THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020042-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: April 12, 2010
• Sequence Number: 42
• Publication Date: September 1, 1971
• Content Type: IM

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Secret
Intelligence Memorandum
The Economic Situation In South Vietnam,
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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 794I, 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.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1971
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Highlights
1. The government plans to implement a number of major economic
reforms immediately after the presidential election. These include
devaluation,, tariff and domestic tax revisions, and a pay increase for
government employees. To lay the groundwork for these reforms, some
important monetary measures were taken last month.
2. For the second consecutive year, these was a substantial increase
in Vietnamese agricultural production. The 9% growth in output in 1970
was due mainly to sizable gains in rice and rubber production.
3. Price increases in Saigon have accelerated somewhat in recent
weeks. Prices rose about 5% between the end of July and :nid-September,
compared with only 4% during the first seven months of the year.
4. The money supply, which was stable from January through April
,
increased almost 5% during May-July. The growth of private sector credit
has been a major expansionary factor. The recent monetary measures should
offset this tendency.
5. After hitting an 18-month low of 347 piasters per dollar in late.
August, the black market price of dollars in Saigon rose to 361 piasters
by mid-September. The turnaround probably reflects uncertainty
surrounding the upcoming election.
6. ,,harts on foreign exchange reserves, money supply and prices
,
import licensing, gold and currency prices, and the government budget
Note: This memorandum was prepared by the Office of Economic
Research.
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Discussion
Economic Reforms - Present and Future
7. For some time, the Vietnamese government has been formulating
a major economic reform package to be implemented after the presidential
election. To assure that the economy is on an even keel for these reforms
(some of which may create inflationary pressure), the government took
significant monetary measures in August. More recently, President Thieu
has tentatively approved the timing and substance of the post-election
measures, which will be much broader in scope. They are designed to
stimulate economic development, improve morale of government employees,
and increase government revenues.
8. To reduce inflationary pressures over the long run, the government
last month placed greater restrictions on loans and raised interest rates on
savings. The ratio of loans to savings and time deposits for commercial
banks was lowered from 70% to 65% and the ratio for demand deposits
from 50% to 40%. Interest rates on treasury bills were increased two to
three percentage points, depending on the length of maturity. For example,
the annual interest rate on a 3-month bill was raised from 12% to 15%
and on a 12-month bill from 18% to 20%. On 1 August, commercial banks
also increased interest rates on savings and time deposits. Ordinary savings
deposits now earn 12% rather than 10% per year. Interest rates on 3-month
and 12-month time deposits were raised from 14% and 20% to 16% and
21%, respectively. The measures should slow the expansion of private credit,
which already has increased 20 billion piasters, or twice the amount
projected last spring for all of 1971.
9. Thieu's economic advisers apparently feel that strong economic
measures can more easily be taken while the country is still absorbed in
the turmoil of the presidential election. Thus much of the reform package
is scheduled to be enacted immediately following the 3 October balloting.
The major features are (a) devaluation, (b) a government wage increase,
and (c) new, simplified tariff and domestic'tax schedules. These provisions
have been agreed upon, but some of the specific details probably will not
be firmly settled until closer to the date of implementation. Almost all
of the measures except domestic tax reform apparently can be enacted
without legislation, but the government plans to ask the National Assembly
for ex post facto sanction of tariff reform and a change in the official
exchange rate.
10. According to the most recent reports, the planned reforms
affecting foreign trade and finance will maintain, at least temporarily, the
-2-
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existing multiplicity of effective exchange rates. For most transactions the
piaster will be devalued from the current rates of 118 and 275 to
400 piasters per dollar, or even above the current black market rate. The
400 rate will apply to exports(1) and all government-financed imports
(about half of total imports). It also will apply to invisible transactions,
including purchases of piasters by American personnel in Vietnam. Imports
financed by the United States under the Commercial Import and Food for
Peace Programs will come in at the rate of 250 piasters as opposed to
the current rate of 118 piasters per dollar. US government purchases of
piasters for official use probably will remain at the official exchange rate
of 118 piasters per dollar at least until the end of the year. By then,
Vietnamese officials hope to have National Assembly approval for changing
the official exchange rate to 400 piasters per dollar.
11. The increase in the cost of imports resulting from devaluation
will be offset to some extent by a new tariff schedule that will reduce
taxes on all imports. In fact, a large portion of total imports will be tax-free
once the reforms are enacted. A simplified tariff schedule -- with five rates
ranging from 0% to 200% - will replace the existing multi-rate customs
and austerity taxes. Until it proves possible to pass tariff legislation to this
effect, the new schedule will be enacted thrcugh subsidies. Protection for
domestic producers will be provided by a perequation tax of up to 25%,
which will be granted only upon review of individual applications.
i 2. Despite the reduction in import taxes and the possible decline
in total imports because of devaluation, government revenues from imports
are expected to increase. This is because revenue from exchange rate
margins(2.) will displace some of the customs receipts, and collection of
revenue through the banking system is much easier than through the customs
bureau, which has been notoriously corrupt. In addition to lessening tax
evasion, a simple tariff schedule with lower rates could be a useful first
step toward bringing domestic and foreign prices into closer alignment and
encouraging a ri,are rational resource allocation.
13. Other anticipated measures affecting imports should eliminate
restrictions that lead to smuggling and graft. Import prohibitions - mainly
on luxury goods - will be lifted in most instances. The general licensing
1. An exchange rate of 350 piasters per dollar already is in effect for
most exports as a result of the government's move last June to stimulate
exports by granting a 75, piaster subsidy.
2. The exchange rate margin, i.e., the difference between what the central
bank pays for dollars and what it sells them fbr, is he government 's source
of revenue from the banking system.
3 -
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system that was introduced in June will become the rule for all
government-financed imports, except a few bulk commodities. This system
greatly simplified import procedures and reduced opportunities for graft
by licensing officials.
14. A pay raise for government employees has been a likely possibility
for several months. Now that Thieu is running unopposed, he apparently
has decided the pay increase can wait until after th., election, when it could
offset some of the unfavorable impact of devaluation. The scheduled pay
raise will increase the government payroll 20%. Employees' base pay will
be raised, and for the first time there will be combat pay allowances for
infantrymen and incentive allowances for such civil servants as tax collectors
and police.
15. On the domestic tax front, the government apparently will submit
a series of proposals to the National Assembly for simplifying and revising
various indirect taxes. The legislature already is considering a revision of
the income tax.
16. Should these various proposed reforms occur as scheduled, the
Vietnamese government will have introduced its sixth major economic policy
package within the past 12 months. Action began in September 1970 with
the interest rate reform and was followed in October by a partial
devaluation, advance deposits on imports, higher official rice prices, and
a government pay increase. In March 1971, rice prices were again raised,
some import taxes were increased, and interest rates on treasury bills were
substantially increased. Finally, the general licensing system for imports was
instituted in June, and the measures described above affecting savings and
credit were taken last month.
Agricultural Production - 1970
17. Following a 12% increase in 1969, agricultural production in
Soath Vietnam rose 9% last year. This substantial growth was largely the
result of sizable gains in the two major crops - rice (12%) and rubber
(13%). Unlike 1969, livestock production. apparently increased very little
in 1970. The number of hogs grew only 2% and the number of chickens
declined 4%. The total cultivated area increased 3% in 1970 as a result
of a like increase in the area planted to rice. The area planted to crops
other than rice held steady after declining for six years in a row.
18. According to. tatistics available from the Ministry of Agriculture
(see the table), there also were impressive increases in the output of crops
such as fruit (8%) and coconuts (20%). Both rubber and sugar cane
production rose for the iirst time in mart' years, although output still was
.4_
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Thousand Metric Tons
1964
Rice (paddy) 5,185
Sweet. potatoes. 301
Manioc 289
Corn 46
Peanuts 36
Fruits 526
108
Coconuts (million 141
nuts)
Tobacco
7
Tea 5
a. Except as noted.
1968
1969
1970
4,366
5,115
5,716
235
226
220
260
234
216
32
31
31
32
34
32
420
440
472
193
235
218
111
98
118
8
8
8
5
5
5
~`~
~e
33
much less than half the prewar level. The decline in output of crops such
as sweet potatoes and manioc, however, continued in 1970. As farmers
switch to more profitable crops, this trend is likely to continue.
m yields, but bad weather may have been a factor.
espi e a sizable
increase in planted area. 'mere is no ready explanation for the sharp decline
. iv-r auu
1969, but declined 7% in 1970. This decline occurred d 't
19. The most surprising statistic is that showing a de
r%- .. cline in vegetable
.... ~.. at__
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Output of Selected Agricultural Products
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20. The Directorate of Fisheries has reported a record high catch for
1970. The marine and fresh-water fish catch increased 24% in 1970 to
577,000 metric tons. The number of fishermen rose about 14%, and the
expansion and modernization of the fleet continued.
21. Saigon retail prices rose 2% during the two weeks ending
13 September, bringing the increase for the year to 8.7%. Reflecting an
acceleration in price increases, the USAID index rose about 5% between
the end of July and mid-September, compared with only 4% during the
first seven months of the year. At this point, it is difficult to pinpoint
the reasons for the acceleration, but there have been indications that concern
over political events has led to some hoarding. The only substantial price
changes have occurred for vegetables, and these probably are at least partly
the result of seasonal factors. During the week ending 13 September,
vegetable prices rose as much as 50% in some cases and declined as much
as 14% in others. Continuing a slow but steady increase that began in April,
rice prices rose 2% during the week. The price of the grade of rice reported
in the USAID index increased about 13% betwee;i March and mid-August
and probably has risen another 5% or 6% since, then. Paddy prices, which
reportedly have increased even more' during the period, are expected to
drop when the harvest gahis momentum fate this month.
22. Unlike the general price index, the USAID index for imported
goods fias been quite stable in recent weeks. During August it rose less
than 1%. Almost all of the 11% increase in the index this year occurred
during the first four months.
Money Supply
23. The money supply increased another 1% in July following a 3%
increase the previous month.(3) The money supply is now 16.1% greater
than at the end of 1970. Although it has increased only 4.6% since the
end of January, all of that increase occurred during May-July. Since January,
credit extension to the private sector has' been a more significant factor
in expanding the money supply than the financing of government
operations. Hence, the government recently acted to tighten credit to the
private sector (see paragraph 8).
6
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Currency and Gold
24. The black market rate for dollars in Saigon hit an 18-month low
of 347 piasters per dollar in late August, but by 13 September it had risen
io 361. Although the August low may have been influenced by the economic
measures taken in the United States, the value of the piaster had been
rising for several months as a result of factors such as a government
crackdown on smuggling and the growing confidence in the economy. The
turnaround in the value of the piaster during the last few weeks is probably
due more to domestic unrest surrounding the October presidential election
than to any other factor. Reflecting no particular trend, the price of a
dollar's worth of gold leaf stood at 498 piasters on 13 September as
compared to 490 on 9 August and 500 on 23 August. The rate for MPC
(scrip) has remained below the legal rate of 275 piasters per dollar since
February.
_7._
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IMPORT LICENSING
Million US Dollars
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GOVERNMENT BUDGET
Billion Piasters
REVENUES
Advances from
National Bank
Foreign Aid
Domestic Taxes
Import Taxes
EXPENDITURES
Civilian
Military
260.0
1965 1966 1967 1968 1969 1970 1971
Data include extrabudgetary revenues and expenditures
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1965 1966 1967
SOUTH VIETNAM
Indexes of Money Sur,?Iy and Saigon Consumer Prices
1 000
700`-.
6 00':
'USAID monthly average retail price index for Saigon
"Data are for end of month
'. 4 I I I :11.1 I: I
JULY AUG SEPT
1971
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
600
1965 1966 1967 1968 1969 1970 1971 JULY AUG SEPT
1971
GOLD Basis: gold leaf worth
$35 per troy ounce
US $10 GREEN
US $10 MPC Military Payment
Certificates (scrip)
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