INTELLIGENCE MEMORANDUM THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040023-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 20, 2016
• Document Release Date: January 5, 2006
• Sequence Number: 23
• Publication Date: September 1, 1972
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum .
The Economic Situation in South Vietnam
USAID review completed
Confidential
ER IM 72-140
September 1972
Copy No.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Summary
1. The limited recovery of business activity in Saigon underway since
mid-June has stalled. Consumer demand reportedly has fallen off, imports
remain below normal, and business is sluggish. The slack in consumer
demand is reflected in the retail price index which, after nearl3 two months
of steady increases, has been relatively stable over the past month. The
near-term outlook for further recovery is not particularly bright bec :use
of the low level of investment and import licensing. However, upward
pressure on pikes will continue, bolstered by the recent 15% government
pay raise.
2. The government is making tentative moves to cope with the
difficult combination of renewed business downturn and growing
government deficit. These moves include limited manipulation of interest
rates to encourage commercial bank lending to the private sector, new taxes
(probably to be implemented in October), and increased efforts to cut
expenditures. However, the key to recovery is consumer confidence and
demand, and these depend primarily on the military situation. It is likely
that only a continued reduction in hostilities can bring the economic
stability and growth the government is seeking.
3. The'rice situation continues to plague the economy. The price
of rice still is rising about 1% a week, despite increased sales from imported
stocks. In addition, poor weather and increased military activity in the Delta
suggest a poor outlook for the next harvest. Rice imports in 1973 probably
will rise somewhat above the 1972 level of some 300,000 metric tons and
could go much higher.
Note: This memorandum was prepared by the Office of Economic
Research.
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4. The adverse effects of US troop withdrawal - principally
unemployment and losses in foreign exchange earnings - were blunted in
1971 and early 1972 by the continuation through June 1972 of large US
military construction programs and sharply increased personal expenditures.
In addition, the economic consequences of the present offensive and
recession have overshadowed and tended to obscure the impact of the US
withdrawal. A complete evaluation of the . cumulative effects of the US
withdrawal will be possible only when the offensive slows down and the
economy returns to some semblance of normality.
5. One encouraging development during the offensive has been the
growth of the financial system. This is reflected by continued increases
both in time and savings deposits and in the number of banks operating
outside Saigon. If the military situation improves, these banks should be
able to provide a growing sl tre of the agricultural credit needs of the
country, now virtually ignored by the Saigon commercial banking system.
6. Charts on foreign exchange reserves, money supply and prices,
gold and currency prices, and he government budget (Figures 1-5) follow
the text.
Current Developments
Business Recession Continues
7. After some signs of a limited recovery, economic activity in Saigon
has slowed again in recent weeks as consumers and businessmen react to
the ups and downs of the war. US officials report that demand has again
fallen off and, with the consequent accumulation of inventories of finished
goods, some sectors of manufacturing appear to have begun another decline.
Further compounding the economic malaise, middlemen and wholesalers
reportedly are reluctant to transport or store goods, presumably because
of the military situation. Despite the slowdown, however, unemployment
apparently is not yet a serious problem. Employment cutbacks, while
relatively extensive in some areas, have not kept pace with the overall
business decline because firms have chosen to carry employees for routine
maintenance work and at reduced hours or wage rates. As another plus,
the slackening of demand for commodities has eased the pressure on prices.
Saigon retail prices, which rose steadily during July and the first half of
August (8% in seven weeks), have been relatively stable for the past month.
However, food prices, particularly for rice, continue to move upward. Retail
prices are now up 11% from the start of the offensive and 17% for the
year.
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8. The outlook for renewed recovery is not particularly bright at
the moment. The now-blunted quickening of business that began in June
was primarily due to a pickup in demand as consumers restocked necessities.
Apparently, they now are again choosing to hold a maximum of earnings
in cash or near-cash as insurance against sudden changes in the war or
economic policy. Consumer demand could revive - and again falter - at
any time. Business irvestment, however, has come to a virtual halt, and
it may be some time before a recovery to the production levels of early
1972 can be achieved. Sales of investment-related goods such as iron and
steel and cement are less than half pre-offensive levels, and import licensing
of these items also is at an extremely low level. In addition, outstanding
commercial bank credit has declined from the June level, at first reflecting
repayment of overdue loans as business conditions improved, but now
apparently due to a low level of new loan:. Time and savings deposits
continue to grow rapidly, but commercial banks, reluctant to risk their
funds in credit to the private sector because of the uncertainty of the
military situation, have been putting their increasing reserves into
government bonds.
New Government Measures
9. On 18 Ser tember the government lowered interest rates on bonds
that have been siphoning commercial bank funds away from the business
community. These bonds - which carried an interest rate of 22% before
the recent decision to lower them to 18% - had become a major hedge
for the banks. To neutralize the effects of this move on bank profits, the
government will increase the interest paid on bonds that banks must ho'd
as part of their reserves. Through these measures, the government hopes
to restimulate the flow of funds from the rapidly growing time and savings
deposits to private-sector enterprises.
10. The government has approved the first basic pay raise in two
years for the approximately 1.5 million South Vietnamese in the military
and civil service. A 15 September decree, retroactive to 1 September, calls
for 50%-60% boosts in base pay; but, since low-ranking servicemen and
civil servants 'receive most of their income from family and other special
allowances, the average overall increase will amount to about 15%. The
increase, therefore, is less than the rate of inflation thus far this year. The
added cost to the government through the remainder of this year will be
about 10.4 billion piasters, or $24 million. Although a rather commendable
attempt to maintain the real incomes of its employees, the government's
pay increase will certainly add to price pressures.
11. In an effort to reduce the growing spread between its own
revenues and expenditures, the government has decided to decree new
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income, excise, and motor vehicle taxes. The decree will probably come
in early October. It had previously been planned to enact an entire package
of revised and new taxes, but it became clear that the formulation of such
a complicated package would take too long and would put off
implementation until well into 1973. Efforts also will be made either to
cut some central government expenditures entirely or to transfer the burden
to local governments. However, increasing requirements for direct military
expenditures, combined with refugee relief, reconstruction, anal increased
government salaries resulting from the pay raise, will make this task almost
an impossibility.
Foreign Exchange Markets
12. There have been no new developments in official exchange rates
or regulations since 22 August (the most recent devaluation), and black
market gold and currency prices have remained relatively stable. The price
of dollars on the Saigon black market (presently 426 piasters to the dollar)
remains; below the official piaster/dollar exchange rate of 435:1. This
apparently is the result of the continuing shortage of cash and the conversion
of private dollar holdings into piasters. The gold market has been very quiet,
with gold prices remaining stable over the past three weeks. On
18 September, gold was selling at about 26,700 piasters per troy ounce,
or $61 converted at 435:1.
Continued Rice Problems
13. Early, optimistic predictions of rice self-sufficiency in 1972
me) ied with the offensive, and imports this year probably will amount to
about 300,000 tons - more than double the 1971 level. These imports
became necessary in part as a result of direct losses and destruction, as
well as planting and transport uncertainties. It also appears, however, that
initial production estimates for the 1971/72 crop year (ending 31 May
1972) were overstated by 50,000 to 100,000 tons.
14. The price of rice, which has climbed steadily since late June,
continues to move up about 1% a week, despite increased sales of imported
rice. New arrivals of rice from the Delta have slowed markedly in recent
weeks as paddy reserves from last year's harvest dwindle, and there is little
prospect for any substantial upswing in the volume of new rice arrivals
fron, the Delta before the major harvest at year's end. The government
already is drawing on its reserves of imported PL480 rice, with additional
imports scheduled to arrive through the rest of this year.
15. Estimates for the 1972/73 crop are increasingly pessimistic in light
of the continued high level of enemy activity in major rice-growing regions.
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Of even more immediate importance, however, is the weather, which will
probably be the decisive factor in determining the quant. ty of this year's
crop. Inadequate rainfall following late planting is having a serious impact
on the production outlook, and current predictions range between no
increase and a decline in 19,2/73 production. In any event, South Vietnam
will have to continue importing a substantial amc unt of rice through 1973.
US observers now estimate that 1973 rice import requirements will be at
least another 300,000 tons, and - under further adverse conditions - this
figure could double. Meeting South Vietnam's projected 1973 rice deficit
may also be complicated by the present dearth of rainfall throughout
Southeast Asia. Increasingly gloomy predictions of next year's crop are
coming from many of the rice surplus countries, and there could be
considerable pressure on the world market and PL-480 stocks.
Effects cf US Withdrawal
16. US troop reductions, which began in early 1969, were originally
expected to pose serious and fairly immediate problems for the economy
because of heavy South Vietnamese dependence on US piaster purs;iases
for foreign exchange and on US service requirements for local employment.
Further indirect consequences were expected from the shrinkage of
Vietnamese industries and services catering to those employed in the US
se.;tor. In 1971 and early 1972, however, the potentially disruptive
consequence: of the US withdrawal were blunted somewhat by the
continuation of large US military construction programs (which ended in
June 1972) and sharply increased personal expenditures resulting from the
adoptiov of more realistic exchange rates.
17. More recently, the impact of continued US layoffs and reduc;ti~ pis
in piaster purchases has been in part offset or camouflaged by the enemy
offensive. Consumer and investment demand fell to a low level after the
offensive began at the end of March, and the resulting business recession
has not ended. Consequently, manufacturers' and importers' requirements
for imported raw materials and finished goods remain at a relatively low
level. The loss of foreign exchange earnings from US purchases thus has
fortuitously been partly offset by the reduction in foreign exchange
requirements for imports. At the same time, the impact of US layoffs of
locally hired people has been obscured by the rising unemployment resulting
from the current business recession and the large number of refugees.
Increased manpower requirements of the armed forc.;s probably have also
absorbed some of the unemployed males.
18. Looking beyond the offensive, it is hoped that the loss of dollar
earnings from US purchases will be offset by such new US economic aid
vehicles as the Economic Support Fund (ESF) and the Economic
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Development Fund (EDF). The ESF, for which $50 million has been
requested from Congress for US fiscal year 1973, will be a grant for
unrestricted purchase of goods and services. The EDF ($75 million
requested) will be used by Vietnamese credit institutions for infrastructure
development projects. Another hoped-for offset to the decline in piaster
purchases will be increased local procurement of goods by the US military
forces remaining in Vietnam. The employment outlook for those laid off
by the United States depends more immediately on the economic situation.
In the short run, several factors may ease the potential political and welfare
problems. For example, workers probably have accumulated substantial
savings knowing that, once the US withdrawal began, their jobs would
eventually be eliminated. Severance pay also has provided some cushion.
For the longer term, prospects hinge on how quickly and to what extent
the economy recovers from the present recession. In any case, however,
the observed impact of US layoffs on unemployment rates will not be as
great as the former numbers of locally hired people would indicate. The
reason is that more than half of the jobs created by the US presence have
been held by women, many of whom have simply dropped out of the labor
force.
The Financial System Continues Its Expansion
19. One of the few bright spots in the economy throughout the
offensive has been the continued increase in time and savings deposits held
by commercial banks, private rural banks, and in the provincial branches
of the Agricultural Development Bank (ADB). The September 1970 interest
rate reform, which approximately doubled the rates paid by commercial
banks and led to similar deposit rates at the rural banks and the ADB,
initiated a phenomenal increase in financial savings held in commercial
banks. These savings increased by 50% in the last quarter of 1970 and
doubted in 1971. Totaling 63.4 billion piasters in commercial banks at the
end of March 1972, these deposits have continued to rise through most
of the offensive, reaching 85 billion piasters on 19 August. Although the
increase is due in part to consumer caution, the fact that these funds are
now held in banks rather than mattresses indicates growing confidence in
Vietnam's banking system. These funds also may play an important role
in reconstruction and business financing when more normal economic
conditions prevail.
20. Another relatively new development in Vietnam's financial system
is the growing network of banking facilities outside Saigon. One of the
most en..ouragi,ig aspects of this growth is the private rural banking system,
inaugurated in late 1969. This system consists of small barks located
throughout the country and organized by local citizens on broad guidelines
provided by the government. Although half the initial capital is subscribed
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by the government, it has no voting rights in these banks' operations. At
the end of June 1972 there were 28 such banks, with total deposits of
about 500 million piasters. In addition, the ADB maintains a branch bank
in each of the 44 privinces. Also, a growing number of commercial banks
are located outside Saigon. For example, two commercial banks recently
opened in Quang Ngai City in MR 1.
21. At present, less than 1% of commercial bank loans go to
agriculture. Given the leading role agriculture is expected to play in future
economic growth, the expansion of the financial system into rural areas
is a prerequisite for development. The ADB and private rural banks now
provide an estimated 12% of agricultural credit needs, the remainder coming
from private money lenders, informal credit unions, relatives, or friends.
Although this percentage is still small, it is double that prevailing a few
years ago. The possibilities for further improvements in rural savings and
credit institutions must, of course, be viewed in the context of the still
uncertain security situation. Nevertheless, some gains have been registered
even during the offensive, and an end to hostilities could bring a rapid
expansion of Vietnam's embryonic financial system.
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
Figure 1
22b
1966 1967 1968 1969 1970 1971
'Excluding holdings of commercial banks
!5149th 97'2
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
January 1965=100
1000
900
800
700
'USAID monthly average retail price index for Saigon
"Data are for end of month
Figure 2
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SAIGON
Free Market Currency Prices
Piasters Per US Dollar
Figure 3
18 Sep
X426
416
SAIGON
Free Market Gold Prices
Thousand Piasters Per Troy Ounce Gold Leaf
Figure 4
18 Sep
26.7
Jul Aug Sep
1972
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SOUTH VIETNAM
Government Budget*
Billion Piasters
Military Po~ol9n A.osnd
EXPENDITURES REVENUES
199.13
114.6
1!T 1
1
27.5
l
36.31
t 20:3;
Figure 5
1968 1969 1970 1971 1972
Preliminary Plan
*Data include extrabudgetary revenues and expenditures.
**Residual, Financed primarily by borrowing from the National Bank.
"? icludes 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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