Foreign Relations of the United States, 1958–1960, South and Southeast Asia, Volume XV

357. Memorandum of a Conversation, Department of State, Washington, June 12, 1959¹

Washington, June 12, 1959

SUBJECT

• Call upon the Acting Secretary by His Excellency, Mohamed Shoaib, Finance Minister of Pakistan

PARTICIPANTS

• The Acting Secretary, Mr. Douglas Dillon
• His Excellency, Mohamed Shoaib, Finance Minister of Pakistan
• Mr. Aziz Ahmed, Ambassador of Pakistan
• W/MSC—Mr. John O. Bell, Special Assistant for Mutual Security Coordination
• SOA—Mr. Henry W. Spielman

The Finance Minister opened the meeting by apologizing for being late, but pointed out that the flight on which he had a reservation from New York had been cancelled without notice, and it took a little time to locate another flight. Mr. Dillon reassured Mr. Shoaib that this was not unusual and that he had had a similar experience.

The Finance Minister said that he appreciated this opportunity to assure Mr. Dillon that the present Government of Pakistan was continuing its efforts to improve the economic conditions of the country. He thanked Mr. Dillon for the additional $15 million of Defense Support made available to Pakistan,² and pointed out that these funds would be used to help supply the much needed imports to keep Pakistan’s industries operating at near capacity, thereby producing additional commodities that would help combat inflation. Mr. Dillon said that it was because Pakistan, under the new government, had taken effective measures to meet the country’s economic crisis that it was possible for the United States Government to help. Mr. Dillon pointed out that it was the example of such efforts that made it possible for the Department of State to present to Congress justification for the continuation of aid programs. Mr. Shoaib said that both he and President Ayub recognized the fact that the corrective measures taken to date were initial steps and that continued efforts would be required for a considerable period of time before an end would be in sight. For example, he said, it would be necessary to increase the rate of taxation on agriculture. Mr. Dillon injected that this added taxation might not be possible so soon after the implementation of the recent land reform measures. Mr. Shoaib said that Mr. Dillon was correct. He then went on to point out that his government expected some adverse effects from the land reform program, but that they probably would not be noticeable until next spring. He said that the current good wheat crop had been produced under the old system and with favorable weather conditions; that little food was produced during the summer growing season and that the main food crop was wheat, which would be planted in the fall. The old landlords had provided useful services, he said; now the government was busy creating machinery to replace the landlords, making provision for agricultural credit, and in encouraging a broader marketing organization. He, as well as Ambassador Ahmed, thought that credit for service facilities would be ready in time to meet most of the requirements for the fall planting of wheat. However, it probably would not meet the full requirements of the new system, and therefore wheat production, he pointed out, would likely be smaller next year. Mr. Dillon assured the Finance Minister that if additional wheat were required the United States would attempt to supply it from PL–480 resources.

In his conversations with businessmen in New York the Finance Minister said that he was encouraged by the number who had expressed an interest in taking advantage of the two-year tax moratorium for industries established after April 1, 1959. Mr. Dillon said that this tax holiday should be an inducement for encouraging both foreign and domestic investment in new enterprises. He then asked if the revision in Pakistan’s income tax would materially affect receipts. Mr. Shoaib said that by reducing the tax rate on personal incomes he thought that a much higher proportion of income would be declared and that resulting revenue would be maintained at the same level; in fact, in his new budget presentation for FY 1960 revenue from income taxes was being shown as the same amount as the previous year.

Mr. Shoaib said his government was also encouraged by the reaction of the German Finance Minister³ who recently visited South and Southeast Asia and who had recommended a line of credit amounting to Deutschmarks 130 million at 5½ percent interest. Mr. Shoaib said that the German interest was determined by adding one percent to the going rate in Germany at the time of the loan. This loan was for the purchase of goods made in Germany, but was a long term loan and not merely a suppliers’ credit. In response to a question, Mr. Shoaib said that the British used the same rule of thumb for determining the rate of interest on loans.

Mr. Dillon pointed out that one reason Pakistan had received a large amount of Development Loan Fund loan assistance was because Pakistan had submitted a large number of applications for sound projects. He hoped that Pakistan was continuing to develop similar new project applications. The Finance Minister assured Mr. Dillon that such project applications were being developed.

1. Source: Department of State, Central Files, 790D.5–MSP/6–1259. Confidential. Drafted by Spielman on June 15.
2. Rountree informed Shoaib on June 8 that considerable effort had been made to locate additional funds for Pakistan, and that he was pleased to inform the Finance Minister that it would be possible to supply Pakistan with an additional $15 million in Defense Support funds during fiscal year 1959. A memorandum of this conversation, drafted by Spielman, is ibid., 790D.5–MSP/6–859.
3. Heinrich von Brentano.