(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01316A000900080003-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 5
• Document Creation Date: December 12, 2016
• Document Release Date: January 11, 2002
• Sequence Number: 3
• Publication Date: February 23, 1978
• Content Type: CABLE

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ONE ARTICLE FROM OER'S ECONOMIC INTELLIGENCE WEEKLY REVIEM
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25X1 kNDING 23 FEBRUARY 1'978. REQUEST ARTICLE BE PASSED TO AMBASSADOR,
M, ECONOMIC SECTION AND OTHER WORKING LEVEL STATE OFFICERS.
PLEASE PASS TO US MISSION OECD.
PLEASE PASS TO US MISSION TO EC.
1. THE THREE-WEEK-OLD COALITION GOVERNMENT HEADED BY
PRIME MINISTER MARIO SOARES HAS GAINED PARLIAMENTARY CLEARANCE
FOR NEW AUSTERITY MEASURES TO REDUCE THE OUTSIZED PAYMENTS
DEFICIT. NEGOTIATIONS FOR A SMALL IMF LOAN ARE EXPECTED To
RESUME NEXT MONTH, INCREASING THE LIKELIHOOD OF MAJOR
DISBURSEMENTS FROM A.S750 MILLION LOAN PACKAGE ARRANGED
WITH VARIOUS FRIENDLY GOVERNMENTS. TALKS WITH JMF
REPRESENTATIVES v+ERE SUSPENDED LAST NOVEMBER BECAUSE POLITICAL
DISSENSION PREVENTED AGREEMENT IN LISBON ON MAJOR POLICY
CHANGES NEEDED TO REDUCE THE CURRENT ACCOUNT DEFICIT. vwwITH
OMMUNIST-DOMINATED LABOR UNIONS FANNING DISCONTENT OVER
INFLATION AND UNEMPLOYMENT, SOARES WILL HAVE DIFFICULTY
IMPLEMENTING THE LATEST BELT-TIGHTENING PROGRAM.
ECONOMIC DIFFICULTIES.
2. SINCE THE 1974 REVOLUTION, THE PORTUGUESE ECONOMY
HAS BEEN BUFFETED BY POLITICAL TURMOIL, DECOLONIZATION, AND
WORLD RECESSION. THE ENORMOUS INCREASES IN M(?NEY CAGES OF
1974-75 HAVE BEEN vIPED OUT BY INFLATION; IN THE FALL OF
1977 THE REAL AGES OF LISBON- INDUSTRIAL WORKERS 4 EkE 3
PERCENT BELOW THE PREREVOLUTIONARY LEVEL. DOMESTIC TNFL.ATII.) N,
LABOR UNREST IN 60TH INDUSTRY AND AGRICULTURE, BAD vwFA1HER,
AND THE INCREASED COST OF IMPORTED OIL HAVE CONTRIBUTED
TO EVEN HIGHER TRADE AND CURRENT ACCOUNT DEFICITS.
3. IN EARLY 1977 PRIME MINISTER'SOARES, WHO FORMED
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THE PREVIOUS GOVERNMENT IN MID-1976, UNDERTOOK A SERIES OF
AUSTERITY MEASURES INTENDED TO CURB CONSUMPTION AND IMPORTS
AND ENCOURAGE INVESTMENT AND EXPORTS. HIS SOCIALIST PARTY
HAD ONLY A MINORITY IN THE NATIONAL ASSEMBLY, AND ITS
PROGRAMS WERE UNDERMINED BY POLITICAL AND SOCIAL UNREST
AS WELL AS BY BUREAUCRATIC INEFFICIENCY. AS A RESULT, THE
MEASURES WERE INSUFFICIENT AND OFTEN NOT FULLY IMPLEMENTED.
1977 PERFORMANCE,
4, LAST YEAR, INCREASED IMPORTS DUE TO HIGHER CONSUMER
DEMAND, RISING INDUSTRIAL OUTPUT, AND CROP FAILURES RAISED
THE CURRENT ACCOUNT DEFICIT BY ABOUT $80 MILLION OVER 1976,
TO $1.3 BILLION, DESPITE SUBSTANTIAL GAINS IN EARNINGS FROM
TOURISM AND WORKER REMITTANCES. THE MERCHANDISE TRADE
DEFICIT PROBABLY REACHED S2,4 BILLION IN 1977, COMPARED
WITH $2.1 BILLION IN 1976, THE POOR HARVEST, THE RESULT OF
BAD WEATHER AND CONTINUING CONTROVERSY OVER AGRARIAN REFORM,
WILL HURT THE TRADE BALANCE THROUGH MID-1978. AGPICULTURAL
PRODUCTS MAKE UP HALF OF TOTAL IMPORTS,
5. FOREIGN EXCHANGE RESERVES PRESENTLY ARE FLUCTUATING
BETWEEN $100 MILLION AND $300 MILLION, NO MORE THAN FOUR
WEEKS OF,IMPORTS. EVEN THIS LEVEL COULD NOT BE MAINTAINED
WITHOUT SHORT-TERM BORROWING FROM. WEST EUROPEAN BANKS.
ABOUT ONE-HALF OF LISBON'S GOLD RESERVES, WORTH 14 BILLION AT THE
CURRENT MARKET PRICE, ALREADY HAVE BEEN PLEDGED AS COLLATERAL.
TO SECURE FOREIGN LOANS. THE FOREIGN DEBT, OF SMALL CONCERN
BEFORE THE 1974 REVOLUTION, NOW AMOUNTS TO MORE THAN $4
BILLION--EQUIVALENT TO NEARLY 20 PERCENT OF 1977 GNP. DEBT
SERVICE LAST YEAR EQLMALED MORE THAN 25 PERCENT OF EXPORT
EARNINGS.
6. REAL GNP ROSE AN ESTIMATED 5.5 PERCENT IN 1977, LED
BY A SOLID UPTURN IN INDUSTRIAL PRODUCTION. PAY GUIDELINES
HELPED KEEP WAGE INCREASES BELOW 15 PERCENT FOR THE SECOND
STRAIGHT YEAR, PERHAPS THE MOST ENCOURAGING DEVELOPMENT
FOR THE LONG-TERM HEALTH OF THE ECONOMY. ON THE OTHER
HAND, PRIVATE INVESTMENT CONTINUED ANEMIC, AND UNEMPLOYMENT
REMAINED AT ABOUT 15 PERCENT OF THE LABOR FORCE, STABILIZATION
MEASURES, INCLUDING DEVALUATION, HIGHER INDIRECT TAXES,
AND RELAXATION OF A BEWILDERING ARRAY OF PRICE CONTROLS,
RESULTED IN A FURTHER INCREASE IN THE CONSUMER PRICE LEVEL.
RETAIL PRICES IN LISBON ROSE AN ESTIMATED 30 PERCENT IN
1977, UP FROM THE 20-PERCENT RISE OF THE PREVIOUS YEAR.
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SEEKING REMEDIES.
7, HOPING TO BOLSTER THE CONFIDENCE OF INTERNATIONAL
LENDERS, THE PORTUGUESE LAST APRIL NEGOTIATED A
MINISTABILIZATION PACKAGE WITH THE IMF FOR THE RELEASE
OF A FIRST TRA14CHE LOAN OF $50 MILLION, TALKS SUBSEQUENTLY
HAVE CENTERED ON CONDITIONS FOR A SECOND TRANCHE OF 350
MILLION, MORE THAN A DOZEN COUNTRIES AGREED LAST JUNE TO
END PORTUGAL A TOTAL OF $750 MILLION (INCLUDING $300
MILLION FROM THE UNITED STATES), WITH DISBURSEMENTS IN
MOST CASES CONTINGENT UPON A NEW IMF AGREEMENT. FACED WITH
STRONG OPPOSITION IN THE NATIONAL ASSEMBLY, THE MINORITY SOCIALIST
OVERNMENT UNDER SOARES DECIDED NOT TO SUBMIT WHAT WOULD HAVE
BEEN ITS THIRD MAJOR STABILIZATION PACKAGE AND RESIGNED UPON
LOSING A VOTE OF CONFIDENCE LAST DECEMBER,
8. WITH THE BACKING OF PRESIDENT ERNES, THE SOCIALIST
PARTY HAS NOW FORMED AN ALLIANCE WITH THE CONSERVATIVE
CENTER DEMOCRATS (PARTIDO DO CENTRO DEMOCRATICO SOCIAL)
AND SOARES HAS RESUMED HIS ROLE AS PRIME MINISTER. THIS
ALLIANCE ASSURES SOARES MAJORITY CONTROL OF THE ASSEMBLY--143
OF 2b3 SEATS. ON 12 FEBRUARY, THE NEW GOVERNMENT'S
CONOMIC PROGRAM PASSED THE ASSEMBLY AGAINST A DIVIDED
OPPOSITION OF COMMUNISTS AND CENTER-RIGHT SOCIAL DEMOCRATS
(PARTIDO SOCIAL - DEMOCRATA).
9. THE PROGRAM'S GOALS FOR THIS YEAR ARE TO REDUCE
THE CURRENT ACCOUNT DEFICIT TO $800 MILLION, LOvER THE
INFLATION RATE TO 20'PERCENT, AND EXPAND REAL GNP BY
ABOUT 4 PERCENT. ALTHOUGH DETAILS ARE SKETCHY, THE GOVERNMENT
INTENDS TO:
10. HOLD DOWN THE BUDGET DEFICIT BY INCREASING TAXES
AND KEEPING GOVERNMENT CONSUMPTION--AN EXPANSIONARY FACTOR
IN RECENT YEARS--CONSTANT IN REAL TERMS,
11. STIMULATE FOREIGN AND DOMESTIC PRIVATE INVESTMENT
BY RETURNING SOME HOLDTNGS SEIZED BY WORKERS AND THE
OVERNMENT FOLLOWING THE REVOLUTION.
12, LIMIT THE EXPANSION OF DOMESTIC CREDIT, GIVING
PREFERENCE TO EXPORT-ORIENTED, IMPORT-REPLACEMENT, AND
ABOR-INTENSIVE ACTIVITIES.
13. THE OUTLINE OF THE PRQGRAM APPEARS GENERALLY IN
LINE WITH RECOMMENDATIONS PUT FORWARD BY THE IMF BEFORE
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TALKS WERE SUSPENDED IN NOVEMBER. ALTHOUGH THE NEW
GOVERNMENT APPARENTLY HAS RULED OUT ANOTHER SIZABLE
DEVALUATION, IT IS LIKELY TO FULFILL A PLEDGE MADE EARLIER
TO ALLOW THE ESCUDOTO DEPRECIATE BY ABOUT 1 PERCENT EACH
MONTH. THE ESCUDO ALREADY HAS GONE TO 40 PER DOLLAR FROM
25 AT THE TIME OF THE REVOLUTION. BOTH COALITION PARTIES
ARE COMMITTED TO REACHING AGREEMENT WITH THE IMF, AND
PARLIAMENTARY CLEARANCE OF THEIR PROGRAM HAS PAVED THE
WAY FOR RESUMPTION OF TALKS, PROBABLY NEXT MONTH.
ROUGH ROAD AHEAD.
14, THE NEW COALITION GOVERNMENT FACES TOUGH GOING
IN TRYING TO CARRY OUT ITS PROGRAM, AND SLIPPAGE IS
LIKELY. WITH THE VOLUME OF INTRA-OECD TRADE PROJECTED
TO INCREASE ONLY 4 TO 5 PERCENT, LISBON PROBABLY WILL
MANAGE TO CUT THE CURRENT ACCOUNT DEFICIT SOMETHING LESS
. THAN THE PROJECTED HALF BILLION DOLLARS, LEAVING THE
COUNTRY WITH A SERIOUS FINANCING PROBLEM. THE TARGETS
FOR GOVERNMENT SPENDING AND GNP ARE LIKELY TO BE EXCEEDED
BUT NOT ENOUGH TO MARKEDLY REDUCE UNEMPLOYMENT. AWARENESS
OF PAST GOVERNMENT FAILURE TO FOLLOW THROUGH ON MUCH
NEEDED ECONOMIC MEASURES AND CONTINUED ANTI-HUSINESS
SENTIMENTS MAKE THE TASK OF RESTORING INVESTOR
CONFIDENCE DOUBLY DIFFICULT. AGRICULTURAL RECOVERY SHOULD
BE AIDED BY BETTER WEATHER, ALTHOUGH IT MAY BE CRIMPED
BY COMMUNIST AGITATION. THE COMMUNISTS CONTROL MANY
COLLECTIVE FARMS IN,THE KEY GRAIN GROVING ALENTEGJO
REGION,
15, THE SOCIAL1ISTS AND CENTER DEMOCRATS UNDERTOOK
THEIR ALLIANCE AT CONSIDERABLE RISK TO THEIR RESPECTIVE
BASES OF SUPPORT AND, AS A RESULT, HAVE A GREAT STAKE IN
MAKING THEIR POLICIES WORK, THE TASK WILL BE COMPLICATED,
HOWEVER, BY THE DIVERGENT PHILOSOPHIES OF THE TWO GOVERNING
PARTIES AND BY OPPOSITION FROM THE SOCIAL DEMOCRATS AND
THE COMMUNISTS. THE COMMUNIST PARTY, WHICH CONTROLS LINIONS
ENROLLING 80 PERCENT OF ORGANIZED LABOR, BEGAN STAGING A
NUMBER OF STRIKES EARLY THIS MONTH. YET THE COMMUNISTS
SEEM RELUCTANT TO RISK AN ALL-OUT CONFRONTATION WITH THE
GOVERNMENT, WHICH COULD TURN PUBLIC OPINION AGAINST THEM,
THEY SEEM CONVINCED THAT. THE. GOVERNMENT EVENTUALLY WILL.
FALL AND THAT A LEFTIST ALLIANCE OF SOCIALISTS AND
COMMUNISTS CAN THEN BE FORMED, (CONFIDENTIAL) E1,2,3 IMPDET
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25X1)qRIG $ AUTH: NFAC/ASA/D/OER ; REL: CH, CS/NFAC
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CL BY 015319.
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