Foreign Relations of the United States, 1955–1957, Near East: Jordan-Yemen, Volume XIII

266. Memorandum of a Conversation, Department of State, Washington, February 4, 1957¹

Washington, February 4, 1957

SUBJECT

• Economic Discussions with Saudi Arabian Delegation

PARTICIPANTS

• U.S. Team
  • 1. Robert Murphy, Deputy Under Secretary
  • 2. Ambassador George Wadsworth
  • 3. Robert G. Barnes, Special Assistant to the Under Secretary for Mutual Security Affairs
  • 4. Jack C. Corbett, Director, Office of International Financial and Development Affairs
  • 5. Cedric Seager, Regional Director, Office of Near East and South Asia Operations, International Cooperation Admin.
  • 6. L. Wade Lathram, Political-Economic Adviser, Bureau of Near Eastern, South Asian and African Affairs
  • 7. Merrill C. Gay, Adviser, Office of International Financial and Development Affairs
  • 8. John Shaw, Officer-in-Charge, Economic Affairs, Office of Near Eastern Affairs
  • 9. Vance Brand, Member of Board of Directors, Export-Import Bank
  • 10. William Welk, Economist, Export-Import Bank
• Saudi Team
  • 1. His Excellency Shaykh Muhammad Surur, Royal Counselor and Minister of Finance and National Economy
  • 2. His Excellency Shaykh ’Abdullah al-Khayyal, Saudi Arabian Ambassador to the U.S.
  • 3. Rasim al-Khalidi, Vice President, Saudi Arabian Monetary Agency

After the amenities, Mr. Murphy observed that a prosperous Saudi Arabia will contribute to peace and stability in the Middle East which obviously is to our mutual interest. He referred to the President’s request of Congress to announce a policy of cooperation with the Middle East looking toward this objective and combatting our greatest threat, the spread of international communism. Referring to His Majesty’s expressed desire for assistance on certain projects which would contribute to Saudi Arabian development, Mr. Murphy hoped we could discuss these measures and how to move forward.

Mr. Murphy hoped and believed that the current decline in Saudi Arabian revenues would soon be eradicated as a result of the progress toward reopening of the canal. He noted that Saudi Arabia had not yet joined the World Bank or the International Monetary Fund and hoped the Saudi Government is now considering such membership. The United States was prepared to discuss ways and means to help Saudi Arabia with the technical and engineering surveys necessary in connection with projects desired. He suggested that the Ministers elaborate on the Saudi Arabian objectives, after which we could discuss ways and means of achieving these objectives. He wanted to know what development or projects were of particular interest, how the United States could best assist in the technical planning and what resources are available to be utilized.

The Minister of Finance, after commenting favorably on the introductory remarks, referred to talks with Mr. Black of the World Bank last year, which had now led to the Saudi Arabian Government’s decision to join the Bank and Fund. He then undertook to explain the economic development of his country and to present related information which he felt important for these discussions, distributing a memorandum in this connection. He noted that the Saudi income before the crisis was at a level of $350 million, one-third of which was allocated for the regular Army of three divisions, another third for government operations, security and police and the other third for projects.

He stated that the revenue would be off this year, assuming the canal opened on March 13, about $90 million, roughly one-third of the revenue from oil (our estimate is about $50 million covering six months closure of the canal) and that the only other source of revenue is the income tax and custom duties, both of which currently yield small returns. He said the Saudi Government had accumulated debts during the past year.

In response to Mr. Murphy’s interest in the debt situation, he indicated the total debt was about $200 million; about $6 million is the balance of the EximBank loan, some is the remaining obligation to pay Aramco for building the railroad to Riyadh, the remainder, presumably the bulk, is internal debt. The Minister, aided by Mr. Al-Khalidi, explained the Saudi practice of borrowing from banks in anticipation of oil revenue, recognizing that these loans were in the nature of overdrafts. The same type of quasi-debt is created in connection with advances of goods by Saudi merchants. About $90 million of the current debt was due to the Suez crisis.

The Minister then referred to His Majesty’s memorandum to the President in which there was a request for economic assistance to Saudi Arabia. Mr. Murphy said this request had led him to wonder about the Saudi Government policy in respect of loans. He felt that Saudi revenues would soon be back to normal, providing a firm basis for government borrowing. Referring to the Saudi Government’s traditional attitude toward loans, he observed that the United States had leaned heavily on loans during much of the period of its economic development. Loans from Europe were prerequisite to our success e.g., in financing our railroads. He would appreciate a frank discussion of the Saudi attitude on this matter. The Minister responded by simply saying the King wished help rather than a loan. Mr. Murphy observed that loans are assistance, that we have loan programs all over the world and the United States policy is to emphasize loans; some countries in fact prefer only this type of assistance.

The Saudi Arabian Ambassador intervened along the following lines: we recognize the friendship between Saudi Arabia and the United States. King Saud has a great desire to make this friendship stronger in the mutual interest of both countries. The King would like as much as possible to avoid loans. Has the United States ever given grants to any state of supplies, money, munitions or equipment?

Mr. Murphy replied in the affirmative, adding that there had consequently been a great reaction against it. He emphasized that our grants had been to countries unable themselves to provide the necessary resources and which were without adequate credit means. These situations do not characterize Saudi Arabia which has enjoyed exceptionally large revenues and a high degree of credit worthiness.

The Ambassador asked if this meant a grant to Saudi Arabia is not possible. Mr. Murphy responded that United States policy has emphasized loans where they are possible, where there is ability to produce dollars for repayment. (The Saudi Ambassador at this point left the meeting for another appointment.) Mr. Murphy and Ambassador Wadsworth elaborated further on the United States’ desire to emphasize loans where possible, on the present views of the United States Congress and on the procedures involved in obtaining funds from Congress for foreign assistance purposes. It was emphasized that Americans would not understand the need of the Saudi Government for grant assistance. Mr. Wadsworth requested the Minister to explain in as much detail as possible why the King wanted to avoid loans; we ourselves are often borrowers and it is hard to understand their point of view.

The Minister of Finance thereupon expatiated upon the economic situation of Saudi Arabia which he characterized as a country “jumping from horseback to plane in one step”. He emphasized that it differed vastly from other Middle East and Arabian countries in that what it has now has mostly come during the past fifteen years. During the past ten years the Saudi Government had used a large part of its revenue for pilgrims, public utilities and projects of a type mentioned in the memorandum. If this were continued on a basis of loans, his country would eventually be shouldering heavy responsibilities and possibly find itself without sufficient income to cope with the requirements. In short, they fear large borrowing which would be required for big projects. Having only lately stepped into the field of development, how could they cope with these large money requirements. They want agricultural and industrial development, but need much capital to get it. They do not want to face a critical situation later as a result of borrowing; therefore, they “want help, not loans”.

Mr. Murphy observed that Saudi dollar income would probably double in ten years from oil revenues, reach a figure of perhaps $600 million. There followed considerable statistical discussion, the Saudis arguing in favor of large outside requirements, the United States that loans constitute the logical means of financing Saudi economic development. The Minister mentioned that Saudi imports increased from $26 million rials in 1943 to $821 million rials in 1955. Mr. Murphy observed that as their expenses increased their revenues would also rise, i.e., that projects would be productive. The Minister again queried if this discussion meant no grant was possible. It was explained we have to discuss all angles, possibilities and requirements before coming to any conclusions. We could undoubtedly provide on a grant basis certain types of technical assistance, such as surveys of projects and necessary consultants.

Ambassador Wadsworth cited the views of Mr. McCloy, who had visited Saudi Arabia, on the question of financing Saudi development. In brief, that there be added something to each part of the Saudi budget bringing it up to perhaps $400 million. In ten years Saudi Arabia would be receiving $600 million in oil revenues a year; in fifteen years, perhaps $900 million. Set aside $400 million to start with and use as much of the difference as desired for projects to be paid back in fifteen years. He wondered why the Saudi Government could not accept this point of view, reiterating the difficulty of American minds seeing it differently. The Finance Minister replied that they want first to be delivered from the present crisis, then maybe they could follow Mr. McCloy’s ideas; but how could they be sure of the present rate of growth and what if there were another Suez crisis?

This led to a general discussion of the necessity and universality of risk taking and that Mr. Black, as all bankers do, would accept the principal of force majeur. If we didn’t have confidence in Saudi Arabia, we wouldn’t talk about loans. Statistical comparisons in respect of the two countries, per capita income, per capita debt, etc., led to the Saudi observation that the United States had unlimited resources while Saudi Arabia had only one and Saudi Arabia had massive requirements. The Finance Minister then observed that there were only three days left of their visit, and His Majesty feels when the United States is aware of their need it will provide assistance in the form of grants. He wondered if some of the projects mentioned are of the type for which the United States could give grant assistance.

Mr. Murphy said we would welcome additional information including the Saudi Government’s plans regarding the projects listed, suggesting in particular the Dammam Harbor, the Medina Railroad and the broadcasting projects. The Minister proceeded to discuss in some detail the needs of Dammam Harbor. He alleged that delays in unloading were so great that some companies refuse to use the port. The increase in the cost of commodities is such that frequently it is cheaper to carry goods across the desert. They wish to enlarge the port sufficiently to service three vessels concurrently. At present many ships go to Bahrein at considerable cost to the Saudi economy. (Aramco’s report on the harbor was suggested for study.) It is estimated that it would cost from $5 to $10 million to enlarge the port and $20 million would cover the port, plus the road from Dammam to Riyadh. Mr. Murphy felt this to be a revenue producing project and inquired how the Saudi Arabians proposed to finance it. The Minister replied that “only later would it be a source of income, they wanted it now and could we help them have it?” He emphasized that they came for a grant. If it had to be a loan, perhaps they could get it from a bank. He was interested in knowing what the United States can offer as grant aid for the project. He implied that this was also true for the other projects. Ambassador Wadsworth observed that the Medina Railroad was so large that it certainly would require a loan.

There followed discussion of the Riyadh–Medina Railroad, and the reports that had been made respecting it. It was observed that the section up to Damascus was really a separate project involving Syria and Jordan. Ambassador Wadsworth observed that this part of the project might fit into the larger concept of area assistance. The Minister thought Syria and Libya might carry part of the cost but most of it would fall to Saudi Arabia. He wondered which of the two projects the United States is interested in helping and how much could be given as a grant.

Mr. Murphy noted that the Minister was not asking for a specific amount in either case and wondered what were his suggestions as to how the United States could participate. The Minister continued to insist on turning the question to the United States, that is, how much would we wish to help them. Mr. Murphy emphasized again that we were not in a position to answer this question, that these were after all Saudi Arabian projects; he wondered how the Saudi Government planned to contribute toward them. This raised questions re dollar cost vs rial cost, etc. The Minister’s only response was that they are asking for help as one brother would ask from another brother and that it was up to the United States to determine what it could do, if anything. In response to the further question as to how much the Minister felt was needed, he hesitated to say, but wanted to know the “percentage” of our contribution to the project. He could not say they are proposing the United States do any particular portion of the job without consulting the King, but, he queried, “are we in agreement with the ‘principle’ of giving aid?”

Mr. Murphy, indicating we could not directly answer this now, said the United States Government would have to consider further regarding these two projects and noted that the World Bank might be interested, which would be a factor to consider. We would need to know what the Bank could do and what the Saudi Arabians could do themselves. He proposed some discussion of the broadcasting stations.

It was reported that His Majesty had ordered expansion of a small station in Jidda and a new one built in Riyadh, both of which would cost about $6 million excluding local costs. Ambassador Wadsworth inquired if the King would be willing to proceed with the Riyadh Railroad on a loan basis, noting that the large cost of this project, between $120 and $150 million, would make financing on any other than a loan basis impracticable. The Finance Minister indicated he might have an answer to this tomorrow; the King might ask for a loan to cover “their share”.

Mr. Murphy reiterated he could not at this time say what the United States could do. He emphasized that, in discussing these matters with the King, the King not be given the impression that if he puts up say one-half the required resources for any project the United States will cover the rest. It is impossible for the United States to talk in such terms. We have to know, for example, what can be done through banking channels; this is the way we deal with such questions everywhere else.

The Saudi Ambassador, who had rejoined the group, asked if we could accept the principle of contributing a grant to Saudi Arabia. Mr. Murphy once again explained the United States position, emphasizing that where we give grants there has to be a demonstrated need accompanied by a lack of ability to borrow. Consequently, with all the good will in the world, we cannot answer their questions now; we have to consider what our Congress will do. He reiterated the belief that the Saudi objectives could be achieved by loans as well as by grants.

The Finance Minister concluded the meeting, which had lasted three hours, by observing that both parties need more time, but that if the United States wants to give aid to Saudi Arabia “it can find a means”.

1. Source: Department of State, Central Files, 611.86A/2–457. Secret. Drafted by Gay.