THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP82S00205R000200010005-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 20, 2016
• Document Release Date: August 22, 2006
• Sequence Number: 5
• Publication Date: September 7, 1970
• Content Type: IR

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DIRECTORATE OF
INTELLIGENCE
Intelligence Report
The Economic Situation in South Vietnam
(Biweekly)
State Dept. review completed
Secret
USAID review completed i17
7 September 1970
No. 0430/70
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WARNING
This document contains information affecting the national defense of the
United States, within the meaning of Title 18, sections 793 and 794, of the
US Code, as amended. Its transmission or revelation of its contents to or
receipt by an unauthorized person is prohibited by law.
rax3i g i
[,UDED FROM AUTOMATTO
OOWNORADUNO AND
Secret
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
The Economic Situation in South Vietnam
Summary
By limiting the issuance of licenses for im-
ports the Vietnamese Government has succeeded in
halting the decline in foreign exchange reserves,
but in so doing has added to inflationary pres-
sures. Prospects for enactment of effective eco-
nomic stabilization measures are not bright in
view of the current unsettled political situation.
Retail prices in Saigon declined slightly in
August. During the first eight months of this year
the USAID monthly average index increased about 42
percent. Black market currency and gold prices
continued to increase, approaching the all-time
high levels of last April.
ANNEX: Weekly and Monthly Currency and Gold Prices
(Graph)
Cost of living, money supply, and foreign ex-
change reserves (Chart)
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Imports and Stabilization
1. Following the rash of orders for imports
subsequent to the enactment of higher austerity
taxes last October, the Vietnamese Government re-
stricted the issuance of import licenses in order
to halt the decline in its foreign exchange re-
serves. As a result of this restriction the value
of orders for imports during the first half of 1970
was 45 percent below that of the last half of 1969
and the decline in reserves was halted, at least
temporarily. Imports financed by the US through
the Commercial Import Program (CIP) and the Food
for Peace Program (PL-480) are not affected by
Vietnamese restrictions on licensing--the amounts
being largely determined by US Congressional ap-
propriations in the case of the CIP and by the need
for surplus US agricultural commodities, mainly rice,
in the case of PL-480 imports.
2. Although one might have expected the in-
crease in austerity taxes to reduce orders for im-
ports, orders increased dramatically, as shown in
the following tabulation, with the result that for-
eign exchange reserves dropped sharply several
months later when the dollar payments were made by
the National Bank (see chart).
Import Licenses
(million dollars)
2nd Half 1969 1st Half 1
970
Jul-
Sep
Oct-
Dec
Jan- Apr-
Total Mar Jun
Total
-
-
82.0 - -
113.1
-
-
69.5 - -
46.9
Vietnam-
ese-Fi-
nanced 70.1
173.7
243.8 80.8 53.3 134.1
395.3 294.1
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Importers speculated on continuing inflation and on
the possibility of a large devaluation, which would
greatly increase their costs. Despite the higher
austerity taxes importers still can make enormous
windfall profits on many goods because they sell
them at the inflated domestic price level while pay-
ing for them at the artificially low official ex-
change rate. Some US officials have estimated that
importers' excess profits amount to $100-150 million
per year. Moreover, speculative buying by importers
is easy because they are able to obtain what amounts
to free credit to finance their inventories. Com-
mercial bank interest rates to importers currently
are 12 percent per year, whereas commodity prices
rose about 42 percent during the past 12 months.
3. Although the licensing data show that the
importers' spending spree had almost run its course
by January 1970, the government, concerned about the
decline in foreign exchange reserves that had al-
ready started, decided to limit licensing to a
maximum of $20 million per month from a restricted
list of goods. Had the government been able to
outwait the importers, much of the speculation in
imports probably would have died out. The licensing
restrictions reportedly were removed in August, but
by reducing the flow of imports for six months the
government has added to inflationary pressures. The
slowdown in arrivals of imports will cut back the
major source of government revenue--taxes on im-
ports--and force the government to resort to in-
creased deficit financing in order to cover its ex-
penditures. Although the money supply has not yet
increased significantly--only eight percent during
the first seven months of this year--the rate of
increase will pick up as expenditures on new pro-
grams, such as veterans' benefits and land reform,
get under way. Moreover, a wage increase for gov-
ernment employees cannot be long delayed and it
will add significantly to government spending.
4. The prospects for early enactment of ef-
fective stabilization measures, such as tax in-
creases or devaluation and interest rate reform,
are not bright. The government already has de-
layed such measures several months awaiting Senate
approval to enact reforms by decree, and most
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observers agree that favorable Senate action is un-
likely. President Thieu has indicated that if he
does not get legislative agreement he will then
decree stabilization measures on his own authority.
The enactment of reforms in this manner, however--
even measures much less stringent than those called
for by economic considerations alone--would cause a
considerable political uproar, such as occurred last
October when austerity taxes were raised without Na-
tional Assembly approval. Some changes in tax and
exchange rates probably will be made with or with-
out legislative approval during the next several
weeks, but major reforms apparently will be post-
poned until some unspecified future date when the
political situation is less unstable. In the mean-
time, the Vietnamese will rely in large part on in-
creased US aid to keep inflation from getting out
of hand.
5. Although retail prices in Saigon increased
slightly during the last week in August, the aver-
age price level for the month declined slightly from
the July level. Prices increased about 42 percent
during the 12 months ending in August, and about 25
percent during the first eight months of 1970. Data
on prices of imported commodities during August are
not available, but the USAID index for imports rose
21 percent during January-July 1970.
Currency and Gold
6. Saigon black market currency and gold prices
continued to increase during the two weeks ending 31
August. The rate for MPC (scrip) reached a new high
of 240 piasters per dollar, while the prices of dol-
lars and gold approached the all-time high levels
of last April. On 31 August the price of dollars
was 415 piasters per dollar compared with the offi-
cial rate of 118 piasters, and the price of a dol-
lar's worth of gold leaf was 505 piasters. In addi-
tion to the general uncertainty about government
economic measures, one factor that apparently in-
fluenced black market rates was the widespread press
reporting that the National Bank is planning to issue
SECRET
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the 1,000-piaster notes that have been in its
vaults for several years. The largest banknote
now in circulation is the 500-piaster note, and
the bank has denied any plans to issue the larger
denomination, which the press views as inflationary.
(A graph on monthly and weekly currency and gold
prices is included in the Annex. Also included are
charts on the cost of living, money supply, and for-
eign exchange reserves.)
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nnwk~ GOLD Basis gold leaf worth $35 per troy ounce
=W~ US $10 GREEN
US $10 MPC Military Payment Certificates (scrip)
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Saigon Cost of Living Index* (For Working Class Family Without Rent)
Billions cif P~aster~s:
*Official GVN-index
South Vietnam Money Supply
South Vietnam Foreign Exchange Reserves*
l! illion of US.Dollars
o
*Excluding holdings of commercial banks
999029-70
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NMVW
Secret
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