INTELLIGENCE MEMORANDUM THE LESS DEVELOPED COUNTRIES FACE THE OIL PRICE PROBLEM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700070003-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 24
• Document Creation Date: November 17, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 3
• Publication Date: May 1, 1974
• Content Type: IM

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T kE: Less aeveloped, Countries Face the
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Confidential
No Foreign 1)J .rew
intelligence Memorandum
The Less Developed Countries Face the Oil Price Problem
Confidential
ER IM 74.3
May 1974
Copy No. 41
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
Classlfled by 015319
Exempt from general declassiflcntlon schedule
of E.O. 11662, exemption category:
? 513(1), (2), and (3)
Automnticelly declasslfled on:
Date Impossible to Determine
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No Foreign Dissem
May 1974
The Less Developed Countries
Face the Oil Price Problem
Key Judgments
? Higher oil prices will increase the LDC oil bill by about $8.5 billion this
year - the equivalent of' 2VO-311o of' their GNP.
? The LDCs have few opportunities to switch to alternative energy sources
or to squeeze oil consumption without affecting output.
? Worsening terms of' trade could make it even more difficult to pay for
oil imports.
? Shortrun reserve drawdowns and increased borrowing can cushion the
adjustment this year but subsequently the burden will fall on non-oil
imports, with a resulting loss in real income.
? The United States and other aid donors will come under increasing
LDC pressure to grant additional assistance. Concessional food aid will be
especially sought.
? The United States, the largest LDC creditor, will face rising demands for
debt relief.
US export growth will be adversely affected since part of' the
LDC adjustment to higher oil prices will be to reduce imports, and the
United States is a major LDC supplier.
25X1A
Note: Comments and queries regarding this memorandum are welcomed. They may he
directed to of the Office of' Economic Research, Code 143,
25X1A
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Setting
1, For the non-oil producing LDCs as a group, 1973 was one of
the best postwar years. With ar. unprecedented simultaneous boom in most
industrial countries durigig 1972-73, primary product prices rose to record
levels. The improved terms of trade led to sharply increased real income
for most LDCs, as demand for both foodstuf'f's and industrial raw materials
of all types boomed. Primary product export prices (excluding oil) rose
about 50% during 1973. Since the prices of their industrial imports rose
much less rapidly, the LDCs sharply expanded their imports while reducing
the trade deficit. Net capital flows -- spurred by increased private
investment -- also rose, and the LDCs were able to accumulate record
foreign reserves. Net capital flows rose by $2 billion to $13 billion in 1972,
and a similar rise took place last year. During 1972-73 the LDCs' aggregate
foreign reserves doubled to $28 billion.
2. Although the recent prosperity was broad-based, a relative handful
of' countries accounted for the bulk of (lie rise in reserve holdings. Several
of the poorer food-importing LDCs clustered in Africa and South Asia were
severely pinched by the sharp rise in food grain prices and failed to improve
their position despite the rise in export prices. Ten countries with only
one-eighth of LDC population accounted for three-quarters of' the
$ 14 billion growth in reserves. Brazil alone took a third of' the rise. Another
small group of Western Hemisphere countries, including Chile and Jamaica,
and most Central and West African countries lost reserves. Reserves in the
populous South Asian countries showed little change.
The Oil Price Problem
3. The LDC oil import bill will leap by $8.5 billion to reach
$13.7 billion this year if current prices hold and consumption stays at the
1973 level. Oil will reach about 15,x, of total imports, compared with 8%
in 1973. Thus the expected oil outlay is equal to 24;r, of' total 1973 export
earnings by oil-importing LDCs and 507 of their foreign exchange reserves.
The rise in their oil bill equals about three-fourths of' total net capital flows
to these countries from OECD nations. (For a discussion of the impact
of' the oil bill, by region and country, see the Appendix.)
4. The LDCs wiH find it difficult to lower their import bill by
reducing oil consumption. They collectively consume less that one-fifth as
much oil as industrial countries, yet they are more dependent upon oil
for energy than the developed world. Latin America, for example, counts
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on oil For nearly three-quarters of' its primary energy supply. Moreover,
much LDC oil consumption is used by industry and for essential
transportation. Relatively little is used for automobiles or home heating,
and only small savings can be expected.
The Problem Compounded
5. The import financing problem of the LDCs in 1974 and 1975
is likely to'be compounded by a worsening in their non-oil terms of' trade.
Although LDC exports this year should increase, the rate of growth will
slow sharply from last year's record 34%. Because of' the general economic
slowdown in developed countries, raw material demand is expected to
slacken and lead to lower prices. Thus far, speculative buying and normal
inventory buildup have strengthened demand for most primary products.
6. For several important commodities - cocoa, tea, copra, edible
and inedible oils, rubber, and timber -- which account for about 10`/o of
total non-oil LDC exports, prices now appear likely to decline substantially.
If the widely forecast upturn for the s^cond half of 1974 in developed
economics is delayed or the downturn in the first hall' is sharper than is
generally expected, commodity price weakness will he more pronounced
and will spread to most exports (see 'f'able 1). Only natural fibers, because
of shortages of' oil-based substitutes, and cereals appear likely to be largely
immune to sharp prices declines this year and next. These products,
however, account for less than 10'/: of' LDC exports.
7. To nlako the situation worse, prices for LDC imports of industrial
goods will rise even more rapidly this year. Inflation in OECD nations has
intensified, partly because of the working through of higher prices for energy
and other raw materials. Industrial product prices are now beginning to
accelerate sharply. The rise in industrial product export prices will probably
exceed 15'%. This will lead to a deterioration in LDC non-oil terms of trade
on file order of' 15`/,-20`% -- a loss of sonic $10 billion in purchasing power,
or 15% of' 1973 imports; if the falloff in primary product prices is severe,
the decline could be even greater.
8. Price tends will continue to pinch severely the
food-importing LDCs. In Latin America, Chile, Peru, Guyana, and several
Caribbean islands will be affected. In Africa, the Sahel, l 1hiopia, and Sudan
will continue to be hurt, ac will India, Bangladesh, Pakistan, and Indochina
in Asia. Because of' continued high population growth and crop problems
caused by drought and fertilizer and fuel shortages, their need for food
imports will remain high. For the same reasons, prices will stay higher I'or
most f'oodstuf'fs than tor other primary products. This will intensify the
terms of trade loss of these and other similarly situated LDCs. Most of'
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Export Prices of Major Product Categories
1973
19741
1971
1972
1st Half
2nd Half
1st Half
2nd Half
Primary commoditIes2
105
119
154
200
1903
1753
Food and beverages
116
131
163
200
190
186
Agricultural raw materials
92
115
N.A.
235
241
206
Minerals and metals
102
104
121
168
157
142
Pctroleum3
132
146
187
242
754
675
Manufactured goods
Selected prices
115
125
136
1563
1653
1753
Wheat
100
111
162
278
250
219
Rice
66
76
122
229
197
157
Maize
111
107
163
217
196
174
Sugar
128
173
201
216
243
213
Coffee
118
133
162
170
181
166
Cotton
118
124
N.A.
284
312
277
Rubber
80
77
128
190
207
156
Copper
84
84
115
164
137
123
Tin
107
114
129
165
174
158
Zinc
114
139
183
434
415
363
1, II3RD projections,
2. Excluding petroleum.
3. CIA estimates.
these same countries were unable to boost their reserves substantially during
the past two years and are particularly vulnerable to further dislocations.
9. The LDCs must also cope with tighter supplies and much higher
costs of products derived from petroleum. These include synthetic fibers,
plastics, chemical fertilizers, and synthetic rubber. Prices for these products
could rise by 50% during 1974, and the supply shortage is likely to hold
1974 consumption to 90% of last year's level. Scarcities of oil-based
fertilizers for rice producers throughout Southeast Asia may reduce output,
which will limit agricultural exports by some countries and force imports
of higher cost foods by others. When these costs are added to the basic
oil bill, the burden on the LDCs exceeds by $10 billion the previous year's
level.
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10. The LDC's aggregate trade deficit will rise sharply during 1974.
The oil price rise alone could push the deficit to an unprecedented
$16 billion. While LDC non-oil terms of' trade are better now than at any
time since the early 1950s, they are likely to worsen, which could widen
the deficit substantiaily in 1975. Because OECD nations are also facing
sizable deficits, the flow of official capital shows little prospect of rising
much to cover this deficit -- unless oil producers provide substantial aid.
Paying the Bill
1 1. The LDCs will have to cope with higher oil prices by drawing
on reserves, increasing indebtedness, ~,nd curtailing imports. Over the longer
term, increased domestic energy production is an option for some countries.
Others, such as the bauxite producers, may try to emulate OPEC, but their
success is doubtful. They generally lack the cohesion and financial resources
necessary to cut production and exports. Moreover, most LDC exports are
not as essential as oil.
12. Many LDCs have accumulated record foreign exchange reserves
which can be used to pay the oil bill. Most LDCs will spend these reserves
very reluctantly. Moreover, many of the harder hit nations, such as India,
Sri Lanka. Chile, Uruguay, and the smaller African nations, have; only slim
reserve holdings (see Table 2).
13. The more credit-worthy LDCs, such as Brazil, Turkey, and
Taiwan, are those that have large reserves and in the short-run are least
affected by increased oil prices. Although the share of Eurodollars loaned
to LDCs has increased sharply in the last two years and larger deposits
by the oil producers will increase the pool of funcs, many of' the poorer
LDCs may be unable to obtain loans. Developed nations are also borrowing,
and competition will be stiff.
14. The oil producers have shown a growing appreciation for the need
to do something for the LDCs. Unless sustained aid from these countries
materializes, a split may develop that would pit the non-oil LDCs against
them. Thus far, oil-producer aid schemes are only in the formative stage.
An OPEC proposal to form a "Special Development Fund" has yet to be
ratified. Iran and Iraq have provided direct relief' on a bilateral basis to
a few LDCs in which they have a special interest. These credit arrangements
may become more widespread in the coming months. While loans will
provide some relief' to the LDCs, this option cannot be used indefinitely.
The debt-carrying capacity of the LDCs and their credit-worthiness would
decline rapidly.
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Oil Importing LUCs: Reserves and Oil Costs
Reserves, Year End
Additional
Oil Cost
1971
1972
1973
Oil Cost
19741
as a Percent
of Reserves
Total
14.3
20.4
28.1
8.5
30
Latin America
4.9
8.6
12.6
4.0
32
Of which:
Argentina
0.3
0.5
1.3
0.4
31
Brazil
1.7
4.2
6.52
1.6
25
Uruguay
0.2
0.2
0.2
0.1
50
Asia
5.7
7.3
9.4
3.1
33
Of Which:
India
1.2
1.2
1.32
0.7
54
South Korea
0.6
0.7
1.0
0.7
70
Pakistan
0.2
0.3
0.5
0.3
60
Philippines
0.4
0.6
1.0
0.4
40
Thailand
0.9
1.1
1.3
0.4
31
Africa
1.7
1.9
2.3
1.0
43
Of which:
Ethiopia
0.07
0.09
0.18
0.05
28
Ghana
0.05
0.11
0.19
0.07
37
Sudan
0.03
0.04
0.05
0.03
60
Zaire
0.15
0.18
0.24
0.06
25
Zambia
0.28
0.17
0.19
0,03
16
Other LDCs
2.0
2.6
3.8
0.4
11
1. Projcuted yearend.
2. November.
15. The only long-term solution, if oil prices remain high, will be
to adjust imports and exports to eliminate most of the deficit. As time
goes on, most LDCs will probably be forced to curtail imports because
of the difficulty of boosting export volume. A slowdown of import growth,
however, will present substantial difficulties. For most LDCs, the choice
will be between current consumption and economic growth. Since financing
is more available for capital goods, most LDCs will probably opt to cut
consumption. Such moves will be painful. Inflation will be exacerbated
regardless of the choices made, and greater political instability is likely as
various factions vie for the chance to solve the problem their way.
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Implications for the LDCs and the United States
? Reduced ability of sonic countries to pay for food imports
ni,.eases the possibility of famine, especially in those already
plagued by several years of drought.
? Slower growth in the poorer LDCs will heighten the disparity
among LDCs and between them and the developed countries.
This will eventually sharpen LDC stridency in international
forums.
? Higher oil prices will also pit non-oil LDCs against OPEC
states should OPEC fail to offer sufficient aid to buy them
off. Unless arrangements such as Iran's concessionary oil deal
with India becomes more widespread, a deep split could
develop among the LDCs, and political support for the Arab
cause in the Midd! East may be eroded.
LDCs may case their restrictions on private foreign
investment, particularly in the energy field.
? The United States will be increasingly pressed to grant more
aid. Pleas for food aid will become stronger, and the LDCs
will take their case to international forums.
? LDCs will press for commodity agreements to support the
prices of their exports.
? The United States, the largest LDC creditor, will face
increasing requests for debt relief. With the oil bill, many
LDCs will be hard pressed to service existing debt
requirements.
? LDC adjustment to higher oil import bills will slow US
export growth to LDCs.
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APPENDIX
IMPACT, BY REGION AND SELECTED COUNTRY
Sub-Saharan Africa
The oil import bill for sub-Saharan Africa's LDCs will triple in 1974
to an estimated $1.5 billion if last year's import level is maintained. All
of the non-oil producing countries would be adversely affected, although
the capability of individual countries to absorb the added costs varies widely.
At least seven countries have foreign exch,mge reserves or':xpanding
export earnings that could support the new oil costs for a year or so.
Ethiopia, Tanzania, and Kenya have foreign exchange reserves sufficient to
cover the added oil import costs. In addition, Kenya and Tanzania will
earn increased revenues from their re-exports of imported crude as refined
products. Zaire's small trade surplus will be reversed, the size of the deficit
depending on the price of its copper exports. Zambia, Ghana. and Ivory
Coast may still be able to maintain small trade surpluses in 1974, depending
on trends in prices for copper, cocoa, coffee, and timber.
The impact on the trade position and the economies of the remaining
32 oil-importing countries will be more severe. Total foreign exchange
reserves in this group stood at little more than $600 million at the end
of 1972. Their adverse trade balance that year totaled nearly $1.3 billion.
Chad, the Central African Republic, and Mali are among the poorest of
these, having combined foreign exchange reserves of only $15 million and
imports in 1972 that were one-third larger than exports. Any weakening
of export prices for primary product exports of the poorer countries --
iron ore, peanuts, palm oil, cocoa, and other agricultural products -- would
further aggravate trade deficits. Without concessionary prices for oil imports
or increased financial assistance on soft terms, an inevitable cutback in oil
consumption and investment will slow the development of agriculture and
tie small industries that make up the heart of the emerging modern sector.
The most pronounced impact of the increased oil price is being felt
in the South Asian countries - India, Bangladesh, Sri Lanka, and Pakistan -
and the three war-torn nations of Indochina (see Table 3). The cost of
1974 oil imports to South Asian countries will rise to about $2 billion --
that is, the equivalent of existing foreign exchange reserves, or about double
net development assistance annually disbursed by developed countries.
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Table 3
19731
19742
GNP Growth
Balan
ce of Reserves
Rate 19731
Total
Increase
Total Trade
19731 31 December 19731
(Percent)
Latin America
Argentina
150
350
500 9
60
1,300
4
0
Brazil
850
1,650
2,500 .6
00
6.500
.
11
4
Caribbean
SI5
700
1,215 N.
A.
N. A.
.
N
A
Central American Common
Market and Panama
165
330
495 ?4
20
370
.
.
5
0
Chile
120
210
330 ?34
8
300
.
?6
0
Mexico
85
185
270 -1,70
0
1,200
.
8
0
Paraguay
5
8
13
5
75
.
5
8
Peru
50
90
140 9
0
570
.
5
3
Uruguay
50
100
ISO 2
5
210
.
1
0
Near East
Cyprus
N.A.
N.A.
N.A. -1
7
300
.
1
5
Israel
'75
50
125 -2,50
0
2,200
.
N
A
Jordan
12
....
12 -30
0
325
.
.
8
0
Lebanon
40
90
130 -49
53
1,245
.
4
0
Morocco
40
1St,
170 -13
5
265
.
6
2
Turkey
175
475
650 -77
5
2,200
.
7
5
Africa
Ethiopia
15
45
60 ?4
03
180
.
6
04
Ghana
20
65
85 11
53
190
.
4
04
Ivory Coast
20
70
90 13
53
88
.
8
04
Kenya
55
165
220 -17
03
233
.
6.D4
Tanzania
45
95
140 ?7
03
145
5
04
Zaire
20
55
75 4
53
240
.
7
04
Zambia
30
30
60 19
53
190
.
11
04
Asia
Afghanistan
8
2
10 -5
0
60
.
N
A
Bangladesh
60
90
150 -40
0
160
.
.
N
A
Burma
6
-I
5 -35
70
.
.
2
0
Cambodia
9
27
36 -100
35
.
N
A
India
485
715
1,200 -245
1,300
.
.
5
0
Laos
10
-2
8 -55
N. A,
.
N
A
Pakistan
65
285
350 30
500
.
.
5
5
Philippines
200
400
600 15
1,000
.
8
0
South Korea
300
700
1,000 -675
1,020
.
17.0
South Vietnam
80
70
150 -655
185
N
A
Sri Lanka
25
75
100 -45
85
.
.
2
5
Taiwan
175
600
775 680
1,880
.
12
0
Thailand
200
400
600 -490
1,300
.
5.0
1. Estimated,
2. Projected.
3. Data are for 1972.
4. Data are for 1971.
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Petroleum price hikes are cornpounding payments problems encountered
by South Asian countries struggling to finance costly foodgrain imports
necessitated by the 1972 crop failure. India faces considerable hardship and
a setback to its gradual recovery from the recent economic slump. Reduction
in the use of oil and fertilizers will impact heavily on the agricultural sector,
and India is not expected to improve its food self-sufficiency. India will
require more than $1 billion additional foreign aid to avoid cutting back
essential imports, even with concessions and the financial assistance garnered
so far. Similar difficulties experienced by Sri Lanka, Bangladesh, and
Pakistan will be compounded by soaring inflation.
FuA Burma, Cambodia, Laos, and South Vietnam, increased oil costs
add one more burden to an already difficult economic situation. Even before
the oil price hikes, prospects for expanded exports and improved living
standards were poor. Unless foreign aid increases sharply, economic activity
in these countries will be slowed by reduced imports.
Most other Asian LDCs will be able to weather the impact of increased
oil import costs without severe difficulty. The Philippines is representative
of this group. Although its leaders must remain particularly aggressive in
lining up credit to offset its small net foreign exchange holdings, total
imports and economic growth need not fall much below 1973's good
performances. Of more concern will be the impact of imported inflation
on domestic political conditions. The sorts of stabilization measures likely
to be introduced could cause considerable dissension without significantly
contraining price increases below 30% to 40%. Other countries - for
example, Thailand, South Korea, and Taiwan - have a more substantial
exchange reserve base and better credit positions and may accordingly be
able to manage their stabilization problems with somewhat more latitude.
Bangladesh
Petroleum outlays in 1 74 will approximate $150 million, 2-1 /2 times
last year's expenditures for approximately the same import volume.
Although Bangladesh, a Muslim country, is a prime candidate for
concessionary arrangements with petroleum-exporting states, none have yet
materialized. Without price concessions, import costs in 1974 will increase
an estimated 27% to about $800 million, as Dacca would like to hold import
volume to at least last year's level. Prices for Bangladesh's principal exports,
jute and jute goods (85% of total exports), increased about 10% last year.
Prices will continue increasing in 1974 but not nearly enough to offset
increased import prices. Export revenues in 1974 are expected to be on
the order of $350 million, leaving a potential trade deficit of $450 million.
Foreign exchange reserves of about $160 million clearly will not be used
to finance this year's deficit. Although little information is available on
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foreign aid availabilities, the amount probably will be well below $450
million, thereby forcing a cut in imports. In turn, reduced imports will
frustrate significant economic development.
New Delhi is desperately seeking relief' from its soaring oil bill by
restricting consumption to the 1972 level, soliciting concessionary terms
from major suppliers, and spurring domestic energy production. As things
now stand, imports of' 260,000 b/d of' crude and 40,000 b/d of products
will cost an estimated $1.2 billion (see Table 4), about one-third of
projected export earnings, for the present fiscvl year ending 3I March 1975,
compared with about $485 million, or 161/o of' earnings, last year.
India: Estimated Balance of Payments
Million US S
19721
19731
19741
Exports (f.o.b.)
2,605
3,000
3,400
Imports (c.i.f.)
-2,396
-3,245
-4,655
Foodgrain
-78
-600
-700
Petroleum
-271
-484
-1,200
Fertilizer
-120
-200
-500
Other
-1,927
-1,961
-2,255
Trade balance
209
-245
-1,255
Other transactions
-939
-976
-1,010
Debt rcpay.nent
-681
-718
-755
Other, nett
-258
-258
-255
Overall deficit
-730
-1,221
-2,265
Financed by
Food aid
3
200
200
Foreign aid3
883
950
N.A.
Transactions with the
IMF, net
....
75
375
Aid from Iran and Iraq
....
....
250
Total
896
1,225
825
Change in reserves
166
4
N.A.
Additional financing needed
1,440
1. Fiscal year, beginning I April of stated year.
2. Including invisibles, autonomous capital movements, and errors and omissions.
3. Including debt relief.
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Indian officials have been scrambling all over the Persian Gull' to o11 ; in
oil on concessionary ternis. New Delhi is attempting to negotiate long-term
loans, payment with Indian goods, and a wide range of joint ventures in
an effort to improve access to Arab oil. India also is seeking tnaximum
loan and debt relief' from the World Bank. In addition, New Delhi has
enlisted Soviet technical assistance to accelerate its oil development program
and to increase the production of coal.
Petroleum accounts for about 25% of commercial fuel consumption
and is used principally by industry and transport. Although New Delhi
heavily taxes nonessential uses of petroleum to restrict constunption,
petroleum usage has been rising at about 8% to 10'% annually. Reduced
petroleum supplies in 1974 cannot be replaced by coal and electric power,
which will continue to be in short supply. Industrial production is stagnating
and shortages of petroleum will slow the country's recovery.
In addition to increased import costs for petroleum, higher costs for
fertilizer, food, and other developmental imports will push India's 1974
import bill up 43'% to about $4.7 billion. Fertilizer prices have more than
doubled. To maintain the 1973 volume of fertilizer, imports will cost New
Delhi $.')v0 million in 1974 -- a $300 million increase. Although foodgrain
imports ultimately will depend on the rains from this year's summer
monsoon, current estimates are 4 million metric tons, about the same
volume as last year, costing an additional $100 million. To maintain the
country's remaining purchases abroad at about last year's volume will cost
an additional $300 million.
Exports alone cannot pay these greatly increased import costs. Prices
for most of the country 's major exports have increased at a much lower
rate than import prices. Cotton textile prices have increased about 25i(%,
and those for jute manufactures about 15%. Further im;,-rases are likely
in 1974 because of higher prices for synthetics. Tea prices, however, have
stagnated. While other exports will benefit from higher world prices, India's
total sales abroad will increase only 13% to $3.4 billion in 1974.
India's estimated overall balance-of-payments deficit of $2.2 billion is
expected to be reduced about $825 million by
? the $200 million remaining Soviet food loan,
? the $250 million oil concession from Iran and Iraq, and
? the use of a $375 million International Monetary Fund (IMF)
standby credit, which currently is being considered by IMF
officials.
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Iran, which normally supplies about 70'Y% of India's oil imports, has
agreed to supply an estimated 48,000 h/d of crude oil annually for five
years. The cost of the crude -- more than $11 per barrel - will be slashed
by easy payment terms requiring a $3.50 per barrel downpayment and,
following a five-year in oratorium payment of the balance, over an additional
live-year period at 2.5% interest. A similar Iraqi agreement reportedly will
provide 56,000 b/d in 1974. These two agreements will supply India with
a total of 104,000 b/d of crude in 1974 at a balance-of-payments savings
of more than $250 million.
After accounting for the assistance currently available, New Delphi will
still face a remaining deficit of $ 1.4 billion. With foreign exchange reserves
of about $1.3 billion, the equivalent of only about three months' imports
at 1974 levels, the government will be reluctant to maintain imports by
drawing down reserves. Unused non-project aid o" about $450 million
cannot be drawn clown rapidly, because the bulk of it is tied to specific
products and countries. On balance, New Ue:hf probably would need more
than $1 billion additional foreign aid in 1974 to maintain last year's import
volume.
For South Vietnam, Cambodia, and Laos, totally dependent on
imported oil, higher petroleum prices and financing difficulties add another
burden to economics already beset with problems resulting from military
disruption. Per capita incomes in real terms probably are little changed from
those of' a decade ago. Moreover, all three couWries depend heavily on
foreign aid and possess few IF any export commodities whose prices will
keep pace with the rising prices of imported goods.
The most important source of import financing for these countries --
foreign aid -- has declined in rail terms in recent years as the value of
this aid has failed to keep pace with increasing dollar import costs. The
anticipated doubling of oil import costs in 1974, along with increases in
other import costs, will seriously wor;Crn the problem.
South Vietnam's overall import prices are expected to increase by as
much as 35% in 1974, bringing the total import bill to nearly $1 billion.
Exports are optimistically predicted to reach $100 million this year. Unless
US aid increases markedly from the current level of about $500 million,
the volume of imports will have to be further reduced.
The South Vietnamese government has taken a variety of relatively
successful conservation measures (short of direct rationing) to cope with
petroleum shortages, but the impact on the economy still will be serious.
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I'vcn though petroleum supplies will rtlntosl cerlahtly he cut by
South Vietnam's oil bill will increase by $ 150 million. South Vietnam's
small inchrstr?ial sector, already in a slump for the past Iwo years, is especially
vulnerable to reduced supplies and higher costs, I'uel shortages and price
increases also are creating problems in agriculture. Since the mid-1 )6Os the
introduction of hit,h-yielding rice varieties and file increasint, availability
of aid-I'imurced fertilizer and agricultural machinery imports have raised firm
incomes and made the country's fnm ling much more dependent on oil niid
oil-based products. A cost squeeze oil farmers will discourage increased
commercial production. The forestry ail fishing industries, which accounted
I'or almost half of South VietnaM's commodity exports last year, also are
feeling the impact ot'sntallcr I'ticl st.npNes and higher costs. Curtailed activily
will reduce output in these industries and could lead to foreign exchange
earnings well below earlier au ticilrat':d levels.
Cambodia, already experiew ing rampant inflation and severe
commodity shortages, will be in an even more precarious position as a result
of the oil crisis. Petroleum imports currently are financed by US aid, and
unless additional aid sources are found, additional oil cutbacks will be
required, production will decline further, and inflation will worsen. Laos
too will face more inflation and reduced supplies.
Phlllpp%IW S
The Philippine economy, coming out of a good year, is in increasingly
good shape to cope with the oil problem for 1974, at least.
In 1973 the economy rebounded from the impact of floods and
drought in 1971, under the impetus of' unprecedented price increases for
its major exports (sugar, coconut products, copper, anti timber). The trade
balance turned from a deficit to surplu.;, and foreign exchange reserves
jumped from $400 million to $1 billion.
In 1974, higher petroleum prices will raise imports by more than $400
million. At the same time, imports of products other than oil will rise
sharply as a result of substantially increased government investment and
higher prices for metals, machinery, transport equipment, and chemicals.
An increase of 40%-50% in the value of total imports seems likely.
Export earnings in 1974 will probably decline by 5% to I0%. A sharp
reduction is expected in the quantity of coconut products exported. Sales
of other products -- copper and timber, for example - are likely to grow
more slowly than last year because of less buoyant expansion in various
developed countries. The trade balance probably will go into the red by
about $600 million.
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Most of this (let ,iciI, however, probably will be covered by ol'I'icial aid,
(fired foreign investment, "111" long-term loons. UI''iuial I'oreit;n :11d is likely
to continue at the recent rate oI' ;about $200 million a year, The accelerated
search I'm oil aa,&I other, raw materials will attract more foreign capital.
With its improved credit stint;, the Philippines recently has had little
dil?ficulty negotiating long-term revolving credits of $500 million from hark
consortia ir, liurol?; , Japan, and the United States. It Is now seeking further
loans of this kind. ''Iwse receipts of capital should make a precipitous
drawdown of I'or?eign reserves unnecessary.
Nevertheless, higher import prices are likely to slow economic growth
to perhaps a 5i