INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000400030011-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: February 24, 2011
• Sequence Number: 11
• Publication Date: November 10, 1983
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
DI IEEW 83-045
10 November 1983
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International
Economic & Energy
Weekly
10 November 1983
iii Synopsis
1 Perspective-LDC Import Cutbacks: Investment and the Private
Sector
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
11 International Financial Situation: Political Update
This article was prepared by analysts from ALA, OEA, NESA, and OGI
15 International Financial Situation: Imports of Manufactures Dow
n Sharply in
Key Debt-Troubled LDCs
17 South America: Import Contraction Hurts Growth
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23 Saudi Arabian Military Programs: The Impact of Reduced Oil Revenues
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27 Dominican Republic: Struggling To Revitalize Its Economy
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Comments and queries rezarding this publication are welcome. They may be
directed to Directorate of Intelligence,
10 November 1983
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International
Economic & Energy
Weekly
Synopsis
Perspective-LDC Import Cutbacks: Investment and the Private Sector
The current international financial situation has forced key Third !World
debtors to cut back dramatically on imports, particularly machinery and
equipment. As these cuts work their way through LDC economies, current
production and longer run economic potential will be lowered. In response
Third World leaders could take two very different paths-greater import
substitution or increased reliance on direct foreign investments.
International Financial Situation: Political Update
This article is part of a special series on the economic and political aspects 'of
the international financial situation. It updates the political situation in several
International Financial Situation: Imports of Manufactures Down Sharply in
This is another in the special series on the economic and political aspects of the
international financial situation. This article examines the sharp falloff since
1981 in imports of manufactures by major debt-troubled LDCs.
South America: Import Contraction Hurts Growth
The import contraction in many South American countries this year is likely to
exceed IMF targets because of tighter exchange controls, the lack!of trade
financing, and recession. For the entire region, imports will most likely decline
27 percent below the $65 billion recorded in 1980. The United States is
bearing the brunt of South America's import plunge.
Saudi Arabian Military Programs: The Impact of Reduced Oil Revenues
Saudi military spending for 1983 will be cut back 15 percent from 1982 to ap-
proximately $22 billion. Because of existing manpower and equipment prob-
lems, we do not believe the spending cutbacks will have a serious additional
impact on Saudi military capabilities or readiness.
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DI IEEW 83-045
10 November 1983
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Dominican Republic: Struggling To Revitalize Its Economy
Despite the tough austerity measures taken last year, the Dominican Republic
still is grappling with severe financial problems. We believe President Salvador
Jorge Blanco will remain hard pressed by short-term financial woes and the
challenge to make basic economic reforms needed to minimize longer term
growth prospects and exploit the trade and investment incentives under the
Caribbean Basin Initiative
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International
Economic & Energy
Weekly
Perspective LDC Import Cutbacks:
Investment and the Private Sector
The current international financial situation has forced key Third World
debtors to cut back dramatically on imports. Manufactured goods, in particu-
lar machinery and equipment, have borne most of the burden. If the first-half
trade statistics of the major industrial countries are an accurate guide, the
investment component of key debtors' imports has been cut in half during the
past two years.
The impact of the capital goods cutback goes well beyond the trade numbers.
Most of the debt-troubled LDCs have relied on foreign machinery and
equipment to build their industrial base. The importance of these! purchases is
underscored by the fact that capital goods accounted for 50 percent of the
debt-troubled countries' imports in 1981. As the cutback in investment goods
works its way through Third World economies, not only will current produc-
tion be curtailed but, more important, longer run economic potential will be
lowered.
We doubt that Third World leaders will sit idly by and watch their nations'
economic base deteriorate. If nothing else, the political effects of declining
living standards will force a response. Among the key questions then are what
form will the response take and what will the side effects be.
There are at least two dramatically different paths Third World leaders could
opt for:
? Import substitution has frequently been a Third World response to trade
problems. While there is room for import substitution in consumer goods,
much more could be done on the investment goods side. Even though budget
deficit constraints are likely to rule out subsidies and rebates, numerous
national restrictions could be woven together to develop large, albeit
inefficient, domestic investment goods industries.
? Alternatively, greater reliance could be put on foreign direct investment.
This could be done in a number of ways ranging from attracting traditional
manufacturing investment to experimenting with a modified version of
recent British and West German industrial policy-selling off nationalized
industries to domestic and foreign investors in an attempt to strengthen the
private sector, reduce budget deficits, and perhaps raise foreign exchange.
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Whichever investment path is chosen, difficulties will abound. Import substitu-
tion will entail more government intervention and control. Moreover, it
typically widens trade deficits in the near term because of the imports needed
simply to set up the domestic industries. If the direct investment option is
chosen, many hurdles would have to be overcome. Increased private invest-
ment would most likely meet strenuous opposition from groups claiming that it
is a sellout to foreign interests. In addition, it will be difficult to pursue
because it hinges on Western investors' willingness to put money into risky
foreign ventures just at the time when OECD recovery is picking up steam and
domestic opportunities are growing. Moreover, the LDCs would have to assure
foreign investors that foreign exchange will be available to repatriate their
profits-assurances that are not bolstered by current policies that generally
put the private sector at the end of the foreign exchange queue.
Despite its well-established shortcomings, the import substitution path has a
strong nationalistic appeal for the LDCs and could become policy by default.
While it would be easier to implement in the short run, the inefficiencies it
would generate could easily sow the seeds for future financial crises.
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Energy
Mexico Sees Small Pemex-Mexico's state oil company-is projecting crude oil production to
Rise in Oil Output, average 2.75 to 2.90 million b/d and exports of crude and products to average
Exports Next Year 1.65 to 1.70 million b/d in 1984, Crude 25X1
production this year is running at about 2.75 million b/d-about!the same
level as 1982. A drop in domestic consumption to just over 1.10 million b/d,
however, has enabled Mexico to raise exports to nearly 1.65 million b/d,
including almost 100,000 b/d of refined products primarily sold to the United
States. Mexico also produces about 260,000 b/d of gas liquids, all of which is
consumed domestically. 25X1
Mexico claims that demand for its oil still exceeds its sales contracts, despite a
total increase of $2 per barrel in the price of heavy Maya crude since April.
Maya crude, now priced at $25 per barrel, accounts for about 55;percent of
Mexican crude exports so far this year. The United States remains by far
Mexico's largest customer, accounting for 54 percent of Mexico's' crude
exports-slightly above the maximum permitted by Mexican policy. Mexico
still has about 250,000 b/d of shut-in capacity, mostly in newly developed
offshore fields, which Mexican officials claim they are withholding from the
market to support OPEC's effort to uphold oil prices. In fact, Pemex has
allowed maintenance to lapse over the past few months, which could present
problems in bringing this capacity back on line. The producing capacity of
older onshore fields is continuing to erode as well.
Japan Increases Tokyo has announced plans to buy an additional 7.86 million barrels for its
Oil Stockpile government-owned stockpile by yearend. The addition would raise the stock-
pile to 87 million barrels, equal to 20 days of last year's net imports. Originally
the Ministry of Trade and Industry (MITI) was seeking a 15.7-million-barrel
increase, but in negotiations with the Finance Ministry gained approval for
only half. We expect MITI will request approval to purchase the remaining
7.86 million barrels in early 1984. The goal of the stockpile program remains
at 189 million barrels by 1988.
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Electric Utilities Total oil consumption by electric utilities in France, Italy, West Germany, the
Reduce Oil United Kingdom, and the United States in first-half 1983 averaged only about
and Gas Use 700,000 b/d-down about 50 percent from 1979 levels, before the second oil
shock. Gas consumption by the electric utilities in these countries dropped by
240,000 b/doe to 740,000 b/doe. Increased nuclear and coal-fired generation
during the period offset the declines in oil and gas consumption. The United
States and Italy remain the largest users of oil for electricity, burning 340,000
b/doe and 220,000 b/doe respectively. In Italy, oil accounts for about 50
percent of electricity generation. The United States, on the other hand, burns
oil to produce only about 6 percent of its electricity. High utilization rates in
nuclear, coal-fired, and hydroelectric generation leave little room for addition-
al declines in oil- or gas-fired electricity generation in the near term.
New Australian The Australian Labor Party's Parliamentary Caucus narrowly approved Prime
Uranium Development Minister Hawke's new uranium policy this week. As a result, Australia-with
Policy the largest recoverable uranium reserves in the non-Communist world-will
not permit the development of new uranium mines, except for the huge Roxby
Downs mine in South Australia. In addition, no new export contracts will be
permitted for Australia's two operating mines pending an inquiry into
Australia's role in the nuclear fuel cycle-expected to be completed in
mid-1984. Two contracts that were negotiated with US electric power utilities
earlier this year, however, will be honored. The policy represents a compromise
between Hawke's pro-uranium development faction and the Labor Party
platform calling for a complete phaseout of uranium mining and exports.
Opposition to the new policy remains widespread; unions are against uranium
mining whereas local political leaders are disappointed over the loss of $500
million in investment for new mines.
Egyptian Negotiations Cairo may soon double subsidized bread prices to improve its chances for a
With the IMF $300 million IMF standby agreement. US Embassy sources in Cairo and Fund
officials in Washington believe that the Mubarak government is likely to
announce the price increase before the IMF team's scheduled arrival in Cairo
on 15 November. Fund officials have indicated that without the increase,
negotiations for the standby will be postponed.
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Even if Cairo takes this politically hazardous step, negotiations with the Fund
are likely to be difficult. The IMF will probably demand austerity measures
including reduced budget deficits and a 40-percent devaluation of the coun-
try's official exchange rates-one Egyptian pound (EE) equals $1!.43-to the
free market rate of # E 1 equals $0.87. The most contentious issue, however, is
likely to be energy prices. Fund demands for domestic energy price hikes early
next year are certain to clash with the government's desire to hold the line un-
til the expected furor over higher bread prices has subsided and until after the
People's Assembly elections in April.
Moroccan Debt Paris Club members have tentatively agreed to provide Morocco with a $530
Rescheduling million aid package-$120 million short of meeting the IMF's projected
Jeopardized balance-of-payments gap through the end of 1984. Representatives from the
IMF have notified Paris Club members that, unless the gap is closed before the
Fund's standby loan review in late November, the IMF program in Morocco
will be canceled. Donors are reconsidering their pledges in light of the IMF
warning because failure to continue the IMF program would leave Rabat's
debt rescheduling and financial stabilization program in disarray. The US
delegation has been urged by Paris Club members to offer additional support
and will be watched closely by other Paris Club participants and the Moroccan
delegation.)
Trouble Brewing for Continued heavy payments on publicly guaranteed private debt will probably
Honduras-IMF push Honduras out of compliance with its IMF standby agreement, endanger-
Agreement ing disbursement of the Fund's final 1983 tranche of $16 million.~Debt
servicing has pushed Tegucigalpa's domestic borrowing $30 million above the
IMF ceiling, Moreover, the government's 25X1
reluctance to cut spending and raise taxes will impede a new standby
arrangement in 1984. Meanwhile, Honduras's net international reserves have
slipped to a minus $110 million. Tegucigalpa probably will await the final
word on US aid levels-and hope that Washington will press the Fund to
disburse the final 1983 tranche despite the violation-before making political-
ly difficult cuts at home. 25X1
Global and Regional Developments
Bonn Dissatisfied West Germany is increasingly critical of the Community's steel program and
With EC Steel is threatening to increase subsidies to its steel industry if the EC does not raise
Policy West German production quotas and curb imports from third countries. The
steel industry is pressing the Kohl government to protect domestic markets
from heavily subsidized steel imports from other EC countries. The industry
argues that higher West German production quotas-and lower quotas for
other EC countries-would help alleviate the problem. West German steel-
makers also are complaining that their domestic market is absorbing an
inordinately large share of total EC steel imports from third countries. In first-
half 1983 West Germany accounted for 40 percent of EC steel imports from
third countries compared with 34 percent in 1980.
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The EC is unlikely to provide any relief for the West German steel industry,
over the short term and Bonn probably will act on its own. Faced with surging
imports, steel disputes with the United States, and the mounting financial
problems of key steel companies, Bonn is committed to providing financial aid
to help restructure the industry and reduce capacity. West German Economics
Ministry spokesmen have threatened that any new steel subsidies would come
at the expense of West German contributions to the EC budget, adding to
Brussels's financial woes. The move also would reduce the likelihood that the
EC Commission will be able to phase out EC and national subsidies by the end
of 1985.
National Developments
Developed Countries
Israeli Tax Increases The Israeli Cabinet agreed on Monday to a number of measures designed to
increase government revenues, according to a press report. The measures
include:
? A higher tax bracket for Israelis earning $32,000 a year or more-from 60
percent to 66 percent.
? An $80 annual education fee for each child in public schools.
? A doubling of the tax on foreign travel to $100.
The Cabinet also agreed to tax child allowances provided by the government,
freeze government hiring, and cut overtime. Earlier press reports had indicated
that Finance Minister Cohen-Orgad had agreed to these measures, particular-
ly the higher tax bracket for wealthier Israelis, in order to get agreement on
future budget cuts from TAMI, a coalition party that has a lower-income
constituency. The government raised gasoline prices 15 percent last Friday,
and similar increases on other items with government-controlled prices are
expected soon. The new measures will make only a small dent in the budget
deficit. They reflect Cohen-Orgad's cautious approach and desire to work out
agreements with other Cabinet ministers whose continuing support is neces-
sary if his austerity program is going to work.
Canada To Begin The Canadian federal government and the government of Quebec have joined
Manufacturing a US firm to invest in Canada's first helicopter manufacturing plant. Three
Helicopters different helicopter models are to be manufactured with production beginning
in 1985. In addition, Ottawa will provide a subsidy of $81 million to Pratt and
Whitney Canada, Ltd., to expand production of helicopter engines for the new
aircraft. The firms involved project more that $8 billion in helicopter and
engine sales over the 20-year life of the project-a figure we believe is
optimistic given the competitiveness in the helicopter market.
The Canadian move to jointly produce helicopters with a US firm underscores
Ottawa's commitment to maintaining a broad-based aerospace industry
despite last year's $1.1 billion loss by Canadair and a $200 million loss by
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DeHavilland. Because of a limited home market, Canadian aerospace firms
have had difficulty reaching production break-even points. Canada is the
world's second-largest market for civil helicopters, however, and Ottawa
believes the new plant will significantly reduce imports as well as boost
exports; the US firm involved expects to export 85 percent of production.
50 percent by late December to forestall additional rationing measures.
South African Drought South Africa's wet season began on schedule in late September with normal
Eases But rainfall bringing some immediate relief to areas hard hit by a year of severe
Impact Lingers drought. The rains enabled corn farmers-who have suffered most from the
drought-to begin this season's planting and have caused officials estimates of
the wheat harvest to be revised sharply upward. Wheat supplies are now
projected by Pretoria to be adequate for 1984-apparently without imports.
There was little runoff from the rains, however, and dams remain well below
normal levels. The dam that provides most of the water for households in the
Pretoria-Johannesburg region is at only 22 percent of capacity and must reach
Less Developed Countries
Saudi Arabia's Riyadh intends to institute austerity measures as part of its fourth Five-Year
Strategy for Its Next Plan (1985-90
Five-Year Plan
The plan calls for lower
government expenditures-particularly for consumer subsidies and the opera-
tion of public facilities-improved government efficiency, and a larger private-
sector role, particularly in providing social services. The Saudis' new plan is
based on expectations of at best a stabilization in their oil production and in
the world oil price at a time when they will face rising costs for completed de-
velopment projects. Subsidy reductions, however, will risk popular dissatisfac-
tion among Saudis who expect improved economic well-being.
Nicaragua Plans To Managua is attempting to reactivate a mothballed oil offloading ;facility on
Reactivate Oil Port Nicaragua's Pacific coast in order to counter insurgent attempts ito destroy its
other oil import facilities
addition to opening another import route, the reopening could a week to
the country's 18 weeks' worth of storage capacity and reduce the economy's
vulnerability to insurgent disruptions. In a related move, Managua has begun
building a new road and rail causeway to help secure transportation between
the mainland and Corinto, the country's principal port. Nicaraguan leaders
have been concerned over insurgent attempts to knock out the existing road
bridges to Corinto that carry about 85 percent of the country's foreign trade.
Managua hopes to complete construction by February 1984.
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Cuban Economic Data released recently by Havana indicate that Cuba's economic downturn
Problems Continue' and foreign exchange problems continued during the first half of 1983.
Convertible currency export receipts fell by nearly 30 percent from the
previous period because of:
? A.1-million-metric-ton drop in sugar production and foreign sales resulting
from poor weather during the peak harvest season.
? The 25-percent decline in world sugar prices compared with the same period
a year earlier.
? A decrease in the volume of nickel exports apparently because of smaller
sales to Japan and some West European countries that were beginning to
negotiate agreements with Washington to certify that no Cuban nickel is
contained in their steel exports to the United States.
Lower foreign exchange earnings and the continued reluctance of Western
bankers to provide credits forced Havana to keep hard currency imports
during the first half of this year at the depressed 1982 level-40 percent below
1981 purchases.
Shortages of imported raw materials and spare parts from the West are
causing economic activity to stagnate. Particularly affected are consumer
goods and public transport. Production of fertilizers and textiles as well as
repairs of sugar harvest machinery also are behind schedule. Although we
expect some recovery in sugar production next year, projected increases in
export earnings will not ease the shortage of convertible currency much. As a
result, we expect Cuba in early January will seek a Paris Club rescheduling of
debts due in 1984.
Chinese Failure To International grain traders say China will fail to meet its commitment to
Honor US Grain purchase 6 million metric tons of US grain this year under the Long-Term
Agreement Grain Agreement. Purchases for delivery this year now stand at 3.8 million
tons. This would be the first time China has failed to purchase the minimum
called for in the agreement, which expires at the end of next year. The Chinese
claim that US textile trade quotas forced them to cut purchases of US grain
this year, but cheaper supplies from other exporters and record Chinese
harvests also contributed to their decision. China already has signed long-term
agreements that would cover its stated import plans for 1984, including 6
million tons of US grain. Traders suggest that during bilateral talks this month
the Chinese will refuse to carry over any shortfall of purchases for 1983 into
1984. Furthermore, if the current countervailing duties case on textiles is not
resolved to China's satisfaction, it could be offered as a reason for canceling
purchases of US grain in 1984.
Good Start for Soviet Prospects for the winter grain crop have been helped by good weather this fall.
Winter Grains press reports indicate that the sowing of winter
grains was virtually complete by late last month and that good emergence was
evident in most areas. The sown area is 6 to 7 percent larger than it was at the
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same time last year. Although soil moisture in the southern Ukraine, North
Caucasus, and South Volga areas was deficient in September, most of the
region received sufficient rainfall in October for germination. October's
improvement in soil moisture is likely to result in a good winter grain crop as
long as the winter weather remains normal.
First-Half 1983 Soviet Recently released data show that the USSR recorded a substantial improve-
Trade Results ment in its trade balance during the first six months of 1983 compared with
the same period in 1982. Almost all of the improvement occurred in the
USSR's trade with its socialist trading partners. Higher oil prices accounted
for most of the rise in Soviet exports to the CEMA countries; oil prices are cal-
culated on a five-year moving average, so the price charged by Moscow
increased about 20 percent while world oil prices dropped 10 percent. Trade
with the West during first-half 1983 stagnated at about last year's level, and
January-June 1982
January-June 1983
Total
41.9 42.6
-0.7
45.3 43.8
1.5
Socialist
23.0 22.9
0.1
25.9 24.1
1.8
Eastern Europe
17.8 17.1
0.7
20.0 18.9
1.1
Other
5.2 5.8
-0.6
5.9 5.2
0.7
Developed West
12.7 14.7
-2.0
12.5 14.5
-2.0
Less developed countries
6.2 5.0
1.2
6.9 5.2
1.7
Moscow's hard currency trade position remained close to last year's level
during the first six months with exports increasing by $300 million to $15.9
billion while imports remained at $15.7 billion. Partial Western trade data
indicate that Soviet imports of machinery and equipment were about 30
percent higher than in first-half 1982; the higher level probably represents
goods for the export gas pipeline as well as a rebound to pre-1981, levels. The
rise in machinery and equipment imports was balanced by a sharp drop in
Soviet purchases of agricultural products. Soviet imports of US grain dropped
by almost 50 percent during January-June compared with the same period in
1982. In Soviet trade with the less developed countries, Soviet deliveries of
military equipment apparently were responsible for the rise in exports in first-
half 1983. On the import side, an increase in Soviet oil purchases!from Libya
more than offset a decline in imports from other LDCs
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Soviet Manganese
Purchases Soviets have purchased as much as 500,000 metric tons of high-grade
manganese ore during the first half of 1983-about 400,000 tons from
Australia and the rest from Gabon. This purchase is the first evidence of
Soviet manganese ore imports in over a decade. With about 30 percent of
known world reserves, the Soviet Union is the largest producer of manganese
ore, and production was about 10 million tons last year. The Soviets, however,
have been plagued by declining quality of their ore. We believe the high-
quality imported ore is needed to blend with Soviet ore for use in new
Japanese-designed electric furnaces for the manufacture of high-grade ferro-
manganese, a compound used to increase the hardness and wear resistance of
steel.
Austria Helps East Austria's willingness to provide large credits to financially strapped East
Germany Through Germany is helping East Berlin avoid a financial crisis. While East Germany
Trade Financing has slashed imports from most Western countries, purchases from Austria
surged to $183 million in January-July 1983 compared with $104 million in
the same period last year. An Austrian loan of $180 million extended last
December has facilitated this growth, and as a result Austria has become East
Germany's second-largest Western trading partner after West Germany. A
recently concluded $195 million trade pact promises further expansion of
commercial and financial links between the two countries
Hungarian Capital Budapest, increasingly supportive of a larger role for private enterprise, is
Market Experiments pushing an unorthodox new tactic-the sale of government bonds to individ-
uals. Bond sales would absorb large personal savings, curb consumer spending,
and direct assets toward priority investment projects. Previously, consumers
could earn at most 5 percent on long-term savings deposits. Following
government decisions late last month, they now can earn up to 9 percent by in-
vesting in "development bonds" that will help finance a new natural gas
pipeline. Individuals also can purchase development bonds in some local areas
for projects ranging from expanding telephone service to setting up a winery.
More venturesome investors can risk their savings to help capitalize private
and semiprivate ventures in the newly authorized small enterprise program.
While these new financial options only faintly resemble the full-fledged capital
market that some Hungarian reformists have proposed, they demonstrate the
regime's continuing resolve to experiment with schemes that elswhere in
Eastern Europe are considered audacious and even heretical.
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International Financial Situation:
Political Update
This article is part of a special series focusing on
the economic and political aspects of the interna-
tional financial situation.
Political strains have intensified in some key LDC
debtors over the past month. This is particularly
the case in the Philippines, where the Marcos
government is under steady attack. Recent disturb-
ances in Pakistan have eroded President Zia's
authority, but he still has the upper hand. In other
countries the situation is in flux. In Argentina, the
unexpected magnitude of Alfonsin's victory gives
him some political leeway. The Brazilian adminis-
tration has devised a less painful austerity law
which is expected to gain Congressional approval.
In Chile demonstrations have increased in frequen-
cy but diminished in strength. The situation in
Mexico has been relatively quiet.
We believe the political ground rules have changed
in the Philippines. Marcos's relations with key
interest groups have been badly damaged, and the
unity of the military and the ruling party apparatus
is no longer assured. Some military personnel are
meeting with business leaders and politicians to
discuss alternatives to the Marcos government. We
believe the shift in the loyalty of the business
community away from Marcos is a pivotal develop-
ment, and the need for financial austerity suggests
it may be irreversible.
Several signs also
suggest growing divisions within the Cabinet.
Prime Minister Virata and Foreign Minister Ro-
mulo have recently demonstrated their indepen-
dence from Marcos on key political issues
The deteriorating financial situation is limiting
Marcos's room for maneuver. The US Embassy
reports that the banking system has stopped issuing 25X1
new letters of credit for importers because of
foreign exchange shortages. Manila has tightened
import regulations, ordered banks to surrender all
foreign exchange receipts at the official exchange
rate, and has warned of additional layoffs and fuel
rationing. These moves almost certainly will put the
business community and labor groups more firmly
in the opposition camp. In recent weeks labor
strikes involving about 50,000 workers have added
fuel to almost daily demonstrations calling for
Marcos's resignation.
Antigovernment demonstrations have flared up
again in Pakistan. In the past month further
violence occurred in Sind Province, lawyers held 25X1
protest marches in nearly all major cities, and
5,000 trade unionists staged the largest antigovern-
ment demonstration in Punjab in recent years. The
Sindhis believe the Punjabi-dominated government
has ignored their region's economic development
and favored Punjabi settlers. They support opposi-
tion groups who are demanding that President Zia
end martial law and call early national elections. So
far, the protests have caused little disruption to
economic activity, and Pakistan is making debt
repayments on schedule-mainly to official credi-
tors who hold 90 percent of the country's foreign 25X1
debt. ;25X1
In Argentina the Radicals' decisive election victory
should give President-elect Raul Alfonsin some
time to initiate policy changes, but prospects for
stability remain uncertain. After his inauguration
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in mid-December, we expect him to move on a
variety of contentious issues, including military
reforms. Alfonsin is strongly antimilitary, and he
intends to reorganize the high command to subordi-
nate the services to the civilian government. He
says he will investigate the military regime's hu-
man rights abuses and corruption.
Alfonsin's political position over time could be
further complicated by Argentina's economic prob-
lems. The economy is in a severe recession, and a
wage-price spiral pushed inflation to an annual rate
of 925 percent in September. On the foreign front,
the President-elect has pledged to obtain more
favorable terms in rescheduling the country's $40
billion foreign debt. Alfonsin probably will quickly
begin discussions with foreign creditors and try to
exploit his mandate to gain easier repayment terms.
Foreign bankers say they are encouraged by his
victory; if rescheduling efforts progress, they may
be ready by the end of this month to make long-
delayed disbursements of funds that are vital to
avoid default and to maintain minimal import
levels.
The Brazilian Government's introduction of a new
and milder wage restraint law-central to the
austerity program prescribed by the IMF-has
temporarily calmed the stormy political situation in
Brazil. The Embassy reports that ruling party
leaders have enough votes to pass the new.law
because, unlike four previous efforts, they negotiat-
ed the law with the Congress. The new measure
will permit wage hikes averaging 87 percent of the
consumer price index, compared with an 80-percent
ceiling stipulated in Brazil's revised IMF letter of
intent.
The IMF probably will find the new wage law
acceptable only if the government agrees to take
other steps to reduce the public-sector deficit,
including even deeper cuts in state enterprise bud-
gets. Such actions undoubtedly would arouse sub-
stantial popular and congressional opposition. Until
these questions are resolved, the government is
maintaining the 60-day state of emergency de-
clared for Brasilia in mid-October.
Secret
10 November 1983
Even with a renewed IMF agreement, political
trends in Brazil do not augur well for an effective
stabilization program. Decisionmaking remains in
the hands of five or six military and civilian
advisers, with President Figueiredo on the sidelines.
Without authoritative guidance, the administration
is likely to continue floundering, further eroding
public confidence.
Confrontations in Chile, although increasingly fre-
quent, have diminished in strength in the past few
weeks. The government is taking a hard line, and
the opposition has been unable to mobilize large
numbers of protesters. This situation has reduced
the prospects for renewal of talks between Interior
Minister Jarpa and the opposition Democratic Alli-
ance. Reduced turnout for protests is making the
moderate opposition leaders increasingly desperate.
This increased polarization, the lack of an
effective channel for dialogue, and growing frustra-
tion of the opposition, if coupled with a harsh
government crackdown on leaders of the national
strike set for next month could provoke widespread
violence.
Jarpa has recent-
ly urged President Pinochet to replace Finance
Minister Caceres to clear the way for more expan-
sionary economic policies. Opposition demands
have become so focused on political change, how-
ever, that we doubt moves to revitalize the economy
would significantly ease political pressures on the
government.
In Mexico President de la Madrid successfully
juggled problems with labor and dissident groups
over the past month, once again demonstrating his
political skills:
? A leftist-sponsored nationwide protest against
austerity in mid-October generated little popular
support.
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? Labor disputes with workers for the National
University and foreign and domestic airlines were
settled with wage increases substantially below
government guidelines.
? Price hikes for milk, eggs, and rice were an-
nounced, but so far public reaction has been
muted.
? A dispute between farmers and PEMEX officials
in the southeastern state of Tabasco, which had
caused a number of producing wells to be shut in,
was ended when police forcibly dispersed
demonstrators.
? In Juchitan, Oaxaca, where a leftist mayor re-
cently was removed from office, supporters are
still occupying the city hall. Tensions are expect-
ed to mount as elections approach.
? Veteran labor leader Fidel Velazquez is repeating
earlier statements that new wage hikes will not be
sought this year, but organized labor is cam-
paigning hard for large increases in January
1984.
Over the next month, Mexico City will be con-
cerned about potential setbacks and possible out-
breaks of violence in seven states where local
elections are scheduled. While losses in some key
municipalities could be embarrassing, the ruling
party should prevail in most elections.
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Secret
International Financial Situation:
Imports of Manufactures Down Sharply
in Key Debt-Troubled LDCs
This article is part of a special series focusing on
the economic and political aspects of the interna-
tional financial situation.
The 15 key debt-troubled LDCs have sharply cur-
tailed their purchases-largely manufactured
goods-from the industrial West over the last year
and a half.' Trade statistics for the major industrial
countries indicate that during the first half of this
year purchases of manufactured goods, excluding
chemicals, were running only 50 percent of their
1981 level. The bulk of the falloff has been in
machinery and transport equipment. The decline in
imports of machinery in most cases reflects the
drop in investment activity in these LDCs. While
lower imports are reducing foreign payments pres-
sures, cutbacks in capital spending will retard
industrial growth. This in turn will limit the ability
of these countries to provide domestic employment
for rapidly growing work forces. At the same time,
the reduction in purchases from the industrial West
could feed back onto the debt-troubled countries to
the extent it slows the pace of OECD recovery and
thereby limits LDC export expansion.
Trade statistics for the United States, Japan, and
West Germany-which together account for about
two-thirds of OECD sales to the debt-troubled
LDCs-show that reduced exports of manufactures
accounted for 83 percent of the $13 billion drop in
Big Three sales to these countries in 1982. Most of
the remaining decline was in sales of foodstuffs and
raw materials. In the first half of this year, 90
percent of the drop came in sales of manufactures.
'The 15 key debt-troubled LDCs are Argentina, Brazil, Chile,
Costa Rica, Ecuador, Indonesia, Ivory Coast, Kenya, Mexico,
Morocco, Nigeria, Peru, Philippines, Venezuela, and Zaire.F-
Fifteen Key Debt-Troubled LDCs: Billion US $
Composition of Imports From the Major
Industrial Countries a
First Half
1992
1983
Total trade
62.1
49.1
27.0
17.8
Foodstuffs
6.9
4.8
27
2.5
Raw materials
2.0
1.3
0. 1
0.6
Fuels
0.9
1.8
1.11
0.5
Manufactures
51.5
40.7
223
14.0
Chemicals
6.7
5.9
3.1
2.6
Semifinished goods
9.4
7.5
43
2.2
Machinery
20.7
17.1
9.2
5.6
Transport and
equipment
10.5
6.9
4.4
2.6
Consumer goods
4.2
3.3
1.6
1.0
Other
0.8
0.5
0.2
0.2
a Data presented here are exports from the United States, Japan,
and West Germany. These three countries account for about 40
percent of total purchases by this group of Third I World countries.
Available data for other industrial nations show
manufactured goods accounting for one-half to
two-thirds of the sales reduction to these 15 debt-
troubled LDCs. Most of the remaining decline in
exports was in foodstuffs.
Across the individual debt-troubled LDCs, the
composition of the import reductions from the three
major industrial countries has been fairly uniform:
? In Brazil, reduced imports of manufactures ac-
counted for 85 percent of the falloff in purchases
from the three countries in 1982 and 80 percent
of the year-over-year decline in first-half 1983.
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Selected Debt-Troubled LDCs: Imports
of Manufactures From the Major
Industrial Countries a
1982
1983'
Total
5.1
4.4
2.2
1.6
Chemicals
1.1
0.9
0.4
0.3
Semifinished goods
0.5
0.4
0.2
0.1
Machinery
2.6
2.1
1.1
0.7
Transport and
equipment
0.7
0.6
0.4
0.3
Consumer goods
0.2
0.3
0.1
0.1
Indonesia
5.7
6.6
3.4
2.6
0.8
0.8
0.4
0.4
Semifinished goods
1.3
1.5
0.8
0.5
Machinery
1.9
2.7
1.3
1.0
Transport and
1.4
1.3
0.8
0.5
Total
17.0
10.9
6.6
3.5
Chemicals
1.8
1.4
0.9
0.6
Semifinished goods
3.3
1.7
1.1
0.5
7.0
4.8
2.8
1.5
Transport and
equipment
3.3
1.7
1.2
0.6
Consumer goods
Venezuela
Total
5.7
6.0
3.0
1.3
Chemicals
0.6
0.6
0.3
0.2
Semifinished goods
1.2
1.4
.0.8
0.2
Machinery
2.4
2.5
1.2
0.5
Transport and
equipment
1.0
0.9
0.4
0.3
a Data presented here are exports of manufactures from the United
States, Japan, and West Germany.
Secret
10 November 1983
? For Indonesia, a dropoff in purchases of manufac-
tures accounted for almost all of the first-half
1983 reduction.
? In the case of Mexico, the fall in imports of
manufactures accounted for 85 percent of the
decline last year and over 90 percent of the drop
in the first six months of this year.
? Nearly all of Venezuela's first-half 1983 decline
in imports was in manufactures
Composition of Reduction in Manufactures
Machinery and transport equipment have account-
ed for most of the drop in imports of manufactures.
Export data for the three major industrial coun-
tries, for instance, show that these two categories
accounted for two-thirds of the overall decline in
manufactures sales to the key debt-troubled LDCs
last year. In first-half 1983, reduced purchases of
machinery accounted for over 40 percent of the
drop in imports of manufactures while a falloff in
sales of transport equipment comprised just under
one-fifth. Declines of 50 percent or more in ma-
chinery imports have occurred this year in Ecua-
dor, Ivory Coast, Kenya, Nigeria, and Venezuela.
Mexican machinery imports from the major indus-
trial countries were down 45 percent from the same
period last year, following a 30-percent decline in
1982. In one of the few exceptions, Morocco in-
creased imports of machinery, in the first half,
probably because of the steady flow of funds for
projects sponsored by Saudi Arabia.
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South America: Import Contraction
Hurts Growth
The import contraction in many South American
countries this year will most likely exceed IMF
targets because of tighter exchange controls, the
lack of trade financing, and recession. For the
region as a whole, imports are likely to decline
27 percent below the $65 billion recorded in 1980.
We estimate import demand in South America will
remain depressed thoughout 1984. The United
States is bearing the brunt of South America's
import plunge.
Import cuts necessary to improve current account
positions and reduce foreign borrowing require-
ments are contributing to the economic slowdown
South America: Real Import and
GNP Growth Trends
throughout the region and fueling inflation. Over T5
the longer term, the current import cutbacks will
adversely affect capital formation and export po-
tential.
Import Performance
South America's imports rose from $6 billion in
60 1973 75
1960 to $65 billion in 1980. The region's sustained
development and industrialization have required
growing imports of capital goods and raw materi-
als, especially oil. The sevenfold increase in nonoil
imports to $49 billion in 1980-mainly capital
goods for development projects-has made possible
increased manufacturing, agricultural moderniza-
tion, and development of the natural resource base.
Oil imports increased from a mere $40 million in
1960 to $16 billion in 1980.
? The EC's share of South American imports de-
clined from 28 to 19 percent over the period.
? South American purchases from other developing
countries soared from 19 to 36 percent over the
20-year period.
? Imports from Japan boosted its share from 2 to
7 percent. (c)
South American economies since 1960 have diver-
sified their imports away from the United States
and Western Europe to other LDCs and Japan:
? South American purchases from the United
States-the region's main supplier with $18 bil-
lion in sales in 1980-fell from 40 percent of total
imports in 1960 to 28 percent in 1980.
Brazil, Venezuela, and Argentina have been the
leading importers since 1960. Brazil-the region's
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largest purchaser-has sustained rapid industrial- South America: Imports
ization and modernization through increased pur-
chases of oil from the Middle East and capital
goods and industrial inputs from developed coun-
tries. As a result, Brazilian imports increased from Percent
$1.5 billion in 1960 to $25 billion by 1980. Imports Import Composition
by Venezuela-the second-largest market-rose
from about $1 billion in 1960 to $12 billion in 1980,
driven by consumer goons and industrial equip-
ment. Foreign purchases by Argentina soared in 90
the late 1970s to $10.5 billion as the government
attempted to use import competition to force
industrial efficiency. Smaller South American
economies also represented dynamic markets, par-
ticularly for manufactures and equipment needed 60
for energy-related development projects.
Since 1980, the situation has changed dramatically.
In 1981 imports grew only 3 percent to $67 billion.
In 1982, the deteriorating financial position of
South American countries caused imports to drop
by 16 percent to $56 billion. The region's ability to
import was squeezed further as the debt service
burden rose to $49 billion-equal to 80. percent of
sagging export revenues. By late 1982, worries
about the solvency of many South American bor-
rowers prompted international bankers to tighten
credit lines.
Additional import cutbacks were planned this year
as part of IMF-sponsored adjustment programs.
With export revenues flat, South American coun-
tries were forced to slash imports to improve cur-
rent account and debt servicing prospects so they
LDCs
1960
1980
United States
European
Community
can qualify for IMF support. To meet trade targets, Japan
countries such as Brazil and Ecuador have imple-
mented large devaluations and tightened exchange Canada
controls. Throughout the region, the stiff IMF-
mandated austerity measures-public spending Soviet Union
cutbacks, tight monetary policies, and financial and Eastern Europe
reforms-are slowing economic activity and import
demand.
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Secret
Trade credit cutbacks are further limiting imports.
bankers are insist-
ing that a greater share of trade transactions with
South America be on a cash basis. Moreover, as
importers fall behind in payments, foreign suppliers
are requiring collateral, eliminating open accounts,
and demanding advance payment for shipments. By
placing a greater proportion of international trade
on a cash basis, foreign suppliers could increase
short-run liquidity pressures on cash-short South
American countries, risking financial rescue pack-
ages in place throughout the region.
South American import retrenchments, according
to Embassy reports and available trade statistics,
will likely exceed IMF targets in many countries
this year. We estimate imports will decline
16 percent to $47 billion:
? Brazil cut imports 23 percent to $11 billion in the
first nine months of this year, as compared with
the same period in 1982. Nonoil imports declined
about 30 percent while oil imports were down by
some 20 percent.
? Venezuela slashed imports in half to $3.1 billion
through June, as compared with the same period
last year. The downturn in oil earnings and
mounting debt difficulties have resulted in deval-
uation, foreign exchange controls, import prohibi-
tions, and higher duties.
? Argentina's imports of $2.3 billion through June
were 23 percent lower than the same period of
1982.
? Colombia's imports in January-June were 13 per-
cent lower than the same period of 1982. To avoid
debt rescheduling, Bogota is imposing licensing
requirements on over 80 percent of its imports
and stepping up its monthly devaluations.
? Paraguayan imports dropped 18 percent through
July 1983 as a result of foreign exchange short-
ages and slack demand resulting from the slow-
down of the Itaipu dam construction.
South America: 1983 Imports Billion US $ 25X1
IMF CIA
Target Forecast
21.1 16.1 16.0
3.5 3.5 3.4
? Uruguay reduced imports 45 percent to $223
million during the January-May period.
Economic stringencies, depressed export earnings,
and borrowing difficulties are also causing the
Andean importers to retrench. Peru, Chile, and
Ecuador all reduced imports by about one-third
during the first six to eight months of this year.
Bolivia, which has banned the import of nonessen-
tial items to conserve foreign exchange, reduced
imports by half during the first quarter.
Economic Impacts
Despite lackluster export performance, we estimate
import retrenchments will reduce South America's
current account deficit by 30 percent this year to
$17-18 billion, the same as 1980 levels. This im-
provement is having the intended effect of depress-
ing foreign borrowing requirements. As expected,
shortages of capital goods and industrial imports
are slowing down production, contributing to the
2.5 percent decline in regional economic activity we
foresee in 1983. At the same time, devaluations and
import controls are pushing up prices: throughout
South America this year.
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Argentina
100
90
51
48
Bolivia
100
100
63
67
Brazil
100
97
84
64
Chile
100
124
69
67
Colombia
100
112
118
100
Ecuador
100
99
88
76
Paraguay
100
98
122
97
Peru
100
138
144
121
Uruguay
100
101
64
65
Venezuela
100
111
107
91
The longer term cost of achieving trade surplus by
cutting imports will be reduced capital formation.
In Brazil, for example, import shortages are hinder-
ing the completion of investment programs, espe-
cially in the energy sector; US businesses report
that import controls are restricting oil investment
in Venezuela. Colombia's import squeeze, accord-
ing to the US Embassy, is slowing resource devel-
opment that ultimately could reduce the country's
ability to earn its way out of its financial problems.
We estimate-on the basis of projections of various
forecasting services-that South American imports
will most likely range between $45 billion and
$50 billion in 1984, little change from this year.
Import demand will remain sluggish throughout
the region as a result of continued economic auster-
ity programs under IMF auspices. Moreover, South
American exports in 1984 will face uncertain
Secret
10 November 1983
Peak Year E
P
(
xports at
eak Year
Billion US $)
Percent Decline
from Peak Year
to 1983 a
Argentina
1980 2
.6
81
Bolivia
1981 0
.2
60
Brazil
1980 4
.4
71
Chile
1981 1
.5
77
Colombia
1982 1
.9
55
Ecuador
1980 0
.9
70
Paraguay
1982 0
.1
36
Peru
1982 1
.5
73
Uruguay
1981 0
.2
42
Venezuela
1981 5
.4
68
markets, maintaining the squeeze on import capaci-
ty. Beyond this, bankers remain reluctant to in-
crease lending to South America, and high debt
servicing payments will continue to claim a large
share of exchange earnings.
Implications for the United States
The United States is bearing the brunt of South
America's import contraction. US sales to South
America declined by 15 percent to $15 billion in
1982-possibly displacing as many as 60,000 work-
ers in the United States.' In the first half of 1983
US sales fell a further 60 percent compared with
the same period a year earlier. US capital goods
producers, industrial suppliers, and farmers have
been most affected.
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A continued squeeze on imports could prompt
South American governments to shift to more
nationalistic economic strategies. To meet debt
payments and conserve foreign exchange reserves,
they may tighten import restraints further. Addi-
tionally, most South American governments-in
response to domestic recession and growing unem-
ployment-are encouraging local production of
goods previously imported. If import substitution
again emerges as a primary pillar of South Ameri-
can development strategies, US suppliers will face
a tou h challen a regaining access to these mar-
kets.
21 Secret
10 November 1983
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Saudi Arabian Military Programs:
The Impact of Reduced Oil Revenues
The decline in Saudi oil revenues has forced reduc-
tions and reevaluation of several military programs.
Saudi military spending for 1983 will be approxi-
mately $22 billion, a 15-percent cutback from
1982,
Although the cuts are tailing most heavily on it
Force and Navy programs, the Land Forces and
National Guard also are affected. No major pro-
grams have been canceled, but funding delays have
become common; scheduled Foreign Military Sales
(FMS) contract payments to the United States are
in arrears by about $1 billion. Because of existing
manpower and equipment problems, we do not
believe the spending cutbacks will have a serious
additional impact on Saudi military capabilities or
readiness
Background
The drop in oil revenues has confronted Riyadh
with difficult financial problems. We expect oil
revenues for 1983 to be about $45 billion, down
from $75 billion in 1982. To cope with lower
revenues, the regime has instituted across-the-
board budget cuts for the fiscal year ending in
April 1984. Military spending, however, will re-
main the largest item in the Saudi budget-about
30 percent of total. The Saudi Government also has
responded to reduced earnings by delaying pay-
ments to foreign contractors, drawing down its
substantial foreign assets and curtailing foreign
Budgeting in the Ministry of Defense and Aviation
Before the decline in Saudi oil revenues, the Minis-
try of Defense and Aviation "budget" was a collec-
tion of programs over which the Ministry exercised
only loose control. Service programs with direct
political backing from a royal family member or
the Ministry of Finance often were funded without
prior coordination with the Defense Ministry.
Defense Ministry officials have recently begun
placing greater emphasis on service accountability
for programs. Within the Ministry, the Foreign
Procurement Division has been charged with exer-
cising increased oversight over the three services'
budgetary requests, according to Embassy report-
ing. Moreover, the Ministry of Finance now has the
power to deny funds to previously approved mili-
tary programs. This has led to at least temporary
arrearages on FMS contracts already signed by the
Saudi Government.
Royal Saudi Air Force
25X1
2bAl
Several large, high-priority programs within the
Royal Saudi Air Force are receiving reduced fund-
ing this year, The 25X1
largest program affected is Peace Shield, a major
improvement of the Saudi air defense network,
which includes the purchase of AWACS aircraft
and the upgrading of ground radar and communi-
cations facilities 25X1
funding will be spread over three years 25X1
instead of one. Although the scale of the program
has not been reduced, the delay in a program the
Saudis view as critical suggests how seriously they
regard their current budgetary problems. In addi- 25X1
tion, Air Force "wish list" items, such as additional
fighter aircraft and the Patriot surface-to-air mis-
sile (SAM) have been temporarily shelved. Even
without funding problems, however, chronic Saudi
manpower shortages probably would have forced
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delays in the purchase of more fighter aircraft and
the Patriot.
The Saudi Arabian Land Forces have had at least
one major ongoing construction project affected by
spending constraints, and some Army "wish list"
projects have been quietly dropped. Construction of
the King Khalid Military City, a division-size
installation near the sensitive Kuwaiti-Iraqi border,
has been scaled back. In April 1983, as fiscal
problems became apparent, the Land Forces asked
the US Corps of Engineers' supervisors of the
project for an assessment of the impact of a $600
million cut this year. One brigade area has been
eliminated, and construction on the supporting
airfield may be delayed. Military manpower short-
ages probably combined with the financial consid-
erations to force the changes.
The 10-year $6.4 billion army aviation program,
now in the final planning stages,
commitment by the army.
In addition, the Army decided in July 1983 to
purchase an additional 100 US M-60 tanks. Nei-
ther sale, however, represents a new large program
Royal Saudi Naval Forces
The Royal Saudi Naval Forces have been hard hit
by spending cuts, with payments for US-sponsored
naval programs in arrears. These programs involve
construction of several naval training centers capa-
ble of training thousands of personnel each year
and a communications network. In addition to
current arrearages totaling some $700 million, the
Saudi Navy faces near-term obligations of $900
million. If the current arrearages are not paid off,
some US contracts could be canceled.
At the same time, payments for the $4 billion
shipbuilding program with France, the Saudi
Navy's largest project, are on schedule,
The contract includes the
purchase of four frigates, two support ships, 24
helicopters, antiship missiles, and an extensive per-
sonnel training program in France. Although deliv-
ery dates for the frigates have slipped six months,
program (plans call for up to 500 helicopters and 18
new airfields) probably will be cut back and de-
layed. Other army projects apparently experiencing
funding problems are a $5 billion purchase of
additional French Shahine mobile SAM batteries
(for tactical air defense for Army units) and a
multibillion dollar purchase of a replacement tank
for the two Land Forces armored brigades. The
Saudis are considering the US M-1 tank and the
West German Leopard II tank. Spending concerns
have become so acute that the Army objected to
the cost of flying, rather than shipping, the demon-
stration model M-1 tank into Saudi Arabia. F_
So far as we know, other programs are on track. In
June 1983 the Land Forces agreed to purchase the
Stinger hand-held SAM system to replace the
Redeye SAM already in use with Army field units.
Secret
10 November 1983
funding has not been delayed.
Some of the funding delays for the US programs
can be attributed to the new Defense Ministry and
Ministry of Finance budgetary review processes. In
our judgment, however, the Navy is hard pressed to
justify a near-term need for the program. Its cost,
manpower shortages, and existing naval training
programs in France and Pakistan tend to diminish
arguments by the Navy for the US program. It
may, in fact, be allowed to lapse.
Virtually immune to fiscal constraints in the past,
the Saudi Arabian National Guard has had to
delay by two years the completion of the second
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phase of its ambitious modernization program. It
calls for equipping two National Guard brigades
with tanks and armored personnel carriers. The
start of the third phase of the program, which
involves equipping additional units with tanks and
armored personnel carriers, probably will be de-
layed indefinitely. Moreover, Embassy reporting
indicates that plans for upgrading the National
Guard medical support program are being ques-
tioned by the Ministry of Finance.
Future Impact
The decline in military spending presents advan-
tages as well as problems for the Saudi military. On
the positive side, the military will have more time
to train personnel and absorb new equipment. We
do not believe the fighting capabilities of the Saudi
armed forces will be seriously diminished by
stretching out major capital projects. Furthermore,
continued budgetary constraints could foster useful
competition for scarce funds between and within
the services. This competition probably would cen-
ter around funding for "pet" projects sponsored by
various senior military officers, some of whom are
royal princes. Such infighting, however, could re-
duce cooperation in planning and exercises to the
detriment of Saudi readiness.
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Dominican Republic: Struggling
To Revitalize Its Economy
Despite the tough austerity measures taken last
year, the Dominican Republic still is grappling
with severe financial problems. In an attempt to
comply with IMF targets, the government probably
will take additional belt-tightening measures soon;
these could weaken popular support and intensify
rivalries within the ruling party. We believe Presi-
dent Salvador Jorge Blanco will remain hard
pressed by short-term financial woes and by the
challenge to make the basic economic reforms
needed to improve longer term growth prospects
and exploit the trade and investment incentives
under the US-sponsored Caribbean Basin Initiative
(CBI).
Jorge Blanco Inherits an Economic Crisis
When Jorge Blanco took office in August 1982, the
country was saddled with severe foreign payments
problems, budget shortfalls, stagnating output, and
unemployment approaching 30 percent. Weak
world demand and domestic supply constraints
since early 1981 have slashed sugar and mineral
sales, which had contributed up to 70 percent of
export earnings. To deal with rising world oil
prices, Jorge Blanco's predecessor had slashed im-
ports by banning vehicle purchases and by pushing
many foreign exchange transactions onto the more
costly parallel foreign exchange market. Despite
these efforts, foreign payments pressures mounted
through mid-1982 as bulging payments on largely
short- and medium-term debts came due and as
jitters prior to the May election slowed capital
inflows. At the time of Jorge Blanco's inauguration,
import-financing arrears had exceeded $300 mil-
lion and foreign exchange reserves were only about
three weeks' import coverage.
Public-sector fiscal performance in 1981 and the
first half of 1982 mirrored the weakened trade
position. Declining trade tax receipts-about half
Dominican Republic: Percent
Economic Indicators
Real GDP growth
2.1
4.8
5.7
3.5
0
1.0
Change in consumer
prices
3.5
9.2
16.7
7.5
7.6
7.5
a Estimated.
b Projected.
c Debt servicing as a share of earnings from merchandise exports
and services.
of government revenues-and overspending by in-
efficient public enterprises deepened the public-
sector deficit despite cuts in central government
capital spending. To finance the deficit, the govern-
ment took a major share of expanded domestic
credit, edging out the private sector.
Economic activity slowed to a standstill by mid-
1982. This compares to real growth averaging 5
percent a year during 1976-80. Tight credit mar-
kets and up to one-year delays in obtaining official
foreign exchange for imports crimped production
across the board. Output in agriculture-17 per-
cent of GDP and the source of almost half the jobs
in the economy-barely grew because of price
controls, export restrictions on certain foodstuffs,
and an inefficient internal marketing network.
Heavy rains and rust disease cut sugar production
in 1981. Mining experienced severe setbacks as the
world recession led to the suspension of ferronickel
mining operations in early 1982, the closure of
bauxite operations, and declining production of
dore (a gold and silver alloy).
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Swift Response to the Crisis
The Jorge Blanco government quickly announced
sweeping austerity measures to deal with the dete-
riorating economy:
? Measures to cut the trade deficit and maintain
official foreign exchange reserves included a ban
on some 150 consumer imports, the transfer of
additional imports to the more expensive parallel
market, and an import surcharge. Incentives were
established for exports.
? Government expenditures were trimmed by cut-
ting pay for civil servants and by slashing subsi-
dies to public enterprises.
? Income taxes were increased and a value-added
tax was imposed to raise revenue.
The new government's policies contributed to
mixed results in 1982. The restrictive fiscal and
monetary policies trimmed the budget deficit and
helped keep inflation under 8 percent, one of the
lowest rates in Latin America. Production stagnat-
ed, however, and the current account deficit grew
slightly. Import cuts and increased tourist earnings
were offset by the effects of depressed world prices
for exports.
Beginning a Slow Recovery
In early 1983 Jorge Blanco won IMF approval of a
three-year, $408 million Extended Fund Facility
(EFF) program. By initiating a tough austerity
program several months prior to formal negotiation
with the IMF, Jorge Blanco managed to skillfully
sidestep public opposition to IMF-directed auster-
ity. The targets of the IMF's stabilization program
include steady cuts in the public deficit, limits on
foreign borrowing and reserve drawdowns, and the
elimination of arrears by early 1986.
The tight rein on imports and public spending
necessary to comply with IMF guidelines will result
in real GDP growth of at best 1 to 2 percent in
1983 and 1984. Low world sugar prices are limiting
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10 November 1983
sugar output despite the recent replantings of rust-
resistant cane. Overhanging world inventories prob-
ably will delay recovery in mineral production until
late 1984. The construction sector, however, is
expected to rebound moderately because of new
public investment for housing and roads.
Strengthened tax administration combined with
current spending cuts should reduce the public
deficit to less than 4 percent of GDP this year,
meeting the IMF target. Smaller public borrowing
requirements and continuing monetary restraints
probably will keep inflation again near 8 percent
this year.
OECD economic recovery, government import
curbs, and reduced oil prices probably will halve
the current account deficit in 1983 to $200 million.
After lengthy negotiations, the Dominican Repub-
lic has reached agreement with foreign bankers to
reschedule some $600 million in debt-mostly im-
port financing arrears and other short-term trade
credits-and the package is awaiting the approval
of the Dominican Congress. Paris Club restructur-
ing of the country's official debt, held primarily by
the United States and Spain, is likely to be delayed
until early 1984, pending a yearend IMF review
and the formulation of second-year financial tar-
gets. In the absence of a Paris Club rescheduling
this year, the government could push additional
imports to the parallel market to ease payments
problems.
Until now, the administration has been able to
maintain popular support for austerity by contain-
ing inflation and cracking down on corruption and
tax evasion. Labor and student unrest has been
diffused; the military has been used to eject strikers
from the publicly owned cement plant, ward off
strikes in several financially troubled businesses,
and quell student demonstrations for increased
university funding. Nevertheless, additional gov-
ernment spending cuts under the IMF program are
likely. As a result, oppositon to government policies
is likely to mount, even from members of Jorge
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-311
-331
-670
-406
-430
-200
-186
-269
-558
-264
-482
-275
Exports (f.o.b.)
676
869
962
1,188
768
825
Sugar
181
201
310
534
287
300
Imports (f.o.b.)
862
1,138
1,520
1,452
1,250
1,100
Net services and transfers
-125
-62
-112
-142
52
75
Debt amortization c
96
234
102
148
263
209
Fina
ncial gap
-407
-565
-772
-554
-693
-409
Capi
tal account balance
397
678
760
563
582
Net direct investment
64
17
93
80
-1
Medium- and long-term loans
207
377
432
299
468
Net short-term capital, including errors and
omissions
126
284
235
184
115
a Estimated.
b Projected.
c Excludes debt rescheduling under negotiation.
Blanco's own party. His party is divided after last
year's bitter election contest and already the jock-
eying has begun in preparation for the 1986 elec-
tions.
Longer Term Economic Restructuring and the CBI
In order to sustain economic recovery, Jorge Blanco
will have to go beyond the current austerity pro-
gram and institute fundamental economic reforms.
Diversifying production, for example, would help
break the chain between world commodity price
fluctuations and chronic Dominican balance-of-
payments crises. The development of cost-competi-
tive sugar substitutes abroad and growing competi-
tion from subsidized European sugar beet
production clouds the long-term outlook for Do-
minican sugar, which is the country's largest source
of foreign exchange earnings and the basis for one-
fourth of total industrial production. The develop-
ment of high-value, labor intensive export alterna-
tives will require substantial investment and time.
The expansion of fruit, vegetables, cut flowers,
meat, and light assembly and agroindustries could
show quick results.
The government has sought to encourage foreign
investment in new export industries by amending
the foreign investment law and establishing a high-
profile investment promotion council to cut bureau-
cratic redtape. Nevertheless, pressing financial
problems, powerful domestic business lobbies and
Jorge Blanco's often fractious congressional sup-
port probably will delay necessary policy changes.
The Dominican Republic is particularly well suited
to benefit from the CBI, which allows 12-year,
tariff-free access for many Caribbean exports to
the US market and provides long-term trade and
investment incentives. The economy is the largest
in the Caribbean area-excluding Cuba-and al-
ready directs 80 percent of its exports to the US
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market. Sugar constitutes the bulk of these exports
and, although US sugar imports will remain under
quota restrictions at least through most of next
year, tariff-free entry of Caribbean sugar will
support Dominican sugar earnings and provide
revenues to support export diversification. The
elimination of US tariffs under the CBI and the
possible hardening of Generalized System of Pref-
erences (GSP) terms for other LDCs after 1984
should attract investors to the Dominican Republic.
Moreover, the US tax deduction for convention
expenses under the CBI is likely to spark new
interest in Dominican tourist facilities.
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