepted the Security Council resolution on behalf of his government, he had a reservation with respect to the wording of point (3) regarding the insulation of the operation of the Canal from the politics of any country. With respect to the Egyptian Declaration of April 24, Ambassador Lodge commented in the Security Council on April 26, 1957³ that, in its present form, it “does not fully meet the six requirements of the Security Council”. Noting that there is no provision for organized and systematic cooperation between Egypt and the Canal Users, Ambassador Lodge stated that there is no assurance that the six requirements will in fact be implemented. He went on to point out, however, that “perhaps no final judgment can be made regarding the regime proposed by Egypt until it has been tried out in practice.”

Operation of the Canal since that time has shown that, with the exception of the special question of Israel transit, the system proposed by Egypt has worked effectively. At the IBRD Board meeting on March 10 President Black himself commented very favorably on the record of efficient Egyptian operation of the Canal. While full observance by the UAR of the various international instruments with respect to free and open transit through the Canal is manifestly desirable, we question whether, at least at this preliminary stage, it would be advisable for the IBRD to become directly involved in a problem so intractable as the Arab-Israel question. This view is supported by our Ambassador in Cairo (Embtel 3032 attached, Tab F). Any attempt by the Bank to attach conditions to a loan for Canal development along the lines of those suggested by the British would unquestionably be regarded by the UAR, particularly in view of the existing unilateral Egyptian declarations of March 18 and April 24, 1957 on this subject, as an effort to compel the UAR to modify its attitude with respect to the Israel transit problem. We question whether such an attempt would be feasible, in the light of the UAR record on the Palestine question, or desirable, in view of current differences between the UAR and the Soviet Union arising out of the situation in Iraq.

It is also our impression that Mr. Black may have given some indication, in his past contacts with Egyptian officials, of a willingness to consider Bank financing for Canal improvement projects once a Suez settlement were reached and British and French financial differences with the UAR regulated. If this impression is correct, it would appear unwise for the IBRD now to seek to attach additional conditions of a sensitive nature to any loan agreement with the UAR.

In conclusion, we believe in view of all the circumstances that it would be inadvisable to raise the question of attaching specific political conditions to an IBRD loan to the UAR for Canal improvement at this stage. We understand that it will be many months before the IBRD is prepared to give formal consideration to a UAR application for significant projects to widen and deepen the Canal, by which time there will have been a further opportunity to observe UAR practice with respect to freedom of passage through the Canal with particular reference to the transit problem. In the event that UAR practice continues unsatisfactory with respect to Israel cargoes, Israel itself may well raise objections to any large-scale loan for deepening and widening the Canal (Tel Aviv Embtel 831 attached, Tab G), thus making it as unnecessary as it is politically undesirable for the major Western powers to take the initiative on such a sensitive question.

Recommendations:

1. That the Department recommend to the US Executive Director in the IBRD that he take the following preliminary position with respect to the UAR loan application for improvement of the Suez Canal:

(a) In general the US is prepared to support UAR loan applications for sound projects, including Canal development.

(b) While the Egyptian reservation with respect to the six principles and the Egyptian declaration of April 24, 1957 does not fully meet the desired requirements for operating the Suez Canal, these declarations have provided a generally acceptable legal framework within which the operation of the Canal since that time has been relatively satisfactory.

(c) The UAR has not, however, given full effect either to the six principles or the Egyptian declarations of 1957 as the result of the special circumstances arising out of the Arab-Israel problem.

(d) While it would appear desirable for the IBRD to obtain UAR agreement to cease all discrimination with respect to shipping through the Canal, we believe, subject to President Black’s views, that it might be politically unwise for the Bank to attach any conditions to a loan which would link Bank financing to a politically difficult UAR concession on the Israel problem. Specific questions regarding observance of the Security Council resolution of October 16, 1956 would appear matters for the U.N. to decide.

(e) In the circumstances, the US believes the IBRD should (i) move forward on what we understand is the immediate UAR interest in partial financing of existing Canal improvement contracts without attaching special conditions; and (ii) defer the question of including in a major loan agreement more specific guarantees than currently exist until such time as a question of such a loan for new improvements comes up for discussion, when it should be considered carefully in the light of the continuing UAR practice with respect to the freedom of Canal transit.

2. That you authorize us to consult with the British regarding our attitude as outlined above before it is communicated to the IBRD Board.

3. That you informally acquaint President Black of our preliminary views in accordance with the foregoing recommendations.⁴

1. Source: Department of State, Central Files, 986B.7301/4–2959. Confidential. Drafted by Brewer on April 27 and initialed by Rountree. Concurred in by E, EUR, W/MSC and the Department of the Treasury.
2. Tabs A and C–G are not printed. Tab B is printed as Document 236.
3. For text of this statement, see American Foreign Policy: Current Documents, 1957, pp. 969–970.
4. Dillon initialed his approval of all three recommendations on April 29.