(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707050001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: January 12, 2017
• Document Release Date: October 15, 2010
• Sequence Number: 1
• Publication Date: June 22, 1984
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
22 June 1984
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DI IEEW 84-025
22 June 1984
Copy e o i
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Secret
International
Economic & Energy
Weekly
Synopsis
Energy
International Finance
Global and Regional. Developments
National Developments
15 $'audi Arabia's Military: The Impact of Reduced Oil Revenues
Audi Arabia: Interest Groups and the Oil Slump
.25 Western Europe: Decisions Affecting Gas Security,
directed to (Directorate of Intelligence
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International
Economic & Energy
Weekly
Synopsis
Saudi Arabia's Military: The Impact of Reduced Oil Revenues
Oil wealth guarantees that Saudi Arabia can afford virtually any weapon
system it wants despite two years of reduced oil revenues.
21 Saudi Arabia: Interest Groups and the Oil Slump
impact of spending cuts caused by reduced oil revenues.
The Saudi Government has worked hard to insulate its citizenry from the
25 Western Europe: Decisions Affecting Gas Security
The outcome of London's gas negotiations with Norway and the Netherlands
could have major implications for the security of West European gas supplies
in the 1990s.
31 Botswana: Economic Success Story
Third World-is being tested by a series of setbacks.
Botswana's impressive economic development record-one of the best in the
Secret
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International
Economic & Energy
Weekly
Secret
DI IEEW 84-025
22 June 1984
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Secret
Indonesian President
Names New Head of
Z7
President Soeharto last week ousted Pertamina President Judo Sumbono and
named General Abdul Rachman Ramly, head of the state tin mining
corporation, to succeed him.. Sumbono's ouster followed months of increasing
criticism both by senior Indonesian officials and foreign oil company represen-
tatives for his mismanagement, financial misdeeds, and refusal to cooperate
either with the Pertamina Board of Commissioners or with the foreign oil
companies. We believe foreign oil companies will welcome Ramly's appoint-
ment as an indication that the Indonesian Government is responsive to their
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youth African
Natural Gas
Norway Lowers
timate of Troll
as Reserves
complaints and wants their continuing investment. Ramly has a good reputa-
tion for management as head of the state tin mining corporation. Unlike
Sumbono, who had limited contact with foreigners before his appointment to
head Pertamina, Ramly has served as a diplomat in the United States.
vulnerability to a fuel embargo and cut its fuel import bill.
Pretoria is considering the exploitation of a natural gas field off the southern
coast that could meet 6 to 8 percent of South Africa's fuel needs. Exploitation
of.the Mossel Bay gasfield has been delayed for a number of years, but press
reports now indicate that Pretoria is studying a $1.6 billion proposal to develop
the gasfield and then convert the gas into methanol and then into gasoline and
diesel fuel. The field holds an estimated 30 billion cubic meters of gas.
Government spokesmen have been unwilling to verify the reports, but have
acknowledged that the South African cabinet could be asked to decide on the
project in the next few months. Development would further reduce Pretoria's
gas from this portion of the field next year.
The Norwegian Petroleum Directorate now estimates recoverable natural gas
reserves from the Troll field at about 1,290 billion cubic meters, 20 percent
lower than earlier estimates. The downward revision is unlikely to significantly
alter Norway's ability to supply gas to European purchasers in the next two
decades. The reevaluation of reserves is based on data from exploratory wells,
compared with earlier estimates that were based solely on seismic work. The
adjustment affects estimated recoverable reserves in the eastern portion of the
field, which has yet to be declared commercial, and is not expected to begin
producing until after the year 2000. Recoverable reserves in block 31/2-the.,
western portion of the field-remain unchanged at 460 bcm: Statoil, the
Norwegian state oil company, is expected to begin negotiations for the sale of
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Secret
IMF Suspends
Guatemala's
S dby Agreement
Argentine Reaction Buenos Aires has reacted with restraint to the US decision not to extend a
to US Move on Loan $300 million loan guarantee. The Argentines appear inclined to contain
Guar tee criticism of the United States as they continue talks with the IMF and try to
work out a package with commercial lenders for payment of outstanding loan
interest due on 30 June.
reaffirmed their intention not to accept any contractionary economic policies.
The US Embassy and press reports suggest that Buenos
Aires wants to limit damage to bilateral relations, but Argentine officials have
?ti
accord with creditors.
The US Embassy reports that President Alfonsin, in the wake of the accord
signed earlier this month with political opponents, is becoming increasingly
unwilling to resist labor's demands for additional wage hikes. Strike activity
has increased, and labor leaders have formulated a "battle plan" to extract
concessions in coming weeks. As a result, wage policy is, at least in the private
sector, beyond government control. Alfonsin will probably use labor restiveness
to bolster his arguments against accepting IMF-mandated austerity measures.
Unless he moves soon to regain control of wage policy and challenge labor,
however, Alfonsin will face increasing political difficulties in reaching an
tougher measures.
The IMF suspended Guatemala's standby agreement after Chief of State
Mejia refused to raise the unpopular value-added tax (VAT). The IMF
believes this was necessary to reduce the current account deficit and the
budget deficit', which threatens to reach 5.5 percent of GDP. Without a VAT
increase to curb import demand, the government will face a growing need to
take the unpopular step of devaluing the currency. Because the remedies are so
unpopular, Mejia is likely to temporize by announcing a few minor increases in
other taxes, while allowing arrears on debt service and other foreign payments
mount. Consequently,- the trade deficit and creditworthiness of Central
America's largest economy will continue to worsen until the government takes
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Global and Regional Developments
Canada Sets New Ottawa and Tokyo agreed last week on revised import quotas on Japanese
Quotas on Japanese automobiles that will limit them to a maximum of 18.1 percent of the
Aut/Imports Canadian new car market. The agreement, covering the year ending 31 March
1985, pegs the level of Japanese car imports to a percentage of the Canadian
market for the first time since quotas were introduced in 1981. The new quota
is based on projected total Canadian automobile sales of 917,000 in 1984,
which will permit the importation of 166,000 Japanese cars. If actual sales in
1984 are significantly above the government projection, however, Ottawa will
allow additional Japanese imports-up to 4,400 more-into Canada during
the last three months of the agreement. Despite expected healthy growth in the
domestic automobile market-Canadian auto sales to date, together with
industry projections, indicate domestic sales could exceed 1.1 million cars this
year-International Trade Minister Regan warned that quotas are likely to
continue unless Japanese automakers make "very dramatic investments" in
Canada. Regan noted, for example, that Honda's decision to establish a
production facility in Ontario played a pivotal role in Ottawa's decision to
increase this year's quota.
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22 June 1984
991
988
1,003
932
904
714
843
943'
917
Japanese imports
135
113
79
138
208
178
177
170
166
Japanese share of Canadian market
(percent)
13.6
11.4
8.0
14.8
23.0
25.0
20.9
18.1
18.1
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Secret
EC Proposes
Telecommunications
iative
OPEC Imports From
ajor Industrialized
Nations Down Sharply
Coffee Market
Unsettled
Community's commitment to advancing high-technology industries.
The EC Commission proposed a new initiative in early June calling for an "ac-
tion program" to create a Communitywide market for telecommunications
equipment. The proposal is the third and final part of the Community's high-
technology program already consisting of ESPRIT-an R&D program on
information systems-and a small program intended to promote the biotech-
nology industry. The telecommunications initiative, however, is little more
than a statement of goals and contains few substantive recommendations. For
example, the initiative recommends that the national telephone monopolies in
each country increase purchases of equipment produced by other EC mem-
bers-rather than relying on domestic producers-but it does not propose how
to achieve this. Furthermore, the Commission does not intend to submit a
proposal for an R&D program in telecommunications until late in 1984.
Nevertheless, the initiative probably will be approved by the heads of state
during the 25-26 June European Summit in Fontainebleu to demonstrate the
development programs introduced last year.
According to US, Japanese, and West German trade statistics, OPEC imports
from these major industrial countries continued to decline in the first quarter
of 1984. For the OPEC members as a group, imports were down 13 percent.
This first-quarter decline follows a 20-percent drop for all of 1983. Indonesia,
Iraq, Nigeria, and Saudi Arabia accounted for nearly all of the first-quarter
fall in sales. Imports of manufactures-off 16.4 percent-showed sharp
declines while food imports rose sharply. This decline in sales reflects the
financial problems facing some OPEC members as well as cutbacks in
30 September, by 7 percent.
The coffee market since last fall has been buffeted by higher prices, low
inventories in consuming countries, adverse weather-which cut output by 14
percent in the Ivory Coast and reduced crop quality in Brazil-and shipping
difficulties in Colombia. The International Coffee Organization's (ICO)
Executive Board will meet next week in Kinshasa, Zaire, to discuss the current
market situation. Key agenda items are likely to be undershipments of export
quotas by some members, requests for quota increases by other members, and
a redistribution of export shortfalls. Prices broke the $1.50 per pound barrier
for mild arabica coffee in April-outside the ICO's $1.20 to $1.40 price
range-before settling back slightly in recent weeks. Higher prices have
triggered four one-million-bag ICA quota increases-the latest on 1 June-
and have boosted exporters' quotas in the coffee marketing year, which ends
recent occurrence was in July 1981.
Producers believe higher prices in the futures market are attributable, in large
part, to speculation by some US buyers, who believe a damaging frost could hit
Brazil's coffee crop before the frost season ends in mid-August. In recent
years, damaging frosts have hit Brazil every two or three years, and the most
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National Developments
Developed Countries
British Defense British Defense Secretary Heseltine intends to officially unveil a reorganiza-
Ministry Considers tion plan for the Ministry of Defense (MOD) next month that includes a
Co petitive controversial proposal to base procurement policy on competitive bidding.
Purement Policy Heseltine, who is known for his management expertise, reportedly believes that
competition in the procurements procedure would take it out of the political
realm and tighten his control over the process within the Ministry. The
reorganization plan also carries out a recent commitment by the government to
increase cooperation between the MOD and the Department of Trade and
Industry to develop defense equipment and services with greater export
potential. Trade Secretary Norman Tebbit, a close Thatcher lieutenant,
apparently has contributed substantially to Heseltine's plan.
evelopments in
West German
Metalworkers' Strike
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22 June 1984
According to the US defense attache in London, Heseltine will propose:
? Replacing the current "sole-source" preferred contractor procurements
policy with a more competitive open-market approach.
? Increasing reliance on industry for the design and development of defense
equipment.
? Emphasizing closer work with US defense firms to stretch R&D funding.
? Splitting contracts between several firms to develop alternative suppliers.
The main opposition to Heseltine's procurement plan will come from major
British defense firms. Many of the companies have already seen an outline of
the proposal and are arguing that the change in procurement policy would be
unlikely to result in significant cost savings in the 1980s and would not provide
adequate safeguards for protecting sensitive technological information. They
also contend that it would reduce both their profits and their motivation to
achieve excellence, encourage foreigners to purchase small firms in the United
Kingdom-thus reducing British control over the domestic defense industry-
and eliminate needed financial support for risky R&D ventures. Despite this
opposition, we expect Heseltine will- be successful in his drive to change MOD
procurement procedures. He probably has the support of Prime Minister
Thatcher because the initiative is consistent with her goal to revive British
. industrial competitiveness.
Prospects for a settlement appear only marginally improved as nonbinding
arbitration of the six-week-old metalworkers' strike began this week. Former
Defense Minister and labor leader Georg Leber heads the eight-man media-
tion panel. Despite steep costs to both sides, neither labor nor management is
budging from its position on the key union demand-that the workweek be
gradually reduced from 40 to 35 hours without pay cuts. Chancellor Kohl is in-
creasingly under fire for siding with management. His condemnation of labor's
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Secret
Dual-Use Engine for both automobiles and cruise missiles.
West Germany The Bundestag voted last month to establish a commission to monitor and
Establishes evaluate the ethical and moral consequences of biotechnology research. Only
technology the Greens-who favor a much more restrictive approach to this field-voted
Commission against the Social Democratic motion. Commission members, representing a
eramics Nissan is using a rotor made of advanced ceramics in the development of a
firms.
Japanese Researching Japan's Nissan Motors is attempting to develop ceramic gas-turbine engines
foreign exchange market to support the New Zealand dollar. The move was
prompted by devaluation rumors and a heavy outflow of funds late last week
following Prime Minister Muldoon's announcement of early elections on 14
July. The Reserve Bank withdrew from forward dealings nearly a year ago in
an effort to lift trading restrictions on the dollar, but is anxious to avoid a de-
valuation that could boost inflation, currently 4 percent annually. Nonetheless,
we expect market pressures will necessitate a devaluation before yearend.
using government influence to reach a settlement.
demands has bolstered union resolve, and he has ruled out the past practice of
West German hopes for 3-percent real GNP growth this year and a record
trade surplus have been dashed by the strike. Many businessmen, including
those in sectors not directly affected, are delaying new orders and investment.
cross-section of the public, are to begin work in July. West Germany lags in
commercial application of biotechnology research, but Bonn has targeted this
and other high technologies for increased funding. In addition, Foreign
Minister and Free Democratic Party leader Hans Dietrich Genscher has
proposed creation of private universities funded by firms to specialize in
microelectronics and biotechnology research that would be shared with the
iuu-norsepower gas-turbine engine. Although primarily an automobile term,
Nissan already supplies gas-turbine engines for operational short-range,
antiship cruise missiles as a subcontractor to Mitsubishi Heavy Industries.
Ceramic engine parts can improve engine efficiency and have the potential to
boost auto mileage by about 30 percent and cruise missile ranges by as much
Nero Zealand Supports The New Zealand Reserve Bank has announced it will reenter the forward
Phili pine Banking
Isis Looms
Less Developed Countries
The Philippine Central Bank recently averted the failure of the nation's 11th- 25X1
largest commercial bank by organizing a $21 million emergency loan from
other banks. Nonetheless, the bank's near collapse has convinced many -
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assets exceed $5 billion.
Philippine analysts that a major financial crisis is imminent, according to the
US Embassy. The Central Bank provided commercial banks with over $400
million in overdrafts earlier this year-contributing to rapid money supply
growth and further delaying negotiations with the IMF for a $650 million
standby loan. Recent Central Bank efforts to restrain money supply growth
have weakened many banks as interbank lending rates have risen to over 40
percent. Moreover, the quality of loan portfolios is declining because of rising
business failures, and banks are increasingly relying on volatile short-term
deposits. These developments threaten the viability of many "second tier"
banks as well as the large government-owned Philippine National Bank, whose
Pakistani Growth After six consecutive years of almost 6-percent growth, the Pakistan Govern-
Slows ment estimates that GDP will grow by only 4.5 percent during the fiscal year
ending 30 June, the lowest rate of growth since President Zia came to power in
1977. We believe GDP growth actually is even lower than government
estimates because some data indicate agricultural production was even less
than that reported by the government. Agricultural output, according to
government estimates, declined by an estimated 4.6 percent because of a
massive shortfall in the cotton crop and disappointing wheat and rice harvests.
Industrial output, however, reportedly increased by 7.7 percent. Data on the
foreign payments indicate a drawdown in foreign exchange reserves of about
$270 million from the June 1983 level of about $2 billion reflecting smaller
cotton exports and a 3-percent decline in workers' remittances. This is the first
drop in remittances since the major exodus of workers to the Persian Gulf in
the early 1970s.
Despite a deterioration in economic performance, we do not believe that the
economy by itself will generate serious political problems for Zia as he
prepares for elections that probably will be held in the fall. We believe he will
be able to convince Pakistanis that bad weather caused most of the agricultur-
al problems. Moreover, the government has held down price increases for basic
foodstuffs. Foreign exchange reserves still are equivalent to about three and a
half months of imports, a very comfortable margin for Pakistan by past
standards. The falloff in remittances, however, casts a shadow on future
economic growth. Remittances have been a major source of foreign revenue
and have been instrumental in increasing the middle and lower class incomes.
Djibou is Financial . A decline in French grant aid to Djibouti since 1981 and the government's un-
ProWms willingness to cut spending sufficiently or raise taxes have caused an increas-
ingly tight financial bind. Lower official aid flows, stagnating tax receipts,
larger defense expenditures, and increased loans to public enterprises resulted
in an overall budget deficit of $28 million last year, according to IMF
statistics, compared to a $12 million surplus in 1981. The trend has worsened
this year; the US Embassy reported a $9.6 million budget shortfall in the first
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CEMA Summit
DecI ations
worsen.
quarter. The reduction in grant aid, drops in spending by French personnel
within the country, and continued high import levels have hit the external
accounts as well. By yearend 1983, external debt had increased 150 percent
over the 1981 level to reach $44 million, according to the IMF. Moreover, by
April of this year, untied foreign reserves had dropped to almost one-half the
December 1982 level, and were sufficient to cover only two months of imports.
Djibouti is responding by delaying development projects, borrowing from the
national social security fund, collecting past due taxes, and appealing to Saudi
Arabia for an additional $10 million in economic assistance. Economic
difficulties have had little political impact to date, but tensions could arise
between the dominant Issas tribe and the rival Afars if the economic problems
Communist
starting in 1986; other sources believe the issue has not been resolved.
stated that the five-year average would be replaced by a three-year average
Official declarations issued at the CEMA summit last week are long on
rhetoric and short on substance. A statement on the preservation of peace
reendorsed Soviet and Warsaw Pact proposals for a comprehensive test ban,
nonmilitarization of space, a ban on chemical weapons, limiting and reducing
military budgets, and other arms controls. The United States is portrayed as a
threat to the international economic order, but the parties favor continued
trade with the West and reaffirm a CEMA commitment to expand economic
ties with non-Socialist countries. Although the reaffirmation of interest in
East-West trade is weakly stated, it nonetheless appears to be a political
victory for the East Europeans, who have resisted Soviet pressure to reduce
their economic links with the West. On the issue of Soviet oil prices, one Soviet
Moscow Evaluates Izvestiya recently published the first detailed high-level statement on the
I dustrial Experiment progress thus far of the "economic experiment," which gives five industrial
ministries more autonomy in using investment and wage funds.
each of the ministries has improved its performance
economy as long as resources are in short supply.
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The leadership had preordained that the experiment would be a success and a
model for Soviet industry. The industries involved have been given priority in 25X1
such areas as the acquisition of resources. Consequently, the results will reveal
little about the actual potential for applying these measures throughout the
preparing to broaden the experiment widely in 1985 and beyond.
of success under the experiment. Results are less encouraging for enterprise
planning of investment spending, but the official commented that factories
have not had enough time to plan such expenditures. He said the Soviets are
since the test began in January in meeting delivery contracts, the key indicator
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S/vies Drought
/Abates
likely during the next few days.
Recent rains have broken the severe drought that has devastated the grain crop
in and around the Volga Valley, an area that produces about one-fourth of the
annual Soviet grain harvest. The rains have temporarily halted further damage
to the surviving grain crops, but'additional rainfall is needed to replenish
subsoil 'moisture. If ideal weather prevails through the end of the crop season,
total Soviet grain production still could reach 200 million metric tons-5
million tons more than last year's estimated output. Meteorological data show
that the high-pressure system responsible for the most damaging weather had
dissipated by 6 June. According to reporting from 12 Soviet weather stations
in the valley, precipitation since the beginning of the month has been 60
percent above normal. Current weather patterns suggest that more rainfall is
oviet Grain Purchases Grain traders say the USSR is negotiating to buy 1.2 million metric tons of
Sharp Increase in
Vietnam's Hard
Currency Debt Arrears
Secret
22 June 1984
this year's US wheat crop and 300,000 to 500,000 tons of US corn. These are
the earliest purchases in several years and probably reflect concern about the
Soviet crop and a desire to set prices should Western crops deteriorate.
According to a recent IMF report, Vietnam's foreign debt arrears to non-
Communist countries reached $428 million at the end of 1983-a 70-percent
increase over the previous year. Private Japanese banks and businesses account
for nearly half of the overdue payments and the Iraqi Central Bank for 20 per-
cent. Hanoi's scheduled debt service payments since 1979 have doubled to
about $260 million annually, roughly one and a half times hard currency
earnings from exports. Since 1981 Hanoi has rescheduled on a bilateral basis
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Soviet Crop Conditions, Mid-June 1984
Good to excellent
Fair
Poor
Very poor
The United Stal.. Government has not recognized
the incorporation of Estonia. Labia, and Lithuanie
into the Soviet Union. Other boundaryrepreaentaticn
Indian claim
Ce o Fre J ~ ,,
7 or conrrnt
YaRii`a 1,
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$250 million in loans from commercial banks and official creditors. Hanoi's
requests for a Paris Club rescheduling and for IMF loans, however, have been
turned down because Hanoi has been unwilling to undertake economic reforms
under an IMF-supported' loan program.
Cu Fails To Lure In the two years since Havana implemented a law permitting direct foreign in-
F,A reign Investors vestment in Cuba, the country has failed to attract any investors. The Cubans
have been seeking investment in the tourist industry to help boost foreign
exchange earnings and have been courting the Japanese in particular.
Although tax provisions in the law are favorable and the transfer of dividends
in hard currency is permitted, other provisions apparently have discouraged
investment:
? Only minority foreign ownership is permitted.
? Firms must be managed or comanaged by Cubans.
? Cuban government-owned firms must receive first priority as suppliers to
the foreign firm.
? All labor and materials must be paid for in hard currency at the overvalued
official exchange rate.
We doubt that Havana will relax these regulations given Castro's often stated
antipathy toward economic liberalization.
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Secret
The Impact of Reduced Oil Revenues
Unlike most Third World nations, Saudi Arabia's
oil wealth guarantees that it can afford virtually
any weapon system it wants. Most developing
countries are limited by financial considerations in
purchasing weapons, but Saudi Arabia has the
luxury of choosing suppliers according to its politi-
cal and technical preferences. We anticipate that
recent events in the Persian Gulf-including Iran's
air attacks on Saudi ships and the Saudi Air
Force's downing of an Iranian F-4 in early June-
Budget constraints imposed by reduced oil reve-
nues, however, are forcing the Saudis to scale back
or reevaluate many military projects. The govern-
ment has not canceled any major programs cur-
rently under way, but it has instituted some cut-
backs in spending, more careful monitoring of
military expenditures, and program delays in order
to stretch out weapons payments. Although these
measures reduced military spending last year by
about one-third to $17.4 billion, we believe short-
ages of skilled manpower and other nonfinancial
The Military's Mission and Political Role
The primary role of the 57,000-man, regular armed
forces is defense against external attack. The Sau-
dis see themselves as surrounded by potential.ene-
mies and recognize that their extensive borders and
small population make them vulnerable to outside
aggression. The primary threat at present is Iran,
but Saudi Arabia has longstanding border disputes
with North Yemen and South Yemen that have
periodically produced clashes. In addition, the Sau-
dis greatly fear Israeli military power and, their
current financial support for Iraq's war effort
notwithstanding, remain apprehensive about Bagh-
dad's potential regional ambitions. The growing
Soviet military presence around the Arabian Penin-
sula and Moscow's military relations with North
Yemen and South Yemen also are sources of Saudi
concern. To deal with these perceived threats, we
estimate that since 1973 the Kingdom spent about
$150 billion on its armed forces. Much of the
equipment ordered is among the most advanced
available
The primary role of the 20,000-man National
Guard and the secondary role of the regular armed
forces is maintaining internal security. The siege of
the Grand Mosque in Mecca in 1979, evidence of
growing religious fundamentalism among some
groups, and fear of Iranian-supported subversion by
Saudi Shias has led the Saudi leadership to devote
substantial resources in recent years to improving
its internal security capabilities.
Although the overall capabilities of Saudi military
and internal security forces have improved marked-
ly, their rapid expansion over the past 10 years has
produced substantial problems that limit military
effectiveness. These include severe manpower
shortages, which have led to an increasing depend-
ence on potentially unreliable expatriates. Paki-
stanis, for example, man an entire Army armored
brigade and fill important technical and other
support positions within the Air Force and the
Navy. As in many developing. countries,F_
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Budget Impact on the Military
$20 billion once all revisions are in.
All three regular services, as well as the National
Guard, have experienced budget cutbacks and de-
lays in major programs over the past year. Mindful
of its wide-ranging defense needs, however, the
government has yet to cancel a major military
program. Military expenditures increased steadily
for nine. years before dropping severely during the
last fiscal year. We believe that the $17.4 billion
spending level announced by the. government is
somewhat understated and will probably approach
the
Saudis see airpower as the most effective means of
defending their country and have made improve-
ment of the Air Force their highest military priori-
ty. As a result, the 17,000-man Air Force has
engaged in a massive modernization program over
the past 10 years that has included the purchase of
F-15 fighters, French-made Shahine/Crotale sur-
face-to-air missiles (SAMs), and air defense radars.
At present, the Saudis deploy one of the most
modern air forces in the Middle East. In addition,
under the $4 billion US-supervised Peace Shield
Program, the Air Force plans to acquire its own
AWACS aircraft and upgrade ground radar and
Budgeting in the Ministry of
Defense and Aviation
Before the decline in Saudi oil revenues, the Minis-
try of Defense and Aviation "budget" was a collec-
tion of each force's programs. over which the Minis-
try exercised only loose control. Service programs
with direct political backing from a royal family
member and/or the Ministry of Finance often were
funded without prior coordination with the Defense
Ministry.
Defense Ministry officials have recently begun
placing greater emphasis on accountability. Within
the Ministry, the Foreign Procurement Division has
been charged with increased oversight over the
three services' budgetary requests. Moreover, the
Ministry of Finance now has the power to deny
funds to previously approved military programs.
This had led to late payments exceeding $1 billion
on a wide range of contracts.
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22 June 1984
Nonetheless, the recent decline in oil revenues has
affected Air Force programs-an indication. that
the Saudis take their current budget difficulties
seriously. Western contracters have indicated that
funding for Peace Shield now will be spread over
three to five years instead of one, although- the
scope of the program has not been reduced.
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Fiscal Defense Spending
Year a
Value
(billion US $)
a Ending in April.
b Preliminary.
c Projected.
Total Budget Balance
(billion US $)
Share of Government
Expenditures (percent)
the Saudis seem serious about procuring
Financial problems have not, however, prevented
the Saudis from moving quickly to redress air
defense shortcomings in response to events in the
Iran-Iraq war. In May 1984, for example, Iranian
attacks on Gulf shipping led the Saudis to order
400 US Stinger hand-held SAMs. At the same
time
for a similar aircraft as
a replacement for their aging Lightning intercep-
tors. Complete replacement of the Lightning fleet
with Tornados would probably cost at least $650-
700 million, not including spare parts and training.
Although no orders appear imminent and
new fighters in the near future.
The government has scaled back one of the largest
land forces construction projects, the King Khalid
Military City at Hafar al Batin near the Kuwaiti-
Iraqi border. When finished, this division-sized,
multibillion-dollar installation will be one of the
largest and most modern Army facilities in Saudi
Arabia. Since 1983 fiscal considerations have led to
the elimination of facilities for one brigade and to
delays in the construction of the supporting airfield.
The 10-year, $6.4 billion Army aviation program,
now in the final planning stages, reportedly is under
close scrutiny by the Ministry of Finance. This
ambitious program calls for the organization of.
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three combat aviation battalions, acquisition of
as many as 500 helicopters, and construction of 18
new airfields.
under
way since 1980, includes purchase of four guided-
missile frigates, two support ships, 24 helicopters
equipped with antiship missiles, and an extensive
personnel training program.
We believe, however, that this
program also will suffer delays and cutbacks,F_
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Funding problems and competing priorities may
also be delaying a multibillion-dollar purchase of a
new main battle tank for the Saudis' two armored
brigades. Riyadh is considering the US M-1 and
West German Leopard,II as replacements for its
older French AMX-30s. The government may also
be delaying the tank purchase because of manpow-
er considerations and a desire to divert more funds
to air defense needs.
Largely immune to fiscal
restraints in the past, because of the clout of its
political patrons, the National Guard has had to
delay by two years the completion of the second
phase of its ambitious modernization program. This
calls for the equipping of two brigades with tanks
and armored personnel carriers.
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Initiated in 1972, the US-supervised Saudi Naval
Expansion Program (SNEP) has, at a total cost of
over $7 billion, provided Riyadh with 13 missile-
equipped warships, major bases at Jiddah on the
Red Sea and Jubail on the Persian Gulf, plus
training for about 2,000 naval personnel. At pre-
sent, projects under way include construction of
several naval training centers and a communica-
tions,network. Although financial constraints have
led to many of the SNEP's current difficulties, new
budgetary review processes in the Defense and
Finance Ministries probably also account for some
of the funding delays. In our judgment, however,
the Navy's large French and Pakistani naval train-
ing programs and the service's severe manpower
shortages may also diminish arguments for con-
tinuing to lavish funds on the US projects.
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Internal Security Forces
Despite recent budget problems, the Saudis have
spent about $1 billion since 1979 to modernize their
internal security capabilities. Items purchased in-
clude helicopters, riot control equipment, comput-
ers, and electronic surveillance devices. Given the
regime's sensitivity to domestic opposition and the
continuing threat of Iranian-backed subversion, we
anticipate that the Saudis will not allow reduced oil
revenues to prevent them from proceeding with
further improvement of their internal security
forces.
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We expect that the world oil market probably will
remain soft through 1986. As a result, some Saudi
military programs will suffer cutbacks and delays
as the government adjusts its budget to the reduced
oil revenues. Financial constraints already seem to
have encouraged more disciplined budgetary prac-
tices at the Ministries of Finance and Defense.
Riyadh's lower oil income will, we believe, provide
a useful pretext for the Saudis to pick and choose
more carefully what military systems they plan to
buy, delay purchase of less urgent items such as a
new main battle tank, and eliminate costly but non-
essential options associated with many ongoing
programs. Funding for operations and maintenance
could suffer as well.
Lower oil revenues probably will affect Saudi
negotiating strategy with its principal arms suppli-
ers. We anticipate that the Saudis, will take a much
tougher bargaining position than they have in the
past, pressing potential suppliers for more favorable
contracts. Moreover, this year Saudi Arabia passed
a law requiring major defense contracts to provide
for the investment of 35 percent of the contract's
value in local, jointly owned industrial projects. In
addition, tighter budgets could also serve as a
convenient excuse for the Saudis to continue with
policies designed to diversify their arms sources so
as to preclude overreliance on a single supplier.
Somewhat tighter defense budgets in the future
could elicit unfavorable reactions from certain mili-
tary officers, unused to financial limitations on
their pet projects or disturbed over possible reduc-
tions in their living standards.
and the
likelihood of continuing tensions in the Gulf area,
however, we doubt that the government would cut
the overall budget
Because of its immense oil.reserves and consider-
able financial clout, Saudi Arabia will nonetheless
remain in the enviable position of being able to
afford almost any major weapon system. We antici-
pate that the kingdom will continue to accord
military spending-especially for those items relat-
ed to air defense-a high priority in the budget:
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and the Oil Slump
Saudi Arabia: Interest Groups
Saudi Arabia has worked hard to insulate its
citizenry from the impact of spending cuts caused
by two years of reduced oil revenues. Riyadh's
ability to protect subsidies and other welfare pro-
grams, however, will be tested if Saudi Arabia's
revenue position shows no marked improvement
during the next several years. Popular expectations
of a steady rise in living standards, particularly in
urban areas, have grown during more than a
decade of soaring oil income and have locked the
Government austerity measures have not signifi-
cantly affected most elements of Saudi Arabia's
urban population. These include well-educated bu-
reaucrats who oversee the daily operations of im-
portant government ministries, professionals who
fill the ranks of the civil service, and the military
officer corps. Several high nonroyal officials, in-
cluding the Minister of Finance, Aba al-Khayl, and
the Minister of Petroleum and Minerals, Yamani,
are inner circle advisers and are very well compen-
sated. Riyadh provides ample salaries to all senior
officials as well as other generous perks that help
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Most government officials, however, do not have
such influence, and resent the almost total control
of the government by the royal famP
Many are frustrated over Fahd's
failure to implement long-promised political re-
forms that would-give them a voice in the decision-
making process.
Religious Groups
Riyadh is paying close attention to its relations
with the country's two leading religious groups, the
Sunnis and the Shias. On balance, we believe the
current economic slowdown may help the govern-
ment to placate the growing number of Sunni
fundamentalists who believe that the rapid pace of
Westernization in Saudi Arabia runs counter to
Islamic tenets. Since Fahd assumed the throne
almost two years ago, fundamentalism has been on
the rise among the lower and middle classes, -
particularly university students. This increase prob-
ably reflects the movement of the uneducated lower
classes into the cities.
A more immediate concern for Riyadh is the Shia
community concentrated in the Eastern Province.
The Shias play a prominent role in Saudi Arabia's
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Saudi Arabia: Quality of Life Indicators
Number of telephones in operation
100.0
139.1
222.1
287.7
410.0
Consumer imports b
100.0
120.7
137.2
149.5
165.0
Consumer price index
100.0
103.3
106.6
106.6
110.0
a Estimated.
b Includes electrical appliances, leisure goods, and wearing apparel.
Does not include foodstuffs or automobiles.
oil industry, making up about 30 percent of the
total Aramco payroll and 80 percent of all Saudis
working for the company.
The government has not forgotten t at ong-
standing Shia bitterness over their second-class
status boiled over into open violence in late 1979.
Hefty increases in development spending since the
riots have helped improve relations between Riyadh
and the Shias, according to the US Embassy. With
only about 16 percent of the country's population,
the Eastern Province accounts -for about 30 percent
of all current construction activity, according to the
Consulate in Dhahran. Not all of this money filters
down to local Shias; for example, the multibillion-
dollar industrial complex at Jubail is being built
mostly by foreign workers.
The government has not allowed the spending
slowdown to have a significant impact on the
lifestyle of Saudi Arabia's influential bedouin pop-
ulation. The bedouins are the most loyal supporters
of the royal family, and they dominate the National
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22 June 1984
Guard, the country's most powerful internal securi-
ty force. We believe the bedouin are the least likely
to abandon loyalty to the royal family because of
their deep-seated respect for a political system
based on tribal traditions. They receive large gov-
ernment subsidies in return for their loyalties.
Although a steady migration from a rural subsist-
ence existence to the material offerings of an urban
life-particularly health services-has reduced the
number of nomadic bedouins, we believe the total
bedouin population is well over 1 million. Many
bedouin tribesmen work in cities for only short
durations before returning to.their rural homes.
Many knowledgeable observers believe that one of
the most serious threats to political stability is the
increasing number of unemployed Saudi youth. Of
particular concern are the approximately 50,000
students studying abroad who expect to share in the
modernization process. Students exposed to West-
ern social values probably are unwilling to conform
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completely to a restrictive religious society. King
Fahd approved over 24,000 new jobs immediately
before the current budget was announced last
April, but similar moves in the future are less likely
because of a hiring freeze now, in effect.
Riyadh is pursuing a number of approaches to
preclude student dissatisfaction that could become
a focal point for antigovernment activity by other
groups critical of royal behavior.
In addition, the regime stresses local educa-
tion in part to improve its ability to monitor
students. Another lever is the government's willing-
ness to cover the cost of tuition and other amenities,
such as food allowances at local universities. F
The Royal Family
The material demands of the royal family, whose
number totals between 3,000 and 5,000, are in-
creasing the drain on Riyadh's finances and are a
potentially contentious political issue. The place-
ment of royal family members in key positions in
the government, business, and the military shelters
many princes from the effects of the economic
slowdown. The princes not only continue to collect
-their royal allowances, but also receive lucrative
commissions from project contracts and other busi-
ness dealings. We estimate that as much as $250
million may be set aside. just for allowances.
The general slowdown in the economy has affected
the local real estate market, another important
source of royal family income. Demand for rental
property is down, particularly in high-cost inner
city areas, while the slump in construction activity
is limiting opportunities for quick profits in land
speculation.
the royal family.
The Saudi Government has successfully avoided
the need to adjust expenditures with politically
unpopular austerity measures. Riyadh's ability to
continue this approach would be strained by a
prolonged slump in oil revenues. Fahd will be under
close public scrutiny to see that he does not mishan-
dle the allocation of government funds in favor of
any single interest group. A large drop in the flow
of funds to the Shia community, for example, risks
rekindling old resentments, which could be exploit-
ed by Tehran to recruit local dissidents for terrorist
activities. Fahd's balancing act will not be any
easier by his likely refusal to make more than token
reductions in the extravagant spending habits of
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Western Europe:
Decisions Affecting
Gas Security
The United Kingdom is in the final stage of a
political debate over whether to purchase large
quantities of natural gas from Norway's Sleipner
field. Some British officials oppose these imports
because of the foreign payments implications. They
favor instead increased domestic production and a
small volume of imports from the Netherlands. The
outcome of London's gas negotiations with Norway
and the Netherlands could.have major implications
for the security of West European gas supplies in
the 1990s. Failure to proceed quickly with the
development of the Sleipner field could delay the
subsequent development of Norway's Troll field-a
future source of gas that is needed to prevent
further inroads by the Soviet Union into the West
European gas market in the 1990s. Although the
Dutch option would add flexibility to the West
European gas market by integrating the pipeline
network between the continent and the United
Kingdom, it could also eventually provide Moscow
with a means to penetrate the UK market.
Market Setting
The prospects of rising gas demand and declining
indigenous production in Western. Europe indicate
that both continental Europe and the United King-
dom-two distinct markets because of the absence
of any interconnecting pipeline-will become in-
creasingly reliant on natural gas imports during the
remainder of the century. Current forecasts project
that natural gas demand on the Continent will
increase from 167 billion cubic meters (bcm) in
1983 to approximately 200 bcm in the mid-1990s,
with only about 85 percent of projected require-
ments covered by indigenous production and exist-
ing supply contracts. Prospective suppliers for the
remainder of the century now include the Nether-
lands, Norway, the USSR, and Algeria, and com-
petition for incremental market share will be stiff.
Marketing efforts by Norway and the Nether-
lands-secure OECD suppliers-are under way
both on the Continent and in the United Kingdom.
The United Kingdom is a major European gas
producer and now meets about three-fourths of its
requirements from indigenous production; the Brit-
ish Gas Corporation (BGC)' imports the remainder
from Norway. Declining production from Britain's
southern basin gasfields and termination of Norwe-
gian deliveries from the Frigg field in the early
1990s point to a potential gas supply gap in the
United Kingdom of around 30 bcm in 1995, ac-
cording to the BGC. Unlike most other European
buyers facing similar prospects, the BGC is moving
now to fill these-projected needs.
Meeting British Needs
After 18 months of negotiations, the Norwegian
state oil company (Statoil) and the BGC reached an
understanding in February for the purchase of
about 12 to 14 bcm of natural gas from Norway's
Sleipner field. Sleipner gas supplies are expected to
be developed by the early 1990s and would roughly
offset the loss in supplies from the Norwegian
Frigg gasfield. The gas deal is subject to both
British and Norwegian parliamentary approval.
Some British officials, however, have voiced reser-
vations about the agreement. In particular, Nigel
Lawson, Chancellor of. the British Exchequer and
former Energy Secretary, has played a key role in
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North Sea: Natural Gas Systems
to Major natural gas field
I - Existing
????? Planned
- - Under consideration
Sweden
orway
!Heim' dal' KarstO
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Baltic
Sea
opposing the deal because of the potential financial
implications. According to some British economists,
the. $28 billion gas deal would increase British
imports by $2 billion a year in the mid-1990s. In
addition, if these volumes are not produced domes-
tically, the cost to the Treasury from lost tax
revenues could total more than $4.2 billion. For.
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22 June 1984
Finland
The United States Go$emment has not recognized
the incorporation of Estonia; L .W.. end Litheania
into the Soviet Union. Other boundary rapre entatien
ie not necessarily aethoritetive.
these reasons, Chancellor Lawson has advocated
increased reliance on domestic gas production and
imports from the Netherlands as an alternative to
the purchase of Sleipner gas. In February, the UK
Department of Energy instructed the BGC to
explore the possibility of purchasing natural gas
from Gasunie, the Dutch state gas utility.
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Although the Dutch have not previously sold gas to
the United Kingdom, the Netherlands now has
additional gas available for export, and Gasunie
has offered to supply the British with about 5 bcm
per year-less than half the volume that would be
available from Sleipner-possibly beginning as ear-
ly as 1990. Although the initial offer was at a price
about 20 percent higher than the Sleipner price,
Gasunie recently made a more competitive offer
and indicated its willingness to negotiate. With
only lukewarm interest expressed recently by Con=
tinental buyers in additional Dutch gas volumes,
The Hague would like to penetrate a new gas
market in the United Kingdom. We believe any
Dutch sales to London would reduce future avail-
ability of Dutch gas to Continental buyers in the
1990s. At the same time, the outcome of London's
gas negotiations with Norway, and the Netherlands
will have major implications for the security of gas
supplies in Western Europe during the next decade.
The Politics of Negotiation
The Sleipner gas deal is a major and complex
political issue in the United Kingdom. In addition
to Lawson, who has close connections with Prime
Minister Thatcher, several oil companies and oil
industry consultants also oppose the deal. On the
other hand, Sir Dennis Rooke, chairman of the
BGC, strongly supports it. Although Rooke has a
good reputation in the gas industry, his relations
with the current government are poor, according to
US Embassy sources. The combative Rooke has
even considered signing the contract without gov-
ernment approval in the hope he can get away with
it. Rooke and Lawson clashed in 1982 when Law-
son, as Energy Secretary, promoted legislation that
brought private industry into the energy sector and
ended the BGC monopoly on gas sales.
the biggest reason for
believing that Sleipner will not be accepted by the
government is that doing so now could strengthen
the BGC and Rooke at a time when high officials
in the British Treasury and Department of Energy
want to "privatize" the corporation. There is specu-.
lation that these officials and other Cabinet mem-
bers want to keep Rooke uncertain until they reach
Dutch Push Gas Exports
The Netherlands-Western Europe's largest gas
supplier-is looking to negotiate new gas export
contracts for the 1990s. In its new 25 year gas-
marketing plan, Gasunie indicates it wants to
preserve existing foreign markets by extending
present export contracts by 10 years. Dutch gas
marketing efforts are prompted by the expiration
of current export contracts around 1990, the ex-
pected stabilization of domestic sales, and an
increase in gas reserves. By reclassifying some
uncertain reserves as proven, Gasunie recently
boosted proved gas reserves by 24 percent to 1.9
table besides Sleipner.
decisions on privatization and then cut a deal-
perhaps in a year's time-with many issues on the
The Sleipner Option
A British decision to proceed with the Sleipner
agreement would provide a secure and certain
source for meeting roughly one-fourth of British,
gas demand in the 1990s. Even with Sleipner gas
imports of 12 to 14 bcm annually, the United
Kingdom would require increased domestic produc-
tion, according to the BGC. Indeed, BGC is cur-
rently engaged in its largest ever exploration pro-
gram-spending $140 million annually on domestic
gas exploration. With a statutory requirement to
ensure supplies for 16 million customers, the BGC
views the Sleipner deal as a prudent course. More-
over, the agreed price is favorable to BGC, and the
corporation probably wants to finalize the agree-
ment soon, given the current buyers' market for
natural gas in Western Europe.
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Viewing the Dutch Option
Some UK officials) (have pro-
posed increasing domestic production and import-
ing Dutch gas to meet future demand needs. Ac-
cording to this strategy, the lower volume of Dutch
gas imports would have a less adverse effect on the
foreign payments, and increased domestic produc-
tion could benefit British industry. Some compa-
nies have recently unveiled significant new gas
development plans in the British sector of the
North Sea and have stated that there is no need for
Norwegian imports:
? Conoco intends to develop four new North Sea
gasfields with recoverable reserves of 70 bcm at a
cost of over $1 billion and claims that southern
basin gas reserves are sufficient to meet British
requirements to the year 2000.
? British Petroleum (BP) recently stated that
enough British gas reserves are recoverable at a
price comparable to the Sleipner price to meet
domestic needs until after the year 2000 and has
announced it will develop four gasfields in the
southern sector of the North Sea capable of
producing about 4 bcm annually.
? One energy consulting firm asserts that eight or
nine new gasfields will be given the go-ahead in
the North Sea in the next few years alone.
Without Sleipner, however, the British gas industry
will have to find and develop more than the equiva-
lent of about three-fourths of its current output to
satisfy demand requirements when Frigg gas sup-
plies run out. To meet such an ambitious target,
British offshore gas would have to be developed
much faster over the next 10 years than it was
during the boom years of the 1970s. Given the
uncertainties surrounding demand, indigenous sup-
ply, and foreign payments implications,
London may even-
tually approve the Sleipner contract with lower
volumes and possibly take some Dutch gas as well.
Under this scenario, London may also change its
current policy of forbidding' export of UK North
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22 June 1984
Sea gas, according to Embassy reporting. Dutch
supplies could be used to meet British needs in the
1980s, while Norwegian supplies would come on
line in the 1990s in combination with maximum
domestic production.
Outlook and Implications
In our judgment, the security of gas supplies in
Western Europe over the next decade will be
significantly influenced by the British decision on
the Sleipner contract. A decision by London to
approve the Sleipner purchase would improve pros-
pects for marketing the Norwegian Troll field. Oslo
has stated that progress on Troll will be delayed
pending resolution of Sleipner sales. Troll is the
only large, secure OECD gas supply available and
capable of meeting Continental requirements in the
1990s. Because of a 10-year leadtime for Troll
development, we believe a decision to proceed with
the project in the next year or so is essential to
prevent significant additional Soviet gas sales to the
West Europeans in the 1990s.
Alternatively, a decision by London to rely on '
increased indigenous production and some smaller
volume of Dutch gas imports could pose risks to the
United Kingdom, if-as we believe is possible-
domestic output falls short of expectations. The
United Kingdom would then be forced to seek
additional imports, either from Norway or poten-
tially the Soviet Union. The Soviet option would be
available to London once the pipeline link to the
Continent from the United Kingdom was built to
import Dutch gas. The pipeline, however, could
enhance other aspects of European gas security by
integrating the distribution network. 0
On balance, we believe London will eventually
approve the purchase of Sleipner gas. British De-
partment of Energy officials, however, may instruct
BGC to reduce the volume agreed to in the original
deal by 20 percent because they believe domestic
production can be increased significantly.
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The French and West
Germans are negotiating with the Soviets for lower
prices, and the Soviets have been successful in
selling additional gas to Italy. As a result, attempts
by the British to unilaterally alter contract terms
probably would force a review of Sleipner market-
ing plans and portend delays for Troll.
Beyond Sleipner
The willingness of West European gas suppliers to
adjust to the realities of a weak energy market by
lowering prices could have a positive impact on
West European gas security. Norway and the
Netherlands-which account for 70 percent of
proved European gas reserves-recently have
shown considerable price flexibility in making
available additional gas supplies. The Norwegian
price offer to the United Kingdom on Sleipner gas
was well.below its 1980 deal to sell Statfjord gas to
the Continent, and even lower than the Norwegians
seemed determined to get six months ago. Such
price flexibility is probably a prerequisite to the
development of Troll's huge reserves. Although the
Dutch initially misread the market and priced
future supplies too high, The Hague submitted a
more competitive offer to the United Kingdom,
indicating a willingness to negotiate further. On the
Continent, the Dutch have offered to provide addi-
tional gas supplies to Italy at the present price. Two
months ago, the Dutch were demanding a higher
price as a premium for being a secure gas supplier,
Given the price flexibility of suppliers, the prospect
of enhancing gas security now rests primarily with
consumers. In gas contract renegotiations sched-
uled to occur this year with the Dutch, consumers
probably will have the opportunity to take addition-
al volumes of Dutch gas beyond contract expiration
dates. Indeed, The Hague has indicated a willing-
ness to offer buyers a 10-year extension of current
contracts, which run into the 1990s, according to
industry sources. Additional Dutch gas supplies
have the potential to partially meet future demand
growth and minimize Soviet sales until the Troll
field can be developed in the mid-to-late 1990s.
Price flexibility on the part of Norway and the
Netherlands, however, may not be enough to at-
tract consumers. Although the Dutch offered addi-
tional gas supplies at competitive prices, Rome
recently opted for Soviet gas and lucrative counter-
trade agreements. As a result of signing for Siberi-
an gas, Rome hopes to make sales of $600-800
million to Moscow by 1990, beginning with the
signing of a $150 million contract for the construc-
tion of an experimental coal slurry pipeline in the
Soviet Union, according to US Embassy reporting.
Thus, even if the Sleipner agreement is approved
and the outlook for Troll development brightens,
the prospect of receiving lucrative Soviet contracts
in return for gas purchases could lure some West
European consumers to purchase additional Siberi-
an gas in the 1990s.
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a36~r
Angola Zambia
Namibia
Lake
Nga2
Botswana
Jwaneng
\ \t%
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22 June 1984-
984 -
Boundary representation is
Boundary
not necessarily authoritative.
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' Lake
Kariba
Economic Activity
\I/I Diamond mine td Tourism
Copper-nickel
mine and mill Beef processing
Coal mine
Cattle corn,
Coal resources sorghum
Soda ash deposit Cattle
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Botswana:
Economic Success Story
Botswana's impressive economic development rec-
ord-one of the best in the Third World-is being
tested by a series of setbacks. Heavily dependent on
the United Kingdom and other foreign donors at
independence in 1966, Botswana has built an
export-based economy and today finances all of its
operating budget and much of its development
spending from its own resources. Per capita nation-
al income has risen from $75 at independence to
more than $900-although the distribution is high-
ly unequal. The economy has good growth pros-
pects, but it remains 'vulnerable to swings in the
diamond market and to disruptions in its close
economic ties to South Africa.
Growth and Vulnerability
The 1970s were years of rapid, export-led economic
growth and of surpluses in the budget and current
accounts. The mining of diamonds, nickel, and
copper, begun in the early 1970s, along with im-
provements in the commercial cattle industry and
the start of beef exports to the European Communi-
ty, boosted real national income by an average of
nearly 15 percent annually during the decade.
Increases in customs receipts and diamond royalties
led a 33-percent average annual rise in government
revenues during the decade. Conservative fiscal
management allowed Gaborone to enjoy budget
surpluses that were applied to development spend-
ing. Foreign investment in mining spurred growth
in the construction industry and accounted for the
bulk of large inflows of private capital that, togeth-
er with export growth of about 30 percent annually,
resulted in foreign payments surpluses.
Since 1979, however, Botswana's narrowly based,
export-led economy has been. jolted by a series of
reverses. These difficulties have included an epi-
demic of hoof and mouth disease that curtailed
beef exports, sharp swings in the international
diamond market that whipsawed Botswana's key
export, and a prolonged slump in the world miner=
als market that threatens the solvency of Botswa-
na's major employer, a nickel and copper mine. In
1982 Botswana experienced the onset of a severe
drought-as yet unabated-that has withered sub=
sistence crops, devastated grazing lands, and
caused substantial reductions in the national cattle
herd. These, together with other weaknesses, en-
sure that periods of severe economic stress will
continue to challenge Gaborone's economic man-
agement.
The Mineral Sector. Diamond mining has been the
springboard for Botswana's economic growth. As'a
result of a mine that opened in 1982, diamond
production has more than doubled and mining has
become Botswana's largest productive sector, ac-
counting for about one-fourth of GDP. Botswana
now ranks just behind South Africa and the USSR
in diamond production.
Diamond sales constitute two-thirds of exports but
have been subject to volatile world demand. During
the speculative diamond boom of 1979-80, for
example, the value of diamond exports nearly
tripled. In 1981, however, slumping world de-
mand-especially for the high-quality gemstones
that account for over one-third of the diamonds
produced in Botswana-caused sales to fall by 40
percent, resulting in the first current account defi-
cit in a decade.
Botswana's diamond mines are operated by a sub-
sidiary of De Beers, the South African diamond
giant, and are marketed by a De Beers-controlled
cartel-the Central Selling Organization (CSO)-
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Real GDP Growth, 1978-84a
Percent
Balance of Payments, 1978-83
Million US $
-100 1978 79 80 81 82 83
GDP by Sector, 1982183b
Percent
transportation
Manufacturing
Agriculture
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22 June 1984
Commerce,
finance, services
Inflation Rate, 1979-83
Percent
Production of Principal Food Crops, 1980-84d
Thousand tons
a Year ending 30 June. Based on consumer price deflator., In comparison,
the use of a consumer price deflator to reflect the real purchasing power of
Botswana's export-oriented output results in a decline in real GDP for both
1981 and 1982, when the Botswana pula experienced substantial
devaluation.
b Estimated.
Consumer price index.
d Year ending 30 June.
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in London. Contractual arrangements with De
Beers guarantee that a percentage quota of Botswa-
na's annual output-based on Botswana's share of
the total volume supplied to the CSO worldwide-
will be purchased.
The collapse of the diamond market in 1981,
however, compelled Gaborone to add to its dia-
mond stockpile, now valued at more than $500
million, equivalent to about half of Botswana's
national income. Despite record export sales last
year, about one-third of output was stockpiled.
Botswana's only other significant mineral produc-
tion is nickel-copper matte and a small amount of
coal for domestic use. The nickel mine is owned
jointly by the government, Anglo-American Corpo-
ration of South Africa, and a US firm that.is the
only significant US investor in Botswana. The
complex is considered one of the most technically
efficient in the world)
Although the US partner buys all of the output for
refining in the United States and reexport to
Europe, low world prices have caused repeated
losses and rising debt, according to press reports.
The mine's political importance as a source of
employment, however, has made its continued oper-
ation a government priority. Gaborone has success-
fully pressured its private partners in the venture to
participate in a series of financial bailouts to keep
the mine open.
Prospects for new mineral development are mixed.
Once-promising prospects for an expansion of coal
output for export are now dimming in the face of a
world coal glut. On the other hand, development of
soda ash deposits in northeastern Botswana is set to
begin soon; South Africa is slated to be the major
market, but political tensions between Gaborone
and Pretoria could derail the project
Agriculture. The severe drought-now in its third
year-has aggravated Botswana's chronic food de-
ficiencies. Even under normal conditions Botswana
cannot feed itself. Output before the drought aver-
aged only about one-third of domestic consumption,
and has fallen to about 10 percent of consumption
in each of the last two years. Imports of food-
mostly from South Africa, which treats Botswana
as part of its domestic market for grain-have
increased substantially, as has dependence on inter-
national food relief. We estimate that Botswana
will require well over 100,000 tons of foodgrain
imports in 1984. As many as half of the roughly
1 million population now depend on government
food distribution, according to press and US Em-
bassy reports.
The cattle industry, the country's second-largest
foreign exchange earner, has also been afflicted by
the drought. The industry has long been a major
factor in economic growth and is still the main
economic activity for about 70 percent of the
populace. With 2.8 million head of cattle, the
country has the highest cattle-to-people ratio in the
world. Commercial ranching has become more
popular in recent years, and the nearly 400 large
ranchers now own 500,000 head, according to the
World Bank.
Beef processing is Botswana's main manufacturing
activity and the principal employer in the manufac-
turing sector. Beef exports-primarily to South
Africa and to the United Kingdom and other
members of the EC-were just recovering from the
economically devastating bouts of hoof and mouth
disease when the drought hit. Although a high
slaughter rate, has prevented some near-term eco-
nomic losses, the national herd may have fallen by
as much as 800,000 head since 1981. Moreover, the
UN Food and Agriculture Organization estimates
that an additional 800,000 or more head could die
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Economic Ties With South Africa
Botswana's economy is linked closely to that of
South Africa. Most of its foreign trade depends on
South African roads and railways. We estimate
that 40,000 migrant laborers from Botswana work
in South Africa, nearly half legally in South
Africa's mines and most of the others unofficially
in agriculture. These jobs help relieve Botswana's
unemployment, boost incomes, and provide foreign
exchange.
Botswana is dependent on South African corporate
investment. One promising project requiring Pre-
toria's cooperation involves the development of
large soda ash deposits for export to South Africa.
British Petroleum has begun the initial phases of
an investment of over $300 million, but Pretoria,
which is a potential partner in the construction of
associated transport systems, has attempted to
link its involvement to Botswana's willingness to
sign a formal security accord. Gaborone's determi-
nation to proceed with the project and Pretoria's
interest in obtaining a low-cost source of soda ash
for its glass, aluminum, and paper industries sug-
gest the two countries will find a compromise.
Botswana's membership, along with Lesotho and
Swaziland, in the South African-sponsored South-
ern African Customs Union (SACU) has provided
Pretoria with another important source of lever-
age. South Africa collects duties on the imports
destined for these landlocked countries and then
transfers the revenues based on reported SACU
imports. Pretoria, however, also provides a hidden
form of aid by allowing the members to overstate
their imports, a practice probably intended origi-
nally as a reward for formal cooperation in the
union with South Africa. According to the US
Embassy in Pretoria, however, South African offi-
cials have recently hinted that such supplements
will be reduced in September unless current mem-
bers accept South Africa's jour so-called independ-
ent tribal homelands as new and equal members of
SACU. Although we believe Botswana would
strongly resist such a demand, SACU receipts
account for over 30 percent of its government
revenues, and Gaborone would feel the pinch if
Pretoria decided to reduce these payments.
Like other states in the region, Botswana has
sought, unsuccessfully, to loosen its economic ties
to South Africa. Botswana is a founding member
of the Southern African Development Coordination
Conference (SADCC), a nine-nation regional group
formed in 1980 partly to promote regional develop-
ment but also to alleviate economic dependence on
South Africa. The SADCC secretariat is located in
Gaborone. (Other SADCC members are Angola,
Lesotho, Malawi, Mozambique, Swaziland, Tan-
zania, Zambia, and Zimbabwe.) Despite support
from Western donors, however, the SADCC has
made little progress. Its efforts have been ham-
pered, in part, by South African-backed insurgents
in Angola and Mozambique who have disrupted
transport routes and precluded the building of new
transportation links that are vital to developing
alternatives to South Africa.
from the drought before the rainy season starts in
October.
Despite recent difficulties, the Botswana economy
is demonstrating resilience. Diamond sales were up
sharply early last year, spurred largely by higher
Secret
22 June 1984
production but also by some improvement in the
world market. Diamonds last year earned a record
$416 million in foreign exchange, double the 1982
level, and accounted for two-thirds of total exports,
according to press reports. Beef sales to the EC,
which absorbs half of Botswana's beef exports, also
are strong; these sales last year nearly filled the
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quota Botswana is allowed under the Lome Con-
vention.'
As a result, foreign exchange reserves rose dramati-
cally-they now cover more than six months of
imports-and foreign payments achieved a record
surplus last year, according to press reports.
Botswana's external debt remains low, with debt
servicing absorbing less than 6 percent of export
earnings.
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The domestic economy stabilized during the last
year, despite the continuing drought. Inflation
eased to 10 percent in 1983 from its peak of 16
percent in 1981. The government continues to
maintain strict control over the budget and projects
a surplus for the current fiscal year that started on
1 April.
Botswana faces a critical need to generate nonagri-
cultural jobs for its rapidly growing labor force.
The unemployment rate probably exceeded 12 per-
cent last year, hitting young people hardest and
creating potentially fertile ground for political un-
rest. Out of an annual increase in the labor force of
12,000 to 13,000, 7,000 to 8,000 became employed,
according to press reports. Although jobs in the
modern sector grew by 10 percent annually during
the 1970s, less than 30 percent of total employment
in Botswana is in the modern sector. The rest is in
subsistence agriculture and traditional herding sec-
tors, which are not expected to have rapid growth.
' Under the Lome Convention, exports from the former colonies of
EC members are accorded duty-free access to the European
market. The United Kindgom's entry to .the EC gave Botswana
such access but subject to nontariffbarriers that include a negotia-
ble quota on volume and price restrictions designed to prevent
dumping on the European market.
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