Foreign Relations of the United States, 1964–1968, Volume XXV, South Asia

328. Memorandum From Secretary of State Rusk to President Johnson ¹

Washington, April 27, 1966.

SUBJECT

• An Aid Deal for Pakistan

We have told Mrs. Gandhi that we are prepared to do our part in support of an economic reform program, which is now being worked out between Indian Planning Minister Mehta and the IBRD. We must urgently decide how to proceed with Pakistan. Our economic decisions for Pakistan are complicated, however, by political problems.

Pakistan’s Finance Minister Shoaib leaves Washington April 29. I will be seeing him shortly before his departure and would like your permission to present to him the aid deal indicated below. Shoaib must present his budget in early June and therefore his economic policies must be set within the next six weeks. The IBRD has taken the lead in formally promoting the economic aspects of the aid package recommended below, and to support our effort to achieve an understanding on defense expenditures.

On the political side of the problem there are two basic policy questions: (1) Has President Ayub violated his understanding with you in acquiring Chinese Communist military equipment? (2) Has Ayub’s political performance since his talks with you justified return to economically justifiable development lending?

Our recommendations assume that the steps so far taken do not represent a breach of your understanding and that we need to reach a combined economic-political bargain in order to help Ayub balance the pressures pushing him toward Communist China.

Recommendation 1: That you authorize us to describe to Pakistan’s Finance Minister Shoaib the following bargain: We are ready to resume AID commodity lending in six-month slices beginning in July at a level needed to support Pakistan’s development program and self-help policies (about the FY 1965 annual rate of $140 million) provided other members of the IBRD Consortium do their fair share and that Pakistan: (1) limits its defense expenditures to a level to be agreed upon (we will seek a comparable understanding with the Indians); (2) demonstrates a conscientious effort to maintain the “spirit of Tashkent” and to contain the intensity of India-Pakistan disputes; (3) demonstrates a satisfactory appreciation of basic U.S. interests in Asia; (4) maintains a satisfactory level of cooperation with the United States; and (5) accepts the economic conditions advocated by the IBRD Consortium to restore the funding level of its development program and restore and extend import liberalization. These conditions are defined more fully under U.S. requirements below.

Recommendation 2: That you authorize us to tell Shoaib that after we know the results of this spring’s wheat harvest, we will agree to negotiate a PL–480 agreement and provide shipments for six months, subject to the understanding that the GOP would take further steps to promote greater agricultural output.

Recommendation 3: Within the context of these two decisions to resume aid, we recommend that you authorize us to tell Shoaib at the same time, as a further carrot to performance, that we will proceed to cost out the Karachi Steel Mill and, assuming that the political climate continues to be satisfactory and that costing problems prove to be manageable, we will look forward to a favorable decision within perhaps three to four months on a U.S. contribution of not over the $120 million level ($85 million EXIM Bank; $35 million AID) earlier contemplated.

We have concluded that there will be adequate funds to finance this package. The first slice of commodity aid can be financed from money already appropriated. The second slice is only about half of the new money for Pakistan included in your appropriation request for this year. The $35 million for the steel mill would leave a margin of $40 million.

Administrator Bell concurs; Secretary Freeman concurs in those recommendations concerning food aid.²

Background:

Pakistan-Communist Chinese Relationship: Fear plus India’s attitude on Kashmir operate to pressure Pakistan to seek unqualified political support from a major power. The continuing Indian military build-up pressures Pakistan to seek suppliers of military hardware. The current power alignments and our withholding of MAP cast Communist China in both roles. Pakistan has recently received a number of MIG-19’s (the best estimate cites 22 out of a reported planned total of 100) plus medium tanks from the Chicoms, who are offering substantial additional materiel. During the visit of China’s President to Pakistan last week, the public theme of Chicom-Pak solidarity against India was intensified. But President Ayub appears to have resisted Chinese lures which would place impossible strains on Pak-U.S. ties. Ayub instructed Shoaib to tell us there has been no change whatsoever in the discussion and understandings which Ayub reached with you last December.

Ayub’s Domestic Problems: In the present atmosphere, it is as impossible politically for Ayub to abandon his efforts to resolve the Kashmir dispute with India as it is for Indira Gandhi to make meaningful concessions to Ayub before the elections in 1967. If he is to retain his power base, which has been weakened by recent events, Ayub has few options. He must continue a hard line against India, maintain his ties with the Chicoms, and seek to replenish his military stockpile.

U.S. Requirements:

1. Our requirements are peace and stability in the subcontinent and Pakistan respect for basic U.S. interests in Asia; we assume that the Chinese objectives are the precise opposite. Therefore, we need to have continuing evidence from Pakistan that in managing its relationship with China it is meeting our requirements; e.g.,

• —Maintenance Spirit of Tashkent: Pakistan must make an evident effort to restrain the intensity of India-Pakistan disputes. It must be willing to continue the dialogue with India at whatever levels necessary to achieve progress in resolving “matters of direct concern to both countries.” Pakistan must be willing to seek agreement on other outstanding issues, particularly those left over from last September’s conflict, without conditioning settlement on progress on Kashmir, although we recognize that for its part, India must be willing to discuss Kashmir with Pakistan. Willingness to agree to cooperative joint India-Pakistan economic projects would be evidence of a desire by Pakistan, as India, to maintain the spirit of Tashkent.
• —Satisfactory Appreciation of Basic U.S. Interests in Asia: This should be reflected in the Pakistani attitude on the U.S. effort in Vietnam, and in Pakistan’s continued adherence to the SEATO and CENTO alliances.
• —Satisfactory Level of Cooperation with the U.S.: This should be reflected in the continued operation of the U.S. special facilities at Peshawar, Pakistan (which represent [less than 1 line of source text not declassified] of our intelligence needs in Pakistan and which have continued in operation without interruption); in continuing a satisfactory pace of negotiations for the reopening of our two Atomic Energy Detection Stations [1 line of source text not declassified]; and in building a climate (e.g., through restraint and accuracy in public statements and the controlled press) which is conducive to friendly relations with the United States.

2. Limit on Defense Expenditures: We will require an understanding with Pakistan, as we also will with India, on limiting military expenditures. We have examined various approaches to this problem and have concluded that the most realistic way to proceed is to do what we can this year to reduce the level of defense expenditures in both countries, starting from bargaining positions outlined below. We recognize, however, that, given the current state of India-Pakistan relations and political pressures in both countries, immediate results will be limited. Therefore, we will put the weight of our effort on achieving a downward trend in defense spending over the years by conducting with India and Pakistan an annual review of defense expenditures in connection with consideration of our economic aid program. We would ask both countries to disclose to us, at least in general terms, what equipment they are receiving from Communist China and the Soviet Union. We would also say that if they are unable to sit down together to work out an agreed limitation on defense expenditures, we would hope at least that each would ensure that the other learns of the steps it is taking to cut back on defense spending so as to encourage reciprocal cuts.

For discussions with Pakistan and India this year, we would start from negotiating positions as follows:

• Pakistan: For the fiscal year about to begin, Pakistan should limit its over-all defense expenditures to 3 1/2 % of estimated GNP for a total of about $400 million (expenditures during the past year total $525 million and constitute approximately 5.3% of GNP), and limit its foreign exchange expenditures to $84 million, this figure to include the value of aid from all sources (expenditures in foreign exchange during the past year have been about $147 million).
• India: For the fiscal year just begun, India should reduce its actual defense expenditures from its budgeted level of $2081 million to no more than last year’s actual expenditures ($1972 million or about 3 1/2 % of estimated GNP) and should reduce its foreign exchange expenditures to no more than $286 million, counting Soviet equipment on the basis of deliveries rather than payments. (The $286 million figure comes from a Memorandum of Understanding we negotiated with the Indians in 1964, but the Indians have been counting Soviet equipment, which they get on long-term rupee credit, on a payments basis. On this basis they are probably within the ceiling, but on a deliveries basis they will be $50–100 million over it. We propose a change since it is the deliveries of large quantities of Soviet equipment which is an important stimulus to the extensive Pakistani military procurement program.)

3. Economic Requirements: We will also seek a restoration by Pakistan of its previous priority and funding to economic development in FY 1967, agreement to a resumed and extended import liberalization program by July and steps to increase further agricultural production, including active pursuit of potential foreign investors in fertilizer production.

Dean Rusk

1. Source: Johnson Library, National Security File, Memos to the President, Walt W. Rostow, Aides File, Vol. 1, April 1–30, 1966. Secret.
2. President Johnson approved each of the three recommendations. The decisions were conveyed to Shoaib before he left Washington, and a summary of the talks with Shoaib in which the understanding concerning economic assistance was outlined was transmitted to Karachi in telegram 1564, April 30. (National Archives and Records Administration, RG 59, Central Files 1964–66, POL 7 PAK)