Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized L -JV)-9 7/~9i~ P-66 FILE COPY RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRES IDENT TO THE EXECUTIVE DIRECTORS ON A LOAN TO THE KINGDOM OF NORWAY March 31, 1954
REPORT AN RECO 4ENDATIOS OF, THE PRESIDEWT TO THE EXECUTIVE DIRECTORS ON A LOAN TO TIE KINGDOM OF NORWAY 1. I submit the following report and recommendations on the application of the Kingdom of Norway for a loan of $25 million. PART I - HISTORICAL 2. After some preliminary discussions in April 1953, the Norwegian Government approached the Banlc in YMy with a request for a loan for development and invited the Bank to send a mission to study the Morwegian economry and to discuss the basis for a loan. A Bank mission went to Norway in October 1953. 3. After considering the mission's findings, the Bank informed the Norwegian Government on January 15, 1954 that it was prepared to enter into negotiations for a loan. 4. The Norwegian Government nominated a delegation headed by Mr. Christian Brinch of the MInistry of Commerce to negotiate on its behalf. Negotiations began on February 18 in W;ashington. PART II - DESCRIPTION OF TIiE PROPOSED LOAN The Borrower 5. The Borrower would be the Kingdom of Norway, a member of the Bank. Purpose 6. The general purpose of the loan would be to assist Norway in maintaining productive investment in 1954. Specifically, it would provide foreign exchange to enable Norway to pay for ships ordered in foreign shipyards. Amount 7. The amount of the loan would be $25 million or the equivalent thereof in currencies other than dollars. Terms 8. The loan would bs amortized by 34 increasing semi-annual payments desigred to retire the loan by its maturity. The first repeyment of principal would be due on O^tober 15, 1957 and the last on Arril 15, 1974. On and after October 159 1957, 'the sum of interest and principal due each half year would be about $1.1 million.
- 2-9. The loan would bear interest, including 1% commission, at the rate of 4-3/4% per annum. There would be a commitment charge of 3/4% per annum. The dates for the payment of interest and other charges and repayment of principal would be October 15 and April 15 of each year. PART III - APPRAISAL CF THE IDAN The Norwegian Economv 10. There is attached hereto as Appendix I a report entitled, "The Economy of Norway at the End of 1953" (EA-30b), dated March 29, 1954. 11. Norway has achieved a high standard of living by a steady expansion of her foreign trade. The export industries account for more than one-third of total output ard their expansion occupies a prominent place in the country's economic policy. 12. These industries, including a large merchant marine, are based on the sea, the forests, the mines and water power. They produce commodities and provide services for which, over the long run, tlaere is a growing demand in the rest of the world. 13. The development of Norway's resources, especially water power development, and the expansion and modernization of the merchant fleet, require large investment. But the saving capacity of a comparatively small population is limited, and Norway has traditionally been a capital importer. 14. While therefore the present balance of payments deficit is in part the result of short-term factors, such as falling prices in export markets and the heavy incidence in 1954 of payments for ships ordered during the Korean boom, it is also in part attributable to a long-term characteristic of the Norwegian economy, viz. the insufficiency of local savings to meet investment needs. 15. Existing foreign exchange reserves are comparatively small, so that unless additional resources could be obtained abroad, there would have to be cuts in consumption, investment and defense. It would be unrealistic. to expect any significant curtailment of consumption or defense expenditure, and although some reduction of investment in housing and social services is recognized as advisable, there are sound reasons for maintaining directly productive investment. 16. At the levels of consumptton, investment and defense envisaged there would be a total balance of payments deficit in 1954 of 1W52 million. With a loan of $25 million from the Bank it should be possible for the Government to cover the remaining balance by raising other foreign loans and credits, by reducing imports and, to the extent that might be unavoidable, by further drawing on foreign exchange reserves.
-3 - The Shipping Industry 17. The Norwegian merchant marine is briefly described in a report entitled, "Norwegian 1-brchant IvSrine," dated Yarch 26, 1954 which is attached hereto as Appeudix II (TO 50). 18. Norway is the third most important maritime nation. The present size of the fleet is over 6 million gross registered tons. The fleet is young and modern, 42% of the tonnage is less than 5 years old and 77% of the fleet is diesel-driven. Tankers account for 57% of the total tonnage. 19. Although the world shipping industry is going through a period of readjustment, and recently some shipping has become surplus, the long-term outlook for Norwegian shipping is good. The fleet is in a strong competitive position. Norwegian shipowners are experienced managers, crews are efficient and operating costs are comparatively low. About nine-tenths of the fleet either works on long-term charter or is engaged in liner service on entrenched routes. 20. The fleet is an important foreign exchange earner. About 95% of the deep-sea vessels are engaged in cross trade. Although only about 3-1/2% of the employed population is directly engaged in shipping, net earnings from shipping services paid for over 20% of imports of goods and services in 1950, 30% in 1951 and 1952 and 22% in 1953. 21. The proceeds of the loan would be applied towards meeting payments for ships, which account for a significant part of the foreign exchange deficit expected in 1954. Unitil recently the Norwegian economy had no difficulty in finding external resources to finance the expansion of the fleet.. However, large orders placed during the past few years have resulted in a heavy concentration of payments primarily to British, Swedish and German yards. Though the shipping companies themselves are in a strong financial position and do not need any assistence,'payments due in 1954 will impose a heavy burden on Norway's foreign exchange resources. 22. These payments are ir various currencies, chiefly pounds sterling, Swedish crowns and German marks. It has so far not been possible to obtain the release of these currencies out of the 18% subscriptions of the members concerned. It is therefore likely that the greater part of the loan, if not the whole, would be disbursed in dollars. These dollars would be paid directly to Norway. However, to the extent that EurQpean currencies were available out of 18% capital subscription or from borrowed funds, the Bank would disburse in these currencies. 23. The kroner equivalent of the loan would be used to repay internal Government debt.
-4- PART IV - PROSPECTS FOR REPAYMENT OF THE LOAN 24. Norway is a modern and progressive country, and her resources provide a broad basis for further development. Production and employment are high and the per capita income is among the higheot in Europe. As soon as postwar reconstruction had been largely completed, the Government launched a large scale investment effort, the First Four-Year Program, for the years 1949-52, the success of which was assured by exceptionally favorable circumstances such as large U.S. aid and high export and shipping profits earned in a seller's marlcet, especially during the Korean boom. Calculated at constant prices, the gross national product reached in 1953 a level nearly 50% above that of 1938, gross investment rose over 70% and private consumption over 40%, while the increase in pqpulation was about 14% during the same period. 25. Since about the middle of 1952, Norway has been in a period of transition from a boom to more normal conditions, and the Second Four-Year Frogram, covering the years 1954-57, coincides with the task of adjusting the Norwegian economy to a new set of circumstances which include the termination of U.S. economic aid and a lower level of export prices and freight rates, combined with a considerable deterioration in the terms of trade. 26.. The balance of payments deficit is the net result of a surplus with the dollar area, a balanced position with clearing account countries and a large deficit with the EPU area. In view of the high degree of flexibility inherent in the Norwegian economy, the maintenance of an appropriate rate of investment, together with previous investments, should permit Norway to maintain her her dollar surplus and gradually reduce her EPU deficit to a level where it can be financed by moderate borrowing abroad. 27. The financial position of the Government, though less strong than during recent years, is still very comfortable. The ordinary budget continues to show a considerable surplus and defense needs are not likely to impose an unmanageable burden. 28. The Norwegian Government recognizes that-adjustments are needed in the present transition period. A beginning has been made in reducing investment in housing, and there is evidence of an increased awareness of the need to revive the capital market and attract foreign investors. 29. The risk involved in lending to an economy so heavily dependent on foreign trade is that of a prolonged depression in world markets. Over the long run this risk is very largely offset by the fact that Norway continues to enjoy a strong competitive position. Private enterprise has shown its ability, especially during the past two years, to adjust itself to changing conditions. In fact, though average export prices in 1953 were still about 15% below the boom time peak, the export industries continued selling their produce abroad at the record volume of 1951...
-5-30. Norwayts foreign indebtedness is small. Existing foreign exchange reserves are modest but current earnings are large. Payments of interest and amortization on-the present external public debt will reach their height in 1957 and will then take less than 3% of the total of present foreign exchange receipts. Service payments on the dollar debt will absorb at the peak about 10% of present dollar earnings. 31. After allowing for all the additional foreign borrowing likely in 1954, Norway still would have an external debt which is well below her capacity to service. As explained in more detail in the Economic peport, Norway's prospective balance of payments position is such that she can safely borrow in dollars in which she may be expected to earn a surplus of between $15 and $20 million a year. Therefore, there is no particular risk in lending dollars to Norway in the araount contemplated or even more. 32. Norway has a good debt record and she has always paid her obligations promptly. There is, however, a longstanding dispute between the Norwegian Government and the Association Nationale des Porteurs Francais de Valeurs Mobilieres, representing holders of certain Norwegian bonds issued between 1885 and 1909. The French compalint appears to be twofold: first that since 1931, the debtors have paid the bonds on the basis of the various currencies in which they were expressed (francs, sterling, and crowns) and not on the basis of gold; secondly, that the debtors have discriminated against French holders by paying Sw6dish holders in Swedish crowns without offering eqlivalent treatment to French holders. The Association has put forward certain proposals and has suggested that failing agreement, the dispute should be submitted to the Arbitral Tribunal of the International Chamber of Commerce. 33. There have been discussions on the subject between French and Norwegian representatives over many years and I am informed that-the Norwegian debtors have not accepted the French case, They have stated, however, that they will abide by the decision of any court having jurisdiction of the dispute, including the Norwegian Supreme Court and the International Court of Justice at The HIague. 34. In view of the complicated legal position and the nature of the issues involved, I feel that the Bank should not attempt to judge the merits of the case. PART V - SALE CF BONDS 35. The Bank has entered into conditional agreement for the sale without its guarantee of the first four maturities of the loan on a yield basis rising from 3-1/4% for the first maturity to 3-5/8% for the fourth, The purchasers, and the amounts taken by each are as follows: Bank of America National Trust and Savings Association $1,512,000 The Philadelphia National Bank 504.000 $2p016,000
-6- PART VI - LEGAL INSTRUMIENTS 36. A draft of the Loan Agreement between the Kingdom of Norway and the Bank is attached as Appendix III. This draft Agreement incorporates Loan Regulations No. 3 dated October 15, 1952 and, with the exception of $ection 5.03, the so-called negative pledge, is in the usual form of the Bank t s agreements for this type of loan. The negative pledge has been modified to avoid constitutional problems arising from its application to political subdivisions and their agencies. If the Norwegian Government, for constitutional reasons, is unable to make the negative pledge effective with respect to these political subdivisions and their agencies, it will grant to the Bank an equivalent lien satisfactory to the Bank. An excepw tion to the negative pledge similer to that in the recent Ecuadorian Guarantee Agreement exempts certain liens given by political subdivisions and their agencies if the liens do not result in priority in the allocation or realization of foreign exchange. PART VII - COMPLIANCE WITH ARTICLES OF AGREE1kENT 37. Appendix IV attached hereto contains the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank. 38. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VIII - RECOIENDATIOIS 39. I recommend that the Bank at this time make a loan in the amount of $25 million, or equivalent in currencies other than dollars, for a total term of 20 years, with interest, including commission, at 4-3/4% per annum, and on such other terms as are specified in the form of Loan Agreement attached hereto. E. R. Black Washington, D.C.