INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807720001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: October 15, 2010
• Sequence Number: 1
• Publication Date: October 4, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
Inter ,tional
Economic & Energy
686
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International
Economic & Energy Weekly 25X1
Synopsis
1 / Pers ective-The LDC Debt Situation: Rising Frustrations
LDC Debtors: Elections and Austerity Programs
Lee Kuan Yew's Singapore: Is the Magic Fading?
Tjinidad and Tobago: Downside of the Oil Boom
17 /Iran: Political Debate Over Foreign Exchange Crisis
21 / Lebanon: Economy Down But Not Out
directed to irectorate of Intelligence,
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Secret
DI IEEW 85-040
4 October 1985
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Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy Weekl~~ 25X1
Synopsis
1 Perspective-The LDC Debt Situation: Rising Frustrations
Dissatisfaction with chronic financial problems and with IMF-supported
austerity programs is growing among debt-troubled LDC. Even those that
have been the voices for moderation are advocating an expansion of lending re-
sources of multilateral financial institutions and greater financial participation
by developed country governments.
3 LDC Debtors: Elections and Austerity Programs
Traditional measures used to stimulate the economy before national elections
are causing increasing problems for debt-troubled LDCs, particularly those
operating under IMF-supported austerity programs.
7 Lee Kuan Yew's Singapore: Is the Magic Fading?
Lee Kuan Yew's visit to Washington next week coincides with a rare period of
economic and political turbulence for the island republic. While Lee is setting
the stage for a transfer of political leadership from his generation to the next,
the process may be delayed if Singapore's economic troubles persist. F 25X1
11 Trinidad and Tobago: Downside of the Oil BoornO
Trinidad and Tobago's oil-based economy-once the envy of the Caribbean
region-has experienced a cumulative decline in real GDP of 17 percent since
1982 and faces much harsher austerity in the coming years.
17 Iran: Political Debate Over Foreign Exchange Crisis
Sagging oil sales and low foreign exchange reserves have forced drastic
reductions in imports since the beginning of the year and have led to a bitter
debate within the govenrment over the control of foreign trade
21 Lebanon: Economy Down But Not Out
After 10 years of intermittent civil war, Lebanon's economy is probably
operating at about 50 percent of its pre-war level. Despite some progress in re-
building foreign exchange reserves and reviving agricultural production,
extensive rebuilding probably will not begin until an overall political settle-
ment is reached
Secret
DI IEEW 85-040
4 October 1985
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International
Economic & Energy Weekly
Perspective The LDC Debt Situation: Rising Frustrations
Dissatisfaction with chronic financial problems and with IMF-supported
austerity programs remains high among debt-troubled LDCs. The general
perception in these countries is that their financial obligations have become
overwhelmingly burdensome, that living standards have suffered enough, and
that reschedulings only postpone, rather than ease, the repayments burden.
With little economic improvement in sight, the 11 nations of the Cartagena
Group have been examining proposals for interest-payment relief. Even those
that have been the voices for moderation are advocating an expansion of
lending resources of multilateral financial institutions such as the IMF and
World Bank and greater financial participation by developed country govern-
We believe the challenge currently facing the international financial commu-
nity is to find a "carrot" that can be used to reward debt-troubled LDCs that
undertake substantial structural economic reforms. At present, short-term
adjustments-devaluations and cuts in subsidies and wages-are being made,
while the fundamental inefficiencies and rigidities of the debtors' economies
are going largely unaddressed. Progress in reducing the size and roles of
parastatal organizations in the debtor nations, for example, has been quite
limited partly because of the vested interests that would be threatened.? I 25X1
The debtor nations strongly endorse actions that would increase World Bank
lending which would help boost growth and development. World Bank officials
are just beginning to develop a more catalytic role for the Bank, including co-
financing with commercial banks and more structural adjustment loans, but
are somewhat constrained by the Bank's limited resource base. Meanwhile, the
IMF remains the focal point for short-term financial assistance. We believe,
however, the Fund will resist expansion of its responsibilities because it does
not want to be viewed as the "policeman" of the international financial
community.
In our judgment, the debtors will use every available forum to push demands
that industrial countries:
? Implement sound economic policies to promote world growth and lower real
interest rates.
? Resist protectionist tendencies and open markets to LDC exports.
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DI IEEW 85-040
4 October 1985
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? Boost multilateral development resources, particularly for the World Bank
and Inter-American Development Bank.
? Liberalize some West European regulations, which currently restrict com-
mercial bank lending to LDCs. 0
For the first time, the LDCs have submitted proposed reforms-including
easing conditionality of creditor lending and increasing international liquid-
ity-for consideration at the upcoming IMF/World Bank annual meetings in
Seoul. Moreover, the economic and foreign ministers of the Cartagena Group
plan to meet soon. Given the current environment, we cannot rule out more
radical actions, such as making only partial interest payments to commercial
banks. Mexico bears the closest watching. Its IMF program has been
suspended, and economic and political pressure, which could intensify if oil
prices continue to fall, could make it the first of the big-three debtors-Brazil,
Mexico, and Argentina-to confront creditors with alternate solutions. The
LDC debtors' response will depend in large part on industrial countries' and
commercial banks' actions during the next three months
Secret 2
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LDC Debtors: Elections and
Austerity Programs F-1
Traditional measures used to stimulate the econo-
my before national elections are causing increasing
problems for debt-troubled LDCs, particularly
those operating under IMF-supported austerity
programs. Increased government spending, hikes in
the money supply, or postponement of needed, but
unpopular, austerity policies can temporarily
brighten the economic picture and voter attitudes.
Even when a ruling party victory is assured, the
temptation to buy a landslide is strong. Stiff post-
election measures, however, are often needed to
trim the resulting growth in budget deficits and
inflation. Stimulative policies in Mexico and Brazil
before elections this year have been prime exam-
ples-in Mexico's case, loss of compliance with
IMF targets was instrumental in the recent Fund
suspension of its program with Mexico. Over the
near term, Mexico, Brazil, the Philippines, Venezu-
ela, Jamaica, and South Korea all face important
national elections. If past patterns hold, stimulative
policies or avoidance of needed austerity measures
will likely imperil compliance with Fund-supported
programs, or for those under self-imposed ro-
grams, complicate relations with creditors
Country Patterns
Brazil had its first election of a civilian president in
the 1965-85 period this year. Accordingly, little
evidence exists to support the theory of a pattern of
stimulative policies prompted by presidential elec-
tion considerations. The money supply, however,
does show a jump prior to the 1985 presidential
election, which the new government has been reluc-
tant to rein in. The congressional elections of 1982
also provide a vivid example of election consider-
ations determining economic policy. As the elec-
tions drew near, previous cuts in government spend-
ing were abandoned and monetary policy was
relaxed. Moreover, Brasilia needed IMF assistance
at the time, but postponed the unpopular move
until after the elections.)
The case of Mexico differs from other countries
with regular election histories in that the Mexican
Constitution prohibits presidential reelection. The
Mexican Government, in an effort to rally support
for the ruling party and reduce the need for voting
fraud, has often increased expenditures on public
works and other projects before elections. It has
usually implemented unpopular measures such as
exchange-rate adjustments and cuts in public-
sector spending after elections. This general trend
was obvious before the 1982 presidential elections
and last July's midterm elections. In the most
recent case, the de la Madrid government's pursuit
of stimulative policies was instrumental in the
recent Fund decision to suspend its agreement with
South Korea has a well-developed economy and a
history of preelection economic stimulation. While
money supply data suggest no clear pattern of
stimulative policies preceding elections, govern-
ment spending figures indicate fairly heavy use of
pump priming.
Patterns in the Venezuelan case are not as obvious.
Venezuela's process of political succession is one of
the best developed in Latin America. This system
would seem to promote expansionary policies aimed
at reelection, yet only a weak trend appears. Efforts
to improve the party's position focus more on
sophisticated campaigns and strong endorsements
by top party officials than on increasing expendi-
tures or expanding the money supply.
In the Philippines, stimulative measures appeared
before the 1965 and 1969 presidential elections.
Subsequent elections show no such trend. New
austerity measures-including a devaluation of the
peso-came just weeks after the May 1984 nation-
al assembly elections
Secret
DI IEEW 85-040
4 October 1985
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LDC Debtors: Government Spending and Money
Supply Growths
A\ ~Z
4-4 11 " 11
-10
-20
-30
1965
I I I_
-40 1965 70 75 80 84
~ 11 )
~ v
V V.\
Vertical lines represent election years.
Brazil's only election in the last 20 years was in 1985.
84
A comparison of spending and money supply fig-
ures under various administrations in Argentina is
less revealing than in other cases because of the
lack of continuity in Argentina's recent political
history. In the last 20 years, there have been as
many coups in Argentina as elections. In most
cases, irregular and tumultuous political succession
has precluded stimulative policies. Figures from the
1983 election, however, do show a large increase in
the money supply prior to the election of that year.
If historical patterns hold, several debtor country
governments will increase expenditures and loosen
their money supplies before their next elections,
resulting in larger deficits, higher inflation
and increased difficulties with creditors.
Municipal elections in Brazil are scheduled for
mid-November. We believe Brasilia probably will
not take the steps necessary to conclude a new IMF
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agreement-including more extensive cuts in the
budget deficit-until afterward to prevent the op-
position from exploiting the issue. The impasse with
the Fund will continue to cause concern among
bankers.
In South Korea, national assembly elections are
scheduled for 1987. President Chun has promised
to step down in 1988. Despite his leaving office,
Chun may be compelled to tamper with the econo-
my to effect a favorable election climate for his
party. F__1
In the Philippines, President Marcos is maneuver-
ing between creditor prescriptions and decaying
domestic conditions. Manila met its July IMF
targets, but economic difficulties persist, including
a projected 15-percent drop in export earnings for
1985. With increasing opposition, Marcos might
elect to pursue expansionary policies prior to the
1986 local and 1987 presidential elections. Result-
ing deficits and inflation, however, would put
Manila out of compliance with its IMF agreement
and consequently cut off further commercial credit.
Two other countries face elections within three
years. Mexico's President de la Madrid is likely to
pursue somewhat more expansionary policies prior
to next year's gubernatorial elections and, more
notably, before the 1988 presidential election. Ef-
forts to reflate the economy for the presidential
election are likely to begin in mid-1987, possibly at
the time presenting major problems for Mexico
with its international creditors.
Venezuela faces elections next in 1988. Though it is
not currently under an IMF agreement, it is being
monitored by the Fund, and serious increases in
government spending and inflation could compli-
cate agreements with commercial creditorsF
Finally, Jamaica recently renewed its agreement
with the IMF, rescheduled debts to foreign com-
mercial creditors, and made progress in reducing its
deficit. Jamaica, however, still faces a 50-percent
debt service ratio, and resistance to further auster-
ity measures is growing. Should the government
fail to improve the performance of the economy
before the next general election-which constitu-
tionally must be called by December 1988-the
opposition's prospects would be strengthened.
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Lee Kuan Yew's Singapore:
Is the Magic Fading?'
Lee Kuan Yew's visit to Washington next week
coincides with a rare period of economic and
political turbulence for the island republic. The
sudden plunge of Singapore's GDP growth rate
from 10 percent (at an annual rate) in first quarter
1984 to minus 1.4 percent in second quarter 1985 is
unprecedented. In addition, the relatively poor
showing of Lee's People's Action Party (PAP) in
the December 1984 election has encouraged many
among the traditionally docile populace to defy the
government and actively support opposition posi-
tions. While Lee is setting the stage for a transfer
of political leadership from his generation to the
next, the process may be delayed if Singapore's
economic troubles persist. F__-]
In the 25 years since independence, Singapore has
been a model for Third World economic develop-
ment. It has become the world's second-busiest
port, second-largest builder of offshore drilling rigs,
third-largest oil refining center, third-largest ship
building and repair center, and the commercial,
financial, and communications hub of Southeast
Asia. During 1961-81, Singapore averaged 9.2
percent annual real GDP growth-far outpacing
growth in developed nations.
Annual growth in 1985, however, is expected to
reach 2 percent at best, and the economy may even
contract-for the first time. Business failures are
rising in all sectors. Unemployment also is on the
rise: more Singaporean workers lost their jobs in
the first five months of 1985 than in all of 1984.
The manufacturing sector has been hardest hit,
primarily because of stagnant US demand for
electronics products and computer peripherals.
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Lee Kuan Yew
Shrewd, sophisticated, and
tough minded ... anticipates
and attacks problems head-
on ... brooks little opposi-
tion ... known for personal and
official honesty and efficien-
cy ... strong supporter of con-
Petroleum refining faces dwindling production as
world oil prices fall and Indonesian and Middle
Eastern producers develop their own refineries. In
addition, traditional entrepot trade has suffered
because Singapore's ASEAN partners are improv-
ing local shipping and marketing sectors. Ship-
building and repair, for the same reasons, have
been in deep depression for almost a year. F__1
Other sectors affected by the slowdown show no
sign of quick turnaround:
? Textiles and other labor-intensive manufacturing
industries are shifting operations to neighboring
countries such as Malaysia and Hong Kong
where labor costs are cheaper.
? Tourism and retail trade have suffered as Thai-
land, Indonesia, and Malaysia have dramatically
increased taxes on visitors and shoppers going to
Singapore.
? A surplus of office and hotel space has signifi-
cantly slowed construction activity. Because bank
loans have been heavily concentrated in construc-
tion, the finance industry is suffering as well. 25X1
Secret
DI IEEW 85-040
4 October 1985
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Singapore: Economic Indicators, 1978-85
Real GDP Growth
Percent
Real Growth in Manufactured
Exports
Percent
I I I
0 1979 80
I I I 1
85 -10 1979 80
L_J
85a
Real Growth in Construction Real Growth in Petroleum
Activity Refining and Petroleum Products
Percent Percent
Productivity and Real Wages
in Manufacturing
Index: 1978=100
Value of the Singapore
Dollar
US Cents
z Estimated,
n Productivity is real manufacturing output divided by number
of workers in manufacturing. Real wages are real earnings
per worker per hour.
Initial Steps To Ensure Economic Resurgence
Lee has tried to direct Singapore's resources to-
ward high-technology enterprises, hoping to capi-
talize on the nation's comparative advantage in
highly educated and skilled workers. His first
reaction to the slowdown was to provide seed
money early this year to newly created firms to
invest in high-risk, high-technology ventures-typi-
cal of his long-term strategy of moving the country
up the technological ladder. The government also
offers special investment, tax, and export incentives
to high-technology ventures. F-7
In July, however, Lee Hsien Loong, chairman of
the Economic Committee formed early this year
and elder son of Lee Kuan Yew, assessed the
slowdown in terms critical of previous government
planning. Lee admitted that the relatively high cost
of doing business has eroded Singapore's competi-
tive edge-something the government has long
refused to acknowledge. The remedies he an-
nounced were:
? Reducing charges for some communication,
transport, and real estate services provided by the
government.
? Partially rebating business property taxes.
? Lowering interest rates for some small business
loans.
? Accelerating public construction projects.
? Allotting an additional $45 million of venture
capital for investment in high technology.
? Halting government land sales for two years to
shore up the property market.
The government initially held the line against
business complaints about high wages, which, since
1980, have risen at an average rate of 8 percent
annually. Singapore's labor costs are now almost 70
percent above the next highest in the region, Hong
Kong.
In his National Day speech on 18 August, Lee
called for a voluntary two-year freeze on wages-a
sharp reversal of six years of policymaking. At the
same time, Lee reassured his countrymen that,
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Singapore's Wage Policies
Since 1979 the National Wages Council has rec-
ommended annual pay increases above national
productivity gains in order to force capital intensi-
fication and boost productivity. The Skills Devel-
opment Fund-which sponsors enterprise-level
training programs-has penalized labor-intensive
industries with less-skilled employees by collecting
higher contributions from employers whose work-
ers earn less than a certain annual wage. In
addition, the Central Provident Fund-a retire-
ment scheme-collects one-fourth of a worker's
annual salary from the employee and one-fourth
from his employer and accounts for 40 percent of
wage costs in Singapore.
while the present economic transition is painful,
recovery is achievable by 1987, barring world
recession. He encouraged business to redirect ef-
forts away from sectors with bleak futures, such as
shipbuilding and oil refining, toward such promis-
ing ventures as biotechnology and specialty services
in engineering design and medicine. Although
Lee's message contained little new-almost all of
Singapore's unions had already agreed to forgo pay
increases this year and businesses are being forced
by market realities to reallocate resources as he
suggests-it was favorably received. F-I
The Economy and the Succession
Lee believes, in our judgment, that securing his
reputation requires reversing the current downslide
and putting the economy securely back on the fast
track. He wants to assure himself that his dream
for Singapore-achieving an economic status equal
to that of Switzerland by 1999-is within reach.
To do this, Lee almost certainly believes he must
engineer a smooth transition of leadership to a new
generation so that a quarter century of careful
economic policy making will not be "recklessly
overturned." Lee has encouraged a gradual rejuve-
nation of the ruling party, rejecting the Chinese
tradition of lifelong service for high-ranking offi-
cials. He is proposing that government officials
retire at age 65. Lee himself will be 65 at the time
of the 1988 elections and has said he will step down
then. Accordingly, he has placed several promising
young technocrats-typically Singapore born, hold-
ers of advanced college degrees, and recruited from
a local corporation or profession-in party and
government sitions to test their capacity for
leadership.
Nonetheless, Lee appears ambivalent about turning
over the reins to the young technocrats he has
recruited. Throughout the 1970s and early 1980s,
he made every major policy decision himself, rarely
consulting anyone other than a few close advisers.
While younger politicians are taking a higher
profile in Parliament and in public, when circum-
stances warrant he has not hesitated to turn to
respected leaders of his own generation in devising
strategy. Lee underscored his lack of confidence in
the younger generation of his party by introducing
his elder son, Lee Hsien Loong, into Parliament as
a junior minister in 1984 and making him head of
Singapore's new Economic Committee.
Furthermore, Lee is preparing to reserve a role for
himself in future governments to ensure economic
policy continuity. At Lee's behest, the Cabinet is 25X1
drafting a constitutional amendment to make the
now honorary presidency an elective position with
the power to veto government spending of foreign
exchange reserves accumulated by previous govern-
ments. Lee probably intends to move into this
watchdog position after the 1988 elections if he
settles on a successor, which would enable him to
turn over the day-to-day management of the econo-
my while still retaining substantial controlF 25X1
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We believe Lee will continue to direct economic
relief measures principally toward business. Never-
theless, he opposes several of business's primary
demands:
? He has vowed not to lower retirement fund
contributions because these contributions fund
public housing and other important government
projects.
? Because Lee is resolved to sustain the govern-
ment's budget surplus, observers in Singapore
discount the possibility of substantial tax breaks,
even though corporate taxes-at 40 percent-are
the highest in the region.
? Businessmen have asked the government to relax
the Central Bank's heavyhanded regulation of
investment loans-saying it inhibits local entre-
preneurs-but government officials recently took
advantage of a bank collapse in Hong Kong to
justify stringent bank regulation.
? Businessmen argue that offshore banking regula-
tions are less rigorous and tax laws favor foreign
investors. Lee, however, believes that keeping up
with world technological improvements is the
only way for Singapore to remain prosperous.
There are hints that the government may be soften-
ing its hard line on other issues. Workers may now
use their retirement fund accounts to purchase
more than one residential property and may soon
be able to use these savings to invest in non-
residential property such as offices, shops, factories,
and warehouses. According to press reports, the
government is also considering allowing workers to
use their retirement fund accounts to purchase
selected domestic blue-chip stocks. Moreover, re-
ports are multiplying that the government will
make good on its promise to list state-owned com-
panies publicly, beginning with Singapore Interna-
tional Airlines-an initial step toward privatiza-
tion
In our judgment, Lee's relief policies to date are
less a blueprint for economic recovery than a
message that recovery depends on individual initia-
tive. We expect Singapore's growth rate to turn
upward before the end of the year but believe the
recovery will require significant industrial restruc-
turing over the longer term. Thus GDP growth
during the next two years is unlikely to return to
traditional levels of 8 to 9 percent annually.
We judge that Lee will not hesitate to hang on to
the reins of government if he believes that the
people are hesitant to follow the younger leaders or
that the younger leaders are improperly asserting
their authority. Lee may decide, furthermore, that
he is the only person with enough political power
and charisma to bring Singapore out of its econom-
ic slump-a judgment we think he is likely to make
if the slump continues. Even in the best of circum-
stances, we believe Lee is unlikely to turn power
over to the younger generation without retaining a
watchdog role for himself.
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Trinidad and Tobago:
Downside of the Oil Boom
Ll /
Trinidad and Tobago's oil-based economy-once
the envy of the Caribbean region-has experienced
a cumulative decline in real GDP of 17 percent
since 1982 and faces much harsher austerity in the
coming years. The Chambers government-wor-
ried about the record-low popularity jeopardizing
the ruling party's nearly 30-year hold on power-
has taken only piecemeal actions to deal with the
country's hemorrhaging foreign exchange reserves.
The private sector is too small to take the lead in
creating new jobs or generating new sources of
foreign exchange. Even the Caribbean Basin Initia-
tive and other US trade benefits are unlikely to
spark much growth in nonoil exports as long as
labor costs remain high and the Trinidadian dollar
remains overvalued. Trinidad will likely postpone
severe belt tightening until elections are held, prob-
ably by late 1986. Such foot-dragging, however,
will merely make the adjustment process more
difficult no matter who wins.)
From Prosperity to Austerity
Led by the oil sector, Trinidad has long had the
largest economy in the English-speaking Caribbean
and one of the highest standards of living in the
Western Hemisphere. Between 1975 and 1982, the
country's real GDP grew at an average annual rate
of 5.4 percent, compared with a weighted average
of 2.5 percent for the rest of the Caribbean region.
By 1980, the booming petroleum sector contributed
42 percent of GDP, more than double the 1972
share, and 90 percent of the country's export
earnings. With its new-found wealth, the govern-
ment initiated a number of capital-intensive, ex-
port-oriented projects and even became a major aid
donor to its less prosperous neighbors. F__-]
By the end of 1982, however, Trinidad's growth
stalled and real GDP fell in the next two years
under the weight of the international oil glut and
declining oil prices. The country's petroleum refin-
eries operated at less than 25 percent of capacity
during 1983 and 1984, mainly due to reduced US
demand. In addition, manufacturing suffered from
declining domestic demand. Export competitiveness
was badly eroded by high labor costs and a steady
appreciation in the real exchange rate-largely
because of the linkage of the Trinidadian dollar to
the soaring US dollar. Construction activity also
sagged as large-scale investment projects were
completed and government expenditures on new
projects were slashed. Agriculture continued to
suffer from prolonged neglect.
Government responses so far have concentrated on
reducing the country's internal and external pay-
ment deficits. Between 1982 and 1984, the govern-
ment's budget deficits as a share of GDP declined
five percentage points to 7.6 percent as spending 25X1
cuts-mainly in capital outlays and net lending-
more than offset declining revenues. Overall reve-
nues reportedly have been far below expectations
this year because of lower business earnings and
inefficient methods of tax collection.
The government has concentrated on trying to
conserve foreign exchange reserves. For example, in
October 1983 the government introduced exchange
controls to slow reserve losses that totaled nearly $1
billion for the year. Ceilings were placed on the
availability of foreign exchange to purchase specific
imports. To protect local producers, licenses also
were required for over 400 imports. In 1984, these
restrictions and reduced capital expenditures by the
government contributed to a 26-percent decline in
imports. A slower-but still serious-outflow of
foreign reserves continued, and new taxes on im- 25X1
ports and foreign travel were introduced this year.
Although the government accelerated foreign bor-
rowing in recent years to help cover its payment
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4 October 1985
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Trinidad and Tobago: Economic
Indicators, 1980-85
Real GDP Growth
Percent
Consumer Price Growth
Percent
_L1W
iNEll&
Central Administration Revenues
From the Petroleum Sector
Million US $
shortfalls, evidence suggests that heavy capital
flight more than offset such inflows.
Economic diversification has moved slowly even
though the Industrial Development Corporation
(IDC) indicates existing oil reserves are likely to be
depleted in 10 years.
Trinida-
dian officials have also publicly touted the CBI as
an investment lure, but privately
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have become increasingly frustrated
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with the lack of visible results from the program.
Trinidad's economic bind has even prompted the
government to explore expanded ties to Cuba and
the Soviet Union, but it is moving cautiously. In
late 1984, Trinidad entered into a $15-million
reciprocal trade agreement with the Castro regime.
Havana
has tried to take advantage of Port-of-Spain's
economic plight and gain a diplomatic presence in
Trinidad by claiming that, once more "normal"
relations are in place, Cuba would expand its
purchases of Trinidadian products. Trinidad also
has considered a Soviet request to establish a
resident office according to a fairly reliable source.
Despite the government's efforts, US Embassy
reporting indicates the downward economic spiral
unemployment is about 25 percent an expec e
rate to hit 30 percent by the end of this year.
Projected.
End of rear.
Peelirninarv.
Budgeted.
Meanwhile, foreign currency reserves have dropped
from a peak of $3.3 billion in 1981 to $550 million.
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Trinidad and Tobago: Balance of Payments
347.0
364.9
-813.3
-1,091.6
-670.1
-500.0
Merchandise balance
547.9
626.0
-526.6
-468.7
208.8
500.0
_ Exports (f.o.b.)
2,541.7
2,607.8
2,224.8
2,108.3
2,115.0
2,100.0
Imports (c.i.f.)
1,993.8
1,981.8
2,751.4
2,577.0
1,906.2
1,600.0
Net services
-200.9
-261.1
-286.7
-622.9
-878.9
-1,000.0
Capital account balance
324.3
314.4
555.4
344.7
434.1
450.0
Total public-sector borrowing
179.0
197.0
324.0
251.0
58.0
350.0
Direct investment
125.5
167.1
210.5
164.5
300.6
150.0
Other
19.8
-49.7
20.9
-70.8
75.5
-50.0
Errors and omissions c
-42.1
-126.5
-11.5
-230.0
-511.7
-850.0
Allocation of SDRs
11.3
10.7
0
0
0
0
Change in gross reserves
640.5
563.5
-269.4
-976.9
-747.7
-900.0
External debt, yearend
771.0
968.0
1,292.0
1,543.0
1,601.0
1,925.0
a Preliminary.
b Projected.
c We believe the large "errors and omissions" component in official
Trinidadian statistics includes heavy capital flight.
Obstacles to Adjustment
investors, aware of the government's history of
imposing onerous restrictions on selected firms, are
wary of entering into joint ventures. For example,
the US-based Tesoro Petroleum Corporation for
years was not allowed to retain any earnings in its
joint venture with the government. In 1982, Tesoro
finally decided to sell its 49.9-percent share to the
government, but a price agreement has yet to be
reached.
Despite Trinidad's recent aggressiveness in pursu-
ing foreign investment, formidable roadblocks work
against quick progress. High labor costs particular-
ly discourage foreign investors. According to IMF
data, unit labor costs in nonoil, nonsugar manufac-
turing nearly doubled between 1980 and 1984,
while productivity rose only 8 percent
A number of US businessmen have told US Em-
bassy officials that Trinidad has not acted fast
enough to create a proinvestment climate. The
prohibition against sole foreign ownership of an
enterprise is a major disincentive. Many foreign
Trinidad's nonoil export sector faces other obsta-
cles. Aside from high wages, the 68-percent appre-
ciation in Trinidad's real exchange rate between
1980 and 1984 has caused export prices to soar in
terms of other currencies. Devaluation, however, is 25X1
opposed by government and business leaders, who,
according to US Embassy reports, believe it would
raise import prices while only modestly increasing
export earnings because most sales are priced in US
dollars.
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Trinidad and Tobago: Share of GDP-
by Sector, 1980 and 1984
30.6
Agr
2.4
Non
relat
man
5. 7
iculture
petroleum
ed
39.0
Agri
2.9
related manufacturing
6.6
At factor cost.
h Estimated.
The government's heavy involvement in the econo-
my also poses obstacles to adjustment. During the
oil boom in the 1970s, the government invested
heavily in costly energy-intensive industries, ex-
panded its equity position in foreign-owned firms,
and absorbed unprofitable businesses. Unwilling to
eliminate jobs, the government has failed to
streamline most of these companies and has been
reluctant to transfer ownership if layoffs would
result. Today the state controls approximately 80
percent of the economy through 64 joint or wholly-
owned enterprises. According to official data, only
seven of these firms operated profitably in 1984.
Moreover, huge government subsidies have sup-
ported some hopelessly insolvent enterprises. In
recent years, such subsidies have even exceeded 10
percent of GDP, according to IMF data. The
ISCOTT steel plant has absorbed $500 million in
government support since its 1981 startup and has
never operated above 30 percent of capacity. In
order to protect the nearly 3,500 jobs that would
have been eliminated by the closure of the Texaco
refinery at Pointe-a-Pierre, the government pur-
chased the $189 million facility last March. In the
following three months, the refinery incurred losses
of $21 million.
The Chambers administration shows no sign of
reversing these policies. In fact
government's financial bind and bad publicity sur-
rounding the huge public-sector losses, however,
have prevented implementation of the plan.
We believe the economy will continue to decline
over the next few years, worsening already serious
unemployment and foreign payment problems. The
government expects its 1985 revenues from the
petroleum sector to be only 60 percent of the peak
1981 level. We believe that revenues will also
continue to be hurt by lower nonoil business earn-
ings and inefficient tax collection. As a result,
Trinidad will be tempted to substantially increase
its foreign borrowing and debt service burden.
Moreover, the worrisome investment climate prob-
ably will retard economic diversification. We be-
lieve the CBI will be of little benefit as long as
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Secret
labor costs and the exchange rate reduce the
competitiveness of exports. Extensive public owner-
ship ensures that economic decisions will continue
to be based heavily on political considerations.
Even a dramatic increase in Soviet or Cuban trade,
which seems unlikely, probably would be insuffi-
cient to reverse the country's economic slump.
The weakening economy will continue to erode
support for the ruling party, which is facing a
serious challenge from a unified opposition. The
National Alliance for Reconstruction-a moderate,
broadly-based coalition-already enjoys a substan-
tial lead over the ruling People's National Move-
ment in opinion polls. If the 1985 fiscal deficit
exceeds the budget forecast-as we expect-the
government will have to grapple with the need for
much harsher austerity in the coming months.
Until now, workers' concerns over losing their jobs
have largely muted labor unrest. After the elec-
tions-which must be held before February 1987-
we believe the potential for unrest will grow as new
austerity measures take effect.
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Iran: Political Debate
Over Foreign Exchange Crisis
Sagging oil sales and low foreign exchange reserves
have forced drastic reductions in imports since the
beginning of the year and have led to a bitter
debate within the government over the control of
foreign trade. The shortage of hard currency has
caused depressed industrial output to fall even
further and threatens more cuts in an already-
austere development program. Prime Minister Mu-
savi's government, made up largely of radicals, has
been blamed for mismanagement and corruption by
the more conservative Consultative Assembly
(Majles) and by the Iranian press. General discon-
tent over the economy remains high within the
Revolutionary Guard and the merchants-both key
interest groups. Tehran's concern over the vulnera-
bility of its oil exports has spurred efforts to raise
foreign exchange reserves, and this is likely to
aggravate problems in the near term.
Imports Slashed
Iran has slashed imports in the face of low oil
revenues to avoid drawing on its limited foreign
exchange reserves. Imports in the first three
months of 1985 from OECD countries-about two-
thirds of total imports-were down 46 percent from
the same period in 1984. The trend has continued
into the summer. Numerous press reports indicate
rising complaints by Iranian importers about diffi-
culties obtaining government permission to import
goods.
Foreign exchange shortages have even forced Teh-
ran to restrict cash purchases of some items it
considers high priorit
in June, for the first time, Iran
requested delayed payment terms on purchases of
medical supplies. Moreover, Western banks have
tightened letter of credit procedures for customers
dealing with Iran
Press reports indicate many firms
stayed away from the Tehran International Trade
Fair in early September because they believed
business opportunities did not justify the expense
and personal hazards involved. Foreign firms in
Iran report that in the past two weeks Tehran has
clamped down hard on remaining imports and
currency transfers abroad. The firms describe the
current foreign exchange crisis as the most severe
since the revolution 25X1
Tehran's difficulties over the past several months
are directly linked to the soft oil market. Iranian
exports to OECD countries in the first quarter of
this year were down 47 percent from the first
quarter last year. We estimate oil exports-about
95 percent of foreign exchange earnings-averaged
only about 1.5 million barrels per day (b/d) during
the first six months of the year compared with
about 2.0 million b/d in the same period last year.
Oil prices also have dipped, with spot prices of 25X1
Iranian light falling from around $27 per barrel in
June 1984 to about $25 this June. Iraq's current
bombing campaign against Khark has made a bad
situation worse. oil 25X1
shipments out of Khark have been interrupted by
recent attacks, and Tehran is increasingly frustrat-
ed over its inability to defend the island
Shoring Up Revenues
The attacks on Khark Island have highlighted
Iran's need to maintain its dwindling foreign ex-
change reserves. We estimate Iran's foreign ex- 25X1
change reserves currently stand at $4-5 billion, but
only about $2 billion is readily accessible. At least
$1 billion is tied up in negotiations over the fate of
a loan made by the former Shah to the French 25X1
Government; another $1.5 billion is illiquid or in 25X1
the form of uncollectable loans to Third World
countries. Readily accessible reserves are sufficient
to maintain the current low rate of imports for 2 to
3 months if revenues are completely cut off. 25X1
Secret
DI IEEW 85-040
4 October 1985
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Since the beginning of this year, Tehran has sought
to limit the drain on its foreign exchange reserves
to avoid turning to foreign credit or cutting essen-
tial imports in an emergency. The Majles had
hoped to bolster reserves though a provision in the
recently passed Foreign Exchange Budget Bill re-
quiring 10 percent of all foreign exchange receipts
to be set aside in a Special Emergency Reserve
Account with the Central Bank. At current reve-
nues, however, this measure would only increase
import coverage by about three weeks in the first
six months.
Efforts to boost nonoil exports have foundered. An
overvalued rial has been a major obstacle. The
government pays exporters at the official exchange
rate for foreign currency-they would earn six or
seven times more at black-market rates. Preferen-
tial exchange rates on nonoil exports and other
incentives were included in the Majles' foreign
exchange bill passed this summer, but are still
pending approval from the Council of Guardians.
Nevertheless, the Central Bank, which would over-
see implementation, reportedly is unwilling to offer
exchange rates near market rates for fear of in-
creasing inflation. At any rate, because nonoil
exports are only a small share of the total, any
boost probably would not add significantly to Iran's
revenues.
Economic Impact
Reduced imports have lowered domestic produc-
tion, aggravated a general scarcity of consumer
goods, and slowed development
most goods are available only at high black-
market prices. Shortages of raw materials and
spare parts have cut production or caused outright
closings in many industries. In July, Heavy Indus-
tries Minister Nabavi said that lack of foreign
exchange caused average monthly production for
March through June to fall 24 percent compared
with the same period a year earlier, according to
Iranian press. Articles and editorials in the Iranian
papers are especially critical of the many layers of
bureaucracy created to conserve foreign currency.
Development programs are being cut further at a
time when some public services are already at a
postrevolutionary low. Industrial development has
been particularly hard hit. This is sparking increas-
ing criticism from proponents of industrial growth
and, ironically, frustrating plans for greater self-
sufficiency. Minister of Industry Shafei recently
complained in a report to the Majles that meager
foreign exchange allocations to the industrial sector
are to blame for the failure of his Ministry's plans.
The Minister warned that current allocation rates
provided only 10 percent of the foreign currency
needed for this year's planned projects.F--]
Political Repercussions
Conservatives blame mismanagement and corrup-
tion for many of Iran's foreign exchange problems,
and they have used these charges to discredit their
radical opponents in Musavi's government. During
debate on this summer's foreign exchange bill,
members of the Majles criticized the government
for deviating from official import priorities. They
cited examples such as a letter of credit for vital oil
industry equipment that took months while one for
television components took only a few weeks. Press
reports indicate that political clout, bribes, and
outright mistakes have resulted in some commod-
ities being overordered while crmponents
have not been ordered in time.
The more conservative Majles has capitalized on
the government's inability to manage the economy
by seeking a greater role, especially in foreign
trade. In August, the Majles passed bills requiring
that representatives of the assembly be admitted to
sessions of the Foreign Exchange Appropriations
Committee, and that the government publicly dis-
close details of foreign exchange expenditures. In
addition, the legislature recently directed the Oil
Ministry to report oil revenues monthly and fore-
cast receipts three months in advance. Most gov-
ernment officials oppose this interference. They are
concerned that, if ratified by the Council of Guard-
ians, these and other actions by the Majles would
impair the Cabinet's ability to act decisively.
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The government's public image has suffered from
poor management and corruption. Efforts to con-
serve currency and the resulting depression of
economic activity have increased dissatisfaction
with t regime among key interest groups.
Low foreign exchange reserves, combined with a
weak oil market, will keep Tehran's economic
margin thin. A lengthy shutdown of Khark Island
would reduce oil exports by at least 75 percent and
would be economically debilitating, especially if
combined with renewed strikes or a poor fall har-
vest.F____1
The economy is by far the most divisive issue facing
the government, and increased political infighting
over distribution of the shrinking economic pie is
likely to open wider rifts between opposing factions.
Radicals will probably bear the brunt of the politi-
cal heat, and the Majles will be able to further
expand its power. Moreover, government misman-
agement and lower revenues will increase reliance
on the private sector, thwarting radicals' plans to
increase centralized planning and direction.F_
Reduced operations at factories could lead to re-
newed labor unrest, if leaders emerge to organize
worker workers' purchasing
power has already fallen by at least 35 percent
since the revolution. The regime remains wary of a
repeat of the strikes that occurred earlier this year.
The Minister of Labor recently expressed concern
over acts of sabotage in Iran's production units and
warned workers against political activities.
General discontent over lower levels of imports and
the state of the economy will probably increase.
Moreover, attacks on Khark Island and Tehran's
popular confidence in the government.
drive to at least maintain foreign exchange reserves
will spur Iran's program to cut imports. Prime
Minister Musavi recently announced that taxes and
government-controlled prices are likely to rise, ac-
cording to the Iranian press. Stricter government
controls on trade will open even greater opportuni-
ties for corruption and will spur black-market
activity. These factors are likely to further erode
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Lebanon: Economy Down
But Not Ou(__J
After 10 years of intermittent civil war, Lebanon's
economy is probably operating at about 50 percent
of its prewar level. In the last year, inflation has
jumped to about 75 percent, the Lebanese pound
has depreciated by 60 percent, and government
debt has grown by over one-third. Much of Leban-
on's economic infrastructure has been damaged or
destroyed, many of its most skilled people have
emigrated, and the country is cut up into sectarian
zones of influence. The government still provides
some services, bankrolls a bloated payroll, and
collects limited taxes and fees but cannot rule the
country. Despite some progress in rebuilding for-
eign exchange reserves and reviving agricultural
production, extensive rebuilding probably will not
begin until an overall political settlement is
reached.F___1
Borrowing To Stay Alive
In Lebanon, government spending not only primes
the pump, but also provides much of the fuel to
keep the economy running. According to the US
Embassy, government spending, through its payroll
and a few public works projects, is one of the main
reasons the economy remains afloat. Unfortunate-
ly, spending has continued to grow, while revenues
have dropped to practically nothing.
Revenue from customs receipts, formerly the main
source of funds, was budgeted at about 3 billion
pounds ($160 million)' for 1985. The government's
plan to take over illegal ports last fall was largely a
failure, however. Customs duties for the first half
of 1985 totaled only 200 million pounds ($10
million), less than 15 percent of what was needed to
meet the budget. Nonetheless, expenditures, origi-
nally budgeted at 11.4 billion pounds ($600 million)
for 1985, were upped at midyear to 12.4 billion
($650 million)-and could go higher.
' All pound figures are con to US dollars at the current rate
of 19 pounds to the dollar.
Typical of the straits in which the government now
finds itself, the Ministry of Finance has recently
stopped paying for imported crude and petroleum
products in an effort to force the cabinet to cut
petroleum subsidies. The Director General of the
Ministry stated that the petroleum budgetary defi-
cit will probably exceed 11 billion pounds ($600
million) this year and that about 25 percent of
locally produced and imported petroleum products
were illegally reexported to other Mediterranean
countries. According to official statistics, the port
of Beirut alone imported enough petroleum in 1984
to satisfy Lebanon's total domestic demand. At the
same time, there have been stories of entire ship-
loads of Lebanese products going abroa25X1
While the Ministry hopes to force the Cabinet to
double petroleum prices, the Central Bank appar-
ently tried similar tactics several months ago and
failed. The Ministry's move itself is likely to boost
petroleum prices sharply but also cause consider-
able confusion and petroleum shortages. In addi-
tion, renewed sectarian clashes may result if the
Muslim militias perceive the fuel shortages as a
Christian plot.
According to the Central Bank, the overall govern-
ment deficit amounted to 9.2 billion pounds ($480
million) in 1984-almost 50 percent higher than
the 1982 level. The 1984 deficit equaled over one-
third of Lebanon's estimated GNP, one of the
highest shares in the world. The deficit for 1985
will likely again set a record, probably well over 10
billion pounds ($530 million)
Government debt grew from 30.5 billion pounds
($1.6 billion) at the end of 1984 to 40.7 billion
pounds ($2.1 billion) at the end of July, and debt
service now accounts for about one-fourth of total
government expenditure. So far, the government
has had no problem in funding its deficit because
Secret
DI IEEW 85-040
4 October 1985
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Lebanon: Selected Financial Data, 1981-85
Official Foreign Exchange
Reservesa
Billion US $
3
2 l-
I
Lebanese Pound Exchange
Rate
US cents per pound
Domestic Public Debt
Billion Lebanese pounds
Total
Bank of Lebanon share
0 1981 82 83 84 85 0 81 82 82 83 83 84 84 85 85 0 1981 82 83 84 85
Jun Dec Jun Dec Jun Dec Jun Dec Jun Aug Jul
Lebanese banks have few local investment alterna-
tives. The cost of borrowing has risen steadily,
however, with average rates on treasury bills now
around 17 to 18 percent.
The Economy Hangs On
According to the US Embassy, industry continues
to function, albeit at a very low level. The unstable
security situation keeps industrialists from expand-
ing capacity, maintaining large inventories, or even
anticipating future sales. In addition, the fighting
keeps workers from their jobs and holds down the
number of shifts during calm times because work-
ers can only get to and from their jobs during
daylight hours. Credit limitations and the drop in
the value of the pound have hurt manufacturers'
ability to import raw materials. Tax-free goods
brought in through the illegal ports also make
many domestic products uncompetitive. Despite
these adverse conditions, some industries have pros-
pered by flexibly adapting to existing conditions.
Profitable industries reportedly include ready-to-
wear clothing, electrical fixtures, publishing, wine,
fruit juices, and jewelry
Commercial activity has been hurt by the contrac-
tion of local demand, credit limitations, and fear of
damage to stocks. On the other hand, it has been
helped by a lively trade in smuggled goods going to
Syria. While the actual extent of this trade is not
known, it has been variously estimated to be at
least $50 million and possibly as high as $75
million a month
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Lebanon: Balance of Payments,
Million US $
1981-84
Trade balance
-2,404
-2,413
-2,699
-2,117
Exports a (f.o.b.)
836
727
691
595
Imports ^ (f.o.b.)
3,240
3,140
3,390
2,712
Overall balance b
NA
360
-933
-1,475
a Trade partner data.
b Estimated from financial flows.
Agriculture probably has the brightest prospects of
any of Lebanon's economic sectors. Agricultural
sales suffered considerably following Israel's inva-
sion of south Lebanon in 1982. Orchards were
destroyed and land was taken out of production for
security reasons. In addition, transportation diffi-
culties and boycotts by some Arab countries caused
domestic sales and exports to fall. With the Israeli
withdrawal, most of the marketing bottlenecks
probably will be reduced and more land put into
production. The fall of the pound also makes
Lebanese farm products more competitive in export
markets.
External Accounts May Actually Improve
Prior to 1983, Lebanon ran large trade deficits that
were offset by remittances from abroad and by
surpluses in the service sector. In the last couple of
years, however, remittances, which once totaled
more than $2 billion a year, have fallen off consid-
erably as the growing number of Lebanese living
outside the country have kept their money abroad.
This year, Lebanon's foreign payments position
may actually improve. The 60-percent fall in the
pound's value against the dollar since last Septem-
ber should cut into import demand and help exports
of both agricultural and manufactured products.
There have also been numerous reports of the
renewed flow of funds from abroad to militias in
Lebanon. This has been especially attributed to
efforts by the PLO to reestablish their position
within the country. According to one US Embassy
report, the consensus of opinion in the Beirut
financial community is that the Palestinians
brought in some $400 million during April, May,
and June but nothing during July and August. If
true, this helps explain the partial strengthening of
the pound at midsummer. Another Embassy report
estimates average monthly flows to Muslim militias
of at least $50 million a month
The amount of capital fleeing the country is also
likely to decline. Most of the money that could be
taken out has probably already left the country.
The rapid depreciation of the pound will also
discourage further flows. The main factor that
would cause renewed capital flows would be an all-
out push by the Muslim militias against the Chris-
tian heartland, which seems unlikely at the mo-
mentl
While Lebanon's economic picture is indeed
gloomy, this does not mean that people are without
food or that there is not considerable money in
circulation. The Lebanese are enterprising and still
have sources of funds:
? The overseas money flowing to the various mili-
tias may total as much as $100 million a month,
and both Muslim and Christian groups provide
employment for otherwise unemployed youth.
? Illegal trade with Syria increases commercial
activity and provides income.
? Remittances from Lebanese workers and busi-
nessmen abroad still continue, perhaps on the
order of $60-90 million a month.
Lastly, there is the lucrative drug trade. Hashish
cultivation in the Bekaa Valley has been unencum-
bered by government control or Syrian interference
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for the last several years. The hashish trade has
been estimated to be worth $600 million to $1
billion a year to Lebanon, and some press sources
put the total as high as $2 billion a year. Lebanon is
also a transit point for cocaine and heroin. F__-]
The Lebanese economy cannot rebound until the
security situation is brought under control. This,
however, would require a political accommodation
between the various factions that seems far from
likely any time in the near future. The government
will have to continue to finance its spending
through borrowing, which will eventually generate
greater inflation. If the civil war remains relatively
calm (a precarious assumption), the pound, howev-
er, will likely depreciate at a slower rate than it did
over the last 12 months. Although this year's
foreign payments position may actually improve,
infusions of foreign aid needed for rebuilding will
remain minimal until Lebanon's political situation
is resolved
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Major Soviet Oil
Export Difficulties
Energy
The USSR last week indicated it will cut total oil exports to the West by as
much as 50 percent beginning in October with many customers to be cut off
completely, according to Western oil traders. The Soviets did not say how long
the reduction in deliveries would last, but many Western traders expect it to
continue through the first quarter of next year. There are indications of only
marginal disruptions in shipments to Eastern Europe. The export difficulties
almost certainly are the result of shortfalls in production, possibly aggravated
by a buildup of domestic stockpiles to prevent spot shortages such as occurred
last winter. A sharp decline in oil exports for the rest of the year, combined
with lower oil prices this year, could cut Soviet hard currency oil sales by as
much as $3-4 billion for 1985. Moscow will probably be able to satisfy its
Western import requirements for 1985, but continued shortfalls in earning will
cut its purchasing power for the next couple of years unless Moscow takes
further action-such as aggressive borrowing
/ Iraqi Aqaba Pipeline Prospects for construction of the 1 million b/d Iraqi-Jordanian pipeline remain
Negotiations Stalled poor despite the latest efforts by a US firm to revive the project. In comments
China Developing
Offshore Gasfield
to a US delegation in Baghdad, an Iraqi Ministry of Petroleum Undersecre-
tary was critical of an estimated $200 million increase in project cost and the
small US equity in the project. Oil market and technical factors also weigh
against the project. Baghdad is beginning operation of its 500,000 b/d line to
Saudi Arabia's Red Sea port of Yanbu and is likely to increase export capacity
another 500,000 b/d in early 1987 with the expansion of its Turkish export
pipeline. Possible completion of the second phase of the Iraqi-Saudi line would
add another 1.1 million b/d to Iraqi capacity. Limited northern oilfield
productive capacity would require a costly additional pipeline to southern
fields to enable efficient use of the proposed line to Aqaba. F---]
Secret
DI IEEW 85-040
4 October 1985
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China Increases
Productivity at
State Coal Mines
loans-such as those provided by Japan-to finance these purchases.
Beijing has increased productivity at its state-run coal mines by increasing
mechanization, introducing wage incentives, and reassigning unproductive
workers. Last year, state mines, which produced about half of China's 772
million tons of coal, increased their output 4.3 percent over 1983 in spite of a
5-percent cut in the work force. Beijing this year expects state mines to
increase output slightly with even fewer miners. Many of these productivity
gains are a result of the introduction of foreign equipment from the United
States, Poland, and West Germany. To achieve its goal of producing 1 billion
tons of coal per year by 1990, China will need to import significantly larger
quantities of foreign equipment and will probably seek more low-interest
Costa Rica's Financial San Jose regained access to IMF funds last week by renegotiating the standby
Squeeze Eased
Secret
4 October 1985
program it lost last July, but we doubt that President Monge, facing the end of
his term next May, will be able to deliver on austerity promises. The
administration agreed to sharp spending cuts, new budget controls over state
enterprises, revised interest rate policies, and a freeze on public-sector wages.
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Secret
rates.
The accord reopened San Jose's access to World Bank and commercial bank
loans needed to reduce debt arrearages and maintain critical imports. Estab-
lishing controls over state enterprises-which will require approval from an
uncooperative National Assembly-will be particularly difficult. Moreover,
the government has assured the public that neither salaries nor exchange rates
would be modified, and that public expenditures would continue at projected
Sudan Fails To Reach A high-level meeting between the udanese Government and an IMF
Accord With IMF delegation ended in failure last week. hartoum 25X1
was unwilling to agree to badly needed economic reforms, including a rise in
gasoline taxes and an agreement in principle to adjust its export exchange rate.
The impasse raises, again, the threat of a suspension of Sudan's IMF 25X1
membership. This would likely make coordination among donor countries even
more difficult, and compromise further Sudan's ability to attract financial
assistance. The IMF will review no later than 25 October a previously made
decision to limit Sudan's use of the Fund's general resources, and it may also
declare Khartoum ineligible to receive any financing unless an acceptable
economic reform program can be agreed upon. Khartoum's overdue financial
obligations to the IMF currently total over $150 millionr_~ 25X1
Morocco's Financial Agreements reached last month with the IMF and Paris Club members have
Problems Abate snatched Morocco from the brink of a major debt crisis and opened the way
for debt negotiations with commercial creditors. Morocco's IMF package
provides $116 million immediately and another $200 million over the next 18
months under a standby arrangement. Paris Club members agreed to provide 25X1
debt relief through February 1987-a departure from previous one-year Paris
Club reschedulings. The complicated nine-year rescheduling allows four years'
grace and service rmerq ()0 ent of the $2 billion in payments due during
the period negotiations 25X1
with London Club members could result in a generous agreement covering
about the same amount of Morocco's commercial debt. The US Embassy
reports that initial local reaction to the IMF and Paris Club actions has been
favorable, but resulting budget cuts almost certainly will result in lower livin
standards, which will increase the possibility for unrest this winter 25X1
Pakistan Declines Bouyed by a recent gain in reserves, Pakistan declined an IMF standby loan
IMF Standby Loan during negotiations last month. The Pakistanis argued that the IMF targets-
including a devaluation, a reduction in domestic subsidies, and higher taxes-
were politically untenable during the transition to a more representative
government. Pakistan's foreign exchange reserves had fallen to about $400
million in mid-August-less than one month's imports-but have now more
than doubled because of the success of new foreign currency bonds and capital
increases in foreign banks, according to the US Embassy. The infusion of
capital has bought Islamabad some time, but there is little chance of
substantial export or worker remittance growth. The situation will deteriorate
rapidly unless the government undertakes some economic reforms and cuts
back on imports. F___-]
Secret
4 October 1985
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 Global and Regional Developments
Foreign Advances in Automakers in Western Europe and Japan are taking steps to significantly
Auto Engine improve performance and fuel efficiency in their auto engines. Engines with
Technologies four valves per cylinder will be available in the US market for 1986 from
Volkswagen, Mercedes-Benz, Porsche, Saab, Lotus, Ferrari, Honda, and
Toyota for use primarily in their high-performance cars. Audi, Mazda,
Mitsubishi, and Nissan are in the latter stages of developing similar engines.
Toyota and Honda use a three-valve-per-cylinder design for their smallest and
most fuel-efficient gasoline engine. US production is at least two model years
away. While US producers could achieve four-valve performance by applying
standard turbocharger technology, the Europeans and Japanese are ahead in
combined four-valve-turbocharge technology. We believe that foreign manu-
facturers will increase their domination of the US high-performance auto
market in the next few model years
Yugoslav-French Auto The Yugoslav automaker IMV may terminate its joint production agreement
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Failing
Chinese-Canadian
Ultralight Aircraft
Venture
with the French firm Renault. Under the present arrangement, IMV assem-
bles Renault R-4s for export to France using French engines and drive trains.
Yugoslav components have not been able to meet Renault quality standards
and IMV has had to import these parts, leading to higher production costs and
losses last year of $10 million on sales of $97 million. Crvena Zastava (maker
of the Yugo-55 recently introduced to the US market) is interested in
acquiring IMV's production facilities. While Belgrade has hopes for economic
recovery through high-tech joint ventures, IMV's failure could dampen foreign
China has entered into a $6.5 million joint venture with a Canadian firm to
manufacture 500 ultralight aircraft employing Chinese materials and Canadi-
an designs. Although initial plans call for the ultralight to serve as a crop dust-
er, China has an eye on the export market. Under the agreement, the
Canadian firm is charged with developing foreign markets for the ultralight
stressing its uses in aerial photography, rescue work, agriculture, and pilot
training. The low detectability of ultralights may also make them useful in
some combat support roles.__~
National Developments
Developed Countries
25X1
25X1
25X1
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4 October 1985
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Secret
Strong Canadian
Growth Continues
preciate further, pulling the Canadian dollar down with it
The Canadian economy expanded at a 4.2-percent annual rate in the second
quarter, and for all of 1985 is now expected to grow at least 1 percentage point
faster than the 3.1 percent forecast by Ottawa last May. Unlike 1984's 5-
percent growth, which was primarily generated by increasing exports to the
United States, the present expansion is fueled mainly by rising domestic
spending. Final domestic demand jumped 7.1 percent in real terms in the
second quarter, and construction, which had been sluggish the past two years,
leaped by 35 percent. Growth in the second half of 1985 should remain strong
because inventories are low and exports should improve. The US economy is
expected to pick up this fall, and the US dollar is generally anticipated to de-
Italy Introduces
1986 Budget
undermine confidence in his ability to direct economic policy.
After a month of sometimes contentious debate, the Italian Cabinet has agreed
on a budget proposal for 1986 that would stem the growth of Italy's massive
public-sector deficit, now 15.7 percent of GDP. The plan calls for slightly
lower income taxes to be offset by a $4.4 billion cut in social spending. Italians
will pay more of their medical and transportation costs and contribute more to-
ward social security to prevent the deficit from rising above the projected
$55.4 billion, or 14.5 percent of estimated GDP. The budget proposal is a
politically strong step toward addressing Italy's budget problems. In Parlia-
ment the Communist Party will strongly oppose the spending cuts and is likely
to pick up enough support from sympathetic leftist members of the coalition to
force the government to backpedal. In his two years in office, Prime Minister
Craxi has been unable to reduce the budget deficit; another failure will
29 Secret
4 October 1985
25X1
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Sweden Moves To With a general election over, the Palme government has now begun to place
Restructure Industry greater emphasis on forcing Swedish industry to restructure and become more
competitive. Stockholm has announced that it will stop all state assistance to
the shipping sector, as well as to private firms in other industries that
encounter financial troubles. In a major move, the government has decided not
to rescue Consafe-the world's largest lessor of floating platforms and other
rig equipment-from bankruptcy. The government's Ship Credit Guarantee
Board loan guarantees, worth $235 million, cover more than 80 percent of
Consafe's debt. The Consafe failure will contribute to the problems of
Sweden's three state-owned shipyards and could lead to closure of two,
Ardenal and Kockums, that already are in shaky financial shape. If the
government lets these yards fold, Sweden will no longer be a major player in
offshore platform construction. F___]
Less Developed Countries
Egypt Considers New The government of Prime Minister Lotfi is already under considerable
Economic Moves pressure to demonstrate economic progress amid signs of growing public
discontent. Uncertainty over future import policies has contributed to abnor-
mally heavy purchases of dollars in recent weeks by both private- and public -
sector companies and has sparked a sharp 20-percent depreciation in the free
market rate of the Egyptian pound. Moreover, the US Embassy reports the
government is increasingly worried about the possibility of social unrest over
further price increases for food and consumer goods. Lotfi could effectively
ease the exchange-rate crisis, which has already moderated somewhat, by
introducing a genuinely flexible commercial-bank rate. A move toward a
unified exchange rate would, however, eventually raise the cost of Egypt's
exorbitantly expensive subsidy system and produce even more pressure for
politically dangerous price increases. Instead, the government may again seek
a stopgap solution, permitting some additional flexibility in bank exchange
rates and allowing only very gradual consumer price increases.
Pa istan Sends
ilitary Technicians
Iran
Pakistan, in return for lower priced oil, has agreed to send between 50 and 100
military technicians and advisers to Iran to help repair damaged military
equipment Islamabad also has approved
Iranian purchases of small arms and spare parts from private Pakistani arms
dealers; previously it had turned a blind eye to the practice but had not
officially allowed it. Pakistan reportedly refused to give Iran as many
technicians as it asked for and will not sell the arms openly to avoid offending
Saudi Arabia and Iraq. While the government has shied away from sending
military-related personnel to the warring states, Pakistan's foreign payments
problems nonetheless are making expanded economic ties to Iran, already a
major trading partner, increasingly attractive. Islamabad probably will not go
much beyond the present agreement, however, to avoid jeopardizing relations
with Saudi Arabia.
Secret
4 October 1985
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Secret
Moscow Fails
To Fulfill
US Grain Agreement
Despite assurances given the US Secretary of Agriculture in August, Moscow
has not purchased the remaining 1.1 million metric tons of US wheat called for
in the second year of the US-Soviet long-term grain agreement. The Soviets
are required to make annual minimum purchases of 4 million tons each of
wheat and corn under the agreement, which went into effect 1 October 1983.
Soviet officials are dissatisfied with their exclusion from the US Export
Subsidy Program and want a discount similar to the $22 per ton recently
offered Egypt.
6viet Steps Toward
ndustrial
Modernization
USSR Seeking
Foreign Agricultural
Technology
25X1
General Secretary Gorbachev's modernization campaign is being translated
s and is reaching far down into industry.
he Minister of Nonferrous Metallurgy-responding to ,25X1
decree by the Council of Ministers-in early September ordered a review of all
construction projects under his jurisdiction that would be under way during th25X1
1986-90 plan period. The review had to be concluded by the end of November
and was undertaken to ensure that all construction projects met criteria for
modernization. A plant official who complained that the review would bring all
his work to a halt was told the review applied to the whole USSR. A quality re-
view alone, however, will not assure speedy modernization; success also
depends on changing the incentive program to reward workers for renovation
and on industry's ability to deliver advanced production equipment. Indeed,
the complaint about likely work stoppages indicates that the review itself will
be disruptive.F_~ 25X1
The Soviets recently signed a long-term agreement worth as much as $1.3
billion with a US-based multinational firm to purchase Austrian-produced
corn seed. The Soviets may buy up to $60 million worth of corn seed a year by
1990 and $120 million by the year 2000. In addition, the firm will build
turnkey facilities for producing and processing corn seed in the USSR-worth
about $300 million. Austrian officials claim the plant and the purchases could
supply up to 15 percent of Soviet requirements by the year 2000. This first So-
viet long-term agreement to buy foreign seed is in line with General Secretary
Gorbachev's policy to acquire Western farming techniques. Soviet failure to
modernize its agrotechnology has thus far limited production of corn, even in
areas where corn yields are greater than those of other crops. In addition,
indirect benefits the Soviets will receive-knowledge that will improve crop
breeding, seed raising, and production practices-may far exceed the direct
benefits. F__~
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4 October 1985
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Ii
Polish-Soviet
Cooperation Accords
The USSR and Poland signed an agreement last month to cooperate in
industry and technology over the next five years. Warsaw and Moscow have
selected seven priority areas and 85 specific projects on which to concentrate
research, including electronics, energy, biotechnology, and the consumer good
and machinery sectors. Research goals include the development of aircraft
guidance systems, digital color televisions, and new varieties of grain, food,
and drugs. Cooperation will continue on many of these same projects past
1990. These agreements, as well as several sectoral accords signed earlier this
year, seem to be elaborations of the long-term program for the development of
economic, scientific, and technical cooperation through the year 2000 signed in
May 1984. Such cooperation, however, could be a drain on Poland, which
needs to invest in projects more oriented to the Western market to increase
hard currency exports and pay its debts.F_~
Chinese Communist Recent high-level party meetings in Beijing approved an outline of the Seventh
Party Approves Seventh Five-Year Plan (1986-90). According to Premier Zhao Ziyang, the actual text
Five-Year Plan of the plan will be formally approved next spring by China's rubberstamp
Proposal legislature. The proposal reaffirms the leadership's commitment to compre-
hensive economic reform, while calling for containment of currently overex-
tended capital investment and urging an end to the thorny problems associated
with excessively high growth rates. Specific reforms include:
-Expanding enterprise decisionmaking powers and relaxing the state's control.
? Greater use of monetary and fiscal policy, and strengthening the nation's
banking, auditing, and statistical systems.
? Completing price reform by 1990.
? Continuing China's "open policy" of expanding foreign trade, promoting
increased foreign investment in the special economic zones, and making
greater use of foreign borrowed funds.
? Creating a social safety net to minimize reform-related personal hardship.
The few growth targets cited are not ambitious. Overall economic growth is
planned to increase at a 7-percent average annual rate, with agricultural
output growing by 6 percent and industrial production by 7 percent. Com-
ments made during the party meeting by senior leaders, however, suggest that
disagreement will continue between reformers and conservatives over the
future course of China's economic reform program.
China's Trade Deficit China's State Statistical Bureau (SSB) has predicted a trade deficit of $18
Controversy
Secret
4 October 1985
exchange levels, is probably maintaining efforts to curtail imports.
billion for 1985, although a more realistic estimate would fall below $12
billion. The SSB projection appears to be an overstated straight-line projection
of midyear levels. Beijing, however, began to cut imports after a first-quarter
deficit of $2.5 billion and concerns that foreign exchange reserves were falling
too fast. Moreover, China's exports generally rise toward yearend, which
would further reduce the trade gap. China's Ministry of Foreign Economic
Relations and Trade (MFERT) strongly criticized the SSB projections.
MFERT, because of anxiety among the national leadership over foreign
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Secret
Military Joins in
Chinese Airline
Competition
United China Airlines (UCA)-created, staffed, and maintained by the
Chinese Air Force-has joined the growing number of local air carriers
competing against the national airline, the Civil Aviation Administration of
China. The fledgling airline operates a fleet of aging Trident and Soviet
passenger planes from makeshift terminals created at military airports. 25X1
According to one senior UCA official, the airline is barred from domestic
civilian airports except in Jiangxi Province, where the provincial governor has
lifted the ban in an effort to attract tourists from Hong Kong and Macau.
UCA now flies routes between Huiyang (near Hong Kong) and Xian,
Hangzhou, and Beijing.F_ 25X1
25X1
Cambodia Devising a
Five-Year Plan
he Vietnamese-backed regime in Phnom Penh 25X1
is setting goals for its first Five-Year Plan (1986-90) pegged to Vietnam's
announced timetable for pulling its troops out of Cambodia 25X1
regime plans call for self- 25X1
exchange to buy them-that would assure self-sufficiency in rice
sufficiency in food production as well as creation of an army capable of
defending the country without outside assistance by 1990 25X1
also that Phnom Penh is not considering a rigid, Soviet-style economic system,
but intends to promote a more open market-oriented economy-a move that,
we believe, reflects recognition of reality. We believe, however, the targets will
remain far beyond the regime's capabilities. Cambodia, for example, may
succeed in avoiding widespread starvation, but the country remains critically
short of necessary agricultural inputs and infrastructure-or the foreign
33 Secret
4 October 1985
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Secret
Secret
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