INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000100180007-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: November 1, 2010
• Sequence Number: 7
• Publication Date: July 26, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
26 July 1985
DI IEEW 85-030
26 July 1985
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International
Economic & Energy Weekly
26 July 1985
iii Synopsis
1 Perspective-Key LDC Debtors: Domestic Pressures Mount Over the Longer
Term
3 Oil Stocks and Government Policies of Industrialized Countries
7 India: Growing Opportunities for Technology Diversion
11 EC-Italy: Aftermath of the Lira's Plunge
13 Eastern Europe: Uncertain Economic Recovery
19 USSR: Renewed Interest in Seabed Mining
23 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligencef
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DI IEEW 85-030
26, July 1985
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International
Economic & Energy Weekly
Synopsis
Secret
1 Perspective-Key LDC Debtors: Domestic Pressures Mount Over the Longer
Term
We believe economic, social, and political pressures will increase in the key
LDC debtors as international financial problems linger over the longer term.
Although these pressures have been successfully vented so far, they could
become difficult to manage during the next five years
3 Oil Stocks and Government Policies of Industrialized Countries
A further sharp reduction in commercial inventories combined with uncertain-25X1
ties regarding strategies to liquidate government-controlled stocks would leave
the industrialized world more vulnerable to a major supply disruption.
7 India: Growing Opportunities for Technology Diversion
India is likely to offer an increasingly attractive target for Soviet science and
technology collectors in the years ahead. Although India apparently intends to
protect sensitive US technology under a Memorandum of Understanding
signed last year, New Delhi will be hard pressed to offer the degree of security
Washington expects.
11 EC-Italy: Aftermath of the Lira's Plunge
The European Monetary System (EMS) came through its realignment last
weekend with flying colors following the unexpected plunge of the Italian lira
on Friday. Despite the good performance of the EMS as a whole, "black
Friday" puts the Italian Government in a poor light as the perception grows
that it bungled a planned devaluation of the lira
13 Eastern Europe: Uncertain Economic Recovery
East European economic performance improved in 1984, but the likelihood of
a sustained recovery is not great. Over the longer term, external constraints
and systemic weaknesses will make it difficult for the region to return to the
generally good economic performance of the early 1970s.
19 USSR: Renewed Interest in Seabed Mining
Recent efforts to acquire Western deep sea mining technology and equipment
and to resolve conflicting ocean-mining claims signal renewed Soviet interest
in seabed mining.
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Secret
.International
Economic & Energy Weekly
26 July ?1985
Perspective Key LDC Debtors: Domestic Pressures Mount Over the Longer Term
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It is clear that the key LDC debtors ' will be plagued by international financial
problems for at least the next five years. Although interest payments are 25X1
falling,a slowdown in export growth, rising imports, an upcoming bulge in
principal repayments, and increased capital flight will likely boost the foreign
capital requirements of these countries. At the same time, their access to
foreign capital probably will remain restricted. We believe commercial banks
will strive to reduce their exposure in debt-troubled LDCs, official lending will
increase only marginally, and foreign direct investment will remain depressed.
These trends in the demand and supply for foreign capital will result in a fi-
nancing gap that we believe will have to be closed by several more years of aus-
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Domestic economic pressures surely will increase as austerity drags on. Our
projections of lackluster investment performance and sluggish export growth
portend historically slow economic growth in the key LDC debtors at least
through 1990. Major private forecasts confirm this, indicating that GDP will
grow at least 40 percent slower than during the 1970s. Given population
projections, sluggish economic growth would allow only minimal improvement
in already depressed living standards and probably would lead to worsening
unemployment-nearly 40 million persons could enter their work forces during
the next five years. Frustrated by the lack of opportunities in the traditional la-
bor market, an increasing number of job seekers will turn to the underground
economy, including illicit activities such as the narcotics trade, smuggling, and
street crime.
Social pressures are also building as a result of prolonged austerity. If massive
government deficits are to be reduced significantly, the governments of the key
LDC debtors must begin cutting social welfare spending. Such cuts would
have a highly visible effect on public education, health, and housing, com-
pounding the hardships of a populace already smarting from falling incomes
and unemployment and providing a rallying point that could focus popular
discontent on the government. In addition, social tensions could rise between
ethnic and religious groups as competition for jobs and social services becomes
more intense.
These rising economic and social pressures will come at a time of political
uncertainty in most key LDC debtors. In Argentina, Brazil, and Peru,
democratic governments will strive to consolidate their positions. In Chile and
the Philippines, opposition to autocratic regimes will rise. Nigeria's military
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government will be plagued by continued coup plotting. While still a potent po-
litical force, Mexico's ruling party probably will command less popular support
if serious economic problems persist. Against this backdrop, governments will
face the challenge of implementing politically unpopular adjustment measures
such as subsidy cuts, which will result in higher prices for food and fuel. In
some countries such as the Philippines and Peru, the necessary adjustment will
be complicated by insurgencies, which could capitalize on the increased
hardship that will accompany continued austerity.
Faced with the domestic pressures of prolonged austerity, the key LDC debtors
will increasingly look beyond their borders for relief. Countries with IMF-
supported adjustment programs will lobby even harder for more liberal
economic performance targets. If the Fund proves uncompromising, some
countries-Peru is a likely'candidate-may bypass the IMF and seek direct
relief from private and official sources. Other countries may play the game of
adopting a revised program, quickly falling out of compliance, and requesting
another revision. Individually, or possibly in groups, the key LDC debtors will
try to extract concessions and increased lending from commercial banks. They
will also press governments and international organizations to boost their
lending and development assistance. In addition, their pleas to developed
countries for indirect relief will become more forceful. They will lobby the
developed countries to take their needs into account during the formulation of
macroeconomic policy. The debtors will also press developed nations to reduce
trade barriers and absorb more of their exports.
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Secret
Oil Stocks and Government Policies
of Industrialized Countries
A further sharp reduction in commercial inven-
tories combined with uncertainties regarding strat-
egies to liquidate government-controlled stocks
would leave the industrialized world more vulnera-
ble to a major supply disruption. In July 1984
International Energy Agency (IEA) members
agreed to coordinate stock drawdowns in future oil
disruptions and urged countries with low inven-
tories to improve their stock situation. Weak con-
sumption and ample excess crude oil productive
capacity, however, continue to spur companies to
reduce stocks. Renewed expectations of lower oil
prices will encourage. further reductions. We esti-
mate oil stocks in the OECD countries fell about 40
million barrels last year as increases in govern-
ment-owned stocks only partly offset the decline in
commercial inventories. Moreover, budgetary con-
straints and soft market conditions have slowed
additions to government stockpiles and related
compulsory inventories in some countries.
Total stocks, however, do not represent actual
stocks available for drawdown in the event of a
supply disruption.
We estimate that total primary oil stocks including
government-owned stocks in the industrialized
countries stood at approximately 3.0 billion bar-
rels-about 95 days of forward consumption at the
end of March 1985. In contrast, government and
commercial stocks in 1981 approximated 120 days
of forward consumption in most West European
countries. The overall stock situation in the United
States and Japan, however, has remained at about
1981 levels. Declines in commercial stocks have
generally been offset by increases in government-
owned stocks. Government-owned stocks, which
were practically nonexistent 10 years ago, now
amount to about 20 days of forward consumption.
,OECD: First-Quarter Oil Stocks
I^ J Commercial 0 Government owned
OECD 1981
1983
1985?
United States
Japan
Canada
Western Europe
France
Italy
West Germany
United Kingdom
a
large portion of commercial stocks-about 55 to 60
days of consumption-represent minimum operat-
ing stocks needed to ensure smooth functioning of
the distribution system. Another 10 to 15 days
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1985 1981 1982 1983 1984 1985
Total stocks including
government owned
3,423
3,281
3,139
3,098
215
194
159
145
134
120
106
90
88
83
Italy
157
158
155
146
142
95
95
101
99
98
West Germany
311
274
256
246
213
143
126
117
110
98
United Kingdom
160
130
117
108
107
112
88
84
.62
63
222
424
446
547
633
7'
13
14
17
20
United States
121
299
312
392
462
8
20
21
25 '
31
Japan
.46
70
79
94
110
11
17
20
23
28
West Germany
55
55
55
55
55
25
25
25
25
25
Italy
0
0
0
6
6
0
0
0
4
4
represent compulsory stocks that companies main-
tain to meet government regulations. The balance
of about five days of consumption represents usable
commercial stocks that provide added flexibility to
meet seasonal as well as unexpected changes in
demand. This stock has declined from about 20 to
25 days in the early 1980s and now provides only a
small cushion against oil supply cutoffs. Moreover,
because oil is the primary backup fuel for gas,
elimination of discretionary stocks would leave
West European countries more susceptible to gas
supply curtailments.
Renewed expectations of lower oil prices will en-
courage oil companies to draw down inventories to
minimum levels to avoid losses that would occur
with a price drop. A substantial drawdown of
usable commercial stocks would sharply reduce
demand for OPEC oil and further exacerbate
downward price pressures. The liquidation of most
usable commercial inventories, however, would
leave companies more vulnerable to a major supply
loss.
Individual member governments have- instituted a
variety of stockpile policies to meet their IEA
commitments. There are three basic forms of stock-
pile programs in the industrialized countries:
? Government-owned stockpiles .intended for civil-
ian use.
? Public storage corporations set up with govern-
ment assistance to finance or administer energy
reserves.
? Government requirements. that the oil. industry
maintain emergency reserves.
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Major Government-Owned Stockpiles
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Secret
Major Developed Countries: Stock Ownership
Government Stockholding Company
Owned Entities Owned
United States X X
Ireland X
Luxembourg
United Kingdom
West Germany X X
a Includes stocks held by companies that are partly or fully owned
by governments and stocks held by certain large consumers, such as
utilities, in some countries as required by law or otherwise con-
trolled by governments.
b Includes stocks held to meet mandatory stockholding
requirements.
Some governments have adopted more than one of
these programs. The responsibility for procuring
and storing oil stocks has been given to commercial
firms in most industrialized countries. The firms
maintain physical control over stocks and carry the
financial burden of storage, although concessions
are granted in some countries. In three countries-
the United States, Japan, and West Germany-the
governments have become major stockholders
through the purchase and storage of crude oil.
United States. Until the establishment of the Stra-
tegic Petroleum Reserve (SPR) in 1975, all oil
stocks in the United States except military require-
ments were controlled by commercial firms with no
government involvement. The SPR totaled 462
million barrels at the end of March 1985 and is
expected to increase to 489 million barrels by I
October 1985. The current objective of the pro-
gram is to*accumulate 750 million barrels by 1991.
Japan. Tokyo's stockpile program requires the pe-
troleum industry to maintain 90 days' product
equivalent of the previous year's consumption with
the MITI responsible for setting annual objectives.
In addition to this, in 1977 the government decided
to develop its own stockpile with the objective of
acquiring 189 million barrels by 1988. Purchases
began in 1978, and by March 1985 the govern-
ment-owned stockpile held 110 million barrels.
Tokyo has assured the United States that it will
meet its stockpile target.
West Germany. Bonn initially required refiners and
importers to meet the IEA stockpile objective even
though the government had been accumulating a
separate strategic stockpile since 1970. In 1978
responsibility for compulsory stocks was shifted to
the Compulsory Storage Corporation (EBV), a state
corporation. EBV was required to purchase a 65
day supply of oil based on the previous year's
consumption and acquire sufficient storage capaci-
ty for these supplies. In early 1983, EBV stocks
stood at about 117 million barrels. The government
also requires refiners to hold an additional 25 days
of inventory as working stocks. In addition to these
compulsory stocks, the government's strategic
stockpile currently contains 55 million barrels with
an ultimate goal of 73 million barrels. Budgetary
constraints have prevented Bonn from adding to the
strategic reserve since 1981.
Stockpile Programs in Other Countries
Companies operating in France must maintain
stocks equivalent to 90 days of the previous 12
months' inland sales; the government has expressed
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no interest in maintaining a separate strategic
reserve. The French Government reportedly is con-
sidering easing mandatory stock requirements to
save foreign exchange. In general, Paris favors
imposing demand restraint measures in the initial
stages of a disruption rather than drawing down
stocks.
Increasing domestic production has enabled the
United Kingdom to reduce stock requirements. Oil
companies maintain the bulk of oil reserve stock-
piles. Canada and Norway-the two other major
oil-producing OECD countries-have announced
no stockpile programs.
The Italian Government requires oil companies to
maintain 90 days of emergency oil stocks. The
Italian strategic reserve is held by SOGESCO, a
company under the control of ENI, the state oil
company. In Sweden, industry is required to hold
stocks equal to 110 days of the previous year's
consumption. Government-owned stockpile levels
and target goals are a closely guarded secret, but
we estimate that current government inventories
total about 45 million barrels.
Belgium relies on oil companies to meet IEA
objectives. Private petroleum companies are obli-
gated under a 1965 law to hold stocks equivalent to
90 days of the previous year's consumption. In a
crisis, control of Belgian stocks would pass to the
National Emergency Sharing Organization. The
government presently has no plans to build a
government-owned stockpile.
In Switzerland, compulsory stocks are equivalent
to 180 days of the previous year's consumption and
are held by industry. Oil companies in the Nether-
lands are required to hold stocks equivalent to 90
days of the previous year's consumption, and oil
traders are required to hold an additional 70 days
of stocksd the public-
sector corporation, COVA, also has acquired 30
days of supplies including a mix of crude and
products.
Commercial stocks, as measured in days of forward
consumption, are now approaching levels that exist-
ed in the mid-1970s and could even go lower. If oil
companies believe that oil prices will continue to
fall, an estimated 100-200 million barrels of inven-
tories could be dumped on the market. Should
another major supply disruption occur, we believe
companies will have little cushion available in the
form of usable stocks to offset reduced oil flows.
We believe the increase in government-owned oil
stocks will only partially affect this drop because of
budgetary constraints. Nevertheless, effective de-
ployment of government-owned stocks under IEA
coordination could play an important role in offset-
ting any future oil supply disruption. The key
players in any coordinated strategic stock draw-
down would be the United States, Japan, and West
Germany. The major problem will be the design
and implementation of a program believed to be
effective and equitable. In addition to demand
restraint measures, countries without government-
owned stockpiles could share the burden of a
disruption by augmenting supplies through a relax-
ation of mandatory commercial stockpile require-
ments.
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India: Growing Opportunities for
Technology Diversion'
India is likely to offer an increasingly attractive
target for Soviet science and technology collectors
in the years ahead. Prime Minister Rajiv Gandhi
has introduced sweeping economic reforms that
promise to encourage imports of sophisticated
Western technology and boost India's ability to
manufacture its own high-tech products. Faced
with increasing difficulties in procuring Western
high-tech elsewhere, Moscow almost certainly an-
ticipates reaping a bountiful harvest of controlled
technology once New Delhi begins to import it.
Although India apparently intends to protect sensi-
tive US technology under a Memorandum of Un-
derstanding signed last year, New Delhi will be
hard pressed to offer the degree of security Wash-
ington expects.
Memorandum of Understanding (MOU) on tech-
nology transfer with the United States last year-
setting the stage for a takeoff in US high-tech
sales-and several other Western countries are
offering attractive technology packages in order to
gain a foothold in India's burgeoning electronics
market.
In addition, India's ability to produce indigenously
high-technology items of interest to the Soviets is
likely to increase significantly during the next
decade. Gandhi is eager to make Indian high-tech
goods competitive in world markets. The develop-
ment of software for export, for example, is receiv-
ing particular emphasis. With an abundance of
trained, English-speaking software engineers and
low labor costs, India enjoys a comparative advan-
tage in software production that it is only beginning
India as a High-Technology Target
India is poised for an unprecedented expansion of
its technological capabilities. After decades of slow
and uneven growth, India has built its heavy
industrial infrastructure and is moving increasingly
into high-tech areas such as electronics and com-
puters. We believe the scope for such expansion is
vast-India boasts a broad range of scientific activ-
ity and an impressive reservoir of technically
trained manpower. Advanced technology is expect-
ed to play a central role in Rajiv Gandhi's driving
ambition to modernize India by improving produc-
to exploit on a large scale.
Although Western Europe and East Asia remain
the primary focus of Moscow's efforts to acquire
high technology, three major factors make India a
potential source:
? India's large, active, and capable scientific
community.
? The ease with which sensitive information can be
acquired in a developing country with democratic
traditions.
? New Delhi's close and longstanding relations
with Moscow.
tivity and.government efficiency.
India's technological expansion poses a double
challenge to the international trade control mecha-
nism. Imports of controlled technologies will almost
certainly increase significantly and offer opportuni-
ties for diversion. Gandhi has already liberalized
key aspects of India's overregulated economy-
including rules on foreign joint ventures and
import/export policies-to fuel efforts to modern-
ize with new technology. New Delhi signed a
Indo-Soviet Ties: A Special Concern
The USSR is uniquely positioned to acquire tech-
nology in India because of its close and longstand-
ing relations with New Delhi. Although their rela-
tionship is based on a congruence of national
interests and not ideological affinity, it allows the
Soviets to maintain a large official presence in
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India that reinforces bilateral cooperation across a
broad front-political, economic, military, and sci-
entific-and provides an excellent cover for intelli-
gence collection operations. We estimate that the
KGB S&T contingent in India consists of about 13
officers-one of Moscow's largest S&T efforts.
Although evidence of their operations is scarce, we
believe they have-proved adept at targeting Indians
with special knowledge or with relatives in the
United States who can supply-technical informa-'
India's nonalignment and Gandhi's preference for
Western_over Soviet technology have prompted
New Delhi to adopt a more evenhanded approach
toward the superpowers than in the past. Nonethe-
less, Gandhi cannot afford to jeopardize the signifi-
cant economic and military benefits India receives
from Moscow as he seeks new ties to the West.
Despite recent attempts at arms diversification,
India will continue to rely on- the Soviets for most-
of its'sophisticated weaponry for at least the rest of
For the Soviets, India's growing interest in expand-
ed ties with the West-and its quest for advanced
technology present both a challenge and an oppor-
tunity.
hardening attitudes in the industrialized countries
toward Soviet espionage and illegal technology
procurement activities have forced the Soviets to
seek alternative sources in the LDCs.
Acquisition Mechanisms
The Soviet Union -acquires technology in India
through a variety of mechanisms, including legal
and illegal purchases, cooperation and exchange
agreements, and intelligence operations. We have
no evidence that formal trade agreements them-
selves promote illegal technology transfer. On the
other hand, well-established bilateral cooperation
over a broad range-of scientific disciplines enables
Soviet scientists to profit from access to their
Indian counterparts. Many scientists in India were
trained in the United States and have retained
informal contacts with colleagues-here-both US
and' Indian-in high-technology fields. We believe
these contacts-which the Indian Government en
courages-offer immense scope-for technical data
diversions that are almost impossible to-monitor.
We have persuasive evidence that some controlled
US technology-mainly computer-related items
such as software with ' both civilian and military
applications-has been transferred by Indian firms
and individuals to the USSR over the last decade.
In our view, these transfers occurred without the
official approval of the Indian Government, al-'
though in some cases employees of government-
controlled institutions have been- implicated
transfers of other
controlled items-includin Western military tech-
nology-have occurred
Indian Security Practices
Indian officials' believe their security procedures
are adequate to support assurances lo the United .
States and to deny the Soviets access'to Western
technology within the government,-the military,
and public-sector enterprises. Indeed, over the past
two decades, the Indian Government,has demon-
strated-to the extent we can, verify-an ability to
compartment and restrict access to sensitive tech=
nologies, especially at military installations. New
Delhi is far less sanguine of-its ability to.prevent
diversions through the private'sector-where w
e
believe they are most likely'to'occur=but has
warned the United States not to sell-to certain
companies suspected of working for- the Soviets.'
Good intentions aside, New Delhi will'-be hard
pressed to-offer the degree-of protection Washing-
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ton expects. Recent revelations of widespread espio-
nage within the government and private industry
suggest that India would be vulnerable to aggres-
sive S&T collection efforts. Through improved
licensing, enforcement, and security practices, how-
ever, India may be able to prevent actual diversions
of hardware and equipment.
Protecting sensitive technical data will rove far
more difficult.
If Soviet collectors can locate US equip-
ment protected under the MOU, we believe that in
time they can almost certainly gain physical access
to the machines and their technical data.
Perceptions and Prospects
We believe the Indian Government has become
sensitized to US concerns about unauthorized di-
versions of sophisticated technology and is fully
committed to upholding its security obligations
under the MOU. Both New Delhi and Indian
private industry fear loss of access to US technol-
ogy if illegal transfers occur and are discovered
because they recognize the importance of high
technology to India's economic development.
Despite pledges to protect US technology as the
price of acquiring it, we believe India would resist
strongly any pressure from the United States to
subscribe to international technology controls or to
restrict exports of its own high technology to any
country, including the USSR. Indian officials
would resent such pressure as an attempt to under-
mine India's sovereignty, limit its freedom of ac-
tion, and prevent it from challenging the West in
world markets.
Although New Delhi clearly prefers US equipment
and technology, some West European and Japanese
suppliers are offering attractive alternative pack-
ages with favorable financing and fewer restrictions
on use or reexport.
India would turn increasingly to these suppliers if
US requirements prove onerous. In the long run, we
believe only a coordinated position by COCOM
member countries on controlled high-tech exports
to India will prove effective in limiting technology
diversions to the USSR.
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EC-Italy: Aftermath of the
Lira's Plunge
The European Monetary System (EMS)' came
through its realignment last weekend with flying
colors following the unexpected plunge of the Ital-
ian lira on Friday. For the first time in the system's
history, technical experts handled the realignment
without having to call in the EC finance ministers.
Despite the good performance of the EMS as a
whole, "black Friday" puts the Italian Government
in a poor light as the perception grows that it
bungled a planned devaluation of the lira.
US Dollar-Italian Lira
Exchange Rate, 8-19 'July 1985
The Realignment
The lira's 18-percent plunge against the US dollar
began when.the government-owned energy holding
company ENI placed an order for $125 million on
the Milan exchange, which normally trades about
$60 million a day in foreign currency. According to
the US Embassy, ENI was rumored to have ad-
vance word that the government would be pushing
for a devaluation of the lira at last weekend's
regularly scheduled meeting of the EC finance
ministers. Later press reports discount this, but
note that the Bank of Italy pressured ENI to
postpone the transaction until Monday.
As pressure on the lira mounted, the Bank of Italy
refused to intervene, and, in a 15-minute period,
the dollar jumped from 1,860 lire to 2,200 lire by
the Milan exchange's normal closing hour. Trea-
sury Minister Goria then ordered the Bank of Italy
to suspend foreign exchange operations involving
the lira for the rest of the day, and other EMS
central banks followed suit.
' The EC countries set up the EMS in 1979 to stabilize their
exchange rates in preparation for a monetary union with a common
currency. The 10 EC currencies make up the European Currency
Unit-the basket against which the EMS countries try to maintain
exchange note stability. Although members of the EMS, the United
Kingdom and Greece have not pledged to intervene in the exchange
markets to stabilize their currencies against the other EMS curren-
1,800 8 9 10 11 12 15 16 . 17 18 . 19
July
Technical experts from the EMS countries, who
had been scheduled to meet in Basel, Switzerland,
on Saturday, worked out the details of the realign-
ment Friday night and announced them Saturday
morning. In the realignment, the lira was devalued
6 percent against the European Currency-Unit
(ECU)-the basket of the 10.EC currencies that
stands at the center of the EMS. The other EMS
currencies were revalued by 2 percent against the
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ECU to compensate for the impact of the fall in the
lira on the ECU's value, thereby keeping all other
exchange rates constant. In effect, the lira was
devalued 7.8 percent within the EMS.
Factors Behind the Realignment
The Italian Government apparently decided during
its policy review last week to push for a lira
devaluation to reverse the country's declining trade
competitiveness. Growth of Italian exports has
slowed sharply in the past year largely because
Italy's inflation rate-8.7 percent for the 12
months ending in June 1985-remains almost dou-
ble the average rate of its major trading partners.
With economic growth spurring import demand,
the trade deficit rose to $7.4 billion for January-
May 1985-50 percent higher than the level of the
same period last year.. Moreover, projections of a
record current account deficit this year raised fears
that Italy would have difficulty attracting enough
Rome wanted to devalue before growing market
speculation against the lira eroded the country's
international reserves. According to the US Em-
bassy, Italy's monetary authorities further reck-
oned that moving now would allow the government
to take advantage of declining oil prices to cushion
the devaluation's inflationary impact on imports.
Implications` for `the EMS and Italy
The fact. that technical experts for the first time
worked- out the details of. a. realignment bodes well
for the future of the system. Past realignments have
often been acrimonious as finance ministers at-
tacked each other's: economic~policies; Although the
decision for :..realignment remains a political, one,
the absence.of finance ministers 'at last weekend's
meeting indicates that the-EMS governments now
look at the magnitude of :a realignment as a.
technical problem. If finance ministers stay out of
discussions on future realignments, the chances of
the EMS breaking up should be much lower.
Nevertheless, "black Friday" will make significant
initiatives toward monetary union even less likely in
the near term. Rome will be more reluctant to
adopt the 2.25-percent band in which other EMS
currencies are allowed to fluctuate without forcing
a realignment; the lira is the only,EMS currency
with a 6-percent band. Other EMS countries,
particularly West Germany and the Netherlands,
probably will renew their insistence that capital
controls.. among EMS countries should be disman-
tled before new measures to foster monetary union
are taken; they almost certainly will cite the lira's
fall as a consequence of.capital controls that help
keep Italian financial markets thin.
The devaluation of the lira probably is too small to
wipe out the Italian trade deficit. More stringent
measures are needed to reduce inflation and in-
crease industrial productivity before Italian compa-
nies can significantly improve their trade competi-
tiveness.. Prime Minister Craxi probably will
redouble his efforts to reduce existing capital con-.
trols and seek tougher economic measures to ad-
dress, the trade and public-sector deficits. The
government's, inability to handle the devaluation
smoothly, however; highlights the riskiness of in-
vestments in lire and probably will slow the broad-
ening of Italian financial markets:
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Eastern Europe: Uncertain
Economic Recovery
East European economic performance improved in
1984, but the likelihood of a sustained recovery is
not great. Most of the growth resulted from large
gains in agricultural output due to good weather.
This year, although the region has rebounded from
the harsh weather this past winter that disrupted
industry and transport and damaged some crops,
economic growth probably will fall below last
year's level. Over the longer term, external con-
straints and systemic weaknesses will make it diffi-
cult for the region to return to the generally good
economic performance of the early 1970s.
Eastern Europe's economic growth improved signif-
icantly compared with the early 1980s. Romania
scored the largest gain among the CEMA Six,' but
the economic turnaround by Bulgaria and Hungary
was impressive.' Yugoslavia's economic perfor-
mance also showed a significant recovery from
1983's decline. Although the region's overall per-
formance was the best in this decade, growth rates
are still well below the relatively high levels of the
early 1970s.
Last year's economic gains resulted largely from '
good weather that helped push agricultural produc-
tion to record levels in most of the region. Every
country except Bulgaria harvested a record grain
crop, and Bulgaria's was still a substantial improve-
ment over its 1983 results. The increase in grain
production-following two years of above-average
harvests-and improved output of many nongrain
crops supported strong growth in livestock produc-
tion.
' Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and
Romania.0
' We estimate Romanian GNP growth at 4.3 percent, but, because
of the large distortion in the underlying official indexes, we have
less confidence in this estimate than in those for the other countries.
Although industry's gains lagged agriculture's,
East European industry continued to recover from
its 1981-82 downturn. Hungary and Czechoslova-
kia, which had the poorest performance in 1983,
recorded the largest improvements last year. Po-
land led the region in industrial growth for the
second consecutive year, even though the rate of
increase slowed. Poland's high rate of growth,
however, is largely a rebound from the severe
depression of 1980-82 when industrial production
fell more than 15 percent.
Some easing of external problems as well as adjust-
ment to reduced Western imports and Soviet oil
deliveries underlie the modest revival of East Euro-
pean industry. Economic recovery in the West
helped boost hard currency exports 7 percent in
dollar terms. This increase in sales and a greater
availability of trade financing allowed all of the
regimes, except Budapest, to ease import restraints
imposed during the 1981-83 financial crisis. Al-
though hard currency imports remained well below
their 1980 peak, last year's small increase probably
improved domestic supplies of key raw materials
and manufactured goods, helping to ease bottle-
necks and support the upturn in industrial produc-
tion. Planners also have probably shifted produc-
tion and distribution patterns somewhat, enabling
the East European economies to substitute domes-
tic production for goods previously imported from
the West and to conserve on the use of materials.
Moreover, East Germany, and, to a lesser extent,
Hungary and Czechoslovakia, which suffered cut-
backs in Soviet oil deliveries after 1981, have
achieved some success in energy conservation and
substitution.
Consumption, which most East European regimes
had already favored over investment in adjusting to
financial problems, benefited further from last
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Eastern Europe: GNP Growth a
year's pickup in economic' growth. Poland recorded
the fastest growth rate in private,consumption as
the government backed away for the second consec-
utive year from stringent austerity measures in
order to curry popular support and to show progress
in resolving the country's economic problems. East.
Germany and Czechoslovakia recorded increases in
consumption on a par with those of the, 1970s while
Hungary at least recouped 1983's losses. Only
Yugoslavia and probably Romania suffered a drop
1971-75
1976-80
1981-82
1983
GNP' ; ,-
-4.7'
1.0
2.9
-1.6
3.1
Agriculture
2.2` ?_
- 3.4 -
5.2
- 12.4'
7.5
Industry
5:7.
3.4
2.5-
1.9
2.3
Other, _
_:. 5.7
- 1.6
1.9.
1.2 .
1.7
Czechoslovakia
.
GNP ? .
. 3.4.
2.2
0.7
1.0
2.3
Agriculture .
2.4
1.4
-0.4
1.7
4.2
Industry
3.9
2.8
1.4
0.9
2.5
Other
3.3
1.9
0.4
0.8
1.4
East Germany
GNP
3.5
2.3
0.8
1.6
3.0
Agriculture
2.8
`0.7
0.8
3.1
8.3
Industry '
3.4
3.0
1.7
1.9
2.0
Other
3.7
2.2
-0.1
0.8
2.6
Hungary
GNP' ? ' -
3.3
2.0-
12 "
-1.2
1.3-
Agriculture
3.9
1.6
5.8
-5.8
2.1
Industry 1:
2.6
2.2
1.6
1.0 ?
2.1
Other
3.5
2.1
0.7
-0.3
0.3
Poland,
GNP
6.5"
0.6
-3.2
4.6 "
3.4,
Agriculture
1.1
-1.0
4.4
4.7
3.9
Industry
7.6
0.6
-7.9
5.2
4.1
Other
10.0
1.8
-3.9
4.2
2.7
Romania
GNP
6.7
3.9
1.5
0.2
4.3
Agriculture
5.3
3.2 '
4.1
-0.3
11.4
Industry
9.2 '
4.4
0.8
3.1
3.8
Other
5.4
3.9
-0.2
- 2.6
-1.2
CEMA Six
'
Agriculture
'2.5
0.4 3.5 0.6
6.2
Industry.
5.5.. .
2:4 --,1.0 . 2.6
2.9
Other
5.7
2.2- - -.0.9 , 1.3
1.6 "
Yugoslavia. .
GNP
6.1
5.6 1.1 - 1.3
1.7
Agriculture
2.9
2.2 5.6 -1 8
1.1
Industry
.5.8 . .
7.2 1.0 1.4
1.8
Other
7.6.
5.8 -0.3 -2.9
1.8
Caution must be used when viewing the rates of growth for total
GNP and by sector of`origin for the CEMA Six. While they are
useful in illustrating individual country differences from the aver-
age, their primary shortcoming stems from the fact that they are an
artificial measure that is the combination of individual countries
measured in different factor costs.
b Preliminary.
in private consumption. Although private consump-
tion was up for-the region as a whole, imbalances
continued resulting in shortages, price hikes, and-
in Poland and Romania-rationing of some food
and consumer goods.
Growth rates for investment were much more
mixed than those of consumption. Although tight
control on investment since 1980 has raised concern
in Eastern Europe about long-term growth, East
Germany, Hungary, Bulgaria, and Yugoslavia con-
tinued to limit, if not reduce, investment to free up
output for export and consumption. Poland, Roma-
nia, and Czechoslovakia accelerated investment,
but much of this spending went to reviving large,
heavy industrial projects that will probably, have
little, if any,.payoff. Many of these projects were ill
conceived from the outset and due to the long
leadtime for completion will be technologically
obsolete.
1985: Recovery From a Bad Start
Last year's economic'upturn probably. will not . .
carry over to 1985 for most of the East European
countries. The region was, hit by extremely harsh
winter weather that led to energy shortages, disrup-
tions in transportation and production, poor hard
currency trade performance, and damage to winter
grain crops in B 1 is of Romania.
some recovery from
the first-quarter losses is taking place, but the more
hard-hit and fragile economies are still struggling:
? Romania is unlikely to match last year's -growth
rates. Lack of'energy reserves may have cut
industrial production as much as 7 percent com-
pared with first quarter 1984, and worsening
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Comparing Official and-Reconstructed
Growth in Eastern Europe
Two frequently used measures of economic activity
are the official national income produced (NIP)
used in Marxist national income accounts and
GNP as conventionally measured in the West. NIP
and GNP differ in three ways: services, prices, and
depreciation. Marxist national income accounts
exclude as nonproductive most services, including
housing, education, government administration,
and consumer services. Prices also'distort Marxist
national income accounts. Goods are valued in
purchasers' prices that include turnover taxes-
taxes on sales to consumers that vary from item to
item. Western-style GNP accounts, on the other
hand, value goods and services at factor cost-the
value of labor and capital services used in their
production.;A change in turnover taxes will, there-
fore, affect Marxist national income, but not West-
ern-style GNP. NIP. measures also suffer an up-
ward bias . resultingfrom.underestimation of price
increases in official indexes. This upward bias is
due to two factors: (1) the declining quality of
goods while their prices remain the same and (2)
the introduction of new products whose prices are
set excessively high,,although the new product may
be in reality an older product with some insignifi-
cant alteration.. The third difference is that GNP
measures do not deduct depreciation from gross
payment problems have. led the regime to slash
already sparse imports and redouble its export
drive. Because of weather problems and shortages
of inputs, the outlook for agricultural production
is mediocre..
? Poland's economy had its worst start since 1982.
Data for the first quarter indicate industrial
production stagnated, and the hard currency
trade surplus fell to $250 million from $360
million in the same period last year. While results
from April and May show growth in industrial
production, Polish officials are pessimistic about
this year as a whole.
fixed capital formation while Marxist national
income measures do.
As a result of these accounting differences, growth
rates measured in Western-style GNP terms differ
markedly from growth rates expressed in Marxist
national income terms. Movement in Western-style
GNP growth measures tends to be less extreme
than their Marxist counterparts because services,
excluded from Marxist accounting practices, usu-
ally are more stable on a year-to-year basis than
the other components of production.
The following tabulation compares percentage
growth in NIP and GNP terms for 1984:
GNP NIP
Bulgaria 3.1 4.6
2.3 ' 2.8
3.0 5.5
1.3 2.8 to 3.0
3.4 5.1
? Bulgaria seems likely to turn in one of its-poorest
economic performances in years. The regime's
effort to make up for weather-related production
losses through a six-day workweek does.not seem
to be yielding results; Agricultural performance
will likely suffer due. to. continuing drought and
low reservoir levels. ? .
? Yugoslavias goal -of recording major gains -over
1984 has been dashed, although some growth is
likely. Industrial'production slumped during the
first quarter while a -falloff in exports and. an.
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Eastern Europe:
Private Consumption Growth
Average Annual Percent
Bulgaria
3.8
1.6
3.2
0.5
1.7
Czechoslovakia
2.7
1.6
0.8
0.9
2.0
East Germany
3.9
2.0
0.2
0.5
3.7
Hungary
3.3
2.2
1.3
-0.8
1.0
5.5
2.4
-5.6
5.2
5.1
Romania
5.1
4.7
0.4
-1.9
NA a
Yugoslavia
5.2
4.9
-0.5
-1.7
-2.0
a The Romanian Statistical Office has ceased publication of key
data necessary for the calculation of private consumption.
increase in imports produced a current account
deficit of $359 million through April in contrast
to a $31 million surplus in the same period of
1984.
? Czechoslovakia, East Germany, and Hungary
will probably come close to matching last year's
economic performance. Although all of these
economies were affected by the harsh weather,
overtime and other administrative measures have
helped overcome the first-quarter deficiencies.
Prospects
Although this year's slowdown is largely related to
the unusually harsh winter, external factors and
systemic weaknesses will limit economic growth for
the rest of the decade. We doubt that the region
can sustain GNP growth of more than 2 percent
annually over the next few years, far below the
growth rates obtained during the 1970s:
? The East Europeans will face strains in their
economic relations with both the West and the
Eastern Europe: Gross Fixed Investment Percent
Bulgaria
8.6
6.1
6.1
0.4
1.0
Czechoslovakia
8.3
3.0
-3.5
0.6
4.4
East Germany
4.8
3.4
-1.3
0
0
Hungary
7.0
2.4
-3.7
-2.7
-1.0
Poland
18.5
-3.0
-17.5
9.4
8.0
Romania
11.4
8.5
-5.5
2.9
6.1
Yugoslavia
5.8
5.5
-7.7
-10.0
-6.0
USSR. Large hard currency debt service require-
ments and caution among Western creditors will
continue to limit imports and require improved
export performance. At the same time, the East
Europeans can no longer count on Soviet largess.
To bring the economic relationship into closer
balance, Moscow is insisting that the East Euro-
peans provide more and better quality goods,
along with investment resources, in return for
energy and raw material exports.
? Growth of inputs needed to sustain economic
growth will be slow. In all the countries except
Romania, the rate of growth in the labor supply
will decline during 1986-90. Because of external
constraints and unease over reductions in domes-
tic consumption, most regimes will probably keep
investment rates below historical levels, limiting
improvements in productivity.
? Most of the countries suffer from low energy
reserves and inefficient energy-intensive indus-
tries, and the possibility of more reductions in
Soviet oil deliveries is always present.
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? Although most of the regimes recognize the
inefficiency of their economic systems, only Hun-
gary has undertaken meaningful action to decen-
tralize decisionmaking, rationalize prices, or in-
crease the role of market forces in the economy.
Hungary's economic performance, however, is
not an unequivocal testament to reform. Al-
though the Soviets are pressing the East Europe-
ans for greater economic efficiency, most regimes
appear uncertain about the degree of reform
Moscow is willing to permit and are unlikely to
do more than tinker with their existing systems.
Given this outlook, the East European regimes will
face tough decisions allocating the limited growth
of output between the competing uses of invest-
ment, consumption, defense, and exports.
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Seabed Mining
Recent efforts to acquire Western sea-mining tech-
nology and equipment and to resolve conflicting
ocean-mining claims signal renewed Soviet interest
in seabed mining. Although this interest may be
driven by several factors, including military appli-
cations, we believe Moscow's primary motivation is
the future extraction of minerals, especially manga-
nese, largely because of the declining quality of
domestic manganese ore.'
The USSR is the world's largest producer of
manganese ore, but Soviet high-grade manganese
ores, which have a lower metal content than those
normally mined in the West, could be completely
exhausted at the two major mining areas of Chia-
tura and Nikopol in nine and 20 years, respectively.
This would leave only lower-grade ores that are
much more difficult and expensive to process. The
large Bolshoy Tokmak deposit, which the Soviets
are just beginning to develop, consists almost en-
tirely of low-grade ores. The poor quality of Soviet
ore, has contributed to inefficiency in steelmaking.
The Soviets have had a longstanding interest in
locating and analyzing ocean-bottom mineral de-
posits, especially manganese nodules. They first
reported the recovery of nodules in 1957 from the
Pacific Ocean.
he USSR started developing technology
for seabed mining in the late 1960s. An organiza-
tion in Siberia developed the chemical techniques
for separating metals of interest. Additionally,
' Manganese nodules consist mainly of manganese and iron oxides,
but they also contain copper, nickel, cobalt, aluminum, titanium,
lead, vanadium, molybdenum, zinc, and chromium. Of most eco-
nomic interest are nickel (used primarily in steel production), copper
(widely used in electrical equipment), cobalt (used in the electrical
and aerospace industries), and manganese. Deposits of these small,
dark brown, irregularly shaped nodules are normally found at
depths of 4,000 to 6,000 meters. The distribution of nodules is
uneven, but the largest deposits are thought to be in the Clarion-
Clipperton zone, an area of the Pacific Ocean that extends from
Moscow has made several attempts in the last few
years to buy from Western companies a submers-
ible nodule mining vehicle, an oceanographic
camera system, a seabed miner built on a drill ship
hull, and a transfer and storage vessel.
We believe that the Soviets are interested in seabed
mining primarily because of their need for higher
grade manganese ore. Manganese ore extracted
from nodules is of poorer quality than that avail-
able from many international suppliers, but it is
superior to most domestic reserves. In addition,
much of the seabed mining research has occurred
following warnings from Soviet geologists that
high-quality manganese ore was being rapidly de-
pleted.
The USSR's interest in manganese nodule mining
could also be driven by several other factors:
? A desire to prevent other countries from corner-
ing the market.
? National pride'because the United States and
Japan have developed and tested prototype sys-
tems for manganese nodule mining.
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military applications. The technology involved in
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weapons and antisubmarine warfare sensors.
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Seabed Mining of Manganese Nodules
Many Western countries, including the United
States, Japan, the United Kingdom, Canada, and
West Germany, have been actively involved in
studying the potential of commercial seabed min-
ing. Development, however, has been slowed by
continuing legal, economic, and technical ques-
tions.
The Law of the Sea (LOS) Treaty, signed by over
100 nations, in 1982, formed a regulatory agency
and outlined some controversial conditions for
seabed mining. The treaty, however, has not been
signed by the United States and several other
Western countries. It is unclear what will happen
when claims filed with the regulatory agency con-
flict with mining rights claimed outside the LOS
framework.
Economic questions also hamper the development
of seabed mining. A recent US Bureau of Mines
study estimates that a four-metal mining project
that processes 3 million tons of nodules annually
would require an estimated $2 billion capital .
investment and operating expenses of $150 per dry
ton and would yield a rate of return after taxes of
about 7 percent. Most Western investors would
probably require a rate of return of about 20
percent before undertaking such a risky venture.
The markets for metals produced from the seabed
are fairly uncertain, and the technology for mining
and processing is even less clear. Four major
components are involved-a mining system, a
mother ship to provide the focus of mining opera-
tions, ore transporters, and processing plants.. The
weakest link in the chain is the mining system.
Systems that include either self-propelled or towed
collection apparatus with lifting devices attached
to a continuous line bucket have been tested on a
pilot basis.
Dependence on Western Equipment
If the Soviets undertake full-scale nodule mining
operations, they will almost certainly depend on
Western equipment and technology, particularly
for the mining phase of the operation. Because of
the possible military applications, however, the
Soviets have had trouble obtaining submersible
craft for this purpose. Equipment capable of per-
forming beyond 1,000 meters is COCOM con-
trolled, although some suppliers such as Finland
are not COCOM members.
The Soviet Ministry of Geology reportedly ordered
two ocean-mining research ships from Finland in
early 1985. The two ocean-mining research ships
will each be equipped to support a 6,000-meter
manned submersible.
the Soviets signed a contract with the Finnish firm
Rauma Repola in May for a 6,000-meter submers-
ible vehicle.
Although Soviet demand for manganese may level
off because of slow growth in steel production and
modernization of the industry, manganese will re-
main an essential ingredient in steelmaking. The
Soviets probably can get by using their domestical-
ly produced ore for the next 15 to 20 years for most
applications. New refining techniques and methods
for lowering the amount of manganese necessary
for steel production may alleviate some of the
problems associated with using low-grade ores.
If the USSR is to avoid sole reliance on its low-
grade ore, it will have to import high-grade ore
from the West or obtain Western technology to
develop production from seabed nodules. The Sovi-
ets should have no problem importing ore in the
near future. According to Western studies, current
world operating rates of manganese mines average
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only 60 percent of capacity, and growth in world-
wide demand is expected to be slow.
Should the Soviets choose the seabed-mining op-
tion, full-scale operations probably are over 20
years away. In addition to the technological barri-
ers, some workable legal framework for mining the
seabed needs to be established. As an initial signer
of the Law of the Sea Treaty, the USSR is
guaranteed a minesite on the seabed.
Earlier this year, a Soviet delegation met with
delegations from Japan and France and reached
tentative settlements of conflicts regarding their
minesite claims. We believe, however, that the
USSR claim conflicts with one or more of the
claims of four multinational consortiums that in-
clude companies from the United States, the Unit-
ed Kingdom, West Germany, Canada, Italy, and
Belgium.
If the Soviets obtain the technology and undertake
seabed-mining operations, the effect on internation-
al metals markets eventually could be dramatic.
According to Western studies, an annual 3-million-
ton operation might not only yield 500,000 tons of
manganese ore, but also an estimated 40,000 tons
of nickel and 7,000 tons of cobalt. Much of the
yield from such an operation probably would be
sold on the international market in direct competi-
tion with such metal suppliers as Canada, Cuba,
Australia, Zambia, and Zaire.
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Energy
Effects of Iraqi Iraqi missile damage to Iranian shuttle tankers on 9 and 12 July shows that
Attacks on Iran's the Iranian oil shuttle system can be briefly disrupted by sporadic aircraft
Oil Shuttle attacks, but Iraq would need to intensify attacks over a long period to have a
major effect on Iranian oil exports. Oil sales and barter so far this year account
for 95 percent of the foreign exchange Tehran is expending to prosecute the
war and provide essential commodities to its people. Since May approximately
80 percent of Iran's oil exports-which have averaged 1.7 million barrels per
day-have been moved to the southern Persian Gulf by the shuttle operation
between Khark terminal and Sirri Island. Baghdad would have to ensure that
fewer than seven tankers are available on a day-to-day basis to drive the
shuttle capacity below the level of current exports. With the ready availability
of idle tankers in or near the Gulf, however, Tehran would have no trouble re-
placing a damaged ship within a few weeks-although it might have to pay
higher charter rates. As a last resort, the Iranians could entice tankers back to
Khark Island by offering lower oil prices, as they did during the height of the
Iraqi attacks on tankers last spring.
Nigeria To Repay The US Embassy reports that the governor of the Central Bank of Nigeria has
US Exim pledged to repay all short-term arrears owed to the US Export-Import Bank.
Bank Arrears Nigeria is paying about $15 million to free up two undisbursed Exim medium-
term loans, which will be used to purchase US-manufactured turbines and a
pump assembly plant. Because the repayment proposal does not involve any
rescheduling, it will not violate Paris Club guidelines prohibiting creditors
from unilaterally rescheduling their outstanding loans.
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Iraqi Debt Relief Iraq's major Western creditors are providing relief for Baghdad's current
financial crunch. The US Embassy in Baghdad reports that an agreement
appears likely with Japan to defer 75 percent of Iraq's 1985 payments by two
years-some have been overdue since April. The Embassy also says that West
Germany will continue to provide credit despite Baghdad's requests for
rescheduling of loans due this fall.
Iraq's financial troubles could become unman-
ageable if oil prices fall by' more than a few dollars per barrel.
British Lower Egypt's The United Kingdom's Export Credit Guarantee Department (ECGD) put
Credit Rating Egypt in its highest risk category last month, the first such state agency to do
so. Cairo currently is in arrears on three loans from the ECGD totaling 2.87
million pounds ($4 million). The lower credit rating, combined with an across-
the-board increase in interest rates for all ECGD-backed loans, means Egypt
faces an effective 50-percent increase in premiums on new loan guarantees.
Progress in Chilean After six months of stalemate, Chile's debt package is now moving along. The
Debt Package IMF agreed in principle on 15 July to a three-year, $765 million extended fund
facility that cleared the way for a 17 July Paris Club rescheduling of $170 mil-
lion. The World Bank responded to Santiago's lifting of the state of siege by
approving a $140 million highway project loan in late June and authorizing
negotiation of a $300 million cofinancing loan.
The
Inter-American Development Bank announced it will approve $400 million in
loans this year to Chile. Santiago is counting on disbursements from the IMF
in August, bankers in September, and the World Bank in late fall. We remain
concerned that technical delays or resurgent political problems could tempo-
rarily untrack negotiations-in which case Chile would be unable to cover its
current account deficit and meet its IMF reserve targets in 1985. Thus, we
project Santiago will continue to experience foreign exchange strains this
year-possible selling off some gold reserves to meet obligations-and will
seek waivers from the IMF on its reserve and inflation targets.
Moroccan Debt Rescheduling of Morocco's official debt for 1985 and 1986 suffered another
Rescheduling Delayed blow last week when Paris Club members postponed further consideration
until at least September. Club members were reluctant even to meet the
Moroccan delegation, according to the US Embassy in Paris, and did so only
under pressure from the French delegation. Little progress is likely in
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September unless Morocco signs the long delayed 1983-84 London Club
rescheduling agreement and negotiates a new IMF package. The delay in
reaching such accords almost certainly will result in harsher rescheduling
terms and possibly a reluctance by commercial banks to continue already
limited short-term credit lines. With only $90 million in foreign exchange
reserves remaining, Rabat is near the end of its financial rope unless wealthy
Arab states or other benefactors appear.
Indonesian External The World Bank announced last week that Jakarta's external public debt for
Debt Rising yearend 1984 reached $24.6 billion, $2.9 billion above year-earlier levels,
making Indonesia the fifth most heavily indebted nation in the world.
Although its debt is increasing at a relatively modest pace as a result of sharp
reductions in imports, Indonesia's debt horizon is clouded by continued
softness in oil prices as well as a possible slowdown in the global economy. The
US Embassy reported last week that export revenues in the first quarter of the
fiscal year that began 1 April dropped by 25 to 30 percent over the same peri-
od last year. Although we believe Indonesia is capable of coping with $24 to
$25 per barrel of oil, a drop to $20 per barrel would place severe strains on its
external finances. Unlike two years ago when similar circumstances led to
cutbacks in development projects and a rupiah devaluation, Jakarta's budget
has already been sharply trimmed, and the government will be harder pressed
to handle comparable declines in export earnings.
Jamaica's New The IMF approved a $118 million, 22-month standby loan for Jamaica last
IMF Agreement week, but the new program may soon be in jeopardy. The US Embassy reports
that the ALPART alumina refinery probably will close by Au ust.
Strikes by public-sector
workers protesting IMF-recommended adjustments-including 2,700 lay- 25X1
offs-paralyzed the country for several days last month. Prolonged economic
troubles will make it increasingly hard for Prime Minister Seaga to carry out
planned austerity measures without creating more labor unrest. If ALPART
ceases operations-eliminating 1,200 more jobs-sympathy strikes may occur.
Jamaica already expects to lose $140-230 million largely as a result of weak
demand for bauxite and alumina; the loss of additional bauxite revenue or
lower tourist receipts that would result from violent labor unrest could cause
the economy to decline by more than 4 percent this year-to a level barely
matching that of 1980, Prime Minister Manley's last year in off'ice.I 25X1
Global and Regional Developments
Reaction to US Brazil, Zimbabwe, and Botswana are adopting a wait-and-see attitude; they
Stockpile Sales Policy are carefully studying disposal plans for metals produced in their countries.
The Peruvian Minister of Mines, however, in an unusually strong local press
statement called any plan to sell stockpiled silver "truly a declaration of war"
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that would reduce his country's silver exports by 20 to 30 percent. Thailand is
worried that US tin sales under the new plan may exceed the 3,000-ton-per-
year limit provided for in a.US-ASEAN memorandum of understanding. An
Australian official has commented that sales from the US stockpile may
further depress international commodity prices. More negative reactions are
likely as governments study the proposal carefully and local producers and the
press are briefed on the details. LDC producers of silver, tin, and cobalt-met-
als with the largest surpluses under the new program-are expected to be the
most critical. Peru and Mexico, leading silver producers currently expanding
production, are likely to protest sales. Tin producers, particularly members of
the International Tin Council already suffering from export controls, probably
will launch a collective lobbying effort to limit US sales.
Japan-India Honda entered into a capital and technical tieup with the Indian industrial
Auto Tieup giant Tata this month to produce small passenger cars. This investment-
estimated at $160 million over the next five years-will be Honda's largest in
Asia. India's demand for cars is expected to soar over the next few years in the
wake of recent regulations to encourage competition in India's antiquated
automobile industry. The Honda-Tata venture will probably be one of the most
competitive among the Japanese tieups with India's auto manufacturers
because Tata has the technical skills, capital, and infrastructure to overcome
problems of tooling and parts supplies which will likely plague other manufac-
Increasing competition in the
emerging Indian vehicle market, coupled with a slowdown in Japan's domestic
demand, has probably spurred Honda to expand its overseas passenger car
market.
Slow Progress West European foreign and research ministers last week made limited progress
on EUREKA setting up a framework and funding for EUREKA. President Mitterrand
pledged $115 million for the program, and West German Research Minister
Riesenhuber said Bonn would provide some funding. Even so, West Germany
and the other West European countries made no firm financial commitments.
The ministers made little headway on the structure or areas of research for
EUREKA, despite detailed French proposals. A high-level group of experts-
formed at British urging-will work on financial arrangements and solicit
ideas from industry on possible projects in preparation for a research ministers'
meeting in mid-November in Bonn. France probably views the meeting as a
setback in its drive to attract West European companies to EUREKA. West
Germany and the United Kingdom evidently prefer a cautious approach until
a clear industry-oriented framework for EUREKA can be worked out. West
European leaders agree that EUREKA should focus on civilian goals, but they
are still at odds on how closely its research areas should match SDI's.
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EC Commission
Maintains
Mediterranean
Citrus Preferences
French Nuclear Export
Policy Toward
South Africa
EC citrus market.
The EC Commissioner for Mediterranean Policy has proposed that tariffs on
citrus imports from non-EC Mediterranean states be reduced over. a~ 10-yearr
period in parallel with similar reductions for Spain and Portugal after they join
the Community on 1 January. The declining. tariff rates would apply to the
first 800,000 tons annually-an average of import levels over recent years; a
higher tariff would apply above the ceiling. The move reflects an EC
commitment to promote economic development in the region and protect
Mediterranean citrus exporters-primarily Morocco, Tunisia, Israel, and
Cyprus-from the effects of enlargement. The proposal-which would form
the basis for talks this fall with the Mediterranean states-has yet to be
approved by the 10 member governments. It makes no mention of relatively
higher tariffs on US citrus and would reduce the EC's ability to meet US de-
mands at separate, upcoming EC-US negotiations on improving access to the
Developed Countries
obtain the container technology from other.European nuclear suppliers.
The French Government has informed Washington that it will, for the first
time,'refuse to endorse the sale of nonsensitive nuclear equipment to South
Africa. At issue is.Pretoria's bid for nuclear waste storage containers and
associated training and technology for its Koeberg nuclear power plant. Paris
banned sensitive nuclear exports to South Africa in 1983. We believe the
French move reflects concern in Paris about recent domestic developments in
South Africa. Though not binding, the move may in fact kill the sale and dis-
courage future nonsensitive sales by French suppliers. Pretoria probably could
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Large Turkish Turkey's continuing budget deficit is likely to keep inflation high and is the
Budget Deficit main reason Ankara was unable to reach a standby agreement with the IMF
this past May. Ankara's reluctance to increase taxes is largely responsible for
the budget shortfall which last year reached $2.6 billion-nearly 6 percent of
GDP. Tax revenues as a share of GDP plunged from 17 percent in 1983 to just
13 percent in 1984, one of the lowest rates in the OECD. Little improvement is
likely this year, despite the introduction of a value-added tax, because of other
tax cuts. The IMF has stressed the need to raise more revenue and favors ad-
justing Ankara's 5.5-percent GDP growth target downward. In response to the
large deficit, Prime Minister Ozal has decided to reduce government expendi-
tures by up to 20 percent and may shelve many planned state investments, ac-
cording to press reports. In addition, Ozal reportedly has postponed tax reform
plans aimed at reducing the tax burden on low wage earners. The failure to re-
duce the deficit and control inflation may hurt Turkey's credit rating at a time
when large repayments of previously rescheduled debt are falling due.
Less Developed Countries
Conflicting Mexican Opposing demands on President de la Madrid are making it difficult for him to
Budget Pressures take strong action to stem the burgeoning government budget deficit. The
President apparently believes that he cannot make drastic budget cuts, because
Mexicans will not accept a further round of harsh austerity. Labor, the best or-
ganized sector of the ruling party, will strongly protest subsidy cuts or sharp
reductions in real wages. Private-sector dissatisfaction, however, is becoming
more intense because of the government's inaction on the deficit and exchange
rate issues. Moreover, Mexico City's recent move to raise bank reserve
requirements will aggravate businessmen's difficulties with higher interest
rates and a greater scarcity of credit. Capital flight also is likely to continue at
high levels as the administration temporizes on economic adjustment.
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Sudanese Pound
Sliding
deteriorating living standards.
The Sudanese pound continues to slide on the black market, which has
displaced official exchange dealers since the coup, according to the US
Embassy in Khartoum. The growing disparity between the official and
unofficial US dollar exchange rates-12 percent-is causing intense specula-
tion and stifling the flow of badly needed remittances from Sudanese
expatriates. The military council's failure, thus far, to devalue or adopt a
floating exchange rate system puts it in conflict with the December IMF
accord calling for a realistic commercial exchange rate. Chances are slim for a
new IMF standby loan if the government fails to intervene. Nevertheless,
intense pressure from labor and opposition parties makes a decision on the
exchange rate risky for the regime that came to power on a wave of unrest over
Sudanese Finance The US Embassy says Finance Minister Abdel Majeed resigned Saturday over
Minister Resigns union demands that Prime Minister Dafallah fire-the acting governor of the
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central. bank and separate the bank from the Ministry. The Embassy, however,
speculates that the major reason behind Abdel Majeed's leaving was his
inability to persuade the government to hold the line on wages and prices.
Khartoum recently settled several strikes with the promise of pay hikes and de-
creased the price of diesel oil as a result of union pressure. Abdel Majeed's de-
parture almost certainly will hurt Khartoum's ability to negotitate a stabiliza-
tion program with the IMF next month. He was the only one in the
government who understood economic issues, and Khartoum is unlikely to risk
union unrest now by taking a firm line on prices and wages. A new finance
minister may be chosen from the large pool of leftist-oriented academics who
oppose the IMF and support reneging on debt obligations; few other qualified
candidates can meet the criteria of not having worked for the former regime.
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Tuni- iani~Bread? -_.
-`
Bread and corn, prices were: raised 17 and 18 percent, respectively, last week in
Prices Rise-
? a: surprise' move-Tunis previously -had indicated that price hikes would be'
postponed?for -the rest of theyear. 7T-he increases in bread prices-which could
-: , 'reduce:the=-budget deficit by asmuch as $10 million-are the first since last
domestic reaction.
Mauritanian Economic
Crunch Persists
-`--July-'and=caught consumers offguard:'Nevertheless, the action has provoked
,`little more than grumbling, according to the-US'-Embassy. The move appears
'to be: a' compromise-to-keep budget reform efforts alive, because-unlike price
hikes that provoked the January-1984 food riots=prices for other cereal-based
_' products remain unchanged. The limited scope of the increases, plus the
announcement during the traditional vacation season, should limit adverse
Chief of State Taya warned last week that an end to the rapid disintegration of
Mauritania's economy is not in sight. Urgent concern was expressed for the
..nation's banking system. One major bank teeters on the brink of bankruptcy
and deposits at other major banks are dwindling as consumer confidence
wanes, according to the US Embassy;, Government intervention to stem the
crisis already has consumed a large share of meager foreign exchange reserves.
Even harsher austerity measures will be necessary to stem the economic
decline 'and restore confidence in the financial system. Moreover, with
unemployment at a high level, additional restrictive economic measures will
only complicate efforts by the Taya regime to control disgruntlement and
Ghana Expands
return the government to civilian control.
Ghana implemented a new investment code and significantly liberalized its
foreign exchange controls in mid-July as part of its IMF-backed economic
reform program. Ghanaians and resident non-Ghanaians may now maintain
tax-exempt, interest-bearing bank accounts denominated in several-hard
currencies, including US dollars. These accounts will be free from foreign
exchange restrictions, but cannot receive earnings from the export of
Ghanaian goods and services. Accra hopes the scheme will encourage re-
mittances- from Ghanaians living abroad, but local reaction indicates lingering
-suspicions that such accounts would be vulnerable to future government
intervention.
Bangladesh.'s -New.- ''. ,The=new-Bangladesh budget for fiscal year 1985/86 (July-June) calls for
Austerity Moves `- reductions'in food, fertilizer, gas', and electricity subsidies. New wage scales
' .for.;government workers will take away the-cost-of-living allowance and the
'elimination -of paid`vacations'is planned. If fully implemented, these austerity
-measures would improve Bangladesh's chances' of obtaining new IMF loans
Local businessmen, according to the US Embassy, have criticized the price
hikes for essential commodities; the price of natural gas, for example, is
expected to go up by 20 percent.
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Adjustment Successes Mauritius' agriculturally based economy-centered on large sugar planta-
in.Mauritius tions-has emerged from a.prolonged recession and may be entering a period
;. j,. of sustained economic growth. Exchange rate devaluations, wage restraints,
-reduced food-subsidies, increased utility rates, and. limitations on social service
expenditures-undertaken to comply with IMF and IBRD adjustment pro-
?.,,e grams-are now, generating results. Real GDP growth increased from 0.3
percent. in. 1983 to, 3.1 percent in 1984, and;is expected to hit 5.3 percent in
1985; The annual inflation sate hasdropped;to approximately 7 percent, from
sectors with concomitant increases in employment.
addition, growth has been strong in the export-processing zones and tourism
a high of 42 percent in 1980. Budgetary restraint has caused the overall fiscal
deficit to decline from 12.9 percent of GDP, in .1982 to 6.5 percent in 1985. In
ThailandLobbying In a bid to protect Bangkok's second-largest foreign exchange earner, high-
Against US ~ level Thai policymakers are mobilizing to oppose the Thurmond-Jenkins textile
Textile Proposal . bill. If passed, the legislation would cut Thailand's textile and garment exports
to the United States-the country's largest, market-by up to 64 percent. The
National Assembly earlier this month called upon all legislators to use their
contacts with US Congressmen in a concerted lobbying effort against the bill.
,? In addition, the influential National Economic and Social Development Board
has proposed that Bangkok implement unspecified "countermeasures" if the
bill is enacted. Before taking such action, however, Bangkok would most likely
seek an exemption from the legislation.
Favorable Soviet.: Grain crop conditions in the USSR are mostly favorable following a month of
Grain Prospects. weather extremes. crops 25X1
in Kazakhstan and the Urals were damaged.;by hot, dry weather from mid-
June through early, July. In contrast, crop vigor 25X1
improved significantly in parts of the European. USSR-especially the Volga
Valley-because of unusually good weather;: Crop losses in Kazakhstan and
the Urals are estimated at about 6 million metric tons but appear to have been
offset by the better-than-expected prospects elsewhere. As a result, total Soviet
grain production this year is likely to be about.200 million tons. This is far
short of Moscow's target of 245 million tons, but. would be the best since the re-
cord 237 million tons in 1978 and well above: the estimated average of 180 mil-
lion tons during 1980-84. 25X1
Hungarian=Soviet_:...;, The session earlier this month in Moscow.of,the Soviet-Hungarian Intergov-
Economic:Cooperation;, ernmental Commission.for Economic, Scientific, and Technical Cooperation,
focused on the implementation of the program signed in April, for cooperation
in these three areas to. the year 2000. The commission also called for the
...implementation of .the new CEMA agreement on_cooperation in designing and
producing computer-controlled production systems. The commission agreed to
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expand production sharing in the automobile, tractor, telecommunications,
construction, rubber, and computer industries and signed extensions, of'more
than 30 cooperation agreements that cover 40 percent of Hungary's exports to
the Soviets and 15 percent of Hungarian imports. Four new agreements call
for increased cooperation in the development of noncorrosive pipelines,
telecommunications systems, medical microanalysis, and inventory mainte-
nance and transport systems. The emphasis on accelerating these programs
probably is a Soviet attempt to give them legitimacy and satisfy Budapest's re-
quest for quicker action. The agreement to increase cooperation in the
transport,'storage, and registration of goods appears to respond directly to
Hungarian complaints during the June CEMA Council meeting of inefficient
transportation procedures between CEMA countries.
China Resumes The US Department of Agriculture reports China has bought 510,000 tons of
US Grain Purchases US soft red winter wheat in the past month, the first purchases since
November. According to grain trade sources, Canada, Argentina, and France
have made unannounced sales of wheat to China in recent weeks. There is
some speculation the Chinese have also made purchases in the US grain
futures market. The renewed Chinese interest has caught grain traders by
surprise. China probably intends to sell some of its recent purchases of US
grain at a profit. Beijing may believe that the United States does not have
enough soft red wheat both to meet its trade commitment to China and to car-
ry out its export enhancement program and that supplies will become tight and
prices will rise. There have been reports China has already brokered US wheat
to Tunisia and Pakistan.
New Bank of China New Bank of China President Wang Deyan replaces Jin Degin
President
Wang is a longtime bank bureaucrat with
32 years' experience in the Bank of China, including 18 in Hong Kong. The
Bank of China, which specializes in international finance, has been closely
monitoring China's foreign exhange situation since reserves dropped from $17
billion at the end of September 1984 to $12 billion at the end of March 1985.
Controls adopted since then appear to be working, but Wang-echoing
Beijing's continuing concern-advocated tighter control over foreign exchange
and reduced imports of consumer goods at.an international monetary confer-
ence held in Hong Kong in June.
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China's Transport The success of Beijing's market-oriented agricultural reforms is being ham-
System Hinders pered by the limited ability of the state-owned rural transport system to move
Agricultural Reforms agricultural commodities to urban consumers. Recent adjustments in state
agricultural procurement policies permit peasants to market a larger share of
their harvest on the open market. They are using transportation more as they
search beyond traditional markets to find the most profitable outlets for their
goods. Beijing is encouraging peasant entreprenuers to develop private trans-
port businesses, but local transportation units-anxious to protect their
monopoly-are obstructing these efforts through such measures as taxation
and route restrictions. Although Beijing has insisted that such barriers be
eliminated if markets remain inaccessible and local market prices continue to
fall, increasing rural discontent may force Beijing to revise its market-oriented
policies.
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