INTERNATIONAL ECONOMIC & ENERGY WEEKLY 23 SEPTEMBER 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300110007-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: January 12, 2011
• Sequence Number: 7
• Publication Date: September 23, 1983
• Content Type: REPORT

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International
Economic & Energy
Weekly
23 September 1983
DI IEEW 83-038
13 September 1983
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Weekly
International
Economic & Energy
23 September 1983
Synopsis
Perspective-Restive Banks
5 Briefs Energy
International Finance
Global and Regional Developments
National Developments
17 IMF/IBRD Annual Meeting: Key Issues
21 Eastern Europe: Facing Up to the Debt Crisis
South America: The Export Challenge
directed to~~Directorate oJlntelligence, telephone
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Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy
Weekly
Synopsis
Perspective-Restive Banks
As the international financial crisis drags on into its second year, many 25X1
financial analysts believe it will be increasingly difficult to maintain the
cooperation of the hundreds of small banks with loans to LDCs-a necessary
ingredient for the smooth resolution of debtors' financial problems.
IMF/IBRD Annual Meeting: Key Issues
This year's IMF/IBRD meetings are likely to be dominated by discussions of
IMF conditionality, IMF funding, and a new issue of Special Drawing Rights.
25X1
Eastern Europe: Facing Up to the Debt Crisis
Most of Eastern Europe has withstood the severe credit crunch that began in
1980, but the region remains financially vulnerable
After three decades of strong economic performance, the LDC's growth has
come to a near standstill in the past few years. Real GNP growth in 1981 and
1982 was the lowest of the east 30 years, and we expect little or no
improvement this year.
South America: The Export Challenge 25X1
?For the third successive year, faltering exports are impeding South American
economic growth and eroding debt servicing capabilities. Moreover, the likely
failure by South America to increase export earnings in 1984 will seriously ag-
gravate debt servicin difficulties and endanger rescheduling agreements and
IMF programs. 25X1
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Perspective
Weekly
International
Economic & Energy
23 September 1983
As the international financial crisis drags on into its second year, many
financial analysts believe it will be increasingly difficult to encourage any new
lending from the hundreds of small banks with loans to LDCs-a necessary in-
gredient for the smooth resolution of debtors' financial problems. So far,
tensions among banks with different size, exposure, flexibility, and corporate
strategies have generally been kept within the banking system and out of the
courts. This situation may change as smaller banks become more frustrated
with carrying risky or nonperforming loans on their books and increasingly
disinterested in international business. 25X1
The large role played by smaller US banks in lending to LDCs is a fairly re-
cent phenomenon. As the structure of LDC external financing shifted from
predominantly official credits in the 1960s to predominantly commercial bank
credits in the 1970s, the smaller banks saw profit opportunities in the Third
World and enhanced prestige in the banking community by riding the coattails
of the large international banks in their overseas operations. The smaller banks
joined in syndicated loans managed by the large banks or bought into parts of
loans held by them. In Mexico, Brazil, Venezuela, and Argentina, US banks
smaller in size than the top 24 account for about 20 percent of total US bank
exposure of $65 billion 25X1
The smaller banks' concerns about their exposure in debt-troubled LDCs were
heightened by Argentina's Falklands-related financial crisis in early 1982.
They were the first to sharply curtail new lending to Mexico and other Latin
American countries, and to refuse to roll over short-term loans or refinance
medium- and long-term loans. The major banks recognized early on that the
smaller banks were weak links in any extensive debt restructuring effort.
The smaller banks have raised a number of complaints about their subordinate
role: 25X1
? They point to what they believe is unjustified pressure by the International
Monetary Fund and the Federal Reserve to continue lending to countries
experiencing debt repayment difficulties.
? They resent the tendency of financial rescue programs to stretch out
principal repayments on short- and medium-term loans, locking them into
maturity positions far beyond their original intentions.
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? They feel left out of key decisions on loan restructuring and report they are
often informed of decisions by syndicate managers or bank advisory groups
only after the fact.
Executives at major international banks generally respond that the smaller
banks have been happy enough to enter profitable markets in a subsidiary role
when the going was good and should now temper their complaints at a time of
adversity.
The smaller banks' entry into international lending was often influenced by the
desire to exploit the prestige of closer links with the money center banks. Now,
however, the managers of the smaller banks are more concerned with the
attitudes of their directors and shareholders than with their relationship with
bigger banks in the colder climate of debt restructuring. Indeed, there is
growing concern among smaller banks about shareholder law suits regarding
high-risk loans, which would certainly reduce bank participation in any
additional lending to LDCs, especially if banks' domestic business prospects
improve with US economic recovery.
So far, most smaller banks have not fought the desires of the IMF, the Federal
Reserve, or the large banks to go along with debt restructuring-probably
because of coercion, powerlessness, or a sense of group responsibility. Most of
the key LDC debtors are in "technical default" for violating their loan
contracts. In order to force legal action, however, creditors must choose to
declare the debtor in default. For syndicated loans, creditors holding usually a
simple majority of the loan amount must vote to declare a default. Thus, most
syndications are safe in that smaller banks do not carry enough votes on any
The smaller banks are now showing signs of greater restiveness. The Michigan
National Bank of Detroit filed suit last month to recover from Citibank its $5
million share of a $45 million syndicated loan to Mexico. The Michigan bank
claims that Citibank extended the repayment schedule on the loan without its
agreement. While the suit will not come to court for some time, bankers were
surprised at the break in ranks and are worried that the action could set a legal
precedent for small banks that want to force large banks to either buy out their
loans or call a debtor country in default.
More recently, Venezuela's failure to pay past-due interest on its private-
sector foreign debt, despite over $10 billion in reported foreign exchange
reserves, is pushing banks closer to a tougher stance that could risk formal de-
fault. The US Embassy reports that a source on the bank advisory committee
for Venezuela fears that regional banks will balk at further extensions of
Venezuela's deferred payments on public-sector debt and will seek court
authorization to attach Venezuelan assets abroad. The Venezuelan Govern-
ment incorrectly assumes, said one banker, that the advisory committee can
hold in check the more than 400 smaller banks with loans outstanding in
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Venezuela. An episode earlier this year involving Venezuela's failure to pay
creditors on time was quietly resolved out of court; this time the danger of
more severe legal action is greater because the banks' level of dissatisfaction is
higher. Moreover, the smaller banks are joined in their frustration by Wells
Fargo, the 12th-largest US bank, which manages some $900 million in loans to
Venezuela. While Venezuela's situation may be unique, bankers-large and
small-will be watching the outcome carefully.
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Energy
OPEC Production OPEC has decided to postpone until at least late next month any move to raise
Quotas Re~jrrmed its ceiling on crude oil production of 17.5 million barrels per day, despite
widespread cheating and requests from several members for larger quotas. The
organization's market monitoring committee concluded at a meeting last week
that the market is too weak to support an increase in production. Saudi
Arabia's efforts to export more crude have particularly contributed to recent
weakening of spot prices. The Saudi increase, combined with higher Iranian
production, has pushed OPEC roduction above 18 million barrels per ~~~~
since the beginning of July. 25X1
The Saudis have no quota but are responsible for adjusting their production to
keep overall OPEC production at 17.5 million barrels per day. Recent
increases in Saudi production probably are intended to prevent other producers
from increasing their output, to dampen price pressures in the spot market,
and to earn additional revenues. Riyadh is concerned that an increase in
OPEC quotas now would leave the cartel ill repared for the seasonal drop in
demand early next year 25X1
Sabotage of Managua admitted that last week anti-Sandinista insurgents sabotaged all five
Nicaraguan Oil mooring buoys at Puerto Sandino, the country's only crude oil import terminal.
Import Terminal Divers have already found two of the sunken buoys. Total repair costs are
expected to exceed $1 million. Meanwhile, some crude oil shipments have been
postponed, and refinery operations have been reduced from 10,000 to 7,500
barrels per day to conserve the estimated 15-day supply of remaining crude.
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It will take at least four to six weeks to order, import, and install new buoys-
and possibly longer if damage to piles or pipelines requires underwater welding
and leasing of a.pipelaying barge. The refinery in Managua could be forced to
close temporarily if barges are unable to haul enough crude to shore to sustain
refinery operations. Refined product, however, can still be offloaded at
Corinto. Nicaragua already rations gas, but the government may have to
institute additional restrictive measures.
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Transcanada Pipelines Transcanada Pipelines, a major gas transmission company, has tentatively
Renegotiates Gas agreed to reduce the required minimum volume in one of its seven contracts
Contract with US pipeline companies. As amended, the contract will require purchases
of at least 1.8 billion cubic meters (bcm) annually, rather than the original re-
quirement of 2.6 bcm. The firm is Canada's largest exporter of natural gas to
the United States with contracts covering about 30 percent of Canadian gas
exports. Given the current oversupply of gas in the United States, we expect
other Canadian gas transmission companies to also consider relaxation of
stringent take or pay provisions in gas supply contracts in coming months.
Possible West German The governor of Baden-Wuerttemberg has directed two West German utilities
Purchases of French to begin negotiations with Electricite de France (EDF) toward concluding a
Electricity long-term electricity supply agreement. In informal discussions with EDF, the
German utilities have, offered to purchase for a period of over 10 years
electricity equivalent to the output produced by a 400-megawatt-electric
(MWe) power plant. If an agreement can be reached, it would be the first long-
term electricity supply agreement between the two countries. Faced with
continuing sluggish demand for electricity, the West German utilities would
use the imported electricity to replace scheduled output from the Wyhl nuclear
plant-a 1,300-MWe plant, which the governor of Baden-Wuerttemberg
proposes to postpone indefinitely. For its part, France has encouraged EDF to
attempt to export up to 20 terawatt-hours of electricity per year-equivalent to
electricity generated by a 3,800,-MWe Hower plant-in an effort to more fully
utilize French nuclear capacity.
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Yugoslavs Raise Belgrade last week increased wholesale prices of petroleum products by an
Oil Prices average of 35 percent and retail prices by 25 to 30 percent. Similar increases
were implemented last April. Officials claim the increases are necessary to
meet higher costs of imported oil that resulted from the 44-percent deprecia-
tion of the dinar in the first half of 1983. Oil prices will continue to rise as long
as the regime-to ensure ex ort com etitiveness-follows a policy of gradually
devaluing the dinar 25X1
The price increases will fuel inflation both by raising the cost of oil products
and of goods that use oil in production. Although the higher prices will curb oil
demand somewhat, they will not eliminate present shortages-which are due
to a rapid drop in crude imports resulting from an acute shortage of foreign ex-
change. The higher prices will, however, ease the financial burden on
refineries, which are earmarked to receive 25 percent of the additional revenue
Esso Seeks Contract According to Embassy reporting, Esso Natuna will seek agreement from
Revision From Pertamina-Indonesia's state oil company-to amend its contract to postpone
Pertamina gas exploration and development at its offshore contract area near Natuna
Island, without relinquishing its rights to the area. According to industry
estimates, the Natuna Island area may have natural gas reserves of 2 trillion
cubic meters (tcm), but disposal of the estimated 5 tcm of carbon dioxide found
in the reservoir make exploitation costs extremely expensive. Esso has been
engaged in a four-well drilling program to determine the commercial viability
of the gasfield and reportedly believes that, given current gas market
conditions, Japan would be the only market large enough to support the
investment necessary to continue development. Based on present supply
commitments, however, Japan faces a potential surplus of LNG of nearly 6 bil-
lion cubic meters in 1990-the year Esso must declare the field com
relinquish its concession to Pertamina under current contract terms.
Syria Closes Refinery
to blend with its domestic low-gravity, high-sulfur crude to create a mix
suitable for domestic use and export. Syria reportedly has been involved in a
dispute over the last 18 months with the charter transport company Polyventor
that delivers the Iranian oil. The Syrians claim the company has not fulfilled
contract volumes and that the oil delivered contains salt that corrodes Syria's
refineries. Damascus consequently has delayed payment to the company for
the past several cargoes, causing Polyventor to renege on delivery of about 25X1
8,000 b/d of crude to Banias. Operations of Syria's other refinery at Homs
have also been affected by the shortage of Iranian Light crude
annu~it~ 120,000 barrels per day-was closed on 12 September 25X1
because of a shortage of Iranian light crude. The refinery needs Iranian Light
25X1
~yria's refinery at Banias-with an
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Status of Polish The US Embassy in Paris reports that Poland's Western government creditors
Debt Rescheduling reluctantly agreed last week only to reaffirm the decision?made in July to move
ahead in principle with rescheduling. They had expected to agree to open
negotiations with the Poles by mid-October-a timetable that now has slipped
at least a month. Austria, Switzerland, and Sweden are increasingly impatient
with the delay. Meanwhile, the US Embassy in Warsaw reports that Austria
has approved a $30 million guarantee for grain financing, the first new
government-guaranteed credit for Poland since martial law
The delay probably prevents substantial progress from being made on 25X1
rescheduling government debt before the end of the year. Allied creditors
generally have supported Washington's go-slow approach, and the neutrals
have not been able to develop a strategy of their own. Brazil has even asked to
join the Western creditors, after failing for two years to get some payments on
its $1.8 billion credit in bilateral negotiations with Warsaw.
Continued Because of the hard line taken by Paris, the EC so far has been unable to for-
Disagreement in EC mulate a 'oint a roach for the OECD ne otiations next month on export
Over Export Credits credits. est German Chancelor Helmut
Kohl has rebuffed French President Francois Mitterrand's recent attempts to
enlist help in forming a common EC front against the United States and other
OECD participants who want to dismantle export credit subsidies. A French
EC representative has told US officials that unless Finance Minister Jacques
Delors is offered at least "face-saving"?concessions, he cannot back away from
the French position that calls for reductions of 1.5 percentage points in the
OECD consensus interest rates. Although interest subsidies are a strain on the
French budget, Paris believes they help assure French export competitiveness.
Without a unified EC position, the OECD negotiations could be postponed,
resulting in still another extension.
25X1
Deteriorating Israeli
US bankers are becoming increasing-
25X1
Credit Rating
ly cautious about their lending to Israel. Although the level of concern varies
among the bankers, they appear to be worried about persistent triple-digit
25X1
inflation, the rowin trade deficit and the possibility of a future debt
rescheduling.
(Israeli officials, faced with a rapidly growing financial
gap over the next few years, may not be able to borrow the commercial funds
that would be required to avoid a drawdown of foreign exchange reserves and
will probably look to the US Government for additional aid on better terms.
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revealed, but the total amount probably will exceed $500 million
an upcoming meeting. Terms of the Paris Club rescheduling have not been
Moroccan IMF Loan The recently approved $315 million IMF standby loan for Morocco will
Approved provide badly needed support and should expedite its debt rescheduling.
Discussions between commercial creditors and the government over $500
million of commercial debt payable through December 1984 are progressing 25X1
more swiftly than earlier expected, according to Embassy ,reporting. In
addition, the Paris Club will consider rescheduling Morocco's official debt at
Global and Regional Developments
Soviet Purchase of
Canadian Gas
Equipment
he Canadians already have deliv-
ered $10 million worth of workover rigs, valves, and other equipment, and 25X1
preliminary negotiations for another $3 million in equipment for the project
reportedly have taken place. The Soviets have asked that all the equipment or-
dered so far be delivered before the end of the year 25X1
The Canadians have been anxious to broaden their participation in the
Astrakhan project, hoping that contracts with the Soviets will help establish
Canada as a leading international supplier of oil and gas technology. Canada
already enjoys a favorable trade balance because of its agricultural exports to
the USSR. Nonetheless, it would like to increase its sales of manufactured
goods. The Astrakhan project could bring Western equipment suppliers as
much as $1.5 billion in Soviet orders. The Soviets plan to begin producing gas
next year and hope-optimistically-to reach full capacity production of about
6 million cubic meters of gas and 3 million tons of sulfur annually by 1986.
The Soviets have bought some equipment from the French-who are mana -
ing construction of the project-and from the West Germans, 25X1
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Tokyo To Support a Tokyo has reversed an earlier decision and now favors providing financial and
Second Steel Complex technological support for a second Posco steel mill complex in South Korea.
in South Korea Although Japanese steel companies participated in the first steel mill, they had
been reluctant to respond to Korean requests to assist the second project for
fear of creating more competition that would cut further into their profits. The
proposed $2.3 billion steel mill, which is scheduled for completion in 1988,
would have an initial capacity of 3 million metric tons per year.
Nakasone persuaded Japanese steel executives to participate.
Following ministerial talks with the Koreans in August, Prime Minister
akasone believes the project will help build better economic
re ations with South Korea over the long term. Nippon Steel has agreed to sell
new technology for the proposed plant, 25X1
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Tokyo will likely offer some financial help. An additional
factor in Tokyo's decision has been the lobbying efforts of Japanese construc-
tion firms and machinery manufacturers, who have been suffering from a
worldwide economic slump and feared that contracts on the proposed plant
might go to European competitors
Soviet Soda Ash the USSR during the early part of 1983
Production Problems experienced severe technical difficulties in the production of soda ash-a
chemical commodity used primarily in the manufacture of glass, other
chemical compounds, and soap. Because of domestic production shortfalls, the
Soviets have turned to Eastern Europe-the world's major soda ash producing
and exporting region-as well as the United States and have withheld soda ash
shipments from a number of their own customers. Major purchasers of Soviet
soda ash are Italy, Cuba, Finland, and Czechoslovakia. Recent shortages of
soda ash contrast sharply to Soviet dumping in 1982, which led to the
imposition of duties by the EC. Argentina and China, traditional East
European customers, have turned to the United States and other sources for
much of their soda ash. US companies recently have been faced with
underutilized cauacity because of declining worldwide demand for soda ash.
25X1
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Indian-Soviet Trade The USSR agreed this month to sell India 20,000 b/d of crude oil in 1984 in
addition to the 50,000 b/d it will supply under along-term contract. This deal,
similar to one signed last July for delivery in 1983, is intended to reduce the
Indian bilateral payments surplus, which led Moscow to curtail purchases of
Indian goods during the past year. The oil agreement reflects some concessions
on both sides to help revive bilateral trade. The Soviet Union has been pushing
India to diversify its imports, now about 80 percent petroleum, by buying more
Soviet machinery and equipment, but New Delhi has continued to resist
pressure to buy inferior capital goods. Although New Delhi could have
obtained crude oil at a slightly lower price by avoiding Soviet intermediaries
and negotiating directly with Middle Eastern suppliers, we believe India is
willing to increase total purchzses from the Soviet Union so that Moscow will
have the rupee earnings to buy more from Indian exporters
National Developments
Developed Countries
Fujitsu First To Mass- Fujitsu has become the first Japanese firm to mass-produce the next-
Produce 256K RAMS generation memory device, the 256K RAM. Fujitsu is several months ahead of
its Japanese competitors such as Hitachi and Mitsubishi, who are still in the
sampling stage. Accordin to the Ja anese ress Fujitsu produced 100,000
256K RAMS in July. Fujitsu's July
production rate and predicted Fujitsu would reach its goals of 300,000 units
25X1
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per month in October and 1 million per month by March 1984. Traditional US
suppliers to the open market are further behind Fujitsu than are its Japanese
rivals. Two US firms are about to deliver their initial samples for customer
testing-a process that usually takes about six months-while most have yet to
start sampling. A third major US maker, which has just initiated a policy of
open-market sales and is capable of matching Fujitsu's current production
level, is heavily committed to meeting internal requirements and is not
expected to be a market competitor to Fujitsu before 1984
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13 September 1983
Less Developed Countries
Mexico Announces New With output of cars and trucks cut by nearly 50 percent this year because of
Guidelines for the country's financial and economic problems, Mexico City has undertaken to
Automobile Industry streamline production and increase efficiency in its automobile industry as well
as save foreign exchange. Under the new regulations, each manufacturer will
be restricted to a single car line with no more than five models by 1987. In ad-
dition, eight-cylinder engines in cars and small trucks are banned, production
of heavy trucks is reserved for majority Mexican-owned companies, and 25
percent of cars must be austere models without "superfluous accessories." The
decree also tightens local content requirements and calls for balanced trade
between both Mexican subsidiaries and their parent firms and domestic
component producers and their foreign suppliers 25X1
ized parts. The US Embassy reports that despite the new rules nom -
er appears to be considering withdrawing from the Mexican market.
According to Embassy reporting, business and labor leaders have reacted
negatively. Most manufacturers will have to extensively retool production and
forfeit their most profitable lines, while labor leaders expect the new decree to
eliminate jobs. US subsidiaries will be harder hit than their European and
Japanese counterparts because they produce a greater variety of cars, includ-
ing larger "luxury" models that are now discouraged. Subsidiaries that have
established engine and automobile component plants, however, will be encour-
aged-because of cheaper pesos-to increase exports to parent companies and
other affiliates. Moreover, the restrictions on model types may help local
suppliers improve cost and quality by forcing concentration on a few standard-
service and resulted in some property damage.
Pakistani Disturbances The antigovernment campaign begun last month by the Movement for the
Restoration of Democracy (MRD) thus far has had only a small impact on Pa-
kistan's economy and has been confined primarily to Sind Province. A Karachi
newspaper reports that vegetable prices in the city have risen shay ly because
of the interruptions of highway traffic. several 25X1
trucks carrying crude oil from wells at Badin to the refinery in Karachi have
been attacked and destroyed. Attacks on rail facilities have disrupted local
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Substantial violence
~ Large protest
'~ City with Army presence
--- Province-level boundary
.., Boundary representation is A'~!%'3'
not necessarily authoritative. ~ cy
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Resentment by Sindhis, who believe that the Punjabi-dominated government
in Islamabad has ignored their region's economic development and favored
Punjabi settlers, has been a key issue in the protests in Sind. The relative pros-
perity of the country, however, due in large part to the record inflow of worker
remittances, has made it difficult for the antigovernment forces to carry the
demonstrations to other parts of the country. The anti-Zia campaign would get
a boost, however, if imports of consumer goods and fuel were disrupted. Most
imports enter the port of Karachi and are transported by road or rail through
Sind to major population centers in the north including Islamabad and Lahore.
25X1
Suriname Unable To Suriname's recent attempt to secure $200-300 million in loans from major
Secure Balance-of British banks apparently has failed, in part due to the inexperience of the
Payments Assistance Surinamese negotiators and the need for detailed economic studies. This latest
rejection follows similar rebuffs by a major US bank and the Inter-American
Development Bank. Although Suriname's foreign reserve cushion remains
relatively high, at three months' import coverage, the lack of significant
austerity measures has contributed to more than a 30-percent drawdown in
reserves so far this year. Prime Minister Alibux, already under pressure from
the radical, pro-Cuban party, has claimed that his government would fall if it
fails to unearth significant balance-of-payments support soon. Bouterse's
confidence in Alibux's socialist party-reaffirmed last week-could weaken
considerably should the suspension of Dutch aid continue through 1984-a
prospect the regime unrealistically appears to ignore
Argentine Meat In an attempt to pressure the government to change its tax and pricing policies,
Exporters Protest the Argentine Chamber of Regional Meat Packers last week suspended meat
Government Policies shipments to the Soviet Union, Argentina's largest export market. The
exporters are demanding elimination of or a sharp reduction in the govern-
ment's 20-percent "retention," a tax levied on earnings from farm-sector
exports, and want subsidies to help them compete in international markets.
The dispute will not, however, disrupt the world meat market in the near term
because dampened demand has resulted in exportable surpluses and low prices.
The action taken by the exporters also will have little impact on the USSR,
which expects higher meat production this year and can readily make meat
purchases elsewhere to make up for any lost Argentine shipments.
Ethiopian Austerity Ethiopia has approved a severe austerity budget for FY 1984 and restrictive
Measures foreign exchange policies to counteract a deepening financial squeeze. The
measures include a 10-percent reduction in the budgets of all ministries except
Defense, a 40-percent reduction in development spending, a clampdown on
luxury imports, and a 21-percent cut-$40 million-in oil imports. We do not
believe, however, these measures are sufficient to pull the country out of its
economic nosedive. Growing apathy among peasants and civil servants, low
agricultural producer prices, and the shortage of skilled manpower will further
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Secret
reduce economic growth during FY 1984. At the same time, Ethiopia's
military expenditures continue to rise because of insurgent activities in the
north. We believe these factors will force Mengistu to seek greater financial
support from the Soviets and T.ibya, although relations with Tripoli are cool at
this time.
Soviet Grain Harvest The grain harvesting campaign in the USSR is entering the final stages. The
Nearing Completion Central Statistical Administration reports that, as of 12 September, 101
million hectares-more than 80 percent of the total area-had been cut.
Except for recent delays caused by rainfall in the northern parts of the grain
region, the harvest has proceeded at an unusually quick pace. Moreover, the
Soviet press indicates that the quality of grain harvested thus far is much
better than last year.
Grain quality in the wet areas still to be harvested probably will be somewhat
poorer. Even so, unless the rains continue unabated for the next few weeks, So-
viet farmers should be able to complete the harvest with little loss in quantity.
The amount of post-harvest straw residue
corroborates previous evidence that Moscow wi arvest a out mi ion
tons of grain this year. Although a crop of this size would fall far short of the
target of 238 million tons, it would be the fourth largest in history and the
most since the record crop of 237 million tons in 1978.
Moscow Cuts Retail Effective 1 September, Moscow cut retail prices on a variety of consumer
Prices goods sold in state and cooperative outlets. Prices were reduced from 30 to 60
percent on selected models of black and white televisions, refrigerators, and
mopeds, as well as on carpets, jewelry, and clothing. If these goods are sold at
the lower prices, the price cuts, according to a Moscow radio report, will result
in a savings to consumers of 3 billion rubles-about 1 percent of total retail
sales in 1982, in current prices. 25X1
The price reductions probably are designed to reduce inventories of poor-
quality items and goods that have saturated the market. Although data on
inventory accumulation for 1982 are not yet available, the stagnation in
growth of retail trade last year may in part be an indication that an
abnormally large buildup occurred. The price cuts underscore a continuation
of established retail price policies by the new leadership. Soviet industry for
years has failed to produce a product mix to. meet consumer demand, leading
to accumulation of large stocks of unsold goods followed by periodic price cuts
to reduce inventories.
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~ecrer
Romanian Miners' More than 600 miners in the northern part of the country staged aone-day
Strike strike earlier this month to protest wage reductions resulting from failure to
meet production quotas. The miners complained about inadequate food
supplies, long working hours, and the requirement to perform agricultural
tasks. Similar disturbances recently affected the Jiu Valley, the country's main
coal mining area. President Ceausescu is insisting that his tough wage policy
These are the largest confirmed worker disturbances since the rash of protests
that occurred in 1980 and 1981. Discontent is widespread and could erupt into
spontaneous protests. Ceausescu's effort to increase coal output by nearly 40
percent over last year to alleviate the energy shortage appears to be backfiring.
The additional pressure on miners has already reduced their productivity.
Hungary Hikes Blaming "very serious" drought this summer, Budapest this week ordered an
Food Prices immediate increase of 16 to 23 percent in retail prices of sugar, cooking oil,
bread, and other basic foodstuffs. Government spokesmen acknowledged that
the austerity program for 1983 had forecast no further boosts in centrally fixed
consumer prices, but stressed that they were now needed to help adjust for
poor harvests. The new price hikes could push Hungary's rate of inflation into
double digits; the overall consumer price index was already rising at an annual
rate of 8.5 percent b mid ear com ared with 6.9 percent in 1982 and 4.6 per-
cent in 1981.
25X1
The abruptness of the announcement is out of character for the Kadar regime,
which in the past has generally warned consumers well ahead of time of
impending price increases. Indeed, when state purchase prices of foodstuffs
were raised last January, Budapest reported its intention to keep the lid on re-
tail prices. Since then, industrial production has slowed even further than
planned, while domestic demand has remained higher than anticipated,
complicating Hungary's ability to keep pace with the stabilization program
worked out with the IMF. The price hikes, therefore, were probably motivated
not only by supply problems but also by desires to reduce consumer subsidies,
curb purchasing power, and safeguard food exports. We expect that the
strongest resentment is likely to be felt by workers and pensioners who have
not found a way to supplement their incomes in Hungary's large second
Higher Soviet Freight Increases over the past year in Soviet rail freight rates on East-West container
Rates traffic over the Siberian land bridge-the Soviet-established rail artery across
Siberia for international container traffic-may cost the Soviets much-needed
hard currency. Container traffic earnings amounted to $210 million in 1979,
and the Soviets hope they will reach $1.3 billion in 1985 when expansion of
container facilities at the port of Vostochnyy are completed. The increased
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Major Cities Served by Soviet Land Bridge
The Vnited States Government hae n cognizetl
the orppretion of Estonia. Latvia, endr Lithuania
into the Sovist Unien. Other boundary representation
_~ ie not necessarily authoritative, f
Sea
of
Okhotsk
~~ ~ +1
?
a,
~~.,~'~ ~ ~ Railroad
~ ~ YeIM' Sea
~~~> -Sea route j _
S ~ ~ f~~ ", ~ t P
`~ ~} ~ To Hong Kong
charges consisted of the recission of a longstanding 10-percent discount rate
for Japanese shippers and the addition of a 20-percent surcharge on Iran-
bound containers. The USSR justified the rate hikes by a need to recover
expenses incurred in expanding the container ship fleet operating on the Sea of
Japan, adding storage space for stranded Iran-bound containers, and providing
additional freight cars for swiftly expanding container traffic to Iran.
The rate increases have evoked strong Japanese protests and demands for
rectification. Tokyo trade firms place little value in Soviet claims that the
surcharge would be lifted by early October when congestion problems at
Vostochnyy are supposed to be resolved. Japanese shippers, who provide the
bulk of the land bridge trade, have also been critical of Soviet information
services that fail to keep them up to date on the precise location and status of
their cargo. Japanese disenchantment with land bridge use comes at a time
when independent Taiwanese nonconference sea-transport companies are
undercuttin both the land brid a rates and the rates set by sea freight
conferences.
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IMF/IBRD Annual Meeting:
Key Issues
The backdrop for the annual meetings of the
International Monetary Fund (IMF) and the World
Bank (IBRD) next week is one of increased tensions
between creditor and debtor nations, concerns
about the liquidity of the IMF itself, and pessimis-
tic forecasts about the pace of LDC economic
development. Although we do not expect any sub-
stantially new policy directions to emerge from the
IMF/IBRD meetings that would ease international
financial pressures, these sessions will set the tone
for financial relationships over the next year.
The Agenda
Three themes are likely to dominate discussion at
this year's annual meetings:
? LDCs and industrial countries alike will watch
for any indication that the IMF is about to depart
from its rigorous austerity demands imposed on
borrowing countries. About 35 countries are cur-
rently undertaking IMF-mandated economic ad-
justment programs, often at the cost of rising
political and social pressures.
? The IMF's own liquidity is an increasingly impor-
tant issue. Demands on IMF funds by financially
strapped LDCs are high, while several major
contributors to the Fund have not met the quota
increase authorized earlier this year.
? The third topic certain to surface at the annual
meeting is the expansion of the IMF's reserve
assets, the Special Drawing Rights (SDRs). In-
dustrial countries have been concerned that ex-
panding the supply of SDRs, which member
countries can convert into hard currencv, may
rekindle global inflation.
External Debt
(billion US $J
IMF Program
Brazil
85.4
Yes
Mexico
83.2
Yes
South Korea
37.2
Yes
Argentina
36.7
Yes
Venezuela
33.7
Indonesia
23.5
India
21.5
Yes
Egypt
21.5
Chile
18.3
Yes
Algeria
17.2
Philippines
16.2
Yes
Peru
11.7
Yes
Thailand
11.1
Yes
Pakistan
10.3
Yes
Morocco
10.1
Yes
Nigeria
10.0
Imminent
Malaysia
9.9
Taiwan
9.7
Colombia
9.3
Ecuador
6.6
Yes
IMF Conditionality
Members' traditional demands for easier access to
Fund resources are taking on additional emphasis
this year because of the unprecedented magnitude
of LDC debt problems and the profound economic
and political impact of IMF-mandated austerity on
such key members as Brazil and Mexico. Of the top
20 LDC debtors, 12 are operating under austerity
programs as conditions for obtaining IMF loans,
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and one other is likely to join this group. These
austerity programs usually require painful econom-
ic adjustments:
? IMF-prescribed current account targets and de-
valuation criteria imply large import reductions.
Brazil, for example, has been forced to devalue
the cruzeiro by 70 percent this year, resulting in a
25-percent cutback in imports from 1982 levels;
Mexico has devalued the peso by more than 20
percent.
? Countries are required to bring inflation under
control by substantially reducing government def-
icits and monetary expansion. The fund has asked
Mexico to cut last year's record 100-percent
inflation rate to 55 percent this year; Brazil's
1984 inflation target is 90 percent, as compared
with this year's rate of 160 percent.
? Economic efficiency must be increased by reduc-
ing or eliminating subsidies and returning prices
and interest rates to free market levels. For
example, Mexico allowed petroleum prices to rise.
sharply and removed subsidies on many basic
foodstuffs.
Several financially troubled LDCs-among them
Brazil, Venezuela, Argentina, and India-have
publicly expressed concern that the industrialized
countries will pressure the IMF to apply austerity
conditions even more rigorously. They are worried
that the fragile political structure in their countries
will make it impossible to reach strict trade, infla-
tion, and government deficit targets. Already Bra-
zilian Central Bank President Langoni has resigned
because he views the Fund austerity program as
unworkable and new inflation and public-sector
spending targets as unattainable. We believe the
Fund is unwilling to risk its reputation as a sound
financial adviser by imposing unobtainable per-
formance criteria; yet it must come down strongly
in favor of effective conditions because LDCs need
more rational economic policies: (a) to avoid a
repeat of the current financial crisis, (b) to restore
development progress, and (c) to encourage com-
mercial banks to resume lending. The Fund has
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23 September 1983
been reasonably successful at balancing these de-
mands, and we believe it is unlikely to alter its
existing policies toward conditionality
IMF Liquidity
The Fund already has outstanding loan commit-
ments of almost $42 billion, while its total loanable
resources currently available are about $36 billion.
Quotas, or members' subscriptions, account for
about two-thirds of the IMF's resources; the re-
mainder is borrowed. Quotas, which also represent
individual members' voting strength in the organi-
zation, are reviewed at least once every five years
and revised if necessary. Earlier this year the Fund
decided to boost members' subscriptions about 48
percent, anticipating increased demand for Fund
resources through the remainder of the 1980s. The
US quota was raised from $13.2 billion to $18.8
billion. As of mid-September, only 48 countries
accounting for only one-fourth of total quotas had
formally accepted the new assessments.
Major European nations, angered by the delay in
Congress of legislation to increase the US contribu-
tion to the IMF, last week rejected a request from
IMF Managing Director Jacques de Larosiere for a
temporary advance of $3 billion, which would have
been matched by a like amount from Saudi Arabia.
Comments in the financial press suggest that the
decision to delay making the advance available to
the IMF reflects a European belief that the Fund
does not face as severe a liquidity crisis as it has
sought to depict. France and West Germany, in
particular, have begun to question whether the $6
billion"commitment" gap estimated by the IMF is
accurate. While the Fund does not face an immedi-
ate liquidity bind, it sought the loan to match
disbursements expected next year
A side issue to the quota increase will be whether
members should have more or less access to IMF 25X1
lending facilities in the future. The IMF's executive
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Major Debtors:
1983 IMF Commitments
and Associated New Commercial
Bank Lending
IMF Funds Associated
Commercial
Bank Fundsa
board has agreed in principle that after the current
quota increase takes effect some time next year the
Fund's recent policy of "enlarged access" will have
to be trimmed back. Unless access to the IMF's
pool of money is limited, several of the executive
directors from major industrialized countries have
said they fear the institution will soon exhaust the
cushion provided by the quota increase. The IMF
executive board last month approved a plan recom-
mending that the current enlarged access policy-
under which a member may draw resources equiva-
lent to 150 percent of quota in a single year or 450
percent of quota over three years-be phased down
by 1986. Some industrial countries, including the
United States, West Germany, Japan, and Austra-
lia, which represent 33 percent of Fund voting
power, believe that the annual access ceiling should
be revised downward to nearer 100 percent. The
net effect of this proposal coupled with the quota
increase is that the amount a member could draw
annually is basically unchanged
Embassy reports indicate representatives of the
LDCs are likely to insist on more generous access
limits. Ten executive directors representing roughly
34 percent of voting power have advocated main-
taining the present limits after the new quota
increase becomes effective. Reports in the financial
press anticipate, and we tend to agree, that a
compromise will probably be reached scaling back
the enlarged access limits but still allowing for an
increase in the absolute level of funds available to
borrowers 25X1
The World Bank's soft loan affiliate-the Interna-
tional Development Association (IDA)--is similarly
mired in funding problems. The 1981 decision of
the United States to stretch its contributions to 25X1
IDA-6-the sixth replenishment of IDA covering
the three fiscal years 1981-83-over afour-year
period had a strong adverse effect on other donors.
Several donors at that time indicated they were
considering making their level of contributions to
IDA-7, currently under discussion, conditional on
maintenance by the United States of what they
regarded as its proper share. While funds commit-
ted under IDA-6 have not been fully collected, the
World Bank will attempt to establish the reple -
ment level for IDA-7 at the upcoming meeting.
The question of burden sharing-particularly con-
tentious after the experiences with IDA-6-seems
likely to become acute at this year's meeting. It 25X1
seems likely that the United States' decision to
scale back its commitment to IDA-7 to $750
million annually from $1.1 billion under IDA-6 will
be met by a like response from other donors. Such a
replenishment cutback will force a precipitous de-
cline in soft loan disbursements between now and
1987. Any decline in disbursements is almost cer-
tain to give rise to allocation problems, exacerbated
by the difficulty of accommodating both China's
borrowing request and existing IDA commitments
to Sub-Saharan Africa.
Aside from the funding difficulties experienced by
the IDA, the IBRD itself is encountering difficul-
ties increasing its capital. Traditionally, any change
in the relative position of member countries in the
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ratified the proposed general quota increase.
On 19 September the IMF announced, jor the~rst
time in its history, that it has suspended all negotia-
tions on new credit programs. Press sources said the
negotiations will remain suspended at least until the
next IMF executive board meeting on 3 October. The
Fund move is apparently an attempt to put pressure
on industrial country central banks to provide the
IMF with $3 billion in short-term bridging~nance, to
be matched by a like contribution from Saudi Ara-
bia. The IMF Managing Director is also distressed
that only 48 of the 146 members of the Fund have
global liquidity and help ease debt repayment and
development financing problems. Opponents from
several industrialized countries believe a clear case
for greater liquidity has not been made and that an
allocation at this time would risk re-igniting global
inflation. We believe the chances are less than even
that the G-10, the controlling industrial country
group, will recommend a new issue.
IMF-such as just occurred under the eighth quota
increase-is followed by a similar adjustment by
the World Bank. An exact match in IMF subscrip-
tions would require an increase in IBRD capital of
$20 billion. West Germany and the United States,
however, would like to see an increase of only $3
billion-the amount needed to adjust the position
of Japan and a few other countries. Preliminary
indications are that the Bank's management will
seek to work out a compromise of approximately $8
billion. A final resolution may not come until the
IMF/IBRD interim committee meeting next
spring.
Special Drawing Rights
Fund documents indicate the IMF staff has been
studying the feasibility of a new issue of SDRs for
distribution to member nations. The Managing
Director is required to recommend to the annual
meeting whether an issue of SDRs is justified.
Since 1967 about $22 billion in SDRs have been
allocated to Fund members; the last issue occurred
in early 1981. Proponents-nearly all the LDCs-
argue that an issue of SDRs would contribute to
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Eastern Europe: Facing Up
to the Debt Crisis
Most of Eastern Europe has withstood the severe
credit crunch that began in 1980, but the region
remains financially vulnerable. The peak of the
crisis occurred in the first part of 1982, when it
seemed that several countries were on the brink of
default. The regimes responded by imposing auster-
ity, mostly in the form of severe import reductions.
With the incipient economic recovery in the West
and signs of some easing in creditors' attitudes, the
worst of the crisis is probably over. Some countries
may yet have to reschedule their debts, however,
and most will continue to look to the West for
financial assistance. For the longer run, all will
need to rely more on their own resources, which
will increase pressure for more systemic solutions to
economic problems. The adjustment process almost
certainly will increase the risk of internal instability
and will present problems and opportunities for the
USSR and the West.
While Western bankers showed some unease about
Eastern Europe as early as 1980, the credit crunch
intensified the following year when Poland's inabil-
ity to service its debts gave bankers second
thoughts about continuing to lend to other East
European countries. Banks initially refused to pro-
vide more medium-term loans. As a result, the East
Europeans had to resort to more official financing,
activate undisbursed credit lines, seek costly short-
term borrowing, and draw down their reserves. By
yearend, all the East European countries faced
liquidity problems. The crunch thus hit Eastern
Europe well before Latin America and other devel-
oping countries.
a New credits minus repayments of
principal and interest.
and Romania led bankers to withdraw short-term
credits from the entire region in addition to refus-
ing to roll over maturing medium-term loans. For
the year as a whole, Western banks reduced their
short-term exposure by 30 percent and rolled over
only $3.6 billion of $9.1 billion in maturing medi-
um- and long-term obligations. Western govern-
ment-backed credits did not offset the loss of
private loans; the region as a whole contracted new
government-backed loans in roughly the same
amount that it owed in repayments.
The squeeze grew particularly severe in the first
half of 1982. The imposition of martial law in
Poland and difficult rescheduling talks with Poland
Secret
DI /EEW 83-038
23 September 1983
Net Resource Transfer to Eastern Europe
From Western Financing'
Western government
and multilateral
institutional
financing
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Eastern Europe
Bulgaria
Czechoslovakia
East Germany
5,877
6,048
5,824
10,715
11,252
5,342
-1,513
-6,685
628
407
428
556
-86
-495
-489
-320
5
609
510
485
950
541
-224
-473
1,164
1,170
715
1,494
1,760
1,375
805
-1,874
892
892
1,413
1,747
1,058
64
-305
-940
2,427
2,550
1,327 ?
3,167
3,393
339
-890
-1,373
133
-163
470
1,406
1,552
1,362
-707
-826
628
583
961
1,860
2,625
2,156
297
-879
a Net financing flows equal changes in the stock of bank claims as
reported in the Bank for International Settlements (BIS) statistics.
This reflects new credits less repayments.
Adjusting to the Credit Squeeze
Lack of credits and inability to expand exports
because of Western recession forced the East Euro-
peans to slash imports by 30 percent in 1981-82.
Planners focused the cuts on those items that would
have the least immediate impact on their economies
and populations. Purchases of capital equipment
were generally denied because the loss of these
items would not jeopardize current production. For
political reasons, most regimes have been cautious
about reducing purchases of consumer goods and
foodstuffs although last year's good harvest permit-
ted cutbacks in grain imports. Despite attempts at
insulation, the reduction in Western imports has
been a key factor in the decline of GNP which fell
by 0.5 percent annually in 1980-82 for the six
CEMA countries compared with an annual average
growth of 2.5 percent in 1976-79. For Yugoslavia,
growth slowed from a peak of 7.0 percent in 1979
to only 0.3 percent last year.
The East European countries reacted to their finan-
cial problems in varying ways. Poland, after West-
ern governments refused to reschedule its 1982
debt or extend new credits, secured de facto debt
relief simply by not making repayments. Warsaw
Secret
23 September 1983
was able to negotiate debt relief from commercial
banks, and Western bankers report that Warsaw
met the repayment schedule. Altogether, Poland
managed to cover less than half of its $11 billion
financing requirement last year. The need to deal
with the resulting arrearages continues to delay
and complicate Warsaw's economic recovery.
Doubts about Bucharest's creditworthiness brought
the credit crunch to Romania in early 1981. After
arrears reached $1.1 billion at the end of the year,
Bucharest gained breathing room through agree-
ments with @Vestern banks and governments to
reschedule 1981 arrears and principal payments
due in 1982. By mid-1982 there were signs that
Bucharest was addressing its financial problems.
By the end of the year, it had cut imports by one-
third, enough to earn a current account surplus of
$655 million, but was still left with arrears of
nearly $400 million. The import cuts intensified
shortages of food, gasoline, and other consumer
goods. Data presented to the IMF show that con-
sumption fell for the first time since World War II
and that the rate of growth of industrial production
fell to a new low.
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East Germany, despite suffering the region's larg-
est cutback in credits-$1.9 billion, was the only
heavily indebted country in the region that did not
require debt relief or emergency loans in 1982. The
Percent change East Germans apparently managed last year's
Eastern Europe: Domestic Economic Indicators
GNP
Per capita
consumption
I I I I I I L
-10 1977 78 79 80 81 82a 83b
a Preliminary.
b Projected.
The problems of Poland and Romania had a spill-
over impact on Hungary, East Germany, and Yu-
goslavia--countries also dependent on new credits
to meet debt obligations. In Hungary, the with-
drawal of $1.3 billion in short-term credits by
Western, OPEC, and CEMA banks and inability to
roll over medium-term credits brought Budapest to
the brink of a liquidity crisis in early 1982. The
Hungarians parlayed their good relations with the
West and reputation as sound managers into
enough emergency support from Western govern-
ments, the Bank for International Settlements
(BIS), and the International Monetary Fund (IMF)
to avert rescheduling. After temporizing for some
months, Budapest imposed import controls and
tougher austerity on consumers. Hungary conse-
quently was able to slash its current account deficit
by more than $600 million and stabilize its finan-
cial position.
credit crunch through tough adjustment measures
and skillful cash management. Trade adjustments
offset about 80 percent of the cutback in bank
credits, but the measures exacted a stiff price from
the domestic economy. We estimate that GNP
growth fell from 2.4 percent in 1981 to 0.5 percent
last year. t"
Yugoslavia did not suffer as severe a reduction in
Western bank lending as Hungary or East Germa-
ny, but the impact on its financial position proved
more damaging. The country's financial crisis
stemmed as much from failure to reduce the cur-
rent account deficit and poor cash management in
the banking system as from fewer credits. Bel-
grade's current account deficit reached $1.4 billion
in 1982 instead of the planned $500 million, and
emergency measures to strengthen the Yugoslav 25X1
National Bank's liquidity position failed. IMF
credits of $600 million could not offset the shortfall
in current earnings and capital flows, and Yugosla-
via had to draw down its reserves by $1 billion. By
yearend, with arrears of $500-600 million, the
country technically was bankrupt.
Because of their conservative trade and borrowing
policies, Czechoslovakia and Bulgaria did not face
as severe financial problems in 1982 as the other
East European countries. The Czechoslovaks none-
theless slashed hard currency imports by 19 per-
cent. The import curbs flowed from President
Husak's pronouncement in 1981 that Czechoslova-
kia would not live on "credit." With shrinking
export earnings, Prague's planners had to make
deep cuts in purchases to meet the leadership's goal
of reducing external indebtedness.
Bulgaria's low debt and comfortable maturity
schedule freed it from onerous repayment obliga-
tions. Its conservative trade policy yielded surpluses
Secret
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Eastern Europe
Commercial
Official e
IMF/World Bank
Bulgaria
Commercial
Official e
Czechoslovakia
Commercial
Official a
East Germany
Commercial
Official e
Hungary
Commercial
Official a
BIS/IMF
Poland
Commercial
Official e
Romania
Commercial
Official a
IMF/World Bank/CEMA banks
Official a
IMF/World Bank
9,510
30,659
83,598
84,842
80,503
5,396
23,721
61,793
59,692
53,383
3,765
6,002
18,506
20,267
20,223
349
936
:1,299
4,883
6,897
743
2,640
3,562
3,065
2,782
442
2,453
3,128
2,575
2,187
301
187
434
490
595
485
1,132
4,756
4,400
3,998
284
926
4,013
3,610
3,158
201
206
743
790
840
1,408
5,388
14,089
14,680
13,077
693
4,423
11,411
11,535
9,642
715
965
2,678
3,145
3,435
1,071
3,135
9,276
8,700
7,800
968
3,081
9,053
8,380
6,748
103
54
223
320
415
0
0
0
0
637
1,399
8,879
24,840
25,500
24,800
420
6,547
14,740
15,045
14,340
979
2,332
10,100
10,455
10,460
1,227
2,924
9,467
10,160
9,766
585
2,024
6,537
6,167
5,408
642
706
1,750
1,845
1,428
0
194
1,180
2,148
2,930
3,177
6,561
17,608
18,337
18,280
2,004
4,267
12,911
12,380
11,900
824
1,552
2,578
3,222
3,050
349
742
2,119
2,735
3,330
a Includes Western government-guaranteed credits and direct offi-
cial loans.
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Secret
on the hard currency trade account. Although some
firms reported problems with payments from Sofia
last year, we believe these were not the result of
any serious financial deterioration.
Lender attitudes toward Eastern Europe have
eased slightly since last year's rush to reduce
exposure, in part because their worst fears proved
exaggerated. Poland did not default and Romania
has improved its relations with banks. BIS and
IMF involvement in Hungary's and Yugoslavia's
crises has encouraged, and to some extent com-
pelled, continuing banker involvement in these
countries.
Continuing wariness among bankers and closer
governmental supervision of commercial bank ex-
posure will restrain the pace and extent of new
loans. Major Eurodollar syndications will be much
rarer than in the late 1970s; a far greater share of
lending will be short term and trade related. The
cost of credit will be higher, and the debt maturity
structure will remain unfavorable for most coun-
tries. Commercial banks, furthermore, are likely to
insist on more Western government backing for
their loans or demand security from the borrowers,
including gold collateral and offsetting deposits.
As a prerequisite for increasing lending, bankers
are looking for evidence that the East Europeans
are addressing their payments imbalance through
structural changes to improve export performance.
Creditors regard the draconian import reductions
of the past two years as a short-run expedient with
little positive impact on long-term creditworthiness.
Some bankers remain skeptical that the East Euro-
peans will or can do as much as the financially
troubled LDCs to correct their fundamental prob-
lems. To assure long-term economic discipline, they
are putting more weight on IMF membership,
while urging the East Europeans to provide more
complete economic and financial data.
Eastern Europe: Trade and Current
Account Balance
In 1983 we estimate the region (excluding Poland,
because of the uncertainties regarding rescheduling
terms) will experience another large outflow on the
capital account of more than $2.4 billion. Yugosla-
via will probably be the only net gainer, thanks to
the Western financial rescue package. An expected
slight improvement in borrowing conditions and a
pickup in Western demand for East European
exports should enable a few East European coun-
tries to ease the import cuts of the past two years,
but we still anticipate a 1- to 2-percent decrease in
Eastern Europe's (excluding Poland's) hard curren-
cy imports this year. Import gains seem likely in
1984-85, assuming continued growth in the West
and continuing improvement in creditor attitudes.
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Only under the most favorable lending assump-
tions, however, would the absolute level of imports
in 1985 exceed the level reached in 1980. With a
modest revival of lending, imports in 1985 would be
about 4 percent below the 1980 peak, while contin-
ued lending shortfalls would keep 1985 import
levels some 8 percent below 1980 levels.
Even if lending revives, some countries-notably
Bulgaria, Czechoslovakia, and Romania-may be
unwilling to expand imports at the rates our projec-
tions suggest, opting instead to continue reducing
hard currency debt or building up reserves. Most
regimes will give preference to goods needed for
consumption and current production. Some econo-
mists and planners, however, are arguing more
strongly that their economies need a revival of
investment, using Western resources to lay the
foundation for long-term growth. This may have
some greater impact down the road.
The prospect of slow export growth and at best
small credit inflows means that financial problems
will continue to beset nearly all the East European
countries. In the near term, Poland-and very .
likely Yugoslavia-simply cannot generate enough
debt servicing capacity on their own to meet obliga-
tions. Most regimes will have to restrain consump-
tion and investment in order to lower demand for
imports and free goods for export. Pressure will
build to produce more output with fewer inputs.
This will highlight the necessity of attacking the
systemic flaws that contribute to low productivity.
Poland and Yugoslavia, caught in a medium- to
long-term financial crisis, seem least able to impose
effective adjustment measures and to attack'struc-
tural problems. Poland's insolvency and lack of
progress in dealing with debt problems have locked
it into a continuing economic crisis. Merely to stem
the increase in its debt, Poland must generate net
exports equal to annual interest payments, an effort
requiring large current account surpluses and,
thereby, a commitment by the regime to revive
economic growth and by the populace to make
large sacrifices.
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23 September 1983
Even with completion of this year's financial rescue
package, we believe that Belgrade will need more
help in 1984. Yugoslavia's position entering 1984
will be very similar to that at the beginning of this
year-stocks of imported goods and foreign ex-
change reserves will be at minimal levels and few
credits will be in the pipeline to bridge the seasonal
financing gap in the first half of the year. Adjust-
ment policies and structural reforms needed for
recovery may impose a higher price than regional
politicians and the population are willing to accept.
Romania, East Germany, and Hungary show signs
of financial recovery, but their positions remain
fragile. East Berlin and Bucharest have squeezed
their economies much harder than Budapest, while
the latter seems further along in addressing struc-
tural problems. Bucharest has passed the peak in its
debt maturity structure, but is having problems in
satisfying IMF targets and in obtaining credits.
Even if it meets its goal of avoiding rescheduling
next year, another test of its external adjustment
efforts will come in 1985 when Bucharest must
begin to repay obligations rescheduled in 1982.
Next year's expiration of the current IMF standby
arrangement also will add to pressures for large
current account surpluses.
East Germany probably can avoid a rescheduling,
but the country continues to face a serious liquidity
problem. The recent decision of the West German
Government to guarantee a $400 million five-year
credit from West German commercial banks
should improve prospects for covering this year's
borrowing requirement. East Berlin can also draw
on new government-guaranteed trade credits from
France, Canada, and Austria. Over the medium
term, the country will have to live more within its
means, implement measures that improve export
competitiveness, and promote economic growth
without heavy reliance on Western imports and
credit.
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secret
Hungary is still on a financial tightrope despite
some successes in raising credits in the first half of
1983. Budapest faces a rising level of debt repay-
ments through 1985 and has requested a second
IMF standby credit. The Hungarians must tighten
adjustment policies, as well as continue to forge
ahead with measures to improve efficiency and
competitiveness. Fortunately for Budapest, many
Western bankers believe they should support Hun-
gary's reform program as an example for other
East European countries.
Due to their small debts and generally good stand-
ing with Western banks, Czechoslovakia and Bul-
garia enjoy the luxury of choosing whether to
continue paying off their debt or to lift self-imposed
restraints on imports from the West.
The Greater Implications
Our forecast of continuing serious financial prob-
lems for some countries (Poland and Yugoslavia)
and, at best, slow improvement for the rest implies
that the leaderships will face difficult decisions in
the next few years. The problems are not new ones,
but are now more severe than in the past. Muddling
through-tinkering, temporizing, and relying on
help from the USSR and the West-has become
less of an option. More than ever, the East Europe-
an countries will be forced to rely on their own
resources and on the ability of their economic
managers and systems to adjust. Continuing finan-
cial and related problems will influence East Euro-
pean policy on a wide range of issues:
? Relations with the USSR, the West, and each
other.
? Allocation of resources to investment, consump-
tion, and defense.
? Economic reform-along with its political and
ideological implications.
The East European regimes are likely to draw some
sobering conclusions from the financial crisis of the
past two years and from the past decade of expand-
ed economic ties with the West. While the Polish
situation is abhorred by the rest of the region, most
of the countries made some of the same mistakes,
albeit to a lesser degree. In retrospect, the regimes
overborrowed-at first to purchase Western capital
goods with which to modernize their economies and
later to buy grain and other supplies to support
consumption.
Although East European officials instinctively
blame the West for their problems, they must also
recognize that their own shortcomings made them
more vulnerable to the credit cutoff. At a mini-
mum, they probably will try to be more certain that
they can repay loans and will build more caution
into their forecasts of the potential impact of
Western economic performance on their external
accounts. At the same time, the East Europeans
probably will conclude that they now need the
West more than ever. The problems that led them
to seek Western trade and credits a decade ago are
now even more pressing.
Economic relations with the USSR will still figure
heavily in their decisionmaking; and Bulgaria's
relative economic success in recent years will stand
as an example of the advantages of less dependence
on the West and strong Soviet ties as well as,
perhaps, increased CEMA integration. The leader-
ships realize that one of their chief assets is their
borderline position between the USSR and the
West, and they will try to play off East against
West.
The long-talked-about CEMA summit, if and when
it is held, should provide some clues as to which of
these conflicting pulls is predominant. The USSR
has been pressing for more balanced and possibly
less subsidized trade, as well as for increased
integration. The East Europeans have seen these
aims as burdening their economies still more and
threatening their relations with the West and have
delayed the convening of the summit.
The increased need for efficiency and the priority
of boosting sales in hard currency markets is likely
to give fresh impetus to reform advocacy in most
countries. The problem is that reforms take a long
time to implement and can be politically unsettling,
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threatening the privileges of the bureaucracies and
challenging the ideological underpinnings of these
regimes. The prospect of greater Soviet economic
demands, continued stringency in economic rela-
tions with the West, and sharp domestic adjust-
ments to the credit squeeze are likely to heighten
tensions within the leaderships and between the
leaderships and the led.
Although the populations have accepted recent
austerity reasonably placidly, their patience may
not survive the period of austerity ahead. The
regimes will have to decide whether to use more
repression (as in Romania) or to explain the prob-
lem and enlist public support (as in Hungary).
The Soviets will want to provide the minimum
sustenance necessary to assure stability in Eastern
Europe. With economic constraints of their own,
the Soviets will want to avoid doing much more
than is necessary.
Eastern Europe's economic difficulties may also
persuade Western governments that they have new
opportunities to weaken Moscow's influence in the
region. To pursue these opportunities, however,
would require a revival of willingness to take
financial risks and to use new policy tools, such as
including more East European states in the IMF,
pursuing agreements between them and the EC, or
assuming politically motivated aid burdens of in-
definite duration and return.
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LDCs: Worst Economic Performance
in Three Decades
After three decades of strong economic perform-
ance, LDC growth has come to a near standstill in
the past few years.' Real GNP growth in 1981 and
1982 was the lowest of the past 30 years, and we
expect little or no improvement this year. By the
end of this year real per capita income will have
been on a downward slide for three years in a row.
LDCs. Average ~ynnual Real GNP
Growth
Percent
7
Growth of Only 1 Percent a Year Since 1980
According to data from the World Bank, the IMF,
and our estimates, the LDCs as a group have
recorded real GNP growth of only 1.2 percent a
year since 1980. Moreover, overall LDC growth
has steadily worsened over the past three years-
from 2.0 percent in 1981 to 0.8 percent in 1982 and
an estimated 0.7 percent this year. In contrast,
those countries' GNPs expanded at a 6.2 percent
annual rate in the 1970s. Even after the oil price
shocks of 1973/74 and 1979/80, they achieved
strong economic expansion-5.7 percent a year real
growth in 1974-80-in part by offsetting the im-
pact of higher oil prices by rapid increases in
international borrowing.
Fifteen key financially troubled LDCs have suf-
fered the severest growth reversals. After growing
7.3 percent a year in the 1970s, their economies
contracted in 1982 and probably will do so again
' In this article, we have included 93 countries in our examination
of LDC growth. Data for those countries for 1961 to 1980 are from
The Planetary Product in 1980: A Creative Pause? Those for 1981-
83 are CIA data and estimates. The source for the historical data
was chosen bacause of its comprehensive coverage of LDC and
developed country real growth performances. In some cases, partic-
ularly the OPEC countries where substantial shifts in external
terms of trade occurred, there are discrepancies between The
Planetary Product growth rate estimates and those derivable from
other sources. We do not believe, however, that these discrenancies
25X1
this year. Argentina, Brazil, and Costa Rica have
experienced particularly sharp downturns. We esti-
mate that real GNP in each this year will be about
10 percent lower than it was in 1980.
25X1
Real GNP growth in 10 other financially troubled
LDCs has remained relatively strong, holding close
to the 1970s pace in 1981-82. Indeed, average
growth in these countries may even accelerate
somewhat this year. The favorable group perform-
ance, however, masks a marked slowdown in
growth in several of these countries, notably
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LDCs: Average Annual Growth Percent
of Real GNP
e Estimated.
n Argentina, Brazil, Chile, Costa Rica, Ecuador, Ivory Coast,
Indonesia, Kenya, Mexico, Morocco, Nigeria, Peru, the Philippines,
Venezuela, and Zaire.
Colombia, Egypt, India, Malaysia, Pakistan, Paraguay, South
Korea, Sudan, Thailand, and Uruguay.
a Hong Kong, Singapore, and Taiwan.
Colombia, Paraguay, and Uruguay. At the other
extreme, South Korea, Malaysia, and India have
done rather well in 1981-83.
The remaining newly industrializing countries
(NICs) of East Asia-Hong Kong, Singapore, and
Taiwan-also have done well, averaging 6-percent
a year real GNP increases in 1981-83. Although
growth in all of these countries slowed in 1982, as
the industrial country recession depressed their
exports, we believe it will rebound this year, except
in Singapore
Among the other 65 LDCs that we presently
classify as nonfinancially troubled, those in two
regions-the Middle East and Latin America-
suffered major growth slowdowns. The declines in
Latin America were caused by the impact of the
world recession and import cuts by the larger,
financially troubled Latin American LDCs; in Cen-
tral America domestic security problems also
played a major role. In the Middle East, the sharp
Secret
23 September 1983
overall real GNP decline since 1980 was caused by
the economic dislocation in Iran and Iraq and the
drop in incomes stemming from the soft world oil
market
The areas that have experienced the mildest slow-
downs in growth in 1981-83 have been nonfinan-
cially troubled African and Asian countries. None-
theless, because growth in the African countries
was below average throughout the 1970s, their real
GNP Bain for 1981-83 slipped below population
growth. In the Asian countries, growth in 1981-83
has averaged 3.9 percent, an acceleration from the
1970s pace. Improved performances in Sri Lanka
and Burma accounted for much of the increase.
Shifts in Underlying Factors
We believe key causes of the dismal post-1980
LDC growth performance are global factors: high
oil prices, record interest rates, and worldwide
recession. While these forces are continuing to
constrain growth, for the most part they are exert-
ing much less of a negative influence than earlier.
World short-term interest rates are down more
than 7 percentage points from 1981 peaks, OECD
real imports are again rising, and oil prices are
down. While lower oil prices cut both ways, on 25X1
balance they are probably beneficial to LDC eco-
nomic prospects.
Despite the slightly more favorable external eco-
nomic environment, however, many LDCs are un-
able to boost growth because of their precarious
debt positions. Some 34 LDCs, for example, are
under IMF-mandated domestic austerity programs 25X1
and many others have instituted their own domestic
cutbacks. As a result, we project the key financially
troubled LDCs to experience a 2.3-percent real
GNP decline in 1983
In terms of real growth performances, the worst is
probably over for the LDCs. The outlook should
brighten in 1984 as OECD growth picks up and
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LDCs: Average Annual Growth
of Real GNP
Central African 2.6 2.4 2.0 3.0 3.0
Republic
Swaziland
9.6
5.1
5.0
3.7
5.0
Syria
6.6
8.3
8.8
5.0
5.0
Taiwan
9.1
8.5
5.0
3.8
6.0
United Arab 17.6 8.8 16.3 10.0 5.0
Emirates
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LDCs: Average Annual Growth
of Selected Determinants
of Economic Growth
Oil prices
mandate (number)
a Estimated.
b Data for 1980 only.
Percent
(except where noted)
The political impact of slower improvement in
living standards is uncertain. At a minimum, we
believe less fa ~orable LDC economic performances
and prospects will increase strains on those coun-
tries and their governments. In particular, the risks
of political instability could rise in those countries
experiencing the greatest continued growth slow-
downs. On the other hand, countries that respond ?
to domestic economic hardship by attempting to
boost economic activity run the risk of destabilizing 25X1
precarious debt repayment schemes
commodity prices recover. Nevertheless, more
rapid long-term growth is by no means assured.
Most observers believe that the international in-
debtedness of the LDCs and the reluctance of
private banks to extend new credit will keep LDC
economic growth depressed well past the middle of
this decade. Wharton Econometrics Forecasting
Associates (WEFA), for example, projects LDC
real GNP growth at only 3.2 percent a year
through 1988, a pace barely half that of the 1970s.
The slowdown in LDC economic growth during the
past three years has reversed gains in living stand-
ards that characterized the previous three decades.
Overall LDC real per capita GNP rose at an
average annual rate of 3.0 percent a year in 1951-
80; during 1981-83 it has declined at a 1.1 percent
a year pace. For the future, it seems probable that
the decline will be reversed, but gains are likely to
be substantial only in East Asian countries. Ac-
cording to WEFA, Latin American real GNP will
rise 2.6 percent a year in 1983-88; during that
period, population will rise at a 2.4-percent rate.
Similarly, African population growth of 3 percent a
year in the 1980s seems almost certain to outstrip
that region's real growth, put by WEFA at only
1 percent a year.
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South America:
The Export Challenge) 25X1
For the third successive year, faltering export
growth is impeding South American economic
growth and eroding debt servicing capabilities. In
the past, these countries relied on rapid export
South America: Price Fluctuations
of Key Exports
increases to drive their industrialization and growth 19so=loo
strategies. Starting in 1980, however, the global lzo
recession severely set back export momentum.
More recently, IMF stabilization programs have
contributed to a weakening of exports within the
region; as most countries have slashed imports to
alleviate foreign exchange pressures, export mar-
kets for neighboring countries have contracted. In
1983, we estimate that only four South American
countries will succeed in boosting exports over the
previous year. Moreover, the likely failure by South
America to increase export earnings in 1984 will
seriously aggravate debt servicing difficulties and
endanger rescheduling agreements and IMF pro-
grams
Export Performance
South American exports grew from $6 billion in
1960 to $65 billion in 1980-an average annual
growth rate of about 12.5 percent. Although the
bulk of South American exports have been primary
products, manufactures have played an increasing-
ly important role driving the region's export boom
over the past two decades. Between 1960 and 1980,
the manufactures share of exports rose from 5 to 18
percent. Exports of manufactures have been espe-
cially important for Brazil, Argentina, Chile, and
Peru.
At the same time, South American countries have
diversified their export markets away from the
United States and Western Europe:
? South American sales to the United States de-
clined from 39 percent of total exports in 1960 to
21 percent in 1980.
25X1
I I I I I
1980 1981 1982 1983a 1984b
a First quarter data.
bProjected first quarter prices.
? The share of South American exports to the EC
fell from 31 to 23 percent between 1960 and
1980.
? South American sales to Japan expanded from 1
to 6 percent of the total.
? The share of intraregional exports climbed from 9
to 15 percent in the past two decades.
? The value of South American goods absorbed by
non-South American developing countries
jumped as a share of total exports from 15
percent in 1960 to 21 percent in 198.
? Soviet Bloc countries more than tripled their
share of South American exports-from 2 per-
centin 1960 to 7 percentin 1980.
Secret
D/ IEEW 83-038
23 September 1983
Wheat
Cacao
Coppper
Cottee
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South America: Export Composition and
Direction of Export Flows
300731 (AO3437) 983
Secret
23 September 1983
Latin South Soviet
America America Union
and
Eastern
Europe
The star export performers over the past two
decades have been Brazil, Argentina, and Venezue-
la, although a number of other countries also
achieved significant gains. Rapid industrialization
and an array of export promotion policies have
permitted Brazil, the region's leading exporter, to
increase sharply its manufactures sales to industri-
alized and Latin Ar.~grican customers while con-
tinuing to take advantage of its large agricultural
and mineral export capability. Argentina also has
succeeded in boosting both agricultural and manu-
factured exports, especially to the Soviet Union and
Latin America. The export impetus for Venezuela
derived from rapidly rising petroleum sales to
developed nations.
Hard hit by the global recession, South American
exports slumped badly in the early 1980s. Exports
grew only 5 percent in 1981 and dropped by 10
percent in 1982 as both volume and prices sagged.
Real earnings from primary products exports
dropped to a 30-year low by 1982. In 1982, South
America's export receipts shrank 10 percent to $61
billion, and regional debt service ratios rose dra-
matically. Argentina and Brazil, for example, had
to allocate over 75 percent of their export earnings
to service 1982 debts.
IMF Programs .
The foreign exchange strains brought about by
deteriorating current accounts and a diminishing
ability to obtain foreign bank loans made South
American countries, excluding Colombia and Para-
guay, turn to the IMF for assistance. Among the
conditions for its financial support, the IMF is
requiring South American countries to meet bal-
ance-of-payments and foreign exchange reserve
criteria. To achieve these goals, the IMF has set
trade targets and specified policies to boost earn-
ings and control foreign exchange expenditures. As
a result, most governments are pushing for in-
creases in export earnings through currency devalu-
ations, export incentives, and larger credit alloca-
tions. Furthermore, they are seeking greater
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South America: Comparative Index 1980=100
Export Trends
Value
Volume
Bolivia
Value
Volume
Ecuador
Value
Volume
Paraguay
diversification of export markets and products and
are attem tin to stren then regional trade integra-
tion. 25X1
Because of the growing inability of South Ameri-
can countries to generate sufficient foreign ex-
change to cover their import needs, many are
turning increasingly to alternative trade schemes.
Accordingly, more trade is being transacted under
countertrade agreements, bilateral credit lines, and
barter arrangements. The recent agreement be-
tween Brazil and Mexico, which includes $3 billion
in barter trade, and Brazil's efforts to reach similar
agreements with other Latin American countries
are examples of this new trade track.
According to Embassy reports and available export
statistics, only four South American countries are
improving export performance this year. Brazil
boosted exports 7 percent to $14.4 billion in the
first seven months of this year compared with the
same period in 1982 mainly through large devalua-
tions and export credits. Nevertheless, 1983 earn-
ings probably will fall short of the $22 billion
targeted by the IMF because of the effect of a still
overvalued cruzeiro on manufactures sales to West-
ern Europe and substantially reduced exports to 25X1
cash-short Venezuela, Argentina, Chile, and
Mexico-countries that together absorb 15 percent
of Brazil's total sales abroad and represent its
fastest growing export markets.
Argentina's $2.6 billion of exports in January-April
were 16 percent lower than the same period of
1982, intensifying Buenos Aires's difficulties in
trying to meet the $9.5 billion IMF annual export
goal. While Argentina has a record wheat harvest,
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South America: Debt Servicing
Obligations and Export Earnings Trends
the production of corn-the second-largest agricul-
tural foreign exchange earner-is down because of
drought. The government's elimination, under IMF
pressure, of a 5-percent tax incentive for exporting
to new markets has further depressed exports.
Venezuela pushed up exports during January-
March, but lower oil prices since March are likely
to cause 1983 annual exports to fall at least 10
percent short of last year's $16 billion. Petroleum
products account for about 90 percent of Venezue-
la's export earnings.
Colombian, Uruguayan, and Paraguayan exports
have been adversely affected by significant devalu-
ations ~in their principal export markets. For exam-
ple, Colombian exports declined 22 percent to $1
billion in the first half of 1983 compared with the
first half of 1982, as sales to Venezuela and
Ecuador fell sharply. Although Uruguayan first-
half 1983 sales have risen 13 percent to $531
million, as compared with the same period of last
Secret
23 Sep ember 1983
South America: IMF Export Goals Billion vs $
Compared With Likely Results, 1983
Argentina
Brazil
Chile
1983 IMF export target
IMF
Target
CIA
Forecast
Forecast
Deviation
From
IMF Target
9.500
8.000
1.500
22.000
21.500
0.500
4.500
4.255
0.245
2.336
2.000
0.336
3.030
2.915
0.115
1.135
1.100
0.035
year, the US Embassy in Montevideo reports that
weak global economic conditions may not permit
annual Uruguayan sales to reach the $1.1 billion
Ecuador and Peru also have had difficulties in-
creasing exports this, year despite their incentive
programs. Ecuadorean export earnings this year
totaled $1.2 billion through June, a 5-percent in-
crease over the same period in 1982, as a result of
increases in oil, shrimp, and coffee exports. It is
unlikely, however, that exports will do as,well in the
(second half of the year because of the one-third
agricultural production decline. Continued de-
pressed demand for mineral exports, weak copper
prices, and weather-induced declines in petroleum
production kept Peruvian export earnings at $1.3
billion through June, 10 percent below the same
period last year, providing little optimism that
Lima will meet the $3 billion IMF export target.
Bolivia and Chile are also heavily dependent on
minerals sales. In Bolivia, declines in mineral pro-
duction-mainly resulting from labor stoppages
and lack of spare parts-resulted in a $24 million
25X1
25X1
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Secret
drop in first-quarter 1983 exports. Chile's plan to
increase export earnings through the financing of
export industries and continuing peso devaluations
has not succeeded because of weak global economic
conditions. Chilean January-July sales dropped to
$1.9 billion, 12 percent below comparable period
1982 levels, rendering the $4.5 billion IMF annual
export goal almost unattainable
An Early Look Ahead
South American exports in 1984 probably will
continue to face shaky markets and, consequently,
are unlikely to register major gains. For oil-export-
ing Venezuela and Ecuador, earnings may firm in
1984, but at lower levels than in recent years.
Markets for Brazilian and Argentine manufactures
will remain soft pending a strong worldwide eco-
nomic recovery and improved financial health
throughout the region. Although most forecasters
expect increased industrial country economic activ-
ity next year, few are predicting a major surge in
growth. Moreover, sustained commodity price rises
tend to lag industrial country recovery some six
months. Labor and management pressures for in-
creased industry protection in developed countries
may restrict a rapid expansion of imports from
South America. Intraregional trade also will con-
tinue to be constrained by austerity programs
throughout the region
Implications for the United States
Failures on the part of South American countries to
increase their export earnings will jeopardize IMF
stabilization programs and heighten debt servicing
difficulties. Foreign bank rescheduling agreements
and IMF programs may not survive without tough-
er austerity and additional foreign government 25X1
assistance. The unraveling of a few financial pack-
ages-such as those of Brazil and Argentina-
would have widespread repercussions throughout
the rest of South America. A further drop in
financial support to South America would deepen 25X1
recessions in the region, reduce world trade, and
slow the global economic recovery
Secret
23 September 1983
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