INTELLIGENCE MEMORANDUM THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030012-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: November 1, 2010
• Sequence Number: 12
• Publication Date: January 1, 1972
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
25X1
Confidential
Intelligence Memorandum
The Economic Situation in South Vietnam
LOAN CGflPY
Confidential
ER IM 72-12
January 1972
Copy No.
2C8
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 7
Exdudtd from aufomotic
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Highlights
1. In the face of many potentially disruptive factors, South
Vietnam's economic performance was notably brighter on several fronts in
1971. The rate of inflation was the lowest since 1964. Interest rate reform
gave rise to a phenomenal increase in savings. Real output - from both
agriculture and industry - increased at a very respectable pace. Moreover,
the government showed greater flexibility and resolution in dealing
decisively with economic problems.
2. One of the prime goals of government economic policy for
1972 -- increasing domestic tax collections - received a setback recently
when President Thieu signed a bill that provides large-scale exemptions from
income taxes.
3. The Saigon retail price level rose about 1% during the first two
weeks of 1972, but some specific commodity prices went higher as tighter
security measures slowed the flow of goods into the city.
4. Black market dollar prices have been generally stable since the
November 1971 devaluation. The price of gold, however, has risen steadily
in recent weeks, reflecting the higher price of gold in the world market
as well as the usual increase in demand prior to the Tet holidays.
5. Charts on foreign exchange reserves, money supply and prices,
import licensing, gold and currency prices, and the government budget
follow the text.
Note: This memorandum was prepared by the Office of Economic
Research.
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CONFIDENTIAL
Discussion
Highlights of 1971
6. South Vietnam's economy brightened notably on several fronts
in 1971. One of the most obvious successes was the slowing o inflation
to the lowest rate since 1964. Tied to this factor as well as to the impact
of the interest reforms in 1970-71, there was a phenomenal rise in savings
as real interest rates turned positive for the first time in many years. Even
more significant for the longer term was the government's increasing
flexibility in adapting policy to meet changing conditions in the economy.
Not only were comprehensive reform packages enacted, (1) but periodic
small adjustments in policy also were made throughout the year. The
Vietnamese also made solid progress in terms of output levels in 1971.
It was another record year for rice production, and preliminary indications
are that industrial output increased at a very respectable rate. These
achievements are the more remarkable considering such factors promoting
uncertainty as two national elections, the accelerated withdrawal of US
forces (with a consequent potential decline in local employment), and the
US Senate rejection of the foreign aid bill.
7. The rate of increase in the cost of living fell to a seven-year low
in South Vietnam during 1971. Saigon retail prices rose only 14% in 1971,
compared with increases ranging from 30% to 55% during 1965-70 (see
the table). More than 80% of the 1971 increases occurred during
August-December, mainly reflecting some speculative activity prior to the
presidential election in October and the major economic reforms of
15 November. The reforms - one of the most important elements of which
was a devaluation - also resulted in price increases for particular
commodities. Prices of imports rose 29% in 1971, with significant increases
following the raising of import taxes in March and the devaluation in
November.
8. The more interesting question, however, is why prices rose as little
as they did. Although one significant reason was the relatively slow growth
of money supply during the past three years (see the discussion, below,
and the table), there were various psychological factors affecting price
behavior. Thus the rate of inflation already had slowed markedly during
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CONFIDENTIAL
Prices and Money Supply
Annual Percentage Increase
Saigon Retail Import Money
Year _ Prices a/ Prices a/ Supply b/
1965
1966
1967
1968
1969
1970
1971
N. A.
N.A.
N.A.
17 c/
a.
Based on the USAID monthly average index (the
December average of previous year equals 100).
b. Based on end-of-year data (the end of December
of previous year equals 100).
c. Through November,
the last half of 1970, and consumer expectations about inflation (which
tend to be self-fulfilling) probably were for more of the same. In addition,
the only conspicuous commodity shortage was in rice,(2) and the effects
of this problem were limited to a few weeks near the end of the year.
Indeed, even this problem was due to marketing difficulties rather than
a shortfall in production. Deflecting the improved public confidence in the
economy, the velocity of money (the rate at which money changes hands)
was quite stable through July and then increased only about 10% during
August-October, reflecting the flurry of pre-election and pre-reform
speculation.
Money Supply
9. Higher interest rates and restrictions on credit were primarily
responsible for holding the increase in money supply to 17% during
2. Prices of medium-quality rice increased more than 50% during the year, but other
important items in the USAID index such as vegetables, pork, cloth, and kerosene were
either unchanged or down slightly for the year.
J
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CONFIDENTIAL
January-November in the face of a 30%-35A increase in government
expenditures and almost no change in US aid last year. The major factors
in expanding the amount of money in circulation were the growth of private
sector credit and deficit financing by the government. Despite higher interest
rates, loans to the private sector increased almost 40% during the first
11 months of 1971. They increased at almost double that rate during the
first half of the year, but the lower guidelines fo.- loan/deposit ratios fot
commercial banks set in June and August succeeded in actually reducing
the amount of credit outstanding. Deficit financing, or government
borrowing from the National Bank of Vietnam (which generally must resort
to printing more piasters), rose about 25% during January-November. It
would have increased much more, however, had not the government raised
some import taxes in March and acted to increase sales of treasury bills.
As a result of interest rate increases in March and again in August, holdings
of treasury bills increased almost 15 billion piasters during
January-November, an amount equivalent to about 40% of government
borrowings from the National Bank during the period.
10. In addition to the credit restrictions and higher interest rags on
treasury bills mentioned above, higher commercial and rural bank interest
rates on savings and time deposits also succeeded in holding down the
growth of money supply. The interest rate reform of September 1970 and
another small increase in rates in August 1971 resulted in an almost 110%
increase in savings and time deposits during the first 11 months of 1971.
Savings and time deposits in proportion to the money supply thus rose
from 15% to 26%. The large advance deposits required on imports beginning
in October 1970 were a major contractionary factor during the first half
of 1971, but their impact lessened as coverage and rates were reduced.0)
Production
11. Although real output may not have risen so rapidly in 1971 as
in 1970, preliminary and incomplete data indicate that both agriculture
and industry made a respectable showing last year. Early estimates for the
1972 rice arop(4) forecast an increase of 8% to 10%, compared with a
12% increase for the previous year. Partial data on forestry operations
indicate a doubling of timber production. Even allowing for substantial
underreporting in the past, the increase would be sizable. During the first
half of 1971, industrial output increased at ?n annual rate of 12% compared
with 14% in 1970. Existing firms planned significant additions to capacity
as evidenced by a roughly 50% increase in the value of applications approved
3. Advance deposits on imports were eliminated as part of the 15 November 1971
reforms.
4. The crop year ends on 31 May 3f the stated year.
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CONFIDENTIAL
for US-financed imports of industrial machinery and equipment. Foreign
private investors, especially the Japanese, showed greater interest in
establishing joint industrial ventures in South Vietnam, although there
understandably has been no foreign investment boom. There was virtually
no change in the total value of imports in 1971 compared with the previous
year, but the supply of goods available in the economy - both total and
per capita -- increased as a result of the increase in domestic production.
Manpower
12. Additional resources became available to the civilian economy in
1971 in the form of about 20,000 workers released from the US sector.
Recorded employment by US military and civilian agencies and their
contractors has declined steadily since March 1970 from 153,000 to about
105,000 at the end of 1971. The decline actually has been much larger,
however, if one considers the workers who are employed privately by US
personnel and those whose jobs depend on the spending of the Vietnamese
who work for Americans. Through 1971, most of these people found other
jobs or, in the case of women, simply dropped out of the labor force.
There are, however, localized unemployment problems in Military Regions I
and 2, where the dependence on US sector employment has been greatest
and where there are fewer job openings in the private sector.
Outlook
13. At the outset of 1972 it appears that the Vietnamese are facing
more severe pressures on the economy than last year. There are some signs
that enemy military activity may increase significantly over last year's level.
As the US withdrawal continues, the release of labor from the US sector
will become more difficult to absorb. Incomes will probably be reduced
in many areas of the country, and unemployment may become a serious
problem in Military Regions I and 2. Government expenditures are
expected to rise another 25%, whale most of the anticipated increase in
revenues depends on the very difficult task of increasing domestic tax
collections. Moreover, there probably will be at least a slight reduction in
US aid to South Vietnam. Prospects of obtaining offsetting aid and/or
investment from other countries are most uncertain. Coping with these and
other problems will severely tax the capacity of the Thieu government.
Its much improved performance in economic policy matters in the last 18
months, however, is encouraging. Much more than in the past, top officials
seem willing to adapt policy to changing conditions. Although recent
reforms are clearly designed to enhance growth prospects, there will
undoubtedly be some lingering price pressures and difficulties in
adjustment.(5)
5. See the discussion below on tax reform problems.
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CONFIDENTIAL
Income Tax Reduction
14. Efforts to increase domestic tax revenues were set back on
14 January when President Thieu signed into law a Lower House income
tax bill despite the opposition of his economic advisers. The new law
exempts from income tax all wage earners with annual incomes below
360,000 piasters ($878 at the financial market exchange rate of 410 piasters
per dollar) for the duration of the war. It also exempts pensions and triples
the standard deduction allowed for taxpayers and their dependents. All
provisions are retroactive to 1 January 1971, thus requiring the government
to refund roughly half of individual income tax receipts for 1971.
15. The principal ejections to the new law do not so much concern
the loss of revenue, whict- is small,(6) but the scope of the exemptions
granted during a period when the government is planning a major drive
to increase domestic tax collections. President Thieu apparently felt he could
not risk vetoing or amending such a popular bill. Early in 1971 he had
proposed exempting government employees from income taxes, but the
National Assembly then took over the issue and considerably broadened
the exemptions. The new law will, in effect, exempt from income taxes
almost all civil servants and military personnel as well as a great many private
sector employees. Thieu's economic advisers hope to regain some ground
later in the year by submitting to the National Assembly a completely new
income tax code to take effect in 1973. They also plan to increase
considerably the number of tax collectors.
Current Developments
16. During the first two weeks of the new year, retail prices in Saigon
rose about I %. From mid-November - when the piaster was devalued --
through mid-January, the USAID index increased 4.5%. Except for rice,
there was a general increase in food prices during the week ending
17 January, reportedly because tighter security measures slowed the flow
of goods to market. Rice prices, however, have declined fairly steadily since
mid-December, when the new crop began reaching the market.
Currency Black Market
17. Following an initial adjustment to the mid-November devaluation,
the black market price of dollars in Saigon has been quite stable at or
near 415 piasters per dollar. The price of gold leaf, on the other hand,
6. Individual income tax receipts generally have amounted to only l%-2% of total
revenues from both domestic and import taxes.
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rose steadily between 20 December and 17 January from 581 to 626
piasters per dollar. According to market sources, this increase reflects an
adjustment to the realignment of world currencies as well as the usual
increase in demand for gold prior to the Tet holidays (14-17 February).
The rate for MPC has fluctuated throughout the period from 368 to 390
piasters per dollar, well below the legal rate of 410.
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1000
900
800
700
SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
..~. .,o,.~,~..._....____-_
1966 1967 .~._._196....,8 1969 1970 1971 1972
'Excluding holdings of commercial banks
512885 1.72
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
January 1965=100
! 7 Jan 805
I I I I I
1966 1967 1968 1969 1970 1971 1972 NOV DEC JAN
1971 1972
'USAID monthly average retail price index for Saigon
**Data are for end of month
512586 1.72
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
GOLD Basis: gold leaf
worth $35 per troy ounce
US $10 GREEN
US $10 MPC Military
Payment Certificates (scrip)
iRtII!:i1f1
NOV DEC JAN
1971 1972
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IMPORT LICENSING
Million US Dollars
,Commorcial Import
Program
247
335
r--t 325
A
Total Total
407 660
229
nr;
ry
345
1967 1968 1969 1970
Total Total Total Total
531 624 740 641
'luly through
November only
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GOVERNMENT BUDGET
Billion Piasters
Advances from
National Bank
Foreign Aid
Domestic Taxes
Import Taxes
EXPENDITURES
Civilian
Military
47.0
1965
1970 1971
Preliminary Plan
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