Foreign Relations of the United States, 1969–1976, Volume E–7, Documents on South Asia, 1969–1972
Document 215
215. Memorandum From the Executive Secretary of the Department of State (
Eliot
) to the President’s Assistant for National Security Affairs (
Kissinger
)
1
2
Washington
,
January 25, 1972
Subject:
Economic Aid Policy for Pakistan and India
At the
SRG
meeting of January 19 we were asked for recommendations on our aid policy for Pakistan and India. Joint State-
AID
recommendations are as follows (addendum provides background and additional rationale):
PAKISTAN
Rice Export
Follow up as appropriate on our approval of
Bhutto
’s request for permission to export 300,000 tons of low quality rice which is now surplus in West Pakistan as a result of interruption of normal inter-wing trade. In this connection we have already authorized Embassy Islamabad to offer to assist in meeting foreign exchange costs of moving part of this surplus rice to Bangladesh, providing
Bhutto
can work out such an arrangement with Bangladesh authorities. (
Bhutto
has already publicly offered rice to the East; we are suggesting that he follow up with an offer of humanitarian assistance through the
UN
.)
PL
–480
Conclude current negotiations for
PL
–480 agreement of 300,000 tons of wheat and 25,000 tons of edible oil, valued at $27 million. This will help meet the immediate need for food and budgetary help.
Debt Deferral
Adopt a forthcoming attitude at the February 22 meeting of Aid-to-Pakistan Consortium with regard to

the
GOP
request for further debt deferral. Pakistan’s foreign debt position is sharply deteriorating and relief is required urgently.
New Development Aid
Indicate to the
GOP
our readiness to act in concert with the Aid-to-Pakistan Consortium in providing resumed financial support for Pakistan’s development effort, as soon as an outline of Pakistan’s revised development plan and strategy is available. The
IBRD
tentatively envisages a Consortium pledging session in July. However, Pakistan’s financial situation is such that some
FY
72 commodity lending may prove necessary for short-term financial support short of preparation of a full development strategy.
INDIA
Aid Suspension
Hold in abeyance for the time being any decision with regard to the suspension of $87 million of the
FY
71 pipeline but review the suspension at frequent intervals as Indian intentions become clearer.
PL
–480
Conclude an agreement with the
GOI
if, in spite of its initial negative reaction, it finally decides to pick up our outstanding offer to substitute 50,000 tons of vegetable oil to replace some of the wheat under last year’s
PL
–480 agreement, which we made in order to stabilize the distressed
US
soybean oil market.
If this agreement is reached, consider, in light of
US
market conditions at the time, whether we wish to proceed with the negotiation for a further 150,000 tons of vegetable oil under a new
PL
–480 agreement which was pending at the outbreak of the Indo-Pakistan war.
Leave in abeyance for the moment the question of 30,000 bales of cotton which we agreed to permit the Indians to buy under a letter of credit last October in anticipation of (but without formal commitment to) such an amount in a new
PL
–480 agreement.

Trade and Investment Programs
Give a go-ahead to
USG
agencies, administering programs primarily for the benefit of
US
trade and investment (Export-Import Bank, Overseas Private Investment Corporation, and Commodity Credit Corporation). These agencies have held in abeyance programs of loans, guarantees, and credits which
US
commercial concerns are requesting in order to safeguard Americans’ interests and enhance the
US
firms’ competitive position in the Indian market. We think they should now be instructed to apply normal commercial criteria to these programs.
New Development Aid
Consider the extension of new development aid to India at such time as a new relationship with India is worked out.
Theodore L. Eliot, Jr.

Attachment
Paper
Washington
,
undated
ECONOMIC AID TO INDIA AND PAKISTAN
Background and Rationale
PAKISTAN
1.
Pipeline Aid
The aid pipeline of undisbursed
AID
funds for Pakistan is $56.7 million ($29.9 million in commodity aid and $26.8 million in projects). Of this, $35.5 million was earmarked or obligated for East Pakistan lending; $21.2 million for West Pakistan.
2.
PL
–480
We have authorized our Mission in Islamabad to conclude a
PL
–480 Title I agreement for Pakistan of wheat and edible oil valued at $27 million. This agreement, the first for West Pakistan since before the fighting in East Pakistan in March 1971, will help meet West Pakistan’s immediate need for food and budgetary assistance. In concluding the agreement we have also authorized a waiver of export limitation, permitting Pakistan to seek export markets for its surplus rice, and we have informed President
Bhutto
that if arrangements could be made to move part of the rice to former East Pakistan under the
UN
relief effort, we would be prepared to assist in paying shipping costs of such rice.
3.
Consortium Debt
The World Bank has called a meeting of heads of delegations of the Consortium on February 21, 1972, primarily to discuss Pakistan’s foreign debt position which is onerous and worsening. Currently Pakistan is committed to repay foreign loans amounting to over 25 percent of its earnings from exports as computed before the East Wing broke away.

It is unrealistic, financially and politically, to expect Pakistan to resume its international debt payments in full on February 1 the expiration date of the nine month unilateral moratorium. We should press for recognition of this by Consortium members. In last fall’s Consortium discussion, a $90 million annual debt deferral package was considered and rejected (supported by the
US
). Pakistan is now seeking a higher level. However, Pakistan is likely to recognize that any request for complete deferral will not be accepted by the Consortium and may settle for loss than the de facto annual rate of $120 million of the current unilateral moratorium. We should help the World Bank lead the Consortium members to an appropriate compromise. Alternatively, since there is a trade-off between the amount of debt relief and the duration of the debt relief timetable, we could seek agreement on a short (2 or 3 month) full extension while the matter of longer term debt rescheduling is being arranged.
4.
New Development Aid
Mr.
Peter Cargill
, Chairman of the
IBRD
Aid-to-Pakistan Consortium, has just completed a short visit to Pakistan. He outlined to
GOP
officials the importance of prompt revision of Pakistan’s national development plan and accompanying report. Bank President
McNamara
will visit Pakistan beginning January 29 and his visit will serve to reinforce Bank reviews on the need for forthright economic decisions by the
GOP
(including exchange reform) as a prelude to resumption of development aid to Pakistan by Consortium members.
Cargill
has suggested to Pakistan that the Consortium could not meet on general aid until Pakistan was able to present its revised development strategy and
FY
1973 budget. (This would not be before July.) Pakistan hopes for earlier action on general aid. We believe an earlier date is both possible and desirable.
We have suggested to
GOP
officials that they consider asking for an earlier Consortium meeting (perhaps as early as March) at which they would present a report of economic decisions taken and would outline basic elements

of the
FY
1973 development strategy (as opposed to a detailed budget which could not be presented for several months). If the
GOP
agrees to make such a presentation, we should urge the World Bank to call a meeting, and should mobilize support among other nations.
At such a proposed meeting we should be prepared to announce a
US
commodity loan and should urge: (a) others to do the same, including the World Bank, and (b) provision of a standby credit by the
IMF
: The magnitude of a
US
commodity loan could be $50 million (this would compare with about $45 million which would have been made available for West Pakistan imports under the loan contemplated but not made in
FY
1971Y.
INDIA
1.
Pipeline Aid
$87.6 million in non-project aid that had not been finally committed to suppliers and banks was suspended on December 6 and remains suspended. Not covered by the suspension is $135 million of prior years’ aid, consisting of about $105 million in non-project aid already covered by irrevocable bank and suppliers’ commitments and about $30 million in project aid.
2.
Aid Suspension
Hold in abeyance for the time being any decision with regard to the suspension of $87 million of the
FY
71 pipeline but review the suspension at frequent intervals as Indian intentions become clearer.
We must recognize, however, that a decision to continue the suspension could carry certain costs to the
US
, including:

[
1 page not declassified
]
soybean oil market, whether we should proceed with negotiations for an additional sale of 150,000 tons under a new
PL
–480 agreement, which had been cleared within the
US
Government and had been discussed in general terms with the Indians before the outbreak of hostilities on the subcontinent.
If we do decide it is in our interest to move this additional 150,000 tons of vegetable oil, we will also have to consider what disposition to make of the 30,000 bales of cotton for which we issued a reimbursable letter of credit to the Indians last October in the anticipation that at least this amount of cotton would be included in a new
PL
–480 agreement. (The Indians have not purchased under this letter of credit and are not likely to do so unless it appears we will include this cotton in a new
PL
–480 agreement so that the high
US
price could be compensated by concessional terms.) Since we now have a tight cotton situation, it would probably be in our interest to withdraw last October’s letter of credit for the 30,000 bales. We should for the present, however, hold a decision on this in abeyance as we may wish to include an offer of cotton as inducement to the Indians to take the additional vegetable oil.
4.
Trade and Investment Programs
ExIm Bank,
OPIC
, and
CCC
have held their Indian programs in abeyance since the outbreak of the war, while awaiting positive political guidance from the Department of State. These programs are designed for the short and long term benefit of
US
commercial interests, and we think it would therefore be against our interest for them to be held up further. Thus we recommend that such agencies be advised henceforth to apply normal commercial criteria in regard to decisions about their India programs. Specific examples of programs involved are:

Export-Import Bank
—The Bank has recently denied request backed by
US
commercial interests operating in India, to extend the period of validity of a line of credit for the importation of industrial raw material and components from the United States.
Overseas Private Investment Corporation
—This agency wishes to go ahead with investment guarantees for potential investors in India and to pursue its programs of lending
US
-owned rupees, both directly and indirectly (through Indian lending institutions) to
US
firms operating in India in order to give them some competitive advantage over other firms.
Commodity Credit Corporation
—This agency has applications from
US
exporters for medium-term credit to finance commercial sales of wheat to India.
USDA
would like to approve these applications in order to ensure the
US
a reasonable share of the Indian commercial market following India’s decision no longer to purchase wheat on concessional terms (
PL
–480 Title I). Indian imports are a major factor in the economical management of our wheat surplus.
CCC
credits are our mechanism for providing terms competitive with those offered by India’s other major commercial suppliers of wheat (Australia and Canada).