Coll 17/10(3) 'Internal: political situation; relations with HMG' [‎57r] (113/513)

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Mr. Winston Churchill to Sir K. Cornwallis (Bagdad).
(No. 22.)
Sir, Foreign Office, March 11, 1941.
IN his telegram No. 660 of the 7th November last Sir Basil Newton referred
to the possibility of financial and economic' assistance for Iraq and enumerated
the points on which it seemed to him most important that the Iraqi Government
should in return take action to meet the wishes of His Majesty’s Government.
2. The position as regards financial assistance is that His Majesty’s
Government would in principle be prepared to agree to a direct subsidy to the
Iraqi Government. The most convenient basis for such a subsidy seems to be
the payment of a sum sufficient to make up the decrease in the oil royalties due
in present circumstances from the Iraq Petroleum Company. I understand that,
although the figure involved cannot yet be accurately forecast, it would amount
to between £500,000 and £800.000 per annum. Payment would be made in
i monthly instalments, so that the subsidy could at once be stopped if the Iraqi
Government failed to fulfil their undertakings. The subsidy would be in sterling
and would only be available for expenditure in the sterling area.
3. Out of this sum the Iraqi Government would be required to repay to
His Majesty’s Government, in monthly instalments of £15,000 free of interest,
their outstanding debt of some £300,000 for the Hinaidi buildings.
4. If such a subsidy is paid. His Majesty’s Government would expect the
i Iraqi Government to reappoint a British financial adviser. The deterioration
of their finances since the termination of the former adviser’s contract should
convince them that such an appointment would be in their own interest. It is,
of course, in the interest of His Majesty’s Government, in order to prevent misuse
of the subsidy, e.g., by maintaining agitators from Palestine.
5. As soon as the Iraqi Government’s attitude again becomes satisfactory
His Majesty’s Government will be prepared, if necessary, to provide dollars for
the commercial needs of Iraq to an annual amount of £150,000. It is. however,
at present impossible for His Majesty s Government to provide dollars for
military expenditure in the United States of America, since they have informed
the United States Government that they no longer have any dollars to meet their
own military expenditure in the United States of America and are on this ground
obtaining assistance from the United States Government. The question whether
some arrangement could be made with the United States Government by which
war material could be supplied to Iraq could be considered when circumstances
appear to warrant it, but in any case it is not certain that it is in the interests
of His Majesty’s Government to provide assistance in this matter, especially
in view of the doubts they feel as to the use to which such material might be put
on its arrival in Iraq.
6. As a condition of providing the Iraqi Government with foreign
exchange. His M^ajesty’s Government would also require them to establish a
satisfactory system of'exchange control on the lines already suggested to them.
This is important from the point of view of His Majesty’s Government, since
money can be transferred to Iraq freely from the rest of the sterling area,
including this country, and there is therefore a grave risk that leakage might
take place on a very large scale. It is also in the interest of Iraqi Government,
since dollars can only be supplied to them in strictly limited quantities, and it
is onlv by establishing effective exchange control that they can ensure that the
best possible use is made of the dollars they earn themselves.
7 If His Majestv’s Government are to pay a direct subsidy to the Iraqi
Government other types of economic assistance may be unnecessary. They would
in any case’be more difficult to arrange in practice. As regards barley, for
instance the Iraqi Government cannot really need any assistance to dispose of
their surplus crops since the demand for barley in the Middle East, and
[15—31]
"enclosure IN WEEiTiT letter
1 3 ’ 2 9 1941
from secretary, political and
SECRET DEPT. INDIA 0FF£E__