THE DECLINING GOLD TRADE IN LAOS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010069-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: May 14, 2010
• Sequence Number: 69
• Publication Date: September 1, 1968
• Content Type: IM

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-Sesra~-
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Declining Gold Trade in Laos
ER IM 68-119
September 1968
Copy NZ). j).-)
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1968
INTELLIGENCE MEMORANDUM
The Declining Gold Trade in Laos
Summary
A sharp decline in tax receipts from gold imports
in the first half of 1968 has complicated the Lao
government's fiscal problems and probably will require
an increase in foreign, particularly US, budgetary
assistance. Laos, one of the two major legal im-
porters of gold in the Far East, is the source of
most 25X1
taxes on gold imports account for an important part
of Lao government revenues. Government revenues,
however, cover only about 45 percent of expenditures,
the difference being made up through foreign aid.
Gold imports into Laos in the first half of 1968
were some 50 percent smaller than in the first half
of 1967. Initially the drop was a result of the
disruption of distribution channels to and in South
Vietnam caused by the Tet offensive. Since the
establishment in March of a two-tiered wcrld gold
market, speculative demand for gold has fallen sharply,
and the continued decline in Lao gold imports probably
reflects this development. The instability of world
free gold markets and the resultant fluctuations in
gold prices in Vientiane and Saigon also may have
contributed to reduced imports of gold through their
unsettling effects on gold traders.
The drop in gold imports has deprived the Lao
government of about $1.8 million in anticipated tax
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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revenues from gold, which had been expected to con-
tribute about 45 percent of total domestic revenues
in fiscal year (FY) 1968.* Although increases in
other government revenues -- mainly customs re-
ceipts -- nearly made up for the decline in gold
revenues, government expenditures were higher than
expected and the Lao budget deficit exceeded the
level on which planned foreign economic aid was
based.
Laos' benefactors are now using the gold prob-
lem as an opportunity to increase pressure on
Vientiane to improve its fiscal structure and per-
formance. Increases in taxes on activities other
than the gold trade, improvements in tax collection,
a crackdown on corruption, and tighter controls on
government spending are being recommended. Action
along these lines is.likely to be meager, however,
and an increase in foreign budgetary support prob-
ably will be necessary to avoid a devaluation of
the kip. Increases in budgetary support probably
will be at the cost of some reduction in develop-
ment aid to Laos.
The Lao fiscal year begins on 1 JuZy of the year
stated.
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Background
1. On 10 October 1958, Laos suspended all li-
censing requirements and controls on financial
transfers and gold movements as part of a monetary
reform directed at the establishment of unrestricted
convertibility of the Lao kip. This action allowed
gold to be imported and exported, subject only to
payment of an ad valorem duty and to a declaration
for statistical purposes. In 1959 the duty on gold
imports was reduced from 20 to 3 percent and gold
was exempted from the 16 percent business turnover
tax. Laos, one of the world's most underdeveloped
nationsy soon became a major legal importer of gold
in the Far East,* although the growth of its gold
market was interrupted in 1960 and again in 1962-64
by political instability. Gold imports into Laos
during 1958-67 are shown below:
Year
Metric
Tons
Year
Metric
Tons
1958
0
1963
7.0
1959
12.4
1964
11.3
1960
16.7
1965
36.3
1961
26.3
1966
53.0
1962
20.1
1967
72.2
2. The increase in gold imports in 1964-67
resulted in large part from the increased demand
for gold in South Vietnam as US dollars became more
available there and Saigon's political future be-
came more questionable. In early 1968, Lao gold
dealers estimated that about two-thirds of their
gold finds its way into South Vietnam. The remain-
der, except for small amounts purchased by Lao
citizens, moves to Thailand, and then perhaps to
Malaysia, Singapore, or India.
Macao, through its close ties with Hong Kong, is
Laos' only important Aszan rival as an entrepot
for gold trade.
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5. Approximately two-thirds of the gold enter-
ing Laos is imported by the Banque de 1'Indochine
(BIC), with most of the remainder handled by two
local Chinese entrepreneurs who rely on the BIC for
banking services. The gold is purchased in London
and delivered to Vientiane by commercial airlines
via Bangkok. Some 20 local dealers in Vientiane
act as middlemen for a host of smugglers, who are
often Vietnamese nationals.
6. Trade in gold has become the largest source
of domestic revenue for the Royal Lao Government
(RLG), and taxes on gold imports accounted for more
than 40 percent of internal RLG receipts in FY 1967.
(For RLG revenue sources in FY 1965-68, see Fig-
ure 1.) A r,cowing demand for gold led the RLG, en-
couraged by the United States and other financial
backers, to boost the customs tax on gold imports
from 3 to 5 percent in May 1964. The duty subse-
quently was raised in frequent steps to its present
level of 8/ percent by April 1967, without any
apparent effect on gold imports. US officials
estimate that there is very little smuggling into
Laos to avoid the payment of the customs tax.
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Gold in 1968
7. Gold imports into Laos declined sharply in
the first half of 1968 as shown below:
Metric Tons
January
6.7
February
3.2
March
3.5
April
3.0
May
1.8
June
1.7
January-June
1968
19.9
a/
January-June
1967
40.1
July-December
1967
32.1
a. Imports decreased to 0.9 tons in
July, but rebounded to 1.3 tons in
August.
8. The sharp decline in February imports prob-
ably reflects the disruptive effects of the Tet
offensive. The restriction of air flights into
Saigon sharply reduced the possibilities for smug-
gling gold. Within South Vietnam the personal
security of gold distributors, like other South
Vietnamese, was endangered, particularly in Cholon,
the Chinese section of Saigon, where a large part
of the Saigon gold market is located and where the
fighting was most intense and prolonged.
9. The continued decline in gold imports since
March is probably explained by other factors. The
Washington agreement of 18 March separated the free
market for gold from the official market and since
then the free market price has fluctuated with
supply and demand. The establishment of this two-
tiered market sharply reduced the speculative demand
for gold. Since March there has been a decline in
gold imports in Hong Kong, where speculative demand
is clearly of considerable importance. The decline
in imports of gold in Vientiane probably reflects
the same factors. Moreover, the increased instabil-
ity of world free gold markets since March has pro-
duced greater fluctuations in the profit margin of
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Lao gold traders and a greater financial risk. The
spread between the large dealers' price of gold in
Vientiane and the price of gold in Saigon in recent
months has been as low as $2.00 per troy ounce and
as high as $8.00 or more between mid-March and June.
10. The Vientiane dealers' selling price for gold,
which stayed in the neighborhood of $1,255 per kilo-
gram ($39.04 per troy ounce) between April 1967 and
14 March 1968, reached $1,500 on 15 March when the
Lundon gold market closed. The BIC also stopped its
sales on 15 March, while other Vientiane dealers
sold from their stocks. By 18 March, after a free
market was established, dealers' prices were fluctu-
ating between $1,450 and $1,500 per kilogram. The
instability continued, with prices ranging from a
low of about $1,340 (possibly even less) in April to
a high of about $1,485 in June. The amplitudes of
the price variations appeared to closely follow those
on the London and Zurich exchanges, as shown in
Figure 2.
Implications for the Lao Economy
11. The drop in gold imports into Laos in the
first half of calendar year 1968 resulted in a
decrease of about $1.6 million (800 million kip) in
gold customs receipts, compared with revenues in the
first half of 1967. The decline in gold duties during
all of FY 1968 compared with FY 1967 amounted to only
about $0.7 million, but an increase of about $1.1 mil-
lion had been planned in the Lao budget.
12. Although other revenues -- principally customs
taxes other than those on gold -- were some $1.6 mil-
lion higher than anticipated for FY 1968, RLG expen-
ditures also increased faster than planned, largely
because of intensified Communist military activity.
Total expenditures probably were on the order of $31.7
million, which resulted in a budget deficit of some
$17.3 million. Such a deficit approximates the def-
icit originally projected by the RLG but is larger
than the $16.8 million limit agreed to by the RLG as
a basis for budget support assistance from the United
States and other aid donors in 1968. Moreover, the
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MILLION KIP
000 r-
80001
REVENUE SOURCES OF THE ROYAL LAO GOVERNMENT
FY
FY 1965-68
rK *~
Customs Taxes other
than on Gold
Customs Taxes
on Gold
6~~1
FY 1968
(Preliminary)
7401
r-
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GOLD PRICES: Vientiane and London, March-June 1968
$ US/Kilogram
1600 r-
and Zurich,* 18 March-1 April 1968
London Market Closed
15 March- I 'April
10 20 1 10 20 1 10
FEBRUARY MARCH APRIL
?Prices on the Zurich cold market closely paralleled those in
London alter the London gold market reopened on I April
1 10 20
MAY
1 10 20
JUNE
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FY 1969 budget proposed by the RLG to its national
assembly in July 1968 -- which is less sanguine in
its projections of gold imports -- projects a deficit
of $16.8 million compared with the $15.8 million def-
icit limit agreed to earlier by the RLG and the
foreign aid contributors.
13. The budget deficit is closely linked to Laos'
requirements for foreign exchange because Lao govern-
ment expenditures are the country's predominant source
of money income. Since most of the economy is geared
to subsistence production, a very large share of money
income is spent on imports, the bulk of which are
financed by foreign aid. According to official Lao
statistics, which are notoriously inadequate, in 1966
imports were $23.9 million and exports only $1.5 mil-
lion. Taxes on the gold trade covered another $3.8
million worth of imports. A large and growing share
of foreign aid to Laos (about 25 percent of the total
in 1967) has been provided in the form of budget
support assistance through the Foreign Exchange
Operations Fund (FEOF).*
14. The increase in Lao government expenditures
in 1968 is tending to increase commercial activity
and the demand for imports beyond expected levels at
a time when foreign exchange earnings from taxes on
gold are declining. In consequence, FEOF will have
to provide more foreign exchange unless the kip is
devalued or something is done to reduce the budget
deficit. Imports could be reduced through devaluation
or by cutting the budget deficit. Devaluation, how-
ever, might well trigger a rapid inflation and under-
mine morale in a country where most wage earners are
government employees who already have been complain-
ing about inadequate salaries for years, and on whom
the government depends heavily for political support.**
* FEOF, which receives contributions from the United
States, the United Kingdom, Australia, France, and
Japan, was established in 1964. Within agreed limits
it makes foreign exchange available on the open mar-
ket in Laos without restrictions as to the individual
amount or to the purposes for which it may be used.
The United States has been the primary donor to FEOF,
accounting for more than 60 percent of the total
contributions of almost $60 million to FEOF in cal-
endar years 1964-67. Total US economic aid to Laos
since 1946 has amounted to almost $600 million.
Total US military aid is approaching $500 million.
** The cost of living in Vientiane, which approxi-
mate Zy quadrupled [footnote continued on p. 8]
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15. In preference to devaluation, FEOF has pre-
scribed the prompt implementation of measures to
improve Laos' fiscal structure and performance.
Foremost among these measures is a crackdown on the
corruption prevalent at the highest official levels,
including the general staff of the Royal Lao Army.
Military corruption includes illegal traffic in opium
(and infrequently gold), the smuggling of liquor
and cigarettes, the utilization of military aircraft
for smuggling, and budgeted expenditures covering
7,000 soldiers who could not be specifically identi-
fied. Additional steps needed to bring the Lao
economy into line include the following: a tighten-
ing of tax collection procedures; increases in exist-
ing taxes, particularly on imports other than gold
and on real estate; a reduction of spending on con-
struction and nonessential military outlays; and a
halt to the rapid growth of the government's civil
payroll.
Outlook
16. It is unlikely that gold trade in Laos will
soon regain its former high level. In recent weeks
the two-tiered world market has seemed more durable
and the prospects for an increase in the official
price of gold more remote. Consequently, the spec-
ulative demand for gold probably will remain depressed,
barring a new dollar or sterling crisis. Moreover,
Vietnamese Communist military activities in South
Vietnam threaten to continue disrupting the rarket
for gold there. The RLG, as noted, has taken account
of these conditions and has reduced its reliance on
gold in its FY 1969 budget. Revenues anticipated
from the gold tax in FY 1969 are based on average
monthly gold imports of 3.2 tons compared with the
6 tons a month projected in the FY 1968 budget and
the 4.3 tons per month actually received. The RLG
currently is negotiating with a Lao-Thai group which
would guarantee Laos gold imports of at least 3 tons
per month in return for a monopoly on gold imports
into Laos.
17. Laos probably will be able to struggle through
its current economic crisis without being forced to
devalue its currency, primarily because foreign aid
in the period 1962-64, when the external value of
the kip also decrease-' precipitously, increased by
the relatively moderate amount of 30 percent in
1965-67, when FEOF was keeping the exchange rate
stable.
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is still on tap to underwrite Lao deficits and thereby
underwrite Lao political stability. On the other hand,
long-term prospects for economic growth are bleak.
The allocation of foreign funds for budget stabiliza-
tion through FEOF may be at the cost of funds origi-
nally planned for development projects. Although
some progress can be expected in Laos' own efforts
to improve fiscal performance and reduce corruption,
these efforts will be hindered, as ever, by bureau-
cratic inertia and by the reluctance of many Lao
officials to put aside their own vested interests in
favor of the nation's needs. Thus, although the RLG
is currently sponsoring outspoken indictments of
corruption and tax evasion in the Vientiane press, a
proposed capitation tax has been rejected by the RLG
assembly and higher taxes on gasoline have been post-
poned until October, after the rice crop is in, when
people will have more cash available and the polit-
ical reaction will be more subdued.
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