INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000200050007-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 49
• Document Creation Date: December 27, 2016
• Document Release Date: July 14, 2011
• Sequence Number: 7
• Publication Date: September 27, 1985
• Content Type: REPORT

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Directorate of Secr^e
Weekly
International
Economic & Energy
DI IEEW 85-039
27 September 1985
Copy 8 4 4
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Secret
International
Economic & Energy Weekly
I
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27 September 1985
iii Synopsis
Perspective-OPEC: Saudi Arabia Throws Down the Gauntlet
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Impact of a Persian Gulf Oil Cutoff
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South Africa: Unlikely to Use Strategic Minerals Leverage
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13 Japan's Debt Refinancing Crunch: Much Ado About Nothing?
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17 Peru: An Economy Under Siege
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29 Egypt: Mounting Debt Woes
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33 Briefs Energy
34 International Finance
35 Global and Regional Developments
36 National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
Secret
DI JEEW 85-039
27 September 1985
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-OPEC: Saudi Arabia Throws Down the Gauntlet
OPEC ministers will again face a seemingly intractable set of circumstances
when they meet next Thursday in Vienna. Failure to reach an agreement that
the major producers are willing to live with could touch off another round of
price reductions, notwithstanding higher winter demand.
3 Impact of a Persian Gulf Oil Cutoff
Iraq's recent attacks against Khark Island have increased the risk that Tehran
might move to interdict oil shipments from the Persian Gulf. Although US
imports from Persian Gulf countries are small, the United States would share
the burden of any net supply shortfall as oil prices rose and oil companies di-
verted supplies in response to market pressures.
9 South Africa: Unlikely to Use Strategic Minerals Leverage
We believe that South Africa is unlikely to react to Western sanctions by
cutting off supplies of strategic minerals to the import-dependent West. Even
if some limited action were taken, such an embargo probably would be short
lived and have limted impact on the West.
13 Japan's Debt Refinancing Crunch: Much Ado About Nothing?
Prime Minister Nakasone and the powerful Ministry of Finance will continue
to use the specter of a debt refinancing crisis to argue against increasing
government spending to stimulate the economy. Tokyo remains concerned that
refinancing massive amounts of debt falling due in the next few years-
averaging about $45 billion annually-will disrupt Japanese capital markets.
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17 Peru: An Economy Under Siege
Alan Garcia, sworn in as Peru's new president on 28 July, has moved swiftly to
implement new economic policies to restore growth, improve social welfare,
and reduce foreign dependency. Nonetheless, we foresee worsening economic
conditions for some months and a continuing impasse in debt negotiations,
which will cut off the country from the resources needed to reactivate the
economy.
Secret
DI IEEW 85-039
27 September 1985
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Haiti's inability to remain in compliance with its IMF program threatens to
undo fledgling progress under the previous accord and push the economy back
into a prolonged recession. In these circumstances, Port-au-Prince is likely to
look increasingly to Washington for a bailout as a quid pro quo for
implementing US-prodded political reforms.
29 Egypt: Mounting Debt Woes
Egypt's foreign payments position has turned sharply negative as a result of
poor hard currency earnings. Over the next several years, Egypt will face
continued payments deficits that are likely to stymie economic growth,
increase public discontent, and strain the present political consensus within the
country.
Secret iv
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Perspective
Economic .& Energy Weekly I 25X1
International
27 September 1985
OPEC ministers will again face a seemingly intractable set of circumstances
when they meet next Thursday in Vienna. Discussion of production quotas-
purposely avoided at the July meeting-will apparently be the primary item on
the agenda. Demand for OPEC oil has been running more than 1 million b/d
below the organization's 16 million b/d production ceiling. While the majority
of members have exercised remarkable production restraint over the interven-
ing two months, it has still fallen upon Saudi Arabia to bear the brunt of the
production cutbacks needed to support prices. 25X1
Riyadh is now intent on using price discountin to raise oil 25X1
production by about 1 million b/d in October. 25X1
of the expected growth in fourth-quarter demand.
The Saudi moves appear to formalize Riyadh's renouncement of its swing
producer role, which has propped up OPEC's official price structure. Recently
negotiated crude contracts reportedly reduce Saudi prices by as much as $3
per barrel in the current market by linking them to product prices. King Fahd
has indicated that Riyadh has the right to set its prices unilaterally, as long as
it remains within its quota of 4.35 million b/d. It is questionable whether the
other members will acquiese to the Saudi action by holding their own
production at, or near, present levels. Furthermore, the move comes at the
same time Iraq's newly completed pipeline link to Saudi Arabia becomes
operational. Planned increases in Saudi and Iraqi output would cover nearly all
shipments.
The escalating Iran-Iraq war may also polarize OPEC at a time when cohesion
is essential to deal with an oil market that refuses to take the organization's ac-
tions seriously. While Tehran has threatened to match any increase in Iraqi
exports, Baghdad's escalation of attacks on Khark Island may seriously affect
Iran's capacity to increase crude exports. Indeed, there is a substantial risk
that another major attack could knock out Khark exports entirely for an
extended period, precipitating Iranian retaliation against Persian Gulf oil
Several other OPEC members also have the potential to undermine OPEC's
tenuous balance:
? Despite the new government's verbal support for OPEC, the new Nigerian
President has made it clear that oil policy will be based on "national
interest." Nigerian production is beginning to climb significantly following
price concessions to producing companies.
? Financially strapped Indonesia is also reported to be seeking new means to
bolster slumping oil sales and revenue.
1 Secret
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27 September 1985
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? Venezuelan oil exports climbed over 30 percent in August following price
cuts on its heavier crudes and refined products.
Despite severe revenue pressures, many OPEC members have been willing to
act with restraint over the past several months on the presumption that they
would be able to share in the general rise in winter exports. In the face of ag-
gressive Saudi and Iraqi marketing tactics, however, these countries may not
be able to take advantage of the seasonal increase in demand without further
price concessions of their own.
Failure to reach an agreement that the major producers are willing to live with
could touch off another round of price reductions, notwithstanding higher
winter demand. Central to the outcome in Vienna and the future of OPEC is
how individual members react to the Saudi move and Iraq's intention to run its
new pipeline at full capacity. We expect the majority of OPEC members to
emerge from the meeting pledging to abide by production quotas. Precarious
financial conditions in most member countries, however, will make compliance
difficult and keep downward pressure on prices. Should competition for market
share intensify, prices could decline sharply-perhaps to below $20 per barrel.
Nontheless, a disruption of Persian Gulf supplies would radically change this
situation. Depending on the severity of the cutoff, surplus productive capacity
would shrink and possible supply shortfalls could result.
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Impact of a Persian Gulf
Oil Cutoff
Iraq's recent attacks against Khark Island have
increased the risk that Tehran might move to
interdict oil shipments from the Persian Gulf. The
cumulative effect of Baghdad's attacks has reduced
Khark's export capacity by about 60 percent to less
than 3.8 million b/d. With non-Communist surplus
capacity now running at about 11 million b/d-
almost one-half is in Saudi Arabia-the market
could easily absorb a loss of exports from Iran, as
well as Iraq and Kuwait. A serious problem, howev-
er, would arise if Saudi exports were also cut or if
all oil shipping in the Persian Gulf were stopped.
Although US imports from Persian Gulf countries
are small, the United States would share the
burden of any net supply shortfall as oil prices rose
and oil companies diverted supplies in response to
market pressures. In the event of a major disrup-
tion, oil supplies might be allocated based on the
International Energy Agency (IEA) sharing agree-
ment, which could mean significant diversion of oil
from the US market to Western Europe and Japan.
of that surplus is outside the Persian Gulf.
about 11 million b/d, but only some 3 million b/d
The current combination of substantial excess pro-
duction capacity and weak demand provides con-
siderable protection in the event of an oil supply
cutoff. Current available surplus capacity stands at
Weak market conditions, however, have caused oil
companies to reduce oil stocks. We estimate non-
Communist oil stocks at midyear stood at roughly
4.0 billion barrels or some 85 days of supply:
? Most of current stocks represent minimum oper-
ating requirements, compulsory stocks that com-
panies maintain to meet government regulations,
and government-owned stocks. We estimate that
usable commercial inventories total only about
Non-Communist Oil Supplies Million b/d
First Half 1985 a
Available
Capacity
Current
Production
Surplus
Capacity
Persian Gulf
17.4
10.0
7.4
Saudi Arabia
8.5
3.4
5.1
3.3
2.4
0.9
Iraq
1.3
1.3
0.0
Kuwait
1.3
0.9
0.4
UAE
1.8
1.3
0.6
Other
1.2
0.8
0.4
Non-Persian Gulf
37.2
34.1
3.2
Indonesia
1.8
1.3
0.4
Libya
1.9
1.1
0.8
Nigeria
2.2
1.5
0.7
Venezuela
2.3
1.7
0.7
Algeria
1.2
1.1
0.1
100-200 million barrels or two to four days of
consumption. This stock cushion has declined
from about 20 to 25 days in the early 1980s and
now provides only a small hedge against oil
supply cutoffs.
? Sizable government-owned stocks are located
only in the United States (486 million barrels),
Japan (110 million barrels), and West Germany
(55 million barrels). In July 1984 IEA members
agreed to coordinate stock drawdowns and/or
take "complementary action" (demand restraint)
to share the burden of any economic dislocations
in future oil disruptions.
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DI IEEW 85-039
27 September 1985
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CanmuRgia!ve IDzmnalge to
lralu's Khnirk Nz nd ?nll IFacnll>itnes
Khark Island
(Jazireh-ye Khark)
-BERTH 14 ? -19 Se~ds [0) C^Z
- ?
_Submeraed oil ninallno \ ? _ ?
------=* 0 e
P P.""e ? 3 1 ?
P
merged a
-BERTH 12 qP __"Partially repaired since so**
* June 1984 attack
?0
BERTH 8t/-since August attack
Remains damaged
BERTH 2 since August attack
BERTH 4 BERTH 3
BERTH 6 BERTH 5
T.-jetty oil-
loading terminal
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Western Dependence on Persian Gulf Oil
Persian Gulf countries are now exporting about 7.5
million b/d, accounting for about one-fifth of total
non-Communist oil supplies. Of this, some 6 million
b/d flow through the Strait of Hormuz, with the
remainder shipped via pipelines from Saudi Arabia
and Iraq to the Mediterranean and the Red Sea. In
first quarter 1985, Western Europe, Japan, and the
United States relied on the region for about 18
percent, 58 percent, and 4 percent, respectively, of
their total oil imports. Although Western Europe's
reliance on the region has declined in recent years,
several countries remain heavily dependent on Per-
sian Gulf oil. Italy, Greece, Portugal, and Turkey
received from 33 to 80 percent of their oil supplies
from the region during first quarter 1985.
Damage at Khark
The ability of the Iranians to continue exporting oil
from Khark Island is the linchpin of the current
threat to Persian Gulf oil flows. The 19 September
Iraqi attack, coupled with the cumulative deterio-
ration of Khark's oil facilities since the beginning
of the war, has substantially reduced its export
flexibility and durability. Although the recent air
attacks-13 since mid-August-have probably not
yet reduced export capacity below recent island
export levels of 1.6 million b/d, oil shipments have
been disrupted for brief periods, and the flexibility
and reliability, have been substantially reduced.
air attacks.
The island's oil loading capacity has been reduced
from 9.1 million b/d to a maximum of 3.8 million
b/d by the recent attacks. Ongoing repairs are
likely to add only another 700,000 b/d capacity
within the next month. While this capacity is
roughly twice recent island export levels, it is
concentrated at four of 14 berths that have also
been damaged by Iraqi raids during the war. It is
questionable whether capacity can be maintained
because of the temporary nature of the repairs,
much less withstand the pressure of repeated Iraqi
The prospect of continued attacks against Khark
combined with its increasingly fragile operating
condition suggest that another major Iraqi raid
could easily knock out Khark exports for an extend-
ed period. Loss of Khark would reduce Iranian
export to less that 400,000 b/d from its southern
Gulf island terminals at Lavan and Sirri. Oil in
Iran's floating storage off Sirri could maintain
recent export levels for only about one week.
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Vulnerability of Other
Persian Gulf Oil Facilities
With the exception of Iraqi oil facilities, key choke
points in the oil systems of other Arab Gulf
countries are vulnerable to Iranian attacks. Al-
though crude oil is now beginning to flow from
southern Iraq through the spur to Saudi Arabia's
East-West pipeline, the well-defended pumpsta-
tions along the Iraq-Turkey pipeline remain the
most critical choke points for Iranian attack fol-
lowed by the crude processing plants at Kirkuk,
which serve Iraq's northern oilfields. Elsewhere in
the Gulf, the most critical and vulnerable oil
targets are the export-loading facilities. Saudi facil-
ities at Ras Tanura and Ju'aymah are at risk to
both Iranian air attack and commando raids, as
Kuwait's Mina al Ahmadi onshore export terminal
and Sea Island. While less accessible, Saudi Ara-
bia's inland crude processing plant at Abqaiq is
also an essential oil facility the Iranians might
target. If key components of these facilities were
damaged, it could take more than three months to
reopen them even partially;, repairing major struc-
tural damage could take a year
Impact of Oil Disruptions
The impact of a disruption of Persian Gulf oil
exports in the near term would depend mainly on
its severity and duration, the availability of supplies
from other producers, and the use of petroleum
stockpiles. Surplus available capacity is more than
sufficient to offset the loss of Iranian exports,
currently averaging about 1.8 million b/d. Spot
prices, however, would likely rise if buyers antici-
pated a further spread of the conflict.
If Khark Island were shut down and Tehran retali-
ated by severing the Iraqi pipeline and knocking
out Kuwaiti exports, a total of nearly 5 million b/d
of export capacity would be lost. Although other
countries could replace these lost supplies by rais-
ing output, this would eliminate much of the
surplus capacity. The uncertainties surrounding the
duration of the disruption and the fear of a much
Oil Disruption Scenarios Million b/d
Cutoff of Iranian
exports
Cutoff of exports
from Iran, Iraq,
and
Kuwait
Loss of Saudi
Gulf exports
Cutoff of all Per-
sian Gulf exports
and interruption of
Iraq-Turkey
pipeline
Demand
Lost
Capacity
Available
Productive
Capacity
Surplus
44.1
4.8
49.8
5.7
44.1
5.9
48.7
4.6
44.1
13.7
40.9
-3.2
more serious shortage resulting from a cutoff of
Saudi exports would cause spot prices to rise. As
long as Saudi export capabilities remain intact,
however, oil supplies should be adequate to meet
winter consumption requirements.
Under a worst case scenario the interruption of oil
flows through the Iraq-Turkey pipeline and the
cutoff of all Persian Gulf oil exports-nearly 14
million b/d in Persian Gulf productive capacity
would be lost to the market. Denial of access to
Persian Gulf oil supplies for a prolonged period
would cause a 3 to 4 million b/d net supply
shortfall, almost double the size of the shortage
caused by the Iranian Revolution in 1979. Under
these circumstances, oil prices would rise sharply
and the OECD economic recovery would be inter-
rupted. We estimate oil prices could rise by about
$5 to 10 per barrel for each 1 million b/d net
supply shortfall. Furthermore, under this worst
case scenario the real GNP growth rate for the
OECD in the first year of the disruption could be
reduced by up to 2 percentage points.
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Implications for the United States
minimum of 7 percent.
The United States has a large stake in the contin-
ued flow of oil from the Persian Gulf in spite of the
fact that US oil imports from the Gulf are less than
200,000 b/d. Although the United States could
draw on non-Gulf surplus capacity to cover a loss in
Persian Gulf imports, it probably would be required
to share the burden of any OECD net supply
shortfall either through informal company redistri-
bution or the IEA allocation system. The IEA
sharing plan can be triggered when the shortfall
faced by a member country or the group reaches a
stockpile requirements.
Effective deployment of-government-owned stocks
under the terms of the IEA agreement would play
an important role in offsetting any future oil supply
disruption. The key players in any coordinated
strategic stock drawdown would be the United
States, Japan, and West Germany. The major
problem would be the design and implementation
of a program believed to be effective and equitable.
In addition to demand restraint measures, countries
without government-owned stockpiles could share
the burden of a disruption by augmenting supplies
through a relaxation of mandatory commercial
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Strategic Minerals: World Production and Reserves, 1984
Share of Western
Production
Share of World
Production
Share of World
Reserves
Chromium
46
27
84
Manganese
24
11
71
42
81
30
47
Secret 8
Share of World
Production
USSR
29
Albania
11
Zimbabwe
5
Turkey
5
India
5
USSR
47
Gabon
9
Brazil
9
China
7
India
6
USSR
54
Canada
3
USSR
33
China
17
Finland
11
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South Africa: Unlikely To U
Strategic Minerals Leverage
We believe that South Africa is unlikely to react to
Western sanctions by cutting off supplies of strate-
gic minerals to the import-dependent West. A
South African embargo would be counterproduc-
tive economically, lowering export earnings in the
face of a debt and liquidity crisis. Moreover, an
embargo would tarnish South Africa's reputation
as a reliable supplier of strategic minerals and
would spur substitution and recycling efforts by
industrial users. Even if some limited action were
taken for political reasons, we believe that such an
embargo would be short lived and have limited
impact on the West.
Strategic Minerals: Import Dependence Percent
United States
EC a
(1983)
Japan a
(1983)
Share of US
Consumption
Supplied by
Imports
(1984)
Share of US
Consumption
Supplied by
South Africa
(1980-83)
Manganese
99
39
99
95
Platinum
group
91
49
100
95
Key Supplier
Concerns that South Africa would use its vast
mineral wealth as a political lever against the West
have surfaced each time Western economic sanc-
tions against Pretoria have been suggested or im-
posed. South African officials themselves have
occasionally hinted that a strategic mineral cutoff
might be used in retaliation. What makes the
threat credible is the heavy dependence of many
Western countries on a variety of South African
minerals:
? South Africa is the West's leading producer of
chromium, manganese, platinum-group-metals
(PGM), and vanadium, accounting for 24 to 90
percent of Western output. Only the Soviet Union
can compete in terms of volume of production
and reserves.
? Western import dependence for these four strate-
gic minerals varies from 50 to 99 percent for the
United States, 92 to 100 percent for the EC, and
70 to 99 percent for Japan. South Africa is the
key supplier to most of these markets.
a Details on EC and Japanese imports of South African strategic
minerals are incomplete.
While mining revenues account for approximately
two-thirds of South African export earnings, the
importance of strategic minerals is dwarfed by the
economic contribution of gold and other minerals.
Gold alone accounts for nearly half of all export
earnings. Diamonds and coal, not normally consid-
ered strategic, contribute an additional 10 to 11
percent. Chromium, manganese, vanadium, plati-
num-group metals, and ferroalloys account for no
more than 9 percent of earnings, according to our
estimates.
The strategic mineral industry's contribution to
South African employment also is relatively minor.
The entire mining industry (including coal and
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South Africa: The Importance of
Strategic Minerals, 1984
a Platinum group metals, 5 percent; ferroalloys, 3 percent; and other, I percent.
uranium) employs only 14 percent of all South
African workers with the gold industry again the
major player. We estimate that only 10 percent of
all mine workers-1 percent of the entire labor
force-are employed by the strategic minerals sec-
Lack of Minerals Leverage
Although the South African economy is not depen-
dent on the export of strategic minerals, an embar-
go at this time would deepen the current financial
crisis. Over the longer term, an embargo would be
more damaging:
? Gold earnings are expected to decline because of
depletion of high-quality reserves, and South
Africa will look to nongold exports-such as
strategic minerals-to maintain economic
growth.
? Any deliberate supply cutoff would tarnish South
Africa's reputation as a reliable supplier, and a
portion of its market share could be lost even if
the embargo were later lifted.
? In addition, a supply cutoff would undoubtedly
trigger accelerated substitution and recycling ef-
forts, encourage competing producers to gear up
production, and possibly lead to use of govern-
ment stockpiles. The Soviet Union would proba-
bly exploit the situation, using substantial profits
to offset declines in other hard currency exports.
Prospects for an Embargo
Moreover, there is no indication that South African
mineral producers are concerned that their govern-
ment will take action. According to Embassy re-
porting, producers are more concerned that West-
ern trade sanctions-currently confined to coal-
could spread to other mineral commodities. As a
result, we believe that a total embargo of South
African strategic minerals is unlikely. However,
Pretoria might opt for a partial embargo as a
political gesture. South Africa would lose little of
its trade volume, at least in the short run, and
would probably try to reorient its strategic mineral
trade to other markets. In that case, we believe
Western countries could survive by encouraging
alternate producers to restart idled capacity, in-
creasing imports from the USSR, using stockpiled
materials, intensifying recycling efforts, and, if
necessary, reducing civilian usage.
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South African Strategic Minerals-
Prospects and Vulnerabilities
Uses and Strategic
Applications
Ferrochromium stain-
less steel specialty
alloys
Tanks, ships, military
aircraft, naval nuclear
propulsion systems
South African
Prospects
South African
Vulnerabilities
Will probably
emerge as premier-
ferrochromium
producer because
of vast reserves and
cheap power
Low rand value
will contribute to
keep costs down
and dollar earnings
high for producers
Earnings unlikely
to rise dramatical-
ly-prices forecast
to increase slowly
Auto catalytic
converters
Electrical contacts
Petroleum and chemi-
cal catalysts
No major new
competition on
horizon
Domestic industry
in throes of major
expansion to meet
projected increased
demand
Industry controlled
by three companies
who adjust produc-
tion to changes in
demand, thus sti-
fling substitution
and recycling
Consumption ex-
pected to rise as
Europeans impose
strict auto emis-
sions standards
Some competition
from new ferrochro-
mium plants in
Greece, India, Phil-
ippines, Finland,
Sweden, and Turkey
Increased substitu-
tion likely in noncrit-
ical applications
Recent merger of
two major produc-
ers should curb
production costs
and improve
competitiveness
Consumption tied to
steel demand
Increased competi-
tion from Gabon,
Australia, and Brazil
May be unqble to
capture pa. i of new
Soviet and Chinese
markets
Forces depressing Steel alloys
gold prices-strong
dollar, high interest Titanium alloys
rates, and low infla-
tion--could continue Oil pipelines
to keep lid on PGM
prices despite im- Jet engines
proved market
Uses and Strategic South African
Applications Prospects
Manganese
South African
Vulnerabilities
Technology will con-
tinue to lower
amount of manga-
nese used per unit of
steel
Ferromanganese for Will retain position
steel production as one of world's
major producers-
Ships, tanks, other has large reserves
military vehicles
Producers willing
to compete by low-
ering prices
Rand weakness has
boosted revenues
Boom-bust nature of
industry likely to
continue
Recycling could sup-
ply up to 10 percent
of world consump-
tion by 1990
Large sales to the
West by China if
prices rise
sufficiently
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Secret
Japan's Debt Refinancing Crunch:
Much Ado About Nothing?
Prime Minister Nakasone and the powerful Minis-
try of Finance will continue to use the specter of a
debt-refinancing crisis to argue against increasing
government spending to stimulate the economy.
Tokyo remains concerned that refinancing massive
amounts of debt falling due in the next few years-
averaging about $45 billion annually-will disrupt
Japanese capital markets. We doubt, however, that
such disruption will occur over the next 18 months,
chiefly because Tokyo has created more attractive,
market-oriented government debt instruments and
because private-sector loan demand is weak. Be-
yond 1986, only the combination of a sharp in-
crease in government spending, rising international
interest rates, and a domestic investment boom
would make it difficult for Tokyo to raise funds and
necessitate an increase in Japanese interest rates
relative to the rest of the world.
Government Debt and Austerity
Rapid economic growth in the 1950s and 1960s
allowed Tokyo to steadily increase government
spending, cut taxes most years, and still generate a
budget surplus. Beginning in the mid-1970s, how-
ever, perennial budget surpluses turned into large
deficits-peaking at 5 percent of GNP in fiscal
year 1979 (1 April-31 March).' As a result, the
central government debt has grown from about $7
billion in 1974 to about $530 billion currently.
To head off a financial crisis, both the government
and the ruling Liberal Democratic Party (LDP)
agreed in 1979 that austerity measures were need-
ed. Nakasone in 1983 made the elimination of
operating budget deficits by 1990 the centerpiece
of his government's austerity campaign. Although
it will probably not meet this goal, Tokyo has made
' The government had regularly financed capital expenditures by
public borrowing; deficit financing bonds, however, require an
annual authorization from the legislature. The figures include
Japan: Scheduled Redemption of Central Billion US $
Government Debt, 1983-90 a
Fiscal Year
Total
Construction
Deficit
Financing
1983
22.1
21.5
0.6
1984
25.8
25.2
0.6
1985
41.0
31.9
9.1
1986
44.5
30.1
14.4
1987
46.7
28.3
18.4
1988
41.6
28.0
13.6
1989
44.4
19.4
25.0
1990
48.2
15.6
32.6
substantial progress. General government outlays
rose only 23 percent between 1980 and 1985,
compared with a 31-percent rise in nominal GNP.
The proposed budget for fiscal 1986 continues the
austerity trend, with general outlays projected to
increase by only 0.9 percent over fiscal 1985. Most
ministries will suffer a 10-percent reduction in
operating budgets-the third straight year of cuts
in nominal expenditures. Proposed spending for
public works, moreover, is down 5 percent for the
second year in a row. The exceptions-as for the
past several years-are defense (allowed a 7-per-
cent rise) and foreign aid (up 10 percent).
The Debt Refinancing Crunch
Tokyo's budget-cutting effort has been spurred by
concern over a possible debt refinancing crunch.
Secret
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General Government Budget Balance
as a Share of GNP, 1979-86a
I I I I I _J
1979 80 81 82 83 84 85 86
a 1985-86 data projected. Government deficits adjusted by OECD
for comparability to include social insurance programs.
Between 1975 and 1980 Tokyo financed its bur-
geoning deficits by issuing 10-year bonds. Thus, the
government now faces the task of refunding mas-
sive amounts of debt. Some Japanese and US
economic analysts predict a serious problem in
convincing the Japanese private sector to lend the
government enough money to refund maturing debt
without seriously disrupting the Japanese financial
system. Under this scenario, the government would
be forced to pay sharply higher interest rates to
attract funds, thus slowing Japanese economic
growth. Higher domestic interest rates would prob-
ably reduce the flow of capital out of Japan and
strengthen the yen. Another common fear is that
bonds with less than one year to maturity-paying
relatively high interest rates for the Japanese mar-
ket-would begin to drain funds from bank and
postal savings accounts, which have regulated, low
interest rates. The resulting drop in low-interest
deposits would harm bank profitability.
Prospects for Refinancing
Despite the gloomy predictions, we believe Tokyo
will have little trouble rolling over the debt coming
due this year and next, as well as borrowing
additional funds to finance ongoing deficits. The
government has taken steps to ensure new debt
issues will be welcome in the more competitive
Japanese financial environment. These measures
include issuing securities with varying maturities,
some public auctions of government bonds, and
offering short-term government bonds starting later
this fiscal year. Tokyo also plans to use-some funds
derived from next year's sale of Nippon Telephone
and Telegraph stock to refund part of the debt.
Crowding out of private business investment by
government borrowing also appears unlikely in the
near term. Most private investment in Japan is
financed by internal funds or bank loans rather
than in the bond market. Although business invest-
ment has been strong over the past year and capital
outflows brisk, there is no shortage of domestic
funds. The steady reduction in the budget deficit-
projected to fall another $600-700 million in fiscal
1985-also reduces competition for Japan's ample
savings. The first real test of the crowding-out
thesis will come with the November 1985 and
February 1986 refinancing of $9 billion in each
month.
Beyond 1986, we believe it is unlikely that debt
refinancing would lead to sharply higher interest
rates and upward pressure on the yen unless there
were concurrent increases in government spending,
a general rise in world interest rates, and a domes-
tic investment boom. Unless the Bank of Japan
then eased its stringent monetary policy, Japanese
interest rates would probably increase relative to
US rates, slowing the capital outflow.
Implications for Demand Expansion
In the past two months, influential Japanese politi-
cians and government officials increasingly have
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Secret
Impact on Financial Liberalization
Concern over a possible debt refinancing crunch
provides continuing impetus for Tokyo's commit-
ment to liberalize financial markets. The need to
offer attractive financial terms to sell $50-60 bil-
lion in government bonds annually has constrained
the Finance Ministry's ability to set long-term
interest rates. It is no longer able to dictate terms
to the bond underwriting syndicate or to force
banks and securities houses to "digest" large
quantities of debt at below-market interest rates.
The rapid growth of the debt itself created a vast
secondary market for trading government bonds-
a market that dwarfs the corporate bond market-
and provides a benchmark interest rate from which
the government's new issues cannot far deviate.
The Finance Ministry now also auctions off some
shorter maturity bonds at market rates and float
15-year and longer bonds by private placement.
Measures to ease refinancing, such as reducing the
period that underwriting institutions have to hold
the new issues before selling them to the public,
have greatly increased the liquidity of government
securities.
called for Tokyo to adopt measures to expand
domestic demand as a method of easing trade
friction with the United States. Nonetheless, Tokyo
has all but ruled out increased government spend-
ing to stimulate the economy, citing the need to
reduce the growth of the debt. Special government
and party commissions are considering tax mea-
sures to spur private spending, but these measures
are supposed to be revenue neutral.
Over the next year, the Finance Ministry plans still
other moves to ease refinancing:
? Short-term bonds (maturity of less than one
year) are scheduled for issue some time this year.
? A bond futures market is scheduled to open in
October 1986.
? Although the Finance Ministry still opposes the
public sale of Treasury bills (now absorbed en-
tirely by the Bank of Japan) as deficit financing
measures, their use is still being studied, accord-
ing to press reports.
diation.
The Finance Ministry remains worried about the
possible impact of the maturing government debt
on bank and postal savings accounts. Although the
Bank of Japan has absorbed most of the bonds
with less than a year to maturity, it may not
continue to do so. Finance Ministry officials hope
to avoid having to raise interest rates on savings
deposits ahead of schedule to prevent disinterme-
almost certainly decline further the next year. If
the revenues tagged for the social security trust
fund were included in the budget figures-as they
are in the United States-Tokyo's deficit would be
only about 1.5 percent of GNP for fiscal 1985.
Debt refinancing is likely to proceed smoothly if
Tokyo continues financial liberalization. Nonethe-
less, the strong resistance to economic stimulus is
likely to continue because, in our view, top govern-
ment and party leaders wish to reduce the size of
We believe it will become harder, however, for
Tokyo to cite a burdensome budget deficit and
potential debt refinancing crisis as limiting fiscal
expansion. Our estimates indicate the deficit will
fall below 4 percent of GNP in fiscal 1986 and will
the government sector in Japan.
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Secret
Peru: An Economy
Under Siege
Alan Garcia, sworn in as Peru's new president on
28 July, has moved swiftly to implement new
economic policies to restore growth, improve social
welfare, and reduce foreign dependency. He re-
mains committed to bypassing the IMF and limit-
ing debt servicing to 10 percent of export earnings
over the next 16 months. Garcia's crusading style
in launching these initial economic moves has
contributed to his broad domestic popularity. As he
attempts to translate this support into policy, Gar-
cia most likely will choose between his current plan
for self-imposed austerity, or a stimulative program
to foster high levels of growth and job creation.
Under either approach we foresee worsening eco-
nomic conditions for some months and a continuing
impasse in debt negotiations, which will cut off the
country from the resources needed to reactivate the
economy.
The New President's
Economic Views
Based on Garcia's press statements and public
speeches
the center-left President favors highly nationalistic
economic policies aimed at restoring growth and
reducing foreign dependency. Externally, these in-
clude limiting debt servicing to 10 percent of export
earnings over the next 16 months, promoting joint
action among Latin debtors to secure easier repay-
ment terms, criticizing "economic imperialism,"
strengthening controls over foreign investment, and
tightening exchange controls to bolster exports and
reduce imports. Domestically, Garcia stresses agri-
cultural development to eliminate food imports and
import-substitution behind tariff barriers to reacti-
vate industry. To stabilize the economy, the new
President wants to tax heavily wealthy individuals
and corporations and implement tighter planning to
balance the budget. We judge
that Garcia's goal is a self-imposed
stabilization program, similar to those in Colombia
and Venezuela, that would win support from for-
eign lenders without the need for a formal IMF
adjustment program.
Garcia Takes Charge
Domestic Policy. Following through on pledges
given in his inaugural address, Garcia -is. moving to
bolster living standards. According to US Embassy
reporting, he first lowered domestic interest rates,
froze rents, and put price controls on basic consum-
er goods for 90 days in a politically popular attack
against inflation. He then froze dollar deposits for
90 days and devalued the currency 12 percent to
reduce capital flight. Next, he placed import con-
trols on 300 items to protect industry and foreign
exchange. More recently, Garcia reduced salaries 25X1
of top officials, froze government hiring, and began
restructuring the agricultural and oil bureaucracy
to reduce the budget deficit. He has also granted
wage hikes to quell worker restiveness and prom-
ised technical and financial assistance to farmers.
Debt and Foreign Investment. Garcia views debt as
a primarily political issue because it impedes his
flexibility to initiate the social welfare programs he
regards as necessary to prevent political unrest.
While the new President has yet to formulate
concrete debt repayment schedules, US Embassy
reports suggest he may follow Bolivia's example by
dribbling out payments to multilateral institutions
and then to government donors. Finance Ministry
officials have requested that all longer term debt
maturities be extended through next January, ac-
cording to US Embassy and press reports. A repre-
sentative of Peru's foreign bank advisory committee
has visited Lima to discuss current debt policy on
interest payments, but Garcia's public posture is
Secret
DI JEEW 85-039
27 September 1985
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Secret
Peru: Balance of Payments, 1980-85
Peruvian CIA
Government
Current account balance
62
-1,723
-1,613
-875
-253
-552
-395
Trade balance
837
-553
-428
293
1,007
864
1,020
Exports, f.o.b.
3,898
3,249
3,293
3,015
3,147
3,122
3,120
Of which:
Copper
752
529
460
443
442
475
450
Oil
777
692
719
544
618
547
545
Imports, f.o.b.
3,062
3,802
3,721
2,722
2,140
2,258
2,100
Net services and transfers
-775
-1,170
-1,185
-1,168
-1,260
-1,416
-1,415
Interest payments c
-667
-721
-713
-828
-632
-605
-600
Capital account balance
785
1,117
1,744
1,384
1,232
675
75
Direct investment
27
125
48
38
-89
-68
-70
Amortization
-1,511
-1,520
-1,106
-1,239
-1,758
-1,344
-1,345
New borrowing
343
302
855
1,294
1,010
900
300
Short-term capital, errors and omissions
323
389
544
-552
-735
-157
-200
Arrearages
0
0
0
0
450
589
590
Foreign exchange reserves, at end of year d
1,979
1,200
1,350
1,365
1,630
1,460 e
1,000
Total debt
9,594
10,230
11,340
12,442
13,475
14,375
13,775
Debt service ratio (percent)
56
68
55
69
76
95
80
Debt as a share of GDP (percent)
44
51
56
77
80
84
80
a Estimated.
b Projected.
c Scheduled interest payments minus arrears.
d Excludes gold holdings, as reported in the IMF's International
Financial Statistics.
e As of 12 July 1985.
impeding the resumption of negotiations. Mean- Pressure Points Ahead
while, he recently rescinded US oil companies'
contracts, citing their failure to reinvest profits, but Reducing the budget deficit will be a problem area.
provided 90 days to renegotiate these contracts on We concur with the US Embassy that the direction
more favorable terms, according to the US Embas- of fiscal policy is unclear. Currently, the President
sy. similar action may is forcing cabinet ministers to reduce expenditures
be taken against Southern Peru Copper Corpora- but is promising additional spending on pet pro-
tion, another US venture.
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Secret
Peru: Stormy Relations With the IMF
Negotiations for a Compliance with program: Periods of
program S (Standby); noncompliance
EFF (Extended Fund Facility)
Adjusted
compliance
IMF board approves 3-year
$715 million EFF through
May 1985 and $225 million
in compensatory financing
Cont.
EFF
2nd year
jects, such as development funds for the guerrilla-
prone emergency zones. Garcia's success in keeping
spending down also hinges on his ability to cope
with military demands for arms purchases, tradi-
tionally one of the largest components of the gov-
ernment budget. The agricultural assistance pro-
gram, still not well defined, could also cause
significant budgetary overruns.
IMF board approves
14-month $255 million
standby through
July 1985
Fiscal deficit
target renegotiated
IMF tranche not
disbursed because
of noncompliance
Garcia's impulsive style will pose problems for
economic management. The US Embassy, for ex-
ample, has reported that he did not inform Finance
Minister Alva Castro of his decision to rescind US
oil companies' contracts
Thus, we foresee increased tension
Garcia's bold first steps have created the appear-
ance of a government with vision and determina-
Unable to draw
tranche because
of noncompliance
Garcia reiterates
intention to bypass
IMF and deal directly
with creditors
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Secret
tion. Even so, Peru faces bleak economic prospects
over the next 12 months, raising the risk that his
promises will boost popular expectations to an
unrealistic level.
streamline the bureaucracy, limit arms spending,
and improve tax collection could eventually co-
alesce into a self-imposed stabilization program 4
that would break the financial impasse. Central o
Bank President Webb, for example, recently told
US Embassy officials that higher tariffs will bolster -4
government revenues while public spending is being
restrained. Given the limit on debt repayments,
Webb projects a small budget surplus which will 12
Even in the best case, we and other experts believe
economic growth will fall short of last year's 3-
percent rate because shortages of industrial imports
and foreign credit and uncertainty will stifle do-
mestic investment and construction. Moreover, in-
flation, running at an annual rate of 170 percent in
July, will easily reach 200 percent as a result of a
large fiscal deficit. Based on current trade returns,
depressed prices for key exports will lead to another
current account deficit. At best, we believe Lima
will not allow any more than token interest pay-
ments, and a financial settlement probably will be
delayed until next year. Meanwhile, the weak
economy and uncertainty over the investment cli-
mate will most certainly discourage foreign invest-
ment.
The Economic Disaster Scenario. Pursuit of piece-
meal adjustments, aimed at protecting Garcia's
popularity, however, could lead to a dramatic wors-
ening in economic performance over the near term.
Should Garcia then opt for growth and' job cre-
ation-as we believe he would if his popularity
were to slide because of the resurgence of infla-
tion-increases in government investment and as-
sistance programs would outrun tax collection,
forcing the Central Bank to print money. As a
result, the budget deficit could soar to a record 18
percent and push inflation beyond 300 percent,
according to an econometric forecast by Peru's
Development Institute.
Industrial Production
Index: 1980 100
Agricultural Output
Index: 1980 100
Money Supply Growth
Percent
Consumer Price Growth
Percent
Mineral and Petroleum Output
Index: 1980 100
Savings and Investment a
Percent
Government Deficit as a Share
of GDP
Percent
a Gross national savings and gross capital formation as a share of GDP.
Is Estimated.
C Projected.
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Under such conditions, Garcia's continued commit-
ment to bypass the IMF and stick to his 10-percent
debt service ceiling would cause creditors to cease
financial support. We believe the cash bind would
intensify-in the face of weak exports and the
likely cessation of trade credits-and restrain eco-
nomic growth. Importing would be on a cash basis
or through barter deals-already in the cards with
the USSR, Israel, France, and Brazil. In our view,
Garcia would continue to press for regional cooper-
ation against creditors to obtain financial conces-
sions and would not hesitate to use international
forums to tout his goal.
Implications for US Interests
Under either scenario, we believe bilateral com-
mercial friction will intensify. Additional import
controls and prospective export subsidies could
enlarge the $735 million US trade deficit recorded
last year with Peru. The financial pinch probably
will make Lima increasingly critical of US counter-
vailing duty actions against Peruvian exports. Al-
ready the press is stridently criticizing Washing-
ton's "reprisals" on Peruvian steel.
Government officials have denied that the decision
to rescind US oil companies' contracts heralds
nationalizations. Nonetheless, according to the
communique published in Lima newspapers, if a
new operating agreement is not reached in 90 days,
Petroperu, the state oil company, will take control
of the facilities of the three foreign oil companies.
Even if the US oil companies' contracts are suc-
cessfully renegotiated, we expect the contracts of
other US companies to be challenged. Peru's insis-
tence on such nationalistic policies as increased use
of local supplies and suppliers is likely to scare off
new foreign investment, especially if Lima also
tightens remittances abroad.
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Haiti: Recent Economic Reverses
Haiti's inability to remain in compliance with its
IMF program threatens to undo fledgling progress
under the previous accord and push the economy
back into a prolonged recession. Haiti faces little or
no economic growth, at best, this year and severe
financial difficulties that could spark renewed un-
rest similar to last year's sporadic food riots. Inter-
national donors-increasingly impatient with the
government's unwillingness to curtail extrabudge-
tary expenditures-are unlikely to respond to
Haitian pleas for help as quickly as in the past.
Unless the Duvalier regime overcomes its myopic
economic policies, even benefits offered under the
US-sponsored Caribbean Basin Initiative (CBI) are
unlikely to entice much new investment. In these
circumstances, Port-au-Prince is likely to look in-
creasingly to Washington for a bailout as a quid
pro quo for implementing US-prodded political
reforms.
Recent Setbacks to the Economic Upturn
Forced by its desperate economic conditions of the
early 1980s to turn to the IMF for help, Haiti
strictly complied with a one-year adjustment pro-
gram (August 1982-September 1983) and was thus
able to conclude a two-year, $63-million standby in
July 1983. the new agree-
ment-slated to run until the end of this month-
was designed to consolidate previous gains, boost
lagging international reserves, attract foreign in-
vestment, and sustain economic growth. The gov-
ernment missed its first spending targets in October
1983 but achieved compliance in January 1984.F-
In May 1984, the regime's response to outbreaks of
civil disturbances, in effect, terminated the standby
program. According to US Embassy reports, erod-
ed living standards caused by reduced government
spending-especially food subsidy cuts-were
largely responsible for the riots. The government
instituted temporary job and food programs in the
affected areas that exceeded IMF guidelines on
spending.
Because of Haiti's failure to maintain compliance,
IMF funding was suspended. Port-au-Prince adopt-
ed a "shadow" IMF program-an informal adjust-
ment scheme requiring adherence to less stringent
targets but providing no financial disbursements.
The Fund views such programs as an intermediate
stage leading to the resumption of a formal pro-
gram. Nevertheless, with financial discipline bro-
ken, Haiti has failed to comply with any IMF
targets.
tion.
Despite the loss of IMF funding, increased govern-
ment spending and generous aid disbursements
from benefactors helped the economy to grow
2 percent last year. Increased exports to the US
market also boosted Haiti's foreign payments posi-
The positive growth figures, however, mask serious
problems. Short-term borrowing abroad to support
unchecked government spending caused the coun-
try's debt-service ratio to edge toward 15 percent
last year. The spurt in public-sector spending also
pushed inflation to 15 percent. Living standards
also suffered from the fiscal indiscipline. Even with
limited government subsidies to selected areas, food
prices escalated 15-25 percent in the last half of
1984 alone. US Embassy reports indicate unem-
ployment, despite costly make-work projects, still
failed to decline. Moreover,
per capita income stood at only $240-9
percent below the 1980 level in current dollars.
Secret
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Secret
A Desperate Economy
Haiti's hand-to-mouth economy foundered in 1981,
and real GDP began two consecutive years of sharp
decline. A hurricane destroyed one-third of the coffee
crop-Haiti's primary export. The export slump
came on top of unbridled public spending and sky-
rocketing oil prices. Living standards-already the
lowest in the hemisphere-deteriorated, and inflation
continued unabated. With unemployment of at least
20 percent and underemployment in the 50-
60-percent range, large-scale legal and illegal emigra-
tion flourished.
The Haitian Government grudgingly turned to the
IMFfor a new program-a $65-million standby
running from August 1982 to September 1983. The
Fund's main target was a cut in total government
Haiti: Economic Indicators, 1980-85
Real GDP Growth
Percent
spending of 25 percent during the period. New sales
taxes were introduced and food subsidies reduced to -8 1980 81 82 83 84 85 a
Debt Service Ratio C
Percent
strengthen government revenues. The Duvalier regime
also severely restricted money supply growth and
imposed a moratorium on commercial borrowingfor
new public projects.
Haiti's efforts produced results by yearend 1983,
although foreign reserves were reduced to barely one
week's import cover in the process. Inflation was
slashed to only 6.5 percent, and the debt service ratio
was held to a manageable 10 percent. Moreover,
foreign payments arrears-which had totaled nearly
$20 million in 1981-were virtually eliminated.
Inflation Rate
Percent
Gross Foreign Reserves,
at Yearend
Million US $
Concessional aid from official donors-largely from
the United States, France, and West Germany-
nearly doubled in response to Haiti's adherence to
IMF stipulations. Foreign investment also rose
sharply in response to the improving economic cli-
mate. Still, living conditions improved little, and
unemployment and underemployment, especially in
the countryside, worsened.
1980 81 82 83 84 85 0 1980 81 82 83 84 85 b
a Little or no growth projected.
b Projected
c Medium- and long-term principal plus interest payments on debt of all
maturities as a share of exports of goods and services.
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Haiti: Balance of Payments, 1981-85
Current account balance
-93.7
-57.5
-78.3
-65.5
-63.5
Trade balance
-192.2
-127.8
-136.6
-128.0
-128.4
Exports
176.1
206.1
222.0
256.6
278.8
Coffee
33.8
40.0
51.2
49.6
56.0
54.3
66.3
73.5
88.9
95.4
Other
88.0
99.8
97.3
118.1
127.4
Imports
368.3
333.9
358.6
384.6
407.2
Oil
59.7
51.5
55.3
59.0
61.6
Other
308.6
282.4
303.3
325.6
345.6
98.5
70.3
58.3
62.5
64.9
101.5
37.7
83.1
69.5
59.5
83.9
41.2
60.2
59.0
55.9
Direct investment
42.4
45.6
63.9
62.0
67.8
Medium- and long-term loans
41.5
-4.4
-3.7
-3.0
-11.9
Net short-term capital
50.4
-8.7
25.3
5.9
6.6
Private capital, errors, and omissions
-32.8
5.2
-2.4
4.6
-3.0
Change in gross reserves
7.8
-19.8
4.8
4.0
-4.0
unless Haiti restores fiscal
Haiti is
having difficulty meeting IMF spending guidelines
because President-for-Life Duvalier continues to
interfere with the budgetary process. Duvalier re-
portedly has authorized government purchases of
residences, overseas properties, and military air-
craft totaling several million dollars. The US Em-
bassy speculates that Duvalier may also be divert-
ing funds to finance a recently formed, pro-
government political party.
ment measures will be needed.
negotiations cannot begin in earnest until Haiti
repays arrears owed it-currently $16 million-
and shows several months of significant progress
under the shadow program. The longer Haiti re-
mains out of compliance with the Fund program,
however, the more difficult it will be to negotiate a
new accord because even more draconian adjust-
IMF fold. Moreover,
discipline the country will suffer another economic
tailspin. Despite recent IMF talks with the govern-
ment, Haiti has made no real progress toward a
new IMF agreement this year. In our judgment,
the regime's unwillingness to come to grips with
excessive government spending and central bank
credits, in particular, will prevent a return to the
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Haiti: A Snapshot of Socioeconomic Disparities
Haiti is a land of startling contrasts; jetsetters, a
millionaire elite, and luxury tourist resorts coexist
with urban squalor and rural destitution.
24,000 Haitians out of a total
population of 6 million own half the country's wealth.
As a result, the per capita income of over 99 percent
of the populace is actually less than $120 a year. In
Petionville, just outside of the capital, the wealthy
live on hillsides overlooking Port-au-Prince in luxury
homes complete with tennis courts, swimming pools,
and formal gardens. By contrast, the vast majority of
Port-au-Prince's 850,000 residents live without pota-
ble water, bathe in open sewers, and many scavenge
the city's garbage dumps for food.
Despite the grinding urban poverty,
30,000 Haitians emigrate to the capital
each year to escape the even more wretched condi-
tions in the countryside.
per capita income in the capital is 10 times
higher than in rural areas, where many Haitians live
outside the money economy altogether. Moreover,
less than 5 percent of the rural population has access
to safe water, compared with nearly 45 percent in
urban areas. Similar rural-urban disparities exist in
the availability of education, health care, and other
social services.
We believe Duvalier will be hard pressed to achieve
even these limited objectives because Haiti's do-
mestic and foreign financial positions are likely to
worsen dramatically by the end of 1985. Haiti
almost certainly will deplete its meager foreign
reserves and run up additional arrears to meet day-
to-day expenses. Unchecked public spending will
increase inflation, and further weaken the gourde,
hurting Haiti's export competitiveness. Moreover,
Duvalier's frivolous expenditures will do little to
generate jobs or spur economic growth. We judge
that stagnation is about the best the Haitian econo-
my can hope for this year.
Haiti's
brightest prospects for resuming economic growth
lie in light manufacturing-especially the assembly
industries. Unless the country can reach agreement
with the IMF on a new program, however, potential
investors will be deterred, even with the advantages
offered by the CBI. Much help from other sectors
is unlikely. For example, the near-term prospects
for agriculture are poor because of the weak world
outlook for coffee, as well as Haiti's badly eroded
There is a good chance that the country will
experience shortages of foodstuffs and other im-
ported staples that could easily prompt renewed
Haiti Dominican
Republic
Population, 1985 5.8 6.6
(million persons)
Per capita income, 1984 235 1,091
(US Dollars)
Adult literacy, 1984 23 68
(percent)
Urbanization, 1980
(percent)
Infant mortality 118 a 28 b
(deaths per 1.000 live births)
Life expectancy 55 63 b
(years at birth)
Birth rate
(births per 1.000 inhabitants)
Population growth rate, 1970-83 1.7 2.7
(average annual percent)
Labor force in agriculture, 1984 79 47
(percent)
a 1980-85.
b 1983.
popular unrest.) )internation-
al reserves in mid-1985 were sufficient to cover less
than two weeks' worth of imports. Foreign suppliers
are demanding prompt payment for such key im-
ports as petroleum and flour, and one company
reportedly recently delayed offloading oil until the
government fully paid the bill.
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soil and primitive farming methods. In addition,
adverse international
publicity from Haiti's AIDS outbreak will hurt the
small tourist sector.
Haiti's inability to agree on and comply with an
IMF program is likely to present several problems
for the United States. The likely decline in capital
inflows from private and multilateral sources al-
most certainly will prompt Haiti to look to Wash-
ington for larger sums of aid. Reacting to interna-
tional pressure, largely from the US Government,
Duvalier agreed last spring to legalize political
parties and create a prime ministerial system. As a
result, we believe Port-au-Prince will expect espe-
cially generous aid in return. Should the United
States-and other key donors-not meet Haiti's
expectations, Duvalier might well use the country's
economic plight to justify a political crackdown on
his domestic opponents. Some influential hardliners
in the regime, who oppose even limited reforms,
probably already are pushing for such action.
Washington also is likely to face stepped-up illegal
migration to the United States over the near term.
between 1979
and 1984 as many as 40,000 Haitians illegally
entered the United States. Prolonged economic
difficulties are encouraging growing numbers of
Haitians to seek jobs elsewhere. Many probably
will head for the United States because other
traditional havens-The Bahamas and the Domini-
can Republic-have cracked down on illegal en-
trants in recent years. Moreover, the lure of high
US wages will remain especially strong.
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Egypt: Mounting Debt Woes
program.
Egypt's foreign payments position has turned
sharply negative as a result of poor hard currency
earnings. Over the next several years, Egypt will
face continued payments deficits that are likely to
stymie economic growth, increase public discon-
tent, and strain the present political consensus
within the country. Moreover, political con-
straints-particularly on the sensitive food subsidy
issue-will slow the pace of any economic austerity
Tightening Financial Constraints
past year.
Egypt's foreign payments position swung from a
small $200 million surplus in the fiscal year ending
30 June 1984 to an estimated $1.3 billion deficit
this past fiscal year, The
Fund predicts continued large deficits through the
rest of the decade unless the Egyptian Government
embarks on a "comprehensive and substantial ad-
justment effort." Egypt's external debt now ex-
ceeds $32 billion, excluding an estimated
$2.5 billion owed the Soviet Union. Annual debt-
servicing obligations have reached $3.5 billion a
year-roughly one-third of current account re-
ceipts-and arrearages climbed sharply over the
urban growth of 3.5 percent.
Looming financial problems are taking their toll on
the domestic economy. Egypt's modest surpluses
helped fuel annual economic growth of around
8.5 percent between 1975 and 1983, but only 5
percent growth-at best-is projected for the next
several years. Although this is relatively good
growth for an LDC, it is too low for a country with
total population growth of 2.6 percent annually and
Moreover, the need to address external financial
difficulties is unmasking numerous systemic defi-
ciencies in the Egyptian economy. Subsidies, artifi-
cially low interest rates, and a complex, multitiered
Secret
Current account balance
-2
.2 -1.3
-1.4
-1.9
Trade balance
-5
.1 -5.6
-6.6
-6.1
Exports (f.o.b.)
4
.1 3.6
4.0
4.0
Oil
3
.0 2.5-
2.6
2.7
Imports (c.i.f.)
9
.2 9.2
10.6
10.1
2.8 3.8
4.5
3.3
5.9 7.2
8.2
7.1
Remittances
2.1 3.2
3.9
2.8
Suez Canal
0.9 1.0
1.0
0.9
Tourism
0.4 0.3
0.3
0.4
Payments
3.1 3.4
3.7
3.8
Official transfers
0.1 0.5
0.7
0.9
Capital account
1.4 1.3
0.7
0.1
Balancing items
0.9 0.9
0.9
0.5
Overall balance
0.1 0.9
0.2
-1.3
a IMF data for Egyptian fiscal year ending 30 June of the stated
year.
exchange rate system are the most notable distor-
tions that have caused serious resource misalloca-
tions over the years. In agriculture, for example,
Egypt has gone from a position of relative self-
sufficiency in the early 1970s to that of importing
half of its food needs at a cost of more than $2.5
billion annually. And the explicit subsidization of a
wide variety of consumer goods adds nearly $3
billion annually to the government's seriously
bloated budget.
Secret
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position stems largely from the poor performance of
Egypt's major foreign exchange earners-workers'
remittances, oil sales, tourism, and Suez Canal
revenues. Workers' remittances are proving to be
an especially unpredictable source of income. Offi-
cially recorded receipts from the estimated 2 mil-
lion to 3 million expatriate workers have fluctuated
between $2 billion and $4 billion the past four
years. Prospects are not good for any significant
upturn in this source of revenue as long as the
economic slowdown continues in the oil economies
of the Persian Gulf-the area employing most of
Egypt's overseas workers. The situation has been
worsened by Libya's recent decision to expel Egyp-
tian workers. Although the accumulated savings of
many returning workers might provide a one-shot
offset to reduced annual flows, this would be
overshadowed by the added burden on domestic
employment.
Oil sales have hovered around $2.6 billion the past
two years-down from a $3 billion peak reached in
1982-and are unlikely to revive. The sluggish
world oil market has limited,sales to around
250,000 b/d and has forced Cairo to cut oil prices
twice over the past year. Oil revenues also will
remain constrained by the growth of domestic
demand, which at more than 10 percent per year
will continue to outpace production growth.
Other key hard currency earners are unlikely to
pick up much of the slack. Suez Canal revenues
had stabilized at around $1 billion the past few
years but showed signs of declining during the first
half of 1985. Growth will remain constrained large-
ly by sluggish economic activity in the Gulf region
but also by heightened security concerns about
canal shipping. Tourist revenues have increased
somewhat recently, according to Embassy report-
ing, but remain too small to have much of an
impact.
Poor Borrowing Prospects
Egypt has limited access to other channels to help
close its external financial gaps. Official govern-
ment credits and aid are unlikely to increase much
beyond what the United States is willing to offer.
Supplemental US aid of $500 million over the next
two years still will leave significant shortcomings,
and additional requests for US relief-especially
from FMS payments-are probable. The US Em-
bassy reports that the Egyptian Government has
reached a limited rescheduling agreement with the
French to help on overdue payments for military
equipment. On the other hand, the British Export
Credit Guarantee Department-the equivalent of
the Ex-Im Bank-has recently downgraded Cairo's
credit rating as a result of growing arrearages.
Egypt has approached the IMF about a standby
credit-about $500 million is the most widely
quoted figure-but negotiations are likely to be
difficult and protracted. One Egyptian official re-
cently told the US Embassy that the government
agrees with some of the IMF's criticisms, but that
the Fund is wrong in pushing for exchange rate and
interest rate adjustments. The Mubarak govern-
ment could eventually conclude that the adjust-
ments recommended by the Fund carry too high a
political cost.
Growing concern about its creditworthiness will
limit Egypt's commercial borrowing in both the
United States and Western Europe. Cairo managed
to repay a $200 million syndication last July, but
this has done little to allay bankers' fears; the US
Embassy reports that most bankers doubt Egypt
could now raise a similar loan. Moreover, a spokes-
man for the syndicate manager voiced concern as to
where the money came from and said the repay-
ment would not alter the bank's views that the
economy is entering a dangerous phase. F__1
President Mubarak repeatedly stresses that the
economy is his top priority, and
Egypt is unilaterally limit-
ing new borrowing. The government already has
undertaken other significant actions-at least by
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and domestic.
Egyptian standards-over the past year, including
hikes in official prices for energy and bread, some
modifications of the cumbersome foreign exchange
system, and an end to the policy of government-
guaranteed employment for graduates. More re-
cently, it has compiled a comprehensive economic
reform package that focuses on such issues as the
elimination of subsidies, increased privatization of
the economy, and debt reduction-both external
tudes away from support for Mubarak.
may presage a fundamental shift in popular atti-
The dilemma confronting the Mubarak govern-
ment is the pace of implementing reforms. Cairo
appears committed to a gradualist approach for
needed austerity measures to stave off worker
unrest. For example, current planning envisions a
five- to seven-year period for the elimination of
most subsidies. Such a pace will yield few dividends
in the near-term, however. Should Cairo's financial
position continue to deteriorate, the regime may
have to resort to progressively harsher austerity
measures in a rather short period of time. For a
population that over the past 10 years has had
rising economic expectations, such a development
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Energy
Spot Oil Market Spot oil prices, which had been slowly firming since July because of OPEC
Trends production restraint, rose more sharply last week on the news of the most
recent Khark Island attacks. Nigerian Bonny Light and North Sea Brent
increased $0.35 per barrel from week earlier levels to $28.30 and $27.55,
respectively. Arab Light prices, however, dropped slightly to $27.35 compared
to the official price of $28.00-probably in response to the Saudi decision to
boost sales at discounted prices. If underlying market conditions remain weak
and other producers follow the Saudi lead and boost production, spot prices
could begin falling despite the seasonal winter upturn in demand.
Iraq-Saudi Arabian Iraq may begin exporting oil from Saudi Arabia's Red Sea port at Yanbu by
Pipeline in Operation 29 September, according to the US Embassy in Riyadh. The 500,000 b/d
Iraqi spur line connecting Baghdad's southern oil facilities to the Saudi East-
West pipeline became partially operational on 12 September,
Put into service before all metering and control equipment was
installed, the system's export capacity is expected to be limited initially to less
than 300,000 b/d. It should reach its designed export capacity by early 1986,
adding about $4 billion in revenues annually-helping to offset reduced war
aid from Saudi Arabia and Kuwait-while putting further pressure on the
already weak oil market.
European, and Japanese markets.
Trends in World Although world coal trade to remain stagnant this
Coal Trade year, coal exports from the United States rose 9 percent in the first half of
1985 over year-earlier levels to 38 million metric tons. The increase stemmed
mainly from greater steam coal exports to Western Europe and the Far East.
Polish sales to the West fell to 12 million tons in first half 1985 from 14.5 mil-
lion tons in first half 1984, due primarily to the harsh winter. South African
exports through the first half were running at 18 million tons, about 8 percent
below last year's level. By contrast, Australian shipments were up by 28
percent over last year's first-half exports. US coal is likely to face increasingly
stiff competition. South Africa has mounted an aggressive campaign to
penetrate Asian markets, partly in response to the possibility of the loss of tra-
ditional European and US customers. Furthermore, Colombia has recently
begun coal exports with sales to Israel, and expects to compete in the US, West
33 Secret
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Australian Coal Coal shipments-Australia's largest export earner-were up 28 percent in the
Exports Up first six months, over comparable 1984 levels. Steam coal exports rose
significantly as a result of a 66-percent jump in deliveries to Japan, and a
25-percent increase in shipments to Western Europe. If present trends
continue, total Australian coal exports could exceed 86 million metric tons this
year-surpassing the record-breaking 1984 level by more than 12 percent. At
these volumes, Australian coal exports are likely, for the second consecutive
year, to top coal exports by the United States-historically the world's largest
coal exporter.
OECD Export Credit As expected, last week's Export Credit Group meeting made no progress
Group Meeting toward tightening control over the use of tied aid credits, according to US
Embassy reporting. Despite an OECD ministerial mandate to strengthen
discipline over tied aid credits, France and Italy blocked the EC from
accepting any changes in current guidelines, particularly any increase in the
minimum grant element. Most other participants agreed that a higher grant
element is needed to reduce commercially-motivated tied aid credits. In
response to the lack of progress, the Chairman agreed to small group meetings
between the United States, EC, Japan, and maybe Canada to provide options
for the next plenary meeting in early 1986. On the positive side, a broadened
definition of tied aid credits and a draft text calling for face-to-face
consultations on controversial tied aid credit projects were formally adopted.
West Germany Iraq's ability to secure bilateral debt relief and to use oil to make repayments
Reschedules was demonstrated again last week when West Germany rescheduled $100
Iraqi Debt million due 1 October. The US Embassy in Baghdad reports that the payment,
owed under a 1983 debt rescheduling agreement, will be stretched out to the
end of 1987. Under the agreement, $60 million will be paid through oil
purchases by private German companies with the rest paid in cash. Bonn,
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however, refused to guarantee the oil purchases and insisted that they be at
current market, rather than official, prices. West Germany agreed to the
rescheduling because it wants to retain access to the Iraqi market.
Global and Regional Developments
EC Pushing Wheat The EC subsidy on exports of soft wheat to Egypt, Algeria, Morocco, Tunisia,
Exports With Price and Syria has been increased by 34 percent in response to a recent US wheat
Cuts sale to Egypt at a below-market price under the BICEP export enhancement
program. The EC Commission justified the move-its first substantive
response to BICEP-by the need to safeguard interests in its traditional
EC price cutting-fostered by a
surplus of million tons from last year's harvest-will likely drive already de-
pressed world prices even lower and add to tensions between the Community
and other grain exporters.
1986-90 Soviet five-year plan.
Britain Trying To Keep London is trying to minimize the damage to commercial relations with
Soviet Economic Moscow in the wake of last week's confrontation over diplomatic expulsions.
Relations on Track The British press reports that Trade Minister Channon still expects to sign a
new trade treaty next month. Negotiations are also continuing between
Moscow and British Aerospace for the joint manufacture of the Advanced
Turboprop (ATP) aircraft, a short-haul civilian airliner that carries about 60
passengers. The British apparently are counting on the pragmatism of the new
Soviet leadership to prevent a disruption in trade relations. The two countries
began serious work on the new economic and industrial cooperation program
following Gorbachev's visit to London last December. London probably wants
a quick agreement so that British firms can benefit from imports under the
problems.
Finnish-Soviet Trade A Finnish diplomat recently told US officials that trade with the USSR will
Decline Continues probably decline in 1985 for the second consecutive year. Although their
commercial agreement requires annual balancing of trade, a fall in the price
and volume of Soviet oil exports has produced a growing Finnish surplus. Oil
makes up the bulk of Finnish imports from the USSR. The diplomat
commented that Finnish dissatisfaction with the low quality and limited range
of other Soviet goods leaves little room for increased Soviet sales to match the
Finnish surplus. The Finns are especially worried that their industrial
production would suffer if exports to the USSR must be reduced to balance a
lower level of trade. The Finns would prefer to buy more Soviet oil, but an in-
crease in Soviet oil exports is unlikely because of domestic production
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27 September 1985
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Growing Trade and economic contacts between South Korea and China are growing
South Korean-Chinese rapidly. Even with the recent slowing of Chinese purchases, total two-way
Economic Ties trade should approach $1.5 billion this year-about double the level of
Chinese-North Korean trade-making China South Korea's sixth largest
trade partner. A number of joint-venture projects, particularly for electronics
plants, are under discussion, and South Korean businessmen in Hong Kong are
meeting directly with Chinese officials to discuss economic cooperation. Trade
via Hong Kong (about half of total Chinese-South Korean trade) more than
doubled in the first half of the year. Japanese press reports that Beijing has au-
thorized direct trade with South Korea, however, are probably not true; such a
move would provoke strong reaction from P'yongyang.
National Developments
Developed Countries
Japan Drafts Corporate The Ministry of Finance (MOF) is drafting tax legislation that, if passed in
Tax Change early 1986, could raise the amount of taxes paid by corporations with
operations in both the United States and Japan.
the legislation will enable the MOF, like the US Internal Revenue Service, to
adjust corporate internal prices assigned to products passing between parent
companies and foreign subsidiaries. Tokyo claims that US subsidiaries of
Japanese companies and Japanese subsidiaries of US companies frequently
alter internal prices to take advantage of lower tax rates in Japan to the
detriment of Japanese tax revenues.
Tokyo Plans Tariff MITI has decided to replace its import quotas for leather and leather footwear
Quotas for Leather with a tariff quota system. Under the new system, imports up to a yet-
Products unspecified limit will be assessed the present tariffs of 20 percent for leather
and 27 percent for leather shoes, with a higher duty for imports above the
limit. The ministry's plan is in response to last year's GATT ruling against Ja-
pan's leather quotas, and to Washinton's 1 December deadline for progress on
bilateral leather negotiations. Japan will negotiate within GATT on when to
adopt the new measures.
Britain Issues The government last week issued a $2.5 billion floating rate note on
Jumbo Eurobond international capital markets to boost its sagging foreign exchange reserves.
Since 1979, reserves have declined by almost 60 percent, hitting a level of only
$7.5 billion in August. While the government has insisted the borrowing was
only insurance against "foreign exchange turbulence," the move may have
been made in anticipation of the recent G-5 decision to take steps to lower the
value of the dollar. Britain probably will need to bolster the pound vis-a-vis the
dollar, particularly if oil prices further weaken. The media, on the other hand,
have speculated that the borrowing may signify the beginning of a British bid
to become a full member of the European Monetary System (EMS). Prime
Minister Thatcher, however, remains opposed to British membership because
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she believes it would eliminate flexibility in domestic economic policies.
Whatever the motive, the note issue could be profitable for the Bank of
England because the funds can be reinvested at a rate higher than the
attractive 8.2 percent at which London borrowed the money.
British Welfare Prime Minister Thatcher's efforts to cut back the welfare state could be stalled
Reform in Question in Parliament because of growing criticism from several powerful interest
groups. British insurance companies have strongly attacked the proposal to
replace the supplemental State Earnings-Related Pension Scheme with private
pension plans. The insurers, who would reap additional business from the new
system, contend that the proposed 4-percent combined employer-employee
contribution is too low to provide adequate pensions. Moreover, they complain
that the timetable for implementation-April 1987-is too short to accomplish
the overhaul of the system. The Confederation of British Industries has also
come out against the plan, citing the increased costs for employers. Criticism
from traditional Thatcher supporters will bolster arguments by opposition
party leaders and moderate Tories and could lead to defeat of the legislation or
at least postpone a vote on it until after the next election, due by June 1988.
French Defense The French Council of Ministers has approved a government budget for 1986
Spending that Paris claims will provide almost 2-percent real growth in defense spending
after three years of zero growth.
1985. The overall national budget, however, is to increase by only 3.6 percent.
The French claim of a 2-percent real increase is based on unrealistically low
projections of inflation. If inflation is higher, as independent economic
forecasts indicate, real growth in defense spending will continue to be almost
zero. France's nuclear forces will continue to receive the highest priority-
about one-third of the procurement funds. The budget also allocates funds for
military space programs, but does not provide funds for the planned purchase
of a US AWACS aircraft or a new long-range transport to support French in-
tervention overseas.)
a nominal increase of percent over
Spain Pushing The Spanish Government has called Washington's approval of AT&T's export
High Technology license for a microprocessor plant near Madrid a major step forward for the
country's reindustrialization program. The $200 million project, the first of its
kind in Western Europe, is the cornerstone of Spain's ambitious National
Electronics Plan, aimed at acquiring foreign technology, investment, and
marketing assistance. The joint venture will design and produce custom-made
microchips primarily for export to the United States, Japan, and Western
Europe. We believe that this and other possible deals with multinationals will
likely put within reach by 1987 the government's goals to double production
and quadruple exports of electronics products.
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Spanish Crackdown On Madrid has begun a program aimed at forcing greater compliance with tax
Tax Evasion laws to reduce the budget deficit. Unreported taxable income was estimated at
8 billion pesetas in 1984. Electronic cross-checking of data will be used,
stricter laws have been passed, and an additional 500 investigators have been
hired. Tax authorities will concentrate on the people in the top tax brackets
where fraud is a particular problem. Madrid's efforts are likely to be
effective-tax revenue in first half 1985 increased 34 percent over the same
period last year. The crackdown probably will be unpopular with the business
community, but the government believes this is a politically safer strategy than
cutting social expenditures for the Socialists' working class constituency.
Dutch Government The 1986 budget presented last week relaxes-but does not abandon-the
Relaxes Austerity austerity program followed since 1982. The new budget includes cuts of $2.5
Program billion in welfare spending, ministry budgets, and public-sector wages. The
government calculates that a reduction in social security contributions,
combined with falling inflation-forecast at 1.0 to 1.5 percent-would allow
disposable income to rise by 2.5 percent, the sharpest increase in seven years.
The ruling center-right coalition was unable to provide any personal income
tax cuts, but corporate taxes will be cut to offset the abolition of an investment
subsidy program. The deficit as a share of national income is to be reduced
slightly to 7.8 percent next year. The goal of a 7.4-percent share was
abandoned because of fears that additional spending cuts would hurt the
coalition in the elections scheduled for next spring. While Finance Minister
Ruding credited the austerity program for a reduction in inflation, the Dutch
economy has mainly benefited from a strong export performance, which is not
likely to continue.
Greek Balance of The significant deterioration in Greece's foreign payments position during the
Payments Worsening first half of 1985 is likely to add impetus to Prime Minister Papandreou's plans
to implement limited austerity measures. The current account deficit rose
nearly 39 percent in the first six months of the year, reaching almost $2 billion.
The trade deficit increased about 14 percent, as exports fell about 8 percent
and imports rose slightly. Invisible receipts dipped almost 6 percent, led by
declines in shipping and emigrant remittances. The current account deficit for
all of 1985 will easily exceed the 1981 record of $2.4 billion. To avoid seeking
IMF assistance, Papandreou probably will tighten incomes policy and reduce
public spending. If the current account deficit shows little improvement in
1986, Greece is likely to find credit more difficult to obtain and probably will
face debt servicing problems next year or in early 1987.
New South African Pretoria recently announced economic measures designed to demonstrate
Economic Measures government concern over rising unemployment and economic hardship among
blacks; another motive is to strengthen efforts to conserve foreign exchange. A
10-percent hike in selected customs duties will fund a $200-million increase in
projects to create jobs, to assist small businesses, to expand job training, and to
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provide additional food relief. Small reductions were announced in bank
interest rates, credit restrictions, and taxes on the sale of automobiles. The
customs surcharge will apply to about 55 percent of South Africa's imports
and will reduce import demand. The additional spending on relief for
unemployment will do little to reduce the number of jobless blacks, now
estimated at more than 2 million. Assistance to small businesses and expanded
job training will be at least as beneficial to the 65,000 unemployed whites,
Asians, and Coloreds.
Less Developed Countries
Rumored Resignation The Kuwaiti press reports that Oil Minister Ali Khalifa intends to resign
of Kuwaiti Oil before the National Assembly reconvenes this fall. The US Embassy in
Minister Kuwait says he tried to resign last summer following the resignation of
Kuwait's Justice Minister but was dissuaded by the Amir. The Assembly has
accused Ali Khalifa of malfeasance in connection with the purchase of the US-
based Santa Fe Corporation, and he has been blamed for many of the negative
effects of the collapse of the unofficial stock market in 1982. Ali Khalifa may
have started the rumors himself to get the government to reaffirm its support
for him before the Assembly opens. Even if the Amir complies, Ali Khalifa
probably will go through with the resignation if the Assembly debate on the
Sante Fe purchase turns bitter. The ruling family may let Ali Khalifa go in
hopes of pacifying the Assembly, which could prompt critics in the Assembly
to go after other targets-including Crown Prince Saad Abdullah.
India Chooses Europe's Indian Airlines-India's domestic carrier-has canceled a letter of intent to
Airbus Over Boeing purchase 12 Boeing 757s in favor of an Airbus offer of up to 31 A320s for $1.6
billion, according to the press. Airbus apparently "pulled out all the stops" in
offering a combination of lower prices on advanced A320s-available later in
the decade-concessional financing, and loans of free-of-charge airplanes to
meet New Delhi's immediate needs. The Indian decison was probably based on
estimates of a lower long-term cost of the new Airbus deal relative to the
Boeing 757s. If the agreement holds, Airbus will supplant Boeing in the large
and growing Indian domestic airplane market.
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India Allows Private In a major policy shift, New Delhi has decided to allow Indian private firms
Investment in and foreign partners to invest in two new petroleum refineries. The US
Petroleum Refineries Embassy reports that India's ambitious Seventh Five-Year Plan (1986-1990) is
strapped for funds and the long-awaited refineries-which cost an estimated
$2.2 billion-faced either further delays or cancellation without outside
financial assistance. The government will likely retain 26 percent-ownership-
and control-with the remainder divided among the private partner and public
stock issues. The refineries-which will not be on line before 1990-will boost
India's refining capacity an estimated 36 percent and help ease the growing
demand for imported petroleum products. The new move demonstrates Prime
Minister Gandhi's commitment to economic liberalization and may will
presage New Delhi's acceptance of other means of public-sector project
financing to achieve its plan objectives
Soviet Grain The US Department of Agriculture reports that in the past week Moscow has
Purchases purchased 1.8 million tons of US corn-the first such purchases in the 1986
market year that began 1 July. Moscow has also
purchased 4 million tons of wheat from Canada under their ong-term
agreement. Moscow has been buying
Argentine wheat and sorghum and wheat from the EC and Australia.
Reflecting an improved Soviet crop, Moscow to date has lined up only 10.5-12
million tons of grain as compared with 24 million tons at this time last year. So
far the USSR has purchased no US wheat. Unless it buys 1.1 million tons of
US wheat by 30 September, it will no longer be in compliance with its long-
term agreement with the United States.
Moscow Approves Moscow radio has announced Politburo approval of an ambitious program
Consumer Program aimed at increasing the availability and quality of consumer goods and services
during the 1986-2000 period. The production of services and goods other than
food is to grow by 30-40 and 30 percent, respectively, during the Twelfth Five-
Year Plan (1986-90). Without a much larger allocation of resources, however,
the growth in output of consumer soft goods and durables probably cannot
double from the estimated growth of less than 15 percent for the 1981-85
period. Resources needed to implement the planned increases are not likely to
be forthcoming if the leadership follows through on its stated intention to
concentrate investment on the modernization of heavy industry. Indeed, a
Gosplan official in April indicated to the US Embassy that the new consumer
program would not receive the needed increase in the resources.
Soviet Industrial Official Soviet statistics just released for industrial performance through
Statistics Withheld August omit key indicators of growth. Growth rates are not reported for
industry overall, nor for key industrial ministries or republics in the USSR, al-
though the usual data were published for individual products. Performance in
recent months has not been embarrassing, as it has been on past occasions
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when such information was withheld. Two weeks ago, however, General
Secretary Gorbachev cited a preliminary estimate of industrial growth that
subsequently may have been revised downward slightly. The present omissions
may have been made to avoid contradicting Gorbachev's figure. Soviet
industrial growth continues at a rate likely to reach 3 percent or better for all
of 1985. This performance is respectable, even though it probably will not
match the pace of over 3.5 percent for 1983 and 1984.
Soviets Drop The recent annual handbook of Soviet economic statistics for 1984 omits
Alcoholic Beverage statistics on the production and consumption of alcoholic beverages. These
Statistics were replaced by production statistics for nonalcoholic drinks and mineral
water. The deletion of data on alcoholic beverages is in line with the traditional
Soviet practice of withholding publication of statistics that are embarrassing or
in some other way sensitive. The timing appears to reflect the impact
Gorbachev's anti-alcohol campaign, announced on 4 April. The smaller
handbook of economic statistics, published in March, included statistics on
alcoholic beverages.
Hungarian Banking Hungary is moving ahead cautiously with its program to create a less
Reforms centralized and more competitive banking system. According to the US
Embassy, the government recently created eight new institutions to finance
technological development and foreign trade for state enterprises and coopera-
tives. The new banks will be allowed to peg their loan rates up to 1.5
percentage points above the base rate set by the National Bank. In addition,
Budapest approved Citibank's plan to open a joint venture bank in Hungary
that will engage in both domestic and international operations. Citibank will
own 80 percent and the National Bank 20 percent. Finally, the Foreign Trade
Bank is to enter the domestic lending market while the State Development
Bank can now issue bonds and establish joint ventures and financial institu-
tions. Budapest hopes these measures will improve the efficiency of credit
allocation, but its wariness of excessive decentralization will limit the activities
of the new banks. The new banks themselves probably will remain cautious un-
til they develop expertise in judging the creditworthiness of firms and the
profitability of investment proposals.
Sino-Japanese Talks last week in Beijing to renegotiate the Sino-Japanese Long-Term Trade
Oil Trade Agreement (LTTA) were probably contentious because of serious differences
Dispute Developing over future levels of Chinese crude oil sales. Beijing is anxious to renew the
agreement for another five years and increase its 160,000 b/d minimum to
help offset its trade deficit with Japan-$3 billion for the first half of 1985. In
view of the world oil glut, however, Tokyo wants to negotiate minimum levels
annually-with no increase next year-and maintain price flexibility. China's
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China's crude oil exports to Japan last year were worth $2.2 billion and
accounted for 39 percent of China's exports to Japan. Beijing has been
increasingly irritated by Japan's unwillingness to import more Chinese goods
and invest in China. China has been selling about 60,000 additional b/d of
crude on the Japanese spot market, but at prices below those set by the LTTA.
If Beijing fails to get either a multiyear agreement or an increase in the annual
minimum export level, it is likely to retaliate by cutting back on Japanese
imports.
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