Transcript of fifteenth special meeting of the Executive Directors of the Bank, held on Wednesday, September 13, 1950 : South Africa - Transport and Electricity Supply Commission (ESCOM) Projects

l. STRICTLY CONFIDENTIAL 89483 of the of the ZXECU'r lVB DTt\~CTORS UF' THE BANK held in at The Bank of l<'rance, Paris, on Wednesday, :::,eptent1Jer 13, 1~~50, at 4.30 p.m. President of the Bank, in the Chair. (Fr01:1 trte ShortlJ.anci Notes of ,, .13. UUi\.Ni:.;Y, SONS & 1:1'UNNEL:L, 50, Victoria Street, ,.estminster, London, S.,,.l.)  lO STRICTLY CONFIDENTIAL  11 STRICTLY CONFIDENTIAL I sent to you in the last few days about t~e union of South ~\frica. I 'l:ould lH:e to 8S 1-:: ~-r. lliff to cive you the '::sckground of this subject. . IJ~I?Y: :'r. Chajruon~ as the Por-trd v·i 11 rer;1eE1ber .r. Garner 'f'il" J v:sited South .'\frica in t'he Bpring of this year . .\fter his return an j_ nvi t\n tion VI·" s recei vee! fror:• the G-overmnE.n t of t!'~e union for 8 ba:'1:z mis?ion to [;o to South ~fricrJ to exa:---;ine ::1 ' ' tr~e genera 1 financial econmnic position of the union, to take f'. a look at the union's development programme end to discu~s the possibilities of ~orkin[ out a los~ in the event of the Union of South ~frica d ciding to approgc~ the Bank. The Eission was headed by I':r. Burlo.nd 0f the Loa:1 Department, and '.:ith him went :-r. :'{osen a:1d ~-r. Co:C.lier of the Economic,i Department, also >r. Spottswood of the Bank's E':le;ineering staff. 'l'hey arrived in South i\.fric[::l on the 28th ,'Tuly, s.nd trtey spent Hbout a mont':-: in the Union. Further conv· rsations have taken place .,._. ith the l~nister of Finance of the Union Government ~hile he has __ been in Vlash).nL ......... ton, and . 11 s a result of those convErse tions the T7nion Government have indimted to the Bank tho.t they  1 :-) .J STRICTLY CONFIDENTIAL ~nould desire to contract 8. lonc-ter•:: loan with the Ban1{ to finance ~rt of the import requirements over the next two ye.ars of the import program:~e of the 2.outh /\.fricDn railways snd of the South .'i.frican Electricity Supply Commission. The tot:::tl inqort (J'eq_uirem~ts for the roj lways over the next tv1o years are estim.a ted s t a ,,-,t'Jroxinn tely forty-one millio~J dollars - tb.s t is) the erq· uivelent 0 . f for tv-one million dollars. 'I'he needs of the 1:ilectrici ty Supply Corrz.;.iss io•1 over t:1e next twc years are estimated 8 t s. pproxiL19. tely forty-five :Dillion dollars . So the total import progran;.ttle for both over the two years is ap;::roXilr~qtely tl:.e e.1uivalent o-r cig 1·1ty-six million TJnitec3 States dollars. Of that abm~t nine millio:.1 dol1-'1rs ·,'.'Ould be in hard cur:r·enci es, D nd"' the remainder~ a · proxinB te ly the e ..J.U i VG.lent of seventy-seven :.nillion dollars, v,•ould be in no>:l-dollar cu:'r enc i es • The South African ~~nister of Finance indicated to us th~t he Dould be interested in ne£otiating wit 1:-: the B2nk '" lon:J of :1 --·e order of sixtv million dollars, 01~ the e~l1Jiva.lent iYJ. other currencies, to meet part of the cost of the inr;Jort program:lJ.e that I have just mentioned. /Contract commit ·ents---- IV-H 1 13 STRICTLY CONFIDENTIAL contract commitments ha're already been entered into for the full amount of the electricity co~~issiqn programme and for more than half of tbe railway programne. No amounts, how- ever, have yet been paid, and the South African Government has indicated its desire to include these past orders in the loan. paragraph 9 of the President's memorandum which has been circulated to the Board draws attention to certain currency questions connected with the proposed loan, which would have to receive further consideration during the ne- got ia t ions. I should now like to say a word about the general investment programme of the Union. Since the War a large proportion of the totsl &ee-e investment, both Go,rernment ' and private, has been financed directly or indirectly partly rrom the inflow of foreign capital into South .h.frica and partly from the liquidation of South african exchange re- serves. Ttle size of the in,restment progra.m.ne both in the public and the private sectors which the Union Government would wish to maintain over the next few years is greater than can be financed rrom local savings and fro!'!! private capital imports from abroad. It is because the Government cannot obtain the necessary invest~ent resources by borrowing either at home or abroad and because tbey do not wish to run down their foreign exchange reserves that they desire to borrow from the 1nternat1onaJ Bank; so that the contribution of a Bank loan would in fact be that of enabling South Africa to carry out an investment prograrmne at a greater speed and at a higher level tnan would otherwise '00 possible, wbilst simultaneously enabling here to maintain her exchange reserves at a.pprox ima teJ.y tbe present level. The traditional pattern of the South African balance of payments bas been one of substantial deficits on 2 14 STRICTLY CONFIDENTIAL current account made good b,y an inflow of capital mainly from London. In 1948 this flow came to a temporary halt, rna 1nly, it is felt, bec~oi.use of pol it leal developments in the Union. r.rhe rf7sult was that from early in 1948 up to t tle end. of Sept o~bAT', 1949, t be gold and fore 1p,n e.xc hange holdings of the Reserve .Bank of South Africa suffered a very h·9a.·vy decline. Then, late in 1948, under the pressure of this sharp fall in the central Bank's reservss, South Africa began to introduce severe restrictions on imports. The effect of these restrictions was slow to appear, os pe c i~lly b ec&..u se the sterling imports were only gradu- ally brought under control. However, up to th9 last quarter of 1949, owinr, to these restrictions on imports and to an increase in the st:erling valuo of gold e.xpol'ts which resulte~ from devaluation, the balance was restored in Soutb Africa's current accour.t and. that balance bas been maintained d·uring the first half of 1950. MeanNbile, the inflow of pri~!ate uapital that had suffered some in- ter·rupt ion for the reasons I ba ve r.1en t ioned had resumed, and thers was also some official overseas borrowing,}:~,na 1be result b..a.s been that South 1\frica has been able to re- coup part of lts previous gold and roreign exchange losses. This balanced current account posit ion of South Afr loa cannot be regarded as any thing but a temporary phon- omenon. 'rhere you have a developing economy wittl subs~antial investment needs, and it is likely that South Africa will continue to import more than it exports, looking to imports of capital to cover the gap. In appraising the foreign excnange-earnlng capacity of South Africa, the future production of gold is of paramount importance. In 1950 it is estir1ated tha.t sales of gold will earn t be equiw:~.lent of a bout 400 mill ion dollars and when the new mines in the Oranr,e Pree State come 3 15 STRICTLY CONFIDENTIAL into production gold production should increase by as much as one-third by 1955 to 1960. As regards the external debt sltuat ion of the Union, in 1939 tbe external debt of South Africa. amounted. to just over 100 million sterling- wbolly in sterling- but by June, 1949, practically the whole of that external debt had been repatriated and the o·utstanding amount had been reduced to only 13 million pounds sterling. Last year arrangements were made 'liitn the UnlteJ. Kingdom au- tborities for the South Afr~can Government to raise £20million on the London market. Of that only £10 million was in fact issued. That issue was made in November, 1949 an:i that isst.Je of £10 million brought tbe Govorn:nent's total sterling debt at the present time to around £22 million in sterling. But apart from the sterling debt, there is a small post-war loan from the United States Government for too purchase of surplus property, of which just under 1~ :nillion dollars remains outstanding. Apart from this, the Union novernment's only foreign borrowings outside the London oarket have been two revolving three-year credits arranged early this year with a group of United States banks and a group of Swiss commer c tal banks • rrhe amounts were 20 mill ion dollars in the case of the United States banks and 06 million Swiss francs or roughly 9 million United States dollars in the case of switzerland. The external debt record of tre Union shows no default. Now, despite South Africa's excellent credit standin~, market conjit;ions are such to-l.lay that she would have difficulty in obtaining a long-term credit for any substantial amount in the l\Iew York market. We propose to continue to look at the prospects of ber securing additional sterling financing in the London market. As we see it, the ba.s io risk inherent in a Bank loan to South Africa is tnis: 4 lb STRICTLY CONFIDENTIAL tbat, as I have said, the country will probe.bly for some time f 4' ( -.• ~. ~•. ~.~- ... ,...,.J> to come incur a--greater amount . of balance of payments deficits ~ which will have to be met by an inflow of foreign capital and primarily of private capital. We cannot have aqy complete assurance that circum- stances may not recur similar to those tl:"la.t stopped the inflow of capital in 1948. In those circumst~nces, foreign exchange reserves would be oound to st1ow a marked downward tendency, and very strict controls on imports and investments would probably be necessary to restore the situation. But we feel that a risk of this kind is inherent in the South African econom~, and it seems to us that 1t is a risk which tbe Bank can reasonably take. Accordingly we have felt, at staff level, able to advise the President that he should recom1end to the Board that negotiations be undert~ken for a loan ror South Africa's import requirement:3 for transporiat1on and electricity developmentft over the next two years of the order of 60 million dollars or the equivalent in other uurrenc ies. Clit\IH.MaN : Any quest ions? MR. HOPPENO'r: There is s omet bin~:-~ that is not •1ery clear to me about the fact t;hat the intended application is for 50 million dollars or tne equivalent in other currencies. lt is said somewhere t~t the hard currency really needed will be only a small amount. MR ILIFF: 9 mill ion dollars. MR HOPPE!mT: Yes. Is it the expectation of the Bank that the d ifferenoe, which is 51 million dollars, Will be .!:a.ctually found -tlt_at in t:bose otbar cur rene ies, or is it,zthat part of it will ha17e to be bought against dollars and in that case be ~ -8-f'e~ et; in dollars by the prospective borrower? He. ve we any ideas on t ba r. po in t ? !\~R IL.lFli': The question or currency to be provided under this loan, as I mentioned in the course of my statenent,raises questions which we think will have to be considered and very carefully 5 17 STRICTLY CONFIDENTIAL cons 1dered during the negot tat ions. I think some of the considerations involved are set out, as I mentioned, in paragraph 9 of tt:e President's memorandum. :f.R HOPPENO'l1 : If that quest ion is not clearer than it seems to be, and without having anything against a loan of tha.t im- portance to be made in sterling to South Africa, which is certainly a good credit, I would not like to think that this Board is exactly co~~itt1ng itself. 1 woulc not like to give the impression that 1 am against the loan, but this is rather a new approach, and I would like to be sure that all questions come before us as a Bo~rd w~tbout prejudice to the negotiations wben we are asked to approve. CHAIR"M.N: Any other qte stions·z The only point that Mr Iliff failed to mention is that there is a fairly good possibility, in relation to tte loan, of interesting t.be private market in New York in part of this loan. In conversations with tbe Minister of Finance, we were informed t ha. t he would like to ha. ve a loan of probably a 15-year maturity, but he did not know at the time, and was 1:~ not in a position to say, wba.t,(e~~~ort1zat1on ,payments would be - possibly, he tbougbt,~~start somewberefabout t brae year sf ~I think tbat there is a very good chance tbat there might be ~icipation in New York it' the earlier /.. part of this loan. We discussed that with the Minister of Finance, and he is very anxious for us to explore that feature. That would be without our guarantee - in other words, it rnight be a loun made either with 6ee i!'lt:ePeatl eF private bankers in New. York or we might make the loan and then, in turn, sell part of it without our guarantee. It would probably have to be the latter, becawe this loan, as I understand, will not be drawn down- if approved- for about three years. It would be drawn upon in the neighbourhood of 20 million dollars a year. Are tbere no other quest ions'?