INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707260001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: November 9, 2010
• Sequence Number: 1
• Publication Date: November 2, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
International
Economic & Energy
Weekly
C~CCILT
D/ IEEW 84-044
1 November / 984
~~ ~,
ropy 6 9 4
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-007718000707260001-0
Secret
International
Economic & Energy
Weekly
iii Synopsis
1 Perspective-The IMF/IBRD Role in LDC Economic Adjustment
Energy
International Finance
Global and Regional Developments
National Developments
15 OPEC Financial Troubles: Broader Ramifications
19 Major LDCs: Financial Impact of an Oil Price Decline
25 Chile: Looming Payments Problems
29 West Germany: Obstacles to Growth
35 Morocco-Libya: Implementation of the Union
25X1
1
25X1
25X1
1
25X1
25X1
1
25X1
25X1
1
25X1
25X1
1
25X1
Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligences
Secret
2 November l 984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
25X1
~ i
International
Economic & Energy
Weekly ~~ 25X1
Synopsis
1 Perspective-The IMF/IBRD Role in LDC Economic Adjustment) 25X1
The IMF and IBRD are coming under growing pressure to become more
involved in the LDCs' long-term economic stabilization programs. After one to
two years of tough austerity measures leading to encouraging economic
performance, debtors feel they deserve a longer leash than an IMF program or
a one-year Paris Club rescheduling can provide.
25X1
15 OPEC Financial Troubles: Broader Ramifications 25X1
Since the shift in the world oil market after 1979 to oversupply and sagging
prices, the plunge in OPEC countries' oil earnings has forced a number of
uncomfortable financial adjustments. Beyond the impact on the economies of
the members, the revenue loss is beginning to have broader ramifications for
OPEC cohesiveness, Third World debt, Soviet-OPEC relations, and interna-
tional aid flows.
25X1
19 Major LDCs: Financial Impact of an Oil Price Decline 25X1
The decline in world oil prices is introducing additional uncertainty into the fi-
nancial outlook for LDC debtors.
I
25X1
25 Chile: Looming Payments Problems ~~ 25X1
Chile's current IMF program is coming unglued, and mounting current
account problems could force a suspension of debt service in coming months.
Santiago wants the IMF to accept some adjustments to its current program
and to negotiate a new agreement for next year, but problems are jeopardizing
any quick resolution on either front.
25X1
29 West Germany: Obstacles to Growth) 25X1
West German manufacturers have lost some international competitiveness
since the early 1970s as a result of sluggish investment, declining productivity,
and tardy adaptation to changing markets, especially in high technology.
Although West Germany's standing as a major economic power behind the
United States and Japan is not in jeopardy, the technological and structural
gap that has opened will not be closed soon.
Secret
DI IEEW 84-044
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
25X1
35 Morocco-Libya: Implementation of the Union
Libya and Morocco are moving rapidly to implement their union agreement
and demonstrate that the accord is providing tangible economic benefits. The
union also promotes the interests of the two leaders in broadening their
international contacts. The long-term viability of this accord, however, will
depend in part on Qadhafi's ability to improve his poor track record on
financial commitments.
Secret
DI IEEW 84-044
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
International
Economic & Energy
Weekly
Perspective The IMF/IBRD Role in LDC Economic Adjustment
The IMF and IBRD are coming under growing pressure to become more
involved in the LDCs' long-term economic stabilization programs. Increasingly
those LDCs that have complied with short-term IMF-supported programs and
have improved their economic situation are looking for the potential reward of
financially attractive multiyear reschedulings. Longer term rescheduling, in
which debt falling due over the next several years is rescheduled all at once,
provides the debtor with more manageable debt repayments and a concrete
planning horizon. Moreover, after one to two years of tough austerity measures
leading to encouraging economic performance, debtors feel they deserve a
longer leash than an IMF program or a one-year Paris Club rescheduling can
provide.
Already this year, Mexico and Venezuela have successfully negotiated mul-
tiyear packages with commercial banks. Yugoslavia is currently negotiating
with its bank creditors on a multiyear rescheduling and has received support
from many Western governments and some of its creditors. On the basis of its
compliance with an IMF-supported program, Brazil should merit a multiyear
package as well. We expect that .Argentina and the Philippines-which have
only recently signed letters of intent with the Fund-will ask their creditors to
consider multiyear rescheduling, but they are less likely to be successful.
While the Fund has been reluctant to get involved with the long-term
economic adjustment process, creditors agreeing to multiyear reschedulings
insist that some form of IMF economic monitoring continue in the absence of a
conditionality program. In both Mexico and Venezuela, the IMF will monitor
economic performance despite the fact that it will be lending no money of its
own. This form of enhanced Fund review is acceptable to creditors, and it
allows enough flexibility that the debtors do not fear a loss_of economic
sovereignty.
Some observers, particularly the British, contend that the IMF is not equipped
to monitor numerous long-term adjustment programs and believe that the
World Bank should play a greater role in influencing long-term economic
development. Many World Bank officials hope that Secretary Regan's propos-
al for a debt conference next spring, which will focus on LDC growth and de-
velopment in a medium-term context, will be a step toward integrating the
Bank's more flexible, growth-oriented approach to economic adjustment with
the IMF's sharper line of conditionality. We believe that officials in LDCs will
be watching the industrial nations for indications of increased. financial
1 Secret
DI IEEW 84-044
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
commitments to the IBRD that would enable the World Bank to play a larger
role in the adjustment process. In particular, they would like to see an increase
in structural adjustment loan (SAL) allocations.
We believe the IMF will gradually increase its role in the LDCs' longer term
economic adjustment process. In addition to its monitoring role, the IMF may
expand its use of the extended arrangements, but use of these two-to-three-
year packages would almost certainly entail strict conditionality. While the
IBRD will attempt to expand its own involvement, the Bank's SAL program is
limited to 10 percent of total IBRD lending in any one year. Furthermore, the
IBRD faces capital constraints, and, since donor nations-in particular the
.Group of 10-favor the IMF's approach to economic assistance with strict
conditions attached, they will hesitate to increase financial commitments to
the IBRD for nonproject lending.
Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Energy
Big Seven Oil Big Seven oil consumption rose 6 percent in first half 1984 over the same peri-
Consumption Increases od last year-the first six-month increase since 1979. This increase reflects
continued economic recovery in the United States and Japan, colder-than-
normal weather in early 1984, and a continuing UK coal strike. Heavy fuel oil
consumption in the United Kingdom soared 51 percent, largely as a result of a
200-percent increase in oil use by the electric power industry. UK heavy fuel
oil use contrasts with a 10-percent overall decline recorded by the Big Seven.
During the same period, Big Seven gasoline and light fuel oil consumption
increased by 2 percent and 9 percent,respectively.
Major Developed Countries'
Oil Consumption
Percent change over
year-earlier levels
Secret
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Secret Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Impact oJ' Mexican The size and duration of Mexico's oil export cutback to help defend OPEC
Impact
ojOil Price Cut
on British Finances
Soviet Energy
Embargo Against
Britain
Secret
2 November 1984
year.
prices remain uncertain, although it was scheduled to take effect this week. To
our knowledge, PEMEX has yet to inform any of its customers that it is
trimming their November allotment. At most, we expect a 10-percent cutback
that will last no more than three months. If fully implemented, such a cutback
would cost $375 million. Mexico could avoid any revenue loss, however, by
basing the cut on last year's 1.53 million barrels per day export level, which
was about 10 percent higher than current levels. Moreover, because of
Mexico's current high level of foreign exchange reserves, any oil revenue losses
are unlikely to affect imports, debt negotiations, or other economic trends this
tax revenues.
ings-and hence tax revenues. We estimate that -the annual loss to the
Exchequer will be $665 million. This represents only 0.5 percent of projected
The recent cut in oil prices by British. National Oil Corporation (BNOC)
should have little effect on British tax revenues at current exchange rates. It
has been estimated that for every $1 drop in British oil prices the Exchequer
loses 60 cents in revenues, thus the $1.35 price reduction translates into a per
barrel tax revenue loss of 81 cents. The price reduction affects only Britain's
contracted sales because prices on spot-market sales of up to 500,000 barrels
per day are already below the new official price. The revenue loss, however, is
partly offset by the impact of the pound's depreciation. Since June, the price of
oil in sterling has risen by almost 3 pounds per barrel, due to the fall in the ex-
change rate from $1.35 to $1.20. Depreciation of the pound acts as a built-in
revenue stabilizer" because oil is priced in dollars, boosting sterling earn-
trying to line up further sales of energy-mainly gas-to the West.
The USSR publicly indicated on Monday that to support the strike by British
coal miners it will stop deliveries of oil and coal to the United Kingdom. A se-
nior Soviet trade union official said the embargo would last for the duration of
the strike, "regardless of the great sacrifices of currency." The embargo will
have no effect on the UK's energy situation-the USSR provides less than 1
percent of total British energy supplies-and Moscow obviously intends it as a
purely political gesture. It does have broader implications for the increasing
dependence of Western Europe on Soviet energy supplies and the potential for
the USSR to influence Western internal developments later in this decade. If
the economic stakes were higher, Moscow might be more reluctant to make
such a move, fearing being labeled an unreliable supplier at a time when it is
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Iraq Pushes
Turkish Pipeline
Exports
Iraq pumped a record 980,000 barrels per day (b/d) of crude oil through the
expanded Iraq-Turkey pipeline in October,
doubling the use of drag-reducing chemicals.
Turkish line's flow rate to 1.2 million b/d in January 1985 by more than
enabling Baghdad to exceed its 1.2-million-b/d OPEC production quota by an
estimated 100,000 b/d. Iraqi officials reportedly are planning to raise the
Meanwhile, Italy's
UAE Plans
.for Strait's
Bypass Pipeline
the future despite the weak oil market
Baghdad continues to push its crude oil exports to finance its economy and war
effort, and has indicated it will seek a higher production quota from OPEC in
capacity by 500,000 to 600,000 b/d
Snamprogetti firm has been awarded the engineering-design contract for the
second Iraq-Turkey crude oil pipeline, according to the US Interests Section in
Baghdad. The $600 million project, scheduled to begin construction in July
1985 and to be operational by early 1987, will boost the system's export
The UAE Government has decided in principle to build the Abu Dhabi-Fu-
jeirah crude oil pipeline-providing an export route outside the Strait of
Hormuz-according to the US Embassy in Abu Dhabi. The Abu Dhabi
National Oil Company (ADNOC) has undertaken detailed site study plans and
is now preparing bid tenders. The 500,000-b/d pipeline reportedly could be
completed in under 18 months and-could carry onshore crude oil from Abu
Dhabi's gathering center at Habshan to a new export terminal at Fujeirah.
The projected high cost of the project, its vulnerability to Iranian attack, inter-
Emirate squabbles, and the current underutilization of the Jebel Dhanna
export terminal still present strong arguments against the project.
exports.
While early construction of the line appears unlikely,
political considerations and a suitable funding package could, in our view,
override these doubts if an escalation of the Iran=Iraq war threatens UAE
Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Extension of Soviet Gas Moscow and Helsinki have signed a preliminary agreement for joint construc-
Pipeline in Finland tion of a gas pipeline in Finland, according to the US Embassy in Helsinki. Fi-
nal agreement will be reached later this year, and construction will begin in
the first half of 1985. The pipeline will support additional Soviet gas exports to
Finland. Annual Soviet gas sales to Finland would nearly triple-from about
$90 million in 1983 to as much as $240 million in 1990, at current prices. Sovi- 25X1
et hard currency earnings would not increase, however, because Finnish-Soviet
trade is not conducted in convertible currencies.
Mexican Spending Mexico City's sudden increase in public-sector spending at midyear to stem
Imperils IMF Targets the slide in living standards threatens to push the budget deficit well above the
IMF program target for 1984. Data just released by the Bank of Mexico
indicate that the increase is in part a result of higher subsidies for basic goods
and services and increased government investment. ~
Mexico City is counting on IMF leniency because of its success in
turning its foreign payments position around in the last two years.
The spending rise probably was designed to ease social tension and cultivate
voters before nationwide elections next year. The government has failed to
reinvigorate private investment and has kept consumer demand down by
reducing real wages by about one-third in the last two years. Nevertheless,
Finance Minister Silva Herzog hopes that higher government spending will
result in a 2- to 3-percent growth in the economy this year.
Yugoslavia Proposes
Multiyear
Rescheduling
Secret
2 November 1984
is in place
The US Embassy reports that Yugoslav offiicials proposed to representatives of
17 Western governments at a meeting in Belgrade that they reschedule debts
coming due between 1985 and 1987 or, if possible, 1988. As in its proposal to
Western banks, Belgrade is seeking a 10-year rescheduling period with five
years' grace and lower interest rates than those contained in previous
packages. The Yugoslavs also indicated that they want to avoid negotiating a
new IMF standby program. The governments have proposed meeting in late
November but will not conclude an agreement until an IMF standby program
another IMF program is likely to prolong negotiations.
Conclusion of multiyear rescheduling probably will prove difficult. Although
commercial banks have voiced some support for the Yugoslav proposal, they
will not conclude a deal until official creditors agree to a comparable
rescheduling. The banks and governments are insisting on an IMF standby
program because they doubt the probability of Belgrade's success in persever-
ing with its adjustment program. Growing opposition within Yugoslavia to
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
25X1
Mozambican Debt
Rescheduled
Western governments have agreed in principle to reschedule $200 million in 25X1
debt service payments owed them by Mozambique, according to press reports.
Terms will be negotiated bilaterally with each creditor government 25X1
in addition to $1.2 billion owed to Western govern
ments,
g
25X1 I
Mozambi ue owes $300 million to Western banks which is to be rene otiated
q
later. 25X1
25X1
Global and Regional Developments
USSR and Libya Moscow has reportedly agreed to reschedule Libya's large debt, with half of
Agree on Arms Debt the amount to be repaid with oil at a reduced price. Libyan leader Qadhafi has
decided to visit the USSR soon because the Soviets have agreed to consider his
request for weapons. In 1982 the Soviets allowed Libya to make payments on
its multibillion-dollar military purchases with crude oil, which Moscow sold
for hard currency at a discount price in the.West. This deal could be
extended-or possibly expanded-as part of another large arms agreement
now being negotiated. If so, additional Libyan oil would appear on the world
market, increasing pressure on OPEC prices.
7 Secret
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Progress on EC
Enlargement
US May Lose
Foreign Partners
to Airbus Industrie
declaration confirming that Portugal will join in 1986.
EC members last week overcame several obstacles to Community membership
for Spain and Portugal in 1986, but the most contentious issues remain
unresolved. The EC Foreign Ministers' meeting in Luxembourg on 23 October
broke afour-month stalemate and agreed on proposals to curb olive oil
production and to dismantle Spanish industrial tariffs after Spain and
Portugal join the Community. The Ministers also reached a consensus on
social security benefits for the families of Iberian workers and issued a
take place before December.
Lisbon and Madrid almost certainly will accept the EC's economic proposals
at a negotiating session in mid-November. The meeting this week has
rekindled hopes that the 1986 deadline for accession can still be met, but it did
not address the more contentious issues of production limits for wine and
Spanish fishing rights. Differences among EC members on these issues have
yet to be resolved, and final negotiations with the applicants probably cannot
range airplane.
In the wake of the huge Pan Am/Airbus agreement, both Japan and Italy are
concerned about a perceived lack of commitment by US companies to an all-
new 150-seat aircraft program to compete with the narrow-body Airbus A320.
Both countries resisted pressure by Airbus to participate in the A320 program
in favor of retaining traditional ties to US manufacturers. In March 1984,
Japan, in a move to upgrade its aerospace .technologies, signed an agreement
with Boeing fora 25-percent risk share in a 150-seat aircraft if it were
launched. Italy was counting on Boeing or McDonnell-Douglas programs to
maintain employment in its- aircraft sector. If no US program is available,
Japan and Italy may find it hard to resist the pressures to join Airbus. Airbus
Industrie has already approached Italy and Japan about participation in the
proposed TA-11 program to develop afour-engine, medium-capacity, long-
Quebec Makes Trade Quebec Premier Levesque's recent trade promotion trip to the Far East has
Deals With China provided new trade opportunities for several firms in the economically
depressed province. The Quebec government claims that the Chinese authori-
ties were eager to do business. Among the deals .negotiated, a Montreal firm
will supervise construction of a roasting oven for an aluminum plant. In
addition, Hydro-Quebec-the provincially owned electric company-will con-
tinue its collaboration with the Chinese and conduct a feasibility study for a
hydroelectric project on the Yangtze River. In a third deal, Bombardier signed
a deal with the Chinese to assemble snowmobiles in China for use in patrolling
the border with the Soviet Union. Bombardier also manufactures mass
transportation equipment and sees possibilities for future deals with China.
Secret 8
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
French Economy
Back on Track
National Developments
Developed Countries
warned that he will stick to austerity.
French international payments adjustment seems to be back on track after a
disappointing beginning early in the year. The seasonally adjusted trade deficit
for the first three quarters of 1984 was less than $2.5 billion, down from the
$5.5 billion deficit for the same period last year. Over the same period, the cur-
rent account deficit dropped from $5 billion last year to less than $0.5 billion
for the first three quarters of 1984. Both deficits make the recent government
forecast appear pessimistic. The 12-month inflation rate also has shown a large
improvement, falling to 7.1 percent compared with 10.1 percent in September
1983. More important, France has reduced its inflation differential with its
major trading partners by about 2 percentage points over the past year. The
government has held public-sector wage increases well below inflation. Despite
these favorable signs and a continued rise in unemployment-up more than 1
percentage point in the last year to 10 percent-Prime Minister Fabius has
UK Mine Foremen's The decision last week by mine foremen to call off their strike is a blow to min-
Spanish Bud
Proposal
suspend the strike rather than call it off entirely.
ers' chief Scargill. The strike, which would have forced the closing of the 25
percent of the mines still operating in the United Kingdom, apparently was
averted by Coal Board concessions on pay and by indications of flexibility on
mine closures. The foremen reportedly rejected requests from other unions to
force him to come to terms.
The apparent settlement with the foremen follows a refusal by electric power
workers to support the miners. Most estimates indicate that the current level of
operations could keep coal stocks from running down until early next year. If
the Coal Board and the government demonstrate increased flexibility on the
timing of mine closures, a settlement may be worked out. Scargill's eagerness
to force a confrontation with Thatcher, however, probably means that only
strong pressure from other unions or a return to work by more miners will
The draft Spanish budget for 1985 reflects the Socialists' determination to
maintain relative austerity. Higher taxes and lower real public-sector invest-
ment growth suggest lower domestic demand than Madrid predicts. The
Gonzalez government is proposing several measures to cut the budget deficit
from 5.5 percent of GDP this year to 5 percent next year. The real rate of in-
crease in government spending will slow to 5.6 percent, down from about 10
percent this year. Growth of real public-sector investment will fall from 7
percent this year to 3 percent in 1985. Export subsidies will be cut, transfers to
public-sector enterprises held constant, and government employees' real wages
lowered by 1.4 percent. Spain's high unemployment rate and the Socialists'
promises to increase unemployment-compensation coverage and finance a
9 Secret
1 November 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
larger share of social security, however, will push social security expenditures
up 14 percent in real terms. Madrid is counting on increased taxes and
measures to discourage fraud to boost real revenues 9.7 percent.
Portugal's Talks Negotiations with the IBRD for a loan to restructure public-sector enterprises
With World Bank are proceeding slowly and may not be concluded until mid-1985, according to
Stalled Embassy reporting. The Soarer government originally sought Bank assistance
in 1983 when it was suffering an acute foreign exchange shortage. Lisbon's
brightening external outlook this year, however, has reduced its incentive to
submit to the World Bank's condition. Although Lisbon recognizes the
problems of the state sector, Portuguese officials are balking at Bank proposals
for tying disbursements to the performance of three major state firms, for
creating a ministerial council to manage public-sector companies, and for
settling back- debts to private-sector firms. Libson's mediocre track record on
economic reform and the difficulty of carrying out politically unpopular
austerity in 1985 as elections approach make us skeptical that the Portuguese
would make much headway without pressure from the World Bank.
Secret
1 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Dim Prospects
jor Bangladesh's
Economy
from donor countries over the coming year.
Bangladesh's fragile economy, which showed signs of recovery last year, has
begun to falter. Recent flooding caused extensive damage to the rice crop-we
estimate losses at over 1 million metric tons-and foodgrain production will
probably stagnate in 1984/85 (July/June) while the population continues to
grow at 3 percent per year. Although high world jute and tea prices will
improve export performance, an expected sharp drop in foreign remittances
and increased imports are likely to worsen its foreign payments problems,
according to US Embassy reporting. Complicating the economic situation are
loose monetary and fiscal policies, which have fueled inflation. Because of the
deteriorating economy, we believe Dhaka will press for further economic aid
Brazil's Orange Juice Brazil's earnings from frozen concentrated orange juice (FCOJ) exports are
Export Earnings Surge expected to approach $1.1 billion in 1984, up 80 percent from 1983 earnings.
Threat of Famine
in Uganda
Recurring production problems in the United States, continued growth in
West European demand, and rapid development of Brazilian citrus production
and processing have made Brazil the world's largest exporter of FCOJ.
Brazilian exports in 1983 totaled 553,000 tons-80 percent of world trade in
FCOJ-and earned a record $610 million, compared with exports of only
181,000 tons worth $82 million in 1975. About two-thirds of Brazil's orange
crop goes to manufacture FCOJ almost exclusively for export. The US and EC
markets account for about 80 percent of Brazilian sales. Strong world demand
for Brazilian FCOJ is foreseen for the remainder of 1984 and 1985 as US cit-
rus production in Florida struggles to recover from bad weather and disease.
Drought and military operations have led to serious food shortages in the
Karamoja area of northeastern Uganda, renewing the threat of unrest in this
perennially troubled region. Moreover, transport and administrative problems
are delaying food aid distribution. As a result, deaths reportedly are increasing
and people are beginning to move to resettlement centers in search of food.
11 Secret
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
little effort even to move food from surplus areas.
The government, preoccupied with political infighting and a spreading insur-
gency near Kampala, has been unwilling to take on afamine-relief program;
particularly in a politically out-of-favor tribal region. It therefore has made
Annual CEMA Session The annual meeting of CEMA heads of government begun this week in
.Havana probably will make little progress in implementing decisions made by
party leaders at their summit in June. The agenda reportedly will focus on the
issues of energy and raw materials. A plan for meeting the long-term needs of
the member countries and for making efficient use of resources will be
presented for approval. Specific proposals for cooperation in these fields
through 1990 will be discussed. The delegations will also give progress reports
on coordination of their 1986-90 economic plans.
Soviet Cutback on
Exports oj~ a Strategic
Mineral
Talks Imminent
Premier Tikhonov warned about the dangers of trading with the West.
Although bilateral and CEMA commission meetings have discussed the
summit decisions, the sparse agenda suggests only limited progress in resolving
CEMA's problems. The energy plan probably involves a Soviet effort to win
Eastern Europe's commitment to a proposed new gas pipeline and to investing
in Soviet energy and raw materials development, but it will not address future
Soviet oil deliveries to CEMA and pricing arrangements. A program for
scientific-technical cooperation in CEMA, which was to be drafted after the
summit, apparently is not ready for consideration. This meeting also may take
a milder tone on East-West trade than the session last year, when Soviet
the Soviets have reneged on several contracts
suppliers.
for the export of chrome ore worth $4 million on the world market. As of late
September,. the cutbacks reached an estimated 50,000 tons-roughly 10
percent of Soviet exports in 1983. Japan, which depends on the USSR for
about 10 percent of its chrome ore imports, has been forced to turn to other
reduction in exports.
The Soviets traditionally have been scrupulously reliable suppliers of chrome
ore. These cutbacks are probably related to mining problems-chrome ore
production has been limited by mine depletion, declining ore grades, and the
change from open pit mining to more expensive underground mining. In-
creased internal demand for stainless steel, however, may also figure in the
A Soviet trade delegation plans to visit China soon to negotiate the bilateral
annual trade agreement for 1985. Both Soviet and Chinese officials are
reported to be optimistic about the prospects for another substantial expansion
of trade next year. In 1984, two-way trade is targeted to nearly double the
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
$650 million level of 1983. In the first six months of 1984, turnover with China
was roughly $500 million-more than triple the comparable level of the
previous year. The trends underscore mutual efforts by Moscow and Beijing to
improve economic relations in spite of political differences.
China To Sell China International Trust and Investment Corporation (CITIC) has begun
US Timber in Japan_ logging operations in Washington state, where it holds the cutting rights on
three large tracts of timber. A CITIC official informed Embassy Beijing that
although most of the logs would be used in China the best grades would be sold
in the Japanese market. Japan has long been a purchaser of high-grade West
Coast logs, and Chinese sales of US-cut timber in Japan probably will reduce
direct West Coast sales. Over the past few years, China has greatly increased
its purchase of West Coast logs. A major West Coast log-exporting port
reported shipping 299 million board feet (mbf) to China and 243 mbf to Japan
in 1983, compared with 83 and 194 mbf, respectively, in 1981.
13 Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Broader Ramifications
Since the shift in the world oil market after 1979 to
oversupply and sagging prices, the plunge in OPEC
countries' oil earnings has forced uncomfortable
financial adjustments. Oil revenues declined from a
peak of $275 billion in 1980 to $154 billion last
year, and our calculations suggest revenues will rise
only slightly this year. Beyond the impact on the
economies of the members, the revenue loss is
beginning to have broader ramifications for OPEC
cohesiveness, Third World debt, Soviet-OPEC rela-
tions, and international aid flows.
Financial Impacts
The decline in revenues over the past several years
has led to a deterioration of OPEC's current ac-
count, acutback in imports, a drawdown of foreign
assets, and a reduction in OPEC aid:
? OPEC's current account-in surplus by $109
billion in 1980-registered a $22 billion deficit
last year, according to our estimates. Saudi Ara-
bia, because of its role as swing producer, has
absorbed most of the production cuts and record-
ed the largest deficit-$17 billion. We project an
OPEC current account deficit of $11 billion in
1984, and Riyadh's deficit will approach $14
billion.
? We estimate that OPEC countries-primarily
Saudi Arabia, Iran, and Iraq-drew down $28
billion in official assets in 1983. In addition,
Indonesia, Algeria, Saudi Arabia, Nigeria, and
Ecuador borrowed $3.5 billion from commercial
banks and the IMF.
? OPEC import volume dropped 11 percent in 1983
and probably will decline another 5 percent this
year. This contrasts markedly with average annu-
al increases of 15 percent during 1981-82.
? Major OPEC aid donors cut disbursements to
LDCs last year by nearly $5 billion to $6.5 .
billion.
The financial bind the soft oil market has imposed
on most OPEC states is becoming an increasing
threat to the cohesiveness of the organization itself.
The dramatic drop in oil consumption in the past
few years has caused substantial price weakness
and forced OPEC to behave like a true cartel.
Nonetheless, financial pressures have periodically
forced members to exceed their production quotas
by offering discounts or bartering oil. Only a sharp
production cut by Saudi Arabia this past July
averted another price decline stemming from such
discounting actions and temporarily reaffirmed the
cartel's commitment to defending oil prices.
The recent price declines present yet another threat25X1
to OPEC unity. Some slippage in discipline already
is occurring:
? Nigeria has cut prices to boost its sales and ease
pressing debt and economic problems.
? Marketing problems have forced Algeria to sell
crude by offering discounts,
Secret
DI IEEW 84-044
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Secret Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
OPEC Countries: Foreign Accounts, 1974-84
Current Account Balances Official Yearend Assets
? Libya is exploring barter arrangements with a
greater number of Western suppliers,
The prolonged weak oil market has added three
OPEC countries to the long list of LDCs unable to
service their debt. After financially extending
themselves during the oil price. runup period, Nige-
ria, Venezuela, and Ecuador were. unable to absorb
the loss in oil revenues and stay current with their
debt repayments:
? According to our estimates, Lagos has $8-10
billion in officially guaranteed and unguaranteed
trade arrearages. While many uninsured credi-
tors have accepted Lagos's refinancing offer of
six-year promissory notes, official creditors re-
main reluctant to implement a restructuring
without an IMF-supported program in place.
Secret
2 November 1984
o
? Large-scale capital flight sparked by a concern
about lower oil revenues and the overvalued
Bolivar led the Venezuelan Government to post-
pone principal payments on public and private
debt in March 1983. Aself-imposed austerity
program, has received favorable comment by IMF
representatives, and, as a result, bankers have
recently concluded a provisional debt-restructur-
ing agreement without the usual prerequisite for
a formal IMF agreement.
? Ecuador negotiated an IMF-supported adjust-
ment program and a financial package with
creditor banks. last year that included debt re-
structuring and a new $430 million line of credit.
The one-year standby expired in July,-and recent-
ly inaugurated President Febres-Cordero is nego-
tiating anew program as well as a 1984 debt-
refinancing package with bankers.
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Algeria and Indonesia so far have been able to
continue to meet their debt obligations and main-
tain fairly good credit ratings-largely because of
their more diversified export bases and quicker
implementation of austerity measures in response
to the oil-revenue decline. Financial strains are
evident, nonetheless, and if the oil market remains
weak or there is a further runup in interest rates,
their creditworthiness could quickly erode. Jakarta
will have difficulty boosting nonoil exports this
year, while Algeria's natural gas sales are sluggish.
The austerity measures imposed in many of the oil-
producing countries have sparked public criticism
of government mismanagement and corruption.
The change of governments in Nigeria and Venezu-
ela last year was due in part to discontent over
economic conditions. -Moreover, the new govern-
ments in these two countries are continuing to face
political difficulties. Venezuelan President Lusin-
chi's ability to implement his austerity program
hinges on maintaining a fragile social pact with
business and labor. Failure of the 10-month-old
Buhari government to revive Nigeria's economy as
promised is straining the already delicate fabric of
the armed forces. The government is reluctant to
implement extensive reforms and austerity meas-
ures for fear of being ousted by disgruntled sol-
diers.
In Indonesia, President Soeharto is risking popular
backlash against austerity policies. For the Iranian
and Iraqi Governments, heavy war expenses and
lower oil revenues have combined to produce con-
sumer shortages, making it more difficult to main-
tain popular support for the prolonged war. ~i
Generally, the economic adjustment and political
fallout have been less severe for those OPEC
members with substantial foreign assets, smaller
import requirements, and small populations; these
governments have been able to maintain generous
subsidies and welfare programs that help insulate
the citizens from the impact of spending cuts.
Nevertheless, the sharp contraction in domestic
liquidity has taken a heavy toll on financial, real
estate, and construction sectors and generated dis-
gruntlement among businessmen and members of
the ruling families with substantial income from
these sectors:
? In Kuwait, liquidity constraints have helped delay
a comprehensive and final settlement of the 1982
Suq al Manakh stock market crash, which
touched off private capital flight and a drain on
foreign assets.
? In the United Arab Emirates, the banking sector
has been hard hit with the failure of a major
institution last year and a large number of loans
to near-bankrupt construction companies.
Over the past decade, the wealthier OPEC mem-
bers have considered aid a major foreign policy tool
to promote their influence in the Third World and
in international forums. Feeling the pinch of
OPEC's reduced aid disbursements, major recipi-
ents are looking for other donors to make up the
loss and in the process are willing to strain relations
with their more traditional Gulf donors. For exam-
ple, we judge that Syria is tilting toward Tehran in
part to offset. the $1 billion in aid lost from Saudi
Arabia and Kuwait last year. Reduced internation-
al aid flows were a principal motive for Moroccan
King Hassan's recent union with Libya.
In the case of Jordan, Pakistan, and Sudan, the
cutbacks have resulted in increased pressure on
Washington for additional assistance. The United
States has strategic interests in these countries and
Secret
2 November 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
reduced financial inflows could lead to increased
instability and foreign meddling by Libya in Su-
dan. In addition, the Saudis may be less willing to
use foreign aid in ways that dovetail with US policy
interests.
The sharp drop in OPEC's share of the oil market
continued price pressures; and financial problems
created by these conditions have led the cartel to
seek the cooperation of a number of other produc-
ers, including last year the first formal contact with
Moscow. OPEC members had become concerned
that aggressive Soviet pricing and growing exports
to Western countries were undermining the cartel's
ability to stabilize prices.
As long as the market remains weak, we believe
OPEC members will continue to seek contacts with
the Soviets, to gain support for their pricing struc-
ture. On the barter scene, Moscow is unlikely to be
able to exert any political leverage over OPEC
members with whom it has special oil-supply rela-
tionships. Furthermore, we believe that Soviet ef-
forts to maximize hard currency earnings will make
Moscow unwilling to adopt an oil export policy that
would support OPEC price guidelines.
We do not expect any early improvement in
OPEC's financial position. We now project a $12
billion current account deficit in 1985, assuming no
further unraveling of the price structure and a
slight rise in demand for OPEC oil. Given the
financial problems of many OPEC countries, we
expect imports will grow slower than exports, but
calculate that the small improvement in the trade
balance will be offset by a larger net services
deficit
Even under this price scenario, OPEC members
will. be forced to continue politically difficult eco-
nomic-adjustment policies:
? We are most concerned with the ability of the
Nigerian Government to contain the political
fallout from its financial crunch.
Secret
2 November 1984
? A resurgence of ethnic and religious tensions is
contributing to antigovernment sentiment in
Indonesia.
? In Venezuela, economic stagnation could intensi-
fy strains between business and workers and
disrupt Lusinchi's consensus for his austerity
program.
Moreover, if oil, prices decline in the months ahead,
the problems for OPEC countries would become
more acute. In particular, an oil price decline would
cause serious financial problems for major OPEC
debtors-Nigeria, Venezuela, Indonesia, and Ecua-
dor-as well as non-OPEC debtors such as Mexico
and Egypt. These debtors could opt to suspend debt
service payments to reduce foreign exchange out-
flows and preserve dwindling export earnings.
A sustained soft oil market over the next few years
could even have substantial political repercussions
for the wealthier OPEC members. Press accounts.
indicate that Riyadh is assuming that demand in
the world oil market will recover substantially in
1986. This is contrary to expectations of many
private petroleum analysts. If they are correct,
wealthier OPEC members will come under growing
pressure to adopt more stringent policies to control
spending and stem the drain on foreign assets. We
believe the Saudis and others .are not prepared for
any sustained economic reversals.
25X1
25X1
25X1
I
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Major LDCs:
Financial Impact
of an Oil Price Decline
The decline in world oil prices is introducing
additional uncertainty into the financial outlook for
LDC debtors. A $2 per barrel drop would have only
moderate effects on most LDCs. If a major decline
in oil prices occurs, however, oil-exporting debtors
will face substantial reductions in their export
earnings that would impair their ability to meet
debt obligations. On the positive side, oil-importing
countries would realize savings on their oil bill.
Foreign Trade Impact
With a decline in oil prices, LDC oil exporters such
as Indonesia, Mexico, Nigeria, and Venezuela
would find themselves with less foreign exchange to
meet their import spending and debt service obliga-
tions. South Korea, Brazil, the Philippines, and
other oil-importing debtors would be able to in-
crease imports of nonoil goods and perhaps improve
their debt service record. The foreign trade impact
would not end here, however, because any oil price
decline would start up a global adjustment process
that would involve further trade shifts and require
probably two or more years to work out. These
secondary effects probably would work in favor of
most debtors as lower prices stimulate OECD real
growth and import demand.
To quantify the impact of oil price declines on key
debtors, we calculated the dollar impact of two
scenarios: a price reduction of $2 per barrel to a
benchmark price of $27-roughly representing the
current decline-and a reduction to $20 per bar-
rel-representing a major decline. We are assum-
ing across-the-board cuts in oil prices even though
prices for different types of oil may not change
uniformly. Moreover, to simplify analysis, we as-
sumed that export and import volumes will stay
constant at 1984 levels.
The Losers. If prices declined only $2 per barrel, we
anticipate that only Egypt and Nigeria would
experience increased financial problems. Egypt's oil
earnings would fall by $160 million, and Nigeria's
losses would be roughly $800 million, about 5
percent of total export earnings for each. With a
price drop to $20 per barrel, however, almost all oil
exporters would face serious problems. The revenue
losses of Mexico would be $5 billion, 20 percent of
total exports, while losses in Nigeria and Venezuela
would amount to roughly $4 billion each, represent-
ing 25 percent of their respective export totals.
Oil-exporting countries essentially would have four
options for adjusting to these revenue losses:
? Cut imports.
? Draw down foreign exchange reserves (including
foreign assets).
? Increase foreign borrowing.
? Delay foreign debt service payments (run
arrearages).
In most cases, countries would choose some combi-
nation of these policies, depending on their credit
standing, foreign exchange reserve level, and ability
to manage import cuts. Thus, such troubled debtors
as Mexico and Nigeria probably would have little
success in borrowing additional new funds unless
official assistance was provided. At the same time,
according to press reports, Mexico has foreign
exchange reserves of about $7 billion and Venezue-
la of $12.5 billion, which could provide a cushion if
Secret
DI IEEW 84-044
1 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Secret Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
- 200
-550
Impact of Oil Price Declines on Trade
Balance (million US $J e
desired. Debtors with limited foreign exchange
holdings would probably opt for some combination
of import cutbacks and arrearages on debt pay-
ments. For countries that have low reserves and
that already have made substantial reductions in
imports, delaying debt payments is the likely course
of action.
Debtors with excess oil-productive capacity would
have the additional option of increasing their oil
exports, although such a move. would almost cer-
tainly put additional downward pressure on prices.
Of the major LDCs, Nigeria currently has about
500,000 barrels per day (b/d), of surplus productive
capacity and Venezuela and Indonesia each have
about 100;000 b/d.
The Winners. Those LDCs heavily dependent on oil
imports would realize substantial savings if oil
prices declined. Brazil and South Korea each would
save $300-400 million annually under a $2 per
barrel price decline, and about $1.5 billion each
under a $9 per barrel price decline.
Secret
2 November 1984
The net oil importers would have favorable options
available. Two major ones are:
? Government revenues could be raised almost
painlessly by imposing an oil import tax that
matched any price decline. Revenue-short gov-
ernments, especially in Brazil and the Philippines,
could find this tax policy attractive. Domestic oil
prices would be maintained, thus not disturbing
investment projects .and energy-consumption pat-
terns predicated on a roughly. $30 per barrel oil
price.
? Alternatively, some countries could choose simply
to pass. on the full oil price reduction to their
domestic economies, allowing greater imports of
other goods. At the same time, the decline in oil
prices would boost oil consumption and encourage
a greater volume of oil imports, especially after
an adjustment period of several years.
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Second-Order F~,~`ects. In our judgment, LDCs that
sell substantial amounts of goods to oil-exporting
countries could find markets in these countries
diminishing following an oil price decline. At the
same time, however, markets in the oil-importing
countries, including most of the OECD, would be
expanding with the increased purchasing power of
consumers in those countries. Thus, although ini-
tially exports to the oil producers might drop faster
than new exports to oil-importing countries would
increase, after a year or two we believe the favor-
able trade-boosting impact would more than com-
pensate for any decline. Although the diverse com-
position of LDC exports makes it difficult to assess
which countries would benefit most from this im-
pact, export-oriented economies such as South Ko-
rea and Brazil would be in the best position to take
advantage of this increased demand.
Interest Rates. An oil price decline could help bring
down interest rates. Over the longer run, interest
rates reflect real supply and demand conditions for
credit as well as the anticipated rate of inflation. A
falling oil price would reduce the component of
interest rates that reflects future inflation. Some
analysts have predicted that a $2 per barrel oil
price cut would lead to a 1-percentage-point drop in
interest rates. In this case, all LDGs would gain,
particularly those with a proportionately large
share of their debts at floating interest rates, such
as Argentina, Brazil, Mexico, and Nigeria.
Implications
We believe lower oil prices would on balance
contribute appreciably to a more robust world
economy, especially after an adjustment period of
several years. OECD growth would be promoted,
and interest rates probably would ease. Some LDC
debtors that depend heavily on oil exports, however,
would be in a much more precarious financial
situation, particularly if an oil price decline was
substantial. Egypt and Nigeria are especially vul-
nerable because of their lack of maneuvering room;
Egypt has few alternative exports, and Nigeria has
large arrearages and dwindling foreign exchange
holdings.
Major Debtors:
Net Savings of a I-Percentage-Point
Interest Rate Decline a
310
Aso
130
so
120
s0
130
220
e These data are derived from the change in the portion of net debt
(gross debt less deposits) pegged to floating interest rates.
The risks of a moratorium on debt service pay-
ments by one or more of these countries thus would
increase if oil prices plummeted. Initially, these
countries probably would run greater arrearages
and also attempt to negotiate much improved debt
terms and new credit. Private creditors, however,
would be very reluctant to extend new loans after a
fall in oil prices. We believe only relatively small
amounts of new lending would be forthcoming as
creditors attempted to protect outstanding loans.
Disruptions to the international financial system
from lower oil prices also could stem from countries
that are less dependent on oil earnings. For exam-
ple, Peru and Argentina already are in desperate
financial straits. Even a small reduction in their
export earnings; which would follow an oil price
decline, could push them closer to a moratorium on
all debt payments.
A decline in oil prices would not be enough to
substantially ease the debt problems of oil-import-
ing LDCs. Most of the larger debtors-particularly
Secret
1 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Impact on Individual Oil Exporters
llgexico would be hit hard by lower oil revenues,
largely because the country still has little room to
maneuver. Imports have been cut to the bare
minimum over the past three years, and noiioil
exports-although growing-would not be able to
pick up the slack generated by large oil revenue
losses. Mexico recently reached preliminary agree-
ment with its bank advisory committee on a debt
restructuring, but the package must still be signed
by all creditor banks. A small drop in oil prices
could be absorbed by Mexico because some cush-
ion has been built into the restructuring package; a
large price decline, however, would pose serious
problems. Many banks-some of which are kl-
ready reluctant to participate in the restructur-.
ing=could find it even harder to justify their
participation. Should oil prices drop to $20 per
barrel, Mexico might not be able to meet its
interest payments, adding strains to the world
.financial system.
Venezuela probably -would be able to absorb a
small drop in oil prices because of its relatively
better financial position. Foreign exchange reserves
remain. high, and the recent. restructuring package
with commercial banks will reduce debt service
requirements o~~er the next several years. The
package probably will be signed by the individual
banks. because of its overall benefits for both
creditors and debtor. Banks, however, could be
reluctant to participate in new loans over the
medium term should Venezuela not take actions
such as drgwing down reserves to make up for the
loss in oil revenues.
Indonesia also would.be able to adjust to a small
price decline, although at some cost to its economic
growth prospects. Because Jakarta could not ex-
pect much help from nonoil exports, the govern-
ment might reduce spending on development proj-
ects as it did in 1983. This in turn would reduce
imports of capital and intermediate goods, which
would ojjset the loss in. oil revenue. Foreign ex-
change reserves also provide a cushion in the near
term. Even with a sharp drop in oil prices, Indone-
sia would not have immediate debt repayment
problems because of thefavorable structure of its
repayment schedule. Moreover, creditors probably
Secret
2 November 1984
would respond favorably to an Indonesian cutback
in spending so that the country s credit rating
would not be severely altered:
Egypt could be hard hit by falling oil prices
because of its precarious financial situation. Banks
currently view Egypt as abelow-average credit
risk, and gloss- of oil income-which accounts for
over 60 percent of exports and over 20'percent of
exports of goods and services-could lead to debt
repayment d~culties. We believe Cairo would
press the United States even harder for debt relief
on Foreign Military Sales credits and might have
to seek reschedulingfrom other private.and:o.~cial
creditors. A significant reduction in prices could
also interrupt Egyptian oil-exploration efl"orts, hin-
dering the future growth of oil production. More-.
over, deepening financial problems in .Persian Gu,(f
countries could.reduce the need for Egyptian mi-.
grant labor.
Nigeria currently is .under serious financial strain.
Lagos has major-debt servicing problems, with a
large buildup. of arrearages on short-term debt-and
dwindling foreign exchange reserves. 1f its recent
oil price cut is.maintained, the annual loss in
export earnings will be some $800 million, accord-
ing to.our estimate. Reduced oil revenues would
put increased pressure on Lagos to cut spending
and reduce imports and to reach agreement with
the IMF on a standby arrangement. The impasse
with the Fund probably will continue through
yearend, however, because 'of the government's
unwillingness. to implement a devaluation.
Ecuador probably: would be able to absorb a small
drop in oil prices. Quito is close to reaching a new
standby arrangement with the IMF, which will be
followed by bank negotiations on a debt restructur-
ing and new money. Ecuador.'s economic team has
been cooperative with the IMF and will probably
take the steps necessary to adjust to lower oil
export revenues. A largefall in oil prices, however,
could make creditors reluctant to provide new
money, since some banks already are balking at
increasing their exposure.
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
in Latin America-are unable to attract any new
lending from foreign creditors outside of their debt-
restructuring packages. Moreover, capital flight
remains a problem as does a lack of foreign direct
investment. Still, to the extent that faster OECD
growth and a decline in interest rates result from a
lower oil price, the combination could lead to some
easing of financial pressure.
We expect creditors to look at the oil-importing
LDCs more favorably in the event of lower oil
prices, but this could be overshadowed by lender
concern for the financial situation of the major oil-
exporting debtors. Mexico, in particular, would
attract lender attention because of the size of the
country's debt and the implications for the interna-
tional financial system as a whole. Thus, the overall
positive impact on oil-importing LDCs probably
would be realized more over the medium term than
in the short term.
23 Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Chile: Looming
Payments Problems
Chile's current IMF program is coming unglued, Chile: Balance of Payments Million us $
and mounting current account problems could force
a suspension of debt service in coming months.
External factors-lower-than-anticipated copper
prices and higher-than-expected interest rates-
and an overly stimulative economic growth pro-
gram instituted by Santiago this spring share the
blame for Chile's predicament. Recent government
actions to slow import growth came too late to have
much impact on the $500 million foreign exchange
shortfall we anticipate this year.
Santiago wants the IMF to accept some adjust-
ments to its current program and to negotiate a
new agreement for next year, but problems are
jeopardizing any quick resolution on either front. In
any case, bankers appear unwilling to provide the
level of .new lending Chile believes it needs..This
leaves the government with the choice of either
slowing the economy-which could fuel increased
political opposition---or suffering the gradual loss
of critical imports as foreign lending dries up.
Problems With the IMF Program
The first cracks in this plan occurred in March,
when falling copper prices and rising interest rates
began to cut into Chile's ability to finance imports.
1983 1984
---
Assu
Und
Prog
mptions
er IMF
ram a
CIA
Projections
Current account
-1,068 -1,
250
-1;850
Trade balance
1,014 1,
000
500 .
Exports
(f.o.b.)
3,850 4,
150
3,950
Imports
(f.o.b.)
-2,836 -3,
150
-3,450
Net services
and transfers
-2,082 -2,
250
-2,350
Interest
-1,600 -1,
700
-1,800
Other
-482 -
550
-550
Capital account
513 1,
250
1,350
Foreign
financing
2,386 1,
940
2,040
IMF
495
238
238 b
Bank
lending
1,300
780
780 b
Net direct
foreign
investment
152
160
100
Other
439
762
922
Amortization
on debt
-1,873 -
690
-690
Foreign exchange gap
555
0
500
e January 1984.
n Should Chile be found out of compliance with its IMF-supported
program in November, banks could suspend $190 million in
lending, and the IMF could withhold $108 million in credits.
Secret
DI IEEW 84-044
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Hopes for holding unemployment under 12 percent
diminished as tight domestic credit continued to
hurt private-sector expansion. At the same time,
the political and labor opposition movement re-
sumed its protests following the traditional Decem-
ber-March "summer" recess, and Pinochet felt
obliged to respond by installing a new economic
team that advocated greater growth.
Payments Stresses Materialize
The new economic team immediately took steps to
spur a strong economic recovery. In mid-April,
Finance Minister Escobar increased public invest-
ment in housing, mining, and infrastructure im-
provements to reduce unemployment. In May, Es-
cobar eased domestic credit by injecting liquidity
into the crippled banking sector. According to US
Embassy estimates, this bank bailout would cost
Santiago $1 billion or 5 percent of GDP over the
next 12 months. The government also offered new
subsidies to promote domestic manufacturing and
agricultural production, to spur import substitution
and export growth.
Santiago succeeded in boosting GNP growth to
nearly 7 percent in the first half of 1984, but the
expansion took its toll on foreign exchange avail-
ability. Imports surged 23 percent in the first half
over the same period in 1983, while export growth
slowed to 1 percent. The $360 million trade surplus
during January-June was only half that of the first
six months of 1983. The IMF-alarmed by these
developments-refused Chile's request for relax-
ation of its budget deficit target. Escobar suggested
to lenders that additional lending, beyond the $780
million that Santiago and the banks had agreed on,
would be needed to sustain growth.
Averting Cash Strains
Chile's economic team has had to tap a wide
variety of sources of external financing to meet
growing payments problems. Chile drew $512 mil-
lion of its IMF and bank credits in the first half of
1984.
Secret
2 November 1984
According to IMF reports, Chile was able to
achieve its IMF target of no reserve drawdown only
by offering domestic financial and commercial
institutions premium interest rates to repatriate
foreign assets. The Central Bank, by arranging
short-term swap agreements with these institutions,
garnered $340 million.
Although these moves kept Chile in technical com-
pliance with IMF reserve targets, bankers turned a
deaf ear to Escobar's request for $500 million in
additional credits. According to US Embassy re-
porting, Chile's bank advisory committee chairman
threatened in August to withhold nearly $200
million in promised credits if Chile fell out of
compliance with the Fund agreement. Without new
credits, Escobar suggested Chile would need to
draw down $300 million in foreign exchange re-
serves by the end of the year. The US Embassy
reported that Santiago already had begun dipping
into reserves in July, and had drawn down $150
million in reserves in July-August.
Santiago has responded slowly to IMF calls for
austerity, fearing that such moves would provoke
greater political and labor opposition to the govern-
ment. Instead, the government is trying to slow
imports by implementing higher tariffs. In July, for
example, the economic team raised tariffs on luxu-
ry goods-making up 6 percent of imports-from
20 percent to 35 percent. After antiregime protests
in September failed to gain momentum, Chile took
additional steps to ease payment strains and adhere
to its IMF program. Escobar announced a 24-
percent devaluation and established a 35-percent
uniform tariff-up from an average tariff level of
21.4 percent. Additionally, he suspended scheduled
tax cuts to shore up government revenues, and he
promised to tighten public spending.
A Rough Fourth Quarter
Despite the devaluation and tariff increase, we
believe Chile could experience a foreign exchange
shortfall of $500 million by December. Low copper
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
prices probably will reduce expected export reve-
nues by $200 million this year. In addition, interest
rate hikes could add $100 million to debt service
costs.
Failure to comply with Fund targets may cause
bankers and the IMF to suspend undrawn credits.
Although Santiago already is drawing down re-
serves, the IMF has yet to sanction these moves. If
Santiago is found out of compliance with its IMF
program during the early November review, and if
bankers in turn withhold nearly $200 million in
fourth-quarter credits, this would increase the Chil-
ean payments shortfall to over $800 million. If
neither the IMF nor the banks relent, Chile will be
forced to suspend debt servicing.
We believe a payments suspension by Chile-.
known in the past for its faithful debt servicing-
would be directed mainly at holders of private-
sector debt. According to US Embassy reporting,
Escobar has stated that in the event of a foreign
exchange shortage, interest on the public debt will
be paid, but the private sector will have to fend for
itself. Santiago also could implement exchange
controls on private-sector external payments by
1985.
Repercussions for 1985
Chile's efforts to improve its payments balance will
cause the economy to languish in the first half of
1985. According to US Embassy estimates, each
10-percent decrease in imports causes economic
growth to slow by 2.5 percentage points. Economic
growth could drop below 3 percent in the fourth
quarter once the impact of the devaluation and
tariffs begins to slow imports. Escobar is asking
bankers to lend Chile $1.5 billion in 1985-which
we estimate would support at least 3-percent real
GDP growth-but we judge that because of region-
al bank reluctance Santiago will receive new credits
of $700 million or less, holding economic growth to
2 percent or less for the year.
If Chile fails to conclude a new IMF program
before January, economic growth next year could
be further reduced. This could delay rescheduling
of $2.2 billion of principal due in 1985, forcing
Chile ,into arrears. New commercial lending also
would be suspended, leaving Santiago to rely on its
dwindling reserves to cover essential imports. In
this case, Chile's economy would slip back into
recession. ~~
Pinochet's efforts to shore up the external accounts
could also undermine his ability to redress popular
discontent. The coming December-March vacation
period will blunt adverse political reaction to the
recent devaluation and tariff increase. A prolonged
foreign exchange squeeze, however, would increase
business failures and unemployment--conditions
that last year helped unite Chile's disparate opposi-
tion factions.
We believe Pinochet would try to relieve pressure
with progressively more nationalistic economic poli-
cies aimed at boosting domestic manufacturing.
Santiago might again relax fiscal discipline, in-
crease public spending, provide new credit and
consumer subsidies, and introduce higher tariffs.
We judge Pinochet would also consider tightening
foreign investment laws to placate economic na-
tionalists. Such changes would lead to economic
stagnation, rapid inflation, and persistent payment
constraints.
Implications for the United States
Chile imported $250 million worth of goods from
the United States during January-April 1984-a
22-percent increase over the same period last
year-with capital goods and chemicals constitut-
ing 60 percent of the total. The higher tariffs and
recent devaluation will moderate these gains sharp-
ly in the months ahead. Moreover, Santiago's
Secret
2 November /984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
increased emphasis on import substitution could
restrict access to Chilean markets.
Chile's suspension of debt servicing would sour
relations with the IMF and bankers, thus delaying
a new Fund program, debt rescheduling, "and new
commercial lending. Escobar has suggested that
the upshot of this would be an increase in Chile's
need for debt relief beyond the five-year grace-
period on principal payments. The impact of a
Chilean debt-servicing suspension could also extend
beyond the $5.5 billion in Chilean debt that US
banks hold by encouraging other Latin debtors to
press for increased politicization of the issue.
Secret 28
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
West Germany: Obstacles
to Growth
West German manufacturers have lost some inter-
national competitiveness since the early 1970s as a
result of sluggish investment, declining productivi-
ty, and tardy adaptation to changing markets,
especially in high technology. Overall, West Ger-
many has seen its share of the world exports
(excluding oil) drop from a high of 15 percent in
1970 to 13 percent in 1982. Although all major
Western countries have experienced share losses
due to the export success of Japan and the newly
industrialized countries, these trends have shaken
the confidence of industry. Although West Germa-
ny's standing as a major economic power behind
the United States and Japan is not in jeopardy, the
technological and structural gap that has opened
will not be closed soon.
West German investment has been anemic since
1970. In real terms, it grew on average only 1.5
percent per year during 1971-79 before falling
sharply during the recession in the early 1980s.
Among Big Seven countries, only Italy and the
United Kingdom did worse, while US and Japanese
investment grew more than twice as fast. Real
gross fixed investment in West Germany in 1983
was just 10 percent higher than the 1970 level,
whereas Japanese, US, and French investment
grew by 58,45, and 28 percent, respectively
Although West German technology remains among
the most advanced in the world, some key sectors
have not kept pace with developments in Japan and
the United States:
? In microelectronics, West Germany's electrical
engineering trade association has concluded that
the country's third-largest industry is falling be-
hind industries in the United States and Japan.
West Germany has been unable to develop a
successful mainframe computer industry and has
ceded its dominance of the European consumer
electronics market to France and Japan. It lags
by far the United States and Japan in the use of
integrated circuits, and is weak in software for
information processing.
? West Germany has lost the technological suprem-
acy it held in machine tools in the 1960s and
dropped 10 percentage points in its export market
share (equal to Japan's gain) since 1973.
? Japan is challenging West Germany in fiber
optics, precision forging technology, medical elec-
tronics equipment, and advanced metalworking
equipment.
? West Germany lags the latest developments in
biochemistry, high-tech metals and materials,
and advanced telecommunications.
Observers of the West German economic scene
have proposed numerous explanations for West
Germany's industrial problems:
? West German industrialists are "coasting" on
their reputation and not investing in the future.
? The vaunted German work ethic has eroded.
? The weak financial position of West German
firms is retarding economic change.
? The Bonn government, with a growing web of
taxes and administrative regulations, is increas-
ingly an obstacle to innovation and
entrepreneurship.
Secret
D! IEEW 84-044
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
A massive social benefits system tends to discour-
age worker "sacrifices" for the economy and to
squeeze company profit margins.
"Coasting. "The very success of West German
industry in postwar decades is today a handicap to
competing in a period of rapid technological
change, according. to a number of industry observ-
ers. West German industrialists developed an over-
confident, even arrogant attitude toward foreign
competition after being so successful for, so long
with existing product lines. For example, photogra-
phy industry experts say Japan completely dis-
placed the top West German manufacturers in the
amateur photography equipment market because
they resisted incorporating new technology in their
products.
Although impossible to quantify, the West German
work force's reputation for dependability, hard
work, and a superior product appears to be eroding.
A recent poll indicated that the work ethic in West
Germany had declined to "an incredible extent"
and was the lowest of the countries surveyed. West
German working hours already are among the
shortest in the OECD and will fall markedly when
the 38.5-hour workweek (at 40 hours' pay) begins
next year for a large share of West German
workers.
In the 1950s and 1960s, large productivity in-
creases allowed for rapid wage increases while
maintaining competitiveness. Over the past decade,
however, sluggish investment and aging of the
capital stock have led to slower productivity
growth. West German output per worker. rose on
average at nearly 6 percent in 1961-73 but at
slightly less than a.4-percent rate in 1974-82.
Japan's record is better, while the US record is
worse.
Weak Financial Position of West German Firms.
The primary sources of West German investment
funding are business profits and bank lending.
Stocks and bonds represent less than 5 percent of
funds raised by West German nonfinancial compa-
nies. The profitability of West German firms has
declined steadily for over a decade. During 1978-
82, West German corporations averaged barely 7
Secret
2 November 1984
Productivity in Manufacturing,
1967-83
percent in net return on equity capital, while the
French average was 8 percent, British and Japa-
nese 10 percent, and US 14 percent. Poor profit-
ability has clearly weakened the equity capital base
of West German industry. The equity. capital ra-
tio" Zfell from 30 percent in 1967 to 18.5 percent in
1982, lessening the ability of business to undertake
investment and withstand business reverses.
Administrative/Regulatory Bottlenecks. Com-
plaints about administrative and other barriers to
innovation and investment have multiplied since
the mid-1970s. With a highly codified legal struc-
ture; Germans look to the courts to adjudicate civil
disputes that elsewhere would tend to be settled by
compromise or .arbitration. Moreover, environmen-
talists are increasingly influential in West Germa-
ny, and have blocked or delayed a number of power
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
West Germany: Marginal Tax and Social
Contribution Rates, 1965, 1982, and 19848
Disposable income
Direct taxes
Social Security
station and public works projects through legal and
Business complaints about bureaucratic obstruc-
tions most frequently mention layoffs. To fire an
employee without a legal proceeding is almost
impossible. This encourages firms to avoid new
hiring when business is good and to rely instead on
overtime. To close an unprofitable activity requires
an onerous compensation plan for dismissed person-
nel that frequently causes firms to put off rational-
ization. Establishing a new business involves appli-
cations requiring up to 150 approvals, and moving a
plant to a new location entails several hundred
approvals.
Government "Crowding Out."Rapid growth of
government spending was a source of alarm for the
conservative business and financial community un-
til the Kohl government's austerity program suc-
cessfully halted the trend over the past two years.
Government spending at all levels, including trans-
fers and interest, grew from $104 billion in 1970 to
$313 billion in 1982. As a share of GNP, spending
jumped from 39 percent to 50 percent, the highest
level in the Big Seven. The major contributor to the
rapid growth of government spending, after social
programs, was interest on government debt.
25X1
25X1
In the postwar economic miracle years, West Ger- 25X1
man governments moved to improve and protect
living standards by developing an array of lavish
social programs. Social spending now claims one-
third of West German GNP, compared with 19
percent in the United States. West Germans enjoy
the highest per capita social benefits in the EC.
Certain programs are particularly generous: tu-
ition-free university education plus interest-free
student loans, paid maternity leave for five months,
unemployment compensation of up to 80 percent of
aftertax salary for the first year, four-week visits to
medical spas every three years, and almost unlimit-
ed paid sick leave.
Secret
2 November 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
The burden of government spending is reflected in
increasing taxes. The average worker will contrib-
ute over 40 percent of his income for taxes and
social levies this year. The marginal rate of tax-
ation now reaches 63 percent- compared with
about 42 percent in 1965. Only French taxes in the
Big Seven exceed West Germany's. For employers,
high and growing contributions to government so-
cial programs put a tight squeeze on the profits of
many companies, discouraging hiring and invest-
ment and contributing to the record number of
bankruptcies.
Government Efforts To Encourage a Turnaround
The Kohl government has taken some first steps to
restructure industry, bolster competitiveness, re-
vamp the cumbersome and expensive social welfare
program, and stimulate lagging investment. It has
given priority to reducing the budget deficits since
Kohl assumed power two years ago, on the assump-
tion that fiscal consolidation would lower interest
rates and revive investor confidence. Bonn also is
playing a growing role in encouraging the develop-
ment of advanced manufacturing technology by
coordinating and funding private R&D and calling
attention to West Germany's high-tech gaps and
However, Kohl's policy of promoting a more mar-
ket-oriented environment for West German firms
has made little progress. Indeed, bureaucratic ob-
stacles and the system of subsidies have increased
under the Kohl government. After a bold start in
trimming social programs, Bonn eased off in the
face of labor union and other protests. We believe
West German businessmen perceive a drift in
economic policy that is inhibiting their longer range
investment plans.
West German Government and business leaders
are acutely aware of the existing obstacles to
growth and are taking first steps to overcome them:
? Overconfident attitudes of West German eco-
nomic leaders have been replaced, in our view, by
Secret
2 November 1984
respect for and readiness to learn from Japanese
technology and US entrepreneurship. Joint ven-
tures and other forms of technology exchange
with Japanese and US firms are increasing, and
the West German financial market is looking
closely at the United States as a model for
reforms.
? West German firms are trying to speed reaction
time to market developments, intensify R&D, and
update product lines, looking in particular toward
microelectronics.
? The financial position of West German firms
should strengthen over the next few years, as
profitability improves with recovery. Some move-
ment in stimulating the stock market and forming
venture capital companies are already evident.
The economic environment for innovation probably
will be neutral at best over the next few years. Our
econometric model of the West German economy
forecasts an average annual real GNP growth for
1985-87 of 2.5 percent, assuming fairly robust
world trade and continued low oil prices. Past
sources of growth, investment, and exports, will be
present but less dynamic. The key obstacles to
investment will continue to include: 1) government
inability to create an environment more conducive
to business confidence; 2) high taxes and overgener-
ous social benefits that diminish incentives; and 3)
socioeconomic factors that retard adaptation to
changes in technology, finance, and marketing.
Concerning trade, we expect West Germany to
have a hard time maintaining its 13-percent share
of world nonoil exports in an environment of inten-
sified world competition.
Although a century of German industrial leader-
ship will not dissipate quickly or easily, in our view
West Germany's high-technology gap will persist at
least for the next several years. Given the accelerat-
ing pace of change in high tech, West Germany's
own successes plus assimilation of foreign technol-
ogy may leave it in the same relative position. Even
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Selected Industrial Countries;
Comparative Tax Burden, 1981
Social Security
contributions
General taxes
- Direct
? Indirect
Japan
United States
Canada
Italy
United Kingdom
West Germany
France
in the best of circumstances, the required changes
in the conservative German business and social
fabric will take time.
We expect that the Kohl government will not be
inclined to push hard enough to achieve innovation
in economic policy.
facing reelection in 1987.
? Economics Minister Bangemann is new and inex-
perienced, and Finance Minister Stoltenberg is
single-mindedly fixated on budget consolidation.
? The government probably will continue to be
saddled with budget deficits, although these will
be low by international standards. Even the mod-
est success of the recovery will be a temptation
not to press forward on the politically most
contentious planks of the government's reform
program, especially with Kohl and his party
A sluggish and less confident West German econo-
my has serious implications for Bonn's relations
'-.
with its West European neighbors and with the
United States. In such conditions, the government
would be even more likely to show:
? Reluctance to boost military spending and contri-
butions to NATO programs.
? Resistance to measures that could jeopardize
Eastern Bloc markets.
? Concern about a US budget that could jeopardize
Eastern Bloc markets.
? Concern about US budget deficits, interest rates,
and volatility of the dollar.
? Increasing sensitivity over bilateral trade differ-
ences.
Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Morocco-Libya:
Implementation
of the Union
Libya and .Morocco are moving rapidly to imple-
ment their union agreement and demonstrate that
the accord is providing tangible economic benefits.
Access to Libya's still substantial financial re-
sources and oil will help King Hassan temper
growing domestic disgruntlement over deteriorat-
ing economic conditions. Libyan leader Qadhafi
has secured a source of skilled labor and agricultur-
al goods, and possible access to restricted US-origin
spare parts for aircraft and other equipment. The
union also promotes the interests of the two leaders
in broadening their international contacts. The "
long-term viability of this accord, however, will
depend in part on Qadhafi's ability to improve his
poor track record on financial commitments. He
also will have to avoid pressing Hassan for public
support of Libya's more radical, initiatives against
the United States; Israel, and moderate Arab gov-
ernments.
A Year in the Making
The rapprochement between Morocco and Libya
began in late June 1983 after Hassan bowed to
Saudi pressure and agreed to see Qadhafi. During
his visit, Qadhafi promised to back Morocco on the
Western Sahara issue and to withdraw his support
to the Polisario Front. In turn, Hassan agreed not
to act against Libyan interests in Chad.
Hassan first proposed a union in mid-July 1984.
Qadhafi and Hassan signed the federation treaty at
Oujda, Morocco, on 13 August, and the union was
approved in referendums held in Morocco and
Libya by the end of the month.
Hassan and Qadhafi will preside jointly over the
union. The headquarters will alternate between the
two capitals, with permanent representatives in
each. Morocco's former Minister of Cooperation
Radi,. a socialist, is Secretary General of the union,
and Kamal Hasan al-Maghur, former Libyan Pe-
troleum.Minister.and president of OPEC, is the
assistant secretary general. Joint political, defense,
economic, and education councils are to be estab-
lished. The agreement calls for coordination of
foreign policy, cooperation in economic develop-
ment and defense, and the creation of an Executive
Committee, Federal Court, and Federal Parlia-
ment. Each country retains control of its domestic
affairs.
Economic Dynamics of the Relationship
The accord follows a year of growing economic.
relations. Libya reportedly has given Morocco a
$100 million. grant,. $190 ,million in credits, and has
accepted an estimated 15,000 to 20,000 Moroccan
workers. Tripoli has supplied as much as 15 percent
of Morocco's oil on favorable terms and provided
an important market for Moroccan agricultural
exports.
Hassan has encouraged the popular belief that
Qadhafi has offered almost $1 billion in economic
assistance to Morocco. during the next year
This package-about one-
half is to be in cash-would be one of the largest
Qadhafi has ever offered .and, if fulfilled, would
displace Saudi Arabia as Morocco's principal fi-
nancial benefactor. Tripoli advanced $50 million to
Rabat in September to help pay Morocco's interna-
tional creditors
Secret
DI IEEW 84-044
2 November /984
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Arab-African Federation
Morocco-Libya
Moroccan Secretary General
Libyan Assistant
Defense
Advisory groups: Executive Committee-members
of Moroccan Council of Ministers
and Libyan General Peoples'
Committee execute decisions of
Presidency
Federal Court- to adjudicate
disputes in implementing pact
Objectives of union: Firm diplomatic coordination in
international affairs
Economic cooperation to achieve
technical, industrial, agricultural,
commercial, and social
development
Federal Parliament- members of
Moroccan Parliament and Libyan
Peoples' Congress recommend
proposals to strengthen treaty
objectives
Mutual defense
Educational cooperation to maintain
moral value in Islamic teaching .. .
exchange teachers and students .. .
joint university education and
research
Abdelouahed Radi Kamal Hasan
Possible First al-Maghur
Secretary General of Assistant Secretary
the Arab-African General of the Arab-
Federation African Federation
Secret
2 November 1984
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
The remainder of Libyan aid will consist of oil and
military materiel, including small arms and light
Cooperation on merging the national airlines and
armored vehicles
~ The US Embassy in Rabat says that Mo-
rocco has signed a contract for up to 3.5 million
barrels of Libyan crude oil to be delivered before
April, possibly at concessional rates. The volume
involved would provide about 10 percent of Moroc-
co's needs and help reduce the one-third share of oil
purchases in Rabat's import bill. Morocco also may
be considering refining Libyan oil to help circum-
vent Tripoli's OPEC production quota. Tripoli can
finance its total aid commitment to Rabat with
revenues from about 95,000 barrels of oil per day-
less than 10 percent of current oil production.
Libya provides a ready market for Morocco's agri-
cultural and manufactured exports to offset domes-
tic shortages. Of particular concern is food, which
soaks up over $500 million in foreign exchange
annually. Morocco exported only $18 million worth
of goods to Libya last year-about 1 percent of its
total exports-but hopes to boost these exports to
$100 million by 1986. This increase would provide
a major shot in the arm to Morocco's stagnant
agricultural exports, which are being hurt by quota
restrictions in the European Community.
Jobs for Moroccan workers in Libya are particular-
ly important to Rabat because of already high
domestic unemployment-30 percent of the labor
force-and the prospect that a large number of
workers will be returning home as a result of
industrial restructuring in Western Europe. Under
the accord, Tripoli plans to replace Tunisian, Egyp-
tian, and other foreign workers with about 80,000
Moroccans. Remittances from Moroccans working
in Libya totaled only $16 million in 1983, but
under the union are likely to rise, rapidly stemming
the decline in this important source of foreign
exchange, which totaled $900 million last year. The
US Embassy in Tunis reports that Qadhafi recently
threatened to expel all 70,000 Tunisians working in
Libya by 31 December and replace them with
Moroccans, although such a move would be logisti-
cally difficult. Qadhafi's statement underscores his
willingness to bring in large numbers of Moroc-
cans.
on shipping also is moving apace
n agreement has report-
edly been signed and includes:
? Moroccan procurement of spare parts for Libya's
commercial airlines.
? Moroccan help in procuring European commer-
cial aircraft for Libya.
? Morocco's agreement to take over the operation
of passenger ships between the two countries.
? Libya's agreement to operate an undetermined
number of Moroccan cargo ships.
The US Embassy in Rabat reported in September
that some Moroccan aircraft technicians already
had gone to Libya.
The airline merger, if implemented, would provide
significant advantages to both sides. The Moroccan
airline would gain access to Libya's more abundant
financial resources and extensive traffic rights,
while offering Tripoli the strong organizational
skills and efficiency of Morocco's airline. Qadhafi
probably will use this arrangement to request re-
stricted US aircraft spare parts for his US-origin
fleet.
Hassan probably hopes the union will allay pres-
sures caused by the Western Sahara conflict and
Morocco's deteriorating social and economic condi-
tions. Qadhafi has promised to support Morocco on
the Western Sahara issue and not to provide mili-
tary assistance to the Polisario Front. He also may
help Hassan gain economic or military assistance
from the USSR
Secret
1 November 1984
25X1
25X1
25X1
25X1
1
25X1
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Qadhafi's motives in signing the agreement are
both tactical and ideological. He will draw on the
union to enhance his influence in regional affairs,
to strengthen his international standing, and to
counter US attempts to isolate him. He almost
certainly hopes that improved relations with other
moderate governments will weaken their relation-
ship with Washington. The union, we believe, will
encourage Qadhafi to more aggressively pursue his
longstanding policy of threatening other Arab
states with subversion unless they unite in a more
militant posture toward Israel.
Prospects for the Union
Hassan's personal prestige is now engaged, and we
anticipate that he will resist strongly any pressure
to repudiate the union. As long as Qadhafi provides
some economic support, backs Morocco on the
Western Sahara,
Hassan
will move forward with the union. Hassan may use
the Libyan deal as a bargaining chip in~obtaining
new aid from the West.
Morocco's turning over Libyan dissidents to Qa-
dhafi
ave
given Qadhafi an important stake in maintaining
good relations. As a result, Qadhafi is likely to
continue promoting economic cooperation with Mo-
rocco and to give limited financial aid to keep the
union on track.
Secret
2 November 1984
Qadhafi's consistent failure to deliver on past
promises of aid-especially large aid commit-
ments-and the bleak outlook for oil revenues,
however, suggests that over time he will fail to
honor his commitments on a-level satisfactory to
Hassan. A major shortfall in expected financial
assistance probably would introduce significant
strain in the relationship.
In addition, we expect that Qadhafi in time will try
to involve Hassan in his radical stand against the
United States and Israel and in his adventurism in
the region. Such moves also are likely to reduce
Hassan's motivations for implementing the union.
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Q
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0
Secret
Secret
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707260001-0