SECRET
GOVERNMENT HOUSE
Hong Kong
ANNEX D TO XCS(71)12
24th March, 1971
Please refer to your letter of 27th February, about the
defence contribution.
2.
I should be grateful if you would inform the Unofficial Members of the Executive Council that I have been instructed to reply to the Memorandum attached to your letter in the following terms.
3.
After most careful study of your Memorandum HMG much regret that they feel unable to alter the views conveyed to you by me on 19th February.
4.
It is true that in 1966 the U.K.'s balance of payments problem was a major factor contributing to the request for an increased Defence Contribution from Hong Kong. Since then the U.K. has been able, as a result of a number of difficult and sometimes painful measures, to move to a position of substantial surplus on current account, with a consequent improvement in the external financing position. But this improvement has occurred in the relatively recent past. The magnitude of the U.K. financing problem previously was such that, even though substantial repayments of debt have been made, a very large burden of short and medium-term official debt remains outstanding. These debts have to be repaid in the next few years. The need for the U.K. to maintain a substantial and continuing surplus on current account not only to repay remaining debt, but also to cover large capital outflows associated with aid, overseas investment and trade credit, and to achieve a more sustained economic growth than in the past, has not therefore diminished.
5.
It is fully realised that Hong Kong faces large financial commitments in the years ahead. It was precisely for this reason that HMG informed me, in reply to my enquiry, that they were ready to accept £8.5 million, but only as the very minimum contribution to which they could reasonably agree.
Such a contribution would do no more than restore the situation (as regards the proportion of total costs which it would represent) which obtained when the current contribution was negotiated in 1966. It would represent some 3.9% of Hong Kong's estimated revenue for 1971/72: in 1967/68 the corresponding figure was 4.25%: immediately after the war it was 5.5%.
6.
It has long been HMG's policy that the Governments of Dependent Territories should provide for their own internal security (on the grounds that the maintenance of law and order must be one of the first priorities of any Government) and that they should also provide as far as possible
for their own local defence.
R.W. Primrose, Esq., MBE, UMELCO Office.
SECRET