CENTRAL AMERICA: BACKGROUND ON ENERGY AND ECONOMIC DEVELOPMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001200630001-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: September 1, 2010
• Sequence Number: 1
• Publication Date: November 21, 1984
• Content Type: MEMO

Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
" I I
Central Intelligence igence Agency
21 NOV 1984
MEMORANDUM FOR: William F. Martin
Special Assistant to the President for
National Security Affairs and Senior
Director for Coordination
SUBJECT: Central America: Background on Energy and
Economic Development
Attached, per your request, is our assessment of the
economic and energy situation in Central America. If you have
any questions, please call
Attachment:
Central America: Back round on Energy and Economic
Development GI M 84-10207, November 1984,
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
SUBJECT: Central America: Backgroung on Energy and
Economic Development
OGI/SRD/EMB, I(15 Nov 84)
Distribution:
1 - William F. Martin
1 - SA/DDCI
1 - ExDir
1 - DDI
1 - DDI/PES
1 - NIO/ECON
1 - DD/OGI, D/OGI
1 - CPAS/ISS
1 - OGI/PG/Ch
8 - OGI/EXS/PG
1 - Ch/sRD
1 - SRD/EMB
1 - ALA/MCD/CAN
1 - ALA/MCD/CAS
1 -
1 -
1 - D/ALA
25X1
25X1
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
' I I
Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
15 November 1984
Central America:' Background on Energy and
Economic Development
Summary
.Central America depends on commerical energy--petroleum and
electricity--to satisfy approximately 45 percent of total energy
needs. Wood and agricultural residue supply the balance and are
used primarily in the residential sector. Petroleum use has more
than doubled since 1970 and accounts for at least 90 percent of
total commerical energy consumption in most countries. Last
year, the region imported almost 35 million barrels of oil at a
cost of about one billion dollars. Commercial energy use is
expected to rise as energy intensive industries and the
transportation sector develop, and as the region moves away from
non-commercial energy to prevent deforestation and soil erosion.
By the year 2000, oil demand could more than double, diverting
foreign exchange from more beneficial uses. Improvements in
energy use, assistance in exploration and development of
indigenous resources, and the creation of an attractive
investment climate could help lessen the financial burden on
This memorandum was prepared by
Branch, Office of Global Issues;
Energy Markets
Central America
Office of African and Latin American Analysis. The Information
contained herein is updated to 15 November 1984. Comments may be
directed to Chief, Strategic Resources Division, on
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Central America: Background on Energy and
Economic Development
Overview
The six Central American countries examined in this
memorandum primarily depend on petroleum, electricity and wood to
meet their energy requirements.' The transportation and
industrial sectors are the major consumers of petroleum and
electricity, while wood and other non-commercial energy sources
are used primarily for heating and cooking by the residential
sector. The use of non-petroleum fuels currently has several
drawbacks. Hydroelectric production varies with seasonal and
yearly river fluctuations and deforestation and soil erosion are
becoming more common in this region as wood usage takes its
toll. To overcome these problems petroleum is becoming an
increasingly important component in the energy balance of these
nations. Guatemala is the only oil producer in the region;
consequently, these countries must rely on imported oil to meet
domestic requirements. Under the San Jose Accord, oil supplies
are purchased from Mexico and Venezuela on a concessionary
basis. Last year the region imported a total of about 35 million
barrels of oil at a cost of about 1 billion dollars. By the year
2000 oil demand could more than double, diverting foreign
exchange from more beneficial uses.
Economic Background
Economic development in Central America varies considerably
from country to country, but all share important similarities and
linkages that provided the foundation for their fast-paced
economic expansion between World War II and 1978. This common
growth path was built on: periodic booms in agricultural
commodity prices; dynamic, regionally protected manufacturing
sectors; and heavy foreign borrowing. During 1961-78, Central
America economic growth averaged about 5.6 percent per annum--
above the rate of LDCs as a whole. This strategy failed,
however, to produce enduring, broad-based economic expansion.
(Panama is the only exception to this general pattern, and is
treated separately below).
Agriculture, the keystone of the region's economic
development, remains the primary source of export earnings and
employment. Despite wildly fluctuating international prices for
major commodities--coffee, sugar, bananas, cotton and meat--the
region has maintained its longstanding dependence on these items
which account for more than seventy-five percent of export
'This memorandum covers six Central American countries: Belize,
Costa Rica, El Salvador, Guatemala, Honduras and Panama.
25X1
25X1
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 ""--
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 25X1
earnings. Indeed; a three-fold increase in coffee and sugar
prices in the
mid-1970s helped compensate for the 1973 OPEC oil
F__ I
Agriculture has also provided the springboard for
industrialization. Roughly 25 percent of regional economic
activity was directly attributable to agriculture in 1983, and 75
percent of manufacturing output was directly related to
agriculture as well. Food processing accounts for nearly half of
manufacturing activity; textiles, wood, paper, and rubber
production account for another quarter. The nascent
manufacturing sector provided the most energetic component of
regional economic growth during the 1960s-70s, as Central
America's industrial base grew 7 percent annually.
Industrial performance was also greatly spurred by the
formation of the Central American Common Market (CACM) in 1960.
The CACM eliminated intraregional tariffs and trade restrictions
and established a stiff common tariff on foreign manufactures.
As a result, intraregional trade boomed and currently absorbs
virtually all the region's manufactured exports. At the same
time, however, these countries failed to develop products that
would be competitive outside the protected CACM market.
As in many LDCs, rapid economic growth was financed in large
measure by foreign borrowing. Wide variations exist, however;
while Costa Rica's debt service burden is a major cause of its
current foreign payments crisis, Guatemala has largely escaped
debt-service problems.
Shaken by Change: 1979-1984
Regional economic growth fizzled in 1979 when a dramatic
deterioration in external terms of trade coincided with sustained
insurgent activity in Nicaragua, El Salvador and Guatemala.
Spillover effects from the conflicts dampened foreign investor
interest throughout the region. The Central American current
account deficit rose to more than $2 billion in 1981 following a
50-percent drop in real coffee prices and a near tripling of
energy bills over the previous two years. By the end of 1983,
total import volumes were only about half of 1978 levels.
Manufacturing withered, in part due to import declines but also
because of inter-CACM problems. Mounting payments arrearages
between member countries and exchange rate imbalances are
continuing to prompt frequent trade and border closures. As a
result, inter-CACM trade has fallen 35 percent in real terms
since 1980. Today, we estimate that overall economic activity in
the region is about 20 percent below its 1979 peak, a drop of
more than one-third in per capita terms.
During 1984 the economies in the region have enjoyed a
slight recovery, the first in four years. We project that these
six country's economies will grow an average 1-2 percent. This
improvement results from marginally better export markets, US aid
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 25X1
to finance raw materials imports and some progress against the
insurgencies in El Salvador and Guatemala. Population growth of
3 percent annually, however, will mean a continued decline in per
capita output.
Panama: A Special Case
In contrast to some of its neighbors, Panama's prosperity is
closely linked to the performance of its service industries,
particularly finance and transportation. Nongovernmental
services account for roughly 60 percent of its $4.2 billion
GDP. Panama City has a thriving financial industry with a large
number of foreign commercial banks. In fact, Panama has become
the region's financial center, with billions of dollars flowing
into its banking system from abroad. The two key stimulants to
the development of Panama's large financial sector have been:
o Use of the US dollar as the local currency.
o Strict banking secrecy laws that make Panama an attractive
The transportation sector centers on the Panama Canal.
Tolls for transiting the Canal earned Panama some $430 million
last year--10 percent of total GDP. An oil pipeline built across
the country in 1982 to transship Alaskan oil to the US east coast
provides another 5 percent of GDP. Agriculture and mining, in
contrast to the other economies in the region, account for a
total of only 10 percent of GDP and manufacturing contributes
another 10 percent.
In 1983, the world recession and general decline in shipping
helped to cut Panamanian real GDP by about 2 percent. Since the
US economy has picked up this year, however, we believe that
Panama has resumed slight positive growth.
Energy Supply and Demand
Total energy consumption for this region has increased by 48
percent, rising from about 52 million barrels of oil equivalent
in 1970 to about 76 million barrels of oil equivalent in 1981--
the last year for which data on all fuel types are available.
From 1970-1978 energy demand grew by an average of 4.5 percent
per year. As a result of rising prices and deteriorating
economic conditions, energy use first slowed and then declined
slightly after 1978. According to United Nations statistics,
during 1979-1980 total energy demand grew by an average of only
2.5 percent per year. In 1981 total energy demand for the region
dropped by about 1 percent, with Belize, Guatemala and Panama
recording about a 3 to 4 percent drop in total energy demand.
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Commercial Energy
Commercial energy as a percentage of total energy use
averages about 45 percent for the region compared with an average
of 40 percent in 1970. Costa Rica and Panama, two of the more
developed countries, depend on commercial energy to satisfy about
70 percent of total energy demand. Guatemala, which has shown no
trend toward urbanization, relies the least on commercial
energy.
Total commercial energy use increased about 73 percent
between 1970 and 1981, according to United Nations statistics.
The annual growth rate in commercial energy demand averaged about
6.4 percent during 1970-1979. In 1980, however, commercial
energy demand grew by only 1 percent and in 1981 demand decreased
by 2 percent. Despite this overall growth, annual commercial
energy use per capita in 1981 ranged from about 1 barrel of oil
equivalent in El Salvador and Guatemala to 5 barrels in Panama,
extremely low when compared to per capita energy consumption of
about 50 barrels of oil equivalent in the United States.
Petroleum use has more than doubled since 1970 and accounts
for more than 90 percent of total commercial energy consumption
in most countries, including generation of about 40 percent of
all the electricity produced in the region. The transportation
and industrial sectors are the largest oil consumers. All of the
countries except Guatemala are 100 percent dependent on
imports. Proved oil reserves in Guatemala total less than 50
million barrels and production is a scant 5,000 b/d, representing
about 20 percent of oil consumption.
Electricity generated from non-petroleum sources has almost
tripled since 1970 and is expected to continue to rise as this
region tries to diversify its energy supplies. High annual
rainfall and steep terrain provide Central America with a large
resource base for hydroelectric development. Although accurate
figures are difficult to obtain,
potential hydro-power capacity for the region to be over 25,000
megawatts (MW), ranging from about 10,000MW in Guatemala to under
1,500MW in El Salvador. Hydroelectricity currently accounts for
almost 60 percent of total electric power compared to 54 percent
in 1970. Costa Rica is the largest consumer of hydro-power which
satisfies an estimated 90 percent of total electricity demand.
.Most of the Central American countries also possess proven
or potential geothermal resources. One study estimates the
region has about 3,000MW of geothermal potential. High heat flow
is commonly found in areas of the region's volcanoes and
mountains. Geothermal development in El Salvador is most
advanced and accounts for approximately 25 percent of total
electricity demand. Domestic supply is expected to grow with
increases in installed hydroelectric and geothermal capacity;
however, it appears unlikely that oil-based electricity
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
generation will be entirely replaced. According to one study,
future growth rates, including petroleum-generated electricity,
are estimated to range from a low of 7.1 percent in Costa Rica to
a high of 10.0 percent in Guatemala. Although these estimates
would seem to be high, they are lower than historical growth
rates. Moreover, these projections envision large hydrolectric
expansions in Costa Rica, Guatemala, and Panama and smaller ones
in Nicaragua, Honduras and El Salvador.
The use of solid fuels has not been significant in the
energy balance of these countries to date. Coal reserves have
been largely unexplored. Although significant deposits have not
been found, small amounts of lignite appear throughout the
Non-Commercial Energy
Non-commercial energy--relatively abundant and cost free--
increased by about 35 percent between 1970 and 1981, and
continues to be a mjor source of energy in the residential and
commercial sectors. Its share of the total energy mix, however,
has fallen from an average of about 60 percent in 1970 to
approximately 55 percent in 1981. According to one study, non-
commercial energy demand will continue to grow at the rate of_,_
population growth through to the year 2000. Forest land and
agricultural residue from the area's coffee, banana and sugar
industries provide a vast biomass resource. The more urbanized
countries such as Costa Rica and Panama rely less heavily on non-
commercial energy to satisfy their energy needs. At the other
extreme, according to a State Department estimate, about 90
percent of the rural population in El Salvador relies exclusively
on wood. The residential sector in Guatemala is also primarily
d b- f4 --
-- a -I---_ ,
fuel
e
ood
Balance of Payments, Oil Imports, and the San Jose Accord
We estimate that in 1984 the region will incur a total trade
deficit of 51.3 billion with exports of $4 billion and imports of
$5.3 billion. Oil bills will probably amount to about Si
billion--accounting for about 15 percent of total commodity
imports. Concessionary oil financing from Venezuela and Mexico--
the two countries that supply the majority of oil to the region--
ill
w
c actual oil expenditures somewhat below this total.
.The Mexican-Venezuelan San Jose Accord, which includes all
countries under consideration here except for Belize, has
cushioned the impact of the 1979 oil price shock on nine Central
2Non-commercial energy is defined as the use of wood, charcoal
and vegetable residue.
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
American and Caribbean countries. The accord grants loans--for a
five-year term at 8 percent--covering 20 percent of the oil's
price. Furthermore, should the beneficiary invest the money in
long term economic development projects--especially in the energy
sector or to promote regional economic integration--the terms of
the loan can be extended to 20 years at 6 percent. Preference is
also given to projects that incorporate a major portion of goods
and services from Mexico and Venezuela.
Mexico and Venezuela handle the financing details somewhat
differently. Importers of Venezuelan oil pay 100 percent of
their bill in dollars, of which 20 percent is deposited in the
beneficiary country's account at the Central Bank of Venezuela.
Half of the money is deposited in non-convertible bolivares, and
half in dollars. Beneficiaries repay in whatever currency they
draw down. Mexico, by contrast, requires cash for only 80
percent of the oil bill, and accepts repayment completely in
In practice, the beneficiaries have not used their credits
to finance energy projects. Since 1980,
Mexico has received only ree or four proposals
to convert the credits into long term loans. All proposals have
been returned to the beneficiaries for additional work and none
Outstanding Debt
A large external debt of approximately $12 billion continues
to burden the Central American economies and debt service
payments have become harder to meet because of declining export
earnings. Costa Rica, Panama, and to a lesser extent Honduras
are the most seriously affected, having debt service ratios
exceeding 20 percent. The debt burden is less significant in El
Salvador, Guatemala, and Belize where debt service ratios are
less than 15 percent. Since none of these countries have been
able to service their debts through expanded exports, they have
had to cut back on imports. In the process, imports of capital
goods and crucial production inputs have been reduced, thereby
di
i
mm
ng the prospects for future growth.
Domestic spending has been cut and taxes raised under both
International Monetary Fund (IMF) and self-imposed austerity
programs. The adjustments have had a high social cost and are
often blamed for rising unemployment and declining living
standards. With the exception of Belize, all of these countries
have had an IMF program in the last two years. They are all,
including Belize, at various stages of negotiating standby
agreements with the IMF for 1985, but growing political
opposition will hinder future economic adjustments.
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 25X1
Demographic Projections
The six countries have a population of 22 million that is
growing 3.1 percent annually. The more developed countries--
Costa Rica and Panama--have the lowest population growth rates at
2.5 percent and the poorest country, Honduras, has the highest
growth rate at 3.5 percent. Total population is expected to grow
to nearly 35 million by 2000.
With the exception of Guatemala, the countries are expected
to continue a long-run trend toward increased urbanization. The
region's population is approximately 40 percent urbanized. The
urban growth rate is 4.1 percent compared to only 2.3 percent for
the rural population. Guatemala is the least urbanized and has
shown no trend toward urbanization. The 33 percent urban
population in Guatemala is unchanged from the 1960 level.
Energy Demand and Development
The transition from non-commercial energy to commercial
energy is a natural progression as an economy develops. The use
of commercial energy is needed to forestall deforestation and
soil erosion. Moreover, the rural population may realize an
increase in productivity as the time usually spent collecting___
wood and agricultural residue is made available for more
economically productive applications.
Movement away from non-commercial fuels, development of more
energy intensive industries, and the increase in the use of
energy consuming durable goods like automobiles contribute to
increased energy use during the development process. This
partially explains the higher energy/GDP ratios common to LDCs
when compared to developed countries. Consequently, it is quite
likely that in a healthier economic environment, energy demand in
As a result of rising energy use, oil demand in the region
is expected to increase significantly. According to one study,
it is expected to rise by between 3.6 and 5.4 percent per year
and the region may require more than 200,000 barrels per day
(b/d) in the year 2000--compared to the current 95,000 b/d. Due
to the financial conditions prevailing in these countries and
their external debt situation, we believe it would be difficult
for these countries to finance energy imports at this level.
Failure to import adequate amounts of oil could be one factor
which might hinder future economic development.
Energy Strategy for Central America
To avoid increased reliance on imported oil, several steps
could be taken to help these countries develop along more energy
efficient lines:
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 25X1
o Energy Planning. Tracking and predicting energy demand for
these countries has been a difficult if not an impossible
task. During the past 10-13 years demand has often been
erratic and incongruent with the rate of change in GDP or in
the level of prices. Energy statistics from these countries
have been unreliable, incomplete and sometimes
nonexistent. Many of these countries are without a formal
energy policy or a reliable system for retrieval and
analysis of raw energy data. An attempt to develop a system
of collecting accurate data on energy use in these countries
could result in more efficient monitoring and planning of ~-%1A
o Development of Indigenous Resources. It is inevitable that
these countries will continue to incur large financial
burdens unless indigenous resources are found and
developed. Assistance in exploration and development of
indigenous resources within these countries is a necessary
first step toward reducing import expenditures. To develop
these supplies would require accurate resource assessments,
including establishment of laws and conditions creating a
favorable investment climate for the private sector. 25X1
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1 25X1
Central America
Projected Petroleum Demand in the Year 2000
(million barrels)
Guatemala
El Salvador
Honduras
Costa Rica
PanamaC
Total
Case IIb
(these projections are based on 1977/78 oil prices and GDP growth
rates of 5-6.7 percent.
aCase I: Income elasticity = 1.35;
b Ca s e II: Income elasticity = 1.00; > Price Elasticity = -.32
Clncludes the area of the Panama Canal but excludes sales to
ships using the canal.
25X1
25X1
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Central America: Estimated Energy Consumption
1981
(thousand barrels oil equivalent)
Total Energy CaQnercial Energy
All Per
Fuels Oil Capita
Non-Ccnmercial Energy
Belize 1020 447 447 2.7 573
Costa Rica 9988 6751 5424 2.9 3237
El Salvador 11061 5234 4340 1.1 5827
Guatemala 28958 8437 8239 1.2 20521
Honduras 12435 4567 4171 1.2 7868
Panama 12634 9031 8261 4.7 3603
Total for Region 76096 34467 30882 N/A 41629
NOTE: Data are based on UN Statistics. We are currently updating these figures.
NA = Not applicable
25X1
- Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Central America Economic Indicatorsa
1983
Mer
Tra
GDP Bal
chandise
de
ance
Net Oil
Import
Bill
External
Debt
Population
(millions)b
Belize
176
-29
22
67
Costa Rica
3040
-132
150
3500
El Salvador
3730
-132
120
1000
Guatemala
8940
-100
180
1500
Honduras
-82
128
2000
Panama
-916
253
3500
2.0
Total
-
1391
aMonetary terms are in thousands of 1983 US dollars.
bPopulation figures are as of 1983.
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Percentage of Total Energy Use by Source
Central America
Non-Commercial
Other Commer.
4.0%
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
 Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1
Iq
Next 14 Page(s) In Document Denied
Sanitized Copy Approved for Release 2010/09/01 : CIA-RDP85T00287R001200630001-1