DEPARTMENT OF STATE Memorandum of Conversation
DATE: September 22, 1952
SUBJECT: Turkish Request for MSA Aid to Meet EPU Deficits
PARTICIPANTS: Mr. Feridum C. Erkin, Turkish Ambassador. The Secretary Mr. William O. Baxter, Deputy Director, GTI
COPIES TO: S/S Ankara - BY STAMP S/MSA NEA
Ambassador Erkin called on me today at his request to present his Government's views on the serious problem facing Turkey as a result of large recent deficits in its EPU balance of payments.
The Ambassador said he wished to refer briefly to the unprecedented improvement in various fields of economic endeavor in Turkey. He mentioned the rapid expansion of Turkish agriculture as evidenced by a large exportable surplus of wheat now being sold at world prices; the stability of price levels; industrial development projects; and a balanced budget. Despite these encouraging aspects, Turkey is faced at the moment with a serious but temporary dollar gap in its EPU balance of payments. As Turkey's exports are preponderantly agricultural, the summer and fall months are always a slack season in the Turkish economic cycle, and the present temporary imbalance is one which may be expected to persist until this year's crops get into export trade.
Ambassador Erkin explained that, though he had tried to handle this matter without troubling me, his Government viewed its position with such concern that it wished to have the matter brought to my personal attention. In summarizing the background, he said that Turkey had requested MSA to authorize the use of Special Resource funds to meet current EPU deficits. In reply MSA suggested that EPU might help, but EPU recommended that Turkey turn to MSA. The Ambassador thought there was some mutual resentment between MSA and EPU which had the net effect of preventing any action to help Turkey.
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As remedial steps already taken by the Turkish government to improve its balance-of-payments position, the Ambassador stated that deposits required for foreign exchange letters of credit had been raised from 10% to 30%; that the maturity period for agricultural loans had been reduced from four to two years; that Turkish exports are now being sold at world prices; and that the Government has ordered all imported good cleared from warehouses. He also pointed out that not all Turkish imports are consumer goods; much of it is machinery and capital goods, such as petroleum products, trucks and tractors required as a result of excellent American assistance in developing agriculture and the road system.
Only this morning, the Ambassador said, he heard from Ankara that the Turkish EPU deficit for August had been met by the pledging of gold abroad; however, Turkey will soon be faced by a September deficit now estimated at $25 to $28 million, which can be met only by shipping gold out of Turkey. This would have a disastrous effect on the Turkish public.
According to Ambassador Erkin, one of the main recommendations made to Turkey by MSA is that it should institute a schedule of quantitative import restrictions. The Turkish Government believes that it would be a shame to halt the healthy expansion of Turkish economy which is achieving the desirable objective of raising the previously very low standard of living of the Turkish peasant - an objective which has been implicit in the extension of United States aid. Now the Turkish Government wishes merely an advance of aid already allocated to Turkey, which it is confident could be made up when next year's crop begins to move into world markets. The ambassador urged me strongly to support the Turkish position with MSA.
I said that, as of course he knew, I had no authority to direct MSA. The only thing I might do would be to discuss MSA problems with Mr. Harriman.
I told the Ambassador that we had been following this Turkish problem very closely and sympathetically. I thought there were two points which should be taken into consideration. If our aid is used to meet balance-of- payments deficits, it may be dissipated without achieving the purposes for which it had been granted, and we are of the opinion that the Turkish Government should undertake to set up import restrictions.
I asked the Ambassador specifically whether Turkey considered that it could make up the advance aid it was requesting and achieve a stable balance-of- payments position after this temporary period of imbalance. His answer was an emphatic yes.
During the remainder of the call we exchanged generalities on Iran, the Middle East and the recent Soviet-Chinese talks in Moscow. In leaving Ambassador Erkin reiterated his strong hope that the Department might help Turkey out of its present predicament.
Attachment - Aide-Memoire
NEA:GTI:WOBaxter:flj 10/3/52
TURKISH EMBASSY Washington
Aide-Memoire
Negotiations have recently taken place in Ankara and in Paris in connection with the level, timing and terms of the U.S. Special Resources Aid to Turkey. The Turkish Government had placed great hopes on the outcome of these talks which coincided with a particularly difficult period of its trade relations due to the seasonal character of Turkey's exports and to other circumstances. However, these conversations have, unfortunately, failed to produce any satisfactory results.
During the negotiations the representatives of the Mutual Security Agency have asserted the view that the main cause of the present Turkish deficit with EPU countries is due to the structural rather than seasonal character of Turkey's balance of payments disequilibrium and that the correction of this trend can be achieved only by the introduction of quantitative import restrictions, by the adoption of appropriate internal measures, and by a more concentrated export drive.
The Turkish Government has already put into effect most of the measures suggested, with the exception of quantitative restrictions.
There is no doubt that seasonal maladjustments do not constitute the only reason for Turkey's payments' deficits during the post war period. A military expenditure program out of line with her current revenue and a moderate Investment program designed to increase the standard of living
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from the prevailing low levels to a tolerable rate, have concurred as important elements in causing deficits in the Turkish balance of payments. On the other hand, trade deficits of a certain degree have constituted a characteristic trait of all developing economies at a stage of transition to a higher level and as such should not be considered as an unhealthy sign. It is to be expected that the increase of foreign earnings due to a remarkable expansion in mineral and especially in agricultural output, coupled with U.S. economic aid, should keep in balance the payments position of Turkey throughout this year, provided that the measures adopted by the government to offset the stockpiling of imported goods and to curb credits are given the necessary time to produce results.
It is important to note, however, that the bulk of Turkey's exports being agricultural products, no substantial increase in their volume could be expected before late in November and that any measures adopted at the present time to curtail imports will normally take several months to be effective on the balance sheet. The allocation of the already earmarked special resources aid at this difficult transitional period, would be of great value to turkey in meeting the present emergency without being obliged to take such drastic restrictive measures on trade as will be adversely interpreted in the country and will create serious disturbances in the general level of prices.
The Turkish Government is confident on the adequacy of the measures recently adopted to curb the present level of imports with a view to improve its balance of payments with the EPU countries. The 10% cash deposit requirement for the
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establishment of letters of credit to finance imports has been increased to 30%. Steps have been taken to clear the custom warehouses in the country of an accumulation of imported goods valued at around $60 million in the port of Istanbul alone. As a further step to absorb a part of the monetary income arising from increased agricultural earnings the maturity of the farm machinery and equipment credits of the Agricultural Bank Loans are being decreased from 4 to 2 years.
Parallel to these measures, drastic efforts are being made to sell the exportable surplus of the new crop, whose volume constitutes a record in Turkey's history, at world prices.
The Turkish Government feels that these measures will suffice to change the adverse swing of the balance of payments pendulum if their American friends provide an opportunity to meet the immediate deficits through the use of Special Resources. As it will be recalled, the advisability of the use of Special Resources at this time was also recommended by the Balance of Payments Committee in Paris.
The application of Special Resources will bring down the estimated EPU deficit for Turkey from $92 million to $42 million. $30 million of this balance will be met by additional exports and the remaining $12 million will be covered either by obtaining short term credits from foreign exporters or by postponing imports corresponding to this amount.
The generous aid of the United States, the concentrated efforts of the Turkish people and the Turkish Government in the last years, have now started to produce remarkable results which are considered by many as very promising for the future prosperity of Turkey's economy. This is another reason why the present difficulties which are of a transitional character, should not be
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allowed to imperil the splendid example of economic recovery already achieved and which will certainly rise to higher levels if given the proper chance to mature.
The stability of prices, the balance in the budget and the important expansion in production lead the Turkish Government to believe that the present difficulties are not deep rooted and should not be treated as of a permanent nature.
The time lag which has occurred last year in Turkey's inability to sell abroad her cotton and wheat crops on time due to the unstable prices of the international market is one of the chief causes of the present trend. Another factor is the spur of buying on the part of importers who, having been aware of rumors as to the negative attitude which was shown to Turkish demands, were led to believe that trade with the EPU areas would soon be drastically curtailed or de-liberalized. The delay in the timing of American Aid in general and of Special Resources in particular is also having its share in the creation of this adverse psychological momentum. According to the judgment of the Turkish Government, none of these causes would justify the adoption of quantitative import restrictions which, if adopted, may harm the financial stability of the country more than they may serve the purpose for which they were designed.
These issues are so clear to the Turkish Government that it finds it difficult to understand the reasons why its American friends are denying a helping hand to Turkey at a moment when such aid is especially desirable to relieve her from the present emergency.
The Turkish Government is confident that the development of events will prove the soundness of its evaluation of the present situation. It still hopes that Turkey will not be deprived of mutual cooperation and left alone in this emergency, thus being obliged to take by herself all necessary measures to face the situation, in the light of her responsibilities and her commitments.