INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100170001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 48
• Document Creation Date: December 22, 2016
• Document Release Date: July 8, 2011
• Sequence Number: 1
• Publication Date: March 21, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP97-00770R000100170001-4
Directorate of Scent
Intelligence
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29
International
Economic & Energy
Weekly
21 March 1986
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Secret
DI IEEW 86-012i0,
21 March 1986
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International
Economic & Energy Weekly
21 March 1986
iii Synopsis
1 Perspective?Third World Debt: The Risks of Muddling Through
3 Brazil: Economic Stabilization Prospects
7 International Financial Situation: Egypt's Foreign Payments Squeeze
11 Venezuela: Managing a Declining Economy
15 Nigeria: Looming Debt Crisis
19 Summit Issues: Big Six Economic Outlook
25 Haiti: Economic Needs in the Post-Duvalier Era
29 Briefs Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
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International
Economic & Energy Weekly
Synopsis
Secret
1 Perspective?Third World Debt: The Risks of Muddling Through
We judge that time is running short for Western creditors to come up with a
positive plan that effectively preempts radical debtor action and enlists the
commitment of debt-troubled governments to a restructuring plan.
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3 Brazil: Economic Stabilization Prospects
In a historic announcement, President Sarney ordered economic shock treat-
ment in February and indicated his willingness to tackle major institutional
reform. We believe, nevertheless, that a more determined effort to eliminate
the fiscal and monetary causes of inflation is needed in the face of tough
interest group demands before these reforms will provide long-term economic
gains.
7 International Financial Situation: Egypt's Foreign Payments Squeeze
Egypt's foreign payments position will probably become unmanageable during
1986 without some combination of significant increases in external assistance,
debt rescheduling, and large cuts in import growth.
11 Venezuela: Managing a Declining Economy
Recent sharp declines in world oil prices will test President Lusinchi's ability
to manage the economy and govern the nation. There is virtually no hope for
economic recovery this year, and a recovery before the 1988 elections is
doubtful, with a sharp recession likely if oil prices stabilize at current levels.
15 Nigeria: Looming Debt Crisis
The plunge in world oil prices, coupled with Nigeria's rejection of an IMF
agreement and failure to obtain a debt rescheduling, has pushed the country to
the brink of financial default. We believe the hard-pressed Babangida
government will stop or slow most of its debt payments in order to avert a dev-
astating cut in imports and a politically unacceptable accord with the IMF.
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19 Summit Issues: Big Six Economic Outlook
Economic recovery is continuing at a moderate pace throughout the Big Six?
for 1986, growth will probably average more than 3 percent. Steady Big Six
economic growth is being accompanied by relatively good news about inflation
and the balance of payments.
25 Haiti: Economic Needs in the Post-Duvalier Era
Haiti's interim government faces formidable economic problems that threaten
its ability to maintain public order. Unless business confidence improves,
investment will continue to deteriorate and even generous foreign aid?
Washington will be the focus of Haitian requests?will do no more than
temporarily prop up imports and living standards.
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Perspective
International
Economic & Energy Weekly
21 March 1986
Third World Debt: The Risks of Muddling Through
We judge that time is running short for Western creditors to come up with a
positive plan that effectively preempts radical debtor action and enlists the
commitment of debt-troubled governments to a restructuring plan. Hardline
negotiating tactics by both sides are precluding effective communications that
are essential to seeking more innovative solutions to the Third World's
financial difficulties. For example, Mexico City's initial announcement that its
financing gap this year would be $9 billion shocked creditors who have been
scaling back their Third World lending. Similarly, creditors' demands for far-
reaching economic reforms allow President de la Madrid little maneuvering
room in dealing with powerful domestic opponents of further belt-tightening.
Although we believe both sides are posturing, we are concerned about the
possibility of miscalculation as each side tries to shift the burden of adjustment
onto the other and assumes that Washington will step in to help if negotiations
break down.
Current creditor and debtor negotiating positions appear far apart. Debtors,
especially in Latin America, are demanding some kind of interest rate relief,
such as capitalization or rate reduction, to foster domestic growth and
investment. According to press statements, they believe that they have borne
the brunt of the adjustment to date and that further austerity measures are po-
litically risky. In addition, they point to external conditions beyond their
control as the main cause of their renewed financial problems and stagnant
growth. Declining commodity prices?including oil?protectionism in devel-
oped countries, and the sharp cutback in new commercial lending have raised
the domestic political costs for governments that continue to service their debt
without pressing creditors for concessions.
For their part, banks are adamantly opposed to any scheme that sets interest
rates at or below international market rates, fearing that concessions to one
debtor will quickly spill over into negotiations with others. In some cases, such
as Brazil and Venezuela where new money has not been requested, bankers
have agreed to reschedule principal repayments without an IMF-supported
program at reduced interest rate spreads.
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We are concerned about the possibility of deadlocked negotiations prompting
debtors to take more radical action. With less new money available, economic
incentives for meeting debt obligations have declined significantly. At the
same time, domestic political demands for a change in debt and economic
policies are mounting. Increasingly, major debtor governments are viewing
resolution of the debt burden as a political problem. In our judgment, they
might see economic benefits as well as immediate political gains in taking a
more confrontational stance if concessions are not forthcoming, particularly if
they believe it would force Washington to move on its commitment for a new,
more comprehensive debt strategy. Debt-troubled oil exporters will be increas-
ingly inclined in this direction if oil prices fall further. Moreover, Manila faces
tough IMF negotiations, and press reports indicate that President Aquino is
considering repudiating some of the Marcos-era debts.
Many of the debtors view US action on debt relief as the central element in
their current bilateral relationships with Washington. New democratic lead-
ers, in particular, consider it a critical demonstration of support for their
fragile democracies and essential to consolidation of their positions. With
many debtors facing potentially acute economic and political tensions, the
ultimate risk to US interests of not providing the expected financial support, in
our view, is the emergence of more nationalist and anti-Western policies
among Third World leaders
While most debtors have welcomed the US debt initiative, they have expressed
reluctance to undertake the structural reforms the plan would require. In our
judgment, commitment to and monitoring of structural reforms is the major
challenge. Under the current strategy, the central role of the IMF in
monitoring quarterly economic criteria provides Third World leaders with a
convenient scapegoat for domestic economic ills and enables them to avoid
responsibility for creating more dynamic economies and forging the required
social consensus. Greater debtor participation in formulating the adjustment
program and monitoring its progress offers a better prospect for more
responsible domestic economic policies, in our opinion.
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Brazil: Economic
Stabilization Prospects
While Brazil's achievements over the past three
years in adjusting its external accounts have been
the most impressive of all major Latin debtors, it
has failed to pursue far-reaching internal reforms
to break persistent high inflation. In a historic
announcement, President Sarney ordered economic
shock treatment in February and indicated his
willingness to tackle major institutional reform.
The program is drawing massive public support and
should prove moderately successful in reining in
inflation and keeping the payments accounts strong
this year. We believe, nevertheless, that a more
determined effort to eliminate the fiscal and mone-
tary causes of inflation is needed in the face of
tough interest group demands before these reforms
will provide long-term economic gains.
Economic Performance in 1985
After he unexpectedly inherited the office in
March 1985, Sarney sought to bolster his position
by setting restoration of rapid growth and expand-
ed social programs as his highest economic priori-
ties. Official statistics indicate GDP rose more than
8 percent and industrial employment more than 5
percent last year?the best performances in this
decade?largely because of stimulative government
fiscal and monetary policies. According to the US
Embassy, the administration also substantially in-
creased spending on health, education, food, and
housing programs to pay Brazil's "social debt" and
allowed a 12-percent real wage increase to boost
living standards.
The decision to soft-pedal stabilization in deference
to politically popular rapid growth led to another
hike in Brazil's triple-digit inflation?from 225
percent in 1984 to 234 percent last year. Brazilian
economists report that the surge would have been
considerably higher had it not been for price con-
trols and other artificial restraints. As the public-
sector deficit soared to a record high in 1985,
3
institutional reforms languished. Sarney made no
progress in implementing plans to reduce the bloat-
ed and inefficient state-owned corporations and to
dismantle the indexation system?key to reining in
inflation.
Despite these stimulative policies, Brazil main-
tained a strong foreign payments position last year,
largely because of its successful import-substitution
program. The resulting $12.4 billion trade surplus
was Brazil's second-highest ever. Notwithstanding
aggressive devaluations, exports fell 5 percent be-
cause of slowed OECD growth and low commodity
prices. The moderate drop in foreign sales, howev-
er, was largely offset by a $1.1 billion cut in oil
imports as domestic crude production rose. The
large trade surplus permitted Brasilia to cover its
interest payments?reduced substantially by falling
LIBOR rates?hold its international reserves at
more than $11 billion, and take an increasingly
tough stand in its relations with the IMF and
foreign banks.
Historic Economic Policy Shift
By early 1986, however, swelling price pressures
evoked strong public concern. Monthly inflation
accelerated to more than 400 percent at an annual
rate between November 1985 and February of this
year. The combined effects of expanding domestic
demand, drought-induced food shortages, and
dwindling excess industrial capacity overwhelmed
the government's patchwork inflation-fighting
measures. growing
pessimism in the private sector about future infla-
tion, coupled with tightening profit margins, caused
many domestic and foreign firms to abandon plans
for investment. According to the US Embassy,
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Brazil: Economic Indicators,
1981-85
Real GDP Growth
Percent
Inflation
Percent
?6
Monetary Base Growth
Percent
Public-Sector Borrowing
Percent of GDP
Current Account Deficit
Percent of GDP
Foreign Debt
Percent of GDP
8
50
40
30
20
1981
a Estimated.
303559 3-86
Secret
1981 85,
Brazilians also worried about the eventual negative
impact of accelerating prices on their external
accounts.
Disturbed by the potential political consequences,
Sarney made his boldest move since taking office
when he announced on 28 February a sweeping
emergency economic program. According to the
decree-law, the program ends the pervasive indexa-
tion system for wages and financial transactions
that had been perpetuating inflation. The program
also features a new currency unit, the cruzado,
pegged to the US dollar, a temporary wage and
price freeze, and an unemployment insurance
scheme. Sarney emphasized in his address to the
nation his aim to drive inflation abruptly down to
near zero, but pledged not to permit another reces-
sion. Although Brasilia had announced in late
January major reforms of the federal budget pro-
cess and mechanisms for controlling the money
supply, Sarney gave no indication of plans to
further tighten fiscal and monetary policies.
A secondary motive behind the program,
is Sarney's interest in continued
large trade surpluses to facilitate debt servicing and
strengthen the government's bargaining position
with creditors. Because the cruzado is pegged to the
US dollar, the recent decline in the dollar will help
Brazil's near-term export performance. We believe
the government will adjust the exchange rate if
future inflation threatens export competitiveness.
The administration also believes, according to the
US Embassy, that large external trade surpluses
and timely interest payments provide justifica-
tion?consistent with the US case-by-case ap-
proach on debt?for a multiyear rescheduling
based on only a consultative arrangement with the
IMF. In any event, Finance Minister Funaro has
stressed publicly that a formal IMF standby agree-
ment will not be politically possible this year, and
we believe the Brazilians are unlikely to relent,
given the public animosity toward the Fund.
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Brazil: Balance of Payments,
1983-86
Billion US $
1983
1984
1985
1986 a
Current account
-6.8
0.1
-1.2
-0.7
Trade balance
6.5
13.1
12.4
12.0
Exports (f.o.b)
21.9
27.0
25.6
26.0
Oil
1.4
1.8
1.5
1.6
Nonoil
20.5
25.2
24.1
24.4
Imports (f.o.b.)
15.4
13.9
13.2
14.0
Oil
8.2
6.9
5.8
4.3
Nonoil
7.2
7.0
7.4
9.7
Net services
and transfers
-13.3
-13.0
-13.6
-12.7
Interest on debt
10.2
10.2
10.4
9.1
Other, net
-3.1
-2.8
-3.2
-3.6
Capital account
5.5
6.1
1.2
1.2
Long-term inflows, net
6.6
8.3
1.0
0.5
Principal payments
3.4
2.0
2.1
2.5
New borrowing
10.0
10.3
3.1
3.0
Direct investment
1.4
1.6
1.3
1.3
Short-term movements
-2.5
-3.8
-1.1
-0.6
Reserve changes
-1.3
6.2
0
0.5
a Projected.
Foreign Payments Prospects
In our judgment, Brazil's foreign financial position
will remain strong this year, bolstered by another
large trade surplus and lower world interest rates.
Coffee earnings will surge because of a price boom,
and sales of manufactured goods will rebound,
reflecting faster OECD growth and the decline of
the US dollar. At the same time, another drop in
the oil import bill-stemming primarily from
slumping world prices-probably will keep overall
imports near $14 billion, despite expected large
foreign grain purchases to offset drought-inflicted
crop losses. Brazil's current account will be in near
balance for 1986, and its modest foreign financing
needs probably will be met easily through foreign
direct investment, loans from multilateral develop-
ment banks, and supplier's credits.
5
For the most part, we believe the Sarney adminis-
tration probably will relegate its relations with the
IMF and other foreign creditors to the background
in the coming months to prevent their becoming a
significant issue before the important November
congressional elections. According to the US Em-
bassy, government officials insist they will not
request new commercial bank money. Moreover,
the banks have tentatively agreed to reschedule
$6 billion in 1985 arrears, defer $9.5 billion in
principal coming due this year, and maintain $15.5
billion of short-term credits until 1987 without the
precondition of a formal IMF agreement. Using
that as a precedent, the Brazilians have tried
unsuccessfully to negotiate a Paris Club reschedul-
ing of bilateral official debt without an IMF pro-
gram. In our view, they will also pressure official
creditors by withholding payments.
Maneuvering Room
We believe the emergency economic program will
benefit from broad popular support for much of this
year and, accordingly, will prove moderately suc-
cessful. Despite the 33-percent increase in prices
for January and February, the program probably
will cut annual inflation to under 100 percent in
1986. The emergency measures, however, may stall
recovery later in the year by squeezing business
profits and consumer spending. This will probably
discourage new private investment at a time when
capital expansion will be necessary to sustain indus-
trial growth. Furthermore, a falloff in tax revenues
and restraints on price increases for state enter-
prises may erode the government's financial posi-
tion and prevent the public sector from picking up
the slack
As the economy begins to sputter, in our judgment,
the Sarney administration will probably face rising
domestic criticism of its economic policy, especially
from the left. Accordingly, Brasilia may ease wage
and price restrictions to bolster economic growth
before the congressional elections. A relaxation of
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controls late in the year should permit Brazil to
record a politically acceptable 3- to 5-percent real
economic growth. By that time, several months of
impressive monthly price performances may con-
vince the government that it has conquered infla-
tion and can relax fiscal discipline.
To prevent inflation from returning to the 200- to
300-percent range after wage and price ceilings are
eased, the Sarney government will need to take a
hard stand against budgetary and monetary ex-
cesses. In particular the government will have to
confront a variety of interest groups ranging from
the armed services demanding higher military ap-
propriations to the lower classes pushing for redress
of long-neglected social inequities.
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International Financial
Situation: Egypt's Foreign
Payments Squeeze
Egypt's ability to meet both import requirements
and external debt obligations is deteriorating rapid-
ly in the face of falling world oil prices. Its foreign
payments position will probably become unman-
ageable during 1986 without some combination of
significant increases in external assistance, debt
rescheduling, and large cuts in import growth.
Hard Currency Earnings Plummet
The outlook for Egypt's petroleum exports is poor.
Production has been averaging 870,000 b/d, and
output much beyond the range of 900,000 to
950,000 b/d is unlikely
/Meanwhile, domestic oil
consumption has been increasing at an annual rate
of 10 to 13 percent over the past several years,
cutting ever deeper into the exportable surplus.
This negative trend has now been reinforced by the
precipitous slide in world oil prices. If the average
price per barrel for the year falls to $20, Egypt
would lose about $650 million in hard currency oil
revenues. If average prices fall to $15 per barrel,
Egypt could lose $1.2 billion.
Foreign earnings losses even at the $20 per barrel
level will strike Egyptian Government finances
particularly hard in the coming months. Cairo has
already experienced serious difficulties in servicing
its international debt obligations, now estimated at
about $3.7 billion annually. Lengthening delays in
repayment, a large debt burden, and declining
earnings potential have effectively prevented Egypt
from negotiating further medium-to-long-term
commercial loans.
Egyptian borrowers are experiencing increas-
ing difficulties in obtaining short-term credits as
well.
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Egypt: Oil Consumption and
Export Projections, 1985-90
Thousand b/d
600
500
400
300
200
100
I 1
0 1985 86
Consumption
Export
I
87
I I I
88 89 90
307580 12-85
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Other major sources of foreign exchange?remit-
tances and tourism, in particular?are unlikely to 25X1
compensate for the loss of oil earnings during the
current year. We can, in fact, detect no component
of foreign earnings likely to experience significant
growth over the current year. The economic down-
turn in the oil economies of the Persian Gulf?the
area employing most of Egypt's overseas workers?
has already begun to affect expatriate earnings.
Layoffs will occur particularly among less skilled
workers, and reductions in pay and benefits are
probable for many more. Similarly, tourist earn-
ings, which provided over $400 million in hard 25X1
currency last year, are likely to decline, especially 25X1
in the wake of the February police riots, which,
aside from their bad publicity, destroyed tourist 25X1
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Egypt: Estimated Foreign Debt
Billion US $
approximately $2.3 billion annually and leave
Cairo no better, and possibly worse off, than before.
would jeopardize current US assistance levels of
December
1985
Civilian
29.2
Medium and long term
23.7
Short term
5.5
Military
7.8
Of which:
US FMS debt
3.7
Total
37.0
Policy Options
The Mubarak regime will probably accelerate re-
form, but we doubt it will take the form of a
coherent, integrated program. More than likely,
reform will remain piecemeal, given Mubarak's
excessively cautious approach and the fragmenta-
tion of economic decision making within the cur-
rent government. Certain commodities will be sub-
jected to substantial price hikes, while others,
probably including bread, will be left relatively
untouched. Some measures, including harsh import
controls, may throttle economic activity and do
more harm than good if selectively implemented to
fall disproportionately on the private sector. In any
case, it is unlikely that unilateral reform alone, at
this late stage, will provide sufficient relief to
extricate Egypt from its economic crisis.
Rescheduling of Egypt's large debt servicing obli-
gations, while an attractive economic alternative,
would be extremely difficult to implement in politi-
cal terms. Rescheduling of public-sector debt?
including US Foreign Military Sales obligations,
which Cairo believes can be easily restructured?is
traditionally contingent upon having an IMF-sup-
ported economic adjustment program in place. For
Egypt, an IMF standby agreement would entail
adherence to strict financial and monetary guide-
lines, including much more rigorous subsidy re-
forms and more rapid movement toward a unified
exchange rate. Such adjustments almost certainly
would force substantial increases in consumer
prices and probably provoke more political unrest.
Substantial funding from foreign sources is proba-
bly not a viable alternative. The Gulf Arab states?
the most likely source of additional financing?
would probably seek a major political reorientation
by the Egyptian Government?including deempha-
sis of the Camp David accords?as a quid pro quo.
The countries, however, are also financially pressed
because of falling oil revenues and would not be
inclined, we believe, to provide the substantial
additional aid Egypt will require. Moreover, the
political realignment required to secure Arab aid
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In the absence of large increases in aid, Cairo
probably will be forced into some form of resched-
uling this year. Most likely, Egypt will try to
negotiate a standby agreement with the IMF and
pursue a Paris Club rescheduling of official debt. A
rescheduling of commercial bank debt, however?
which accounts for more than half of Egypt's total
debt?would be a lengthy and fragile process that
would be derailed if Cairo were to fall out of
compliance with its IMF program.
Alternatively, the Mubarak regime could decide to
go it alone, as some Third World countries already
have done, and limit debt payments without an
agreement with creditors. Such a move could in-
volve a unilaterally imposed debt moratorium, a
freeze on principal repayments, or a decision to
repay only those creditors Cairo believes are likely
to provide fresh funds. Because this approach
avoids any foreign role in domestic economic poli-
cies, it would be more politically palatable than an
IMF program. This course, however, probably
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would result in a drastic reduction or cutoff of
short-term credit lines, an event that would slow
imports to a trickle, given Egypt's low foreign
exchange reserves.
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Venezuela: Managing a
Declining Economy
Recent sharp declines in world oil prices will test Venezuela: Economic Indicators,
President Lusinchi's ability to manage the economy 1980-85
and govern the nation. Although Lusinchi had
hoped that his successes in rebuilding international
reserves and rescheduling the external public debt
would permit him to turn full attention to the Real Nonoil GDP Growth Gross Private Fixed
moribund domestic economy this year, the emer- Percent Investment
gence of huge financial gaps as a result of the oil Billion 1968 Bolivars
revenue shortfall has forced renewed vigilance over 2 12
the external accounts. Such gaps could total
$14 billion over the 1986-88 period, requiring
. I
tough adjustment measures to ensure the nation's o
capacity to meet interest obligations. We believe
that further debt reschedulings are almost certain.
The oil price collapse also signals continued prob-
lems for the domestic economy. There is virtually -2
no hope for economic recovery this year, and a
recovery before the 1988 elections is doubtful, with
a sharp recession likely even if oil prices stabilize at
current levels.
Roots of Current Problems
Venezuela's economic problems predate the soft
world oil market?real per capita GDP has de-
clined 27 percent since 1978. According to the US
Embassy, the economy's chronic stagnation, even
as oil revenues reached record levels in 1980 and
1981, is directly related to sagging investor confi-
dence in the government's management of the
economy. Official unemployment climbed from 5.0
percent in 1978 to 14.5 percent in 1984 before
dipping to 12.5 percent in 1985. Last year, the
domestic economy again registered no growth, as
private investment remained dormant and the pub-
lic sector posted a second successive surplus. Slack
demand, however, combined with the government's
restraint on wages to limit inflation to 9.1 percent
last year, following 13.7 percent in 1984. The
external accounts were another bright spot, with
the current account registering a third successive
surplus and international reserves closing the year
9
6
3
N.A.
-4
Public-Sector Fiscal
Balance
Percent of GDP
Petroleum Export Earnings
Billion US $
10
20
-15
1980 85 1980 85
303539 3-86
11 Secret
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Secret
up $1.3 billion. On the basis of these successes,
international lenders agreed to a multiyear re-
scheduling of $21 billion in external public debt.
Program for Domestic Recovery
Lusinchi's hopes for economic recovery now ride on
a three-year program to invest $5 billion in roads,
public buildings, low-cost housing, and public utili-
ties. The Planning Ministry anticipates that such
outlays will create 600,000 new jobs and generate
annual economic growth of 3 to 5 percent over the
program period. For 1986, total government expen-
ditures would increase by 12 percent over 1985,
converting 1985's budgetary surplus-about 3 per-
cent of GDP-into a deficit this year. Reaching the
program's targets, however, depends on the pro-
gram's success in triggering a resurgence of private
investment.
This fiscal stimulus program is already threatened
by the collapsing world oil market. Each $1 billion
shortfall in oil exports cuts government revenue by
about $700 million. To cover the looming fiscal
deficit, the government secured agreement from its
foreign bank creditors in February 1986 to defer
$923 million in principal due this year, freeing
these resources for other uses in the 1986 budget.
According to press accounts, the government is also
considering a 10-percent cut in current outlays and
a steep inheritance tax. Nonetheless, the Embassy
believes that the administration also will stretch out
or delay funding for major investment projects.
Despite the government's concern about inflation,
it is already planning to sell treasury bonds to the
central bank.
Managing the External Accounts
Prospects for the external accounts have deteriorat-
ed sharply in the last two months. The govern-
ment's initial foreign exchange budget for 1986-88,
based on an oil price of $24.50 per barrel, projected
a cumulative current account surplus of $8.9 bil-
lion. This surplus would have allowed Venezuela to
Secret
Venezuela: Current Account Trends
1982-85
Billion US $
1982
1983
1984
1985
Current account balance
-3.2
4.4
5.3
3.9
Trade balance
3.9
8.4
8.6
7.6
Merchandise exports (f.o.b.)
16.5
14.8
15.9
14.2
Petroleum
15.7
13.8
14.8
12.8
Nonpetroleum
0.9
1.1
1.1
1.4
Merchandise import (f.o.b.)
12.6
6.4
7.3
6.6
Consumer goods a
3.8
1.9
1.6
NA
Raw materials a
3.0
2.3
3.1
NA
Capital goods a
5.8
2.2
2.6
NA
Services balance
-6.5
-3.7
-3.1
-3.6
Nonfactor services (net)
-5.0
-1.6
-1.8
-1.6
Interest and dividend receipts
2.6
1.5
2.2
1.7
Public sector
2.0
0.9
1.1
0.9
Private sector
0.6
0.6
1.1
0.8
Interest and dividend payments
4.1
3.6
3.5
3.7
Public sector
3.0
2.9
3.1
2.9
Private sector
1.1
0.7
0.4
0.8
Net transfers
-0.6
-0.2
-0.1
-0.1
a Estimated.
meet its external debt service obligations, while
maintaining the central bank's reserves above the
government's $9 billion comfort threshold. With
Venezuela's average oil export price now hovering
around $15 per barrel, reserve levels and debt
service capacity are threatened.
To assess the impact of the sharply lower oil prices
on Venezuela's debt servicing capacity, we have
examined two Venezuelan oil price scenarios-$18
and $13 per barrel-projecting the balance of
payments through 1988:'
'In each scenario the following are held constant over the 1986-88
period: money-center interest rates; oil export volume of 1.4 million
b/d; trade restrictions; foreign exchange controls and policies; and
plans for major investment projects. Zero economic growth is
assumed.
12
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Venezuela: External Debt and
Financial Assets, 1985a
Medium- and Long -Term External Debt
Total: $36.3 billion
Private,
unregistered 405
Private,
registered 7.0
Public,
non restructured
4.1
Public,
restructured
21.2
Financial Assets
Total: $27.0 billion
Commercial banks 1.1
Venezuelan Investment
Fund 1.7
Venezuela
Petroleum 2.2
Private,
nonbank 8.2
3 Yearend 1985.
b Estimated.
308540 3-86
Central Bank
13.8
? With oil at $18 per barrel, the current account
surplus almost evaporates, producing a financial
gap?current account balance plus scheduled
debt amortization?of $2.6 billion in 1986. Al-
though such a gap could be covered this year by
drawing down central bank reserves, cumulative
financial gaps of about $8.6 billion through 1988
would be too large to be covered comfortably by
reserve drawdowns.
13
Secret
? If oil falls to $13 per barrel, the current account
registers a $2.1 billion deficit in 1986, which,
when added to required principal repayments,
yields a financial gap of about $4.8 billion. Such
a gap also could be covered this year by drawing
down foreign exchange reserves, but cumulative
financial gaps over the period would total almost
$14 billion?exceeding central bank reserves.
Bridging the Gaps
Although domestic political sensitivities probably
preclude IMF assistance or non-project-related
loans from international lenders, the government
nevertheless appears to have adequate options to
cover the financial gaps that would be produced by
oil prices in the $13 to $18 range. The options most
likely to be considered could produce about $13
billion in foreign exchange savings over the 1986-
88 period, which, in conjunction with reserve draw-
downs, would permit Venezuela to service interest
on the external debt:
25X1
? Tighten trade controls. Consumer durable im-
ports now eligible for the official rate of 7.5
bolivars per dollar would probably be switched to
the parallel market rate, currently 19 per dollar,
and import licensing requirements would proba-
bly be expanded. Because imports have already
been sharply squeezed, the potential foreign ex-
change savings would be limited. We believe that
new import reductions exceeding $1 billion annu- 25X1
ally would have a sharply negative effect on the
economy.
? Delay or stretch out development projects.
Projects whose foreign exchange costs are not
covered by the financing of multilateral develop-
ment banks will probably be postponed or
stretched out. Potential foreign exchange savings
total about $200 million per year.
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? Further reschedule debt. The $3 billion in princi-
pal due on the rescheduled public debt over the
period to 1988 could be deferred. Although more
difficult, $1.9 billion in principal on the external
public debt due over the same period, but not
included in the February deal, could be resched-
uled. Lastly, $3.6 billion in scheduled principal
repayments on the registered external private
debt could be delayed or stretched out. Although
unlikely to be realized in full, potential savings
from reschedulings total $8.5 billion.
? Devaluation and capital controls. A devaluation
and limits on foreign exchange purchases in the
parallel market would substitute for direct import
controls. Capital controls could yield savings of
about $400 million per year on travel abroad and
private capital transfers.
The Economy in 1986
We concur with US Embassy and independent
Venezuelan analysts who forecast further recession
this year. The oil market slide and the resulting
uncertainty over the administration's policy re-
sponse will almost certainly dash demand for con-
sumer durables and planned private-sector invest-
ment outlays. Paramount among business fears are
expanded controls on imports, a price freeze, and a
devaluation coupled with limits on capital transfers.
Although an energetic implementation of the ad-
ministration's fiscal stimulus program would cush-
ion the shortfall in private demand, the US Embas-
sy believes that the administration is, instead, likely
to adopt a go-slow approach out of fear that deficit
financing would be inflationary. Even if the admin-
istration forges ahead, the US Embassy questions
the ability of the bureaucracy to implement such a
program, when, over the past two years, it has been
unable to meet more modest investment targets.
Management of the foreign payments position will
continue to take top priority. We believe that
Lusinchi will move decisively to ensure the nation's
capacity to service interest obligations on the exter-
nal debt and to protect international reserves.
Secret
A Longer Term Perspective
The next three years promise a stern test of Lusin-
chi's ability to manage the economy and govern the
nation. Even under the most optimistic oil market
scenarios, we believe that Venezuelan investors are
unlikely to repatriate savings from abroad to invest
in the uncertain domestic environment any time
before 1988. More pessimistic oil market scenarios
would put private investment in the deep freeze and
necessitate cuts in the investment budgets of the
state oil company and other public enterprises. In
our view, overall economic activity will remain
stagnant at best, and, in the more pessimistic case,
would decline by 3 to 7 percent by 1988. We expect
continued recession to cause political problems for
Lusinchi and the ruling party. As the 1988 elec-
tions approach, Lusinchi will find it increasingly
difficult to turn aside appeals from ruling party
insiders and their labor allies to abandon his con-
servative strategy in favor of sharp boosts in outlays
on social programs, more controls on prices, and
generous wage increases. Inflationary pressures will
mount, if Lusinchi is forced to make such conces-
sions.
14
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Nigeria: Looming
Debt Crisis
The plunge in world oil prices, coupled with Niger-
ia's rejection of an IMF agreement and failure to
obtain a debt rescheduling, has pushed the country
to the brink of financial default.
e e ieve t e
ar. -presse a s angi a government will stop or
slow most of its debt payments in order to avert a
devastating cut in imports and a politically unac-
ceptable accord with the IMF. Lenders, however,
already have significantly cut credit lines to Nige-
ria, and even a unilateral moratorium probably will
not offset the expected decline in export earnings.
No Deal With the IMF
Nigeria's oil exports?which account for 97 percent
of foreign exchange earnings?dropped from $25
billion in 1980 to about $11.7 billion in 1985.
Barring a major rebound in oil prices, export
revenues probably will decline to less than $7
billion this year. Efforts to muddle through the
four-year crisis have led to a 10-percent drop in
real GDP, shortages of basic commodity imports,
and steadily rising unemployment. Many Western
bankers and economists had expected Lagos to
cushion the blow by agreeing to an IMF program,
which would have provided timely relief by:
? Enabling Nigeria to borrow about $3 billion from
the IMF and World Bank over a three-year
period.
? Facilitating the rescheduling of Nigeria's medi-
um- and long-term commercial debt, for which an
IMF agreement is generally a prerequisite.
' The estimate for Nigeria's external debt has been revised
downward from about $23 billion because of the likelihood that
Lagos will validate only about one-half of roughly $9 billion in
trade debt arrears.
15
Secret
Nigeria: Selected Economic Indicators,
1980-86
Exports
Billion US $
Debt Service
Billion US
30
6
20
4
10
2
0
1980
85a 86
0
1980
85 86'
Real GDP Growth
Percent
Consumer Price Increases
Percent
Estimated.
b Projected.
c Projected obligations.
308560 366
? Allowing the rescheduling of official trade debt.
Western export credit agencies organized under
the Paris Club have refused to reschedule without
an IMF agreement.
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After taking power in a coup last August, President
Babangida pledged to break a two-year negotiating
deadlock with the IMF. Two previous governments
had balked at the political risks of a major devalua-
tion of the naira, elimination of domestic petroleum
subsidies, and trade liberalization. Babangida
sought a popular mandate to negotiate with the
Fund by initiating a national debate on the issue.
He created a special commission?stacked with
officials who favored an agreement, according to
the US Embassy?to guide the debate and issue a
final recommendation. A torrent of negative public
opinion spearheaded by the newly emancipated
press quickly dominated the forum, however, and
by December Babangida announced an end to the
IMF option. A senior Nigerian financial official
later told the State Department that Babangida
was the only member of the 28-man Armed Forces
Ruling Council to vote in favor of an IMF agree-
ment.
The government subsequently unveiled its 1986
budget, which largely relies on the previous policies
of austerity, countertrade, and gamesmanship with
the creditors to offset lower export revenues.
Babangida has maintained stringent foreign ex-
change controls?which have cut Nigeria's import
bill by about 55 percent over the past four years to
about $8.3 billion in 1985?and will continue to
promote countertrade agreements despite his previ-
ously stated doubts. The regime also announced
last January that debt service would be limited to
30 percent of export earnings, which would have
covered only about one-half of this year's obliga-
tions even before the recent plummet in oil prices.
Mounting Foreign Payments Problems
Nigeria's new debt service ceiling effectively for-
malized and expanded a tactic employed since
1982, when Lagos first stopped paying its short-
term debts to ease the decline in exports. Some $2
billion of arrears owed to bankers was rescheduled
in 1983, but the government still has not fulfilled
its 1984 pledge to reconcile $6-8 billion in overdue
supplier's claims. So far only $1.3 billion of supplier
Secret
credits has been rescheduled, and only $433 million
has been paid to Western export credit agencies,
which hold another $2 billion in arrears. Moreover,
Nigeria again has fallen behind in payments on
short-term bank debt: the US Embassy reports that
about $1 billion in letters of credit now are over 120
days past due. As a result, both official and
commercial creditors for several years now have
stopped issuing medium- or long-term loans, and
the press reports that short-term trade credits have
dwindled as well.
The US Embassy estimates that Nigeria's 1986
debt obligations now total $5.4 billion, roughly
three-fourths of projected export revenues at
current oil prices. We believe that Lagos almost
certainly will not earmark more than the 30 per-
cent of exports?$2 billion?for debt payments.
Lagos probably would have to negotiate a freeze on
short-term debt payments and reschedule over 80
percent of this year's obligations to both commer-
cial creditors and the Paris Club if it is to avoid an
outright default.
Significant differences between the Babangida gov-
ernment and its creditors, however, reduce the
likelihood that a comprehensive rescheduling can
preempt a default.
bankers are demanding a major currency devalua-
tion before any rescheduling, while the Paris Club
still insists on an IMF agreement. Babangida has
stated publicly, however, that a sharp devaluation
is out of the question. Nor do we believe Babangida
is likely to restart negotiations with the IMF this
year, even though he recently cut petroleum subsi-
dies as recommended by the Fund. Several recent
controversial moves by Babangida?including the
execution of 10 military coup plotters and the
decision to join the Islamic Conference Organiza-
tion?have left him, in our judgment, poorly posi-
tioned to endure additional domestic strife
16
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Outlook
A rescheduling stalemate appears likely and proba-
bly will coincide with an increasingly severe short-
age of imported commodities. As a result, Lagos
will probably cease servicing most of its debts.
Babangida probably would calculate that the po-
tential savings outweigh the loss of Nigeria's re-
maining trade credits and also would provide a
temporary boost to his sagging domestic popularity.
In our judgment, however, the government is not
likely to repudiate outright its debt obligations
because it probably hopes eventually to reenter into
the long-term credit market.
Regardless of the government's debt service poli-
cies, real GDP almost certainly will drop sharply in
the absence of a significant turnaround in the oil
market. The US Embassy reports that the import-
dependent industrial sector already is operating at
15 percent of capacity. Economic decay contribut-
ed to the downfall of the two previous governments
and almost certainly has weakened the Babangida
regime, which appears increasingly vulnerable to a
coup. The danger exists that a group of radical
junior officers could seize power and launch a still
more nationalistic and autarchic economic course.
17 Secret
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Secret
Summit Issues: Big Six
Economic Outlook
Economic recovery is continuing at a moderate
pace throughout the Big Six?for 1986, real GDP
growth will probably average more than 3 percent.
Private investment in plant and equipment will
again be the strongest growth component, while
government spending will be relatively weak in
most countries as Big Six governments continue
their deficit reduction efforts. Pushed on by lower
oil prices and the lagged effects of the previous
strong dollar, the combined Big Six current ac-
count surplus will surge another 50 percent this
year, to about $90 billion, with Japan and West
Germany again accounting for almost all of the
total. With inflation expected to slow further in all
of the countries except Canada, the average rate
for the Big Six will drop to just below 3 percent this
year.
Recovery Continuing
Big Six aggregate GDP growth is estimated at 3.3
percent for 1986. In broad terms, slower growth of
net exports in 1986 is largely being offset by
stronger growth of domestic demand:
? Private nonresidential investment (that is, plant
and equipment) will again be the strongest growth
component for the Big Six, although the 5.4-
percent increase that we expect represents a
decline of one-third from the 1985 figure.
? Private residential investment should increase
about 4 percent this year, following a small
decline in 1985. Despite lower interest rates,
residential investment remains weak for most of
the Big Six countries.
? Government investment in the Big Six should rise
about 1.7 percent this year following a 4.2-
percent decline in 1985. The United Kingdom
will have the sharpest turnaround, in part because
government investment figures are distorted by
19
the transfer of assets out of the public sector
under Prime Minister Thatcher's privatization
program.
? Private consumption is continuing its steady, if
unspectacular, increase throughout the Big Six.
For the group as a whole, growth should pick up
to about 2.9 percent in 1986.
? Government consumption will remain sluggish in
1986 as all Big Six governments continue to limit
expenditures.
Inflation and the Balance of Payments
25X1
25X1
Steady Big Six economic growth is being accompa- 25X1
nied by relatively good news about inflation and the
balance of payments. All Big Six countries
achieved single-digit consumer price increases last
year, and all except Canada should make further
progress in 1986, pulling the group average to just
below 3 percent. 25X1
With lower oil prices, most countries will see their
current account positions improve in 1986; only in
the United Kingdom and Canada?net oil export-
ers?will current account balances remain little
changed. The Big Six combined current account
surplus, which reached $60 billion last year, should
jump another 50 percent in 1986. Japan ($59
billion) and West Germany ($24 billion) will contin-
ue to be the major contributors to the surplus.
Unemployment and Interest Rates
Big Six unemployment should finally stabilize in
1986. We estimate the average rate for the group
at 7.7 percent this year?down slightly from
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Secret
Big Six: Growth of GDP
Consumption and Investment
1985?as decreases in Canada and West Germany
just offset small increases in Japan and Italy. The
wide disparity in rates will continue, however,
ranging from 2.8 percent in Japan to 13.1 percent
Percent simi 1985 1986 in the United Kingdom.
Real GDP Private Consumption
0 2 4 6
Big Six
Japan
West Germany
France
United
Kingdom
Italy
Canada
Government Consumption
?5
Big Six
Japan
West Germany
France
United
Kingdom
Italy
Canada
0
Residential Investment
?20-10 0 10 20
Big Six
Japan
West Germany
France
United
Kingdom
Italy
Canada
Big Six
Japan
West German
France
United
Kingdom
Italy
Canada
0 2 4 6
Government Investment
?20 ?10
Big Six
Japan
West Germany
France
United
Kingdom
Italy
Canada
0 10
Nonresidential Investment
0 5 10 15 20
Big Six
Japan
West Germany
France
United
Kingdom
Italy
Canada
308554 3-86
Interest rates are generally still declining across the
Big Six, continuing the trend that began about four
years ago, and helping to fortify the economic
recovery. In February, long-term government bond
yields in Canada, France, the United Kingdom,
and Italy were down about 6 percentage points
from early 1982 levels. West German and Japanese
yields?in single digits in 1982?have fallen by
about 2 to 3 percentage points. As a result, interest
rate differentials among the Big Six have narrowed
substantially from four years ago.
Government Policy Remains Conservative
Economic policy has not changed dramatically in
any Big Six country since the French Socialists
shifted from expansion to austerity in mid-1982.
All six governments are following, or trying to
follow, generally conservative fiscal and monetary
policies. Budget deficit reduction is a goal in all
cases, although the results have varied widely.
West Germany and Japan may hold their deficits
below 1 percent of GDP this year, down from about
3.5 percent in 1982. At the other extreme, the
Italian deficit seems stuck at 16 percent of GDP as
the divided coalition government is unable to agree
on a budget-cutting strategy.
Impact of Future Changes in the Dollar and Oil
Prices
Any further fall of the dollar below its present
level, or drop in the average price of oil much below
$20 per barrel, would influence our forecast for
economic prospects in 1986. If the dollar continues
to decline, export performance in the Big Six would
suffer more than we presently expect, trimming
economic growth. For example, our Linked Policy
Impact Model (LPIM) of the world estimates that
Secret 20
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Secret
Big Six: Inflation and the Balance of Payments
EIZM 1985 MI 1986
Consumer Price Inflation
Percent
Big Six
Japan
West Germany
France
United Kingdom
Italy
Canada
2
4
PISMOTMeg msi,A,Aptool
6
8 10
00#5:!::41.00t4::g:
ONMX#4
r7,410111.
Current Account Balance
Billion US $
?20 0
Big Six
Japan
West Germany
France
United Kingdom
Italy
Canada
20
40
60
80
100
308555 3-86
economic growth in 1985 was 0.3 percentage point
lower than what it would have been had the dollar
remained constant. Only Canada gained because of
a depreciating US dollar since its currency followed
the US dollar down. According to the LPIM, each
additional $5 per barrel decline in oil prices would
stimulate Big Six growth by 0.2 percentage point
above our present projection. In addition to lower
oil import costs, lower inflation would help pull
down interest rates, prompting more investment
and spending by consumers on durable goods.
Country Profiles
The slowdown in the Japanese economy, which
began last summer, will probably continue through
1986. We expect real GDP to fall well short of the
official forecast of 4 percent. The stronger yen is
reinforcing the slowdown in exports to the United
States and China under way since early last year.
21
The deteriorating economy is becoming a tough
political issue for Prime Minister Nakasone, who is
being pressed for fiscal stimulus before this sum-
mer's parliamentary elections. Tokyo will probably
adopt minor pump-priming measures, including a
small cut in income taxes, but we expect no major
reversal of the government's four-year-old budget
austerity.
25X1
25X1
West German economic growth should lead the Big
Six this year after a rather lackluster showing in
1985. Growth will be more balanced, as stronger 25X1
domestic demand replaces dependence on exports.
Fiscal and monetary policy will remain relatively
tight with continuing emphasis on reducing the
budget deficit. Consumer price inflation will be the
lowest among the Big Six, and unemployment is
also likely to fall?for the first time since 1979.
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Big Six: Unemployment Rates
am3 1985 1986
Big Six
Japan
West Germany
France
United Kingdom
Italy
Canada
6
9 12 15
308556 3-86
French economic growth, although sluggish in re-
cent years, will pick up to more than 3 percent this
year. The steady decline in the French inflation
rate since 1981 is perhaps the government's most
important achievement and has helped spur busi-
ness and consumer confidence. Unemployment re-
mains the bleakest aspect, but even here there are
recent signs of improvement.
British economic growth this year will be tempered
primarily by sharply reduced growth in plant and
equipment investment. The current account will
remain in surplus as strong invisibles earnings take
up the slack for the likely shortfall in net oil export
earnings and a projected boom in consumer im-
ports. Unemployment remains the most serious
problem facing the Thatcher government as the
next general election approaches. Nonetheless, we
believe the government will continue to reject both
direct jobs programs and any formal incomes poli-
cy.
Secret
Big Six: Long-Term Government
Bond Yields
Percent
25
20
15
10
IIIII1111111111111111I LIII Jill 1 1 1 1 1 I III! I 1 1 1 I I I I I
Italy
Canada
France
United
Kingdom
West
Germany
Japan
0 1982 83 84 85 86
308557 3-86
Italy's poor export outlook and a maturing of the
investment boom will probably slow real GDP
growth this year. Italy's already-high interest rates
could rise further because the divided governing
coalition will have difficulty curbing the budget
deficit and will have to borrow to meet its debt
obligations. Despite the priority given to fighting
inflation, the government will miss its target by at
least 1 percentage point. Unemployment is also a
growing concern, and the ad hoc programs to
22
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encourage hiring are unlikely to offset the continu-
ing shedding of labor in industry.
The Canadian economy will probably slow this
year because of higher interest rates and higher
taxes. Ottawa's primary economic focus is on un-
employment. Although job creation has been
strong?Canada created more jobs in 1985 than all
of Western Europe?much of the gains have been
offset by labor force growth. The government is
also under great pressure to reduce the federal
deficit?but is doing so by relying primarily on
higher taxes. Ottawa sharply tightened its mone-
tary policy early this year to defend its currency,
pushing up short-term rates.
Secret
23 Secret
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Haiti: Economic Needs in
the Post-Duvalier Era
Haiti's interim government faces formidable eco-
nomic problems that threaten its ability to main-
tain public order. Unless the government quickly
secures new foreign aid for critical food and fuel
imports, public unrest probably will grow. With a
virtually bankrupt treasury, government attempts
to meet popular expectations for improved living
standards risk overspending, which could threaten
a needed IMF accord essential to the restoration of
business confidence. Unless business confidence
improves, investment will continue to deteriorate
and even generous foreign aid?Washington will be
the focus of Haitian requests?will do no more than
temporarily prop up imports and living standards.
Moreover, sustainable economic growth will not
occur until President Namphy undertakes political-
ly perilous economic reform to reduce corruption
and lessen wide income disparities. In the best case,
economic progress would be slow, hampered by an
eroded agricultural base, primitive transport and
communication networks, an uneducated work
force, and a shortage of skilled managers.
Namphy's Economic Challenges
Duvalier's ouster intensified economic problems
that have been particularly acute since 1980, and
the government will have to scramble to avert
further economic decline. Food and petroleum sup-
plies probably will be adequate until mid-April, but
prospects for the following months are unclear.
Foreign grants, for example, will cover immediate
needs for 15,000 metric tons of wheat. The govern-
ment recently obtained a $5 million commercial
loan from local banks to cover one month's oil
imports, but the slim foreign exchange reserves of
the local banking system will prevent continued
access to such loans.
US Embassy indicate
that business confidence, already low in the uncer-
tain political climate, is dropping further as a result
25
Secret
of worker demands for higher wages. Workers,
flush with victory, probably hold unrealistically
high expectations for better living standards. Em-
ployees in more than a dozen factories and govern-
ment offices have gone on strike since Duvalier's
overthrow, demanding increases in the current $3
per day minimum wage and the removal of manag-
ers who had ties to the former regime. Investment,
which dropped in reaction to anti-Duvalier protests,
will dip further if the government decrees substan-
tial wage hikes./
We estimate that Haiti needs roughly $125 million
in new foreign aid this year?in addition to the
$150 million already committed by various donors
before Duvalier's fall?to stop the economic slide.
To boost real GDP by 3 percent?and regain the
peak 1980 level?we calculate that Haiti would
have to raise imports 20 percent above last year's
depressed level to about $400 million. Of this total,
about $100 million would be needed for food
purchases, which we estimate have fallen at least
20 percent in real terms since 1980. Although
falling world oil prices will help, we calculate that
Haiti still would need roughly $70 million for
petroleum products this year. The remaining $230
million would finance imports of raw materials and
intermediate goods for agriculture and manufac-
turing, as well as medical supplies, building materi-
als, and small amounts of consumer goods.
/
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We believe that Haiti's foreign exchange earnings
in 1986 will not exceed $250 million, partly as a
result of the recent unrest, and the trade deficit will
rise to about $150 million. Despite rising world
prices for coffee?Haiti's main agricultural ex-
port?disruptions to harvests and exports from
October through January will limit Haitian earn-
ings to no more than $70 million this year,
We judge that other
Secret
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Haiti: Socioeconomic Comparisons
Haiti
Dominican Republic
Jamaica
Haiti
Dominican Republic
Jamaica
Life Expectancy at Birth,
1982
Years
0 20
40
Secondary School Enrollment
Rate, 1981
Percent
60 80 0 20 40
Per Capita GNP, 1984
Thousand US $
60 0 0.3 0.6 0.9 1.2
Infancy Mortality Rate, 1982
Deaths per thousand infants
30
60
90
Ratio of Population to
Physicians, 1980
Thousand persons per physician
120 0 2 4 6 8
3C6558 3-86
Crude Death Rate, 1982
Deaths per thousand persons
0 5 10 15
commodity exports, including cocoa and sugar, at
best will stagnate near last year's $47 million
earnings. Foreign sales of light manufactured
goods, Haiti's largest export earner, also are likely
to be disappointing.
In addition to the trade deficit, scheduled external
debt repayments, other service payments abroad,
and capital flight probably will boost total foreign
funding needs to about $275 million. To cover this
financial gap, we can identify $150 million in aid
commitments made before the change of govern-
ment. Of this total, $130 million are grants from
governments, multilateral institutions, and charita-
ble organizations, according to IMF data. In addi-
tion, the World Bank is slated to distribute $20
million in concessionary project financing.
Secret
Other potential sources of funds include the IMF,
the EC, and other industrialized nations:
? The IMF is willing to send a team to Haiti soon
to lay the groundwork for a $17 million standby
to take effect as early as June, according to Fund
officials. Before the new government could begin
negotiations for the loan?which would cover
only previous obligations?it would be required to
repay some $5 million owed to the Fund.
? In addition to the $20 million already in the
pipeline, the World Bank probably will approve a
$26 million transportation credit for disburse-
ment this year?a project that would help to ease
unemployment.
26
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Haiti: Balance of Payments,
1984-86
Million US $
1984
1985a
1986b
Current account
?60.9
?56.3
?98
Trade balance
?122.5
?105.9
?153
Exports (f.o.b.)
229.5
228.0
247
Coffee
54.0
48.0
70
Light manufactures
124.6
132.9
130
Other
50.9
47.1
47
Imports (c.i.f.)
352.0
333.9
400
Services, net
?61.5
?66.5
?75
Tourism
28.0
25.1
20
Transfers (grants)
123.2
116.1
130
Capital account
60.9
56.3
NA
Net official capital
55.3
37.3
NA
Net private capital, errors and
omissions
?6.8
?6.1
NA
Drawdown in international
reserves and increase in arrears
12.4
25.1
NA
a Estimated.
b projected, based on 1980 import volume.
? Canada, France, and the Netherlands reportedly
may increase support, but are awaiting a clearer
picture of Haiti's financial needs.
? Bonn reportedly will not commit new funds until
Haiti's political situation clarifies, and London
claims it cannot afford to increase aid to the
Caribbean region.
? The Organization of American States recently
agreed to augment humanitarian aid in order to
help Haiti move toward democracy, according to
press reports.
27
No Quick Fix
If the Namphy government can quickly convince
potential donors that real political and economic
reform is under way, we believe Haiti could receive
the aid needed to raise real GDP to the 1980 level.
Even rapid and generous aid flows, however, would
do no more than temporarily support higher im-
ports and living standards. We doubt that substan-
tially larger aid inflows would improve economic
conditions much more, however, because Haiti
lacks the administrative and technical capacity to
manage massive assistance programs. Warehouse
space and refrigeration for food supplies are limited
and reliable distribution channels are scarce. The
work force is poorly skilled and would require
training before many construction projects could be
implemented.
Unless the government moves quickly to present a
reasoned economic policy statement, we believe
that a crisis of business confidence could force a
devaluation of the gourde and dim hopes for eco-
nomic recovery. Speculative pressures and capital
flight are weakening the gourde, and US dollars
trade on the parallel market at a 17-percent premi-
um above the official rate.
If the gourde were devalued, political-
ly risky hikes in food and fuel prices would occur.
Moreover, we believe economic activity would slow
because rising costs of essential imported inputs
would discourage production and investment more
than stimulate exports.
Need for Structural Change
In addition to these immediate concerns, the gov-
ernment ultimately must adopt real economic re-
forms to reduce corruption and lessen the wide gap
in incomes if sustained economic improvement is to
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Secret
occur. Entrenched corruption acts as a confiscatory
tax on legitimate economic activity that robs the
few domestic resources otherwise available to inves-
tors hoping to take advantage of Haiti's industrious
work force, strong private-sector orientation, and
inclusion in the Caribbean Basin Initiative. Al-
though we believe some members of the new gov-
ernment will continue past corrupt practices, there
is a precedent for foreign influence on this issue.
For example, lender intolerance for obviously shady
bookkeeping practices led to the demise of the
notoriously corrupt Tobacco Bureau in the early
1980s.
Imbalances in incomes, in our view, will prove more
difficult to moderate. The ruling elites have a clear
interest in maintaining the status quo despite the
wide gulf in living standards that deters some
foreign investors, according to businessmen. More-
over, although malnutrition and disease cut deeply
into labor productivity, according to the World
Bank, businessmen probably will continue to resist
wage increases or higher taxes to finance greater
spending on food programs, sanitation, or medical
care
Implications for the United States
We believe the highly publicized US role in Duva-
lier's departure has raised Haitian Government and
popular expectations that Washington will provide
guidance and generous economic help. As a result,
Namphy will press the United States to lead
international aid efforts. In this environment, US
stipulations to encourage economic and political
reform can be expected to carry more weight than
under the Duvalier regime. Because the Haitian
economy is not yet capable of self-generated
growth, similar requests will recur for some time.
Repayment of the roughly $220 million in Haitian
debt owed to US creditors will remain in jeopardy.
Moreover, we doubt that illegal migration will slow
over the next few years. No foreseeable economic
path could quickly lessen unemployment or raise
the minimum wage enough to reduce the lure of
US economic opportunity, particularly to rural
Haitians.
Secret 28
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OPEC Production
Update
Briefs
Energy
OPEC crude oil production averaged 18.1 million b/d in February, a 500,000-
b/d increase from January levels. Increased Saudi output, spurred by netback
sales to the Far East, accounted for most of the rise. Intense competition has
allowed OPEC to capture some non-OPEC market share, but at the cost of
plummeting prices-which have fallen to as low as $13.75 and $12.00 for
North Sea and US spot crudes, respectively.
OPEC: Crude Oil Production, 1985-86
Million b/d
Quota
1985
1986
January
February
Total
16.0
16.4
17.6
18.1
Algeria
0.66
0.7
0.7
0.7
Ecuador
0.18
0.3
0.3
0.3
Gabon
0.14
0.2
0.2
0.2
Indonesia
1.19
1.2
1.4
1.4
Iran
2.30
2.3
2.4
2.1
Iraq
1.20
1.5
1.7
1.7
Kuwait a
0.90
1.1 (0.9)
1.2 (1.0)
1.2 (1.0)
Libya
0.99
1.2
1.1
1.0
Nigeria
1.30
1.5
1.2
1.5
Qatar
0.28
0.3
0.3
0.3
Saudi Arabia a
4.35
3.5 (3.3)
4.3 (4.1)
4.9 (4.7)
UAE
0.95
1.1
1.2
1.3
Venezuela
1.56
1.6
1.6
1.4
a Amount in parentheses excludes production from the Neutral
Zone, whose output is divided between Saudi Arabia and Kuwait
and included in their country quotas; the Neutral Zone has no
production quota of its own.
29 Secret
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Secret
Major Chinese
Coal Discovery
Reserve Positions
of Problem Debtors
Secret
21 March 1986
Beijing claims to have found an enormous new coalfield with verified reserves
of more than 200 billion metric tons. The 40,000-square-kilometer field,
located in Shaanxi and Nei Monggol Provinces, would raise China's coal
reserves by 25 percent to almost 1 trillion tons. China expects the field to pro-
duce 35 million tons annually by the year 2000. China currently lacks the
infrastructure to develop this coal, although the rail line between Datong and
the port of Qinhuangdao is being improved and could be extended to the new
find. Beijing expects coal to continue to account for about 70 percent of
China's energy into the next century, with annual production of 1.2 billion tons
slated for the year 2000. Low international prices and strong domestic demand
will probably keep China from becoming a major exporter.
International Finance
Total foreign exchange reserves in problem debtor countries remained roughly
constant during 1985, primarily because of events in a few key countries.
Mexico was the major factor as declining oil revenues and a significant rise in
imports before the June elections led to a sharp drawdown in foreign exchange
reserves. Similarly, Nigeria experienced a loss of almost 50 percent in reserve
holdings last year because of lower oil export revenues. In contrast, Argentine
reserves nearly doubled with new credit inflows and a debt rescheduling
agreement; even with the increase, however, reported reserve levels will only
support six months of imports. Venezuela's reserve position was bolstered by a
sizable current account surplus and is equivalent to 17 months of imports.
30
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OECD Export
Credit Meeting
Debtor LDCs: Foreign Exchange Reserves a
Reserves
(Billion US $)
Reserve-to-Import
Ratio, 1985 (months)
1984
1985
Total
37.3
37.4
Argentina
1.2
2.3 b
6
Bolivia
0.3
0.2 b
4
Brazil
11.5
11.5
10
Chile
2.3
2.4
4
Colombia
1.4
1.6
6
Ecuador
0.6
0.7
3
Ivory Coast
NEGL
NEGL b
1
Mexico
7.3
495
3
Morocco
NEGL
0.1
NEGL
Nigeria
1.5
0.8
1
Peru
1.6
1.9 b
8
Philippines
0.6
0.6
2
Uruguay
0.1
0.2 b
3
Venezuela d
8.9
10.2
17
Total reserves minus gold; yearend.
b Third quarter.
c Less than half a month.
d Reserves in central bank only.
25X1
The EC nearly agreed in private discussions with the United States on a
compromise to increase discipline over the use of tied aid credits during last
week's OECD Export Credit Meeting in Paris, according to diplomatic
reporting. Opposition by West Germany and the Netherlands to a proposal by
Chairman Axel Wallen to adopt a new interest rate system, however, resulted 25X1
in a collapse of the US-EC compromise. Wallen also proposed new methods to
calculate the grant element?opposed by Japan?and an increase in the
minimum grant element. In contrast, the US-EC compromise called for
eliminating tied aid credits for highest income countries and doubling the
minimum grant element?the aid portion of these credits?to at least 50
percent for the least developed countries. The issue of tied aid credits will
probably be on the agenda for the OECD Ministerial next month. EC
ministers are scheduled to meet on 5 April to develop a mandate based on the
proposed US-EC compromise. 25X1
31
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Philippines Skirmishing
With Foreign Creditors
Polish
Debt Rescheduling
Agreement
Burma's Debt
Management Problems
Secret
21 March 1986
Tough IMF recommendations and hints that President Aquino is considering
defaulting on part of the country's foreign debt suggest she will face problems
with foreign creditors in the months ahead. According to the US Embassy,
talks between the government and the IMF last week centered on Manila's
budget problems. The IMF estimates that the budget deficit through mid-
March reached $540 million?four times the original IMF projection. Embas-
sy sources say the Fund is urging Manila to prepare a new budget and will
probably advise it to trim the deficit through tax increases when negotiations
resume next month. The Fund reportedly is prepared to allow some leeway on
the deficit only if Manila begins to make major economic reforms soon.
Meanwhile, Deputy Foreign Minister Shahani and Economic Planning Minis-
ter Monsod told the press last weekend that the government is discussing
repudiating selected portions of the country's $26 billion foreign debt,
including borrowings by businesses owned by associates of former President
Marcos. Failure to agree on a financial program could further delay a $230
million loan disbursement from the Fund and a $350 million disbursement
from a commercial bank financing package. A default on selected foreign
loans would go far beyond Aquino's campaign pledge to limit debt repayments
to a fixed percentage of foreign exchange earnings and would almost certainly
result in a cutoff of badly needed commercial financing. How quickly and
effectively Aquino's more conservative economic advisers?such as Finance
Minister Ongpin?thwart it will be an important indicator of their influence
with Aquino.
Poland recently reached agreement with its Paris Club creditors on reschedul-
ing official debt. The amount of debt relief exceeds $1.7 billion but is short of
the $2.1 billion requested by Warsaw. All maturities due this year will be
rescheduled over 10 years, with repayment to begin in 1991. Payments due
under the rescheduling agreements of 1981 and 1985 are not affected, and
interest originally due last December on the 1982-84 rescheduling will be
payable later this year. Having reached agreement with government creditors,
the Poles must now obtain debt relief from commercial banks. The Paris Club
wants the banks to provide $1.1 billion in relief under its formula for an
equitable sharing of the burden, but the bankers have indicated a willingness
to reschedule only $600-800 million of principal. Even if the banks were to pro-
vide all the desired relief, Warsaw is likely to continue missing payments under
the rescheduling pacts with the Paris Club.
Burma's dismal export performance is fueling speculation by US bankers that
Rangoon may reschedule some of its $3 billion foreign debt, according to the
US Embassy. Merchandise exports for the current fiscal year, which ends 31
March, are likely to drop almost 20 percent from the previous year's $375 mil-
lion?the second year of sharp decline. Foreign exchange reserves have already
dipped as low as $20 million?about 2 weeks' import coverage?forcing
Rangoon to borrow at least $55 million in short-term commercial funds to
finance imports of raw materials and spare parts. As a result, Burma's debt
32
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Renewal of
International
Wheat Agreement
Hong Kong's
Economic Status
Central American
Common Market Woes
service ratio?including short-term principal repayments?probably will top
70 percent. With grace periods on many of Burma's loans due to expire soon,
we believe continued export difficulties could prompt a rescheduling as early
as this summer unless Rangoon obtains substantial balance-of-payments
assistance.
International Trade
Recent Soviet efforts to sabotage the International Wheat Agreement were
squelched as a group of 60 wheat importers and exporters approved a new five-
year pact to take effect 1 July. The agreement includes a Wheat Trade
Convention to collect market information and a Food Aid Convention that
commits 11 donor countries to supply at least 7.6 million metric tons of food
aid per year for humanitarian relief. The Wheat Trade Convention lacks
market provisions such as strategic stocks, price setting, or market sharing.
The Food Aid Convention continues to effectively guarantee minimum food
aid levels to needy countries; donations in recent years have topped 10 million
tons, largely to Sub-Saharan Africa.
25X1
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25X1
The Sino-British Liaison Group has agreed to let Hong Kong become an
independent GATT member next month?it has been represented by the
United Kingdom. Hong Kong's GATT membership may also allow China to 25X1
increase its influence in the organization, particularly if Beijing's own efforts
to join succeed. The group also agreed on a formula for Hong Kong's
continued participation in the Multi-Fiber Arrangement and established a
subgroup to work out more than 800 international treaties affecting the
territory. The two sides further agreed that Hong Kong residents may use
UK-issued travel and identity documents after the UK lease expires in 1997.
The friendly atmosphere of the talks and concrete results should help allay the
worries of many Hong Kong firms. Beijing's cooperation reflects its economic
interest in a smooth transition. 25X1
Prospects for a revival of the Central American Common Market (CACM)
have been further weakened by the Costa Rican Central Bank's decision to
halt preferential trade with Honduras and El Salvador. San Jose last month
discontinued processing Honduran and Salvadoran transactions through the
CACM clearing house, and put trade on a cash basis because of mounting un-
paid bills. Costa Rican bank officials said that the combined Honduran and
Salvadoran debt to Costa Rica now stands at nearly $100 million, compared to
$67 million last summer. The US Embassy in San Jose reported that Costa
Rica resumed preferential trade with Guatemala last December after Guate-
mala City promised to pay its clearing house obligations. Although regional
foreign exchange problems have caused intra-CACM trade to decline by one-
third in recent years, CACM remains the most important market for the
region's industrial exports.
33
Secret
21 March 1986
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Secret
Tokyo To Push Oil
Price Stabilization
at Summit
Japanese Machine
Tool Manufacturers
Seek Soviet Trade
Yugoslavia Avoiding
US Export Controls
Secret
21 March 1986
Global and Regional Developments
Worried that falling oil prices will further boost its trade surplus, undercut its
efforts to diversify supply sources, and lead to general uncertainty, Japan
probably will suggest measures to stabilize prices at the upcoming Economic
Summit. Prime Minister Nakasone and Foreign Minister Abe broached the
subject during talks with US officials in March./
A recent Japanese press piece speculates Tokyo will propose that energy
ministers of advanced countries formulate a joint strategy to smooth global
price fluctuations, including expanding oil demand through increased stockpil-
ing, and convincing London to alter its policy of nonintervention in North Sea
production.
According to recent press reporting, Japanese machine tool manufacturers see
the October 1986 Trade Fair in Moscow as an opportunity to offset the
potential for shrinking exports to the West. The Japanese firms, whose exports
are under pressure from the yen's rise, are concerned that they will have to cut
production in 1986. Moreover, they also face either a voluntary restraint
program imposed by the Japanese government or potential US import
restraints. Consequently, we believe a number of Japanese machine tool
builders are anxious for Soviet business. They could increase sales to Moscow
sharply without violating COCOM restrictions because the Soviets need
relatively unsophisticated robots, NC machine tools, metal-pressing machines,
and plastic injection molding machines. The increased pressure on exports,
however, may lead to attempts by Japanese manufacturers to evade COCOM
restrictions.
The Yugoslav firm Nikola Tesla has redesigned a computer-controlled
telephone exchange of a type subject to COCOM controls to avoid the use of
US-origin components This particular
model?the ARE 13?is made in Yugoslavia under license from the Swedish
company LM Ericsson. According to an article in the Soviet press, an ARE 13
is in operation in Kiev. Although neither Sweden nor Yugoslavia is a member
of COCOM, sales of the ARE 13 to COCOM-proscribed destinations have
been restricted because of its use of US-origin components. If the official's
statement is true, the company is now free to export without restrictions.
COCOM governments will find it difficult to enforce the embargo, if
companies in their countries conclude that firms in neutral countries are
taking advantage of the situation.
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Asian Countries
Improve Copyright
Protection
Chinese Aid
to Bangladesh
Japan's Exchange
Rate Policy and
Election Politics
As a result of strong US pressure, a number of Asian countries have recently
improved their protection of copyrighted works. Seoul approved a draft review
of the current copyright law allowing for the protection of US works and
extending protection from 30 to 50 years after the death of the copyright
holders. Taiwan granted all American authors copyright protection equal to
that received by nationals. Singapore is expected to introduce a new copyright
bill to Parliament in the next couple of weeks. The law will probably stiffen
penalties and double the period of protection from 25 to 50 years.
25X1
25X1
China agreed during President Li Xiannian's visit to Bangladesh earlier this 25X1
month to provide Dhaka with an interest-free loan and grant totaling more
than $30 million, The assistance will be used
to finance economic development projects and military purchases. In addition, 25X1
the two countries discussed the possibility of joint ventures, transfer of
technology, and technical cooperation./
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/China still provides less than 1 percent of Bangladesh's total
bilateral assistance, but relations between the two countries have been growing
since China recognized Bangladesh in 1975. 25X1
National Developments
Developed Countries
The Bank of Japan this week intervened in the New York foreign exchange
market to moderate a wave of speculative yen purchases that had cut the
dollar exchange rate to a record 174 yen on Monday. The bank acted after
other measures?two discount rate cuts over the past two months and
"jawboning"?proved ineffective. In our view, this intervention largely reflects
Tokyo's concern that the yen appreciation--25 percent against the dollar since
September?was much too fast to allow exporters to adjust. The rapid
appreciation, moreover, is proving troublesome for the ruling Liberal Demo-
cratic Party. It appears increasingly likely that elections for both houses of the
Diet will be held this summer and Prime Minister Nakasone and top LDP offi-
cials are concerned that the deflationary impact of the strong yen would
damage the party's prospects.
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Japanese Producers
To Market Minicars
in the United States
Secret
21 March 1986
Japanese auto manufacturers plan to begin exports of "minicompact" cars to
the United States in 1987. The Japanese would have the market for the small,
1,000 to 1,300 cc, 3- to 4-cylinder vehicles to themselves?no other country is
currently exporting a car this size, and no US company has plans to produce
one. Minicars are popular in Japan, and Japanese auto builders probably see
an opening in the US market as a result of the initial success of the Suzuki-
built Chevrolet Sprint-31,000 were sold in 1985. We do not believe Japanese
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Britain's
New Budget
Delay in Sale of
British Airways
New Turkish Foreign
Investment Law
firms would cut exports of high-profit, upscale cars to make room for sales of
the low-profit minis. Therefore, minicars could cause automakers to increase
pressure on Tokyo to end voluntary export restraints. The current VRA
extension expires in March 1987.
London presented a budget this week designed primarily to reassure financial
markets that its economic policies are on track. The target for the Public
Sector Borrowing Requirement was lowered from $10.5 billion to $9.8
billion?equivalent to less than 2 percent of GDP?raising expectations of an
imminent cut in domestic interest rates. Citing falling government revenues
from North Sea oil, Chancellor of the Exchequer Lawson announced a tax
reduction package of only $1.5 billion, aimed at individuals in the lower tax
brackets. In an overtly political move, he promised further cuts of almost
$3 billion next year, in the last budget before the next general election.
Meanwhile, Lawson rebuffed widespread calls for greatly increased spending
to alleviate Britain's critical unemployment, reiterating the government's
position that the solution lies with the private sector. Instead, the budget
proposes some additional expenditure on existing programs that encourage the
jobless to accept low-paying jobs.
London is postponing the privatization of British Airways indefinitely pending
resolution of two important bilateral issues with the United States. The
government's announcement blamed uncertainty over the application of US
antitrust legislation to international civil aviation?such as the suit that
followed the collapse of Laker Airways?and difficult negotiations with
Washington over capacity limits for North Atlantic flights. The postponement
of the sale could cost the government as much as $1.5 billion in planned
revenue this year. Critics are predicting that the sale now will not take place
until after the next election, which is due in 1988. Blaming US actions for the
embarrassing delay could also add fuel to the anti-US feeling displayed in
recent weeks during the takeover of Westland Helicopter by a US-led
consortium and the proposed sale of British Leyland to General Motors.
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Ankara has introduced new rules for foreign investment intended to attract 25X1
foreign capital. Current stiff export performance requirements?up to 50
percent of output for the textile industry?have been waived completely. In 25X1
addition, the Foreign Investment Department of the State Planning Organiza-
tion will be empowered to make decisions on issues such as capital increases
and changes in the company's activities, which formerly were referred to the
Council of Ministers. Despite Prime Minister Ozal's efforts to attract foreign
investment, the inflow thus far has been disappointing?about $100 million in
both 1984 and 1985. The new law probably will have some success as interest
in Turkey remains high among potential investors, but inflation in the 43- to
45-percent range and domestic interest rates exceeding 65 percent will
continue to discourage investment inflows. 25X1
37
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11 March 1986
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Secret
Mexican Export
Promotion Campaign
Lower Guatemalan
Oil Bill
Intensive Technology
in Soviet Grain
Production
Secret
21 March 1986
Less Developed Countries
Mexico City earlier this week announced a new export promotion scheme
designed to boost sales of nonpetroleum goods and services by at least
$1 billion in 1986. The new program will aid private exporters by reducing tax-
es, increasing trade credits, and loosening transportation and import restric-
tions. Mexican businessmen would respond favorably to any new export
incentives, according to the US Embassy, to compensate for an anticipated fall
in domestic sales this year. Even though these initiatives may boost nonpetro-
leum export revenues temporarily as businessmen take advantage of special
government concessions, the program does not include the reforms that, in our
view, are needed to sustain a long-term buildup and diversification of Mexico's
export base. We believe that Mexico City instead may resort to a reintroduc-
tion of import quotas and export subsidies and requests for special US trade
concessions to make Mexican exports more competitive.
Lower world oil prices and the completion of the Chixoy hydroelectric project
are likely to reduce Guatemala's 1986 petroleum bill by one-half, but the
government is still likely to face short-term difficulties paying for oil imports.
Chixoy?which started up last fall and reached full capacity in February?will
reduce oil imports by 25 percent, according to US Embassy estimates. Oil
import savings may total roughly $85 million.
Venezuela and Mexico?who supply oil to Guatemala on
concessionary terms under the San Jose Accord?are complaining that only
token payments have been made since last summer. The government has been
using revenues from gasoline sales to cover general government expenses,
rather than to pay for oil imports.
Communist
Soviet plans for 1986 call for greater use of "intensive technology" to increase
grain production, including the use of high-yield grain varieties, planting after
leaving land fallow, improved transportation, and appropriate use of agro-
chemicals. Recent plans call for an additional 26 million metric tons of grain
on 31 million hectares allocated to intensive technology. At the party congress
General Secretary Gorbachev praised the intensive technology effort of 1985,
which he said "allowed production of an additional 16 million metric tons,"
apparently of grain. Gorbachev's figure is higher than the 10-million-ton
increase Soviet agricultural officials claimed earlier and considerably higher
than the US estimates of 5-8 million tons. The 16-million-ton figure probably
represents the increased output on lands where intensive technology was
employed, but does not take into account the concurrent production fall in
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Secret
Poland's Economic
Performance in 1985
Polish Price
Increases
areas where these resources were pulled. The expansion of intensive technol-
ogy?coupled with the Soviets' experience and reported increased training in
its use?could add another 10-15 million tons to this year's grain production.
Official Polish statistics indicate that national income grew 3 percent last year
(an estimated 2.3 percent in Western GNP terms), a significant slowdown from
the previous two years. Industrial production grew 3.8 percent?slightly below
plan?as a surge in output during the last four months of 1985 helped to
overcome the effects of a severe winter. Agriculture experienced its fourth
consecutive good year. Uncontrolled investment spending continued?capital
expenditures rose 6.3 percent more than planned and project completion rates
decreased from nearly 70 percent in 1984 to less than 66 percent. Real wages
outpaced productivity gains while forced savings accumulated because of
continued shortages of goods. A reduced trade surplus with the West?hard
currency imports rose 8.1 percent while exports dropped 3.8 percent?
contributed to Warsaw's failure to make payments of about $515 million due
Western government creditors last December. In the continued absence of
vigorous economic reform, we believe national income is unlikely to grow
significantly faster in 1986.
The announcement last Saturday, with virtually no warning, of price increases
on many basic foodstuffs will probably increase worker dissatisfaction and
may lead to more protests or job actions. This is a sharp departure from the re-
gime's policy in recent years of trying to prevent adverse reaction to the
traditionally sensitive issue of food price increases by conducting elaborate
public consultations beforehand. Prices of staples such as bread, sugar, and
dairy products increased by about 9 percent. Meat prices are slated to rise by 8
percent in August. The regime did not announce any additional wage or
benefit increases, claiming that continuing increases in wage levels, recent
boosts in pensions, and low-income supplements will partially offset the price
rises. The Polish statistical office announced last month that real wages
increased by about 3 percent in 1985. Lech Walesa said protests would be jus-
tified but left it to the workers to decide what form they should take.
According to Western press sources, several thousand Poles marched to protest
the price increases in Gdansk but were dispersed without violence. Chairman
Jaruzelski is probably confident of his control over the security situation but
may have miscalculated the willingness of the people to accept the hikes as
passively as they did last July.
39
Secret
21 March 1986
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