INTELLIGENCE MEMORANDUM THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020076-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: May 19, 2010
• Sequence Number: 76
• Publication Date: November 1, 1971
• Content Type: IM

Declassified in Part - jgjjjjkk,,,1j
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Release 2011 /11 /29 0 Idn CIA-RDP85TOO875RO01 70002
Declassified in Part -
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Release 2011 /11 /29
CIA-RDP85TOO875RO01 70002
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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Situation In South Vietnam
Secret
ER IM 71-223
November 1971
Copy No. 2 i
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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
Excluded from oulomollc
downrypodinp and
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
November 1971
T.*NTELLIGYNCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Hi li hts
1. Despite of*cial :,pprehcnsion, initial reacton to the sweeping
economic reforms ena _ted on 15 November has been calm. Officials predict
the reforms will boost prices 5% to 15% in the short run, but as of
22 November Saigon retail prices had risen only 2%.
2. Unlike past reform efforts, which were aimed mainly at achieving
price stability, the curre;it measures are focused principally on paving the
way for more rapid economic growth? They include a major d%.valuation
of the piaster, adoption of a flexible exchange rate system, restructuring
of import and domestic taxes, and removal of restrictions on trade.
3. Although emergency rice imports arrived early in November,
continuing concern over the low level of government stocks has prompted
US officials to divert another PL 480 rice shipment to South Vietnam.
4. Charts on foreign exchange reserves, money supply and prices,
import licensing, gold and currency prices, and the government budget
follow the text.
Major Economic Reforms
Initial Reaction
5. The initial response of both consumers and businessmen to the
sweeping reform program announced by President Thieu on 15 November
Note: This memorandum was prepared by the Office of Economic Research.
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has been a wait-and-see attitude. A check on 22 November showed prices
tip only 2% since the reforms were announced. At the time the reforms
were agreed upon, Embassy spokesmen expected them to boost prices
5%-10% in the short run, whereas Vietnamese officials forecast a 10%-I5%
increase.
6. A variety of other pressures will continue to influence prices over the
next few weeks, however, and could lead to increases greater than these
estimates. Commodity and currency speculation,(1) initially triggered by
low rice stocks and concern over reduced US foreign aid will be a persistent
threat in the period of uncertainty that accompanies initial application of
the reform measures. In addition, the effect of substantia! increases in rice
primes in early November has been to cause producers to continue to
withhold rice in anticipation of further gains.
Content of Reforms
7. The two major targets of the reforms are increased efficiency in
the use of available resources and creatiun of an improved investment
climate. The first of these is to be achieved through exchange and customs
reforms that bring South Vietnamese prices more closely in line with world
market prices. The second target will be served by less government
interference in the private sector and by public capital assistance for
private-se.;tor development. The principal measures enacted were:
(a) devaluation of the piaster to a rate near its recent black market level
and provision that the new rate be flexible; (b) removal of administrative
controls on foreign trade; (c) simplification and reduction of import taxes:
and (d) restructure of domestic taxes. President Thieu called for speedy
passage of a new investment law already pending in the National Assembly
that would provide greater incentives for private foreign investment. He
also established a 10 billion piaster ($24 million) development fund to be
used for medium-term loans for private-sector development projects. Along
with the reform measures, Thieu announced a wage increase for all
government employees plus special incentive payments for combat troops,
1. The speed with which price changes from these forces can take place was shown
just prior to the reform announcements. After an increase of only 7% fro.n the end
of 1970 through the end of October 1971, retail p6 yes in Saigon jumped 3% during
the first tw?o weeks in November, and rice prices rose about 12%. Prices of imported
goods jumped 5% during the second week alone. The tendency of the Vietnamese to
hoard rice in times of uncertainty has created even further concern, since the current
low level of government rice stocks is not sufficient to withstand a major wave of
speculation and hoarding. Corresponding increases occurred in the currency black market
as the price of gold reached an all-time high on IS November and the rate for dollars
also rose sharply.
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police, and tax collectors. All of the new measures were enacted by decree,
but the government will ask the legislature to change the official exchange
rate and seek its ex post facto endorsement of the changes in import taxes.
Exchange Rates
8. The new exchange rate system (see the table) will maintain the
existing multip:e rate structure. There will be less differentiation of rates
within the main categories of transactions, but special subsidized rates will
be established for certain basic commodities such as fertilizer, wheat flour,
and sugar in order to prevent their prices from rising too sharply. A special
rate (275 rather than 400 piasters per dollar) was given to US-financed
imports to overcome the disadvantages of higher cost and longer delivery
time for goods purchased in the United States.
9. The major departure from past practices is that exchange rates
are to be flexible. Small adjustments at frequent intervals will be determined
by a group composed of the Ministers of Economy and Finance and the
Governor of the National Bank. They already have indicated that they
expect about a 20% devaluation over the coming year. The rate likely to
be most flexible is the so-called financial rate, which has initially been set
at 410 piasters per dollar. The financial rate will be announced daily, and
the other rates probably weekly. It is hoped that such a flexible rate for
personal transactions will eventually eliminate most of the currency black
market. The extent to which this hope is fulfilled, however, depends on
the rate selected and the restrictions adopted to prevent capital flight.
10. As shown in the table, the rate of exchange for official
transactions of governments - 11 8 to I - has not changed. It is the
"official" exchange rate and cannot be changed without legislative approval,
which the government hopes to get by yearend.(2) The rate at which the
US Government buys piasters for official use is crucial for the Vietnamese,
for most of their earnings of foreign exchange come from these purchases.
For the past several years the Vietnamese have earned more than $300
million annually from this source. Although US purchases will decrease in
any case as our military involvement winds down more rapidly, a change
in this rate to, say, 400 piasters per dollar would of itself reduce Vietnam's
dollar earnings from this source by 70%. With likely reductions in US
economic aid in the offing, the legislature, as well as the government, may
be extremely reluctant to devalue the official rate to any great extent.
2. Changes in the other rates are being made by administrative decree under authority
granted by the National Assembly at the time of the October 1970 devaluation.
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Exchange Rates
Piasters per US $
Old New
Merchandise imports
.GVN financed
About half
118
About half
400
A few items in-
275
cluding pharma-
ceuticals and
machinery
US financed a/
118 275
Merchandise exports
Rubber
27S
410
Most other goods
350
Invisible transactions
US and other govern-
118 118
;rents' piaster pur-
chases for official
use
Piaster purchases for
275 410
personal use (accom-
modation rate)
Most others, including
275 410
profit remittances of
foreign firms and
foreign investment b/
a. Although by US taw, PL 480 imports must enter
the country at the highest existing exchange rate,
the actual rates paid by private-sector importers
are those shown. Internal adjustments, not yet
fuZZ;/ worked out, will cover the difference.
b. I:-jisible transactions directly related to
impor;a, such as freight and insurance, will be
carried on at the appropriate merchandise import
rates.
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Trade Liberalization
H. A very important, but much less publicized, feature of the reforms
is the elimination of the licensing system for all exports and for
GVN-financed imports, which make up about half of total imports.(3)
Henceforth, importers will simply buy their foreign exchange from
commercial banks and order the goods they desire. Market forces - rather
than administrative rules - generally will be allowed greater play in
determining the type and volume of goods to be imported. This will mean
an end to a system that was not only cumbersome but also rationed imports,
frequently on the basis of graft. It is hoped that opportunities for corruption
will be reduced. Furthermore, most of the many imported items currently
barred from the country will be taken off the prohibition list by mid-1972.
Some imports, however, such as automobiles and motorbikes will continue
to be prohibited.
Import Taxes
12. The major achievement of the new import tax structure is to
boil down the existing maze of customs, austerity, and perequation taxes
and their hundreds of different rates into a single tariff schedule with only
four rates ranging from 0% to 200%.(4) Although the new schedule will
reduce tax rates on most imports, the average cost of all imported goods
will still be higher because of the higher exchange rates.
13. In addition to reducing tax evasion, a single tariff schedule wih
lower rates is an important first step toward aligning domestic and foreign
prices and encouraging a more rational allocation of resources. Imports that
now compete with domestically produced items will be taxed at the 25%
rate. Some of these imports will cost less than they did before, and, as
a result, inefficient local producers may be driven out of business. In some
instances, however, as competing imports now banned (live baby chicks,
for example) are allowed into the country, the government may give local
producers the benefit of an additional tax on the competing good.
Domestic Taxes
14. The major aims of the proposed domestic tax reforms will be
to increase government revenues and to spread the tax burden more
equitably. The specific proposals are not yet available, but it is known that
3. The first step toward elimination of licensing was taken last June, when licensing
requirements for most exports were abolished and the so-called general licensing system
was introduced for about half of GVN-financd goods.
4. Only automobiles, if permitted, will be taxed at the 200% rate.
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the government has prepared a revised income tax code for submi:,sion to
the National Assembly. Any tax program probably will face rough sledding
in the legislature. Irrespective of the constructive uses to which the
government might out new revenues, the initial and most obvious effect
on the nation is to hit consumers with higher income and property taxes
and/or higher taxes on locally produced goods.
Government Wage Increase
15. A 50% decline in real wage., of government employees since 1964
has led to a decline in morale and ::n increase in corruption. Moreover,
it almost certainly has contributed to the high desertion rate among the
armed forces. An increase of some 20% in the total government wage bill
announced by President Thieu obviously will not eliminate these problems,
but it is a useful first step. All employees were granted an increase of 1,200
piasters (about $3) per month retroactive to 1 November, but for the first
time there will be incentive pay for combat troops (4,500 piasters per
month), police, and tax collectors.
Evaluation
16. The 15 November measures were the sixth and by far the most
wide-ranging series of reforms enacted during the past year. They mark
a turning point in the direction of economic policy in the sense that they
are focused more on future economic growth than on price stabilization.
Decisions such as those to adopt a more realistic and flexible exchange
rate, to free restrictions on trade, and to rationalize both domestic and
import taxes had to be made if significant growth is to occur. The
government still must do a real sales job on the legislature to ensure that
many of these decisions are carried out. Nevertheless, the program is a
courageous one to adopt in the face of continuing warfare and probable
cuts in US aid.
.ice Problems Continue
17. Despite the arrival in early November of emergency rice imports,
concern has not yet abated over the low level of government stocks. Officials
had earlier thought that the imports would tide government stocks over
until mid to late December, when domestic rice from the new crop would
be marketed in quantity. Because of the rapid rise in rice prices during
the first two weeks iii November, however, merchants apparently are
unwilling to commit themselves to a fixed-price government contract for
deliveries in December. Therefore, diversion of another PL 480 rice
shipment is planned, with arrival scheduled for early December.
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18. As part of a longer term solution to this recurring rice marketing
problems,(5) the government announced on 15 November a substantial
increase in the retail prices of rice sold from government stocks in order
to bring them more in line with free market prices. This move is designed
to help reduce dependence on government stocks in the northern rice-deficit
provinces by encouraging commercial marketing of domestic rice in this
region. Heretofore, private merchants have had no incentive to market Delta
rice in the, north, because a large part of the population has had access
to government rice at considerably below commercial market prices.
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IMPORT LICENSING
Million US Dollars
Commercial Import
Program
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 GOVERNMENT BUDGET"
Billion Piasters
Advances from
National Bank
Foreign Aid
Domestic Taxes
Import Taxes
EXPENDITURES
Civilian
Military
1970 1971
Preliminary Plan
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1965 1986 1967 1968 1969 1970 1971
'Excluding holdings of commercial banks
1 000
900
800 JANUARY 1985@100
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
{ SAIGON r_
300 CONSUMER PRICES'
MONEY SUPPLY"
Oct 759
1966 1967 1968 1969 1970 1971
'USAID monrhly average retail price index for Saigon
"Data are for end of month
22 Nov 786
I 11. 1 i Ii I. I.:
SEP OCT NOV
1971
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GOLD Basis: gold leaf worth
$35 per troy ounce
US $10 GREEN
US $10 MPC Military Payment
Certificates (scrip)
SAIGON
Free Market Gold and Currency Prices
Piasters Par US Dollar
22 Nov
628
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