EAST AFRICA: ACCUMULATING ECONOMIC WOES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00225R000100260001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 21, 2016
• Document Release Date: July 22, 2008
• Sequence Number: 1
• Publication Date: June 1, 1982
• Content Type: REPORT

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Directorate of
t_ll! Secret
In
East Africa:
Accumulating Economic Woes
An Intelligence Assessment
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State Dept. review completed
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Directorate of Secret
East Africa:
Accumulating Economic Woes
An Intelligence Assessment
Information available as of 21 May 1982
has been used in the preparation of this report.
Secret
ALA 82-10084
June 1982
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Secret
East Africa:
Accumulating Economic Woes
Key Judgments East Africa's strategic importance and proximity to major oil transport
routes has increased superpower interest in the area. Soviet influence is
particularly strong because of Moscow's close ties to the Marxist regime in
Addis Ababa and the Soviet and Cuban role in making Ethiopia black
Africa's foremost military force. To counter the threats to the continued
flow of oil, Washington has signed agreements with the Kenyan and
Somali Governments that permit US access to their military facilities.
The increase in East Africa's political and military importance coincides
with deteriorating economic conditions in the area. Before the mid-1970s,
East African countries-from Ethiopia south to Tanzania-generally met
their basic food requirements, their urban populations were small and
undemanding of public services, and financial stresses were manageable.
Ironically, their large subsistence sectors for a time cushioned most of the
area's 85 million people from the severe internal and external shocks that
struck during the first half of the 1970s. Some countries, notably Ethiopia
and Tanzania, even made significant improvements in rural living
standards.
Since the mid-1970s, however, East African governments have come under
unprecedented stress over the handling of their economies. The entire
region now desperately needs money, basic foodstuffs, and producer
supplies. Discontent and unrest are likely to increase the potential for
political instability and encourage Soviet, Cuban, and Libyan meddling.
The need for money also clearly played a key role in the willingness of both
Kenya and Somalia to accede to Washington's request to use their military
facilities.
Reforms dictated by the International Monetary Fund, when implemented,
have had limited impact because of the size of the task and because of
backsliding in the face of political risks. Area leaders are also inclined to
dissipate limited resources in uneconomic but politically important efforts
to appease tribal, regional, and other frictions. Key economic posts go to in-
experienced political cronies, and corruption is an increasingly disruptive
fact of life.
iii Secret
ALA 82-10084
June 1982
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CPPret 25X1
In the Horn of Africa, the armed insurrection by separatists in Eritrea and
Tigre, the hostilities in the Ogaden, and drought have compounded the
chaos that ensued from the sweeping socialist restructuring of the Ethiopi-
an and Somali economies during the 1970s. A tendency to rely on
immediate gains from income redistribution more than on laying the
foundation for sustained economic growth has only hastened the day of
reckoning for Mogadishu and Addis Ababa.
The area south of the Horn also faces grave problems:
? Kenya, once one of Africa's star economic performers, has had a steady
decline in its once thriving agricultural sector, as unchecked government
spending through inefficient public corporations restricted the country's
potential. Population growth of 4 percent annually-among the world's
highest-threatens to overwhelm the country's fragile rural-urban
balance.
? Uganda is recovering from the excesses of the Idi Amin regime, but still
faces great difficulties as President Milton Obote struggles to control
internal security.
? Tanzania, disillusioned with President Julius Nyerere's socialist experi-
ment, is at an impasse with the IMF over corrective strategies; even such
liberal past donors as the Scandinavian countries are growing impatient
with Nyerere's refusal to undertake necessary reforms.
Over the next few years, the outlook for economic recovery throughout
East Africa-and therefore for the area's political stability-is grim. The
mounting burden of enormous arms debts will be an additional throttle on
several of the region's economies. The longer these countries forgo badly
needed IMF financial guidance and money, the harder it will be to
accommodate Western financial backers.
Able until recently to blame outside factors for their depressed economies,
East African leaders are increasingly the target of popular discontent.
Dismantling inefficient parastatal enterprises risks offending powerful
vested interests. Even a sustained commitment to reorganizing key institu-
tions would require time. Meanwhile, economic well-being in East Africa
will depend largely on the thin hope of good weather and strong world de-
mand for key agricultural exports.
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Secret
Against this background, the political leadership will increasingly try to
make the IMF a scapegoat while expecting the United States and other
principal Western donors to increase their aid. Most East African leaders
believe that Washington's emphasis on private investment masks an
unwillingness to come to their support.
Ethiopia probably is willing to make only token economic or political
concessions to attract Western aid and investment. As long as secessionist
threats remain, Chairman Mengistu believes Soviet military support is
more important than Western financial capital. Nevertheless, Soviet-
Ethiopian relations could come under heavy stress as Ethiopia's military
debt repayments mount in the mid-1980s.'
The moderate Governments of Somalia and Kenya will expect Washington
to shoulder a larger aid burden, including stretching loan repayments in
return for continued US access to their military facilities. These govern-
ments already are sensitive to claims by opponents that access agreements
implicate them in superpower politics. They could decide to modify the
agreements substantially or, over the longer term, cancel or refuse to renew
them if US aid does not meet their expectations.
The Governments of Uganda and Tanzania are likely to make only slow
progress dealing with their economic problems, as both are debilitated by
serious problems outside the realm of economic management. In Uganda,
continued lack of public security precludes effective long-range planning,
investor confidence, and normal commercial activity and agricultural
production. In Tanzania, Nyerere's personal and political commitment to
his unique form of socialism prevents him from coming to terms with the
IMF and securing critical foreign assistance. 25X1
' This paper examines the economic problems and prospects of Kenya, Uganda, Tanzania
and Somalia.
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Tanzania: Nyerere's Stabilization Crisis 5
Leadership Alternatives and Economic Consequences 8
Uganda: Fragile Recovery 9
Somalia: The Economy Continues To Falter 11
Siad's Takeover and Ensuing Economic Decline 11
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East Africa: Major Economic Activity
Lake
Rudolf
Lake MOZAMBIQUE
Nyasa
Boundary representation is
not necessarily authoritative.
YEMEN
(Aden),
Tea
Q Sugar
Figure 1
Berbera
Hargeyss
Bender
Cassim
MANUFACTURING MINING
It Oil refining Au Gold
Lo Steel mill Cu Copper
as Automotive assembly Fe Iron
Q Chemicals Mn Manganese
'g Textiles Ph Phosphate
? Cement Sn Tin
Power generating W Tungsten
Sugar refining
Q Meat processing
AGRICULTURE
Coffee %_j Other agricultural and
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East Africa:
Accumulating Economic Woes
Kenya: Deepening Economic Problems '
Kenya's deteriorating economy is President Moi's
most difficult challenge since he assumed office in
1978. Once thriving agriculture has been hit by bad
weather, inappropriate government policies, and weak
world demand for coffee and other export crops.
These forces also have affected Nairobi's internation-
al payments position and halted an ambitious econom-
ic development program. Inflation is at a record rate,
and corruption is increasing.
Prospects for improvement are uncertain. Over the
next. few years, Nairobi must restore agricultural
productivity to provide the foreign exchange needed to
resume industrialization. The longer term outlook
depends on how the government copes with a popula-
tion growth rate of 4 percent-among the highest in
the world-that threatens to overwhelm the country's
already fragile urban-rural balance. In the meantime,
Moi is counting on US aid and investment to bail him
out in return for his agreement to allow US access to
Kenyan military facilities
A Marked Decline. Kenya's current economic diffi-
culties are in marked contrast to 15 years of steady
economic growth under the firm hand of former
President Jomo Kenyatta. From 1963 to 1978, eco-
nomic expansion averaged 6.5 percent a year, a record
in black Africa exceeded only by that of Ivory Coast.
An essential element in this success was Kenyatta's
pragmatism and stature as a leader of the independ-
ence struggle. These qualities enabled him to satisfy
African demands for a share of economic benefits
without driving away expatriate farmers and mer-
chants, whose expertise had developed Kenya's colo-
nial economy and was needed to keep it functioning.
He controlled ethnic and racial animosities, built a
national consciousness, and intensified economic de-
velopment. Moreover, Kenyatta's determination to
'This paper examines the economic problems and prospects of
25X1
hold back on expanding African participation in the
economy attracted a large number of international
private investors who did much to develop a flourish-
ing manufacturing base and a tourist industry.
Kenyatta's formula had its flaws, however, and these
were already affecting the country's economic health
by the time of his death in August 1978. Heading the
list was the government's refusal to take measures to
reduce Kenya's staggering population growth rate,
which was putting increasing pressure on land avail-
ability and basic urban amenities. Per capita food 25X1
production was slipping as a result of low government-
set producer prices and Nairobi's insistence that all
agricultural goods be marketed through inefficient
public corporations. The 1973-74 leap in world oil
prices and subsequent surge in import costs exposed
the vulnerability of hinging industrialization on im-
ported raw materials, machinery, and spare parts. The
business community received another jolt in 1977
when the dissolution of the East African Communit-2
and the overthrow of Idi Amin cut off markets in 25X1
neighboring Tanzania and Uganda. Finally, Kenyatta
had permitted much of the country's economic wealth
to be concentrated in the hands of his family, and of
the Kikuyu, Kenya's largest tribe.~ 25X1
Squandering Economic Potential. Moi-who was un-
comfortable with economic matters and preferred to
leave them to his advisers-did little during his first
year in office (1978-79) to tackle Kenya's emerging
economic problems. His primary concern was consoli-
dating his political position and reducing the prepon-
derant influence of the Kikuyu tribe. Government 25X1
spending continued unchecked and payoffs became a
prerequisite for conducting even simple bureaucratic
tasks. Although substantial amounts of money contin-
ued to enter the country,
much was diverted throug corrup ton.
2 The East African Community was a common services organiza-
tion and customs union consisting of Kenya, Tanzania, and Ugan-
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Figure 2
Kenya: Economic Indicators
Percent
Moi's refusal to devise an economic program coin-
cided with the maximum impact on Kenya of global
economic recession. The country's international trade
balance was hit by a combination of reduced export
receipts-the result of depressed coffee prices and the
decline in tourism-and record import levels associat-
ed with the newly launched development program.
Nairobi tried to cope with these problems by imposing
import controls, but these did little to offset a bulging
current account defic' n though they cut economic
growth nearly in hal
The next hurdle was the severe drought in late 1979
and early 1980. Production of corn, the main dietary
staple, fell to the lowest level in nearly 10 years.
Shortages were especially serious in Nairobi because
farmers refused to supply the government distribution
network that was responsible for the cities' needs.
Widespread reports that rural officials were hoarding
stocks in preparation for resale at exorbitant prices
aggravated the situation. Moi extricated himself from
a potentially explosive problem only by spending
almost $200 million in limited foreign exchange for
food importsF_~
The food crisis forced the regime to reevaluate its
rapidly deteriorating financial position. The govern-
ment's refusal to follow the sharp fall in coffee prices
with cutbacks in development spending was pushing
Kenya's current account and budgetary deficits to-
ward dangerous highs. By 1980 the country's annual
overseas financing needs were approaching $1 billion,
nearly 20 percent of the country's gross domestic
product. At the same time, excessive public spending
on defense, education, health, and consumer subsidies
ultimately contributed to a record shortfall of $570
million in the fiscal year that ended in June 1981.0
During 1980/81 the government covered its various
deficits with a combination of heavy borrowings on
both international and local markets and some belated
attempts at financial discipline. In return for a two-
year, $310 million loan from the International Mone-
tary Fund, Kenya agreed to impose budgetary con-
trols, particularly on the parastatal corporations. The
parastatals, however, were the preserve of old Ken-
yatta cronies and other powerful political interests
whose support Moi needed, and he backed off from
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Kenya: Trade and Financial Indicators
Trade balance
-461
Exports, f.o.b.
648
Imports, c.i.f.
1,109
Net services and transfers
-68
Current account
-529
Foreign exchange reserves
169
External debt
570
Debt service ratio (percent)
3.6
-445
825
1,270
-100
-545
272
700
4.4
infringing on their activities. Not surprisingly, Nairo-
bi failed to meet the Fund guidelines on expenditures,
and the loan agreement and disbursements were
terminated in December 1980.
Although Nairobi again in 1981 failed to limit spend-
ing effectively, it was somewhat more successful in
limiting imports. The processing of import licenses
was deliberately delayed, foreign exchange allocations
were rationed, and the currency was devalued by
25 percent. Import control implementation was, how-
ever, impeded by disputes between various govern-
ment ministries and the central bank over authority
for controlling the licenses. In the meantime, applica-
tions for industrial goods were often held back, while
those for consumer items were quickly approved,
usually with the aid of a kickback.
In response to heavy public pressure, import restric-
tions were lifted after only six months, but they did
keep 1981 import spending below that of the previous
year's record. They also resulted in a sharp slowdown
in business activity, as the lack of timely deliveries of
spare parts forced many firms to close their doors or
substantially reduce production. The industrial reces-
sion in turn paved the way for another year of
unacceptably high inflation and slow economic
growth, as well as a worrisome unemployment rate of
nearly 20 percent
-89
-685
-555
-1,087
-1
129
1,195
1,025
1,104
1,243
,
1
114
1,284
1,710
1,659
2,330
,
2
243
-29
-38
-6
56
,
420
-118
-723
-561
-1,031
-709
.04
338
520
466
216
920
1,085
1,435
1,745
2
095
3.7
7.0
6.6
8.9
,
14.0
1982 Another Inauspicious Year. The current year
will provide another stiff test of Moi's ability to
control the economy and show Kenyans that he can be
forceful and decisive when necessary. Moi's central
dilemma is how to restrain budgetary spending. As
part of a second standby arrangement signed late last
year with the IMF, Moi agreed to cut this year's
budgetary deficit by nearly 40 percent. According to
Nairobi officials he hopes to do this primarily by
limiting government salaries and spending on defense,
education, and foreign travel. He also announced the
suspension of the harambee system, which made
government money available to Kenyan politicians for
local projects and had become an important source of
corruption. Finally, Nairobi consented to bring the
entire budgetary process under closer scrutiny by
requiring ministries to submit monthly reports of their
revenues and expenditures. As a warning to officials
to take their financial responsibilities seriously, Moi
has ordered the central bank not to cash payroll and
other checks of various parastatals when they have
On the international front, the Embassy feels that
Moi's main concern is financing what Nairobi hopes
will be no more than a $600 million current account
deficit this year. Even this requires a major push in
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exports and holding import spending to last year's
total, goals that appear to be out of reach. Last year's
devaluation not only boosted import prices by nearly
20 percent, but also prompted a heavy demand for
overseas goods in anticipation of still another devalu-
ation. At the same time, international coffee prices
are still in the doldrums, hampering Nairobi's ability
to achieve what it hopes will be a record year for
overseas sales. Export receipts are also down because
of the government's decision to divert an increasing
share of its refined petroleum products to local con-
sumption instead of reexporting them for foreign
sales.
The result has been a sharp drawdown in foreign
exchange reserves, which reportedly are now insuffi-
cient to cover a month's worth of imports. Kenya has
responded with another slowdown in processing im-
port licenses and by not meeting deadlines for pay-
ment of outstanding bills. These measures will not
help Kenya's credit rating when it goes abroad in
search of additional commercial loans. Indeed, they
may already have held up completion of a large
World Bank loan and additional funds from the IMF.
The rest of this year will not be easy for Moi as he
tries to lay the groundwork for financial stability and
economic recovery. He has made it clear to Embassy
officials and Western donors that foreign assistance-
especially from the United States-is vital. Recent
complaints about what Moi believes is Washington's
stinginess underscore his concern about obtaining
such aid. Although Moi has met some IMF conditions
on public spending, he is unlikely, in our view, to be
able to continue these restrictive measures without
creating political problems. This may mean an inter-
ruption in access to vital IMF funding. Any related
interruption in the flow of imports will have a direct
impact on Kenya's industrial performance and on
Nairobi's ability to satisfy relatively sophisticated
consumers
Despite the economic pinch, recent open-source mate-
rial indicates that most Kenyans realize their living
standards are still considerably better than those of
' Kenya's refinery at Mombasa, using imported crude oil, provides
around 60,000 barrels per day of refined products for export to
regional consumers, including several Indian Ocean islands.
their neighbors. Such reasoning, however, will prob-
ably start to wear thin without a break in the circle of
high unemployment and record inflation. Moreover,
continued economic hard times are certain to add to
the difficulties Moi faces in trying to reduce corrup-
tion. While the President works on budget cuts, his
opponents will focus on kickbacks as a major source of
excessive government spending. At the same time,
civil servants-faced with shrinking real incomes-
will, in the Embassy's view, be increasingly tempted
to engage in illegal financial deals to supplement their
incomes
The Next Decade. Even if Moi survives the year with
only some slowdown in the economy, he-and any
successor-faces a number of problems over the next
decade that will severely test Kenya's political and
economic systems. The country will encounter more
serious social and economic pressures-rapid popula-
tion growth, increasing rates of urbanization, declin-
ing food production, high levels of unemployment, and
rising import bills. As competition for finite or dimin-
ishing natural resources increases, more intense rival-
ry among Kenya's tribal groups is likely. Moi's abili-
ty-or failure-to balance these various demands will
determine his political future.
Probably the most critical need is to slow the popula-
tion explosion and the impact of continuous internal
migration. At its current rate, Kenya's population will
double during the remainder of this century. The
impact of this increase will be felt most heavily in the
countryside. Kenya needs to double food production
within the next 20 years just to regain self-sufficiency,
but expansion at this rate will be difficult as increas-
ing amounts of marginal land are brought into pro-
duction. With the poor outlook for agriculture, Kenya
will have to base future economic development on
manufacturing. For this policy to be effective, howev-
er, the government must improve industry's efficiency
and reduce its dependence on imports for raw materi-
als and spare parts.
The alternative is to increase reliance on foreign
financial assistance to maintain economic stability.
According to Embassy sources Kenya's current lead-
ership expects Washington to shoulder a sizable share
of this burden in return for continued US access to
Kenyan military facilities
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Tanzania: Nyerere's Stabilization Crisis
Tanzania's economy is suffering from accumulating
external and internal problems that seriously threaten
Julius Nyerere, the President since independence in
1961. In the last 10 years, rising oil prices, fluctuating
export earnings, and prolonged drought have wreaked
financial havoc on an economy already beset by
pervasive mismanagement and corruption. More re-
cently, Nyerere's insistence on inefficient state control
of the economy and a stalemate with the International
Monetary Fund over stabilization strategies have led
to deepening shortages and inflation, opening Nyerere
Import constraints and continuing mismanagement
probably will lead to further declines in already low
incomes this year. Real growth in gross domestic
product is likely to be substantially less than popula-
tion gains, and short-term credit arrears will probably
increase unless there is an IMF agreement. Moreover,
the combination of high levels of government deficit
spending and the shortages of consumer goods that
accrue from import limitations will add to an inflation
that is now running at 35 percent.
Tanzania's agrarian-based economy has little hope of
a substantial recovery anytime soon. A break in the
impasse with the IMF probably would-at best-only
avert further income declines over the next three to
five years. Even a new government more favorably
disposed toward capitalist-oriented policies would re-
quire continuing large infusions of foreign aid to
correct longstanding deficiencies in investment and
maintenance of transportation facilities. Meanwhile,
Tanzania's heavy dependence on a few export com-
modities to earn needed foreign exchange leaves it
vulnerable to world economic conditions.
The Roots of Nyerere's Problems. In 1967, President
Nyerere launched a development program (ujamaa)
designed to mesh socialism and traditional African
communalism. This program entailed wholesale na-
tionalization in most economic sectors and a settle-
ments plan that would bring Tanzania's rural popula-
tion-95 percent of the country's total-together in
loose communes, to promote food self-sufficiency and
to reduce dependence on foreign aid.~~
Nyerere's Troubled Socialism
inhibit formation of social classes.
25X1
25X1
25X1
Arusha Declaration spells out Tanzanian
Government's long-term economic and so-
cial objectives, including public ownership
of production, broad-based rural develop-
ment, national and local development ef-
forts aimed at self-reliance, universal edu-
cation, and sustained economic growth.
Overall program, entitled ujamaa, aims to
reduce gap between rich and poor and to
1974-76 Government accelerates rural develop-
ment by creating cooperative villages for
communal agricultural production. F_
goals but short on implementation plans.
agricultural production. Program long on
tion of additional income from higher
25X1
Program for National Economic Survival
unveiled to increase production in agricul-
ture and industry. Key objective is genera-
Ujamaa "temporarily" shelved because of
disruption offarm production and govern-
ment's inability to meet minimal needs of
estimated ople in communal vil-25X1
25X1
some migration to traditional vil-
1 25X1
ment among rural population prompts
ready cumbersome system. Disillusion-
adds another bureaucratic layer to al-
keting. Program, which reinforces ujamaa,
order to streamline distribution and mar-
strengthen rural cooperative societies in
Prime Minister's office introduces plan to
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The resultant disruptions soon exacted a heavy toll.
The comprehensive economic restructuring required
management and planning skills far beyond Tanza-
nia's capabilities. Moreover, the government's com-
mitment to raise living standards increasingly divert-
ed scarce resources from critical productive sectors.
The creation of some 400 powerful parastatals in
commerce and light manufacturing merely fed oppor-
tunities for corruption, and these companies began to
dominate the entire Tanzanian economy
Soaring world oil prices after 1973 deepened Tanza-
nia's economic troubles. Its net oil import bill jumped
from $34 million in 1973 to almost $100 million by
1977. Meanwhile, periodic droughts prevented domes-
tic producers from capitalizing on scattered price
peaks for the country's principal exports-coffee, tea,
and cotton. After mid-decade, rising coffee prices
failed to offset declining prices for Tanzania's other
major export earners and the stagnation of manufac-
tures exports such as textiles. Real GDP growth
averaged under 4 percent annually during 1974-77
and, with population growing more than 3 percent,
income gains were minimal. Only the imposition of
import controls and generous Western aid-at over
$30 per capita each year, much higher than
other LDCs-kept incomes from declining.
Dar es Salaam's decision to loosen import controls
and another round of world oil price increases drove
trade and current deficits to new highs in the late
1970s. The seriousness of the crisis sent the Tanzani-
an Government to the IMF for balance-of-payments
assistance. Tanzania had no trouble getting compen-
satory financing of $43 million in early 1979, but
negotiations for a $250 million standby agreement
broke down in late 1979 over IMF insistence on
increases in domestic interest rates, removal of price
controls, and a substantial currency devaluationC
Like Kenya, Tanzania also faced payments drains
associated with the breakup of the East African
Community and the three-year-long war in neighbor-
ing Uganda. Following the dissolution of the Commu-
nity in 1977, Dar es Salaam had to assume much
greater staffing and financing responsibility for the
rail, port, and air services that had previously come
under Community auspices. Tanzania's inability to
Tanzania: Selected Economic
and Financial Indicators
Million US $
(Except As Noted)
-613
-538
-736
-945
432
1,045
527
1,065
524
1,260
511
1,456
Net services and
transfers
Current account balance
179
-434
207
-331
147
-589
194
-751
Foreign exchange
reserves (yearend)
Debt service ratio
(percent)
92
9.4
64
8.6
20
15.4
17
16.9
Inflation rate (percent)
11.6
13.8
30.2
25.0
Real GDP growth
(percent)
5.8
5.5
3.6
2.9
take on these tasks successfully meant that rehabilita-
tion and routine maintenance suffered, particularly in
Dar es Salaam harbor, Tanzania's largest deepwater
port. The Tanzanian war with Uganda-which began
in 1978-further complicated problems accruing from
the break with its neighbors. The offensive against
Uganda spurred an immediate 50-percent rise in
public spending that further diverted resources from
productive sectors.
The Deepening Decline. Prolonged stalemate with the
IMF and mounting damage from Nyerere's social
schemes have added to a variety of other factors to
spell continuous problems over the past two years.
Real GDP growth averaged just over 3 percent in
1980 and 1981-barely enough to keep pace with
population gains. At the same time, 25- to 30-percent
inflation rates and mounting shortages of basic con-
sumer goods further eroded low living standards
Agriculture, especially, has suffered serious and last-
ing damage. Compounding the years of chaos under
ujamaa, stringent price controls on food have sup-
pressed output even below the low levels that might
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have been expected in the face of continuing drought.
So, too, has smuggling to nearby countries, especially
Kenya. Disillusionment with the government's farm-
ing schemes prompted some Tanzanian farmers to
leave their communal plots and return to traditional
villages, further disrupting output of cash crops.
Others have fled to urban areas, boosting the urban-
ization rate to among the highest in Africa. The
deterioration of the transport and marketing systems,
spurred by equipment and parts shortages and poor
management, has intensified the impact on consumers
of production shortfalls.
As current account and budget deficits have piled up,
all aspects of financing have become much more
difficult. The high cost of maintaining Tanzania's
military presence in Uganda combined with large
food and fuel import bills and a 10-percent drop in
export volume in 1981 caused the current account
deficit to balloon to $750 million. Nyerere had expect-
ed substantial Western support for helping to oust the
Idi Amin regime, but his appeals drew only small
increases from regular donors. By the end of 1981,
Tanzania's foreign exchange reserves had been nearly
depleted, to less than one week's import cover.)
Meanwhile, the financing of government expenditures
began to absorb even more domestic resources. Even
though the share of expenditures allocated to defense
came down with the subsidence of the Ugandan war,
the government's decision to take the lid off public-
sector wages helped to keep the ratio of total public
spending-about 29 percent of GDP-from falling.
Last year's wage hikes added about $70 million to the
government ' g inflation and budget
problems.
Bleak Outlook in 1982. The economy will continue to
stagnate this year. Real GDP growth is unlikely to
match last year's 2.9 percent. Shortages of materials
and adverse government policies will offset any bene-
fits from good weather in the agricultural sector.
Tanzania's few factories typically are running at 20 to
30 percent of capacity, because of equipment and raw
material shortages and recurrent power failures.
Moreover, the combination of expansionary financing
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of budget deficits, wage increases, and insufficient 25X1
consumer goods already has lifted inflation to an
annual rate of 35 percent, and it will almost surely
continue to rise throughout this year.
Tighter import controls probably will throttle growth
in the current account deficit in 1982 much beyond
last year's level. Domestic producer disincentives, in
the form of lower-than-market prices to coffee and
cotton producers and reduced world prices for Tanza-
nia's major exports, will cause export volume and
earnings to fall again this year. As a result, Tanzania
will not have enough foreign exchange to import
simultaneously the $100 million in needed foodstuffs
as well as the raw materials and intermediate goods
vital to maintaining production. Because the foreign
exchange bind has prevented Tanzania from taking
advantage of lower spot prices for oil, domestic fuel
consumption stands at only 75 percent of the 1980
Negotiations with the IMF for enough mone at 1
_
to hel 7t-term debts
remain acrimonious. The
Fund's insistence on as much as a 60-percent devalu-
ation of the shilling, the dismantling of some parasta-
tals, and other steep cuts in government spending-
especially consumer subsidies-are meeting stubborn
resistance. Traditional major donors-including Swe-
den, the Netherlands, and West Germany-are re-
ported by embassy sources to be increasingly reluc-
tant to bail out the Tanzanian Government without an
IMF agreement. Tanzania's severe financial bind and
heavy donor pressure prompted Nyerere grudgingly to
impose a 10-percent devaluation in March. He has
openly stated, however, that IMF prescriptions for
Tanzania are counterproductive because they would
intensify shortages of imported producer and consum-
er goods alike, thereby thwarting attempts to raise
output for domestic and export sales and to lower
inflation. There is little reason to believe that govern-
ment companies, which absorb about 90 percent of
imports, would allocate these purchases to their most
productive uses.
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expenditures, according to embassy sources, rankle
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Conflict With the IMF
August
1975
Twin effect of oil price increases and
world recession precipitates balance-of-
payments crisis that forces Tanzania to
take down $12.3 million IMF standby
credit. Nyerere government implements
10 percent currency devaluation, restricts
imports and wage increases, raises food
prices, and redirects public develop nt
spending toward productive sectors
October IMF refuses Tanzania's request for $250
1979 million standby agreement. Nyerere re-
jects Fund conditions, including a $62
million cut in government spending, a 25-
percent devaluation, higher domestic in-
terest rates, and removal of price and
import controls.
September Two-year IMF program worth $255 mil-
1980 lion put in place. Includes $235 million in
standby credits and $20 million in com-
pensatory financing.
December
1980
pansion.
Standby credits canceled after only $33
million drawn because Dar es Salaam
failed to meet ceilings on import arrears,
public spending, and domestic credit ex-
May Negotiations to reinstitute an IMF pro-
1982 gram, deadlocked since January 1981,
may resume. Tanzanian Government ap-
pears desperate for an agreement and is
reportedly ready to make substantial cuts,
about $160 million, in the government
budget. Nyerere s continued obstinance,
however, may prove an obstacle.
budget deficit is slated to exceed $400 million-or 10
percent of GDP-by mid-1982. Even keeping the
shortfall at this level seems overly optimistic, however,
Substan-
tial belt tightening to meet Fund requirements would
entail politically risky slashes in government services
and an end to bailing out parastatals, which employ
one-third of the country's 600,000 wage earners.
Leadership Alternatives and Economic Consequences.
Nyerere has often said that he wants to step down as
head of state but remain as president of Tanzania's
only political party. The longer the economy deterio-
rates, however, the greater will be the risk of a
military takeover. We believe that such a move would
result in a regime that repudiated Nyerere's economic
policies. We also believe that the military would
distance itself from trying to solve the country's
economic problems, preferring, instead, to give that
job to the Western-educated technocrats now man-
ning most government ministries
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Even if a new regime were to implement a more
rational development plan, it would take some time,
perhaps five years, to revitalize Tanzania's economy. 25X1
Considering the low levels of investment in the last
several years, it would be difficult to elicit the kinds of
positive responses from producers that might be ex-
pected from a substantial devaluation. Even a sus-
tained commitment to restructuring key institutions
and improving the country's infrastructure would
require time and would keep the Tanzanian economy
highly aid dependent
Some accommodation with the IMF will be critical to
any progress to be made over the next several years.
Aside from badly needed financial guidance, an IMF
agreement would facilitate continued Western assist-
ance and some commercial bank financing. This
however, would have to exceed debt repay-
support
,
ment requirements for Tanzania to stick to vigorous
IMF stipulations. Otherwise, Tanzania probably
would fall further behind on its short-term obligations
and would begin to lag in servicing its $1.3 billion
medium- and long-term debt.
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Tanzania: Foreign Economic
Aid and Debt
Total aid disbursements,
net
516.3
Bilateral
402.2
591.5
681.9
United Kingdom
33.6
59.9
141.5
Netherlands
63.4
94.4
88.7
Sweden
64.2
105.2
87.2
West Germany
63.3
87.3
81.3
Norway
30.7
38.7
52.2
Denmark
38.1
50.1
37.1
Japan
23.0
28.6
33.2
Italy
-5.8
27.3
32.1
United States
14.0
22.0
28.0
Other
77.7
78.0
100.6
Multilateral
114.1
152.1
156.5
External debt a
1,159.7
1,218.4
1,300.0
Official
1,051.2
1,098.7
1,150.0
Private
108.5
119.7
150.0
Debt service
54.9
58.0
108.0
Official
27.2
34.7
56.4
Principal
10.4
12.6
29.5
Interest
16.8
22.1
26.9
Private
27.7
23.3
51.6
Principal
20.2
14.7
35.1
Interest
7.5
8.6
16.5
Dar es Salaam has few external financing alterna-
tives, however. Previous attempts to garner backing
from the Soviet Bloc have yielded little. We believe
that Libyan support for Amin in the Ugandan conflict
makes it unlikely that Dar es Salaam will consider
turning to Tripoli for help.
Uganda: Fragile Recovery
President Obote's government, in office since Decem-
ber 1980, has had some success in pointing Uganda
toward recovery after eight chaotic years under Idi
Amin. A package of reforms announced in June 1981
has reduced the government's involvement in the
economy and provided a ray of hope for farmers and
the few remaining businessmen. All-important coffee
production is recovering and there are some signs of
reduced requirements for food aid. Still, continuing
problems in domestic security and the risk of renewed
tribal infighting could lead to Obote's overthrow and
upset the fragile recovery at any point.
The economic cost of Amin's reign was a sharp
decline in per capita income for eight years and the
total disruption of the private sector. From one of the
most promising African economies in the 1960s and
early 1970s, Uganda plummeted to one of the poorest
in the world. By the mid-1970s Uganda was one of the
approximately 20 least developed countries designated
by the United Nations. A sharp drop in world coffee
prices after 1977, combined with the progressive
decline in other productive sectors, deepened the long
slideF 25X1
The current government came to power in December
1980 as a result of the Tanzanian invasion of Uganda.
By June of 1981 the IMF had convinced President
Obote that he should take a variety of measures to
rationalize domestic prices and the exchange rate,
thereby encouraging the private sector. Accordingly,
Obote removed price controls on consumer goods,
increased producer prices for coffee and food, and
allowed the shilling to float. Higher producer prices
and improved security conditions gave a solid boost to
exports, which were further reinforced as the shilling
was allowed to float from 7.8 to 86 shillings per dollar.
Last year, for the first time since 1973, Uganda was
able to meet its international coffee quota of 120,000
metric tons; this year's quota was raised to 174,000
metric tons. The IMF projects that this-and a
substantial recovery in food production-will support
a real growth rate approaching 6 percent this year, up
from 1 percent in 1981. 25X1
There are substantial signs that the 1981-82 recovery
can be extended if domestic political and security
conditions do not deteriorate. Since announcing the
reform package, Uganda has received large-scale
commitments of economic assistance. Approximately
a third of a total $750 million in promised aid is in the
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Trade balance
Exports, f.o.b.
Coffee
Imports, c.i.f.
Net services and private
transfers
Current account balance
GDP real growth (percent)
Inflation rate (percent)
-8
-31
-75
-20
-180
322
326
345
355
535
315
319
340
350
525
330
357
420
375
715
-167
-146
-214
-145
-150 to-200
-175
-177
-289
-165
- 330 to - 380
0
-2
0
1
5to6
80
85
80
100
50 to 100
form of balance-of-payments support from the IMF
and the World Bank and the remaining two-thirds is
project-related assistance from Western donors. In
addition, some $70 million of loans to previous Ugan-
dan governments has been canceled by the creditors,
and other debts have been rescheduled. While the rate
of use of the assistance will depend heavily on sensible
project formulations by the Ugandan Government
and Western donors, there is a clear historical basis
for expansion of tea and copper production, which all
but disappeared during the Amin years.
Day-to-day economic management in Uganda is still
not easy, however. Though inflation is subsiding
somewhat, it is well above an annual rate of 100
percent. Balance-of-payments pressures remain
acute-the deficit will be close to $400 million this
year-even as shortages of raw materials, spare parts,
and consumer goods continue to recur. Urban wage
earners have a difficult time buying food at current
prices. Security conditions in Kampala and other
parts of Uganda are bad, and this disrupts the flow of
supplies from the country's most advanced regions.[
The success of Obote's efforts to encourage Asian
entrepreneurs to return to Uganda, after their whole-
sale expulsion during the Amin years, will probably be
limited. The critical need for skills and investment
capital has prompted the government to propose
legislation that would facilitate the return of some
commercial properties to Asian businessmen or, at
least, set compensation for those assets taken over by
the government. We believe, however, that the Asians
will not return in significant numbers. They remem-
ber the anti-Asian sentiment of many Ugandans and
are aware that any substantial reinvolvement by
Asians in the Ugandan economy would engender
substantial political backlash.
The key to continued progress in Uganda is a stable
political situation. After some earlier fumbling, Obote
appears to have gained confidence and greater skill in
dealing with the various factions. Nonetheless, serious
tribal divisions still plague the country and manifest
themselves in dissension in the Army, guerrilla activ-
ity, and intragovernment feuding.' These frictions
have the potential for renewed domestic strife that
could topple Obote. Were Obote to come under
pressure that he felt could not be relieved solely
through Western aid, we believe he would revive his
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once close ties to Moscow or to seek aid from Cuba or
radical Arab states. In our view, most plausible
successors would show the same inclination. In any
event, renewed turmoil in Uganda, should it come,
would have the potential once again to disrupt Ugan-
da's economy as well as those of other East African
states
Somalia: The Economy Continues To Falter 6
Somalia's economy has stagnated over the past three
years as a result of damaging weather, an enormous
influx of refugees, high oil prices, and record inflation.
As a result, the economy is now dependent on massive
amounts of Western assistance to keep afloat. The
sudden infusion of these funds, however, has added to
already widespread corruption and economic misman-
agement. Rising domestic criticism of President
Siad's economic policies is contributing to the most
serious challenge to his authority since he came to
power in 1969. Siad is trying to placate his critics with
promises that the agreement permitting US access to
Somali facilities has opened the door to funds needed
to revive the economy and restore Mogadishu's mili-
tary.
Siad's Takeover and Ensuing Economic Decline.
Somalia has few natural resources on which to base
economic development. Much of the country is semi-
arid and two-thirds of the population is nomadic. The
small commercial agricultural sector is primarily cen-
tered around livestock and banana production. West-
ern oil companies are doing some exploratory work
along the coastline, but industry officials remain
pessimistic about finding commercially significant oil
deposits.
Siad did nothing to enhance Somalia's development
prospects when he decided to impose socialism shortly
after assuming power in 1969. He established a
number of government-owned corporations and
staffed them with inexperienced political cronies who
viewed their jobs primarily as a means to enrich
themselves. At the same time, the government insti-
tuted price controls to limit the cost of living in
comic assistance 150 285 220 235
-Communist 115 260 210 230
US 5 5 15 20
Other OECD 20 25 45 50
OPEC 35 180 100 95
International agencies 55 50 50 65
munist 35 25 10 5
USSR 15 10 0 0
China 20 15 10 5
Lary assistance 90 575 270 130
-Communist NEGL 520 265 130
OPEC 0 460 100 75
Other NEGL 60 165 55
munist 90 55 5 NEGL
USSR 90 50 0 0
China 0 0 5 0
Eastern Europe 0 5 0 NEGL
510
495
60
140
130
165
15
0
15
100
80
80
0
20
0
20
politically sensitive urban areas. The combination of
poor management and inadequate price incentives
soon resulted in economic stagnation. Recurrent
drought and the unsuccessful invasion of the Ogaden
hastened the decline of Somalia's economy. Import
costs took a leap in 1980 with the loss of concession-
ary oil supplies from Iraq, Somalia's sole supplier.
Mogadishu initially tried to cope by permitting mas-
sive budget and current account deficits, which in
turn fueled inflation and by the end of 1980 nearly
exhausted the country's meager foreign exchange
reserves. Siad tried to hold down inflation by banning
price increases, but merchants responded by withhold-
ing goods or shifting them to the flourishing black
market. Corruption became more pervasive among
government civilian and military personnel-many of
whom had not had a pay increase in nearly 10 years.
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Imports, c.i.f.
a Estimated.
b Projected.
c Excludes military purchases.
The Search for Aid. Growing popular unrest over the
deteriorating economy finally persuaded Mogadishu
to seek help. The International Monetary Fund in
1980 provided a $50 million stabilization program in
exchange for an agreement by the Somalis to rein in
public spending, devalue the currency, increase agri-
cultural prices, and eliminate some of the more
inefficient parastatal organizations in favor of private
enterprise
In addition to the IMF loans, Mogadishu acquired
funds from several other sources. Almost all of the
cost of refugee relief is now covered by contributions
from Western governments and international agen-
cies. Somalia has also used its membership in the
Arab League to obtain from various OPEC institu-
tions sizable sums, a large part of which is used to
purchase military equipment.
The economy continued to flounder last year despite
some vroeress in implementing the IMF conditions.
farmers were
-393
-511
-350
106
137
172
499
648
522
95
185
47
pleased with the decision to raise producer prices, but
the move came too late to have much impact on
plantings. In addition, output was affected by heavy
rains and flooding last September. Mogadishu did
have limited success in moderating budgetary spend-
ing, which helped ease inflationary pressure. Never-
theless, consumer prices were still up by 45 percent.
Efforts to generate additional revenues through a 25-
percent tax on livestock stopped all shipments last fall.
Deliveries resumed later in the year only after Moga-
dishu agreed to a substantial reduction in the tax rate.
Siad Looks to the United States. Siad is counting on
the United States to become his principal benefactor.
According to both embassy and Somali sources, since
breaking ties with the Soviets in 1977, Mogadishu's
military establishment has deteriorated substantially.
He believes that his agreement to permit US military
forces access to Somali facilities entitles him to money
needed to reequip his army and pay for food and other
basic consumer imports
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Additional US economic aid may be needed to offset
possible losses of other overseas assistance. Money for
refugee relief is likely to decline in view of a recent
UN census that indicates the number of refugees is
considerably lower than the Somalis claim. In addi-
tion, if Arab-US relations deteriorate, some Arab
donors could use Siad's close association with Wash-
ington as a pretext for a cutoff or slowdown of aid.
Several Arab donors have also been distressed by the
occasional diversion of foreign aid into the private
bank accounts of Somali officials
Even with ample foreign aid, Siad has little chance of
revitalizing the economy during the next year or so.
At a minimum, he will have to turn over more of the
settled economy to private hands to generate improve-
ments in productivity. To do so, however, risks offend-
ing important political forces that have gained finan-
cially from the present system. Even if Siad scraps his
socialist policies, Somalia's economic well-being will
still depend largely on the performance of the agricul-
tural sector, which, in turn, will fluctuate with weath-
er patterns.
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