118. Letter From the Acting Coordinator for Security Assistance of the Department of State (Vest) to the Director of the Defense Security Assistance Agency (Peet)1
This is in response to your memorandum of February 21 (I–1487/74) regarding FY 1974 credit assistance to Tunisia.
The Department of State concurs in the extension of $2.5 million in FMS direct credit to the Government of Tunisia in accordance with the terms and conditions set forth in the enclosed Credit Justification dated May 9, 1974. This Justification has been concurred in by representatives of the Departments of State, Defense, and the Office of Management and Budget. The Department of the Treasury believes that given the amount of credit involved and the strength of the Tunisian economy that the credit term should be no more than five years. Any significant changes in the purpose of the credit or in the terms and conditions should be submitted for similar approval.
You will note that the term of repayment has been set at eight years in contrast to the ten year period suggested in your memorandum. The eight year period has been decided upon on the basis of available economic information on Tunisia and US foreign policy interests vis-à-vis Tunisia and the Middle East in general.
I am sending copies of this letter to the Department of the Treasury and the Office of Management and Budget with the understanding that this letter constitutes a request to OMB to apportion the necessary funds.
Sincerely,
George S. Vest
[Page 332]Attachment
Credit Justification
Washington, May 9, 1974.
JUSTIFICATION OF FY 1974 CREDIT
1. Country: Tunisia
2. List of Major Items and Estimated Costs:
14 rehab A–4C aircraft at an estimated cost of $7 million. FY 1974 funding required will be $2.5 million.
3. Financing:
a. In August 1973, Tunisia decided to buy and the US agreed to sell a quantity of used A–4C aircraft to replace the GOT’s aging F–86’s. Subsequently, the GOT informed us of its desire to use FY 74–75 credits to help finance this purchase.
b. Concessionary Interest Rate: None
c. Total Amount of this Credit: $2.5 million
d. Procedure: A $2.5 million direct FMS credit agreement will be concluded between the GOT and the USG providing for repayment of principal over an eight year period and with interest at the cost of money to the USG as of the date the agreement is signed. Repayment of principal will be 15 consecutive semi-annual installments of $150,000 each commencing 1 January 1976 and a final payment of $250,000. Interest will be paid each 1 January and 1 July commencing 1 July 1974 on the amount by which cumulative disbursements exceed cumulative repayments of principal. The disbursement period of the agreement ceases two years from signature.
4. National Security and Military Justification:
a. Does the provision of this credit support a military requirement derived from a US-approved force goal?
Yes. The USG has agreed that these aircraft are necessary to replace existing, obsolete aircraft.
b. Are there other military justifications?
This transaction will enable Tunisia to meet its legitimate security needs. Neighboring countries possess sizeable military forces with considerably more sophisticated aircraft than Tunisia. Tunisia’s existing F–86’s are obsolete and need to be replaced. The A–4C aircraft is a logical replacement, since it is modestly priced, subsonic, and less sophisticated than most other jet fighters. The acquisition of these aircraft [Page 333] would be consistent with Tunisia’s desire to maintain a modest self-defense capability.
c. If there is a grant military assistance program (MAP), does the provision of this credit complement the program? Does it take into account MAP priorities?
Grant military assistance for Tunisia is being phased out at the end of FY 75. Beginning in FY 74, Tunisia is receiving FMS credits to assist it in meeting its defense needs. The provision of this credit will therefore complement the MAP program.
d. Does the recipient country have the capability to absorb and utilize the equipment effectively?
Yes.
e. Does a major item represent an important advance in weapons sophistication?
No.
5. Foreign Policy Justification:
a. What are the relevant policy considerations affecting the provision of this credit? How does it support US objectives in the country and in the region?
Tunisia is a moderate Arab country which has long been favorably disposed towards the United States and the West. Tunisian ports are the only ones on the southern Mediterranean littoral that are open to visits by the US Sixth Fleet, and even during the recent Arab-Israeli conflict the Tunisian Government maintained a favorable posture towards the USG. Tunisia has no expansionist or aggressive policies, and is interested in peace and stability in the Middle East. It is therefore in US interests to continue to maintain friendly relations and provide reasonable security assistance to Tunisia. Provision of this credit on the terms stated above is consistent with our foreign policy objectives vis-à-vis Tunisia.
b. Will the provision of this credit affect the regional arms balance or contribute to an arms race?
No. Tunisia is replacing one type of aircraft with another which is only slightly more advanced, and will still have far less sophisticated fighter aircraft than its immediate neighbors.
c. Will this credit be used to provide sophisticated weapons systems within the meaning of the Conte Amendment?
The A–4C aircraft is not believed to be a sophisticated aircraft within the meaning of the Conte Amendment. This preliminary characterization will be reviewed by the IPMG.
d. Is the country run by a military dictatorship which denies social progress within the meaning of the Reuss Amendment?
No.
[Page 334]6. Economic Justification:
a. Is there a demonstrable need for credit assistance?
Yes. With the anticipated phasing out of grant military assistance at the end of FY 75, Tunisia is turning to the use of credits to meet its modest security needs. Credit assistance enables Tunisia to allocate its resources in a more rational manner, and is best suited to its existing financial situation.
b. Will the provision of this credit create a repayment obligation which will place an undesirable burden on the country’s foreign exchange resources, produce excessive changes on future budgets, or otherwise interfere with development?
No. The following is a recent summary of Tunisia’s economic situation based on information supplied by Embassy Tunis:
“Tunisia’s crude petroleum exports are modest when compared to other Arab States and represents only 27% of total exports. Currently, Tunisia produces and exports 30 million barrels of high grade crude a year and imports about 7 million barrels a year of high sulphur crude (low grade) for its refineries. After deducting imports from exports, net foreign exchange earnings from petroleum are expected to increase from $75 million in 1973 to $295 million in 1974. These earnings, together with increased earnings from phosphate exports, result in an improved balance of payments; projections indicate a change in the current account balances from a deficit of $115 million in 1973 to a surplus of $57.5 million in 1974.
While the current economic picture is bright some compromising factors should also be noted; i.e., the boom in petroleum and phosphate prices may end in 1975; import prices for fertilizer, machinery, manufactured goods, and agricultural commodities will decline as Europe experiences overall recession; and high unemployment continues in Tunisia.”
7. Congressional Implications:
We do not anticipate that there will be any Congressional problems over the provision of this credit.
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Summary: Vest informed Peet of the extension of $2.5 million in FMS direct credit to Tunisia with a repayment period of 8 years.
Source: Washington National Records Center, OSD Files: FRC 330–800025, Box 2, Tunisia. Confidential.
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