INTELLIGENCE MEMORANDUM THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030059-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 59
• Publication Date: April 1, 1972
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Situation In South Vietnam
Secret
ER IM 72-59
April 1972
Copy No. n
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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 'r94, of the t 3 Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Excluded from OVlemelit
downgrodinq end
Jrcloniftulion
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^ SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Summary
1. Saigon's commodity and currency markets remained reasonably
calm during the first three weeks of the enemy's military offensive. Except
in those provinces hardest hit by the fighting - which are not major
contributors to the nation's food supply - there is little evidence of
economic activity being disrupted.
2. First quarter exports, led by shrimp and timber, were double last
year's level. Barring major and widespread military setbacks for ARVN, this
pace is likely to be maintained, thereby giving South Vietram its first
increase in exports since 1963.
3. Despite concentration on military affairs, the government
continued to respond promptly to changes in leading economic indicators.
To curb the rapid growth of the money supply ard hold down import
demand, interest rates on deposits and loans were raised two percentage
points effective 7 April.
4. The exchange rate system was considerably simplified on 1 April
when South Vietnam devalued the rate for government transfers (mainly
US piaster purchases) to the more realistic level in effect for most other
foreign transactions. The resulting large loss of dollar earnings from US
purchases of piasters will be offset by several measures, including a
drawdown in foreign exchange reserves.
5. A recent cabinet decision that the armed forces should not
participate in business activities spells an end to military ownership of one
of Vietnam's largest banks and several other firms as well. Acquisition of
Note: This memorandum was prepared by the Office of Economic
Research. .
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these firms was financed through a forced soldiers' savings fund which the
government ordered dissolved.
6. Charts on foreign exchange reserves, money supply and prices,
import licensing, gold and currency prices, and the government budget
(Figures 1-5) follow the text.
Discussion
Current Developments
7. The enemy's military offensive has caused apprehension in Saigon,
especially as fighting intensified in adjacent Military Region (MR) 3, but
business activity apparently has gone on much as usual. Commodity and
currency prices have remained comparatively stable. The commodity price
level in Saigon rose only 2% during the three weeks ending 17 April. This
index is now up 8% since the start of the year and 21% during the past
12 months.(1) There has been similar relative stability in black market
currency and gold prices, which have even fallen slightly below the
pre-offensive level.
8. The offensive has, however, stimulated limited hoarding of goods
and caused minor interruptions of marketing in some areas. Hoarding has
been reported for such staples as rice, kerosene, and canned goods, and
supplies of charcoal and beef have declined because of fighting in the major
producing areas near the Cambodian border. For the most part, however,
the hardest hit provinces are not major contributors to the nation's supply
of goods. Moreover, the flow of imports - an important source of goods -
has not been affected at all by the fighting. Rice supplies probably are
adequate in most areas because the major harvest has been completed, but
the traditionally deficit areas of MRs I and 2 may run short if the offensive
continues. In locations where there are large numbers of refugees, the
government reportedly has sufficient food and medical supplies available,
but distribution problems have arisen.
9. Production of goods has been relatively little affected by the
military offensive so far. Industrial output has been largely untouched
because most productive facilities are in the Saigon area and depend on
imports for a significant share of raw materials. The following tabulation
shows the share of nationwide output of selected agricultural products
provided by five provinces (Quang Tri and Thua Thien in MR 1, Kontum
1. No information is available on price developments outside the Saigon area.
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Product
Percentage
Share
Rice
4
Vegetables
5
Sugar care
2
Tobacco
5
Rubber
61
Cattle
9
Pigs
7
Chickens
5
in MR 2, and Binh Long and Tay Ninh in MR 3) where fighting has been
most intense. Except for rubber, nationwide output of agricultural products
has not been seriously affected. Rubber production from the plantations
in Binh Long and Tay Ninh (which have been the scene of many battles
over the years) undoubtedly will suffer, as will rubber exports. The longer
term effect on production in these provinces will depend, of course, on
how long the offensive continues and when the large numbers of refugees
will be able to return to their homes. Since the offensive began on
30 March, more than 150,000 persons in the five provinces, or about 10%
of their population, have become refugees.
Exports on the Rise
10. First quarter data indicate that this year South Vietnam's exports
will increase handsomely for the first time since 1963.(2) Exports declined
steadily from $83 million in 1963 to only $12 million in 1968 and
remained at that level through 1971. During the first quarter of the year,
however, exports amounted to about $5 million and are expected to total
$24 million for the year as a whole.
11. This striking upturn is essentially the result of improved security
and a more realistic exchange rate. Most of the increase has occurred in
exports of timbcr and shrimp, which have found ready markets in Japan,
Singapore, Hong Kong, France, and the United States. Access to the forests
of MRs 2 and 3 requires good security, and security has - until just
recently - been improving throughout much of the country for the past
two years. The impetus to exploit the forests and fishing grounds, however,
came with the major devaluation last November. Exports of shrimp, for
example, amounted to $830,000 during the first two months of this year,
2. Assuming, of course, thA the current enemy offensive does not create major
economic dislocations.
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which is almost double the value of shrimp exports for ail of 1971. Data
are not available for timber exports, but they are likely to slack off
somewhat as a result of the current offensive.
12. Fishery and forestry products are likely.to be the leaders in export
growth during the next several years. For this period, at least, they will
tend to take over the traditional role of rubber and rice, output of which
declined because of the war. Rubber exports are still significant, but have
dropped to about one-third of the 1963 level, and rice has been imported
each year since 1964. Neither is expected to again drive export growth,
largely because foreign markets for these products have shrunk.
13. As a further stimulus, the government is considering granting a
subsidy to all exporters. US officials expect announcement shortly of a
100 piaster subsidy, which will boost the current exchange rate from 410
to 510 piasters per dollar. The subsidy should be of particular help to shrimp
exporters, whose product already is in great demand but who must invest
in trawlers and refrigeration equipment to increase their catch.
Interest Rates Up
14. Despite concentration on military activity and concern over its
effect on the economy, momentum on economic policy changes has not
been !ost. Responding to the rapid increase (1017o) in the money supply
during the first two months of this year, interest rates were raised two
percentage points. In viewing average rate changes, it should be remembered
that the banking system has been - and -presumably will continue to be -
encouraged to make exceptions for certain categories of loans. For example,
the lending rate was lowered for such activities as export financing and
financVig of commercial rice shipments to MRs 1 and 2. The new interest
rates, effective 7 April, are as follows:
Deposit rates
Savings deposits
Time deposits
6 month
12 month
Treasury bonds
6 month
12 month
Lending rates
Guaranteed loans
Unguaranteed loans
Preferential loans
16 Aug 71 -
6 Apr 72
7 Apr 72
12
14
16
18
21
23
17
19
20
22
24
26
30
32
14
10
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15. Higher interest rates should encourage more saving and at the
same time curb the expansion of credit, which increased 21% during
January-February, or about half the increase projected for the entire year.
Since a large share of commercial credit goes to finance imports, the higher
interest rates should also dampen the demand for imports. Advance deposits
on imports were reinstituted last month, but further action was believed
necessary to keep import demand within the limits of foreign exchange
availability this year.
Exchange Rate Reform
16. In a long-planned move, South Vietnam on 1 April raised the
exchange rate at which the US Government buys piasters to the more
realistic rate that i:ow prevails for most other foreign transactions. The rate,
which has been unchanged since October 1967, was raised from 118 to
410 piasters per dollar. As a result, the United States (and other
governments) will spend fewer dollars for the piasters it needs to cover
expenditures in Vietnam. The new rate also means, of course, that South
Vietnam's earnings of dollars, most of which come from US piaster
purchases, will decline sharply. In 1971, US piaster purchases were worth
about $400 million to South Vietnam, but this year the amount will drop
to about $175 million. The decline is almost entirely due to the change
in the exchange rate, since US piaster expenditures are expected to change
very little.
17. Several factors will offset the loss of these earnings, which South
Vietnam must have if import requirements are to be met. These include:
(1) a drawdown of South Vietnamese foreign exchange reserves; (2) an
acceleration in the use of US Commercial Import Program funds; and
(3) some increase in Food for Peace (PL 480) imports.
18. With this recent change in rates, South Vietnam has simplified
the exchange rate system considerably. There are now only two rates that
apply to almost all foreign transactions: 285 piasters per dollar for
US-financed imports and 410 piasters for all other transactions.(3) Although
.this rate structure undoubtedly will move up somewhat by yearend, US
economic advisors are urging the government to change it more frequently -
both up and down - in order to prevent speculators from taking advantage
of what they must now think is a steady process of devaluation.
3, The remaining exceptions are that transactions for overseas students and official
business of the South Vietnamese government continue at the 118 rate.
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Military Involvement in Business Ends
19. The growing role of South Vietnam's armed forces in business
activities was curbed recently by a cabinet decision to take over enterprises
owned by the armed forces and to abolish the Soldiers' Mutual Assistance
and Savings Fund (SMASF) which financed them. The SMASF was started
in January 1968 ostensibly to encourage saving among the armed forces
and provide funds for them and/or .their families when they were discharged
or killed. Since that time, 100 piasters per month (about $0.25 at the rate
of 410 piasters per dollar) had been collected through mandatory payroll
deductions from all military personnel except the Popular Forces. These
deductions ceased as of 1 April, and the government has said it will refund
all contributions with interest. There seems to be some sentiment among
the armed forces, however, that the fund should not be d'ssolved but merely
reorganized and put on a voluntary basis.
20. Through the SMASF, the armed forces had by the end of 1971
become heavily involved in commercial activities. The military establishment
had set up five firms engaged in banking, road construction, transportation,
insurance, and food processing and had acquired part ownership of two
other companies.(4) All of these assets, according to the government's
23 March decision, are to be bought out by the Commercial Credit Bank,
the commercial arm of the National Bank of Vietnam, and eventually sold
to private interests.
21. The fund's first and largest business venture - the Bank of
Industry and Commerce - was established in June 1970, and four other
firms were set up between March and September 1971. The bank, which
has a new headquarters skyscraper under construction in Saigon, is currently
the fifth largest bank in the country in terms of deposits. By virtue of
its high level of deposits, fed by the monthly payroll deductions, and the
services of experienced banking personnel detailed from active military duty,
the bank has had a considerable advantage over most of its competitors.
Moreover, one must presume that the SMASF's other business ventures have
had little difficulty getting lucrative military contracts.
22. Although the dissolution of the SMASF was triggered by
allegations of mismanagement by Ministry of Defense officials, the fund
has been criticized since its inception because of its collection method.
Concern, especially among US officials, increased as the assets of the fund
grew and it began to involve itself in activities more appropriately handled
by the private sector. By the end of last year, the assets of the fund totaled
4. One of these is a government paper mill (COGIVINA). The SMASF acquired the
19% share previously owned by the US firm of Parsons and Whittemore, Inc.
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3.2 billion piasters ($7.8 million), an amount equivalent to 6% of total
commercial bank savings and time deposits.
23. The government resale of the SMASF's business interests is likely
to take a long time, and thus the costs of operating them will continue
to be a drain on the budget. With the exception of the bank, the military
firms are relatively new and probably not all that profitable. Most of the
government-owned firms in South Vietnam, which are involved in the
manufacture of such products as cement, sugar, paper, and textiles, operate
at a loss. For several years the government has announced its intention
to sell its enterprises to private interests, but until recently no action had
been taken. Last month, shares in COGIVINA, ? the paper mill of which
the SMASF is part owner, were offered to the general public at 4,000
piasters (about $10) per share, with a guaranteed annual return of 16%
for three years. Response to the offering apparently has been good (about
30% of the 100,000 shares were sold by early April), but the market
probably is not yet large enough, or confident enough, to buy out more
than a few government-owned firms.
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1000
900
Boo
700
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
January 1965=100
*USAID monthly average retail price index for Saigon
"Data are for endNof month
513513 4-72
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I
FEB
Figure 1
I
MAR
1972
Figure 2
10 Apr
878
I I I
APR
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SOUTH VIETNAM
Import Licensing
Million US Dollars
Commercial Import
Program
PL-480, Title 1
Jul-Dec 395
87
325
Figure 3
1986 1967 1968 1969 1970 1971 1972
Total Total Total Total Total Total 'January and
660 531 624 740 641 683 February only
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
1966 1967 1968
GOLD Basis: gold leaf
worth $35 per troy ounce
US $10 GREEN
US $10 MPC Military
Payment Certificates kscrip)
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Figure 4
1972 FEB MAR APR
1972
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SOUTH VIETNAM
Government Budget*
Billion Piasters
EXPENDITURES REVENUES
Aid a
'-J
ir"W1nt '09n
DamO t C Tn%05
142.8
114.6 32.I
r"0l I I_-I
72.0
44a
36.2
27.5
35.3
17.1
270.0
rye 1
155.0
Figure 5
324.0
1968 1969 1970 1971 1972
Preliminary Plan
*Data include extrabudgetary revenues and expenditures.
"Residual. Financed primarily by borrowing from the National Bank.
'Includes customs duties and other import taxes, counterpart funds
generated by US-financed import programs, and profits from foreign
exchange transactions. A major result of the November 1971 reforms
was to make explicit a greater share of US aid to the budget that ear-
lier took the form of high customs duties on aid-financed imports.
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