(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706910001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: January 12, 2017
• Document Release Date: October 29, 2010
• Sequence Number: 1
• Publication Date: March 23, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
Seer
DI IEEW 84-012
23 March 1984
Copy 6 8 7
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Secret
Weekly
International
Economic & Energy
iii Synopsis
1 /Perspective-Marcos, the IMF, and Political Stability
Energy
International Finance
Global and Regional Developments
National Developments
17 /Internati
onal Financial Situation: Politic
al Update
This article
was prepared by analysts in ALA; OEA,
and OGI
19
/Bolivia:
Bleak Economic Prospec
ts
25 /G
uyana:
Economic
Crisis Clouds Burnha
m Regime
29
Hong Ko
ng: Growing De
spite Uncertaint
y
35 USSR: F
avorable Hard Currency Positio
n
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directed to Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
Secret
23 March 1984
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Secret
International
Economic & Energy
Weekly
Synopsis
Perspective-Marcos, the IMF, and Political Stability
Manila's political and economic problems present President Marcos with
tough choices if he is to retain power until presidential elections in 1987 and
secure sufficient external financial support to keep the Philippines on a sound
economic footing. We believe Marcos will seek to dilute economic restructur-
ing programs demanded by international creditors in the hope of avoiding
serious domestic unrest.
17 International Financial Situation: Political Update
Leaders in Argentina, the Philippines, and Venezuela are taking different
tacks to minimize political backlash from their debt problems.
19 Bolivia: Bleak Economic Prospects
Despite a promising start, President Siles' tenuous political position has led
him to backslide on economic reforms necessary to resolve the country's
25 - Guyana: Economic Crisis Clouds Burnham Regime
Guyana, now in its 20th year under the dictatorship of Forbes Burnham, has
become a sociopolitical tinderbox because of the unraveling of the economy in
recent years. Burnham has turned to the Soviet Bloc for additional assistance,
but we doubt that Guyana will receive anything more than token economic and
technical aid.
29 Hong Kong: Growing Despite Uncertainty
Despite investor concern last year over Hong Kong's reversion in 1997 to
Chinese control, the economy grew by 6 percent and is expected to perform
even better this year. A breakdown in Sino-British talks or a Chinese
misstatement of their intentions, however, could reignite the financial prob-
lems experienced last year.
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35 USSR: Favorable Hard Currency Position
The USSR held its hard currency borrowing last year to a minimum, despite a
fall in oil prices and a 3-percent increase in merchandise imports. The net hard
currency debt has stayed at about $10 billion, and Moscow's hard currency
position is likely to remain good at least through 1984F--]
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23 March 1984
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International
Economic & Energy
Weekly
Perspective Marcos, the IMF, and Political Stability
Manila's political and economic problems present President Marcos with
tough choices if he is to retain power until presidential elections in 1987 and
secure sufficient external financial support to keep the Philippines on a sound
economic footing. Conditions demanded by international financial institutions
are designed to set the stage for long-term economic development, but they
would usher in several years of slow or negative growth and would provoke op-
position from key constituencies of his regime. As a result, we believe Marcos
will seek to dilute economic restructuring programs demanded by international
creditors in the hope of avoiding serious domestic unrest.
From Marcos's perspective, because the magnitude and timing of the long-
term benefits of reform cannot be predicted with any certainty, there is little
incentive to adopt policies that he knows will immediately weaken his political
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Marcos's stubbornness is due partly to his concern that the devaluation will be
ill received by the military, whose budgets have suffered re eated cutbacks in
recent years and whose support is critical to his tenure. 25X1
the October devaluation led to a 35-percent 25X1
ecline in the purchasing power of the military's budget.~ 25X1
Marcos also faces National Assembly elections in May and fears his party
could be humiliated at the polls. Devaluation could lead to the near collapse of
Manila's overprotected domestic manufacturing sector and to rising unemploy-
ment in the politically volatile capital. He also is no doubt anxious to avoid the
price increases that followed the 21-percent devaluation of the peso last
October-inflation rose at an annualized rate of 100 percent in the fourth
quarter. At the same time, the large margin of victory Marcos believes is
necessary to restore credibility to his regime will require that the ruling party
spend large sums of money on pork-barrel projects when the economy can least
afford it. Marcos, in fact,. could risk alienating the IMF, by repeating a
practice from the 1960s-exceeding informal targets on government expendi-
tures and monetary growth so as to ensure a sizable election victory.
1 Secret
DI IEEW 84-012
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As the elections approach, Marcos also has to fend off charges from the left
that he has sold out the Philippines to foreign interests. Urban workers-some
of whom are sympathetic to Communist Party propaganda that Marcos is a
puppet of the United States and international financial organizations-will
bear the brunt of austerity measures. If these accusations gain broader
acceptance in politically strategic Manila, Marcos may prove even more
recalcitrant in his dealings with his international creditors
Marcos also risks jeopardizing the political and financial support he receives
from staunch political allies-such as agricultural marketing overlords
Eduardo Cojuangco and Roberto Benedicto-if he bends to IMF and World
Bank pressures to weaken state-controlled agricultural monopolies. He may
consider them too powerful to challenge. Recent efforts by the government to.
reform the sugar monopoly demonstrate that Marcos intends to do little to
restore free market activities to that industry in the near term.
Meanwhile, Marcos's problems with Manila's commercial creditors are grow-
ing more acute because of his decision to stall the IMF over the exchange rate.
Even if Manila adopts the painful measures required by the IMF and the
World Bank, it is in for a rough transition period during the rest of the 1980s.
The Philippines' demographic profile alone-which will add 700,000 new
entrants to the labor force each year-ensures negative per capita economic
growth during the period when economic reforms take hold. In addition,
rescheduled debt payments will begin to bunch toward the end of the decade.
If an export rebound is slow in coming, this could fuel another round of
rescheduling negotiations by 1987, when Marcos's term in office ends.
The period of slow or negative economic growth will provide the Communist
Party of the Philippines, its military arm, and its overtly non-Communist front
groups with an unusually favorable environment for soliciting new recruits,
particularly in the distressed urban sector. Manila's budget austerity at the
same time will continue to erode the military's already weak counterinsur-
gency capabilities. For these reasons, no matter how the current impasse is
resolved, it appears that, not only the government, but the commercial banks,
the Fund, and the World Bank face an anxious decade managing the
Philippines' finances.
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Energy
Decline in OPEC OPEC production averaged 17.4 million b/d in February, marking the first
Production time in seven months that the cartel's output slipped below its self-imposed
ceiling. Strong seasonal demand for OPEC crude-spurred by a cold snap in
the United States-had kept OPEC output high through January. Saudi
production fell 500,000 b/d from month-earlier levels as Riyadh completed its
second round of stockpiling crude oil in floating storage. The former Aramco
partners also reduced purchases after the Saudis forced them to lift a
financially unattractive ratio of light-to-heavy crude oils. Iranian production
slipped slightly. Iran and Japan continued to haggle over terms for direct-deal
contracts, and Japanese buyers reduced liftings of Iranian crude by over
150,000 b/d. Nigeria was the only cartel member to register a production gain
in February. Nigerian output rose 200,000 b/d as Lagos continued to produce
in excess of its OPEC-mandated ceiling without the cartel's approval.
Million bid
Estimated.
Preliminary.
Neutral Zone production is shared equally between Saudi Arabia and
Kuwait and is included in each country's production quota.
n Saudi Arabia has no formal quota; it acts as swing producer to meet market
requirements.
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Change in Mexican Pemex Director General Beteta has announced a slight increase in Mexico's
etroleum Reserve proved petroleum reserves-72.5 billion barrels as compared with the 1981
stimates estimate of 72 billion barrels. Pemex attributed this net increase primarily to
discoveries in 1982 in the Bay of Campeche and discoveries- last year in the on-
shore Reforma trend in Chiapas and Tabasco
Preliminary results of an internal Pemex study show that probable petroleum
reserves will be cut by at least one-half from the 90 billion barrels claimed in
1981. Estimates of probable offshore Campeche reserves alone were cut from
48 billion to 24 billion barrels. The reduction in probable oil reserves and the
modest increase in proved reserves suggest that Pemex may be trying to
reconcile-its reserve announcements with the reality of Mexico's oil availabil-
ity
Abu Dhabi Loses
Japanese Sales
Despite Discounts
Greek-Soviet Gas
Pipeline Feasibility
tudy
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23 March 1984
Despite extensive negotiations with Japanese firms, efforts by the Abu Dhabi
National Oil Company (ADNOC) to renew crude oil export contracts at 1983
levels have failed. Japanese firms have signed contracts to buy 122,000 b/d in
direct deals this year, a decrease of about 35 percent from last year's volume.
Although contract terms vary somewhat, ADNOC generally agreed to extend
credit ranging up to 90 days-compared with the standard of 30 days-
according to the US Embassy. Requirements to use vessels stipulated by
ADNOC and restrictions on reselling crude also reportedly were dropped. The
Japanese pressured Abu Dhabi into the concessions by dropping liftings
sharply in January
Greece and the Soviet Union have signed a contract to conduct a feasibility
study for a 1,200-km natural gas pipeline from the southern USSR to the
northern Greek industrial area, The
study-which is to include cost projections for constructing a Greek gas
distribution network-is to be done by the Soviet State Committee for Foreign
Economic Relations and is expected to take a minimum of two years to
complete.0 the parties are discussing possible gas deliveries of 2
billion cubic meters per year by the early 1990s. The agreement follows a
recent Soviet-Finnish pact to increase Soviet gas sales to Finland and
continued Soviet gas-marketing efforts in Turkey. Because Turkey and Greece
are key steppingstones for suppliers in the Middle East to enter the larger
West European market, an extension of the Soviet pipeline network into these
countries could diminish sales prospects for any Middle Eastern project.F_
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they expect to begin enforcing the rule when four or five firms are in operation.
This could come soon because three foreign firms have plans to set up seismic
processing joint ventures in Indonesia in addition to the three firms already. op-
erating there. The ban will immediately affect Singaporean firms, which have
been processing seismic data for Pertamina as well as for other foreign oil
companies.
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South Africa Activates
First Nuclear
Power Plant
One of the two reactors at the $2 billion Koeberg facility near Cape Town last
week was activated and is operating initially at about 5 percent of capacity
while performance and safety tests are carried out. The plant is scheduled to
operate at 50 percent of capacity within two months and reach its full
920-megawatt capacity within six months. If the second reactor goes onstream
later this year as scheduled, the twin units will make western Cape Province a
net supplier of power to the rest of the country. The region currently obtains a
significant share of its power from plants up to 1,500 kilometers away in the
Transvaal. When fully on line, Koeberg's reactors will be capable of supplying
8 to 10 percent of South Africa's electric power needs and will ease the
workload on the country's coal-fired and hydroelectric power plants that are
experiencing water shortages because of drought.
recently agreed to begin talks on international safeguards for this plant. I 25X1
of the reactors, South Africa expects in the future to use fuel made in a
domestic uranium enrichment plant now under construction. The government
The startup is a year behind schedule, largely because of time needed to repair
damage from a sabotage attack in December 1982 by the African National
Congress, the country's principal black liberation movement. Security at the
site has since been tightened sharply, but powerlines leading from the plant
remain vulnerable to attack. South Africa has placed the facility under IAEA
safeguards and has permitted on-site inspections. Although the French
consortium that built the reactors has fueled and supplied one reload for each
Indonesia To Boost Jakarta will prohibit processing abroad of seismic data on Indonesia in another
Local Participation in bid to expand domestic capabilities and increase local earnings in the oil
Oil Services service sector. Indonesian officials have.informed foreign oil companies that
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Polish Strategy on high-level Polish officials are urging the
Debt Negotiations regime to discontinue negotiating debts with Western governments as a group
and to strike separate deals with individual governments. They believe that
Warsaw should begin making debt service payments to those governments that
are more willing to accommodate Polish concerns. These officials want to put
this strategy into effect if Polish negotiators are unable to reach agreement
with Western government representatives at the meeting scheduled to begin
this week.
credits immediately or to deal with Warsaw on a bilateral basis.
The Poles have tried unsuccessfully in the past two years to break up creditor
unity, and they may be eager to exploit what they see as a growing rift between
the United States and other creditor governments. Consequently, Warsaw may
appear more conciliatory at the meeting this week in hopes that the West
Europeans will urge the United States to accept a West German proposal for
multiyear rescheduling. Although the West Europeans want to break the
impasse over Polish debt rescheduling, none seems eager to extend large, new
goslav Debate on The Federal Assembly this week approved a $380 million standby credit
Y with
IF Credit the IMF. The IMF program, which the government accepted on 1 March after
back down on several austerity measures.
heated debate, provides for lifting a price freeze on 1 May, raising interest
rates to the level of inflation in gradual stages, and devaluing the dinar.
Yugoslavia's acceptance of these terms will qualify it for financial assistance
from Western banks and governments. Even though party and state leaders
have endorsed the IMF program,-the government still faces strong regional
opposition to its other efforts to stabilize the.economy. Regional critics,
especially those who fear recentralization, oppose Belgrade's proposals to
curtail investment credits for selected unprofitable enterprises, to restrict
government budgets at the federal and local levels, and to encourage greater
foreign investment. Last fall, opposition in the Assembly forced Belgrade to
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Growing Concern Over The Hawke government floated the Australian dollar last December to
Floating Australian strengthen its control over the domestic money supply, but the general strength
ollar and volatility of the currency since then is causing concern among Australian
exporters and import-competing industries. For one thing, there have been
Suriname Finanical
Pjoblems Grow
//
wide daily swings in the dollar's value. Against the Japanese yen, for example,
the Australian dollar depreciated by 5 percent in only 11 days before
appreciating by 7 percent over the next two months. In addition, since the
float, the dollar has appreciated by 4 percent against both the US dollar and
the Japanese yen, making Australian goods more expensive abroad and foreign
goods cheaper locally. Together with an inflation rate that is more than double
the OECD average, Australia's competitiveness-based on exchange rates
adjusted for inflation differentials-has declined nearly 10 percent in the past
10 months, and is now lower than at any time in the last five years. Several
unions and industry groups already have warned the government that a
continuation of this trend will result in campaigns for additional protection
from import competition. Neither Hawke nor Paul Keating, the conservative-
minded Treasurer, would welcome moves to increase current levels of protec-
tionism; Australia already has one of the most protected markets in the
OECD.F____1
The economic consequences of the recent bauxite workers' strike have added a
the government now expects earnings from
export of bauxite and related products to fall more than 25 percent below its
original projections this year as a result of the monthlong strike. Together with
the suspension of other revenue measures as part of the strike settlement, the
budget deficit this year could reach almost $200 million.
The US Embassy reports growing concern among Surinamese businessmen
that the Central Bank will be unable to provide foreign exchange for imports.
The government already has suspended all import licenses issued before
August 1983, and some importers have been denied new licenses. Business
concerns are likely to mount if Paramaribo drains credit available to the
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private sector by financing the budget deficit largely with Central Bank loans,
as it did last year. Moreover, Suriname's foreign exchange reserves probably
are sufficient to cover less than one month's worth of imports, and even tighter
import restrictions will be necessary. Paramaribo has failed to secure any
substantial amount of hard currency assistance since December 1982. Suri-
namese officials are counting on a quick infusion of IMF funds, but Bouterse
may well lack the resolve or political dexterity to institute the unpopular
austerity measures needed to obtain IMF support any time soon
Global and Regional Developments
Collapse of EC The EC summit in Brussels ended in failure on Tuesday when Prime Minister
Gain Market service during his recent visit to the United States that the USSR probably
Thatcher refused to compromise on demands that the United Kingdom's
annual EC budget payments be cut substantially. The impasse prevented
agreement on vital budget reform measures, which increases the chances of
EC bankruptcy this fall. Failure came despite eleventh-hour efforts by
President Mitterrand, who chaired the meeting, to forge a compromise. This is
the second time in four months that EC leaders have failed to resolve the EC's
financial crisis. Last-minute confusion was heightened when Irish Prime
Minister FitzGerald walked out of the meeting over a proposal to cut EC milk
production. After the meeting EC Foreign Ministers voted to block $630
million now owed London from its 1983 budget rebate
Thatcher probably will recommend to her Cabinet the unprecedented step of
withholding British payments to the Community. Such action would violate
the EC treaty and further isolate the United Kingdom from other-Community
members. The collapse of the summit marks a personal defeat for Mitterrand.
He may be discouraged with his EC partners, and he probably will not push
outstanding US-EC trade disputes as aggressively as he might have if the
Community had been able to set its house in order. Mitterrand may now be
more sympathetic to the importance of transatlantic ties because European
unity appears to have been dealt another blow.
Moscow Reentering the The director of the Soviet grain-purchasing agency told a Western news
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23 March 1984
will buy several million more tons of grain than it already has purchased from
the United States. He also said that Soviet purchases in the current market
earlier this month for delivery during April and May.
USSR purchased as much as 1 million tons of corn from the United States
year are unlikely to exceed 12 million tons
Purchases of the magnitude implied by the Soviet official suggest that Moscow
anticipates Argentina, because of its port congestion and shipping delays, will
be unable to meet the rest of the USSR's corn requirements during the market
year that ends 30 June. Soviet grain officials had said in the past few months
that the USSR would purchase only the minimum amount required under the
grain agreement with the United States. This amount was fulfilled in January.
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The recent purchases would raise total US grain sales to the USSR to slightly
more than 9 million tons.
N asone To Pledge
ew Aid Package
in Beijing
ILLEGIB
Prime Minister Nakasone, during his visit to China over the next several days,
will, reiterate Japan's long-term commitment to China's economic moderniza-
tion and announce a seven-year 470-billion-yen ($2.1 billion) development
credit, according to the Japanese press. The size of this second aid package-
Japan extended a five-year $1.3 billion credit in 1979-reflects the excellent
state of Sino-Japanese relations and Japan's interest in drawing China toward
the West and away from the Soviet Union. The credits will be used for
transportation, communications, and energy projects. Although most of the aid
will be untied, Japanese firms will be aggressive in seeking the business the yen
credits generate
cooperation agreement.
To solidify its position as China's leading economic partner, Japan is working
out details for Export-Import Bank loans to support coal and oil development.
Although the latter projects are keyed in part to Japan's interest in diversify-
ing sources of supply for energy, Japan currently does not need the output
from the coal development projects. Over time, increased imports of Chinese
coal could make it more difficult for. US suppliers to compete in the Japanese
market. The Japanese also have agreed to exchange notes with the
Chinese for a one-time export of nuclear reactor equipment. The notes
reportedly include provision for on-site "visits" by Japanese officials-the first
time the Chinese have agreed to visitation of nuclear plants by foreign
personnel. The two countries are continuing to work toward a nuclear energy
Japanese Semi- Leading Japanese microelectronic firms are shipping growing numbers of
conductor Quality defective integrated circuits (ICs) and circuit packages to US and West
Slipping European customers. Hitachi of Japan, for example, recently supplied defec-
tive high-speed-logic IC device packages to a US company, possibly causing a
delay in the introduction of the US company's latest line of mainframe
computers. In another case, Hitachi shipments of 64K DRAMS to Olivetti of
Italy were found to have high failure rates
the problem could force Olivetti to reconsider its projected $26 million
microelectronic purchases from Hitachi this year. Also, sophisticated micro-
electronics packaging from Kyoto Ceramics, the world's largest IC ceramic-
- Z " package supplier, has been plagued by poor quality control; up to 30 percent of .
their shipments to a US firm have been rejected because of fabrication flaws.
Japan establish a reputation for quality.
maintain past levels of testing and screening-costly practices that helped
As production has increased, Japanese firms apparently have been unable to
Japanese microelectronics firms are pressured by the government to
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microelectronics firms are pressured by the government to supply first the
needs of Japanese customers before shipping products abroad. In an effort to
satisfy both domestic and foreign demand, the Japanese may have been forced
to lower the high production standards that existed earlier.
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National Developments
Israeli Wage
Negotiations
Developed Countries
The Histadrut labor union organization, which represents virtually all Israeli
workers, probably will win most of its demands in negotiating a new two-year
labor relations agreement with the Manufacturers' Association. The current
agreement expires at the end of this month. US Embassy sources indicate that
both sides agree on a cost-of-living formula that calls for quarterly adjust-
ments, with advance payments made if the consumer price index rises by more
than a specified rate. The major sticking points are likely to be the Histadrut's
demand for no declines in real wages and a minimum wage set at 50 percent of
the average wage. The Histadrut has already publicly dismissed the proposal
made last week by Finance Minister Cohen-Orgad for a six-month freeze on
Meanwhile, new regulations issued by the Bank of Israel to prevent Israelis
traveling abroad from using credit cards to circumvent foreign exchange
controls will probably be widely ignored. According to the regulations, credit
cards will be valid for only six months, purchases will be limited to $2,000, and
credit card companies must prepare monthly reports on clients who violate the
regulations while abroad. The Israeli Government is notoriously lax in
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23 March 1984
enforcing such laws.
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Increased Opposition in The coal miners' strike, which is in its second week, is another test of Prime
the United Kingdom to Minister Thatcher's efforts to curb militant unions. The leadership of the
Miners' Strike National Union of Mineworkers ordered the walkout after the government
injunction.
decided to close 20 unproductive mines, costing some 20,000 jobs. The strike
has idled most of the United Kingdom's 174 coal mines, but press reports state
that support for the strike among the miners. is sporadic and halfhearted.
Workers at some large coalfields recently voted to reject the strike call and
continue to work. The government has obtained a court injunction forbidding
strikers from picketing anywhere except at their own workplaces, but union
president Scargill has said the "flying pickets" would do their work until all
mines are closed. There already has been some violence between strikers and
miners who want to work, and the union faces large fines if it defies the
Thatcher is likely to prevail because the rank and file is split over the strike.
Scargill's bargaining position also is weakened by the large surpluses of coal in
the United Kingdom. In addition, he has alienated some miners by failing to
call a nationwide strike vote. The Trades Union Congress, which represents all
of the United Kingdom's unions, has thus far stayed out of the dispute. The
Congress still is smarting from its defeat earlier this month, when Thatcher
banned union membership at the government's signals communications facili-
ty. If opposition to the strike increases in the Mineworkers Union, the
Congress is likely to be more reluctant to support Scargill. Without some
evidence that other unions endorse their efforts, the miners may have to call
/Japan's GNP Up in Japan's GNP grew at a 3.6-percent annual rate in the fourth quarter of 1983
Fourth Quarter
putting real growth for 'the year at 3.0 percent-the lowest annual rate since
1975. Domestic demand contributed three-fourths of the growth, with personal
consumption and private investment both up. The fourth quarter's perform-
ance assures that Japan will hit the official target of 3.4-percent growth for fis-
cal year 1983, which ends 31 March.
Italian Communists To According to press and Embassy reporting; the Communist-dominated CGIL
Protest Limit on. labor union-the nation's largest-and the Communist Party (PCI) are
the government decree limiting wage increases. Issued last month to break a
deadlock in government-labor-management negotiations over labor costs, the
decree limits cost-of-living wage adjustments to 9 percent and sets a
10-percent ceiling on increases in administered prices. As a concession to
labor, it provides some minor tax relief to low-income workers)
Successful implementation of the new measures is now uncertain. The PCI is
putting up stiff opposition in Parliament, and some Republican coalition
members are concerned about possible adverse effects of the revenue and
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expenditure measures on Rome's large budget deficit. If the measures are fully
implemented, we believe they-coupled with the lira's recent appreciation
against the dollar and voluntary restraints by retailers on food prices-could
slow inflation to about 11 to 12 percent this year, down from 15 percent in
1983. Even so, this would still be the highest rate among the Big Seven and
above the government's target of 10 percent this year.
The Australian Wheat Board is increasing
projections for exports for the fiscal year ending September 1984 to a record
13 million metric tons-almost double last year's total. The rebound in
overseas sales is the result of the Wheat Board's aggressive marketing of this
year's record 21-million-ton harvest, which follows the worst drought in over a
century. The boost in sales will increase export earnings by nearly $1 billion
and will help improve Australia's current account deficit, which stood at $4
Australian Record
Wheat Exports
billion last year.
New British Budget The Thatcher government last week presented the first budget of its second
additional workers.
term. Although there were few surprises-largely because of the government's
four-year planning cycle-the package contains significant tax-reform mea-
sures, including progressive reductions in both corporate tax rates and
depreciation allowances for capital investment. The lower depreciation allow-
ances, coupled with removal of a 1-percent payroll surcharge that has helped
finance national health insurance, will reduce the tax system's current strong
bias in favor of investment in plant and equipment. Although the budget
contains no measures specifically designed to reduce the United Kingdom's
13-percent unemployment rate, Prime Minister Thatcher and her colleagues
probably hope that these measures over time will spur employers to hire
In presenting the budget, Chancellor of the Exchequer Lawson set forth the
government's economic strategy for the next five years. London intends to
continue whittling away at inflation-with a 3-percent target for 1989
compared with about 5 percent at present-and to reduce the budget deficit as
a percentage of GDP from 3.25 percent in the fiscal year just ending to 1.75
percent by the end of the planning period: Monetary growth targets also are to
be lowered progressively; the government projects real growth will average
2.25 percent during the period. These ambitious targets generally are consist-
ent with the program that Thatcher set forth after her election in 1979, but, by
establishing tough standards now, the government is leaving itself open to
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23 March 1984
criticism from the opposition should it fall short of its goals.
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Tokyo To Develop a The Japanese Government has decided to develop a three-man submersible
Deep Sea Submersible vessel capable of diving to a depth of 6,000 meters. The decision was made af-
ter the recent discovery of extensive seabed mineral deposits in the Japan Sea.
Tokyo hopes to exploit these deposits and those in deeper waters to reduce Jap-
anese dependence on imports of critical raw materials such as manganese,
copper, and zinc. The submersible, which will cost over $50 million, can also be
used in a variety of scientific and military applications. Japanese press reports
indicate that Mitsubishi Heavy Industries and Kobe Steel have developed a
special titanium alloy suitable for the pressure hull. The Soviet Union is
interested in obtaining a 6,000-meter submersible and in the past has sought
Japanese cooperation in developing such a submersible.
Fjench Trade Deficits In both January and February, France recorded trade deficits of over $500
million on a seasonally adjusted basis, a sharp reversal of the improvement in
Less Developed Countries
Nicaraguan Economic
Problems
the final quarter of 1983 when trade was nearly in balance. The January
deficit was due mainly to a surge in imports, apparently because of oil
restocking. Imports returned to yearend levels in February, but exports fell by
$500 million. If the trend continues, this year's trade deficit would be near last
year's level of $6 billion and probably would lead to a continuation of economic
austerity.
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Mined harbors and a bad coffee harvest are the latest economic headaches
plaguing the Sandinistas. Since insurgent-laid mines at Nicaraguan ports have
begun damaging merchant ships, 17 commercial vessels are known to have
canceled calls. Some of these ships were scheduled to load cotton and coffee-
Nicaragua's main cash crops-for export. A disappointing coffee harvest this
year will cut further into hard currency earnings. Coffee sales-which last
year provided $160 million, or one-third of total exports-will earn only about 25X1
$100 million this year, according to the US Embassy. Cash reserves are so low
that foreign commercial banks are requirin Mana ua to use its gold holdings
as collateral for ordinary trade financing. I 25X1
Brazilian Stabilization After subsiding substantially during the last two months of 1983, inflation
Program Imperiled by surged in January -and February at annual rates exceeding 200 percent. The
sing Inflation IMF had wanted Brazil to hold inflation down to 100 percent this year. The
US Embassy notes that, because of Brazil's extensive indexation system, rising 25X1
,prices will make it extremely difficult for Brasilia to meet the IMF's fiscal and
monetary targets for the first quarter of this year. Failure to meet these targets
probably would require renegotiation of the revised IMF agreement.
Unless inflation begins to fall substantially
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within the next couple of months, we foresee the possibility of a new
confrontation with the IMF and another major financial crisis in Brazil.
Egyptian Exchange The Egyptian Government has introduced new foreign exchange regulations in
Rate Adjustments an attempt to attract more worker remittances and tourist expenditures into
the Central Bank's foreign exchange pool. According to US Embassy reports,
the new regulations allow for the exchange of dollars to Egyptian pounds in the
four public-sector banks at the rate of $1.00 for LE 1.12 instead of the old "in-
centive" rate of $1.00 for LE 0.84. Accompanying the new regulations will be
a renewed crackdown on unofficial foreign exchange dealers. In the meantime,
reports in the official press indicating that the new rate may soon be extended
to joint-venture banks in the private sector were denied by government
ministers.
These moves are designed to ease recurrent foreign exchange shortages that
have made it difficult for the government to meet its debt service obligations
and have forced public-sector companies into the parallel exchange market.
Rationalization of Egypt's exchange system would also be a prerequisite for an
IMF standby loan should one become necessary later this year. The new rate
remains about 6 percent below the parallel market rate, and the gap will widen
further as rumors of more changes lead holders of foreign currency to wait for
the regulations to be clarified.
Indian Ports Closed A weeklong strike by workers at India's 10 major ports has brought three-
by.Labor Dispute
fourths of India's foreign trade to a halt. The dockworkers' agreement with the
central government expired last December, and union leaders may have
expected Prime Minister Gandhi to be more accommodating to their demands
for higher wages and benefits in this election year. Instead, she has declared
the strike illegal and asked the Navy to help unload essential supplies. So far,
the military's role has been limited. Moves to resume negotiations are under
way. Indian industrial production, which is heavily dependent on imported
petroleum, would be crippled if the strike continues.
China Tightens Foreign China's announcement on 9 March of tightened foreign trade controls
Trade Controls completes several months of adjusting trade responsibilities between local and
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23 March 1984
central authorities. Western businessmen may encounter initial confusion and
delay in negotiations for purchases or sales of goods. Most major import and
export goods have been handled by the national foreign trade organizations.
They continue to control imports of grain, sugar, chemical fertilizers, rolled
steel, and timber and exports of crude oil, coke, cotton, and some grains. Other
commodities-such as silk and coal-are handled by national-level industrial
ministries or corporations.F--]
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Yugoslavia Requests
,Additional CCC
Credits
will require guidance from Beijing.
The new policy aims to correct abuses stemming from a decentralization of
trade over the past five years. Many local authorities imported unneeded goods
or sold imports at a profit to other localities. Local efforts to expand exports re-
sulted .in intraregional competition for foreign markets that cut prices.
Subsidies to exporters to make their products competitive became very costly,
especially in Guangdong Province, with its strong export links to Hong Kong.
Local authorities apparently will continue to be able to trade in some goods but
The US Embassy in Belgrade reports that Yugoslavia has requested an
additional $60 million in US Commodity Credit Corporation (CCC) credits for
the purchase of cotton, hides, and skins. Belgrade originally requested $340
million in CCC credits for fiscal year 1984 but received only $125 million
because of limits on CCC funding. Approval of the new request probably
would help Yugoslavia improve its hard currency trade performance because
the imports would be processed into textiles, footwear, and leather goods-
important Yugoslav exports to the West. The financing would also increase
US cotton sales to Yugoslavia. With the aid of CCC credits last year, the
United States reportedly captured a 40-percent share of the cotton market,
which had previously been dominated by the Soviet Union.
Improving Hungarian The US Embassy reports that Hungary is making good progress obtaining
Financial Outlook foreign credits to meet medium- and long-term debt repayments of $1.5 billion
this year. US bankers say that a $150 million loan syndication is fully
subscribed and could be increased to $200 million. The Hungarians also are
close to reaching agreement with the World Bank on project loans totaling
$200 million, and Japanese banks are arranging a cofinancing package that
will provide about $300 million. Earlier this year the IMF agreed to provide
Hungary a standby credit of nearly $440 million.
The enthusiastic response of bankers to Hungary's loan requests brightens its
financial prospects for this year considerably. Hungary's foreign borrowings
probably soon will reach its original goal of $1.1 billion, and a projected
current account surplus of about $400 million would close the remaining
financial gap. Budapest reportedly is considering seeking another syndication
later this year from commercial banks to build up its foreign exchange
15 Secret
23 March 1984
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International Financial Situation:
Political Update
This article is part of our series focusing on the Major Developments
economic and political aspects of the international
financial situation.
? Unrest will probably flare up again in Brazil with
inflation surging at more than a 200-percent
annual rate. Unless it is reduced substantially by
April or May, we think Brasilia will face intense
demands for a break with the IMF and for a
moratorium on debt repayment.
? The US Embassy reports that Peru's four major
labor confederations agreed to stage a 24-hour
national strike this week to demand changes in
government economic policies.
? Because of Jamaica's dismal economic situation,
Prime Minister Seaga will ask Parliament to
postpone for up to a year the local elections
scheduled for this month,
the Argentine 25X1
Government is making tough demands on US
bankers during talks regarding overdue interest 25X1
payments. According to US Embassy officials,
their informal discussions with Economy Minister
Grinspun indicated the hardness and emotional
content of his position. In addition, the Argentine
economic press has been reporting that there are
hardline and moderate schools of thought on over-
all debt negotiating strategy within the ruling
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of play, but the press coverage and other sources
indicate that-at the very least-competing pres-
sures exist within the government.
At the same time, President Alfonsin faces growing
discontent in the military and more determined
opposition from key civilian groups. Officers re-
portedly are upset about organizational changes
and proposed budget cuts, as well as press attacks
on the military for human rights abuses.
On the labor front, Al on-
sin's proposal for reforming the unions has been
defeated in the Senate by a coalition of Peronists
and conservatives, according to press reports. The
proposal would have forced the heads of the Peron-
ist-dominated unions to face new internal elections.
? Students in the Dominican Republic protested in
the capital and at least seven provincial cities last
week against government negotiations with the
IMF, according to the US Embassy.
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Opposition to Alfonsin is beginning to coalesce as
indictments and trials of officers accused of human
rights violations move forward, reforms are debat-
ed, and summer vacations end. The President prob-
ably realizes that the euphoria from his election
victory is dissipating and that the success of future
legislative initiatives will require greater conces-
sions. The Peronists are encouraged by the defeat
of the labor reform bill, and they are likely to take
a strong stand in congressional debates, the budget,
IMF negotiations, and other sensitive issues. We
believe unrest will spread among the military unless
the President can ease public criticism and prevent
human rights investigations from reaching the mid-
By getting IMF approval early this month to hold
off floating the peso until 1 June, Philippine Presi-
dent Marcos has avoided the political risks of a
devaluation before the 14 May legislative elections.
Meanwhile, the investigation of Aquino's assassina-
tion is moving closer to implicating Armed Forces
Chief of Staff Ver, a development that could have
grave political consequences for Marcos. In our
judgment, Ver is willing to take any action he
believes necessary to protect his interests, including
the elimination of witnesses who could implicate
him. If Ver interferes with the investigative board's
proceedings, we believe Marcos would have to
choose between sacrificing Ver or suffering even
more severe political repercussions as a result of
appearing to protect those responsible for the kill-
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23 March 1984
The US Embassy in Venezuela reports that the
economic program President Lusinchi has fash-
ioned over the past month tries to accommodate the
demands of various interests. Consequently, it does
not satisfy any group fully and is unlikely to
overcome the country's financial problems. Re-
duced interest rates are aimed at mollifying the
private sector, while food subsidies and the require-
ment that all firms expand employment by 10
percent are designed to appeal to labor. To satisfy
foreign banks, the program includes permission for
private firms to use a preferential exchange rate for
servicing foreign debt, a devaluation of the bolivar,
and steps to increase agricultural production. Al-
though foreign banks have characterized the new
program as a positive first step, they-as do we-
believe tougher fiscal and monetary measures as
well'as reduced government controls are necessary
to cut the budget deficit and shift resources from
consumption to investment.
More than a week of rioting by an outlawed
Muslim sect in northeastern Nigeria early this
month diverted the government from its attempts
to deal with corruption and the economy. The
Army finally restored order, but there are rumors
of more such outbreaks to come. We believe Gener-
al Buhari will use whatever force he deems neces-
sary to prevent more disturbances because any
appearance of faltering government control could
serve as a pretext for a coup by middle- or junior-
level officers. According to the Embassy, many of
them are already upset by Buhari's slowness in
achieving economic recovery. The government is
trying to find more revenues, but raising oil output
in a weak market could depress prices, and Lagos
remains reluctant to meet the IMF's prescription
for a devaluation. Press reports indicate that the
new regime is now beginning to realize that its
adjustment program will have to be even more
austere than the one put forth by the government it
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Bolivia: Bleak Economic Prospects
Since assuming office in late 1982, President Her-
nan Siles Zuazo has faced the difficult task of
resuscitating Bolivia's ailing economy. Despite a
promising start, President Siles' tenuous political
position has led him to backslide on economic
reforms necessary to resolve the country's financial
problems. Economic output last year, meanwhile,
plunged at least 12 percent, and consumer prices
rose 330 percent. Moreover, failure to reconcile
with its creditors has left Bolivia virtually bank-
rupt.
Bolivia faces bleak economic prospects again this
year. La Paz probably will be unable to pursue
reforms necessary to deal with inflation, debt refi-
nancing, and longer term economic revitalization.
Even if Bolivia makes a good faith effort to imple-
ment an IMF program, economic recovery this year
would be slight. There is a small chance that Siles
could pursue nationalistic economic policies that
could push the country to the brink of economic
collapse
Siles' Policy Response
Siles, who took office in October 1982, inherited a
severely weakened economy. With five different
governments in three years, La Paz has been
unable to implement economic reforms. Initially,
the government undertook some reforms to restore
fiscal discipline. For example, it lowered subsidies
on gasoline, utilities, and many food staples. In
November 1982, La Paz established a unified
exchange rate to bolster the trade accounts and
required that foreign exchange be remitted to state
control to pay for essential imports. Siles also
banned nonessential imports and introduced for-
eign exchange controls to restrain capital flight.
These early reforms paved the way for a successful
renegotiation of $570 million in outstanding debts
owed to Argentina and Brazil, as well as an
extension of debt payments to international bank-
ers.F__1
Because of his tenuous political position, however,
Siles backed away from implementing unpopular
economic reforms for most of 1983. Despite initial
price hikes, gasoline and food price subsidies re-
mained sizable, and the government failed to pre-
parea budget. Moreover, the government granted
wage increases to calm labor. agitation. Policy
backsliding prevented reconciliation with the IMF,
causing Bolivia to experience growing difficulties in
meeting foreign obligations.
Because of Siles' inability to exert strong manage-
ment, the economic crisis deepened:
? The budget deficit last year was reduced slightly
to an estimated 20 percent of GDP last year.
? The inflation rate skyrocketed to 330 percent in
1983.
? GDP fell at least 12 percent because of declining
domestic demand and natural disasters.
? Official unemployment in the four largest cities
rose to 14 percent in 1983 from 12 percent in
1982.
? Declines in mineral exports and increases in food
imports caused a $30 million trade deficit, swell-
ing the current account deficit by 20 percent to
$375 million.
Deteriorating economic conditions aroused consid-
erable social unrest at the close of 1983. Miners
protested food shortages, and public servants de-
nounced the government's refusal to grant bonuses
and improve social security benefits to compensate
for the increasing cost of living. Peasants, angry
over price increases, blocked roads in La Paz
Province in efforts to pressure the government to
provide them with additional seeds and machinery.
Citizen groups in the capital organized mass dem-
onstrations in protest against food shortages and
reduced urban transport services
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Bolivia: Selected Economic
Indicators, 1975-84
Bolivia's Economic Mismanagement
General Garcia Meza, who took power in a July
1980 coup, laid the foundations for Bolivia's eco-
Real Economic Growth Consumer Price Inflation nomic disintegration. Under his regime, govern-
400
350
300
250
200
150
100
50
0-
Mineral Production
Index: 1980= 100
Money Supply Growth
Percent
a Estimated..
b Projected.
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23 March 1984
- ^
Agricultural Output
Index: 1980=100
120
Government Deficit as a
Share of GDP
Percent
25
ment spending exploded for self-serving political
purposes, mainly financed by printing money. In
early 1981 Garcia Meza tried a series of moves
aimed at regaining IMF support and securing
foreign loans. By April, however, spending re-
straints had given way to large wage increases and
increased consumer subsidies to avoid political
unrest. F__~
In September 1981 a subsequent military govern-
ment sought to restore international creditors'
confidence and regain assistance from the IMF by
undertaking monetary and credit reforms. By
March 1982 these reforms had succumbed to
pressures from Bolivian interest groups for eco-
nomic concessions. During the next four months,
the budget deficit rose 300 percent, public credit to
state enterprises increased 100 percent, and the
money supply grew 125 percent
In August 1982 General Vildoso, the last military
ruler, recognized that tough measures were neces-
sary to end the inflationary spiral. The continuing
economic and political crisis hastened the installa-
tion of the civilian constitutional government of
President Siles in October 1982.
A New Beginning?
Last November, under pressure from international
bankers and domestic business groups, Siles de-
creed new reforms to stabilize the economy, im-
prove the payments account, and qualify for IMF
assistance. To gain political support for these meas-
ures, La Paz first announced a 72-percent increase
in minimum wages on 5 November. This was
quickly followed by (a) a 60-percent devaluation to
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1975-79
Average
1980
Current account balance
-227
-166
-312
-310
-375
-355
Trade balance
-14
262
229
110
- 30
-15
Exports, f.o.b.
606
942
909
720
620
625
Of which:
Net services and transfers
-213
-428
-541
-420
-345
-340
Interest payments, net
74
242
310
280
262
250
Arrears
3
0
50
250
430
300
Capital account balance
238
19
Of which:
Direct investment
15
41
60
37
45
50
Long-term loans
391
441
434
305
390
375
Short-term capital
-12
-20
148
- 36
31
48
Foreign exchange reserves
(at end of year)
170
106
100
156
146
135
a Estimated.
b Projection. Assumes La Paz backs away from austerity program.
500 pesos per US dollar, (b) a reduction in food and
gasoline subsidies, and (c) a 50-percent hike in
transport fares and electric power tariffs. To as-
suage the critical public reaction to these moves, La
Paz announced income tax reductions and new
credits for farmers, industrialists, and exportersr-
An IMF representative in La Paz expressed disap-
pointment with the November measures, according
to the US Embassy, because they did not go far
enough. To qualify for a $300 million IMF Extend-
ed Fund Facility, Siles would have to make deep
cuts in the budget deficit, tighten monetary policy,
and close the gap between the official and the free
market exchange rate. Although La Paz has con-
tinued discussions with the IMF to secure desper-
ately needed foreign funds, substantial differences
persist. F
Bleak Prospects for 1984
In our judgment, Bolivia faces bleak economic
prospects this year but could start the necessary
economic rebuilding process. Much will depend on
the Siles government's ability to implement eco-
nomic reforms in the face of labor and political
opposition and then on the level of export earnings
and the availability of new foreign credit. We
foresee three possible scenarios.
Policy Paralysis Continues. We believe it is most
likely that-based on historical precedent and our
estimate of Siles' potential room for maneuver-La
Paz will back away from its austerity program. In
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this case, strong labor objections and the resistance
of influential state corporations to economic re-
forms will prevent the government from scrapping
$150 million in subsidies and scaling down the
budget deficit to 4 to 5 percent to meet the IMF's
demand. As a result, inflation will remain above
300 percent, the economy will continue depressed,
and unemployment will stay high. On the external
side, the overvalued peso will impede the govern-
ment's export drive and encourage contraband
trade. Consequently, La Paz will make only limited
progress in reducing the current account deficit.
Discussions with the IMF will remain at an im-
passe, precluding refinancing the debt over a longer
term and a resumption of aid and credit flows.
Reconciliation With the IMF. In this scenario,
Siles makes a good faith effort to implement
economic reforms under IMF guidance, even
though there may be some backsliding to assuage
public discontent. To begin economic reconstruc-
tion, La Paz would reduce the budget deficit by
restraining wage increases and strengthening con-
trols over state corporations. To restore production
incentives, La Paz also would raise prices for
essential commodities and continue devaluations to
encourage exports and hold down imports. As a
result, bankers would provide debt relief, and devel-
opment assistance would again begin to flow. Even
in this instance, economic recovery would be un-
likely, but the foundation is laid for future progress.
Although inflation would surge in the first half of
1984 as subsidies were removed, prices would start
to decline by the end of the year as shortages eased.
Until Bolivian mineral exports strengthen, there
would be only limited improvement in the current
account.7--l
Nationalistic Backlash. There is a small probabili-
ty that heightened political pressure on Siles could
result in strongly nationalistic economic policy.
Under this scenario, La Paz would reject any
agreement with the IMF. Instead, social and politi-
cal pressures would lead the Siles government to
increase spending in an effort to revive the econo-
my. Expansionary economic policies would proba-
bly force inflation above 400 percent. Reduced
domestic production and dwindling foreign ex-
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23 March 1984
change would result in widespread shortages, in-
creased barter, numerous business failures, and
massive unemployment. Traditional allies would
suspend official aid, private bankers would refuse
to renegotiate the debt, and La Paz could retaliate
with debt repudiation
Political Realities and Dangers
In charting his economic course, Siles is well aware
of the political ramifications. Last year he contend-
ed with several military coup conspiracies and is
now especially sensitive to the ways his economic
policy choices could contribute to renewed plotting.
Under our most likely scenario, Siles would stand
the best chance of prolonging his tenure in office,
even though the economic costs would be high. He
would continue to face pressures from both labor
and business, but economic concessions would miti-
gate serious unrest. In contrast, pursuing reform
policies would lead quickly to a major confronta-
tion with labor. Not only would this play into the
hands of military coup plotters, but it would also
rouse nationalistic sentiment by causing domestic
hardships in apparent exchange for international
banker assistance. Alternatively, if Siles opted for a
strongly nationalistic economic program, the devas-
tating effects would eventually override the short-
term political gains and lead to deep dissatisfaction
with the governmentF_~
We believe the military is most likely to dominate
economic policy making if Siles is forced from
office, although the same dilemmas would remain.
Even nationalistic military governments in Bolivia,
however, historically have felt driven to win US
acceptance in order to demonstrate their legitimacy
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and gain foreign financial assistance. Thus, we
would expect a regime dominated by the military to
try to appear responsive to US encouragement for
economic adjustment measures. Such a govern-
ment, therefore, would probably continue to deal
with the economic situation, much as Siles has--on
a short-term, ad hoc basis.
Implications for the United States
US commercial interests are being hurt by Bolivia's
severe economic deterioration. American sales to
Bolivia shrank by one-half to $99 million in 1982
and an additional one-fourth in 1983. Already deep
in arrears, Bolivia has failed to meet adjusted
payments schedules to international banks. More-
over, we remain concerned about prospects for
more nationalistic policies. In a recent concession to
labor, La Paz awarded the State Mining Company
exclusive gold exploitation rights, notifying a large-
ly US-owned gold mine that its operating contract
will not be renewed at the end of this year.
Mounting debt servicing difficulties have also led
Bolivia to join countries like Nicaragua in calling
for joint Latin American action or debt repudia-
tion.
Bolivia will increasingly seek out any source of
financial support to prop up its ailing economy. The
Siles administration can no longer rely on economic
assistance from Washington and other Western
donors, who are now demanding economic reforms
and eradication of the cocaine trade. La Paz now
claims it has received promises of financial assist-
ance from the Soviet Union. Finance Minister
Baptista claims the USSR has offered Argentina
an advance for wheat sales that would be used to
pay its gas debt to Bolivia. Although such an action
would be unusual for the Soviet Union, it would
strongly enhance the Soviet image and exert pres-
sure on Western governments to support financially
strapped Bolivia.
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Guyana: Economic Crisis Clouds
Burnham Regime---]
Guyana, now in its 20th year under the dictatorship
of Forbes Burnham, has become a sociopolitical
tinderbox because of the unraveling of the economy
in recent years. By the end of 1983, Guyana's
economic output had fallen 35 percent below the
peak.1976 level-the steepest economic decline of
any Latin American country during this period.
Signaling despair of economic or political improve-
ment, large numbers of Guyanese have emigrated.
Burnham's corrupt coterie and his ethnically con-
centrated security forces have been protected from
much of the economic decline, but the majority of
the citizenry has become absorbed with day-to-day
survival.
Facing continued deterioration in the economy and
the possibility of political unrest, Burnham has
turned to the Soviet Bloc for additional assistance,
but we doubt that Guyana will receive anything
more than token economic and technical aid in
addition to limited arms and training. Burnham's
staying power probably turns on his continued
ability to deliver privileges to his security forces
-15 1970 71 72 73 74 75 76 77 78 79 80 81 82 83a 25X1
and their families.
Despite a wealth of natural resources, Guyana's
economic output has declined an average of 6
percent annually since 1976. The output of key
exports-bauxite, alumina, sugar, and rice-has
suffered from pervasive corruption, mismanage-
ment, and costly labor disputes. Undeterred by
mounting inefficiency, Burnham has expanded
state control of the economy, shrinking the record-
ed share of the private sector to 15 percent of
Guyana: Real GDP Growth, 1970-83
national output while driving much economic activ-
ity underground. In the process, control of the
economy has shifted steadily to Burnham's Afro-
Guyanese followers, leaving other ethnic groups-
who make up a majority of Guyana's approximate-
ly 700,000 citizens-with little effective political or
economic clout.
Recent Economic Performance
The pace of general economic deterioration has
quickened in the past two years. Production has
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been stifled by greater shortages of imported spare
parts, equipment, and fertilizers; at the same time,
foreign buyers increasingly have turned to suppliers
offering better quality, more reliable delivery, and
lower prices. Burnham's resort to priming the
money pump to cushion the operating losses of state
enterprises has accelerated inflation. Although the
latest official statistics showed an increase in the
urban price index of only 23 percent in 1982, this
figure excludes goods traded on the burgeoning
black market.
Local production problems and soft world demand
have accelerated the decline of Guyana's bauxite
and alumina industry. Long the country's major
supplier of foreign exchange, this sector has be-
come a net user of hard currency. Guyana's sole
alumina plant has -been closed since mid-1982,
awaiting the availability of foreign exchange re-
quired for renovation. In an effort to cut huge
operating losses in the industry, the labor force-
largely made up of Burnham's Afro-Guyanese fol-
lowers-was cut by one-third last year despite the
political risk involved. Much of the market share
loss may be irreversible. China, for example, has
taken a large share of Guyana's US market for
refractory-grade bauxite.
The large agricultural sector has confronted similar
problems. The Guyanese Government has looked
unrealistically to sugar to replace bauxite/alumina
as the country's chief foreign exchange earner.
Heavy rains, sporadic strikes by the predominantly
Indo-Guyanese labor force, and worsening short-
ages of imported inputs caused sugar output last
year to drop 14 percent to its lowest level since
1977. More than a year after accepting the sugar
industry's carefully framed plan for revitalization,
the government has implemented few of the plan's
provisions. Once the rice bowl of the Caribbean,
Guyana in recent years has seen its exports steadily
shrink. Low producer prices have deterred the
independent, mostly Indo-Guyanese farmers from
planting rice, and mismanagement and corruption
have undermined the operations of the govern-
ment's processing and distribution monopoly. For-
eign buyers increasingly are deterred by poor quali-
ty, unreliable supply, and highly uncompetitive
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23 March 1984
Guyana: Selected Commodity Production,
1977-83
Calcined bauxite
Sugar
prices. The sharp deterioration in output-the US
Embassy estimates that output last year fell to its
lowest level since 1976-has taken on added signif-
icance because the government's halting of wheat
imports in 1983 has made rice the country's main
staple.
Other sectors are particularly battered by shortages
of imported inputs. In recent years, as many as half
of Guyana's private firms have ceased production
altogether. Most of the manufacturing firms still in
business are involved in assembling products for
reexport. Despite high foreign demand, Guyana's
once promising timber and shrimp industries are
experiencing many of the problems that have hob-
bled other sectors
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The Burgeoning Black Market
As the legitimate private sector has dried up, the
black market has expanded. Many observers esti-
mate that the black market now is larger than the
official economy. Manufacturers and retailers, un-
able to obtain licenses and foreign exchange legal-
ly, have turned to illicit sources for imports. Illegal
exports of rice, gold, diamonds, shrimp, and curren-
cy have increased. Consumers, who initially looked
to the black market as a source of luxury items,
increasingly are turning to it for necessities. Al-
though this activity deprives the regime of desper-
ately needed customs duties and commodities for
export, efforts to clamp down have been ineffective
in the face of widespread corruption and collusion
at all levels of government. Moreover, extensive
networks and widespread expertise, developed with
the spreading black market, have begun to be used
for drug trafficking, heretofore a negligible activity
in Guyana.
Deprivation Fuels Social Unrest
Guyana's economic unraveling has reduced the
living standards of the bulk of the population,
especially the majority Indo-Guyanese, who also
face growing victimization by Burnham's ruling
party and security forces. Although Guyana's
shortages of food, drugs, transportation, electricity,
and water are endemic, deprivation became even
more widespread in 1983. Crime has increased,
with robbery and assault falling most heavily on the
Indo-Guyanese, whose traditional distrust of banks
has caused them to hoard cash in their homes. The
educational system, once the region's best, has
disintegrated and has been replaced by a curricu-
lum of indoctrination and mass games on the North
Korean model.
The Guyanese people have endured increasing mis-
ery over the years without serious protest, although
they have grown cynical toward government exhor-
tation to work for "self-sufficiency" and to resist
"imperialist plots.'
survival increasingly consumes
the attention of most Guyanese, who believe-
accurately-that the country's leaders, while
preaching sacrifice, secretly indulge their taste for
banned commodities.
Without substantial inflows of concessional aid and
genuine organizational and management
changes-neither of which seems on the horizon-
Guyana's economic slump will deepen. The World
Bank-sponsored Caribbean Sub-Group Committee
on Economic Development (CGCED) meeting in
Washington last month offered little hope for
assistance, according to US State Department re-
ports. The openly hostile attitude of Guyana's
representative was evident and reportedly appeared
to erode any residual sympathy for Guyana's
plight. Representatives of potential donors insisted
that Guyana conclude an IMF agreement as a 25X1
prerequisite to assistance. Burnham's relations with
the IMF have been stormy, however, and prospects
for reestablishing a program this year are remote.
Past IMF programs have foundered on Guyana's
repeated failures to meet agreed fiscal and mone-
tary targets; the last agreement became inoperative
after only three months and was finally canceled in
1982. Negotiations for reinstituting support have
dragged on for two years as Burnham refuses to
jeopardize his power base by restructuring the
economy along the lines mandated by the IMF.F-
Aid on the scale necessary to revive Guyana's
moribund economy is highly unlikely to come from
the Soviet Bloc. The loss of Grenada as a possible
future site for air and naval facilities might in-
crease Soviet interest in Guyana. The development
of useful facilities, however, would require a long-
term investment, not only in the facilities, but in
stabilizing Guyana's economy-a commitment we
doubt the Soviets would judge worthwhile, at least
as long as Burnham remains in power. Moscow is
probably reluctant to become too closely involved 25X1
with a leader whose economic mismanagement has
made his political future uncertain.
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Cuba does not have the capability to provide
substantial assistance. Should Fidel Castro, in the
wake of Grenada, decide to try to breathe new life
into his relationship with Burnham, he is likely to
focus on offering those kinds of assistance that
would help Burnham maintain his grip on power
while costing Cuba little-image-building projects,
such as roadbuilding and medical teams.
Guyana's hapless citizens almost certainly will
experience deeper misery, even malnutrition, in
1984, and the prospects for social and political
unrest will grow. Burnham is likely to respond by
calling on international agencies for humanitarian
aid and continuing to blame his problems on US-
inspired economic destabilization. We believe that
Guyanese passivity could give way to sudden rebel-
lion at any time-particularly as the living stan-
dards of the relatively more privileged Afro-Guya-
nese decline. Indeed, Afro-Guyanese bauxite
workers struck to protest food shortages in the
spring of 1983. Burnham. quickly sent riot police
and troops to the area to forestall disturbances. In
the absence of widespread civil unrest, we believe
Burnham's grip on power will depend on how long
he can continue to provide his security forces and
their kin with the perquisites that have ensured
their loyalty so far.
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Hong Kong: Growing
Despite Uncertainty
The Hong Kong economy in 1983 was a study in
contradictions. An export surge brought about an
upturn in real economic growth from the depressed
level of 1982. The financial markets, however,
spent much of the year in disarray as investor
confidence waned in the face of a Chinese takeover
in 1997.
At the moment, economic prospects for 1984 are
excellent. Manufacturers' order books are already
filled through July, and foreign demand continues
to increase. The financial markets have been stable
since last October, but an underlying air of uncer-
tainty remains. Domestic investment in plant and
equipment has fallen over the past few years, a poor
sign for long-term growth. Any of several possible
events-including a breakdown in Sino-British
talks or a Chinese misstatement of their intentions,
however, could reignite the financial problems ex-
perienced last year.
Emerging in Stride
Hong Kong emerged from 1983 in excellent eco-
nomic condition. The economy achieved a healthy
5.9-percent real growth-twice the level predicted
by government officials early in the year. Exports
again provided the engine of growth, rising 15
percent in real terms. The surge left Hong Kong
manufacturers with order books filled through
July. The yearend unemployment rate of about 4
percent remained even with the December 1982
figure but down from the peak of 5.1 percent
registered in the first quarter of 1983. The local
stock market closed the year on a strong note, and
there is evidence that the capital flight experienced
earlier in the year has ceased. The Hong Kong
dollar appears stable once again.
The strength shown at yearend belied the turmoil
experienced during the year. Several of the Colo-
ny's largest firms-those most heavily involved in
the depressed property market-filed for bankrupt-
cy, taking a number of small creditors with them
and sending large creditors looking for financing of
their own. Two major conglomerates-Eda and
Carrian-went under with outstanding debts total-
ing more than $2 billion. Hong Kong Land, the
Colony's largest property company, posted its first
loss in years and was forced to arrange a $230
million standby credit to meet its short-term obli-
gations; its total debt outstanding is estimated at
about $2 billion.' Nor were the property companies
the only ones hard hit. Several of Hong Kong's
largest textile producers are still dangerously close
to bankruptcy, despite the recent closing down of a
host of medium and small textile plants
Concern over "the 1997 issue"-the date of Hong
Kong's reversion to Chinese control-caused peri-
odic panic in the financial markets. A nervous
movement of funds out of the Hong Kong dollar-
one of the world's more stable currencies between
1978-81-weakened the currency in early 1983
and pushed it through the psychological barrier of
HK $7/US $1 in May. Despite open market
intervention by both the Hong Kong Government
and the Bank of China (BOC), the Hong Kong
dollar dropped to a record HK $9.6/US $1 during
September, sending the inflation rate back into the
double-digit range. The stock market also respond-
ed to investor uncertainty, fluctuating sharply
throughout the year. Between July and October the
market lost 40 percent of its value.
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Hong Kong: Economic Indicators, 1977-83
Real GDP Growth Consumer Price Growth
Coping With Uncertainty
Problems in the financial markets forced the Hong
Kong Government to move away from its tradition-
al laissez faire philosophy. In October the govern-
ment abandoned freely fluctuating exchange rates,
after the Hong Kong dollar plunge set off panic
buying in which local residents rushed to exchange
currency for goods.. Now the exchange rate is
effectively pegged at HK $ 7.8/US $1, and interest
rates are allowed to fluctuate in response to market
pressures. When first instituted, speculators doubt-
ed the government's willingness to risk slowing the
economy by permitting sharp interest rate in-
creases. As a result, they continued to unload Hong
Kong dollars in anticipation of a devaluation.
When the government proved willing to accept
overnight interest rates as high as 40 percent, the
pressure subsided, and capital has been moving
back into Hong Kong dollars.
The government was forced, for the first time, to
take over a failing financial institution-Hapg
Lung Bank. There is no central bank in Hong
Secret
23 March 1984
Kong, and hence no lender of last resort. Tradition-
ally, the Colony's large commercial banks have
filled this void. In the prevailing air of uncertainty,
however, even the large commercial banks were
unwilling to come to Hang Lung's aid, forcing the
government's hand.
In fiscal matters the Colony has also made adjust-
ments. For the first time ever, the government
allowed the domestic budget to remain in deficit for
two consecutive years; a third deficit is now expect-
ed. The fiscal year 1983 budget (April 1983-March
1984) will be about $450 million in the red com-
pared with $600 million during Fiscal Year 1982.
Expenditures on public housing and transportation
remained high while revenues tapered off. Inflows
from land sales-the largest revenue earner in the
late 1970s-remained depressed, as did tax reve-
nues. Government attempts to counter the declines
included,sharp increases in alcohol, tobacco, and
airport taxes. The maximum average rate of tax
payable on earnings from any source was hiked
from 15 to 17 percent.
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Hong Kong: Financial Market Instability Indicators, 1977-83
US cents per HK$
Domestic Investment as a Share of GDP
Percent
The government also has been forced to become
more responsive to local sentiment. In the past,
Hong Kong's local populace has generally accepted
whatever economic legislation the authorities im-
posed. Last October, however, despite an increasing
deficit, the government bowed to local pressure and
removed a 10-percent tax on interest earned on
Hong Kong dollar deposits. More recently, a pro-
posed increase in licensing fees on taxicabs was
rescinded after the drivers took to the streets in
protest. The work stoppage precipitated the worst
rioting since 1967.
Help From the Mainland
China became increasingly involved in Hong
Kong's economic affairs in 1983. Early signs of
China's willingness to throw its economic weight
behind the Colony came when Beijing made several
unsuccessful attempts to support the weakening
currency. Beijing also moved to increase its indus-
trial presence by establishing the Everbright Cor-
poration, a "nongovernmental company" with
status equivalent to that of a state ministry. Initial-
ly contrived to facilitate China's acquisition of
Western technology, more recent indications are
that the company will play a major role in support-
ing the Hong Kong economy. Since its establish-
ment in August 1983, the company has been active
in both the local stock and real estate markets. In
the latter, Everbright's recent $130 million pur-
chase of a residential complex was one of the
largest the failing property market has seen in a
year.
Other instances in which Beijing proved willing to
prop up Hong Kong's industrial sector include:
? Establishment last year of China's first industrial
joint venture in Hong Kong-a woolen finishing
and dyeing factory. Discussions are under way for
two other possible projects-a brewery and a
cement plant.
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? Directives to authorities in Shanghai, the major
Chinese commercial center, to become more eco-
nomically involved in Hong Kong.
? Increased lines of credit by the Hong Kong
branch of the BOC and its affiliates to business
and housing.
BOC is becoming a major competitor
orl' both ng Kong and China business.
? The registration of China's largest trading com-
pany in Hong Kong-China Resources Company
(CRC)-as a private limited liability company
under Hong Kong law. The official explanation
for the change was that it enabled the company to
operate more freely in Hong Kong. Locally,
however, the move was viewed as an attempt to
demonstrate China's willingness to operate under
Hong Kong's legal system.
The Coming Year
On purely economic grounds, the Colony's pros-
pects for 1984 are excellent; we expect real growth
of about 8 percent. Exports to date have been
spurred largely by purchases by the United States,
up 25 percent in real terms last year. Continued
economic recovery in Europe and Japan should
lend an additional boost in 1984; Hong Kong goods
remain a bargain at the current exchange rate.
Success in the export market will continue to
stimulate domestic retail sales and, at the same
time, guarantee growth for the Colony's important
commercial sector. With the exchange rate holding
firm, consumer price increases should not exceed 8
percent, the lowest rate in five years.
The financial markets have performed well so far in
1984. Stock prices remain near their two-year high.
Moreover, rumors of capital flight and possible
currency devaluation have been deflated by falling
interest rates and continued heavy purchases of
Hong Kong dollars. Recently, in fact, the govern-
ment has been under pressure to revalue. Neverthe-
less, an air of uncertainty remains, and we expect
to see periodic downward pressure on both the
foreign exchange rate and local stock prices before
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23 March 1984
the year is out. A currency realignment in 1984,
however, is unlikely. The government fears that
any attempt to adjust the exchange rate could set
off a new, perhaps uncontainable, round of specula-
tion.
round with positive statements.
How the financial markets perform in 1984 de-
pends to a large degree on the success the govern-
ment has in clearing several upcoming hurdles.
Each round of British-Chinese talks on the 1997
issue, for example, will provide a potential catalyst
for instability. Beijing and London are aware of
how closely progress on the talks is followed in
Hong Kong and have taken measures to ensure that
each round ends on a favorable note. So far,
however, progress has been made only on the most
straightforward issues. Now that more contentious
issues are coming up for consideration, it may
become increasingly difficult to conclude each
In September the Colony could face an additional
crisis. Beijing has stated that it will unilaterally
spell out a plan for Hong Kong's future at that time
if the Sino-UK negotiations have failed to reach
any conclusion. By establishing the September
1984 deadline, Beijing hoped to push London into
an early settlement. It is becoming increasingly
apparent, however, that any detailed bilateral
agreement will take much longer. As the Septem-
ber deadline approaches, we believe that the Colo-
ny is likely to grow more uneasy and that any
misstatement by local, UK, or Chinese officials
could have negative spillover effects on local mar-
kets. To remove the specter, Beijing will probably
attempt to get British cooperation in making a joint
statement concerning progress made so far. Failing
that, the Chinese may claim that sufficient pro-
gress has been made to warrant forgoing any
unilateral declaration. If the talks proceed without
major problems up to the September deadline,
there is a good chance that an innocuous statement
by the Chinese will be interpreted favorably in the
Colony's financial markets.
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Over the longer run, we believe that continuing,
and potentially destabilizing, problems will have a
negative impact on the economy. Real investment
in fixed assets fell 6 percent last year after a decline
of 1 percent in 1982. Real imports of capital goods
were down 10 percent in 1983. Without a surge in
investment spending, the Colony may lose much of
the dynamic character that brought record growth
during the past two decades. Indeed, Financial
Secretary Bremridge recently warned that, without
an investment increase this year, Hong Kong's
growth rate may fall several percentage points
below its potential as early as 1985.
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USSR:
Favorable Hard Currency Position
Soviet trade data for the first nine months of 1983
indicate that the USSR held its hard currency
borrowing last year to a minimum despite a fall in
oil prices and a 3-percent increase in merchandise
imports. This was achieved by boosting military
deliveries to the LDCs and increasing the volume of
oil exports enough to offset the drop in prices. The
net hard currency debt has stayed at about $10
billion, and Moscow's hard currency position is
likely to remain good at least through 1984.F__-]
Background .
Moscow has tried to limit its hard currency debt
since 1976, after a surge in Soviet borrowing to
finance imports of Western technology and equip-
ment caused the Soviet payments position to deteri-
orate. The USSR cut imports of Western equip-
ment-which in real terms fell by one-fifth
between 1976 and 1980-and benefited from spi-
raling world prices for its oil exports. The Soviets
were able to limit borrowing despite sizable in-
creases in agricultural imports in 1979-80.
In 1981 Moscow experienced a continuing rise in
agricultural import needs in the face of stagnating
oil prices. As a result, the trade surplus plunged,
and debt rose sharply. Although imports of machin-
ery rose substantially in 1982 as deliveries for the
Siberia-to-Western Europe pipeline began, Mos-
cow was able to turn its payments position around
by sharply boosting the quantity of hard currency
oil exports and taking advantage of an improved
harvest to reduce agricultural imports.
1983 Trade Developments
The USSR-in 1983 apparently experienced a small
decline in its hard currency merchandise trade
surplus. According to Soviet and Western data, the
surplus in the January-September period was about
$2.5 billion compared with $2.2 billion in the first
nine months of 1982. We believe, however, that for
the year as a whole export growth was less than
that of imports, leading to some decline in the trade
surplus. F__]
Most of the small rise in export earnings appears to
have been due to increases in arms deliveries and
arms-related commercial exports to the LDCs,
which account for roughly one-fourth of total
Soviet hard currency receipts. In January-Septem-
ber these deliveries rose sharply over the first nine
months of 1982 as the USSR moved to resupply
both Iraq and Syria with military goods.' Our
calculation for the full year assumes that Soviet
arms deliveries in the last quarter of 1983 were at
about the same high level as in fourth-quarter
1982.
We estimate that hard currency oil exports totaled
1.3 million b/d in 1983, up by about 100,000 b/d
over the previous record high in 1982. With the
average price of crude oil and oil products down
about 10 percent, however, the value of Soviet hard
currency oil exports for the year probably remained
close to the $15 billion level of 1982. The rise in the
volume of Soviet oil sales was made possible by an
increase in oil imports from the OPEC countries in
partial payment for past arms deliveries and per-
haps by some drawdown of domestic stocks. As far
as we now know, the USSR did not again reduce its
oil exports to the Communist countries.
Most of the modest increase in hard currency
imports probably came from purchases of machin-
ery and equipment and of crude oil. Western data
indicate that Soviet imports of machinery and
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USSR: Equipment Orders Placed With
Hard Currency Trading Partners
Oil and Natural
Gas Projects
Chemical and Petro-
chemical Equipment
Metalworking and
Metallurgical Equipment
Other
Projects
1975
4,650
525
1,660
1976
6,000
1,700
1,020
1,820
1,460
1977
3,800
300
1,630
640
1,230
1978
2,800
825
700
350
925
1979
2,675
190
610
935
940
1980
2,600
400
410
805
985
1981 a
6,870
4,320
465
590
1,495
1982
3,745
1,330
505
800
1,110
1983 n
2,100
810
365
225
700
a The value for 1981 includes about $4 billion in orders for the gas
export pipeline project. Some of this-such as pipelayers-is
included under categories other than oil and natural gas equipment.
b information for 1983 is not complete.
equipment increased-although nowhere near as
much as in 1982, when these imports jumped about
30 percent. Much of the 1983 increase in such
imports probably reflects deliveries of equipment
contracted for in 1981-82. Among the more impor-
tant orders in these two years were:
? The roughly $4 billion for compressors and other
equipment for the Siberia-to-Western Europe
gas pipeline.
? Some $600 million in equipment for the Astra-
khan' sour gas project placed with French and
West German firms.
? $540 million for a turnkey steel plant from
Austria. .
? $287 million for a rolling mill from West Germa-
ny for the Oskol steel complex.
? $165 million for a diazinon insecticide plant from
French and West German firms.
? $110 million for two butadiene plants from
Japan.
West Germany, France, Japan, and Italy continued
to account for the bulk of the orders. The US share
of orders dropped from about 10 percent in 1980 to
2 percent in 1982, reflecting US sanctions and
Soviet concern about the reliability of the United
States as a supplier.F__-]
Oil imports from Iraq, Libya, and Saudi Arabia,
largely in repayment for Soviet deliveries of arms,
last year rose by roughly $200 million. The oil from
Saudi Arabia was in payment for Iraqi obligations
to the USSR. We estimate the volume of these
imports at about 186,000 b/d as compared with
165,000 b/d in 1982. In addition, the USSR
imported in 1983 about 61,000 b/d of crude oil
from soft currency countries (Syria and Iran) as
compared with 32,000 b/d the previous year.
Agricultural imports, on the other hand, may have
fallen to $9 billion or less in 1983, compared with
$10 billion in 1982. Hard currency imports of grain
dropped by an estimated 4 million metric tons to 32
million tons worth about $5 billion; imports of
sugar also declined. Imports of large-diameter pipe,
which increased substantially in 1982-largely re-
flecting the start of construction of the Siberia-to-
Western Europe gas pipeline-and of nontubular
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USSR: Estimated Hard Currency Balance of Payments
-4,607
1,904
-100
4,206
4,000
Merchandise trade balance
-4,797
1,714
200
4,606
4,200
Exports, f.o.b.
9,780
27,784
27,978
32,052
32,500
Of which:
Additional military deliveries to
LDCs, f.o.b. b
14,577
-570
760
900
1,000
1,100
1,100
6,520
1,630
5,840
-1,240
1,000
6,371
2,865
6,200
2,650
3,900
Government backed
1,972
2,195
2,000
2,850
3,100
Commercial
4,399
670
4,200
-200
800
Repayments
969
3,050
3,200
3,415
3,600
Government backed
730
1,915
2,000
2,100
2,300
Commercial
239
1,135
1,200
1,315
1,300
Net change in assets held in Western banks
-395
-235
-140
1,575
500
Gold sales
725
1,580
2,700
1,100
1,200
Net errors and omissions d
-1,913
-3,534
-5,740
-2,966
-5,000
a Estimated.
b These estimates exclude the value of arms-related commercial
exports to individual
LDCs, which we estimate at about $2 billion in 1982. They are
based on the reported export residuals in published Soviet data on
trade with LDCs (that is, the difference between Soviet-reported
With the surplus on total hard currency trade
estimated at about.$4.2 billion and net expendi-
tures on interest and other invisibles at about $200
million, the USSR realized a current account
surplus of $4 billion, down only slightly from 1982.
Gold sales-which hit 200 tons valued at $2.7
billion in 1981-were down to less than 100 tons
worth an estimated $1 billion for the second year in
a row as Soviet financing needs remained small. F_
aggregate exports to the LDCs and Soviet reporting on exports to
individual LDCs). The export residuals were reduced by the
estimated value of Soviet exports of major arms systems to non-
hard currency paying LDCs on an f.o.b. basis. The estimates
exclude the value of follow-on services, which may be substantial.
The errors and omissions category rose substantial-
ly, reflecting in part increased credits and deferred
payments to cover military and other sales to the
LDCs. Moscow also apparently rescheduled some
LDC debt. For example, according to press reports,
the USSR agreed in September 1983 to allow Peru
to postpone for six years repayment of $167 million
falling due in 1983.
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23 March 1984
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USSR: Estimated Hard Currency Debt to the West a
Gross debt 10,577 14,707 15,609
Commercial debt 6,947 9,662 9,858
Government and 3,630 5,045 5,751
government-backed debt
16,375
18,050
17,865
20,865
20,100
20,400
9,515
10,480
10,015
13,015
11,500
11,000
6,860
7,570
7,850
7,850
8,600
9,400
a Yearend data.
b Estimated.
Financing
Moscow probably was able to reduce its net hard
currency debt by about $200 million in 1983,
compared with a reduction of $2.3 billion in 1982.
Although the USSR's net liabilities to commercial
banks rose by more than $1 billion in the first nine
months of the year, mainly due to a $1.5 billion
drop in Soviet assets, it is likely that as in previous
years the USSR sharply boosted its assets in the
last quarter of the year. The Soviets apparently are
reluctant to end a year with bank deposits equiva-
lent to less than four months' imports.
Assuming the fourth-quarter growth in assets ap-
proximated $2 billion-the increase in the last
quarter of 1982 was $2.6 billion-Soviet assets
would have hit a record $10.5 billion by the end of
1983, up from $10 billion at the end of 1982. Gross
commercial debt-which declined slightly in Janu-
ary-September-could well have remained below
the yearend 1982 level. Western government-
backed debt, on the other hand, probably rose as
machinery and equipment imports continued to
rise. Thus, we estimate that total gross debt in-
creased somewhat to $20.4 billion, whereas net
debt, because of the probable increase in assets,
dropped slightly to $9.9 billion.
Secret
23 March 1984
Moscow's favorable hard currency position is likely
to continue at least another year. The 1984 foreign
trade plan announced by Planning chief Babaykov
in December implies that Moscow intends-as it
hoped to last year-to reduce trade with the
West-perhaps by as much as 10 percent. Al-
though the USSR probably will not achieve the
reduction in hard currency imports from the West
implied in the plan this year, we believe it will-
barring a bad harvest-be able to continue to hold
the line on them in 1984. Agricultural import
requirements could remain at about the 1983 level
if the harvest is fair to good this-year.
Purchases of Western machinery and equipment
could level off or decline. Although substantial
deliveries of equipment for projects contracted for
in the past few years are still to take place,
deliveries for the Siberia-to-Western Europe gas
pipeline are almost completed. Ongoing negotia-
tions for Western equipment for the Tenghiz natu-
ral gas facility are unlikely to be concluded soon,
ruling out sizable deliveries this year. Moreover,
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orders for nonenergy equipment fell in 1983 to $1.3
billion-not much more than half the average for
1979-82. Soviet purchases of large-diameter pipe
are unlikely to increase unless additional pipeline
construction-which peaked in 1982 with work on
the new export line-is initiated. The Soviets may
be aided in holding down imports of pipe by
bringing onstream their first domestic large-diame-
ter pipe producing facility.
On the export side, Moscow could well experience
some difficulties. Net hard currency oil sales are
likely to level off, or even decline somewhat, as
domestic production stagnates and deliveries to
Eastern Europe remain high.
the USSR, which reduced oil exports to
Eastern Europe in 1982, will delay further cuts.
Exports of natural gas could increase as deliveries
begin through the new Siberia-to-Western Europe
pipeline. Other commodity exports are likely to
show little if any growth in 1984. In a number of
industries (for example, nonferrous metals and tim-
ber), domestic production is stagnating and domes-
tic requirements are rising, squeezing the export-
able surplus.
Even if hard currency exports stagnate and a poor
agricultural year necessitates higher imports than
now foreseen, the Soviets can manage: With sub-
stantial gold reserves-estimated in excess of $20
billion at current prices-and production running
in excess of consumption and exports, Moscow
could easily cover a sizable portion of its financing
requirements through increased gold sales should
the need arise. Moreover, the USSR has already
lined up substantial Western-government backed
and commercial credits to support imports of plant
and equipment and of large-diameter pipe. In
addition, after a five-year absence, Moscow has
recently made a series of successful forays into the
Euromarket
39 Secret
23 March 1984
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