INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707360001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: October 19, 2010
• Sequence Number: 1
• Publication Date: January 18, 1985
• Content Type: REPORT

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Directorate of t
Intelligence
International
Economic & Energy
Weekly
18 January 1985
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DI IEEW 85-003
18 January 1985
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3 Briefs Energy
International Finance
Global and Regional Developments
iii Synopsis
1 / Perspective-Eastern Europe: Growing Diversity in Economic Policy
1 I /Poland: Mixed Performance Prospects for 1985
17 , lungary's 1985 Plan: The End to Austerity
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23 /Yugoslavia: Financial Recovery Remains Elusive
29 East Germany: A Case of Successful Adjustment
35
Weekly
International
Economic & Energy
18 January 1985
Romania: On a Financial Tightrope
Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligent
Secret
18 January 1985
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Eastern Europe: Growing Diversity in Economic Policy
Unlike in the past two decades, the East European countries in the 1980s are
pursuing divergent economic strategies to cope with their varied economic
situation. Moscow has tolerated this diversity in economic policy making as
long as party control remains unchallenged. 25X1
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11 Poland: Mixed Performance Prospects for 1985 25X1
Warsaw is still reluctant to take the steps needed to deal with the basic causes
of its economic problems.
17 Hungary's 1985 Plan: The End to Austerity
After six years of economic austerity designed to stablilize Budapest's foreign
payments situation, the 1985 plan calls for increased domestic demand and no
further cuts in real wages or investment.
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23 Yugoslavia: Financial Recovery Remains Elusive 25X1
Despite the optimistic forecast Yugoslavia has given its creditors, we believe
debt servicing constraints will limit growth for the rest of the decade. 25X1
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29 East Germany: A Case of Successful Adjustment 25X1
Following several years of painful austerity and major foreign trade adjust- 25X1
ments, East German economic growth rebounded in 1983-84 making East
Germany the standout economic performer in Eastern Europe.
Ceausescu's strategy for continued
without help from the IMF or foreig
port prospects and worsening domes
reductions in R
n creditors wil
tic strains fro
omania's foreign debt
l be undermined by poor ex-
m the required austerity.
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DI IEEW 85-003
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International
Economic & Ener
Weekly ~~
18 January 1985
Perspective. Eastern-Europe:. Growing Diversity in EconomicPolicy
Unlike in the past two decades, the East European countries in the 1980s are
pursuing divergent economic strategies to cope with their varied economic
situations. Differences in policy emerged as a result of the debt crisis triggered
by Poland in 1981, which-combined with reduced Soviet subsidies-forced
most of Eastern Europe into major adjustment programs. Economic relations
with the West, differences'in domestic political pressures, and contrasting
leadership and management styles have shaped each country's policy response.
Western assistance=debt relief and new credits-has been a key ingredient in
easing the financial problems of these countries. Recently, however, some
regimes either have chosen or have been forced to reduce economic reliance on
the West while others seem ready to expand trade:
? Romania has made the sharpest reversal in its policy on economic relations
with the West. Bucharest secured debt relief and IMF credits in 1982-83,
but President Ceausescu has banned new'borrowing, denounced the IMF,
and is pursuing a policy of paying the debt off through hard currency trade
surpluses wrung from an already severely strained economy.
? Poland anticipates that IMF membership and a new rescheduling agreement
with Western governments will help it regain access to Western credits.
Warsaw's mountain of debt and continuing political problems, however,
make it a poor credit risk, and it probably will have to manage with reduced
levels of Western goods.
? Yugoslavia has received substantial Western debt relief, new credits, and
IMF assistance and is counting on even more generous rescheduling terms
from Western banks and governments. Belgrade's reputation for poor
economic management, however, is likely to frustrate its inflated
expectations.
? Czechoslovakia, although unscathed by the region's financial crisis, will
continue to limit Western imports and keep reducing its modest hard
currency debt.
1 Secret
DI IEEW 85-003
18 January 1985
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? East Germany and Hungary have avoided embarrassing reschedulings. For
East Germany, ,the large West: German; financial umbrella has been
important; for Hungary, a timely decision. to join the IMF has combined
with a reputation for good management to reassure bankers. Recent large
syndicated loans have demonstrated the improved credit rating of both
countries.
Politica_l,forc..es-have,helped:Ishape adjustment policies as well as approaches: to
economic reform. The Jaruzelski regime has been,most sensitive to public
reactions to austerity. Although it took advantage of martial law to boost
prices,sharply in 1.982, it is now allowing for increases in real income.
Hungary, and.to a lesser extent East Germany and Yugoslavia, have also
fashioned adjustment policies that protect living standards. For these coun-
tries, :however, the resulting burden on investment could hurt their ability to
provide enough growth to satisfy future consumer aspirations. With Ceausescu
apparently confident. of his ability to maintain control, Romania has not
hesitated to implement increasingly severe austerity measures.
Although resistance by entrenched bureaucracies is the main political obstacle
to market-type reforms throughout the region, the strength of this opposition
varies :widely. Hungary's preference for decentralization and market-type
forces appears to rest on recognition that further. economic progress depends on
continuing reliance on trade with the West, enhanced export competitiveness,
and systemic changes to enhance efficiency. East Germany, on the other hand,
has successfully. improved productivity and resource allocation by refinements
in its:itightly controlled but well-managed system. Poland gives lipservice to
self-management and other reforms but remains unwilling to take major steps.
Romania shows no interest in decentralization, and its Stalinist economic
policies reflect Ceausescu's autocratic and repressive style of leadership. In
contrast, Yugoslavia suffers. from excessive decentralization that prevents the
collective leadership from implementing the economic reforms needed to
attack. the root causes of financial problems.
Moscow seems willing to tolerate some diversity in economic policy making as
long as party control remains unchallenged. The Soviets,
approved Hungary's reform efforts provided that Budapest meets
its EM_A obligations. The USSR apparently recognizes that the economic
strength of the Warsaw Pact is enhanced by relations with the West as well as
limited. experimentation with reforms. The Soviets play a strong cautionary
role; however, particularly when Western contacts have political overtones that
run counter to, or get ahead of, Soviet East-West policy. Moreover, Moscow's
renewed efforts to foster. . more. joint planning. within CEMA could eventually
narrow; the bounds for market-oriented reforms.'and trade relations with the
West.
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18 January 1985
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North Sea
Oil Prices
Statoil and BNOC-the
approximate $28; January prices could fall to $27 per barrel.
cember probably will drop about $4 per barrel, from the last official -price and
Norwegian and British national oil companies-have agreed with oil buyers to
set purchase prices in line with spot market levels.Norwegian oil prices for De=
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A change in official North ea prices has
Eastern Europe
Energy Shortages
been expected since December, but Oslo and London have hesitated to
announce a new oil price mechanism because OPEC threatened that a linkage
to spot market prices could cause an oil price war. The new North Sea pricing
poses a dilemma for OPEC members-especially Nigeria. Lagos has vowed to
match North Sea prices
Harsh weather since the beginning of the year has led to widespread energy
shortages and production problems in Eastern Europe. The worst problems are
in Romania, where shortages have been reported since early November.
Bucharest has ordered around-the-clock coal mining, cuts in household
electricity use, strict limits on power consumption in factories, and a ban on
the use of private cars. To cut peak power demand, work shifts are to be
shorter but will be increased from six to seven days a week in most factories.
Interruptions in coal deliveries in East Germany led a major power plant to
shut down temporarily and caused several factories to close in the past two
weeks. Coal deliveries have slowed in Czechoslovakia, and gas supplies to
industrial users have been cut by more than 10 percent. In Yugoslavia, cold
weather has sent electricity consumption soaring and disrupted coal, heating
oil, and gas supplies. Officials are negotiating with large industrial users to
lower consumption and have appealed to the.populace to cut back. Sporadic
electric power cuts and heating reductions have been reported in Bulgaria, and
officials have implemented measures to conserve energy. East European
countries have faced similar difficulties in the past, and most should be able to
avoid major disruptions unless temperatures remain abnormally low. The
difficulties in Romania, however, are likely to continue beyond the winter.
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18 January 1985
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Ira ian Oil
Workers' Strikes
St lemate
it difficult to import more refined oil to offset losses from the strike.
A high-level Iranian bank official told US officials in Abu Dhabi that strikes
by oil refinery workers in Shiraz and Tabriz are contributing to serious
shortages of home heating oil in Tehran and other northern Iranian cities. The
affected refineries produce nearly 15 percent of Iran's refined petroleum
products. Because Iran experiences shortages of heating oil every winter, the
oil workers probably timed their strike to achieve maximum leverage. The
government's problem is compounded by a lack of hard currency, which makes
International Finance
President Belaunde is trying to break the stalemate with foreign lenders, but
still refuses, for political reasons, to submit to an IMF program.
trade credits are drying up, according to a US Embassy source. We
judge that Belaunde probably will opt for patchwork financial measures until
he leaves office in July. The government has increased currency devaluations,
approved gradual hikes in gasoline prices, and requested consultations with the
Fund. Such moves probably will prevent a declaration of default but leave a
legacy of tough financial problems for Belaunde's successor.
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Dominican Republic's
,/Troubled IMF
Z Negotiations
Portuguese
Discussions
With-the IMF
as much as. $600 million.
Squabbling within the ruling party is delaying an agreement with the IMF and
undermining President Jorge Blanco's efforts to right the economy. The
Senate has unanimously rejected the administration's tax plan designed to
obtain an IMF standby loan. The IMF has suggested further substantial
boosts in petroleum and electricity rates as an alternative to tax increases.
Meanwhile, the country's financial position continues to deteriorate. Official
reserves in late 1984 were-equivalent to only two to four weeks' worth of
imports. Despite the recent rescheduling of petroleum-related debt to Venezu-
ela and a US grant of $50 million, unpaid debt still exceeds official reserves by
economy running.
Jorge Blanco probably remains committed to reaching an accord with the
IMF, despite the recent setback. Continued delays in implementing an IMF
program not only would jeopardize the accord itself but also postpone
renegotiation of external debts and the initiation of new foreign funding. Some
international creditors, increasingly impatient because they have not even
received interest payments from the Dominican Republic since November, are
hinting at a cutoff of new funds. Without further debt relief, the country may
not have enough cash in the coming weeks to cover essential debt payments-
for oil, in particular-or enough imports of producer goods to keep the
confidence.
The IMF has granted Lisbon a waiver on technical grounds for exceeding its
31 July short-term debt target. According to Embassy reporting, Portuguese
officials will seek a waiver for a small overrun of agreed domestic credit limits
for September, but not for a larger overshooting of the same ceiling in
December. The Soares government would also like to have a Fund team return
for Article IV consultations and for a review of the standby program in
January if the IMF Board leans toward granting the waiver. Portugal plans to
tap the commercial market for a $350 million syndicated loan later this month
or early in February, and the requests reflect Lisbon's desire to retain bankers'
Global and Regional Developments
Japanese-Soviet Trade Annual trade consultations between Japan and the USSR, which were
Talks To Resume suspended in 1982, are to resume in Tokyo on 22 and 23 January, according to
the US Embassy in Tokyo.
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18 January 1985
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rt Limits has agreed to a small increase in steel imports by the EC countries. For most of:
these countries import tonnage in 1985 will be limited to 90 percent of the
f h 1' ' f 87 5 Th h h 1 f
1980 1 1
t
rt
t
rt
Mixed West German
Economic Performance
eve up rom
e previous im
o . percen
-
. V, ig er im
or
these voluntary export restraint accords partly reflects the Commission's belief
that EC market conditions are improving. The Commission now has concluded
bilateral arrangements covering.1985 steel imports from Bulgaria, Hungary,
Czechoslovakia, Poland, South Africa, South Korea, Japan, Australia, Aus-
tria, Sweden, and Finland. Negotiations are continuing with Spain, Norway,
Romania, and Brazil. Such arrangements cover approximately 80 percent of
EC steel imports. Only European Free Trade Association (EFTA) countries-
which have a free trade agreement with the EC-do not have to negotiate spe-
cific quotas, but must pledge to adjust their steel exports based on conditions in
the EC's internal market.
National Developments
Developed Countries
leveled off.
A record trade surplus, low inflation, and relatively healthy 2.6 percent real
GNP growth were the major pluses in West German economic performance
last year. At 2.4 percent, inflation was near the bottom among OECD
countries. Exports and GNP grew despite the disruptive metalworkers' strike
last spring. Nominal export growth of 14 percent and 12-percent import
growth yielded an $18 billion trade surplus. About one-fourth of that came in
the US market, as West Germany's US sales soared by an.estimated 46
percent. The bad news was unemployment, which averaged 2.26 million, or 9.1
percent, although the seemingly inexorable growth of the last four years has
/ Japan's Trade Surplus Japan's trade surplus reached. a_record $33.7 billion in 1984, up sharply from
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18 January 1985
$20.5 billion in 1983. Exports-led by office equipment, video tape recorders,
semiconductors, and cars-totaled a record $170.1 billion. Lower crude oil
import prices helped hold imports at $136.5 billion-up 8 percent over last
year but still short of 198 l's record level of $143.3 billion. Japan's surplus with
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the United States hit a record $33.1 billion. as exports jumped 40 percent to
$59.4 billion, and purchases from the United States increased by only 9
percent. Sales to the United States accounted for.. 35.2 percent of Japan's total
exports in 1984, compared with 29.1 percent in.1983.
South African Workers Black labor union officials are threatening a national strike of up to 1 million
Threaten Strike ' . workers to protest actions of the government-owned synthetic fuel company
the end of the 30-day conciliation period required before a legal strike.
that SASOL and union representatives are likely-to reach a compromise before
(SASOL). SASOL fired 90 percent of its black workers-some 5,000-for
joining a two-day general strike last November. The company ,has reinstated
more than 1,500 of those dismissed and has promised to consider rehiring
another 2,500, but union leaders demand 95-percent reinstatement. We believe
Less Developed Countries
Mexico Moves To V Mexico probably will keep tight restrictions on foreign investment, despite
R gulate Foreign rising government concern that foreign businessmen are refusing to put money
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P oblems in
Nicaragua's /
Coffee Harvest
Even
though the US Embassy suggests that some Mexican o s are pusning for
a compromise, we believe that strong domestic opposition to foreign competi-
tion will reduce the President's willingness to be flexible.
Nicaraguan coffee exports are likely to be only half the official target of about
$160 million. only 10
percent of beans were picked during the first half of the harvest season. The in-
surgents have disrupted operations at government plantations, and critical
labor shortages are holding up harvests at other farms. The shortfall will
aggravate financial difficulties because Managua has already spent revenue
from the presold harvest and is likely to default. on delivery commitments.
Major Cuban Aid
Project in
Nicaragua .~,
Nicaragua last week dedicated the new Cuban-built Timal sugar, refinery,
Havana's largest single economic aid.project in the Third World.
the plant is not scheduled to be fully operational until 1987.
- 800 About Cubans have worked on the project over the past two years. The
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need for Cuba to purchase sugar on the world market.
;showcase project underscores Havana's commitment to Nicaragua as well as
being a subject of Cuban pride: Timal incorpor.ates:.the most financing-a loan
equivalent to.about $50 million--ever, provided by Havana for a foreign I
..project. Cuba may buy the mill's
output to help meet its export contracts with the East Europeans, reducing the
~Ilanese- The Lebanese Cabinet held a. special session on the economy last Saturday, but
conomic. Moves. failed to take effective action to correct the deteriorating situation. The
government revenue, thereby increasing the budget deficit.
Cabinet appointed a new Governor of the Central Bank, Edmond Main, an ac-
ademic with no economic experience, and four .vice governors, a Druze, a Shia,
a Sunni, and a Catholic-politically correct but with no known financial
experience..In addition; two committees were set up to seek solutions for
Lebanon's economic problems. The only other action taken was to institute a
special exchange rate for customs valuation on certain basic imports. The rate,
which does not cover luxury,items,automobiles; and products competing with
local production, will slightly offset the inflationary impact of the falling
pound. It will,: however, also reduce customs duties, the major source of
Pakistan Implements The first stage. of Pakistan's Islamic banking system is now in effect. As of 1
Islamic Banking . . January, all financing -by banks to the government, public-sector corporations,
v
.and joint-stock companies must be on Islamic-that is, noninterest-terms.
This first stage probably will have little effect on the economy because we
believe most transactions will involve. government entities that will attempt to
assure adequate rates of return without calling it "interest." Two other phases
scheduled to be in effect by 1 July will require Islamic terms for all loans to
private firms and individuals and will prohibit interest on bank deposits.
New Pertamina
Pyesident Shows.
is Clout
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18 January 1985,
Islamization of the economy will become a political issue.
banks incur large loan losses or, if large-scale fraud becomes evident,
If Pakistani
The. new president of Indonesia's state oil company, Abdul Rachman Ramly,
has quashed a. refining and marketing deal that, benefited a son of President
Soeharto. According to well-placed Embassy sources, Bambang Soeharto's
Singapore trading firm had been purchasing 100,000 b/d of Indonesian crude
oil at the government selling price under an arrangement signed last Septem-
ber. The company reportedly marketed 20,000 b/d in third markets and
refined the remainder. Half of the refined products reportedly were sold in
Japan, where they undercut Pertamina's own pricing strategy, and half were
resold to Pertamina at.a premium sufficient to provide the trading firm a profit
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of $1.35 to $1.85 per barrel. When Ramly became aware of the financial
implications, he enlisted the help of a senior government official to inform the
President, who then terminated the arrangement. Ramly's success in ending
the deal reflects his determination to improve Pertamina's financial manage-
ment even at the risk of antagonizing Soeharto family members.
ebels Reduce Reduce Chad's
This year's cotton crop-Chad's major export earner-is predicted to drop to
110,000 metric tons from last year's near-record 160,000 tons. This is within
Chad's normal annual production range of 85,000 to 174,000 tons. Southern
dissidents carried out a fairly successful campaign to disrupt planting by
burning seed, uprooting plants, and driving peasants from their fields. The
rebels now are sporadically attacking trucks transporting the cotton and
impeding market activity to deny the cash-strapped government hard currency
earnings.
China Trying To Lure Xiamen, one of the four special economic zones opened to increase foreign
/Taiwanese Investment investment, is trying to lure investment by firms based in Taiwan. According
to a press report, Xiamen has offered special tax breaks and other advantages
to businesses or joint ventures started by Taiwan interests and scheduled to op-
erate for 10 years or longer. These enticements-more preferential than those
offered other foreign firms-come at a time when Taiwan is similarly trying to
lure businesses away from Hong Kong, which will come under Chinese
jurisdiction in 1997. It is unlikely that the Taiwan Government would approve
projects involving direct business ties with the mainland, although some
Taiwan businessmen may invest through indirect channels.
Vietnamese Food
Pro ction Stagnates
Adverse weather held foodgrain production in 1984 to 17 million metric tons-
1 million tons below the government's target, according to preliminary official
statistics. Moreover, production of subsidiary crops such as corn and potatoes
declined sharply for the third straight year. The poor harvest, combined with
population growth of 2.4 percent annually, puts an end to Hanoi's claim of
self-sufficiency in food. Vietnam imported 150,000 to 200,000 tons of rice in
1984, and we expect substantial purchases again this year. Hanoi has already
quietly requested food aid from the European Community and international
organizations but will probably be turned down, according to diplomatic
reporting.
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'Poland: Mixed Performance
Prospects for 1985
Warsaw is still reluctant to take the steps needed to
deal with the basic causes of its longstanding
economic problems. Political constraints will proba-
bly force the regime to once again bow to workers'
demands for wage increases and higher priority for
consumption. In other areas, little progress is being
made in implementing reforms needed to stream-
line management, enhance efficiency, and intro-
duce more effective tools of macroeconomic policy.
In general, Warsaw's 1985 planned growth of
GNP, industrial output, and agricultural produc-
tion appears achievable, but the foreign payments
targets are unrealistic. Almost $18 billion, includ-
ing nearly $14 billion in arrears, comes due this
year, but Warsaw has offered:to pay only $3.8
billion. In order to cover even the $3.8 billion, the
regime assumes new credits from Western govern-
ments and an initial drawing from the IMF. We
project that, even under the unlikely case of ideal
domestic conditions and 10-percent cuts in con-
sumption, investment, and government spending,
hard currency imports would not fall enough to
meet Poland's payments goal.
Some Improvement but Problems Multiply
Polish economic growth remained positive in 1984
for the second successive year. Industrial produc-
tion grew 4 percent although output in the coal and
chemical sectors stagnated. We estimate that agri-
cultural output rose by about 7 percent because of a
near-record grain harvest.'Nonetheless,'GNP still
is 2 percent below 1978 levels and industrial pro-
duction lags 9.percent: Production quality has
deteriorated, many basic foods continue to be. ra-
tioned, and.shortages of imported raw materials
have held down output.
As in 1983, the: government. last year backed away
from stringent austerity measures. Consumer goods
received priority to curry popular support and to
Poland: Total Payments Million US $
Due Creditors a
show progress in resolving the country's economic
problems. When meat production fell last year, for
example, the regime spent scarce hard currency for
imported meat rather than lower ration levels. In
the first three quarters of the year, the amount of
consumer goods on the market increased about 8
percent. Warsaw kept the inflation rate below the
planned level of 15 percent by raising food prices
less than expected-and limiting price increases of
many consumer goods to 10 percent. As a result,
budget subsidies rose more than 20 percent.
Meanwhile, the government made little effort to
combat excessive wage hikes. Enterprises=receiv-
ing subsidies and tax concessions from the central
government-gave in to workers' pressure to raise
money wages by an average of 20 percent. As a
result,: real wages increased by more than 6 percent
in the first three quarters of 1984 compared with
the previous.year-the highest increase since 1978,
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GNP Growth Agricultural Growth Industrial Production Growth
Percent Percent Percent
6
0
-12
-10 1978 79 80 81 82 83 84 -16 1978 79 80 81 82 83 84 -15 1978 79 80 81 82 83 84
Industrial Production Indexa -1978 Consumer Supply Indexa
Index: November 1976=100 -1981 Index: 1979 IV= 100
-1983
-1984
20
_LLJ
60 J F M A M J J A S 0 N D 70 1978 79 80 81 82 83 8
4 0 1971 75 80 84
Warsaw also failed to keep the lid on investment of work before completion, are likely to be techno-
spending and to shift it toward the export and logically obsolete, and probably will not increase
consumer goods sectors. Investment rose 15 percent production of exports or consumer goods.
during the first three quarters of the year, instead
of the planned 6-percent decline. Much of the
spending went to large, heavy industrial projects
revived in late 1983 after a two-year freeze. Most
of these projects will require at least several years
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18 January 1985
Retail Price Changes
Percent
110 120
The government gave little substance to its reform
rhetoric. It continued to favor detailed central
control. Over 40 percent of industrial inputs remain
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under some form of central administrative controls
despite measures to decentralize decisionmaking.
The authorities continued to subsidize inefficient
firms, probably to avoid throwing workers out of
jobs. Despite a well-publicized conservation pro-
gram, some factories used more energy and raw
materials without incurring any significant penal-
ties.
Poland ran a hard currency trade surplus of $1.2
billion in the first nine months of 1984, about $150
million greater than the same period in 1983,
largely'because imports were held below planned
levels. In real terms, hard currency imports rose 11
percent in constant zlotys (4.5 percent in US dol-
lars), and hard currency exports increased 13 per-
cent in constant zlotys (4.3 percent in US dollars).
Exports'of energy, agricultural, and mineral prod-
ucts rose while exports of machinery and construc-
tion services fell. Despite the increase, export per-
formance was hurt by weak demand for poor-
quality Polish goods. In addition, efforts to encour-
age exports-including the 20-percent devaluation
of 'the zloty against the US dollar-were offset by
domestic inflation and producers' continued prefer-
ence for selling'in the domestic market.
Warsaw's financial strategy continued to focus on
trying to secure generous debt relief. The moratori-
um on payments to Western government- creditors
allowed the Poles to minimize hard currency debt
payments and to boost imports. Although the fi-
nancing requirement for 1984 totaled about $17
billion-over 80 percent consisting of arrears and
payments due government creditors Warsaw re-
paid only about $1.9 billion, mainly to Western
banks. The Polish Government rescheduled on fa-
vorable terms most of its 1984-87 payments to'
private banks-worth $2.1; billion-and has
reached agreement with the Paris Club on resched-
uling-principal and interest due in 1982-84
Poland ran about a $325 million deficit with
CEMA countries in the first nine months of 1984
mainly because of ahead-of-schedule deliveries of
Soviet oil and the slowdown of Polish exports to
Poland: Hard Currency Million US $
Foreign Payments
1984a
1985
Plan
1,300
1,900
Hard currency trade
1,370
1,500
Exports
5,900
6,300
Imports
4,530
4,800
Invisibles, net c
400
500
-470
-100
Borrowed
560
1,850
Guaranteed credits
340
850
Bank credits
220
400
IMF loans
NA
600
a Estimated.
b Payments capacity is the amount.of debt service a creditor can
pay by earning a surplus from trade and other current account
transactions, excluding interest, and obtaining new loans from
creditors.
c Excluding interest.
CEMA countries in the third quarter. Poland's soft
currency debt rose 10 percent in the first six
months of 1984 compared with the same period of
1983 and amounted to the equivalent of $6 billion
by mid-1984. Polish officials have said that the
Soviet part of the debt is covered by long-term low
interest credits. The hard currency debt owed to
the USSR reportedly was rescheduled until after
1986.
Plans Versus Reality
The 1985 economic plan indicates that Warsaw
will continue a muddle-through approach to its
economic problems. Growth targets are moderate
and in, line with recent performance. Plans to
reduce imbalances in the consumer goods market
will require Warsaw to overcome its reluctance to
enforce controls on wages and investment. Subsidy
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from previous period
1983-
1984
First Three
Quarters
1985 a
Plan
National income
(produced)b
6.0
NA
3.0-3.5
Industrial production c
5.8
3.8 d
4.0-4.5
Agricultural
production b
5.1
NA
-0.8-1.4
a Official data.
b Constant zloty prices.
c First eight months of 1984.
d Estimate.
cuts appear unlikely because of the political risks.
The financial strategy remains unchanged, and
Warsaw is. still overoptimistic about its borrowing
ability, and foreign trade performance. There is no
evidence of concrete action on long-overdue re-
forms to promote efficiency, foster more rational
investment decisions, and provide greater incentives
for exports.
Domestic Targets. The 1985 plan calls for continu-
ing moderate-increases in industrial production and
holding agricultural output close to last year's
better-than-average level. Planned industrial
growth is to come from more efficient use of raw
materials and increases in productivity. These have
been unreliable sources of,growth in the past,
however, and are not- likely to be significant factors
this year because of limited investment in more
efficient capital stock in recent years and only
Secret
18 January 1985
marginal improvements in worker incentives., Over-
all .consumer supplies will rise about 4 percent, with
food supplies.up about 2 percent and the amount of
meat rising only. 1.1 percent. The higher,, planned
growth rate in the consumption of nonfood items
indicates that the regime has not yet discovered
how to encourage food production without increas-
ing hard currency imports. Although more funds
have been channeled into agriculture, continuing
shortages of many inputs (especially those depen-
dent on hard currency imports) and a neglected,
infrastructure will limit increases in output, espe-
cially in the absence of good weather.
The government claims it will curb inflation in
1985-by cutting budget subsidies, freezing real
wages, and reducing investment-but shows no
inclination for a determined fight. The regime
cannot lower subsidies and hold prices within the
proposed .12 to 13.percent limit. Moreover, the
government has taken no action to force firms to
keep wage and investment spending in line with the
plan. Firms are likely to continue to cave in to
worker pressure for wage increases ignoring gov-
ernment recommendations that increases be linked
to productivity gains. They have.the funds because
of generous government tax concessions and subsi-
dies and suffer no penalties for ignoring guidelines.
The money supply also will increase if many re-
deem the bonds that were issued to protect the
value of savings when prices rose 100 percent in
1982. Plans to tighten investment credits in 1985
will not ensure reduced spending because. of com-
mitments to ongoing investment projects, which.
will cost more than $12 billion over the next.several
years. High investment levels will increase.pres-
sures to import because investment historically has
required large amounts of imports from both the
West and.CEMA.
External Finances. Warsaw plans to continue its
practice of covering only a small portion of its
financial obligations.. Almost $18 billion, including
nearly $14 billion in arrears to the Paris Club, is
due this year, but Warsaw plans to repay only $3.8
billion. Poland apparently plans not to make signif-
icant payments to Paris Club members and is
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Secret
Poland: Hard Currency Trade, 1970-84
Deficit
Surplus
from 1985 planned levels of consumption, invest-
ment, and government spending-and the best of
domestic circumstances, net hard currency earn-
ings would reach only $2.4 billion. Furthermore,
savings on the hard currency import bill would
diminish as the domestic belt is progressively tight-
ened. For example, the first 2-percent cut in domes-
tic demand would save $325 million in hard curren-
cy imports, but the fifth cut (from an 8-percent cut
to a 10-percent cut) saves only $65 million in hard
currency imports.' The Poles likely realize this and
are unwilling to run the political risks of dramatic
cuts in domestic trade absorption to realize progres-
sively-shrinking gains in the foreign accounts.
0 1970 72 74 76 78 80 82 84
counting on rescheduling its Paris Club debt or
continuing the de facto moratorium.
The Poles, however, will have trouble coming up
with even $3.8 billion that assumes a trade surplus
of $1.5 billion. Such a surplus is possible only under
ideal conditions, including a favorable grain har-
vest, implementation of planned investment cuts
without producing capital stock shortages, and no
further deterioration in the terms of trade. More-
over, because we expect Poland's net earnings from
services and new credits to be closer to $700 million
than the projected $2.3 billion, Warsaw would have
to run a hard currency trade surplus of about $3.1
billion to meet its payments goals.
Our calculations indicate that, even with stringent
austerity measures, the Polish economy could not
generate a trade surplus of $3.1 billion. We esti-
mate that Warsaw's projection of a $1.5 billion
surplus is achievable but believe that $1.3 billion is
more likely under current conditions. Even under
assumptions of drastic austerity-l0-percent cuts
An Optimistic Note
The withdrawal of. US opposition to membership in
the International Monetary Fund has given Poland
hope that it will receive credits from the IMF and
World Bank. If membership is granted in 1985,
Poland would be eligible for $450 million in IMF
credits under limited conditionality. Further money
would not come quickly or easily, however, because
Warsaw would resist, for domestic political rea-
sons, stringent but needed austerity measures that
would likely be proposed by the IMF. Entry into
the IMF, however, could give Poland a slightly
better standing in financial markets.
Although the population accepted a large degree of
austerity in 1982 under martial law, it probably is
expecting greater improvements in living standards
after several years of small increases. The regime,
as in the past, most likely will back down and allow
' These calculations are based on POLGNP, our detailed economic
model of Polish domestic economy-foreign trade interactions. The
savings of hard currency imports decline with each reduction in
domestic activity because a major function of imports is to break
supply bottlenecks. At lower levels of economic activity, there are
fewer supply bottlenecks, fewer imports are needed,-so fewer
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18 January 1985
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a rise in real .wages to satisfy workers. The govern-
ment probably will tolerate much more.. investment
than is. suggested by the plan. This could make
inevitable future adjustments harsher and more
politically difficult. -In any case, sustainable eco-
nomic growth will eventually require major.
changes in the economic system. Given the political
problems facing:the'Jaruzelski regime, however, a
gradualist approach may, be the only feasible alter-
native.
The Jaruzelski regime also realizes that sustained
economic progress requires better ties with the
West to. allow Poland access to the new credits and
IMF membership and to avoid economic stagnation
over the longer term. On balance, Jaruzelski seems
prepared to make some overtures to the West in the
interest of improving economic ties, but he will be
unwilling to pay too steep of a political price and
will be anxious to avoid the appearance of linkage
between any political concessions and economic
benefits.
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Hungary's 1985 Plan:
The End to Austerity
The 1985 plan signals a fundamental change in
Hungarian economic policy. After six years of
economic austerity designed to stabilize Budapest's
foreign payments situation, the 1985 plan calls for
increased domestic demand and no further cuts in
real wages or investment. The plan indicates that
the leadership will rely on economic reform to
increase labor and capital productivity, reduce raw
material and energy consumption, and spur hard
currency export growth. Budapest is also counting
on continued strong support from Western bankers
to help it meet 1985 debt service obligations.
Hungary began the decade in serious financial
trouble. Domestic adjustment measures, coupled
with credit policies to boost hard currency exports
and import restrictions, contributed to a gradual
improvement in all major external accounts by the
end of 1983. The hard currency trade balance
moved gradually from a record deficit of $800
million in 1978 to a surplus of $900 million in 1983.
At the same time, the hard currency current
account improved from a $1.2 billion deficit to a
surplus of $300 million reflecting not only the
decrease in imports but also some growth in invisi-
ble earnings and a decline in net interest payments.
In recent years, Budapest has also relied very
heavily on loans from Western bankers and finan-
cial institutions. A sharp cut in the availability of
short-term credits in early 1982 pushed Hungary to
the brink of financial crisis. _A rescue package
organized by the Bank:for International Settle-
ments (BIS) restored banker confidence, helping
Hungary raise an estimated $1.1 billion in
medium- and long-term credits in 1982 and $1.3
billion in 1983, in addition to loans from the IMF.
After drawdowns of foreign exchange reserves of
$1.3 billion in 1981-82, Budapest rebuilt reserves in
1983 to a level of $1.9 billion, equivalent to almost
six months of hard currency imports. Gross debt at
the end of 1983 stood at $8.3 billion, compared
with a high of $9.1 billion at the end of 1980.
Preliminary Look at 1984
Initial reports show that 1984 economic growth was
a little stronger than planned, 2.0 to 2.5 percent,
because of higher-than-expected industrial and ag-
ricultural output. According to official measures,
industrial production rose 2.5 to 3.0 percent, due
particularly to healthy boosts in the chemical, light,
and food industries. At the same time, the agricul-
tural sector outstripped growth targets with a grain
harvest of over 15 million tons-slightly exceeding
the bumper crop of 1982, according to official
estimates.
Budapest used a combination of tight credit, re-
straints on government spending, and wage and
price regulations to keep domestic. demand within
acceptable limits. Real gross fixed investment fell
for the fifth consecutive year since 1979, although
at a slower rate than originally planned. Average
per capita consumption likewise registered only a
slightly higher gain than planned, although the
income gap between those with private-sector earn-
ings and those solely dependent on a state wage
widened further and contributed to social tension.
As of December 1984, high-level Hungarian bank-
ing officials were still predicting a hard currency
current account surplus of $300-400 million for the
year, despite a disappointing trade performance in
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1985
Plan
Domestic utilization
6.2
10.0
-5.8
-1.7
0.7
- 1.1
-2.7
1.0-2.0 .
NA
1.0-1.5
Real gross fixed investment
13.0.
4.9
1.0
-5.8
-5.1
-2.2
'-3.3
7.0-8.0
NA a
0
Real per capita consumption
4.1
3.3
1.9
0.6
2.6
1.3
0.5
0-0.5
1.0
.1.01.5
Industrial production
6.6
4.9
3.0
-2.1
2.8
2.4
0.7
1.5-2.4
2.5-3.0
3.0
Construction industry production
6.4
3.7
0.8
-3.0
-0.2
0.5
-2.7
-2.0-3.0
NA
1.0-2.0
Agricultural production
10.3
2.0
-1.1
4.3
2.0
7.3
-.3.2
0-1.0 b
5.0
1.0.
Real per capita income
4.9 :
2.9
-0.2
0.7
2.9
0.9
0.9
0
1.0
1.5-2.0
Real average wages
3.8
3.1
-1.7
-1.6
1.1
-0.7
-3.1
-2.5
-2.5
0
Consumer price index -
3:9
4.6
8.9
9.2
4.6
6.8
-7.4
- 7.0-8.0
8.5
7.0
a Publishedresults on investment for 1984 have thus far been
vague; they indicate that the volume fell somewhat but exceeded
the planned amount.
b Compared with the buinper'crop of 1982.
the first three quarters of the year.
Hungary's exports once again suf-
fered worsening terms of trade with a drop of 25 to
30 percent in the price of meat exports to the West
and a fall of 6 percent in machinery. prices. In
recent years, however, Budapest has achieved as
much as 50: percent of the- year's trade surplus in
the last quarter and- probably .did so again. The
current account -also benefited from a healthy dose .
of tourism receipts and perhaps from slightly lower
interest rates on external debt.
Western lenders responded enthusiastically. to Bu-
dapest's requests in.1984, extending about $1.6
billion, excluding short-term borrowing. -Major-
loans included:
? A $450 million IMF standby facility and World
Bank project loans' totaling $200 million. -
? A-$2-10 million consortium loan from US, Japa-
nese, Arab, and West European banks signed in
April.
? A World Bank cofinancing package providing
$487 million to support industrial export develop-
ment and energy modernization.
? A $300 million loan signed in December with,a
group of European, Japanese, and US banks.
At the end of September 1984, Budapest's foreign
exchange .reserves stood at a very comfortable $2.1
billion, compared with $1 billion at the end of the,
third quarter of 1983.
This year's plan indicates a new focus for Hungar-
ian economic policy. In recent public addresses,
economic policy makers-including Politburo
member Ferenc Havasi and Planning Minister
Lajos Faluvegi-have indicated that Hungary has
successfully dealt with its.external financial.prob-
lems and =that the austerity. of the past. several years
has exhausted all the country's material.and-"emo-
tional" reserves. These?statements are supported, by
the 1985 .plan targets, which allow for the first
small increase in domestic, demand since 1981. and
call for a modest increase in economic growth. The
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Hungary: Selected Hard Currency
Financial Indicators
Net debt d .
5;154
5,910
6,532
6,666
6,415
6,347 .
5,622
Trade balance e
-782
-167
276
445
766
878 .
1,078
Current account balance
-1,242
-826
-370
-727
-92
298
400
s Projected.
b Includes gold holdings valued by Hungary at $126 per ounce in
1978 and $226 per ounce thereafter.
c At the end of September.
d Gross debt minus reserves.
Trade data are on a payments basis.
regime is concerned that five years of consecutive
cuts in investment have damaged the future techno-
logical development of certain industries and post-
poned improvements in infrastructure. Budapest
has targeted investment to remain at last year's
level, or grow slightly if resources permit. At the
same time, the leadership is anxious to rekindle
popular support, which depends so critically on
improvements in the standard of living, by allowing
further growth of 1 to 1.5 percent in real per capita
consumption.
Financing Strategy
Budapest's policy may lead to an important change
in its external financing strategy this year as well.
Following-two. years of relative success with IMF-
supported programs, the Hungarians may not sign
a new standby credit facility with the Fund for
1985. The. US Embassy reported._that, negotiations,
with the Fund for a$200-300 million, loan broke off
in late 1984. Hungarian bankers contend that, after
viewing Budapest's improved financial picture, the
IMF staff felt they would have. difficulty convinc- .
ing the Fund's management of the need for another
standby., The IMF had indicated:-it might arrange.a
small standby loan.provided Budapest.was willing
to implement structural reforms and adjustment
measures beyond those it was already contemplat-
ing. The standby could only be drawn on in event of
extreme need. We believe that Budapest found the
IMF's terms unattractive given the limited, pros-
pects for. new credits. The Hungarians, neverthe-
less, anxious to maintain favorable relations, have
apparently agreed to continue to provide the IMF
with all the performance data that would normally
be provided under a standby. An IMF mission will
return to Budapest later in the year for further
discussions on a standby program.
We estimate that Budapest needs to borrow a total
of $1.5-2.0 billion from Western credit markets to
meet scheduled debt service payments of roughly
$2.3 billion this year. Barring uncontrolled growth
in hard currency imports, a crop failure, or a
sudden reversal in their ability to borrow, the
Hungarians should be able to manage these obliga-
tions. The reaction of the Western :banking commu-
nity to the possible lack of an IMF facility will be a
crucial factor in Hungary's, borrowing success dur-
ing the year. Remarks in the Western press by
National.Bank official Janos Fekete stress that the
absence of an IMF program attests to-the financial
health of the Hungarian, economy and should there-
fore strengthen the country's credit rating. More.
skeptical bankers,. however, may. feel less secure in
extending new.loans,and,,at the very.least, will
subject: Budapest's accounts .to. more rigorous scru-
tiny;and questioning.
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Hungary: Financing Requirements
and Sources, 1980-84 a
5,004
4;236
3,047
3,358
-727
-92
298
400
276
445
766
878
1,078
4,863
4,877
4,876
4,848
4,994
4,432
4,110
3,970
3,916
-1,100
-976
-662
-671
3,347
2,848
1,764
2,123
104
192
65
100
4,816
4,310
3,141
3,402
4,291
3,577
3,751
3,602
Medium and long term
1,605
1443
1,068
1,276
1,552
2,848
1,764
2,123
1,600
0
510
0
0
a Trade data are on a payments basis.
b Projected.
c Includes changes in gold holdings.
Wary that further cuts in investment will harm
future economic development and fearful of the
political reaction to prolonged efforts-to hold down
living standards, the regime has placed its bet for
economic growth, and stability on economic reform.
During 1985, Budapest will begin implementing
many of the measures passed at the April 1984
party-plenum. The new reforms appear to be
economically sound and promise to move-the econo-
my in a market-oriented -direction. They.affect all
aspects of economic management, including wage
and price deregulation,' income tax reform, worker
participation in factory management, private enter-
prise experiments, bank decentralization; and re-
organization or dissolution of unprofitable firms.
If the reforms are to have the desired impact,
particularly in the short or medium term, Budapest
will have to enforce them strictly. It will have to
withstand grumbling from industrial. workers, trade
union officials, insecure enterprise managers, and
other groups, who will suffer from the reforms.
Moreover, it will have to defend its more radical
steps to Moscow and its other less reform-minded
East European. neighbors.
Hungary Remains Vulnerable
Regardless of Budapest's skill in managing its
problems;and improving its economic system, the
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Secret
Hungarian economy will remain extremely vulner-
able to external shocks and will continue to depend
on support from both East and West. Its ability to
expand hard currency exports, for example, will
rest to a large extent on the strength of Western
recovery, trends in world prices for its export goods,
and Budapest's ability to compete on world markets
with many of the LDCs and other East European
countries. Like all debtor countries, Hungary is
also sensitive to changes in the international lend-
ing climate, interest rates, and world energy prices.
Moreover, the Hungarians remain at the mercy of
Soviet generosity and will be facing Moscow's
demands for more and better quality exports in
exchange for vital raw materials and energy sup-
plies.
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Secret
Yugoslavia: Financial Recovery
Remains Elusive
Despite the. optimistic forecast. Yugoslavia has giv-
en its creditors, we believe debt servicing con-
straints will limit growth for the rest of the decade.
Buoyed by improved export performance and cur-
rent account surpluses in 1983-84, Belgrade be-
lieves that it can revive economic growth while
reducing its debt through 1990. Yugoslav officials
contend that the financial gains already made
warrant lessened IMF supervision of the economy
and a generous multiyear debt rescheduling from
Western banks and governments. We believe Bel-
grade's expectations are unrealistic because the
regime has done little to correct systemic -problems
that produced accelerating inflation and deteriorat-
ing trade performance in the past..Even with
generous reschedulings, Yugoslavia could well face
a shortfall in its.external financing requirements
beginning next year.
this period, Yugoslavia's current account balance
moved from a $1.6 billion deficit to an estimated
$730 million surplus.
The improvement in the external accounts came at
the expense of the domestic economy, but Belgrade
can point to a few encouraging signs. Despite IMF-
supported austerity measures that cut investment
by 20 percent over the past two years, gross social
product grew 2 percent last year following a 1.3- _
percent decline in 1983. Strong export gains helped
boost industrial production 5 percent in 1984 fol-
lowing two years of near stagnation. The adjust-
ment of private consumption has been much less
severe. Withdrawals from dinar and private foreign
exchange accounts and widespread moonlighting
have shored up consumption levels in the face of
falling real incomes. The major disappointment is 25X1
that inflation has continued to accelerate despite
efforts to curb domestic demand. 25X1
Yugoslavia has made progress in the past two years
in recovering from its external financial crisis. At
the beginning of 1983, Belgrade had all but ex-
hausted its hard currency reserves, was some $500
million in arrears to foreign creditors, and was
losing access to private financing. A package of
new credits and.debt refinancing from Western
governments and banks in 1983 and IMF standby
loans helped stem the deterioration in Belgrade's
financial position and cleared up arrears by the end
of the year. Additional private and official debt
rescheduling also helped in 1984. Moreover, Yugo-
slavia's trade and current account performance was
much better than expected. Hard currency exports
grew :by 13 percent in 1983 and 10 percent in 1984,
and an 11-percent cut in imports in 1983 was
followed by a 2-percent upturn last year. As a
result, the trade deficit fell from $3.5 billion in
1982 to an estimated $1.3 billion last year. Over
Encouraged by improved current account results,
Belgrade contends that Yugoslavia can now afford
a more expansionary economic policy. The Yugo-
slavs argue that the IMF-supported austerity pro-
gram is provoking growing unrest and that some
increase in investment and consumption is needed
to sustain the country's recovery. A senior National
Bank official has stated that Belgrade cannot con-
tinue to rely on decreases in domestic demand to
improve its foreign payments position but must
achieve further gains in exports through a signifi-
cant increase in industrial production.
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Yugoslavia: Economic Indicators, 1978-84a
11
0
0 1978 79 80 81 82 83 84
ai Third-quarter data for 1984.
b Constant prices.
c Official Yugoslav estimate.
Secret
18 January 1985
11
11
To support its looser constraints on economic
policy, Yugoslavia asked its private and official
creditors in late 1984 for a generous multiyear
rescheduling agreement and a reduction in IMF
supervision. Belgrade argued that its improved
financial performance entitled it to an arrangement
similar to that received by Mexico. The Yugoslavs
requested a rescheduling of loans maturing in
1985-88 extending repayments for a period of 10 to
12 years with a five- to six-year grace period and at
lower interest rates than those of the 1983-84
reschedulings. Belgrade alleged that such an ar-
rangement would facilitate economic management
by reducing the uncertainties associated with annu-
al debt rescheduling negotiations. The Yugoslavs
stated that they wanted to replace their IMF
standby agreement with a more relaxed monitoring
arrangement similar to that given Mexico.
In conjunction with their request, the Yugoslavs
presented their official and private creditors with a
cash flow projection for 1985-90. The forecast
envisions a $3 billion reduction in hard currency
debt and a $2 billion increase in foreign exchange
reserves over the period. Belgrade believes it can
meet these targets with real export growth averag-
ing 7 percent annually and current account surplus-
es of $1.2 billion over the next several years. The
Yugoslavs claim the projections are consistent with
a 4-percent annual growth in the economy if do-
mestic demand increases by only 3.6 percent to
allow growth in net exports.
Both Western banks and governments have reacted
coolly to the Yugoslav request. The official credi-
tors rejected any multiyear arrangement because
they did not want to establish a precedent for other
Paris Club reschedulings and because they doubt
Yugoslavia's financial performance has improved
sufficiently to preclude new problems in the next
few years. Western banks indicated that, instead of
a single multiyear arrangement, they would refi-
nance debts automatically at the beginning of each
year in 1985-88 provided that the Yugoslavs met
certain criteria. Both the governments and banks
insisted on another IMF standby agreement for
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Yugoslavia: Official Hard Currency
External Debt and-Payments Projections; 1983-90
Financing requirement
4,038
3,600
2,950
2,900
2,800
3,300
2,600
2,600
Current account balance
299
730
1,250
1,400
1,350
1,090
1,000
1,070
Trade balance
-1,798
-1,340
-1,364
=1,379
-1,382
-1,372
-1,345
` -1,298
Exports
6,271
6,898
7,657
8,499
9,434
10,472
11,624
12,903
Imports
8,069
8,238
9,021
9,878
10,816
11,844
12,969
14,201
Net services and transfers
2,097
2,070
2,614
2,779
2,732'
2,462
2,345
2,368-
Interest payments (net)
1,489
1,650
1,750
1,650
1,500
1,500
1,450
1,260
Repayment of medium- and long-term loan
2,560
3,200
3,450
-3,500
3,400
3,500
3,000
3,000
Repayment of short-term loans (net)
670
100
200
200
100
100
0
0
Credits to foreign countries
157
100
250
300
' 350
430
480
540
Credits (other)
0
330
0
- 0
0
-110
-110
-110
1985 and left open the possibility of a less strict.
monitoring arrangement thereafter. Belgrade even-
tually yielded ?on the issue of a 1985 standby
agreement and has negotiated the general outline
of a new one-year program with the Fund. The
Yugoslavs, however, remain committed to winning
a multiyear rescheduling in upcoming negotiations
with Western banks and, governments.
Reasons-for Skepticism
Belgrade's forecast seems implausible because the
regime has done little to correct the problems that
prevented Yugoslavia from achieving growth with
external balance in the. past. The continuing in-
crease in inflation.shows that the Yugoslav econo-
my remains in serious imbalance. Although IMF-
supported price increases, and devaluation of the
dinar have contributed to inflation, the chief
sources of inflation and dependence on Western
imports are rooted in the Yugoslav system:
? Yugoslavia still lacks a capital market to ensure
the efficient allocation of investment and foreign
exchange resources.
? The workers' self-management councils often
vote wage increases in excess of productivity
gains.
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? Local authorities, under Yugoslavia's highly de-
centralized political and economic system, follow
policies of autarkic development that have led to
irrational and redundant investment, subsidiza-
tion of inefficient enterprises, and protection of
local monopolies.
With these systemic problems untouched, an effort
to expand domestic consumption and investment
would worsen inflation and reverse recent gains in
trade performance. Yugoslavia would simply add
another phase to the cycle of stop/go adjustment
that characterized economic performance through-
out the 1970s. The key difference between Bel-
grade's current situation and that of the 1970s is
that foreign lenders are now unlikely to extend the
credits needed to finance import-led growth. Ex-
pansionary policies would soon produce large fi-
nancing gaps, forcing a reduction in imports and a
renewed contraction of domestic demand.
Apart from the lack of basic adjustment, Bel-
grade's projections seem implausible because they
rest on overly optimistic assumptions about export
growth. The 7-percent target for growth in real
exports implies an increase in Yugoslavia's market
share in'the OECD. Although the export gains in
1983-84 did boost Yugoslavia's share of the OECD
market, further gains will be difficult:
? Because of the inflationary impact, Belgrade does
not want to continue the large effective devalua-
tions of the dinar that provided the main boost to
exports in 1983-84.
? Yugoslavia has little scope left for diverting goods
from soft currency CEMA markets to the West
because there is little demand for many of its
exports in Western markets. In addition, the
CEMA countries, particularly the USSR, are not
likely to tolerate growing Yugoslav deficits in
bilateral trade.
? Yugoslavia also faces growing competition from
developing countries in OECD markets as well as
Western protectionism. The West Europeans al-
ready have accused Yugoslavia of dumping some
products, and further increases in market shares
would be likely to provoke tougher restrictions.
Yugoslavia: Real Exchange Rates and
Real Exports to the OECD, 1969-83
On the basis of our econometric model of the
Yugoslav economy, we believe that Yugoslavia's
financial situation will remain much more tenuous
through the remainder of the 1980s than the cash
flow forecast given by Belgrade to its creditors.
Using the long-run relationship between the growth
of Yugoslav exports and OECD growth, we esti-
mate that hard currency exports will grow by about
2.5 percent annually in real terms (about 6.8
percent in nominal terms) through 1990. Even
holding real import growth for Yugoslavia equal to
an average 2 percent (below the rate Belgrade
claims it needs to meet its targets for growth of
gross social product and exports), the hard currency
trade deficit rises steadily to $1.6 billion by 1990
instead of holding at roughly $1.3 billion as project-
ed in the Yugoslav forecast. Because of higher
interest payments than the Yugoslavs assume, we
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Secret
Yugoslavia: Hard Currency External
Debt and Payments, 1983-90 a
' Million US $
1984 b
1985 c
1986 c
1987 c
1988 c
1989 c
1990 c
Financing gap
0
0
0
372
532
1,003
257
496
Financing requirement
4,038
3,600
3,336
3,787
' 4,115
4,608
2,354
1,520
Current account balance
299
730
650
506
210
38
-85
-164
Trade balance
-1,798
-1,340
-1,438
-1,465
-1,511
-1,546
- 1,584'
-1,622
Exports
6,271
6,898
7,418
7,923
' 8,440
9,002
9,597.
10,230
Imports
8,069
8,238
8,856
9,388
9,951
10,548
11,181
11,852
Net services and transfers
2,097
2,070
2,088
1,971
1,721
' 1,584
1,499
1,458
Interest payments (net)
1,489
1,650
1,809
1,792'
1,739
1,903
1,885
1,749
Repayment of medium- and long-term loans
2,560
3,200
3,544
3,924
3,979
'4,268
2,116
1,199-
Repayment of short-term loans (net)
670
100
0 d
Od
Od
'0d
Od
0d
Credits to foreign countries
157
100
200
150
154"
160
' 165
170
Credits (other)
0
330
0
0
0 '
-110
-110
-110
Change in reserves
-55
600
242
219
192
328'
98
97
Errors and omissions
-1,005
0
0
- 0
0
" 0
0
Borrowing sources
4,038
3,600
3,336
3,415
3,583
3,605
2,097
1,024
Medium- and long-term trade credit utilization
4,038
3,600
3,336
3,787
4,115
4,608 "
2,354
1,520
Total rescheduling
1,766
2,190
2,003
1,512-
1,312
920
497
124
New credits
2,272
1,410
1,333
1,903,
2,271
2;685
1',600
900
Total debt outstanding a
19,000
19,300
19,092
18,955
19,091
19,431
19,669
19,990
a CIA projections.
b Estimated.
c Projected.
d Assumes short-term credit lines maintained.
e Assumes new lending or rescheduling covers financing gaps.
project that net services and transfers will fall to
roughly $1.5 billion instead of rising to $2.4 billion.
As a result, our estimates of Yugoslavia's current
account surplus gradually fall after 1984, and a
small deficit is possible by 1989.
If current account balances come close to the levels
we project and Belgrade follows through with plans
to rebuild reserves to cover three months' worth of
imports, Yugoslavia is likely to fall short on its
financing requirements even with generous resche-
dulings and substantial new credits. If Yugoslavia
reschedules all original maturities with Western
governments and banks between 1985 and 1988, it
would still face some $10 billion in maturing
principal. This debt includes loans from suppliers
and socialist and Arab countries not covered by the
reschedulings; obligations to multilateral lending
institutions; repayments on new credits granted 25X1
after 1982; and repayments of principal on debt
rescheduled in 1983-84. At this time, the banks do
not plan to refinance new credits or previously
rescheduled debt. The Yugoslavs would also have
to finance an estimated net outflow of $660 million
in credits to support their exports in 1985-88, and a
reserve buildup of approximately $1 billion. These
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requirements exceed 'the $1.4 billion in current
account surpluses we project for the period, as well
as the $8.2 billion in new private and official
lending Western banks foresee. We project that
financing gaps will reappear by 1986 and grow to
$1 billion by 1988 even if there is no net repayment
The options available for closing these financial
gaps will prevent Belgrade from achieving -its goals
of less complicated dealings with creditors, a re-
duced debt burden,. and an easing. of austerity
policies. The Yugoslavs could forgo a buildup of
reserves or keep tight, controls on imports, but
minimal reserves would leave the country vulnera-
ble to liquidity problems, and import cuts would
constrain economic growth. The other course of
action would be new lending or rescheduling the
debt refinanced in 1983-84 and credits granted
after 1983. Because commercial creditors seem
unwilling to extend substantial new medium- and
long-term credits, any new bank lending would
probably be only to shore up existing loans. A new
credit package or additional reschedulings almost
certainly would entail difficult negotiations and
continuation of IMF-supported austerity measures.
Neither, of these options would reduce Yugoslavia's
debt service burden but merely push an even larger
burden into the next decade. Despite Belgrade's
optimistic hopes, Yugoslavia faces more years of
difficult relations with foreign creditors and tight
external constraints on economic growth.
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East Germany: A Case-of,
Successful Adjustment
Following several years of painful austerity and
major foreign trade adjustments, East German
economic growth rebounded in 1983-84 making
East Germany the standout economic performer in
Eastern Europe. Although East Berlin's debt re-
mains large requiring continued austerity, we be-
lieve East Germany's efforts-with West German
financial help-have reduced markedly the imme-
diate threat of financial crisis, and improved the
prospects for sustained growth while at least keep-
ing the current account in balance. Now, East
Berlin's major uncertainty is Moscow's tough trade
demands that are likely to be a major determinant
of East Germany's economic prospects in the late
1980s.
Financial Crisis Forces Adjustment
East. Germany's financial problems, like those of
most East_European countries, go back to the early
1970s. The Eighth Communist Party (SED) Con-
gress in May 1971, under new party leader Erich
Honecker, established two main economic tasks-.
rapid growth and increasing levels of personal
estimates, to $11.6 at yearend 1980.
East Germany: Hard Currency
Financial Statistics
Million US $
Exports
Imports
Trade
Balance
Current ' Net Debt
Account
Balance
1970
1971
1,368
1,636 .
-268
-197.
.1,205.
1972
1,642
2,125.
-483
=383
1,229
1973
2,230
3,004
-774
-689
_ 1,876.
1974
3,014
4,082
-1,068 .
-1,019
2,592
1975
.3,062
4,187.
-.1;125
-1,067
. 3,548
1976
3,643
5,234
-1,591
=1,446
5,309
1977
3,578
5,088
-1,510
-1,336
6,159
1978
4,158
5,295
-1,137
=1,094
7,548
1979
5,098
6,908
-1,810
-.1,858
9,776
1980
6,555.
8,145
-1,590..
-1,600
.11,592
1981
6,714
6,654.
60
-489
12,267
1982
7,172
5,663
.1,509
1,239.
10,718
consumption-with little regard for the current banker reaction that quickly forced the East Ger-
account balance. The result was chronic hard cur- man regime to act even more vi orousl .
rency trade deficits and growth of net hard curren-
cy debt from $1.0 billion in.1970, according to our
billion improvement over 1980.
Although the. regime maintained its rapid growth,
policies through 1.981, it seemingly became more
worried about its deteriorating external position. As
a result. largely of a cut.in imports of 18 percent,
East Germany managed to achieve a.1981 hard
currency trade surplus of $60 million-its first
surplus since the -1960s and an estimated $1.6
The imposition of martial law in Poland in mid-
December 1981 triggered Western government and
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the regime sought quicker payment for its deliver-
ies, negotiated delays in payment for its purchases,
and accelerated its efforts to secure critical imports
through barter and countertrade. We believe the
regime also diverted to the West some goods
originally scheduled for delivery to East European
countries. As a result, East Germany boosted its
hard currency trade surplus to $1.5 billion in 19.82.
East Germany: Trade With West Germany,
1982-84
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The East Germans also used their "special relation-
ship" with West Germany to help avoid a liquidity
crisis. After running surpluses on intra-German
trade in 1980-81 and early 1982, they boosted
imports and ran a deficit of around DM 900 million
(US $370 million) on intra-German clearing ac-
counts in late 1982 and early 1983. At the same
time, they slashed imports from other Western
countries and paid off debt. The regime bought
some commodities produced in third countries-
such as feedgrains-through the intra-German ac-
count. It also sold some goods in third markets;
West German officials estimate that these "switch
deals" generated $100 million in cash for East
Berlin in 1983. Warming intra-German political
relations also contributed to conclusion of new
agreements-for example, on telecommunications
services-that boosted East Berlin's already sub-
stantial hard currency receipts from Bonn.
East Germany also received financial help from
West Germany. In June 1983 the Kohl government
announced an unprecedented guarantee of an un-
tied five-year DM 1 billion (then nearly $400
million) loan from West German bank subsidiaries
in Luxembourg that covered, we estimate, about
one-eighth of East Berlin's 1983 financing require-
ment. In July 1984, the West German Government
guaranteed a second loan on similar terms, this
time for DM 950 million. The credit triggered
unprecedented public criticism by the Soviets be-
cause of its linkage with a package of administra-
tive changes-mainly involving easing of travel
restrictions-that were seen as political concessions
Secret
18 January 1985
1
1.2 1982
I I I I I
1983 1984
by East Berlin. The ensuing row forced the indefi-
nite postponement of Honecker's long-planned,
first-ever visit to West Germany. Ironically, we
believe the East Germans needed the second credit
much less than the first. In 1984 the East Germans
returned to substantial trade surpluses with West
Germany.
The threat of a liquidity crisis began to ease by
mid-1983, even before the first West German
guarantee. Some Western bankers, already im-
pressed by East Berlin's improved trade perform-
ance, viewed Bonn's guarantee as proof of a West
German financial "umbrella." Banker confidence
was boosted further by Bank for International
Settlements figures that showed reductions in debt
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East G'ennany: Position With, Banks: Reporting to
the Bank for International! Settlements (BIS),
1981-84
Liabilities
By yearend 1984, aided by another hard currency
trade surplus, which we estimate to be in the range
of $0.5 billion to $1 billion, net debt probably had
fallen to about $8 billion-less than two-thirds of
the end-1981 level. We believe that East Germa-
ny's assets at'yearend with BIS reporting banks
probably were somewhat higher than the $4.2
billion reported at. midyear, when East Germany's
deposits were greater than all' other East European
countries" assets combined'.. As, a resui't,, East Ber-
lin's reserves, probably were: suf'cient to cover: eight
months," of import requirements'..
Assets
4
to Western banks. and steady increases in reserves.
By early 1984; East
Germany had' a fairly easy time securing short-
term trade financing, andin May East Berlin
returned to, the medium-term, market, receiving a
five-year $75- million loan on relatively favorable
terms.
By fate- 1984, buoyed by the second' West German
loan and continuing improvement in East Berlin's
financial condition, Western bankers had lent an-
other approximately $500' million in three more
medium-term loans, including a $400 million syn-
dication in December that was the largest commer-
cial credit received by any East European country
since 1980. The loan originally was for $150, mil-
lion but was increased after heavy oversubscription.
The syndication had no West German Government
backing and was on terms more favorable than the
credits guaranteed earlier by Bonn.
As import cuts disrupted industrial production in
the first half of 1982, growth began to decline
sharply. National income growth slowed to 2.5
percent in 1982, down from 4.8 percent in 1981.
We calculate that real GNP growth fell from 2
percent to 0 in the same period and that real
personal consumption actually declined in 1982 for
the first time: under Honecker.. Moreover,, austerity
measures hit consumers especially, hard;~
increased shortages,, 1'onger lines, and
higher prices; for- many consumer good's.,
import reductions; that cut
growth a'so increased underemployment. andl
caused' some genuine unemployment. We estimate
that the number of jobless reached at least I
percent of the work force by late 1982, unprece-
dented for a traditionally labor-short country whose
population has dropped continuously since 1949
and~ whose Constitution guarantees a job for all.
Domestic, Adyustntent Measures
In a ~'tioni to dramatic shifts; in the: external
accounts,, Eastt. B'erl'in since 1992 has; made: at num-
ber of'adjustments in domestic economic policy to
reduce domestic demand and boost net exports.
Most important, the regime seems to have subordi-
nated, at least temporarily, its priority of providing
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East Germany: Selected Economic Indicators,
1979-84-
Investment in the National
Economy (Gross)
a Through June.
Secret
18 January 1985
8
6
4
z
increasing levels ofpersonal.'consumption ,to , main-
taining a balanced; current account.
Retail Price Increases. The regime raised prices on
many consumer goods; increases were most com=
mon on imported luxury items in 1982 but
spread to many domes-
tically produced products in 1983-84. We estimate
that consumer prices rose 3 to 5 percent.
Investment Policy. Import cutbacks contributed to
declines in investment. Official statistics show that
investment declined by over 5 percent in 1982 and
was flat in 1983. Industry's share of the investment
pie continued to rise as the regime redirected
investment resources into import-substitution pro-
jects and resource conservation. The government
also emphasized the modernization of existing
plants over the construction of new ones, and
concentrated more on completing ongoing projects.
Politically sensitive housing construction, however,
has not been significantly affected.
Energy Conservation. To reduce the need for pur-
chases of Western oil in the face of a cap on Soviet
oil deliveries on soft currency account, East Berlin
imposed severe conservation measures and acceler-
ated the expensive development of its large reserves
of lignite. As a result, lignite provided 71 percent of
primary energy in 1983.versus 54 percent in 1980.
To further reduce the:demand for oil and improve
efficiency, the regime drastically changed its trans-
portation mix. The SED cut diesel fuel allocations
to truck enterprises and imposed restrictions on the
use. of trucks. The regime mandated greater use of
the more efficient railroads and domestic water-
ways, and increased the electrification of rail.lines.
Industrial Policy; Although generally avoiding the
term "reform," East Berlin took the following steps
to modernize and improve the: efficiency of
industry:
? The.regime continued to give priority to micro-
electronics, while boosting production of consum-
er goods, a large share of. which it apparently.
intends to deliver to the USSR and to sell in the
West.
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? To encourage more efficient use of industrial
labor, it enacted, in April 1983, a 70-percent
wage tax on enterprises that went into effect in
1984. It also summarily has moved some workers
to enterprises needing labor. This has contribut-
ed, in our view, to the reported rise in industrial
labor productivity of 7.7 percent in 1984.
? East Berlin altered the criteria used to evaluate
enterprise performance and award bonuses. A
November 1983 decree gave profitability in-
creased importance as an enterprise performance
criterion and raised the priority of exports, as well
as energy and materials conservation; production
costs reportedly have dropped.
Agriculture. To boost lagging production and re-
duce grain imports-which contributed significant-
ly to the growth of debt in the 1970s-the regime
announced in early 1983 a sweeping agricultural
price reform that came into effect on 1 January
1984. The government boosted procurement
prices-50 to 100 percent in most cases-while also
sharply reducing subsidies for factor inputs. The
regime hoped that larger monetary incentives
would stimulate a lethargic agricultural managerial
corps and a work force that in the past has shown
little inclination to respond to exhortations for
harder work. The regime credits these measures in
part for the successful agricultural performance
last year, when most production indicators rose
appreciably and the grain harvest was a record 11.5
metric million tons.
Recovery in 1983-84
We believe East Berlin's adjustment efforts, with a
boost from West German assistance, contributed
markedly to the rebound in growth in 1983-84. The
regime reported that the growth of national income
accelerated in the second half of 1983 and reached
4.4 percent, slightly above the plan goal and near
precrisis levels (real-GNP rose about 2 percent).
East Germany thus was second only to-the recover-
ing Polish economy in growth of national income
among East European countries in 1983 -in contrast
to its position as an average performer in the late
1970s. Official data indicate that in 1984 national
income growth hit 5.5 percent, above the rates of
the-late.1970s, while industrial production was up
4.5 percent. Retail sales growth rebounded to 4.1.
percent, and the country ran another-..,as yet un-
specified-hard currency trade surplus. In addi-
tion, East Germany seems likely to have returned
to surplus with the USSR for the first time in a
decade.
We expect East Germany to continue to run at
least modest hard currency surpluses to reduce
gradually its. still-large debt and maintain bankers'-
confidence in its creditworthiness. The regime is
likely to continue to push exports hard but, unlike
some East European governments, is also likely to
increase imports of capital goods and'industrial
inputs from the West as the growth of exports and
Western banker lending policies permit. Although
the domestic economy continues to face significant
problems-including demographic troubles and an
inefficient industrial plant in considerable need of
modernization-we expect moderate real growth
again in 1985.
We expect the consumer's lot to remain about the
same. Although retail sales rose appreciably last -
year, official statistics indicate that growth slowed
late in the year. Meanwhile,
=steadily rising prices, continuing shortages of
luxury items, and popular pessimism that the sup-
ply situation will improve. Continued good trade
performance could permit some increases in im-
ports of consumer goods, but we expect living
standards to rise only modestly over the next couple
of years.
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The regime's comparative success-in weathering its
financial crisis and improving its creditworthiness
is likely to make it even less. willing to undertake
decentralizing reforms. Instead, we expect East
Germany to continue to, work to improve adminis-
tratively what already is probably the best run
economy in Eastern. Europe. Party officials seem
likely.to continue to argue that there are different
national paths to socialism-sometimes an implicit
dig at the Hungarians-and that, despite some
admitted weaknesses, East Germany is happy with
its way.
With the threat of financial crisis receding rapidly,
East Berlin's major external economic uncertainties
lie in Moscow. We believe negotiations for the
1986-90 bilateral trade protocol have been difficult,
/The outcome of these
talks is likely to -be a major determinant of East
Germany's economic prospects in the late 1980s.
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'Romania: On a Financial
Tightrope
Ceausescu's strategy for continued reduction in
Romania's foreign debt without help from the IMF
Romania: Hard Currency
Foreign Debt a
or foreign creditors will be undermined by poor
export prospects and worsening domestic strains
from the required austerity.
avoid another rescheduling, would probably be
willing to extend some medium-term credits. If
Romania does not borrow, Ceausescu has two
unpalatable options.. Hard currency imports could
be cut further, damaging Romania's already
wounded economy and undercutting export poten-
tial.in coming years. Alternatively, Romania could
request another rescheduling, an embarrassing op-
tion for Ceausescu, particularly since creditors
would demand IMF participation. Whatever
course, it will be increasingly difficult to put off
dealing with the causes of lagging growth and poor
export performance.
Ceausescu's Financial Strategy
Following rescheduling agreements with bank and
government creditors in 1.982 and 1983 and a
standby arrangement with the IMF, Ceausescu
embarked upon a "go-it-alone" course. Bucharest
balked at IMF-supported measures that would
lessen central control over the economy, and the
standby accord. for $1.1. billion was canceled by.
mutual agreement in late 1983. At the same time,
Ceausescu told his bank officials to avoid any new
borrowing.
Ceausescu has maintained his hostile stance toward
the IMF.The Romanian Government recently
criticized the Fund and- reversed a number of
measures taken earlier in response to IMF recom-
mendations. The currency unit, the leu, has been
10.1
9.7
8.8
7.9
1985
6.6
1986
5.5
1987
4.4
1988
3.3
1989
2.9
e Includes short-term debt.
reverse these decisions.
revalued, domestic interest rates have been low-
ered, and some domestic prices decreased. .
Ceausescu maybe calculating that, if forced to ask
for IMF assistance again, he would be able to
Ceausescu's unwillingness to. borrow from banks or
the IMF probably stems from his success in revers-
ing the hard currency trade deficit. The reported
1983 hard currency. trade surplus of $1.7 billion
was a dramatic shift from the $1.5 billion deficit in
1980. The turnaround was achieved, however,
largely by forced hard currency. -import cuts of 40
percent-over .198:1-82; when Romania was in deep
arrears and suppliers stopped shipments, and by a
further 3 percent ;in 1.983.
Domestic Economy: Suffers.
The impact of these cuts-has. been severe. We .
estimate that GN-P:growth. slowed, from an average
Secret
DI IEEW 85-003
18 January 1985
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Romania: Hard Currency Financing
Requirements and Sources
Financing requirements
4,160 ,
2,094
260
116
140
192
167
-367
Current account balance
655
922
1;030
1,200
11310
1,380
1,470
1,520
Trade account balance
1,525
1,688
1,750
1,850
1,890
1,890
1',890
1,910
Exports
6,235
6,246
6,480
6,780
7,240
7,720
8,260
8,830
Imports
4,710
4,558
4,730
4,930
5,350
5,830
6,370
6,920
-750
-700
-600
-520
-380 ,
-325
3,170
-2,152
1,220
1,405
1,250
1,372
1,337
753
Medium and long term
2,081
1,211
1,120
1,385
Short term (net)
1,089
941
Net credits extended
502
476
Arrears from previous year
1,143
388
0
0
0
' 0
0
0
Financing sources
3,316
1,876
259
'116
140
192
167 '
- 367
315
240
400 =
400
400
400
956
338
0
0
70
50
'50
- 50
301
132
44
-183
-238
-238
-160
-113
1,700
749
0
0
0
- 0 ..
0..
: 0
Errors and omissions -
844`
218
1 -
0
0 -
0
0
0
Financing gap/arrears
388
0
0
0
- 0
0
n-
n
annual rate of 4 percent in 1976-80 to 1 percent:in
1981-83. Although investment growth has fallen;
the-burden of adjustment.has been primarily on
consumers. Quality foods, especially livestock prod-
ucts; are in extremely short supply, and most staple
foods are rationed. Moreover, the austerity pro-
gram is undercutting. Romania's potential for. ex-
port growth.-Not only are prospects for future
economic growth being undermined by, cuts in the
import of investment goods;, but -inputs critical to
generating export goods in the near term are being
sacrificed. A noteworthy case is the agricultural
sector, which is suffering--from'a lack of seed, -- pesticides, fertilizers, and agricultural machinery-
items that are either being exported for hard:
currency or the import of which is' being restricted
to avoid hard currency outlays.
Secret
18 January 1985'
Romania's external financial constraints eased -in
1984. Scheduled repayments of debt were about
half the 1983 level. Sources of financing, however,
also dropped dramatically from 1983 levels, leaving
the Romanians.dependent on a large trade surplus
to cover their hard currency needs.
Preliminary trade statistics indicate that Romania
achieved a substantial hard currency trade surplus
last year, but perhaps not as large as needed.
Romanian bank officials a ear concerned about
liquidity problems.
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Secret
These cash flow problems also
help explain why Romania has continued to
squeeze some foreign suppliers by demanding that
they accept delayed payments, settle for discounted
payments, or take Romanian goods in lieu of cash.
Mixed Signals About. Borrowing .
Ceausescu's no-borrowing dictum has, kept Roma-
nian banking, officials on a. short string, limiting
their ability to line up potential credits that would
provide a cushion if liquidity problems arise this
year. Since last. fall some Western. bankers, have
been urging.the Romanians to line up.credits from
official and multilateral sources as well as from
commercial banks to cover what they believe will
be a $400 million financing .gap, in 1985.1
The Romanians have been giving mixed signals
about their borrowing intentions for several
months:
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Financial Plan, 1985-89
The basic operating principle of Ceausescu's finan-
cial plans for 1985-89 is to pay off external finan-
cial obligations with no new borrowing. With no
new projected borrowing except for small develop-
ment credits, the burden of debt repayment in
coming years will rest on the trade surplus. Because
of the tight financial situation, plans do not call for
rebuilding foreign currency reserves until 1989.
Scheduled medium- and long-term principal and
interest obligations will amount to about $2 billion
annually in 1985-88. These amounts include debts
rescheduled in 1982-83.' In addition, Romania is
scheduled to begin to repay debt due the IMF in
1985. Because Ceausescu has forbidden further
borrowing, Romania's net credits from the World.
Bank, commercial banks, and governments are
projected. to be less than $200 million annually on
average, leaving $1.7-1.9 billion to be covered by
hard currency trade surpluses.
' Debt rescheduled in the 1982 agreements comes due in 1985-88.
Debt rescheduled in the 1983 commercial bank agreement comes
due in 1987-89, and that rescheduled in the 1983 Paris Club
We believe that at least: some, Romanian, ap-
proaches may.have been made without., Ceauses-
cu's knowledge, and we expect ofl^icials.tomaneu-
ver around his ban on. new borrowing.
Secret
18 January 1985'
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Ceausecu's
late'November attack on the IMF and "other
world bodies and banks" likely reinforced their
fear of incurring his wrath. Meanwhile, they
doubtlessly. are aware `that another liquidity crisis
in 1.985 would incur at least as much displeasure
from Ceausescu.
Limited Options
We believe that it will eventually become clear to,
Ceausescu that trade surpluses cannot alone fill
Romania's financial gap.Three'years of severe
austerity and sharp import cutbacks have taken
their toll. Because this type of adjustment has
failed to deal either with the damage done to
growth and export potential or the economic
misery created for workers and consumers, it
cannot get Romania through the next four years.
Therefore, if, as we expect, Ceausescu fails to
achieve his targets for large trade surpluses, he
will be forced to consider a resumption of borrow-
ing, further import cuts, or rescheduling.
New Borrowing. The Romanians might still nego-
tiate an arrangement with Western banks for
medium-term loans, but they will not be able to
indulge their political preferences on where to
borrow. Because Romania has covered 'its debt
obligations in 1984 and demonstrated its willing-
ness to take tough measures to meet its obliga-
tions, a few'Western banks with Romanian debt
exposure might.be willing to quietly-help avert a
liquidity crisis that ' would 'cause payment' delays.
On the other-hand,Ceausescu might be persuad-
ed by his banking officials to accede to a rollover
loan if it is not characterized as "new" or "addi-
tional credit." Indeed, the bankers may be hoping
Secret
18 January 1985
show it is necessary' to avoid rescheduling.
that he would accept a loan package if they could
tally, over the next four years.
More Import Cuts. If the Romanians are not able
to obtain financing under these difficult condi-
tions, Ceausescu, probably would impose further
import cuts to generate more hard currency. He
reportedly has said he will order cuts of up to 30
percent in 1985 imports if necessary. Such ac-
tion-coming on the heels of largely arbitrary
and poorly planned hard currency import cuts in
1981-83-would seriously damage an already
limping economy, and it would undercut Roma-
nia's ability to produce export goods in future
years. Bucharest would almost certainly be un-
able to sustain such cuts, economically or politi-
Rescheduling. Ceausescu's other option-a re-
quest for rescheduling-is probably the least
palatable. Not only would this be embarrassing,
but foreign government creditors, and perhaps
commercial bank creditors as well, would demand
IMF participation. The IMF would probably
make any assistance conditional on requirements
more far reaching than those imposed in 1981-83.
Ceausescu, who is highly sensitive to any weaken-
ing of his control over the rigidly centrally
planned economy, probably would resist IMF
conditions, making rescheduling negotiations con-
tentious and protracted.
If Romania is to avoid arrears, further borrow-
ing-in some form-seems inevitable. Additional
credits would give Ceausescu some scope to in
crease production and exports but would have to
be integrated with a new economic strategy fo-
cused on rebuilding economic growth and ex-
ports. Last-minute "panic" borrowing to avoid
arrears, however, would do little to mitigate
Romania's still-severe economic adjustment prob-
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