INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707320001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 22, 2016
• Document Release Date: October 14, 2010
• Sequence Number: 1
• Publication Date: December 14, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Directorate of
Intelligence
Weekly
International
Economic & Energy
Secret
DI 1EEW 84-049
14 December 1984
copy L75
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
International
Economic & Energy
Weekly
iii Synopsis
Perspective-OPEC: Pressures Mount
Energy
International Finance
Global and Regional Developments
National Developments
Iraq: Expanding Export Capacity in a Weak Oil Market
17 I I Venezuela: Implications of the Multiyear Debt Rescheduling
Ethiopian Famine: No Solution in Sight
India: Economic Problems and Policy Choices for a New Government
International Financial Situation: Political Update
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligence
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
25X1
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-OPEC: Pressures Mount 25X1
OPEC's failure to adhere to a production ceiling set last October has nearly so-
lidified market opinion that the organization cannot hold the line on prices.
25X1
I
13 Iraq: Expanding Export Capacity in a Weak Oil Market 25X1
Baghdad is moving ahead with plans to boost its oil export capacity, despite
prospects for a continued weak oil market over the next two to three years. If
Baghdad attempts to boost exports substantially once these projects are
completed, oil prices will come under serious, downward pressure in the
absence of accommodating cuts by other exporters. 25X1
I
17 Venezuela: Implications of the Multiyear Debt Rescheduling 25X1
Venezuela's provisional multiyear debt agreement should improve relations
with bankers and lessen financial strains over the next several years. Neverthe-
less, we estimate that debt servicing and import payments will exceed
projected foreign exchange earnings through 1989, which Caracas probably
will finance through reserve drawdowns and additional foreign borrowing.
25X1
I
21 Ethiopian Famine: No Solution in Sight 25X1
Widespread famine in Ethiopia could result in several hundred thousand
deaths this year and, given the poor harvest prospects, conditions will almost
certainly worsen in 1985.
25X1
I
27 India: Economic Problems and Policy Choices for a New Government 25X1
On the eve of national elections in late December, Prime Minister Rajiv
Gandhi inherits a temporarily buoyant economy. Nonetheless, his Congress (I)
Party, which is expected to remain in power, will face chronic economic
inefficiencies and a return of international payments problems before the end
of the decade. 25X1
Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
33 International Financial Situation: Political Update
Governments of financially troubled LDCs this past month used varying
strategies to defuse strikes and protests mounted by opposition forces.
Secret iv
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Perspective
Weekly
International
Economic & Energy
prices either in the next few months or in the next year or so.
OPEC's failure to adhere to a production ceiling set last October has nearly so-
lidified market opinion that the organization cannot hold the line on prices.
OPEC now faces a two-pronged threat on its price structure: market funda-
mentals that indicate continued weak demand and ample, if not growing,
supply potential; and market psychology. At the same time, mounting revenue
needs continue to undermine discipline within the organization. As a result, we
believe there is a growing possibility that OPEC will have to lower official oil
inventories in expectation of lower future prices.
OPEC's commitment to the production cuts agreed to in late'October and an
expected surge in oil demand for winter heating needs have failed to
materialize and are keeping downward pressures on spot prices. OPEC output
has not been reduced significantly and, indeed, has even increased in some
countries. At the same time, generally mild weather in the Northern Hemi-
sphere has kept oil consumption down. The combination of weak market
conditions and lack of OPEC discipline has now convinced most market
participants that oil prices will fall and this, in turn, has further weakened de-
mand as the major oil companies and other consumers deplete high-priced
will be difficult to achieve.
OPEC members continue to be their own worst enemies in defending prices.
Despite the realization that lower prices will be damaging to all producers,
revenue pressures are forcing many producers to discount prices to achieve
higher sales. According to industry estimates, about half of OPEC oil exports
are now being sold outside the official price structure. OPEC's problems are
further compounded by the fact that the current price structure does not
accurately reflect the difference in market values for light and heavy crudes.
The disadvantage experienced by light crude producers such as the UAE and
Nigeria has forced them to offer discounts of up to $2 per barrel. OPEC has
indicated that a proposal to realign the price structure of light and heavy
crudes will be made at the 19 December ministerial conference. Given the
advantage now held by heavy crude producers, however, we believe a solution
of 30 to 45 days to get that oil delivered to' major consuming areas.
draw on. Most of this capacity is in the Middle East, and it takes a minimum
OPEC can probably muddle through the current crisis, especially if some
semblance of cold weather returns to the Northern Hemisphere. While
inventories can be pared further, some minimum stock levels must be
maintained even with the substantial reserve of surplus productive capacity to
1 Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Over the longer term, however, OPEC prospects of maintaining the $29
benchmark are not bright. Industry forecasts indicate only slow growth in
demand at best; recent evidence suggests that the conservation and substitu-
tion effects of higher oil prices have been far more substantial than expected.
Even the historical relationship between economic growth and increased
energy use has weakened considerably over the past several years, resulting in
substantially lower energy requirements per unit of economic output. As a
result, oil production will have to continue to be limited to maintain prices. Lit-
tle support can be expected from non-OPEC producers in cutting production or
even limiting the increase in new production over the next year or so.
Internally, OPEC will continue to be faced with revenue pressures, limited
flexibility for further production cutbacks by Saudi Arabia and Kuwait, and
growing pressure from Iraq for higher output as its export capacity increases
late next year. Unless OPEC is able to muster a cooperative effort heretofore
unseen or oil supplies are again disrupted by war or revolution, the likely
outcome will be a drop-perhaps a substantial one-in the price of oil.
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
N Sea
as Developments
Energy
British and Norwegian representatives met last week for further discussions on
the possible sale of up to 10 billion cubic meters per year of natural gas from
Norway's Sleipner field to the United Kingdom. Although the Norwegians are
seeking a resolution of the matter by yearend, it is doubtful that details can be
finalized by then. In that event, Norway may turn to the continental markets
for both Sleipner and the much larger Troll gasfiel
Statoil has asked Oslo for approval to begin preliminary
Weste n Participation
i ovtet Pipeline
roject
Australian Coal
Exrts Up
reliance on Soviet gas.
negotiations for the sale of Troll gas, according to Embassy reporting.
Development of the Sleipner and Troll gasfields will be an important step
toward meeting West European gas demand in the 1990s and avoiding undue
will be required for the project to succeed.
The US Embassy in Moscow reports that the USSR early next year probably
will select major contractors for a 250-kilometer coal slurry pipeline scheduled
for construction in West Siberia in 1985. US, Italian, French, West German,
and Japanese firms are bidding on the project, which could involve equipment
and technology imports valued at up to $200 million. If the pilot project proves
feasible, the Soviets eventually plan coal slurry pipelines that are 2,000 to
3,000 kilometers long. The USSR has little experience in the construction and
operation of coal slurry pipelines, and substantial Western assistance probably
the world's largest coal exporter.
Coal exports-Australia's largest export earner-are headed for another
record year. Coal shipments were up 23 percent in the first nine months,
compared with year-earlier levels. Steam coal exports rose significantly as a
result of a two-thirds increase in deliveries to Japan and a nearly 75-percent
rise in shipments to Western Europe. The increases resulted in part from price
discounts as well as foreign economic recovery and stockpiling in anticipation
of labor unrest. If present trends continue, total Australian coal exports could
exceed 74 million metric tons this year-surpassing the recordbreaking 1983
level by more than 20 percent. At these volumes, Australian coal exports
possibly could equal or exceed coal exports by the United States-historically
3 Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Soviet-Owned Unauthorized and unrecorded speculation in gold and foreign exchange
nk in Trouble futures by former officials at the Soviet-owned Wozchod Handelsbank in
Switzerland may threaten the bank's financial position. The bank's principal
gold dealer-a Swiss national-has since been dismissed and may face
criminal charges. Former bank president Yuriy Karnauk
has been recalled to
Moscow. This is the latest blatant example of incompetence among Soviet
bankers in the West-several other Soviet-owned banks were hit by financial
fiascoes over the last decade. Even if Wozchod survives, its credibility in the
markets will be low for a long time.
I enews
e Convention
World Food Aid
arget Met
Secret
14 December 1984
Global and Regional Developments
guidelines for greater EC-ACP social and cultural cooperation.
The EC and 65 African, Caribbean, and Pacific (ACP) countries signed a new
trade and development cooperation agreement in Lome, Togo, on 8 December
after nearly a year of contentious negotiations. This third Lome Convention-
the Community's primary aid vehicle-will run for five years, beginning next
March and provide almost $6.4 billion in EC grants and loans. This falls
nearly $1.5 billion short of what the ACP countries demanded, and in real
terms provides no increase in Community aid. The agreement does not
significantly alter existing EC-ACP trade preferences. At the Community's
insistence, the preamble includes a symbolic reference to human rights, and
the text contains a chapter aimed at promoting foreign investment and
which expires in June 1986.
The Food Aid Committee of the International Wheat Council (IWC) recently
announced that the 10-million-metric-ton food aid target-established by the
1974 World Food Conference-has been met for the first time. Total grain
shipments to LDCs reached a record 10.5 million tons in crop year 1983/84,
and US shipments totaled 6.45 million tons, exceeding the minimum US
obligation by nearly 2 million tons. Regional food aid shortages remain serious,
however. While most recent food aid is being channeled to drought-stricken
African nations, current pledges cover less than half of Africa's emergency
food needs-estimated at 4-5 million tons. for 1984/85. Much higher food aid
targets probably will be sought in a renewal of the IWC Food Aid Convention,
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
National Developments
Developed Countries
egislation
on Foreign Investment
Bp!'tish Government
Proposes Changes
in Regional Aid
ties-benefits that Rome presumably would not want to jeopardize.
Rome's concern over recent foreign acquisitions of several leading Italian
companies, including ATT's participation in Olivetti, may lead to tighter
controls over foreign direct investment. The Industry Ministry is considering
new legislation to require prior notification and formal authorization for
capital transactions, particularly for foreign acquisitions exceeding 30 to 40
percent of a domestic firm. The government is especially concerned about the
employment impact of agreements requiring Italian firms to distribute the
foreign partners' products. Such legislation, however, probably would not be a
major impediment to foreign direct investment. Many acquisitions, including
the ATT-Olivetti tieup, have provided Italian firms with much needed capital
and allowed access to the foreign partners' research and development facili-
In late November, the Thatcher government proposed cuts in the regional
assistance policy to industry by reducing the number of regions eligible for
automatic grants and decreasing the amounts. Selective assistance would be
available to an increased number of areas, including the economically
depressed West Midlands.
The government intends o-eliminate grants or
replacing industrial plant and equipment, a move the British Confederation of
Industry says will cut incentives for modernization. The plan, strongly
criticized by the Labor Party and the Trades Union Congress, is designed to
save the government approximately $360 million per year by 1987-88.
Gr wth in French GDP French gross domestic product (GDP) rose at a seasonally adjusted annual rate
of 4 percent in the third quarter of 1984; GDP now stands 2.2 percent above
what it was a year ago. Reversing the pattern of the previous two quarters, ex-
ports rose over 12 percent and imports fell more than 3.5 percent. The external
sector was thus responsible for more than 90 percent of third-quarter growth.
Real investment continued its four-quarter slide, despite government predic-
tions of rapid growth this year. The government has lowered interest rates and
taxes and will probably concentrate on policies to improve investment.
Consumption fell slightly in the third quarter, as anticipated, but government
spending continued to grow.
5 Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
est German Business West German corporate profits and finances improved sharply last year,
Profits Up arresting their long-term slide. According to a Bundesbank study, aftertax
profits increased over 35. percent in 1983, following a drop of nearly 6 percent
est German
Space Station
Participation
in 1982. The improvement was due primarily to lower business expenses,
especially for interest and personnel. Both internal and external financial
resources strengthened, and the ratio of capital stock plus reserves to total
assets made a modest upturn to 18.5 percent. This ratio had dropped from 30
percent in 1967 to 18.4 percent in 1982, lessening the ability of business to
undertake investment and withstand business reverses.
final decision until early next year.
West German participation in the US manned space station reportedly is now
blocked only by financing problems. Research Minister Hans Riesenhuber, the
project's most enthusiastic backer, is prepared to have the Ministry cover two-
thirds of the projected $1 billion German contribution out of its 1985-89
budgets. The Finance Ministry, however, wants the Research Ministry to pay
the entire amount. Bonn views participation as politically important but has
been concerned that the cost might outweigh any substantive benefits,
especially regarding technology sharing. The Cabinet probably will postpone a
Japanese Economic Japan's GNP expanded at an annual rate of 3 percent in the third quarter,
growth Slows in Third down from 7.6 percent in the previous period. Exports were up by only 1.7 per-
Quarter cent, while imports jumped by 7.1 percent. Private plant and equipment
i
hi
h h
l
di
h
d
i
2
b
b
3
nvestment, w
een
ng t
omest
c economy, grew
.
c
as
ea
e
y
percent. Housing and inventory investment were also up. Private consump-
tion-over half of GNP-remained sluggish, however, growing by only 0.7
percent. Government spending, constrained by the need to fight the persistent
deficit, was also weak. The Economic Planning Agency, remains confident that
its target of 5.3-percent growth for fiscal 1984 (which began 1 April) will be
reached. The domestic economy has grown steadily despite the foreign sector's
fluctuations. Some in Tokyo are concerned, however, that investment and
growth will be cut back next year as stimulus from foreign demand declines.
25X1
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Sh African Auto Unemployment in South Africa's eastern Cape Province will rise if a merger-
erger Threatens Jobs which will lay off an additional 2,000 automobile industry workers-takes
Status of Egyptian-
Soviej.Rielations
Lebanese
Reconstruction
Budget Approved
volatile area in South Africa.
place between Ford Motor Company of South Africa and Anglo-American's
Amca Merger plans were prompted by
declining sales in the current economic recession and would shift passenger car
production to Johannesburg. Moreover, US Embassy sources report that each
layoff will cost four additional jobs in related industries. Most of those to be
laid off are black, and community leaders fear that greater unemployment
could add to the simmering unrest in the eastern Cape, which has been hit
hard by the recession and which many observers consider the most politically
Less Developed Countries
IThe USSR wants Egypt to buy more Soviet goods to reduce
the almost $500 million Egyptian commercial surplus. Cairo, for its part,
asked for a 10-year grace period in paying its $875 million clearing account
deficit for military purchases. Gromyko said the Politburo would discuss
Egypt's request, and the Egyptians agreed to pay cash for future purchases of
military spare parts. If Egypt is to pay hard currency for military spare parts,
its financial difficulties will sharply limit purchases. The Soviets may agree to
a short grace period on Cairo's military clearing account deficit, which is
supposed to be balanced at the end of each year. Egypt's total unpaid military
debt to the Soviets, however-amounting to nearly $2.5 billion for purchases
made in the 1960s and 1970s-will make Moscow reluctant to accept any
substantial new deficits.
unrealistic.
The Lebanese Cabinet has approved a 1984-85 reconstruction budget totaling
$575 million for transportation, housing, communications, energy, water, and
private industry. About 25 percent will go to ongoing projects, another 20
percent to loans to the private sector, and the rest to new commitments.
Approximately the same amount, in dollar terms, was appropriated last year,
but actual spending was only about 45 percent of that amount because of the
fighting and a lack of revenue. The new budget calls for 70-percent foreign aid
financing, and an accompanying report on the rebuilding of Lebanon puts
foreign assistance requirements at $1.0-1.2 billion a year for the next eight to
nine years. While Lebanon may receive the direct aid planned for the current
budget if the security situation improves, $1 billion a year is completely
Secret
14 December 1984
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Sudan a Cotton Crop Sudanese officials have told the US Embassy that Sudan is selling its entire
B eyed for Oil crop of medium staple cotton to a company owned by Saudi entrepreneur
Adnan Khashoggi. The cotton will be exchanged for badly needed crude oil
and petroleum products. The Sudanese almost certainly are selling the cotton
at a substantial discount that could have been avoided had the cotton been sold
through normal commercial channels. In the short run, the deal will alleviate
the petroleum shortages that are crippling Sudan's economy. With its main
exportable commodity now sold, however, Sudan faces 1985 with little
prospect of foreign exchange earnings.
ndia-USSR
Wheat Deal
Ov Islamic Banking
into the Soviet market for US wheat.
In accordance with the 1985 trade protocol signed last week, India has agreed
to sell the USSR 500,000 metric tons of wheat, the first major sale to the Sovi-
ets since the mid-1970s. Terms and delivery dates are not known, but Moscow
probably will pay for the wheat through a bilateral clearing account to balance
New Delhi's purchases of petroleum and military equipment. With domestic
supplies already overflowing, we believe New Delhi will deliver old stocks of
Argentine, US, and Canadian wheat to make room for an expected record
Indian harvest next spring. Moscow has indicated a desire to purchase up to 3
million tons of wheat from India, which we expect New Delhi will try to meet
if the wheat harvest matches expectations. The Indian sales are likely to cut
January 1985.
Debate over implementaion of Islamic banking continues in Pakistan, with
both fundamentalists and foreign banking officials opposing government
proposals to alter interest regulations. Religious scholars and fundamentalist
economists, who generally back the government's efforts to "Islamize"
banking, recently rejected as "un-Islamic" plans to continue paying interest on
loans to the government, state-sponsored savings plans, and government bond
issues. Western bankers in Pakistan say that proposed guidelines for the
distribution of profits would substantially reduce profitability and have asked
for modifications, some of which have been agreed to by Islamabad. These
competing objections pose a dilemma for Pakistani officials, who want the
approval of Islamic authorities while retaining incentives for savings and
investment. The continuing debate, along with the short time available to put
the machinery into operation, probably will result in a postponement of the
wholesale conversion to interest-free banking, now scheduled to begin on 1
Mexico Sets Mexico's ambitious 1985 economic program is aimed at continuing the
1485 Economic Goals successful policies of President de la Madrid's first two years in office. Finance
Secret
14 December 1984
officials indicated they plan to reduce inflation, end the slide in real wages,
boost economic growth 3 to 4 percent, and cut the budget deficit further. We
believe achieving these goals will be very difficult. For example, we expect
inflation to significantly exceed Mexico City's target of 35 percent. This will
put pressure on the budget on top of political demands to ease austerity before
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Mexico Steps Up
Peso Devaluation
Mauritian Textile
N,giiations
important elections next summer. Under these circumstances, scheduled
decreases in basic food subsidies may not be fully implemented, and the
government may be forced to reexamine its policy for real wages. Mexico
would then overshoot its deficit target of 5.1 percent of GDP.
announcement.
Mexico's decision to step up the peso's daily slide from 13 to 17 centavos per
day against the US dollar will help nonoil exports but only partially offset
erosion in peso competitiveness. Meanwhile, the government is moving to ease
import restrictions and tariffs to mitigate subsequent inflationary pressure.
Fear of renewed speculation against the peso and the desire to distance the.
decision from next summer's elections probably influenced the timing of the
test of US gratitude for his support for US policies.
A proposed visit to Washington next week by the Mauritian Ministers of
Trade and Industry will focus on upcoming negotiations on US quota
reductions for Mauritian textile exports. The delegation probably will stress 25X1
the impact on economic development, although textile exports to the United
States are a small share of total Mauritian exports. It probably will argue for
preferential treatment based on Mauritian's human rights record and support
for US interests in regional and international forums. According to Embassy
reporting, Prime Minister Jugnauth regards the textile quota issue as a litmus
Goodjaft
to Soviet
inter Grains
the Black Sea, where dry soil conditions caused poor germination.
problems exist only in the southern Volga Valley and in the areas adjacent to
The Soviet winter grain crop, which normally accounts for about one-third of
the USSR's grain output, is off to its best start in three years. Judging from
data released by the USSR's Central Statistical Administration, the area sown
is probably larger than that of last year. The US agricultural attache recently
observed mostly "lush even stands" in the Ukraine, North Caucasus, and
.Central regions. meteorological data indicate that 25X1
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
viet Return to
xtensive
Growth Strategy
wealth Services
Criticized in Politburo
S eech
productivity while slowing the growth of investment.
A Soviet economist in a recent conversation with a US Embassy Moscow
official said that the surge in investment begun in 1983 is responsible for most
of the Soviet economic growth over the last couple of years and reflects a re-
turn to an extensive rather than intensive growth strategy. If current trends
continue, overall investment during this Five-Year Plan (1981-85) will have
grown 20 percent in contrast to the planned 10 percent-much faster than in
1976-80. This is the first acknowledgment by a Soviet official that we are
aware of that Moscow has abandoned attempts to significantly improve
and the slow construction of new facilities.
In a recent speech to the Politburo, General Secretary Chernenko called for al-
locating additional funds to health services but funded by savings from
increased efficiency. The press has criticized the medical profession for
"bureaucratic redtape, vulgar negligence, and downright laziness." Health
services account for less than 3 percent of GNP, and negative trends in life ex-
pectancy and mortality may explain the current criticism. The number of
qualified medical school applicants is dropping, probably because of low pay,
lack of prestige, and primitive working conditions, particularly in rural areas.
The health sector also suffers from shortages of basic equipment and medicine
ino-Soviet Trade The USSR and China have signed an annual trade protocol for 1985 that calls
Agreement Signed for bilateral commerce to reach about $1.5 billion, a 36-percent increase over
this year, according to Chinese news media. The growth in trade projected for
next year continues a trend of expanding economic relations. In late October, a
Soviet adviser, apparently the first since the early 1970s, arrived at a Chinese
factory. The 1985 annual protocol was signed earlier than usual, perhaps to
clear the way for Deputy Prime Minister Arkhipov to sign a five-year trade
agreement during his coming visit.
Secret
14 December 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
currency from abroad. The government increased by two-thirds the rate at
which foreign currency is converted into Vietnamese dong and raised by 50
percent the quarterly sum that individuals could receive. Remittances through
official channels-down 30 percent in 1983-will probably recover next year,
possibly to the 1982 peak of $50 million, allowing Hanoi to resume limited
payments on its $1.5 billion foreign debt to non-Communist countries.
11 Secret
14 December 1984
To ease a severe foreign exchange shortage, Hanoi recently eased the tighter
Overseas Remittances controls instituted in 1983 on receipts by individual Vietnamese of foreign
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Iraq: Expanding
Export Capacity
in a Weak Oil Market
Baghdad is moving ahead with plans to boost its oil
export capacity, despite prospects for a continued
weak oil market over the next two to three years.
Completion of the Iraq-Saudi spurline will raise
Baghdad's export capability by 500,000 barrels per
day (b/d) by early 1986, and construction of a
second Turkish pipeline by mid-1987 would provide
Iraq the capacity to export an additional 500,000
b/d. If Baghdad attempts to boost exports substan-
tially once these projects are completed, oil prices
will come under serious downward pressure in the
absence of accommodating cuts by other exporters.
The Push Behind the Pipelines
Baghdad's efforts to increase oil exports are driven
by serious economic problems. Prewar crude oil
export capability of more than 3 million b/d had
been cut to as low as 700,000 b/d by early war
damage to its Persian Gulf export facilities and
closure of the Iraq-Syria-Lebanon pipeline. As a
result, crude oil exports-90 percent of the coun-
try's foreign exchange earnings-fell to about $7.8
billion in 1983 from a high of $25.3 billion in 1980.
At the same time, Baghdad's revenue needs have
increased substantially over the past 18 months by
its acquisition of expensive weapon systems from
France and the USSR.
Iraq's increasingly difficult economic situation has
forced a major effort to boost oil earnings. As a
first step, Iraq has been able to increase production
and exports by 300,000 b/d, primarily by expand-
ing the export pipeline through Turkey-currently
Iraq's sole outlet. In addition, Baghdad has secured
agreements under which Iraq receives payments for
about 300,000 b/d of Saudi and Kuwaiti crude
delivered directly to Iraqi customers, and also has
increased exports of both crude oil and residual fuel
oil by truck through Turkey and Jordan. Recently,
Baghdad has opened the way for still higher ex-
ports by negotiating agreements to build a spurline
to Saudi Arabia's East-West pipeline and a second
line through Turkey.
New Pipeline Projects Under Way
Iraq's top-priority oil export project is a two-phased
plan to tie the Zubair oilfields to the trans-Saudi
Petroline and, later, to a new Red Sea port south-
east of Yanbu al Bahr. In October 1984, the Italian
Snamprogetti/Saipem group and the French Spie-
Capag Co. won construction contracts worth $500
million for the 48-inch 500,000-b/d pipeline, ac-
cording to various reliable sources. A US engineer-
ing company is serving as project manager, with
the French handling pipelaying in Iraq and the
Italian partners working in Saudi Arabia, accord-
ing to industry press reports. Construction of the
Iraqi section started in October 1984 and will be
completed by June 1985
Meanwhile, pipeline construction in
Saudi Arabia scheduled to begin this month will be
delayed at least a month, apparently because land
ownership claims-settlement of which could dou-
ble the project's cost-are disrupting survey work,
Baghdad has also begun preparations for construc-
tion of a parallel line to the Iraq-Turkey pipeline,
using existing pump station facilities.
Iraq's plans to build the paral-
lel line would boost the system's capacity to 1.5
million b/d without drag-reducing chemicals.
Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Major Existing and Proposed Middle East Oil Pipelines
*ANKARA
*DAMASCUS
.rte
GOLAN HEIGHT
WEST BANK-
(Israeli occupied -
Boundary repro entation is
not necesearly authoritative.
TEHRAN*
Persian
Gulf
Saudi
Arabia
Al
*RIYADH Ghawir
- Existing oil pipeline
- Proposed oil pipeline
0.7 Pipeline capacity (miIlion b/d)
.A-- Oil terminal
S Major oilfield
Note: Alignments of proposed pipelines are
shown for display purposes only. Actual
routes are not currently known.
0 300
Kilometers
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Baghdad contracted with Snamprogetti to complete
engineering studies and tender documents by Janu-
ary 1985. Plans call for the pipeline to be opera-
tional by mid-1987 at a cost of $600 million,
according to the US Consulate at Adana. Con-
struction bidders have been asked to provide fi-
nancing proposals.
Other Options
Some Iraqi plans to increase exports are unlikely to
be successful. According to the US Interests Sec-
tion in Baghdad, Iraq envisions a second phase of
the Saudi spurline project to raise the pipeline's
export capacity to 1.6 million b/d. Riyadh, how-
ever, has not authorized this portion of the project,
and we do not expect them to do so. Meanwhile,
security concerns seem to have caused Iraq to drop
further consideration of the 1-million-b/d export
pipeline from al Hadithah to al Aqabah, Jordan,
If Iraq's pipeline projects are completed as expect-
ed-adding about 1 million b/d to export capaci-
ty-by mid-1987, we believe Baghdad will seek to
export oil at levels close to its new capacity. The
economic conditions that led Baghdad to expand its
export capacity are unlikely to improve significant-
ly before then. Iraqi intentions to use any new
expanded oil-productive capacity were demonstrat-
ed most recently in a statement by Deputy Oil
Minister al-Chalabi that the only production limi-
tation Baghdad recognizes is the availability of
export outlets. Moreover, Baghdad probably will
expect continued war relief assistance from Saudi
and Kuwaiti oil sales to Iraqi customers because
Iraq believes it is fighting Iran on behalf of the
Given industry forecasts of little or no growth in
the demand for OPEC oil, rising Iraqi output may
threaten OPEC's ability to maintain oil prices. In
our view, Baghdad is fearful of an oil price drop
and would be willing to hold production increases
somewhat below capacity to avoid a price break,
but only if other cartel members accept additional
cutbacks. Baghdad believes that other OPEC coun-
tries have benefited from Iraq's export difficulties
and is likely to demand its fair share of OPEC
production, despite the potential impact on other
OPEC members. Risks of a sharp price decline will
increase substantially if higher Iraqi output is not
offset by other OPEC production cuts.
Secret
14 December 1984
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Venezuela: Implications
of the Multiyear
Debt Rescheduling
Venezuela's provisional multiyear debt agreement
should improve relations with bankers and lessen
financial strains over the next several years. Foot-
dragging by Caracas on meeting preconditions,
however, will probably delay implementation of the
agreement planned for next spring. Nevertheless,
we estimate that debt servicing and import pay-
ments will exceed projected foreign exchange earn-
ings through 1989, which Caracas probably will
finance through reserve drawdowns and additional
foreign borrowing. Moreover, Venezuela's pay-
ments position will remain vulnerable to external
shocks such as lower oil prices and higher interest
rates and political pressure for rapid reflation of the
economy.
Breaking the Debt Impasse
An 18-percent drop in oil earnings during 1982 and
heavy capital flight drastically reduced bankers'
willingness to continue lending to Venezuela. In
early 1983, Caracas halted principal payments on
public debt, cut spending, and adopted strict for-
eign exchange controls. International bankers
ceased public-sector lending and cut trade credit,
citing mounting overdue interest and the lack of a
credible adjustment program. Although Caracas
achieved a foreign payments surplus in 1983, rela-
tions with bankers deteriorated, overdue debts piled
up, and Venezuela suffered a sharp recession.
President Jaime Lusinchi pledged to resolve the
debt crisis at his inauguration last February. To
reestablish banker confidence, he .announced an
adjustment program without IMF prodding and
promised to subsidize the cost of foreign exchange
used to repay debt. Delinquent public-sector inter-
est payments were settled in the spring. Moreover,
Caracas maintained a moderate stance at the.Car-
tagena meeting of Latin debtors in June. Taken
together, these moves broke the financial impasse,
and, in September, the bank advisory committee-
representing 460 commercial banks-agreed in
principle to a multiyear rescheduling of the public
debt. 25X1
The Agreement
Creditors conditionally agreed to repackage almost
$21 billion of public-sector debt originally due
during 1983-88 into new loans maturing over 12.5
years beginning next year. Similar to the Mexican
restructuring arrangement, the rescheduled debt
will carry a reduced interest rate-1.125 percent-
age points above LIBOR-and bankers agreed to
forego front-end fees. Because the rescheduling
pact includes no new money, bankers accepted
informal IMF monitoring of the economy.
Since reaching the agreement-in-principle, how-
ever, Caracas has impeded progress toward formal-
ly restructuring the debt. According to US Embas-
sy and press reporting, bureaucratic foot-dragging
continues to hinder clearing $1.3 billion of interest
arrears on private-sector debt, one of the banks'
preconditions. The frustrated bank advisory com-
mittee reportedly has refused to formally endorse
the understanding, thereby preventing Caracas
from selling the arrangement to each creditor bank.
The Embassy indicates that the government recog-
nizes the need to make overdue payments, but we
do not believe that Caracas will do so at a pace
sufficient to satisfy creditors and permit implemen-
tation of the agreement before next spring.
Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
The public debt restructuring agreement did not
affect private-sector debt, which totals an estimat-
ed $7 billion or 20 percent of Venezuela's out-
standing foreign debt. Private-debt obligations
could represent about one-third of Venezuela's
total debt due during 1985-89 if debt is serviced
through the government's preferential foreign ex-
change program announced last February. Under
this arrangement, net private debt must be authen-
ticated by the government and decreed to have
financed only essential imports. Approved debt not
guaranteed by foreign governments then must be
unilaterally restructured over seven years, includ-
ing a two-year grace period on principal payments.
The slow-moving registration procedure is behind
Caracas's failure to clear the private interest ar-
rears that is impeding progress toward a formal
restructuring agreement.
Venezuela: Total Principal Payments on
Public Debt, 1983-97a
Before
restructuring
After
restructuring
0 1983/84 85 90 95 97
The rescheduling will slash Caracas's immediate
principal repayment obligations, and future obliga-
tions will be more evenly distributed. The US
Embassy reports that Venezuela probably will am-
ortize only $1.7 billion of public debt this year,
instead of the $14.3 billion of 1983-84 debt due
under the old arrangement. Caracas then will repay
the rest of the public debt with relatively level
annual payments through 1997. Only one-third of
the public debt is now due by 1989 rather than the
three-fourths scheduled originally.
The multiyear pact will also encourage sustained
growth by easing external constraints. We judge
the new payment schedule should bolster Venezue-
la's creditworthiness and gradually reopen access to
international financing. In addition, the lighter
interest burden will free some foreign exchange for
imports to revive and reorient the economy.
Beyond this, the agreement will pay political divi-
dends to Lusinchi. In our opinion, it will minimize
the prospect of protracted debt talks each year,
Secret
14 December 1984
which typically arouse nationalistic criticism. By
reducing the political visibility of the international
debt issue, we believe the administration will face
somewhat less domestic resistance to economic
adjustment measures.
The Broader Repayment Outlook
Despite reduced obligations in the near term, Vene-
zuela's overall payments position will remain tight
during the rest of the 1980s. Through 1989, our
analysis indicates the economy will generate an
annual average of $4 billion for repaying credi-
tors-the trade surplus less the net outflow of
nondebt related services and capital transactions-
but Venezuela will face almost a $7 billion bill for
public and private debt. We expect the following in
Venezuela:
? Oil revenue to grow annually by 3 percent in a
weak international oil market to reach $17 billion
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Venezuela: Balance of Payments, 1984-89
Current account balance
3.1
0.4
1.2
1.9
1.2
0.8
Trade balance
8.2
7.7
7.2
7.7
6.9
6.2
Exports
15.7
16.0
16.3
17.7
17.9
18.3
Imports
7.5
8.3
9.1
10.0
11.0
12.1
Services and transfers
balance
-5.1
-7.3
-6.0
-5.8
-5.7
-5.4
Principal payments
1.7
1.9
2.5
3.0
3.1
3.5
New borrowing
0
1.3
1.5
1.8
2.1
2.3
Changes in international
reserves
-0.1
-1.4
-1.2
-0.8
-1.7
-2.5
32.6
32.0
31.0
29.8
28.8
27.6
5.8
7:2
6.5
6.8
6.8
6.9
Public
4.9
5.0
4.6
4.5
4.5
4.7
Private
0.9
2.2 b
1.9
2.3
2.3
2.2
a Assumes LIBOR remains constant at current 11.4 percent.
b Includes $1.3 billion of private interest arrearages from 1983-84.
in 1989, and annual nonoil exports to average
$1.3 billion.
? Imports to rebound from the depressed $6.8
billion level of 1983 to $12 billion in 1989,
helping to support Lusinchi's goal of sustained
growth and improved living standards.
? Capital and service net outflows unrelated to
foreign debt to average more than $3 billion
annually.
? Debt service payments to range from $6 billion to
$7 billion, leaving a growing foreign earnings
shortfall through the decade.
Adverse external shocks, moreover, would signifi-
cantly undermine the benefits of the multiyear
rescheduling. Although recent price declines and
the OPEC production cutback have not significant-
ly reduced Venezuelan oil income, a $2 fall in oil
prices would cut export earnings by $1 billion. In
addition, every percentage-point increase in annual
interest rates raises debt payments by $300 million.
Consequently, we estimate that a steady half-point
annual rise in interest rates through the decade
could leave net earnings $3 billion short of current
debt obligations in 1989.
Closing the Gap
Barring a serious downturn in international eco-
nomic conditions, we judge that Venezuela can
probably avoid major payments difficulties through
borrowing and reserve drawdowns. Government
officials are already publicly discussing plans to
raise $4-5 billion from multilateral and official
sources. We anticipate that commercial banks will
lend an additional $4 billion, on the basis of
Venezuela's improved debt repayment capacity,
stronger domestic economic performance, and con-
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Venezuela: Debt Service Capacity Under Varying to walk this narrow path, Caracas and it's creditors
Interest Rate Scenarios, 1984-89a would face another difficult debt 'rescheduling.
1
-8 1984
Earnings
shortfall
Debt
service
I I 1 1
86 87 88 89
a Based on debt as of December 31, 1983.
The interest rates assumed are:
1984 1985 1986 1987 1988 1989
Rising 11.4 11.9 12.4 12.9 13.4 13.9
.Declining 11.4 10.9 10.4 9.9 9.4 8.9
b Excluding debt service payments.
Implications for the United States
We judge that US commercial interests stand to
benefit from Venezuela's debt agreement. Al-
though we estimate the restructuring probably will
cost US banks," which hold roughly one-third of the
debt, at least $500- million in forgone interest
income through 1997, the new repayment schedule
has lowered the prospect of default or continued
delays on servicing the $12 billion of US bank and
commercial claims. Moreover, Venezuela's en-
hanced growth potential and eased foreign ex-
change situation under the arrangement will possi-
bly result in increased US export sales-and a
rebound in US-sponsored investment projects.
tinuing political stability. Even so, Caracas would
have to draw down reserves by about $8 billion by
1989 if it is fully to meet debt obligations and
regain voluntary bank financing.
Despite our cautious optimism, we believe Lusinchi
will avoid recurring liquidity crises during his
administration only by balancing short-term
growth and adjustment. On the one hand, he faces
increasing political pressure-particularly from the
labor wing of his own Democratic Action Party-
for a revival of growth to reverse five years of
declining per capita income. Excessive expansion,
however, would quickly weaken the foreign pay-
ments position as imports soar, capital flight inten-
sifies, and foreign financing is cut back, and it
would discourage prudent adjustment to the reali-
ties of constrained oil income. Should Lusinchi fail
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Ethiopian Famine:
No Solution in Sight
Widespread famine in Ethiopia could result in
several hundred thousand deaths this year, and,
given the poor harvest prospects, conditions will
almost certainly worsen in 1985. Increased aid
shipments have not closed the food gap, and severe
transportation and security problems are seriously
hampering relief efforts for hard-hit areas. We do
not think the Mengistu regime is immediately
threatened by the food crisis, because the govern-
ment is cushioning the military and the politically
important urban areas from the full impact of the
famine and is widely publicizing its relief efforts.
Worsening Conditions. The country's food position
at the the start of this year was, as usual, precari-
ous, and stocks were low. Conditions deteriorated
when the seasonal small rains that usually begin in
February did not arrive. As a result, the midyear
crop, normally between 5 and 15 percent of total
grain production, failed. About 20 percent of the
country's population, estimated at over 40 million,
now faces food shortages-up from about 10 per-
cent at yearend 1983.
According to government estimates, more than 80
percent of the people at risk live in the north.'
Conditions are particularly critical in the provinces
of Eritrea, Tigray, Welo, northern Shewa, and
parts of Gonder, but the drought also has spread
southward; Harerge in southeastern Ethiopia is
especially hard hit. Pest infestations and lack of
water and pasture have resulted in crop and live-
stock losses for both the nomadic population and
the hundreds of thousands of peasants that the
Estimating the numbers at risk in Ethiopia is complicated by
sizable refugee movements out of the country into Sudan, Somalia,
and Djibouti, and within the country by the flow of hundreds of .
thousands of people into towns and feeding stations in a search for
Ethiopian Government had placed in resettlement
projects upon their return from Djibouti and Soma-
lia. Relatively little food aid has been directed to
Hararge, because donors have been concentrating
their attention to the north.
Conditions apparently are not yet as bad in south-
ern Shewa, Bale, Gamo Gofa, and Sidamo, but are
likely to worsen in coming weeks. A US Embassy
drought assessment team sent to this area in Octo-
ber found that rainfall, crop production, and food
and livestock supplies were below normal and that
additional food aid soon would be needed. Some
areas-particularly the highland regions of Gamo
Gofa and southern Sidamo near.the Kenyan. bor-
der-were already in desperate shape.
Government Response. Lacking large food reserves
and foreign exchange, the Ethiopian Government
early this year turned to bilateral and multilateral
aid to help close the country's food gap. In early
1984, the government requested roughly 450,000
metric tons of emergency aid for April through
December-about half the amount it had calculat-
ed as necessary to feed drought-affected people.
The government had scaled down its appeal be-
cause it recognized that it could not distribute
more. For their part, donors, jaded from perennial
requests for aid and denied access by the regime to
production and consumption figures, were reluctant
to cover even the reduced appeal.
Severe transport and security problems are plagu-
ing relief efforts within Ethiopia. The domestic
agencies responsible for disbursing food aid lack
trucks in working order, spare parts, tires, mechan-
ics, funds, and managerial expertise. An inade-
quate road network adds to the transportation
morass. Moreover, active insurgencies in the north
Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Drought-Stricken Area and Grain-Growing Region in Ethiopia
Secret
14 December 1984
Boundary representation Is
not necessarily authoritative.
,% Principal grain-growing region
Province boundary
Road
-- -- Railroad
200 Kilometers
200 Miles
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
morass. Moreover, active insurgencies in the north
necessitate the use of large armed convoys to
deliver food-and these only operate during day-
light hours, according to US Embassy reporting.
To help overcome these. problems, donors have
begun to airlift food from Asmera, Assab, and
Addis Ababa to northern distribution centers such.
as Mak'ele and Aksum. The impact has been
limited, however, by the lack of adequate airfields
and by the inherent capacity limitations of trans-
porting bulk cargo by air. As a result, according to
US Embassy estimates, less than 5 percent of
incoming commodities are moved by airlift.
Late and sparse main rains, coupled with pest
infestations, apparently have decimated the major
harvest that is just beginning, and food stocks are
exhausted. Reporting from Addis Ababa suggests
that the harvest might be only 3.5 to 4 million tons,
or about 30 to 35 percent below normal.
Estimates of the national import requirement for
1985 have run from about 1.5 to 4 million tons, or
about 125,000 to 330,000 tons a month.2 Addis
Ababa used the lower figure to establish its aid
request, but a substantially higher-and growing-
estimate now appears more likely as the drought-
affected population grows.
Mounting evidence of the increasingly severe fam-
ine during the past few months has spurred donors
to pledge almost 400,000 tons of grain aid since
October-roughly enough to meet the lower esti-
mate of need for the next couple of months, but less
than one-third of the grain Ethiopia requires over
the coming year under that estimate. Lack of donor
coordination in timing relief arrivals has resulted in
both congestion and gaps in the food pipeline.
The United States, by far the largest donor, has
pledged over 220,000 tons of grain since the begin-
A Lagging Agricultural Sector
A poor performance in the agricultural sector-
which accounts for almost half of GDP and 90 25X1
percent of exports-has been the major factor
behind Ethiopia's lackluster economic perform-
ance over the past several years. According to
official statistics, real growth in agriculture aver-
aged only 2 percent annually during the past
decade, compared with 3 percent for the economy
as a whole. We think the performance has been
even worse.
Smallholder farming of nationalized land has been
neglected by the collectivization-minded regime-
although it still represents over 95 percent of
cultivated acreage and more than 90 percent of
total agricultural output, according to the World
Bank. Low producer prices, restrictive marketing
policies, and limitations on interregional grain
movements have reduced incentives to produce for
the market. Scarce credit, inadequate extension
services, and insufficient and expensive fertilizer
and seeds have held down overall output.
State farms-mainly used to grow corn and wheat
for urban consumers and cotton and sugar for
export-have proved an unsatisfactory alternative.
Poor management, lack of skilled personnel, and
equipment breakdowns have limited productivity,
despite the ample provision of machinery and
agricultural inputs. As a result, production costs
are high and most state farms have been financial-
ly unsuccessful.
Recurrent drought and lack of irrigation, and soil
degradation caused by erosion, deforestation, and
primitive farming techniques have limited agricul-
tural output across the board. Moreover, poor
roads and a shortage of vehicles, the inefficient
government marketing system, and inadequate
storage facilities have hampered food distribution
throughout the country.
Secret
14 December 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
ning of October, as well as medicines and other
supplies and the services of two transport aircraft-
worth about $116 million. Other Western donors-
including the United Kingdom, France, Italy, Aus-
tralia, Sweden, Norway, and the EC-also have
boosted food and transport assistance. Relief aid
from the Soviet Bloc, however, has been minimal
and primarily transport oriented.
Even if enough aid were pledged to cover the likely
shortfall, we doubt it could all be distributed. The
US Embassy in Addis Ababa estimates that even if
recent improvements in port management continue
and automatic bagging equipment is provided, the
ports of Assab, Massawa, and Djibouti will be
unable to unload more than 135,000 tons of food a
month-assuring that food shortfalls will continue.
Moreover, the scheduled arrival of fertilizer and
other imports could slow discharge.
The Ethiopian regime will continue to be reluctant
to facilitate the movement of relief supplies to
insurgent-controlled areas of the north, which ac-
count for a large portion of the population at risk,
or to agree to a food truce with the rebels. Al-
though Addis Ababa agreed during recent govern-
ment-to-government negotiations to allow Western
donors to provide food aid to all parts of the
country, the Ethiopians are fearful that such assis-
tance will strengthen the regime's enemies and
further weaken its position in the north.
These distribution and security problems, when
combined with the current poor harvest, almost
certainly will cause famine to continue in the north
and spread to other parts of the country in 1985.
Deaths from starvation and related causes will
accelerate beyond their already high rate.
Mengistu-aware that Haile Selassie's attempt to
cover up a similar crisis contributed to public
support for his ouster in 1974-has taken steps in
recent weeks to prevent the widespread famine
from undermining his regime. The government has
cushioned both the military, whose support is essen-
Secret
14 December 1984
cushioned both the military, whose support is essen-
tial to the regime's survival, and the urban popula-
tion from the full effects of the drought.
There have been no reports of food shortages in the
military. Mengistu clearly gives high priority to
military needs, but recurring insurgent claims that
relief aid is being diverted for military uses have
not been substantiated by international observers.
We believe, however, that the regime will attempt
to siphon off food aid to the military if shortages
develop.
The regime is also making special efforts to assure
food supplies in the major cities to ward off out-
breaks of discontent. The government has used
scarce foreign exchange for food purchases and has
requested PL480 aid to help cover food require-
ments in the cities. Even so, shortages have been
reported and rationing has been intensified. More-
over, Mengistu has used the military to keep the
hungry from entering urban areas and has forcibly
transported some of these refugees back into the
drought-stricken areas.
The regime has publicized the international relief
effort, especially from Bloc countries, to show it is
responding to the crisis. Meanwhile, according to
the US Embassy, the Ethiopians have charged that
food shortages are not the result of domestic poli-
cies but of the inadequate response from donor
countries to Addis Ababa's earlier warnings about
the seriousness of the drought.
The government has resurrected and expanded
upon a population resettlement plan-first at-
tempted in the late 1970s-that calls for the move-
ment of several million people from the drought-
stricken portions of Tigray, Eritrea, Welo, and
Gonder to more fertile areas in the western and
southwestern parts of the country. The regime
reportedly has transported some 70,000 people
already, and has announced plans to bring the total
to 2.5 million by the end of 1985. The government,
however, has supplied the settlers with little in the
way of food, equipment, or agricultural resources.
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
relieving population pressures in the north and
opening up underutilized but potentially more pro-
ductive areas of the country to farming, we believe
the regime's primary goals are to cut into the base
of support for northern insurgent groups and fur-
ther its aim of agricultural collectivization.
Over the Longer Term
Government unwillingness to support private agri-
culture, its inability to quell the insurgencies. in the
northern provinces, and severe soil degradation that
cannot easily be reversed will continue to limit
agricultural output. Stimulating higher production
probably would require greatly increased credit to
private farmers, sharply higher producer prices,
enlarged access to agricultural inputs, improved
technology, and expanded private farms. Although
recent press reports indicated that the Ethiopian
Government has promised to move toward a free
market policy, we doubt that the ideologically
driven regime-already strapped by hefty military
expenses-will change its policies enough to sharp-
ly boost incentives for production.
Ethiopia, therefore, will continue to need imported
food, even in years of favorable weather, and will
be vulnerable to severe food crises whenever
drought recurs. Moreover, it probably will not be
able to afford large commercial imports and will
remain dependent on food aid, largely from West-
ern governments, private voluntary organizations,
and multilateral institutions.
25 Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
and Policy Choices
for a New Government
On the eve of national elections in late December,
Rajiv Gandhi inherits a temporarily buoyant econ-
omy. Nonetheless, his Congress (I) Party, which is
expected to remain in power, will face chronic
economic inefficiencies and a return of internation-
al payments problems before the end of the decade.
Economic problems will become even more severe if
the new government is unable to prevent a resur-
gence of communal violence. For the United States,
Gandhi's support for technological modernization
will provide continued opportunities for US firms.
Economic Upswing at Election Time
A miniboom is under way as the election approach-
es. GNP growth this year is expected to be around
4 percent following the 7.5-percent increase record-
ed last year. Despite drought and floods in several
states, the main foodgrain harvest this year will
probably be only slightly below last year's record.
Industrial output is being spurred by the increase in
rural income and the easing of electricity shortages.
Private investment plans are booming, especially in
the motor vehicle and electronics industries. Anti-
Sikh riots following Indira Gandhi's assassination
caused only minor economic disruptions. The gov-
ernment has been able to maintain shipments of
surplus grain from Punjab to other parts of India,
even though the terrorism that preceded the army
attack on the Golden Temple in June and the
restrictions on the travel that followed have cur-
tailed trade within the Sikh majority state
India's international financial position is still man-
ageable. New Delhi opted to forgo additional draw-
ings on an Extended Fund Facility loan from the
International Monetary Fund after April 1984.
Reserves at the end of June were equivalent to
about four to five months of merchandise imports,
higher than the ratio two years ago. Increased
domestic crude oil production is helping lower New
Delhi's net oil import bill, and preliminary data for
April-June 1984 indicate a rise in previously slug-
gish nonoil exports, probably due to a spurt in
garment sales to the West and revival of trade with
the Soviet Union. Tourist earnings will drop, per-
haps by as much as $200-300 million, but the wave
of communal violence has not significantly im-
paired India's international credit standing. Indian
officials expect a decline in funds from Indians
resident abroad, but disbursements from commer-
cial borrowing will probably rise this year, and
receipts of concessional aid will remain at a high
level.
Industry is plagued by high costs and inefficiency.
The growth trend, 8 percent a year before the mid-
1960s, has since declined to less than 5 percent-
even though investment in industry has risen dra-
matically from 6 to 11 percent of a growing GDP.
Although power- generation has risen, shortages of
electricity remain one of the most severe con-
straints on Indian economic growth. Supply has
been at least 10 to 15 percent short of demand over
the past five years. According to World Bank
estimates, the irregular and inadequate supply of
power depresses overall GDP by one to three
percentage points a year. Much manufacturing
capacity is underused and.obsolete. Overstaffing-
the result of political patronage-and delays in
obtaining government approval for business deci-
sions handicap many public-sector corporations.
Secret
DI IEEW 84-049
14 December 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
India: Economic Indicators, 1979-84
Real GNPs
Index: 1970=100
Manufacturing Output a
Index: 1970=100
Foodgrain Production
Index: Crop year 1970=100c
Crude Oil Production 2
Thousand b/d
125
100
NNM
a Fiscal years beginning in April of the year stated.
b Estimated.
c Crop year beginning July of year stated.
Government regulations still limit expansion of
large private companies and restrict imports that
could compete with domestic production. Except in
a few high-technology industries, the momentum of
policy efforts to ease bureaucratic controls has
slackened during the past year. Business continues
to benefit, however, from earlier liberalization
measures that have eased shortages of imported
components and raw materials, and simplified pro-
cedures for obtaining government permission to
establish a factory.
Beginning in 1986, India will be hard put to finance
the imports to sustain a 4- to 5-percent annual rate
of GNP growth:
? Annual debt service payments, now $2 billion,
will rise to $5.7 billion by the end of the decade as
payments to the International Monetary Fund
and commercial banks come due.
? Concessional aid disbursements are likely to fall
in real terms as India's share of reduced Interna-
tional Development Agency funds is cut back to
accommodate China and poor African countries.
? New Delhi's net oil import bill will rise sharply by
the end of the decade, probably to more than $5
billion, according to the US Embassy.
? We believe that payments for military imports
will rise sharply from about $500-600 million' a
year at present, possibly to as much as $1.5
billion by 1990.
India has no easy options for coping with the
impending payments squeeze. Wary of falling into
a debt trap, few Indian officials favor a major
increase in commercial borrowing. Expensive petro-
leum exploration efforts are likely to continue.in
the hope that new discoveries will eventually ease
the oil import bill. Guidelines for the Five-Year
Plan to begin in April 1985 suggest that import-
intensive projects will bear the brunt of a slowdown
in government spending for new industrial develop-
ment.
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
-7,690
-6,960
-6,215
-6,500
-5,000
-6,660
-5,570
-4,615
-3,800
-2,600
-1,030
-1,390
-1,600
-2,700
-2,400
8,510
8,760
9,200
9,400
10,300
Petroleum
10
240
1,200
1,200
2,000
Other
8,500
8,520
8,000
8,200
8,300
Imports b
16,200
15,720
15,415
15,900
15,300
Petroleum
6,670
5,810
5,815
5,000
4,600
Other
9,530
9,910
9,600
10,900
10,700
Interest payments b
440
490
760
880
1,000
Private transfers
2,780
2,300
1,850
1,800
1,700
Current account balance
-2,900
-3,290 .
-3,565
-4,200
-3,000
Principal repayments b
850
890
880
850
1,000
Financial gap
3,790
4,180
4,445
5,050
3,960
Gross concessional aid b
.2,140
1,960
2,300
2,100
786
1,108
875
600
755
1,310
IMF receipts
1,710
690
1,980
1,365
210
Change in reserves
-346
-2,397
504
882
Reserves, yearend
6,858
4,461
4,965
5,847
a Estimated. Fiscal year beginning April of stated year.
b Excludes military.
India is likely to have difficulty maintaining its
investment momentum, especially for central and
state government projects, many of which are
already behind schedule because of budget
shortages:
? There is little scope for a further increase in the
domestic savings rate, which has grown rapidly
since the mid-1960s.
? An even heavier tax burden on manufactured
goods could jeopardize industrial growth and
export prospects.
? Major opportunities for increasing government
receipts fall within the jurisdiction of state gov-
ernments-and would be resisted by farmers who
have become increasingly active in state politics.
Agricultural incomes now largely escape the tax
net, and irrigation water and power are heavily
subsidized.
? Windfall government profits from domestic oil
sales will grow more slowly as crude production
Policy Under a New Government
Political factors will constrain Gandhi's domestic
economic policies. He can loosen government con-
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
India: Savings and Investment as a
Share of GNP, 1967-83
I I~ ~~I
0 1967 70 75 80 83b
a Gross capital formation and domestic savings as share of gross
national product at current market prices. Fiscal years beginning
April of the year stated.
b Estimated.
trols slightly without arousing much opposition, but
will probably consider controversial proposals to
remove almost all restrictions on private industrial
production only if the Congress (I) majority is
secure and if there are no major new disruptions to
trade and production from communal violence.
Faced with a shortage of government funds, he will
probably leave substantial investment opportunities
open to the private sector, which is able to tap
funds that escape the tax system.
Rajiv Gandhi's own interest in technology will help
sustain the push for efficiency and modernization
that is already under way. Imports of advanced
technology, particularly for the electronics, tele-
communications, and export industries, are likely to
be exempted from efforts to lower the import bill.
The new government will probably continue to
Secret
14 December 1984
Rajiv Gandhi
The Congress (I) Party is likely to remain in power
after the election, in our judgment probably with
a reduced majority or even just a plurality. Gan-
dhi's task will be complicated because he has not
yet established his personal authority in his party
or the nation.
absorb new technology.
Rajiv Gandhi's economic policy interests range
from industrial modernization to populist meas-
ures designed to attract votes. In a December 1983
press interview, he emphasized that India must not
be left behind in the technological revolution in
microelectronics and computers. The Indian press
reports that he promoted the opening of telecom-
munications and electronics manufacturing to the
private sector, but also led a program forcing
banks to make small loans to borrowers approved
by the Congress (I). He has both sympathized with
business complaints about bureaucratic delays and
warned that government attempts to relax controls
were often abused. His first policy address after
the assassination reaffirmed India's "adherence to
socialism and planning" and a major role for the
public sector. He also called for greater efficiency
in government and urged the private sector to
encourage technical cooperation with Western
businesses. We are less certain that Gandhi will be
willing to take the political risk of allowing large
but inefficient factories to close.
The outlook for Indian foreign trade policy is
uncertain. Senior bureaucrats have not reached a
consensus on policy recommendations. US officials
in New Delhi anticipate hesitant steps in several
directions, including a more active export promo-
tion policy and a slight increase in commercial
borrowing. The new government will probably
avoid harsh new import restrictions during its first
months in office. We doubt that Gandhi has the
political confidence to risk the comprehensive shift
away from import licensing controls toward high
tariffs that has been discussed by some senior
officials.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Gandhi's political skills will probably have a great-
er impact on India's economic prospects than will
his economic policy choices. Failure to prevent a
resurgence of Sikh and anti-Sikh violence would
jeopardize agricultural shipments from the Punjab
and probably trigger cutbacks in private investment
plans and foreign bank support. He will have to
seek the support of politicians who resent Indira
Gandhi's centralization of political power, but re-
gional imbalances will increase if he caves in to
demands for local control of resources, such as
water, electricity, and grain, that must be shared
among states.
Economic Prospects
The economy for the remainder of the decade will
probably not achieve the average annual growth
rate of 5 percent that Indian officials believe is
essential to permit a reduction in poverty. We
anticipate further agricultural gains as improved
farming practices spread throughout the country,
but in our judgment, there is a better than even
chance that communal conflict, balance-of-pay-
ments strains, and the adjustment to a new political
leadership will slow the industrial momentum pro-
vided by New Delhi's earlier economic liberaliza-
tion policies and its continuing push for technology.
brings substantial progress.
Even if the Congress (I) wins a secure majority in
the December election and violence is contained,
we believe that the new government will eventually
have to curb growth in imports and in government
spending on development projects. A more favor-
able scenario is possible only if oil exploration
efforts are successful or if the push for efficiency
Gandhi's interest in technological modernization
will sustain opportunities for US exporters-at
least for the next 18 months or so-before balance-
of-payments problems mount. Economic issues will
continue to strain bilateral political relations, how-
ever. Even though negotiations for a memorandum
of understanding on technology transfer are under
way, Indian officials remain concerned that US
export controls will be misused to keep Indian
industry at a disadvantage. They also resent US
policies that limit New Delhi's ability to borrow 25X1
from multilateral lending institutions.
Secret
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
International Financial
Situation: Political
Update
Governments of financially troubled LDCs this
past month used varying strategies to defuse strikes
and protests mounted by opposition forces.
In Chile, following the imposition of a state of
siege, moderate and leftist political and labor oppo-
sition groups attempted to organize a two-day
national protest. Government troops, censorship of
the media, and preventive arrests of leftist political
figures and militant slumdwellers, however, effec-
tively curbed demonstrations. Popular support was
limited and there were minimal injuries, in contrast
to previous protests. According to the US Embassy,
only university students directly challenged the
security forces, although terrorism continued un-
abated. Pinochet's actions have significantly hurt
prospects for a dialogue on the transition to democ-
racy, however, and have further polarized society.
Although most Chileans probably support efforts to
root out terrorists and crush violent protests, Pino-
chet's actions probably have increased the likeli-
hood that more will see armed struggle against the
regime as the only option.
Bolivia's economy continued to deteriorate under
hyperinflation as President Siles took several weak
measures to break the accompanying political im-
passe that threatened his government. According to
the US Embassy, Siles agreed to reconciliation
talks among the major political parties hosted by
the church and agreed, on 19 November, to shorten
his term by one year and hold general elections
next summer. In late November, the government
announced a peso devaluation, increases in the
controlled price of essential commodities, and steps
to increase state control of the economy; but several
Bolivian officials conceded privately that these
measures were inadequate.
The radical leftwing trade union confederation
proceeded with a general strike for wage indexation
and commodity price controls. According to press
and US Embassy reports, the strike ended after the
government promised to boost the minimum wage
by 656 percent. Since December 1983, the mini-
mum wage has increased by over 2,000 percent,
and industrialists have threatened a nationwide
"lockout" of private factories. The government also
agreed to freeze the price of 10 basic foods, im-
prove the food distribution system, increase pension
benefits, and institute an emergency public works
plan. In our judgment, these palliative measures
will hurt government attempts at economic reform
and may provide only a breather for the Siles
administration.
In Panama, the political fallout from a recently
implemented emergency fiscal package forced
President Barletta to quickly revoke the program
and call for alternate legislation. Barletta proposed
the austerity plan, which included a substantial
new tax on services, to cover projected revenue
shortfalls and qualify for a new IMF agreement.
The US Embassy reports that the sudden and
drastic nature of the program touched off severe
public criticism, especially from business interests
that felt the measures forced them to pay for the
corruption and waste of the government and mili-
tary. A civilian coalition called for a nationwide
strike as opposition mounted in all sectors, includ-
ing Barletta's own political party. Resentment
spread to the military, which was stung by the
criticism of its extravagance. Barletta's revocation
of the plan defused these immediate political ten-
sions, but his miscalculation probably damaged his
future effectiveness.
Thailand's Prime Minister Prem apparently has
strengthened his political standing by riding out
recent controversies over a devaluation and a na-
Secret
DI IEEW 84-049
14 December 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
tional railway strike. The surprise 17-percent de-
valuation, designed to reduce the large trade defi-
cit, triggered protests from Prem's political rival.
Army Commander Athit publicly denounced the
measure and challenged the government to reverse
its course. The US Embassy reported, however,
that Prem retained palace and military support,
which forced Athit to back down. Meanwhile, labor
leaders, ended their attempt to politicize the railway
strike, and agreed to negotiate a settlement
In the Philippines, rumors fueled the already unset-
tled political situation in the wake of President
Marcos's prolonged isolation because of ill health.
Although strikes and occasional violence over price
increases, unemployment, and government mis-
management continue, the political focus-of both
the ruling and opposition parties-now centers on
succession. Leading ruling party and opposition
political and military figures indicate they support
the constitutional succession process.
The National Assem-
bly, meanwhile, is debating legislation to clarify the
succession process.
Colombia's swelling fiscal deficit, dwindling foreign
reserves, and low growth are undermining Presi-
dent Betancur's controversial truce with leftist
guerrillas. Betancur's plan to end guerrilla violence
depends, in the short term, on increased expendi-
tures to put former insurgents on government pay-
rolls, provide them credits, and give them land.
Public skepticism about the truce and discontent
over high unemployment and inflation are eroding
Betancur's popularity. US Embassy officials say
that recent polls show that the President's public-
approval rating has slipped badly. Organized labor
has begun to stage strikes and demonstrations over
the government's failure to end the recession. Cash
shortages are forcing Betancur to consider going to
the IMF, even though such a move would further
Secret
14 December 1984
Hundreds were arrested during a recent general
strike in Peru organized by the Communist-led
labor confederation. Police dispersed workers and
students with tear gas and water cannons. Al-
though the unions were protesting economic condi-
tions, the strike was also designed to demonstrate
the confederation's political strength.
firm on the island.
In the Dominican Republic, President Jorge Blan-
co's differing responses to protests against govern-
ment economic policies underscore his willingness
to allow legitimate political protests while keeping
a tight lid on radical extremists. The US Embassy
reports that the President allowed academic leaders
to organize peaceful demonstrations calling for
increases in the budget of the Autonomous Univer-
sity. On the other hand, riot police used tear gas
against rock-throwing students, who also were pro-
testing planned cuts in the university's budget. The
opposition leftist Dominican Liberation Party, led
by ex-President Bosch, also demanded an end to
talks with the IMF, an increase in minimum wages,
and the nationalization of the properties of a US
Tension in Liberia has grown over the deteriorating
financial situation and Head of State Doe's preoc-
cupation with election politicking. Government em-
ployees have not been paid for three months, and
debt arrearages are mushrooming. Some local ob-
servers fear a coup unless the situation improves.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Iq
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3
Secret
Secret
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707320001-3