Reference: Our telegram No. 95 of May 18.?

As I explained in my telegram, meetings were held in Ottawa between May 6 and May 14 with Mr. Coomaraswamy, the Assistant Secretary of the Department of Finance in Colombo. I am enclosing with this despatch a copy of the letter which was given to Coomaraswamy at the conclusion of these meetings, which sets out the conclusions reached at the official level and which indicates the type of programme which we now propose to recommend to the Ministers. I am also enclosing for your information a copy of the minutes of the Colombo Group meeting on May 11, which represents a summary of the thinking of Canadian officials which led up to the development of the programme set out in the letter to Coomaraswamy.

2. Mr. Coomaraswamy originally presented a list of projects which totalled over $7 million. When it became clear that the Canadian officials were working on the basis of a figure approximately the same as last year, i.e. $2 million, Coomaraswamy proposed that an interest free loan might be made to Ceylon to cover the difference. For reasons that are set out on page 4 of the minutes of the Colombo Group meeting, this proposal was not actively followed up. Moreover, our Prime Minister had indicated that we should not disturb the rough balance which existed last year in the apportionment of Colombo Plan funds to the three recipient countries. Since funds had already been committed to India and Pakistan on only a slightly reduced scale, it meant that the allotment for Ceylon would have to be in the order of about $2 million, a figure roughly the same as last year.

3. As we indicated in our telegram, the new funds which officials are prepared to recommend for the 1954/55 programme will total $2,115,000. In addition, $200,000 will be transferred from the amounts already voted last year for the equipping of a School of Practical Technology. As you will recall, the total funds allotted last year for this project were $500,000, part of which was to be in flour for local building costs and the remainder in equipment. There were some doubts in the minds of Canadian officials about this procedure, but a formula was finally developed as is set out on page 2 of the letter to Mr. Coomaraswamy.

4. Canadian officials were sympathetic to the budgetary difficulties that Ceylon is experiencing, and realized that this forthcoming year was considered a critical one. Nevertheless, we did not consider that the budget presented a crisis calling for extraordinary or emergency aid as for example in the case of the special grant of wheat to Pakistan. The programme which it is now proposed to recommend to Cabinet will contribute to many of the projects to which the Ceylonese Government give extremely high priority. At the same time, we are not likely to be exposed to criticism from the other two recipient countries whose allotments will be reasonably well maintained this year.

5. As you will see, if the recommended programme is approved, a total of $800,000 in flour will be made available for counterpart assistance in 1954/55. Since Australia is the major supplier of flour to Ceylon, we have asked our mission in Canberra to inform the Australian authorities of our intention and to point out that this amount falls well within what we have been exporting over the past couple of years to Ceylon and what in fact Ceylon would expect to purchase from us this year. To avoid placing unusually large amounts of Canadian flour on the Ceylonese market, we would phase the shipments so that part of it arrived in 1954 and the remainder in 1955.

6. We should perhaps mention one other point that came up in a supplementary discussion between Ritchie and Coomaraswamy which touched on the problem of housing the equipment for the research laboratories which Canada is providing. You will recall in your letter No. 178 of March 26? you informed us that the Ceylonese authorities were hoping that Canada might provide counterpart funds which would pay for the local costs of the required buildings. Ritchie pointed out to Coomaraswamy that the Canadian authorities viewed this as a firm commitment on the part of the Ceylonese Government and that there was little likelihood of Canada agreeing to a change in this understanding. It was also pointed out that the estimated cost of the buildings, about $65,000, appeared to be high in relation to the equipment which would be stored in them. If the new programme for 1954/55 is approved, Canada will be assuming a substantial amount of local costs, and in the light of this it is hoped that the Ceylon Government will find some way to provide buildings for this laboratory equipment. The equipment, incidentally, is now available, and we are anxious to ship it as soon as the buildings become available. Mr. Coomaraswamy agreed in the end that it was likely that his Government would be able to make some arrangement. When he returns to Ceylon, it might be useful for you to follow this up to ascertain that the Ceylonese are in fact going to take steps to provide housing for our laboratory equipment.

7. The information in this despatch and in the attachments is, of course, for your own confidential information. We hope that the recommendations will be sent to the Ministers within the next couple of weeks, but it is important that no publicity should be given these proposals at this time. As you are aware from previous exchange of correspondence, it is difficult but essential to avoid premature publicity for Colombo Plan assistance. When a programme has been approved, we will, of course, immediately inform you so that you may undertake the necessary formal notification of the Ceylonese Government.

A.E. Ritchie
for Acting Secretary of State for External Affairs

Confidential
[Ottawa], May 11, 1954

Those present:
Mr. A.E. Ritchie, Chairman
Mr. Raju Coomaraswamy, Assistant Secretary, Ceylon Ministry of Finance
Mr. A.F.W. Plumptre, Department of Finance
Mr. J.P. Manion, Department of Trade and Commerce
Mr. R.W. Rosenthal, Assistant Colombo Plan Administrator
Mr. P.A. Bridle, Department of External Affairs

Also present:
Messrs. Pratt, Pollock, Churchill, Stoner and Jay
(Mr. Nik Cavell, Colombo Plan Administrator, and
Messrs. L. Rasminsky and G. Freeman, of the Bank of Canada, were present

at the earlier meetings referred to in the opening remarks of the Chairman).

The Chairman recalled that at its meeting with Mr. Coomaraswamy on Thursday, May 6, the Group had been asked to consider a programme comprising nine projects formally presented through our Mission in Colombo and an additional project (for the removal of the Science Faculty to the new University site at Peradenya) formally presented by Mr. Coomaraswamy. The Chairman explained that since that earlier meeting a number of discussions had been held among the Canadian officials concerned, who, at a meeting on May 10, had come to the view that, on the basis of there being about $2 million available for capital aid for Ceylon, an appropriate programme might consist of the following:

(1) $1,330,000 for diesel locomotives and sleepers, which had been given high priority in the Ceylon projects and which was included in the Ceylon budget.

(2) $300,000-Gal Oya, which was an attractive project from the Canadian point of view since it would likely appeal to the Canadian public and seemed to have special importance for both the Canadian Government and the public.

(3) $370,000-flour, the counterpart funds from which might be directed to the fisheries harbour.

2. As a counter-proposal, Mr. Coomaraswamy suggested that a programme of about that size might consist of assistance for the following projects:

(1) $600,000 in the form of flour for counterpart assistance to the fisheries harbour project;

(2) $600,000 for Canadian equipment for the port development project;

(3) $910,000 for four diesel locomotives and the balance in creosoted sleepers (all of which would generate counterpart funds);

(4) $160,000-telecommunication equipment for the Colombo airport;

(5) $200,000 for agricultural and other equipment for the Gal Oya dry farming scheme;

(6) $200,000 worth of flour for rural road development.

Mr. Coomaraswamy stressed that this programme, totalling a little more than $2,600,000, was primarily designed to bring relief to the budget position in Ceylon. He explained that the overall programme represented a reduction from the original Ceylon request in the light of the need to present a programme on the same order as in previous years. He said that he understood the difficulties that might arise in respect of the United States equipment that was included in the request in question, and it was his intention to propose that Canadian equipment for port development be supplied up to the total amount listed in his suggested programme. There could be full consultation on means of avoiding or overcoming any technical difficulties that might arise as between Canadian equipment supplied by Canada and equipment purchased by Ceylon from other sources.

3. During discussion it was noted that although the programme now put forward by Mr. Coomaraswamy was in excess of $2 million, it was likely that the total indicated would be reduced by supply difficulties, although the higher prices of some Canadian equipment might offset this and keep the total up. In the event that an excess over $2 million remained after the removal of those items which had too high a percentage of foreign content, it might be necessary to think in terms of not taking on one or other of the projects. In this connection, Mr. Coomaraswamy was warned that the Canadian officials would wish to look most closely at all of the projects listed with a view to determining whether or not they (or the particular items of Canadian equipment involved) were of a kind that Canada would wish to provide under the Colombo Plan.

4. Mr. Coomaraswamy indicated that if it did become necessary to remove a project, he would prefer that projects at the end of the list be taken off first.

5. During discussion it was also noted that, should it become necessary to make cuts in the programme from the point of view of the supply position in Canada, which would take the total below the $2 million figure, consideration would be given to the possibility of increasing the allocation of assistance to the first three projects listed, all of which were in the budget.

6. It was agreed with Mr. Coomaraswamy that the Canadian officials would give urgent attention to his most recent proposals, both from the point of view of availability of equipment and of whether or not individual projects were of a kind Canada might wish to assist, and would have a further meeting with him at 11 a.m. on Friday, May 14 in the Conference Room.

7. If Canadian aid to Ceylon was not to exceed that of previous years, Mr. Coomaraswamy formally advanced a new proposal. He suggested that consideration might be given to the possibility of extending an interest free loan to his country which he hoped might be on the order of $5 million. He pointed out that such a loan would help to meet the special difficulties facing his country's budget this year, and would not be taken by his country as a precedent for Canadian action in subsequent years. He drew attention to the instance in which special emergency aid had been given to Pakistan in the form of wheat which had later been reimbursed to the Colombo Plan vote. He assured the Group that a loan of this kind would be used only to purchase Canadian equipment and to meet local costs in connection with projects coming within the Ceylon budget.

8. To emphasize the seriousness with which the Ceylon Government regards its budgetary position, Mr. Coomaraswamy pointed out that in the preceding years his Government had been faced by a growing and serious trend towards deficit financing and inflation. In an effort to check this, measures were imposed last year which, because of their severity, contributed to changes in the existing government. These measures have been maintained by the government. The estimates for the 1954/55 budget are being kept at about the same level as the previous year. Essential economic developmental projects already started are being continued, despite the natural growth in cost as they progress, only by drastic curtailment of ordinary government expenditures. Generally no new projects are being undertaken despite the fact that several important ones are ready to go ahead if funds or equipment could be made available without increasing the budgetary burden.

9. According to Mr. Coomaraswamy, the estimated expenditure for 1954/55 is Rs. 1040 million ($208 million). Revenue is estimated at Rs. 950 million ($190 million), leaving a gap of Rs. 90 million ($18 million). This gap will be partially closed by a loan of £5 million (Rs. 65 million) from the United Kingdom Government. On the basis of present estimates, this leaves a deficit of Rs. 25 million ($5 million), but Mr. Coomaraswamy pointed out that to this figure must be added a sum of between Rs. 10 million to Rs. 15 million arising from the local costs of hydro-electric projects, the external costs of which are being financed through a loan from the International Bank. There is also a possibility that the Ceylonese Cabinet may decide to add to the estimates the cost of an important part of the Gal Oya development which Ceylonese officials did not include in their estimates. Taking this contingency into account, the estimated deficit for 1954/55 could amount to about Rs. 50 million ($10 million).

10. Mr. Coomaraswamy stressed that the advisers to the Ceylonese Government (including the Reserve Bank) were seriously worried about the possible internal economic effects of a budget deficit, and were urging the Government to budget for a surplus if at all possible.

11. Mr. Coomaraswamy also drew attention to the loss by Ceylon of foreign exchange. In January 1952 external assets held by the Ceylonese Government amounted to Rs. 1200 million ($240 million); today their holdings were only Rs. 650 million ($130 million). The Ceylonese Government expects this loss to continue, although at a slower rate. Because of the demand for imports in Ceylon, any budget deficit would be reflected in a further decline of these foreign exchange reserves.

12. The Chairman mentioned that it had not been made entirely clear to him in what way the Ceylon budgetary position was of the same emergency character as the financial and food position of Pakistan at the time of the special emergency assistance to that country. He also pointed out that when the extraordinary situation in Pakistan had arisen, there had happily been uncommitted funds within the Colombo Plan vote which could be used as a special measure to grant the assistance requested. In the present case of Ceylon, however, there was unfortunately only a small balance of uncommitted funds on hand.

13. Mr. Plumptre expressed the view that it might be difficult to justify the relating of Colombo Plan aid directly to the danger of a budgetary deficit. In his opinion this was a problem which every government faces and against which, in principle, the Canadian Government would generally not be favourably disposed to provide a cushion. On the other hand, he recognized that a real loan might be on a different footing to a grant in respect of assisting to meet a threatened budget deficit. He did not, however, see where there could be alternative sources to the Colombo Plan vote from which funds might be made available for the purpose envisaged. No suitable market for such a purpose could be found in Canada. The Export Credit Insurance Act, which provided certain authority under which loan assistance could be advanced, seemed on further investigation to be unsuitable for the kind of loan which Mr. Coomaraswamy had in mind, since interest rates under it are commercial and such credits are usually for only short terms.

14. In sum, therefore, there seemed only two possible means of providing additional aid to Ceylon at this time. Either there would have to be a general increase in the total Colombo Plan vote this year, or the normal proportion of aid available for India, Pakistan and Ceylon individually would have to be altered in Ceylon's favour. Since neither of these courses was likely to be followed in the foreseeable future, Mr. Coomaraswamy was informed that if he wished to put forward his proposal for a loan on a more formal basis, it would of course be given sympathetic consideration, but he should not be hopeful that a loan would be forthcoming.

Ottawa, May 14, 1954

My dear Coomaraswamy,

I wanted to let you know informally before your departure of the conclusions that we have reached at the official level about the projects you have placed before us for assistance from Canada under the Colombo Plan. I am sure you appreciate that anything I may say at this time must be subject to whatever decisions are eventually taken by the Government.

Before turning to the new projects, I thought it might be useful to run over the developments since your visit to Ottawa in July, 1953. At that time we were able to notify you that officials were recommending to the Canadian Government that definite approval be given to projects totalling $1,785,000, and that approval in principle, subject to further investigation, be given to a pest control project and to some supplementary assistance for the fisheries pilot project. As you know, these recommendations were accepted by the Canadian Government. The Ceylonese Government was advised of these decisions on July 17 by the Acting Canadian High Commissioner in Colombo. Subsequently your Government was informed of our readiness to provide up to $28,000 worth of assistance for pest control purposes. As we explained at the beginning of our current talks, officials are now recommending to the Canadian Government that in response to the specific request received from Ceylon, the supplementary assistance for the fisheries project referred to above should be provided in an amount which would bring the total Canadian contribution to the external cost of that project up to approximately $1,407,000 (including the $1 million approved in connection with the first year's programme). This will result in an average total programme of approximately $2 million in each of the first two years.

With respect to those proposals which you have suggested might be included in the programme for 1954/55, Canadian officials intend to recommend to the Government that assistance be provided for the following projects:

To be financed out of 1954/55 appropriations

(1) Fisheries harbour

Canadian officials will recommend that flour to an amount of $600,000 should be supplied so that the counterpart fund equivalent could be used for local costs at the fisheries harbour in view of the high priority which you have given to this project.

(2) Colombo port development

Canadian officials will recommend that electrical and other equipment (details to be agreed later) should be made available to assist in the development of the Colombo port up to an amount of $400,000.

(3) Railway equipment

Canadian officials will recommend that in 1954/55 three additional diesel locomotives should be provided, together with a quantity of mixed Douglas fir creosoted sleepers, up to a total cost for all these items of $700,000.

(4) Development of Colombo airport

We will recommend that telecommunications equipment for use at Colombo airport should be supplied under the new programme up to an amount totalling $205,000.

(5) Agricultural development in Gal Oya

Canadian officials will recommend that agricultural equipment, a transmission line and certain other related items be supplied up to a total of $210,000 for use in assisting agricultural development in the Gal Oya area.

The total of the above programme which we propose to recommend to the Canadian Government for 1954/55 is about $2,115,000. ⁴⁰

To be financed out of 1953/54 appropriations

(6) Rural roads

In 1953/54, the Canadian Government assigned an expert to Ceylon to assist in preparing plans for a School of Practical Technology. At the same time the Government agreed to supply a quantity of flour, the proceeds from which would be used to meet construction costs of this School, and it also undertook to contribute towards the costs of equipping the School when built. Since, in the ordinary course, such equipment will not be required until 1955/56, and since 1954/55 is regarded as a critical year in the Ceylon Government's financial and development programme, Canadian officials are prepared to recommend to their Government that it agree that $200,000 of the amount set aside for this purpose may be used in 1954/55 for the provision of flour to be sold for rupees which, in turn, will be applied to the costs of culverts and other materials needed in Ceylon's rural road-building programme. The Canadian officials will recommend that it be understood between the two Governments that the costs of equipment for the School of Practical Technology would be included as part of any regular programme of aid to Ceylon in 1955/56, subject to the appropriation of funds in that fiscal year.

This arrangement would have the effect of adding the equivalent of $200,000 to the funds available to the Government of Ceylon in the particularly difficult year 1954/55 without thereby increasing the amount of new money to be allocated by Canada to Ceylon in that fiscal year or in the next.

The availability from Canadian sources of the bulk of the materials and equipment required for these projects within the amounts indicated has been investigated in a preliminary manner, and it is confidently expected that these contributions will be feasible if the programme as outlined above is approved by the Government. The precise composition of the aid which might best be given to these projects cannot be settled definitely at this time, since, in the event that this programme is approved, it will be necessary to enquire further into, and to consult with the Ceylonese authorities on, a variety of details. These would include specifications for some of the equipment, the feasibility of relating such equipment as is available from Canada with any equipment which Ceylon may be procuring from other sources for these same projects, and the general practicability of using effectively in some of these projects the types and amounts of equipment which Canada might supply from the larger list which you have submitted in presenting your proposed programme. It will also be necessary at a later stage to discuss with the Ceylonese authorities such matters as the administrative arrangements for some of these projects and the terms governing the creation and use of counterpart funds where appropriate. For example, if the programme suggested above is approved, counterpart funds will be generated by the flour and by the railway equipment.

Your presentation and explanation of the various proposals have been most useful and have helped Canadian officials to determine the form of the recommendations which should be sent to the Ministers. It will be appreciated that it is difficult to compare the amount of assistance provided in one year with that provided in another, if only for the reason that the period in which assistance is actually provided rarely coincides with either the fiscal or calendar year. In the nature of the operation, detailed decisions about individual projects, expenditures of funds and indeed the receipt of goods or services tend to be spread unevenly over the years. It is to be hoped that the programme outlined above, if approved by the Canadian Government, will make an effective contribution to Ceylon's economic development during the current year.

I am sure I speak for all of those with whom you have had contact here in Ottawa, when I say how much we appreciate your coming to Canada at this time to discuss the new programme for Ceylon. Your presence has been most helpful, and I hope to be able to inform you shortly of any decisions which the Ministers may reach.

Yours sincerely,
A.E. RITCHIE