INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707440001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: March 15, 1985
• Content Type: REPORT

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Intelligence
Directorate of Secret
Zti
el" C-
Weekly
International
Economic & Energy
15 March 1985
DI IEEW 85-011
15 March 1985
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Secret
WeeklyF-
International
Economic & Energy
iii Synopsis
1 Perspective-LDC Debt Issues: What's Ahead
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Energy
International Finance
Global and Regional Developments
National Developments
11 ilippines: The Reluctant Road to Economic Reform
17 Jn: Competition in Semiconductors To Intensify
Proposed Soviet Gas Pipeline to Eastern Europe
Cyba: Castro Struggles With the Economy
LDC Financial Developments: Monetary Data as an Early Warning
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directed to Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
Secret
15 March 1985
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International
Economic & Energy
Weekly
1 Perspective-LDC Debt Issues: What's Ahead
We believe that further cooperation among creditors and debtors and favor-
able world economic conditions are necessary to maintain the progress made
thus far. 25X1
11 Philippines: The Reluctant Road to Economic Reform
Although they have completed negotiations on a financial rescue package,
creditors and aid donors continue to pressure Manila to make even greater
reforms to stimulate economic growth and restore financial stability over the
long term. President Marcos's political needs and the intransigence of
Manila's technocrats, however, suggest that such negotiations will be lengthy
and difficult and that implementation will be slow.
23 Proposed Soviet Gas Pipeline to Eastern Europe ~
The Soviets are pushing for an agreement with East European countries on the
joint construction of a new gas export pipeline. Moscow wants to get more East
European participation in Soviet investment projects in return for increased
Soviet deliveries of energy and other raw. materials.
27 Cuba: Castro Struggles With the Economy ~ 25X1
President Castro's recent call for new economic priorities and at least another
15 years of economic austerity reflect Cuba's concern over mounting economic
problems as well as its sensitivity to sharp Soviet criticism of Havana's 25X1
33 LDC Financial Developments: Monetary Data as an Early Warning
Central bank data appear to be good indicators of changes in domestic and ex-
ternal financial conditions and evidence of policy behavior in financially
troubled countries.
iii Secret
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Perspective
Weekly
International
Economic & Energy
We believe that further cooperation among creditors and debtors and favor-
able world economic conditions are necessary to maintain the progress made
thus far. Although many financial observers are optimistic about the LDC
debt situation, we believe that the international financial system will remain
under stress for the next three to five years because of LDC foreign payments
troubles. Even this year could bring problems as some countries' difficulties in
meeting IMF goals lead to noncompliance, a cutoff of new money, and
increased creditor-debtor tensions.FI 25X1
Argentina, Venezuela, and the Philippines, have yet to be signed.
A major reason for optimism about the LDC debt situation is the progress in
easing the debt servicing burden for the major debtors. Twenty-three countries
reached formal or tentative agreement on debt restructuring with commercial
banks and Western governments last year, including major debtors such as
Mexico, Brazil, Argentina, Venezuela, the Philippines, and Yugoslavia. The
amount of debt covered in the restructurings was a record $115 billion and in-
cluded obligations due not only in 1984 but over the period 1981-90. The
agreements for some major debtors, however, including Mexico, Brazil,
restructuring terms were more favorable during 1984 than in 1983.
Creditors-particularly commercial banks-made a number of concessions.
The most important development was a multiyear restructuring for Mexico, in
which debt maturing in 1984-90 was spread out over 14 years. Venezuela, 25X1
Ecuador, and Poland also obtained multiyear agreements. In addition, overall
Through a series of meetings, Latin American countries applied persistent but
moderate pressure on creditors for additional debt solutions. At a meeting in
Cartagena last June, 11 nations formed the Cartagena Group as a political fo-
rum to voice Latin concerns. Currently a major goal of the group is to arrange
a political dialogue on debt among the highest levels of Latin and industrial
country governments. 25X1
The flavor and results of the Cartagena process to date suggest that Latin
debtors will continue to support joint action so long as it does not threaten their
ability to negotiate individually with creditor banks and governments. Latin
debtors are now more willing to press for changes in the policies and operations
of official and private Western institutions. We believe that debtors perceive
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at the IMF/IBRD committee meetings in April
their forum as being largely responsible for concessions they received from
commercial banks last year and probably will continue to press for concessions
In our judgment, the major challenge to the international system in 1985 will
be debtor failure to comply with IMF-supported programs and associated
creditor reluctance to lend new money. Slower export growth, industrial
country protectionism, and continued high real interest rates also will be key
issues. Moreover, because these problems may prevent debtors-particularly
the Latins-from repeating the progress made last year, new democratic
governments will come under increased pressure, and the tone of the
Cartagena Group pronouncements may become more strident.
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Energy
nterest Revived in Iraq's Deputy Oil Minister acknowledged that an oil pipeline proposal is again
/ Iraq-Jordan Pipeline under active consideration by Iraq and Jordan, according to the US Embassy
in Baghdad. The principal US construction firm involved in the project is
preparing a final offer for presentation to Iraqi officials in the next several
weeks. The offer will include a new financing proposal designed to address 25X1
Iraq's insistence on guarantees against liabilities for payments and crude
deliveries during a disruption in service. In particular, the Iraqis are insisting
US financiers, contractors, and suppliers bear the risk of a disruption in
construction or operation of the line by the Israelis or others. Baghdad's early
demands has quashed optimism in the project, which Jordan has promoted
vigorously. According to the US Embassy in Tel Aviv, a high government
official has stated that Israel is prepared to guarantee it will not engage in an
unprovoked attack against the pipeline provided there is unspecified US
involvement. Despite the flurry of activity, we believe Baghdad is concentrat-
ing on ongoing negotiations with Riyadh on a separate pipeline to the Red Sea.
If these talks break down, however, Iraq is likely to pursue more seriously the
Jordanian option. 25X1
Indonesia To Indonesia is introducing a new grade of crude oil for export to gain pricing 25X1
Market New Crude flexibility without formally breaking OPEC guidelines.
Pertamina will begin marketing the new "Sumatran 25X1
Medium"-a mix of light crudes, including its benchmark, Minas crude-in
April. Pertamina plans to sell the new blend at $27.40 per barrel-compared 25X1
with the official OPEC price of $28.50 per barrel for Minas crude. Pertamina
will limit sales of Minas under the new label to 100,000 b/d, roughly one-third
of output from the Minas field,'until market reaction to the new crude can be
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Pakistan Buys More Pakistan has agreed to increase its purchases of Iranian oil, from 10,000 b/d to
20,000 b/d as of last fall, for a one-year period to regain a major export
market. The increased oil imports probably will be offset by barter, eliminat-
ing the need for outlays of foreign exchange by either side. Pakistani exports to
Iran decreased by about 65 percent during July-November 1984 compared
with the same period in 1983, dropping Iran from its number-one position
among Pakistani overseas markets to the number-seven position. Pakistan's
poor wheat crop in 1:984, inadequate quality of its. manufactured goods, and
Tehran's foreign exchange shortage all contributed to the downturn in.
Pakistan's sales. Additional oil imports from Iran along with increasing
domestic production could lead to cutbacks in oil imports from Gulf oil states,
and perhaps cause some friction between
Islamabad and the Gulf supporters of Iraq.
Mexican Debt Mexico's $48 billion debt rescheduling agreement was submitted this week to
escheduling Update . the country's 530 bank lenders .for review, seven months after the original
package was neotiated.
Final approval, targeted.for 29 March, still could be jeopardized if
an IMF agreement is not reached quickly. Mexico City and international
bankers plan to ask the United States to intercede with the IMF next week if
agreement with the Fund is not reached by then.
France Encourages In.a move intended to encourage commercial use of the ECU, Paris decided
Use of ECU . last week to allow importers to. engage in forward. currency contracts to cover
anticipated imports that are denominated in European currency units (ECUs).
The French hope the ECU will eventually rival the dollar as both a reserve as-
set and a transaction currency. By buying foreign currency to pay for
contracted imports before the actual import takes place, importers will now be
able to protect themselves against exchange risks. The measure does not
discriminate per se against imports by origin but will probably favor imports
from other European Monetary System members whose firms are more likely
to offer ECU-denominated contracts. The government had forbidden such
"forward cover" in 1981 when the franc was under: pressure, and the eased ac-
_cess probably reflects the recent improvement in the French balance of
payments.
... Global and Regional Developments
7 Gold Lures
Mining Dollars
Planned capital investment in worldwide mineral projects has increased for the
third consecutive year,.according to results of. a new mining industry survey.
Gold continues to be the most attractive metal in terms of the number of
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projects planned. According to the survey, 137 gold projects are either under
construction, have a firm development program, or are in the initial proposal
stage. This is more than double the number of gold projects planned two years
ago and compares with 88 copper, 64 aluminum, 40 lead and zinc, and 33 iron
ore projects. Industry analysts, however, expect low mineral prices to keep
some of the projects on the drawing boards and postpone completion dates on
others. Continued investment in gold has unquestionably come at the expense
of base metals. Despite gold's steady price decline-from $405 per ounce in
March 1984 to $287 in early March 1985,? gold mining is still profitable for
many producers-industry analysts claim that prices could drift even lower
without quashing gold fever. New processing technologies have significantly
reduced operating costs, improved gold recovery rates, and allowed for the
exploitation of lower-grade ores.
National Developments
Developed Countries
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Dollar Fuels
West German
Irfiation, Worries
The dollar's first-quarter surge against the deutsche mark-up about 10
percent from the end of last year-will boost West German import prices,
albeit with a lag, and heighten Bonn's concern that the strong dollar could
eventually re-ignite domestic inflation. Imports-about one-third are denomi-
nated in dollars-represent roughly one-third of GNP. Although West
Germany's overall inflation rate remains low just 2.1 percent year over year
in January-accelerating import price rises this spring could increase pressure
on Chancellor Kohl to take a tougher line on the dollar problem at the summit.
France's SNECMA- SNECMA, the French Government-owned aircraft engine manufacturer, is
E panded Commercial negotiating with General Electric to expand its commercial engine business
.Markets? through shared development of the unducted fan (UDF), an advanced fuel
of the 1990s.
efficient propulsion system that is being supported by NASA. Although the
program would broaden SNECMA-'s technology base, commercial success is
far from certain. The UDF, one of two NASA-backed propulsion systems, is
aimed at fuel savings of up to 25 percent. US and European airlines have ex-
pressed interest in UDF-powered aircraft as replacements for their aging
short-range fleets. This interest may be a way to postpone decisions on the Air-
bus A-320, Unanswered technical
questions have raised concerns about the timing and viability of the UDF
program. Any new aircraft design using this technology will likely be delayed
past 1987, and we believe the earliest operational date will be in the latter half
New Airbus Industrie The appointment of France's Jean Pierson and Johann Schaeflier of West
Managers Face Germany to the two top positions at Airbus Industrie (AI) caps a monthlong
P oblems struggle among the consortium's governments over management structure and
financial control and marks the first.time a West German has been named to a
key operating post. Aircraft manufacturers are facing lackluster demand
throughout the West, and Al has been forced to stretch out existing
citing the impact of changing engine technology on new designs,
programs-and to lay off some.workers. Airbus is also concerned that the Pan
American strike could jeopardize the large sale of the all-new narrow-body A-
320. In Western Europe, airlines continue to delay narrow-body purchases,
In turn, slow sales by Al may delay development of
product line.
the TA-11 long-range aircraft, which is needed to fill out the consortium's
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Less Developed Countries
South Korean. Reaction Seoul has-announced measures to slow. imports and boost exports that may
o Trade Deficit
reduction policies.
presage: stronger action in the wake of:a $1.1 billion trade deficit in the first
two months of 1985-nearly double the same period in 1984. South Korean
economic planners have projected only a $300 million deficit for 1985. Seoul's
plans-include encouraging import substitution in machinery and livestock feed,
reducing oil imports by curbing passenger car. use, and jawboning trading
partners to further open markets to .Korean exports. Continued poor trade
performance will strengthen opponents to import liberalization who advocate
strong. measures such as the government's discretionary tariff and quota
powers.. In our judgment, however, Seoul will temper its actions before
President Chun's US visit in April. In addition, Seoul places high priority on
rapid subscription to the $815 million in loans currently on international credit
markets and will carefully monitor foreign bankers' reaction to its deficit
Thailand Considers . Bangkok is studying the possibility of requiring a reciprocal purchase provision
5ountertrade in all government contracts with foreign suppliers, and recommendations are
h Thailand has conducted
the end of March
Althou
the Cabinet b
/ d
t
..
g
y
ue
o
barter trade with Eastern Europe and South Korea in the past, it has generally
conducted trade multilaterally. Bangkok's troublesome trade deficit, however,
has led to a reconsideration of countertrade. Thai policymakers, moreover, fear
the loss. of commodity export markets to neighboring Malaysia, which is
stepping, up its use of countertrade. Nonetheless, the inefficiencies of barter-
if adopted as government policy-would probably offset much of the favorable
effects of last year's devaluation on Thailand's medium-term export prospects.
Nigerian State Budgets Nigeria's 19.state governments, which depend on. allocations from the Federal
Feel the Pinch Government for-about 80 percent of their revenue, have had to make drastic
cuts.in public services, defer capital projects, and reinstitute some local
taxation to cope with smaller disbursements from Lagos. During the oil boom
federal funds is earmarked for the states under a complex revenue sharing
formula. This year,. however., the Federal Government plans to deduct
payments due from the states on their internal and external debts before
dispensing funds. The oil-producing states, which had received an additional
.3.5, percent of the-total federal allotment for all, 1.9 states, are now entitled only
days under the last civilian regime, most state governments eliminated internal
taxes, accumulated large debts, and spent their share of the oil revenues
flowing from Lagos with virtually no accountability. Currently 35 percent of 25X1
to the 3.5 percent of.revenue that,accrues from onshore oil production. This
means a smaller share for the oil states, all located in the south, and is likely to
aggravate -resentment. of -the northern-dominated military government. 25X1
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Zanzibar's Clove Sales After a four-year hiatus in trade, Indonesia and the Government of Zanzibar
recently concluded an agreement for the Indonesian purchase of 6,000 metric
tons of cloves, totaling $18.3 million. In return, Zanzibar will purchase 15,000
tons of Indonesian rice, the island's staple food. The low clove price of $3,050
per ton-a marked drop from the original asking price of $5,200 per ton-re-
flects Zanzibar's loss of near-monopoly power in the clove market. Inflated
price expectations and poor marketing have undermined its export,market, and
Zanzibar has no other prospective buyers for,its remaining clove stock of
11,000 tons. Cloves account for 90 percent of Zanzibar's export earning. Dim
export prospects will hamper Zanzibar's ability to pay for vital food imports.
In.1980 the export price of $9,000 for each. ton of cloves bought 40 tons of rice;
at current prices, 1 ton of cloves buys only 11 tons of rice.
Panama Moves Against Panamanian authorities seized First Interamericas Bank on 1 March for
Money Laundering involvement in the laundering of drug money, the first such action taken in
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Panama. First Interamericas is owned by a Colombian trafficker, who is under
arrest in Spain and may be extradited to the United States. On 28 February
the government-controlled press. charged Banco Ganadero and Banco Cafe-
tero, Colombian branch banks, with money laundering.
Seizure of the two Colombian banks would let the Panamanian Govern-
ment, which publicly admits to only two or three dirty-money banks, claim its
financial sector has been purged of drug money laundries. This would shield
major launderers who have arranged safe entry of their funds with Panamani-
an customs and the Panamanian Defense Force and who operate through other
banks in Panama that welcome their business. t) .
Poland's IMF
Membership
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15 March 1985
An IMF technical team held talks with Polish officials last. month as the first
step in processing Warsaw's application to rejoin the organization.- The
delegation-the first-since the United States lifted its opposition to member-
ship-found the balance-of-payments data to be generally in line with IMF
practices but recommended changes' in some domestic calculations. Another
team is scheduled to arrive.in mid-April to examine the current economic
situation. Many Western financial experts doubt Poland will enter the Fund
before. the end of the year. The Polish regime remains divided on IMF
membership. Supporters hope membership will help restore a flow of credits
from Western governments and may believe it will facilitate economic reform.
Opponents believe, however, that likely IMF insistence on a stabilization
program represents undue interference in the country's economic affairs.
Moreover, they may cite the recent popular criticism of modest price increases
as evidence that Warsaw cannot heed `IMF austerity demands. Underground
Solidarity leaders recently said they would oppose any IMF program that
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would. cut living standards. The USSR, meanwhile, probably remains reluc-
tantly in favor, of -membership in hopes that it could help Polish economic
performance, or out of concern that a Soviet veto could lead to more Polish
demands on the USSR.[----] 25X1
East Germany's A surge of medium-term borrowing has, bolstered. East Germany's financial
Borrowing Binge strength giving East German economic managers greater flexibility than they
in seven. untied credits of four. to seven years'. maturity on increasingly 25X1
favorable terms. The Bank for International Settlements reports that as of 1
October-before the five most recent loans-East. German assets at reporting
banks reached $4.6 billion; well in excess of normal liquidity needs. We expect
East Germany to seek more medium- and long-term credits, using the proceeds
to trim its still considerable short-term debt as it runs current account .
surpluses to gradually reduce total debt. We doubt reserves will grow much
more. At the same time, East Berlin could be taking advantage of its
improving creditworthiness to reduce interest expenses and forge closer links
with some Western banks. East Berlin also maybe planning a boost in capital
goods imports to: make up for the decline in investment in recent years.
Although this will probably await completion later this year of the economic
plans for 1986-90, we do not expect large hard currency trade deficits as in the
Rapid Chinese China last week announced that the value of its total industrial and agricultur-
Economic Growth al production grew 14.2 percent last year and per capita income rose 15
have enjoyed in years. Since last June, East Berlin has raised about $1.4 billion
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percent. The value of production in 1984 increased 9.9 percent for agriculture,
45.5 percent for rural industries, and 14 percent for urban industries. Rapid
economic growth was sustained by 8-percent increases in coal, oil, and steel
production and a 6.6-percent growth in electric power. The 14-percent increas25X1
in urban industrial output is considerably higher than the 4- to 5-percent
growth rate planned for 1984 and is being used by the leadership as evidence
of the success of economic reforms. Beijing, however, is concerned that the
rapid industrial growth and the sharp increase in personal income and
savings-up 36 percent last year-will lead to inflation. Recent reports of
widespread speculation and illegal price hikes suggest that the Chinese cost of
living is rising faster than the official 2.7-percent rate. FI 25X1
Havana P, ressingfor Although Havana has launched an aggressive campaign to improve its trade
Increased Trade relations with Japan, we believe that a significant increase in bilateral trade is
With Japan unlikely. According to the US Interests Section, Havana recently tried to
impress a visiting Japanese delegation with Cuba's economic performance and
prospects under its new export-promotion policy. At the annual meeting of the
Japan-Cuba Economic Commission last month, Havana pressured Japanese
business leaders to increase imports of Cuban merchandise to improve the
trade balance, now running 2 to 1 in Japan's favor. Cuba also pressed for the
creation of a $60 million joint export promotion fund, with the costs to be split
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this .month. Export prospects are limited, however. Tokyo shows no willingness
to renew long-term official export insurance for Cuba. Nickel exports are
constrained by US prohibitions on imports of steel containing Cuban nickel.
Moreover, poor quality and unreliable delivery continue to limit Cuban citrus
between Cuba and its Western trading partners, including Japan. Havana
probably. will repeat its hard sell during a high-level Cuban visit to Japan later
.and .sugar. sales.
quintales,of food and vegetables this year.
According to the Cuban press, a major portion of the island has been suffering
fromdrought. since last May. Havana.received only. 60 percent of its normal
rainfall last year, causing cutbacks in urban water supplies. In the rural areas,
reports indicate that it has become impossible to provide sufficient water and
food for livestock, increasing the risks of drought-induced diseases and blight.
To address the fodder shortage, a campaign is under way to collect sufficient
residues from sugar and other crops to feed some 170,000 head of cattle. In ad-
dition, microdams have been built in streams at livestock enterprises. The
drought also has reduced the output of tubers, tomatoes, and other foods,
crimping Havana's ambitious new plan to produce more than 33 million
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Philippines: The Reluctant Road
to Economic Reform
Although they have completed negotiations on a
$10 billion financial rescue package covering 1985-
86, creditors and aid donors continue to pressure
Manila to make even greater reforms in agricul-
ture, finance, and manufacturing to stimulate eco-
nomic growth and restore financial stability over
the long term. President Marcos's political needs
and the intransigence of Manila's technocrats,
however, suggest that negotiations on reforms will
be lengthy and difficult and that implementation
will be slow. Delays in economic restructuring
would limit real growth to an estimated 1-percent
annual rate, compared with a 4-percent growth rate
possible by 1987 if the reforms are swiftly enacted.
For the past 18 months, Manila's international
creditors and Philippine technocrats have concen-
trated on stabilizing the faltering economy by
concluding a multiyear financial rescue package
including some economic policy reforms. The pack-
age consists of an IMF standby loan, financing and
rescheduling from commercial banks, and new
loans and rescheduled debt payments from official
creditors. The government's aid donors are now
seeking a more durable solution to the country's
financial problems. They are emphasizing far-
reaching market-oriented policy and institutional
reforms, designed to improve agricultural and in-
dustrial productivity, as well as restructuring the
financial sector and revising tax and public expen-
diture policies.
Manila's creditors believe the need for reform is
clear from the Philippines' recent economic record.
Despite economic growth averaging 6 percent an-
nually during the 1970s, for example, over half the
population still lives below the poverty threshold.
Furthermore, surrounded by neighbors that are
Monopoly marketing institutions are an important
part of the problem. The US Embassy reports that
a coconut monopoly-comprising marketing, mill-
ing, exporting, and banking institutions controlled
by Marcos's longtime political ally, Eduardo
Cojuangco-is partially responsible for nearly halv-
ing coconut farmers' income between 1979 and
1983. Moreover, coconuts are a source of income
for one out of three. Philippine families, and AID
studies conclude that basic marketing and pricing
reforms could boost coconut farmers' income by
about one-third.
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DI IEEW 85-011
15 March 1985
prospering with the world recovery, the Philippines
remains the only economy in East Asia afflicted
with falling real output; the debt crisis, aggravated
by political unrest, precipitated a 5.5-percent de-
cline in output last year and a 50-percent inflation
rate.
the average Filipino will decline further.
Delays in moving ahead with reform will be costly
to the economy. The World Bank believes that
sustained commitment to structural adjustment
and economic policy reform is necessary if the
economy is to achieve a 4-percent annual growth
rate by 1987. Otherwise growth will be limited to
about 1 percent annually and living standards for
The sector in the greatest need of reform is agricul-
ture-which generates over a fourth of national
output, provides a livelihood for more than two-
thirds of the population, and accounts for 40
percent of export earnings. Manila's pricing and
exchange rate policies have long favored urban
consumers over farmers; as a result, farmers' real
income fell 50 percent between 1977 and 1981.
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Philippines: Real Production, 1979-84
1981 1982 1983 1984 a Share of
1984 GNP
(percent)
100
113
The sugar industry, which accounts for approxi-
mately 8 percent of Philippine exports, is another
monopoly dominated since 1977 by a longtime
associate of Marcos, Roberto Benedicto. According
to US Embassy reporting, Benedicto has exploited
his control of NASUTRA-the national sugar
marketing authority-to finance expansion of his
sugar empire into milling, farm equipment, trans-
portation, and banking. Philippine economists esti-
mate since 1977 that his manipulation of the sugar
industry cut $2 billion from revenues paid to local
sugar producers:
Manila's creditors also believe reforms are needed
in the financial sector, which has been undercapi-
talized and recently plagued by failing private
banks and deteriorating loan portfolios in the large
government-controlled institutions. An increase in
nonperforming loans, large deposit withdrawals,
and high interest rates have so weakened private
banks that in 1984 the Central Bank had to provide
emergency loans to 10 percent of the banks. At the
same time, government-controlled financial institu-
tions-especially the Philippine National Bank and
Development Bank of the Philippines-have ex-
panded their lending dramatically to accommodate
Secret
15 March 1985
the government's acquisition of financially dis-
tressed firms, many of which were owned by politi-
cal allies of Marcos. As a result, almost two-thirds
of the Development Bank's assets are nonperform-
ing, and the IMF estimates that this year the three
largest government financial institutions will show
a combined loss equal to about 2 percent of GNP.
Financial reforms suggested by the creditors in-
clude merging some private banks, limiting new
lending by government financial institution's, and
relinquishing some of their functions to the private
Domestic Interests: Lobbying for Reform ...
Reforms demanded by the aid donors are being
strongly supported by Philippine business leaders,
academics, and special economic interest groups.
Well-publicized economic studies by Philippine ac-
ademics and business organizations have concluded
that a resurgent investment climate is required to
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Philippines: Proposed Economic Reforms
Trade policies:
? Lower tariffs.
? Float exchange rate.
? Decontrol foreign
exchange allocations.
Fiscal policies:
? Widen tax base, abolish distor-
tionary taxes, and raise effi-
ciency of tax collection.
? Cut expenditures.
? Prioritize investments.
? Increase utility fees.
? Reform public-sector corpora-
tions.
Agricultural policies:
? Decontrol input and farm-gate
prices.
? Decontrol crop marketing,
especially in coconut and
sugar.
? Increase rural credit.
Financial institutions:
? Rehabiliate government-owned
financial institutions, limit
new loans, and improve loan
collections.
? Merge and consolidate weaker
private banks.
Government decisionmaking:
? Limit use of presidential
decrees for setting economic
policy.
Stimulate export growth, eliminate the trade
deficit, and allocate resources more efficient-
ly. Nontraditional exports could increase by 9
percent annually; industrial output by 5 per-
cent annually.
Balance the government budget, reduce reli-
ance on foreign borrowings, and trim infla-
tion. Establish public expenditure pattern con-
sistent with long-term growth objectives.
Eliminate subsidies to public-sector corpora-
tions.
Raise agricultural output by over 4 percent
annually by 1987, with growth rates of 4
percent for coconuts and rice and 2.3 percent
for sugar.
Central to ongoing World Bank structural adjust-
ment loans (SAL), and IMF standby. Impact of
SALs I and II-providing $500 million beginning
in 1980-diluted by presidential decrees granting
exemptions to Marcos's associates.
Fundamental to the IMF adjustment program.
Additional fiscal policy reforms planned for the
World Bank's 1986 SAL III. Marcos and the
ruling elite oppose budget cuts in favored pro-
grams and ministries as well as suspension of tax
exemptions granted to close associates. Public is
unhappy over increased utility fees for water,
electricity, irrigation, and fuel.
Focal point of reforms advocated by World Bank
and aid donors. Imelda Marcos and some techno-
crats favor continued government intervention in
agricultural marketing, especially by the Nation-
al Food Authority.
Strengthen financial sector and restore public An action plan for financial reforms is required
confidence in banking system. Reduce reli- by IMF. Lending limits on government-owned
ance on foreign savings by raising domestic banks resisted by technocrats favoring continued
savings rate. government acquisition of businesses and by rul-
ing elite seeking financial bailouts.
Greater accountability and participation in One of the key political reforms sought by opposi-
policymaking. Reduced government interven- tion parties, business community, and aid donors.
tion in economy and fewer special favors to Marcos is strongly resisting efforts to curb his
Marcos associates. decreemaking authority.
cope with rapid labor force growth and that agri-
cultural reform is required to slow the expansion of
the Communist insurgency. In addition, opposition
parties in the National Assembly have launched
investigations into Marcos's economic policies. `In
an unprecedented action, one subcommittee, seek-
ing sweeping changes in the. sugar industry, recent-
ly forced. Benedicto to answer questions on corrup-
tion and mismanagement in NASUTRA.
Moreover, special interest groups, such as the sugar
planters and millers, are lobbying with some suc-
cess; and in mid-1984 Marcos deregulated sugar
exports, although NASUTRA retained control over
the domestic market.
... Against Considerable Resistance
The key roadblock to the reform agenda is that it
would undermine the structure of "crony capita-
lism"-the granting of loan guarantees, waived
import taxes, and monopoly privileges-which has
supported Marcos politically. Cojuangco, for exam-
ple, uses his considerable influence to protect his
economic privileges and to expand into new busi-
ness ventures, such as cement, textiles, and food
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Secret
processing. The cronies' financing, moreover, is
particularly critical to supporting the activities of
the KBL, the ruling political party, and under-
writes the campaigns of favored politicians.
Although Manila's technocrats continue to make
strong statements supporting economic reform dur-
ing their official meetings with creditors and aid
donors, the US Embassy reports that, in private
conversations, the leading technocrats-including
Prime Minister... Virata- do not appreciate. the
need for economic restructuring. They continue to
blame external factors for the economy's recent
poor performance and believe that the IMF stabili-
zation program represents the lion's share of the
reforms needed.
Several developments suggest the technocrats do
not take the aid donors' concerns seriously. For
example, in response to the World Bank's insistence
on an analytical study of the coconut and sugar
sectors, the government prepared a paper defending
the status quo. Furthermore, government officials
are reluctant even to discuss politically sensitive
topics such as reform of the National Food Author-
ity and other government institutions that enjoy the
protection of Imelda Marcos
Finally, although some senior
government technocrats have opposed the crony
empires, they are also committed to the govern-
ment's own rapidly. expanding role in the economy.
Tough Course Ahead
There is little on the horizon to suggest a change in
Manila's business-as-usual attitude. Marcos is pre-
occupied with domestic politics. We believe the
policy changes he. does approve are intended largely
to placate domestic and foreign critics.. Manila, for
example, recently announced some reorganizations
in the coconut and sugar sectors but, instead of
consulting with the World Bank on a comprehen-
sive set of reforms, as previously agreed, the gov-
ernment unilaterally developed and announced the
reorganizations in a move likely to increase tensions
Secret
15 March 1985
with the Bank-its largest donor. Moreover, ac-
cording to US Embassy reporting, the return of
coconut trading to the private sector is widely
viewed as lipservice to suggestions by the IMF and
aid donors. The coconut lan
Works to his
financial advantage and leaves the industry tightly
controlled by the government.
Resistance to reform is evident elsewhere. A loom-
ing crisis in the sugar sector-in which low world
prices for sugar and a bankrupt NASUTRA
threaten the jobs of over 250,000 workers-has
prompted Marcos to announce that.NASUTRA
would be converted into a private firm. The ar-
rangement, however, gives the new firm the sole.
right to market sugar-leaving open the possibility
that Benedicto or another Marcos associate may
control its board-and is viewed skeptically by
most observers in Manila.
For their part, the World Bank and IMF, with
support from Manila's largest bilateral aid donors,
appear determined to link increased future assis-
tance to progress on economic reform. The IMF, in
a departure from its traditional short-term adjust-
ment program, has added structural reforms of
taxes, public-sector investments, financial institu-
tions, and agricultural marketing to the perfor-
mance targets for, the Philippines' $615 million
standby loan. A larger portion of the World Bank's
annual $500 million assistance program for the
Philippines is now being linked to fundamental
policy reform. In addition, Manila's commercial
creditors are tying new financing to Manila's com-
pliance with the targets and reforms of the IMF
program.
The government's sidestepping of significant eco-
nomic restructuring so far suggests a ,lengthy con-
frontation between Manila and its aid donors. -
Manila has already missed the first performance
target of the.IMF adjustment program because.it
elected to seek lower interest rates-a popular
move-rather than adhere to the tight money
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supply targets set by the Fund. Additionally, Ma-
nila failed to submit a comprehensive action plan
for coconut and sugar reforms in time for the
Fund's March performance review.
The delays and missed targets will postpone dis-
bursements from the financial rescue package and
risk significantly lower aid levels. As a result of
missing the IMF's target for money supply, an $80
million drawing from the Fund, along with a $300
million disbursement from the commercial banks,
will be postponed at least until May. Manila's
lackluster approach to policy reform, moreover, has
already led some donors to withhold or reduce new
aid pledges at the annual meeting in January of the
Philippine aid donors. To underscore their concern
with policy reforms, a subcommittee of donors will
meet with Philippine officials in April to review
progress on structural and policy reform.
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Proposed Soviet Gas Pipeline to
Eastern Europe
The Soviets are pushing for an agreement with
East European countries on the joint construction
of a new gas export pipeline. Moscow wants to get
more East European participation in Soviet invest-
ment projects in return for increased Soviet deliver-
ies of energy and other raw materials. It is not
certain, however, that the East European nations
could absorb the additional 20-22 billion cubic
meters a year of gas that the pipeline reportedly
would deliver. If not, the Soviets might attempt to
sell some of it to Western Europe.
Moscow has for many years been trying to rectify
what it considers to be inequities in its trade with
Eastern Europe. Soviet assistance to Eastern Eu-
rope has taken the form of price subsidies, trade
credits (as represented by chronic surpluses in
trade), and Moscow's willingness to provide goods
also salable for hard currency (such as oil and other
raw materials) in exchange for goods not as salable.
The Kremlin seems more determined than ever to
reduce this assistance during the next five-year
period. The Soviet approach is reflected in the
October 1984 cooperation agreement with East
Germany that calls on East Berlin to expand its
capacity to produce equipment for the oil and gas
industry as well as developing other sectors that
would supply the USSR with needed goods and
serviced
in
1 3 the USSR was planning to build
a new export pipeline to Eastern Europe during
1986-90. A Soviet announcement, in Pravda in
July 1984 after the June summit of the Council for
Mutual Economic Assistance (CEMA), indicated
that the USSR-with the assistance of the East
Europeans-would build a gas export pipeline to
deliver 20-22 billion cubic meters a year to Eastern
Europe.
the project will cost 10-13 billion rubles
($12-16 billion)-in contrast, CEMA's total invest-
ment projects in the 1986-90 period reportedly will
come to about 45-55 billion rubles ($55-68 billion),
of which the USSR will provide about half.725X1
Previously, the CEMA countries were extensively
involved in the construction of the Druzhba
(Friendship) oil pipeline in 1960-64 and the Soyuz
(Union) gas pipeline in 1977-79. Each of the signa- 25X1
tory nations to the Soyuz gas pipeline agreement
was tasked with complete construction of a large
segment of the line (including compressor stations),
using its own resources and manpower. Western
equipment and pipe purchased for the Soyuz pipe-
line was financed by $2.5 billion in syndicated
loans raised by CEMA's International Investment
Bank (IIB). These funds were then lent to East
European countries, which, in turn, made them
available to the Soviet Union. In addition, Eastern
Europe provided substantial ruble assistance. East
European contributions will be repaid with deliver-
ies of resources and natural gas through 1990.
Requirements for Pipe and Equipment
The new export line will be about 4,600 km in
length-two-thirds longer than the Soyuz line-
and 1,420 mm in diameter. It reportedly is to have 25X1
40 compressor stations and run from the Yamburg
gasfield, about 150 km north of the Urengoy 25X1
gasfield, to the export terminal at Uzhgorod on the
Czechoslovak border. The route will parallel the
recently completed Siberia-to-Western Europe gas 25X1
export pipeline. Construction reportedly will begin
in 1985 and will be completed in 1988.
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Proposed Natural Gas Pipeline From Siberia to Eastern Europe
ea nui. Romania
/ ! q
all Brest
m sm
Turkey
rr~ ro
Do,
\ * S ~W/
The United States Government has not recognized
the incorporation of Estonia, Latvia, and Lithuania
into the Soviet Union. Other boundary representation
re not necessarily authoritative.
The Pipeline at a Glance
Length: 4,600 kilometers (Yamburg-Uzhgorod)
Capacity: 32 billion cubic meters per year (gross);
26-28 billion cubic meters per year (net)
Pipe: 2.8 million tons, 1,420-mm(56-inch)diameter
Operating pressure: 75 atmospheres
Total cost: 10-13 billion rubles
Completion: 1988
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We do not believe that the new CEMA gas export
pipeline will be a major source of equipment con-
tracts for West European firms as was the recently
completed pipeline.
the USSR plans to use Soviet gas turbines. Output
of Soviet turbines suitable for use on 1,420-mm gas
pipelines has increased in recent years. Since the
purchase of the 125 Western gas turbines for the
Siberia-to-Western Europe gas export pipeline, the
USSR has contracted to buy an additional 21
Western 25-megawatt turbines-enough to meet
only about 10 percent of estimated demand during
1984-85. A substantial amount of the 2.8 million
tons of high-grade, large-diameter pipe, however,
will probably have to be imported from the West.
East European Participation
Moscow apparently sees the gas pipeline as a high-
priority project and is pressing to complete bilateral
agreements with the individual East European
countries.
The East Europeans apparently are dragging their,
feet on the pipeline and other projects.
In 1983 Soviet gas exports to Eastern Europe
totaled about 31-34 billion cubic meters or about
Soviet Oil Deliveries to Eastern Europe
The new gas pipeline may be intended to compen-
sate for possible reductions in Soviet oil deliveries
to Eastern Europe. With oil output from the key
West Siberian production region showing signs of
slower growth and that from other production
regions declining by about 10-12 million tons per
year, Soviet oil output during 1986-90 at best will
remain constant. Output in 1984 was 613 million
tons-3 million tons below the 1983 level and 11
million tons below plan. At the annual CEMA
meeting in October 1984, Soviet Premier Tikhonov
announced that the USSR would continue "to
guarantee oil supplies" to CEMA member nations
and "increase future shipments" of electricity and
gas. The wording of the Soviet announcement
suggests that, although the USSR will continue 25X1
delivering oil to the CEMA countries, the volume
of future oil shipments may be reduced.
Europe, excluding Romania.'
three-fifths of total gas consumption in Eastern
Western Europe: An Alternative Market?
It is uncertain whether the East European countries
will have the pipeline network and industrial facili-
ties to distribute and absorb annually the additional
20-22 billion cubic meters of gas to be delivered
annually by 1990. Even if the East European
economies could absorb the planned amount, the
' We are unable to determine precisely how much Soviet gas was
delivered to Eastern Europe in 1983. Soviet trade data indicate a
23-percent increase in the ruble value of gas deliveries, which would
suggest total deliveries to Eastern Europe of 34-35 billion cubic
meters at constant prices, excluding Romania.
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pipeline would still. have some capacity for addi-
tional gas exports to Western Europe. Soviet tech-
nical journals indicate that the net throughput of a
pipeline of this length and diameter operating at a
pressure of 75 atmospheres is about 27 billion cubic
meters per year-5 to 7 billion cubic meters more
than the amount of gas that the Soviet press reports
is earmarked for Eastern Europe. Eastern Europe's
ability to absorb Yamburg gas depends also on the
amount of Soviet gas received through other pipe-
lines. Press reports indicate plans to build a gas
pipeline from the Soviet border at Brest to Warsaw
in 1985. Another gas pipeline will reportedly be
laid from the Soviet export terminal at Izmail to
Bulgaria. (Some of the gas transported through this
pipeline, however, is probably earmarked for Tur-
key.)
If West European gas demand rises more than is
currently expected during the late 1980s and early
1990s, the Soviets could use the excess capacity of
the proposed line to Eastern Europe as a ready-
made vehicle to transport gas to Western Europe.
This could be of substantial help in maintaining
total Soviet hard currency exports at a time when
its oil exports may be declining. The outlook for
such sales to the West would, of course, depend on
energy market conditions and the willingness of
prospective Western buyers to become more depen-
dent on Soviet gas. We believe that current Europe-
an industry and government forecasts for West
European gas demand may be understated and do
not take into account an apparent return to higher
rates of economic growth.
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Cuba: Castro Struggles
With the Economy
President Castro's recent call for new economic
priorities and at least another 15 years of austerity
reflect Cuba's concern over mounting financial
problems as well as its sensitivity to sharp Soviet
criticism of Havana's economic mismanagement.
The regime's new emphasis on meeting debt obliga-
tions to and improving trade balances with the
Soviet Bloc and the West also suggests that eco-
nomic pragmatists have reemerged as the predomi-
nant element in the leadership. The austerity mea-
sures needed to meet Havana's overambitious trade
targets will be a severe blow to Cuban consumers
whose expectations have been fed by moderate
economic growth during 1984 and by optimistic
rhetoric. Although Havana's trade goals will re-
quire Castro to project an image of responsibility
and moderation in the West, we do not anticipate
any change in the regime's distrust of and antipa-
thy toward the United States, nor any fundamental
shift in Cuba's relations with the Soviet Union.
Growing Economic Pressures
After two years of tightened austerity under the
guidance of its Western creditors, Havana appar-
ently gambled in 1984 that a burst of spending on
imports and government construction projects
would increase employment, soothe growing popu-
lar discontent and divert attention away from its
recent foreign policy blunders. By the middle of last
year, however, it was apparent that slack export
demand and domestic economic bottlenecks were
foiling Havana's recovery effort. At best, the ex-
periment produced a moderate increase in short-
term economic growth at the cost of erasing the
hard currency trade surplus and precipitating sharp
criticism from Western and Soviet creditors.
Cuba: Hard Currency Million US $
Current Account
Current account balance
-67
64
359
237
-128
Trade balance
517
364
727
511
32
Exports, f.o.b.
1,759
1,799
1,627
1,431
522
Imports, f.o.b.
1,242
1,435
900
920
490
Services balance
-584
-300
-368
-274
-160
We estimate that the real growth of the Cuban
economy was closer to 3 percent last year than the
7.4 percent claimed by the Cuban Government-a
figure 2 percentage points higher than the official
target. Havana has historically ignored or underes-
timated the impact of domestic inflation.' Accord-
ing to official statistics, growth was driven by a
record increase in construction-apparently stimu-
lated by government investments in transportation
and city planning projects. Shortfalls in sugar,
citrus, and nickel production-Cuba's leading ex-
port earners-contributed to Havana's apparent
failure to meet its economic growth target for 1984. 25X1
' The US Interests Section in Havana estimates that the cost of
living rose about 7 percent last year-almost 5 percentage points
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Cuba: Real Economic Growth, 1980-84
Havana claims that increased worker productivity
accounted for 60 to 80 percent of its economic
growth. This claim reflects the government's effort
to spotlight the success of highly touted incentive
programs introduced into roughly half of all eco-
nomic establishments over the past two years. In
reality, Cuba's economic growth last year probably
was more the result of a sharp increase in imports
that allowed a short-term rise in local production.
During the first half of last year, imports from the
Soviet Bloc rose 19 percent, and those from the
West jumped 69 percent, probably largely the
result of an expanded line of credit from Argentina
and the resumption of government-guaranteed ex-
port insurance from Japan. Past trends and official
policy suggest that more than half the imports from
the West consisted of raw materials and intermedi-
ate goods that would have contributed directly to
domestic output.
Secret
15 March 1985
Cuba: Foreign Trades, 1980-84
Deficit
Communist
countries
Imports
Non-Communist
countries
Imports
Exports
I I I I _ I
1980 81 82 83 84b
a Projected, based on trade patterns over the first six
months of 1984.
b Cuban trade with non-Communist countries is based
on hard currency world prices, while most of its
Communist country trade uses soft currency-negotiated
prices that are frequently subsidized in Cuba's favor
and do not reflect real market values. The result is a
more favorable global trade balance than if Cuba
conducted all of its trade at world market prices.
Havana's Economic Management Under Fire
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Cuba's economic performance was also being scru-
tinized by Cuban economists and Western credi-
tors. According to the US Interest Section, Cuban
economists warned that the government's assertions
regarding economic growth should be adjusted
downward to reflect reality. Commercial and West-
ern government creditors-kept relatively well in-
formed of Cuba's freewheeling spending on im-
ports-will likely make their concerns known as
negotiations over the rescheduling of Cuba's 1985
debt get under way later this spring
Little Improvement in Sight
Cuba almost certainly will be unable to repeat this
year the moderate economic growth achieved in
1984. Soviet economic assistance has leveled off
over recent years. Cuban press reports indicate
that; despite, Havana's vigorous lobbying, Cuba
received little assurance of any real increase in aid
from its Soviet and East European benefactors at
the annual CEMA head of state conference in
October. Nor was the outlook for new lending from
Western creditors bright. Official statistics re-
leased last fall indicated that Havana was falling
short of meeting yearend targets for hard currency
trade and reserves set by official Western creditors
as conditions to any further debt rescheduling.
? The inferior quality of Cuban citrus and con-
tracts obligating the bulk of the crop to the Soviet
Union and Eastern Europe will limit hard curren-25X1
cy citrus earnings.
Despite Havana's hopes for increased nickel pro-
duction as new. factories are brought on line, hard
currency nickel earnings will be limited by a
continued weakness in the world market price
and by US agreements-with Japan and several
West European nations prohibiting the sale of
steel containing Cuban nickel to the United
States.
Furthermore, with no promise of increased Soviet
petroleum, Havana undoubtedly, realizes that its
ability to resell surplus Soviet petroleum for hard
currency and to support the demands of new-fac-
tories-particularly in the energy-intensive nickel
sector-will require strong energy conservation
measures.
Soviet Assistance to Cuba Million US $
1980
3,463
1981
4,558
1983
4,215
1984
3,750 a
The outlook for hard currency export earnings at
the end of 1984 indicated that Havana would be
hard pressed to fund increasing levels of Western
imports over the near term:
? World sugar prices are projected to remain near
record lows through much of 1985 owing, in part,
to the disintegration of the International Sugar
Agreement in December 1984 and massive world
sugar stocks.
In several recent speeches, Castro responded to
these building pressures by declaring a "profound
economic revolution". against waste and inefficien-
cy. The Cuban :president called for discussions to be
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held in every workplace on a set of new economic
priorities:
? Increase nonsugar exports to the West by at least
20 percent.
? Meet export commitments to the Soviet Bloc.
? Limit import spending.
? Honor debts from Western and Soviet creditors.
Havana has released only sketchy information on
how it will meet its new goals. Cuban economists
probably have run up against considerable trouble
in detailing any implementation scheme. We be-
lieve, however, Havana's targets are unrealistic and
often contradictory:
? Havana's overambitious plan to boost hard cur-
rency export earnings will be limited by the need
to meet CEMA trade quotas; by Soviet insistence
that Cuba concentrate on the production of tradi-
tional, yet depressed, exports such as sugar; and
by the difficulty of conserving petroleum for
resale.
? Despite the goal to limit total import expendi-
tures, Castro.has publicly admitted that Cuba
will need increased levels of Western inputs to
production in order to support economic growth
this year.
? With the uncertain outlook for export earnings,
and the unlikelihood of substantial new trade
credits, Havana probably will have insufficient
hard currency reserves to pay for these Western
inputs;
In our judgment, implementation of Castro's plan
will hold growth well below the 4.5- to 5.0-percent
target for 1985. Planned cuts in government spend-
ing for construction and social service projects,
together with energy rationing, will dampen eco-
nomic activity. Havana will have to push sugar
production if it is to meet export commitments to
the Soviet Bloc and still maintain sales to hard
currency markets.
Havana has lowered its sugar production
target this year, because of the extended cane
cutting season last year, unseasonable rainfall, and
a shortage of Western herbicides.
Secret
15 March 1985
Impact on the Consumer
orities.
The Cuban population will bear the brunt of the
new austerity. The simultaneous drive to cut im-
ports and increase exports will reduce domestic
consumption; the production and importation of
consumer goods have become Havana's lowest pri-
Castro's warning that Cuba faces at least another
15 years of economic hardships is a severe blow to
the long-suffering Cuban whose rising expectations
have been fed by recent moderate economic growth
and optimistic rhetoric. Moreover, new regulations
to stimulate productivity-such as longer working
hours and the relocation of workers from inefficient
factories-are likely to add to popular discontent.
In an apparent attempt to mollify the populace,
Castro already has assured Cubans that there will
be no decline in current living standards. Havana is
likely to dangle the possibility of emigration to the
United States under the recent bilateral agreement
as a means of temporarily quieting critics.' Havana
may also loosen some economic controls, such as it
did recently with a new housing law that allows
private ownership and leasing of real estate. Mea-
sures such as the housing law, however, carry the
danger of unleashing long pent-up expectations for
additional reform. Civil disobedience is almost
certain to increase. As it has in the past, the regime
likely will resort to repressive tactics.
Implications for the United States
If past patterns hold true, Cuba's current swing
toward more pragmatic economic policies will have
a major impact in terms of tactics and focus; but
not in ultimate goals. Havana is placing great stress
on developing diplomatic, commercial, and cultural
'The United States and Cuba reached agreement last December to
return to Havana approximately 2,700 "undesirable" refugees and
to allow up to 30,000 Cubans to emigrate to the United States
annually.
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Pragmatists in Charge
The remedial measures Castro has endorsed for
the Cuban economy suggest a revitalization of the
influence of individuals in the leadership who, over
the years, have argued for more pragmatic policies
to alleviate both domestic and international prob-
lems. These pragmatists, who are responsible for
the day-to-day functioning of the economy, see
increased contacts and trade with the West as well
as material incentives as necessary evils to over-
come worker apathy and boost productivity. F_
In policy deliberations, the pragmatists compete
with the hardliners, who head the military and
security establishments. They view permanent con-
frontation with the West as necessary to prevent
ideological contamination and insist that only
moral incentives are ideologically acceptable.
As a confirmed revolutionary, Castro clearly-pre-
fers the dramatic activism advocated by the hard-
liners. Economic reality, however, especially when
reinforced by pressure from Moscow, has forced
him to pay greater heed to the pragmatists in the
past. A measure of the pragmatists' recent success
can be found in the ease with which the new
housing law was approved by the National Assem-
bly. Recently, several hardliners who appear to
have strongly resisted even temporary ideological
backtracking have lost their posts or been demot-
ed.
ties with Western nations in a program aimed at
developing new markets and increasing Cuban
exports. To promote these ties, Castro has donned
the cloak of peacemaker and is relying on his
formidable persuasive skills to refurbish Cuba's-
and his own-image in Western Europe, Latin
America, and the United States. He has already
been able to convince a steady stream of Western
visitors to carry his message abroad that he is
willing to negotiate virtually any differences Cuba
may have with any country, especially the United
States.
Although the pressures on Castro probably will
make him more amenable to negotiate solutions to
less critical bilateral matters-a new antihijacking
agreement, for example-they will not alter his
basic antipathy and distrust of the United States.
Moreover, he cannot relax his overt hostility to-
wards Washington without the risk of feeding
popular expectations that an imminent improve-
ment in relations with the United States will bring
immediate economic relief. He wants no such 25X1
internal pressure that might limit his policy options.
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LDC Financial Developments:
Monetary Data as an
Early Warning
Since late 1982, the international financial commu-
nity has had substantial data on countries under-
taking IMF-supported programs, but financial in-
formation on other LDCs, especially up-to-date
balance of payments and fiscal data, is more
limited. Central bank data, however, appear to be
good indicators of changes in domestic and external
financial conditions and as evidence of policy be-
havior in financially troubled countries.'
According to these indicators, Colombia's domestic
and external financial condition is deteriorating
rapidly and, in the absence of strong adjustment
measures, probably will soon lead to a rapid in-
crease in inflation and a foreign exchange crisis.
The indicators also suggest that the deterioration in
Algeria, India, and Pakistan may warrant closer
attention. Some countries, however, are showing
substantial improvement in their financial condi-
tions, in particular Indonesia.
Financially Deteriorating Countries
According to the methodology, Colombia has expe-
rienced the most serious deterioration of the 11
countries. Starting in early 1983 net foreign assets
of the central bank declined rapidly, and net do-
mestic assets increased. The monetary base also
rose but at a less rapid rate. This information
implies that the Colombian Government has been
running a large fiscal deficit that is being heavily
financed by the central bank. The data also indi-
cate that the central bank was intervening heavily
in the foreign exchange market to reduce the
inflationary growth of the monetary base. If the
' We used the methodology to examine Algeria, Bangladesh,
Colombia, Egypt, India, Indonesia, Malaysia, Pakistan, Thailand,
and Venezuela, countries that do not have an IMF program but
who are potentially troubled debtors; in addition, South Korea was
Methodology
Data on central banks-contained in the IMF s
International Financial Statistics (IFS)-can be
arranged into the monetary base, net domestic
assets, and net foreign assets. Changes in these
categories can then serve as an indication of devel-
opments in domestic and external economic perfor-
mance, especially for countries suspected of having
potential balance-of-payments problems. For
example:
? A rapid increase in net domestic assets indicates
the central bank is heavily financing government
deficits.
? Rapid declines in net foreign assets may indicate
a balance-of-payments deficit.
? Rapid rises in the monetary base suggest the
central bank is running an expansionary domes-
tic policy that will lead to a rapid increase in the 25X1
money stocks and, eventually, inflation.
On the other hand, a rise in net foreign assets
combined with stability in the monetary base and
stability or declines in net domestic assets indi-
cates a relatively strong position such as would
occur with a current account surplus and a small
budget deficit.
Financial analysts using this methodology need to
be wary about forming conclusions based only on
these data. Other factors such as the competitive
value of the exchange rate and major changes in
foreign exchange and credit restrictions may
distort the indicators. Another drawback is that a
few countries submit their central bank data only
after a considerable lag.
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DI IEEW 85-011
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LDC: Financial Performancea, 1981-84
Legend:
Monetary base
Net foreign assets
Net domestic assets
Col ombiac
Billion pesos
Algeria
Billion dinars
Bangladeshh
Billion takas
0
-10
IIIIII111iiiI 11 1 1 11 1 1 11111
0 -20
Egypt
Billion pounds
Indonesia d
Billion rupiahs
Thailand
Billion baht
Malaysia
Billion ringgits
10
Venezuela
Billion bolivares
0
I I I I I I I I I I
India d
Billion rupees
Pakistan
Billion rupees
50
40
30
20
10
0 I I~~ i
South Koreab
Billion won
3,000
2,000
1,000
0 1981 82 83 84
from those stipulated in an IMF program.
b Fourth quarter 1984 based on October 1984 data.
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central bank eventually exhausts its foreign ex-
change reserves-and these declined sharply in
1984-any additional deficit financing by the cen-
tral bank would lead to a rapid increase in the
monetary base, a subsequent rise in the inflation
inflow of foreign exchange and alleviated the need
for central bank financing of the public-sector
deficit.
rate, and a likely balance-of-payments crisis.
The data on India and Pakistan indicate that both
countries experienced a deterioration during late
1981 through the third quarter of 1982. The deteri-
oration in India then slowed until the third quarter
of 1983, and Pakistan's external and domestic
financial situation improved until fourth quarter
1983. According to the indicators, however, finan-
cial deterioration in both countries resumed in
1984.
The information on Algeria indicates that starting
in mid-1982 the government's budget deficit was
heavily financed by the central bank, causing the
monetary base to grow rapidly. At the same time,
the central bank intervened in the foreign exchange
market through purchases of its own currency. The
data indicate, however, that Algeria undertook
some adjustment measures in late 1983 that helped
alleviate the necessity of central bank purchases of
government debt.
Financially Improving Countries
According to the indicators, Indonesia and Venezu-
ela have demonstrated substantial improvement in
their domestic and external finances over the past
few years. Indonesia's improvement was the most
spectacular. Starting in early 1983, Indonesia im-
plemented adjustment measures including devalu-
ing its currency, reducing the public-sector deficit,
and enacting more market-oriented policies. These
measures led to a rapid inflow of foreign exchange.
The central bank largely neutralized the inflation-
ary impact of central bank purchases of foreign
exchange through sales of government debt.
The data on Venezuela indicate an improvement in
domestic and external finances in 1983-84 follow-
ing some deterioration. During 1983 the govern-
ment devalued the currency and substantially re-
duced the public-sector deficit, which led to an
Other Country Situations
The economic indicators for Bangladesh, Egypt,
Malaysia, South Korea, and Thailand did not
indicate any strong trend. The data on Bangladesh
show that the government was heavily financing its
fiscal deficit through the central bank during 1981
and early 1982; however, the deterioration was
halted in mid-1982. In Egypt, the monetary base
and net domestic assets of the central bank have
been growing at a rapid rate since early 1981, but
net foreign assets of the central bank have been
fairly stable. The data on South Korea and Thai-
land have fluctuated greatly over the past three
years, but no long-term trend is discernible. Con-
versely, the indicators on Malaysia have fluctuated
little.
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