292. Telegram From the Embassy in Iran to the Department of State0

1008. Joint Embassy-USAID message. Deptel 894.1 Amini government is being subjected severe strain resulting from fiscal situation. From outset he was confronted with difficult political, economic and administrative problems. By dint personal drive, reform convictions, political finesse and substantial US political and economic assistance, he has been able continue in office more than year, to initiate land reform program, and to make progress with anti-corruption effort. As yet, however, he has been unable establish cohesive cabinet, significantly improve administration, safeguard integrity of Third Plan, or to establish viable political support his government. In recent months he has slipped badly in part due to evident personal exhaustion and almost inevitable difficulties of compromising conflicting political interests. Amini performance in fiscal leadership has been disappointing. He inherited difficult situation which has worsened as 1340 operating expenditures increased 25 percent without compensating actions in revenue field.

Despite reiterated efforts this mission, as well as Plan Org and Central Bank advisors, he has drifted with fiscal problem that predictably was heading into serious crisis unless remedial actions were taken. Had this problem been energetically attacked many months ago, it would still have been a most difficult operation in political and economic sense. However, underlying problem has been aggravated by further commitments for additional operating outlays in 1341 and indecisiveness re critical need increase revenue collections; as result difficulty of bringing fiscal situation under control has increased substantially. Belatedly Amini has become aware that fiscal situation could contribute to collapse his cabinet and he is attempting reduce budgetary deficit.

Total budget deficit has been tentatively identified on order $250 million, about $160 million for the administrative segment and about $90 million for development sector. Revenues are forecast approximately at 1339 level. Oil increases are largely offset by projected declines customs receipts and profits government companies. Tax receipts sluggish due recession with latter contributing factor failure GOI press tax collection and new tax measures. While decision may now be taken [Page 721] impose new taxes on civil service and others, unlikely that actual short-range benefits such actions would be significant.

Administrative expenditure commitments are now at very high levels. Completion Second Plan and other government projects require additional operational and maintenance outlays. The military anticipate a 20 percent increase in defense budget (about $30 million) reportedly for technical improvements. Foreign and domestic obligations re past expenditures represent considerable burden. Carryover unpaid bills on 1340 budgetary authorizations approximate $60 million. Obligations to foreign governments and companies already overdue or falling due this year apparently exceed $100 million spread between operational and development budgets. Main problem, however, has been irrational wage increases for civil servants. Amini’s predecessor, who authorized substantial pay increases for engineer graduates, later loosely interpreted to cover science graduates, fell in large part due his resistance increase for teachers. To mollify latter, Amini authorized almost double pay increase which in combination with engineer/science increases has raised expenditures about $40 million in both 1340 and 1341. Other groups, including police and doctors, have been promised higher salaries. Total potential effect on 1341 payroll estimated at $70 million, including cost extending wage increases to employees retired at full base pay.

Development budget for 1341 consolidates investment expenditure formerly divided between Ministry ($56 million in 1340) and Plan Organization budgets. Total development program expenditures being projected 22 percent above last year, including cost land distribution and partial completion public building program halted 1340. Indicated development deficit of $92 million assumes 55 percent oil revenue allocation for development; $71 million interest and principal on foreign loans; $91 million receipts from existing foreign loans and $6.5 million domestic debt retirement. If no expansion of public investment is undertaken for 1341 development deficit would be about $42 million.

By filling long-vacant post Finance Minister and by ordering administrative budgets to be cut 15 percent below 1340 levels, Amini has taken step in direction reducing deficit. Effectiveness reduction decision limited, however, by apparent intent carry out commitments to teachers, police, military and to agriculture programs related to land reform. As result now appears administrative budget will be pared back, certain obligations will be shifted to capital budget, debt postponements will occur, and certain necessary expenditures will not be made. Given the political and economic rigidities in the present situation, the chances are not bright that GOI can reduce the administrative deficit below $60–70 million without strong possibility of breaking the cabinet. While part of this deficit could be covered by bank credit without undue inflationary [Page 722] consequences, legal and policy problems would be involved since bank charter does not permit credit for GOI operational deficits and cabinet pressure could lead resignation bank officials. To some cabinet members diverting oil revenues from development is preferable to the hard choices in drastically reducing the operational budget and appears a logical adjustment to phased out US grant aid of $30 million last year.

Until budget is finally drawn up it is difficult to give precise answers to specific questions contained reftel. At present, however, we do not believe that Amini has deliberately changed his declared economic and fiscal policies, namely reasonably balanced budget, essential monetary control, and implementation of Third Plan. However, developments have shown that Prime Minister, while continuing to profess these policies, has not been sufficiently aggressive in dealing with the underlying economic and fiscal situation. As a result the attainment of his policy goals is now in serious jeopardy and his expectation of US financing assistance has apparently grown. While we do not think that he has deliberately shifted from his professed policy positions to an attempt to build a case for assistance, we anticipate that before end month he will present to us a program for fiscal reform and a request for large scale transitional emergency assistance.

We also think fact that GOI has been virtually one-man-show, has in past months drained Amini of his extraordinary energies and has made it almost impossible for him to exercise required degree cabinet discipline and to follow-up on specific remedial measures. With regard to specific support by Shah, we do not feel Amini can have serious complaint; the difficulties confronting him at present time are due far more to actions or inactions of himself or his government than to role of Shah. It would of course be of considerable help to Prime Minister if Shah were to agree to reduction in military budget, but it would probably be too much to expect Shah to bail Amini out of a situation essentially created by Amini himself.

In sum, we do not believe Prime Minister has changed his objectives of fiscal responsibility. However, he has permitted situation to develop wherein these goals have been eroded. The chickens have now come home to roost and whether Prime Minister has ability and courage sufficient to undo damage which has been done and to face the serious political disadvantages and repercussions inherent in drastic budgetary cutting remains to be seen. Meanwhile, in conversations with Prime Minister, Foreign Minister, Finance Minister and others, we have consistently pressed for a convincing indication that serious effort has been made to correlate expenditures with domestic resources and have made clear that US interest in assisting Iran financially lies in the field of economic development loans and decidedly not in budgetary support. As mentioned above, however, GOI persists in belief their situation is [Page 723] such that flexible emergency financing will be forthcoming in some form.

In pursuing the line indicated above, we have not of course given any indication of the possible level and specific form of US aid contemplated this year. As this is significant factor affecting GOI budget planning, it might be useful if Ambassador upon his return were authorized to inform GOI that US willing consider requests up to some selected figure in loans for projects and commodity imports related balance of payment need. As part this strategy clear conditions should be conveyed such as: (a) allocation oil revenues to development remains unchanged, (b) credit expansion to public sector not to exceed $30 million and (c) operational budget expenditures over $30 million deficit to be directly tied to revenue increases. We also recommend for consideration that a fiscal stabilization program, including possibility rescheduling foreign debt repayments, be considered as part of the contemplated September 1962 consortium.

  1. Source: Department of State, Central Files, 888.00/6–1262. Secret; Priority.
  2. In telegram 894 to Tehran, June 1, the Department of State requested the Embassy to prepare an assessment of Amini’s current economic and fiscal objectives and the possibility for the successful implementation of his policies. (Ibid., 888.00/6–162)