INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707430001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: July 15, 2010
• Sequence Number: 1
• Publication Date: March 8, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
D/ /EEW 85-010
8 March 1985
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1 /Perspective-South American Democracy and Debt
iii Synopsis
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
13 / Summit Issues: Thatcher's Troubles With the Falling Pound
17 Latin America: Tenuous Economic Gains.
21 / Indonesia: More Austerity in Store
25 /' Eastern Euro e' F ituation: Problems Persist
International
Economic & Energy
Weekly
ub-Saharan Africa: Copin With Economic Adjustment
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directed to Directorate oJlntelligence~
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Comments and queries regarding this publication are welcome. They may be
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8 March 1985
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International ,
Economic & Energy
Weekly.
Synopsis
1 Perspective-South American Democracy and Debt
Although the new civilian governments in South America recognized the
necessity of economic stabilization to maintain creditor cooperation and lay
the foundation for recovery, we believe the freer political environment will
complicate management of these countries' financial rescue programs. ~~ 25X1
13 Summit Issues: Thatcher's Troubles With the Falling Pound
The falling pound has placed Prime Minister Thatcher in a difficult political
and economic situation. The cost of dollar-denominated defense programs is
rising, and London's decision to support the pound by raising interest rates
threatens to retard economic growth.
The key Latin American debtors-Brazil, Mexico, Venezuela, and Argenti-
na-probably will avoid serious payments difficulties this year, but the other
small debtors remain vulnerable to serious financial disruptions that could
further reduce living standards and aggravate political strains.
21 Indonesia: More Austerity in Store
We believe Jakarta has sufficient financial and policy options to withstand
another modest decline in oil prices without extreme austerity measures but
would face very tough choices if oil prices were to drop precipitously.
25 Eastern Europe's Food Situation: Problems Persist
Over the past three years, East European consumers have seen an erosion of
many of the qualitative and quantitative gains in food supplies achieved in the
1970s. Last year's record grain harvest and improved output of many nongrain
crops will provide some relief in 1985, but problems will persist, particularly in
iii Secret
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8 March 1985
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31 Sub-Saharan Africa: Coping With Economic Adjustment
Efforts at economic adjustment by the Sub-Saharan African countries have
produced some modest gains and, if maintained, hold the promise for major re-
structuring of the region's economies over the longer term.
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Secret
International
Economic & Energy
Weekly
Perspective South American Democracy and Debt
management of these countries' financial rescue programs
The inaugurations of elected presidents. in Brazil and Uruguay this month
underscore the steady return of civilian government throughout the region-
eight out of 10 South American 'countries now are or soon will be ruled by ci-
vilians. Newly installed civilian governments have found that a price of
democracy is a more politicized approach to economic problems. Although the
new civilian governments in South America recognize the necessity of
economic stabilization-to maintain creditor cooperation and lay the foundation
for recovery, we believe the freer political environment will complicate
In the newer democracies, consolidating civilian rule has tended to eclipse the
dictates of economic stabilization. Argentina, for example, came to terms with
the IMF only after lengthy delays caused by political exigencies. Peru let its
IMF program lapse to halt the government's declining popular backing, while
Bolivia has been unable to implement coherent economic measures because of
domestic labor discontent. After three years of recession, domestic interest
groups throughout the region are insisting on a return to economic growth and
increased social spending to boost living standards. Organized labor, in
particular, will intensify demands for real wage increases. These demands will
be especially strident in Peru, Bolivia, Colombia, and Argentina, which all face
important elections in the next 18 months.
payments problems
As popular pressures collide with stabilization programs, we remain concerned
that South American countries will seek compromise through patchwork
policies. We expect most governments will take steps to stimulate their
economies-mainly by increased public spending-in order to expand employ-
ment. Simultaneously, price controls likely will be imposed and the pace of
devaluation slowed to hold down inflationary pressure, and exchange controls
probably would be retained in an effort to prevent a resurgence of serious
We judge that such a policy response will help consolidate civilian rule but
pose difficulties for sustaining financial progress. In the next several months,
we anticipate that Argentina, Bolivia, Brazil, Colombia, Peru, and Uruguay
will encounter difficulties in complying with IMF-supported targets and in
securing more lenient terms from creditors. Consequently, we believe South
American debtors will find it harder to obtain the development money needed
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8 March 1985
track.
to foster economic recovery and strengthen the external accounts. Under these
conditions, we remain concerned that domestic policy miscalculation-such as
overly ambitious expansion programs-could jar the rescue programs off
We believe that debtors will increasingly turn to Washington for help in
sustaining their rescue programs. As 1985 wears on, we speculate that debtors
will press US officials to:
? Intervene in disputes with the IMF to balance the requirements of economic
reform against the political imperatives of democratic government.
? Nudge lenders to provide credit and debt rescheduling.
? Help design financial strategies that support economic recovery and convince
creditors that more flexible terms are necessary to improve long-run
performance.
At the same time, pressure may also come from South America's creditors to
pressure recalcitrant debtors to resume payments and continue necessary
economic adjustmen
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Energy
Venezuela Pushes Venezuela has steadily increased its proportion of heavy crude oil-below 22?
Heavy Crude and API gravity-and refined product exports to buoy sales in a sagging market.
Oil Products Exports This strategy gives Caracas considerable marketing flexibility because prices
Expor s Surge
French Electricity
Vie am Seeks
I dian Help in
Oil Exploration
for these exports are not set by OPEC. Moreover, demand for heavier crudes
has been relatively strong as a result of recent refinery modernizations
worldwide that permit greater feedstock flexibility. According to the US
Embassy, exports of medium and light gravity crudes have fallen to about
200,000 b/d in the past year-less than 15 percent of total oil exports. These
crudes accounted for 20 percent of Venezuelan oil exports in 1983 and 30
percent as recently as 1981. Several hundred thousand b/d of light and
medium crude capacity has been shut in, and most of these grades are refined
before export. Most remaining medium and light crude exports are now either
marketed through a refinery in West Germany owned jointly with Veba, or
sold under the San Jose Accord that provides oil on discount credit terms to
other Latin American countries. These adjustments have helped enable
Venezuela to produce at the limit of its OPEC=imposed quota, despite a very
exports will continue to grow.
French exports of electricity to other West European nations grew substantial-
ly again in 1984, continuing a trend beginning in 1981. Net exports totaled
19.2 billion KWh (100,000 b/d oil equivalent), a 43-percent increase from 25X1
1983. Italy and Switzerland purchased the most electricity from France, with
lesser amounts purchased by Spain, West Germany, the Netherlands, Bel-
gium, and Luxembourg. These electricity sales earned about $480 million in
foreign exchange, and $100 million in profits for the national utility Electricite
de France (EDF). Despite competition from abundant oil and gas, French
pricing policies encourage the continuing substitution of electricity for oil and
will likely lead to growing demand for French electricity through the balance
of the decade: In addition, slower growth in domestic demand for electricity
and France's commitment to add nuclear power plants despite a surplus
generating capacity of more than 30 billion KWh indicate French electricity 25X1
Vietnam is negotiating with an Indian public-sector company for the lease of
oil exploration equipment and crews
The equipment, if provided, would probably be used by Hanoi to
supplement Soviet rigs now drilling in the South China Sea. A foreign
exchange shortage frustrated Hanoi's previous attempts to acquire jack-up rigs
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8 March /985
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some good will from Hanoi to offset the costs.
from Japan and Singapore, and the Vietnamese are likely to ask New Delhi to
extend credit for this deal. We are uncertain whether the proposed lease will
divert equipment away from India's own oil exploration effort. Even if it does,
however, New Delhi may be counting on commercial opportunities as well as
- International Finance
Paraguay s Growing Paraguay is one of only two South American countries that has not resched-
Financial Difficulties uled its foreign debt, and we judge its day of reckoning is fast approaching.
According to the US Embassy, foreign banks are growing tired of Asuncion's
continued foot-dragging on its $175 million in arrearages. Commercial
creditors are becoming increasingly reluctant to syndicate new credits, and the
government has been unable to find $15 million in cofinancing to complement
a World Bank loan to Paraguay's livestock fund. Meanwhile, export revenues
from the Itaipu hydroelectric project have slowed to a trickle. According to
IMF estimates, imports and debt service exceeded exports and long-term
capital inflow by $163 million in 1984. Moreover, capital flight totaled an
estimated $130 million last year. The Central Bank drew down foreign
reserves by 23 percent to $471 million between December 1983 and September
1984. With a minimal reserve cushion to meet mounting payments, Asuncion
probably has little alternative but to seek a rescheduling agreement this year
that will entail economic stabilization measures.
New Zealand Volatile trading of the New Zealand dollar on financial markets last week-
Currency Float
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8 March 1985
economy and protecting jobs.
possibly caused by fear of US trade sanctions in the wake of the ANZUS port
access crisis-encouraged, Finance Minister Douglas to enact the float he has
been preparing for months. Douglas had already strengthened the financial
sector by building up foreign exchange reserves, freeing interest rates,
liberalizing barriers on international flows of capital, and allowing an increase
in the number of foreign exchange dealers. Because the float has produced no
marked revaluation in trading this week-the currency has been trading
around 43.3 US cents since the float-Douglas has been able to fend off
criticism that it would harm exporters and risk external manipulation of the
exchange rate. The float will allow the Lange government greater flexibility in
controlling inflation-currently about 15 percent at an annual rate-and in
managing foreign debt financing. Moreover, progress in reducing inflation and
achieving this year's modest growth target would allow Douglas to continue
imposing his conservative economic policies on an often-fractious Labor Party
caucus. We believe it would undercut the party's left wing, which has been
urging Lange to return to traditional policies of stimulating the domestic
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US R Opens New
argo Line to
Nicaragua
v
Libyan-Turkish
Arrears Mount
Global and Regional Developments
According to press reports, the Soviets recently inaugurated a second regular
cargo line between Leningrad and the Nicaraguan port of Corinto. The new
service will utilize vehicle-carrying Magnitogorsk-class roll-on roll-off
(RO/RO) ships, the largest in the Soviet merchant fleet. The actual opening of 25X1
the line may predate the announcement. Two Magnitogorsk-class ships have
already called at Corinto since December. Both delivered military-associated
equipment (at least 600 trucks) as well as commercial cargo (for example, 500
automobiles). These RO/RO ships permit greater security and faster unload-
ing than the conventional freighters of the Soviet Baltcapas line that has
served Corinto since January 1981. ~~ 25X1
Libya's refusal to pay off its arrears to Turkish firms is a major cause for An-
kara's careful handling of Libyan leader Qadhafi. Libya has piled up $490
million in accumulated arrears and owes at least another $1 billion on
equipment purchases and guaranteed notes. The two countries temporarily
resolved their payment differences in 1983 when Ankara agreed to double its
imports of Libyan oil-about 60,000 b/d and 20 percent of total oil imports-
with Tripoli using half of the revenues to pay arrears to Turkish contractors.
The US Embassy in Ankara says that this agreement has not been met over
the past several months. Qadhafi has been using financial arrears to gain
political concessions from other trade partners and probably is looking for a
goodwill gesture-a state visit to Turkey-as the price for resuming payments
National Developments
Developed Countries
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8 March 1985
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 Japanese Concession The Ministry of Health and Welfare and Travenol Japan, a US kidney dialysis
/on Medical Equipment manufacturer based in Japan, have agreed to raise National Health Insurance
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reimbursement fees. for Japanese doctors who use this manufacturer's dialysis
equipment-widely acknowledged as the world's best. The Health Ministry
has decided that reimbursement limits be more than doubled to $230 per
patient per month; an advisory council to the Ministry had recommended an
increase of only $7. Other changes include additional reimbursements for
.telephone consultations and relaxing the qualifications for medical facilities
authorized to use this equipment. These revisions represent about 90 percent of
Travenol Japan's goal and will likely result in increased usage of this dialysis
therapy in Japan. Tokyo probably will use the agreement to counter US
criticism during the 12 March bilateral talks to discuss opening the pharma-
ceuticals and medical equipment markets.
panish Unemployment Falling domestic demand prompted a 3.3-percentage-point increase in the
Rises in 1984 Spanish unemployment rate last year-raising it to 21.7 percent, nearly five
times the 1975 level. Preliminary statistics show job losses were sharpest in
construction and services industries, reflecting drops in private consumption
and investment. The government's replacement of an agricultural make=work
program with unemployment benefits played a smaller part, pushing the
jobless rate up an estimated 1 percentage point. A number of factors suggest
that the unemployment rate may begin to stabilize this year. Real unit labor
costs fell 5.5 percent in 1984, strengthening firms' financial positions. Increas-
ing profits in the export sector, a slowdown in inflation, and the Socialist trade
union's agreement to reduce wage demands should help stimulate investment
and job creation this year.
Greek Budget
Avoids Austerity
Canadian Defense
Spending
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8 March 1985
percent of GDP in 1984 to 16.4 percent in 1985:
The 1985 Greek budget fails to provide the fiscal stringency necessary to
reduce inflation and stem the deterioration in the foreign payments position.
The proposed spending and tax changes in this election year favor principally
farmers and lower income groups. Nominal expenditures ace projected to rise
27 percent-compared with 18-percent inflation-with the largest increases
slated for social services, agriculture; public works, and education. Defense
spending will remain around 5 percent of GDP, but, as a share of the budget, it
will decline to about 13 percent-down from 21 percent in 1979. Costs of
servicing the public-sector debt are projected to jump by nearly 50 percent.
The anticipated 30-percent rise in revenues probably will not materialize
despite a boost in direct taxes as well as better enforcement measures and a
speedup in collection of past years' taxes. Past revenue projections have nearly
always fallen short of their target, given the high level of tax evasion in Greece.
As a result, the public-sector deficit is expected to climb further, from 15.7
Ottawa's spending estimates for the next fiscal year, announced on Tuesday,
indicate that Canada will, as it has since 1980, meet the NATO goal of 3-per-
cent real growth in defense spending. As with many NATO countries,
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spending.
to fully meet its force modernization program and its NATO force goals. As a
result of former Prime Minister Trudeau's underfunding of the military in the
1970s, defense spending would have to grow by much more than 3 percent to
fulfill Canada's current NATO commitments. Prime Minister Mulroney has
progressively limited his government's ability to increase military outlays. The
Tories now seem bent on spending programs to reduce the 11.2-percent
unemployment rate and are wafliing about cutting social benefits and transfer
payments to the provinces because of the possible political costs. Whether
Ottawa uses its next budget to reduce deficits or to increase jobs, there will be
little left for growth in defense spending, and Mulroney seems averse to raising
taxes. Its rhetoric notwithstanding, the government is coming to realize that
there is virtually no political support in Canada for major increases in defense
however, this amount will not allow Canada
Less Developed Countries
Bolivian Labor A labor demonstration in La Paz on Monday, which press accounts say
~otests Increasing
Brazil Expected To
ange Mix of Soybean
Exports
elections scheduled for 16 June.
involved almost 50,000 workers, was the largest antigovernment rally since
President Siles took office in 1982. It followed a decision last Friday by the te-
lecommunicators union to begin an indefinite strike to protest government
austerity measures. Meanwhile, the Defense Minister has warned that the
military is prepared to take over essential state services to prevent a breakdown
in order. The protests reflect a decision by Bolivia's largest labor confederation
to avoid a general strike for now in favor of more limited actions. Miners and
other labor militants, nevertheless, are increasingly restive; their penchant for
violence risks provoking a confrontation with government troops. The
military's promise to control labor demonstrations and the apparent lack of
serious coup plotting point to a growing military acceptance of presidential
Brazil is expected to boost its exports of
soybeans from 1.6 million metric tons during the 1984/85 market year
greatly alter Brazil's earnings potential for 1985.
(February/January) to as much as 3 million tons this season. At the same time,
exports of soybean meal are expected to fall below the 7.6 million tons
exported last season, while soybean oil exports are likely to remain at about the
1-million-ton level. This shift away from the higher valued processed products
is largely because of weak demand for meal in Western Europe. Brazil, the
world's second-largest soybean producer and exporter, earned an estimated
$2.5 billion from soybean and product exports in 1984-roughly 9 percent of
its total export earnings. The shift from meal to bean exports is not likely to
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Moroccan Grain
Outlook
sharply increase the risk of domestic unrest.
Morocco faces bleak prospects for meeting its grain needs again this year. The
US Embassy estimates that, even with the possibility of the best harvest in five
years, Morocco will deplete available grain stores by July if US CCC credits
remain frozen and additional concessional food aid is not forthcoming. The
Embassy confirms French willingness to supply 250,000 metric tons of
concesssionally priced wheat, far short of the 600,000 tons requested by Rabat.
Paris is reluctant to provide more because Rabat already is in arrears on
outstanding French loans. If no new concessional sources are located, Morocco
will have to spend $80 million in scarce foreign exchange to cover necessary
wheat imports through the end of 1985 or reduce consumption that would
Moroccan Inflation Morocco's official inflation rate hit 12.5 percent last year-double the 1983
Unabated level and the sharpest increase since 1981-and the US Embassy anticipates
little relief this .year. The actual level of inflation almost certainly is higher-
. probably around 15 percent-because the official price index includes many
subsidized
oods and no l
n
t
l
fl
i
g
o
ger accura
e
y re
ects consumpt
on patterns. The
opposition press has focused on inflation to justify its charges that wage hikes
budgeted for 1985 are insufficent to protect living standards. In addition, the
$210 million budget allocation for consumer subsidies has been attacked as
inadequate to keep food prices stable. The bad news on prices will seriously
hinder government efforts to hold consumer discontent at bay while attempt-
ing to deal with the IMF, foreign creditors, and a growing food problem this
spring.
Liberian Economy
Deteriorating
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Management of Liberia's economic crisis is taking second seat to preparations
for national elections in October and a return to civilian government in
January 1986. Diplomatic observers believe Head of State Doe will continue to
avoid austerity measures that would further erode living standards. Instead,
we believe that Monrovia will resort to ill-conceived stopgap measures that will
compound the country's financial problems. Doe, for example, may issue more
unbacked Liberian $5 coins; which would fuel inflation, increase capital flight,
and violate a longstanding arrangement that the government has with
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affiliates of US commercial banks designed to shore up the country's dollar-
based financial system. The government will also feel pressured for political
reasons to pay for imported necessities in lieu of debt servicing, which could
bring foreign debt arrearages to $140 million by the end of the year and almost
certainly scuttle negotiations with international lending institutions for new
babwean Reforms ~ /Harare has proposed two agricultural measures that could dampen foreign
hreaten Commercial ~/ investor confidence and demoralize the commercial farming sector. According
Farming to US Embassy reporting, Zimbabwe intends to nationalize grain milling;
although budgetary constraints probably will hamper implementation. The
milling industry has net assets totaling at least $75 million, one-third of which
is owned by foreign shareholders, according to Embassy sources. Nationaliza-
tion would disrupt the industry, further discourage foreign investment, and
complicate negotiations with the IMF for a needed standby agreement. A
proposed land acquisition bill would curtail property rights based on preinde-
pendence law by giving the government first right of refusal for any rural land
offered for sale. In addition, emigrating white farmers would be penalized
because Harare would no longer be required to buy land with foreign currency,
nor to pay full market value. Although the bill is unlikely to be introduced be-
fore the national elections in June, the Embassy believes it is certain to pass. ~
A . gola Ready To Sign Angola is expected to join the Lome Convention soon, thereby making it
~
me Convention eligible to receive badly needed EC development aidl
Luanda's refusal to accept a clause linking West Berlin to the con- 25X1
Burm Rice
Ex its Slump
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8 March 1985
vention had prevented accession. Angola's Bloc allies flatly reject the clause
and apparently had warned the dos Santos regime against signing any 25X1
agreement containing even an implied reference to West Berlin. Under a
compromise solution proposed by the West Germans, Angola will sign the
convention without making specific reference to Berlin. Once the agreement is
signed, Bonn. will send a note to Luanda stating that the German Federal
Republic understands that Angola recognizes the clause. Bonn does not expect
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According to the US Embassy, Burma's rice exports for the fiscal year ending
in March are unlikely to exceed 612,000 metric tons-two-thirds the volume
of the previous year. Although the 1984/85 crop was good, Rangoon is fihding
it difficult to meet procurement targets because farmers prefer to sell their rice
on the black market at substantially higher prices. Rice exports-the leading
foreign exchange earner-probably will remain depressed throughout 1985 as 25X1
well. Burma, the world's fourth-largest rice exporter, has lost several tradition-
al customers because of poor quality and high prices-Thai prices on
comparable grades of rice are now $20 lower per metric ton. Rangoon over the
past year has expressed concern that US rice exports under PL480 have
undercut its exports, and may become even more vocal about US sales as
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Communist
/
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Soviet 1984
The USSR sold 30 metric tons of gold in December 1984
Gold Sales
On the basis of Soviet hard currency needs and the
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8 March l 985
network of the gold trading scandal.
fall in gold prices in 1984-particularly the sharp drop in the second half-we
estimate net Soviet gold sales in 1984 were probably just over 60 tons. The
high December volume, however, did not represent new sales of gold shipped
from the USSR. Rather, the gold was sold to offset future purchase
commitments undertaken previously by gold dealers at?the Soviet-owned
Wozchod Handelsbank. The Swiss-national dealers were recently fired for
unauthorized speculative gold trading, and the Soviet former president of the
bank was recalled to Moscow to face criminal charges. It has been clear for
several months that Moscow would have to take steps to offset Wozchod's
purchase commitments and reduce the total cost to the Soviet financial
Warsaw has started implementing price increases that will raise the cost of liv-
ing about 3.8 percent this year. The government responded to public criticism
by phasing in the increases over the next four months, reducing the planned
hike in coal prices, postponing until next year increases for central heating and
hot water, and boosting compensation for low-income workers. The authorities
maintained rationing on all staples except flour and grain products, and
increased the prices on these latter staple foods as well as milk and sugar by 20
to 70 percent on Monday. Retail prices of electricity, coal, and natural gas will
rise by 20 to 30 percent on 1 April, while the most politically sensitive
increases-l0 to 15 percent on meats and fats-are scheduled for 3 June.
This response to public criticism shows a lack of commitment to austerity
measures that would be required for large IMF credits. Such backsliding will
perpetuate imbalance in the food market and stimulate black-market activity.
By yearend, the cost of subsidies probably will exceed the present 33 percent of
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the budget because prices of most staple foods will still remain 30 to 40 percent
below production costs, and farm procurement prices are likely to rise again in
July. Moreover; price hikes in many manufactured consumer goods are still
limited to 10 percent.
Cze oslovakia
elaxes Import
Controls
The Czechoslovak Government has decided to boost imports from the West
significantly this year. The policy change comes after another year of slow
economic growth and government concern that the industrial sector is
increasingly out of date and uncompetitive in international markets. The top
priority for new purchases will be high-technology goods and machinery aimed
at modernizing such key sectors as electronics and chemicals. During 1981-84,
Czechoslovakia's determination to reduce its dependence on the West led to a
27-percent decline in imports from the West and a jump in the share of trade
with socialist countries from 70 percent to almost 80 percent. Nonetheless, the
government's desire to avoid new borrowing and to completely pay off its small
hard currency debt-about $2 billion at the end of 1984-probably will limit
its new opening toward the West.
roblems and transportation problems. The US Embassy reports that electricity is being
Bulgarian Weather Harsh winter weather has aggravated problems in Bulgaria's import-depen-
Aggravates Energy dent energy system, leading to electricity outages, school and factory closings,
supplied for three-hour intervals nationwide, and long lines have formed at gas
stations. According to one Bulgarian official, freezing temperatures have
hampered lignite mining and slowed coal deliveries from the Soviet Union. In
response, the Ministry of Energy and Raw Materials, formed in January 1984,
has been redivided with former Power Supply Minister Todoriev recalled to
head the new Ministry of Power Supply. An ambitious program is under way
to develop domestic energy supplies, primarily by expanding nuclear and low-
calorie coal facilities, but it is fraught with construction delays. Compounding
Sofia's problems, Moscow is insisting on more and better quality Bulgarian
food products and consumer goods in exchange for its raw material deliveries.
The problems will probably lead Sofia to place a higher priority on completing
new power plants, accelerating investment in energy-efficient equipment, and
converting oil-burning facilities to coal and natural gas.
US Indirect Trade Preliminary Hong Kong trade statistics indicate that US exports to Vietnam
With Vietnam Increases through Hong Kong tripled to $1.8 million in the first six months of 1984, as
compared with the same period in the previous year. The US products
consisted largely of chemicals and spare parts and machinery for Vietnam's
dilapidated industry but also included parcels sent by Vietnamese residents in
the United States. Although the statistics suggest that US imports from
Vietnam through Hong Kong-frozen seafood and raw materials-fell by a
fourth to $150,000, we do not believe this indicates a sharp overall drop in US
purchases of Vietnamese goods. Although most of the US products reaching
Vietnam go through Hong Kong, a substantial share of US imports from
Vietnam flow through Singapore.
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Lao Census Fuels Fears surrounding the first nationwide census-which ended this week-
Cu~ency Depreciation contributed to a 31-percent depreciation in the black-market value of the ki
in late February to 350 kip per US dollar.
the public suspects that the government has ulterior motives for the census-
including confiscating property, enhancing i,.:.,..ial security, and recalling the
currency and issuing new kip. Concern was particularly evident in the
countryside, according to the US Embassy, and large numbers of rural
dwellers flocked to Vientiane to buy gold. In an attempt to halt the kip's slide,
government officials have arrested several gold traders in Vientiane for
overpricing and are increasing their supervision of exchange markets. Another
further sharp drop in the black-market rate would probably make Vientiane
more amenable to longstanding IMF recommendations for an official devalua-
tion of the currency.
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Summit Issues: Thatcher's Troubles
With the Falling Pound
The falling pound has placed Prime Minister
Thatcher in a difficult political and economic situa-
tion. Despite her efforts to lay blame on external
factors such as, oil prices and the "unprecedented"
strength of the dollar, the Labor Party is charging
economic mismanagement. The cost of dollar-
denominated defense programs is rising, and
London's decision to support the pound by raising
interest rates threatens to retard economic growth.
Should oil prices fall again-which many oil ex-
perts expect-the pound is likely to continue its
slide. This would further improve.British industrial
competitiveness in the longer term, but, if accom-
panied by continuing high interest rates, it would
reduce real economic growth prospects. Moreover,
a prolonged pound crisis might threaten the entire
"Thatcher Revolution" by convincing supporters
that the country is on the same "stop-go" treadmill
that the Tories promised to stop.
Exchange Rate Policy
Thatcher prefers to let the exchange markets deter-
mine the value of the pound, but, for political as
much as economic reasons, she has felt compelled
to act. Indeed, she recently painted her government
into a policy corner by stating flatly that the pound
should remain above parity with the dollar.
In early January, in an effort to shore up the
plummeting pound, the Bank of England supported
the commercial banks when they raised the base
lending rate a percentage point, and then the bank
took the initiative by boosting the rate by 1.5
percentage points a week later.' Renewed weakness
' This is the third major occasion that the Thatcher government has
boosted interest rates sharply to halt a run on the pound. After the
first two instances, in October 1981 and July 1984, the pound
temporarily stabilized. Most interest rates, however, came back
down rather quickly, returning to precrisis levels within about six
in oil prices, however, caused a resumption of the
slide, and on 28 January commercial banks boosted
their lending rates an additional 2 percentage 25X1
points to 14 percent-producing the highest real
interest rates in 150 years, according to the Finan-
cial Times. Despite such high rates, the pound
touched an all-time low of $1.039 on .26 February.
The Bank of England also has intervened in the
market by selling dollars. Such intervention gener-
ally has been limited, however, and appears to have
had little effect. London bankers have told our
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United Kingdom: Trade-Weighted Price-Adjusted
Exchange Rates, 1975-85
Against 18
currencies,
excluding the
dollar
Against 19
currencies,
including the
dollar
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United Kingdom: Current Account Balance and
Interest Rates
Current Account Balance
Billion US S
I i I ~ I i I i I
-]0 1975 76 77 78 79 80 81 82 83 84a
Interest Rates
Percent
Embassy they believe there is a growing split
between the Treasury and the Bank of England
over the question of intervention. The Bank seems
to believe that more intervention is necessary but is
under pressure by the Treasury to hold back.
Nonetheless, the Bank apparently intervened heavi-
ly-along with. a number: of other central banks-
on 26_ February:
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Budget Consequences
The fall in the pound and the subsequent interest
rate hikes will make it more difficult for the
government to stay within its planned budget.
Thatcher sees reduced public spending as a key to
sustained economic growth, but the budget already
is under pressure because of increasing outlays for
unemployment compensation and the effect of the
coal strike on government borrowing. Defense costs .
are particularly affected by'the exchange rate. The.
pound's fall has added at least 25 percent to the
estimated cost of the US-built Trident system, for
example, and has forced the government to spread
the cost over an additional five years. Higher
interest rates will also increase other government
expenditures. The US Embassy in London esti-
mates -that debt service will rise this year by almost
$800 million if interest rates remain at their cur-
rent levels for six months.
Chancellor of the Exchequer Lawson added to Tory
nervousness when he recently told Parliament he
might have to abandon widely publicized plans to
cut personal taxes by $1.5-2.0 billion this spring.
Lawson has been torn between wanting the tax cut
to stimulate consumer spending and fearing the
cut's possible inflationary consequences. Cancella-
tion of the promised tax cut almost certainly would
fuel criticism of the government's tight fiscal poli-
cy-as well as its indecisiveness.
Economic Consequences
Using our Linked Policy Impact Model (LPIM), we
estimate that, had interest rates remained at the
late 1984 level of 9.5 percent, the fall in the pound
against the dollar from $1.20 to $1.12 would have a
negligible impact on GNP and unemployment in
1985 and a slightly beneficial economic impact in
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The Ups and Downs of the Pound
The pound has experienced sharp oscillations dur-
ingthe last decade, abetted in part by Britain's
shv't from being a large net oil importer to being a
significant net oil exporter. after a period of
relative stability in the mid-1970s, the pound
began to appreciate sharply at the end of 1978 as
domestic oil production rose. By first half 1981, we
calculate that-on.atrade-weighted and price-
adjusted basis against 19 currencies-sterling had
risen 43 percent above its 1975-77 average.
In 1981 the pound reversed course, and, by the end
of February 1985, its trade-weighted price-adjust-
ed value had dropped back almost to the 1975-77
average. Most of the decline has been a correction
from the previous overvaluation-which seriously
eroded British international competitiveness and
led to an $18 billion deterioration in the nonoil
current account balance between 1981 and 1984.
The general strength of the dollar also has placed
downward pressure on the pound. Between first
hall 1981 and 28 February 1985, the trade-
weighted price-adjusted pound fell 27 percent
against all currencies in our index but only 20
percent against currencies other than the dollar. In
other words, the rise of the dollar accounts.for
almost one-third of the.fall in the pound since
early 1981.
Sterling s latest episode of weakness began in mid-
December. after seeming to stabilize at about
$1.20, the pound plunged nearly 8 percent in a
month, reaching $1.11 on 14 January. This decline
mainly reflected pound weakness rather than dol-
lar strength because sterling.fell almost as much
against other major currencies. The pound weak-
ened primarily because of uncertainty over.future
oil prices and growing questions about London's
resolve infighting irtflation. The coal strike also
was a contributing.factor-we estimate that re-
duced coal output and increased oil imports were
costing Britain $5 billion at an annual rate in
,forgone foreign exchange earnings.
1986. The immediate impact would be mixed be-
cause the lower pound would raise import prices,
thus reducing real consumption spending, but also
would increase exports somewhat as British goods
became more competitive. The longer run effect-
again assuming unchanged interest rates-would
be clearly positive because British consumers would
over time lower spending on higher priced imports
and increase spending on relatively lower priced
domestically produced goods. Also, the competitive
advantage reaped on the export side would boost 25X1
sales abroad.
London's efforts to halt sterling's decline by raising
interest rates, however, could more than offset
these potential gains. If rates stay up for more than
a few months, GNP growth this year is unlikely to
reach the 3.1 percent widely forecast before ster-
ling fell below $1.20. We estimate that, if interest
rates are maintained at the present level of 14
percent through 1986, GNP growth will be slower
both this year and next because of sharply reduced
growth of private consumption and investment. A
substantial improvement in the current account
probably will be insufficient to offset these negative
effects on GNP.
Political Impact of the Falling Pound
currency reflects a country's basic strength, a
notion her opponents are already throwing back at
her. She also has often indicated that Britain's
economic problems are domestically produced and
must be domestically resolved, but she is frustrated
by the weak pound, which she holds is at least
partly due to the strong dollar and thus is beyond
her control. On 31 January, the Labor Party moved
to censure the government's handling of the econo-
my, but the motion failed by a wide margin.
Government efforts to support sterling, especially if
made for a prolonged period, run against
Thatcher's conviction that the government should
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United Kingdom: Economic Impact of a
Weak Pound and High Interest Rates a
Percentage point change
from baseline scenario
Case I Case II
Weak Pound With Stable Weak Pound With Higher
Interest Rates Interest Rates
e Simulation using CIA's Linked Policy Impact Model (LPIM). In
the baseline scenario the pound and short-term interest rates are set
at their late 1984 levels-$1.20 and 9.5 percent, respectively. In
case I the pound is lowered to $1.12, with no change in interest
rates. In case II the pound is kept at $1.12, and short-term rates are
raised to 14 percent.
not attempt to solve problems better left to market an all too familiar episode in postwar British
forces. Both Thatcher and Lawson, in answer to history. The current situation could persuade voters
critics who demand greater public spending to who supported Thatcher in 1979 and 1983 that,
alleviate unemployment, have claimed that market despite brave rhetoric, the country is on the same
forces are ultimately the most effective means by treadmill that the Tories promised to stop.
which inefficient industries can be reformed and
the economy lifted from its long malaise. Thatcher
has also argued that, however painful in the short
term, her policies are the only realistic way of
dealing with long-term problems. The recent weak-
ness of the pound is being portrayed by her oppo-
nents as a direct challenge to both notions. Yet
failure to act could revive speculation that the
government does not care how fast or far sterling
drops, something that Thatcher has said is not the
case.
The plight of the pound also undercuts Thatcher's
claim that she is leading Britain to a painfully
achieved but lasting improvement in the economy.
Pound crises, and subsequent interest rate hikes
and budget cuts to "restore confidence," have been
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Latin America: `Tenuous
Economic Gains
The big Latin American debtors-Brazil, Mexico,
Venezuela,. and Argentina-probably will avoid
serious payments difficulties this year, but the
others remain vulnerable to serious financial dis-
ruptions that could further reduce living standards
and aggravate political strains. Improved creditor/
debtor relations, however, have reduced the likeli-
hood of unified action by Latin American debtors
and have calmed fears about certain debtors. We
nevertheless remain concerned about potential con-
frontations if creditors begin to view debtor auster-
ity programs as inadequate and stiffen their terms
for restructuring debt and providing new money.
Financial Adjustment in 1984
Economic adjustments under IMF-supported pro-
grams enabled the region to reduce its current
account deficit last year by 63 percent from 1983
levels to $2 billion. Preliminary government statis-
tics indicate that the major Latin American debtors
increased their combined trade surplus 19 percent
to $38 billion on the strength of higher exports. On
a country basis; however, the improvement was
uneven:
? Brazil doubled its trade surplus to a record $13
billion by increasing industrial exports-particu-
larly to the vigorous US economy-and cutting
imports.
? Argentina's trade surplus grew by one-fourth to
$4 billion as both agricultural and manufactured
exports rebounded.
' In this article Latin America includes only the major debtors:
Argentina, Brazil, Bolivia, Chile, Colombia, Ecuador, Mexico,
Latin America: Balance of
Payments, 1983-85
ei!lion US S
1983 1
984 1985
Current account balance -5.4
-2.0 -6.4
Trade balance 32.3
38.3 38.1
Exports 78.9
87.5 90.5
Imports 46.6
49.2 52.4
Services and transfers -37.7 -
40.3 -44.5
Of which:
Interest payments 33.3
39.2 39.1
Capital balance 0.3
8.7 2.1
Of which:
Principal payments 13.1
12.4 13.6
New borrowing 38.2
39.8 25.7
? The oil economies-Mexico, Venezuela, and Ec-
uador-posted a 3-percent drop in their combined
trade surplus to $22 billion, because increased
imports more than offset marginally higher oil
exports.
? The Andean debtors'trade surplus almost evapo-
rated, reflecting depressed world commodity
prices and modest import growth.
General adherence to IMF-supported adjustment
programs and the export rebound improved credi-
tor confidence, enabling several countries to attract
new financial support. On the basis of bank and
financial press reports, we estimate that foreign
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creditors provided $40 billion of gross lending to
the region, 4 percent more than in 1983. They
provided large-scale new loans and rolled over
existing credits in support of Brazil, Chile, and
Mexico and restored short-term credit lines to most
countries. Moreover, the IBRD cofinanced some of
the first voluntary long-term bank loans to Latin
America since 1982 in Colombia, Brazil, and Para-
guay. Financial stress eased as the region resched-
uled maturing debt and added about $7 billion to
foreign exchange reserves.
Cooperation between creditors and debtors steadily
improved after midyear, when interest rates began
to decline. Instead of urging a debtors' rebellion,
Latin American finance and foreign ministers ex-
pressed moderate views at the June debt conference
at Cartagena, Colombia. To encourage continued
moderation and to support long-run economic ad-
justment, bankers negotiated provisional multiyear
reschedulings with Mexico, Venezuela, and Ecua-
dor. These agreements, in turn, helped restore
confidence within the region and reduce capital
Latin Americas: Total Foreign Debt and
Debt Service, 1983-85
z Includes data for Brazil, Mexico, Venezuela, Argentina, Colombia, Chile,
Peru, Ecuador, and Bolivia.
b Short-, medium-, and long-term debt.
~ Estimated.
d Projected.
flight in most countries
Although the overall debt repayment bill rose 11
.percent to an estimated $52 billion in 1984, export
recovery held the debt service ratio at 59 percent. A
variety of sources indicate that several countries-
notably Brazil and Mexico-were able to reduce
arrearages and maintain near-normal interest pay-
ments. In contrast, Argentine and Venezuelan in-
terest arrearages grew, as did those of the smaller
debtors-notably Bolivia and Peru.
Financial gains and export-led growth-supported
by a general increase in agricultural production-
halted the erosion of living standards in Latin
.America in 1984. We estimate that the region's
economies expanded 2.6 percent last year-after
having declined 3 percent in 1983-and all major
debtor economies grew except Venezuela's and
Bolivia's. We believe that gains in employment-
although limited-helped Argentina, Brazil, Chile,
Peru, and Colombia deflect domestic pressure for
We expect Latin America's current account deficit
to increase to over $6 billion this year as the trade
surplus declines and as the balance on services and
transfers continues to deteriorate. Most large debt-
ors will face slower growth in manufactured ex-
ports because OECD economic activity is likely to
moderate and protectionism probably will mount in
developed countries. The Latin oil exporters face
the prospect of reduced prices in a deteriorating oil
market, and the Andean debtors-dependent on
agricultural and mineral sales-expect the strong
dollar and worldwide deflation to hold down com-
modity prices.. At the. same .time, despite slower
export growth, Latin American officials have plans
to stimulate economic expansion that call for in-
creased imports.
extreme debt action.
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The region's recovery plans will tend to conflict
with the continued need for adjustments to resolve
serious economic imbalances. The political pres-
sures for growth will be especially strong in Brazil,
Mexico, Peru, and Uruguay, where leaders face
heightened popular expectations of improved living
standards. Even if global interest rates continue
their moderate decline, Latin American debt ser-
vicing payments will increase to $53 billion because
the stock of debts is growing. Thus, as export
growth wanes, the servicing burden will become
more onerous, and growth and employment proba-
bly will suffer. Should Latin leaders attempt to
protect growth through deficit spending, they
would jeopardize the cooperation of lenders that is
essential to economic reform.
Prospects for the Region
We expect the large debtors will avoid serious
financial strains this year, although temporary
setbacks are likely. Financial press reports indicate
that Brazil, Mexico, Venezuela, and Argentina
probably will receive the bulk of new lending to the
region-estimated at about $10 billion-after
reaching formal agreement with bankers on their
debt restructuring packages.
Mexico expects its restructuring pro-
gram to be formally implemented in April, and
Venezuela probably will conclude a multiyear re-
scheduling later in the year after assuring creditors
that private-sector debt will be serviced on sched-
ule. Brazil, Mexico, and Argentina, however, are
encountering difficulties complying with IMF mon-
etary, inflation, and fiscal targets that could jeopar-
dize their provisional debt agreements. Neverthe-
less, we judge that the three countries will conclude
formal debt agreements with creditors this year.
The financial problems of the smaller debtors,
however, could prove serious:
? Chile must overcome banker resistance to provid-
ing $1.2 billion of new credit, without which it
faces the possiblity of severe recession at a politi-
cally sensitive time and the disruption of debt
servicing.
? Peru's resistance to stabilization measures and
mounting interest arrears probably will prevent
any agreement for new funding from the IMF or
bankers before the inauguration of a new presi-
dent in July. This probably would force US banks
to downgrade Peruvian loans.
? Colombia needs over $1 billion of new money
during 1985-86 but continues to refuse creditor
demands for an IMF program. Without renewed
financial support or adequate reserves, debt pay-
ment disruptions could occur in the second quar-
ter of 1985.
? Bolivia probably will not resume interest pay-
ments suspended since last summer-despite le- 25X1
gal action by creditors-because political uncer-
tainty and severe financial problems, including
hyperinflation, have hurt its debt servicing capa-
bility.
Debtor Response
Despite the potential for some serious debt pay-
ment disruptions, US Embassy and press reporting
indicate that support for unified regional action
against creditors is dwindling. The Cartagena
group again resisted radical proposals-such as
tying debt service to exports or capitalizing interest
payments-at its February meeting in Santo Do-
mingo. Instead, Latin Americans called for in-
creased financing on easier terms through existing
multilateral channels and for a political dialogue
with creditor countries.
we judge that the Cartagena group will
maintain this position and will probably only sup-
port positions that do not interfere with bilateral
renegotiation of foreign debt.
We believe, therefore, that Latin debtors will con-
tinue to deal individually with creditors and that
most of the region's leaders will remain willing to
honor debt obligations. Nevertheless, we judge that
Latin officials will increasingly view financial prob-
lems in political terms and consequently intensify
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Latin America:
Foreign Debt, 1984 a
Chile
Peru
postpone the adjustment measures needed to re-
""""'""` "" '" store investor confidence and stabilize growth.
Total Foreign US Bank
Debt Debt
331.6 84.0
100.2 23.6
95.9 26.6
demands for easier stabilization programs and
long-term restructuring arrangements similar to
those negotiated by Mexico and Venezuela last
year. Creditor concessions, however, may encour-
age debtors to opt for patchwork adjustment poli-
cies that placate domestic critics and also heighten
vulnerabilities to financial stress points.
This case-by-case debt strategy can temporarily
succeed in the absence of external shocks and with
continued banker flexibility in dealing with short-
term financial strains. In the most likely scenario;
creditors will reward good faith efforts at economic
adjustment with long-term reschedulings, structur-
al adjustment loans, and loans cofinanced with ..
multilateral institutions. Such policies will encour-
age structural reform and lighten the .debt burden.
We remain concerned that a sharp oil price drop or
a sudden interest rate jump could significantly
increase external payments strains for many Latin
debtors. Moreover, creditors may take a hard line
with debtors-such as Bolivia and Peru-that re-
sist stabilization measures. In this unlikely case, we
foresee the rescue programs fracturing-accompa-
nied by prolonged payments suspensions. The likely
proliferation of nationalistic policies would only
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8 March 1985
Implications for the United States
We believe that Washington increasingly will be .
pressed for financial concessions. Although the US
trade deficit with the region widened in 1984-by
one-third to.$20 billion-this will not blunt de-
mands for increased access to US markets. US
monetary and. fiscal policies are a likely target of
Latin criticism, especially if interest rates should
rise further. Moreover, Latin Americans probably
will press the United States to intervene with the
IMF and commercial banks to provide innovative
debt relief and to encourage more lending.~~
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Indonesia: More Austerity
in Store
President Soeharto's recently announced budget
underscores Indonesia's continuing adjustment to
less buoyant economic prospects. We believe Jakar-
ta has sufficient financial and policy options to
withstand another modest decline in oil prices
without extreme austerity measures but would face
very tough choices if oil prices were~to drop precipi-
tously. The budget calls for overall spending re-
straint to avoid an external payments crisis, while
shifting priorities to stimulate domestic demand.
Fragile Recovery in 1984
Indonesia achieved about 5-percent growth in 1984
largely because new production facilities boosted
liquefied natural gas output more than 30 percent.
In addition, good weather helped produce another
record rice crop, and Jakarta boosted oil export
volumes sufficiently to offset declining prices. Pri-
mary product exports turned in a strong perfor-
mance early in the year, but slowed later as foreign
demand sagged. Manufacturing grew only 4.8 per-
cent-far below the government's 9-percent tar-
get-largely because lower personal incomes and
government spending cuts restrained domestic
demand.
Nonetheless, the government recorded a number of
significant financial achievements last year:
? Foreign exchange reserves rose to nearly $10
billion ($5.7 billion in official reserves and $4.3
billion in foreign assets of the banking system), up
from $7.3 billion in mid-1983.
? Inflation was held below 9 percent despite a 28-
percent devaluation in April 1983 and further
depreciation of the rupiah in 1984.
? Jakarta made another cut in the current account
deficit from the record $7.1 billion deficit of
1982.
The key to cutting the deficit has been Soeharto's
willingness to hold the line on public-sector con-
struction to reduce foreign exchange expenditures.
The 1983 rephasing of the $21 billion industrializa-
tion program, for example, is expected to cut
imports by some $10 billion over a period of several
years
Oil Earnings Solt. The persistent world oil surplus
threatens to reduce Indonesia's annual export earn-
ings by $300-400 million for each $1 drop in the
official OPEC price. Jakarta is already exceeding
its OPEC production quota by at least 100,000 b/d
and has little additional capacity to expand exports.
LNG exports will not repeat the 1984 performance
because no new facilities will come on line. Fur-
thermore, any drop in official oil prices translates
into a comparable fall in LNG revenues because
LNG prices are tied to Indonesia's official oil
export prices.
While Investment Problems Are Rising. Declining
oil prices and signs of hardening nationalism are
certain to further cool the investment climate this
year. Spending on exploration by foreign oil compa-
nies, which exceeded $1 billion annually in 1982
and 1983, fell below $900 million in 1984 and
shows no sign of recovery. Manpower Minister
Sudomo conducted campaigns throughout 1984 to
investigate expatriate employees, found numerous
violations of regulations, and deported a number of
foreign workers. A precipitous drop in private
domestic and foreign investment applications in the
first half of 1984, however, led Soeharto to order
Sudomo to relax his efforts and to reaffirm the
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Indonesia: Economic Indicators, 1980-84
Real GDP Growth
Percent
Consumer Price Growth
Percent
Official Reserves
Billion US $
Current Account Balance
Billion US $
authority of BKPM (the Capital Investment Coor-
dinating Board) to. issue work permits. Other barri-
ers, however, are still deterring potential new inves-
tors, such as the elimination of tax holidays,
uncertainty over other tax revisions, generally poor
market prospects, traditional bureaucratic obsta=
cles, and a wave of antigovernment violence and
suspicious fires and explosions in Jakarta and other
major cities.
And Other Options O,fJ`er Limited Gains. Efforts to
reduce dependence on oil exports by increasing
traditional nonoil~ exports, developing new manu-
factured exports, and opening up new markets have
had limited success so far.. The Indonesians had .
adopted a countertrade program in 1982 to boost
sales of depressed primary products to nontradi-
tional markets.
Jakarta so far has signed countertrade deals
worth only about $500 million and has actually
exported less than half that amount.
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8 March 1985
Jakarta has already run into problems in boosting
manufactured exports, primarily textiles and ply-
wood. Import quotas under the Multifiber Agree-
ment are slowing Indonesia's penetration of foreign
textile markets-particularly the US market-af-
ter explosive growth from 1980 through 1984. In
addition, US textile producers are seeking counter-
vailing duties on Indonesian apparel to offset al-
leged export subsidies, an issue that has caused
serious frictions between Jakarta and Washington.
Similar frictions have arisen between Jakarta and
Tokyo over Japanese import duties on Indonesian
plywood.
Even with lowered expectations, Jakarta's revenue
projection for the fiscal year beginning 1 April
appears overly optimistic. The proposed budget
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Indonesia: Exports, 1980-84
Liquid natural
gas
calls fora 6-percent nominal increase in oil reve-
nues that government officials claim results from
an expected modest depreciation in the exchange
rate. The budget is also projecting a 30-percent
increase in nonoil revenues based on introduction of
a new value-added tax on 1 April and substantial
broadening of the income tax base. With less than
750,000 registered taxpayers in a nation of nearly
170 million, Indonesia's income tax base is among
the lowest in Asia. As one of the major income tax
revisions introduced last year, Jakarta offered a
pardon for new taxpayers to register by December
1984, and has now extended the amnesty to June
1985. Given the past performance of Indonesia's
cumbersome bureaucracy and the lack of trained
personnel to administer the income and value-
added tax programs, prospects for achieving the
government's tax revenue goals are not bright.
Policy Initiatives
Soeharto is moving vigorously to improve economic
management. He has shaken up the leadership of
BKPM in an effort to reinvigorate the investment
climate. In addition, he has replaced the president
of the state oil company, Pertamina, as well as the
director general of Oil and Gas in the Ministry of
Mines and Energy, in order to improve the finan-
cial and marketing management of Indonesia's
most important resource. Both of the new oil
industry officials initially won high marks, but
continuing problems have convinced some foreign
oil companies that Pertamina's new president has
not yet gained full control. In any event, we believe
powerful figures close to Soeharto are unlikely to
yield total control over Pertamina's finances.
Soeharto's new budget reflects his determination to
hold down expenditures. The proposed 12-percent
growth in spending is less than half the increase
budgeted for the fiscal year just ending, and repre-
sents less than 3-percent real growth if inflation
remains at last year's level. Within the overall
budget, spending priorities reflect Jakarta's con-
cern with stimulating domestic demand by boosting
personal incomes through 20-percent pay raises for
the military and civil servants and even larger
increases for pensioners. At the same time, capital
spending is to rise only 2 percent in nominal terms
as the government holds the line on the public-
sector projects shelved in the 1983 rephasing pro-
gram. As in the past, the government probably will
slow capital spending further if revenue shortfalls
threaten to unbalance the budget.
Jakarta, meanwhile, is exploring opportunities to
boost foreign exchange earnings in trade with
Communist countries. High-level trade delegations
visited the USSR and Eastern Europe in 1984 and
signed trade and cooperation agreements with sev-
eral of them. Jakarta also has made preparations to
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8 March 1985
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resume direct trade with China, which had been
broken off since Soeharto came to power in the
aftermath of the Communist coup attempt in 1965.
We believe Jakarta will be hard pressed to main-
tain this year the 5-percent growth rates achieved
in 1983 and 1984. The current disarray within
OPEC suggests that even lower oil prices may be in
the offing, further dampening prospects for oil and
LNG earnings. Growth of nonoil exports-either
traditional primary products or newer manufac-
tured goods-is dependent in large part on condi-
tions beyond Indonesia's control.
The drop in private investment, along with the
government's spending reductions, reduces even
further the already poor prospects for creating jobs
for the expected 2 million new job seekers this year.
Jakarta will have to continue relying on the infor-
mal sector such as pedicab driving, street vending,
and similar personal services-essentially forms of
underemployment. The government will also have
to bank on continuing good fortune in agriculture,
including another bumper rice crop, to provide a
cushion both for employment and subsistence for
the rural population.
On the plus side, Jakarta's successful adjustment to
the oil glut and its conservative attitude toward
foreign debt have avoided an external payments
crisis and have left the government a range of
policy options to deal with a modest drop in oil
prices. Although none of the choices are attractive
to government policymakers, and all promise nega-
tive economic or political effects, Jakarta still has a
sufficient financial cushion to keep the economy
growing at least modestly without incurring an
unmanageable foreign debt. In addition to substan-
tial foreign exchange reserves, the government has
Secret
8 March l 985
substantial lines of unused credit and could impose
import restrictions on consumer luxury items or on
capital goods through further project rephasing.
The government could also devalue the rupiah
further to spur nonoil exports and slow imports.
If oil prices were to plunge, however, Jakarta would
face a prolonged period of slower growth and
higher unemployment that seem certain to intensify
social discontent. Jakarta might find it necessary to
reverse long held economic policies such as free
convertibility of the rupiah and repatriation of
earnings, which have been hallmarks of.the Soe-
harto government's development strategy.
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Eastern Europe's Food Situation:
Problems Persist
Over the past three years East European consumers
have seen an erosion of many of the qualitative and
quantitative gains in food supplies achieved in the
1970s: Import restraints, increased food exports,
below-average output of many nongrain crops, and
problems in state procurements from farmers have
more than offset impressive gains iri grain produc-
tion. Government efforts to alleviate food supply
problems through rationing and by raising food
prices have increased consumer grumblings. Last
year's record grain harvest and improved output of
many nongrain crops will provide some relief in
1985, but problems will persist, particularly in
Poland and Romania.
Recent Belt-Tightening
Measures to limit domestic demand for food were
introduced by all East European regimes in the
early 1980s, but they have had the greatest impact
in Poland and Romania. Warsaw started to ration
meat, flour, milling products, butter, and chocolate
in February 1981 and announced price hikes-
averaging 150 percent-in February 1982,fo1-
lowed by smaller increases for selected items in
1983 and 1984. Romania began rationing a broad
range of foods in the fall of 1981 and raised food
prices by an average of 35 percent in early 1982.
Following 1983's poor grain harvest, Bucharest
reduced rations for meat, flour, milk, cooking oil,
and sugar.
The effect on consumers has been evident. The
share of Polish workers' total expenditures going to
food rose from 36 percent in 1980 to 43 percent in
1984. Per capita meat consumption in Poland fell
from 74 kilograms in 1980 to an estimated 55
kilograms in 1984, near the level of consumption in
1971. Per capita consumption of meat in Romania,
already one of the lowest in Eastern Europe, de-
clined 24 percent from 1980 to 1983 to roughly 34
kilograms. In most other East European countries
food prices have increased faster than overall retail
prices and personal income.
Improved Prospects for 1985
Last year's record grain harvest of 109 million
metric tons and improved output of many nongrain
crops will provide some early relief to consumers,
except possibly in Romania. Most countries face
higher food prices, but shortages will be largely
confined to luxury foods-spices, coffee, chocolate,
Polish consumers should see the greatest improve-
ment in food supplies this year, but they will pay
higher prices. Last year's record grain harvest of 24
million tons was Poland's third consecutive above-
average crop. Moreover, higher procurement prices
have increased sales of grain to the state by nearly
11 percent. An above-average harvest of rye and
record output of rapeseed should permit increased
exports, generating hard currency for the purchase
of other foodstuffs and permitting an increase in
rye-for-wheat barter with the USSR. Dairy prod-
uct supplies will also improve. Despite improved
feed supplies and better price incentives for farm-
ers, the slow recovery in livestock numbers will
limit the planned growth of meat output to only 1.1
percent in 1985, an improvement over last year, but
still below the depressed 1983 level.
Warsaw had announced plans to raise food prices
in March 1985.' Following criticism by official
' In January Warsaw issued three proposals for public discussion
ranging from large price hikes and an end to rationing (except for
meat and chocolate) to smaller price rises with most rationing
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Eastern Europe: Measures To Deal With Food
Supply Problems, 1981-84
May 1983-meats up 23
percent, citrus up 35 percent,
local beverages up 28 percent
January 1982-meat up 27
percent, rice up 100 percent,
tobacco up 39 percent, wine up
18 percent
October 1984-beer prices dou-
bled
January 1984-major price
increases for selected luxury
foods
June 1981-meat up 10 percent
August 1982-bread, flour,
bakery products up average 20
percent; citrus up 25 percent
May 1983-sugar up 23
percent, cooking oil up 20 per-
cent, bread up 16 percent
January 1984-meat and meat
products up 21 percent; poultry
and fish up 10 percent
February 1982-food prices up
average 150 percent, pork up
325 percent, sugar up 340
percent, coffee up 40 percent
January 1984-prices up aver-
age 10 percent
February 1981-food prices up
average 35 percent, meat up 64
percent
October 1983-prices raised for
bread and dairy products
September 1982-sugar up 18
percent, cooking oil up 17
percent, margarine up 18 per-
cent
February 1983-fresh meats up
31 percent, basic agriculture
produce up 22 percent
February 1981-meat,
sugar, fats, chocolate,
butter, flour, and rice
rationed
October 1981-ration
decree issued, consumers
restricted to specified
markets
1982-broader rationing
of bread, flour products,
rice, sugar, and cooking
oil
1984-meat and flour
rations reduced
February 1983-coffee
and cooking oil tempo-
rarily rationed in Bel-
grade and other areas
May 1983 decree against hoarding bread and
flour issued; increases blamed on drought; season-
al prices and 10-percent consumption tax intro-
duced in restaurants.
Meat prices had previously remained fixed at
1953 levels when consumption was half current
level. Meat consumption down 10 percent in
1982.
Prices for a few basic foods remain fixed at
1960's level; increases in prices of other food
items are unannounced and occur regularly.
1982 price increases needed to maintain balance
between production and consumption and to re-
duce subsidies. Increases in 1984 ostensibly at-
tributed to drought in 1983.
In early 1982 meat rations cut to 2.5 kg per
month. Promises to end "temporary" rationing
have gone unfulfilled.
Rationed items and levels differ locally; problems
worsened by large cuts in imports, poor harvest in
1983. Private transportation of foodstuffs within
country forbidden; restrictions on sale of privately
produced foodstuffs.
Problems exacerbated by high inflation, difficul-
ties in procuring grain from private farms, and
poor producer price incentives.
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Eastern Europe: Trends in Prices and trade unions and the banned "Solidarity," however,
Personal Incomes the government recently announced that price in-
creases and selective curtailment of rationing
would be implemented in three stages beginning
Index: 1980=100 Note scale change this month. Officials have stated that price in-
Legend: Bulgaria creases are necessary not only to limit demand, but
Personal income also to avoid increases in food subsidies resulting
Food prices 115 from higher procurement prices put into effect last
Retail prices 9,~ JUIy.
I I I I
95 1980 81 82 83
Romania's prospects for any significant improve-
ment in food supplies in 1985 appear bleak. We
estimate last year's grain output was up slightly
from 1983, but still almost 1 million tons below the
1978-82 average. Official data show that 1984
goals for corn, potatoes, vegetables, and fruits were
exceeded, and meat and dairy production was up.
Past experience, however, suggests that such claims
may be exaggerated
Any gains in 1984 will not benefit consumers
siunificantly nnlPCC imnnrtc of Drain fPPl1C}l~rfC ~.,A
food are increased, exports curtailed, and greater
~ priority given to domestic consumption-none of
83 which is likely to occur. With Bucharest's emphasis
on reducing its hard currency debt, we believe
further cuts in agricultural imports are likely and
that priority will be given to increasing, or at least
meeting, export commitments.
uo
In the rest of Eastern Europe:
? Consumers in Hungary should be best supplied in
1985 thanks to last year's recovery in both the
crop and livestock sectors. Sharply higher prices
for many foods will be only partially offset by
increased wages and benefits.
? Consumers in East Germany will benefit from
last year's record grain harvest and good potato
crop. Supplies of meat, milk, and eggs should rise,
and increased subsidies will hold prices of many
basic foods at mid-1960s levels.
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Record Grain Production, Declining
Food Supplies
Grain production is the primary determinant of
total food supplies in Eastern Europe, but other
.factors play an important role. Despite the region's
three consecutive above-average grain harvests,
food availability declined sharply in 1981-84 as a
result of the following.?
? A 17-million-ton increase in domestic grain out-
put .from 1981 to 1984 was partially offset by a
7-million-ton decline in imports.
? Poor output of many oilseed crops and a falloff
in sugar beet production led to rationing of
cooking oil and sugar in some countries.
? Below-average output of many domestic forage
crops, including potatoes, reduced total feed sup-
plies and led to a decline in livestock output.
? Lower imports of high protein feeds diminished
the effectiveness of other livestock feeds, primari-
ly grain, partially offsetting increases in grain
output.
? In Poland and Yugoslavia, where the private
sector is the main supplier of agricultural prod-
ucts, difficulties in procuring grain because of
unfavorable pricing policies resulted in shortages
of state feed supplies at a time of record grain
output.
? The quality and diversity of domestic grain
output was not always su.~cient to meet grain
requirements for either food or livestock use.
? Financial problems curtailed imports of luxury
.foods such as coffee, tea, and citrus.
? In Czechoslovakia, a 3.5-percent upturn in agri-
cultural output and arecord-1984 grain harvest
should allow continued improvement in livestock
output. Price increases for milk and milk prod-
ucts are rumored, however.
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8 March 1985
? Yugoslavia's excellent grain crop in 1984 should
reduce wheat imports sharply and allow for in-
creased exports of corn to generate hard currency
for the purchase of other agricultural goods. The
current surplus in meat supplies-because of
falling domestic consumption caused by higher
prices and dwindling export demand-could
change abruptly if cattle raising remains unprof-
itable and producers reduce herds.
? Bulgaria's below-plan output of corn, sugar
beets, sunflowers, and potatoes last year, follow-
ing the poor harvest of 1983, will limit livestock
output and could force additional imports of
grain, vegetable oils, and sugar. Market supplies
may tighten, but Bulgarian consumers will still
fare relatively well.
Unusually tight supplies of luxury foods and meat
during the past holiday season and rumors of
higher prices heightened popular discontent
throughout the region. Even where severe shortages
have not occurred, availability and selection have
often been less and prices higher relative to past
years. In many instances, however, consumer dis-
satisfaction appears out of proportion with actual
declines in availability, suggesting sensitivity to any
perceived drop in living standards and impatience
over government failures to live up to previous
commitments.
Although complaints will continue, we see little
potential for political fallout from food supply
problems except in Romania and possibly Poland.
The East European regimes have defused trouble-
some situations in the past by releasing food from
state stocks and in a few instances by allowing
additional imports of selected food items. Most
governments will likely sweeten the pill of higher
prices by ending rationing where feasible,.improv-
ing social benefits; and selectively increasing
wages.
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Polish consumers will be the most vocal in register-
ing their complaints. Although the gap between
past and current levels of supply will remain large,
particularly for meat, we do not foresee serious
unrest. Increases in procurement prices are likely in
July, adding to retail price pressures. Nonetheless,
Warsaw is expected to remain cautious about
upsetting public opinion even if it means increased
food subsidies:
The situation in Romania will remain more uncer-
tain. If Bucharest permits market supplies to im-
prove or at least stabilize, the situation could
remain quiet. Having experienced the major price
and rationing shocks of 1981-82, Romanian con-
sumers may be resigned to their present lot and
preoccupied with just "getting by" on a daily basis.
Some evidence suggests that an increase in second
economy transactions, private arrangements made
through contacts and relatives in the country, and
bargains with store clerks and restaurant employ-
ees have helped ease decreased food availability in
state outlets. If, on the other hand, Bucharest
decides to squeeze the consumer even harder, or a
sharp downturn in agricultural output in 1985
reduces food supplies still further, there would be
greater potential for unrest.
Longer Term Outlook
Reduced Expectations. The problems of the past
few years have led East European regimes to
postpone or at least scale back future commitments
for an improved diet. Polish and Romanian officials
have been candid in warning consumers that expec-
tations must be lowered, particularly with regard to
meat consumption. Romanian President Ceausescu
has even chided consumers for overindulging in
daily caloric intake, despite the decline in the
quality of their diet over the past three years. In
Poland per capita meat consumption is planned not
to exceed 63 kilograms by 1990, compared with 74
kilograms at the beginning of this decade. Even
Czechoslovakia, which faces few financial difficul-
ties, has announced that the target for meat con-
sumption will be reduced to enable the country to
become self-sufficient in grain. Most countries are
counting on increased consumption of dairy prod-
ucts to compensate for the drop in meat consump-
tion. Such changes will be difficult and involve
extensive propaganda and educational efforts.
Higher Food Prices. Consumers will face more
frequent price hikes as the regimes continue to
dampen or redirect demand and reduce sizable 25X1
budget outlays for food subsidies. Food price poli-
cies of most counties will fall between those of
Hungary, which is trying to make prices reflect
more closely the true cost of production, and those
of East Germany, which continues to hold prices of
many basic food items at the level of the mid-
1960s. Prices of imported luxury foods are likely to
rise the most, prices of staple items such as bread
and flour the least. Although meat is one of the
most heavily subsidized foods, most. regimes proba-
bly will be more cautious about increasing meat
prices because supplies and prices are a sensitive
issue with consumers. Any shortfalls in domestic
output that result in increased imports could lead to
sharply higher food prices. In fact, a downturn in
output attributable to bad weather-even if not
very severe-would provide a ready excuse for
additional price hikes.
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Secret
Sub-Saharan Africa: Coping With
Economic Adjustment'
Efforts at economic adjustment by the Sub-
Saharan African countries have produced some
modest gains and, if maintained, hold the promise
for major restructuring of the region's economies
over the longer term. Most countries have had to
enlist IMF financial support over the past several
years to deal with foreign payment problems and
lagging growth in their hard-hit economies. Under
IMF-supported programs, governments in the re-
gion have been encouraged to implement reforms
on exchange rates, taxes, government spending, and
state control of the economy. Although there are no
resounding success stories, countries such as Gha-
na, Senegal, Togo, and Zaire have persevered in .
their programs and made some progress. In con-
trast, economic mismanagement in Liberia and
Tanzania has created obstacles for continued IMF
support, and Nigeria's go-it-alone reform program
has failed to stem the economic decline resulting
from plunging oil revenues.
The economic problems of Sub-Saharan Africa
reflect several years of adverse factors:
? The two oil price shocks of. the 1970s.
? Commodity prices collapsed in 1978-80 and have
only recovered moderately since then.
? Continued dependence om agricultural and miner-
al exports.
? Inadequate price. incentives for agricultural
production, overvalued foreign exchange rates,
troublesome budgetary deficits,..and inflationary
monetary expansion.
? The worst drought in decades has ravaged the
region for the past two years and created wide-
spread food shortages and, in extreme cases,
famine.
' This report covers all countries on the continent except Algeria,
Egypt, Libya, Tunisia, Morocco, and South Africa, plus the islands
Their Impact
The economic impact of these factors on the Sub-
Saharan African countries has been severe. Exclud-
ing the oil-exporting nations of Congo, Gabon, and
Nigeria, we estimate the current account deficit of
the region hit a record $11 billion in 1981: The
deficit has declined since then to about $7 billion in
1984, mainly because of cutbacks in imports and a
modest recovery in exports. Concomitant with the
widened current account deficits, official medium-
and long-term external debt for the region bal-
looned to an estimated $55 billion in 1984. At the
same time, regional per capita output recorded no
gain and actually declined in countries such as
Ghana, Mozambique, and Tanzania. In the face of
these growing economic pressures, 29 of the 46
countries in Sub-Saharan Africa made over 90
standby or extended arrangements with the IMF
between 1978 and 1984 linked to economic policy
adjustments. Fourteen of these countries had active
arrangements at the end of January 1985.
A number of countries have been moderately suc-
cessful in terms of perseverance in their economic
programs and modest economic achievement.
Ghana began implementing an economic recovery
program in 1983, with the support of the IMF and
Western donors. The program-calls for substantial
currency devaluations, reduced public expenditure,
gradual liberalization of price controls, and the
rehabilitation of key economic sectors such as
agriculture and transportation. So far, all IMF
conditions have been met, and the US Embassy
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Sub-Saharan Africa: Selected Economic
and Financial Data a
Current account balance b
-10.0
- 2.0
- 5.0
-17.0
- ] 7.0
-12.0
-12.0
Current account balance bexcluding
Congo, Gabon, and Nigeria
-6.0
-7.0
-10.0
-11.0
-9.0
-7.0
-7.0
Net financial inflows from all sources
9.0
10.0
13.0
13.0
13.0
12.0
12.0
Net financial inflows from the IMF
0.1
0.4
0.6
1.6
1.2
1.6
0.4
a All countries on the continent except Algeria, Egypt, Libya,
Tunisia, Morocco, and South Africa, plus the islands of Comoros,
Madagascar, and Sao Tome and Principe.
b Goods, services, and private transfers.
Estimated.
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estimates that the economic decline has been halt-
ed. The Ghanaian economy, however, is still far
from achieving sustained growth.
Ivory Coast began implementing an IMF-support-
ed stabilization program in 1981. The program was
not fully successful through 1983 because unfavor-
able:export and import price trends impacted ad-
versely on the government's receipts and expendi-
tures. Since then, spending cuts and new tax
measures have sharply reduced the public-sector
deficit. Because of failure to meet December 1984
performance criteria, however, the IMF program
was canceled last month and is being replaced by a
new arrangement presently under negotiation. The
economy remains affected by drought, and the
IMF expects economic growth, negative since 1981,
to be slight for the rest of the decade
Kenya has been almost continuously implementing
adjustment programs with IMF support since 1978.
Nairobi has had problems, with three of the five
programs canceled for failure to meet IMF targets.
The World Bank has declined to make a third
structural adjustment loan because of Nairobi's
failure to meet loan conditions. Even so, substantial
economic adjustment has been made over the years.
Between 1981 and 1984, the inflation rate was
slashed in half to 10 percent; the overall budgetary
Secret
8 March 1985
deficit as a percent of GDP was reduced from 10
percent to 5 percent over the same period; and the
overall balance of payments recorded surpluses in
1983 and 1984. Mainly because of one of the worst
droughts in Kenya's history, however, the economy
had no growth last year and will be slow to
rebound. The government is continuing its econom-
ic adjustment policies with IMF support
Mali's IMF-supported program started in Novem-
ber 1983. The country has made satisfactory prog-
ress since then, iri the view of the IMF. Public-
sector wages have been frozen since 1981 and
government hiring has been curtailed. Some public
enterprises are being liquidated, including the na-
tional airline. External arrears are being reduced
and credit expansion has been well within the limits
set by the program. The government remains com-
mitted to reform, despite drought conditions .that
have substantially-reduced cereal production and
the livestock herd.
Senegal's economic adjustment efforts with IMF
and other external support date .back to 1979.
Through 1983 results were mixed because the
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Sub-Saharan Africa: IMF Standby and
Extended Arrangements in Effect
as of 31 January 1985
programs were not always maintained. Better re-
sults have been achieved since then with a more
rigorous application of policy measures by the
government. Despite being hard hit by drought, all
of Senegal's financial objectives were achieved in
the IMF-supported program ending June 1984.
Within 12 months the fiscal deficit as a percent of
GDP fell from 8 percent to 5 percent; the current
account deficit was reduced from 14 percent to 11
percent of GDP. Serious structural and financial
problems remain, however, and the reform program
continues.
Togo received good marks during 1983-84 for its
adjustment efforts with financial support from the
IMF, World Bank, and bilateral donors. Earlier
programs were less successful. The government has
launched a major denationalization of its many
state enterprises. Other reform measures include
rural development, the overhauling of tax and.
customs administration, restraints on public hiring,
and a restrictive monetary policy. Inflation has
been curbed. On the basis of partial data, we
believe that prices may actually have fallen last
year. Real economic growth is estimated by the
IMF to have been about 1 percent in 1984 after
continuous decline since 1980. The economy re-
mains affected by drought. Togo is working closely
with the World Bank in developing amedium-term
development strategy supported by a structural
adjustment loan from the Bank.
Zaire remains committed to carrying out its latest
of a series of IMF-supported programs that date
back to 1977. The present program has included
drastic exchange rate changes, tax reform, tight
budget practices, and controlled credit expansion.
The IMF regards the program as successful so far.
The inflation rate fell from 76 percent in 1983 to an
estimated 47 percent last year; the 1984 current
account deficit of $230 million was smaller than
the program called for; payments on rescheduled
external debt are on time. Unresolved problems
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include the restructuring of public corporations and
the rehabilitation of the agricultural sector. Prime
Minister Kengo wa Dondo, a key figure in the
reform effort, claims that President Mobutu in-
tends to maintain "economic rigor" throughout his
new seven-year term.
Liberia, Nigeria, and Tanzania are prominent
among the countries that have been less successful
in implementing economic reform. In Liberia there
appears to be a lack of resolve for a sustained effort
in the uncertain political environment preceding a
possible return of civilian government in October.
Nigeria's program is only a year old and has not
been fully formulated by a military administration
of uncertain tenure. For Tanzania, the main cause
appears to be unworkable economic policies based
on President Nyerere's philosophy of "African
socialism."
After showing signs of economic recovery,
Liberia's situation has worsened alarmingly since
mid-1984. With almost continuous involvement in
IMF-supported programs since 1979, Liberia had
achieved moderate success in its adjustment efforts.
Although the country's financial position remained
precarious, the government had eliminated all ex-
ternal arrears by mid-1984. Since then the resolve
of the government has weakened as evidenced by
unbudgeted expenditures and large revenue short-
falls. The Liberian treasury is nearly empty. The
IMF program has been suspended since December
because of failure to make repayments. Economic
assistance from bilateral sources, the European
Community, and the World Bank-most are pessi-
mistic about the country's medium-term economic
prospects-has been held up as a result.
Nigeria has not yet succeeded in stemming an
economic decline that has been going on since
1980. The first priority of the government is deal-
ing with the severe financial squeeze resulting from
a near 60-percent fall in oil revenues between 1980
and 1983. The military administration has imple-
mented an austerity budget with sharp cuts in
expenditures, reductions in public employment, and
Secret
8 March /985
the postponement of most capital projects. Severe
import restrictions have been imposed. The pro-
gram has brought mixed results, so far. Although
official reserves doubled to $1.8 billion last year,
the inflation rate was about 100 percent, according
to a US Embassy estimate. The government has
avoided using IMF support in its reform efforts and
some military leaders have publicly adopted an
anti-IMF attitude. Because of the still serious
economic picture, however, senior civil servants
including the Minister of Finance feel that Lagos
will have to turn to the IMF, according to the US
Embassy.
Tanzania has met with little success in its economic
efforts. The country has been without an IMF-
supported program since 1980. Since then, some
economic adjustment measures have been imple-
mented as groundwork for an IMF-supported pro-
gram that has not materialized because of failed
negotiations or have been taken through broader
economic programs drawn up by the authorities.
Reform measures carried out last year include a
currency devaluation and higher producer prices
for coffee, cotton, and tobacco. These measures
have been too little and somewhat. late. The econo-
my continues to decline, with negative growth each
year since 1980 and living standards lower than
they were 15 years ago.
The governments of Sub-Saharan African coun-
tries have, on occasion, met with internal opposition
to economic adjustment programs. For example: ~
? In Ivory Coast, where an IMF-supported adjust-
ment program has been under way since its initial
implementation in 1981, teachers organized a
strike in 1983 to protest reduced housing
subsidies.
? The labor movement was active in Mali and
Zambia last year protesting IMF-sponsored eco-
nomic reform measures.
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There have been no instances of governments being
ousted, however, because of the application of
IMF-sponsored programs. The threat to stability
appears to come more from worsening economic
conditions that are belatedly or inadequately ad-
dressed. For example, the leaders of a successful
coup in Mauritania last December blamed poor
economic performance and mismanagement of
state enterprises for their action.
The economic crisis in Sub-Saharan Africa is
forcing many African political leaders to alter their
views of foreign financial support and the need for
economic reform. After years of dependence on
official economic assistance-largely based on
grants and project loans with no economic adjust-
ment conditions-many leaders are now compelled
to reform their economies in collaboration with
multilateral financial institutions as a condition for
continued foreign support. The many leaders pub-
licly advocating economic reform measures and
implementing them under IMF auspices include
Presidents Siad Barre (Somalia), Diouf (Senegal),
Kaunda (Zambia), Kountche (Niger), and Mobutu
(Zaire). Similar support for reform by government
leaders is also happening where there is no IMF-
assisted program and even some anti-IMF senti-
ment, for example, in Burkina and Nigeria.
We expect the Sub-Saharan African countries to
expand the implementation of economic adjustment
programs over the medium term. These countries
are highly dependent on bilateral economic assis-
tance to keep their economies afloat. Because of
budget strictures, the bilateral donors have been
increasingly linking their level of assistance to
economic reform, particularly those supported by
the IMF. The Sub-Saharan African countries have
limited financing alternatives. Provided the adjust-
ment programs are maintained, their emphasis on
free markets, fiscal responsibility, and reduced
government participation in production would be a
marked departure from traditional economic policy
in many of these countries. Because IMF financial
assistance is intended to complement financial
flows from other sources, the Sub-Saharan African
states probably will expect the United States to 25X1
play a major role in providing the additional exter-
nal financing that they will require over the medi-
um term because of their continued serious eco-
nomic problems.
Secret
8 March 1985
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