THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040039-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 20, 2016
• Document Release Date: February 3, 2006
• Sequence Number: 39
• Publication Date: October 1, 1972
• Content Type: IM

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Confidential
DIRECTORATE OF
II~,~1'ELLIGENCE
Ir~~elligence Memorandum
The Economic Situation in South Vietnam
USAID review completed
CIA
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~~~~ ~ ~ ~R IM 72-156
~L ~. ~ October 1972
e~~el .CIA-RDP85T00875R001700040039-4
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PY No. 2 (~
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CENTRAL INTELLIi1r,NCE AGENCY
Directorate of Intelligence
October 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATI/JN IN SOUTH VIETNAM
Summary
1. Enemy interdiction of some supply routes led to a 6% increase
in Saigon prices during the first three weeks of October. Consumers reacted
calmly, however, with little Boarding reported.
2. Business activity continues to stagnate as consumer demand
remains depressed because of the offensive. In general, only firms with
bovernment contracts to fill are operating anywhere close to capacity, while
oilers have either reduced production sharply or closed. War damage has
cut rubber output in half, and government security restrictions have greatly
hampered forestry operations in some parts of the country.
3. Heavy fighting in recent weeks has sharply increased the already
enormous number of refugees. Government relief centers now house
758,000 people - anew high for the offensive.
4. Despite the offensive, South Vietnam's exports are expected to
reach about $20 million this year, compared with only $12 million in 1971.
More realistic exchange rates are largely responsible for the upsurge, and
the government recently authorized additional subsidies for exporters.
5. The proposed 1973 budget calls for a 19% increase in
expenditures, but inflation and expenses related to the offensive almost
certainly will boost spending beyond th tt level. Proposed revenues (including
US aid) cover on1.y 64% of projected expenditures, with the large defici?
to be financed by borrowing from 'he banking system.
6. Char?s on foreign ::xchange reserves, money supply and prices,
gold and currency prices, and the government budget (Figures 1-5) follow
the text.
Note: This memorandum was prepared by the Office of Economic
Research.
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Current Developments
Prices and Exchange Rates
7. Price problems dominated the economic news from South
Vietnam in October. Enemy interdiction of some supply routes into Saigon
led to a 6% rise in prices during the first three weeks ~of the mc~i:th.
Temporary shortages of perishable foodstuffs contributed significantly to
the price rises, with fruits and vegetables in particular rising almost 30%.
Sharp increases also were recorded for fish ar,d meat. Surprisingly, prices
of items usually hoarded by consumers -such as rice and canned milk -
were either unchanged or down. The government pay increase announced
in mid-September and a eimilar one on 1 October for Vietnamese employed
in the US sector apparently have not yet impacted on Saigon prices,
lthough several areas outside the capital city reported related price
increases. Saigon retail prices, which had been relatively stable since
mid-August vrith the continuing business recession, are now up 17% since
the start of the offensive and 24% for the year.
8. The continuing stability of the currency black market suggests
t;1at the developments on the commodity markets are a function of real
shortages and not specul4tive fever. ?'he price of dollars on the Saigon black
market has been rising slowly since the end of September but - at 435
piasters - is only one piaster above the official exchange rate. The gold
market has remained even more stable since early September. On
23 October, gold leaf was selling at 26,500 piasters per troy ounce, or
$61 converted at the official rate of 43S:1.
Business Recession
9. Business activity in Saigon, which turned down in August after
a limited recovery earlier in the summer, cantinues to stagnate. All sectors
of manufacturing are operating below 1971 levels, and many smaller, less
competitive firms ha~re closed. With consumer demand dei~ressed because
of the offensive, apparently only firms with government contracts to fulfill.
are operating, anywhere Muse to capacity.
10. Construction, and related industries seem to be the hardest hit
by the recession. Construction, accounting for roughly one-fourth of
industrial output, is said to be operating about SO% below the level of
recent yea: s. Firms producing construction materials such as reinforcir g rod,
galvanized iron sheets, cement, and bricks report output ~iow~t 30%-SO%
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from last year. Smaller firms have had to close, but many of the larger
ones continue to carry their employees fur maintenance and repair work
at reduced hours or wage rates.
11. Other industries seriously affected by the recession include
beverages, bottles, dairy prodrets, shoes, and Vietnam's only automobile
assembly plant. Sales of soft t}rinks and beer -and thus bottles -have
fallen off sharply in areas directly affected by the fighting. The continuing
reduction in US troop st; eng~h also has reduced demand for these products
significantly. The largest bottling firm in Vietnam, which is French-owned,
has shelved -but not yet abandoned -plans to erect plants in Can Tho
and Da Nang.
12. Industries and individual firms that have escaped the impact of
the recent falloff in co_~sumer demand are for the most part those with
government contracts -textiles, cannFtries, and miscellaneous items such
as batteries and aluminum utensils. Textile firms producing military
uniforms have returned to full shift operation. Some others are operating
at two shifts, reflecting some increase in civilian sales of cotton fabrics
as people replace necessary items of clothing. Nevertheless, inventories of
most finished textiles are still large, and tl;e industry probably will not
recover completely until there is a general revival of consumer demand.
13. The slowdown in production due to the offensive extends beyond
Saigon's business community to agriculture and forestry. There has been
no change in the gloomy outlook for rice production this year.~l> Rubber
planters expect production to be down at least 50% from the 1971 level.
The cost of rebuilding plan?ations and processing facilities is estimated to
be at least $S million -almost equal to the value ~~f rubber exports in
1971. In addition to the loss of employment on rubber plantations, a sizable
segment of the population of Military Region (MR) 3 was thrown out of
work by a government ban on forestry operations in six provinces beginning
in June. This ban was lifted at the end of September for three of the
provinces (Bien Hoa, Long Khanh, and Phuoc Tuy), when the government
realized that deteriorating economic conditions were more harmful to its
interests than the security threat posed by enemy use of loggers and their
trucks for resupply. The ban remains in effect, however, in the border
provinces of Tay Ninh, Binh Long, and Phuoc Long.
More Refugees
14. Vietnam's already enormous refugee problem has increased
significantly in recent weeks as the total number of refugees generated since
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the start of the offensi/e reached 1.2 million and the number of people
in government relief centers climbed to a new high of 758,000.~2~ The
in-camp refugee population had dropped from a high of 725,000 in mid-June
to a low of 601,000 in early September, but recent heavy fighting in Quang
Ngai Province in MR 1 and Long Khanh in MR 3 has sent the number
soaring once again. More than 70%'0 of all in-camp refugees are located in
MR 1, primarily in Quang Ngai City and Da Nang. In Da Nang the number
of people in relief ce~~ters has not fallen below 230,000 since shortly after
the offensive began.
15. Considering the scale and nature of the problem, the
government -with the aid of US funds and commodities - is doing a very
creditable job in meeting refugee needs. As might be expected, however,
the record ilas been marred by some instances of corruption. A recent
investigation ir. Da Nang revealed that refugees were being given poor quality
rice while officials were pocketing the funds earmarked to buy good rice.
To prevent a recurrence of this sclierne, rice for refugees must henceforth
be purchased through the P~Iinistry of Economy.
16. Because of the continued hea?~y fighting in MR 1, resettlement
of refugees has been limited. Nevertheless, plans are under way for the
return cf refugees to southern Quang Tri, with perhaps 60,000 people
scheduled to go back to their v?llages within the next six months.
Resettlement benefits For housing v:'ere recently increased 9,000 piasters
so that a family returning ho,~:e or resettling elsewhere will be paid up
to 25,000 piasters ($57) or the ec;~livalent in commodities. They continue
to receive a maximum food !rowan^e of either six months' supply of rice
or 7,200 piasters per person.
Exports Still on the Rise
17. Despite the offensive, South Vietnam's exports have continued
to increase this year largely because of more realistic exchange rates.
Through September, exports totaled about $16 million, compared with
about $9 million for the same period in 1971. For the year as a whole,
exports are expected to reach about $20 million, compared with $12 million
last year. Although down somewhat from pre-offensive estimates, the
increase this ,year will be the first since 1963.
18. Rubber apparently is the onll? major export t~., decline as a result
of the offensive. Because of the destruction of many rubber plantations
2. Refugees not luting in government camps either are staying with relatives and friends
or have returned to their homes.
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and processing facilities, exports are expected to drop more than SG% from
the 1971 level. Exports of pine logs from MR 2, which have assumed
considerable importance this year, reportedly have not been much affect'd
by enemy operations. Even the government's six-week ban on transportati~?n
of Logs through MR 3 to prevent enemy use of trucks in #hat region
apparently had no lasting impact on the fl~.o of logs out of MR 2. Exports
of shrimp ~ ~uve grown apace and may well replace rubber as the leading
commodity this year.
19. As an added boost, the government recently authorized additional
subsidies for exporters. Exporters have had a preferential exchange rate of
500 piasters per dollar since mid-1972 (the official rate is 435), but since
mid-September have received 550 piasters for each dollar of foreign
exchange earned.t3> Exporters of goods never before sold abroad are also
entitled to an incremental subsidy of 25 piasters for a period of one year.~4>
Finally, exporters may now retain 10% of their earnings in hard currency,
compared with 3% earlier. The new subsidies -combined with unlimited
credit privileges at favorable interest rates -seemingly provide adequate
financial incentives for exporters. Much remains to be accomplished an the
institutional side, however, such as improving the performance of the Export
Development Center and increasing commercial representation at
Vietnamese embassies abroad. One step now being considered is converting
part of thr, huge US base at Long Binh near Saigon i~tto an export processing
zone.
1973 Budget
20. President Thieu has sent to the National H.ssembly a proposed
1973 budget that calls fora 19% increase over projected 1972 expenditures.
Expenditures in 1973, however, will almost certainly exceed the planned
figure of 436 billion piasters (see Figure 5) -- about $1 billion converted
at the official rate of 435 piasters to $1 -because of inflation and expenses
related to the a~ffensive. In the past few years the government has submitted
supplemental l-,udgets later in the year with the result that, during 1970-72,
spending increased at the rate of 30%-40% per year. Tne proposed 9%
increase in military expendi~ures for 1973 seems particularly low, and some
effort probably will be made to increase military fundi:~g by pruning civil;an
expenditures or transferring their financing to local governments.
3. Only exports of excess US military property do not qualify for the 50 piaster
subsid;~.
4. According to government sources, 50 different products were exported in 1971,
and 20 new products, including some manufactured items, have been added this year.
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21. Proposed revenues (inclu3ing US aid) cover only 64% of
expenditures, compared with 92% estimated for 1972.5 ~ The deficit, the
largest since 1965, will be covered by borrowing from the banking secto*
(primarily the National Bank of Vietnam). Domestic taxes -such as tho:;~
on income and business activity -are to provide 43% vi' ::venues, out
this share may be increased if proposed new income and pro~~rty taxes
are enacted. As in ?he past tre most important source of revenues is the
US foreign aid prograr-:. These revenues come from the sale of foreign
excha;~ge provided through US-financed import programs, as well as from
customs duties on goods imported with ibis foreign exchange.
5. The government's financial situation greatly improved in I972 because of the sizable
devaluation of the piaster. The profits from revaluing the government's foreign exchange
holdings from 80 pia;:ters per dollar to 435 piasters per dollar were applied to reducing
its debt to the National Bank of Vietr-am.
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iooo
soo
aoo
700
'USAID monthly average retail price index for Saigon
"Data are for end of month
S1A750 i0~71
SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1966 1967 1968 1969 1970
'Excluding holdings of commercial k~anks
sia757 coax
Figure 1
SOUTH VIETNAM
Indexes o~ Money Supply and Saigon Consumer Prices
January 1965=100
Figure 2
is oct
s7o
t t t i'I l t i t t t
Auy Sep Oct
1972
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SAIGON
Free Market Currency Prices
Piasters Per US Dollar
SAIGON
Free Market Gold Prices
Thousand Piasters Per Troy Ounce Gold Leaf
Aug Sep
1972
Figure 3
Figure 4
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SOUTH VIETNAM
Government Buuget~'`
Billion Piasters
Military I;~` r I cnroi9~ did ^ nd
1972
Preliminary
1973
Plan
'Qata 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 prograrr~s, and profits from foreign
exchange transactions. A major result of the Novemb::? ig71 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.
Figure 5
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