INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706830001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: January 27, 1984
• Content Type: REPORT

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DI IEEW 84-004
27 January 1984
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Directorate of
Intelligence
Weekly,
International
Economic & Energy
27 January 1984
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International
Economic & Energy
Weekly
27 January 1984
iii Synopsis
1 / Perspective-Longer Term Aspects of the LDC Debt Crisis
Energy
International Finance
Global and Regional Developments
National Developments
17 / International Financial Situation: Political Update
This article was prepared by analysts in ALA, NESA, and OGI
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19 / International Financial Situation: Devaluations Assist Trade Improvement """ '
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29 Airbus Industrie: Prospects for the A320 Enhance Long-Term Goals
33 Tunisia: In the Aftermath of the Bread Riots
37 ,iCfghanistan: Growing Economic Dependence on the Soviets
Comments and queries regarding this publication are welcome. They may be
directed to ~ Directorate of Intelligence,
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27 January 1984
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Weekly
International
Economic & Energy
Synopsis
1 Perspective-Longer Term Aspects of the LDC Debt Crisis
Concentration on the most immediate financial aspects of the LDC debt crisis
risks papering over more fundamental problems. These include the need for
structural economic and institutional change in the LDCs, sustained world
economic recovery and expanded trade, and the assurance of sufficient future
capital flows to the Third World.
17 International Financial Situation: Political Update
Political trouble caused by reaction to economic austerity measures is
spreading. Strikes and violence have flared up over the past month in countries
as disparate as Suriname, Sierra Leone, Tunisia, and Israel.1
19 International Financial Situation: Devaluations Assist Trade Improvement) 25X1
This article in our series on economic and political aspects of the international
financial situation examines changes in real exchange rates. For a select group
of 15 LDC debtors, our analysis shows that most of these countries experi-
enced real devaluations last year.
Airbus Industrie: Prospects for the A320 Enhance Long-Term Goals
attain
Western Europe's Airbus Industrie appears near a formal commitment to
build the A320, an all-new, 150-seat, advanced technology aircraft. An Airbus
Industrie move into the narrow-body sector of the commercial aircraft market
will erode US sales, set the stage for further expansion of the consortium's
product line, and make profitability of any all-new US program harder to
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Resentment in Tunisia over continuing regional disparities in income and
rising unemployment and prices came to a head at the end of December when
steep increases in the price of bread triggered nationwide riots. The disorders
will make it extremely difficult for the government to enact needed austerity
37 Afghanistan: Growing Economic Dependence on the Soviets
Unable to halt the slide in the economy since the Soviet invasion in December
1979, Kabul has turned to the Soviet Union for financial support to operate the
government as well as for food and other supplies to alleviate shortages in
government-controlled areas.
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27 January 1984
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International
Economic & Energy
Weekly
27 January 1984
Perspective Longer Term Aspects of the LDC Debt Crisis
The international financial community. is currently involved in another round
of LDC debt relief negotiations, which include rescheduling this year's
maturities, raising new credits, and.setting 1984 IMF economic performance
targets. Despite debtor demands for easier terms on new and restructured
loans and some, smaller bank resistance to new loan participation, most
Western financial and government observers are optimistic that financial
packages will be completed and disruptions to the banking system will again be
averted.. The prospect of continued OECD economic recovery, improved LDC
exports, and lower or at least stable interest rates is contributing to Western
confidence that the LDCs' ability to service their-debt is improving.
Although short-term LDC debtor cash flow problems may be under control,
longer term and more difficult aspects of the debt crisis remain. These include
the need,for structural economic and institutional change in the LDCs,
sustained world economic recovery and expanded trade, and the assurance of
sufficient future capital flows to the Third World. Concentration on the
current financial aspects of the LDC debt crisis risks papering over these more
fundamental problems.
In many debtor countries, subsidies and controls on prices, interest rates, and
exchange rates have stimulated demand without improving productive capaci-
ty. At the same time, these price distortions have encouraged capital outflows.
Development policies have sustained large inefficient public-sector enterprises
and bureaucracies, which have consumed large amounts of foreign capital but
which, in many cases, earn small amounts of foreign exchange. Only a
fundamental restructuring of domestic markets can correct these distortions
and.accomplish a major shift of resources to export-oriented industries. Such a
restructuring, however, will involve very difficult. social and political decisions.
Medium-sized enterprises in the private sector could play an important role in
this. restructuring process. Unfortunately, private-sector initiative in most
debt-troubled LDCs has been weakened by recent government austerity
measures, which have placed much of the adjustment costs on the private
sector. In addition, current debt-rescheduling practices focus on public debt
and have left private-sector debt repayment problems largely unresolved. As a
result, incentives for providing new foreign risk capital to LDC private
enterprises have been seriously eroded.
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DI IEEW 84-004
27 January 1984
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It is unclear whether LDC governments are prepared to carry out needed
economic adjustments and pursue new development strategies. Debtors gener-
ally have been successful in meeting external economic targets-largely
through import reductions. Domestic objectives, however, including reductions
in inflation and fiscal deficits, in most cases were not achieved last year.
Moreover, the Plan of Action issued this month by Latin American heads of
government at the Quito economic conference proposes to respond to the debt
crisis by reducing interest payments and spreads, lengthening grace periods
and maturities, assuring new commercial and financial credits, increasing
IMF resources, and revising IMF conditionality, criteria. Notably absent were
suggestions for changes in domestic economic policies and encouragement of
the private sector.
Longer term resolution of the debt problem also depends on open trade policies
in the creditor`countries. This will require some restructuring of economic
activity on the part of the industrialized countries. For this to occur,
government assistance to old, inefficient industries will have to be curbed and
newer activities with a competitive advantage encouraged. Furthermore,
industrialized countries will have to allow LDCs to export a greater share of
manufactured goods at competitive prices.
Although improved LDC internal policies and expanded trade opportunities
will help rebuild banker willingness to lend voluntarily to debt-troubled LDCs,
new sources of capital flows probably will have to be stimulated. Because of
tighter bank supervision and concern over future profits, major international
banks may be constrained from playing so dominant a role in financing LDC
payments deficits in the years immediately ahead. Official credits and private
direct and equity investment could fill the gap, although the latter would entail
changes in restrictive and, in some cases, hostile attitudes of LDC govern-
ments. Nonetheless, alternatives to commercial bank capital flows would have
to be explored and encouraged now to ensure capital flows later in the decade.
If domestic opposition to current austerity measures grows, LDC officials may
find it convenient to denounce the current debt strategy as ineffective in
addressing longer term economic problems. This tactic would risk undercut-
ting existing efforts to avoid financial disruptions. At a recent Washington
economic conference, former Brazilian Central Bank President Langoni
labeled current IMF stabilization programs as too contractionary, suggested
the need for a new negotiating framework, and called on the banks to
recognize their mistakes and accept the necessary losses
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Energy
A reduction in export contract volumes for
1984 has forced Iraq to resort to spot market sales at prices about 50 cents be-
low official levels to dispose of its crude. Iran has renewed contracts for up to 1
million b/d this year by pegging contract prices to spot prices. Indonesia
reportedly has entered indirect discounting arrangements with oil-trading
companies, which are reselling Indonesian crude purchased at official prices on
the spot market. To compensate for the loss on spot sales, Pertamina-
Indonesia's state oil company-reportedly provides these traders with petro-
leum products at prices significantly below market levels.
Widespread price
OPEC's Price . Several OPEC countries are experiencing difficulty selling crude and reported-
iscounts ly will resort to aggressive marketing tactics including price concessions to
maintain export levels.
discounting by OPEC members will put additional downward pressure on
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. prices and weaken the cartel's already fragile price structure. 25X1
Spot Oil Market
Trends
Spot crude oil prices have rebounded to near official levels for many crudes fol-
lowing a cold snap that increased consumption and tightened inventories. Spot
prices for Arab Light now approximate $28.65 per barrel compared to its
official price of $29 and a mid-December spot price of $28.20. UK Brent and
Nigerian Bonny Light have also strengthened and are selling at about $29.50
per barrel-50 cents below their official prices. Although US oil demand 25X1
continues to rise, much of the recent resurgence in consumption probably can
be attributed to seasonal factors. Prices could weaken in coming months in the
absence of a sustained strong rebound in demand. F__~ 25X1
West European Gas West European gas consumption rose 3.5 percent above year-earlier levels in
Market Trends the first nine months of 1983, reversing the downward trend in demand begun
in 1980. Gas demand in the United Kingdom-currently Western Europe's
th
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th
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d
d
t
hil
F
5
l
, w
rance,
e
er
an
s, an
percen
e
e
argest gas consumer-rose
Belgium experienced increases of 6, 6, and 9 percent, respectively. Rising gas
use in Dutch and Belgian electric power stations accounted for nearly one-half
of the increased West European demand. On the supply side, indigenous
production was up 4 percent, with shipments from the Netherlands-Western
Europe's largest gas supplier-up nearly 5 percent. West European imports of
Algerian gas more. than doubled as deliveries of liquefied natural gas (LNG) to
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EC: Gas Supply and Demand_
Thousand b/doe
Percent Change
Jan-Sep 1982
Jan-Sep 1983
3,185
3,298
3.5
807
847
5.0
781
784
0.4
550
584
6.2
417
444
6.5
Italy
450
443
-1.6
Belgium
137
150
9.5
Other a
43
46
7.0
Supply
3,293
3,455
4.9
Indigenous production
2,358
2,456
4.2
Imports
935
999
6.8
Norway
460
406
-11.7
USSR
372
358
-3.8
Algeria
102
234
129.4
Other
1
1
Stock increase
Losses
France and Belgium increased sharply under existing contracts and Algerian
gas supplies began flowing to Italy through the recently completed Trans-
Mediterranean pipeline. Increased Algerian deliveries and higher Dutch sales
came at the expense of Norwegian and Soviet gas imports, which declined by
12 and 4 percent, respectively.
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and Energy educated in the United States, David-West has no previous government
Nigeria Names New Professor Tamundemi Sokari David-West has been appointed Minister of
Iister of Petroleum Petroleum and Energy by Nigeria's new military government..A civilian
Angolan ve en
// Develop pment
Fourth Emirate Begins
Production in UAE
experience or background in oil matters; his appointment comes as a surprise
to many in the oil industry. He replaces Yahaya Dikko who served as energy
adviser and representative to OPEC during the Shagari administration. We
believe that General Buhari will continue to make all final decisions regarding
energy matters and probably will rely heavily on Festus Marinho, whom he re-
cently reappointed as Managing Director of Nigeria's National Petroleum
Corporation, for advice on oil policy.
financial problems are hampering the
government's efforts to secure almost $200 million in Western credits to
finance construction of offshore oil production platforms in the Takula fields.
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government probably will be forced to establish the long-term accounts with 25X1
European banks. 25X1
To carry out its oil development plans, the
Ra's al-Khaymah began producing 5,000 b/d of condensate from its offshore
Saleh field this month, joining Abu Dhabi, Dubayy, and Sharjah as commer-
cial producers in the United Arab Emirates (UAE). The field, operated by
Gulf Oil, is expected to reach peak output of about 30,000 b/d by midyear. Be-
cause condensate is considered a natural gas liquid (NGL), production by Ra's
al-Khaymah will not be counted against the UAE crude oil output quota of 1.1
million b/d imposed by OPEC. Other emirates are also pushing to increase
condensate production. In Dubayy, the new Margham condensate field is
scheduled to start at 20,000 b/d this year, increasing to 80,000 b/d by 1985.
Sharjah's production from the onshore Sajaa condensate field operated by
Amoco has risen to 40,000 b/d and is scheduled to increase further to 55,000
b/d later this year. As a result, total production of condensate and other
natural gas liquids in the UAE will approach 200,000 b/d by the end of 1984,
adding to world oil supplies and further dampening prospects for increased
exports from financially strapped producers such as Nigeria.=
Brunei Seeks Control Brunei, the small, oil-rich Southeast Asian sultanate that gained independence'
of/Energy Resources on 1 January, is moving to increase its control over its petroleum resources.
The sultan recently appointed a permanent secretary for petroleum affairs,
plans to increase the use of independent consultants for advice on energy
exploration and development, and is considering joining OPEC. The govern-
ment intends to assume majority ownership of the country's only oil-producing
company, Brunei Shell Petroleum (BSP), currently a 50-50 partnership
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Argentine Economy
Minister at Odds
ith Bankers
Sudanese Problems
With the IMF
7 billion cubic meters annually of natural gas.
between Brunei and Royal Dutch Shell.
E___[B_rruneii is currently producing 150,000 b/d of crude oil and
Economy Minister Grinspun met stiff resistance from US bankers over his
initial plan to deal with $20 billion of foreign debt due this year. At meetings
in New York earlier this month, Grinspun proposed that banks quickly
disburse $1 billion remaining in a medium-term loan arranged last year.
According to the US Embassy, Argentina plans to return the entire amount of
the disbursement plus some of its own reserves to cover both a $350, million
bridge loan payment due this month and to bring interest arrears current
through the end of 1983
relief this year.
re itor banks, in our opinion, will press for significant
progress toward a new. agreement with the IMF, not expected to be completed
until late April, before making new loans available or setting up a rescheduling
program. Argentina must cover some $12 billion in 1982-84 public-sector
maturities, $5.5 billion in interest due, and $2.5 billion in 1983 arrearages.
Even with the current seasonal increase in export earnings, Argentina likely
will make no more than token debt payments and will require substantial debt
agreement and debt rescheduling
Sudan failed to make a January payment to the IMF, and this is limiting
Khartoum's financial maneuvering. As long as Sudan is in arrears to the IMF,
the final $26 million tranche of its 1983 standby agreement cannot be drawn,
and negotiations for the 1984 standby will remain suspended. Even if the
arrears are covered, there is a chance the IMF will cancel the final
disbursement; the Fund claims Sudan has failed to comply with conditions of
the 1983 standby. According to an IMF official, Sudan has not made all of the
proposed reforms to its foreign exchange market. Moreover, Khartoum has
failed to abide by monetary growth targets and has fallen behind in meeting
debt repayment obligations to Paris Club members. Sudan likely will miss
payments to the IMF and Paris Club again in February because of foreign ex-
change shortages and thus will further jeopardize a 1984 IMF standby
C lombian Financial Colombia recently stemmed the rapid decline in its foreign exchange reserves.
date Reserves declined from $3.9 billion at the start of 1983 to $1.8 billion-four
months' worth of imports-at the end of October. Bogota was able to stem re-
serve losses in November and December because of seasonally higher coffee
earnings. Moreover, its cash position was bolstered by a $50 million credit
from the Andean Reserve Fund. Bogota expects disbursement of a $210
million syndicated loan in the first quarter of 1984 to offset the usual falloff in
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estimated $355 million-the highest level since 1979-and accounted for
about one-third of total exports. According to the US Embassy, Colombo is de-
pending on higher tea prices this year to ease foreign payment problems and
provide government revenues. They may be disappointed. Tea market analysts
expect prices will begin to drop in the next six months, and we believe Sri Lan- 25X1
ka then will experience a worsening in its foreign payments and may have to
seek IMF and donor help. F-7 25X1
Global and Regional Developments
for roughly four-fifths of Free World tin production. Australia's joining
reinforces the ATPC's declared mission to promote tin research and develop-
ment and to improve market conditions. Australia-a supporter of the
International Tin Council (ITC)-became a member of the ATPC, only after
coffee earnings early in the year. The country will face further payments
difficulties later in the year, however, because of depressed prices for key
agricultural exports and slow growth throughout the Andean trading region.
Colombian financial scandals are adding to foreign bankers' concern about the
economy. The Superintendent of Banks recently pressured the president of the 25X1
Banco de Colombia-the country's largest bank-to resigne
follows last 25X1
May's rescue of the Banco de Bogota-Colombia's second-largest bank-and
further tarnishes Bogota's image among bankers. Some foreign creditors , 25X1
believe a nationalization of the banking sector could occur, and this has further
tightened lending.F____1 ? 25X1
Sri Lanka Benefits Recent tea export restrictions by India and the doubling of world tea prices
From Higher Tea over the past year have considerably brightened Sri Lankan export prospects
Prj~es and eased foreign payments problems. Tea export earnings in 1983 rose to an
Australia Joins Tin Australia last week joined the five-month-old Association of Tin Producing
Producer Group Countries (ATPC), bringing its membership to seven countries, which account
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 receiving assurances from other producers that the ATPC would not follow
policies that would be at odds with ITC market actions. With the exception of
Bolivia, all members of the new Association are also members of the ITC. Both
Bolivia and Malaysia have frequently charged that the ITC has not done
enough to boost tin prices; Bolivia has supported the idea that tin producers
ban together to raise prices through export controls and buffer stock opera-
Association of Tin Producing Countries, 1982
Members
Tin-in-Concentrate
Production
(thousand metric tons)
Share of Global
Production
(percent)
Malaysia
52.3
28
Indonesia
33.8
18
Bolivia
26.8
14
Thailand
26.2
14
Australia
12.3
6
Zaire
2.2
1
Nigeria
1.7
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EC To Open
Trade Talks
Wj h Hungary
The European Community and Hungary are moving forward to negotiate a
formal, bilateral trade agreement. EC Foreign Ministers on 23 January asked
Commission officials to complete the EC's negotiating position so that talks
can begin this spring. Negotiations with Budapest probably will result in the
reduction of selected EC trade barriers and the establishment of a mixed
commission to promote further economic cooperation between the Community
and Hungary. EC trade with Hungary rose sharply during the 1970s, but since
1980 has fallen. Community exports to Hungary last year were an estimated
$1.7 billion and imports $1.5 billion; West Germany accounts for slightly more
National Developments
Developed Countries
Isr eli Cabinet On Sunday the Israeli Cabinet unanimously adopted a budget that calls for
proves Budget Cuts substantial spending cuts, but approval came only after Prime Minister
Shamir threatened to resign. Shamir wanted to demonstrate that his govern-
ment is taking steps to reduce the inflation rate of nearly 200 percent, to
improve the foreign payments outlook, and to present a united front during the
debate in the Knesset on Wednesday on a no-confidence motion. Most
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ministers agreed to trim their expenditures by about 9 percent in real terms,
according to press reports. These budget cuts, however, are unlikely to be
carried out. Reductions have not been implemented in the past, and ministers
have become adept at using "unanticipated" price rises to justify exceeding
their spending ceilings.
Meanwhile, the government, in an effort to restore calm on the labor front,
reached an agreement with the Histadrut, the large trade union organization,
to increase the monthly salaries of public-sector workers by 5,000 shekels-
$42 at the current exchange rate. In return, Histadrut officials have agreed to
work against strikes or work slowdowns by government employees protesting
the erosion of real wages until the two-year framework wage agreement
expires on 1 April. Several unions involved in government operations, including
engineers, technicians, and lawyers, however, have not approved the agree-
ment. In addition, there are a number of nonwage issues, such as reductions in
overtime and travel allowances recently approved by the Cabinet, that could be
used to justify strike action. Other work disputes will continue:
? Railway workers are striking for a 30-percent wage-hike.
? The 3,500 engineers at Israel Aircraft Industries staged a 24-hour walkout
on Sunday to demand changes in their pay formulas that they claim unfairly
reward lower skilled workers.
West German Strike A drop in worker support for the 35-hour workweek lessens the chance of
Threat Lessens serious industrial disputes during this spring's wage negotiations. The Decem-
West German Economic
siitutes See
Competitiveness
Declining
ber poll of members of the Metalworkers Union, West Germany's largest
union and pace setter for the rest of organized labor, found 43 percent opposed
to the cut in working time versus 32 percent in favor-roughly the reverse of
an October poll. The results probably will force a strategy shift by the union,
which has been mobilizing to achieve the shortened workweek and has adopted 25X1
an uncharacteristically militant tone in the face of firm employer resistance.
Removing this demand from the negotiations would be welcome news to
government and business, which fear strikes could threaten the nation's
economic recovery. The swing of worker opinion probably results from the
government's proposed early-retirement legislation and a similar offer by the
metal employers association. F__1 25X1
Four of West Germany's five leading economic institutes, in separate studies
commissioned by the Economics Ministry, conclude that West Germany is
falling behind in international competitiveness. They believe the problem is not
only in emerging technologies such as microelectronics and electronic data
processing, but also in three traditional industries-chemicals, machinebuild-
ing, and electrical machinery. The fifth institute-DIW in Berlin-disagrees,
insisting that overall West German competitiveness is "good" and that West
German investment goods have gained in international competitivenessF-1 25X1
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Commission on
anada's Economy
Concludes Preliminary
Hearings
Bracing for Labor
ayoffs in the
Philippines
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27 January 1984
All five institutes agree that the economy is not adapting rapidly enough to in-
ternational economic change. Among the obstacles to adjustment, they cite
wage rigidity, inadequate labor mobility, excessive subsidization of dying
industries and housing, inadequate availability of venture capital, and the low-
equity capital ratios of West German firms. The majority of the institutes
recommend reduced government involvement in the economy through dena-
tionalization, deregulation, and elimination of subsidies. Only DIW thought
the government could play a useful role in directing research and economic ac-
tivity through appropriate subsidization.
The Macdonald Royal Commission on Economic Union and Development
Prospects for Canada has concluded its preliminary hearings and has begun its
deliberations. The commission was established by the Liberal government last
year to identify weaknesses in the economy and suggest new policies. Although
preliminary recommendations are scheduled to be released in April, the bulk
of the $8 million study will not be completed until 1985. US Embassy and
press reports indicate that the commission will recommend government action
to reduce trade protectionism, develop high-technology industries, reform the
Senate to give each province equal representation, and increase cooperation
among labor, business, and government. Several commissioners also have
expressed concern over the great distrust between different groups in Cana-
da-east versus west, provinces versus Ottawa, labor versus business-and
several of the policy recommendations are likely to focus on lessening these
regardless of which party is in power.
The commission's initial findings-favoring less frequent federal economic
intervention-reflect the more conservative political trend detected in polls
across Canada in the wake of the recession. Ottawa already has attempted to
accommodate this mood by decreasing the nationalist tenor of its economic
policy in its budget last April and its legislative program in December. The
Liberals' slightly more conservative economic policy brings them considerably
closer to the philosophy of the Progressive Conservative Party and suggests
that the commission's recommendations will influence future Canadian policy
Less Developed Countries
workers with social security assistance for three months.
The US Embassy and some Philippine officials anticipate layoffs of 200,000
full-time workers in the next few months because of declining economic
activity. Manila has appealed to the United States for emergency food-grain
assistance in an effort to forestall unrest, and it is working with the Catholic
Church on a joint emergency food program. The government is encouraging
private firms to advance wages to dismissed workers, and it will provide
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procedures. At the same time, the government has cut income taxes to increase
take-home pay and has made some adjustments in corporate taxes. According
to press reporting, Mexico City is banking on a concerted drive against tax
evasion to provide the bulk of an anticipated 63-percent increase in 1984 tax
receipts. The Mexican treasury will establish a task force of 3,000 recent law
school graduates to examine cases of suspected evasion. Punishment of evaders
was also stiffened; the government may now seize assets after only one notice
instead of the three required in the past. To stimulate consumer demand,
income taxes were eliminated for taxpayers in the lowest tax bracket and
reduced in higher brackets. The resulting drop in revenues will be partially
compensated for by increased fees on state-provided services and higher taxes
on vehicle ownership. Small increases in corporate tax rates are offset by
liberalized depreciation allowances, new provisions for writing off losses, and
other tax breaks. Increased taxes on corporate dividends are designed, in part,
to discourage payouts and to prod firms to reinvest profits.
11 Secret
27 January 1984
Moroccan Unrest
Subsides
Manila and other urban centers will be hardest hit by the layoffs because
manufacturing activities are concentrated there. Thus far, organized labor has
remained quiet, but demonstrations are almost certain to occur as layoffs
increase. The government's measures will help relieve some of the hardship,
but, until IMF negotiations for a $650 million standby credit are concluded
and normal commercial financing of import trade resumes, economic activity
will remain slow and workers will continue to lose their jobs
despite the extraordinary security measures.
An uneasy calm prevails in several Moroccan cities after as many as 100
persons have been killed in the last two weeks in demonstrations against
impending hikes in food prices and student fees. In an effort to reestablish or-
der, the King last weekend promised an end to price increases, accused foreign
extremists of fomenting the unrest, and warned of stern reprisals should
further disturbances occur. Army troops have been airlifted to troubled
locations to quell new agitations. Labor unions, thus far, have not participated
in the demonstrations, and political parties have been supportive of the
regime's efforts to deal with the unrest. The success in holding off price
increases and the damage done to the regime's prestige, however, could inspire
young radicals and Islamic fundamentalists to incite further disruptions
Events of the past week will make it difficult for Rabat to follow through on
economic austerity. In addition to popular unrest, concern over new austerity
measures has caused a run on some banks by wealthy Moroccans,
To boost confidence, the King may adopt a more expansion-
by loan and could endanger aid flows.
reduce domestic consumption, however, will jeopardize Morocco's IMF stand-
ary economic program to redress growing unemployment-over 25 percent in
urban areas-as he did in 1981. Failure to limit government spending and to
Mexican Tax Reforms Mexico City hopes to boost tax revenues this year through better collection
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Venezuela's New
Economic Cabinet
Venezuelan President-elect Jaime Lusinchi has drawn together a diverse mix
of economic advisers, and this could limit action to confront economic and
financial problems. According to US Embassy reports, Manuel Azpurua-a
businessman who lacks national political experience-will take over the key
Finance Minister slot. Hector Hurtado will be Lusinchi's new Development
Minister. He reportedly wants to introduce gradually the reforms necessary to
promote economic recovery and restructure the external debt. In contrast, Luis
Matos Azocar, the new Minister of Coordination and Planning, is a strong
proponent of state intervention and deficit spending. Diaz Bruzal, the only
holdover from the Herrera administration, will remain as Central Bank
president. He has proposed tough economic reform measures such as the
immediate devaluation of the bolivar and balancing the federal budget.
We believe Lusinchi will find it difficult to balance the competing policy
recommendations made by his economic advisers. Lusinchi lacks a good
understanding of Venezuela's economic problems, and we believe he is likely to
vacillate between the diverse views held by his advisers. This could prevent a
quick reconciliation with the IMF. Recommendations by the Fund to balance
the budget, devalue, and remove subsidies likely will prove unacceptable to
most members of the economic team. In turn, resistance to an IMF program
will impede Venezuela's negotiations with bankers on debt rescheduling.
Food Shortages in Kinshasa is having difficulty supplying the mineral-rich Shaba Region with
Zaire Mining Region corn-the dietary staple. Drought has sharply reduced deliveries from
Zimbabwe and South Africa, and the government corporation responsible for
supplying Zaire's mining industry has drastically reduced distribution of
cornmeal to mineworkers. Deliveries to other recipients-including the Army,
local schools, and hospitals-have been postponed until February. Many
civilians and military personnel are forced to buy cornmeal smuggled in from
Zambia; a 50-pound sack-barely enough to feed an average family for a
month-reportedly is selling at twice a month's salary. With antigovernment
sentiment already widespread in Shaba, food shortages could spark urban
unrest. Moreover, Kinshasa is concerned that mineworkers might sabotage
critical copper mining facilities; last October sabotage threats were made to
protest a government wage freeze.
hailand Overhauls The Thai Cabinet has approved in principle the sale of six unprofitable state
~
State Enterprise Sector enterprises-the Express Transportation Organization, the Thai Maritime
Secret
27 January 1984
Navigation Company, and four small manufacturing companies including
sugar and paper mills-to the private sector. In addition, Bangkok tightened
controls over expenditures and foreign borrowing of the approximately 60
remaining government-run firms. The state enterprise sector's foreign debt has
grown rapidly and accounts for about 60 percent of the government's $9 billion
foreign debt. Although the Prem administration has been more successful than
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Secret
Ec omic Summit
Yugoslav-Soviet
Tide Agreement
More Hungarian
Pre Hikes
past governments in scaling back the state enterprise sector, the latest moves
are likely to meet resistance. Selling the Express Transportation Organization,
which has almost 5,000 employees, is opposed by the strong public-sector labor
unions. The Labor Congress of Thailand has threatened a general strike if the
sales take place.
Preparations for an economic summit of CEMA members have been complet-
ed, and only the continued absence of General Secretary Andropov is holding
up scheduling of the meeting. Press sources state that the Soviets hinted last
month that the meeting might be held at the end of February, but sources at
East European embassies in Moscow now expect a delay of several more
months. The Yugoslav press, citing sources at the CEMA Secretariat, reports
that the Soviets and East Europeans have agreed in principle on the summit
agenda after more than a year of discussions. The most important decision is to
tie deliveries of Soviet energy and raw materials more closely to East European
investment in Soviet resource development projects. Members also have agreed
to grant state enterprises new freedom to deal directly with similar enterprises
in other member countries. The meeting probably will do no more than ratify
these decisions. Moscow originally proposed sweeping changes that would have
markedly increased economic integration in CEMA, but opposition by the
East Europeans apparently forced the Soviets to abandon these proposals.
Yugoslavia and the USSR last week signed a trade protocol for 1984 that calls 25X1
for total trade of $6 billion worth of goods and services.
Last year, according to preliminary figures, the Soviet Union delivered an
additional 20,000 b/d above the 90,000 b/d of crude called for in the 1983
agreement. Since the onset of Yugoslavia's financial crisis in 1982, the USSR
has been generally supportive by increasing the level of its energy exports.
Purchased through a bilateral clearing account, the Soviet oil has enabled
Belgrade to partially offset, the decline in oil imports from other countries that
has resulted from foreign exchange shortages.
Budapest this week ordered another round of consumer price increases. Retail
prices of meat, poultry, fish, canned vegetables and fruit, and beer are up as
much as 21 percent. Private automobiles-which Hungary imports almost
totally from CEMA partners-will cost 6 to 7 percent more, and prices of
home building materials are 20 to 30 percent higher. Large increases also were
announced for household heating oil and utilities including electricity, water,
and sewage.
Secret
27 January 1984
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Government spokesmen have defended the actions as essential for Hungary to
reduce subsidy spending, restrain consumer demand, and improve the foreign
trade balance. Reductions in consumer and producer subsidies are central to
Hungary's new stabilization program approved by the IMF in early January.
As is customary with consumer price increases, some attempt to cushion the
impact was provided through a small monthly income supplement to the
poorest retired people and other hard-pressed families. Embassy officials
reported little panic buying in advance of the expected announcement and a
mood of grudging acceptance by the public, who are becoming resigned to
annual price hikes as the government struggles to stabilize the economy.
Cubans and Dutch An official Dutch delegation held trade promotion talks with Cuba last month.
xplore Trade The discussions in Havana considered cooperation in the sugar industry and a
Possibilities commission was formed that will coordinate efforts between ae-riculture
Representatives from 30 Dutch companies and the agriculture
ministry will return to Cuba in March to examine new trade opportunities.
apanese Pipe
The Dutch probably will urge the Cubans to use the Rotterdam fruit terminal
to be completed in 1985 and they hope to become involved in Havana's
extensive port improvement plans. Bilateral trade between the two countries
has grown. rapidly in recent years although it comprises only a small
percentage of either country's worldwide trade.
The USSR's import requirements are lower because planned
construction of long-distance pipelines is tanerin
are able to manufacture more pipe.
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Ir,eland and the USSR
esume Normal Trade
elation
Irish-Soviet trade relations have returned to normal less than three months
after the Korean Airlines (KAL) incident and the supposedly unrelated
expulsion of two Soviet diplomats from Ireland in September. In mid-
November the Soviets held their first solo trade fair in Dublin, which was
timed to mark 10 years of diplomatic relations with Ireland. By early
Secret
27 January 1984
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Secret
Vietnam Cuts Back
ice Exports
the West
as soon as possible.
Ireland, which has been hard hit by the world recession, achieved a surplus in
its trade with the Soviet Union last year. Although Dublin joined other West
European countries in condemning the Soviet attack on the KAL aircraft, it
was careful not to impose sanctions that would hurt the Irish economy or cause
longstanding friction with Moscow. Dublin claimed that its neutrality in East-
West relations proscribed placing any major restrictions on Aeroflot's use of
Shannon Airport-the airport receives 43 percent of its revenues from this
traffic. For their part, the Soviets did not respond in kind to Irish statements or
actions and have attempted to restore cordial relations between the countries
billion economic debt to Communist countries.
Vietnam appears to be cutting back rice exports to the West in an effort to in-
crease deliveries to the USSR and Eastern Europe. Last month, Hanoi
announced that it would reduce planned exports of rice to a French trading
company from 300,000 metric tons to 120,000 tons for 1984. Under the
original agreement, Hanoi was to provide rice and coal to the French firm in
exchange for fertilizer and wheat over a period of four years. At the same time,
Vietnam is increasing rice exports to COMECON countries. We believe the
shift results from Soviet pressure on Hanoi to repay its approximately $4
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15 Secret
27 January 1984
December, the annual bilateral trade talks-which had been "indefinitely
postponed" by the Irish Government following the KAL shootdown-were
completed, with both parties stating their determination to increase trade.
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Secret
International Financial Situation:
Political Update
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
that economic troubles, which have prompted
austerity measures, could provoke social unrest.
Political trouble caused by reaction to economic
austerity measures is spreading-from the large
debtor nations to the smaller financially troubled
countries around the world. Strikes and violence
have flared up over the past month in countries as
disparate as Suriname, Sierra Leone, Tunisia, and
Israel. Nowhere was the politics of economics
brought home with.greater vengeance than in
Nigeria, where, the recently reelected civilian gov-
ernment was overthrown by .the Army. F__1
In Africa:
? President Stevens of Sierra Leone has closed the
main university indefinitely, following violent stu-
dent disturbances earlier this month in the capital
over shortages of cooking oil and gasoline. If
Stevens imposes austerity measures needed to
obtain IMF assistance, public disaffection over
layoffs, inflation, and shortages of essential goods
is likely to increase.
? In Senegal, students, labor, and Muslim leaders
are becoming more dissatisfied about the coun-
try's economic decline, and the Embassy believes
President Diouf increasingly will be blamed for
the effects of austerity measures he imposed in
August. Senegal's military has remained aloof
from politics, but divisive political wrangling in
the face of economic hardship is likely to provoke
grumbling in the officer corps and perhaps lead to
coup plotting.
? In the Ivory Coast, the second-largest debtor
nation in Sub-Saharan Africa after Nigeria, the
Embassy reports that top officials are concerned
? The US Embassy in Morocco reports that isolat-
ed incidents of violence have occurred in several
cities this month but that there has been no
general strike over deteriorating. economic condi-
Rabat may have to
choose between carrying out austerity measures
required by the IMF to ensure more financing
and risking serious disturbances similar to the
food-price riots that occurred in 1981.
In Israel, threats by the smaller parties to leave
the coalition and growing labor unrest-15 per-
cent of public-sector employees are involved in
strikes or slowdowns-have severely tested Prime
Minister Shamir's ability to hold his coalition
together and to enact needed austerity measures.
Shamir was able to obtain Cabinet agreement on
an austerity budget, but we doubt the cuts will be
implemented.
? The strike by Surinamese bauxite workers lasted
five weeks despite the resignation of Prime Minis-
ter Alibux and his Cabinet and despite the deci-
sion of Army Commander Bouterse to suspend
controversial increases in income taxes,,commod-
ity prices, and import duties. The strike closed
down the aluminum industry, which. accounts for
80 percent of Suriname's exports and at least 20
percent of government revenues. Even though the
Secret
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27 January 1984
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labor dispute was settled this week, the new
Cabinet faces severe economic problems requir-
ing harsh austerity measures that could lead to
more unrest.
? In Uruguay, the government has dissolved the
six-month-old labor confederation that organized
a nationwide strike last week, has banned news .
reports about the work stoppage, and has prohib-
ited party or labor union meetings. The strike
came as workers demanded pay increases to
offset rapid inflation and the military government
was rumored to be considering postponing elec-
tions it had earlier proposed be held in Novem-
ber. The effectiveness of the strike, which follows
a massive antigovernment rally last November, is
likely to cause more concern in the military about
the wisdom of civilian rule.)
The political backlash is having a noticeable impact
on economic policy decisions. Austerity measures
have recently been rescinded or softened, for exam-
ple, in Tunisia. and Poland. Whether these moves
will bring more than a temporary calm remains to
be seen. In other countries, such as Nigeria and the
Philippines, governments are strongly resisting even
initiating policies they must implement to obtain
IMF and bank rescue packages for fear of unrest:
? President Bourguiba. of Tunisia abruptly rescind-
ed bread price increases after widespread riots
broke out in late December. We believe the
protests reflect discontent with a political estab-
lishment that many of the urban poor, the young,
and the unemployed find insensitive to their
needs. Radical Muslims are particularly well
placed to exploit the strains. The price rollback
ended the disorders but will require the govern-
ment to postpone several development projects
planned for this year and increase prices of some
other subsidized goods. A new budget probably
will hurt. the middle class, the government's
traditional base of support,- and it could endanger
wage agreements between the government and
organized labor.
Secret
27 January 1984
? An IMF team is in Tanzania trying to break the
yearlong deadlock on a new loan package. Presi-
dent Nyerere reportedly continues to refuse the
IMF's demand for a large devaluation because he
believes such a move, which would result in price
increases and commodity shortages, would stir up
civil unrest.
? General Buhari's month-old regime in Nigeria
finally appointed a cabinet last week, but it has
put off resuming negotiations with the IMF until
the new economic team has had time to review
the former government's budget.
Coup leaders still
appear to be groping for policies and are likely to
find that expectations raised following the coup
will make it even harder to win popular support
for an austerity budget.
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Secret
International Financial Situation:
Devaluations Assist Trade Improvement
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
Most financially troubled LDCs have devalued
their exchange rates to improve their trade position.
To establish competitiveness, however, requires de-
valuations sufficient to offset inflation differentials
between the devaluing country and its trading
partners. For a select group of 15 LDC debtors, our
analysis of real-price adjusted and trade weight-
ed-exchange rates shows that most of these coun-
tries experienced real devaluations last year. Brazil,
Chile, and Indonesia recorded real devaluations of
20 percent or more.'
'The 15 countries we examined are Argentina, Brazil, Chile, Costa
Rica, Ecuador, Indonesia, Ivory Coast, Kenya, Mexico, Morocco,
Nigeria, Peru, the Philippines, Venezuela, and Zaire. We calculat-
ed the purchasing-power parity exchange rates by taking the ratio
of the consumer price index of each country to a trade-weighted
average of the consumer price indexes of the country's 10 main
Western trading partners, with all indexes converted into dollars at
prevailing exchange rates. The base year for our comparisons was
1975, which is prior to the second runup in oil prices and the sharp
rise in commodity prices, which occurred in the late 1970s. The
calculated real exchange rates do not represent absolute levels of
overvaluation or undervaluation. Instead, they provide a way to
calculate change and take any 1975 exchange rate distortions as a
givenF___1
1982
1983
I
II
III
IV
I
II
III
IV
Argentina 100
241
226
112
101
154
137
70
91
93
95
108
106
Brazil 100
74
87
89
69
87
90
92
87
77
66
67
65
Chile 100
114
136
121
94
141
137
109
96
90
95
96
96
Costa Rica 100
93
52
51
61
43
48
55
58
61
63
61
60
Ecuador 100
114
121
115
111
128
115
102
114
119
104
110
112
Indonesia 100
80
85
93
74
91
92
95
94
91
67
69
69
Ivory Coast 100
131
121
111
104
117
116
107
105
107
105
102
100
Kenya 100
102
99
102
96
98
101
104
103
94
95
96
100
Mexico 100
91
102
73
62
90
72
64
67
60
62
63
64
Morocco 100
98
91
90
81
92
89
90
89
87
85
80
74
Nigeria 100
147
161
159
176
158
157
161
161
164
170
179
191
Peru 100
66
77
77
69
80
79
77
74
71
68
66
70
Philippines 100
100
101
107
88
106
106
110
105
97
92
90
72
Venezuela 100
106
118
128
132
124
127
124
130
129
131
133
135
Zaire 100
145
139
145
156
129
135
150
166
187
205
176
55
Secret
DI IEEW 84-004
27 January 1984
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Selected LDC Debtors: Real Exchange
Rate Index, 1975-83'
Real Exchange Rate Drop
LDC debtors were forced to devalue their curren-
cies in response to their financial difficulties. Cur-
Index: 1975=100 Note scale change rency devaluations usually were part of comprehen-
Nigeria sive economic adjustment programs negotiated
with the IMF. By lowering the foreign price of
200 their exports and raising the domestic price of their
imports, devaluations are intended to improve a
150 country's trade position and its ability to service
foreign debt.
I IV ~
100 / We estimate that, on average, the 15 LDC debtors
devalued their currencies about 8 percent in real
50 terms in 1983 over 1982. Eleven of the countries we
examined had lower real exchange rates in 1983
I I I I I I I I I I I I I I ~ than in 1982. The four exceptions were Costa Rica,
1975 80 83 1975 80 83 Nl A V 1 d Z ; Z U
na
e
Philippines
g
,
nezue a, an air,,. a1re, owever,
moved to correct its overvalued currency late in
1983 with a major devaluation, and by December
the real effective exchange rate stood about 70
percent below, the level of a year earlier.F-]
100 M loo The largest real devaluations were recorded by
Brazil, Chile, and Indonesia, with declines of more
than 20 percent in 1983. Argentina, Mexico, Mo-
rocco, Peru, and the Philippines experienced real
exchange rate declines of 10 to 20 percent. In the
cases of Argentina and Mexico, these exchange
I I I ~ I I I I I I I I I I I I rate corrections followed real declines in 1982 of 50
allu Jv 1JG1\1c11L, 1GJpcl:uvo1y.
Venezuela
All but three of the 15 countries-Ivory Coast,
Kenya, and Venezuela-have exchange rate poli-
cies involving some sort of managed float. Most
have been gradually depreciating their currencies
100 ? 100 with monthly or even daily adjustments. In addi-
I I I I I I I t I I I I I I I
1975 80 83 1975 80 83
Secret
27 January 1984
tion, most of the 15 debtors, like Brazil and
Mexico, instituted "maxi-devaluations" during
1982 or 1983 in a one-time attempt to correct their
overvalued currencies.
We believe Nigeria, Venezuela, and the Philippines
are prime candidates for major devaluations in the
near term. Nigeria's new military government is
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Secret
currently under pressure from its creditors and the
IMF to devalue the naira. Our calculations indicate
that a major devaluation probably is long over-
due-the naira has appreciated 90 percent in real
terms since 1975. Venezuela's new government is
under external and internal pressure to unify its
multiple exchange rates at a devalued level. Even
the head of the Venezuelan central bank has called
for a devaluation of the bolivar. Although President
Marcos has declared that the Philippine peso will
not be devalued again, he is under considerable
pressure to adopt a more flexible exchange rate
policy. Our calculations indicate the peso is already
at its lowest level since the mid-1970s, but IMF
pressure and the sharp divergence between the
official and black-market exchange rates may
make further devaluations necessary
21 Secret
27 January 1984
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Secret
Airbus Industrie:
Prospects for the A320
Enhance Long-Term Goals
Western Europe's. Airbus Industrie appears near a
formal commitment to build the A320, an all-new,
150-seat, advanced-technology aircraft. Several
West European aerospace officials say that the
consortium "internally launched" the narrow-body
design last fall and that engineering work since
then has picked up. These actions, coupled with the
West European perception of an improved competi-
tive climate and some increase in agreement among
consortium countries, have led Airbus officials
recently to reaffirm a projected delivery date of
1988. Although sales for all large commercial air-
craft remain weak and Airbus has an inventory of
20 unsold wide-body models, the consortium be-
lieves a timely move to narrow bodies is necessary
to maintain the West European commercial aero-
space industry and work force and to provide the
consortium with a "family of aircraft" to compete
more effectively with US manufacturers.
Commercial aircraft manufacturers in Western
Europe, the United States, and Japan have been
reviewing 150-seat designs for several years. Al-
though the recession and a slowdown in the growth
of air traffic has made manufacturers cautious,
most aviation experts believe the future 150-seat
market is huge. Sales during 1986-2000 could
reach 2,300 narrow-bodied aircraft, worth $70
billion. Airbus officials believe the core of demand
is for an all-new aircraft rather than derivatives of
existing models. If the final A320 go-ahead occurs
in the next few months, it is scheduled to be
available in mid-1988-at least a year earlier than
any all-new US design. In an effort to boost its
competitive edge; Airbus has been fine tuning the
design to lighten the aircraft and improve efficien-
A number of recent developments suggest that the
A320 program will formally begin in early 1984:
? New orders: A British Caledonian Airlines
(BCAL) order and the signing of a letter _of intent
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by the Yugoslav charter carrier Inex-Adria to-
taled 18 aircraft (including orders and options)
valued at some $450 million;
? Improved consortium climate: A provision in the
1984 West German budget that could provide
$445 million for the A320 and growing British
industry and labor pressure for the UK Govern-
ment to back the program.
? Stronger competitive position: The European per-
ception that McDonnell Douglas has withdrawn a
proposal for an all-new 150-seat D3300 design.
Growing Order Book
Orders and options for the A320 stand at 88
aircraft in mid-January, close to the 100 units
desired by many government and Airbus officials
for a formal launch of the design. Air France
placed the initial order for 25 aircraft with an
option for another 25. Air Inter, France's domestic
carrier, followed in mid-1983 with 10 firm orders
and 10 options. BCAL's commitment in October
1983 for 10 aircraft-seven firm orders and three
options-gave the consortium a significant boost
because it is a privately owned airline. Although
the contract has a cancellation clause if the A320
cannot be delivered by the spring of 1988, Airbus
has assured BCAL equipment managers that the
aircraft delivery schedule will be met. In Decem-
ber, Yugoslavia's Inex-Adria signed a letter of
intent for eight aircraft-five firm orders and three
options. In addition, Airbus has held extensive talks
with Swissair. Elsewhere, the French are pressing
Indonesia's Garuda Airlines and have offered such
incentives as a soft loan not tied to the A320
purchase and possible offset production and tech-
nology transfer to Indonesia's Nurtanio Aircraft
Company.
Secret
27 January 1984
Improved Consortium Climate
There is increasing momentum favoring the A320
in West Germany and the United Kingdom. The
four risk-sharing companies of the consortium have
reached agreement in principal that would result in
the following division of work: 34 percent to
France; 26 percent to the United Kingdom; 37
percent to West Germany; and 3 percent to Spain.
With continued strong backing by the French,
support by West Germany and the United King-
dom remains the key. An increasing number of
government, industry, and airline officials in West
Germany favor an A320 go-ahead, and Bonn has
moved in recent weeks to commit itself to the
design. The West German Government approved a
$4.5 million progress payment to the A320 project
last November and, in early December, parliament
approved $445 million of conditional funds in the
budget. The government spending proposal will be
reviewed before formally obligating funds, proba-
bly by spring 1984
The West German actions indicate that Franz
Josef Strauss, chairman of Deutsche Airbus and
Minister-President of Bavaria, has successfully
pressured the government to back the A320. Al-
though Strauss would like Lufthansa to be a launch
customer, the airline has so far; refused.
The Government of the United Kingdom is under
heavy pressure from the aerospace industry and
labor to approve funding requested by British
Aerospace for the A320 program. The government
has promised a decision early in 1984. Analysis of
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the program, however, is expected to be especially
thorough because the funding could reach $650
million. As of early 1984, the consensus of aero-
space analysts is that the United Kingdom will
back the A320 because of: the West German trend
toward approval; concern about the British aero-
space industry and its work force; and positive
recommendations on the A320 by industry offi-
cials.
The recent antitrust clearance given to an interna-
tional consortium by the US Justice Department to
build a new engine, designated the V2500, puts
additional pressure on the United Kingdom to
support the A320 and may help Airbus Industrie
market the new aircraft. Britain is anxious that the
engine project go forward. The consortium, led by
Rolls-Royce and Pratt and Whitney, announced it
would proceed with the $1.5 billion development of
a high-technology aircraft engine designed for a
150-seat airliner. If available as planned in 1988,
the new engine could counter the objections of
some airlines, including Lufthansa, that the A320
have a more advanced engine rather than a CFM-
Outside the existing Airbus consortium, Italy and
Canada are the two most important countries still
evaluating the possibility of participating in the
A320 program. France is negotiating with Italy for
participation in the A320 program as a result of the
McDonnell Douglas withdrawal from several new
programs. Italy has been involved in McDonnell
Douglas programs in the past, and, unless US
industry comes up with an attractive alternative
offer, the Italian industry's need for work may
move them toward participation in Airbus pro-
grams. The French, however, are insisting that
Italy's Alitalia buy the A320 as a condition for
participation, and we believe Italy is unlikely to
make a quick decision.
The Canadians are still evaluating A320 proposals
but are undecided because of the financial troubles
of their aerospace industry. Moreover, a recent
agreement to build a Bell helicopter production
facility carries a large start-up cost. Canadair,
Canada's largest aerospace firm, as well as DeHa-
viland, had huge losses in 1982. Nevertheless,
Canadian officials recognize the cost advantages of
being an early customer, and if Airbus Industrie
offered a favorable A320 manufacturing program
it could tip the scales. We believe, however, that
problems in Canada's aircraft industry will keep
Ottawa from participating.
The Competitive Scene
Airbus believes the current competitive environ-
ment is favorable to their plans and timing with the
A320. The consortium believes that, as a new
technology design, the A320 will sell well against
US manufacturers now offering only derivatives of
existing aircraft-the MD-80 from McDonnell
Douglas and the Boeing 737-300/400 aircraft.
Moreover, Airbus believes the recent McDonnell
Douglas decision to cancel concept work on several
new designs makes it unlikely the US firm will
build the D3300. Although Boeing is likely to have
their own all-new design, the 7-7, most analysts
believe it could not be ready until mid-1989. Over
the longer term, most European aerospace officials
say that only Boeing is likely to compete with
Airbus across the board. The Europeans perceive
this possibility as strengthening arguments in the
UK and West German Governments that Europe
must have a manufacturer of a family of commer-
cial aircraft, not only wide bodies, to prevent a
Boeing monopoly.
Implications for the United States
An Airbus Industrie move into the narrow-body
sector of the commercial aircraft market with the
A320 will erode US sales, set the stage for further
expansion of the consortium's product line, and
make profitability of any all-new US program
harder to attain. Even before the.pullback of
McDonnell Douglas from an all-new 150-seat de-
sign, Airbus officials set a goal of attaining at least
a 30-percent share of the 150-seat market. We now
believe Airbus is setting its goal closer to 40 percent
with a special emphasis on selling the new design to
one or more US airlines. Airbus may consider
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offering some form of coproduction arrangement of
the A320 to US firms in an effort to secure US
sales.
Over the longer term, building the A320 could
accelerate Airbus plans to expand its product line
and become competitive across the board with US
manufacturers. The A320 itself is likely to evolve
into a series of derivatives with various capacities
and ranges. A wider selection of aircraft will
enhance Airbus's image with airlines around the
world. If in turn Airbus revenues increase, this
could spur faster introduction- of additional wide-
body, designs such as the TA-11, a four-engine 225-
passenger aircraft for transoceanic operation.
Lufthansa has long sought such an aircraft. Other
possible designs include the TA-9, a stretched
version of the A3 10, and the TA- 12, a long-range
twin-engine aircraft.
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the Bread Riots
Resentment in Tunisia over continuing regional
disparities in income and rising unemployment and
prices came to a head at the end of December when
steep bread price increases triggered nationwide
riots. The disturbances were quieted only after the
military was called out and President Bourguiba
reinstituted grain subsidies. The government now
must seek alternative ways to cut its budget deficit
and must struggle to restore .its'damaged prestige
and credibility. The bread riots reflect deep social
strains in Tunisia and unhappiness with a political
establishment judged by many of the urban poor,
the young, and the unemployed as insensitive to
their needs. The disorders have weakened Prime
Minister Mzali's chances of succeeding President
Bourguiba and will make it extremely difficult for
the government to enact needed austerity measures.
1,025
-1,159
-1,195
Exports (f.o.b.)
2,072
1,954
1,660
Petroleum
1,331
835
702
Imports ff.o.b.)
3,097
3,113.
2,855
Services and transfers (net)
582
584
560
Tourism
597
567
546
Worker remittances
358
371
385
Current account balance
Events Leading Up to the Riots.
The last few years have been. disappointing for the
Tunisian economy. Tunisia's main foreign ex-
change earners-. oil, tourism, .phosphates, and
worker remittances-stagnated under the weight of
the worldwide recession. After a lackluster econom-
ic performance in 1982 and faced with reduced
government revenues, Tunisia instituted an eco-
nomic austerity program in 1983. Its efforts were
frustrated, however, by another poor agricultural
harvest, a $4.00 drop in Tunisia's. oil prices, and
French currency restrictions that limited tourism.
OPEC's decision in March 1983 to lower oil prices
sent Tunisian officials scrambling to cut back
spending. Officials estimated that government rev-
enues from oil exports would fall by 11 percent.
The current account deficit was forecast to increase
by $60 million as a result of the oil price change.
With a record $430 million trade deficit for the
first quarter, the government decided to slash
import quotas. Officials considered canceling all
outstanding orders for US military equipment, but
this was dropped when the United States delayed
some payment dates and increased the level of
FMS credits.
In 1983 the government won a labor agreement to
limit wage increases across the board to 10 percent
compared to 20 to 30 percent in the preceding two
years. In turn, the government promised to hold
down prices and then delayed subsidy reductions so
that the labor agreement would stick. F_-]
By late 1983 the economy was gradually pulling
out of its slump. Nonetheless, the unemployed and
the poor were hard hit by cuts in public spending
and delays in major projects in less developed
regions.
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 Tunisia: Economic Indicators, 1979-83
Real GDP Growth
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Consumer Price Growth
Percent
Foreign Reserves, 1983a Total Debtb
Million US $ Billion US $
1979 80 81 82 83d 0 1979 80 81 82 83d 0
Direct Investment
Million US $
Debt Service Ratioc
Percent
0 1979 80 81 82d 0
Trade Balance
Million US $
Defense Budget.
Million US $
1979 80 81 82 83d -1,500 1979 80 81 82 83d
a Excluding gold.
b Including public and private, guaranteed and nonguaranteed debt.
C Ratio debt service payments to exports of goods and services.
d Estimated.
The Quick Fix-A Miscalculation
While inflation declined from 14 percent in 1982 to
less than 5 percent for 1983, government subsidies
Contemplated reductions in cereal subsidies were mounted.
repeatedly postponed throughout the year as vari-
ous Cabinet ministers debated with Prime Minister Last fall, during 1984 budget deliberations, atten-
Mzali over which subsidies to reduce, by how tion turned to the cereal subsidy, which was fore-
much, and when. Several ministers were "relieved cast to grow by 30 percent in 1984. Possibly as a
of their assignments" as a result of policy disputes.
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result of the low level of visible public dissent over
the austerity measures applied in 1983, but also
because of direct pressure applied by Bourguiba,
the Cabinet decided to eliminate completely the
cereal subsidies in 1984. Previously, the politically
sensitive subsidies affecting bread and other wheat
products had been left untouched even as other
subsidies were reduced. The Tunisian Government.
realized this would be a politically dangerous
step-one which had caused riots in Egypt in 1977
and Morocco in 1981-but was confident that
government preparation and countermeasures to
protect the poorest groups could preclude popular
outbursts.
ed the price increases and called for a new budget
within three months to better address the needs of
the poor.
The protests have badly damaged the political
image of Mzali, who was charged with carrying out
the decision to remove the subsidies. His statements
during the disturbances that the government would
proceed with its program probably reaffirmed pop-
ular misconceptions that he-rather than Bourgui-
ba-had planned the price hikes. Bourguiba's
abrupt suspension of the price increases, undercut
Mzali's own efforts to make amends with the poor.
Moreover, the Prime Minister is blamed for order-
ing the sometimes heavyhanded suppression of the
Tunis tried to ensure the support of labor by
holding negotiations with the General Union of
Tunisian Workers (UGTT) during December to
work out acceptable wage increases that would
partially compensate labor for the price increases.
Two opposition parties were legalized at the end of
November, possibly to deter them from criticizing
the government over the subsidy cuts. Finally,
during the last week of December, Mzali an-
nounced supplementary welfare subsidies to help
offset the price increases for the poor, but this was
ineptly handled-the increases were not in place
before the new prices took effect.
Although the UGTT claimed afterward that it had
tried to warn the government of the possible reper-
cussions, government, party, and labor officials
appear to have failed completely to anticipate the
intensity of the public reaction to the price hikes.
This failure has confirmed popular perceptions that
"official" Tunisia is out of touch and insensitive to
On 29 December, even before the price increases
took effect, violence erupted in the southern and
central regions and quickly spread over the rest of
the country. On 3 January, with the police unable
to restore order, Bourguiba declared a state of
emergency and called in the Army to quell the
disturbances. Three days later, Bourguiba rescind-
riots by Army and security forces.
The riots caused extensive physical damage. Post
offices and other government buildings, public
transportation, and even Bourguiba's summer pal-
ace were damaged. Furthermore, the US Embassy
has received reports of attacks on mining facilities
and factories. Because violence was directed
against the Tunisian middle and upper class and
symbols of government authority, government and
commercial properties were hit hardest. The tourist
industry, a mainstay of the economy, is likely to be
damaged by hesitancy on the part of prospective
Western visitors in the wake of the riots. The
confidence of foreign investors-many of who are
from the Gulf states-almost certainly has been
shaken
Bourguiba's decision to maintain the cereal price
subsidies will be expensive-costing at least an
additional $200 million this year. To limit spend-
ing, the new budget will have to reduce other, less
politically sensitive subsidies and probably will
postpone development projects. These measures
will tend to slow economic growth, reduce new job
openings, and boost prices of essential goods result-
ing in further demands for compensation from
labor, youth, and the poor.
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Prospects
Tunisia is counting on foreign investment and
assistance-especially from the United States-
and hoping for no further deterioration in the oil
market. Although the Embassy reports that inves-
tor confidence in Tunisia has been shaken, Tunisia
may still be able to secure considerable investment
funds through five recently established joint Arab-
Tunisian banks. Investor response until the riots
had been encouraging. US private investment in oil
exploration and development was active, and US
cooperation in agricultural development and tech-
nology transfer was increasing. Barring further
disturbances, we do not anticipate any significant
Mzali's new budget almost certainly will have to
include cutbacks that directly affect the middle
class-his traditional political base-in order to
shift funds to address the needs of the poor. Mzali
also will have to maintain labor support. Nonethe-
less, having flexed their muscles so spectacularly,
the "poor and the young may again try to exert their
influence unless they believe their needs are being
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Afghanistan:
Growing Economic Dependence'
on the Soviets.
Unable to halt the slide in the economy since the
Soviet invasion in December 1979, Kabul has
turned to the Soviet Union for financial support to
operate the government as well as for food and
other supplies to alleviate shortages in government-
controlled areas. The Soviets' growing economic
involvement has enabled them to strengthen their
hold on key sectors in those areas under Kabul's
control.
Agriculture-More Imports
Since the Soviet invasion, the agricultural sector
has suffered greatly.
=large numbers of landowners have fled the
country, taking valuable machinery as well as
financial assets. Total foodgrain production in 1982
was at least 1 million metric tons less than peak
output of 1976,
In contrast, government figures show only
a small decline in production. Kabul's data are
highly suspect because the flight of roughly 4
million people to neighboring Pakistan and Iran
and the migration to the cities almost certainly
have reduced cultivated areas.
Despite lower output and the disruptions caused by
the insurgency-and contrary to reports by some
Western journalists and Afghan refugees-food
supplies probably were adequate for most of the
population last year.
good crop conditions pre-
vailed in most regions during the 1983 season and
that harvesting generally was started on schedule.
Most of rural Afghanistan, which is controlled by
Afghanistan: Agricultural Thousand metric tons
Production
Government Western
Statistics Estimates
Foodgrains
4,580
4,460
3,400
Wheat
2,940
2,860
2,200
Fruits and vegetables
1,640
1,830
NA
Industrial crops
380
200
NA
Cotton
160
55
NA
Sugar beets
90
30
NA
Role ofAgriculture
The main economic activities in Afghanistan are
agriculture and animal husbandry. Production of
foodgrains utilizes 90 percent of the land under
cultivation, with wheat alone accounting for 60
percent. Agricultural output was growing by 3
percent annually in the mid-1970s, and the country
was nearly self-sufficient in food production in
1976.
the insurgents or has only limited government
control, appears to be almost self-sufficient in food.
food prices in the
rural areas are down and no major shortages are
wheat from Herat Province is exported to
occurring.
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Iran. We believe that, in areas where domestic
supplies are insufficient shortages are alleviated by
imports from Pakistan.
about 140,000 tons of wheat are
brought in annually by insurgents from refugee
camps in Pakistan.
In government-controlled areas, large-scale imports
from the USSR have prevented serious food short-
ages. the disruption of
- he transportation system, the government's inabil-
ity to collect grain and other agricultural products
in insurgent-controlled areas, and the reluctance of
some farmers to sell to the government have left
urban areas with serious shortfalls. According to
Soviet and Afghan press reporting, wheat imports
from the Soviet Union increased from about 75.000
tons in 1980 to 160,000 tons in 1983.
Production of industrial crops, even by government
records, has dropped dramatically. Harvests of
cotton,- the most important commercial crop, and
sugar beets have declined by two-thirds since the
mid-1970s. Processing industries, many of which
depend on domestic agricultural supplies, have
suffered. Cotton exports have declined, and the
government has boosted sugar imports from the
Soviet Union to make up for domestic production
shortfalls.
Energy-Total Dependence
The Soviet Union has nearly monopolized Afghani-
stan's commercial energy sector. Even before the
Soviet invasion, Kabul was dependent on imports of
petroleum products trucked overland from the So-
viet Union. Subsequently, the Soviets have laid two
small parallel oil pipelines from the Soviet border
to Bagram airbase near- Kabul. Although the pipe-
lines are designed primarily to supply Soviet mili-
tary forces, we believe that some supplies have been
used for civilian purposes.
Despite the Soviet commitment to supply fuel,
Kabul has suffered periodic shortages of virtually
all petroleum products since 1980.
these shortages have re-
sulted from Soviet refusal to ship fuel until overdue
Secret
27 January 1984
accounts are paid and from delays caused by
repeated insurgent attacks on fuel convoys and the
pipeline from the Soviet Union. Kerosene currently
is in short supply, while gasoline and diesel fuel
supplies are adequate. Heavy fighting in the area
between Kabul and the Soviet border is preventing
tankers from reaching the city, and shortages will
worsen unless the highway is reopened soon.
Disruptions in electricity supplies are making
Afghanistan increasingly dependent on the Soviets
for deliveries of fuel for electric power generation.
According to US Embassy reporting, brownouts
and supply interruptions in Kabul continue because
of insurgent sabotage of transmission lines carrying
hydroelectric power to Kabul. The city must now
rely almost exclusively on overtaxed diesel-fired
generators. According to US Embassy reporting,
the situation is even worse in other cities such as
Herat and Qandahar, where a lack of fuel has shut
down government and private generators.
Improving electric power supplies will probably
entail greater Soviet involvement in the only com-
mercial energy sector where the government still
has some control. According to official statements,
the Soviets are planning an electric powerline from
the Soviet Union through Kholm and Pol-e Khomri
to Kabul intended for industrial enterprises. Other
cross-border lines are being built to Towraghondi,
in Badghis Province, and to Qonduz.
The Soviets dominate the natural gas industry-
the country's most important natural resource and
major export. Since 1957 the Soviets have provided
credits, equipment, and technical assistance to de-
velop this industry. The Soviets import about 95
percent of Afghan gas production; the remainder is
used at a nitrogen fertilizer plant and a gas-fired
electric power station.
We believe the Soviets had planned to increase gas
imports substantially from a new gasfield at Jar
Quduq. Moscow
had targeted total Afghan gas production at 4
billion cubic meters in 1981 and correspondingly
increased the capacity of the 100-kilometer pipeline
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Boundary representation is
not necessarily authoritative.
that carries the gas northeast from Sheberghan to
the Soviet border. Although gas production in-
creased significantly in 1981 when the new field
came on stream, output has not approached the
Soviet target.
After 1981, gas output declined.
technical difficulties-probably
shortages of operational equipment-and periodic
insurgent interdiction of the pipeline have reduced
production. We estimate gas exports to the Soviet
Union last year were about 2.4 billion cubic meters
compared with the 2.9 billion cubic meters deliv-
ered in 1975. According to a Kabul press report,
the 1984 contract for exports to the USSR calls for
no increase in volume.
Trade-Changing Pattern
Trade with the Soviet Union has increased signifi-
cantly since the Soviet invasion. Transportation
difficulties have played a major role in the loss of
Western markets for Afghan goods. Traditionally,
most exports to the West transited Pakistan or were
airlifted. The roads to Pakistan are frequently
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27 January 1984
- Gas pipeline
- Petroleum products pipeline (dual)
? Gasfield
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Afghanistan: Natural Gas
Production, 1976-83a
0 1976 77 78 79 . 80 81b 82 83
' By fiscal year which ends 20 March.
b New field on stream but output significantly less
than original target of 4 billion cubic meters.
blocked for days and are dangerous. The Afghan
regime has suspended flights of the state-controlled
airline to Western Europe. The Soviet Union was
Afghanistan's major export market even before the
invasion because it is the only feasible recipient of
natural gas exports. Its share of total exports,
however, has risen from 40 percent to almost 60
percent.in recent years: The Soviet share of imports
has doubled to about 65 percent in the past few
years largely because of increases in food and
capital goods imports.
Foreign Aid and Debt-
Soviet Financial Support
During the 1970s, Afghanistan received substantial
external financial assistance in the form of loans
and grants from both Communist and non-Com=
munist donors. Since the invasion, the Soviets have
largely replaced other donors and have provided
about $850 million in economic assistance as
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27 January 1984
Afghanistan: Changing Trade
Patterns, 1979-83a
900
800
700
600
500
400
E
300
200
100
T1
I
F]
TI
U
a Trade is based on government statistics and does not
include smuggling or trade in areas controlled by in-
surgents. The increase in exports between 1979 and
1983 is attributable in large part to a near tripling of
prices paid for natural gas by the Soviet Union.
b By fiscal year which ends 20 March.
xports
grants. We estimate all but about $100 million has
been disbursed. Most of this'funding has been used
for essential imports. In addition, the Soviets have
provided about $50 million annually in develop-
ment assistance. Western aid has declined by more
than one-half to less than $50 million annually.
Because of its Soviet ties, the Afghan Government
has been denied access to $1 billion in development
funds promised by OPEC states.
Soviet assistance has become critical to support the
government budget. According to the Afghans, the
Soviet occupation has led to a severe fall in govern-
ment revenues. The decline in economic activity
and the inability to collect taxes have made it
difficult to finance the budget. Only with Soviet
financial assistance and a tripling of the price the
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Soviets pay for gas have the Afghans. been able to
come close to covering increased government ex-
penditures. Exports of natural gas to the Soviet
Union account for about 45 percent of government
revenues compared to less than 25 percent before
the invasion.
We do not expect the Afghan economy to show any
real improvement, because the insurgency ensures
that:
? Transportation will be disrupted.
? The government will be unable to procure agri-
cultural products and collect taxes from the
countryside.
? Industry will face shortages of power, equipment,
raw materials, and labor.
? The Soviets will gain greater influence in the
economy as trade and aid from the West remain
curtailed.
Natural gas, in large part because of its proximity
to the Soviet border, will remain the only viable
industry for the Afghan Government. Nevertheless,
the sale of natural gas will not provide Afghanistan
with hard currency to buy goods from the West.
The Soviets undoubtedly are committed to defend-
ing the gasfields from the insurgents because this is
the one sector of the economy that affords any
significant economic benefit to them.
There is little prospect that the Soviets will be able
to reduce the amount of economic assistance pro-
vided to the Afghan Government in the near future.
Although the Soviets currently are not saddled with
large development projects, because there are none,
they still must ensure that sufficient funds are
available for food and fuel imports as well as the
administration of the government.
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27 January 1984
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