TREASURY REQUEST FOR LDC POLITICAL ASSESSMENTS FOR IMF/IBRD MEETINGS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000600900001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: July 27, 2010
• Sequence Number: 1
• Publication Date: September 14, 1983
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
14SEP 1983
MEMORANDUM FOR: Douglas P. Mulholland
Speciai Assistant to the Secretary for
National Security Affairs
Department of the Treasury
Chief, International Finance Branch
SUBJECT : Treasury Request for LDC Political Assessments
for IMF/IBRD Meetings 25X1
1. The attached country sheets respond to your request for brief political
assessments of a number of key LDCs for use by Treasur y officials preparim-- for the 27-
30 September IMF/IBRD Annual Meeting. Discussions
_jwhittled the original 22 country list down to these :
Algeria
Argentina
Brazil
Chile
Egypt
India
Mexico
MMMlorocco
Nigeria
Pakistan
Peru
Philippines
Saudi Arabia
Where appropriate, analysts have made specific references
external financial problems on is political conditions.
2. If you have any questions please call me
impact of
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25X1
Attachment:
Political Assessment of Key LDCs Attending
GI M 83-10227, September, 1983
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Political Assessment of Key LDCs Attending 27-30 September IMF-IBRD Annual Meeting
OGI/ECD/IF
Distribution;
Original - Addressee
1- SA/MCI
1 - ExDir
1 - DDI
1-AI !
1 - Ch/PES/DDI
1 - NIO/Economics
1 - D/ALA
1 - D/NESA
1 - D/OEA
1 - D/OGI
1 - Ch/BCD
2 - Ch/
1 - Ch/CP ILS
8 - OGI/PS
16Sept83
GI M 83-10227
September 1983
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Algeria
Key Domestic Issues
o Algeria finds itself squeezed by the soft oil market; crude' oil exports
have dropped 75 percent since 1978 but are partially offset by
expanded natural gas sales and higher gas prices.
o The government has avoided the massive debt problems of other LDCs;
this year, however, Algiers had to finance a SONATRACH project with
a $500 million loan on the Euromarket-the country's first substantial
new borrowing since 1979.
o The tight rein on borrowing has forced Algeria to draw down foreign
exchange reserves from $3.8 billion in 1980 to $1.9 billion as of June
1983-about two and a half months of imports-and, according to press
reports, to cut back on planned imports by at least $1 billion for 1983.
o Despite austerity measures and increased costs for consumer goods this
year, we believe the Bendjedid regime enjoys public confidence.
Comment
In our judgment, President Chadli Bendjedid's authoritarian, non-aligned
government is secure for the foreseeable future. He retains solid support among the
armed forces and civilian technocrats, and he is probably more popular with the Algerian
public than his two predecessors. The fragmented opposition-primarily doctrinaire
leftists and Islamic fundamentalists-lacks effective leaders and organization. Some
popular, non-revolutionary dissent occassionally is expressed by labor, students, or ethnic
minority groups, but at present the government is addressing their grievances
adequately. In any event, the security services would deal with any disorder firmly but
The Algerian populace expect Bendjedid to alleviate Algeria's chronic
unemployment and consumer shortages. Since 1980 he has redirected economic policy.
away from heavy industry and toward light industry, housing, and agriculture-areas
directly affecting the average Algerian. A weakened market for oil, however,
complicates this policy. Lower oil revenues have also forced the government to cut
nonessential consumer imports such as autos and refrigerators. If the soft oil market and
dwindling foreign exchange reserves force Bendjedid to implement further domestic belt-
tightening, public dissatisfaction with his government may emerge. Alternatively Algiers
may increase its foreign borrowing, but we expect it will seek such financing with
considerable reluctance and judiciously. Bendjedid thus faces increasing difficulty in
balancing consumer and development needs against diminished income, but we do not
believe these problems constitute a threat to his regime.
In the longer term, Algeria will have difficulty offsetting declining oil reserves
with increased production from its enormous gas reserves. In the event that gas
contracts and expansion of production are not forthcoming, Algeria will have to cut
imports and investments further and step up its foreign borrowing.
GI M 83-10227
September 1983 25X1
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Argentina
Key Domestic Issues
o Civilians will assume power after seven years of military rule following
the 30 October general elections.
o Economically, Argentina is experiencing a modest recovery from the
chaos set in motion by the Falklands crisis, but the stabilization
program is threatened by recent concessions aimed at placating labor.
o The dispute over the Falklands with the UK still dominates Argentine
diplomatic activity.
Comment
The preelectoral period has been characterized by continued tensions within the
military over the course of the transition, the protection of its institutional interests,
and the role of the services in the new government. Organized labor has been restive
during the past months as unions work to wrest wage and other concessions before the
new government takes power. At this juncture, although there are groups within the
military who oppose the elections, we do not believe the military will renege.
To halt the economic slide triggered by the mid-1982 Falklands war, Buenos Aires
backed away from populist economic policies in favor of an IMF program. The policy
spurred a modest recovery, but inflation, now about 275 percent yearly for wholesale
prices, has not been brought under control. Earlier this month, the economic team took
steps to relieve inflationary pressures-primarily by implementing tighter controls on
wages, prices, and interest rates. Soon after, however, under pressure from labor, the
regime made wage and other concessions to avert a threatened general strike. Sharp
public sector wage increases this year will play a major role in the collapse of the IMF
program, which we expect to see by yearend. Thus, the new civilian president will be
challenged to balance the demands of an aggressive labor movement with those of the
The electoral contest will pit the traditionally predominant Peronists against the
Radical Civic Union (UCR), the perennial second place finishers. Raul Alfonsin captured
the UCR's nomination and is trying to broaden his party's traditional middle class appeal
with a populist program aimed at attracting working class support away from the
Peronists. The Peronists, with moderate Italo Luder as standardbearer, entered the
contest as clear favorites and remain so, albeit with a diminishing margin. Alfonsin has
an outside chance of winning because the Peronists may be unable to overcome internal
divisions or project the dynamism that ,has characterized Alfonsin's campaign to date.
Recent well publicized sea and air incursions into the British exclusion zone
around the Falklands were aimed at refocusing international attention on the territorial
dispute in anticipation of UN debates. The Argentines are especially anxious to thwart
London's plans to build an airbase on the islands. The draft resolution offered at the UN
is moderate and should gain majority support in the General Assembly, if pre-election
developments in Argentina do not alienate some backers. On the Argentine-Chilean
front, despite the Pope's ongoing efforts to find a solution to the Beagle Channel dispute,
negotiations are likely to remain in limbo.
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Brazil
Key Domestic Issues
o President Figueiredo's administration appears increasingly adrift, and
Figueiredo himself is widely viewed as aloof and ineffective in contrast
to his earlier popularity.
o IMF-mandated austerity measures have sparked labor unrest, and
economic dissatisfaction also is growing within the middle class, the
business community, and the middle echelons of the armed forces.
o Brazil's international payments position has become precarious because
the IMF and foreign banks have suspended further lending pending
acceptable new measures. This situation has prompted major political
and business groups-as well as a majority "of federal deputies-to call
Comment
Brazil's dilemma is how to keep moving toward a return to civilian rule in 1985
while coping with an unprecedented economic crisis. Since economic recovery is unlikely
within the next two years-real wages probably will continue to decline and
unemployment will expand-political pressures are certain to increase. A growing
political backlash could force Brasilia to withdraw pledged spending cuts and a reduction
in wage indexation. In addition, continued IMF delays or refusal to endorse Brazil's
revised stabilization program could provoke a government decision to declare a debt
In our view, the economic problems will reduce the administration's credibility but
probably will not destabilize the government. Figueiredo is unlikely to regain public
confidence during the remainder of his term, and he faces strong challenges from
dissidents within his own party not only to austerity policies but also to his overall
leadership. Nonetheless, we believe plans remain on track for a peaceful transfer of
power in March 1985 to Figueiredo's successor who almost certainly will be from the
F_ I
ruling party.
The transition would be threatened only in the event of protracted economic
decline coupled with a sharp deterioration of public order, and possibly the emergence of
a charismatic politician unacceptable to the military. Such extreme circumstances
would be necessary to push the high command into intervention, which we believe is a
remote possibility over the near term.
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Chile
Key Domestic issues
o A two-year economic recession and President Pinochet's' refusal to
accelerate the timetable for returning the country to civilian rule
before 1989 have fueled the growth of a strong opposition movement
this year.
o Political and labor coalitions composed of activists from across the
political spectrum have sponsored "days of national protest" each
month since May and two national strikes.
o The protests have led moderates inside the government to press
Pinochet to grant concessions; the state of emergency has been lifted,
and Pinochet is considering a suggestion to hold a plebiscite on
amending the 1980 constitution to allow election of a congress before
1989.
o The armed forces still support Pinochet but favor the political
Comment
Pinochet's non-confrontational speech on 11 September marking the tenth
anniversary of the ouster of the Allende regime and the moderate level of violence
during the fifth day of protest on 8 September should permit the continuation of talks
begun in mid-August between the government and the democratic opposition on political
liberalization. In his speech, Pinochet defended the timetable outlined in the 1980
constitution that would lead up to the restoration of civilian rule in 1989, and confirmed
the possibility of an amendment that would allow the earlier election of a congress. He
also took note of the dialogue between Interior Minister Jarpa and the opposition
Democratic Alliance and urged them to continue discussions.
Pinochet's hard-line critics are unlikely to be satisfied with these concessions,
however, since they are demanding his immediate resignation. Communist plans for
continued violence could delay or disrupt the resumption of talks on democratic
Chile's economy has been in a severe recession since mid-1981. Falling prices for
copper-Chile's principal export-high international interest rates, a sharp cutback in
foreign lending, and severe import competition contributed to a 14-percent drop in real
GDP, widespread bankruptcies, and over 20 percent unemployment in 1982. Despite
government employment programs, domestic financial reforms, and IMF and external
debt rescheduling agreements, Chile's economy remains troubled. A modest recovery is
underway but will depend on continuing improvement in the world economy, risin
demand and prices for copper, and renewed domestic financial stability.
Most observers believe that Pinochet will remain president as long as he maintains
the confidence of the armed forces. the armed forces still 25X1
support Pinochet's continuation in of ice. Nevertheless most senior officers, especially
in the Air Force and Navy, favor an acceleration of the transition to civilian rule. Some
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Chile - continued -
military leaders believe that violent repression of demonstrators and publicity about
corruption by members of the president's family hurt their professional image. Pinochet
probably now recognizes this and consequently has been willing to make some limited
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Egypt
Key Domestic Issues
o Egypt is moving toward a foreign financial crisis. The government is
having difficulty making interest payments to the United States on
FMS loans, and we believe the situation will deteriorate in the months
ahead.
o Egyptian officials discussed a standby agreement with the IMF in
August, but little progress was made,
o President Mubarak has stayed ahead of his fragmented opposition, but
domestic politics are warming up in anticipation of parliamentary
elections next spring. A foreign debt crisis could give his opposition
Comment
Egypt hopes to avoid the adverse domestic political repercussions that would
accompany economic austerity measures. The government fears a repeat of the January
1977 riots over increased bread prices and wants to avoid the appearance of having
Washington faces a blitz of senior Egyptian visitors in the coming weeks who,
because of Egypt's financial difficulties, will be focusing on the aid relationship. In
addition to Egypt's representatives at the IMF/IBRD annual meeting, Deputy Prime
Minister and Defense Minister Abu Ghazala and Presidential Assistant al-Baz will be in
Washington next week and President Mubarak will arrive after addressing the UN at the
end of the month. During these discussions Egypt will seek:
economic and welfare policies dictated by the IMF and foreign donors.
o Relief from existing interest payments on FMS loans.
o More FMS funding to accelerate arms purchases.
o A greater share of FMS funding as grants rather than loans.
o Economic aid on a cash transfer basis like that received by Israel.
Egyptian officials will cite a host of reasons to justify increased aid. Presidential
Advisor al-Baz recently told a US Embassy official that he is particularly concerned
about the adverse domestic impact of austerity measures at a time when Egypt is
struggling to pay interest on US loans. The public, according to al-Baz, will attribute the
higher prices to US pressure to repay its loans. The Egyptians also will argue for the aid
parity with Israel that they allege was promised to President Sadat. On the military
front, the Egyptians will cite the need to replace aging Soviet military hardware, will
raise concerns over the large Libyan arsenal, and will complain about the high cost of US
Outside the economic sphere, we see no immediate danger signals for Mubarak's
continued rule. Although not overly popular, Mubarak has generally gained respect over
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Egypt - continued -
the past year. The- government's handling of the Lebanon situation, the refurbishing of
Egypt's nonaligned credentials, and improved relations with other Arab states have been
well received by the Egyptian public. The opposition is poorly organized, lacks effective
leadership, and has found no single issue to rally popular support. Radical elements on
the left and right have been contained by security forces. Most important, Egypt's
military appears su or of Mubarak and his policies despite some grumbling over
economic hardships.
Next year's parliamentary elections likely will focus increased public attention on
Mubarak's policies. The opposition press already is calling for the end of martial law
imposed following Sadat's assassination. The opposition parties will attempt to
underscore government mismanagement of the economy and corruption. Tough austerity
measures, should they be imposed, and foreign debt problems will provide the opposition
with more potent issues to use against the government. Mubarak's ruling party, however,
will not be seriously challenged.
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India
Key Domestic Issues
o According to the Indian press, public dissatisfaction is increasing with
Prime Minister Gandhi's handling of continuing regional dissidence and
.communal conflict, particularly in Punjab State.
o The ruling Congress Party suffered defeat in two important state
elections earlier this year, reportedly because it lost the support of
groups whose votes were key to past electoral victories.
o Satisfactory weather and the end of a major labor dispute will permit a
4-5 percent rate of overall economic growth this year.
o Inflation of about 11 percent-higher for basic consumer goods such as
rice and tea-is moderately severe by Indian standards.
Comment
In our judgment the erosion of the Congress Party's electoral base and the rising
regional and communal strife do not threaten the stability of the Indian political system
in the short term. Nonetheless, we believe these developments have cumulatively eroded
important elements of its future stability. Regional and communal disturbances have
strained the capabilities of India's security forces, damaged the Prime Minister's image,
and highlighted long-term problems resulting from her policies. The recent marked
deterioration of internal security reflects in part social strains brought on by slow
economic gains, but was not triggered by economic troubles. The growing trend toward
centralized crisis management and party control by New Delhi has weakened state
governments, which in turn have been unable to perform effectively or to stem party
Press reporting and state electoral defeats earlier this year suggest Gandhi's
popularity has slipped, but we believe her dominance of the Indian political scene is
secure in the absence of another nationally recognized leader. Even so, the deterioration
of the Congress Party's electoral base and organization is likely to reduce the Party's
parliamentary majority in the next national elections. In anticipation of these elections
which must be called by January 1985, two coalitions of non-Communist opposition
parties have emerged with a view to mounting united challenges to the ruling Congress
Party. We expect both groups-one leftist, one rightist-to have difficulty maintaining
unity. In the unlikely event that either coalition should win a plurality or majority of the
vote, we believe it would split over domestic policy differences.
At present, India's international finances are in good shape because concessional
aid and IMF support sustain reserves while increased domestic petroleum production
moderates the need for fuel imports. IMF-mandated policies are not a major domestic
issue because they neither curb private consumption nor employment. Business reaction
to the required liberalization of economic controls and restraint on the government's
domestic borrowing is mixed and therefore is not a major constraint on government
policy. Elite groups see the plight of Mexico and Brazil as a warning of the danger of
accepting US advice to increase foreign commercial borrowing rather than seek
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In our view, there is a slightly better than even chance that within three years
international financial strains will force policy changes such as greater import austerity
or renewed tight controls on business activity that could arouse substantial resentment in
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Mexico
Key Domestic Issues
o Labor continues to support the government but has made it clear that
support is not unconditional.
o Reaction to austerity has been reflected in minor setbacks to the ruling
party in local elections.
o Generally unconnected with national policies, sporadic regional
violence that is typical of the il'lexican political scene continues.
o Political tensions have eased somewhat as a consequence of the
president's political skills and improvements in Mexico's external
accounts.
Comment
Since assuming office on 1 December 1982, President Miguel de la Madrid has
skillfully and decisively moved against the enormous political and economic problems
inherited from his predecessor. His firm commitment to austerity has yielded progress
toward balancing Mexico's foreign accounts and marginally slowing runaway inflation. At
the same time, his tough policies have generally been regarded as fair and have not
provoked unmanageable splits in the cabinet or the ruling party.
The president's solid but undramatic State of the Union Address on 1 September
reassured Mexicans that the crisis will ease under the government's strong leadership.
Nevertheless, holding to the program for the balance of the year will be more difficult,
as it requires further deep government spending cuts, a substantial reduction in the
public sector payroll, and a probable continuing decline in private business activity.
Determination and skillful negotiating tactics have gained the president the
support of organized labor and earned him the grudging cooperation of business and the
middle class. The unions' primary goal has been to maintain jobs for members, and so far
most employment cutbacks have occurred among less skilled, unorganized labor.
Tranquility on the labor front nevertheless remains conditioned on the government's
ability to control prices. Private business has been pleased with wage restraints and the
president's low-key, down-to-business style.
De la Madrid's improving image as a leader reflects his growing ease in office and
his increasing acceptance of advice from well-chosen political and technical advisers.
The president has delivered important speeches, initiated extensive legislative and
administrative reforms, and played a crucial role in shaping the Contadora group's
Central American initiatives. Indictment of a high-ranking member of the previous
administration on charges of corruption is helping dispel skepticism about de la Madrid's
commitment to curb abuses of power.
Adverse public reaction to austerity and past political abuses has been reflected in
municipal election results in several important northern towns, and we expect further
scattered electoral setbacks will greet the government later this year. While
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Mexico - continued -
embarrassing, these opposition victories will be no threat to the political control of
Mexico's ruling party. 25X1
Sporadic regional violence, typical of the Mexican political horizon, has broken
out in several places, and further isolated incidents are probable. Problems generally
involve regional issues and personalities and do not represent reaction to national
policies. Additional incidents are likely in Oaxaca as municipal elections approach in
November. Serious unrest such as rioting in squatter settlements outside major cities has
not occurred, but the de la Madrid government is quietly preparing for such contingencies
and would have little trouble controlling scattered incidents.
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Morocco
Key Domestic Issues
o A heavy foreign debt equivalent to two-thirds of the gross domestic
product has significantly reduced the nation's creditworthiness; foreign
exchange reserves are able to cover less than a week of imports. '
o Debt service costs that have grown to 45 percent of foreign exchange
earnings and chronic current account deficits have forced Rabat to
stiffen austerity measures to secure a new $315 million IMF standby
loan and to seek a debt rescheduling.
o Deteriorating social services and declining living standards are causing
discontent primarily in urban areas.
o Popular outbursts are more likely as austerity continues, and Kim
Hassan Tay have to use his security forces to quell disturbances.
Comment
We believe that the moderate, pro-Western government of King Hassan II is secure
over the short term. Islamic fundamentalists and socialists, though, remain at odds with
the regime. Deteriorating economic conditions are causing increased unemployment; we
are particularly concerned about the growing number of university graduates who lack
avenues into the governmental patronage system. Although it is difficult to determine
the impact of the worsening economy on the average Moroccan, criticism of the regime's
economic policies is growing among organized labor, students, and the unemployed, and
new urban unrest could result if living conditions deteriorate further. We believe that
renewed economic growth and an improvement in social services and living standards are
unlikely in the next several years as austerity measures are pursued. The danger is that
in the interim the economically disgruntled will join with the politically and religiously
Depressed phosphate earnings and the need once again to increase food imports
because of drought have aggravated the government's financial difficulties and compelled
Rabat to seek new external assistance in addition to a recently negotiated $315 million
IMF standby loan. The government's ability to obtain additional loans from abroad will
remain in doubt until Morocco's debt rescheduling is completed. Saudi aid probably will
be resumed because of Morocco's belt tightening efforts but is likely to remain below
previous levels because of Riyadh's decreased oil revenues. Financial pressures could
necessitate a sharp cut in non-food imports. If the King fails to obtain foreign assistance
or if military deliveries are delayed as a result of the government's not meeting
repayment obligations, which it is having difficulty doing, the regime could become the
disaffected and threaten the regime.
The King's reluctance to entertain criticism and advice on the economy, together
with his preoccupation with foreign policy, is increasing his isolation as well as the risk
that remedial economic measures will not be consistently pursued. Although the
government has stiffened austerity measures to deal with its growing. economic problems,
Hassan has been reluctant to follow IMF recommendations, particularly a reduction of
food subsidies. A cut in food subsidies in June 1981 sparked bloody riots in Casablanca in
focus of opposition rhetoric and of anger within the military.
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Morocco - continued -
which 100 people died. We expect that the security forces, which strongly support the
King, would be able to restore order in the event of new turmoil, but only after some
Communal elections in June passed with little disturbance but occasioned an
uproar of allegations of regime interference. Parliamentary elections now scheduled for
1984 may prove more heated and could produce more serious confrontations between
security forces and voters. The economy probably will be a major political issue in these
We do not expect that the government will be compelled by its current economic
problems to alter its Western Sahara strategy in the near term. If Rabat were to sharply
reduce defense spending for the campaign, however, we believe military morale would be
badly shaken. The military also would be disturbed by a political settlement of the
dispute that, in their view, conceded too much to the insurgents.
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Nigeria
Key Domestic Issues
o Opposition claims that last August's national elections were rigged in
favor of the governing National Party will likely promote a greater
.level of political controversy over the next four years than
characterized President Shagari's first term.
o Prolonged austerity could heighten ethnic tensions, especially in the
more economically developed and largely opposition controlled Yoruba
and Ibo states. They could claim that they are being made to bear the
brunt of economic retrenchment.
o Shagari's commitment to genuine austerity and economic reform could
be undermined by pressures within his own party for patronage rewards
and for scrapping or modifying what are perceived to be externally
imposed economic policies.
o Widespread economic protests could erode public support for still
fragile civilian institutions and serve as a justification for a military
Comment
In our judgment, Nigeria's persistent economic difficulties coupled with continuing
controversy over the extent of Shagari's sweep of last August's national elections will tax
the president's considerable political skills as he begins his second term. Shagari has
proven adept in the past at juggling diverse political, ethnic, and economic interests
while maintaining his image as a strong and impartial national leader. We believe his
public support could begin to wane, however, if he fails to act on his campaign promises
to make extensive cabinet changes, curb corruption, create new states, and get Nigeria's
economy moving again. Moreover, now that he enjoys a comfortable legislative majority,
he no longer can blame Nigeria's economic and political difficulties on opposition
Little economically inspired protest has been reported thus far, but we believe
prolonged austerity-if it is perceived as not being applied equitably-could heighten
ethnic tensions, the root cause of most political instability in Nigeria. In particular, we
believe Shagari is vulnerable in urban areas in Yoruba and Ibo dominated states. Many of
these states are still controlled by opposition governors who we expect will attempt to
capitalize on economic hard times by blaming the federal government for their
We do not believe there is,l extensive support
within the military for a coup at this time. Widespread protests over food shortages or
worsening economic conditions, however, could serve as a pretext for an attempted coup
as could persistent political bickering that diverts the federal government from tackling
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Pakistan
Key Domestic Issues
o President Zia ul-Haq announced plans on 12 August to restore the
constitution, end martial law, and reinstate civilian government by
.March 1985. The military apparently supports his measures.
o The left-center, eight-party Movement for the Restoration of
Democracy has rejected Zia's program and begun a civil disobedience
campaign to force him from office. Conservative and religious
politicians are also critical but so far have disavowed the campaign.
o The anti-Zia campaign has accomplished little outside Sind Province
and would have to spread to Punjab before it would threaten Zia's
rule. Widespread disturbances in Sind reflect regional discontent with
the political and economic policies of the Punjabi-dominated
government.
o Students and labor have largely ignored the agitation, but student
organizations may begin protests if Zia carries through plans to ban
college student unions.
o National economic issues have not been a significant factor
contributing to the unrest in Sind. The relative prosperity of the
country has made it difficult for the anti-government forces to carry
the demonstrations to other parts of the country. Even so, social and
economic discrimination against Sinds is a key issue in the current
Comment
President Zia ul-Haq is coping successfully with the current disturbances in
Pakistan, the most serious threat to his rule so far. We believe his regime's capable
handling of serious anti-government rioting in Sind Province and the unwillingness of
Pakistanis in other provinces to join the protest movement increase the chances that Zia
and the army will continue to guide Pakistan's political future for at least the next one to
two years.
o Zia's authoritarian regime has avoided overly repressive policies,
although it has dealt firmly with organized demonstrations. It has
given the country more than six years of domestic stability and
substantial economic progress.
o Zia also has dealt effectively with external threats. He has stood up to
the Soviets on Afghanistan and has improved relations with India. He
has succeeded in gaining major economic aid and arms assistance from
the United States.
The president ultimately depends on the Army to remain in power. We believe
most senior officers support Zia's plan for a phased return to civilian government and a
permanent oversight role for the armed forces. No ruler, however, can be certain of the
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Pakistan - continued -
army's support if it is called upon to put down civil disorders, particularly in the all-
important province of Punjab. 25X1
Zia's main opposition, the Movement for the Restoration of Democracy (MRD), is
poorly organized and lacks both a popular issue or an effective, leader to galvanize a
nationwide anti-Zia campaign. the protest movement 25X1
in Sind Province this summer was launched largely by the Pakistan People's Party of
former Prime Minister Bhutto. The PPP has substantial support among the urban and
rural poor of Punjab but has found it difficult to mobilize this support in the absence of a
strong leader. ~ 25X1
President Zia has promised to hold provincial and national elections by March
1985, amend the constitution to create a strong presidential system, and withdraw
martial law. His statements suggest he will bar hostile opposition parties, including the
PPP, from participating in the elections.
Given the right circumstances, we believe a nationwide opposition movement
could arise rapidly and with little warning. In such an event, the army probably would
replace Zia with another general who would negotiate a return to civilian rule on terms
the army could accept. In our view, the army would attempt to preserve the present US-
Pakistan relationship, but if a Pakistan People's Party government succeeded in taking
over, US-Pakistan ties, as well as Pakistan's stand on Afghanistan, probably would be
significantly weakened.
While the reasonably strong economy is currently a bright spot that Zia can
exploit for political purposes, he will be looking for any danger signals. These include
any serious downturn in the economy that impacts on the cost and availability of
essential commodities and services and encourages urban demonstrations against the
government, and any rapid return of workers from the financially-pressed Gulf state that
would lead to foreign exchange shortages and greater unemployment at home.
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Key Domestic Issues
o Buffeted by internal security, political, and economic difficulties and
by natural calamities, the Belaunde administration, we believe, is
losing popularity and credibility.
o The Sendero Luminoso (SL) insurgent group's expanded operations in
rural Ayacucho and in Lima have heightened public anxiety and not
helped relations between the president and the military, which wants
more unrestricted counterinsurgency authority.
o Unparalleled climatic disasters have aggravated the recession, caused
food shortages, contributed to inflation, and curbed needed export
earnings.
o Growing factionalism in the governing party and the resurgence of the
major opposition party are weakening Belaunde's political base; we
belies may face setbacks in the November municipal elections.
Comment
We do not believe that the insurgent threat or economic pressures will result in a
coup or other major upheaval during the next six months. Also, in our view, the SL's
limited popular appeal and lack of foreign support severely limit its prospects. At the
same time we believe that the insurgents' political-military apparatus is largely intact
despite their recent heavy casualties. We share the Peruvian military's assessment that
eliminating the SL could take two to three years and prove costly.
Public support for decisive action against the SL is widespread, and we believe
Belaunde will soon order the military to take total control of counterinsurgency
operations. The security forces' effectiveness, though, will continue to suffer from
deficiencies in equipment, training, intelligence capabilities, and tactics. We are
concerned that if the security forces employ more brutal methods, they will alienate
local communities and thereby further delay progress against the SL.
Peru's economy is suffering a severe setback owing to natural disasters, depressed
commodity prices, and IMF-mandated austerity programs. Unemployment and food
prices are rising and imports declined by $1 billion in 1982. Bankers have pulled together
a financial rescue package, but Lima's foreign financial position will remain precarious
until exports rebound. Economic contraction and high inflation are sparking protests
against austerity and putting pressure on Belaunde to loosen tough economic policies, a
move that could cause difficulties with the IMF and foreign creditors. The government
reportedly intends to ask the IMF to ease some restrictions on the standby credit,
especially the requirement that the deficit be held to 4.1 percent of GDP. Although
global recovery would make these problems more manageable, grim economic conditions
and increased terrorist activity may undermine investment and force foreign firms to
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Peru - continued -
Belaunde's position will be tenuous, but his greatest asset is the absence of any
alternative; both the military and the opposition are reluctant and ill-prepared to assume
power. The armed forces desire to confine themselves to professional military pursuits
and lack the inclination or confidence to tackle Peru's intractable socio-economic ills.
The leftist coalition is divided and losing popularity. Moderate parties will increase
pressure on Belaunde, but they fear military intervention and the destruction of their
own political future if civilian government is totally discredited.
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Philippines
Key Domestic Issues
o Moderate opposition participation in the 1984 National Assembly
elections, a possible watershed in the liberalization of post-martial law
politics, is in doubt as the opposition renews threats to boycott the
elections in the wake of the Aquino assassination.
o Manila is concerned that the assassination of Aquino will cause
President Reagan to reconsider his planned visit to the Philippines in
November.
o Manila also fears that Congress will alter the terms of the recently
approved $900 million military base assistance package as a result of
unhappiness with Marcos's human rights policies.
o The Philippines' external financial situation has become increasingly
precarious in recent months, and Manila has begun sounding out
Washington for emergency financial assistance.
Comment
Manila has weathered the initial storm over Benigno Aquino's assassination, and
we believe its prospects for continuing to do so over the next few months are reasonably
good. Aquino's death, however, will leave the domestic political environment, the
country's external finances, and Philippine foreign relations unsettled for some time.
the majority of the political opposition- and 25X1
possibly the majority o the population- believe that the government was involved in the
assassination. 25X1
We believe the government is pressing its investigation of the murder with some
vigor, but it has handled public relations poorly. An independent commission of inquiry
was established, but it has had great difficulty filling its membership with credible public
figures. Filipinos appear to expect little from the investigation; the popular views of the
commission's potential for independent inquiry are polarized along the lines of existing
Aquino's death has overshadowed several other recent developments bearing on
domestic stability. Succession jockeying appears to have intensified as a result of the
health problems Marcos experienced in August. Several close associates of the President
apparently assumed the worst about his condition and moved to align themselves with 25X1
Imelda Marcos. Despite constitutional provisions that the Executive Committee serve as
an interim government, many politicians inside the ruling party assume that Imelda
Marcos will take the reins of power in the event that Marcos becomes incapacitated. F-I
Serious infighting had already surfaced in the defense establishment, and it
appears one result is that the military's potential, role in the post-Marcos era may be
significantly increased. Longstanding tensions between Defense Minister Enrile and
Armed Forces Chief of Staff General Ver broke out into open conflict in late July when,
President Marcos summoned Enrile into his office to 25X1
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I Philippines - continued -
question his loyalty and to inform him of an impending reorganization of the defense
establishment. Since Ver became Chief of Staff, he has consolidated control of the
military by placing officers loyal to him in key military units and in headquarters staff
The Philippines' external finances have become increasingly precarious in recent
months with Central Bank liquidity severely strained; its short-term debt of $2.5 billion
requires immediate attention to avoid a foreign exchange crisis. Manila has implemented
new financial austerity measures in an effort to cope, and domestic political reaction to
them has so far been minimal. Fourth quarter 1983 government spending will be sharply
cut back, and the 1984 government budget plans a 34-percent reduction in capital
been too modest to ease pressures on Central Bank foreign exchange reserves. 25X1
Marcos is aware that international attention will be focused on President Reagan's
visit in November. He had expected it to enhance his international status as a statesman
and put the stamp of legitimacy on his government at home. Marcos now almost
certainly fears that events connected to A uino's death may force the cancellation of the
visit. many US banks would interpret a 25X1
cancellation as a sign that Washington lacked confidence in the Marcos government,
leading them to withdraw credit lines. E -1 25X1
After several months of debate within the ruling party, Marcos has yet to decide
on election rules and party accreditation. His challenge is to find a way to
simultaneously ensure a victory by the ruling party, induce participation by the moderate
opposition so as to legitimize a ruling party victory, and appear fair in setting the rules
of the game. Since the assassination, the moderate opposition appears as disorganized as
ever and without a replacement for the charismatic Aquino. Should they decide to
boycott the election, it would cost Marcos the legitimizing factor he so dearly wants, but
it would also ensure the moderate opposition irrelevance in the country's political
future. 25X1
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Saudi Arabia
Key Domestic Issues
o The drop in Saudi oil revenue triggered by a decline in international
demand for oil is confronting Riyadh with its most difficult financial
problems since the oil boom began in 1973.
o To cope with lower revenues, the government is curbing domestic
spending, drawing from its large foreign reserves, and curtailing some
of its foreign aid disbursements.
o Cuts in government outlays are inflicting financial hardships on the
business community, but criticism remains low-key and as yet poses no
serious political problems for the regime.
Comment
The fall in revenue is having a profound psychological impact on the regime.
Whereas many ministries in the past few years had a surfeit of funds. they must now
compete even for routine allocations.
The government is taking a broad approach to ease financial dislocations. In
addition to drawing down foreign assets, the regime is delaying payments to government
contractors-especially expatriate firms-and imposing a moratorium on new government
contracts. Work on non-essential development projects has halted, and new investment
for some oil facilities and other projects is being cut back. The government also is
showing reluctance to maintain existing levels of foreign aid to several traditional
recipients, including Somalia and Morocco.
Fahd is being careful to avoid austerity measures that could provoke political
unrest. He apparently has ruled out cuts in key government subsidies and social programs
that would hurt middle and lower income groups. Saudi businessmen hurt by the
slowdown in contract payments are unhappy, but the King has helped dissipate criticism
by orderin forei n firms to subcontract a larger share of their business to Saudi
companies.
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