IRAN: THE SHAH'S LENDING BINGE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700070014-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: November 16, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 14
• Publication Date: December 1, 1974
• Content Type: IM

/ %.JL K I / ? \ / 4'ApyoZ;For Release 2000104119 : Clf~-RDP85T00875R001700070014-8
Iran: The Shah's Lending Binge Dec 74`
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Secret
No I rrv,O I )i ni
Intelligence Memorandum
Iran: The Shah's Lending Binge
Secret
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G9
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NATIONAL SECURITY INFORMATION
Unauthorized Disc(i,sure Subject to Criminal Sanctions
Classified by 015319
Exempt from general decloss lficelIon schedule
of E.O. 11052, exemption category:
0 50(1), (2), and (3)
Automatically declassified on:
Date Impossible to Determine
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No Foreign 1)is?.ccrn
Iran:
The Shah's lending Binge
The Shah's massive financial Coll) mitntentsl -- US $6.3 billion so far in
1974 - art' geared to the following:
? accelerating Iran's industrialization through financial tie-ins with Western
suppliers of advanced technology and equipment,
? acquiring supplies of domestically short raw n;aierials,
o cultivating markets for Iran's Hutt-oil exports,
? promoting stability in neighboring countries and improving Political ties
with old adversaries, and
-, promoting Iran's influence and the Shah's image as a world leader.
Iran should Hatch this year's $8 billion surplus in 19752 when, as outlined
by the budget, it plans to lend and invest $2.0 billion. Major candidates for future
financial commitments are
? large industrial nations such as .Japan and Italy, as well as small ones
such a:; Denmark,
? the International Monetary Fund (!MF) and the International Bank for
Reconstruction and Development (I13R1));
1. 'Throughout this memorandum the term financial commilments comprises official bilateral and multilateral
obligations rspressed in an arrecment or equivalent contract undertaken by the Shah or his representatives.
2. The I anion fiscal year, which bo in: on or about 2(t March, applies to budgetary and balance-of-payments
data used in this memorandum.
Note: Comments and queries regarding this memorandum are welcomed. They
may be directed to of the Office of Fconomic Research.
25X1A 25X1A
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? a sprinkling of African comitries anti other I.I)('s;
? sonic Indian (7ec,:n states such as 13antgladcsh and Indonesia;
? Romania and possibly other less doctrinaire Communist countries; and
? the United States -- a prink target for equity investnnenl.
Iran's ability to spend More quickly than other oil producers will result in
continual rising imports and gradual erosion of* the country's surplus revenues.
Indeed, unless oil prices are raised, Iran's balance of payments could he hack in
the red by I979. Thus, the Shah will he antler pressure to
? intensify his hard-headed Ientiint; and investment policy -- eclui,y and
growth-producing project cummitim'nts rattier than concessionary
long-term loans -- and
hasten th,,! development of export alternatives to oil -- natural gas.
petrochemicals, and copper.
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I Iran's recent burst of loan oilers switched the country overnight from
a net borrower to the Middle Bast's largest lender in 1974. Unlike neighboring
oil-rich states, which have piled up billions in foreign hanks, Iran until this year
borrowed heavily from abroad. The Sharp rise in oil prices in 1974, however,
changed this situation, and by October 1974 Iran's foreign assets had grown from
only $ 1.3 billion in 1973 to $6.3 billion, paring the way for the Shah's mammoth
lending and investment activity. As opposed to only scant lending that aver, od
some ;30 million annually in previous years, the Shah has committed almost
$6.3 billion this year.
2. The pace and variety of Iranian f illancial commitments ?- firmly
controlled by the Shah -- contrast with the still largely traditional mode of'
investment by other Middle East countries. Iran's foreign loans Jul those of major
industrial countries. The sequence of his commitments to some 17 countries, ti)
113RI), Ind the IMF has been as follows:
? in Marcl and April $200 million in IBRI) bonds wer.? purchased and
$1 billion in credits offered to India:
? May and Jlllle saw loan Commitment., of $850 million to L.gypt, $150
million to Syria, and $1 billion to France:
? two major agreements followed in .Idly. ` 580 million Ion Pakistan and
$1.2 billion for the United Kingdom (Iran also bought a one-fourtli
interest in West Germany's Krupp steelworks):
? in August, $700 million was extended to file IMI' aid $03 million in
additional credit was made available to Pakistan:
? in Septenli)er and October, Iran provided a SlOt) Inillion loan for Peru,
purchased $150 million worth of additional 113RI) bonds, lent Jordan
$7.4 million, and gave Afghanistan `CIO million: and
? during the first half of November. Iran extended '.redits of $100 million
to Poland and $67 million to Sri Lanka.;
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Iran: Financial Commitments
I January-30 November 1974
Afghanistan 10 million Grant oil 22 October to conduct feasibility studies oil various road,
rail, and industrial projects outlined in an economic protocol signed
on 28 July. Eventual assistance fur these projects could amount to
one or more billion dollars.
Egypt 850 million Protocol signed in Tehran on 25 May. Includes $400 million to
finance Egyptian portion of .joint ventures; $250 million "sofa last"
credits For Port Said reconstruction; $100 million suppliers credit for
purchase of Iranian machinery and equipment, buses, and various
consumer goods; and $100 million to assist Sh'pt's industry.
Ethiopia 0.1 million Grant for drought relief in February.
France I billion Agreement announced on 27 June for interest-bearing advance
payments over three years on ;Ili estimated $4 billion to S5 billion
in projects to be built by French firms.
Possibly On 25 June, the Shah referred to a $1 billion aid package fur India.
I billion Assistance includes $300 million for developing iron ore deposits and
$60 million for alumina development agreed to in March. Remaining
credits probably are for financing 70% of' oil purchases for five years.
Repayment in five years, after a five-year grace period, at 2-I/2i%
interest.
IBRD 350 million Purchase of' 12-year bonds at 81/ interest.
IMF 700 nii!,iott Loan commitnient in August. Iran will be repaid in eight sentiant;ual
installments, starting in 1978 with interest a! 71,',(.
Jordan 8 million Concluded in fate 1973 or early 1974. Includes S5 million for
educational projects to be repaid over 20 years at 2' interest and
$3 million in trade credits. Interest on both credits will be applied
as grants to a special fund for other development projects.
Morocco 30 million Agreement signed in May 1974 fur agricultural development credit.
Repayment in 12 years, after a six-year grace period, at 4'.'7 interest.
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Iran: Financial Commitments
1 January-30 November 1974
(Continued)
Pakistan 580 million Commitment made on 12 July to provide credit fur balance-ol'-
payments and development assistance retriyable in five years Mier
three-year grace period, at 2-1/2% interest.
Senegal 8.5 million
Sri Lanka 67 million
Sudan 65 million
Syria 150 million
Tunisia 5 million
United Kingdom 1.2 billion
Loan agreement in August for industrial projects, including joint
ventures. Terms probably are the same as For the .1111Y colluililnielit.
Part of a syndicated loan in October for construction of Transande;ui
oil pipeline. Repayment in seven years with a four-year grace period,
with interest believed to be at commercial rates.
Credit assistance in constructing paper plant in Poland; signed oil 15
November.
Joint communique issued on 16 June. Includes $4 million for loans,
$3 million to expand industrial free zone in Dakar, and $1.5 million
for irrigation project; loan at 2.51"1( interest.
Agreement in early November 1974 to provide $27 million credit
for fertilizer plant, $32 million advance on exports to Iran, ::,id $ti
million balance-of-payments assistance.
March 1974 agreement to cover two-thirds of' the cost of oil purchase
from Iran of 12.5 million barrels in 1974. Repayni.Int after five years
at 5, interest.
Letter of intent signed 27 May fur low-interest credits or fertilizer
plant, agro-industry, and other development.
Agreement signed on 9 January for loan to build Sadi Salem Uani;
repayment over 20 years at 2,'% interest. Interest on loan May he
applied as gift to special development fund.
Agreement signed 22 July I'ur disbursal over three years. alter which
repayment will be made in five years at commercial rate of' interest.
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3. To da(c, (lie deals hardly have been hliilanlhrul~i More than one-hall'
of (lie amount committed by the Shah calls For repayment or. nea: commercial
terms. Ills largest loans -- to file United Kingdom and !"ranee -- are strictly
conuncrcial, yielding returns comparable with Iiurodollar rates. Moreover, the IRRI)
bonds and loans to (lie IMF bring fairly high rates of 8'/,- and 71i%,, respectively.
Only 1'%, of the 'i,3 billion in commitments to the LD('s consists of grants and
loans wit Ii concessionary repayment terms of 20 or more years and less than 2-1/2,;",,
interest. The large loans to India and Pakistan, for instance, are repayable within
10 and 8 years, respectively. In contrast to the Shah's rather hard terms, the Arab
countries have been quite liberal, frequently providing grants to the LD('s or letting
them repay loans over 10-40 years at rates v.;rying front 0'% to Co.
4. The Shah has kept as close a rein on the $ f 00,000 grants to I'thiopia
,ntd ('vprus as on the huge credit contntitntents to the United KI'ig(lont and France.
Antba;sadors, special ntissio'ts abroad, and the Ministry of I?cunornics and Finance
(in which an underse;;retary to handle investments and foreign aid has been
established) advise the Shah, and the Council of Ministers and the hanian legislature
approve the loans. Fornwlities apart, however, the Shah holds (lie ultimate Icnding
power, which lie uses fur his political-economic strategies.
Objectives of' the Program
5. A primary objective of the loan program has been to speed up the
'ndustrialization under way in Iran. By advancing $ I billion to France for
e(i'Iipnrrnt on order, the Shah hopes to get priority treatment in supply and
installation of a major unclear energy industry as well as assistance iii expanding
steelmaking capacity. To maintain the industrial development pace and to assure
supplies of' machinery and critically needed raw materials, the Shah has provided
credi'.s to the United Kingdom, India, an(! others. 'I he investment in Krupp opens
to Iran the technology of' this West (tern tan industrial giant.
6. These deals - end ! os( of the credits to the LI)('s -- are also designed
to strengthen ma; kets and prices for Iranian oil and to provide new Outlets for
nu-oil exports. T ".1-11's of the credits offered to India, for instance, are linked
to oil sales at prevailing high prices and provide for Indian purchases c,i' Iranian
industrial goods. Si!a;larly, the agreement with Egypt is :red to purchases (::' Iranian
machinery, buses, and other goods that probably could not stand (he test of world
market competition. {'giro also has agreed to give. 'T'ehran access to a Mediterranean
port, enabling Iran to broaden its sales to North African countries and L urope.
In his current efforts to get better trade considerations from the IX', the Shah
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is supported by Denmark, which expects Iranian credits, and by West (;ern ny,
which has received Iranian investment and large orders for capital e(gtiipment.
7. Finally, the loan policy of the, Shah reflects a strong penchant for security
and for influence beyond Iran's borders. By holding out the prospect of huge project
credits to Afghanistan, the Shah hopes to weaken the Soviet grip there and to
influence decisions on the controversial border prol:Icin between Afghanistan and
Pakistan. Current aid outlays to Islamabad are geared to projects improving
economic con(Iitions in the Baluchistan area, where discontent anti threat of
separation are regarded with f'car by the Shah. Aid offers to Egypt, Syria, and
.Jordan are aimed at minimizing reactions to Iran's relations with Israel as well
as to dispose these Arab countries to accept the growing Iranian influence in i,egional
affairs. By plying New I)ellti with badly needed credits, the Shah seeks to improve
political relations with India and to extend his influence in the Indian Ocean area.
The small credits extended to African states bear the imprint of the Shah's influence
peddling and a desire to fend off' criticism as the architect of high oil prices. The
Shah is especially sensitive on the oil price issue and is anxious to be portrayed
as a responsible world) leader. i'o this end, lie has offered financial assistance to
the international organizations, cxicnded his own program for a "neutral oil fund,"
and provided major financial assistance to industrial countries.
Foreign Lending and the Balance of Payments
8. Iran'. balance-of-payments surplus this year and in the next few will
afford the Shah a connfortable cushion for additional lending and investment. I?ven
after the large deals so far this year, Iran's surplus amounts to more than $8 billion.
/dtliough rising imports will diminish the surplus, the amounts available for lending
will be suhstan!ial for several years. Oil payments of S20.( billion in I974 will
(Iua(Iruple those last year. The increase stems almost exclusively Iron'. pricc hikes
in January and from arrangements that give Iran the e niivalent payment of' gains
achieved by Persiati (;ulf producers through increased p!.irticipation. Total foreign
exchange receipts of more than $22 billion outrun imports by a considerable margin
and easily accommod..ate this year's u1-(usual debt prepayment of SI.o billion and
loan and investment ;bursements of' $2.4 billion, as follows:
r,
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France
300
India
140
I BI(D
350
IMF
700
Pakistan
250
Peru
100
United Kingdom
400
Fried. Krupp (:?I1, West Germany
60
(;rununau Cu: p. US
75
9. This year's balance-ol'-payn'ents surplus of $8.4 billion (see 's'able 2)
wouid be larger if it were not for an unusual surge in impte: Es. Foreign exchange
Iran- Balance-of-Payments Projections
1974
1975
1976
1977
1978
1979
Current aecomrt
1':,950
11.755
9,300
6,655
3,120
-2,060
Oil revenues
20,600
21,200
20.650
20,65'i
20,650
20,650
Other exports and services
1,750
2,775
4,020
5,375
6,870
8,040
01' which:
Guvernnrenl investment income
500
;,x)00
1,800
2,600
3,300
3,700
Total revenues
22,350
'?x)75
24,670
26,025
27,520
28,690
Less imports and services
9,40(
12,220
15,370
19,370
24.400
30,75(
Capital account
-4,570
-3,220
1,600
620
810
720
Utilization of foreign ;oars
180
220
....
....
....
Debt service
-750
-370
-300
-260
-180
-160
Debt prepayment
-1,600
-470
....
....
....
....
Loan disbursements
-2,400
-20O
-1,300
....
....
....
Loan repayme;its
....
...
....
880
990
880
Balance of payments
8,380
8,515
7,700
7,275
3,930
-1,340
payments fur imported goods and services this ye r will jump 60;-; -- more than
tlouhle earlier rates -- with possibly one-third due to price rises. The volume ol'
this year's imports reflects the 40';5, real growth outer way in th'_ economy and
the efl-orts to stem inflation. To combat inflation, Iran has opened the import
floodgate on a wide variety of domestically short items such as cement, wood,
newsprint, meats, and other consumer goods. Wheat imports, for instance, are
running nearly double last year's level, and sugar imports are likely to be at record
levels. At the same time, purcl-,ases of military hardware have risen sharply as
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dcf('nse spending jumpers by two-thirds. Accelerated developmental spendit:g -- if,)
by more than one-third to some $3.4 billion -- also has contributed to the import
increase.
10. In a few years, Iran's import growth, esilimited at ihtout 20r/% yearly,4
will begin crowding the Shah's oil earnings and narrowing his foreign reserve
surpluses. At current output and revenue per barrel, Iran's oil receipts will amount
to roughly $21 billion annually, and, by 1979. Iran's balance of payments should
he hack in the refl. Considerations such as these influence the Shah's current hard
attitude on oil prices and his judgments regarding lending and it1VCStillg. WII,Ic
keeping a part of his reserves in fairly liquid types of short investment in the
United States and kur>pe, the Shah is banking heavily on project-tied credits and
a massive domestic, push to increase and diversify the country's export potential.
Foreign Lending and Domestic l)evclopnlcnt
I I. The boom in oil revenues led to an immediate hike in domestic spending
plans. Government expenditures for economic development reportedly are to double
during the 1973-77 plan period. An estimated $30 billion will he added to the
original total budget of' $49 billion. Allowing f'or outlays in 1973, some $67 billion
remain'; programmers to be spent during 1974-77 (see Table 3) The major share
of' the expenditures will be reflected in foreign purchases. Some $4 billion to
Iran: Estimated Covernment Expenditures
in the P iflt!t Plan (1473-77 )
Original
Revised
Operational
'0
8
34
Developmental
23
22
45
Tofal
49
30
79
OI' which'
Del'cnsc
17
R
25
Icssexpenditures in 1973
12
To he spcnl I974.77
(,7
4. An minor( growth :.ate is predicated on past trends and plans f 'or expansion of ghoul I5:' yearly and
inflation of nearly 10"/,% yearly.
aczat
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$5 billion will go for hurcIla::.; of nuclear reactors and other industrial facilities
from France. Loans such as those to Paris and London illustrate how Tehran is
using its foreign lending to promote domestic development. Grants to foreign
institutions training Iranian managers for industry and, in the defense area, to firms
such as Grumman Aircraft are being used to contribute to Iran's defense potential.
12. The revised spending plan also zeroes in on the export sector. Some
$5 billion instead of $3 billion now is slated for investment in oil-related industries
during 1973-77 in an attempt to move rapidly toward exports of oil products
and petrochemicals, the latter yielding an eightfold price advaurtage over crude oil
sales. Iran plans to divert one-fifth of crude oil output to production of relined
products, part of which will fuel new petrochemical facilities at 13a1ndar Shahpur.
Kharg Island, and Shiraz.
13. Iran also plans to nuke more use of its gas reserves -- possibly the world's
largest - by expcnditums on additional pipelines and liquefaction t'lants to facilitate
exports to the USSR :u,d Western Europe, respectively. Funds il,.o are being set
aside to expand copper exports. An ambitious llevelopnleit program, managed by
Anaconda Copper, is well under way with the goal of making Iran the world's
seventh largest producer. The Shall is increasing steelmaking capacity, which could
make some contribution to exports. In support of these projects, large sums are
being poured into new roads, port facilities, and powerplants.
Targets for the Future
14. Following the enormous loans to the United Kingdom and France that
are secured by future exports, the Iranian premier, Amir Abas Iloveyda, stated:
"We are currently engaged in several negotiations of this type and some are nearing
fruition. We do not exclude any industry or any country." Japan could be the
next because it is the leading market for Iranian oil and a major source of advanced
technology. Italy, once rebuffed by the Shah as politically insecure, may be
reLonsidcred for a major loan to secure help for Iran's industrial buildup. Smaller
West I?uropean nations, such as Denmark and Greece, also are on the list of eligible
recipients. Indones)a and 13aag.Iadesli head the list of Indian Ocean countries likely
to receive Iranian credits in the near future. The list could expand, however, as
the Shah recently pledged to assist any littoral state in constructing fertilizer
facilities. He also is expected to make additional loans to the IMF and to purchase
an added $150 million in IBRI) bonds. Apart from these essentially commercial
dealings, the Shah undoubtedly will dole out small concessionary credits to
politically favored LDC's -- probably Zaire, Lesotho, Niger, and Tanzania -- and
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a I'm outright grants, including an expected $150 million contribution to a special
fund for the Ii)('s.
5. Beyond government-to-government loans, the Shah has ,t strong appetite
for direct foreign investment. "We are not going into the real estate business or
buying any restaurants in Las Vegas, but our intention is to make serious and
wise investments in foreign corporations ... more of the kind we ;-ave made For
instance with Krupp of Germany." Ile reportedly has his eye on investments in
other West German firms such as Bayer and Volkswagen as well as in such US
companies as Ashland Oil, a Union ('arhi(Ie affiliate, and arms producers such as
Raytheon and Hughes Aircraft. i. j(,;nt Iranian-US holding company for such
military ventures was mentioned by the Shahs military representative to the United
States early this year. Additional direct loans to private firms also may be in the
offing; at least one has been made ~o 't US company --Grumman Aircraft. Finally,
Iran probably will expand its I,nancing of joint ventures in third countries,
promoting in particular the building of refineries to use Iranian oil and the
development of mining and agricultural projects, as in India, which could serve
Iranian needs. Iranian investment policy is likely to show growing sophistication
as a result of the widened experience of present personnel and the availability
of foreign advisers. A large number of Luropean and US hanks have opened branches
in Iran, and representatives of intern-.itional investment firms are moving to take
advantage of the expanded money market. The US firm of Merrill Lynch, Pierce,
Fenner, and Smith, for instance, recently opened offices in Tehran, where, in
addition to training aspiring Iranian brokers, it may assist the government with
its investments.
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