THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040061-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 20, 2016
• Document Release Date: February 3, 2006
• Sequence Number: 61
• Publication Date: December 1, 1972
• Content Type: IM

USAID revievv completed
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Confidential
D
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Situation in South Vietnam
CIA
DCCUENT SVi!ES 31A!CH
py
DO NOT DESTROY
Confidential
ER IM 72-178
December 1972
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
SUMMARY
1. Inflation was less of a problem in 1972 than might have been
expected, from the various disturbances to the economy during the year.
Although the cost-of-living index for Saigon rose 24%, it still was the second
lowest year-to-year increase since 1964.
Preliminary fourth-quarter date indicate that exports will exceed
$20 million in 1972, up from $12 million in 1971.
3. Despite the recession and other dislocations caused by the North
Vietnamese offensive, local and central government tax collections increased
substantially in 1972. The increase in local government revenues, which
have been neglected in recent years, was the result of an organized,
nationwide effort to help local governments become financially
self-supporting.
4. Charts on foreign exchange reserves, money supply and prices,
gold and currency prices, and the government budget (Figures 1-5) follow
the text.
Market Developments
5. With yearend figures now in, inflation appears to have been less
of a problem in South Vietnam than might have beet- expected from the
various disturbances to the economy in 1972. The cost-of-living index
(computed on a monthly average basis) for Saigon rose 24% over the course
Note: This memorandum was prepared by the Office of Economic
Research.
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of the year. This rise is a deterioration from the 14% of 1971, but it still
compares favorably with the results for 1965-70, when inflation ranged from
30% to 55% annu?illy. Although much of the city's business community
has been in a recession since the start of the North Vietnamese offensive,
supply problems caused by bad weather and enemy interdiction of roads
into the city led to sharp increases in food prices, especially in August
and October. Rice prices increased 30%-35% during the year, and prices
of several nonfood items also rose substantially as the result of higher taxes
and the increasing cost of imports attendant on continuing devaluation of
the piaster.1 The most recent devaluation on 9 December brought the
exchange rate to 455 piasters per dollar compared with 400 to I at the
end of 1971.
6. Although cease-fire discussiois have had comparatively little effect
on commodity markets during the last two months of the year, they
apparently have been the major reason for the steep rise in black-market
dollar rates. The price of dollars, which had been hovering around the
official exchange rate for several months, increased steadily through most
of November and December, reaching 503 piasters per dollar on
18 December. With the renewed bombing of North Vietnam, however, the
rate dropped to 470 piasters on 26 December, only 15 piasters above the
official rate.
Exports Up for 1972
7. Commodity exports from South Vietnam continue at levels
substantially above last year despite heightened enemy activity throughout
much of 1972. Preliminary reporting for the fourth quarter indicates that
total c xports will be in excess of $20 million, up from only $12 million
in 1971. The principal factor in this increase is the implementation of
realistic exchange rates and export subsidies beginning in late 1971. Products
that in the past were overvalued in world markets have become profitable
for Vietnamese exporters, and, as a result, several new export product lines
have appeared as significant foreign exchange earners. In particular, shrimp
and pine log exports - neither of which had been exported in substantial
quantity in previous years - will each bring in more than $5 million in
1972, thereby replacing rubber as the leading export commodity.
Tax Collections Increase Nationwide
8. The big push this past year to increase tax revenues has been
quite successful, especially for local governments. Despite the disruption
from the North Vietnamese offensive, local government tax collections were
double the 1971 level through the end of October. This record was achieved
1. Although many markets outside Saigon suffered more frequent disruptions during the year,
available data indicate that inflation in other parts of the country was not appreciably different
from that experienced in Saigon.
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CONFIDENTIAL
under the aegis of the Local Revenue Improvement Program (LRIP), a
four-year (1972-75) plan to make all provinces and autonomous cities as
well as the majority of villages in South Vietnam self-supporting. In 1971
these local governments financed only about one-sixth of their total
operating and development expenditures, the remainder being covered by
subsidies from the central government. Fewer than 10 of the 44 provinces
and only about 200 of the 2,300 villages were able to cover all their
operating expenses. Even fewer villages could finance their expenditures for
such items as water systems and clinics. More than 200 villages (not
counting those under NVA/VC control) had no revenue collections at all.
9. The division of responsibility for public expenditures in South
Vietnam has always been rather lopsided toward the central government,
and this tendency has been reinforced by security conditions in the
countryside. At present, total local government expenditures are equivalent
to only about 5% of the national iadget. With security improvements, there
will undoubtedly be some pressure to increase the fiscal role of local
governments for items such as education and public works. Before local
governments can take on any additional responsibilities, however, they must
be able to finance their current ones. To do this, local tax reform is required.
Local tax systems have grown into a hodgepodge of nuisance and other
taxes which are neither equitably apportioned nor efficient as revenue
producers.
10. According to the LRIP, revenues were to increase from about
2 billion piasters in 1971 ($4.4 million converted at the current exchange
rate of 455 to 1) to 10 billion piasters in 1975. Collections, however, were
running a year ahead of the original plan, and the goals were therefore
revised upward. The 1972 goal, for example, was boosted from 3.1 billion
piasters to 5.4 billion piasters, and, b;! the end of October, 80% of the
new goal had been reached. Because of their greater wealth and better
security, provinces and villages in Military Regions (MRs) 3 and 4 are
expected to become financially self-sufficient much sooner than those in
MRs I and 2. They also are slated to provide 85% of the total revenues
to be collected under the LRIP.
11. The success of the LRIP is due both to increased numbers of
trained tax collectors and to higher tax rates. For revenue, local governments
rely on surcharges on such national use taxes as those on business licenses
and logging operations. They also collect numerous miscellaneous fees such
as market taxes and export fees on the shipment of produce out of villages
or provinces. Probably the largest single source of revenL:2 in 1972, however,
has been the tax on real property, which had not been collected in many
areas during recent years. In 1972, Saigon instructed local governments to
apply the maximum tax rates on all kinds of real estate as a means of
boosting revenue prior to the enactment of a completely revised property
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tax law. The new property tax law (decreed in October), which will take
effect in 1973 and be fully implemented by 1974, is slated to become
the primary source of tax revenue for local governments, a owing them
to eliminate nuisance taxes and those such as the export fee that' discourage
increased production and marketing in rural areas.
12. Central government revenue collections also registered an
impressive gain through October, but tax officials expect that the continuing
business recession may cause collections to fall somewhat short of the 1972
target. Revenues from domestic taxes were about 40% above the 1971 level,
although October returns were somewhat lower than expected, especially
for production and corporate income taxes. Actually, the recession in Saigon
might have been expected to have a greater impact on revenues, since more
than 90% of domestic revenues are collected in the Saigon area. Higher
tax rates and greater collection efforts, however, were sufficient to offset
much of the potential loss.
13. Neither the central nor local governments can afford to let up
in the drive to increase revenues, for both are far shy of being
self-supporting. President Thieu recently signed the long-pending decrees on
new income and motor vehicle taxes,2 and consideration is still being given
to the adoption of a value-added tax. The major focus in 1973, however,
is likely to be on improving the administration and collection of existing
taxes rather than on adopting new ones.
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
*Consisting of gold and foreign exchange held by the National Bank of Vietnam
515158 1272
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
1000
900
800
700
January 1965=100
'USAID monthly average retail price index for Saigon
**Data are for end of month
515158 12.72
Nov
984
Oct
731
Figure 2
18 Dec
991
Figure J.
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SAIGON
Free Market Currency Prices
Piasters Per US Dollar
Figure 3
1966 1987 1968 1969 1970 1971 1972 Oct
5151+0 1272
SAIGON
Free Market Gold Prices
Thousand Piasters Per Troy Ounce Gold Leaf
1966
915161 1242
30 Nov
27.4
Figure 4
18 Dcc
6. ~ 28.7
if I I I I I I
Oct Nov
1972
~p~g ;6
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CONFIDENTIAL
SOUTH VIETNAM
Government Budget*
Billion Piastts-s
436.0
365.0
r'1iiT 300
Daticil'
Military raiBnr Aid "4
I'
C"Illan In
Damesllc Taos 274.0
EXPENDITURES REVENUES
199.8
Figure 5
'930.0
1972 1973
Preliminary 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 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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CONFIDENTIAL