Foreign Relations of the United States, 1961–1963, Volume XXIII, Southeast Asia

297. Memorandum From Michael V. Forrestal of the National Security Council Staff to President Kennedy⁰

Washington, December 17, 1962.

Emergency Assistance to Indonesia

You will recall that a program of emergency assistance to Indonesia was discussed with you in October.¹ You approved the program as recommended by State except for that part of it which provided for between $15 and $20 million of raw materials and spare parts for Indonesian industry, which is apparently operating at only 50 percent capacity for lack of these commodities. At that time you wanted to know whether these commodities would be procured in the United States or elsewhere before approving this part of the program.

The Indonesians have now furnished us with a list of raw materials and spare parts, approximately $17 million of which would come from the U.S. and $18 million from other sources. State and AID propose to offer the Indonesians a $17-million loan for raw materials and spare parts, to be procured in the United States repayable in U.S. dollars at 3 percent with a maturity of 10 years and a 2-year grace period.

The terms of the loan are thought by AID to be fairly “hard” under the circumstances and not entirely realistic. It is proposed, however, that the loan will contain a clause for renegotiation after a stabilization and development program has been accepted by Indonesia and in the light of any debt rescheduling which may be part of such a program. This is intended to be an additional incentive on the Indonesians to adopt the required measures.

AID’s position is that such a loan at this time is not justifiable on strict economic grounds since, in the absence of stabilization measures, it simply would release an equivalent amount of Indonesian foreign exchange for uneconomic purposes. The justification for this loan is political. Governor Harriman feels strongly that the loan is essential as an indication of our willingness to consider economic assistance to Indonesia once they have put their house in order. An IMF team is presently in Indonesia working on a stabilization and development program. Governor Harriman believes that Indonesian willingness to accept the political burdens of such a belt-tightening program will be substantially affected by a demonstration at this time that the United States was serious when it told Indonesia that it was prepared to give favorable consideration to economic assistance after the settlement of the West New Guinea dispute.

It must also be borne in mind that Governor Harriman told Foreign Minister Subandrio in New York last September that we would provide emergency assistance for spare parts and raw materials.²

The alternative to approving this loan at this time would be to postpone it until we have more evidence that the Indonesians are able and willing to put their affairs in order. The Bureau of the Budget points out that so far the evidence is sadly lacking that this is the case. BoB suggests that we defer any assistance until we are satisfied that it will be properly used. To do otherwise, they suggest, is to start down the same path of balance of payments financing which has proved so ineffective in other countries.

My own recommendation is that you approve the loan as proposed with an injunction against any further commitment until a satisfactory stabilization and development program is accepted by the Indonesians.

MVForrestal³

0. Source: Kennedy Library, National Security Files, Countries Series, Indonesia, Vol. III, 11/62–12/62. Secret.
1. See Document 294.
2. See footnote 1, Document 291.
3. Printed from a copy that bears this typed signature.