INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707390001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: July 15, 2010
• Sequence Number: 1
• Publication Date: February 8, 1985
• Content Type: REPORT

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Intelligence
Directorate of c
e~5~~ 6rl~
Weekly[-
International
Economic & Energy
8 February 1985
-Secret-
DI IEEW 85-006
8 February 1985
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International
Economic & Energy
Weekly
8 February 1985
iii Synopsis
1 / Perspective-South Korea: Emerging Industrial Giant?
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Energy
International Finance
Global and Regional Developments
National Developments
13
South Kore
a: Financial-Sect
or
Liberalization
21
, Sudan: A B
alancing Act
25
North Yem
en: Meeting the
Ch
allenge
s of the Oil
Discovery
31 Jordan: We
athering the Ara
b R
ecession
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Comments and queries regarding this publication are welcome. They may be
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8 February 1985
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Weekly
International
Economic & Energy
Synopsis
1 Perspective-South Korea: Emerging Industrial Giant?
exporter and perhaps its most advanced LDC.
An aggressive private sector aided by government support and a low-paid but
productive work force have propelled South Korea in 25 years from an
underdeveloped agrarian society to the position of the world's 15th-largest
South Korea's liberalization of its financial sector will provide foreign bankers,
in particular, with increased opportunities for financial services in trade and
foreign exchange transactions. We believe that the domestic economy will be
strengthened by more efficient mobilization of capital, more equitable alloca-
tion of credit between large conglomerates and small firms, and shrinking of
the illegal curb market
Sudan: A Balancing Act
the limits of the US role as Sudan's chief benefactor.
The Sudanese Government is under intense pressure to initiate economic
reforms while coping with shortages of food and energy and a growing
insurgency in the south. Khartoum probably will use upcoming visits to test
25 North Yemen: Meeting the Challenges of the Oil Discovery
borders of North Yemen, South Yemen, and Saudi Arabia.
The discovery of oil in July 1984 has brightened the long-term outlook for the
North Yemeni economy but has heightened tensions along the disputed
31 Jordan: Weathering the Arab Recession
and in Arab aid and is showing signs of recovery.
The Jordanian economy has weathered the sharp cutbacks in trade with Iraq
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DI IEEW 85-006
8 February 1985
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Secret
International
Economic & Energy
Weekly
8 February 1985
Perspective South Korea: Emerging Industrial Giant?
An aggressive private sector aided by government support and a low-paid but
productive work force have propelled South Korea in 25 years from an
underdeveloped agrarian society to the position of the world's 15th-largest
exporter and perhaps its most advanced LDC. South Korea has become a keen
competitor in several highly visible industries important to the economies of
the developed countries, prompting some commentators to call Korea the next
Japan. South Korea's growing industrial strength is reflected in:
? Shipbuilding. South Korean shipbuilders captured 20 percent of worldwide
orders in 1983-second only to Japan. Although expansion plans have been
scaled back, Korean shipyards continue aggressively to add capacity.
? Steel. South Korea has become the world's most competitive steel producer
by combining low wages with technologically advanced plants. Plans to
increase capacity by 75 percent in the next decade are being implemented.
? Overseas construction. Orders grew an average of 28 percent annually
between 1975 and 1983. In 1981, South Korean firms accounted for over
one-half of the world's 25 largest general building contractors
Building on these successes, South Korean economic planners have targeted
rapid expansion into knowledge- and technology-intensive industries:
? Automobiles. Seoul plans to boost automobile exports from 43,000 units in
1984 to 800,000 by 1991. Hyundai plans to begin selling cars in the US mar-
ket later this year, and Daewoo, strengthened by a technical and equity tieup
with General Motors, is tripling its capacity.
? Semiconductors. Samsung and other leading electronics firms intend to
begin producing 64K and 256K random-access memory chips. The South
Koreans could apply this technology in the production of other advanced
electronics.
Seoul's track record for astute economic planning, its aggressive private sector,
and its well-disciplined and educated work force are pluses for its ambitious in-
dustrial strategy. The many underemployed college graduates and Koreans
residing overseas also are sources of talent that can be tapped. Seoul will be
better able to encourage the inflow of new technology and to foster domestic as
well as foreign investment because of its ongoing liberalization of foreign
investment, technology transfer, imports, and the financial system.
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DI IEEW 85-006
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Despite these advantages, South Korea must cope with hurdles to growth not
faced by the Japanese two decades ago:
? Small domestic market. With a population of only 40 million and its $2,000
per capita income, South Korea's domestic market does not provide econo-
mies of scale that would be a springboard for many emerging industries,
forcing reliance on foreign markets.
? Dependence on.foreign inputs. Lacking a mature R&D infrastructure, South.
Korea depends upon foreign technology and capital for even rudimentary
development of new industries.
? Protectionism. Forays into technology-intensive exports will result in head-
to-head competition with developed trading partners. Trade frictions will
inevitably increase in areas such as intellectual property rights, trade in
services, and strategic trade controls.
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8 February 1985
? Security issues. A relatively heavy defense burden-nearly 6 percent of
GNP impedes South Korea's climb up the technology ladder.
political stability
? Foreign debt. Unlike the Japan of 1960, South Korea must manage a $43
billion debt-equivalent to half its GNP. Additional capital inflows could be
at risk if foreign bankers become more concerned over South Korean
faces stiff competition from other NICs.
Given these factors, we believe South Korea will emerge as a strong competitor
in world markets for many knowledge- and technology-intensive products but
is unlikely to succeed on the same scale as Japan. Seoul is aware that its very
success could lead to increased strains in its leading export markets and it
In our judgment, serious political instability is unlikely in the near term, but
the recent confrontational note struck by opposition candidates underscore the
potential for political turbulence. Transient episodes of political tension and
scandal could erode foreign confidence in Korea's stability and prompt a cutoff
in crucial capital and technology inflows. In addition, uncertainty about an
anticipated leadership transition in 1988 raises questions among many observ-
ers about prospects for longer term political stability.
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fan Set To Begin
Shuttling Crude to
Southern Gulf
Energy
Iran has chartered four tankers to shuttle crude oil from Khark Island to the
southern Persian Gulf near its Sirri Island terminal and two VLCCs to store
and offload the crude, according to the US Consulate in Dhahran
ehran hopes to boost exports from recently
depressed levels by enabling buyers to avoid the added cost and danger of
calling at Khark. If operated efficiently, the shuttle system is capable of
transshipping at the 1.5-2.0-million-b/d level maintained at Khark over the
past few years. Because of storage limitations, the flow rate will also depend
heavily on a regular timetable for customers' tankers-about one a day to
maintain peak rates. Larger discounts will be a key factor in the scheme's
success, but Tehran's resistance was largely responsible for erratic exports over
the past six months, and customers-particularly the Japaneses-have been
pressing hard for lower prices.
Soviet Oil Deliveries
to Western Europe
Suspended
The shortage of Soviet oil supplies evidently is severe, as the USSR recently in-
formed numerous West European customers that it will not export any oil
during the rest of this month. According to West European press services and
an industry spokesman, the Soviets told some customers that the stoppage was
because of the "national emergency." The West Europeans indicate that they
are not concerned, because alternative supplies are plentiful due to the soft oil
market. It is not yet clear how long the suspension of deliveries will last and
how this will affect the USSR's hard currency situation. During nearly every
winter in recent years, harsh weather at Soviet ports and oilfields has made it
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Secret
Iraqi-Saudi Pipeline
Construction Lags
difficult for the USSR to meet all of its oil commitments and has caused some
stoppage in oil exports. The present conditions, however, clearly are more
serious than last year's, as domestic oil production has fallen in recent months.
Work on the 500,000-barrel-per-day spur line from Iraq to the Saudi Red Sea
pipeline is well behind schedule, and Iraq will not make the September
completion date, according to US Embassy sources in Baghdad and Riyadh.
Progress has been slowed by defective pipe and difficult trenching conditions
as well as by contractor manpower limitations imposed by Iraq. Meanwhile,
construction is under way near
J Technology
Premature
/Announcement of
Turkish Nuclear
Reactor Purchase
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8 February 1985
be reached until mid-1986. 25X1 25X1
the spur's junction with the Saudi's Petroline link to export terminals on the
Red Sea. Additional construction delays are likely, and Iraqi oil probably will
not flow through the line this year. The maximum flow rate probably will not
the new IMF agreements
Falling oil exports will reduce Ecuador's prospective trade surplus and budget
revenues, thereby jeopardizing economic gains. According to the US Embassy,
CEPE-the state oil company-recently lost contracts with two US oil firms
because Ecuadorean crude became overpriced relative to the spot market.
CEPE's exports dropped 17 percent during the last quarter of 1984 to 142,000
barrels per day (b/d), and export revenues could fall by $140 million this year.
Quito is selling oil on the weakening spot market, dropping the effective export
price to $26.25 per barrel-compared with the $27.50 official price for
Ecuadorean crude. Quito also will probably offer discounts to entice its oil
customers, and may be forced to devalue every few months to boost nonoil ex-
ports. If oil income is not replaced, Quito's 1985 budget revenues will suffer,
impeding its ability to achieve the 3-percent budget surplus called for under
Framatome and Electricite de France have demonstrated a new technology
that will allow France to rely more heavily on atomic power and reduce its con-
sumption of imported oil. The new technology improves the ability of a nuclear
reactor to increase or decrease its output rapidly, reducing the need for
conventional power generation to satisfy peak load demands. Existing reactors
can be retrofitted when refueled. The new technology would also increase the
competitiveness of Framatome, even though it may license the technology to
Officials of the Canadian firm AECL last week informed the US Embassy in
Ottawa that they have not signed a contract to build Turkey's first nuclear re-
actor, despite a Turkish announcement three weeks ago. According to the
officials, AECL has only received an invitation to continue negotiations within
the proposed "joint venture" framework. The offer is nonexclusive, indicating
that the West German firm KWU, as well as Westinghouse, are still in the
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Japanese Gas
and Electricity
Demand Rising
bidders to sweeten their proposals.
running. The original ambiguous announcement by the Turkish Energy
Minister may have been aimed at putting last-minute pressure on the other
Japanese imports of liquefied natural gas (LNG) through the first 10 months
of 1984 were running at an annual rate of 36.4 billion cubic meters (bcm), a
30-percent increase from the 1983 total of 28 bcm. Imported LNG accounts
for close to 95 percent of Japan's gas consumption. The increase is due in large
part to a 40-percent rise in LNG-fueled generating capacity to meet rising
electricity demand. Additional electrical capacity currently under construction
is expected to push Tokyo's LNG imports to an annual rate of 45 bcm by the
end of 1986 and 52 bcm by 1990. Japan has sufficient LNG supplies already
under contract, primarily with Indonesia and Malaysia, to meet these
increased requirements until well into the 1990s.
Mexican Debt Mexico is meeting this week with the Bank Advisory Committee in New York
Rescheduling Update to hammer out final details of its $48 billion multiyear debt rescheduling,
The agreement has taken longer than
expected because of lengthy negotiations with European and Japanese banks
the agreement should be in the hands of Mexico's 530 creditor banks by mid-
February. Final ratification probably will take another two to six months
because of the complexity of the documentation and the large number of
signatories
The rescheduling agreement, which allows lending banks to convert about 25
percent of the rescheduled debt into currencies other than the dollar, could
lead to repayment difficulties for Mexico if the dollar drops sharply
About 90 percent of Mexican revenues are received in
dollars, and the current agreement does not insulate repayments from
fluctuations in the US dollar. Mexico, however, is attempting to protect itself
by diversifying its foreign exchange reserves,
Philippine Aid
Donors Focus on
Economic Reforms
Manila's lackluster approach to long-term economic policy reform led some
donors to withhold or reduce new aid pledges at the annual meeting last week
of the Philippine donors. The donors-believing Manila's recently announced
revisions in coconut marketing perpetuate pricing disincentives for producers
and exporters-pledged less than $1 billion, compared with the $1.2 billion
Manila expected. To underscore their concern with policy reforms, a subcom-
mittee of the group will meet with Philippine officials in a few.months to
review progress on structural adjustments. Particular attention will be given to
institutional, marketing, and price reforms in agriculture as well as reforms of
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enjoyed by his strongest supporters.
the weak public-sector financial institutions. Many of the reforms, however,
would require President Marcos to eliminate some major economic benefits
Somalian Economic Mogadishu has implemented several economic reforms over the past month,
Reforms but the fate of its.IMF standby program remains in doubt. The government
has devalued the shilling and established a dual foreign exchange market to
encourage exports and discourage imports. Mogadishu also has ended price
controls and abolished almost all export and import licensing. Tax reforms,
reductions in civil service payrolls, and changes in public enterprises are to
follow. Mogadishu has undertaken the politically risky measures to gain IMF
approval for a crucial one-year, $22 million credit. Pledges from the recent
World Bank's donor conference covered only $80 million of Somalia's
projected $100 million payments gap this year, and the Fund is requiring
Somalia to obtain the full $100 million this month. Moreover, Somalia will
have to reschedule much of its $350 million in current and past-due? debt
service payments to meet IMF financial targets. Mogadishu probably wilbask
the IMF to reverse its current stand and allow proposed funding for export
shortfalls to be applied to the payments gap. In addition, Somalia almost
certainly will seek more aid from past donors-particularly Arab countries
that were conspicuously absent from the recent list of pledgers. Mogadishu
also might pressure the United States for emergency food aid. Even if the
Fund approves the standby, domestic political pressures may soon cause
President Siad to back away from the program-as he did last year-or to
push for modifications.
Global and Regional Developments
EC Farm The EC Commission has called for an overall 0.3-percent cut in Community ? .
/ Price Proposals farm prices-iii terms of European Currency Units-for the marketing year
beginning in April. Support levels for grains and butter would be reduced by
almost 4 percent, but prices for some commodities-including some edible oils
and cheeses-may increase by more than 2 percent. In national currencies,
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~C Pakistan
Economic Cooperation
urope's Esprit
Project Receives
Major Funding
Italian-Soviet
Trade Problems
Commission.
driessen, in presenting the proposals to the press, claimed that US-EC trade
relations would be helped, presumably because export subsidies could be cut on
wheat and butter sales outside the Community. Lower grain prices also
probably would reduce EC demand for feed substitutes, but Andriessen ruled
out dropping efforts to limit imports of US corn gluten. EC governments,
which have yet to discuss the proposals formally, face strong agricultural
lobbies and almost always adopt higher farm prices than those proposed by the
political reasons
The European Community (EC) and Pakistan last month negotiated a new
cooperation agreement to strengthen economic ties between the Ten and
Islamabad. Approval by the EC Council and Parliament is expected before
summer. The agreement extends the nonpreferential trade provisions of the
1976 cooperation pact for a minimum of five years and calls for more frequent
consultation on bilateral and multilateral trade issues. Since 1976, EC exports
to Pakistan-largely machinery and manufactures-topped an estimated $1.1
billion last year compared with EC imports-dominated by textiles-of only
about $500 million. New aspects include EC aid to Pakistan's industrial
development through financial support and technical exchanges; no amounts
were specified. Islamabad, in return, promises to promote and protect invest-
ments by the Community and its members. These provisions are similar to EC
agreements with India and the ASEAN countries, and Pakistan probably
wanted to raise the status of its arrangement with the EC principally for
The Esprit information technologies program, Western Europe's response to
large increases in computer-related research-such as the Japanese Fifth-
Generation Computer Project-has received $126 million in Community
funding for 1985 research. Additional industry funds will bring the total to
nearly $200 million-approximately four times the amount of Japanese
expenditures over the entire three-year initial stage of their project. We believe
that the West Europeans, drawing on their well-developed research base in
advanced architectures and artificial intelligence, could well make some
research progress. Efforts will be aided, moreover, by the inclusion of several
major US high-tech firms. Nonetheless, longer term prospects remain clouded
by likely coordination problems between participants and by Western Europe's
historical weakness in turning high-technology research results into market-
able products.
Prime Minister Craxi intends to complain about Italy's widening trade deficit
with the Soviet Union when Foreign Minister Gromyko visits Rome in late
February, according to the US Embassy in Rome. The deficit for the first 10
months of 1984 stood at about $2 billion, up from $1.7 billion for all of 1983.
Although Moscow pledged to redress the imbalance last year when it signed
the new Siberian gas accord with Italy, Soviet purchases from Italy have
declined. Italian officials also complain that the Soviets hold Italian firms to
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Secret
etroleum
Purchases Sustain
,/Indian-Soviet Trade
week's ICO executive board meeting. Importing members cite high market
prices-about $1.45 a pound, the ICO upper limit-as an argument against a
quota cut and are more concerned about ICO-member coffee sales to
nonmember countries. Such sales have created a two-tier market in which
prices to nonmembers are nearly half those paid by ICO members. Concern
about crop prospects in Brazil and Colombia-the two largest exporters-
along with harvesting and shipping problems in Africa, Asia, and Central
America have boosted coffee prices 10 percent since the ICO quota was raised
last October. Traders expect prices to soften somewhat in the near term as pre-
viously delayed shipments come onto the market. Beyond that, prices will
depend on the weather in Brazil and Colombia as the frost season approaches.
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National Developments
Developed Countries
Thatcher and the Prime Minister Thatcher will face an intensifying political and economic
Pound
dilemma if the pound weakens further, a situation that might cause her to de-
mand more direct US action to control the value of the dollar when she visits
Washington later this month. London has tried to arrest further depreciation
of the pound, primarily by raising interest rates. The base lending rate has ris-
en 4.5 percentage points in two weeks to 14 percent, pushing real interest rates
to the highest level in 150 years. This threatens an economic recovery already
No Changes Expected
oil on the spot market
dollar-denominated contracts while accepting nondollar contracts with leading
West European competitors. These officials point out that higher interest costs
on dollar export financing place Italian firms at a competitive disadvantage.
Unless Craxi wins some concessions, he may feel politically compelled to
increase pressure on the Soviets, perhaps by cutting back purchases of Soviet
Moscow has agreed to sell India 111,000 b/d of crude oil and petroleum
products in 1985-only slightly less than in each of the last two years.
Although no details of the 2 February contract have been announced, we
believe that most of the crude oil will come from the Middle East. Moscow has
been pushing New Delhi to diversify its purchases of Soviet goods-still 70 to
75 percent petroleum-and probably hopes to increase sales of machinery to
private Indian businessmen. India would like to balance payments with the
Soviets-last December's agreement calls for a 24-percent increase in two-way
trade over 1984 levels-by selling more consumer goods, machinery, and
wheat.
Proposals by Brazil for a decrease in the International Coffee Organizations's
at Coffee Meeting ' global export quota to prevent a price drop are likely to be rejected at next
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adrid Focusing
on Export Control
Problems
weakened by the coal strike and opens Thatcher to renewed complaints even
from her own party that she is not doing enough to reduce unemployment. The
pound's weakness also will make it more difficult for the government to stay
within its budget because of increased costs of dollar-denominated purchases,
particularly for defense. Slower economic growth, moreover, will reduce tax
revenues and increase social welfare spending. The government thus will find it
difficult to make tax cuts promised for March without increasing perceptions
that its resolve to hold down inflation is weakening. Meanwhile, worries about
the future of British oil prices are likely to continue downward pressure on the
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The Spanish may be close to a decision to negotiate with the United States
over export controls on sensitive technology. Spanish officials have told the US
Embassy they are increasingly aware that lack of an agreement will limit
Spain's ability to develop its electronics industry and to create new jobs. They
are particularly concerned that a joint venture with a US firm to produce
microchips in Spain is in jeopardy. A high-level official said the Cabinet has
discussed the year-old issue twice, and an options paper is to go to Prime
Minister Gonzalez this week. Options will include joining COCOM or
negotiating a bilateral agreement. We think Gonzalez will lean toward the
latter. Some officials in the Ministry of Commerce, however, are attempting to \25X1
make any solution conditional on settlement of a US case against a Spanish
semiconductor firm for diverting material to Cuba. This would further
complicate the issue. F__1 25X1
Italian Wage Italy may hold a national referendum this spring on last year's six-month
dexation Referendum limitation on wage indexation. Rome's cap on wage indexation was a key
element in bringing inflation down from 15 percent in 1983 to 10.6 percent last
h
b
New Israeli Measures
To Combat Falling
/ Reserves
9 Secret
8 February 1985
e
y t
year. The referendum results from a successful suit begun last year
Communist Party (PCI) before the Italian Constitutional Court. Most labor
leaders, concerned that the referendum will further split the labor movement,
oppose it, but the rank and file may ignore their views.
the Communists believe the indexation cap wou e
defeated by a wide margin. The PCI, however, is now concerned that the
referendum may backfire on the party in May's nationwide elections. As a
result, Rome may be able to work out a legislative compromise that avoids a
referendum.
The Israeli Cabinet this week approved new measures to stem a continuing
drain on foreign currency reserves, which have dropped by nearly $1 billion
since June to $2.85 billion. The new measures will double the foreign travel
tax, impose a temporary duty on overseas airline tickets, and raise taxes on pri-
vately owned cars, boats, and planes. In addition, required deposits on 35
import items will increase, and the linkage of interest on bank deposits to
exchange fluctuations will end for accounts held less than one year. These
stopgap measures probably will not significantly reduce foreign currency
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Bolivia's Economic
Situation Worsening
US-Thai Textile
Unravel
Poland Steps Up
cultural
JBarter Trade
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8 February 1985
losses, but the government hopes to avoid another devaluation that would
intensify inflationary pressures. making adherence to the new wage-price
accord more difficult.
Less Developed Countries
Strikes, food shortages, and runaway inflation have pushed Bolivia even closer
to economic chaos. A prolonged walkout by factory workers has caused
production to plummet. Food shortages are more pronounced, and a nation-
wide shutdown by private banks has prevented cashing of end-of-month salary
checks. Meanwhile, the country's largest labor confederation is threatening to
declare an indefinite general strike. President Siles's prospects for remaining in
office until his term ends in August have been temporarily bolstered by the in-
creasing dominance of prodemocratic forces in the military. His failure to halt
the economic slide, however, leaves him vulnerable to a coup.
Bangkok will find it difficult to eliminate subsidies to textile exporters by 4
March, as called for in last week's agreement with the US Department of
Commerce. Attempts to end subsidies will provide fresh ammunition to
business and political groups who oppose Prime Minister Prem's austerity
policies and will intensify the political debate prior to April's National
Assembly session. If Bangkok maintains the subsidies and Washington again
proposes countervailing duties on Thai textiles, Prem will probably face
pressure from some Thai Cabinet members to link future purchases from the
United States to the outcome of the case. Further problems over textiles would
undoubtedly lead the Cabinet to reject Boeing's bid to sell 737s to Thailand's
domestic airline-a deal that already is in jeopardy
Poland has increased barter trade with CEMA partners and Western suppliers
to augment inadequate domestic meat supplies. Warsaw recently concluded a
$20 million exchange with New Zealand for 18,000 metric tons of frozen lamb
for heavy industrial equipment, believed to be largely mining equipment. In
early January, a deal with West Germany was completed involving 80,000
tons of Polish rye for 10,000 tons of German pork. The two trades would
supply roughly one-third of Poland's estimated meat import needs in 1985.
With cash and credit resources tight, additional barter deals for meat and
other agricultural commodities are likely. Last year's above-average harvest of
rye and record output of rapeseed exceed domestic processing and storage
capabilities, providing a ready surplus for barter.
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ungarian Social
Tension Blamed
on Reform
slow the pace of reform
Public reaction to recent consumer price hikes appears to be greater than
Budapest expected. The government raised prices last week as much as 25 to
30 percent for dairy products and household heating and imposed even stiffer
hikes on postage and transportation. Although the 1985 plan provides for a
small gain in real wages-the first since 1981-the US Embassy reports that
many are skeptical that the average 8-percent wage increase for public-sector
employees will cover the price increases. Moreover, this lastest round of price
reform hits people in the fixed-income public sector much harder than those in
the increasingly lucrative private sector. As a result, social tensions are
growing over wage differentiation, inflation, and conspicuous consumption by
the newly emerging entrepreneurial class. If discontent increases despite
government efforts to mollify the public sector, the leadership may decide to
ina's Civil Aircraft Over the last three months, China has ordered over 50 commercial aircraft
Buying Spree worth about $2 billion, Beijing could spend
\\ s With Research
,Vchnology
Links With Enterprises
C ina Boosting
ertilizer Capacity
some $12 billion over the next few years upgrading its aviation sector. To date,
China has committed nearly $1.4 billion for 25 Boeing aircraft, including
767s, 747s, and 737s. China is also turning to other suppliers with smaller
orders for three Airbus A-310s, eight Shorts 360 from Ireland, nine Soviet
TU-154Ms, and three De Havilland DHC-7s and five DHC-6s from Canada.
Most of the aircraft are scheduled for delivery by 1987 leaving little time to
prepare flight and maintenance crews-both already in short supply. In fact,
the Soviet purchase may be an effort to shorten crew retraining time. China
plans to retire 15 older Soviet aircraft, probably IL-14s, which will free their
Russian-speaking crews to man the new Soviet aircraft
As part of its effort to overcome a longstanding failure to transfer research re-
sults from the laboratory to factories, China is promoting the formation of
technology markets-places where research institutes, universities, factories,
and S&T personnel can discuss problems, display results and negotiate sales of
research results. Over 1,000 of these technical development and exchange
centers reportedly have been formed. The Beijing Technology Market, one of
the few permanent centers, sets selling prices for technology transfers, operates
a job-locator service for S&T personnel, and is involved in developing
inducements for S&T personnel to relocate. In promoting these markets,
China apparently has been influenced by its study of technology-exchange
centers in East Germany and other Eastern Bloc countries.
China is upgrading and expanding its phosphate fertilizer capacity to reduce
dependence on imports. Emphasis is on increasing China's currently small
output of diammonium phosphate (DAP), a multipurpose fertilizer. With
assistance from US, Japanese, Kuwaiti, and Tunisian firms, China will
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Inc 'easing Overseas
R mittances
Vietnam
DAP, two-thirds from the United States.
construct at least five new DAP plants with a total annual capacity of 1.2 mil-
lion metric tons. In 1984, China imported about 1.6 million metric tons of
New incentives have boosted hard currency remittances to Vietnam in the past
few months and may allow Hanoi to settle its $19 million in overdue debt to
the IMF. Overseas remittances, about two-thirds from the United States, fell
to only $30 million last year. In response Hanoi adopted a more favorable
exchange rate for remittances and increased the amount of cash that families
could receive from abroad by 50 percent.
remittances increased substantially in the last two months of 1984. The inflow
may reach $50-60 million this year and possibly $100 million by 1987 if Hanoi
demonstrates it can guarantee its citizens will receive the funds intended for
them. Vietnam will need a substantial portion to pay for rice imports in the
next few months and probably will use any remaining foreign exchange to
reduce overdue debts to the IMF in the hope of lifting the unprecedented
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South Korea:
Financial-Sector
Liberalization
t/
South Korea's'liberalization of its financial sector
will provide foreign bankers with increased oppor-
tunities for financial services in trade and foreign
exchange transactions. Economic policy makers are
taking steps to attract additional capital, technol-
ogy, and management skills, to allow the market to
determine interest.rates, and to expand the use of
equity markets. These measures are part of a
broader effort to open the economy that includes
easing regulation of imports and direct foreign
investment. We believe that the domestic economy
will be strengthened by more efficient mobilization
of capital, more equitable allocation of credit be-
tween large conglomerates and small firms, and
shrinking of the illegal curb market. Seoul recog-
nizes, however, that it must proceed slowly to avoid
shocking the private sector as banks and businesses
are weaned from government-directed, subsidized
credit.
Seoul, which has been loosening controls on the
financial sector since 1982, has accelerated the
pace in the last year. This activity reflects a
growing concern with scandals linked to the "curb
lending market," renewed pressure from foreign
bankers, and countermeasures being applied
abroad against South Korean exports produced
with subsidized credit. Liberalization efforts vary
from one financial market to another, as do the
prospects for future deregulation, but Seoul has
crafted its program to benefit all sectors by promot-
ing competition and reducing government interven-
tion in the routine management of financial institu-
tions, particularly commercial banks
The Ministry of Finance (MOF) is gradually reduc-
ing the Bank of Korea's (BOK)-the central
bank-direct control over the day-to-day manage-
ment of the banking sector, relying instead on
general guidelines and standards of performance:
? In early 1983, the BOK, formerly the majority
stockholder in South Korea's commercial banks,
completed a nine-year divestiture program.
? The government has replaced direct credit con-
trols for each bank with indirect measures such as
reserve requirements, rediscount operations, and
open market operations.
? The BOK's Office of Bank Supervision and Ex=amination is now concentrating on monitoring the
financial performance of individual banks.
? The government is phasing out its special treat-
ment of specific industries by eliminating prefer-
ential interest rates and forced lending (that is,
loans dictated by government policy).
Government influence over the financial system,
however, remains extensive. The MOF, for exam-
ple, controls interest rates to affect inflation and to
avert a slowdown in economic growth. The major
result has been a continual credit shortage caused
by low deposit rates that discourage savings and a
strong demand for loans at these below-market
interest rates. As a result, the MOF must allocate
credit among sectors: domestic banks must reserve
a specified percentage of loanable funds for small-
and medium-sized firms and other high-risk bor-
rowers. Beginning in 1985, foreign banks will also
be required to hold similar reserves. Seoul also
continues to monitor credit flows to the largest
firms and to restrict them if they absorb too large a
percentage of total credit.
The government has taken a few cautious steps to
loosen its control over interest rates, but we believe
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The curb money market, which operates outside
the formal financial sector, provides an estimated
10 percent of total domestic credit. Though the
market is not illegal, nearly all curb market
transactions violate tax laws and are made by
unlicensed brokers. The existence of the curb
market is explained, in part, by a lack of diversi-
fiedfinancial instruments for savers and borrowers
and by a rigid system of interest rates that are a
constraint in a dynamic economy such as that of
South Korea.
The curb market is a relatively simple system in
which a broker collects savings from households
for consumer loans or for short-term credit to
primarily small- and medium-sized firms. Savers
receive higher than official interest rates with no
tax liability and borrowers are willing to pay high
loan rates for scarce capital. The official financial
sector participates in the curb market as bankers
funnel funds between curb market brokers and
borrowers.
South Korea's curb market is periodically rocked
by scandals that paralyze this important source of
short-term financing. A 1982 scandal resulted
from a loss of confidence in a major curb market
broker who blatantly displayed government con-
nections, whereas a 1983 scandal was caused by
the bankruptcy of a major curb market borrower.
These scandals have had only temporary effects on
the curb market, which rebounds with renewed
vigor once order is restored.
The government has tolerated the curb market
because it helps to ease the liquidity problems
caused by its tight money policies, but major
scandals are prompting a harder line. The recent
liberalization of interest rates and laws discourag-
ing the use of aliases that cloak curb market
participants are intended to dry up these resources
and bolster the formal financial sector.
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8 February 1985
near-term prospects for comprehensive decontrol
are dim. Since last year, the MOF has been
phasing out its rigid schedule of loan and deposit
rates in favor of a more flexible system that allows
bankers to charge loan rates-within MOF-im-
posed limits-that reflect the demand for credit
and the risk. At present, however, even the most
creditworthy firms usually pay rates'at the upper
limit because of scarce credit. In November 1984,
interest rates in the call money market and in the
unguaranteed bond market were completely decon-
trolled.
Although some progress has been made, Seoul has
not been responsive to rapidly changing interest
rate market signals and continues to set rates in the
largest credit markets. Moreover, deposit rates,
particularly for small savers, are substantially be-
low market levels. As a consequence, the curb
market still is more efficient at mobilizing savings
than the organized money market. Even so, we
believe the freeing of interest rates in important
financial markets may accelerate if the experimen-
tal call money and unguaranteed bond rates are not
unusually high or volatile.
Better Treatment for Foreign Banks
We believe the new regulations that provide near-
equal treatment for foreign banks in the competi-
tion for won-denominated deposits and lending to
domestic firms will help alleviate criticism from
overseas bankers. Foreign banks can now compete
with domestic banks in the public bond market and
can gain domestic bank status through joint ven-
tures with Korean partners. This year the govern-
ment also will give foreign banks partial access to
the BOK rediscount window for preexport financ-
ing, followed by full privileges in 1986.' Although
'Loans to South Korean firms are typically made by banks
discounting commercial bills or promissory notes, which are then
rediscounted by the BOK at a preferential interest rate. The
rediscounted note or bill is a low-interest loan to the bank, which
then can make a new loan at the official loan rate with the
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access to the rediscount window will open new
business opportunities-essentially by relieving
chronic shortages of won-it will also require for-
eign banks to phase out the use of profitable swap
transactions.'
Despite the progress toward providing full "nation-
al treatment" for foreign banks, several contentious
barriers remain. Restrictive definition of foreign
banks' capital base-the basis of their lending
limits-puts them at a disadvantage with domestic
banks in offering large, single-borrower loans,
opening new branches, or providing high-profit,
nonlending services. The prohibition against for-
eign banks' holding title to real estate and other
property, including ships and aircraft, denies their
use of such collateral to secure loans. Foreign banks
must still gain MOF approval to enter newly
opened markets through a lengthy process with
obscure regulations. Moreover, continued depressed
profits among domestic banks may prompt Seoul to
close the door to new foreign banks.
Equity Market Restrictions Relaxed
Seoul is also gradually easing restrictions on for-
eign participation in the private securities market
to provide alternative corporate financing and to
attract foreign equity investment, thus reducing
foreign borrowing. The Korean Stock Exchange
(KSE) is being opened to foreign investment in
several measured steps:
? Two $15 million trust funds of KSE-listed stocks
were privately placed with foreign institutional
investors in 1981.
? The Korea Fund, started in 1984 as foreigners'
first chance to participate in the Korean securi-
ties market, has been well received and plans are
being discussed for a second fund.
? A limited number of foreign investors will be
allowed to purchase shares directly in prescribed
industries in 1986.
' Swap transactions occur when foreign banks acquire currency
from their home office (usually in the form of a short-term loan)
that is converted into won at the BOK. Swap funds offer a
guaranteed profit of 1 percent and freedom from foreign exchange
? Restrictions on repatriation of profits and on
areas where foreign investment is permitted will
be lifted in 1988.
In addition, foreign securities dealers, on a recipro-
cal basis, may open representative offices and, since
1983, establish joint ventures with South Korean
securities firms.' Seoul plans to lift restrictions on
Korean securities firms in 1988, and Koreans will
be free to make investments in foreign securities by
the mid-1990s, when liberalization is scheduled to
be completed.
We believe that the long-term prospects for an
international, market-based financial system in.
South Korea are favorable. The key argument of
the liberalizers-including many members of Presi-
dent Chun's Cabinet-that greater reliance on
market forces will benefit the Korean economy is
gaining wider acceptance within the bureaucracy.
Nonetheless, progress will come in fits and starts
because of domestic political considerations and
economic conditions, and trading partner pressures
for reforms:
? The pace of financial-sector liberalization could
slacken if policy disputes exacerbate rifts within
the ranks of the liberalizers-evidenced by a 10-
month delay in interest rate reform caused by this
group's infighting. We believe that the liberaliz-
ers will continue to have Chun's ear, but greater
caution and his belief that liberalization and the
economy are progressing may well curb its pace.
? Greater reliance on market forces carries a vari-
ety of risks and uncertainties, and, if economic
conditions deteriorate, criticism of government
policy would put heavy pressure on Seoul to
retake control of the economy.
' Representative offices are authorized to provide only market
information services and cannot conduct securities transactions
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? The 1984 US Trade and Tariff Act links Gener-
alized System of Preferences (GSP) benefits to
progress in economic liberalization, and South
Korean exports to the United States could be
sharply curtailed if these benefits were with-
drawn.
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Sudan: A Balancing Act
The Sudanese Government is under intense pres-
sure to initiate economic reforms while coping with
shortages of food and energy and a growing insur-
gency in the south. President Nimeiri probably is
giving greater weight to the immediate require-
ments for political stability than to the need for
major adjustments in economic policy. In our judg-
ment, Nimeiri's disinterest in, or aversion to, coher-
ent economic decision making-together with his
conviction that foreign benefactors, especially the
United States, ultimately will rescue him-may
preclude a systematic and sustained approach to
solving Sudan's economic difficulties.
To obtain renewed financial assistance from disen-
chanted international donors, we believe that Khar-
toum soon will announce an economic reform pack-
age, albeit one likely to fall short of donors'
expectations. Nonetheless, reforms such as devalu-
ation and price increases, even if only temporarily
or partially implemented, may exacerbate econom-
ic hardship in the cities and fuel growing political
dissent. Barring a resurgence of foreign assistance,
the Nimeiri regime probably will resort to increas-
ingly desperate measures to avert economic col-
lapse, including unorthodox trade agreements with
unscrupulous middlemen and perhaps even over-
tures to Libya or the USSR
Sudan: Economic Assistance From Million US $
Major Donors
Total
698.3
680.7
568.5 c
124.5 c
Western donors
369.3
400.0
300.7
80.1
United States
140.0
175.0
165.0
67.0
France
62.0
130.1
40.0
2.1
W. Germany
79.2
41.3
55.0
13.9
Netherlands
34.8
26.4
30.0
5.5
United Kingdom
53.3
27.2
'10.7
13.5
OPEC
200.0
130.0
178.0
0
Saudi Arabia
160.0
80.0
178.0
0
Kuwait
NEGL
0
NEGL
0
U.A:E.
40.0
50.0
0
0
Multilateral
129.0
150.7
NA
NA
World Bank
64.8
84.9
70.0
16.0
EC
45.5
40.9
19.8
6.5
United Nations
18.7
24.9
NA
NA
Estimated.
b Reflects assistance received up to June 1984.
c Minimum estimate.
represented payments to multilateral institutions,
and technically cannot be rescheduled. Most im-
portant, arrears of $84 million have put Sudan out
of compliance with its standby agreement with the
In common with many other Third World coun- IMF
tries, Sudan's current economic disorder stems
largely from profligate borrowing during the last Unless the IMF arrearages are resolved, the Fund
decade, coupled with economic mismangement and is not likely to extend further standby financing to
adverse shifts in its terms of trade. Despite gener- Khartoum, largely because of the .unfavorable pre-
ous debt rescheduling agreements, Sudan remains cedent it could create with other Third World
unable to meet its debt service obligations. Accord- debtors. The IMF reportedly is willing to accept a
ing to the most recent data, Khartoum was $124
million in arrears to international creditors at
midyear 1984. Over 80 percent of these obligations
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"reasonable payment" toward arrears as long as
full payment is made during 1985. The confronta-
tion with the IMF has also caused a slowdown in
disbursements of financial assistance from most
major donors. From January to June 1984, only
$168 million in official aid was transmitted to
Sudan, out of commitments of $625 million made
for the entire year. Although we lack accurate
information on disbursements during the second
half of 1984, we strongly suspect the slowdown has
continued. Most donors reportedly are extremely
displeased with Khartoum's economic policies-the
Saudis totally halted disbursements last year-and
are awaiting significant reforms by Sudan before
resuming full-scale assistance.
The IMF has recommended several reforms, in-
cluding an almost 50-percent devaluation of the
official exchange rate, a floating free market rate,
substantial price increases in sugar, bread, and
petroleum, and various tax increases and budget
cuts. Khartoum had already announced in Novem-
ber the reintroduction of excise and income taxes
and selected commodity price increases, but almost
all financial observers considered these modest
reforms insufficient. IMF analysts have admitted
that, even if the Fund's recommendations were
fully adopted, it would be impossible for Sudan to
close its foreign payments gap during the 1984
fiscal year.' This would be true even if all official
aid that has been committed were disbursed. The
only ground for optimism is that movement by
Sudan on the IMF reform package might persuade
donors rovide the additional financing required.
We believe Khartoum will seek modifications to the
IMF reform package and probably will delay any
reforms until it is convinced that its major donor,
the United States, will accept no further watering
down of proposed policy adjustments. Khartoum
probably will use Vice President Bush's expected
visit to Sudan in mid-February and Nimeiri's visit
to Washington (probably in March) to test the
limits of the United States' role as Sudan's chief
benefactor. Nimeiri is likely to argue that major
Secret
8 February 1985
Other (including -241 -290 -344 -600
interest payments)
a Fiscal year data beginning 1 July of the stated year.
b Estimated.
c Projected.
economic reforms would lead to growing political
unrest at a time already made difficult by current
austerity measures.
Impact of Drought and Economic Stagnation
The Nimeiri regime's survival over the next six
months may also depend on its ability to cope with
drought-related shortages of food and energy and
general economic stagnation. The regime has man-
aged to minimize the public impact of drought- and
refugee-related food shortages. The distribution of
food grains has been fairly equitable, ensuring that
no region has suffered disproportionately. Nor have
the government's policies favored urban areas at
the expense of the hinterland, thereby lessening the
probability that drought-stricken migrants will de-
scend on the Khartoum area
Food shortages are unlikely to disappear. The US
Embassy estimates the Sudanese grain shortfall in
the current harvest year to be 633,000 metric tons
after all currently pledged food aid from abroad is
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deducted. Sudan's severe foreign exchange short-
age largely precludes commercial imports of food
by the government. The responsibility for making
up the deficit probably will fall on already overbur-
dened international relief agencies.
Economic activity remains severely depressed.
Manufacturers have been badly squeezed by a
combination of recession, new taxes, and price
controls that have throttled production to less than
one-third of capacity. Gasoline supplies are ap-
proaching critically low levels, with most vehicles
restricted to a ration of two gallons per week.
Private investment in the economy has also sunk to
negligible levels as investors await the latest reform
package and a clearer definition of the govern-
ment's Islamization policies on business practices in
Sudan.
Despite shortages and economic stagnation, there
have been only a few signs of growing discontent
including small disturbances in early February over
shortages of bread and fuel. Many urban residents
appear to believe that drought, the influx of Ethio-
pian refugees, and the intransigence of internation-
al donors share blame with the government for the
current economic mess. Many other skilled and
articulate-and thus potentially dissident-Suda-
nese are leaving the country to seek economic
opportunities elsewhere.
Effects of the Insurgency
The insurgency in the south has stopped develop-
ment of Sudan's oil resources, the exploitation of
which would have greatly benefited its balance of
payments over the next two to four years. The US
company holding the principal oil concession.in the
south refuses to return to the area, despite veiled
threats by the government to turn elsewhere to
develop this resource. The recent establishment of
the Sudan National Oil Company, a joint venture
between the government and Saudi entrepreneur
Adnan Khashoggi, may have been intended to
make this threat appear more realistic. We believe
the deteriorating security situation in the south,
however, will deter anyone from operating in this
region in the immediate future.
The upsurge of military activity in the south is also
financially straining the government.
the Finance
Ministry is having increasing difficulty meeting
payroll expenses for the armed forces. Although
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hard currency shortages have been apparent for 25X1
some time, this is the first instance in which
Khartoum has found it difficult to raise local
currency for recurring operating expenses. The
growing cost of military operations could force the
government to abandon monetary restraint and
thereby worsen inflation
We doubt the Nimeiri regime will be capable of
making the structural changes to stimulate eco-
nomic growth. As previous reform programs have
shown, the Sudanese, for political and administra-
tive reasons, usually are unable to maintain the
continuity and momentum needed to see a program
through to its completion. In addition, the govern-
ment's propensity to misappropriate and squander
resources will severely compromise any adjustment
process.
The recent establishment of a Supreme Council for
National Economy, chaired by the President, offers
a faint ray of hope that a more integrated and
coherent economic decision making process will
develop. This body in theory could cut through the
bureaucracy and provide the leadership to sustain
difficult policy adjustments. Nimeiri's behavior,
however, suggests that his interest and close per-
sonal attention will not last much beyond the
immediate objective of securing renewed Western
financing. We believe that without the President's
active involvement, economic decision making will
revert to its previous inconsistency and lack of
focus.
Nimeiri is likely to resort to increasingly desperate
measures to avert economic collapse if foreign
donors continue to withhold their full financial
support. The government reportedly has already
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committed a significant portion of the current
cotton crop to a company owned by Khashoggi as
collateral for badly needed crude oil. Similar deals
with opportunistic middlemen could become more
frequent if alternative financing for Sudan's critical
import requirements is not found.
Nimeiri may also attempt a temporary rapproche-
ment with Libya, or even with the USSR, if
political and economic conditions continue to dete-
riorate. He might expect that a curtailment of
Libyan support for Sudanese insurgents would
enable oil development to resume in the south. We
believe, however, that full settlement of the insur-
gency would be needed. Moreover, we doubt that
either the USSR or any other foreign power that is
not currently an ally of Khartoum would provide
the level of financing that Sudan would require to
weather its current economic difficulties
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North Yemen:
Meeting the Challenges
of the Oil Discovery
The discovery of oil in July 1984 has brightened the
long-term outlook for the North Yemeni economy
but has heightened tensions along the disputed
borders of North Yemen, South Yemen, and Saudi
Arabia. To date, North Yemen's primitive econo-
my has faced increasing financial problems as a
result of import dependency, severe drought, a
decline in foreign aid, and a corresponding sharp
decline in foreign exchange reserves. The package
of austerity measures imposed by the government
in 1983 is easing the immediate balance-of-pay-
ments problem but has nearly halted development
programs. To develop the economy and improve the
living standards of most Yemenis, Sanaa needs to
avoid the "boom" atmosphere and the grandiose
projects that all too often accompany oil discoveries
in the Third World.
The Yemeni Government's hopes for the economy's
long-term vitality are pegged on the recent oil find.
The Hunt Oil Company's first strike was in the
Ma'rib Al Jawf Basin in July 1984. The original
concession area-near the poorly defined borders
with Saudi Arabia and South Yemen-was extend-
ed in November. Hunt has drilled two more suc-
cessful wells and intends to drill six more to
delineate the field. The drilling program is expect-
ed to be completed by this spring, and initial results
will be analyzed before further development plans
are made. On the basis of sparse preliminary
evidence, North Yemen's Petroleum Minister esti-
mates production potential from the first field at
200,000 barrels per day (b/d).
Sanaa has commissioned the Hunt Oil Company to
do feasibility studies on a domestic refinery, a
crude oil pipeline, and an export terminal.
production of at least
100,000 b/d is needed to warrant an export pipe-
line to the Red Sea, a route approximately 240
kilometers long that crosses a 3,000-meter moun-
tain range. Hunt has estimated that exportable oil
production is at least four years away, but Yemeni
officials are hoping to accelerate the timetable by
transporting crude oil in trucks. In either case, this
is a formidable undertaking because port facilities
are underdeveloped, and constructing new roads
and pipelines across the mountains would be ardu-
ous.
Disputed Borders Near Hunt Oil Concession
Tensions among North Yemen, South Yemen, and
Saudi Arabia over disputed borders could compli-
cate Hunt Oil Company efforts to develop its recent
discovery and drill other exploratory wells. None of
the borders in the area have been fully defined, and
Saudi Arabian-North Yemeni territorial claims
overlap by as much as 175 kilometers.
In mid-December, South Yemen deployed elements 25X1
of three brigades in the border region east of
Ma'rib. In response, North Yemeni troops occupied
high ground near the border that Sanaa considers
essential to the defense of the oil-drilling sites.
Early last month, North and South Yemeni troops
clashed briefly nearby.
North Yemen President Salih and South Yemen
President Ali Nasir appear to have defused tensions
in three days of shuttle talks that ended on 21
January. Salih reportedly agreed to extend a 1982
accord between the two countries that provides for 25X1
joint exploitation of oilfields in the vicinity of the
border. As a result, Salih may approve joint efforts,
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Problems in a Primitive Economy
North Yemen is the least developed country on the
Arabian Peninsula:
? Despite efforts at development during the 1970s,
much of the population lives in areas without
roads and electricity and where government au-
thority is minimal.
? Subsistence agriculture is restricted by a domes-
tic labor shortage and harsh and erratic climate.
? Until the recent oil discovery, few commercially
exploitable minerals were found.
The economy is heavily import dependent, with one
of the worst trade imbalances in the world-
exports typically cover less than 1 percent of
imports. Remittances from expatriates, largely
workers in Saudi Arabia, provide the bulk of the
foreign exchange to cover the trade deficit. Despite
predictions that the recession
in the Gulf would cause remittances to decline,
data for the first half of 1984 indicate that remit-
tance income has held up. Worker remittances
have been a mixed blessing, however. The labor
shortage caused by the departure of roughly 1
million Yemeni workers has inflated domestic
wages, while remittance- income has increased the
demand for imports. Government attempts to bene-
fit from this import boom by levying customs
duties resulted in a burgeoning black market of
smuggled goods, which the Embassy estimates is
equivalent to one-third of officially recorded im-
ports.
Foreign aid, primarily from Saudi Arabia and
other Gulf oil producers, is the other important
source of funds covering the trade gap. Recently,
however, the Gulf-wide recession has caused gov-
ernment transfers to decline markedly, from $439
million in 1982 to $160 million in 1983. We
estimate that 1984 aid remained at roughly the
1983 level. As a result, official foreign exchange
reserves fell to a low of $135 million in August
1983, compared with almost $600 million a year
earlier. Embassy reporting suggests that reserves
recently have increased to $300 million, but this
would provide only three months of import cover-
age. The persistent drought and the estimated $2
billion in damage from the December 1982 earth-
quake continue to aggravate the budget and cur-
rent account deficits.
Sanaa implemented a series of austerity measures
in mid-1983 to deal with its deteriorating financial
position. The government raised tariffs on consum-
er items, restricted import licenses, and stepped up
antismuggling measures. Sanaa also cut govern-
ment spending and increased taxes. The result was
a rise in customs revenue and a $900 million
improvement in the current account deficit. The
estimated 1984 current account deficit was $155
million.
Faced with further depletion of hard currency
reserves, the Central Bank stopped selling foreign
exchange in June 1983. Although Sanaa resisted
devaluation because offears of rapid inflation and
widespread public discontent, the divergence be-
tween the official rate and the moneychangers'
"street rate "forced the Central Bank beginning
last February to devalue the riyal several times.
Moreover, to restore business confidence, Sanaa
forced the closing of all moneychangers for two
weeks in November 1984 and then issued stringent
regulations requiring adherence to the official ex-
change rate.
Sanaa's success in temporarily stabilizing its for-
eign payments has come at the cost of scrapping-
most of its Second Five-Year Development Plan
and has sharply reduced growth rates. Real GDP
growth averaged only 2 percent in the last two
years-slightly less than population growth-com-
pared with a 6 -percent average annual rate between
1978 and 1982. Inflationary pressures have in-
creased, spurred by the recent devaluations, import
restrictions, and the continued-albeit reduced-
deficit spending; consumer prices rose an estimated
16 percent in 1984. Because many families hold
"mattress money" as a buffer against hard times,
there has been no observed increase in public
dissatisfaction with government handling of the
economy.
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Trade balance
-1,855
-1,714
-1,921
-1,761
-1,295
1,395
Exports (f.o.b.)
13
11
5
10
5
5
Imports (c.i.f.)
1,868
1,725
1,926
1,771
1,300
1,400
Services balance
1,022
742
875
1,038
1,110
1,200
1,254
943
1,175
1,228
1,300
1,350
2
15
23
26
30
25
-831
-957
-1,023
-697
-155
-170
146
332
439
160
150
150
NA
NA
185
197
200
225
34
40
27
8
10
15
416
166
-104
-24
-355
-370
90
98
69
168
100
100
-145
-321
-407
-188
-50
-50
a Estimated.
b Projected.
but only if promising geological structures are
found that straddle the border zone.
Riyadh is following developments in the border
area closely, and we doubt that the Saudis will
abandon claims to territory near the drilling sites.
Saudi Arabia has never officially accepted North
Yemen's version of its eastern border, which is
based on the so-called Modified Riyadh Line de-
clared unilaterally by the British in 1955. The
Saudis, however, are unlikely to interfere directly
with operations at the present drilling sites. They
know that the stakes for Sanaa are high and that
the Yemenis can be expected to fight to protect the
concession area.
continue to limit imports and rebuild its foreign
exchange reserves. The estimated increase of $8.2
million for investment and development spending in
the 1985 budget, however, would make it difficult
to decrease or maintain low import levels. It is
likely that remittances and foreign aid-despite
Saudi threats to cut contributions-will remain at
their 1984 levels.
Although any benefits are still several years away,
the discovery of "promising amounts" of oil has
presented Yemeni officials with the challenge of
preventing a "boom" atmosphere. The discovery
has changed North Yemen's status in the eyes of
foreign investors. It also has led the Yemeni busi-
ness community to start making grandiose plans
despite recent government efforts to avoid excessive
expectations. The news came at a propitious time
We do not believe that North Yemen's economy
will show any improvement in 1985 over its per-
formance in 1984. Sanaa will probably try to
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Oil Concession and Boundary Disputes
Al
'$Bha ha
Bislah /
Saudi /Arabia 1--
Ethiopia
Secret
8 February 1985
Jazirat
Jabal Zugar(\
(Y.A.R.) o
OJazirat at
H-sh
at K b
al
(Y.Aabw
R.)
/
/
/
Najran (oasis)
,Buq'ah
r. \
ry`J AnHazm
wa
Sanaa ;Me nb A
.ZHarib
J
A
Yemen\1Arab
Rep
ublic~;` ~;5s
(NorthY~emen)
a in,
Golle du.>
rd~Iljibouti
Boundary representation is
alia not necessarily authoritative.
Peop.1ejl
Dern oc"r~a~UNE,
J Hunt Oil Company concession
Oil sites
-- Modified Riyadh Line
-- Maximum Saudi Arabian border
claim (approximate)
Saudi Arabian province boundary
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North Yemen: Economic Indicators, 1978-85
Real GDP Growth
Percent
a Estimated.
b Projected.
Foreign Exchange Reserves
Billion US $
Consumer Price Growth
Percent
for Sanaa because businessmen have been increas-
ingly critical of government policies that have
curtailed growth. As expectations rise, Sanaa will
probably attempt to secure its power base by
distributing the benefits of economic growth to a
broad spectrum of the population. The government
is likely to concentrate on building infrastructure
and increasing health and education levels. Because
of the competing business, tribal, and religious
interests, it is likely that the government will
attempt to balance development throughout the
country. Most of the initial returns from oil produc-
tion will be used to make payments on debts
incurred on oil development projects, but Sanaa
may not be able to put off for long expectations of
higher living standards based on oil revenues.
The Hunt Oil discovery has led to a slight upturn in
US-North Yemeni relations. The discovery is the
one bright spot in the economy, and the fact that a
US firm made the find is a major plus for Wash-
ington. President Salih probably will press for
expanded relations with the United States as a
useful check on the Saudis and a counter to the
Soviet-backed regime in South Yemen. The Yeme-
nis believe that Saudi Arabia has a major influence
on US policies toward North Yemen and Salih will
remain sensitive to signs of Saudi influence on US
actions.
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8 February 1985
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Jordan: Weathering the
Arab Recession
The Jordanian economy has weathered the sharp
cutbacks in trade with Iraq and in Arab aid and is
showing signs of recovery. The inflation rate is low,
industrial production has picked up, and exports to
Iraq-one of Jordan's major markets-have start-
ed to recover. Faced with bleak prospects for oil
earnings, Saudi Arabia and Kuwait-Jordan's
largest donors-are unlikely to increase aid levels
to permit the high growth rates of the early 1980s.
Moreover, foreign exchange reserves have fallen to
their lowest level in eight years keeping Jordan
dependent on even the reduced level of Arab aid.
Amman may have to turn to greater foreign bor-
rowing from non-Arab sources to finance its expen-
ditures for 19851
Production, Prices, and Employment
Jordan's real GNP grew at an impressive average
of almost 14 percent per year between 1974 and
1981. The rapid decline in trade with Iraq in 1982-
83 and cutbacks in Arab aid caused real growth in
those years to drop to about 5.5 percent. Last year
growth slowed further to an estimated 4 percent.
Price increases have been restrained with the falloff
in economic activity. Inflation slowed to an esti-
mated 4 percent last year, as compared with 5
percent in 1983. Unemployment, estimated at 2
percent, is not a problem. In fact, Jordan has a
labor shortage and employs about 35,000 skilled
expatriates-primarily from the Far East and Indi-
an subcontinent-and about 120,000 unskilled
workers-mostly Egyptians. Moreover, about
300,000 skilled Jordanians work abroad, predomi-
nantly in neighboring oil-producing countries.
When the oil-glut recession hit these countries, it
was feared that many of these Jordanians would
have to return home and that an unemployment
problem would emerge. This did not occur, how-
ever, and worker remittances, an important compo-
nent in Jordan's balance of payments, have re-
mained strong
Foreign Aid and Payments
After receiving $1.2 billion in 1980, Arab aid
dropped to around $800 million in 1983. Last year,
Saudi Arabia was the only country to fulfill its
commitment to Jordan and total Arab aid fell to
about $500 million. Kuwait has resumed its aid at a
lower level, but Arab aid in 1985 will probably only
match last year's total.
Estimates for 1984 suggest that Jordan was able to
increase its exports, decrease imports, and maintain
its very positive net services balance. Despite the
falloff in overall grant aid, Jordan's current ac-
count deficit of $380 million for 1984 remained at
roughly the 1983 level.
Jordan's civilian foreign debt totals about $2 billion
and is largely owed to multilateral lenders. Debt
service is manageable, and there is no capital flight.
Short-term capital inflows, however, might have
tapered off last year.
Foreign Exchange Reserves Fall
Jordan's officially reported foreign exchange re-
serves fell to $490 million at the end of November
1984, the lowest level in eight years. Reserves
reportedly fell over $100 million in September
despite a $40 million aid payment from Kuwait
that month, and fell another $53 million in October
despite a $120 million aid payment from Saudi
Secret
DI IEEW 85-006
8 February 1985
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Jordan: Economic Indicators, 1980-84
Real GDP Growth Consumer Price Changes
Percent Percent
Industrial Production Growth
Percent
Arab Aid
Billion US $
Foreign Exchange Reserves b
Billion US $
u Estimated.
b Yearend.
~ November 1984.
Jordanian Government Budget a Million US $
Revenues 1,
701 1,638 1,949
Arab budget support
511 322 476
Development aid
141 178 225
Domestic revenue 1,
049 1,138 1,248
Expenditures 1,
845 1,941 2,109
Current 1,
165 1,266 1,267
680 675 842
144 303 160
a Data based on 1 dinar = US $2.60.
b Estimated.
e Budgeted.
Arabia. Overall, official reserve outflows-includ-
ing some gold sales-appear to have totaled about
$325 million from January through November
1984. This large outflow-which may only show up
as 1984 errors and omissions in the balance of
payments-may reflect large unrecorded govern-
ment payments for arms transactions. The Jordani-
ans signed an arms deal totaling about $300 million
with the Soviets last December, but it seems unlike-
ly that more than 10 to 20 percent would be used as
a downpayment. Amman also may be deliberately
underrepresenting its reserves in order to gain
additional aid or concessionary terms for future
arms deals. Jordan is considering arms purchases
from the French and the British, if concessionary
terms can be worked out.
High Hopes for Energy
Jordan is undertaking a two-pronged plan to reduce
its hefty bill for imported oil. Oil imports from
Saudi Arabia and Iraq cost almost $600 million
last year, about 20 percent of all imports and
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Million US $
Trade balance
-1,823
-2,435
-2,488
-2,456
-2,185
Exports (f.o.b)
575
735
751
580
675
Phosphate
158
166
162
142
186
Unrequited transfers
1,338
1,305
1,060
813
535
Current account balance
374
-42
-336
-389
-380
Capital account balance
-91
216
325
425
350
Errors and omissions
-119
-122
-151
-30
a Estimated.
b Does not equate with changes in official reserves because of
transactions involving official gold, SDR allocations, and official
foreign exchange valuation changes.
almost equal to total merchandise exports. Subsi-
dized energy prices kept overall energy demand last
year at an annual rate of about 14 percent. Under
the plan, Amman will double expenditures on oil
exploration and development to about $36 million a
year.
Two successful wells have been drilled, and the
Jordanians hope the field-as yet undelineated-
may produce 20,000 b/d, about one-third of Jor-
dan's needs. a third
completed well has also produced oil at a flow rate
substantially higher than the first two wells. The
plan also involves measures to lower consumption.
Subsidies have been reduced on petroleum prod-
ucts, and electricity rates, above a base amount,
have been raised. Import tariffs on energy-consum-
ing luxury items, such as large cars, are also being
increased.
Prospects Good for 1985
Despite the cash shortage, economic prospects for
1985 are relatively good. The current account is
likely to improve considerably. Tariffs have been
increased on imports of certain finished goods and
lowered on some raw materials. To reduce con-
sumption of imported oil and decrease government
subsidies, fuel prices have been increased. Worker
remittances remain strong. The government hopes
to increase exports by $300 million this year and 25X1
may come close to this figure. A number of indus-
trial projects involving fertilizers, phosphates, and
cement are coming on line, and the government has
arranged some countertrade deals, such as Iraqi oil
for cement, agricultural products, and other goods,
in order to stimulate sales
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Although the low level of foreign exchange reserves
is worrisome, the situation is still manageable.
Jordan is unlikely to experience a further dropoff in
Arab aid. The government has proposed an overly
ambitious budget. With large arms purchases in
mind, however, King Hussein may well seek further
monetary help from his customary Arab donors. If
donors balk-as expected-Jordan's credit rating
with world bankers is still good and, if necessary,
the country can turn to this source to fill its
financial gaps.
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