LETTER TO DAVE ADDINGTON FROM (SANITIZED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B01390R000400470015-9
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: February 25, 2011
• Sequence Number: 15
• Publication Date: February 25, 1986
• Content Type: LETTER

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STAT
STAT
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L
iaison
v vl lice of Lcyrola?~i a
Washington, D.C. 20505
?~
k
`?"?..as
Telephone: [phone] Feb 86
TO:
Permanent Select Committee on Intelligence
House of Representatives
Attn: Dave Addington
Per your request of ~ ~ I am
attaching unclassified economic data on Central
America.
If you feel you need more information
we recommend you get from the State Department
copies of the cables listed on the attachment.
Office of Congressional Affairs
OBSOLETE
3.79M 1533 PREVIOUS
EDITIONS.
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i netconomist
Intelligence Unit
Quarterly Economic Review of
Nicaragua, Costa Rica,
Panama
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The Econom i st
J
Quarterly Economic Rev icW Of
Guatemala,
El Salvador, Honduras
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CENTRAL AMERICA
Recent Developments -- The evolution of
the Central American economies during the
first months of 1985 has not been as favor-
able as forecast in the spring 1985 Outlook.
The foreign exchange scarcity has been more
acute than previously anticipated, causing
higher exchange rates and a lower capacity
to import. Political events have clouded the
environment and affected the investment
climate. The institutional framework of the
Central American Common Market suffered
another setback when the multilateral pay-
ments scheme was virtually interrupted by
Costa Rica. As a result, the outlook is in
general more pessimistic, especially in the
areas of growth and exchange rate stability.
Growth -- The outlook has been revised
downward for most of the Central American
countries, again raising the possibility of
another negative growth rate for the region
as a whole. The uncertainty associated with
the scarcity of foreign exchange and the
policy to face the scarcit_v, the continuation
of military confrontations in two of the
countries, and the implementation of stabil-
ization policies are some factors behind the
lower growth rates in the region. Negative
rates are now expected for Nicaragua and
Guatemala, and stagnation or very much
moderated growth is likely for Costa Rica, El
Salvador, and Honduras. For 1986 the out-
look has also been revised downward. but
positive growth is expected for the region as
a whole.
Inflation -- Despite the sharp increases in
the exchange rate, inflation is still not a
problem in some Central American econ-
omies. at least from the point of view of the
official CPI. However, other indicators
suggest that inflationary pressures are
building rapidly in Guatemala and El
Salvador, given the increased importance of
the interbank rate in total trade. In Costa
Rica and Honduras, on the other hand, infla-
tion has decelerated compared with the rates
observed during the previous years. In most
countries, inflation will be higher in 1986
than in 1985.
External Sector -- Total trade has
declined in some countries, since imports
have been reduced for lack of foreign cur-
rency, and some exports have been affected
by supply shocks and conditions in world
markets. Trade balances for the region,
however, will not show a sharp improvement
since some of these effects cancel out,
although the deficit will be lower than pre-
viously forecast. The drop in oil prices will
contribute to an improving trade picture
during the second half of 1985 and 1986, and
the decline in world interest rates will be
reflected in lower current account deficits.
Exchange Rate -- In general, the exchange
rate situation has been worse than expected
in three of the five countries. The shortage
of foreign currency, due in part to limited
official capital inflows, has caused an
increase in the black-market rate, putting
more pressure on the official and interbank
markets. As expected, realignment of the
rates was achieved not only by shifting goods
from the official to the interbank market but
through a faster depreciation of the inter-
bank rate. For the rest of 1985 and 1986 we
expect a continuation of this tendency in
Guatemala, El Salvador, and Nicaragua, and
a modification of the exchange rate system
in Honduras so that a dua! market can be
created. Formal devaluations cannot be
ruled out for the next 18 months in the
countries.
For current developments, please turn to the section: Monthly Economic Indicators.
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Fallout from Peru's New Economic Measures ... 249
Warnings of a New Phase in the Debt Crisis ..... 249
... A Close Look at Key Countries ' Burdens .. 254-55
Colombia and GM in a Win- Win Agreement ..... 250
Reaction to Mexico's import Liberalization ..... 251
Business Outlook: Costa Rica ............ 252-253
Bulletins ................................. 256
Peru's New Austerity:
Business Reacts Cautiously
And Awaits Further Changes
After closing the banks for two days last week, Peru's
new government announced the first stage of its eco-
nomic plan. As expected, the steps are tough and
energetic. Though some of the measures will be
harder on business, the strong start is generally wel-
comed, and most hope that Garcia stays the course.
From what has been announced so far, it is clear that
the first priority is going to be inflation control-and
preferably with fast short-term results. Garcia has taken a
page out of Argentina's book, with a wage and price
freeze that attempts to be e,-en-handed. Some adjustments
had to be made before the freeze, however The govern-
men: also approved salar} hike, averaging 1807(. with a
500-( increase going to minimum-wage earners. and then
slapped on the freeze Some prices had to be hiked in
keeping with deficit-reduction targets. The price of gaso-
line was raised (by 13 ro to 51.25 per gallon) along with
substantial increases in electricity, water, telephone, tele-
communications, mail tariffs, urban transport and certain
basic foodstuffs. The neH prices are supposed to apply
until end-1985.
As was expected, exchange controls have been clamped
on for at least 90 days: Now dollars can be obtained from
the banking system onh with authorization. The govern-
ment has also frozen all foreign currency accounts (held
domesticallN and abroad) for 90 days (withdrawals will be
reimbursed in soles plus 307o). However, exchange trans-
actions can still take place legally on the free market. The
measures were accompanied by a 12?io devaluation to
(Continued on page 251)
Latin Debt Crisis:
The Outlook Is Grim
Unless Changes Are Made
Latin America's chronic debt problem is about to
move back into center stage, with a new attempt to
find a "solution" due to begin soon. To put the prob-
lem into perspective for our readers, BL presents a
rundown of the key indicators of the region's ability
to pay in the article below and in the table on pp. 254-
255. As the figures show, the picture is bad-and un-
less something changes. it will get worse.
At end-1984, 13 Latin American debtors owed a total of
5344.2 billion to international creditors. With only the
happy exception of Trinidad, not one single countr\ was
struggling with a debt-service ratio of less than 250 of ex-
ports of goods and services last year, and six of them were
burdened with ratios higher than 500,"0. (Peru's 160io is not
representative because of its arrears.) What's worse, in
light of the dim trade expectations of mane regional debt-
ors, nine out of the 13 face a worsening service load next
year. despite the fact that no significant rise in interest
rates is expected. Most countries' current accounts are
alread\ in def tci: and jus: a one percentage point change
in interest rates wouid make some of them significanth
higher.
Peru's Preside,? ;la Garcc pushing the :slue to the
forefront with hi- con:rc'\ e-star recognition of a simpie
fact-Peru will no: pa\ more than 109,-(, of its export earn-
ings in debt service because it cannot pay more at present.
However, the problem goes much deeper, as the plight of
the region's model debtor, Mexico, is beginning to show.
Both creditors and debtors will soon have to face the
fact that the deals the) are trying so hard to work out are
INSIDE: What's Next in Mexico
"First and foremost, companies that have the funds
to do so are trying to get imports in before the rules
of the game change... The conviction that more
changes are in the offing is widespread. " See p. 251.
249
REPRODUCTION AND TRANSMISSION IN ANY FORM WITHOUT PRIOR PERMISSION PROHIBITED.
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C//-X) /
Special Document
The recent evolution of the Salvadoran economy
I n 1984 the Salvadoran economy entered its sixth
consecutive year of a profound depression, resulting
from a wide variety of both economic and non-
economic factors amply described in the Annual
Report and other ECLA documents.' Nevertheless,
following the strong GDP drop from 1979 to 1982,
in 1983 the negative trend began to bottom out and
in 1984 real GDP grew 1.5%. (Global national in-
come, however, drained by net interest and profit
payments, remained stagnant.) In addition, the low
rowth r of the SaivadQtarL.RQpulation, due to the
sinlficant emI r tIon either for economic reasons
g a -L_ -
or to escARg the direct and -indirect effects of the civil
wa _ enabled _per capita __production to lnciease
slightly- (0.8% 1 over the level of the year before.
The year 1984 was fu-ll of contrasts and contra-
dictions. The internal armed conflict continued, and
in some ways worsened, at the same time as a civilian
government was voted into office. The country's
two principal products, coffee and cotton, both
suffered important declines, but output as a whole
registered moderate growth. Per capita income
rose slightly, but in real terms barely reached the level
of 1960. Finally, the government's fairly expansionist
wage, credit, and fiscal policies were carried out at
the expense of a further deterioration in the balance
of payments.
In part the result of the civil war, these contradic-
tions were also rooted in the multiple and complex
reactions the conflict provoked in both nationa' and
international sectors.
Among the causes explaining the slight reversa~ in
the negative growth trend, one must first mention the
elections carried out in the first semester o' the yea-.
The taking of power by a civilian government, with a
four-year term and an apparently expansionist
economic program,2 as well as the announcement and
later holding of talks between the government and the
insurgents, seemed to improve expectations in regard
to the nation's economic future. Though "business
confidence" is difficult to measure, various members
of the private sector expressed their willingness to
resume investment, and p.,?iv~~nr did rise
over the vea'_before.
Secondly, the recovery of the international, and
especially the US, economy stimulated the Salvadoran
economy, albeit slightly. Among other factors, there
was a I3 rise in the price terms of trade index, the_
first improvement in this decade.
Finally, and most importantly, the growing sup-
port of the international financial community, and
especially of the US, brought an important injection
of resources into the economy, increasing its import
capacity, and with that its productive capacity and
? Freely translated from the UN's Economic Commission for Latin
America (ECLA), Notes pars at Estudio Econemico do America Latina
y El Carib., 1984, El Salvador.
Central America Report
overall demand. Although net capita; income was
down from the year before, this fiow was strongly
complemented by increased unilateral foreign transfers
that helped mitigate both the costs of the economic
policies applied throughout the year, and the escalat-
ing war expenditures.3
The principal goal of the government's economic
policy -explicitly spelled out in their economic
program- was the stimulation of internal demand
and the global supply of goods and services.
On the demand side, the 1982 Law of Economic
Stabilization, which for more than two years had
strictly imposed International Monetary Fund (IMF)
adjustment policies, including a general freeze that
strongl , ed real wages, was revere-n 12
a rise in public sector salaries and-various--minimum
wane increases in private industry and commerce.
This expansive wage policy was accompanied by an
increase in government consumption, especially in
the growing security and defense expenditures.
Also significant was the increase in personal
income of those Salvadorans receiving transfers from
family members living abroad.
On the supply side, favorable weather, a moderately
expansionist credit policy, and a greater supply of
foreign exchange for importing production inputs
resulted in a rewound In agricultural production,
achieved despite the strong contraction in cotton'
and coffee production -due in great part to the
disruptions of the civi' war- and those changes in
production patterns caused by the Agrarian Reform
process. Of special note were the reduction jr interest
rates during the first. semeste' and the Centra: Bank's
late' Oec_ision to ref;r.ar-._e the past-due credit
payments accumulated by m,a- important pro-
ductive sectors (especially rura, producers).
The industrial sector, especially consumer goods
producers, also reacted favorably to the increased
availability of credit and foreign exchange, with
positive linkage effects for industry-related services,
as well. All in all, the global supply of goods. and
services rose 2% over the year before, led by a 4% in-
crease in the volume imports.
The slight economic recovery had, nevertheless,
little impact on the high level of open unemnlnv-
NEnt_of the last five years, which now affects more
-.thhan f of the EAP. Those sectors traditionally
generating the most jobs- coffee, cotton, and
construction- remained the most depressed. In ad-
dition, a large part of the rural population emigrated
from the conflict zones to the country's principal
cities, swelling slum neighbourhoods already inad-
equately supplied with basic services, and timulat-
in th growth of the "informal sector," which acts
in its turn as an important re ease tote unemploy-
ment problem.4 On the other hand, the disruptive
effects of the civil war have not brought excessive
26 July 1985 Vol. XII No. 28
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Special Document /l, r
The recent evolution of the Guatemalan economy
In 1984 Guatemala's recessive trend was inter-
rupted by very slight growth in the Gross Domestic
Product (GDP): virtually a stagnation, but an improve-
ment compared to the very strong drops of the
previous two years. Furthermore, private investment
registered a hike for the first time in srxars. Rea!
per capita income, however, fell for the fourth
straight year; internal and external financra! im-
balances continued, and unemployment worsened,
becoming one of the most dramatic symptoms of the
country's prolonged, deep recession. The bottoming
out of the recessive slide, though positive, must not
then be interpreted as a turning point presaging
decided economic recovery.
The factors that helped maintain the recession in
1984 are the same that helped create if. First,
although the terms of trade in good, and services
improved slightly for the first time in varinu~ yea's
(this, plus a relatively satisfactory yea' 'r as +cu':tore,
largely exp;ains the bottoming out o the negative
growth trend), the international 5itua' c n continued
unfavorable. Tie vnl,~f _T c ~y,pEr er;~ed
new~_ th~,~h.-sl nht...deL1i. the se'v,c nc of the
external public debt began to absorh I- much large
proportion of scarce foreign exchange, and the
country had increasing dlf`ucLlty n con?iact_ng fresh
external -.finanS!pg..._both public andpr sate. The
severe lack of dollars hampered 66Tm--a! productive
activity throughout the yea', eithe' through the
absolute shortage of foreign curie-, ,, needed' tc
import spare parts, inputs, and rav, mate' a~, o,
through the inCreas'nc pace c1 these rnpo a ,l;Z
in the free exchange marke'
Second', in 198 mtrarec . na' trace '.'h ; c; t
more Char a quarter c! Guatemala's, tc' E>_', continued decline. Tne gencraiized c?- e.
the reg'ona' market, compiiateo b\ p'c:
reciprocal payments and thr b iatc'a bade cl,'-
ficulties of countries such a Honduras, led tc 3r-
8% tall in t_ .e value of r t. al~'c reru- al?c
with serious consequences for the manufacturing
sector.
Third, the financial situation of the nubii: sCCtcr'.
especially the central government, worsened, lead rag,
among other consequences. tc a severe co^tract:or,
in capita! expenditures, the trad'trona, molo: o'
economic activity. Central government investmen?
declined more than 339t compared to the previous
year, and even so the fiscal deficit increased, with
the necessary impact or, the money suppry.
Fourth, despite the mid-y Gar election of a Con
stituent Assembly -an event officially marking the
beginning of a return to a civilian and cons! itutiona
government- political and social tensions continued
to foster private sector uncertainty over the economic
future of the country. The 6 7% increase rn~,:. afP
roves ment -the most dynamic element of global
demand- appears to be more a response to having
Central America Report
19 JuR
reached the minimurr, investment floor required to
ma!ntain the country's capita: stock than to any
deliberate decision to increase productive capacity.
(The ratio Of Drrvate investment 1o GDP stood at
just _5,5`k rn .9&4.. compar~~~ an average rate of
1 1_% in the 1970's.1 Despite some investments in new
activities, almost all linked to non-traditional exports,
the industrial sector generally had a high level of
excess capacity, and construction activity continued
to fall off.
Meanwhile, private consumption increased only
_1`k, a rate far inferior to the increase in population.
This reflected the giov.ing level of unemployment
and a slight decline in real salaries, and coyld well also
represent a continued deterioration in the structure
o4 income distribution.
Paradoxically, the relatrve!y satisfactory erfor-
rnance c` Inc agricultural: sector, especially in basic
gran production, tended to accentuate the distributive
aspects of the cris.s The production of corn and
beans, the two mars' impo'tant elements in the
na' ona' die', inc'ea~.= c airr,ost 10ak and 5% respec-
t,,e!y. Not only ,,as se"-s.:;` ciency reached in these
cops (as well as in rice; : u' there were exportable
surpluses. The size o` Inc coin and bean harvests,
however, combined with the inability of the National
Ac-;cultural Market nc !rtittute (Indeca) to buy
up sufficient quantities a' the guaranteed prices,
caused a strong drop tr-.e price of both products.
Th:_ favored urban ," 's but not rural pro-
ducers.
V't-'h re:;Brc tc otne' C'. Jo:tide sectors, the value
mar tu' --carnet at virtually the
sa^~E depre s : e,E _ du: to the desinte-
_r? Ce ?tra k.77-._ :aoe a-d the restricted
,E'na oem.ar,d A' c, the r,OCEn'.ta' Opp
",E- ofrerec b~ tr-+e oove?r:me-rt's Cant..
bean Bann ln+t.ativE, and ;he Gucterrma,an govern-
merr_' w tax :n Pnl v _ gy or , it has not been
possible to move star ifica - tly into new industrial
goods markets.
In the petroleum sector, fc!lowing the last decade's
moderate growth, between 1980 and 1983 the drying
up of various we!rs caused Production to decline by
nearly a third. Furthermore. the uncertain internation-
a! petroleum market led to cutbacks in exploration
-which the new Guatemalan- petroleum legislation
apparently failed to s ,mutate- so no immediate
improvements could be expected. Finally, in 1984
th