INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000400040004-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: November 15, 2010
• Sequence Number: 4
• Publication Date: November 18, 1983
• Content Type: REPORT

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Directorate of Secret
Intelligence
International
Economic & Energy
Weekly
Secret
DI IEEW 83-046
18 November 1983
1 045
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International
Economic & Energy
Weekly
iii Synopsis
1 Perspective-The IMF's Conditionality Dilemma
25X1
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Energy
International Finance
Global and Regional Developments
National Developments
15 International Financial Situation: The IMF Funding Squeeze
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21 International Financial Situation: Bankers' Attitudes Toward
LDC Lending
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23 Japan: Status of Bank Lending to LDCs
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27 Venezuela: Postponing IMF Discipline
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31 Chile: A Risky Shift to Growth-Oriented Policies
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Sudan: The Economy on the Eve of Nimeiri's Visit
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Comments and queries re arding this publication are welcome. They may be
directed to Directorate of Intelligence
Note: The International Economic and Energy Weekly will not be published
next week. The next issue will be on 2 December 1983.
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International
Economic & Energy
Weekly
Synopsis
Perspective-The IMFs Conditionality Dilemma) 25X1
The IMF must soon decide how stringent new or revised economic adjustment
policies should be for several key LDC and East European debtors with
programs currently or soon to be under review. The Fund is caught in a
delicate position of trying to maintain the cooperation of both debtors and
creditors to effect an orderly international adjustment to the debt problem.
International Financial Situation: The IMF Funding Squeeze I 25X1
This article is part of a special series on the economic and political aspects of
the international financial situation. The article examines the uncertainty over
the availability of future IMF resources that is jeopardizing the Fund's pivotal
role in managing the international debt problem.
International Financial Situation: Bankers' Attitudes Toward LDC Lending
This is another article in the special series on the economic and political
aspects of the international financial situation. It examines the willingness of
commercial banks to meet LDC financing needs in the coming months.
Japan: Status of Bank Lending to LDCs
Although some Western analysts have accused Japanese bankers of being 25X1
uncooperative on LDC debt issues, our analysis shows that they have
grudgingly pulled their weight in reschedulings and are expanding their
international lending. Most new LDC lending, however, is going to relatively
well-off East Asian countries. 25X1
Venezuela: Postponing IMF Discipline
Economic conditions in Venezuela have deteriorated rapidly in recent months,
and President Herrera's unwillingness to submit to an IMF program has
stalled progress in rescheduling foreign debt. Caracas has averted cash
difficulties during a period of declining oil revenues by resorting to tough
foreign exchange controls, but at the expense of economic performance. ~~ 25X1
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DI IEEW 83-046
18 November 1983
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Chile: A Risky Shift to Growth-Oriented Policies I 25X1
Santiago since last spring has moved to assuage popular discontent by
gradually stimulating the economy after the steep decline in 1982.F___1 25X1
Sudan: The Economy on the Eve of Nimeiri's Visit
Sudan's economy is beginning to show some progress, but the country remains
deeply in debt and in need of foreign assistance. President Nimeiri will
probably seek US support for his position in negotiations with the IMF as well
as new aid during his talks in Washington next week.
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Perspective
Weekly
International
Economic & Energy
The IMF's Conditionality Dilemma
new capital.
The IMF must soon decide how stringent new or revised economic adjustment
policies should be for several key LDC and East European debtor's with
programs currently or soon to be under review. The Fund is caught in a
delicate position of trying to maintain the cooperation of both debtors and
creditors to effect an orderly international adjustment to the debt problem. On
the one hand, the Fund risks losing the cooperation of debtors in carrying out
needed economic reforms if they judge IMF demands as too harsh and likely
to spur social and political unrest. On the other hand, creditors are looking to
the Fund to oversee needed reforms in these countries before theylwill provide
? Despite the IMF's "seal of approval,"
Some Latin American debtors are questioning the efficacy of current IMF
prescriptions, and we expect them to demand more lenient adjustment
programs in the months ahead. Although the Fund's rescue programs have
averted a major default so far, most Latin leaders believe they have not reaped
the benefits they expected from these programs:
? New commercial and official funds activated by IMF agreemen;ts have 25X1
covered little more than past debt servicing. i
new commercial bank lending to Latin America nearly ceased in 25X1
first-half 1983.
? Simultaneously, IMF-mandated adjustments-devaluations, removal of sub-
sidies, spending cutbacks-are now causing more inflation, unemployment,
and reductions in living standards than Latin leaders and the IMF expected.
The situation is aggravated by growing social strains that have created
political problems in implementing tough IMF programs.~ 25X1
At present Brazil, Argentina, Chile, and Venezuela are leading the effort for a
softening of IMF conditionality:
obtaining congressional approval for the tough wage restraints initially
demanded by the IMF. A compromise wage bill has been approved, and,
? Domestic resistance to austerity prevented the Brazilian Government from
he Brazilians have warned the 25X1
IMF that failure to sanction the wage compromise could force the govern-
ment to declare a debt moratorium.
? Argentina's newly elected government will be under pressure to drive a hard
bargain in order to claim it is able to handle the debt problem more
effectively than the military government.
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? In late October, Chile's economic team bowed to popular discontent and
announced intentions to ease fiscal policy in order to boost economic recovery
in 1984.
? According to recent Embassy reporting, the new Venezuelan government-
widely expected to be led by Jaime Lusinchi-also intends to spur economic
growth and will not easily accept an IMF-mandated stabilization program.
While recognizing debtor concerns, the Fund must also weigh those of
commercial lenders. Debt rescheduling and new financial assistance are, in
most cases, conditional on the implementation of adjustment policies. While
less restrictive IMF programs may meet the internal political needs of the
borrower, they could fall short of what lenders view as minimally acceptable.
At the same time, in drawing up its programs, the Fund must take into
account uniformity of treatment among members. More flexible policies for
Latin debtors would almost certainly spark demands from other financially
troubled countries.
The IMF also has to factor in the views of the governments of the major indus-
trial countries when working up its lending strategy. Presently, the IMF's
flexibility is limited because of uncertainty over its own financial resources.
Even if the quota increase is approved, several industrial countries have
expressed concern that the Fund has gone beyond its traditional role as a
source of temporary balance-of-payments financing and argue that resources
will have to be better conserved in 1984-85.
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OPEC Production OPEC production in October averaged 19 million b/d, 1.5 million b/d above
Remains Above the cartel's self-imposed ceiling. Saudi output remained 1 million b/d above its
Ceiling implicit quota of 5 million b/d as Riyadh continued its war relief assistance to
Iraq in the form of crude sales to Baghdad's customers.
Quota
September a
3rd Qtr a
October a
Total
17.5
19.2
18.7
19.0
Algeria
0.725
0.6
0.6
0.6
Ecuador
0.2
0.2
0.2
0.2
Gabon
0.15
0.2
0.2
0.2
Indonesia
1.3
1.4
1.4
1.4
Iran
2.4
2.6
2.5
X2.4
Iraq
1.2
0.9
1.0
11.0
0.5
0.5
0.4
Nigeria
1.3
1.2
1.4
1.3
Qatar
0.3
0.3
0.3
0.4
Saudi Arabia
5.0 c
6.2
5.6
116.0
United Arab Emirates
1.1
1.2
1.2
11.2
Venezuela
1.675
1.7
1.7
1.7
a Preliminary.
b Neutral Zone production is shared equally between Saudi Arabia
and Kuwait and is included in each country's production quota.
c Saudi Arabia has no formal quota; it acts as swing producer to
meet market requirements.
According to the US
Embassy, Doha plans production at this level for the remainder of the year to
avoid using foreign exchange reserves to pay debts and to finance planned
spending programs. Nigeria has also stated its intention to increase its crude
production through yearend.
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18 November 7983
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OPEC Pressing for The OPEC production quota assigned to Venezuela in March reportedly has
Higher Production begun to impair Caracas's ability to generate much-needed revenues. Accord-
Quotas ing to the head of Venezuela's national oil company, Caracas has been able to
meet its revenue requirements and comply with its 1.7-million-b/d quota by
drawing down inventories on the order of 150,000 b/d to keep exports high.
The official claims that these drawdowns have reduced Venezuela's inventories
to such a low level that the country will need to increase production before
yearend in order to build inventories for 1984. Venezuela is not alone in its de-
sire to raise its production quota. Recent press reports indicate that Tehran in-
tends to ask OPEC at its meeting next month to increase the Iranian quota by
one-third from the current level of 2.4 million b/d to 3.2 million b/d. Both Ca-
racas and Tehran have been critical of Saudi Arabia for producing well above
its implied quota. Riyadh's unwillingness to curb output probably has spurred
other OPEC members to seek higher quotas. Barring a strong upturn in
demand, OPEC will be hard pressed to accommodate these pressures.
Pressures To Relax Nigeria's National Petroleum Corporation (NNPC) reportedly is urging Lagos
Nigeria's Gas Flaring to grant exceptions to its ban on natural gas flaring that will become effective
Ban 1 January 1984. Although initially supportive of the ban, NNPC now officially
opposes it because, without a means to transport gas to domestic consumers or
export options, the Corporation must assume about 70 percent of the costs of
reinjecting the gas. A senior Nigerian oil official has told the US Embassy in
Lagos that NNPC lacks the financial resources needed to pay for reinjection.
Last year Nigeria flared about 1 billion cubic feet a day of gas worth $5.5 bil-
lion, according to oil industry sources. Because Nigeria's gas is produced in as-
sociation with crude oil, which accounts for over 90 percent of foreign
exchange earnings, we believe the government will relax the ban on flaring
rather than forgo needed oil earnings.
West German Energy For the first time since 1979, West German energy demand in the third
Demand Rises quarter rebounded over year-earlier levels, largely in response to the economic
recovery. According to preliminary data, primary energy consumption in the
third quarter increased 1.6 percent compared with a decrease of 2 percent in
the first six months of the year. With the exception of a 1-percent decline in oil
use, all fuels registered gains during the recent quarter. Natural gas consump-
tion increased by 7 percent while use of hydropower was up 18 percent. Coal
and nuclear power showed small increases, largely reflecting increased elec-
tricity demand.
Price Discounting of (brokers in the United Kingdom and West
Polish Coal Germany are offering Polish coal at prices some 10 to 15 percent below prices
quoted by the Polish Government. The brokers contend that the Polish
Government has allotted 500,000 metric tons of coal this year to a foreign
trade organization that will market the coal in the West and use the hard cur-
rency to buy goods for use as incentives for miners. The lower priced Polish
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coal most likely will supplant US and other coal sales in Westerni Europe. In
the first six months of this year, Poland's share of the West European coal im-
port market rose to 16 percent compared with 10 percent a year earlier. The
US share dropped from 55 percent to 44 percent
Mexico Shifting Mexico City is planning to shift its economic policies next year toy emphasize
Economic Policy economic recovery rather than price and exchange rate stability, according to
for 1984 a US Embassy report. The government apparently feels a relaxation in
austerity is needed to avoid political unrest. The proposed 1984 economic
program, now under discussion with the IMF, reportedly calls for! a minimum
increase of 2 percent in GDP, while halving inflation on a December-to-
December basis to 40 percent. Because Mexico City anticipates a continuing
decline in private-sector economic activity, the government believes it is
necessary to spark the economy by boosting federal spending. The first public
indication of next year's program will come later this month when de la
Madrid presents the 1984 budget to Congress.
To give Mexico City some leeway in policy planning, the government is
negotiating with the IMF for flexibility in next year's target for deficit
spending. Because we believe that Mexico City's tax base is still deteriorating,
it is our assessment that the government will not be able to boost GDP while
reducing the deficit to 5.5 percent of GDP in 1984 as agreed with the IMF last
year. In particular, new public-sector price adjustments-including those for
transportation and public utilities-will be difficult to implement." Increased
government deficits would boost the growth in the money supply, putting
renewed pressure on the peso. '
We believe this proposed policy shift endangers Mexico's economic stabiliza-
tion program. If reflating the economy results in wide divergence from IMF
performance targets, we believe de la Madrid would find it necessary to clamp
down on the economy late in 1984 to ensure continued access to foreign
financing. Such a start-stop course could drag out economic recovery and
undercut the government's longer term objective of creating enough employ-
ment to satisfy a rapidly growing labor force.
Mexican Private-Sector I$11.6 billion of a total of $16 billion in 25X1
Debt Rescheduling private-sector foreign debt was entered into the FICORCA program, most just
before registration closed on 25 October. The program is designed! to help
private debtors with rescheduling by guaranteeing them access to ;subsidized
foreign exchange for future debt service obligations. We agree with US
Embassy sources, however, that far less than half of the amount registered has
been formally rescheduled. The remainder was registered in FICORCA under
a last-minute waiver allowing rescheduling to be worked out later. We expect a
will be unwilling to accept lenders' terms while others will go bankrupt. I 125X1
5 Secret
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Philippine Financial 25X1
Developments
The US Embassy reports that stocks of fuel oil have dropped to about a week's
supply as a result of the shortage of foreign exchange. Manila has asked the
United States to help by providing fuel oil from Clark Air Force Base and
Subic Bay Naval Base. Running out of fuel oil, half of which is used by the
government-owned National Oil Company to generate electricity, would result
in a major political setback for the government. Even with temporary
assistance from the United States, the government could face fuel shortages by
January if banks fail to renew commercial import financing.
More Loan Difficulties Bogota's growin troubles on the borrowing front augur a liquidity crunch
for Colombia early next year. banks have withdrawn
from participation in a $225 million loan because of legal disagreements,
causing Colombia to lose $60 million in new credit.
banks are resisting the placement of a $400 million loan for
the country's electric utility. Moreover, despite World Bank cofinancing
guarantees, Colombia's lenders have been hesitant to grant any new develop-
ment loans for the ambitious 1983-86 investment program and were noncom-
mital to the Colombian presentation at its Consultative Group Meeting last
month in Paris. With foreign borrowings cut and Colombia's payments deficit
widening, we believe there is a more than 50-percent chance that Colombia
will be forced to seek debt rescheduling early in 1984.
25X1
25X1
Ecuadorean Financial Ecuador has recently obtained new loans, but its financial position remains
Update strained. The US Embassy reports that Quito's creditor banks recently
disbursed $215 million of the new $431 million credit line as part of the 1983
IMF financial rescue agreement. These funds, however, are not enough to
eliminate arrearages-now an estimated $450-500 million-and to meet
current debt servicing obligations. Meanwhile, an IMF mission is visiting the
country this month to complete its performance evaluation report and to set
economic targets for 1984. According to US Embassy reports, Quito has
succeeded in limiting the 1983 public-sector deficit to 4.2 percent of GDP and
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has also implemented the required interest rate and trade measures. Infla-
tion-running at 60 percent, compared with 25 percent in 1982-remains a
problem because of wage increases and removal of price controls and subsidies.
Unless the IMF grants a waiver, Quito's failure to meet the 35-percent
inflation target may jeopardize disbursement of the remaining $44 million of
the $170 million IMF standby loan. In an attempt to gain additional financing,
President Hurtado has already announced Ecuador's intentions to renegotiate
its 1984 debt at terms similar to those of the 1983 debt rescheduling
Costa Rican Problems Costa Rica has narrowly averted a cutoff of IMF funds, but problems remain
With IMF in securing a new standby agreement for 1984. The Fund has agreed to extend
an October waiver on a 1-percent tax on foreign exchange remittances through
November. This follows the unification and devaluation of the two; tiered
exchange rate, a move that complies with the IMF's December performance
targets. Negotiations to conclude a new standby agreement for 1984, however,
have been postponed again because San Jose has had difficulty in fulfilling
other commitments made to the Fund. IMF officials are most concerned about
the government's proposed 1984 budget-especially the 25-percent increase in
central government expenditures. In addition, the Fund remains concerned
about the adverse impact of the still overvalued exchange rate on export
performance. Although the administration is considering ways to cut next
year's proposed $3 billion budget and the Costa Rican Congress is likely to re-
peal the remittance tax by 1 December, the conclusion of a new standby
agreement could be delayed by at least a few months until these actions are
Global and Regional Developments
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1984 Agricultural International trade in most major food items declined in marketing year (MY)
Trade Outlook 1983 despite falling prices, and we expect little improvement next year. In
many LDCs, imports will be constrained by foreign exchange limitations.
Agricultural imports by the Communist countries, especially the USSR and
China, will level off because of improved domestic production. In order to cope
with this weak demand situation, US competitors are subsidizing sales and
offering favorable financial terms to move surpluses. As a result, US exports of
key items most likely will continue to bear the brunt of the soft market. Using
projections by USDA and other trade sources, we expect:
? Competition will intensify in the world wheat market, as foreign producers
generate large surpluses. The US market share may fall by 2 percentage
points to 38 percent, the lowest level since MY 1973.
? The world soybean market will be characterized by larger carrying stocks,
lower production, and constant demand. As a result of recent oilseed price in-
creases, Brazil and Argentina are likely to expand production and gain a
larger share of soybean product exports. The US share of the soybean
market will fall from 87 percent to 80 percent, while soybean meal exports
will decline by 5 percentage points to 25 percent.
World and United States: Agricultural Production
and Exports
Million metric tons
1983
1984 a
Change
From
Previous
Period
(percent)
1983
1984 a
Change
From
Previous
Period
(percent)
United States
76.4
65.5
-14.3
39.9
38.1
-4.5
Coarse grains c
779.6
681.1
-12.6
89.3
90.5
1.3
United States
255.5
139.5
-45.4
53.3
56.9
6.8
Soybeans c
93.9
77.3
-17.7
28.3
24.6
-13.1
United States
60.7
41.3
-32.0
24.6
19.6
-20.3
Soybean meal c
61.1
57.4
-6.1
21.7
21.0
-3.2
United States
24.2
21.1
-12.8
6.4
5.2
-18.8
Meat
104.3
105.0
0.7
10.3
10.5
1.9
United States
26.9
26.5
-1.5
0.5
0.5
0
Sugar d
100.0
94.7
-5.3
28.1
26.4
-6.0
United States
5.3
5.2
-1.9
0
0
0
a Estimated.
b July/June marketing year.
c October/ September marketing year.
d September/ August marketing year.
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? Competition from Brazil and the EC for poultry markets in 1984 could result
in a slight decline in the US market share.
? The near-term trade outlook for US coarse grains will remain strong at least
until the coarse grain crops of Argentina, Australia, and South Africa begin
to enter the market in March 1984. Deteriorating crop conditions in some
importing countries and the new US-USSR Long-Term Grain Agreement
may strengthen import demand. As a result, the US share of the coarse grain
market should increase from 60 percent to 63 percent.
EC Budget Talks At a Special Council meeting on 9-11 November, EC foreign, finance, and
Stalled agricultural ministers failed once again to agree on proposals for reforming the
Community's budget and the Common Agricultural Policy. The United
Kingdom repeated demands for a permanent reduction in its budget payments
to the Community, and other members argued the necessity of increasing EC
revenues. The EC Commission's proposal that financial contributions be
recalculated in a way that would cut the United Kingdom's rebate caused
London to threaten again to block an increase in Community tax revenues. EC
Foreign Ministers will meet again on 28 and 29 November in an attempt to
reach agreement on a reform package which can be tabled at the EC summit
Prospects for agreement before the summit are not good. The Community is
facing a growing financial crisis because of rising agricultural costs and
limited resources, but EC members remain divided on how to solve the
problem. The United Kingdom and West Germany, the only net financial
contributors to the Community, will continue to insist that the budget burden
be spread more evenly before they will agree to agricultural reforms or
increases in EC revenues. The continuing disarray on agricultural', policy will
prevent the Community from dealing effectively with agricultural, trade
disputes at the high-level meeting next month with the United States.
National Developments
Developed Countries
9 Secret
18 November 1983
Israeli Inflation Consumer prices rose at an annual rate of 895 percent in October-by far the
Skyrockets largest monthly increase in Israel's history-because of the large shekel
devaluation and the boost in most government-controlled prices by 50 percent.
Prices will continue to rise sharply-although probably not as fast as in
October-for the remainder of the year, resulting in an inflation rate for 1983
of 180 to 200 percent. Large increases in the cost of electricity and water will
force manufacturers to boost prices of their goods, and the government raised
the prices of controlled items by another 15 to 30 percent earlier this month.
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Officials of the Histadrut, the large trade union organization, had demanded
an advance on the next quarterly cost-of-living adjustment-scheduled to be
paid on 1 February-even before the October price rise was announced this
week. The Histadrut, the Manufacturers' Organization, and the Finance
Ministry agreed earlier this month to form tripartite committees to study a
number of issues, including the feasibility of advancing the cost-of-living
adjustment. A Histadrut official told a US Embassy officer that Histadrut
leaders are optimistic about getting an advance payment because Finance
Minister Cohen-Orgad would otherwise have refused to establish the commit-
tee. Public outcry over the large price hikes could force Cohen-Orgad to agree
to a partial cost-of-living adjustment before 1 February even though this would
mitigate the impact of higher prices on domestic demand. Cohen-Orgad has
publicly stated that private consumption will have to be reduced over the next
year to reduce inflation and improve Israel's foreign payments outlook
Turkey's Prospects The victory of Turgut Ozal's Motherland Party in the general election on
Under Ozal 6 November portends continuity in Turkey's economic policy. Ozal-almost
certain to be the prime minister of the civilian government slated to take office
later this month-is generally credited with conceiving and implementing
Turkey's market- and export-oriented economic stabilization program in 1980.
The plan has reduced inflation, sparked a resumption of economic growth, and
reduced the current account deficit. As Prime Minister, Ozal will probably
reinforce the measures. In his election campaign, Ozal called for the further
development of the export sector and the encouragement of private savings and
investment. He has promised to continue the fight against inflation, open the
economy to foreign investment, and reduce the large public sector.
Given Ozal's philosophy, Turkey's economic prospects seem relatively bright.
Ozal's emphasis on increasing exports and foreign investment should boost
Turkish economic development and help the country deal with balance-of-
payments pressures when rescheduled debt payments begin falling due in late
1984. His inclination toward tight monetary policies will help control inflation.
Ozal may face some resistance to his program from President Evren, who will
still retain substantial power under the Constitution adopted last year.
Although Evren generally supports the 1980 austerity program, he is more
favorably inclined toward state intervention in the economy and may frown on
Ozal's plans to move quickly to a more market-oriented economy.
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EC Commission The recently released EC Commission Annual Economic Report forecasts a
Forecasts Slow sluggish recovery for the 10 EC economies, with GNP growth averaging only
1984 Growth 1.4 percent in 1984. The Commission points to the continuing efforts of most
governments to trim their budget deficits and cut inflation rates as major
causes for next year's slow growth. Moreover, it expects that several key
industries, such as steel and shipbuilding, will continue to contract because of
declining trade competitiveness.)
EC Commission
GNP Growth Forecasts
1982
1983
1984
0.4
0.6
1.4:
-1.0
0.7
2.1'
United Kingdom
1.5
2.8
2.2,
Italy
-0.3
-0.8
1.5
Belgium
1.0
-0.9
0.6
Denmark
3.4
2.2
1.2
Greece
NEGL
-0.2
1.5
1.2
0.5
1.8~
-1.1
-2.4
-1.0
Netherlands
-1.6
0.3
NEGLI
Although all major components of the Ten's GNP are expected toigrow, the
Commission believes that no one sector will post significant advances. Tax
hikes, increases in joblessness in all 10 countries, and average real iwage gains
of only 0.4 percent are expected to hold down private consumption. The
Commission believes investment will pick up slightly from 1983's depressed
levels, partly because of anticipated declines in interest rates. The strength of
the US dollar should help West European exports sales at the expense of US
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Less Developed Countries
Malaysia's Trade Kuala Lumpur reported a $143 million merchandise trade surplus in the first
Swing half of 1983, up $400 million from the same period last year. The improved
performance stems largely from an export boom based on higher prices.and in-
creased production of key commodities. The price of palm oil, Malaysia's
third-largest export earner, has almost doubled over the past year, and rubber
prices are up sharply because of increased demand in industrial nations.
Output of crude oil, the country's largest export earner, has risen nearly 25
percent-more than offsetting a 15-percent cut in the price of Malaysian
crude last March. In addition, the export of liquefied natural gas to Japan,
which began last January, will generate about $415 million in foreign
exchange this year. The improving trade account should hold the 1983 current
account deficit well below last year's record $3.4 billion and slow the rapid
growth of the country's $12 billion foreign debt.
Economy of Southern The recent decision by the occupying Israeli Defense Forces (IDF) to reopen
Lebanon Remains the coastal road at the Awwali River bridge will not ameliorate economic
Depressed problems in southern Lebanon. The decision was made after a general strike
protesting Israeli security measures shut down most businesses and schools
throughout Lebanon on 8 November. Even with the reopening of the coastal
road, transportation bottlenecks continue to constrain economic activity in the
area. the IDF continues to limit access to the
port at Sidon to certain favored shippers, making it difficult to move
agricultural produce to regional markets. Moreover, a mile-long detour on the
coastal road-diverting traffic away from the area where the IDF headquar-
ters was blown up-and an Israeli requirement that all truckers obtain Israeli
travel permits to cross the Awwali bridge will continue to hamper essential
food and fuel shipments to and from Beirut.
China Projects Record Chinese officials have announced that the 1983 grain harvest will surpass last
Grain Harvest year's record harvest of 353 million metric tons. We estimate the harvest at
about 370 million tons, an increase of 50 million tons over three years ago. Al-
though the bumper harvest is causing transportation and storage problems, we
believe it will lend support to Beijing's current rural reform policies that
provide better incentives to farmers. The harvest also will lessen the demand
for grain imports, while record harvests of cotton and soybeans will reduce
China's need to import these commodities in 1984 as well.
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USSR Illegitimate Contrary to official policy, Soviet demographers appear to be promoting
Births Encouraged unwed motherhood in western regions of the USSR. One scholar recently said
that "illegitimacy is understandable as a way to raise the birth rate in regions
where it is low-that is, the central provinces of the RSFSR, the Ukraine, and
the Baltic republics." Another scholar cited pregnancy out of wedlock as a
poor reason for abortion. These statements probably reflect official concerns
about low birth rates in the Slavic and Baltic regions. There are roughly
500,000 illegitimate births a year in the USSR, about 10 percent',of all
registered births, with the highest rates in Siberia and the Far East
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International Financial Situation:
The IMF Funding Squeeze
This article is part of a special series focusing on
the economic and political aspects of the interna-
tionalfinancial situation.
Uncertainty about the availability of future IMF
resources is jeopardizing the Fund's pivotal role in
managing the international debt problem. The IMF
currently has only about $3 billion
in uncommitted resources, and that amount is
likely to decline to less than $1 billion by April
1984. Because of the financial squeeze, the IMF
has suspended funding of new standby and extend-
ed programs calling for more than 100 percent of a
member's quota. It is counting on ratification of a
30 billi
on
i
$
ncrease
i
n members quotas-$16 bil-
lion of which will be in hard currencies-by 30
November, although sufficient member approval
by this target date is uncertain. We believe that, if
the IMF funding problem persists for several
months, commercial banks could perceive an un-
raveling of the current debt strategy and move to
scale back further their LDC financing. Economic
repercussions would be especially severe for large
LDC and East European debtors-Argentina, Ven-
ezuela, Yugoslavia, Egypt, the Philippines, Nigeria,
Romania, and Hungary-which are currently or
expected to soon be negotiating Fund arrangements
to deal with 1984 financing needs.
The Resource Gap
Part of the reason for the Fund's overriding con-
cern for adequate resources is its conservative
policy of providing for liquidity well in advance of
loan disbursements. At the time a standby or three-
year extended arrangement is agreed upon, the
IMF sets aside the full amount of the commitment.
Actual disbursements, however, may be less than
the commitment because disbursements are some-
times withheld as a result of noncompliance with
IMF Projections of Resource Use, Billion SDRs a
October 1983 Through April 1984
Oct-Dec
Jan-Apr
1983
1984
Uncommitted ordinary resources
from members' quotas b
6.7
4.8
Usable funds at beginning of
period
14.5
10.8
Undrawn loan commitments
4.8
4.1
Estimated new commitments
and other outflows in train
3.3
2.2
Special Finance Facility and
Enlarged Access Resources
credit lines b
3.5
1.8
a I SDR=US $1.05.
b End of period.
program targets or occasionally as a result of a
reduction in members' financing needs.' On the
other hand, the IMF must ensure members' access
to Fund resources since members with large quotas
can almost automatically draw down their reserve
quota.
While the IMF's overall uncommitted resources
have dwindled to less than $3 billion, it, is actually
in deficit on the resources it borrows from members
to augment quota contributions. At the end of
September, commitments of borrowed resources
exceeded available credit lines from the Supple-
mentary Financing Facility and Enlarged Access
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Subscriptions or quotas are the main source of
IMFfunds. The Board of Governors is required to
conduct quota reviews at least every five years. On
31 March 1983, the Board completed the Eighth
General Review of Quotas and authorized nearly a
50 percent increase in aggregate Fund quotas from
$64 billion to $95 billion. Twenty-five percent of
each member's quota is payable in reserve assets-
either SDRs or hard currencies-and 75 percent is
payable in the member's domestic currency. Each
member has until 30 November 1983 to consent to
the increase; new quotas take effect when consent
has been received from members representing at
least 70 percent of present total quotas.
The IMF also is authorized to borrow funds in any
currency and from any source, official or private,
provided that the member whose currency the
Fund wishes to borrow agrees to the transaction.
To date, the IMF has restricted its borrowing to
official entities:
? Since 1962 the Fund has had standing arrange-
ments-called the General Arrangements to Bor-
row (GAB)-with the governments and central
banks of 10 industrial country members under
which it can borrow substantial amounts of their
currencies to finance drawings by any of the 10.
The Fund is awaiting approval of a
proposal to enlarge the GAB from $6.7 billion to
$17.8 billion.
? In 1974-75 the IMF borrowed $7.4 billion from
15 official creditors and created two oil facilities
to help LDC members finance sharply higher oil
import bills. Loans are no longer made under
these facilities, although members continue to
pay charges and make repayments under them.
? In early 1979, 14 official lenders provided $8.2
billion to establish the Supplementary Financing
Facility. These funds, all of which were commit-
ted within two years, went to members with
serious balance-of-payments problems in the
form of additional financing under standby and
extended arrangements.
? In May 1981, the Fund concluded an agreement
with Saudi Arabia to borrow up to $8.4 over two
years, with the possibility of a further $4.2
billion in the third year. These funds, together
with $1.4 billion from 18 other countries, consti-
tute the Fund's Enlarged Access Resources with
which the Fund has been able to continue to aid
those members requiring resources in larger
amounts and for longer periods than available
under regular credit tranche policies.
Resources by over $4 billion. The Fund is attempt-
ing to borrow $3 billion from the Bank for Interna-
tional Settlements (BIS) and a matching amount
from Saudi Arabia to cover both the borrowed
resources deficit and $2 billion in new allocations it
expects to make early next year. The effort to date
has been unsuccessful largely because European
governments believe any BIS credit agreement
would reduce pressure on the US Congress to ratify
the quota increase, according to press reports.
Impact on LDC and East European Debtors
The shortage of IMF resources is likely to make it
much more difficult for those debtors without Fund
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18 November 1983
arrangements to fill their 1984 financing require-
ments. The Fund has been instrumental in assem-
bling major financing packages for debt-burdened
LDCs by tying new commercial bank loans, official
credits, and debt relief to its standby and extended
loans, which are disbursed if quarterly economic
targets are met. In this manner, borrowing from
the Fund not only provides some immediate liquid-
ity, but, more importantly, it has become the
necessary "seal of approval" in restoring the debt-
or's ability to draw on world capital markets and to
obtain debt restructuring. Commercial bank credit
and debt relief associated with IMF agreements
frequently have far exceeded the value of the IMF
commitment.
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As of late September, 43 LDCs and East European
countries had standby or extended arrangements
with the Fund, including 13 of the 20 largest LDC
debtors. Three large debtors-Venezuela, Nigeria,
and Egypt-are negotiating programs that are not
covered by current IMF resources:
? Venezuela continues to talk with the IMF on
obtaining funds from several Fund assistance
programs, but differences remain over condition-
ality. Agreement, if at all, is unlikely until after
the expected inauguration of a new administra-
tion in February. According to the Embassy, a
senior economic adviser to leading presidential
contender Lusinchi believes that conditional IMF
funding is unnecessary given Venezuela's $11
billion reserve level and recent import cuts. Bank-
ers would prefer, however, that Caracas submit to
an IMF adjustment program before they proceed
with debt refinancing of the $18 billion due
before the end of 1984. Bankers recently ap-
proved a fourth extension to an original 90-day
grace period on principal repayments.
? Nigeria is also involved in difficult negotiations
with the IMF and is seeking $2.7 billion in Fund
resources over three years. Settlement of Lagos's
large short-term trade arrearages, however, is
likely to be a precondition to any IMF agreement
or additional bank credits. The US Embassy
attributes Lagos's chronic inability to make these
payments on time to the Central Bank's bureau-
cratic ineptitude rather than a shortage of funds.
? Egypt would like to reschedule its official debt,
especially US foreign military sales payments.
Creditors, particularly the United States, are not
receptive to the request for debt rescheduling
unless it is made in a multilateral forum and in
conjunction with an IMF program. An IMF
mission is due in Cairo this month to work on a
standby arrangement. Heavy government subsi-
dies on basic commodities are likely to be a
contentious issue in the negotiations.
In addition, under its current policy the IMF
cannot fully fund requests for new or revised
programs already made by the Philippines and
Hungary and expected from Argentina, Romania,
and Yugoslavia:
? In September the Philippines was declared out of
compliance with its current one-year, standby
arrangement and ineligible to draw its next $50
million disbursement. Manila recently declared a
90-day moratorium on principal repayments of
all maturities to commercial banks. Prime Minis-
ter Virata is negotiating a new and larger $630
million Fund arrangement that would include the
existing $225 million undrawn balance and leave
$405 million contingent upon the IMF's own
availability of resources.
? Hungary's one-year standby arrangement expires
in January 1984. Improvement in the current
account is falling well short of expectations, and
Budapest has launched discussions with the Fund
on an 18- to 24-month stabilization program with
$600 million in credits. More IMF support is
crucial if Hungary is to line up enough bank
financing to cover large debt service payments in
1984-85.
? Although Argentina's 15-month $1.6 billion
standby arrangement is due to expire in April
1984, disbursements have been suspended since
last July because of payments arrears and the
existence of unacceptable exchange and import
restrictions. Some $500 million in contingent
commercial bank loans have also been held up,
although banks have offered to release the funds
if they are applied toward repayment of arrears.
Argentina has been forced into a de facto morato-
rium with debt renegotiations suspended until the
new civilian government can participate. While
an undrawn balance of close to $950! million
under the current arrangement may be eligible
toward funding of a new program, we estimate
Argentina's needs and severe imbalances will
require a much larger and comprehensive
program.
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Selected Debtors: IMF Arrangements,
New Commercial Bank Loans, and
Debt Rescheduled, 1983
Date of
Arrangement
Expiration
Date
Amount of
Agreement
Undrawn
Balance b
1983 New Bank
Loan Tied to IMF
Arrangement
Debt
Rescheduled
in 1983
Jan 1983
Apr 1984
1,575
945
1,500
7,500
Jan 1983
Jan 1985
525
397
1,300
3,400
Dec 1982
Dec 1983
97
39 -
0
1,500
Hungary
Dec 1982
Jan 1984
500
175
0 c
0
Philippines
Feb 1983
Feb 1984
330
225
0
0
Romania
Jun 1981
Jun 1984
1,158
492
0
800
South Korea
Jul 1983
Mar 1985
605
504
0
0
Sudan
Feb 1983
Feb 1984
180
80
0
2,700
Thailand
Nov 1982
Dec 1983
285
129
0
0
Jan 1981
Dec 1983
1,745
250
600
1,900
Brazil
Feb 1983
Feb 1986
4,450
4,320
4,400
4,700
India
Nov 1981
Nov 1984
5,250
2,415
0
0
Ivory Coast
Feb 1981
Feb 1984
509
121
0
0
Jamaica
Apr 1981
Apr 1984
500
78
0
150 d
Mexico
Jan 1983
Dec 1985
3,580
3,160
5,000
22,000
Pakistan
Dec 1981
Nov 1983
965
198
0
0
Peru
Jun 1982
Jun 1985
683
470
450
1,400
a SDRs converted at rate of 1 SDR=$1.05.
b As of 31 July 1983.
c Hungary has received $400 million in two Eurodollar syndications
this year.
d Under negotiation.
? Romania's disbursements under a three-year
standby arrangement have been suspended since
August because of Bucharest's refusal to raise
energy prices as recommended by the IMF. At
stake are two disbursements totaling $195 million
in second-half 1983. Bucharest continues to talk
with the Fund in an effort to salvage the current
arrangement. Romania's continuing financing
needs suggest that IMF funding will be necessary
beyond June 1984 when the current standby is
due to expire.
? In mid-September Yugoslavia concluded its
much-delayed debt refinancing agreement with
Western bankers. The agreement refinanced $1.9
billion in medium- and short-term debt, provided
$600 million in new credits, and ensured dis-
bursement of the last $250 million available
under a three-year IMF standby arrangement.
Despite improvement in its current account, Yu-
goslavia will enter next year with low foreign
exchange reserves and few credits in the pipeline
to bridge its financing gap.
Other LDCs negotiating new or revised Fund ar-
rangements include Sudan, Zaire, Bolivia, Costa
Rica, Madagascar, Somalia, and Liberia. These
members have a total external debt of $23 billion,
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Secret
ranging from almost $9 billion for Sudan to less
than $1 billion for Liberia. Should these LDC
debtors be unable to line up IMF credit, arrearages
would almost certainly grow and additional de
facto debt moratoriums set in. Moreover, the
chance to effect much-needed economic adjustment
measures would slip by. Zaire, for example, has
implemented politically unpopular austerity meas-
ures as a precondition to a new standby program it
had expected to sign in late October. It now faces
delays in obtaining these funds, and the govern-
ment will be under heavy political pressure to ease
its belt-tightening efforts. The standby was also a
prerequisite for official multilateral debt reschedul-
ing and IBRD consultative group efforts.
Impact on the International Financial System
A delay in approval of the IMF quota increase
beyond first-quarter 1984 could have severe reper-
cussions for the international financial system if
bankers and LDC debtors perceive a lack of com-
mitment and cooperation on the part of the major
industrialized nations and an unraveling of the
current debt strategy. Smaller amounts of IMF
assistance will require more financing from other
parties or even stronger adjustment efforts on the
part of LDC debtors if debt repayments are to be
kept current. Without the IMF program, we be-
lieve commercial banks would be inclined to re-
duce, not increase, their credit lines. Reduced
external financing in turn would most likely result
in a weakening of politically unpopular adjustment
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Even with the quota increase, the IMF will be
under pressure in 1984-85 to conserve its resources.
At the recent Fund annual meeting, some members
expressed concern that the Fund has gone beyond
its traditional role as a source of temporary bal-
ance-of-payments financing. They are advocating
reduced member access to IMF funds and in-
creased conditionality of those drawings that cur-
rently are relatively easy to obtain, such as the
Compensatory Financing Facility, which finances
export shortfalls.
If the IMF's 30 November deadline for approving
the quota increase is not met, the Fund will most
likely ask for an extension for ratification into early 25X1
next year, hoping approval could be obtained before
the end of the Fund's fiscal year on 30 April.
We expect the IMF to continue to ration
resources until the new quota contributions are
approved
The IMF could borrow from private capital mar-
kets, although this would require approval from
those members whose currency is being borrowed.
The United States and many European govern-
ments have long been opposed to commercial mar-
ket funding because they believe that over the
longer term the practice would reduce the IMF's
financial flexibility. Moreover, since the commer-
cial banks would prefer to lend to the less-credit-
risky IMF at this particular time, such a move
probably would be perceived as a bailout of the
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International Financial Situation:
Bankers' Attitudes Toward LDC Lending
This article is part of a special series focusing on
the economic and political aspects of the interna-
tional financial situation.
We believe there is a danger that almost all new
bank lending to financially troubled LDCs in 1984
will go to a handful of major debtors, forcing many
other countries to curtail imports. We also believe
bankers will gauge the level of their lending to
LDCs by the outcome of key debtors' negotiations
with the IMF over the next several months. While
the sheer size of the debt problems of Mexico,
Brazil, and Argentina obliges bankers to find some
workable solution that includes new loans, they feel
no such compulsion to continue new lending to
smaller LDC debtors. The money center banks in
the United States are concerned mainly with pro-
tecting existing loans to the major debtors, and
many regional and foreign banks will make new
loans only after heavy persuasion from the IMF,
the large banks, and governments.
Bank Lending to Latin America
21
The international financial community has become
increasingly concerned over financial conditions in
Argentina because of uncertainty over whether the
government will both adhere to an IMF austerity 25X1
gentine arrearages to grow.
program and request reasonable terms on public
debt reschedulings. Press reports indicate that the
Argentine bank advisory group has set 30 Novem-
ber as the deadline for commercial banks to dis-
burse $500 million, representing the first tranche of
a $1.5 billion credit formally approved in late 1982.
The group is pushing to make the first $500 million
disbursement so that the government can pay off
upcoming principal payments and a portion of
arrearages. We believe that further disbursements
of new bank loans beyond the $500 million tranche
will depend on the new government's coming to an
agreement with the IMF. The agreement could
take the form of either renegotiating the existing
program, which expires in April, or negotiating a
new program. A new IMF program would probably
require several months of preparation, causing Ar-
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Bank Attitudes Toward Major Asian Borrowers
The money center banks do not expect that other
major Asian borrowers will experience serious bank
financing problems during 1984,
everal smaller US
regional banks, however, are concerned that the
financial problems in the Philippines could have a
spillover effect on South Korea and Indonesia. A
large portion of South Korea's debt is short term;
the government has scaled back a number of
development projects, however, and expects that
gross external borrowing from banks in 1984 will
be on the order of $4 billion instead of the $6 billion
it had projected earlier. Indonesia has also cut back
on development projects and substantially devalued
the rupiah. We believe Indonesia's gross borrowing
requirement will not exceed $2.5 billion in 1984.
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18 November 1983
Prospects for Smaller Financially Troubled Debtors
agencies to come to their financial rescue.
and more pressure on governments and official
A concern held by several financial analysts is that
although banks may feel compelled to lend to the
larger LDC debtors, they may cease new lending to
smaller debtors whose external payments problems
do not threaten the international financial system.
For example, smaller debtors in Latin America-
Ecuador, Bolivia, and Costa Rica-may be unable
to pressure banks for new loans. These countries
would then be forced to further adjust their exter-
nal balances by cutting imports. As a result, their
economies would experience low growth throughout
the 1980s, leading to increased domestic discontent
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Japan: Status of
Bank Lending to LDCs
In the wake of recent LDC debt reschedulings,
some Western financial analysts have accused Jap-
anese bankers of being uncooperative, both by
failing to pull their weight in the rescheduling
process itself and, more broadly, by cutting back
lending to LDCs. Our analysis shows that Japanese
banks have been grudgingly cooperative in resched-
ulings and are expanding their international lend-
ing. Most new LDC lending, however, is going to
relatively well-off East Asian countries. A legacy of
bitterness among Japanese bankers over some Lat-
in American rescheduling operations could cause
them to be less forthcoming in the future unless
pressed by the Japanese Government.
Building Up LDC Loan Portfolios
Until 1978, Ministry of Finance (MOF) regulations
allowed Japanese banks to engage in syndicated
offshore lending only on a case-by-case basis. Once
these regulations were relaxed, the Japanese
banks-whose financial exposure to LDCs was
relatively light-rapidly expanded their inter-
national lending. Opportunities in developing coun-
tries were considered especially attractive. More
than one-third of the new medium- and long-term
loan commitments Japanese banks made during
1980-82 were to non-OPEC LDCs; more than half
of this amount went to Latin American borrowers.
Bailing Out Mexico and Brazil
In the immediate aftermath of Mexico's August
1982 moratorium announcement, Japanese bankers
apparently were prepared to curtail sharply lending
to LDCs. The MOF stepped in, however, to ensure
that Japanese banks would cooperate in reschedul-
ing efforts. The MOF reportedly hoped to head off
criticism from foreign governments, primarily the
United States, that Japan was not being helpful on
debt issues. To encourage Japanese banks to par-
ticipate, the MOF waived-in Mexico's case-the
limit of 20 percent of a bank's capital that could be
tied up in loans to any one country. In early 1983
the Ministry allowed banks to set aside reserves
amounting to 5 percent of the value of their loans to
25 financially troubled countries. This new direc-
tive effectively expanded the ceiling on, Japanese
international lending.
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Ministry of Finance Guidance on Offshore
Lending
Despite a 1980 change in Japanese law freeing
international capital transactions in principle, the
Ministry of Finance (MOF) has retained control
over certain aspects of offshore lending. In setting
semiannual guidelines, the Ministry's primary ob-
jectives have been to encourage sound banking
practices and to prevent offshore lending from
damaging Japan's balance of payments. F_~
In addition to overseeing the volume of medium-
and long-term offshore lending, Ministry guidance
usually includes:
? Limits on the amount that can be outstanding to
a single country relative to the bank's capital and
reserves. At present, the limit for city banks is 20
percent. This means that the larger banks may
extend medium- and long-term loans totaling
approximately $500 million to each foreign
country.
? A cap on the ratio of total foreign currency assets
to reserves. This has been raised regularly and
now stands at 15.
? The minimum share of foreign currency funding
that must be in instruments with specific
maturities.
? The maximum share Japanese banks can take of
any given syndicated Eurocurrency loan.
? Instructions on how to deal with loan requests
from countries considered bad credit risks by the
MOF. In September 1982, 16 countries were
counted as risky, including the Philippines, sev-
eral Latin American countries, and most of the
Soviet Bloc.
Given the close relationship between the MOF and
the banks, the Japanese Government was better
able than most creditor governments to police
Secret
18 November 1983
adherence to rescheduling agreements. The Japa-
nese banks, unlike their counterparts in West Ger-
many and Italy, in early August were current on
their money market commitments to Brazi
Bankers in Tokyo,
however, believe that the formula governing indi-
vidual banks' shares in a $4 billion loan for Brazil
forced the Japanese to bear an unfairly heavy
burden. The formula was based only on outstand-
ing medium- and long-term loan balances. Many
Japanese bankers felt a formula based on total
exposure would have been more just since it would
reflect the relatively low level of Japanese exposure
in short-term credits. The failure of many US and
European banks to live up to their short-term
commitments to Brazil reinforced the perception of
inequity.
Increased Lending but More Caution
Japanese cooperation in reschedulings, even if
grudging, and willingness to make new loans out-
side of Latin America have contributed to an
increase in their share of international lending. In
the final quarter of 1982, the Japanese made 35
percent of worldwide medium- and long-term inter-
national loans-up sharply from previous levels.
The relatively high level of Japanese international
lending activity evident in late 1982 apparently is
continuing.
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Japanese banks have become more discriminating,
however, on lending to LDCs. Loans to Latin
LDCs now appear confined mainly to refinancing
operations. One notable exception is Japanese par-
ticipation in a recent $275 million loan for Panama,
where Japanese businessmen hope to expand opera-
tions and eventually to participate in building a
Southeast Asian borrowers have been the primary
LDC beneficiaries of the banks' desire to check the
growth of their exposure in Latin America. The
Japanese dominated the Asia-Pacific syndicated
offshore loan market in the first half of 1983.
According to Asian Finance, seven Japanese banks
were among the top 20 managers of loans to that
region. Thailand and Malaysia appear to be espe-
cially attractive to Japanese bankers now because
their external debts are relatively moderate, as are
their debt service-to-export ratios.
We expect Japanese banks will continue to be
major actors in the LDC loan market in the coming
year, although most new lending will continue to be
confined to East Asian LDCs. There is strong
commercial pressure on the banks to increase over-
seas lending, in part because of the poor domestic
investment climate and continuing large current
account surpluses. As the pace of liberalization in
the domestic capital market has quickened in re-
cent years, profit margins on domestic lending have
been compressed. A surge in investment spend-
ing-which would tend to widen margins-is not in
the cards, according to business surveys. Against
this backdrop, international business will look at-
tractive. We do not believe the MOF will block
expansion of banks' offshore activity by issuing
restrictive guidance.
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18 November 1983
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How active the banks will be on rescheduling will
depend on Finance Ministry pressure and on which
countries are involved. The MOF still has powerful
inducements at its disposal to convince Japanese
banks to be cooperative. For instance, under pres-
sure from the banks, it is considering making the
new bad debt reserves tax exempt. The positions
held-and pressure on Tokyo exerted-by the US
Government will be crucial factors, we believe, in
Ministry decisions on how hard to push the banks
on rescheduling matters.
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Venezuela:
Postponing IMF Discipline
Economic conditions in Venezuela have deteriorat-
ed rapidly in recent months, and President Herre-
ra's unwillingness to submit to an IMF program
has stalled progress in rescheduling foreign debt.
Caracas has averted difficulties during a period of
declining oil revenues by resorting to tough foreign
exchange controls, but at the expense of economic
performance. We expect a 2.5-percent drop in
output this year accompanied by rising unemploy-
ment and a sharp fall in private investment. Even
with a new administration after the elections in
December, we doubt Venezuela's willingness to
take the tough adjustments necessary to deal with
its foreign financial problems. Jaime Lusinchi-
widely expected to win the presidency in Decem-
ber-is backpedaling on earlier commitments to
seek IMF support. We believe lack of an IMF
program will impede debt rescheduling and could
lead to a foreign financing crisis in the first half of
next year.
The Financial Impasse and Its Costs
No progress has been made to date regarding the
restructuring of $18 billion in principal payments
and interest due foreign banks by the end of 1984.
Caracas continues to resist bankers' demands to
adopt an IMF stabilization program in return for
refinancing. To avert a financial confrontation, the
foreign bank advisory committee has extended
Venezuela's payments deferrals, the latest being a
90-day extension on public debt principal repay-
ments that expires in January 1984.1
Although the government has been conducting
discussions with the IMF, Caracas has shown itself
intransigent on the Fund's suggestions regarding
economic adjustment measures. According to Em-
bassy and press reporting, the IMF has stipulated
that Caracas must cut public-sector spending by
nearly 10 percent to create a budget surplus com-
pared with an estimated deficit equal to 4 percent
of GDP for this year. The IMF also wants the
government to remove price controls, allow market-
determined interest rates, devalue and unify
exchange rates, discard import barriers, and elimi-
nate debt arrearages. According to Embassy
reporting, the government is resisting Fund belt-
tightening requirements that it perceives as too
politically costly. Moreover, Caracas believes IMF
assistance may be unnecessary and announced it
will not seek a $1.1 billion Compensatory Financ-
ing Facility from the IMF.
Rather than accept an IMF program, Caracas has
staved off cash problems through its own restrictive
policies, particularly limiting access to' foreign ex- 25X1
change. Tough controls have stopped capital flight.
Additionally, a three-tier exchange system and
import restraints have improved the trade accounts.
According to the Embassy, Caracas will most likely
cut imports 35 percent this year thereby generating
a trade surplus in excess of $6 billion. The improve-
ment in the trade accounts will enable the govern-
ment to nearly eliminate its current account deficit;
last year it was $3.5 billion. This has eliminated the
need for any new commercial borrowings. More-
over, by resorting to commercial arrearages, Cara-
cas has increased its foreign exchange reserves to
some $11 billion, according to a banking source,
compared with about $8.8 billion in February. 25X1
Caracas has avoided submitting to lender-imposed
austerity, but has failed to avoid harming its
domestic economic performance. The tough ex-
change controls have resulted in shortages of raw
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material imports, forcing many firms to suspend
production. While inflationary pressures have been
held at bay by strict price controls, businessmen
have been squeezed between fixed prices and rising
costs, precipitating growing numbers of bankrupt-
cies. Consequently, economic activity is likely to
decline at least 2.5 percent this year, resulting in
rising joblessness. Unemployment has risen to an
estimated 11 percent compared with 8 percent last
year; Embassy sources now estimate that 40 per-
cent of the population has trouble meeting basic
subsistence needs.
The economic contraction plus price and exchange
controls have also resulted in sharp declines in
private and public investment over the last year.
Construction has fallen by 27 percent, in part
reflecting the drop in new industrial plant building.
Petroleum industry investment also contracted by 5
percent in the wake of reduced oil earnings. The
public-sector-controlled Petroleos de Venezuela
(PDVSA), which accounts for about $14 billion or
95 percent of oil exports, is experiencing a liquidity
crisis. PDVSA has been forced to make large
budget cuts, especially in oil development projects,
which have added to the ranks of the unemployed.
The present government has made it difficult for
the private sector to make debt repayments. The
Herrera administration's failure to release dollars
to the business community has resulted in an
estimated $400-600 million in private debt arrears.
Despite a recent decree that was established to
streamline private debt payments, Central Bank
President Diaz Bruzual continues to impede the
release of dollars. These delays are harming the
business sector's international creditworthiness
thereby impeding access to new foreign funds. F_
Challenges Ahead
Venezuela's present administration will pass on
difficult economic problems to the next govern-
ment, widely expected to be led by Jaime Lusinchi
and the Accion Democratica (AD) party. Lusinchi
will be expected to fulfill high expectations from
both the rural and labor sectors-historically the
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18 November 1983
backbone of the AD. He will need to make basic
policy adjustments if the economy is to achieve
long-term growth. For example, although petro-
leum revenues have declined by 30 percent since
1981, government spending has continued to grow.
Little effort has been made to cut costly subsidies
or public-sector inefficiencies necessary to bring
spending in line with available resources.
Venezuela is likely to face a
continued slump in domestic activity without
changes in present exchange rate and price control
policies. Until progress is made in rescheduling the
external debt, financial uncertainties will persist.
In late October, Lusinchi released the blueprint of
his economic program. It is a mix of austerity and
pump priming. Although Lusinchi recognizes the
need to implement austerity, he is promising more
government assistance to reactivate housing and
agricultural development projects. Moreover, his
program shows internal inconsistencies. Lusinchi
pledges to keep inflation down but insists he will
devalue to unify the exchange rates. He wants to
make the public sector more efficient, but without
risking higher unemployment because of his politi-
cal debt to labor for their electoral support. The
high priority he gives to attracting new foreign
investment is likely to collide with his call for
greater state participation in the economy.
The pressures from Lusinchi's economic staff and
party leaders to place Venezuela's economy on a
course of rapid growth will militate against easy
acceptance of an IMF-mandated stabilization pro-
gram. One of Lusinchi's senior economic advisers
has warned that Caracas will not accede to any
IMF requirement to reduce the level of the public-
sector deficit. Moreover, leaders of his political
party indicate that because of fears of social unrest,
prices such as that of gasoline will not be allowed to
rise to levels recommended by the Fund. According
to US Embassy sources, if Lusinchi proceeds along
his present course, there will be no early agreement
with the IMF or international banks.
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Dim Prospects
There is a growing consensus that Venezuela's
economic and financial problems will dissipate in
the coming year. The Venezuelan private sector
generally believes that the present recession is
likely to worsen because they anticipate further
delays in needed economic adjustments. The Vene-
zuelan-American Chamber of Commerce, for ex-
ample, has already projected negative growth for
1984 with inflation rising to some 30 percent-
prices probably would rise 50 percent in the ab-
sence of price controls. Businessmen do not expect
prompt relief from onerous price or exchange con-
trols in 1984 and are braced for an upsurge in
bankruptcies. Consequently, business leaders pro-
ject unemployment may reach 25 percent. Al-
though some international bankers are softening
their demands that Caracas accept an IMF pro-
gram, we expect ongoing difficulties in external
debt renegotiations. With its access to foreign
credit cut, Caracas will remain vulnerable to new
external shocks that could quickly precipitate a
foreign exchange crisis.
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Chile: A Risky Shift to
Growth-Oriented Policies
Santiago since last spring has moved to assuage
popular discontent by gradually stimulating the
economy after the steep decline in 1982. Political
pressure has been building for improving the unem-
ployment picture. In late October, Chile's economic
team announced its intentions to ease fiscal policy
in the hopes of engineering a stronger recovery in
1984. Although we believe there is a good chance
the IMF and other external creditors will support
Santiago's new policies, there are major risks.
Faster growth will translate into higher prices and
some worsening in the foreign payments position
next year. Furthermore, a worsening of domestic
violence could upset government plans and lead to
economic chaos.
After five years of boom that resulted from Chile's
adherence to free market policies, the economy
began to nosedive in mid-1981. The drop in
demand for Chilean exports and intense import
competition contributed to the abrupt slowdown.
Unemployment rose from 8 to 11 percent and was
accompanied by increased business failures. The
press increasingly criticized the government's fail-
ure to respond to worsening conditions, but the
economic team insisted on battling inflation. F_
Santiago's reluctance to ease restrictive policies
caused the Chilean economy to sink deeper into
recession during the first half of 1982. New auster-
ity measures were enacted in March, and, after
President Pinochet came under strong pressure to
relieve growing unemployment, he replaced the
economic team in late April. The policy adjust-
ments that followed, however, were insufficient to
break the economic slide. Santiago only slowly
increased public works spending, thereby failing
to slow the growth in unemployment. Monetary
tightness did not ease until the fourth quarter,
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The mishandling of the exchange rate devaluation
further weakened the economy. The abrupt end of
the fixed exchange rate policy in June 1982 only
served to undermine public confidence in the gov-
ernment's economic policy and spurred capital
flight. Experimentation with several different ex-
change rate systems added to public concern about
disarray in economic policy making. By midyear,
Chile's foreign creditors had become disenchanted,
and the government was forced to begin negotia- 25X1
tions to arrange an IMF standby to shore up
banker confidence.
Economic output declined 14 percent in 1982 com-
pared with growth of about 6 percent a year during
1976-81. Unemployment doubled to 25 percent.
The 22-percent decline in industrial activity caused
business failures to soar; bad debts rose to about 50
percent of bank capital and reserves. Rapid devalu-
ations and agricultural setbacks resulted in a dou-
bling of inflation to 21 percent. The economic
tailspin heightened social discontent and resulted in
a further loss of confidence in the President, his
economic team, and the free market model.
At the same time, Chile's external payments diffi- 25X1
culties mounted. Debt servicing became more oner-
ous because of the falloff in exports, the series of
devaluations, and the decline in foreign lending
from $4.4 billion in 1981 to $940 million in 1982.
Capital flight and the slowdown in foreign loans
drained international reserves by nearly one-third
to $2.6 billion. One of the few bright spots was the
halving of the current account deficit to $2.4 billion
as recession caused imports to fall.
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Santiago early in 1983 attempted to lay the foun-
dation for improved domestic economic perform-
ance while simultaneously trying to deal with its
foreign financial crisis. The government had con-
cluded a new IMF standby arrangement in early
January. Chile's economic team also tried to shore
up the domestic financial system by purchasing bad
debts from the banks.
The hope for quick improvements was dashed by an
abrupt confrontation with foreign bankers. On 13
January, Santiago announced a banking holiday
and intervened in the operation of several banks
while liquidating others. The government failed to
guarantee the foreign debts of these institutions,
however, and foreign bankers reacted by cutting all
new lending and demanding repayment of matur-
ing loans. The cessation of credit and resurgent
capital flight drained nearly $1- billion in reserves
by the end of January. The government responded
by declaring a 90-day moratorium on foreign debt
amortization payments on 31 January. These devel-
opments took Chile out of compliance with its new
IMF standby agreement and put IMF resources on
hold.
In March, the authorities enacted an emergency
plan to stabilize domestic financial markets and
gradually revive the economy:
? Refinancing terms for domestic debts were liber-
alized and cheaper financing for housing was
made available.
? Gas taxes were increased and tariffs were dou-
bled to finance the moves in a manner consistent
with the IMF program. These policies somewhat
restored domestic confidence and laid the founda-
tion for a gradual upturn in economic activity
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18 November 1983
Santiago extended the foreign payments moratori-
um in April. Santiago also requested $1.3 billion in
new medium-term money, the restoration of $1.2
billion in short-term credits, and the rescheduling
of maturing loans from its foreign bankers. Negoti-
ations were also under way to gain release of
embargoed IMF loans.
Political Discontent Brings Economic Concessions
The government responded to popular protests that
began in early May with selective repression in the
streets and some limited concessions, first on
economic policy and then on the political front.
Santiago in June announced increased spending for
housing and health care, hiked public salaries 5
percent, and allowed homeowners to defer some
mortgage payments. In late June the government
announced a program to aid small farmers; in July
the administration slapped a 15-percent counter-
vailing duty on some imports to help industrialists.
In August the government reassessed its political
strategy, and negotiations were begun with moder-
ate opposition leaders. To support the political
dialogue, the economic team announced new public
spending that would create 160,000 jobs.
Cautious reflation has enabled Santiago to comply
with IMF commitments. Higher tax revenues have
prevented a sharp runup in the public deficit.
Monetary expansion has slowed dramatically since
the first quarter. By early August, the visible
progress in the economy enabled Santiago to con-
clude its foreign financial rescue program. The
IMF approved the revised stabilization program,
releasing $100 million in suspended funds, and
foreign bankers approved Chile's financial rescue
program.
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On the domestic front, industrial production rose in
the second quarter. Unemployment dropped from a
peak of 25 percent to about 18 percent and is
projected to fall to 15 percent by the end of the
year. Despite some recovery, the lingering effects of
previous austerity measures caused inflation to
moderate during the summer. Capital flight abated
with the return of steady economic policies. Chile
posted an $830 million trade surplus through Au-
gust, helped by a rebound in noncopper exports and
tough import cuts.
Demands for Economic Expansion
Despite cautious reflation, public pressure contin-
ues to build for more stimulative economic policies.
According to the US Embassy, the business com-
munity is pressing for a strong economic recovery.
Press reports consistently emphasize economic
grievances, especially high unemployment, as the
cause of violent demonstrations in poor neighbor-
hoods.
Political maneuvering within the government has
intensified for easier economic policies.
Interior Minister Jarpa-Pino-
c et s most influential political adviser-is urging
the President to replace the economic team to clear
the way for more expansion. Jarpa believes that
such policies would aid him in negotiations with
opposition elements on the scheduled transition to
civilian rule.
Bowing to these pressures, the present economic
team has announced plans to lower unemployment
in 1984. The Embassy reports that Santiago has
requested the IMF to allow a public-sector deficit
of at least 5 percent of GDP in 1984, up from 2.3
percent this year. The government contends that
increased public spending will be necessary for
4- to 5-percent growth, but the larger deficit will
not accelerate inflation or jeopardize other targets.
Chile would require
up to $1 billion in new foreign loans in 1984 to
finance this plan.
Prospects
The government's announced economic programs
combined with recent political concessions and the
onset of summer vacations in December should
temporarily ease the political crisis. The govern-
ment's ability to sustain recovery depends on the
willingness of the IMF and foreign creditors to
provide financial support. In our view, the IMF will
probably accede to Santiago's request for a less
stringent austerity program. Should this occur, 25X1
increased spending' would trigger an economic re-
bound of upwards of 5 percent and a further
decline in unemployment. Inflation, however,
would accelerate and the current account deficit
would widen, perhaps to $1.5 billion.
Even if the IMF consents to Santiago's expansion-
ary fiscal policies, there remains the risk that other
factors affecting the dialogue with the opposition
could cause the agreement to collapse. A series of
labor stoppages, especially in the mines, would
disrupt production and stall the recovery. Hoarding 25X1
could cause some shortages of consumer staples,
putting upward pressure on prices. Political unrest
also would trigger renewed capital flight that would
drain foreign reserves, undermine banker confi-
dence, and produce a foreign funding gap. Ulti-
mately, polarization and spiraling violence could
force the military to remove Pinochet from office.
Implications for the United States
US firms have been hard hit by Chile's economic
crisis in the wake of the rapid expansion of bilateral
commercial ties since 1976. US banks hold $6
billion in Chilean loans and have experienced a
disruption in debt repayments. Moreover, US ex-
ports contracted by 40 percent to $800 million last
year as Chilean economic activity plummeted.
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Any substantial shift from market-oriented policies
toward more nationalistic economic policies would
further damage US commercial interests. US busi-
nessmen remain vulnerable to new restrictions on
foreign investment, especially in the minerals sec-
tor. At worst, Santiago could nationalize foreign
investment, causing large losses for US companies.
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Sudan: The Economy on the
Eve of Nimeiri's Visit
Sudan's economy is beginning to show some prog-
ress, but the country remains deeply in debt and in
need of foreign assistance. The government has
made progress in bringing its finances under con-
trol and is expecting a boost from oil revenues in
1986. Major economic reforms are being required.
In particular, the IMF-supported by aid donors-
is urging the government to relinquish some state
control of economic activity to the private sector, as
part of a 1984 standby aggreement. President
Nimeiri will probably seek US support for his
position in negotiations with the IMF as well as
new aid during his talks in Washington next week.
Recent Developments
Real GDP fell by 2 percent in the fiscal year
ending in June. The decline was primarily the
result of drought that reduced rain-fed agricultural
production by 20 percent. Notwithstanding the
generally poor agricultural performance, there
were some bright spots. A bumper cotton crop was
29 percent above the previous year's harvest, re-
flecting improved government incentives. Strong
performances also were registered in the sugar and
cement industries. Most industries and services,
however, continue to suffer from shortages of im-
ported spare parts and electric power disruptions.
In the last year the government has made some
progress under the direction of an IMF standby
agreement in controlling budget and current ac-
count deficits. Government revenues kept pace with
inflation, while real government spending fell, pri-
marily because the nominal amount of funds trans-
ferred to regional governments remained un-
changed despite 40-percent inflation. The current
account deficit narrowed as exports-largely cot-
ton-increased 48 percent. Imports fell by 8 per-
cent because of foreign exchange shortages, high
import taxes, and direct import controls.
Despite the narrowing of the current account defi-
cit, a severe foreign exchange crisis was headed off
only by an influx of IMF funds, debt relief, short-
term credits to purchase petroleum, and supple-
mental aid from Saudi Arabia and the United
States. Both states helped close the balance-of-
payments gap by providing aid in excess of earlier
pledges. Total Saudi and US aid disbursements
amounted to $178 million and $140 million, respec-
tively. Nonetheless, the payments situation remains
troublesome. According to the US Embassy, Sudan
apparently has run up a petroleum debt of $900
million. With additional credit hard to obtain,
severe fuel shortages could occur early next year.
Dealing With Debt and the IMF
Sudan's external debt is approaching $9 billion-
an amount exceeding the country's annual GDP.
Debt reschedulings in 1979 and 1982 have proved
inadequate, in part because the Sudanese Govern-
ment was unable to provide an accurate record of
the country's total debt. The IMF and donors now
recognize that the debt problem can only be dealt
with through yearly IMF standbys and annual debt
reschedulings probably for the next several years.
Sudan is currently operating under an IMF stand-
by agreement reached in February 1983 worth
$180 million. The government has remained in
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Real GDP Growth
Percent
Money and Quasi-Money
Index
Percent
Current Account Balance
Million US $
-1,250 1980 81 82 83b
a Fiscal years end in June.
b Estimated.
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18 November 1983
Change in Cost-of-Living
Index
Percent
Trade Balance
Million US S
Government Deficit as a
Share of GDP
Percent
compliance with Fund conditions that encourage
exports, discourage imports, reduce the government
deficit, slow monetary growth, and make greater
use of the free market exchange rate.
Prospects for next year's IMF program, however,
remain clouded. An IMF team went to Khartoum
last month to negotiate another one-year standby
that will make possible a Paris Club rescheduling
of debts coming due in 1984. The team left,
however, without reaching agreement. Sudanese
negotiators were unwilling to accept new IMF
guidelines that include further revenue increases
and expenditure cuts, slower monetary growth, and
the shift of more exports from the official exchange
rate to the free market exchange rate. Embassy
sources report that the major hurdle is the govern-
ment's unwillingness to take action on the domestic
revenue issue; Finance Minister Mansour is reluc-
tant to implement new taxes on top of recent
increases.
The Sudanese Government would like to avoid
further exchange rate reforms because it will raise
domestic prices. The IMF wants Sudan to move
more commodities from the official rate--one Su- .
danese pound (#S 1) equals US $0.77-to the free
market exchange rate in lieu of an official devalua-
tion. Sudanese officials have cited the recent appre-
ciation of the pound on the free market as evidence
that the economy is improving and that future
exchange reform is unnecessary. The rate rose from
# S 1 equals $0.48 in August to $0.57 in mid-
October. In our view, the free market increase is
temporary and results from a lack of demand
stemming from an August ban on imports of
nonessential goods.
Sudan is resisting the changes because moving
transactions from the official exchange rate to the
free market rate will require restructuring Sudan's
public sector. The IMF and donors are focusing on
the petroleum sector; oil purchases represent 25
percent of Sudan's import bill. Mismanagement
and price controls have created persistent fuel
shortages and a thriving black market. According
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Current account balance
-547.2
- 774.7
-1,045.1
-482.8
Trade balance
-758.4
-1,152.5
-1,503.5
-1,179.2
Exports (f.o.b.)
581.5
478.9
381.2
563.3
Imports (c.i.f.)
1,339.9
1,631.4
1,884.7
1,742.5
Services
-82.0
-48.8
-65.1
-38.2
Receipts
261.1
328.5
503.0
534.4
Payments
-343.1
-377.3
-568.1
-572.6
Interest
-70.5
-105.2
-190.2
-169.2
Transfers (net)
293.2
426.6
523.5
734.6
Private
209.0
304.6
350.0
430.0
Official
84.2
122.0
173.5
304.6
a Data for fiscal years ending in June.
b Estimated.
to US Embassy sources, the present system also is a
significant source of graft for officials in the Minis-
try of Energy and the Presidential Palace.
As an inducement for turning Sudan's General
Petroleum Corporation over to private companies,
USAID is prepared to offer a conditional $40
million Commodity Import Program grant for oil
imports in 1984. The Finance Minister and some
government officials agree that moving petroleum
to the free market would have substantial benefits,
but other Sudanese officials with vested interests in
the current arrangement do not support the
changes. Acceptance of the plan by Energy Minis-
ter Tahami will be particularly difficult since he is
reported by Embassy sources to be a prime bene-
The government, however, is reluctant to raise
official prices because of a fear that disturbances
might result. Returning these government opera-
tions to the private sector would raise stated prices
but could eliminate the extensive black markets
where even higher prices prevail.
As a possible attempt to satisfy the IMF, the state-
owned Sudan Airways was disbanded by presiden-
tial decree in early November and converted to a
private company. It remains to be seen whether this
is the first of a series of moves to lessen government
participation in the economy, or whether it is
designed merely to reduce IMF and donor pressure
for privatization in areas such as petroleum.
factor of oil-market corruption.
Divestiture of public enterprises would be a signifi-
cant step toward loosening government control over
the economy and shrinking the budget deficit. Most
commodities distributed by public corporations are
priced below their market value and these subsidies
are a significant drain on the government budget.
Despite government objections to IMF conditions,,
Sudan's financial problems almost certainly will .
Secret
18 November 1983
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force Khartoum to reach an agreement on a new
standby loan before the 1983 agreement expires in
February. An IMF agreement is an essential pre-
requisite for further debt relief and high levels of
donor aid. More intensive negotiations between the
IMF and Khartoum are expected before an agree-
ment is nailed down.
During his visit to Washington, President Nimeiri
almost certainly will request continued high levels
of US aid. Nimeiri probably will underscore the
economic improvements expected in 1986 when the
oil export pipeline is completed. He also may seek
US help to dilute proposed IMF reforms. Nimeiri
will hope that the strategic importance of Sudan
will be sufficient to garner further US support.
Secret
18 November 1983
Sanitized Copy Approved for Release 2010/11/15: CIA-RDP84-00898R000400040004-5
 Sanitized Copy Approved for Release 2010/11/15: CIA-RDP84-00898R000400040004-5
Sanitized Copy Approved for Release 2010/11/15: CIA-RDP84-00898R000400040004-5
 Sanitized Copy Approved for Release 2010/11/15: CIA-RDP84-00898R000400040004-5
Secret
Secret
Sanitized Copy Approved for Release 2010/11/15: CIA-RDP84-00898R000400040004-5