Foreign Relations of the United States, 1964–1968, Volume IX, International Development and Economic Defense Policy; Commodities

35. Memorandum From the Administrator of the Agency for International Development (Bell) to Secretary of the Treasury Fowler¹

Washington, July 9, 1965.

Dear Joe:

In accordance with the proposal made in Secretary Dillon’s letter of August 13, 1964, to Secretary McNamara,² there have been a number of discussions among the staff of Treasury, Defense and State/A.I.D. in an attempt to develop policy guidelines for the military credit sales assistance program.

First, there is agreement that in countries receiving military or economic aid, military credit assistance should be planned, along with military grant assistance and the various forms of economic assistance, as one of the means for achieving U.S. objectives in each country. Specifically, there is agreement that military credit assistance will be included in the programming of total military assistance required to meet U.S. objectives, and that credit assistance to the major aid-recipient countries will so far as possible be programmed in advance, and thus reviewed as part of the total U.S. assistance provided to that country whether by grant or loans. The Defense Department and State/A.I.D. are now operating under these understandings, and it is my impression there has already been some improvement in the rationality of our decisions. Further effort needs to be made to be sure that credit is programmed against requirements and not as add-on to grant aid.

Second, there is agreement that the logical way to achieve the best relationship between grants and credits in the allocation of military assistance funds would be first to estimate total requirements for U.S. military assistance in aid-receiving countries, and then to determine the best techniques for financing, bearing in mind our political objectives in each country. Proposed military assistance programs would be adjusted with a view to allocating credits to those countries in the best position to carry repayment burdens. While there is agreement on this objective, it will take some time before it can be reached. Such countries as Greece and Taiwan are logical candidates for shifting away from grant aid and toward credit aid, thus leaving grant funds available to meet the needs of countries with lesser repayment capacity, such as India. To make such changes will necessarily take time, in view of existing commitments, political problems associated with the changes, etc. Nevertheless, I regard it as a major step toward a rational use of MAP funds that all of us are agreed to move in the direction of allocating credit and grant availabilities in such fashion as to place repayment burdens on those countries most able to bear them.

Third, State/A.I.D. are vitally concerned with the terms on military assistance to the less developed countries, not only in connection with the general coordinating responsibility provided for in the Foreign Assistance Act,³ but also, specifically in connection with the capacity of the less developed countries to service loans for economic and social development. The rapidly increasing debt burden on less developed countries is a matter of growing concern to the industrialized countries, as well as the less developed countries and has a substantial bearing on the possibility of these countries being able to finance their development at a rate consistent with Free World objectives.

As you know, A.I.D. seeks to make its assistance available on terms consistent with the capacity of the aid-receiving country to service foreign exchange debt. Consequently, nearly all of the less developed countries that A.I.D. continues to assist are receiving loans on the most concessional terms authorized under the Foreign Assistance Act. I believe that military assistance to recipients of substantial and continuing A.I.D. assistance at minimum terms should be planned, so far as feasible, on a grant basis. Where special circumstances indicate the desirability of credit sales to these countries, terms should be roughly comparable to A.I.D. medium terms. Originally, I had hoped it would be possible to reach agreement on a general principle that military credit terms would parallel economic assistance terms as to maturities, grace periods, and interest rates. I have been persuaded that this is infeasible because to provide terms for military credit sales as “soft” as those for development loans, for all the countries where credit sales are desirable this year, would require more MAP funds than are available. In order to stretch the MAP funds as far as they need to go, it is plainly necessary to use the guaranty authority granted by the Congress in this year’s Foreign Assistance Act.⁴ This means, even in cases where there is a mixture of guaranteed private financing and direct MAP credit sales, the resulting average credit terms in most instances will exceed substantially the terms on which development loans are made to the same country.

As a practical matter, therefore, it seems to me necessary for the present time to stretch the available MAP funds by using the guaranty authority, recognizing that the resulting terms in a number of cases will be higher than would be desirable in terms of the purchasing country’s repayment capacity. This stretch of availability can be maximized where credits are substituted for grants. Sales and grant plans should be adjusted, however, to result so far as possible in softer terms for those countries with the lowest economic capacity to repay. We can and should ask in each case whether the military sales in question are of sufficient value to U.S. interest to warrant the assumption of the repayment burden that will ensue.

This leaves unsettled, however, the question of what policy should guide us as we look to the future. I take it none of us holds the view that we should regard military credit sales, on the model of Export-Import Bank loans, essentially as means for selling American equipment on near commercial terms, and that such sales should be made to less developed countries only to the relatively small extent that they can afford to accept quasi-commercial terms. All of us, I believe, regard military credit assistance, like military grant assistance and economic assistance, as a flexible means for enabling the U.S. to help a less developed country achieve defense and development objectives with which the United States must concur if the assistance is to be granted.

Logically, the use of all these forms of aid should be related to a plan under which the recipient country can achieve in a foreseeable period of time a self-sustaining economic situation, under which it can afford to pay for its defense and development needs without special assistance from the United States or anyone else. In practice the application of such a standard is, of course, difficult and uncertain. Nevertheless, it is clear that in seeking to achieve it in the case of countries like India, which have very limited economic capacity to assume more debt, military credit sales on medium or hard terms will either slow down the time at which economic viability can be achieved or enlarge the amount of economic assistance on soft terms which will be needed.

So far as I am aware, this logic has not been challenged. Defense, however, proposes to continue providing military credit to these countries on hard terms; indeed, the softest terms that Defense has been willing to consider for the less developed countries would necessitate repayment during the grace period of A.I.D. loans. Defense justifies these terms on the lack of available commercial funds for periods longer than ten years, even when guaranteed by the full faith and credit of the U.S. Government. We believe this questionable in light of our experience in guaranteeing 20-year credits under the A.I.D. housing and other extended risk guarantee programs. We have already authorized guarantees of more than $100 million in credits with 20-year terms and have a number of institutions seeking guarantees for additional credits of this type.

We have concluded, after considerable analysis and evaluation, that Defense should not and need not undo what is being accomplished by A.I.D. We, therefore, would urge that the terms on credits made by Defense to less developed countries to which A.I.D. provides substantial assistance at minimum terms should, in any event, not be harder than a term of 20 years, a grace period of 5 years, and an interest rate of 3% per annum. We would expect such terms could be achieved by an appropriate combination of guaranty and direct credit arrangements.

Sales to non-industrialized countries, other than recipients of substantial A.I.D. assistance at minimum terms, we would suggest could generally be bank financed under the MAP credit guarantee. Such terms currently are 5% interest, repayment 5–10 years, and we would expect, as indicated above, that longer maturities would be feasible where appropriate.

Attached is a list giving a suggested indication of the countries we would think should be included in these categories.⁵ Such a list should, of course, be revised from time to time to reflect changing circumstances.

I assume that sales to industrialized countries should not need military credit sales funds, since the Export-Import Bank will normally be able to supply any credit needed.

I would be glad to discuss these matters further with you and others concerned. I believe the issues involved are important and we should continue to seek their resolution.

Sincerely yours,

Dave ⁶

1. Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 68 A 2148, DEF 19 Military Assistance, FY 1966. Confidential.
2. Not found.
3. See footnote 3, Document 33.
4. Section 509(b) of the Foreign Assistance Act of 1964, as amended, P.L. 88–633 (78 Stat. 1011).
5. Not printed.
6. Printed from a copy that indicates Bell signed the original.